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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003.
[ ] 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 or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
9690 DEERECO RD., SUITE 100
TIMONIUM, MD 21093
(Address of Principal (Zip Code)
Executive Offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 410-427-1700
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
Common Stock, $.10 Par Value
and associated stockholder protection rights New York Stock Exchange
9.25% Series A Cumulative Preferred Stock, $1 Par Value New York Stock Exchange
8.625% Series B Cumulative Preferred Stock, $1 Par Value New York Stock Exchange
8.375%Series D Cumulative Redeemable Preferred Stock,
$1 Par Value New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE.
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 and Exchange Act
of 1934 during the preceding twelve 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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock of the registrant held by
non-affiliates was $195,071,909. The aggregate market value was computed using
the $5.25 closing price per share for such stock on the New York Stock Exchange
on June 30, 2003.
As of February 18, 2004 there were 43,608,956 shares of common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
NONE.
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OMEGA HEALTHCARE INVESTORS, INC.
2003 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART 1
Page
Item 1. Business of the Company.......................................................................... 1
Overview...................................................................................... 1
Summary of Financial Information.............................................................. 1
Description of the Business................................................................... 2
Executive Officers of Our Company............................................................. 4
Risk Factors.................................................................................. 5
Item 2. Properties....................................................................................... 15
Item 3. Legal Proceedings................................................................................ 17
Item 4. Submission of Matters to a Vote of Security Holders.............................................. 17
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters........................ 18
Item 6. Selected Financial Data.......................................................................... 19
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............ 20
Overview...................................................................................... 20
Critical Accounting Policies and Estimates.................................................... 22
Results of Operations......................................................................... 24
Portfolio Developments........................................................................ 29
Liquidity and Capital Resources............................................................... 31
Series D Preferred Offering; Series C Preferred Repurchase and Conversion..................... 33
Item 7A. Quantitative and Qualitative Disclosures About Market Risk....................................... 35
Item 8. Financial Statements and Supplementary Data...................................................... 36
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............. 36
Item 9A. Controls and Procedures.......................................................................... 36
PART III
Item 10. Directors and Executive Officers of the Registrant............................................... 37
Item 11. Executive Compensation........................................................................... 40
Item 12. Security Ownership of Certain Beneficial Owners and Management................................... 44
Item 13. Certain Relationships and Related Transactions................................................... 46
Item 14. Principal Accountant Fees and Services........................................................... 47
PART IV
Item 15. Exhibits, Financial Statements, Financial Statement Schedules and Reports on Form 8-K............ 48
PART I
ITEM 1 - BUSINESS OF THE COMPANY
OVERVIEW
We were incorporated in the State of Maryland on March 31, 1992. We are a
self-administered real estate investment trust, or REIT, investing in
income-producing healthcare facilities, principally long-term care facilities
located in the United States. We provide lease or mortgage financing to
qualified operators of skilled nursing facilities and, to a lesser extent,
assisted living and acute care facilities. We have historically financed
investments through borrowings under our revolving credit facilities, private
placements or public offerings of debt or equity securities, the assumption of
secured indebtedness, or a combination of these methods.
As of December 31, 2003, our portfolio of investments consisted of 211
healthcare facilities, located in 28 states and operated by 39 third-party
operators. Our gross investments in these facilities, net of impairments and
before reserve for uncollectible loans, totaled $812.3 million. This portfolio
is made up of:
o 151 long-term healthcare facilities and two rehabilitation hospitals
owned and leased to third parties;
o fixed rate mortgages on 51 long-term healthcare facilities;
o one long-term healthcare facility that was recovered from customers
and is currently operated through third-party management contracts for
our own account; and
o six long-term healthcare facilities that were recovered from customers
and are currently closed.
In addition, we hold miscellaneous investments of approximately $29.8
million at December 31, 2003, including $22.7 million of notes receivable, net
of allowance, consisting primarily of secured loans to third-party operators to
our facilities.
Our filings with the Securities and Exchange Commission, including our
annual report on Form 10-K, our quarterly reports on Form 10-Q, current reports
on Form 8-K and amendments to those reports are accessible free of charge on our
website at www.omegahealthcare.com.
SUMMARY OF FINANCIAL INFORMATION
The following tables summarize our revenues and real estate assets by asset
category for 2003, 2002 and 2001. (See Item 7 - Management's Discussion and
Analysis of Financial Condition and Results of Operations, Note 3 - Properties,
Note 4 - Mortgage Notes Receivable and Note 16 - Segment Information to our
audited consolidated financial statements).
REVENUES BY ASSET CATEGORY
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
2003 2002 2001
----------------------------------
Core assets:
Lease rental income..................................................................... $ 65,121 $ 62,718 $ 60,117
Mortgage interest income................................................................ 14,747 20,922 20,478
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Total core asset revenues........................................................... 79,868 83,640 80,595
Other asset revenue........................................................................ 2,982 5,302 4,845
Miscellaneous income....................................................................... 3,417 1,757 2,642
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Total revenue before owned and operated assets...................................... 86,267 90,699 88,082
Owned and operated assets revenue.......................................................... - 42,905 162,042
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Total revenue....................................................................... $ 86,267 $133,604 $250,124
==================================
REAL ESTATE ASSETS BY ASSET CATEGORY
(IN THOUSANDS)
AS OF DECEMBER 31,
2003 2002
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Core assets:
Leased assets........................................................................... $687,159 $663,617
Mortgaged assets........................................................................ 119,815 173,914
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Total core assets................................................................... 806,974 837,531
Other assets............................................................................... 29,787 36,887
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Total real estate assets before owned and operated assets........................... 836,761 874,418
Owned and operated and held for sale assets................................................ 5,295 7,895
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Total real estate assets............................................................ $842,056 $882,313
=======================
DESCRIPTION OF THE BUSINESS
INVESTMENT POLICIES. We maintain a diversified portfolio of long-term
healthcare facilities and mortgages on healthcare facilities located in the
United States. In making investments, we generally have focused on established,
creditworthy, middle-market healthcare operators that meet our standards for
quality and experience of management. We have sought to diversify our
investments in terms of geographic locations, operators and facility types.
In evaluating potential investments, we consider such factors as:
o the quality and experience of management and the creditworthiness of
the operator of the facility;
o the facility's historical, current and forecasted cash flow and its
ability to meet operational needs, capital expenditures and lease or
debt service obligations, providing a competitive return on investment
to us;
o the construction quality, condition and design of the facility;
o the geographic area and type of facility;
o the tax, growth, regulatory and reimbursement environment of the
jurisdiction in which the facility is located;
o the occupancy and demand for similar healthcare facilities in the same
or nearby communities; and
o the payor mix of private, Medicare and Medicaid patients.
One of our fundamental investment strategies is to obtain contractual rent
escalations under long-term, non-cancelable, "triple-net" leases and fixed-rate
mortgage loans, and to obtain substantial liquidity deposits. Additional
security is typically provided by covenants regarding minimum working capital
and net worth, liens on accounts receivable and other operating assets, and
various provisions for cross-default, cross-collateralization and
corporate/personal guarantees, when appropriate.
We prefer to invest in equity ownership of properties. Due to regulatory,
tax or other considerations, we sometimes pursue alternative investment
structures, including convertible participating and participating mortgages,
that achieve returns comparable to equity investments. The following summarizes
the primary investment structures we typically use. Average annualized yields
reflect existing contractual arrangements. However, in view of the ongoing
financial challenges in the long-term care industry, we cannot assure you that
the operators of our facilities will meet their payment obligations in full or
when due. Therefore, the annualized yields as of January 1, 2004 set forth below
are not necessarily indicative of or a forecast of actual yields, which may be
lower.
PURCHASE/LEASEBACK. In a Purchase/Leaseback transaction, we purchase the
property from the operator and lease it back to the operator over terms
typically ranging from 5 to 15 years, plus renewal options. The leases
originated by us generally provide for minimum annual rentals which are
subject to annual formula increases based upon such factors as increases in
the Consumer Price Index ("CPI") or increases in the revenue streams
generated by the underlying properties, with certain fixed minimum and
maximum levels. The average annualized yield from leases was 10.1% at
January 1, 2004.
CONVERTIBLE PARTICIPATING MORTGAGE. 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 the revenues
generated by the underlying long-term care facilities, with certain maximum
limits. Convertible participating mortgages afford us the option to convert
our mortgage into direct ownership of the property, generally at a point
six to nine years from inception. If we exercise our purchase option, we
are obligated to lease the property back to the operator for the balance of
the originally agreed term and for the originally agreed participations 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 prices based on specified formulas. At
December 31, 2003, we did not have any convertible participating mortgages.
PARTICIPATING MORTGAGE. Participating mortgages are similar to convertible
participating mortgages except that we do not have a purchase option.
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. At December 31, 2003, we did not
have any participating mortgages.
FIXED-RATE MORTGAGE. These mortgages have a fixed interest rate for the
mortgage term and are secured by first mortgage liens on the underlying
real estate and personal property of the mortgagor. The average annualized
yield on these investments was 11.2% at January 1, 2004.
The following table identifies the years of expiration of the 2004 payment
obligations due to us under existing contractual obligations. This information
is provided solely to indicate the scheduled expiration of payment obligations
due to us, and is not a forecast of expected revenues.
MORTGAGE
RENT INTEREST TOTAL %
-------------------------------------------------
(IN THOUSANDS)
2004........................ $ 1,260 $ 1,281 $ 2,541 3.07%
2005........................ - - - -
2006........................ 3,844 1,462 5,306 6.41
2007........................ 360 44 404 0.49
2008........................ 750 - 750 0.91
Thereafter.................. 63,170 10,580 73,750 89.12
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Total..................... $69,384 $13,367 $82,751 100.00%
=================================================
The table set forth in Item 2 - Properties, contains information regarding
our real estate properties, their geographic locations, and the types of
investment structures as of December 31, 2003.
BORROWING POLICIES. We may incur additional indebtedness and have
historically sought to maintain a long-term debt-to-total capitalization ratio
in the range of 40% to 50%. Total capitalization is total stockholders equity
plus long-term debt. We intend to periodically review our policy with respect to
our debt-to-total capitalization ratio and to modify the policy as our
management deems prudent in light of prevailing market conditions. Our strategy
generally has been to match the maturity of our indebtedness with the maturity
of our investment assets, and to employ long-term, fixed-rate debt to the extent
practicable in view of market conditions in existence from time to time.
We may use proceeds of any additional indebtedness to provide permanent
financing for investments in additional healthcare facilities. We may obtain
either secured or unsecured indebtedness, and may obtain indebtedness which may
be convertible into capital stock or be accompanied by warrants to purchase
capital stock. Where debt financing is available on terms deemed favorable, we
generally may invest in properties subject to existing loans, secured by
mortgages, deeds of trust or similar liens on properties.
If we need capital to repay indebtedness as it matures, we may be required
to liquidate investments in properties at times which may not permit realization
of the maximum recovery on these investments. This could also result in adverse
tax consequences to us. We may be required to issue additional equity interests
in our company, which could dilute your investment in our company. (See Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources).
FEDERAL INCOME TAX CONSIDERATIONS. We intend to make and manage our
investments, including the sale or disposition of property or other investments,
and to operate in such a manner as to qualify as a REIT under the Internal
Revenue Code, unless, because of changes in circumstances or changes in the
Internal Revenue Code, our Board of Directors determines that it is no longer in
our best interest to qualify as a REIT. As a REIT, we generally will not pay
federal income taxes on the portion of our taxable income which is distributed
to stockholders.
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES. If our Board of Directors
determines that additional funding is required, we may raise such funds through
additional equity offerings, debt financing, retention of cash flow (subject to
provisions in the Internal Revenue Code concerning taxability of undistributed
REIT taxable income) or a combination of these methods.
Borrowings may be in the form of bank borrowings, secured or unsecured, and
publicly or privately placed debt instruments, purchase money obligations to the
sellers of assets, long-term, tax-exempt bonds or financing from banks,
institutional investors or other lenders, or securitizations, any of which
indebtedness may be unsecured or may be secured by mortgages or other interests
in our assets. Such indebtedness may be recourse to all or any part of our
assets or may be limited to the particular asset to which the indebtedness
relates.
We have authority to offer our common stock or other equity or debt
securities in exchange for property and to repurchase or otherwise reacquire our
shares or any other securities and may engage in such activities in the future.
Subject to the percentage of ownership limitations and gross income and
asset tests necessary for REIT qualification, we may invest in securities of
other REITs, other entities engaged in real estate activities or securities of
other issuers, including for the purpose of exercising control over such
entities.
We may engage in the purchase and sale of investments. We do not underwrite
the securities of other issuers.
Our officers and directors may change any of these policies without a vote
of our stockholders.
In the opinion of our management, our properties are adequately covered by
insurance.
EXECUTIVE OFFICERS OF OUR COMPANY
At the date of this report, the executive officers of our company are:
C. Taylor Pickett (42) is the Chief Executive Officer and has served in
this capacity since June, 2001. Prior to joining our company, Mr. Pickett served
as the Executive Vice President and Chief Financial Officer from January 1998 to
June 2001 of Integrated Health Services, Inc., a public company specializing in
post-acute healthcare services. He also served as Executive Vice President of
Mergers and Acquisitions from May 1997 to December 1997 of Integrated Health
Services. Prior to his roles as Chief Financial Officer and Executive Vice
President of Mergers and Acquisitions, Mr. Pickett served as the President of
Symphony Health Services, Inc. from January 1996 to May 1997.
Daniel J. Booth (40) is the Chief Operating Officer and has served in this
capacity since October, 2001. Prior to joining our company, Mr. Booth served as
a member of Integrated Health Services, Inc.'s management team since 1993, most
recently serving as Senior Vice President, Finance. Prior to joining Integrated
Health Services, Mr. Booth was Vice President in the Healthcare Lending Division
of Maryland National Bank (now Bank of America).
R. Lee Crabill, Jr. (50) is the Senior Vice President of Operations of our
company and has served in this capacity since July, 2001. Mr. Crabill served as
a Senior Vice President of Operations at Mariner Post-Acute Network from 1997
through 2000. Prior to that, he served as an Executive Vice President of
Operations at Beverly Enterprises.
Robert O. Stephenson (40) is the Chief Financial Officer and has served in
this capacity since August, 2001. Prior to joining our company, Mr. Stephenson
served from 1996 to July 2001 as the Senior Vice President and Treasurer of
Integrated Health Services, Inc., a public company specializing in post-acute
healthcare services. Prior to Integrated Health Services, Mr. Stephenson served
in management roles at CSX Intermodal, Martin Marietta Corporation and
Electronic Data Systems.
Mariner Post-Acute Network and Integrated Health Services, along with
several other long-term care operators, each filed voluntary petitions under
Chapter 11 of the United States Bankruptcy Code in January and February 2000,
respectively.
As of December 31, 2003, we had 17 full-time employees and one part-time
employee, including the four executive officers listed above.
RISK FACTORS
You should carefully consider the risks described below. These risks are
not the only ones that we may face. Additional risks and uncertainties that we
are unaware of, or that we currently deem immaterial, also may become important
factors that affect us. If any of the following risks occurs, our business,
financial condition or results of operations could be materially and adversely
affected.
RISKS RELATED TO THE OPERATORS OF OUR FACILITIES
Our financial position could be weakened and our ability to pay dividends
could be limited if any of our major operators were unable to meet their
obligations to us or failed to renew or extend their relationship with us as
their lease terms expire, or if we were unable to lease or re-lease our
facilities or make mortgage loans on economically favorable terms. These adverse
developments could arise due to a number of factors, including those listed
below.
OUR RECENT EFFORTS TO RESTRUCTURE AND STABILIZE OUR PORTFOLIO MAY NOT PROVE TO
BE SUCCESSFUL.
In large part as a result of the 1997 changes in Medicare reimbursement of
services provided by skilled nursing facilities and reimbursement cuts imposed
under state Medicaid programs, a number of operators of our properties have
encountered significant financial difficulties during the last several years. In
1999, our investment portfolio consisted of 216 properties and our largest
public operators (by investment) were Sun Healthcare Group, Inc. ("Sun"),
Integrated Health Services, Advocat, Inc. ("Advocat") and Mariner Health Care
Inc. ("Mariner"). Some of these operators, including Sun, Integrated Health
Services and Mariner, subsequently filed for bankruptcy protection. Other of our
operators were required to undertake significant restructuring efforts. We have
restructured our arrangements with many of our operators whereby we have
renegotiated lease and mortgage terms, re-leased properties to new operators and
have closed and/or disposed of properties. At December 31, 2003, our investment
portfolio consisted of 211 properties and our largest public operators (by
investment) were Sun (20.7%), Advocat (12.8%) and Mariner (7.4%). Our largest
private company operators (by investment) were Seacrest Healthcare (6.8%) and
Claremont Healthcare Holdings, Inc. ("Claremont") (5.7%). We have a non-binding
agreement in principle with Sun, our largest operator (by investment) regarding
our 51 properties that were leased to various affiliates of Sun. Finalization of
our agreement with Sun is subject to negotiation and execution of definitive
documentation. In addition, we continue to have ongoing restructuring
discussions with Claremont regarding five facilities Claremont currently leases
from us. We might not be successful in reaching definitive agreements with Sun
or Claremont. We are also aware of four properties in our portfolio located in
Illinois where facility operations are currently insufficient to meet rental
payments due to us under our leases for these facilities. These lease payments
are currently being paid by the lessee from funds other than those generated by
the facilities. It is possible that we will need to take steps to restructure
this portion of our portfolio, or other properties in our portfolio with respect
to which our operators encounter financial difficulty. We cannot assure you that
our recent efforts to restructure and stabilize our property portfolio will be
successful.
THE BANKRUPTCY, INSOLVENCY OR FINANCIAL DETERIORATION OF OUR OPERATORS COULD
DELAY OUR ABILITY TO COLLECT UNPAID RENTS OR REQUIRE US TO FIND NEW OPERATORS
FOR REJECTED FACILITIES.
We are exposed to the risk that our operators may not be able to meet their
obligations, which may result in their bankruptcy or insolvency. Although our
leases and loans provide us the right to terminate an investment, evict an
operator, demand immediate repayment and other remedies, the bankruptcy laws
afford certain protections to a party that has filed for bankruptcy that may
render these remedies unenforceable. In addition, an operator in bankruptcy may
be able to restrict our ability to collect unpaid rent or mortgage payments
during the bankruptcy case.
If one of our lessees seeks bankruptcy protection, title 11 of the United
States Code ("Bankruptcy Code"), provides that a trustee in a liquidation or
reorganization case under the Bankruptcy Code, or a debtor-in-possession in a
reorganization case under the Bankruptcy Code, has the option to assume or
reject the unexpired lease obligations of a debtor-lessee. However, our lease
arrangements with operators who operate more than one of our facilities are
generally made pursuant to a single master lease covering all of that operator's
facilities leased from us. Subject to certain restrictions, a debtor- lessee
under a master lease agreement would generally be required to assume or reject a
master lease as a whole, rather than making the decision on a facility by
facility basis, thereby preventing the debtor-lessee from assuming only the
better performing facilities and terminating the leasing arrangement with
respect to the poorer performing facilities. Whether or not a court would
require a master lease agreement to be assumed or rejected as a whole would
depend on a number of factors, including applicable state law, the parties
intent, whether the master lease agreement and related documents were executed
contemporaneously, the nature and purpose of the relevant documents, whether
there was separate and distinct consideration for each lease, and the provisions
contained in the relevant documents, including whether the relevant documents
are interrelated and contain ample cross-references. Therefore, it is not
possible to predict how a bankruptcy court would decide this issue.
o ASSUMPTION OF LEASES. In the event that an unexpired lease is assumed
by or on behalf of the debtor-lessee, any defaults, other than those
created by the financial condition of the debtor-lessee, the
commencement of its bankruptcy case or the appointment of a trustee,
would have to be cured and all the rental obligations thereunder
generally would be entitled to a priority over other unsecured claims.
Generally, unexpired leases must be assumed in their totality,
however, a bankruptcy court has the power to refuse to enforce certain
provisions of a lease, such as cross-default provisions or penalty
provisions, that would otherwise prevent or limit the ability of a
debtor-lessee from assuming or assuming and assigning to another party
the unexpired lease.
o REJECTION OF LEASES. Generally, the debtor-lessee is required to make
rent payments to us during its bankruptcy unless and until it rejects
the lease. The rejection of a lease is deemed to be a pre-petition
breach of the lease and the lessor will be allowed a pre-petition
general unsecured claim that will be limited to any unpaid rent
already due plus an amount equal to the rent reserved under the lease,
without acceleration, for the greater of (a) one year and (b) fifteen
percent (15%), not to exceed three years, of the remaining term of
such lease, following the earlier of (i) the petition date and (ii)
repossession or surrender of the leased property. Although the amount
of a lease rejection claim is subject to the statutory cap described
above, the lessor should receive the same percentage recovery on
account of its claim as other holders of allowed pre-petition
unsecured claims receive from the bankruptcy estate. If the
debtor-lessee rejects the lease, the facility would be returned to us.
In that event, if we were unable to re-lease the facility to a new
operator on favorable terms or only after a significant delay, we
could lose some or all of the associated revenue from that facility
for an extended period of time.
If an operator defaults under one of our mortgage loans, we may have to
foreclose on the mortgage or protect our interest by acquiring title to the
property and thereafter making substantial improvements or repairs in order to
maximize the facility's investment potential. Operators may contest enforcement
of foreclosure or other remedies, seek bankruptcy protection against our
exercise of enforcement or other remedies and/or bring claims for lender
liability in response to actions to enforce mortgage obligations. If an operator
seeks bankruptcy protection, the automatic stay provisions of the federal
bankruptcy law would preclude us from enforcing foreclosure or other remedies
against the operator unless relief is obtained from the court. High "loan to
value" ratios or declines in the value of the facility may prevent us from
realizing an amount equal to our mortgage loan upon foreclosure.
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 and
licensure process of any federal, state or local agency necessary for the
replacement of the previous operator licensed to manage the facility. In some
instances, we may take possession of a property and such action could expose us
to successor liabilities. These events, if they were to occur, could reduce our
revenue and operating cash flow.
OPERATORS THAT FAIL TO COMPLY WITH GOVERNMENTAL REIMBURSEMENT PROGRAMS SUCH AS
MEDICARE OR MEDICAID, LICENSING AND CERTIFICATION REQUIREMENTS, FRAUD AND ABUSE
REGULATIONS OR NEW LEGISLATIVE DEVELOPMENTS MAY BE UNABLE TO MEET THEIR
OBLIGATIONS TO US.
Our operators are subject to numerous federal, state and local laws and
regulations that are subject to frequent and substantial changes (sometimes
applied retroactively) resulting from legislation, adoption of rules and
regulations, and administrative and judicial interpretations of existing law.
The ultimate timing or effect of these changes cannot be predicted. These
changes may have a dramatic effect on our operators' costs of doing business and
the amount of reimbursement by both government and other third-party payors. The
failure of any of our operators to comply with these laws, requirements and
regulations could adversely affect their ability to meet their obligations to
us. In particular:
o MEDICARE AND MEDICAID. A significant portion of our skilled nursing
facility operators' revenue is derived from governmentally-funded
reimbursement programs, primarily Medicare and Medicaid, and failure
to maintain certification and accreditation in these programs would
result in a loss of funding from such programs. Loss of certification
or accreditation could cause the revenues of our operators to decline,
potentially jeopardizing their ability to meet their obligations to
us. In that event, our revenues from those facilities could be
reduced, which could in turn cause the value of our affected
properties to decline. State licensing and Medicare and Medicaid laws
also require operators of nursing homes and assisted living facilities
to comply with extensive standards governing operations. Federal and
state agencies administering those laws regularly inspect such
facilities and investigate complaints. Our operators and their
managers receive notices of potential sanctions and remedies from time
to time, and such sanctions have been imposed from time to time on
facilities operated by them. If they are unable to cure deficiencies
which have been identified or which are identified in the future, such
sanctions may be imposed and if imposed may adversely affect our
operators' revenues, potentially jeopardizing their ability to meet
their obligations to us.
o LICENSING AND CERTIFICATION. Our operators and facilities are subject
to regulatory and licensing requirements of federal, state and local
authorities and are periodically audited by them to confirm
compliance. Failure to obtain licensure or loss or suspension of
licensure would prevent a facility from operating or result in a
suspension of reimbursement payments until all licensure issues have
been resolved and the necessary licenses obtained or reinstated. Our
skilled nursing facilities require governmental approval, in the form
of a certificate of need that generally varies by state and is subject
to change, prior to the addition or construction of new beds, the
addition of services or certain capital expenditures. Some of our
facilities may be unable to satisfy current and future certificate of
need requirements and may for this reason be unable to continue
operating in the future. In such event, our revenues from those
facilities could be reduced or eliminated for an extended period of
time.
o FRAUD AND ABUSE REGULATIONS. There are various extremely complex and
largely uninterpreted federal and state laws governing a wide array of
referrals, relationships and arrangements and prohibiting fraud by
healthcare providers, including criminal provisions that prohibit
filing false claims or making false statements to receive payment or
certification under Medicare and Medicaid, or failing to refund
overpayments or improper payments. Governments are devoting increasing
attention and resources to anti-fraud initiatives against healthcare
providers. The Health Insurance Portability and Accountability Act of
1996 and the Balanced Budget Act of 1997 expanded the penalties for
healthcare fraud, including broader provisions for the exclusion of
providers from the Medicare and Medicaid programs. Furthermore, the
Office of Inspector General of the U.S. Department of Health and Human
Services, or OIG, in cooperation with other federal and state
agencies, continues to focus on the activities of skilled nursing
facilities in certain states in which we have properties. In addition,
the federal False Claims Act allows a private individual with
knowledge of fraud to bring a claim on behalf of the federal
government and earn a percentage of the federal government's recovery.
Because of these incentives, these so-called "whistleblower" suits
have become more frequent. The violation of any of these regulations
by an operator may result in the imposition of fines or other
penalties that could jeopardize that operator's ability to make lease
or mortgage payments to us or to continue operating its facility.
o LEGISLATIVE AND REGULATORY DEVELOPMENTS. Each year, legislative
proposals are introduced or proposed in Congress and in some state
legislatures that would affect major changes in the healthcare system,
either nationally or at the state level. The Medicare Prescription
Drug, Improvement and Modernization Act of 2003, P.Law 108-173, which
is one example of such legislation, was enacted in late 2003. The
Medicare reimbursement changes for the long term care industry under
this Act are limited to a temporary increase in the per diem amount
paid to skilled nursing facilities for residents who have AIDS. The
significant expansion of other benefits for Medicare beneficiaries
under this Act, such as the expanded prescription drug benefit, could
result in financial pressures on the Medicare program that might
result in future legislative and regulatory changes with impacts for
our operators. Other proposals under consideration include efforts by
individual states to control costs by decreasing state Medicaid
reimbursements, a federal "Patient Protection Act" to protect
consumers in managed care plans, efforts to improve quality of care
and reduce medical errors throughout the health care industry and
hospital cost-containment initiatives by public and private payors. We
cannot accurately predict whether any proposals will be adopted or, if
adopted, what effect, if any, these proposals would have on operators
and, thus, our business.
Regulatory proposals and rules are released on an ongoing basis that may
have major impact on the healthcare system generally and the skilled nursing and
long-term care industries in particular.
OUR OPERATORS DEPEND ON REIMBURSEMENT FROM GOVERNMENTAL AND OTHER THIRD-PARTY
PAYORS AND REIMBURSEMENT RATES FROM SUCH PAYORS MAY BE REDUCED.
