Item 1 -- Business of the Company
Omega Healthcare Investors, Inc. (the "Company") was incorporated in the state of Maryland on March 31, 1992. It is a self-administered real estate investment trust ("REIT") which invests in income-producing healthcare facilities, principally long-term care facilities located in the United States. The Company anticipates providing lease or mortgage financing for healthcare facilities to qualified operators and acquiring additional healthcare facility types, including assisted living and acute care facilities. Financing for such future investments may be provided by borrowings under the Company's revolving line of credit, private placements or public offerings of debt or equity, the assumption of secured indebtedness, or a combination of these methods. The Company also may finance acquisitions through the exchange of properties or the issuance of shares of its capital stock, if such transactions otherwise satisfy the Company's investment criteria.
During 1995, the Company became a primary sponsor of Principal Healthcare Finance Limited ("Principal"), an Isle of Jersey (United Kingdom) company established to provide sale/leaseback and mortgage financing to the private-sector healthcare industry in the United Kingdom.
In November 1997, the Company formed Omega Worldwide, Inc. ("Worldwide"), a company which provides asset management services and management advisory services, as well as equity and debt capital to the healthcare industry, particularly residential healthcare services to the elderly. On April 2, 1998 the Company contributed substantially all of its Principal assets to Worldwide in exchange for approximately 8.5 million shares of Worldwide common stock and 260,000 shares of Series B preferred stock. Of the 8,500,000 shares of Worldwide received by the Company, approximately 5,200,000 were distributed on April 2, 1998 to the shareholders of the Company on the basis of one Worldwide share for every 3.77 common shares of the Company held by shareholders of the Company on the record date of February 1, 1998. Of the remaining 3,300,000 shares of Worldwide received by the Company, 2,300,000 shares were sold by the Company on April 3, 1998 for net proceeds of approximately $16,250,000 in a secondary offering pursuant to a registration statement of Worldwide. The market value of the distribution to shareholders approximated $39 million or $1.99 per share. A non-recurring gain of $30.2 million was recorded on the distribution and secondary offerings of Worldwide common shares during 1998. (See Note 10 to the Consolidated Financial Statements).
As of December 31, 1999, the Company holds an $8,015,000 investment in Worldwide represented by 1,163,000 shares of common stock and 260,000 shares of Preferred stock. It also holds a $1,615,000 investment in Principal represented by 990,000 ordinary shares of Principal.
The Company and Worldwide have entered into an Opportunity Agreement to provide each other with rights to participate in certain transactions and make certain investments. The Opportunity Agreement provides, subject to certain terms, that, regardless of whether the following kinds of investments (each a "REIT Opportunity") first come to the attention of the Company or Worldwide, the Company will have the right to: make any investment within the United States (a) in real estate, real estate mortgages, real estate derivatives or entities that invest exclusively in or have a substantial portion of their assets in any of the foregoing, so long as the Company's REIT status would not be jeopardized by the investment; and (b) that, if made by a REIT, would not result in the termination of the REIT's status as a REIT under Sections 856 through 860 of the Internal Revenue Code ("Code"). However, Worldwide will have the right, regardless of whether the following kinds of investments (each a "Worldwide Opportunity") first come to the attention of the Company or Worldwide, to: (a) provide advisory services and/or management services to any healthcare investors, wherever located; (b) acquire or make debt and/or equity investments (through a joint venture or otherwise) in any healthcare investor or in healthcare real estate-related assets outside the United States; (c) make investments in any entity conducting healthcare operations; and (d) make any other real estate, finance or other investments not customarily undertaken by a qualified REIT. If Worldwide declines to pursue a Worldwide Opportunity, it must offer that opportunity to the Company, and if the Company declines to pursue a REIT Opportunity, it must offer that opportunity to Worldwide. Each of the Company and Worldwide may participate, in its discretion, in any REIT Opportunity or Worldwide Opportunity that the other requests be pursued jointly. The terms upon which each of the Company and Worldwide elect to participate in such an opportunity will be negotiated in good faith and must be mutually acceptable to the respective boards of directors of the Company and Worldwide,
with the affirmative votes of the independent directors of the board of directors of the Company and Worldwide. Each of the Company and Worldwide has agreed to notify the other of and make available to the other investment opportunities developed by such party or of which such party becomes aware but is unable or unwilling to pursue. The Opportunity Agreement has a term of ten years and automatically renews for successive five-year terms unless terminated. In response to an opportunity offered to the Company by Worldwide, the Company acquired the equivalent of up to 9.9% of the common shares of Principal Healthcare Finance Trust ("the Trust"), an Australian Unit Trust, which owns 40 nursing home facilities and 475 assisted living units in New South Wales.