Changes in the reimbursement rate or methods of payment from third-party
payors, including the Medicare and Medicaid programs, or the implementation of
other measures to reduce reimbursements for services provided by our operators
has in the past, and could in the future, result in a substantial reduction in
our operators' revenues and operating margins. Additionally, net revenue
realizable under third-party payor agreements can change after examination and
retroactive adjustment by payors during the claims settlement processes or as a
result of post-payment audits. Payors may disallow requests for reimbursement
based on determinations that certain costs are not reimbursable or reasonable or
because additional documentation is necessary or because certain services were
not covered or were not medically necessary. There also continue to be new
legislative and regulatory proposals that could impose further limitations on
government and private payments to healthcare providers. In some cases, states
have enacted or are considering enacting measures designed to reduce their
Medicaid expenditures and to make changes to private healthcare insurance. We
cannot assure you that adequate reimbursement levels will continue to be
available for the services provided by our operators, which are currently being
reimbursed by Medicare, Medicaid or private third-party payors. Further limits
on the scope of services reimbursed and on reimbursement rates could have a
material adverse effect on our operators' liquidity, financial condition and
results of operations which could cause the revenues of our operators to decline
and potentially jeopardize their ability to meet their obligations to us.
OUR OPERATORS MAY BE SUBJECT TO SIGNIFICANT LEGAL ACTIONS THAT COULD SUBJECT
THEM TO INCREASED OPERATING COSTS AND SUBSTANTIAL UNINSURED LIABILITIES, WHICH
MAY AFFECT THEIR ABILITY TO PAY THEIR LEASE AND MORTGAGE PAYMENTS TO US.
As is typical in the healthcare industry, our operators are often subject
to claims that their services have resulted in resident injury or other adverse
effects. Many of these operators have experienced an increasing trend in the
frequency and severity of professional liability and general liability insurance
claims and litigation asserted against them. The insurance coverage maintained
by our operators may not cover all claims made against them nor continue to be
available at a reasonable cost, if at all. In some states, insurance coverage
for the risk of punitive damages arising from professional liability and general
liability claims and/or litigation may not, in certain cases, be available to
operators due to state law prohibitions or limitations of availability. As a
result, our operators operating in these states may be liable for punitive
damage awards that are either not covered or are in excess of their insurance
policy limits. We also believe that there has been, and will continue to be, an
increase in governmental investigations of long-term care providers,
particularly in the area of Medicare/Medicaid false claims, as well as an
increase in enforcement actions resulting from these investigations. Insurance
is not available to cover such losses. Any adverse determination in a legal
proceeding or governmental investigation, whether currently asserted or arising
in the future, could have a material adverse effect on an operator's financial
condition. If an operator is unable to obtain or maintain insurance coverage, if
judgments are obtained in excess of the insurance coverage, if an operator is
required to pay uninsured punitive damages, or if an operator is subject to an
uninsurable government enforcement action, the operator could be exposed to
substantial additional liabilities.
ONE OF OUR LARGEST OPERATORS WAS RECENTLY SERVED WITH SIX LAWSUITS BY THE STATE
OF ARKANSAS SEEKING SUBSTANTIAL DAMAGES RELATING TO PATIENT CARE ISSUES AND
ALLEGED MEDICAID FALSE CLAIMS.
On February 19, 2004, Advocat announced that it had been served with six
lawsuits by the State of Arkansas alleging violations by Advocat and certain of
its subsidiaries of the Arkansas Abuse of Adults Act and the Arkansas Medicaid
False Claims Act. In its announcement, Advocat stated that the complaints seek,
in the aggregate, actual damages of approximately $250,000 and fines and
penalties in excess of $45 million. Although Advocat stated its intention to
vigorously defend itself against the subject allegations, Advocat further stated
that it cannot predict the outcome of the subject lawsuits or the impact of the
ultimate outcome on Advocat's financial condition, cash flows or results of
operations. Advocat accounts for approximately 13.4% of our 2003 total revenues.
In the event that there is an adverse outcome to Advocat in these lawsuits, or
in the event that Advocat's business is otherwise adversely affected as a result
of the lawsuits (for example, as a result of penalties imposed in connection
with a settlement of the lawsuits, as a result of licensure revocation,
admission holds or similar restrictions being imposed or as a result of a
decline in business due to reputational issues), and Advocat is unable to pay
its full monthly rental obligation to us, then we will experience a reduction of
our rental income. Should such events occur, our income and cash flows from
operations would be adversely affected. We are unable currently to predict how
this matter may ultimately affect us.
INCREASED COMPETITION AS WELL AS INCREASED OPERATING COSTS HAVE RESULTED IN
LOWER REVENUES FOR SOME OF OUR OPERATORS AND MAY AFFECT THE ABILITY OF OUR
TENANTS TO MEET THEIR PAYMENT OBLIGATIONS TO US.
The healthcare industry is highly competitive and we expect that it may
become more competitive in the future. Our operators are competing with numerous
other companies providing similar healthcare services or alternatives such as
home health agencies, life care at home, community-based service programs,
retirement communities and convalescent centers. We cannot be certain the
operators of all of our facilities will be able to achieve occupancy and rate
levels that will enable them to meet all of their obligations to us. Our
operators may encounter increased competition in the future that could limit
their ability to attract residents or expand their businesses and therefore
affect their ability to pay their lease or mortgage payments.
The market for qualified nurses, healthcare professionals and other key
personnel is highly competitive and our operators may experience difficulties in
attracting and retaining qualified personnel. Increases in labor costs due to
higher wages and greater benefits required to attract and retain qualified
healthcare personnel incurred by our operators could affect their ability to pay
their lease or mortgage payments. This situation could be particularly acute in
certain states that have enacted legislation establishing minimum staffing
requirements.
RISKS RELATED TO US AND OUR OPERATIONS
In addition to the operator related risks discussed above, there are a
number of risks directly associated with us and our operations.
WE RELY ON EXTERNAL SOURCES OF CAPITAL TO FUND FUTURE CAPITAL NEEDS, AND IF WE
ENCOUNTER DIFFICULTY IN OBTAINING SUCH CAPITAL, WE MAY NOT BE ABLE TO MAKE
FUTURE INVESTMENTS NECESSARY TO GROW OUR BUSINESS OR MEET MATURING COMMITMENTS.
In order to qualify as a REIT under the Internal Revenue Code, or the Code,
we are required, among other things, to distribute each year to our stockholders
at least 90% of our REIT taxable income. Because of this distribution
requirement, we may not be able to fund, from cash retained from operations, all
future capital needs, including capital needs to make investments and to satisfy
or refinance maturing commitments. As a result, we may rely on external sources
of capital. If we are unable to obtain needed capital at all or only on
unfavorable terms from these sources, we might not be able to make the
investments needed to grow our business, or to meet our obligations and
commitments as they mature, which could negatively affect the ratings of our
debt and even, in extreme circumstances, affect our ability to continue
operations. Our access to capital depends upon a number of factors over which we
have little or no control, including general market conditions and the market's
perception of our growth potential and our current and potential future earnings
and cash distributions and the market price of the shares of our capital stock.
Generally speaking, difficult capital market conditions in our industry during
the past several years and our need to stabilize our portfolio have limited our
access to capital. Our potential capital sources include, but are not limited
to:
EQUITY FINANCING. As with other publicly-traded companies, the availability of
equity capital will depend, in part, on the market price of our common stock
which, in turn, will depend upon various market conditions and other factors
that may change from time to time including:
o the extent of investor interest;
o the general reputation of REITs and the attractiveness of their equity
securities in comparison to other equity securities, including
securities issued by other real estate-based companies;
o our financial performance and that of our operators;
o the contents of analyst reports about us and the REIT industry;
o general stock and bond market conditions, including changes in
interest rates on fixed income securities, which may lead prospective
purchasers of our common stock to demand a higher annual yield from
future distributions;
o our failure to maintain or increase our dividend, which is dependent,
to a large part, on growth of funds from operations which in turn
depends upon increased revenues from additional investments and rental
increases; and
o other factors such as governmental regulatory action and changes in
REIT tax laws.
The market value of the equity securities of a REIT is generally based upon
the market's perception of the REIT's growth potential and its current and
potential future earnings and cash distributions. Our failure to meet the
market's expectation with regard to future earnings and cash distributions would
likely adversely affect the market price of our common stock and reduce the
value of your investment.
DEBT FINANCING/LEVERAGE. Financing for future investments and our maturing
commitments may be provided by borrowings under our bank line of credit, private
or public offerings of debt, the assumption of secured indebtedness, mortgage
financing on a portion of our owned portfolio or through joint ventures. We are
subject to risks normally associated with debt financing, including the risks
that our cash flow will be insufficient to make timely payments of interest,
that we will be unable to refinance existing indebtedness and that the terms of
refinancing will not be as favorable as the terms of existing indebtedness. If
we are unable to refinance or extend principal payments due at maturity or pay
them with proceeds from other capital transactions, our cash flow may not be
sufficient in all years to pay distributions to our stockholders and to repay
all maturing debt. Furthermore, if prevailing interest rates, changes in our
debt ratings or other factors at the time of refinancing result in higher
interest rates upon refinancing, the interest expense relating to that
refinanced indebtedness would increase, which could reduce our profitability and
the amount of dividends we are able to pay. Moreover, additional debt financing
increases the amount of our leverage. Our degree of leverage could have
important consequences to stockholders, including affecting our investment grade
ratings, affecting our ability to obtain additional financing in the future for
working capital, capital expenditures, acquisitions, development or other
general corporate purposes and making us more vulnerable to a downturn in
business or the economy generally.
CERTAIN OF OUR OPERATORS ACCOUNT FOR A SIGNIFICANT PERCENTAGE OF OUR REVENUES.
Based on existing contractual rent and lease payments regarding the
restructuring of certain existing investments, Advocat and Sun each account for
over 10% of our current contractual monthly revenues, with Sun accounting for
slightly over 20% of our current contractual monthly revenues. Additionally, our
top five operators account for over 55% of our current contractual monthly
revenues. The failure or inability of any of these operators to pay their
obligations to us could materially reduce our revenues and net income, which
could in turn reduce the amount of dividends we pay and cause our stock price to
decline. For information regarding our non-binding agreement in principle with
Sun, see "Portfolio Developments; Sun Healthcare Group, Inc."
UNFORESEEN COSTS ASSOCIATED WITH THE ACQUISITION OF NEW PROPERTIES COULD REDUCE
OUR PROFITABILITY.
Our business strategy contemplates future acquisitions that may not prove
to be successful. For example, we might encounter unanticipated difficulties and
expenditures relating to any acquired properties, including contingent
liabilities, or newly acquired properties might require significant management
attention that would otherwise be devoted to our ongoing business. If we agree
to provide funding to enable healthcare operators to build, expand or renovate
facilities on our properties and the project is not completed, we could be
forced to become involved in the development to ensure completion or we could
lose the property. These costs may negatively affect our results of operations.
OUR ASSETS MAY BE SUBJECT TO IMPAIRMENT CHARGES.
We periodically but not less than annually evaluate our real estate
investments and other assets 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 we determine that a
significant impairment has occurred, we would be required to make an adjustment
to the net carrying value of the asset, which could have a material adverse
affect on our results of operations and funds from operations in the period in
which the write-off occurs.
WE MAY NOT BE ABLE TO SELL CERTAIN CLOSED FACILITIES FOR THEIR BOOK VALUE.
From time to time, we close facilities and actively market such facilities
for sale. To the extent we are unable to sell these properties for our book
value, we may be required to take an impairment charge or loss on the sale,
either of which would reduce our net income.
OUR SUBSTANTIAL INDEBTEDNESS COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION.
We have substantial indebtedness and we may increase our indebtedness in
the future. As of December 31, 2003, our debt was $280.6 million, the majority
of which currently comes due in 2007. Our level of indebtedness could have
important consequences to our stockholders. For example, it could:
o limit our ability to satisfy our obligations with respect to holders
of our capital stock;
o potentially cause us to violate a cross-default provision under our
various long-term debt obligations;
o make us more vulnerable to economic downturns;
o potentially limit our ability to withstand competitive pressures if,
as a result of a decline in our rating agency ratings, our cost of
capital increases as compared to our competitors' cost of capital thus
reducing the spread on our investments; and
o impair our ability to obtain additional financing in the future for
working capital, capital expenditures, acquisitions or general
corporate purposes.
OUR REAL ESTATE INVESTMENTS ARE RELATIVELY ILLIQUID.
Real estate investments are relatively illiquid and, therefore, tend to
limit our ability to vary our portfolio promptly in response to changes in
economic or other conditions. All of our properties are "special purpose"
properties that could not be readily converted to general residential, retail or
office use. Healthcare facilities that participate in Medicare or Medicaid must
meet extensive program requirements, including physical plant and operational
requirements, which are revised from time to time. Such requirements may include
a duty to admit Medicare and Medicaid patients, limiting the ability of the
facility to increase its private pay census beyond certain limits. Medicare and
Medicaid facilities are regularly inspected to determine compliance, and may be
excluded from the programs--in some cases without a prior hearing--for failure
to meet program requirements. Transfers of operations of nursing homes and other
healthcare-related facilities are subject to regulatory approvals not required
for transfers of other types of commercial operations and other types of real
estate. Thus, if the operation of any of our properties becomes unprofitable due
to competition, age of improvements or other factors such that our lessee or
mortgagor becomes unable to meet its obligations on the lease or mortgage loan,
the liquidation value of the property may be substantially less, particularly
relative to the amount owing on any related mortgage loan, than would be the
case if the property were readily adaptable to other uses. 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 with a new 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. Should such
events occur, our income and cash flows from operations would be adversely
affected.
AS AN OWNER OR LENDER WITH RESPECT TO REAL PROPERTY, WE MAY BE EXPOSED TO
POSSIBLE ENVIRONMENTAL LIABILITIES.
Under various federal, state and local environmental laws, ordinances and
regulations, an owner of real property or a secured lender, such as us, may be
liable in certain circumstances for the costs of removal or remediation of
certain hazardous or toxic substances at, under or disposed of in connection
with such property, as well as certain other potential costs relating to
hazardous or toxic substances, including government fines and damages for
injuries to persons and adjacent property. Such laws often impose liability
without regard to whether the owner knew of, or was responsible for, the
presence or disposal of such substances and liability may be imposed on the
owner in connection with the activities of an operator of the property. The cost
of any required remediation, removal, fines or personal or property damages and
the owner's liability therefore could exceed the value of the property, and/or
the assets of the owner. In addition, the presence of such substances, or the
failure to properly dispose of or remediate such substances, may adversely
affect the owner's ability to sell or rent such property or to borrow using such
property as collateral which, in turn, would reduce the owner's revenues.
Although our leases and mortgage loans require the lessee and the mortgagor
to indemnify us for certain environmental liabilities, the scope of such
obligations may be limited, and we cannot assure you that any such mortgagor or
lessee would be able to fulfill its indemnification obligations.
THE INDUSTRY IN WHICH WE OPERATE IS HIGHLY COMPETITIVE. THIS COMPETITION MAY
PREVENT US FROM RAISING PRICES AT THE SAME PACE AS OUR COSTS INCREASE.
We compete for additional healthcare facility investments with other
healthcare investors, including other REITs. The operators of the facilities
compete with other regional or local nursing care facilities for the support of
the medical community, including physicians and acute care hospitals, as well as
the general public. Some significant competitive factors for the placing of
patients in skilled and intermediate care nursing facilities include quality of
care, reputation, physical appearance of the facilities, services offered,
family preferences, physician services and price. If our cost of capital should
increase relative to the cost of capital of our competitors, the spread that we
realize on our investments may decline if competitive pressures limit or prevent
us from charging higher lease or mortgage rates.
WE ARE NAMED AS DEFENDANTS IN LITIGATION ARISING OUT OF PROFESSIONAL LIABILITY
AND GENERAL LIABILITY CLAIMS RELATING TO OUR PREVIOUSLY OWNED AND OPERATED
FACILITIES WHICH IF DECIDED AGAINST US, COULD ADVERSELY AFFECT OUR FINANCIAL
CONDITION.
We and several of our wholly-owned subsidiaries have been named as
defendants in professional liability and general liability claims related to our
owned and operated facilities. Other third-party managers responsible for the
day-to-day operations of these facilities have also been named as defendants in
these claims. In these suits, patients of certain previously owned and operated
facilities have alleged significant damages, including punitive damages, against
the defendants. The lawsuits are in various stages of discovery and we are
unable to predict the likely outcome at this time. We continue to vigorously
defend these claims and pursue all rights we may have against the managers of
the facilities, under the terms of the management agreements. We have insured
these matters, subject to self-insured retentions of various amounts. There can
be no assurance that we will be successful in our defense of these matters or in
asserting our claims against various managers of the subject facilities or that
the amount of any settlement or judgment will be substantially covered by
insurance or that any punitive damages will be covered by insurance.
WE ARE SUBJECT TO SIGNIFICANT ANTI-TAKEOVER PROVISIONS.
Our articles of incorporation and bylaws contain various procedural and
other requirements which could make it difficult for stockholders to effect
certain corporate actions. Our Board of Directors is divided into three classes
and our Board members are elected for terms that are staggered. Our Board of
Directors also has the authority to issue additional shares of preferred stock
and to fix the preferences, rights and limitations of the preferred stock
without stockholder approval. We have also adopted a stockholders rights plan
which provides for share purchase rights to become exercisable at a discount if
a person or group acquires more than 9.9% of our common stock or announces a
tender or exchange offer for more than 9.9% of our common stock. These
provisions could discourage unsolicited acquisition proposals or make it more
difficult for a third party to gain control of us, which could adversely affect
the market price of our securities.
WE MAY CHANGE OUR INVESTMENT STRATEGIES AND POLICIES AND CAPITAL STRUCTURE.
Our Board of Directors, without the approval of our stockholders, may alter
our investment strategies and policies if it determines in the future that a
change is in our and our stockholders' best interests. The methods of
implementing our investment strategies and policies may vary as new investments
and financing techniques are developed.
IF WE FAIL TO MAINTAIN OUR REIT STATUS, WE WILL BE SUBJECT TO FEDERAL INCOME TAX
ON OUR TAXABLE INCOME AT REGULAR CORPORATE RATES.
We were organized to qualify for taxation as a real estate investment
trust, or REIT, under Sections 856 through 860 of the Internal Revenue Code. We
believe we have conducted, and we intend to continue to conduct, our operations
so as to qualify as a REIT. Qualification as a REIT involves the satisfaction of
numerous requirements, some on an annual and some on a quarterly basis,
established under highly technical and complex provisions of the Internal
Revenue Code for which there are only limited judicial and administrative
interpretations and involve the determination of various factual matters and
circumstances not entirely within our control. For example, in order to qualify
as a REIT, each year we must distribute to our stockholders at least 90% of our
REIT taxable income. We cannot assure you that we will at all times satisfy
these rules and tests.
If we were to fail to qualify as a REIT in any taxable year, as a result of
a determination that we failed to meet the annual distribution requirement or
otherwise, we would be subject to federal income tax, including any applicable
alternative minimum tax, on our taxable income at regular corporate rates.
Moreover, unless entitled to relief under certain statutory provisions, we also
would be disqualified from treatment as a REIT for the four taxable years
following the year during which qualification is lost. This treatment would
reduce our net earnings and cash flow available for investment, debt service or
distribution to stockholders because of our additional tax liability for the
years involved. In addition, distributions to stockholders would no longer be
required to be made.
WE HEDGE FLOATING RATE DEBT WITH AN INTEREST RATE CAP, AND MAY RECORD CHARGES
ASSOCIATED WITH THE TERMINATION OR CHANGE IN VALUE OF THE INTEREST RATE CAP.
We utilize one interest rate cap to 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. We will assess
the probability that our expected future floating rate debt is sufficient for
our cap and may recognize a charge to earnings to reverse amounts previously
recorded as a component of comprehensive income.
RISKS RELATED TO OUR STOCK
THE MARKET VALUE OF OUR STOCK COULD BE SUBSTANTIALLY AFFECTED BY VARIOUS
FACTORS.
The share price of our stock will depend on many factors, which may change
from time to time, including:
o the market for similar securities issued by REITs;
o changes in estimates by analysts;
o our ability to meet analysts' estimates;
o general economic and financial market conditions; and
o our financial condition, performance and prospects.
OUR ISSUANCE OF ADDITIONAL CAPITAL STOCK, WARRANTS OR DEBT SECURITIES, WHETHER
OR NOT CONVERTIBLE, MAY REDUCE THE MARKET PRICE FOR OUR SHARES.
We cannot predict the effect, if any, that future sales of our capital
stock, warrants or debt securities, or the availability of our securities for
future sale, will have on the market price of our shares, including our common
stock. Sales of substantial amounts of our common stock or preferred shares,
warrants or debt securities convertible into or exercisable or exchangeable for
common stock in the public market or the perception that such sales might occur
could reduce the market price of our stock and the terms upon which we may
obtain additional equity financing in the future.
In addition, we may issue additional capital stock in the future to raise
capital or as a result of the following:
o The issuance and exercise of options to purchase our common stock. As
of December 31, 2003, we had outstanding options to acquire
approximately 2.3 million shares of our common stock. In addition, we
may in the future issue additional options or other securities
convertible into or exercisable for our common stock under our 2000
Stock Incentive Plan, as amended, or other remuneration plans. We may
also issue options or convertible securities to our employees in lieu
of cash bonuses or to our directors in lieu of director's fees.
o The issuance of debt securities exchangeable for our common stock.
o The exercise of warrants we may issue in the future.
o Lenders sometimes ask for warrants or other rights to acquire shares
in connection with providing financing. We cannot assure you that our
lenders will not request such rights.
THERE ARE NO ASSURANCES OF OUR ABILITY TO PAY DIVIDENDS IN THE FUTURE.
In 2001, our Board of Directors suspended dividends on our common stock and
all series of preferred stock in an effort to generate cash to address then
impending debt maturities. In 2003, we paid all accrued but unpaid dividends on
all series of preferred stock and reinstated dividends on our common stock and
all series of preferred stock. However, our ability to pay dividends may be
adversely affected if any of the risks described above were to occur. Our
payment of dividends is subject to compliance with restrictions contained in our
bank credit facilities and our preferred stock. All dividends will be paid at
the discretion of our Board of Directors and will depend upon our earnings, our
financial condition, maintenance of our REIT status and such other factors as
our Board may deem relevant from time to time. There are no assurances of our
ability to pay dividends in the future. In addition, our dividends in the past
have included, and may in the future include, a return of capital.
HOLDERS OF OUR OUTSTANDING PREFERRED STOCK HAVE LIQUIDATION AND OTHER RIGHTS
THAT ARE SENIOR TO THE RIGHTS OF THE HOLDERS OF OUR COMMON STOCK.
Our Board of Directors has the authority to designate and issue preferred
stock that may have dividend, liquidation and other rights that are senior to
those of our common stock. As of February 11, 2004, 2,300,000 shares of our
9.25% Series A cumulative preferred stock, 2,000,000 shares of our 8.625% Series
B cumulative preferred stock and 4,739,500 shares of our 8.375% Series D
cumulative redeemable preferred stock were issued and outstanding. Holders of
our preferred stock are generally entitled to cumulative dividends before any
dividends may be declared or set aside on our common stock. Upon our voluntary
or involuntary liquidation, dissolution or winding up, before any payment is
made to holders of our common stock, holders of our preferred stock are entitled
to receive a liquidation preference of $25 per share with respect to the Series
A, Series B and Series D preferred stock, plus any accrued and unpaid
distributions. This will reduce the remaining amount of our assets, if any,
available to distribute to holders of our common stock. In addition, holders of
our preferred stock have the right to elect two additional directors to our
Board of Directors if six quarterly preferred dividends are in arrears.
LEGISLATIVE OR REGULATORY ACTION COULD ADVERSELY AFFECT PURCHASERS OF OUR STOCK.
In recent years, numerous legislative, judicial and administrative changes
have been made in the provisions of the federal income tax laws applicable to
investments similar to an investment in our stock. Changes are likely to
continue to occur in the future, and we cannot assure you that any of these
changes will not adversely affect our stockholder's stock. Any of these changes
could have an adverse effect on an investment in our stock or on market value or
resale potential. Stockholders are urged to consult with your own tax advisor
with respect to the impact that recent legislation may have on your investment
and the status of legislative regulatory or administrative developments and
proposals and their potential effect.
RECENT CHANGES IN TAXATION OF CORPORATE DIVIDENDS MAY ADVERSELY AFFECT THE VALUE
OF OUR STOCK.
The Jobs and Growth Tax Relief Reconciliation Act of 2003 that was enacted
into law on May 28, 2003, among other things, generally reduces to 15% the
maximum marginal rate of tax payable by individuals on dividends received from a
regular C corporation. This reduced tax rate, however, will not apply to
dividends paid to individuals by a REIT on its shares, except for certain
limited amounts. While the earnings of a REIT that are distributed to its
stockholders still generally will be subject to less combined federal income
taxation than earnings of a non-REIT C corporation that are distributed to its
stockholders net of corporate-level tax, this legislation could cause individual
investors to view the stock of regular C corporations as more attractive
relative to the shares of a REIT than was the case prior to the enactment of the
legislation. Individual investors could hold this view because the dividends
from regular C corporations will generally be taxed at a lower rate while
dividends from REITs will generally be taxed at the same rate as the
individual's other ordinary income. We cannot predict what effect, if any, the
enactment of this legislation may have on the value of the shares of REITs in
general or on the value of our stock in particular, either in terms of price or
relative to other investments.
ITEM 2 - PROPERTIES
At December 31, 2003, our real estate investments included long-term care
facilities and rehabilitation hospital investments, either in the form of
purchased facilities which are leased to operators, mortgages on facilities
which are operated by the mortgagors or their affiliates and one facility owned
and operated for our account. The facilities are located in 28 states and are
operated by 39 unaffiliated operators. The following table summarizes our
property investments as of December 31, 2003:
GROSS
NO. OF NO. OF OCCUPANCY INVESTMENT
INVESTMENT STRUCTURE/OPERATOR BEDS FACILITIES PERCENTAGE(1) (IN THOUSANDS)
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PURCHASE/LEASEBACK
Sun Healthcare Group, Inc......................... 4,028 38 85 $168,482
Advocat, Inc...................................... 2,997 29 77 91,567
Seacrest Healthcare............................... 950 7 88 55,020
Claremont Health Care Holdings, Inc............... 628 5 95 45,900
Alden Management Services, Inc.................... 868 4 56 31,727
Harborside Healthcare Corporation................. 465 4 84 22,868
Haven Healthcare.................................. 442 4 95 22,387
Alterra Healthcare Corporation.................... 273 7 75 22,216
StoneGate Senior Care LP.......................... 664 6 84 21,781
CommuniCare Health Services....................... 260 2 60 20,300
Infinia Properties of Arizona, LLC................ 378 4 69 17,852
USA Healthcare, Inc............................... 550 5 75 14,879
Conifer Care Communities, Inc..................... 195 3 87 14,365
Senior Management................................. 386 3 83 13,463
Washington N&R, LLC............................... 286 2 80 12,152
Peak Medical of Idaho, Inc........................ 224 2 70 10,500
HQM of Floyd County, Inc.......................... 283 3 87 10,250
Triad Health Management of Georgia II, LLC........ 304 2 99 10,000
Mark Ide Limited Liability Company(2)............. 373 4 78 9,885
The Ensign Group, Inc............................. 271 3 93 9,656
Lakeland Investors, LLC........................... 300 1 62 8,348
Hickory Creek Healthcare Foundation, Inc.......... 138 2 89 7,250
American Senior Communities, LLC.................. 78 2 73 6,195
Liberty Assisted Living Centers, LP............... 120 1 100 5,995
Emeritus Corporation.............................. 52 1 72 5,674
Longwood Management Corporation................... 185 2 93 5,200
Eldorado Care Center, Inc. & Magnolia
Manor, Inc...................................... 167 2 46 5,100
Nexion Management................................. 131 1 96 4,603
LandCastle Diversified LLC........................ 238 2 62 3,900
Lamar Healthcare, Inc............................. 102 1 68 2,540
Generations Healthcare, Inc....................... 59 1 87 2,507
-------------------------------------------------------------------------------
16,395 153 81 682,562
OWNED AND OPERATED ASSETS--FEE
Nexion Health Management, Inc(2).................. 128 1 84 5,295
-------------------------------------------------------------------------------
128 1 84 5,295
CLOSED FACILITIES
Closed Facilities................................. - 6 - 4,597
-------------------------------------------------------------------------------
- 6 - 4,597
FIXED-RATE MORTGAGES
Mariner Health Care, Inc.......................... 1,618 12 94 59,688
Essex Healthcare Corporation...................... 633 6 76 14,484
Advocat, Inc...................................... 423 4 82 12,715
Parthenon Healthcare, Inc......................... 300 2 81 10,851
Hickory Creek Healthcare Foundation, Inc.......... 667 15 71 10,025
Tiffany Care Centers, Inc......................... 319 5 75 4,518
Texas Health Enterprises/HEA Mgmt. Group, Inc..... 450 3 67 3,226
Evergreen Healthcare.............................. 191 2 66 2,131
Covenant Care Midwest, Inc........................ 150 1 60 1,691
Paris Nursing Home, Inc........................... 144 1 70 486
-------------------------------------------------------------------------------
4,895 51 82 119,815
Reserve for uncollectible loans...................... - - - -
-------------------------------------------------------------------------------
Total......................................... 21,418 211 81 $812,269
===============================================================================
(1) Represents the most recent data provided by our operators.
(2) Effective January 1, 2004, our remaining owned and operated asset was
re-leased to Mark Ide Limited Liability Company.
The following table presents the concentration of our facilities by state
as of December 31, 2003:
TOTAL % OF
NUMBER OF TOTAL INVESTMENT TOTAL
FACILITIES BEDS (IN THOUSANDS) INVESTMENT
--------------------------------------------------------------------
Florida................................... 23 2,770 $126,128 15.5
California................................ 19 1,556 66,436 8.2
Ohio...................................... 14 1,445 58,878 7.2
Illinois.................................. 11 1,513 51,274 6.3
Michigan.................................. 9 1,171 42,009 5.2
Texas..................................... 14 1,746 41,496 5.1
North Carolina............................ 8 1,154 40,389 5.0
Arkansas.................................. 12 1,253 39,325 4.8
Indiana................................... 24 1,277 35,968 4.4
Alabama................................... 9 1,152 35,932 4.4
Massachusetts............................. 5 600 31,168 3.8
West Virginia............................. 7 688 30,579 3.8
Kentucky.................................. 9 757 26,963 3.3
Connecticut............................... 4 442 22,387 2.8
Tennessee................................. 6 642 21,553 2.7
Washington................................ 3 194 18,230 2.2
Arizona................................... 4 378 17,852 2.2
Colorado.................................. 4 232 16,948 2.1
Iowa...................................... 7 700 16,679 2.1
Missouri.................................. 7 605 16,671 2.1
Pennsylvania.............................. 2 200 15,697 1.9
Idaho..................................... 3 264 11,100 1.4
Georgia................................... 2 304 10,000 1.2
New Hampshire............................. 1 68 5,800 0.7
Louisiana................................. 1 131 4,603 0.6
Kansas.................................... 1 40 3,419 0.4
Oklahoma.................................. 1 36 3,178 0.4
Utah...................................... 1 100 1,607 0.2
--------------------------------------------------------------------
Total................................ 211 21,418 $ 812,269 100.0
====================================================================
Our core portfolio consists of long-term lease and mortgage agreements. Our
leased real estate properties are leased under provisions of Single Facility
Leases or Master Leases with initial terms typically ranging from 5 to 15 years,
plus renewal options. Substantially all of the Master Leases provide for minimum
annual rentals that are subject to annual increases based upon increases in the
CPI or increases in revenues of the underlying properties, with certain limits.
Under the terms of the leases, the lessee is responsible for all maintenance,
repairs, taxes and insurance on the leased properties.
At December 31, 2003, we had one owned and operated facility which is
subject to governmental regulation and derives a substantial portion of its net
operating revenues from third-party payors, including the Medicare and Medicaid
programs. This facility is managed by an independent third party under a
management contract. The manager is responsible for the day-to-day operations of
the facility, including, among other things, patient care, staffing, billing and
collection of patient accounts and facility-level financial reporting. For its
services, the manager is paid a management fee based on a percentage of nursing
home revenues. We leased this facility to an operator effective January 1, 2004
and, as of the date of this report, we have no owned and operated facilities in
our portfolio. (See Note 3 - Properties to our audited consolidated financial
statements).
ITEM 3 - LEGAL PROCEEDINGS
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. 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 consisting 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 $1.26 million was recorded in 2002 relating
to this note. As of December 31, 2003, the principal balance on this note was
$2.2 million prior to reserves.
In 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 Uniform Commercial Code ("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 in the
first quarter of 2003 to accept a lump sum cash payment of $3.2 million. The
cash proceeds were offset by related expenses incurred of $1.0 million resulting
in a net gain of $2.2 million.
We and several of our wholly-owned subsidiaries have been named as
defendants in professional liability claims related to our formerly owned and
operated facilities. Other third-party managers responsible for the day-to-day
operations of these facilities have also been named as defendants in these
claims. In these suits, patients of certain previously owned and operated
facilities have alleged significant damages, including punitive damages against
the defendants. The lawsuits are in various stages of discovery and we are
unable to predict the likely outcome at this time. We continue to vigorously
defend these claims and pursue all rights we may have against the managers of
the facilities, under the terms of the management agreements, which include,
among other matters, the requirement that the operators indemnify us against all
losses, cost, fines and related expenses arising out of such matters. We also
maintain insurance against such claims, subject to self-insured retentions of
various amounts. There can be no assurance that the operators will fulfill their
obligations to indemnify us or that such insurance will be available to fund any
losses or settlements arising as a result of such claims.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to stockholders during the fourth quarter of the
year covered by this report.
PART II
ITEM 5 - MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on the New York Stock Exchange under the symbol
OHI. The following table sets forth, for the periods shown, the high and low
prices for our common stock as reported on the New York Stock Exchange Composite
for the periods indicated and cash dividends per share:
2003 2002
-------------------------------------------- ------------------------------------------
DIVIDENDS DIVIDENDS
QUARTER HIGH LOW PER SHARE QUARTER HIGH LOW PER SHARE
-------------------------------------------- ------------------------------------------
First $ 3.9200 $ 2.2600 $ 0.00 First $ 6.2000 $ 3.8000 $ 0.00
Second 5.6000 2.2100 0.00 Second 7.6600 5.0300 0.00
Third 8.3500 5.0700 0.00 Third 7.5800 4.5500 0.00
Fourth 9.4200 7.4000 0.15 Fourth 5.9400 3.2500 0.00
------- -------
$ 0.15 $ 0.00
======= =======
The closing price for our common stock on December 31, 2003 was $9.33 per
share. As of December 31, 2003, there were 37,290,562 shares of common stock
outstanding with approximately 1,700 registered holders and approximately 14,200
beneficial owners.
In 2003, we paid all cumulative, unpaid dividends and resumed our regular
quarterly dividend payments on our Series A, B and C preferred stock and common
stock. (See Note 13 - Dividends; Note 20 - Subsequent Events).
The following table provides information about all equity awards under our
company's 2000 Stock Incentive Plan and 1993 Amended and Restated Stock Option
and Restricted Stock Plan as of December 31, 2003.
- ------------------------------------------------------------------------------------------------------------
(a) (b) (c)
- ------------------------------------------------------------------------------------------------------------
Number of securities
Number of securities remaining available for
to be issued upon Weighted-average future issuance under
exercise of exercise price of equity compensation plans
Plan category outstanding options, outstanding options, (excluding securities
warrants and rights warrants and rights reflected in column (a))
- ------------------------------------------------------------------------------------------------------------
Equity compensation
plans approved by
security holders 2,282,630 $3.20 566,332
- ------------------------------------------------------------------------------------------------------------
Equity compensation
plans not approved by
security holders -- -- --
- ------------------------------------------------------------------------------------------------------------
Total 2,282,630 $3.20 566,332
- ------------------------------------------------------------------------------------------------------------
ITEM 6 - SELECTED FINANCIAL DATA
The following table sets forth our selected financial data and operating
data for our company on an historical basis. The following data should be read
in conjunction with our financial statement 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,
------------------------------------------------------
2003 2002 2001 2000 1999
------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
OPERATING DATA
Revenues from core operations................................... $ 86,267 $ 90,699 $ 88,082 $ 98,325 $120,385
Revenues from nursing home operations(1)........................ - 42,905 162,042 167,287 1,050
------------------------------------------------------
Total revenues................................................ $ 86,267 133,604 250,124 265,612 121,435
------------------------------------------------------
Income (loss) from continuing operations........................ $ 23,341 (3,744) (15,588) (43,250) 18,966
Net income (loss) available to common........................... 2,915 (34,761) (36,651) (66,485) 10,040
Per share amounts:
Income (loss) from continuing operations:
Basic......................................................... $ 0.09 $ (0.69) $ (1.78) $ (3.00) $ 0.47
Diluted....................................................... 0.08 (0.69) (1.78) (3.00) 0.47
Net income (loss) available to common:
Basic......................................................... $ 0.08 $ (1.00) $ (1.83) $ (3.32) $ 0.51
Diluted....................................................... 0.08 (1.00) (1.83) (3.32) 0.51
Dividends, Common Stock(2)...................................... 0.15 - - 1.00 2.80
Dividends, Series A Preferred(2)................................ 6.937 - - 2.31 2.31
Dividends, Series B Preferred(2)................................ 6.469 - - 2.16 2.16
Dividends, Series C Preferred(3)................................ 29.807 - - 0.25 -
Weighted-average common shares outstanding, basic............... 37,189 34,739 20,038 20,052 19,877
Weighted-average common shares outstanding, diluted............. 38,154 34,739 20,038 20,052 19,877
DECEMBER 31,
------------------------------------------------------
2003 2002 2001 2000 1999
------------------------------------------------------
BALANCE SHEET DATA
Gross investments............................................... $842,056 $882,313 $938,228 $974,507 $1,072,398
Total assets.................................................... 725,054 804,009 892,414 950,213 1,040,688
Revolving lines of credit....................................... 177,074 177,000 193,689 185,641 166,600
Other long-term borrowings...................................... 103,520 129,462 219,483 249,161 339,764
Subordinated convertible debentures............................. - - - 16,590 48,405
Stockholders equity............................................. 436,235 479,701 450,690 464,313 457,081
- ----------
(1) Nursing home revenues and expenses of owned and operated assets are shown
on a net basis for the year ended December 31, 2003 and are shown on a
gross basis for the years ended December 31, 2002, 2001, 2000 and 1999.
(2) Dividends per share are those declared and paid during such period.
(3) 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 preferred stock.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This document contains forward-looking statements, including statements
regarding potential financings and potential future changes in reimbursement.
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 under "Risk Factors" in Item 1 above;
(ii) uncertainties relating to the business operations of the operators of
our assets, including those relating to reimbursement by third-party
payors, regulatory matters and occupancy levels;
(iii)the ability of any 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 process of a bankruptcy
proceeding and retain security deposits for the debtors' obligations;
(iv) our ability to sell closed assets on a timely basis and at terms that
allow us to realize the carrying value of these assets;
(v) our ability to negotiate appropriate modifications to the terms of our
credit facilities;
(vi) our ability to complete the proposed refinancing with respect to our
existing credit facilities;
(vii)our ability to manage, re-lease or sell any owned and operated
facilities;
(viii) the availability and cost of capital
(ix) competition in the financing of healthcare facilities;
(x) regulatory and other changes in the healthcare sector
(xi) the effect of economic and market conditions generally and,
particularly, in the healthcare industry;
(xii) changes in interest rates;
(xiii) the amount and yield of any additional investments;
(xiv)changes in tax laws and regulations affecting real estate investment
trusts; and
(xv) changes in the ratings of our debt and preferred securities.
OVERVIEW
As of December 31, 2003, our portfolio consisted of 211 healthcare
facilities, located in 28 states and operated by 39 third-party operators. Our
gross investment in these facilities, net of impairments, totaled $812.3 million
at December 31, 2003, with 97.1% of our real estate investments related to
long-term care facilities. Our portfolio is made up of 151 long-term healthcare
facilities and two rehabilitation hospitals owned and leased to third parties,
fixed rate mortgages on 51 long-term healthcare facilities, one long-term
healthcare facility that was recovered from a customer and was operated through
a third-party management contract for our own account and six long-term
healthcare facilities that were recovered from customers and are currently
closed. At December 31, 2003, we also held miscellaneous investments of
approximately $29.8 million.
Nearly all of our properties are used as healthcare facilities; therefore,
we are directly affected by the risk associated with the healthcare industry.
Our lessees and mortgagors, as well as any facilities owned and operated for our
own account, derive a substantial portion of their net operating revenues from
third-party payors, including the Medicare and Medicaid programs. These programs
are highly regulated by federal, state and local laws, rules and regulations and
subject to frequent and substantial change. The Balanced Budget Act of 1997
("Balanced Budget Act") significantly reduced spending levels for the Medicare
and Medicaid programs. Due to the implementation of the terms of the Balanced
Budget Act, effective July 1, 1998, the majority of skilled nursing facilities
shifted from payments based on reasonable cost to a prospective payment system
for services provided to Medicare beneficiaries. Under the prospective payment
system, skilled nursing facilities are paid on a per diem prospective case-mix
adjusted basis for all covered services. Implementation of the prospective
payment system has affected each long-term care facility to a different degree,
depending upon the amount of revenue it derives from Medicare patients.
Legislation adopted in 1999 and 2000 increased Medicare payments to nursing
facilities and specialty care facilities on an interim basis. Section 101 of the
Balanced Budget Relief Act of 1999 ("Balanced Budget Relief Act") included a 20%
increase for 15 patient acuity categories (known as Resource Utilization Groups
("RUGS")) and a 4% across the board increase of the adjusted federal per diem
payment rate. The 20% increase was implemented in April 2000 and will remain in
effect until the implementation of refinements in the current RUG case-mix
classification system to more accurately estimate the cost of non-therapy
ancillary services. The 4% increase was implemented in April 2000 and expired
October 1, 2002.
The Benefits Improvement and Protection Act of 2000 ("Benefits Improvement
and Protection Act") included a 16.7% increase in the nursing component of the
case-mix adjusted federal periodic payment rate and a 6.7% increase in the 14
RUG payments for rehabilitation therapy services. The 16.7% increase was
implemented in April 2000 and expired October 1, 2002. The 6.7% increase is an
adjustment to the 20% increase granted in the Balance Budget Relief Act and
spreads the funds directed at three of those 15 RUGs to an additional 11
rehabilitation RUGs. The increase was implemented in April 2001 and will remain
in effect until the implementation of refinements in the current RUG case-mix
classification system.
The expiration of the 4% and 16.7% increases under these statutes 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. Medicare reimbursement could
be further reduced when the Centers for Medicare & Medicaid Services ("CMS")
completes its RUG refinement, thereby triggering the sunset of the temporary 20%
and 6.7% increases also established under these statutes.
On August 4, 2003, CMS published the payment rates for SNFs for federal
fiscal year 2004 (effective on October 1, 2003). CMS announced that the SNF
update would be a 3.0% increase in Medicare payments for federal fiscal year
2004. In addition, CMS announced that the two temporary payment increases - the
20% and 6.7% add-ons for certain payment categories - will continue to be
effective for federal fiscal year 2004.
Also in the August 4, 2003 announcement, CMS confirmed its intention to
incorporate a forecast error adjustment that takes into account previous years'
update errors. According to CMS, there was a cumulative SNF market basket, or
inflation adjustment, forecast error of 3.26% for federal fiscal years 2000
through 2002. As a result, CMS has increased the national payment rate by an
additional 3.26% above the 3.0% increase for federal fiscal year 2004.
Due to the temporary nature of the 20% and 6.7% payment increases
established under the Balanced Budget Relief Act and Benefits Improvement and
Protection Act, we cannot be assured 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 be assured
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. Rising
Medicaid costs and decreasing state revenues caused by current economic
conditions have prompted an increasing number of states to cut or consider
reductions in Medicaid funding as a means of balancing their respective state
budgets. Existing and future initiatives affecting Medicaid reimbursement may
reduce utilization of (and reimbursement for) services offered by the operators
of our properties. In early 2003, many states announced actual or potential
budget shortfalls. As a result of these budget shortfalls, many states have
announced that they are implementing or considering implementing "freezes" or
cuts in Medicaid reimbursement rates, including rates paid to SNF providers, or
reductions in Medicaid enrollee benefits, including long-term care benefits. We
cannot predict the extent to which Medicaid rate freezes or cuts or benefit
reductions will ultimately be adopted, the number of states that will adopt them
nor the impact of such adoption on our operators. However, extensive Medicaid
rate cuts or freezes or benefit reductions could have a material adverse effect
on our operators' liquidity, financial condition and results of operations,
which could affect adversely their ability to make lease or mortgage payments to
us.
On May 28, 2003, the federal Jobs and Growth Tax Relief Reconciliation Act
("Tax Relief Act") was signed into law, which included an increase in Medicaid
federal funding for five fiscal quarters (April 1, 2003 through June 30, 2004).
In addition, the Tax Relief Act provides state fiscal relief for federal fiscal
years 2003 and 2004 to assist states with funding shortfalls. It is anticipated
that these temporary federal funding provisions could mitigate state Medicaid
funding reductions through federal fiscal year 2004.
In addition, private payors, including managed care payors, are
increasingly demanding discounted fee structures and the assumption by
healthcare providers of all or a portion of the financial risk of operating a
healthcare facility. Efforts to impose greater discounts and more stringent cost
controls are expected to continue. Any changes in reimbursement policies which
reduce reimbursement levels could adversely affect the revenues of our lessees
and mortgagors and thereby adversely affect those lessees' and mortgagors'
abilities to make their monthly lease or debt payments to us.
At December 31, 2002, we owned three long-term healthcare facilities that
had been recovered from customers and were operated for our own account. During
2001 and 2002, we experienced a significant increase in nursing home revenues
attributable to the increase in owned and operated assets. During 2003, these
increases abated as we re-leased, sold or closed all but one of these
facilities. 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. As of January
1, 2004, we had sold or re-leased all of the owned and operated facilities in
our portfolio and had six closed facilities in our portfolio Our management
intends to sell 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.
The following significant highlights occurred during the twelve-month
period ended December 31, 2003.
FINANCING
o In June 2003, we obtained a $225 million Senior Secured Credit
Facility ("Credit Facility") to repay borrowings under our two
previous credit facilities, replace letters of credit and pay
cumulative unpaid preferred dividends.
o In December 2003, we secured a $50 million acquisition credit
facility, which we believe, combined with the $225 million Credit
Facility and cash on hand, will provide us the flexibility to initiate
a growth strategy in 2004.
DIVIDENDS
o In July 2003, our Board of Directors declared a full catch-up of
cumulative, unpaid dividends and regular quarterly dividends for all
classes of preferred stock and such dividends were paid on August 15,
2003 to preferred stockholders of record on August 5, 2003.
o In September 2003, our Board of Directors reinstated our common stock
dividend and a dividend of $0.15 per share of common stock was paid on
November 17, 2003 to common stockholders of record on October 31,
2003.
RE-LEASING
o In March 2003, we re-leased nine skilled nursing facilities ("SNFs")
formerly operated by Integrated Health Services, Inc. to four
unaffiliated third-party operators.
o In July 2003, we amended our Master Lease with a subsidiary of Alterra
Healthcare Corporation ("Alterra") whereby the number of leased
facilities was reduced from eight to five.
o In November 2003, we re-leased two SNFs formerly leased by Claremont
Healthcare Holdings, Inc. ("Claremont"), located in Ohio and
representing 270 beds, to a new operator under a Master Lease.
o Throughout 2003, we re-leased 12 SNFs formerly operated by Sun to six
unaffiliated third-party operators.
ASSET SALES
o In May 2003, we sold an investment in a Baltimore, Maryland asset,
leased by the United States Postal Service ("USPS"), for approximately
$19.6 million. The purchaser paid us proceeds of $1.8 million and
assumed the first mortgage of approximately $17.6 million.
o In December 2003, we sold one SNF formerly leased by Claremont,
located in Illinois and representing 150 beds, for $9.0 million. We
received net proceeds of approximately $6.0 million in cash and a $3.0
million, five-year, 10.5% secured note for the balance. We also sold
our investment in Principal Healthcare Finance Trust for proceeds of
approximately $1.6 million.
o Throughout 2003, we sold eight closed facilities and four assets held
for sale for proceeds of approximately $9.0 million.
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 2 to our audited 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 which we believe are
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:
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.
ASSET IMPAIRMENT
Management periodically but not less than annually evaluates the 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, management evaluates the carrying value of the related
real estate investments in relation to the future undiscounted cash flows of the
underlying facilities. Provisions for impairment losses related to long-lived
assets are recognized when expected future undiscounted cash flows are less than
the carrying values of the assets. If the sum of the expected future
undiscounted cash flow, including sales proceeds, is less than carrying value,
then an adjustment is made to the net carrying value of the leased properties
and other long-lived assets to the present value of expected future undiscounted
cash flows. The fair value of the real estate investment is determined by market
research, which includes valuing the property as a nursing home as well as other
alternative uses.
LOAN IMPAIRMENT
Management periodically but not less than annually evaluates the
outstanding loans and notes receivable. When management identifies potential
loan impairment indicators, such as non-payment under the loan documents,
impairment of the underlying collateral, financial difficulty of the operator or
other circumstances that may impair full execution of the loan documents, then
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. The fair value of the loan is
determined by market research, which includes valuing the property as a nursing
home as well as other alternative uses.
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.
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 audited
consolidated balance sheet. For 2003, operating assets and operating liabilities
for our owned and operated properties are shown on a net basis on the face of
our audited consolidated Balance Sheet. For 2002, operating assets and operating
liabilities for our owned and operated properties are shown on a gross basis on
the face of our audited consolidated balance sheet and are detailed in Note 16 -
Segment Information. The net basis presentation in 2003 is due to the decrease
in the size of the owned and operated portfolio (one facility at December 31,
2003).
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 SFAS 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.
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 audited consolidated financial statements and accompanying
notes.
YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002
REVENUES
Our revenues for the year ended December 31, 2003 totaled $86.3 million, a
decrease of $47.3 million from 2002 revenues. When excluding nursing home
revenues of owned and operated assets, revenues were $86.3 million for the year
ended December 31, 2003, a decrease of $4.4 million from the comparable prior
year period. The decrease during the year was primarily the result of operator
restructurings, the sale of our investment in a Baltimore, Maryland asset leased
by the USPS, partially offset by a legal settlement.
Detail changes in revenues during the year ended December 31, 2003 are
as follows:
o Rental income for the year ended December 31, 2003 totaled $65.1
million, an increase of $2.4 million over 2002 rental income.
o Mortgage interest income for the year ended December 31, 2003 totaled
$14.7 million, decreasing $6.2 million.
o Other investment income for the year ended December 31, 2003 totaled
$3.0 million, decreasing $2.3 million.
o In 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 Uniform Commercial Code 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 in the first quarter
of 2003 to accept a lump sum cash payment of $3.2 million. The cash
proceeds were offset by related expenses incurred of $1.0 million
resulting in a net gain of $2.2 million.
We believe that the presentation of our revenues and expenses, excluding
nursing home owned and operated assets, provides a useful measure of the
operating performance of our core portfolio as a real estate investment trust
("REIT") in view of the disposition of all but one of our owned and operated
assets as of December 31, 2003.
EXPENSES
Our expenses for the year ended December 31, 2003 totaled $63.6 million,
decreasing approximately $76.3 million from expenses of $139.9 million during
2002. When excluding nursing home expenses of owned and operated assets,
expenses were $62.1 million for the year ended December 31, 2003, a decrease of
$14.0 million from the comparable prior year period. The decrease during the
year was primarily the result of $4.0 million of lower interest expense, $0.9
million favorable reduction in general and administrative and legal expenses,
$8.8 million favorable reduction in provision for uncollectible mortgages, notes
and accounts receivable, off set by an increase of $5.2 million in provision for
impairment and $0.9 million in adjustments of derivatives to fair value.
Our nursing home expenses, net of nursing home revenues, for owned and
operated assets decreased to $19.4 million from $20.9 million in 2002 due to the
releasing efforts, sales and/or closures 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.
Effective January 1, 2004, our remaining owned and operated asset was
re-leased to an existing operator. This facility, located in Illinois, was
re-leased under a new Master Lease which encompasses four additional facilities.
An analysis of significant changes in our expenses during the years ended
December 31, 2003 and 2002 is as follows:
o Our general and administrative expenses for 2003 totaled $5.9 million
as compared to $6.3 million for 2002, a decrease of $0.4 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.
o Our legal expenses for 2003 totaled $2.3 million as compared to $2.9
million in 2002. The decrease is largely attributable to a reduction
of legal costs associated with our owned and operated facilities due
to the releasing efforts, sales and/or closures of 32 owned and
operated assets since December 31, 2001.
o Our interest expense for the year ended December 31, 2003 was
approximately $23.4 million, compared with $27.4 million for 2002. The
decrease in 2003 is due to lower average borrowings on our credit
facilities as well as the impact of our current year refinancings and
the payoff in 2002 of $97.5 million of 6.95% Notes that matured in
June 2002.
o In 2002, we recognized a $7.0 million refinancing expense as we were
unable to complete a planned commercial mortgage-backed securities
transaction due to the impact on our operators resulting from
reductions in Medicare reimbursement and concerns about potential
Medicaid rate reductions.
o Provisions for impairment of $8.9 million and $3.7 million are
included in expenses for 2003 and 2002, respectively. The 2003
provision of $8.9 million was to reduce the carrying value of two
closed facilities to their fair value less cost to dispose. The 2002
provision of $3.7 million reduced the carrying value of three closed
facilities to their fair value less cost to dispose.
o 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). The 2002 provision also included
$0.4 million to adjust accounts receivable to their net realizable
value.
o 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.
OTHER
During 2003, we recognized a gain on assets sold of $0.7 million, primarily
a result of the following transactions:
o The sale of our investment in a Baltimore, Maryland asset, leased by
the USPS, for approximately $19.6 million. The purchaser paid us
proceeds of $1.8 million and assumed the first mortgage of
approximately $17.6 million. As a result, we recorded a gain of $1.3
million, net of closing costs and other expenses.
o The sale of four closed buildings, which were classified as assets
held for sale in 2001, in four separate transactions, realizing
proceeds, net of closing costs, of $2.0 million, resulting in a net
loss of approximately $0.7 million.
o The sale of our investment in Principal Healthcare Finance Trust
realizing proceeds of approximately $1.6 million, net of closing
costs, resulting in an accounting gain of approximately $0.1 million
LOSS FROM DISCONTINUED OPERATIONS
Discontinued operations relates to properties we disposed of in 2003 that
are accounted for as discontinued operations under SFAS No. 144. The loss of
$0.3 million in 2003 versus the loss of $10.9 million in 2002 was primarily due
to provisions for impairment of $11.7 million on seven facilities in 2002 as
compared to none in 2003.
FUNDS FROM OPERATIONS
Our funds from operations ("FFO") for the year ended December 31, 2003, on
a diluted basis was $35.0 million, an increase of $41.5 million as compared to a
deficit of $6.5 million for 2002 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 GAAP and therefore should not be considered an
alternative to net earnings as an indication of operating performance, or to net
cash flow from operating activities as determined by GAAP 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 and diluted FFO 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,
2003 and 2002:
YEAR ENDED DECEMBER 31,
---------------------------
2003 2002
---------------------------
NET INCOME (LOSS) AVAILABLE TO COMMON.................................. $ 2,915 $(34,761)
Add back loss (deduct gain) from real estate dispositions(1)......... 149 (2,548)
---------------------------
3,064 (37,309)
Elimination of non-cash items included in net income (loss):
Depreciation and amortization(2)..................................... 21,426 21,270
Adjustment of derivatives to fair value.............................. - (946)
---------------------------
FUNDS FROM OPERATIONS, BASIC........................................... 24,490 (16,985)
Series C Preferred Dividends......................................... 10,484 10,484
---------------------------
FUNDS FROM OPERATIONS, DILUTED......................................... $ 34,974 $ (6,501)
===========================
(1) The add back of loss/deduction of gain from real estate dispositions
includes the facilities classified as discontinued operations in our
consolidated financial statements. The 2003 net loss add back includes $0.8
million loss related to facilities classified as discontinued operations.
(2) The add back of depreciation and amortization includes the facilities
classified as discontinued operations in our consolidated financial
statements. The 2003 and 2002 includes depreciation and amortization of
$0.4 million and $0.7 million, respectively, related to facilities
classified as discontinued operations.
TAXES
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. For tax year 2003, preferred and common dividend
payments of $65.5 million made throughout 2003 satisfy the 2003 REIT
requirements (must distribute at least 90% of our REIT taxable income for the
taxable year and meet certain other conditions).
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001
REVENUES
Our revenues for the year ended December 31, 2002 totaled $133.6 million, a
decrease of $116.5 million from 2001 revenues. Excluding nursing home revenues
of owned and operated assets, revenues were $90.7 million for the year ended
December 31, 2002, an increase of $2.6 million from the comparable prior year
period.
Detail changes in revenues during the year ended December 31, 2002 are as
follows:
o Our rental income for the year ended December 31, 2002 totaled $62.7
million, an increase of $2.6 million from 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 $6.3 million due to bankruptcies,
restructurings and other.
o Our mortgage interest income for the year ended December 31, 2002
totaled $20.9 million, increasing $0.4 million over 2001 mortgage
interest. 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.
o Our nursing home revenues of owned and operated assets for the year
ended December 31, 2002 totaled $42.9 million, decreasing $119.1
million over 2001 nursing home revenues. This decrease is due to the
re-leasing, sale and/or closure of 30 assets in 2002.
EXPENSES
Our expenses for the year ended December 31, 2002 totaled $139.9 million,
decreasing approximately $125.1 million over expenses of $265.0 million for
2001.
Our nursing home expenses for owned and operated assets decreased to $63.8
million from $169.9 million in 2001 due to the re-leasing, 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.
An analysis of significant changes in our expenses during the years ended
December 31, 2002 and 2001 is as follows:
o 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.
o 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 re-leasing, sale and/or closure of 30 owned and operated assets
during 2002.
o Depreciation and amortization of real estate totaled $20.5 million in
2002, 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.
o 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.
o In 2002, we recognized a $7.0 million refinancing expense as we were
unable to complete a planned commercial mortgage-backed securities
transaction due to the impact on our operators resulting from
reductions in Medicare reimbursement and concerns about potential
Medicaid rate reductions.
o Provisions for impairment of $3.7 million and $8.1 million are
included in expenses for 2002 and 2001, respectively. The 2002
provision of $3.7 million reduced the carrying value of three closed
facilities to their fair value less cost to dispose. The 2001
provision of $8.1 million related to facilities recovered from
operators and classified as held for sale assets to fair value less
cost to dispose.
o We recognized a provision for loss on uncollectible mortgages, notes
and accounts receivable of $8.8 million in 2002. The provisions
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 provisions 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.
o 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.
o 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.
o 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 Statement of Financial
Account Standard ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities.
OTHER
During 2002, we recognized a gain on assets sold of $2.5 million, primarily
a result of the following transactions.
o 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).
o The sale of 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.
o 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.
LOSS FROM DISCONTINUED OPERATIONS
Discontinued operations relates to properties we disposed of in 2003 that
are accounted for as discontinued operations under SFAS No. 144. The loss of
$10.9 million in 2002 versus the loss of $1.1 million in 2001 was primarily due
to provisions for impairment of $11.7 million on seven facilities in 2002 as
compared to $1.5 million on one facility in 2001.
FUNDS FROM OPERATIONS
Our FFO for the year ended December 31, 2002, on a diluted basis was a
deficit of $6.5 million, an increase in the deficit 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 GAAP and therefore should not be considered an
alternative to net earnings as an indication of operating performance, or to net
cash flow from operating activities as determined by GAAP in the United States,
as a measure of liquidity and is not necessarily indicative of cash available to
fund cash needs.
In October 2003, NAREIT informed its member companies that the 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 and diluted FFO 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
---------------------------
(37,309) (35,974)
Elimination of non-cash items included in net income (loss):
Depreciation and amortization(1)..................................... 21,270 22,066
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)
===========================
(1) The add back of depreciation and amortization includes the facilities
classified as discontinued operations in our consolidated financial
statements. The 2002 and 2001 includes depreciation and amortization of
$0.7 million and $0.8 million, respectively, related to facilities
classified as discontinued operations.
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
Alterra announced during the first quarter of 2003, 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. At that time, we
leased eight assisted living facilities (325 units) located in seven states to
subsidiaries of Alterra.
Effective July 7, 2003, we amended our Master Lease with a subsidiary of
Alterra whereby the number of leased facilities was reduced from eight to five.
The amended Master Lease has a remaining term of approximately ten years with an
annual rent requirement of approximately $1.5 million. This compares to the 2002
annualized revenue of $2.6 million. On November 1, 2003, we re-leased one
assisted living facility formerly leased by Alterra, located in Washington and
representing 52 beds, to a new operator under a lease, which has a ten-year term
and has an initial annual lease rate of $0.2 million. We are in the process of
negotiating terms and conditions for the re-lease of the remaining two
properties. In the interim, Alterra will continue to operate the two facilities.
The Amended Master Lease was approved by the U.S. Bankruptcy Court in the
District of Delaware.
CLAREMONT HEALTHCARE HOLDINGS, INC.
Effective December 1, 2003, we sold one SNF formerly leased by Claremont,
located in Illinois and representing 150 beds, for $9.0 million. We received net
proceeds of approximately $6.0 million in cash and a $3.0 million, five-year,
10.5% secured note for the balance. This transaction results in a non-cash,
non-FFO accounting loss of approximately $3.8 million, which was recorded in the
fourth quarter of 2003.
On November 7, 2003, we re-leased two SNFs formerly leased by Claremont,
located in Ohio and representing 270 beds, to a new operator under a Master
Lease, which has a ten-year term and has an initial annual lease rate of $1.1
million.
Separately, we continue our ongoing restructuring discussions with
Claremont regarding the five facilities Claremont currently leases from us. At
the time of this filing, we cannot determine the timing or outcome of these
discussions. Claremont failed to pay base rent due during the fourth quarter of
2003 in the amount of $1.5 million. During the fourth quarter of 2003, we
applied security deposits in the amount of $1.0 million to pay Claremont's rent
payments and the Company demanded that Claremont restore the $1.5 million
security deposit. At December 31, 2003, we had no additional security deposits
with Claremont. Due to the significant uncertainty of collection, we recognize
revenue from Claremont on a cash-basis as it is received.
SUN HEALTHCARE GROUP, INC.
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. As a
result, during 2003, we re-leased 12 SNFs, formerly leased by Sun, in the
following transactions:
o On July 1, 2003, we re-leased one SNF in Louisiana and representing
131 beds, to an existing operator under a Master Lease, which lease
has an eight-year term and requires an initial annual lease rate of
$400,000;
o On July 1, 2003, we re-leased two SNFs located in Texas and
representing 256 beds, to an existing operator under a Master Lease,
which has a ten-year term and has an initial annual lease rate of
$800,000;
o On July 1, 2003, we re-leased two SNFs located in Florida and
representing 350 beds, to an existing operator under a Master Lease,
which has a ten-year term and has an initial annual lease rate of $1.3
million;
o On October 1, 2003, we re-leased three SNFs located in California and
representing 271 beds, to a new operator under a Master Lease, which
has a 15-year term and has an initial annual lease rate of $1.25
million;
o On November 1, 2003, we re-leased two SNFs located in California and
representing 185 beds, to a new operator under a Master Lease, which
has a ten-year term and has an initial annual lease rate of $0.6
million;
o On December 1, 2003, we re-leased one SNF located in California and
representing 59 beds, to a new operator under a lease, which has a
ten-year term and has an initial annual lease rate of $0.12 million;
and
o On December 1, 2003, we re-leased one SNF located in Indiana and
representing 99 beds, to an existing operator under a lease, which has
a five-year term.
As a result of the above-mentioned transitions of the 12 former Sun
facilities, Sun operated 38 of our facilities at December 31, 2003.
Effective January 1, 2004, we re-leased four SNFs to an existing operator
under a new Master Lease, which has a five-year term and has an initial annual
lease rate of $0.75 million. Three SNFs formerly leased by Sun, located in
Illinois, representing 350 total beds, were part of this transaction. The fourth
SNF in the transaction, located in Illinois, representing 128 beds, was the last
remaining owned and operated facility in our portfolio. A fifth facility, leased
in December 2003, was incorporated in this Master Lease.
On January 26, 2004, we announced the signing of a non-binding term sheet
representing an agreement in principle with Sun regarding properties we own that
were leased to various affiliates of Sun prior to the impact of the transactions
above. Under the arrangement contemplated by the non-binding term sheet, Sun
would continue to operate and occupy 23 long-term care facilities, five
behavioral properties and two hospital properties. One property in the State of
Washington, formerly operated by a Sun affiliate, has already been closed and
the lease relating to that property will be terminated. With respect to the
remaining 20 facilities, 15 have already been transitioned to new operators and
five are in the process of being transferred to new operators.
The non-binding term sheet contemplates execution and delivery of a new
master lease with the following general terms:
o Term: Through December 31, 2013.
o Base Rent: Commencing February 1, 2004, monthly base rent would be
$1.56 million, subject to annual increases not to exceed 2.5% per
year.
o Deferred Base Rent: $7.76 million would be deferred and bear interest
at a floating rate with a floor of 6% per year. That interest would
accrue but would not be payable to us through January 3, 2008.
Interest thereafter accruing would be paid monthly. We are releasing
all other claims for base rent which otherwise would be due under the
current leases.
o Conversion of Deferred Base Rent: We would have the right at any time
to convert the deferred base rent into 800,000 shares of Sun's common
stock, subject to certain non-dilution provisions and the right of Sun
to pay cash in an amount equal to the value of that stock in lieu of
issuing stock to Omega. If the value of the common stock exceeds 140%
of the deferred base rent, Sun can require Omega to convert the
deferred base rent into Sun's common stock. We would have the right to
require Sun to prepare and file a registration statement to facilitate
resale of the Sun stock.
The terms described above are subject to the negotiation and execution of
definitive documents satisfactory to us and Sun. Separately, we continue our
ongoing restructuring discussions with Sun. We cannot determine the timing or
outcome of these discussions at the time of this filing. There can be no
assurance that Sun will continue to pay rent at the current level, although, we
believe that alternative operators would be available to lease or buy the
remaining Sun facilities if an appropriate agreement is not completed with Sun.
ASSET DISPOSITIONS IN 2003
OTHER ASSETS
o We sold an investment in a Baltimore, Maryland asset, leased by the
USPS, for approximately $19.6 million. The purchaser paid us gross
proceeds of $1.8 million and assumed the first mortgage of
approximately $17.6 million. As a result, we recorded a gain of $1.3
million, net of closing costs and other expenses. (See Note 3 -
Properties; Other Non-Core Assets).
o We sold our investment in Principal Healthcare Finance Trust realizing
proceeds of approximately $1.6 million, net of closing costs,
resulting in an accounting gain of approximately $0.1 million. (See
Note 3 - Properties; Other Non-Core Assets).
CLOSED FACILITIES
o We sold eight closed facilities realizing proceeds of approximately
$7.0 million, net of closing costs, resulting in a net gain of
approximately $3.0 million. In accordance with SFAS No. 144, the $3.0
million realized net gain is reflected in our audited consolidated
statements of operations as discontinued operations. (See Note 3 -
Properties; Closed Facilities and Note 19 - Discontinued Operations).
ASSETS HELD FOR SALE
o We sold the four remaining facilities, which were classified as assets
held for sale in 2001, realizing proceeds of $2.0 million, net of
closing costs, resulting in a net loss of approximately $0.7 million.
(See Note 3 - Properties; Assets Held for Sale).
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2003, we had total assets of $725.1 million, stockholders
equity of $436.2 million and long-term debt of $280.6 million, representing
approximately 39.1% of total capitalization. In addition, as of December 31,
2003, we had an aggregate of $2.3 million of scheduled principal payments in
2004.
The following table shows the amounts due in connection with the
contractual obligations described below as of December 31, 2003.
PAYMENTS DUE BY PERIOD
LESS THAN MORE THAN
TOTAL 1 YEAR 1-3 YEARS 3-5 YEARS 5 YEARS
----------------------------------------------------------
(IN THOUSANDS)
Long-term debt(1).......................... $280,594 $2,319 $276,280 $ 900 $1,095
Other long-term liabilities................ 1,051 198 630 223 -
----------------------------------------------------------
Total................................ $281,645 $2,517 $276,910 $1,123 $1,095
==========================================================
(1) The $276.3 million includes the $100.0 million 6.95% Note, which
matures in August 2007, and the $170.1 million of credit facility and
term loan borrowings, which mature in June 2007. BANK CREDIT
AGREEMENTS
We have two secured credit facilities totaling $275 million, consisting of
a $225 million Senior Secured Credit Facility and a $50 million acquisition
credit facility ("Acquisition Line"). At December 31, 2003, $177.1 million was
outstanding under the Credit Facility and $12.1 million was utilized for the
issuance of letters of credit, leaving availability of $85.0 million. The $177.1
million of outstanding borrowings had an interest rate of 6.00% at December 31,
2003; however, no funds have been drawn under the Acquisition Line. In addition,
during 2003, we paid off four Industrial Revenue Bonds totaling $7.8 million
with a fixed blended rate of approximately 9.66%.
In 2003, we completed the $225 million Credit Facility arranged and
syndicated by GE Healthcare Financial Services, with General Electric Capital
Corporation ("GECC") as agent and lender. At the closing, we borrowed $187.1
million under the Credit Facility to repay borrowings under our two previous
credit facilities and replace letters of credit totaling $12.5 million. In
addition, proceeds from the loan were permitted to be used to pay cumulative
unpaid preferred dividends and for general corporate purposes.
The Credit Facility includes a $125 million term loan ("Term Loan") and a
$100 million revolving line of credit ("Revolver") collateralized by our
interests in 121 facilities representing approximately half of our invested
assets. In addition, we are the guarantor of our subsidiaries' obligations under
the Credit Facility and have pledged to the lenders the shares of these
subsidiaries. Both the Term Loan and Revolver have a four-year maturity with a
one-year extension at our option. The Term Loan amortizes on a 25-year basis and
is priced at London Interbank Offered Rate ("LIBOR") plus a spread of 3.75%,
with a floor of 6.00%. The Revolver is also priced at LIBOR plus a 3.75% spread,
with a 6.00% floor.
Borrowings under our old $160.0 million secured revolving line of credit
facility of $112.0 million were paid in full upon the closing of the Credit
Facility and the agreements were terminated. Additionally, $12.5 million of
letters of credit previously outstanding against this credit facility were
reissued under the new Credit Facility. LIBOR-based borrowings under this
previous credit facility had a weighted-average interest rate of approximately
4.5% at the payoff date.
Borrowings under our old $65.0 million line of credit facility, which was
fully drawn, were paid in full upon the closing of our Credit Facility.
LIBOR-based borrowings under this previous credit facility had a
weighted-average interest rate of approximately 4.6% at the payoff date.
As a result of the new Credit Facility, for the twelve-month period ended
December 31, 2003, our interest expense includes $2.6 million of non-cash
interest expense (financing costs) related to the termination of our two
previous credit facilities mentioned above.
In December 2003, we closed on a four-year, $50 million revolving
acquisition line of credit arranged by GE Healthcare Financial Services. The
Acquisition Line will be secured by first liens on facilities acquired or
assignments of mortgages made on new acquisitions. The interest rate of LIBOR
plus 3.75% with a 6% floor on the revolving acquisition line of credit is
identical to our existing Credit Facility.
We are required to meet certain property level financial covenants and
corporate financial covenants, including prescribed leverage, fixed charge
coverage, minimum net worth, limitation on additional indebtedness and
limitations on dividend payout 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 9 - Financial Instruments).
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. Due to our 2002 taxable loss, no
distribution was necessary to maintain our REIT status for 2002.
In September 2003, our Board of Directors reinstated our common stock
dividend that was paid on November 17, 2003 to common stockholders of record on
October 31, 2003 in the amount of $0.15 per common share. Total common stock
cash dividends were approximately $5.6 million for the twelve months ended
December 31, 2003.
In addition, our Board of Directors declared its regular quarterly
dividends for all classes of preferred stock that was paid on November 17, 2003
to preferred stockholders of record on October 31, 2003. Series A and Series B
preferred stockholders of record on October 31, 2003 were paid dividends in the
amount of approximately $0.578 and $0.539 per preferred share, respectively, on
November 17, 2003. Our Series C preferred stockholder was paid dividends of
$2.50 per Series C preferred share on November 17, 2003. The liquidation
preference for our Series A, B and C preferred stock is $25.00, $25.00 and
$100.00 per share, respectively. Regular quarterly dividends represented
dividends for the period August 1, 2003 through October 31, 2003. Total
preferred cash dividend payments for all classes of preferred stock totaled
approximately $59.9 million for the twelve months ended December 31, 2003.
In July 2003, our Board of Directors declared a full catch-up of
cumulative, unpaid dividends for all classes of preferred stock and such
dividends were paid on August 15, 2003 to preferred stockholders of record on
August 5, 2003. In addition, our Board of Directors declared the regular
quarterly dividend for all classes of preferred stock that also was paid on
August 15, 2003 to preferred stockholders of record on August 5, 2003. Series A
and Series B preferred stockholders of record on August 5, 2003 were paid
dividends in the amount of approximately $6.36 and $5.93 per preferred share,
respectively, on August 15, 2003. Our Series C preferred stockholder was paid
dividends of approximately $27.31 per Series C preferred share on August 15,
2003.
LIQUIDITY
We believe our liquidity and various sources of available capital,
including funds from operations, our existing availability under our Credit
Facility and expected proceeds from planned asset sales are adequate to finance
operations, meet recurring debt service requirements and fund future investments
through the next twelve months.
SERIES D PREFERRED OFFERING; SERIES C PREFERRED REPURCHASE AND CONVERSION
On February 5, 2004, we entered into a Repurchase and Conversion Agreement
with Explorer Holdings, L.P. ("Explorer") pursuant to which Explorer granted us
an option to repurchase up to 700,000 shares of Series C preferred stock at
$145.92 per share (or $9.12 per share of common stock on an as converted basis),
provided we purchased a minimum of $100 million on or prior to February 27,
2004. Explorer also agreed to convert all of its remaining shares of Series C
preferred stock into shares of our common stock upon exercise of the repurchase
option. At the time Explorer entered into the Repurchase and Conversion
Agreement, Explorer held all of our outstanding Series C preferred stock, which
had an aggregate liquidation preference of $104,842,000, and was convertible at
the holder's option into our common stock at a conversion price of $6.25 per
share.
On February 10, 2004, we sold in a registered direct placement 4,739,500
shares of our 8.375% Series D cumulative redeemable preferred stock at $25 per
share for net proceeds, after fees and expenses, of approximately $114.9
million. The Series D preferred stock may be redeemed at par at our election on
or after the fifth anniversary of the original issue date. These securities rank
pari passu with the Series A and Series B preferred stock and are not
convertible into any other Omega securities. The Series D preferred stock has no
stated maturity and will not be subject to a sinking fund or mandatory
redemption.
We used approximately $102.1 million of the net proceeds of the Series D
preferred stock offering to repurchase 700,000 shares of Series C preferred
stock from Explorer as of February 10, 2004 pursuant to the repurchase option.
In connection with the transaction, Explorer converted its remaining 348,420
shares of Series C preferred stock into 5,574,720 shares of common stock.
As a result of the offering of Series D preferred stock, the application of
$102.1 million of the net proceeds received to repurchase 700,000 shares of
Series C preferred, and the conversion of the remaining Series C preferred stock
into shares of our common stock, (i) no Series C preferred stock is outstanding,
and we plan to re-classify the remaining authorized shares of Series C preferred
stock as authorized but unissued preferred stock, without designation as to
class; (ii) 4,739,500 shares of our 8.375% Series D cumulative redeemable
preferred stock, with an aggregate liquidation preference of $118,487,500, have
been issued; and (iii) Explorer holds, as of February 20, 2004, 18,118,246
shares of our common stock, representing approximately 41.5% of our outstanding
common stock. Under the stockholders agreement between Explorer and us, Explorer
continues to be entitled to designate four of our ten directors.
In connection with our repurchase of a portion of Explorer's Series C
preferred stock, our results for the first quarter of 2004 will include a
non-recurring reduction in net income attributable to common stockholders of
approximately $39 million. This amount reflects the sum of (i) the difference
between the deemed redemption price of $145.92 per share of our Series C
preferred stock and the carrying amount of $100 per share of Series C preferred
stock multiplied by the number of shares of Series C preferred stock repurchased
upon exercise of our option to repurchase shares of Series C preferred stock,
and (ii) the cost associated with the original issuance of our Series C
preferred stock that was previously classified as additional paid in capital,
pro rated for the repurchase. On July 31, 2003, the SEC issued its
interpretation of FASB-EITF Issue D-42, "The Effect on the Calculation of
Earnings per Share for the Redemption or Induced Conversion of Preferred Stock."
Under the SEC's interpretation relating to the redemption of preferred stock,
the difference between the carrying amount of the shares and the redemption
price must be recorded as a reduction in net income attributable to common
stockholders. The SEC's interpretation also included a statement that, upon
conversion or redemption, all costs associated with the original issuance of
such preferred stock should be recorded as a reduction of net income
attributable to common stockholders. These non-recurring reductions in net
income attributable to common stockholders will reduce our earnings per share
and funds from operations for the first quarter of 2004.
In June 2003, we provided a guaranty of the obligations of our various
subsidiaries that are the borrowers under a loan agreement with GECC, on its own
behalf and as agent for certain other banks who are participating in our Credit
Facility. Our guaranty contains various affirmative and negative covenants
typical for such transactions including a limitation on the amount of dividends
that we can pay that is equal to 95% of our "Funds from Operations" as defined
in the White Paper on Funds from Operations approved by the Board of Governors
of the National Association of Real Estate Investment Trusts in April 2002. GECC
and certain of the other banks participating in our Credit Facility have
confirmed that the non-recurring reduction in net income attributable to common
stockholders resulting from our repurchase of a portion of Explorer's Series C
preferred stock and the cost associated with the original issuance of our Series
C preferred stock will not be included in the calculation pursuant to our
guaranty of the maximum amount of dividends that we can pay.
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We are exposed to various market risks, including the potential loss
arising from adverse changes in interest rates. We do not enter into derivatives
or other financial instruments for trading or speculative purposes, but we seek
to mitigate the effects of fluctuations in interest rates by matching the term
of new investments with new long-term fixed rate borrowing to the extent
possible.
The market value of our long-term fixed rate borrowings and mortgages are
subject to interest rate risks. Generally, the market value of fixed rate
financial instruments will decrease as interest rates rise and increase as
interest rates fall. The estimated fair value of our total long-term borrowings
at December 31, 2003 was $272.4 million. A one percent increase in interest
rates would result in a decrease in the fair value of long-term borrowings by
approximately $2.1 million.
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. GAAP 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, 2003, the derivative instrument was reported at its fair value of $5.5
million. An adjustment of $1.6 million to other comprehensive income was made
for the change in fair value of this cap during 2003. 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, $1.2 million is expected to be reclassified
to earnings from other comprehensive income.
In 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 in December 2002, we received payments when LIBOR
exceeded 6.35% and paid the counterparty when LIBOR was less than 6.35%. 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%. 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.
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, 2003 and 2002
is included in Note 17 to our audited consolidated financial statements, which
is incorporated herein by reference in response to Item 302 of Regulation S-K.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A - CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, we
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures as of the end of the period covered by this report and,
based on that evaluation, our principal executive officer and principal
financial officer have concluded that these controls and procedures are
effective. There have been no significant changes in our internal controls or in
other factors that have materially affected, or are reasonably likely to affect,
our internal control over financial reporting during the most recent fiscal
quarter.
Disclosure controls and procedures are the controls and other procedures
designed to ensure that information that we are required to disclose in our
reports under the Exchange Act is recorded, processed, summarized and reported
within the time periods required. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
we are required to disclose in the reports that we file under the Exchange Act
is accumulated and communicated to our management, including our principal
executive officer and principal financial officer, as appropriate, to allow
timely decisions regarding required disclosure.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following information relates to the directors of Omega.
YEAR
FIRST
BECAME A TERM TO
DIRECTORS DIRECTOR BUSINESS EXPERIENCE DURING PAST 5 YEARS EXPIRE IN
- -----------------------------------------------------------------------------------------------------
Daniel A. Decker* (51)............ 2000 Mr. Decker is Chairman of the Board and 2006
has served in this capacity since July
17, 2000. Mr. Decker also served as
Executive Chairman from March 2001 until
June 12, 2001 when Mr. Pickett joined us
as Chief Executive Officer. Mr. Decker
has been an officer of The Hampstead
Group, L.L.C., a privately-held equity
investment firm based in Dallas, Texas,
since 1990. Mr. Decker previously served
as a director of various other public
companies.
Thomas F. Franke (74)............. 1992 Mr. Franke is a Director and has served 2006
in this capacity since March 31, 1992.
Mr. Franke is Chairman and principal
owner of Cambridge Partners, Inc., an
owner, developer and manager of
multifamily housing in Grand Rapids and
Ann Arbor, Michigan. He is also the
principal owner of a private healthcare
firm operating in the United States and
is a principal owner of a private hotel
firm in the United Kingdom. Mr. Franke
was a founder and previously a director
of Principal Healthcare Finance Limited
and Omega Worldwide, Inc.
Bernard J. Korman (72)............ 1993 Mr. Korman is a Director and has served 2006
in this capacity since October 19, 1993.
Mr. Korman has been Chairman of the Board
of Trustees of Philadelphia Health Care
Trust, a private healthcare foundation,
since December 1995 and Chairman of the
Board of The Pep Boys, Inc. since May 28,
2003. He was formerly President, Chief
Executive Officer and Director of MEDIQ
Incorporated (health care services) from
1977 to 1995. Mr. Korman is also a
director of the following public
companies: The New America High Income
Fund, Inc. (financial services), The Pep
Boys, Inc. (auto supplies), Kramont
Realty Trust (real estate investment
trust), and NutraMax Products, Inc.
(consumer health care products). Mr.
Korman was previously a director of Omega
Worldwide, Inc.
Thomas W. Erickson* (53)......... 2000 Mr. Erickson is a Director and has served 2005
in this capacity since July 17, 2000. Mr.
Erickson served as our Interim Chief
Executive Officer from October 1, 2000
until June 12, 2001. Mr. Erickson has
served as Interim President and Chief
Executive Officer of Luminex Corporation
(NASDAQ) since September 2002. In
addition, Mr. Erickson was Co-Founder,
President and Chief Executive Officer for
CareSelect Group, Inc., a physician
practice management company, from 1994 to
2001 and has served as President and
Chief Executive Officer of ECG Ventures,
Inc., a venture capital company, from
1987 to present. Earlier in his career,
Mr. Erickson held several management
positions at American Hospital Supply
Corporation. He currently is Chairman of
the Board of LifeCare Hospitals, Inc.
Harold J. Kloosterman (62)........ 1992 Mr. Kloosterman is a Director and has 2005
served in this capacity since September
1, 1992. Mr. Kloosterman has served as
President since 1985 of Cambridge
Partners, Inc., a company he formed in
1985. He has been involved in the
development and management of commercial,
apartment and condominium projects in
Grand Rapids and Ann Arbor, Michigan and
in the Chicago area. Mr. Kloosterman was
formerly a Managing Director of Omega
Capital from 1986 to 1992. Mr.
Kloosterman has been involved in the
acquisition, development and management
of commercial and multifamily properties
since 1978. He has also been a senior
officer of LaSalle Partners, Inc.
Edward Lowenthal (59)............. 1995 Mr. Lowenthal is a Director and has 2004
served in this capacity since October 17,
1995. From January 1997 to March 2002,
Mr. Lowenthal served as President and
Chief Executive Officer of Wellsford Real
Properties, Inc. (AMEX:WRP), a real
estate merchant bank, since 1997, and was
President of the predecessor of Wellsford
Real Properties, Inc. since 1986. Mr.
Lowenthal also serves as a director of
REIS, Inc. (a provider of real estate
market information and valuation
technology), Corporate Renaissance Group,
Inc. (a mutual fund), Equity Residential
Properties Trust, Great Lakes REIT and a
trustee of the Manhattan School of Music.
Christopher W. Mahowald* (42)..... 2000 Mr. Mahowald is a Director and has served 2004
in this capacity since October 17, 2000.
Mr. Mahowald has served as President of
EFO Realty since January 1997 where he is
responsible for the origination, analysis,
structuring and execution of new investment
activity and asset management relating to
EFO Realty's existing real estate assets.
Donald J. McNamara* (50).......... 2000 Mr. McNamara is a Director and has served 2005
in this capacity since October 17, 2000.
Mr. McNamara is the founder of The
Hampstead Group, L.L.C., a privately-held
equity investment firm based in Dallas,
Texas, and has served as its Chairman
since its inception in 1989. He has
served as Chairman of the Board of
Directors of FelCor Lodging Trust
(NYSE:FCH) since its merger with Bristol
Hotel Company in July 1998. Mr. McNamara
has also served as a director of Franklin
Covey Co. (NYSE:FC) since May 1999. Mr.
McNamara also currently serves as a
trustee of St. Mark's School in Texas and
a trustee of the Virginia Tech Foundation.
C. Taylor Pickett (42)............ 2002 Mr. Pickett is the Chief Executive 2005
Officer and has served in this capacity
since June 12, 2001. He has served on
the Board of Directors since May 30,
2002. Prior to joining our company, Mr.
Pickett served as the Executive Vice
President and Chief Financial Officer
from January 1998 to June 2001 of
Integrated Health Services, Inc., a
public company specializing in post-acute
healthcare services. He also served as
Executive Vice President of Mergers and
Acquisitions from May 1997 to December
1997 of Integrated Health Services. Prior
to his roles as Chief Financial Officer
and Executive Vice President of Mergers
and Acquisitions, Mr. Pickett served as
the President of Symphony Health
Services, Inc. from January 1996 to May
1997. Mr. Pickett was also previously a
director of Omega Worldwide, Inc.
Stephen D. Plavin** (44).......... 2000 Mr. Plavin is a Director and has served 2004
in this capacity since July 17, 2000. Mr.
Plavin has been Chief Operating Officer
of Capital Trust, Inc., a New York
City-based mortgage REIT and investment
management company and has served in this
capacity since 1998. In this role, Mr.
Plavin is responsible for all of the
lending, investing and portfolio
management activities of Capital Trust,
Inc.
* Director designated by Explorer pursuant to the Stockholders Agreement with
Explorer.
** Independent Director approved by Explorer pursuant to the Stockholders
Agreement.
Information regarding our executive officers is set forth in Item 1 of this
report.
AUDIT COMMITTEE
The Board of Directors has an Audit Committee consisting of Messrs.
Kloosterman, Korman and Plavin. The Board has determined that Mr. Korman is an
Audit Committee Financial Expert and that all the members of the Audit Committee
are independent directors in accordance with the criteria established by the New
York Stock Exchange.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
To our knowledge, all filings required under Section 16 of the Securities
Exchange Act of 1934 were made on a timely basis.
CODE OF ETHICS
We expect to adopt a Code of Ethics on or before our 2004 annual meeting of
stockholders and intend to post the Code of Ethics on our website at
www.omegahealthcare.com. We have not adopted a Code of Ethics as of the date of
this report because we had previously anticipated implementing a Code of Ethics
prior to the filing of its definitive proxy statement within 120 days of fiscal
year end, and incorporating the information required by this item by reference
to the definitive proxy statement. In connection with the exercise of Explorer's
registration rights, we have elected to include in the information under Part
III within the body of this report at this time, rather than by incorporation by
reference to the definitive proxy statement to be filed.
ITEM 11 - EXECUTIVE COMPENSATION
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth, for the years ended December 31, 2003, 2002
and 2001, the compensation for services in all capacities to Omega of each
person who served as chief executive officer during the year ended December 31,
2003 and the four most highly compensated executive officers serving at December
31, 2003.
LONG-TERM COMPENSATION
ANNUAL COMPENSATION AWARD(S) PAYOUTS
------------------- ------- -------
RESTRICTED SECURITIES ALL
STOCK UNDERLYING LTIP OTHER
NAME AND AWARD(S) OPTIONS/ PAYOUTS COMPENSATION
PRINCIPAL POSITION YEAR SALARY($) BONUS($) ($) SARS(#) ($) ($)(1)
- ------------------------------------------------------------------------------------------------------------------------------------
C. Taylor Pickett.......... 2003 463,500 463,500 -- -- -- 6,000 (1)
Chief Executive Officer 2002 450,000 191,250 -- -- -- 6,000 (1)
(from June 12, 2001) 2001 250,673 250,500 116,000 (2) 1,120,000 -- --
Daniel J. Booth............ 2003 283,250 141,625 -- -- -- 6,000 (1)
Chief Operating Officer 2002 275,000 58,438 -- -- -- 4,125 (1)
(from October 15, 2001) 2001 58,349 30,000 -- 350,000 -- --
R. Lee Crabill, Jr......... 2003 221,450 110,750 -- -- -- 6,000 (1)
Senior Vice President 2002 215,000 45,688 -- -- -- 19,285 (4)
(from July 30, 2001) 2001 91,237 45,500 -- 245,000 -- 21,851 (3)
Robert O. Stephenson....... 2003 221,450 110,750 -- -- -- 6,000 (1)
Chief Financial Officer 2002 215,000 45,688 -- -- -- 4,300 (1)
(from August 1, 2001) 2001 89,583 45,500 -- 325,000 -- --
- -----------
(1) Consists of contributions to our 401(k) Profit-Sharing Plan.
(2) Represents a restricted stock award of 50,000 shares of our common stock to
Mr. Pickett on June 12, 2001, which vested on June 12, 2003.
(3) Represents compensation to Mr. Crabill for reimbursement of moving
expenses.
(4) Consists of contributions to our 401(k) Profit-Sharing Plan and
compensation to Mr. Crabill for reimbursement of moving expenses.
OPTION GRANTS/SAR GRANTS
There were no options or stock appreciation rights ("SARs") granted to
the named executive officers during 2003.
AGGREGATED OPTIONS/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES
The following table summarizes options and SARs exercised during 2003
and presents the value of unexercised options and SARs held by the named
executive officers at December 31, 2003.
NUMBER OF
SECURITIES
UNDERLYING IN-THE-MONEY
SHARES UNEXERCISED OPTIONS/SARS AT
ACQUIRED OPTIONS/ SARS AT FISCAL
ON VALUE FISCAL YEAR-END (#) YEAR-END ($)
EXERCISE REALIZED UNEXERCISABLE (U) UNEXERCISABLE (U)
NAME (#) ($) EXERCISABLE (E) EXERCISABLE (E)
- ----------------------------------------------------------------------------------------------------
C. Taylor Pickett........... 20,000 110,000 468,219(U) $ 3,157,548(U)
-- -- 631,781(E) $ 4,281,452(E)
Daniel J. Booth............. -- -- 145,833(U) $ 915,331(U)
-- -- 204,167(E) $ 1,283,169(E)
R. Lee Crabill, Jr.......... -- -- 98,750(U) $ 619,633(U)
-- -- 146,250(E) $ 919,317(E)
Robert O. Stephenson........ -- -- 165,985(U) $ 1,067,032(U)
-- -- 159,015(E) $ 1,016,968(E)
LONG-TERM INCENTIVE PLAN
For the period from August 14, 1992, the date of commencement of our
operations, through December 31, 2003, we have had no long-term incentive plans.
DEFINED BENEFIT OR ACTUARIAL PLAN
For the period from August 14, 1992, the date of commencement of our
operations, through December 31, 2003, we have had no pension plans.
COMPENSATION AND SEVERANCE AGREEMENTS
C. TAYLOR PICKETT EMPLOYMENT AGREEMENT
We entered into an employment agreement with C. Taylor Pickett dated as of
June 12, 2001, to be our Chief Executive Officer. The term of the agreement
expires on June 12, 2005.
Mr. Pickett's base salary is $450,000 per year, subject to increase by us
and provides that he will be eligible for an annual bonus of up to 100% of his
base salary based on criteria determined by the Compensation Committee of our
Board of Directors. In connection with this employment agreement, we issued Mr.
Pickett 50,000 shares of our restricted common stock on June 12, 2001, which
vested during 2003. In connection with the employment agreement, Mr. Pickett was
granted an incentive stock option to purchase 172,413 shares of our common stock
and a nonqualified stock option to purchase 627,587 shares of our common stock.
The incentive stock option has vested as to 25% of the shares on December 31,
2002; as to an additional 25% after Mr. Pickett completes two years of service;
as to an additional 25% ratably on a monthly basis in 2004; and as to the final
25% ratably on a monthly basis in the first six months of 2005, in each case
provided Mr. Pickett continues to work for us on the applicable vesting date.
The nonqualified stock option will become vested as to 50% of the shares after
Mr. Pickett completes two years of service and will become ratably vested as to
the remainder of the shares on a monthly basis over the next 24 months of
service following that two year anniversary.
If we terminate Mr. Pickett's employment without cause or if he resigns for
good reason, he will be entitled to payment of his base salary for a period of
12 months or, if shorter, for the remainder of the term of the agreement.
Additionally, Mr. Pickett will be entitled to payment of an amount equal to the
bonus paid in the prior year, payable in 12 monthly installments. Mr. Pickett is
required to execute a release of claims against us as a condition to the payment
of severance benefits. The vesting of Mr. Pickett's options may be subject to
acceleration upon the occurrence of certain events such as termination without
cause or resignation for good reason and will become fully vested if, within one
year following a change of control, he is terminated without cause or resigns
for good reason.
Mr. Pickett is restricted from using any of our confidential information
during his employment and for two years thereafter or from using any trade
secrets during his employment and for as long thereafter as permitted by
applicable law. Mr. Pickett is subject to covenants which prohibit him from
competing with us and from soliciting our customers or employees while he is
employed by us and for 12 months following his termination of employment.
DANIEL J. BOOTH EMPLOYMENT AGREEMENT
We entered into an employment agreement with Daniel J. Booth effective as
of October 15, 2001, to be our Chief Operating Officer. The term of the
agreement expires on January 1, 2006.
Mr. Booth's base salary is $275,000 per year, subject to increase by us,
and he is eligible for an annual bonus of up to 50% of his base salary based on
criteria determined by the Compensation Committee. In connection with his
employment agreement, Mr. Booth was granted an incentive stock option to
purchase 166,666 shares of our common stock and a nonqualified stock option to
purchase 83,334 shares of our common stock. The incentive stock option has
vested as to 40% of the shares on December 31, 2003; and will vest as to 20% of
the shares on each of October 1, 2004, October 1, 2005 and January 1, 2006, and
the nonqualified stock option vested on October 1, 2003, provided that Mr. Booth
continues to work for us on the applicable vesting date.
Our agreement with Mr. Booth contains severance and accelerated option
vesting provisions similar to those in Mr. Pickett's agreement described above.
Mr. Booth is required to execute a release of claims against us as a condition
to the payment of severance benefits. He is also subject to restrictions on his
use of confidential information and our trade secrets that are the same as those
in our agreement with Mr. Pickett described above.
ROBERT O. STEPHENSON EMPLOYMENT AGREEMENT
We entered into an employment agreement with Robert O. Stephenson effective
as of August 30, 2001, to be our Chief Financial Officer. The term of the
agreement expires on January 1, 2006.
Mr. Stephenson's base salary is $215,000 per year, subject to increase by
us, and he is eligible for an annual bonus of up to 50% of his base salary based
on criteria determined by the Compensation Committee. In connection with his
employment agreement, Mr. Stephenson was granted an incentive stock option to
purchase 181,155 shares of our common stock and a nonqualified stock option to
purchase 18,845 shares of our common stock. The incentive stock option has
vested as to 40% of the shares on December 31, 2003; and will vest as to 20% of
the shares on each of August 1, 2004, August 1, 2005 and January 1, 2006, and
the nonqualified stock option vested on August 1, 2003, provided that Mr.
Stephenson continues to work for us on the applicable vesting date.
Our agreement with Mr. Stephenson contains severance and accelerated option
vesting provisions similar to those in Mr. Pickett's agreement described above.
Mr. Stephenson is required to execute a release of claims against us as a
condition to the payment of severance benefits. He is also subject to
restrictions on his use of confidential information and our trade secrets that
are the same as those in our agreement with Mr. Pickett described above.
R. LEE CRABILL, JR. EMPLOYMENT AGREEMENT
We entered into an employment agreement with R. Lee Crabill, Jr. effective
as of July 30, 2001, to be our Senior Vice President of Operations. The term of
the agreement expires on July 30, 2005.
Mr. Crabill's base salary is $215,000 per year, subject to increase by us,
and he is eligible for an annual bonus of up to 50% of his base salary based on
criteria determined by the Compensation Committee. In connection with his
employment agreement, Mr. Crabill was granted an incentive stock option to
purchase 133,333 shares of our common stock and a nonqualified stock option to
purchase 41,667 shares of our common stock. The incentive stock option has
vested as to 50% of the shares on December 31, 2003; and will vest as to 25% of
the shares on each of August 1, 2004 and August 1, 2005, and the nonqualified
stock option will vest as to 50% of the shares after Mr. Crabill completes two
years of service and will become ratably vested as to the remainder of the
shares on a monthly basis over the next 24 months of service following that two
year anniversary, provided Mr. Crabill continues to work for us on the
applicable vesting date.
Our agreement with Mr. Crabill contains severance and accelerated option
vesting provisions similar to those in Mr. Pickett's agreement described above.
Mr. Crabill is required to execute a release of claims against us as a condition
to the payment of severance benefits. He is also subject to restrictions on his
use of confidential information and our trade secrets that are the same as those
in our agreement with Mr. Pickett described above.
COMPENSATION OF DIRECTORS
For the year ended December 31, 2003, each non-employee director received a
cash payment equal to $15,000 per year, payable in quarterly installments of
$3,750. Each non-employee director also received a quarterly grant of shares of
common stock equal to the number of shares determined by dividing the sum of
$3,750 by the fair market value of the common stock on the date of each
quarterly grant, currently set at February 15, May 15, August 15, and November
15. At the director's option, the quarterly cash payment of director's fees may
be payable in shares of common stock. In addition, each non-employee director
was entitled to receive fees equal to $1,500 per meeting for attendance at each
regularly scheduled meeting of our Board of Directors. For each teleconference
or called special meeting of our Board of Directors, each non-employee director
received $1,500 for meetings with a duration in excess of 15 minutes and $750
for meetings with a duration of less than 15 minutes. In addition, we reimbursed
the directors for travel expenses incurred in connection with their duties as
directors. Employee directors received no compensation for service as directors.
The cash compensation, not including reimbursement for expenses, paid by us
in consideration of Mr. Decker's and Mr. McNamara's service on our Board of
Directors as Explorer designees was paid directly to Hampstead under the
advisory agreement.
Each non-employee director was awarded options with respect to 10,000
shares at the date the plan was adopted or upon their initial election as a
director. Each non-employee director is also awarded an additional option grant
with respect to 1,000 shares on January 1 of each year they serve as a director.
All grants have been and will be at an exercise price equal to 100% of the fair
market value of our common stock on the date of the grant. Non-employee director
options vest one-third after each year for three years.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION
The following table provides information about all equity awards under our
company's 2000 Stock Incentive Plan and 1993 Amended and Restated Stock Option
and Restricted Stock Plan as of December 31, 2003.
- ------------------------------------------------------------------------------------------------------------
(a) (b) (c)
- ------------------------------------------------------------------------------------------------------------
Number of securities
Number of securities remaining available for
to be issued upon Weighted-average future issuance under
exercise of exercise price of equity compensation plans
Plan category outstanding options, outstanding options, (excluding securities
warrants and rights warrants and rights reflected in column (a))
- ------------------------------------------------------------------------------------------------------------
Equity compensation
plans approved by
security holders 2,282,630 $3.20 566,332
- ------------------------------------------------------------------------------------------------------------
Equity compensation
plans not approved by
security holders -- -- --
- ------------------------------------------------------------------------------------------------------------
Total 2,282,630 $3.20 566,332
- ------------------------------------------------------------------------------------------------------------
BENEFICIAL OWNERSHIP OF MANAGEMENT AND PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding beneficial ownership
of our capital stock as of February 18, 2004:
o each of our directors and the named executive officers appearing in
the table under "Executive Compensation--Compensation of Executive
Officers;" and
o all persons known to us to be the beneficial owner of more than 5% of
our outstanding common stock.
Except as indicated in the footnotes to this table, the persons named in
the table have sole voting and investment power with respect to all shares of
our common stock shown as beneficially owned by them, subject to community
property laws where applicable. The business address of the directors and
executive officers is 9690 Deereco Road, Suite 100, Timonium, Maryland 21093.
COMMON STOCK SERIES A PREFERRED SERIES B PREFERRED
PERCENT PERCENT PERCENT
NUMBER OF OF NUMBER OF OF NUMBER OF OF
BENEFICIAL OWNER SHARES CLASS(1) SHARES CLASS(17) SHARES CLASS(18)
- ---------------------------------------------------------------------------------------------------------------------
C. Taylor Pickett............. 633,185 (2) 1.5% -- -- -- --
Daniel J. Booth............... 76,986 (3) 0.2% -- -- -- --
R. Lee Crabill, Jr............ 90,403 (4) 0.2% -- -- -- --
Robert O. Stephenson.......... 107,237 0.2% -- -- -- --
Daniel A. Decker.............. 18,139,296 (5) (6) 41.6% -- -- -- --
Thomas W. Erickson............ 57,969 (7) 0.1% -- -- -- --
Thomas F. Franke.............. 67,834 (8) (9) 0.2% 7,400 0.3% 2,000 0.1%
Harold J. Kloosterman......... 106,594 (10) 0.2% -- -- -- --
(11)
Bernard J. Korman............. 548,080 (8) 1.3% 200 * 1,300 0.1%
Edward Lowenthal.............. 31,221 (12) * -- -- 100 *
Christopher W. Mahowald....... 30,352 (6) * 16,500 (15) 0.7% -- --
Donald J. McNamara............ 18,679,201 (5) (6) 42.8% 4,800 (16) 0.2% 9,959 0.5%
(13)
Stephen D. Plavin............. 22,853 (6) * -- -- -- --
Directors and executive
officers as 20,469,965 (14) 46.9% 28,900 1.3% 13,359 0.7%
a group (13 persons)..........
5% BENEFICIAL OWNERS:
Hampstead Investment Partners
III, L.P. (through Explorer
Holdings, L.P.)
3232 McKinney Ave.
Suite 890, LB 12 18,118,246 (5) 41.5%
Dallas TX 75204...............
- -----------
* Less than 0.10%
(1) Based on 43,608,956 shares of our common stock outstanding as of February
18, 2004.
(2) Includes stock options that are exercisable within 60 days to acquire
243,963 shares.
(3) Includes stock options that are exercisable within 60 days to acquire 6,250
shares.
(4) Includes stock options that are exercisable within 60 days to acquire 4,375
shares.
(5) Represents 18,118,246 shares of common stock owned by Explorer. Hampstead
holds the ultimate controlling interest in Explorer. Messrs. McNamara and
Decker disclaim beneficial ownership of the common stock, which they may be
deemed to beneficially own because of their ownership interests in
Hampstead, which holds the ultimate controlling interest in Explorer.
(6) Includes stock options that are exercisable within 60 days to acquire
11,999 shares.
(7) Includes stock options that are exercisable within 60 days to acquire
46,333 shares.
(8) Includes stock options that are exercisable within 60 days to acquire 5,000
shares.
(9) Includes 47,141 shares owned by a family limited liability company (Franke
Family LLC) of which Mr. Franke is a Member.
(10) Includes shares owned jointly by Mr. Kloosterman and his wife, and 35,206
shares held solely in Mr. Kloosterman's wife's name.
(11) Includes stock options that are exercisable within 60 days to acquire 6,999
shares.
(12) Includes stock options that are exercisable within 60 days to acquire 8,001
shares.
(13) Includes 373,215 shares held by a partnership established by Mr. McNamara
for the benefit of certain members of Mr. McNamara's family, 7,546 shares
held by a charitable foundation established by Mr. McNamara, and 1,466
shares held by a trust established by Mr. McNamara for non-family members
of which Mr. McNamara is the trustee. Mr. McNamara disclaims any beneficial
ownership of the shares held by the partnership, the foundation and the
trust.
(14) Includes 373,917 of stock options that are exercisable within 60 days.
Includes shares of our common stock owned by Explorer. See Note (5) above.
(15) Includes 300 shares held solely in Mr. Mahowald's wife's name.
(16) Includes 800 shares held by a trust established by Mr. McNamara for
non-family members of which Mr. McNamara is the trustee. Mr. McNamara
disclaims any beneficial ownership of the shares held by the trust.
(17) Based on 2,300,000 shares of Series A preferred stock outstanding on
February 18, 2004.
(18) Based on 2,000,000 shares of Series B preferred stock outstanding on
February 18, 2004.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
EXPLORER HOLDINGS, L.P.
Hampstead, through its affiliate Explorer, indirectly owned 18,118,246
shares of our common stock, representing 41.5% of our outstanding voting power
as of February 5, 2004. Daniel A. Decker, our Chairman of the Board of
Directors, is a principal 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. Explorer is entitled to
designate a majority of the members of our Board of Directors pursuant to our
Stockholders Agreement with Explorer. See "Stockholders Agreement with Explorer
Holdings, L.P."
REPURCHASE AND CONVERSION AGREEMENT. Pursuant to our Repurchase and Conversion
Agreement with Explorer, we used approximately $102.1 million of the net
proceeds of our Series D preferred stock offering to repurchase 700,000 shares
of Series C preferred stock and Explorer converted its remaining 348,420 shares
of Series C preferred stock into 5,574,720 shares of common stock, all as of
February 10,2004. (See Item 7 - Management's Discussion and Analysis of Results
of Operation and Financial Condition; Series D Preferred Offering; Series C
Preferred Purchase and Conversion).
Pursuant to our Repurchase and Conversion Agreement, we paid Explorer
$150,000 in settlement of all outstanding claims by Explorer for reimbursement
of expenses (other than travel and related expenses incurred by representatives
of Explorer on behalf of us) and in consideration of Explorer's agreement to pay
all expenses incurred by it in connection with the transactions.
ADVISORY AGREEMENT. Under the terms of an amended and restated advisory
agreement dated October 4, 2000 between us and Hampstead, we have agreed to pay
Explorer an advisory fee if Hampstead provides assistance to us in connection
with the evaluation of growth opportunities or other financing matters. We have
also agreed to reimburse Explorer for certain direct expenses. As of December
31, 2003, we reimbursed Explorer for approximately $0.6 million of such direct
expenses. (See Note 12 - Related Party Transactions).
REGISTRATION OF EXPLORER'S SHARES. On February 5, 2004, we received a request
from Explorer pursuant to its registration rights agreement with us requesting
that we file a registration statement with the SEC registering Explorer's shares
of our common stock on a shelf basis permitting sales from time to time as
determined by Explorer, and we have filed such a registration statement. Under
the registration rights agreement, we bear the expenses associated with such
registration, other than fees and expenses of Explorer's counsel and excluding
underwriting discounts and commissions relating to the offer and sale of
Explorer's shares.
STOCKHOLDERS AGREEMENT WITH EXPLORER HOLDINGS, L.P. On July 14, 2000, Explorer
Holdings, L.P. completed a Series C investment of $100.0 million in exchange for
1,000,000 shares of Omega's Series C preferred stock. In connection with
Explorer's Series C investment, Omega entered into a Stockholders Agreement with
Explorer dated July 14, 2000. As a condition to the closing of Explorer's
additional $31.3 million investment in February 2002, we amended the
Stockholders Agreement with Explorer to provide that Explorer would 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, not to
exceed five directors (or six directors upon the increase in the size of the
Board of Directors to ten 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. The Stockholders Agreement as amended
terminates February 20, 2007.
ITEM 14 - PRINCIPAL ACCOUNTANT FEES AND SERVICES
Ernst & Young LLP audited our financial statements for each of the years
ended December 31, 2001, 2002 and 2003.
AUDIT FEES
The aggregate fees billed by Ernst & Young LLP for professional services
rendered to our company for the audit of the Company's annual financial
statements for fiscal year 2002 and 2003 and the reviews of the financial
statements included in the Company's Forms 10-Q for fiscal years 2002 and 2003
were approximately $216,000 and $167,000, respectively.
AUDIT RELATED FEES
There were no fees billed by Ernst & Young LLP for professional services to
our company relating to employee benefit audits, due diligence related to
mergers and acquisitions, accounting consultations and audits in connection with
acquisitions, internal control reviews, attest services that are not required by
statute or regulation and consultation concerning financial accounting and
reporting standards for fiscal years 2002 and 2003.
TAX FEES
The aggregate fees billed by Ernst & Young LLP for professional services to
our company relating to tax compliance, tax planning and tax advice taken as a
whole were approximately $149,000 and $33,000 for fiscal years 2002 and 2003,
respectively.
OTHER FEES
The aggregate fees billed by Ernst & Young LLP for professional services to
our company rendered other than as stated under the captions "Audit Fees,"
"Audit-Related Fees" and "Tax Fees" above for fiscal years 2002 and 2003 were
approximately $71,000 and $0, respectively. We reimbursed certain fees and
expenses of an investment banking firm selected to act as placement agent in
connection with a planned commercial mortgage-backed securities ("CMBS")
transaction pursuant to our agreement with the placement agent. In 2002, we were
unable to complete the proposed CMBS transaction due to the impact on our
operators resulting from reductions in Medicare reimbursement and concerns about
potential Medicaid rate reductions. The placement agent engaged the transaction
support group based in a different office of Ernst & Young LLP to provide the
placement agent with certain procedures agreed upon by Ernst & Young LLP and the
placement agent. Among the placement agent expenses that were reimbursed by us
were $1.2 million for services provided to the placement agent by Ernst & Young
LLP.
DETERMINATION OF AUDITOR INDEPENDENCE
The Audit Committee has considered the provision of non-audit services by
our principal accountants and has determined that the provision of such services
was consistent with maintaining the independence of Ernst & Young LLP.
AUDIT COMMITTEE'S PRE-APPROVAL POLICIES
The Audit Committee's current practice is to pre-approve all audit services
and all permitted non-audit services to be provided to our company by our
independent auditor; provided, however pre-approval requirements for non-audit
services are not required if all such services (1) do not aggregate to more than
five percent of total revenues paid by us to our accountant in the fiscal year
when services are provided; (2) were not recognized as non-audit services at the
time of the engagement; and (3) are promptly brought to the attention of the
Audit Committee and approved prior to the completion of the audit by the Audit
Committee.
PART IV
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, 2003 and 2002....... F-2
Consolidated Statements of Operations for the years ended
December 31, 2003, 2002 and 2001................................. F-3
Consolidated Statements of Stockholders Equity for the years ended
December 31, 2003, 2002 and 2001................................ F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 2003, 2002 and 2001................................. 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-35
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable or sufficient information has
been included in the notes to the Financial Statements and therefore has been
omitted.
(a)(3) Listing of Exhibits -- See Index to Exhibits beginning on Page I-1
of this report.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended December 31,
2003. The following report on Form 8-K was furnished during the quarter ended
December 31, 2003:
Form 8-K dated October 24, 2003: Report with the following exhibit: Press
release issued by Omega Healthcare Investors, Inc. on October 24, 2003.
(c) Exhibits -- See Index to Exhibits beginning on Page I-1 of this
report.
(d) Financial Statement Schedules -- The following consolidated financial
statement schedules are included herein:
Schedule III -- Real Estate and Accumulated Depreciation
Schedule IV-- Mortgage Loans on Real Estate
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, 2003 and 2002,
and the related consolidated statements of operations, stockholders equity and
cash flows for each of the three years in the period ended December 31, 2003.
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, 2003 and 2002, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 2003, 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 19 to the consolidated financial statements, in 2003
Omega Healthcare Investors, Inc. adopted the provisions of Statements of
Financial Standards No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets."
/s/ Ernst & Young LLP
Chicago, Illinois
January 27, 2004, except
for Note 20, as to which the date is
February 13, 2004.
OMEGA HEALTHCARE INVESTORS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31,
2003 2002
------------------------
ASSETS
Real estate properties
Land and buildings at cost................................................... $ 692,454 $ 669,188
Less accumulated depreciation................................................ (134,477) (117,986)
------------------------
Real estate properties--net................................................ 557,977 551,202
Mortgage notes receivable--net............................................... 119,815 173,914
------------------------
677,792 725,116
Other investments--net.......................................................... 29,787 36,887
------------------------
707,579 762,003
Assets held for sale--net....................................................... -- 2,324
------------------------
Total investments............................................................ 707,579 764,327
Cash and cash equivalents....................................................... 3,094 14,340
Accounts receivable--net........................................................ 1,893 2,766
Interest rate cap............................................................... 5,537 7,258
Other assets.................................................................... 6,951 5,597
Operating assets for owned properties........................................... -- 9,721
------------------------
Total assets................................................................. $ 725,054 $ 804,009
========================
LIABILITIES AND STOCKHOLDERS EQUITY
Revolving lines of credit and term loan......................................... $ 177,074 $ 177,000
Unsecured borrowings............................................................ 100,000 100,000
Other long-term borrowings...................................................... 3,520 29,462
Accrued expenses and other liabilities.......................................... 6,583 13,234
Operating liabilities for owned properties...................................... -- 4,612
Operating assets and liabilities for owned properties - net..................... 1,642 --
------------------------
Total liabilities............................................................ 288,819 324,308
------------------------
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 as of
December 31, 2003 and 2002, respectively................................... 57,500 57,500
Issued and outstanding--2,000 shares Class B with an
aggregate liquidation preference of $50,000 as of
December 31, 2003 and 2002, respectively................................... 50,000 50,000
Issued and outstanding--1,048 shares Class C with an
aggregate liquidation preference of $104,842 as of
December 31, 2003 and 2002, respectively................................... 104,842 104,842
Common stock $.10 par value; authorized--100,000 shares
Issued and outstanding--37,291 shares and 37,141 shares
as of December 31, 2003 and 2002, respectively............................. 3,729 3,714
Additional paid-in capital...................................................... 481,467 481,052
Cumulative net earnings......................................................... 174,275 151,245
Cumulative dividends paid....................................................... (431,123) (365,654)
Unamortized restricted stock awards............................................. -- (116)
Accumulated other comprehensive loss............................................ (4,455) (2,882)
------------------------
Total stockholders equity.................................................... 436,235 479,701
------------------------
Total liabilities and stockholders equity.................................. $ 725,054 $ 804,009
========================
See accompanying notes.
OMEGA HEALTHCARE INVESTORS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
2003 2002 2001
---------------------------------------
REVENUES
Rental income................................................................ $ 65,121 $ 62,718 $ 60,117
Mortgage interest income..................................................... 14,747 20,922 20,478
Other investment income--net................................................. 2,982 5,302 4,845
Nursing home revenues of owned and operated assets........................... -- 42,905 162,042
Litigation settlement........................................................ 2,187 -- --
Miscellaneous................................................................ 1,230 1,757 2,642
---------------------------------------
86,267 133,604 250,124
EXPENSES
Nursing home expenses of owned and operated assets........................... -- 63,778 169,861
Nursing home revenues and expenses of owned and operated assets - net........ 1,466 -- --
Depreciation and amortization................................................ 20,985 20,538 21,300
Interest..................................................................... 23,388 27,381 33,204
General and administrative................................................... 5,943 6,285 10,383
Legal........................................................................ 2,301 2,869 4,347
State taxes.................................................................. 614 490 739
Refinancing expenses......................................................... -- 7,000 --
Provisions for impairment.................................................... 8,894 3,657 8,135
Provisions for uncollectible mortgages, notes and accounts receivable........ -- 8,844 683
Severance, moving and consulting agreement costs............................. -- -- 5,066
Litigation settlement expense................................................ -- -- 10,000
Adjustment of derivatives to fair value...................................... -- (946) 1,317
---------------------------------------
63,591 139,896 265,035
---------------------------------------
INCOME (LOSS) BEFORE GAIN (LOSS) ON ASSETS SOLD................................. 22,676 (6,292) (14,911)
Gain (loss) on assets sold--net................................................. 665 2,548 (677)
---------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS........................................ 23,341 (3,744) (15,588)
Loss from discontinued operations............................................... (311) (10,902) (1,069)
---------------------------------------
NET INCOME (LOSS)............................................................... 23,030 (14,646) (16,657)
Preferred stock dividends....................................................... (20,115) (20,115) (19,994)
---------------------------------------
NET INCOME (LOSS) AVAILABLE TO COMMON........................................... $ 2,915 $ (34,761) $ (36,651)
=======================================
INCOME (LOSS) PER COMMON SHARE:
Basic:
Income (loss) from continuing operations..................................... $ 0.09 $ (0.69) $ (1.78)
=======================================
Net income (loss)............................................................ $ 0.08 $ (1.00) $ (1.83)
=======================================
Diluted:
Income (loss) from continuing operations..................................... $ 0.08 $ (0.69) $ (1.78)
=======================================
Net income (loss)............................................................ $ 0.08 $ (1.00) $ (1.83)
=======================================
Dividends declared and paid per common share.................................... $ 0.15 $ -- $ --
=======================================
Weighted-average shares outstanding, basic...................................... 37,189 34,739 20,038
=======================================
Weighted-average shares outstanding, diluted.................................... 38,154 34,739 20,038
=======================================
COMPONENTS OF OTHER COMPREHENSIVE INCOME:
Net income (loss)............................................................... $ 23,030 $ (14,646) $ (16,657)
Unrealized gain (loss) on Omega Worldwide, Inc............................... -- 969 (939)
Unrealized loss on hedging contracts......................................... (1,573) (2,033) (849)
---------------------------------------
Total comprehensive income (loss)............................................... $ 21,457 $ (15,710) $ (18,445)
=======================================
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, 2000 (20,038 common 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 (84 shares).................................... (9) (336) -- --
Issuance of Series C preferred stock (in lieu of
November 2000 dividends)............................ -- (45) 4,842 --
Net loss............................................... -- -- -- (16,657)
Unrealized loss on Omega Worldwide, Inc................ -- -- -- --
Unrealized loss on hedging contracts................... -- -- -- --
---------------------------------------------------------
Balance at December 31, 2001 (19,999 common shares)....... 2,000 438,071 212,342 165,891
Issuance of common stock:
Release of restricted 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 director fees
(18 shares at an average of $5.129 per share)....... 2 88 -- --
Net loss............................................... -- -- -- (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 common shares)....... 3,714 481,052 212,342 151,245
Issuance of common stock:
Release of restricted stock and amortization
of deferred stock compensation...................... -- -- -- --
Dividend Reinvestment Plan (6 shares)................. 1 41 -- --
Exercised Options (121 shares at an average
exercise price of $2.373 per share)................. 12 275 -- --
Grant of stock as payment of directors
fees (23 shares at an average of $4.373 per
share).............................................. 2 99 -- --
Net income............................................. -- -- -- 23,030
Common dividends paid ($0.15 per share)................ -- -- -- --
Preferred dividends paid (Series A of $6.359 per
share, Series B of $5.930 per share and
Series C of $2.50 per share)......................... -- -- -- --
Unrealized loss on interest rate cap................... -- -- -- --
---------------------------------------------------------
Balance at December 31, 2003 (37,291 common shares)....... $ 3,729 $481,467 $212,342 $174,275
=========================================================
See accompanying notes.
OMEGA HEALTHCARE INVESTORS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
UNAMORTIZED ACCUMULATED
RESTRICTED OTHER
CUMULATIVE STOCK COMPREHENSIVE
DIVIDENDS AWARDS LOSS TOTAL
-------------------------------------------------------------
Balance at December 31, 2000 (20,038 common shares)....... $(365,654) $ (607) $ (30) $464,313
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 -- 251
Cancellation of restricted stock (52 shares).......... -- 330 -- --
Dividend Reinvestment Plan (10 shares)................ -- -- -- 29
Grant of stock as payment of director fees
(37 shares at an average of $2.454 per share)........ -- -- -- 90
Cancellation of stock held as collateral for
note (84 shares).................................... -- -- -- (345)
Issuance of Series C preferred stock (in lieu of
November 2000 dividends)............................ -- -- -- 4,797
Net loss............................................... -- -- -- (16,657)
Unrealized loss on Omega Worldwide, Inc................ -- -- (939) (939)
Unrealized loss on hedging contracts................... -- -- (849) (849)
-------------------------------------------------------------
Balance at December 31, 2001 (19,999 common shares)....... (365,654) (142) (1,818) 450,690
Issuance of common stock:
Release of restricted and amortization of
deferred stock compensation......................... -- 26 -- 26
Dividend Reinvestment Plan (1 shares)................. -- -- -- 5
Rights Offering (17,123 shares)....................... -- -- -- 44,600
Grant of stock as payment of director fees
(18 shares at an average of $5.129 per share)....... -- -- -- 90
Net loss............................................... -- -- -- (14,646)
Unrealized gain on Omega Worldwide, Inc................ -- -- 558 558
Realized gain on sale of Omega Worldwide, Inc.......... -- -- 411 411
Unrealized gain on hedging contracts................... -- -- 849 849
Unrealized loss on interest rate cap................... -- -- (2,882) (2,882)
-------------------------------------------------------------
Balance at December 31, 2002 (37,141 common shares)....... (365,654) (116) (2,882) 479,701
Issuance of common stock:
Release of restricted stock and amortization
of deferred stock compensation...................... -- 116 -- 116
Dividend Reinvestment Plan (6 shares)................. -- -- -- 42
Exercised Options (121 shares at an average
exercise price of $2.373 per share)................. -- -- -- 287
Grant of stock as payment of directors
fees (23 shares at an average of $4.373 per
share).............................................. -- -- -- 101
Net income............................................. -- -- -- 23,030
Common dividends paid ($0.15 per share)................ (5,582) -- -- (5,582)
Preferred dividends paid (Series A of $6.359 per
share, Series B of $5.930 per share and
Series C of $2.50 per share)......................... (59,887) -- -- (59,887)
Unrealized loss on interest rate cap................... -- -- (1,573) (1,573)
-------------------------------------------------------------
Balance at December 31, 2003 (37,291 common shares)...... $(431,123) $ -- $ (4,455) $436,235
=============================================================
See accompanying notes.
OMEGA HEALTHCARE INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
2003 2002 2001
---------------------------------------
OPERATING ACTIVITIES
Net income (loss)............................................................... $ 23,030 $(14,646) $(16,657)
Adjustment to reconcile net income to cash provided by operating activities:
Depreciation and amortization............................................... 20,985 20,538 21,300
Provisions for impairment................................................... 8,894 3,657 8,135
Provisions for uncollectible mortgages, notes and accounts receivable....... -- 8,844 683
Amortization for deferred finance costs..................................... 4,761 2,784 2,483
(Gain) loss on assets sold - net............................................ (665) (2,548) 677
Amortization of derivatives................................................. 149 -- --
Adjustment of derivatives to fair value..................................... -- (946) 1,317
Adjustment for discontinued operations...................................... 441 12,441 2,239
Other....................................................................... 804 (1,052) (3,035)
Net change in accounts receivable for owned and operated assets................. 5,994 18,792 2,909
Net change in accounts payable for owned and operated assets.................... (1,478) (4,427) (3,820)
Net change in other owned and operated assets and liabilities................... 2,157 5,407 2,069
Net change in accounts receivable............................................... 873 1,799 5,932
Net change in other assets...................................................... (1,354) 2,524 2,606
Net change in operating assets and liabilities.................................. (8,138) (5,911) (12,115)
---------------------------------------
Net cash provided by operating activities....................................... 56,453 47,256 14,723
---------------------------------------
CASH FLOW FROM INVESTING ACTIVITIES
Proceeds from sale of real estate investments .................................. 12,911 1,246 5,216
Capital improvements and funding of other investments........................... (1,504) (727) (1,706)
Proceeds from other investments - net and assets held for sale - net............ 23,815 16,027 2,252
Investments in other investments - net and assets held for sale - net........... (7,736) -- (548)
Collection of mortgage principal................................................ 3,624 14,334 23,956
Other........................................................................... -- -- 119
---------------------------------------
Net cash provided by investing activities....................................... 31,110 30,880 29,289
---------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from new financing..................................................... 260,977 -- --
Payments on new financing....................................................... (83,903) -- --
Proceeds from credit line borrowings............................................ -- 20,005 25,548
Payments of credit line borrowings.............................................. (177,000) (36,694) (17,500)
Proceeds from long-term borrowings.............................................. -- 13,293 --
Payments of long-term borrowings................................................ (25,942) (98,111) (46,268)
Payments for derivative instruments............................................. -- (10,140) --
Receipts from Dividend Reinvestment Plan........................................ 42 5 29
Receipts from exercised options................................................. 287 -- --
Dividends paid.................................................................. (65,469) -- --
Proceeds from rights offering and private placement - net ...................... -- 44,600 --
Deferred financing costs paid................................................... (7,801) (1,650) (2,688)
Other........................................................................... -- -- (45)
---------------------------------------
Net cash used in financing activities........................................... (98,809) (68,692) (40,924)
---------------------------------------
(Decrease) increase in cash and cash equivalents................................ (11,246) 9,444 3,088
Cash and cash equivalents at beginning of year.................................. 14,340 4,896 1,808
---------------------------------------
Cash and cash equivalents at end of year........................................ $ 3,094 $ 14,340 $ 4,896
=======================================
Interest paid during the year.................................................. $ 18,101 $ 26,036 $ 34,236
=======================================
See notes to consolidated financial statements.
OMEGA HEALTHCARE INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
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 income-producing
healthcare facilities, which include long-term care nursing homes, assisted
living facilities and rehabilitation hospitals. At December 31, 2003, we have
investments in 211 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.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REAL ESTATE INVESTMENTS
We allocate the purchase price of properties to net tangible and identified
intangible assets acquired based on their fair values in accordance with the
provisions Statement of Financial Accounting Standards ("SFAS") No. 141,
Business Combinations. In making estimates of fair values for purposes of
allocating purchase price, we utilize a number of sources, including independent
appraisals that may be obtained in connection with the acquisition or financing
of the respective property and other market data. We also consider information
obtained about each property as a result of its pre-acquisition due diligence,
marketing and leasing activities in estimating the fair value of the tangible
and intangible assets acquired.
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 shorter of useful life or term of the lease, with lives
ranging from four to seven years.
OWNED AND OPERATED ASSETS AND ASSETS HELD FOR SALE
Real estate acquired and operated pursuant to a foreclosure proceeding is
designated as "owned and operated assets" and recorded at the lower of cost or
fair value and is included in "real estate properties" on our audited
consolidated balance sheet. For 2003, the assets and liabilities of our owned
and operated properties are shown on a net basis on the face of our audited
consolidated balance sheet. For 2002, operating assets and operating liabilities
for our owned and operated properties are shown on a gross basis on the face of
our audited consolidated balance sheet and are detailed in Note 3 - Properties.
The net basis presentation in 2003 is due to the insignificance of the owned and
operated portfolio (one facility at December 31, 2003).
When a formal plan to sell real estate was adopted and we held a contract
for sale, the real estate was 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 was excluded from operations after
management has committed to a plan to sell the asset. Upon adoption of SFAS No.
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.
ASSET IMPAIRMENT
Management periodically, but not less than annually, evaluates the 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, management evaluates the carrying value of the related
real estate investments in relation to the future undiscounted cash flows of the
underlying facilities. Provisions for impairment 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, then an impairment charge is recorded to
write the asset down to the present value of expected future cash flows. The
fair value of the real estate investment is determined by market research, which
includes valuing the property as a nursing home as well as other alternative
uses.
LOAN IMPAIRMENT
Management periodically, but not less than annually, evaluates the
outstanding loans and notes receivable. When management identifies potential
loan impairment indicators, such as non-payment under the loan documents,
impairment of the underlying collateral, financial difficulty of the operator or
other circumstances that may impair full execution of the loan documents, 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. The fair value of the loan is
determined by market research, which includes valuing the property as a nursing
home as well as other alternative uses.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash on hand and 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 SFAS 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 are 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 are either 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.
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 $0.0 million, $5.9 million and $7.3 million
was recorded in 2003, 2002 and 2001, respectively.
INVESTMENTS IN EQUITY SECURITIES
Marketable securities classified as available-for-sale are stated at fair
value with unrealized gains and losses recorded 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 which approximates the effective interest
method. Amortization of financing costs totaling $4.9 million, $2.8 million and
$2.5 million in 2003, 2002 and 2001, respectively, is classified as interest
expense in our audited 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 was expensed and was classified as refinancing expense in 2002 in
our audited consolidated statements of operations.
We have adopted Statement of Financial Accounting Standard 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
audited consolidated statements 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.
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.
EARNINGS PER SHARE
Basic earnings per common share ("EPS") is computed by dividing net income
available to common stockholders by the weighted-average number of shares of
common stock outstanding during the year. Diluted EPS reflects the potential
dilution that could occur from shares issuable through stock-based compensation,
including stock options and the conversion of our Series C preferred stock.
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.
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 Accounting Principles Board ("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
In May 2003, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 150, Accounting for Certain Financial Instruments with Characteristics of
Both Liabilities and Equity. SFAS No. 150 requires certain financial instruments
that embody obligations of the issuer and have characteristics of both
liabilities and equity to be classified as liabilities. The provisions of SFAS
No. 150 are effective for financial instruments entered into or modified after
May 31, 2003 and to all other instruments that exist as of the beginning of the
first interim financial reporting period beginning after June 15, 2003. We do
not have any financial instruments that meet the provisions of SFAS No. 150,
therefore, adopting the provisions of SFAS No. 150 did not have an impact on our
results of operations or financial position.
In January 2003, the FASB issued Financial Interpretation Number ("FIN")
46, Consolidation of Variable Interest Entities an Interpretation of ARB No. 51.
FIN 46 is an interpretation of Accounting Research Bulletin No. 51, Consolidated
Financial Statements and addresses consolidation by business enterprises of
variable interest entities. We believe that, as of December 31, 2003, we do not
have any entities that meet the definition of a variable interest entity under
FIN 46, therefore, the provisions of FIN 46 are not expected to have an impact
on our results of operations or financial position.
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 6 - Concentration of Risk).
RECLASSIFICATIONS
Certain reclassifications have been recorded to the prior year financial
statements to conform to current year presentation.
NOTE 3 - PROPERTIES
LEASED PROPERTY
Our leased real estate properties, represented by 151 long-term care
facilities and two rehabilitation hospitals at December 31, 2003, are leased
under provisions of single leases and Master Leases with initial terms typically
ranging from 5 to 15 years, plus renewal options. Substantially all of the
leases and Master Leases provide for minimum annual rentals which are subject to
annual increases based upon increases in the CPI 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,
2003 2002
---------------------
(IN THOUSANDS)
Buildings.............................. $ 649,591 $ 628,764
Land................................... 32,971 30,774
---------------------
682,562 659,538
Less accumulated depreciation.......... (131,604) (115,529)
---------------------
Total............................... $ 550,958 $ 544,009
=====================
The future minimum contractual rentals for the remainder of the initial
terms of the leases are as follows:
(IN THOUSANDS)
--------------
2004................................... $ 68,269
2005................................... 68,125
2006................................... 67,396
2007................................... 64,190
2008................................... 63,733
Thereafter............................. 241,782
-------------
$ 573,495
=============
A summary of the lease transactions which occurred in 2003 is as follows:
ALTERRA HEALTHCARE CORPORATION
o Alterra Healthcare Corporation ("Alterra") announced during the first
quarter of 2003, 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. At that
time, we leased eight assisted living facilities (325 units) located
in seven states to subsidiaries of Alterra.
o Effective July 7, 2003, we amended our Master Lease with a subsidiary
of Alterra whereby the number of leased facilities was reduced from
eight to five. The amended Master Lease has a remaining term of
approximately ten years with an annual rent requirement of
approximately $1.5 million. This compares to the 2002 annualized
revenue of $2.6 million. On November 1, 2003, we re-leased one
assisted living facility formerly leased by Alterra, located in
Washington, to a new operator under a Lease, which has a ten-year term
and has an initial annual lease rate of $0.2 million. We are in the
process of negotiating terms and conditions for the re-lease of the
remaining two properties. In the interim, Alterra continues to operate
the two facilities. The Amended Master Lease was approved by the U.S.
Bankruptcy Court in the District of Delaware.
CLAREMONT HEALTHCARE HOLDINGS, INC.
o Effective December 1, 2003, we sold one skilled nursing facility
("SNF") formerly leased by Claremont Healthcare Holdings, Inc.
("Claremont"), located in Illinois, for $9.0 million. We received net
proceeds of approximately $6.0 million in cash and a $3.0 million,
five-year, 10.5% secured note for the balance. This transaction
results in a non-cash accounting loss of approximately $3.8 million,
which was recorded in the fourth quarter of 2003.
o On November 7, 2003, we re-leased two SNFs formerly leased by
Claremont, located in Ohio, to a new operator under a Master Lease,
which has a ten-year term and has an initial annual lease rate of $1.1
million.
o Separately, we continue our ongoing restructuring discussions with
Claremont regarding the five facilities Claremont currently leases
from us. We cannot determine the timing or outcome of these
discussions. Claremont failed to pay base rent due during the fourth
quarter of 2003 in the amount of $1.5 million. During the fourth
quarter of 2003, we applied security deposits in the amount of $1.0
million to pay Claremont's rent payments and we demanded that
Claremont restore the $1.5 million security deposit. At December 31,
2003, we had no additional security deposits with Claremont. We
recognize revenue from Claremont on a cash-basis as it is received.
SUN HEALTHCARE GROUP, INC.
o On February 7, 2003, Sun Healthcare Group, Inc. ("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. As a result, during 2003, we released 12 SNFs, formerly leased
by Sun, in the following transactions:
o On July 1, 2003, we re-leased one SNF in Louisiana to an existing
operator under a Master Lease, which lease has an eight-year term
and requires an initial annual lease rate of $400,000;
o On July 1, 2003, we re-leased two SNFs located in Texas to an
existing operator under a Master Lease, which has a ten-year term
and has an initial annual lease rate of $800,000;
o On July 1, 2003, we re-leased two SNFs located in Florida to an
existing operator under a Master Lease, which has a ten-year term
and has an initial annual lease rate of $1.3 million;
o On October 1, 2003, we re-leased three SNFs located in
California, to a new operator under a Master Lease, which has a
15-year term and has an initial annual lease rate of $1.25
million;
o On November 1, 2003, we re-leased two SNFs located in California
to a new operator under a Master Lease, which has a ten-year term
and has an initial annual lease rate of $0.6 million;
o On December 1, 2003, we re-leased one SNF located in California
to a new operator under a lease, which has a ten-year term and
has an initial annual lease rate of $0.12 million; and
o On December 1, 2003, we re-leased one SNF located in Indiana to
an existing operator under a lease, which has a five-year term.
o As a result of the above-mentioned transitions of the 12 former Sun
facilities, Sun operated 38 of our facilities at December 31, 2003.
o Effective January 1, 2004, we re-leased four SNFs to an existing
operator under a new Master Lease, which has a five-year term and has
an initial annual lease rate of $0.75 million. Three SNFs formerly
leased by Sun, located in Illinois, were part of this transaction. The
fourth SNF in the transaction, located in Illinois, was the last
remaining owned and operated facility in our portfolio. A fifth
facility, leased in December 2003, was incorporated in this Master
Lease.
o On January 26, 2004, we announced the signing of a non-binding term
sheet representing an agreement in principle with Sun regarding 51
properties we own that are leased to various affiliates of Sun. Under
the arrangement contemplated by the non-binding term sheet, Sun would
continue to operate and occupy 23 long-term care facilities, five
behavioral properties and two hospital properties. One property in the
State of Washington, formerly operated by a Sun affiliate, has already
been closed and the lease relating to that property will be
terminated. With respect to the remaining 20 facilities, 15 have
already been transitioned to new operators and five are in the process
of being transferred to new operators. The non-binding term sheet
contemplates execution and delivery of a new master lease with the
following general terms:
o Term: Through December 31, 2013.
o Base Rent: Commencing February 1, 2004, monthly base rent would
be $1.56 million, subject to annual increases not to exceed 2.5%
per year.
o Deferred Base Rent: $7.76 million would be deferred and bear
interest at a floating rate with a floor of 6% per year. That
interest would accrue but would not be payable to us through
January 3, 2008. Interest thereafter accruing would be paid
monthly. We are releasing all other claims for base rent which
otherwise would be due under the current leases.
o Conversion of Deferred Base Rent: We would have the right at any
time to convert the deferred base rent into 800,000 shares of
Sun's common stock, subject to certain non-dilution provisions
and the right of Sun to pay cash in an amount equal to the value
of that stock in lieu of issuing stock to Omega. If the value of
the common stock exceeds 140% of the deferred base rent, Sun can
require Omega to convert the deferred base rent into Sun's common
stock.
The terms described above are subject to the negotiation and execution
of definitive documents satisfactory to us and Sun. Separately, we continue
our ongoing restructuring discussions with Sun. We cannot determine the
timing or outcome of these discussions at the time of this filing. There
can be no assurance that Sun will continue to pay rent at the current
level, although, we believe that alternative operators would be available
to lease or buy the remaining Sun facilities if an appropriate agreement is
not completed with Sun.
As a result of our 2003 re-leasing efforts, our owned and operated
portfolio has decreased from three at December 31, 2002 to one at December 31,
2003.
OWNED AND OPERATED ASSETS
At December 31, 2003, we owned one, 128-bed facility that was previously
recovered from a bankrupt customer and is operated for our own account. The
facility and its respective operations are presented on a consolidated basis in
our audited consolidated financial statements. At December 31, 2002, we owned
and operated three long-term care facilities (two owned and one subject to a
leasehold interest). Impairment charges of $3.0 million, including $2.0 million
for a property that was sold, was taken on these assets for the year ended
December 31, 2002.
A summary of our investment in the one and two owned and operated real
estate assets at December 31, 2003 and 2002, respectively, is as follows:
DECEMBER 31,
2003 2002
---------------------
(IN THOUSANDS)
Buildings............................... $ 5,039 $ 5,251
Land.................................... 256 320
---------------------
5,295 5,571
Less accumulated depreciation........... (681) (675)
---------------------
Total................................ $ 4,614 $ 4,896
=====================
Effective January 1, 2004, our remaining owned and operated asset was
re-leased to an existing operator. This facility, located in Illinois, was
re-leased under a new Master Lease which encompasses four additional facilities.
CLOSED FACILITIES
At December 31, 2003, there are six closed properties that are not
currently under contract for sale. We recorded a $8.8 million and $3.7 million
provision for impairment for the year ended December 31, 2003 and 2002,
respectively. These properties are included in real estate in our audited
consolidated balance sheet. A summary of our investment in closed real estate
properties is as follows:
DECEMBER 31,
2003 2002
---------------------
(IN THOUSANDS)
Buildings............................... $ 3,970 $ 3,875
Land.................................... 627 204
---------------------
4,597 4,079
Less accumulated depreciation........... (2,192) (1,782)
---------------------
Total................................ $ 2,405 $ 2,297
=====================
In 2003, six facilities were transferred to closed facilities. Two
facilities were transferred from purchase leaseback and non-cash impairments of
$8.8 million were recorded to reduce the value of the investments to their
estimated fair value. Three facilities were transferred from mortgage notes
receivable after we received a Deed in Lieu of Foreclosure. Finally, we
transferred one facility from our owned and operated portfolio into closed
facilities.
In addition, in 2003 we sold eight closed facilities realizing proceeds of
approximately $7.0 million, net of closing costs, resulting in a net gain of
approximately $3.0 million. In accordance with SFAS No. 144, the $3.0 million
realized net gain for the twelve months ended December 31, 2003 is reflected in
our audited consolidated statements of operations as discontinued operations.
(See Note 19 - Discontinued Operations).
ASSETS SOLD OR HELD FOR SALE
During 2003, we sold the four remaining facilities, which were classified
as assets held for sale in 2001, realizing proceeds of $2.0 million, net of
closing costs, resulting in a net loss of approximately $0.7 million, in the
following transactions:
o On June 6, 2003, we sold one closed facility classified as held
for sale located in the state of Indiana, realizing net proceeds
of $0.2 million, resulting in a gain of $0.1 million.
o On July 9, 2003, we sold one closed facility classified as held
for sale located in the state of Indiana, realizing net proceeds
of $0.2 million, resulting in a gain of $0.1 million.
o On September 30, 2003, we sold one closed facility classified as
held for sale located in Indiana for its approximate net book
value.
o On October 31, 2003, we sold our remaining held for sale facility
located in Texas, realizing proceeds of $1.5 million, net of
closing costs, resulting in a loss of $0.8 million.
During 2002, we realized proceeds of $1.7 million associated with the sale
of two facilities, which were classified as assets held for sale in 2001, and
miscellaneous beds. Accordingly, these six facilities (four sold in 2003 and two
sold in 2002) were subject to SFAS No. 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 audited consolidated financial
statements.
During 2001, we recorded a provision of $8.3 million for impairment of
assets transferred to assets held for sale. We also realized proceeds of $1.4
million during 2001.
OTHER NON-CORE ASSETS
o On May 8, 2003, we sold an investment in a Baltimore, Maryland
asset, leased by the United States Postal Service ("USPS"), for
approximately $19.6 million. The purchaser paid us proceeds of
$1.8 million and assumed the first mortgage of approximately
$17.6 million. As a result, we recorded a gain of $1.3 million,
net of closing costs and other expenses.
o On December 4, 2003, we sold our investment in Principal
Healthcare Finance Trust realizing proceeds of approximately $1.6
million, net of closing costs, resulting in an accounting gain of
approximately $0.1 million.
o During 2002, we received proceeds of $16.4 million from sales of
certain other non-core assets, resulting in a gain of $2.6
million. We also recognized a provision of $3.7 million for
uncollectible mortgages, notes and accounts receivable. This
charge was primarily related to the restructuring and reduction
of debt owed by Madison/OHI Liquidity Investors, LLC ("Madison"),
as part of the compromise and settlement of a lawsuit with
Madison. (See Note 14 - Litigation).
NOTE 4 - MORTGAGE NOTES RECEIVABLE
Mortgage notes receivable relate to 51 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 ten states, operated by ten 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.
The following table summarizes the mortgage notes balances for the years
ended December 31, 2003 and 2002:
2003 2002
----------------------
(IN THOUSANDS)
Gross mortgage notes--unimpaired............ $119,815 $171,514
Gross mortgage notes--impaired.............. -- 11,086
Reserve for uncollectible loans............. -- (8,686)
----------------------
Net mortgage notes.......................... $119,815 $173,914
======================
During 2003, we reduced the number of mortgaged facilities by 12 as a
result of the following:
o One facility, located in Indiana, was removed from an existing
mortgage and sold on behalf of the mortgagor. Net sales proceeds
from this transaction of approximately $73 thousand were used to
repay principal on the existing mortgage.
o Fee-simple ownership of two closed facilities on which we held
mortgages were transferred to us by Deed in Lieu of Foreclosure.
These facilities were transferred to closed facilities and are
included in our audited consolidated balance sheet under "land
and buildings at cost." 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.
o Titles to eight IHS properties on which we held mortgage were
transferred to our wholly-owned subsidiaries by Deed in Lieu of
Foreclosure. These facilities were then subsequently leased to
four unaffiliated third-party operators as part of four separate
transactions. (See Note 3 - Properties).
o We received fee-simple ownership to one closed property, which we
previously held the mortgage on, by Deed in Lieu of Foreclosure.
This facility was transferred to closed facilities and is
included in our audited consolidated balance sheet under "land
and buildings at cost."
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.
The outstanding principal amounts of mortgage notes receivable, net of
allowances, are as follows:
DECEMBER 31,
2003 2002
--------------------
(IN THOUSANDS)
Mortgage note due 2010; interest only at 11.57% payable monthly....................... $ 59,688 $ 59,688
Participating mortgage note due 2003; interest at 11.55% payable monthly.............. -- 37,571
Mortgage notes due 2015; monthly payments of $189,004, including interest at 11.01%... 14,484 15,120
Mortgage note due 2010; monthly payment of $124,833, including interest at 11.50%..... 12,715 12,748
Participating mortgage note due 2008; interest at 10.69% payable monthly.............. -- 12,000
Mortgage note due 2006; monthly payment of $107,382, including interest at 11.50%..... 10,851 10,971
Mortgage note due 2004; interest at 7.62% payable monthly............................. 10,025 10,112
Other mortgage notes.................................................................. 12,052 15,304
Other convertible participating mortgage notes........................................ -- 2,400
--------------------
Total mortgages-net.............................................................. $119,815 $173,914
====================
Mortgage notes are shown net of allowances of $8.7 million at December 31,
2002.
NOTE 5 - OTHER INVESTMENTS
A summary of our other investments is as follows:
AT DECEMBER 31,
2003 2002
-------------------
(In thousands)
Notes receivable........................................... $ 25,525 $ 14,236
Notes receivable allowance................................. (2,787) (2,804)
Purchase option(1)......................................... 7,049 7,258
Assets leased by United States Postal Service-net.......... -- 16,931
Equity securities of Principal Healthcare Finance Trust.... -- 1,266
-------------------
Total other investments............................... $ 29,787 $ 36,887
===================
(1) We paid $7.0 million to enter into a purchase option to acquire a portfolio
of seven SNFs in Ohio from a third-party operator. Under the terms of the
purchase option, the amount paid for this option will be offset against
future purchase price consideration. We have the ability to exercise this
option from 2007 to 2011 and we are continuing to assess the feasibility of
this option.
A summary of our notes receivable is as follows:
AT DECEMBER 31,
2003 2002
-------------------
(In thousands)
Note receivable callable in 1999; interest only at 14%..... $ 6,000 $ 6,000
Working capital note receivable due 2004;
interest only at 11%..................................... 5,000 --
Note receivable due 2008; interest only at 11%............. 3,000 --
Other notes receivable; 6% to 14%; maturity dates range
from on demand to 2013................................... 11,525 8,236
-------------------
Total notes receivable................................ $ 25,525 $ 14,236
===================
NOTE 6 - CONCENTRATION OF RISK
As of December 31, 2003, our portfolio of investments consisted of 211
healthcare facilities, located in 28 states and operated by 39 third-party
operators. Our gross investment in these facilities, net of impairments and
before reserve for uncollectible loans, totaled $812.3 million at December 31,
2003, with 97.1% of our real estate investments related to long-term care
facilities. This portfolio is made up of 151 long-term healthcare facilities and
two rehabilitation hospitals owned and leased to third parties, fixed rate
mortgages on 51 long-term healthcare facilities and one long-term healthcare
facility that was recovered from customers and is currently operated through a
third-party management contract for our own account and six long-term healthcare
facilities that were recovered from customers and are currently closed. At
December 31, 2003, we also held other investments of approximately $29.8
million, including $22.7 million of notes receivable, net of allowance.
At December 31, 2003, approximately 41.6% of our real estate investments
are operated by four public companies: Sun Healthcare Group, Inc. (20.7%),
Advocat, Inc. ("Advocat") (12.8%), Mariner Health Care, Inc. ("Mariner") (7.4%)
and Emeritus Corporation ("Emeritus") (0.7%). The two largest private operators
represent 6.8% and 5.7%, respectively, of our investments. No other operator
represents more than 4.0% of our investments. The three states in which we have
our highest concentration of investments are Florida (15.5%), California (8.2%)
and Ohio (7.3%).
Effective January 1, 2004, our remaining owned and operated long-term
healthcare facility was re-leased to an existing operator. This facility,
located in Illinois, was re-leased under a new Master Lease which encompasses
four additional facilities.
NOTE 7 - LEASE AND MORTGAGE DEPOSITS
We obtain liquidity deposits and letters of credit from most operators
pursuant to our lease and mortgage contracts with the operators. These generally
represent the rental and mortgage interest 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, 2003, we held $3.3
million in such liquidity deposits and $6.5 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.
NOTE 8 - BORROWING ARRANGEMENTS
We have two secured credit facilities totaling $275 million, consisting of
a $225 million Senior Secured Credit Facility ("Credit Facility") and a $50
million acquisition credit facility ("Acquisition Line"). At December 31, 2003,
$177.1 million was outstanding under the Credit Facility and $12.1 million was
utilized for the issuance of letters of credit, leaving availability of $85.0
million. The $177.1 million of outstanding borrowings had an interest rate of
6.00% at December 31, 2003.
The Credit Facility includes a $125 million term loan ("Term Loan") and a
$100 million revolving line of credit ("Revolver") collateralized by our
interests in 121 facilities representing approximately half of our invested
assets. Both the Term Loan and Revolver have a four-year maturity with a
one-year extension at our option. The Term Loan amortizes on a 25-year basis and
is priced at London Interbank Offered Rate ("LIBOR") plus a spread of 3.75%,
with a floor of 6.00%. The Revolver is also priced at LIBOR plus a 3.75% spread,
with a 6.00% floor.
Borrowings under our old $160 million secured revolving line of credit
facility of $112.0 million were paid in full upon the closing of the Credit
Facility. Additionally, $12.5 million of letters of credit previously
outstanding against this credit facility were reissued under the new Credit
Facility. LIBOR-based borrowings under this previous credit facility had a
weighted-average interest rate of approximately 4.5% at the payoff date.
Borrowings under our old $65 million line of credit facility, which was
fully drawn, were paid in full upon the closing of our Credit Facility.
LIBOR-based borrowings under this previous credit facility had a
weighted-average interest rate of approximately 4.6% at the payoff date.
As a result of the new Credit Facility, for the twelve-month period ended
December 31, 2003, our interest expense includes $2.6 million of non-cash
interest expense related to financing costs written off in conjunction with the
termination of our two previous credit facilities mentioned above.
In December 2003, we secured a $50 million revolving Acquisition Line
arranged by GE Healthcare Financial Services. The Acquisition Line will be
secured by first liens on potential facilities acquired or assignments of
mortgages made on new acquisitions. The interest rate on the outstanding
borrowings is LIBOR plus 3.75% with a 6% floor.
Also in 2003, we sold an asset located in Baltimore, MD, leased by the
USPS. The asset was secured by a first mortgage note, which was fully assumed by
the purchaser, with an outstanding principal amount at the time of sale of $17.6
million and a fixed interest rate of 7.26%. The note amortized over a 20-year
term. In addition, during 2003, we paid off four Industrial Revenue Bonds
totaling $7.8 million with a fixed blended rate of approximately 9.66%.
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 an interest
rate cap to reduce exposure to interest rate fluctuations (See Note 9 -
Financial Instruments).
At December 31, 2003, we had borrowings under a 6.95% $100 million
interest-only note due in August 2007.
The following is a summary of our long-term borrowings:
DECEMBER 31,
2003 2002
--------------------
(IN THOUSANDS)
Unsecured borrowings:
6.95% Notes due August 2007........................... $100,000 $100,000
Other long-term borrowings............................ 3,520 3,850
--------------------
103,520 103,850
--------------------
Secured borrowings:
Revolving lines of credit and term loan............... 177,074 177,000
Industrial Development Revenue Bonds.................. -- 7,855
Mortgage notes payable to banks....................... -- 17,757
--------------------
177,074 202,612
--------------------
$280,594 $306,462
====================
Real estate investments with a gross book value of approximately $424.6
million are pledged as collateral for outstanding secured borrowings at December
31, 2003.
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, 2003 and the aggregate due thereafter are set forth
below:
(IN THOUSANDS)
2004..................... $ 2,319
2005..................... 2,481
2006..................... 2,654
2007..................... 271,145
2008..................... 435
Thereafter............... 1,560
---------------
$ 280,594
===============
NOTE 9 - FINANCIAL INSTRUMENTS
At December 31, 2003 and 2002, the carrying amounts and fair values of our
financial instruments are as follows:
2003 2002
CARRYING FAIR CARRYING FAIR
AMOUNT VALUES AMOUNT VALUES
--------------------------------------------
(IN THOUSANDS)
ASSETS:
Cash and cash equivalents.................................. $ 3,094 $ 3,094 $ 14,340 $ 14,340
Mortgage notes receivable - net............................ 119,815 127,814 173,914 183,618
Other investments.......................................... 29,787 29,995 36,887 37,419
Interest rate cap.......................................... 5,537 5,537 7,258 7,258
--------------------------------------------
Totals................................................... $158,233 166,440 232,399 242,635
============================================
LIABILITIES:
Revolving lines of credit.................................. $177,074 $177,074 $177,000 $177,000
6.95% Notes................................................ 100,000 92,240 100,000 90,413
Other long-term borrowings................................. 3,520 3,121 29,462 29,320
--------------------------------------------
Totals................................................... $280,594 $272,435 $306,462 $296,733
============================================
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 2 - Summary of Significant Accounting Policies).
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 caps to 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. GAAP 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 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, 2003, the
derivative instrument was recorded at its fair value of $5.5 million. An
adjustment of $1.6 million to other comprehensive income was made for the change
in fair value of this cap during 2003. Over the term of the interest rate cap,
the $10.1 million cost is amortized to earnings based on the specific portion of
the total cost attributed to each monthly settlement period. Over the next
twelve months, $1.2 million is expected to be reclassified to earnings from
other comprehensive income.
In 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%. 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%.
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.
NOTE 10 - RETIREMENT ARRANGEMENTS
We have 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, 2003.
Our contributions to these retirement arrangements totaled approximately
$52,200, $38,800 and $33,500 in 2003, 2002 and 2001, respectively.
NOTE 11 - STOCKHOLDERS EQUITY AND STOCK OPTIONS
SERIES C PREFERRED STOCK
Explorer Holdings, L.P. ("Explorer"), an affiliate of Hampstead Investment
Partners III, L.P. ("Hampstead"), a private equity investor, owned all of the
1,048,420 outstanding shares of our Series C convertible preferred stock as of
December 31, 2003 with a liquidation preference of $100 per share. 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. (See Note 20 - Subsequent Events).
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 stock 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 stock), 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.
FEBRUARY 2002 RIGHTS OFFERING AND CONCURRENT PRIVATE PLACEMENT
In 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.
In connection with Explorer's 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.
SERIES A AND SERIES B CUMULATIVE PREFERRED STOCK
As of December 31, 2003 and 2002, respectively, there are 2.3 million
shares of 9.25% Series A Cumulative Preferred Stock ("Series A preferred stock")
with a liquidation preference of $25 per share. Dividends on the Series A
preferred stock are cumulative from the date of original issue and are payable
quarterly. As of December 31, 2003 and 2002, respectively, there are 2 million
outstanding shares of 8.625% Series B Cumulative Preferred Stock ("Series B
preferred stock") with a liquidation preference of $25 per share. Dividends on
the Series B preferred stock are cumulative from the date of original issue and
are payable quarterly. At December 31, 2003, the aggregate liquidation
preference of Series A and Series B preferred stock issued is $107.5 million.
(See Note 13 - Dividends and Note 20 - Subsequent Events).
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,
2003, there were 2,282,630 outstanding options granted to 21 eligible
participants. Additionally, 350,278 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.
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. 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.
Statement of Financial Accounting Standard No. 148, Accounting for
Stock-Based Compensation - Transition and Disclosure, which was effective
January 1, 2003, requires certain disclosures related to our stock-based
compensation arrangements. The following table presents the effect on net income
and earnings per share if we had applied the fair value recognition provisions
of SFAS No. 123, Accounting for Stock-Based Compensation, to our stock-based
compensation.
YEAR ENDED DECEMBER 31,
2003 2002 2001
----------------------------------
(IN THOUSANDS, EXCEPT PER
SHARE AMOUNT)
Net income (loss) to common stockholders.......................... $ 2,915 $(34,761) $(36,651)
Add: Stock-based compensation expense included in
net income (loss) to common stockholders.................... -- -- --
----------------------------------
2,915 (34,761) (36,651)
Less: Stock-based compensation expense determined
under the fair value based method for all awards........... 79 70 30
----------------------------------
Pro forma net income (loss) to common stockholders................ $ 2,836 $(34,831) $(36,681)
==================================
Earnings per share:
Basic, as reported................................................ $ 0.08 $ (1.00) $ (1.83)
==================================
Basic, pro forma.................................................. $ 0.08 $ (1.00) $ (1.83)
==================================
Diluted, as reported.............................................. $ 0.08 $ (1.00) $ (1.83)
==================================
Diluted, pro forma................................................ $ 0.07 $ (1.00) $ (1.83)
==================================
At December 31, 2003, options currently exercisable (1,299,354) have a
weighted-average exercise price of $3.429, with exercise prices ranging from
$2.32 to $37.20. There are 566,332 shares available for future grants as of
December 31, 2003.
The following is a summary of activity under the plan.
STOCK OPTIONS
WEIGHTED-
NUMBER OF AVERAGE
SHARES EXERCISE PRICE PRICE
------------------------------------------
Outstanding at December 31, 2000... 1,167,064 $ 5.688 - $37.205 $ 7.276
Granted............................ 2,245,000 1.590 - 3.813 2.780
Canceled........................... (1,012,833) 6.250 - 36.617 4.798
------------------------------------------
Outstanding at December 31, 2001... 2,399,231 1.590 - 37.205 3.413
Granted............................ 29,000 6.020 - 6.020 6.020
Canceled........................... (33,730) 19.866 - 25.038 22.836
------------------------------------------
Outstanding at December 31, 2002... 2,394,501 1.590 - 37.205 3.150
Granted............................ 9,000 3.740 - 3.740 3.740
Exercised.......................... (120,871) 1.590 - 6.125 2.448
------------------------------------------
Outstanding at December 31, 2003... 2,282,630 $ 2.320 - $37.205 $ 3.202
==========================================
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.
NOTE 12 - 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 54.2% of our outstanding voting power as of December 31, 2003.
Daniel A. Decker, our Chairman of the Board, is a principal 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 reimbursed Explorer for Explorer's direct
expenses. As of December 31, 2003, we reimbursed Explorer approximately $0.6
million of such direct expenses.
DIVIDEND AND GOVERNANCE RIGHT DEFERRAL. 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 with Explorer dated November 14,
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 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.
OMEGA WORLDWIDE
In December 2003, we sold our investment in the Principal Healthcare
Finance Trust, an Australian Unit Trust, which owns 47 nursing home facilities
and 446 assisted living units in Australia and New Zealand, realizing proceeds
of approximately $1.6 million, net of closing costs, resulting in a gain of
approximately $0.1 million.
During 2002, we sold our investment in 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. 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 ("Principal"), an Isle of Jersey company, whose
purpose is to invest in nursing homes and long-term care facilities in the
United Kingdom, 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.
NOTE 13 - 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.
In July 2003, our Board of Directors declared a full catch-up of
cumulative, unpaid dividends for all classes of preferred stock that were paid
on August 15, 2003 to preferred stockholders of record on August 5, 2003. In
addition, our Board of Directors declared the regular quarterly dividend for all
classes of preferred stock that was also paid on August 15, 2003 to preferred
stockholders of record on August 5, 2003. Series A and Series B preferred
stockholders of record on August 5, 2003 were paid dividends in the amount of
approximately $6.36 and $5.93 per preferred share, respectively, on August 15,
2003. Our Series C preferred stockholder was paid a dividend of approximately
$27.31 per Series C preferred share on August 15, 2003.
In September 2003, our Board of Directors reinstated our common stock
dividend that was paid on November 17, 2003 to common stockholders of record on
October 31, 2003 in the amount of $0.15 per common share. Total common stock
cash dividends totaled approximately $5.6 million for the twelve months ended
December 31, 2003.
In addition, our Board of Directors declared its regular quarterly
dividends for all classes of preferred stock that was paid on November 17, 2003
to preferred stockholders of record on October 31, 2003. Series A and Series B
preferred stockholders of record on October 31, 2003 were paid dividends in the
amount of approximately $0.578 and $0.539 per preferred share, respectively, on
November 17, 2003. Our Series C preferred stockholder was paid a dividend of
$2.50 per Series C preferred share on November 17, 2003. Regular quarterly
dividends represented dividends for the period August 1, 2003 through October
31, 2003. Total preferred cash dividend payments for all classes of preferred
stock totaled approximately $59.9 million for the twelve months ended December
31, 2003.
Per share distributions by our company were characterized in the following
manner for income tax purposes:
2003 2002 2001
------------------------------
COMMON
Ordinary income...................... $ -- $ -- $ --
Return of capital.................... 0.150 -- --
Long-term capital gain............... -- -- --
------------------------------
Total dividends paid.............. $0.150 $ -- $ --
==============================
SERIES A PREFERRED
Ordinary income...................... $1.064 $ -- $ --
Return of capital.................... 5.873 -- --
Long-term capital gain............... -- -- --
------------------------------
Total dividends paid.............. $6.937 $ -- $ --
==============================
SERIES B PREFERRED
Ordinary income...................... $0.992 $ -- $ --
Return of capital.................... 5.477 -- --
Long-term capital gain............... -- -- --
------------------------------
Total dividends paid.............. $6.469 $ -- $ --
==============================
SERIES C PREFERRED
Ordinary income...................... $ 4.572 $ -- $ --
Return of capital.................... 25.235 -- --
Long-term capital gain............... -- -- --
------------------------------
Total dividends paid.............. $29.807 $ -- --
==============================
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.
On January 21, 2004, our Board of Directors declared a common stock
dividend to be paid on February 13, 2004 to common stockholders of record on
February 2, 2004 in the amount of $0.17 per common share. Also on January 21,
2004, our Board of Directors declared its regular quarterly dividends for all
classes of preferred stock. Series A and Series B preferred stockholders of
record on February 2, 2004 will be paid dividends in the amount of approximately
$0.578 and $0.539 per preferred share, respectively, on February 13, 2004. Our
Series C preferred stockholder will be paid a dividend of $2.72 per Series C
preferred share on February 13, 2004.
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, 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. 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 consisting 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, 2003, the principal balance on this note was
$2.2 million prior to reserves.
In 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 Uniform Commercial Code ("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 in the
first quarter of 2003 to accept a lump sum cash payment of $3.2 million. The
cash proceeds were offset by related expenses incurred of $1.0 million resulting
in a net gain of $2.2 million.
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.
We and several of our wholly-owned subsidiaries have been named as
defendants in professional liability claims related to our owned and operated
facilities. Other third-party managers responsible for the day-to-day operations
of these facilities have also been named as defendants in these claims. In these
suits, patients of certain previously owned and operated facilities have alleged
significant damages, including punitive damages against the defendants. The
lawsuits are in various stages of discovery and we are unable to predict the
likely outcome at this time. We continue to vigorously defend these claims and
pursue all rights we may have against the managers of the facilities, under the
terms of the management agreements. We have insured these matters, subject to
self-insured retentions of various amounts.
NOTE 15 - SEVERANCE, MOVING AND CONSULTING AGREEMENT COSTS
We entered into several consulting and severance agreements in 2001 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 for the year ended December 31, 2001.
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, 2003,
2002 and 2001.
FOR THE YEAR ENDED DECEMBER 31, 2003
CORE OWNED AND CORPORATE
OPERATIONS OPERATED AND OTHER CONSOLIDATED
---------------------------------------------------------
(IN THOUSANDS)
Operating revenues................................ $ 79,868 $ 4,601 $ - $ 84,469
Operating expenses................................ - (6,067) - (6,067)
---------------------------------------------------------
Net operating income (loss).................... 79,868 (1,466) - 78,402
Adjustments to arrive at net income:
Other revenues................................. - - 6,399 6,399
Depreciation and amortization.................. (20,055) (153) (777) (20,985)
Interest expense............................... - - (23,388) (23,388)
General and administrative..................... - - (5,943) (5,943)
Legal.......................................... - - (2,301) (2,301)
State taxes.................................... - - (614) (614)
Provisions for uncollectible accounts.......... (8,894) - - (8,894)
---------------------------------------------------------
(28,949) (153) (26,624) (55,726)
---------------------------------------------------------
Income (loss) before gain on assets sold.......... 50,919 (1,619) (26,624) 22,676
(Loss) gain on assets sold - net.................. - (671) 1,336 665
---------------------------------------------------------
Income (loss) from continuing operations.......... 50,919 (2,290) (25,288) 23,341
Loss from discontinued operations................. - - (311) (311)
---------------------------------------------------------
Net income (loss)................................. 50,919 (2,290) (25,599) 23,030
Preferred dividends............................... - - (20,115) (20,115)
---------------------------------------------------------
Net income (loss) available to common............. $ 50,919 $(2,290) $(45,714) $ 2,915
=========================================================
Total assets...................................... $673,179 $ 4,613 $ 47,262 $ 725,054
=========================================================
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................................ $ 83,640 $ 42,905 $ - $ 126,545
Operating expenses................................ - (63,778) - (63,778)
--------------------------------------------------------
Net operating income (loss).................... 83,640 (20,873) - 62,767
Adjustments to arrive at net income:
Other revenues................................. - - 7,059 7,059
Depreciation and amortization.................. (18,659) (844) (1,035) (20,538)
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...................... (3,010) (647) - (3,657)
Provisions for uncollectible accounts.......... (8,844) - - (8,844)
Adjustment of derivatives to fair value........ - - 946 946
--------------------------------------------------------
(30,513) (1,491) (37,055) (69,059)
--------------------------------------------------------
Income (loss) before gain (loss) on assets sold... 53,127 (22,364) (37,055) (6,292)
(Loss) gain on assets sold - net.................. - (75) 2,623 2,548
--------------------------------------------------------
Income (loss) from continuing operation........... 53,127 (22,439) (34,432) (3,744)
Loss from discontinued operations................. - - (10,902) (10,902)
--------------------------------------------------------
Net income (loss)................................. 53,127 (22,439) (45,334) (14,646)
Preferred dividends............................... - - (20,115) (20,115)
--------------------------------------------------------
Net income (loss) available to common............. $ 53,127 $(22,439) $(65,449) $ (34,761)
========================================================
Total assets...................................... $720,220 $ 16,941 $ 66,848 $ 804,009
========================================================
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................................... $ 80,595 $ 162,042 $ - $ 242,637
Operating expenses................................... - (169,861) - (169,861)
--------------------------------------------------------
Net operating income (loss)....................... 80,595 (7,819) - 72,776
Adjustments to arrive at net income:
Other revenues.................................... - - 7,487 7,487
Depreciation and amortization..................... (16,687) (3,253) (1,360) (21,300)
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......................... - (8,135) - (8,135)
Provisions for uncollectible accounts............. (683) - - (683)
Severance, moving and consulting agreement costs.. - - (5,066) (5,066)
Adjustment of derivatives to fair value........... - - (1,317) (1,317)
--------------------------------------------------------
(17,370) (11,388) (58,929) (87,687)
--------------------------------------------------------
Income (loss) before gain (loss) on assets sold...... 63,225 (19,207) (58,929) (14,911)
Gain (loss) on assets sold - net..................... 189 (866) - (677)
--------------------------------------------------------
Income (loss) from continuing operations............ 63,414 (20,073) (58,929) (15,588)
Loss from discontinued operations................... - - (1,069) (1,069)
--------------------------------------------------------
Net Income (loss).................................... 63,414 (20,073) (59,998) (16,657)
Preferred dividends.................................. - - (19,994) (19,994)
--------------------------------------------------------
Net income (loss) available to common................ $ 63,414 $ (20,073) $(79,992) $ (36,651)
========================================================
Total assets......................................... $708,579 $ 115,277 $ 66,983 $ 890,839
========================================================
Nursing home revenues and nursing home expenses in our audited consolidated
financial statements which relate to our owned and operated assets are as
follows:
YEAR ENDED DECEMBER 31,
2003 2002 2001
----------------------------------
(IN THOUSANDS)
NURSING HOME REVENUES (1)
Medicaid................................ $ 2,624 $25,575 $ 95,426
Medicare................................ 747 9,307 40,178
Private & other......................... 1,230 8,023 26,438
----------------------------------
Total nursing home revenues (2)....... 4,601 42,905 162,042
----------------------------------
NURSING HOME EXPENSES
Patient care expenses................... 2,566 31,219 111,429
Administration.......................... 2,245 13,463 26,825
Property & related...................... 389 3,861 10,960
Leasehold buyout expense................ 582 4,342 --
Management fees......................... 257 2,465 8,840
Rent.................................... 28 2,536 4,516
Provisions for uncollectible accounts... -- 5,892 7,291
----------------------------------
Total nursing home expenses (2)....... 6,067 63,778 169,861
----------------------------------
Nursing home revenues and expenses of
owned and operated assets - net (2)... $(1,466) $ -- $ -
==================================
(1) Nursing home revenues from these owned and operated assets are recognized
as services are provided.
(2) Nursing home revenues and expenses of owned and operated assets for year
ended December 31, 2003 are shown on a net basis on the face of our audited
consolidated statements of operations and are shown on a gross basis for
the year ended December 31, 2002 and 2001.
Accounts receivable for owned and operated assets is net of an allowance
for doubtful accounts of approximately $5.7 million at December 31, 2003 and
$12.2 million at December 31, 2002. The following is a summary of allowance for
doubtful accounts:
2003 2002 2001
-----------------------------------
(IN THOUSANDS)
Beginning balance..................... $12,171 $ 8,335 $ 1,200
Provision charged..................... - 5,892 7,291
Provision applied..................... (7,655) (2,056) (156)
Collection of accounts receivable
previously written off.............. 1,218 - -
-----------------------------------
Ending balance...................... $ 5,734 $12,171 $8,335
===================================
The assets and liabilities in our audited consolidated financial statements
which relate to our owned and operated assets are as follows:
DECEMBER 31,
2003 2002
-------------------------
(IN THOUSANDS)
ASSETS
Cash......................................... $ 624 $ 838
Accounts receivable - net.................... 1,412 7,491
Other current assets......................... 253 1,207
-------------------------
Total current assets (1).................. 2,289 9,536
-------------------------
Investment in leasehold - net (1)............ -- 185
Land and buildings........................... 5,295 5,571
Less accumulated depreciation................ (681) (675)
-------------------------
Land and buildings - net..................... 4,614 4,896
-------------------------
Assets held for sale - net................... -- 2,324
------------------------
Total assets............................. $ 6,903 $16,941
=========================
LIABILITIES
Accounts payable............................. $ 98 $ 389
Other current liabilities.................... 3,833 4,223
-------------------------
Total current liabilities................. 3,931 4,612
-------------------------
Total liabilities (1)................... $ 3,931 4,612
=========================
Operating assets and liabilities for
owned properties - net (1)............... $(1,642)$ $ --
=========================
(1) Operating assets and liabilities for owned properties as of December 31,
2003 are shown on a net basis on the face of our audited consolidated
balance sheet and are shown on a gross basis as of December 31, 2002.
The table below reconciles reported revenues and expenses to revenues and
expenses excluding nursing home revenues and expenses of owned and operated
assets. Nursing home revenues and expenses of owned and operated assets for the
year ended December 31, 2003 are shown on a net basis on the face of our audited
consolidated statements of operations and are shown on a gross basis for the
year ended December 31, 2002 and 2001, respectively. Since nursing home revenues
are not included in reported revenues for the year ended December 31, 2003, no
adjustment is necessary to exclude nursing home revenues.
YEAR ENDED DECEMBER 31,
2003 2002 2001
------------------------------
(IN THOUSANDS)
Total revenues............................... $ 86,267 $133,604 $250,124
Nursing home revenues of owned and
operated assets.......................... -- 42,905 162,042
------------------------------
REVENUES EXCLUDING NURSING HOME REVENUES
OF OWNED AND OPERATED ASSETS........... $ 86,267 $ 90,699 $ 88,082
==============================
Total expenses............................... $ 63,591 $139,896 $265,035
Nursing home expenses of owned and
operated assets.......................... -- 63,778 169,861
Nursing home revenues and expenses of
owned and operated assets - net.......... 1,466 -- --
------------------------------
EXPENSES EXCLUDING NURSING HOME EXPENSES
OF OWNED AND OPERATED ASSETS............ $ 62,125 $ 76,118 $ 95,174
==============================
NOTE 17 - SUMMARY OF QUARTERLY RESULTS (UNAUDITED)
The following summarizes quarterly results of operations for the years
ended December 31, 2003 and 2002.
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE)
2003
Revenues................................................ $ 24,308 $ 20,534 $ 20,671 $ 20,754
Income from continuing operations....................... 5,851 6,699 3,550 7,241
Net income available to common.......................... 956 1,800 4 155
Income (loss) from continuing operations per share:
Basic income (loss) from continuing operations....... $ 0.02 $ 0.04 $ (0.04) $ 0.06
Diluted income (loss) from continuing operations..... $ 0.02 $ 0.04 $ (0.04) $ 0.06
Net income (loss) available to common per share:
Basic net income..................................... $ 0.02 $ 0.05 $ - $ -
Diluted net income................................... $ 0.02 $ 0.05 $ - $ -
Cash dividends paid on common stock..................... $ - $ - $ - $ 0.15
2002
Revenues................................................ $ 42,411 $ 33,455 $ 30,341 $ 27,397
Income (loss)from continuing operations................. 4,261) 99 6,580 (1,524)
Net loss available to common............................ (572) (5,569) (12,891) (15,729)
Loss from continuing operations per share:
Basic loss from continuing operations................ $ (0.03) $ (0.13) $ (0.31) $ (0.18)
Diluted loss from continuing operations.............. $ (0.03) $ (0.13) $ (0.31) $ (0.18)
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)
Note:2003 - During the three-month period ended March 31, 2003, we recognized
provisions for impairment of $4.6 million. During the three-month period
ended June 30, 2003, we recognized a $1.3 million gain on the sale of an
asset held for sale and a non-healthcare investment. During the three-month
period ended September 30, 2003, we recognized provisions for impairment of
$4.3 million and a $91 thousand gain on the sale of two assets held for
sale properties. During the three-month period ended December 31, 2003, we
recognized a $0.8 million loss on the sale of an asset held for sale and a
non-healthcare investment.
Note:2002 - During the three-month period ended June 30, 2002, we recognized
provisions for impairment of $1.5 million and provisions for uncollectible
mortgages, notes and accounts receivable of $3.7 million. In addition, we
recognized a $0.3 million loss on the sale of a property. During the
three-month period ended September 30, 2002, we recognized provisions for
impairment of $1.2 million and provisions for uncollectible mortgages,
notes and accounts receivable of $5.2 million. Also during the third
quarter, we recognized a $2.2 million gain on the sale of a non-healthcare
investment. During the three-month period ended December 31, 2002, we
recorded a $7.0 million refinancing expense, a $1.0 million provision for
impairment and a $0.7 million gain on asset sales.
NOTE 18 - EARNINGS PER SHARE
The following tables set forth the computation of basic and diluted
earnings per share:
YEAR ENDED DECEMBER 31,
2003 2002 2001
-----------------------------------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
Numerator:
Income (loss) from continuing operations............................. $ 23,341 $ (3,744) $(15,588)
Preferred stock dividends............................................ (20,115) (20,115) (19,994)
-----------------------------------
Numerator for income (loss) available to common from continuing
operations - basic and diluted..................................... 3,226 (23,859) (35,582)
Loss from discontinued operations.................................... (311) (10,902) (1,069)
-----------------------------------
Numerator for net income (loss) available to common per share -
basic and diluted.................................................. $ 2,915 $(34,761) $(36,651)
===================================
Denominator:
Denominator for net income (loss) per share - basic.................. 37,189 34,739 20,038
Effect of dilutive securities:
Stock option incremental shares.................................... 965 - -
-----------------------------------
Denominator for net income (loss) per share - diluted................ 38,154 34,739 20,038
===================================
Earnings per share - basic:
Income (loss) available to common from continuing operations......... $ 0.09 $ (0.69) $ (1.78)
Income (loss) income from discontinued operations.................... (0.01) (0.31) (0.05)
----------------------------------
Net income (loss) per share - basic.................................. $ 0.08 $ (1.00) $ (1.83)
==================================
Earnings per share - diluted:
Income (loss) available to common from continuing operations......... $ 0.08 $ (0.69) $ (1.78)
Income (loss) income form discontinued operations.................... - (0.31) (0.05)
----------------------------------
Net income (loss) per share - diluted................................ $ 0.08 $ (1.00) $ (1.83)
==================================
The effect of converting the Series C preferred stock and the effect of
converting the 1996 convertible debentures in 2003, 2002 and 2001 have been
excluded as all such effects are anti-dilutive.
NOTE 19 - DISCONTINUED OPERATIONS
The implementation of SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, as of January 1, 2002, resulted in the
presentation of the net operating results on facilities sold during 2003 as
income from discontinued operations for all periods presented. We incurred a net
loss from discontinued operations of $0.3 million, $10.9 million and $1.1
million for 2003, 2002 and 2001, respectively, in the accompanying consolidated
statements of operations.
Upon adoption of SFAS No. 144, long-lived assets sold or designated as held
for sale after January 1, 2002 are reported as discontinued operations in our
financial statements. All 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 following table summarizes the results of operations of the sold and
held for sale facilities for the years ended December 31, 2003, 2002 and 2001,
respectively.
YEAR ENDED DECEMBER 31,
2003 2002 2001
----------------------------------
(IN THOUSANDS)
REVENUES
Rental income...................................................... $ 944 $ 2,103 $ 1,072
Nursing home revenues of owned and operated assets................. - 1,371 6,116
Mortgage interest income........................................... - 33 306
----------------------------------
944 3,507 7,494
----------------------------------
EXPENSES
Nursing home expenses of owned and operated assets................. - (1,968) (6,324)
Depreciation and amortization...................................... (441) (732) (766)
Provisions for impairment.......................................... - (11,709) (1,473)
----------------------------------
(441) (14,409) (8,563)
----------------------------------
Income (loss) before loss on sale of assets........................... 503 (10,902) (1,069)
Loss on assets sold - net............................................. (814) - -
----------------------------------
LOSS FROM DISCONTINUED OPERATIONS..................................... $ (311) $(10,902) $ (1,069)
==================================
NOTE 20 - SUBSEQUENT EVENTS
SERIES D PREFERRED OFFERING; SERIES C PREFERRED REPURCHASE AND CONVERSION
On February 5, 2004, we entered into a Repurchase and Conversion Agreement
with Explorer, pursuant to which Explorer granted us an option to repurchase up
to 700,000 shares of Series C preferred stock at $145.92 per share (or $9.12 per
share of common stock on an as converted basis), provided we purchased a minimum
of $100 million on or prior to February 27, 2004. Explorer also agreed to
convert all of its remaining shares of Series C preferred stock into shares of
our common stock upon exercise of the repurchase option. At the time Explorer
entered into the Repurchase and Conversation Agreement, Explorer held all of our
outstanding Series C preferred stock, which had an aggregate liquidation
preference of $104,842,000, and was convertible at the holder's option into our
common stock at a conversion price of $6.25 per share.
On February 10, 2004, we sold in a registered direct placement 4,739,500
shares of our 8.375% Series D cumulative redeemable preferred stock at $25 per
share for net proceeds, after fees and expenses, of approximately $114.9
million. The Series D preferred stock may be redeemed at par at our election on
or after the fifth anniversary of the original issue date. These securities rank
pari passu with the Series A and Series B preferred stock and are not
convertible into any other Omega securities. The Series D preferred stock has no
stated maturity and is not be subject to a sinking fund or mandatory redemption.
We used approximately $102.1 million of the net proceeds of the Series D
preferred stock offering to repurchase 700,000 shares of Series C preferred
stock from Explorer as of February 10, 2004 pursuant to the repurchase option.
In connection with the transaction, Explorer converted its remaining 348,420
shares of Series C preferred stock into 5,574,720 shares of common stock.
As a result of the offering of Series D preferred stock, the application of
$102.1 million of the net proceeds received to repurchase 700,000 shares of
Series C preferred, and the conversion of the remaining Series C preferred stock
into shares of our common stock, (i) no Series C preferred stock is outstanding,
and we plan to re-classify the remaining authorized shares of Series C preferred
stock as authorized but unissued preferred stock, without designation as to
class; (ii) 4,739,500 shares of our 8.375% Series D cumulative redeemable
preferred stock, with an aggregate liquidation preference of $118,487,500, have
been issued; and (iii) Explorer holds, as of the date of this report, 18,118,246
shares of our common stock, representing approximately 41.5% of our outstanding
common stock. Under the stockholders agreement between Explorer and the company,
Explorer continues to be entitled to designate four of our ten directors.
SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION
OMEGA HEALTHCARE INVESTORS, INC.
DECEMBER 31, 2003
(3)
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 (4) 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.:
Alabama (LTC) (2) $ 23,584,956 $ 23,584,956 $ 4,587,901 1997 33 years
California (LTC, RH) (2) 48,467,605 $ 82,708 48,550,313 8,560,440 1964 1997 33 years
Idaho (LTC) (2) 600,000 600,000 118,145 1997 33 years
Illinois (LTC) (2) 8,842,726 8,842,726 1,906,072 1996 30-33 years
Massachusetts (LTC) (2) 8,300,000 8,300,000 1,634,336 1997 33 years
North Carolina (LTC) (2) 22,652,488 56,951 22,709,439 6,287,463 1982-1991 1994-1997 33-39 years
Ohio (LTC) (2) 11,864,320 20,247 11,884,567 2,099,495 1995 1997 33 years
Tennessee (LTC) (2) 7,905,139 37,237 7,942,373 2,317,026 1994 30 years
Washington (LTC) (2) 10,000,000 1,274,300 11,274,300 3,715,098 1997 33 years
West Virginia (LTC) (2) 24,751,206 42,238 24,793,444 4,337,722 1997 33 years
-----------------------------------------------------------------
166,968,440 1,513,678 168,482,118 35,563,698
-----------------------------------------------------------------
Advocat, Inc.:
Alabama (LTC) (2) 11,588,534 758,261 12,346,795 4,142,727 1975-1985 1992 31.5 years
Arkansas (LTC) (2) 37,887,832 1,473,599 $ (36,350) 39,325,081 13,511,691 1984-1985 1992 31.5 years
Florida (LTC) (2) 1,050,000 1,920,000 (970,000) 2,000,000 135,750 1992 31.5 years
Kentucky (LTC) (2) 15,151,027 1,562,375 16,713,402 4,313,466 1972-1994 1994 33 years
Ohio (LTC) (2) 5,604,186 250,000 5,854,186 1,517,144 1984 1994 33 years
Tennessee (LTC) (2) 9,542,121 9,542,121 3,328,867 1986-1987 1992 31.5 years
West Virginia (LTC) (2) 5,437,221 348,642 5,785,863 1,494,313 1994 33 years
-----------------------------------------------------------------
86,260,921 6,312,877 (1,006,350) 91,567,448 28,443,958
-----------------------------------------------------------------
Seacrest Healthcare:
Florida (LTC) (2) 55,019,839 55,019,839 4,881,244 1997-1998 33 years
-----------------------------------------------------------------
Claremont Health Care
Holdings, Inc.:
Florida (LTC) 25,700,000 25,700,000 4,293,568 1979-1990 1998 33 years
New Hampshire (LTC) 5,800,000 5,800,000 996,048 1993 1998 33 years
Pennsylvania (LTC) 14,400,000 14,400,000 2,472,946 1998 33 years
-----------------------------------------------------------------
45,900,000 45,900,000 7,762,562
-----------------------------------------------------------------
Other:
Arizona (LTC) 24,029,032 426,712 (6,603,745) 17,851,998 2,835,101 1998 33 years
California (LTC) (2) 17,333,030 29,579 17,362,609 3,061,393 1997 33 years
Colorado (LTC, AL) 16,754,408 193,652 16,948,060 2,396,507 1998-1999 33 years
Connecticut (LTC) 26,989,849 355,703 (4,958,643) 22,386,909 2,917,125 1999 33 years
Florida (LTC, AL) (Closed) 21,725,430 2,018,626 (3,901,250) 19,842,806 4,357,390 1992-1994 31.5-33 yrs
Georgia (LTC) 10,000,000 10,000,000 201,081 1998 37 years
Idaho (LTC) (2) 10,500,000 10,500,000 1,450,653 1999 33 years
Illinois (LTC) (Closed) 42,500,187 952,480 (1,021,600) 42,431,068 11,024,646 1994-1999 30-33 years
Indiana (LTC, AL) (2) 26,784,105 1,002,118 (1,843,400) 25,942,823 5,156,172 1980-1994 1992-1999 31.5-33 yrs
Iowa (LTC) (Closed) 15,176,410 520,390 (708,578) 14,988,222 2,862,353 1996-1997 30-33 years
Kansas (AL) 3,418,670 3,418,670 447,527 1999 33 years
Kentucky (LTC) (2) 10,250,000 10,250,000 1,243,240 1997 33 years
Louisiana (LTC) (2) 4,602,574 4,602,574 895,323 1997 33 years
Massachusetts (LTC) 30,718,142 407,153 (8,257,521) 22,867,774 3,158,370 1999 33 years
Missouri (LTC) 12,301,560 (149,386) 12,152,174 1,739,181 1999 33 years
Ohio (LTC, AL) 26,468,999 186,187 26,655,186 4,254,344 1998-1999 33 years
Oklahoma (LTC) 3,177,993 3,177,993 416,021 1999 33 years
Pennsylvania (LTC) (Closed) 5,500,000 (4,203,077) 1,296,923 871,923 1998 33 years
Tennessee (AL) 4,068,652 4,068,652 532,614 1999 33 years
Texas (LTC) (2) 37,342,113 441,789 37,783,902 6,229,648 1993-2001 33-39 years
Washington (LTC, AL) (Closed) 11,573,693 (4,617,568) 6,956,125 1,775,154 1997-1999 33 years
-----------------------------------------------------------------
361,214,847 6,534,389 (36,264,768) 331,484,468 57,825,767
-----------------------------------------------------------------
Total $715,364,047 $14,360,944 ($37,271,118) $692,453,873 $134,477,229
=================================================================
(1) The real estate included in this schedule is 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 the GE Healthcare
Financial Services line of credit and term loan borrowings totaling
$177,074,000 at December 31, 2003.
YEAR ENDED DECEMBER 31,
(3) 2001 2002 2003
---------------------------------------------------------------
Balance at beginning of period $710,542,017 $684,848,012 $669,187,842
Additions during period:
Conversion from mortgage 8,249,076 2,000,000 49,971,206
Impairment (a) (6,871,266) (1,679,423) (8,894,000)
Impairment on discontinued operations (1,472,939) (11,709,098) -
Improvements 2,418,873 674,899 1,585,097
Disposals/other (28,017,749) (4,946,548) (19,396,272)
---------------------------------------------------------------
Balance at close of period $684,848,012 $669,187,842 $692,453,872
===============================================================
(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.
(4) 2001 2002 2003
---------------------------------------------------------------
Balance at beginning of period $ 89,869,907 $100,037,825 $117,986,084
Additions during period:
Provisions for depreciation 19,939,678 19,435,023 20,208,110
Provisions for depreciation on
on discontinued operations 766,092 732,121 441,012
Dispositions/other (10,537,852) (2,218,885) (4,157,977)
---------------------------------------------------------------
Balance at close of period $100,037,825 $117,986,084 $134,477,229
==============================================================
The reported amount of our real estate at December 31, 2003 is less than the tax
basis of the real estate by approximately $5.4 million.
SCHEDULE IV MORTGAGE LOANS ON REAL ESTATE
OMEGA HEALTHCARE INVESTORS, INC.
DECEMBER 31, 2003
CARRYING
FACE AMOUNT OF
INTEREST FINAL PERIODIC PRIOR AMOUNT OF MORTGAGES
DESCRIPTION (1) RATE MATURITY DATE PAYMENT TERMS LIENS MORTGAGES (2)(3)
- ---------------------------------------------------------------------------------------------------------------------
Michigan
(9 LTC facilities) and
North Carolina
(3 LTC facilities) 11.57% August 31, 2010 Interest payable at None $ 59,688,450 $ 59,688,450
11.57% payable monthly
Ohio
(6 LTC facilities) 11.01% January 1, 2015 Interest plus $59,000 None 18,238,752 14,484,496
of principal payable
monthly
Florida
(4 LTC facilities) 11.50% February 28, 2010 Interest plus $3,100 None 12,891,454 12,714,609
of principal payable
monthly
Florida
(2 LTC facilities) 11.50% June 4, 2006 Interest plus $3,900 None 11,090,000 10,850,522
of principal payable
monthly
Indiana
(15 LTC facilities) 7.62% October 31, 2004 Interest plus $3,100 None 10,500,000 10,025,089
of principal payable
monthly
Texas
(3 LTC facilities) 11.00% to 11.50% 2006 to 2011 Interest plus $57,800 None 5,733,104 3,226,081
of principal payable
monthly
Other Mortgage Notes:
Various 9.00% to 13.00% 2004 to 2011 Interest plus $69,300 None 11,725,258 8,826,035
of principal payable --------------------------
monthly $129,867,018 $119,815,281
==========================
(1) Mortgage loans included in this schedule represent first mortgages on
facilities used in the delivery of long-term healthcare of which 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 $206,709,570 $195,193,424 $173,914,080
Deductions during period - collection of
principal and other (23,956,355) (14,333,620) (4,127,592)
Allowance for loss on mortgage loans - (4,945,724) -
Conversion to purchase leaseback/other changes 12,440,209 (2,000,000) (49,971,207)
--------------------------------------------------------------
Balance at close of period $195,193,424 $173,914,080 $119,815,281
==============================================================
INDEX TO EXHIBITS TO 2003 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)
3.7 Form of Articles Supplementary relating to 8.375% Series D Cumulative
Redeemable Preferred Stock (Incorporated by reference to Exhibit 4.1 of the
Company's Form 8-K filed February 10, 2004)
4.0 See Exhibits 3.1 to 3.7
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 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)
10.2 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)
10.3 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)
10.4 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)
10.5 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)
10.6 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)
10.7 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)
10.8 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)
10.9 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)
10.10 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)
10.11 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)
10.12 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)
10.13 1993 Amended and Restated Stock Option Plan (Incorporated by reference to
Exhibit A to the Company's Proxy Statement dated April 6, 2003)**
10.14 2000 Stock Incentive Plan (as amended January 1, 2001) (Incorporated by
reference to Exhibit 10.1 to the Company's Form 10-Q for the quarterly
period ended September 30, 2003)**
10.15 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)**
10.16 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)**
10.17 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)**
10.18 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)**
10.19 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)**
10.20 Loan Agreement among General Electric Capital Corporation and certain
subsidiaries of Omega Healthcare Investors, Inc., dated as of June 23, 2003
(Incorporated by reference to Exhibit 10.1 to the Company's Form 10-Q for
the quarterly period ended June 30, 2003)
10.21 Guaranty by Omega Healthcare Investors, Inc. for the benefit of General
Electric Capital Corporation, dated as of June 23, 2003 (Incorporated by
reference to Exhibit 10.2 to the Company's Form 10-Q for the quarterly
period ended June 30, 2003)
10.22 Ownership Pledge, Assignment and Security Agreement between Omega
Healthcare Investors, Inc. and General Electric Capital Corporation, dated
as of June 23, 2003 (Incorporated by reference to Exhibit 10.3 to the
Company's Form 10-Q for the quarterly period ended June 30, 2003)
10.23 Repurchase and Conversion Agreement by and between Omega Healthcare
Investors, Inc. and Explorer Holdings, L.P. dated as of February 5, 2004
(Incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed
February 5, 2003)
10.24 Form of Purchase Agreement dated as of February 5, 2004 by and between
Omega Healthcare Investors, Inc. and the purchasers of the 8.375% Series D
cumulative redeemable preferred shares (Incorporated by reference to
Exhibit 10.1 to the Company's Form 8-K filed February 10, 2004)
10.25 Placement Agent Agreement by and between the Omega Healthcare Investors,
Inc. and Cohen & Steers Capital Advisors, Inc. dated as of February 5, 2004
(Incorporated by reference to Exhibit 10.2 to the Company's Form 8-K filed
February 10, 2004)
10.26 Loan Agreement dated as of December 31, 2003 among General Electric Credit
Corporation (as Agent and a Lender), the other financial institutions party
thereto, Omega Acquisition Facility I, LLC and other entities who become
parties thereto (Incorporated by reference to Exhibit 10.3 to the Company's
Form 8-K filed February 10, 2004)
10.27 Guaranty dated as of December 31, 2003 made by Omega Healthcare Investors,
Inc. in favor of General Electric Credit Corporation, as Agent and a Lender
(Incorporated by reference to Exhibit 10.4 to the Company's Form 8-K filed
February 10, 2004)
10.28 Ownership Pledge, Assignment and Security Agreement dated as of December
31, 2003 made by Omega Healthcare Investors, Inc. in favor of General
Electric Credit Corporation, as Agent and a Lender (Incorporated by
reference to Exhibit 10.5 to the Company's Form 8-K filed February 10,
2004)
21 Subsidiaries of the Registrant*
23 Consent of Ernst & Young LLP*
31.1 Certification of the Chief Executive Officer under Section 302 of the
Sarbanes-Oxley Act of 2002*
31.2 Certification of the Chief Financial Officer under Section 302 of the
Sarbanes-Oxley Act of 2002*
32.1 Certification of the Chief Executive Officer under Section 906 of the
Sarbanes- Oxley Act of 2002*
32.2 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.
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) 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.
By: /S/ C. TAYLOR PICKETT
-----------------------------
C. Taylor Pickett
Chief Executive Officer
Dated: February 20, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities on the date indicated.
SIGNATURES TITLE DATE
- --------------------------------------------------------------------------------
PRINCIPAL EXECUTIVE OFFICER
/S/ C. TAYLOR PICKETT Chief Executive Officer February 20, 2004
- ---------------------------
C. Taylor Pickett
PRINCIPAL FINANCIAL OFFICER
/S/ ROBERT O. STEPHENSON Chief Financial Officer February 20, 2004
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Robert O. Stephenson
DIRECTORS
/S/ DANIEL A. DECKER Chairman of the Board February 20, 2004
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Daniel A. Decker
/S/ THOMAS W. ERICKSON Director February 20, 2004
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Thomas W. Erickson
/S/ THOMAS F. FRANKE Director February 20, 2004
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Thomas F. Franke
/S/ HAROLD J. KLOOSTERMAN Director February 20, 2004
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Harold J. Kloosterman
/S/ BERNARD J. KORMAN Director February 20, 2004
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Bernard J. Korman
/S/ EDWARD LOWENTHAL Director February 20, 2004
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Edward Lowenthal
/S/ CHRISTOPHER W. MAHOWALD Director February 20, 2004
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Christopher W. Mahowald
/S/ DONALD J. MCNAMARA Director February 20, 2004
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Donald J. McNamara
/S/ C. TAYLOR PICKETT Director February 20, 2004
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C. Taylor Pickett
/S/ STEPHEN D. PLAVIN Director February 20, 2004
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Stephen D. Plavin