As of December 31, 1999, the Company's portfolio of domestic investments consisted of 211 long-term care facilities, 3 medical office buildings and 2 rehabilitation hospitals. The Company owns and leases 147 long-term facilities, 3 medical office buildings and 2 rehabilitation hospitals, and provides mortgages, including participating and convertible participating mortgages on 64 long-term healthcare facilities. The facilities are located in 28 states and operated by 24 unaffiliated operators. The Company's gross real estate investments at December 31, 1999 totaled $892 million.
The Company initiated a plan during 1998 to dispose of certain properties judged to have limited incremental potential and to re-deploy the proceeds from sale. Following a review of the portfolio, assets identified for sale had a cost of $95 million, a net carrying value of $83 million, and annualized revenues of approximately $11.4 million. After consideration of the results of sales and other developments identified as part of the continuing evaluation of the assets held for sale, the Company recorded a provision for impairment of $6.8 million to adjust the carrying value of those assets judged to be impaired to their estimated fair value, less cost of disposal. During 1998, the Company completed sales of two groups of assets, yielding sales proceeds of $42,036,000. Gains realized in the dispositions approximated $2.8 million.
During 1999, new investments approximated $103 million as a result of entering into sale/leaseback transactions and making mortgage loans and other investments. Also during 1999, the Company completed asset sales yielding net proceeds of $18.2 million. In 1999 a loss of $10.5 million was recognized on these assets. In the 1999 fourth quarter, management initiated a plan for additional asset sales. The assets identified as for sale in 1999 had a cost of $33.8 million, a net carrying amount of $28.6 million and annualized revenue of approximately $3.4 million. As a result of this review, the Company recorded a provision for impairment of $19.5 million to adjust the carrying value of assets targeted for sale to their estimated fair value, less cost of disposal. The Company is committed to sell the remaining facilities as soon as practicable.
At January 15, 1999 the Company employed 28 full-time employees. The executive offices of the Company are located at 900 Victors Way, Suite 350, Ann Arbor, Michigan, 48108. Its telephone number is (734) 887-0200.
Investment Objectives
The investment objectives of the Company are to pay regular cash dividends to shareholders; to provide the opportunity for increased dividends from annual increases in rental and interest income from revenue participations and from portfolio growth; to preserve and protect shareholders' capital; and to provide the opportunity to realize capital growth.
Given the current challenging operating environment and the Company's limited access to new equity capital, the Company may invest through joint ventures or partnerships with capital partners rather than directly.
Investment Strategies and Policies
The Company maintains a diversified portfolio of income-producing healthcare facilities or mortgages thereon, with a primary focus on long-term care facilities located in the United States. In making investments, the Company generally seeks and intends to focus on established, creditworthy, middle-market healthcare operators which meet the Company's standards for quality and experience of management. Although the Company has emphasized long-term care investments, it intends to diversify prudently into other types of healthcare facilities or other properties. The Company seeks to diversify its investments in terms of geographic locations, operators and facility types.
In evaluating potential investments, the Company considers such factors as: (i) the quality and experience of management and the credit worthiness of the
operator of the facility; (ii) the facility's historical, current and forecasted cash flow and its adequacy to meet operational needs, capital expenditures and lease or debt service obligations, while providing a competitive return on investment to the Company; (iii) the construction quality, condition and design of the facility; (iv) the geographic area and type of facility; (v) the tax, growth, regulatory and reimbursement environment of the community in which the facility is located; (vi) the occupancy and demand for similar healthcare facilities in the same or nearby communities; and (vii) the payor mix of private, Medicare and Medicaid patients.
A fundamental investment strategy of the Company is to obtain contractual rent escalations under long-term, non-cancelable, "triple-net" leases and revenue participation through participating 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.
The Company prefers to invest in equity ownership of properties. Due to regulatory, tax or other considerations, the Company sometimes pursues alternative investment structures, including convertible participating and participating mortgages, that achieve returns comparable to equity investments. The following summarizes the four primary structures currently used by the Company:
Purchase/Leaseback. The Company's owned properties are generally leased under provisions of leases for terms ranging from 8 to 17 years, plus renewal options. The leases originated by the Company generally provide for minimum annual rentals which are subject to annual formula increases (i.e., based upon such factors as increases in the Consumer Price Index ("CPI") or increases in the revenues of the underlying properties), with certain fixed minimum and maximum levels. Generally, the operator holds an option to repurchase at set dates at prices based on specified formulas. The average annualized yield from leases was 11.42% at January 1, 2000.
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 revenues of the underlying long-term care facilities, with certain maximum limits. Convertible Participating Mortgages afford the Company an option to convert its mortgage into direct ownership of the property, generally at a point six to nine years from inception; they are then subject to a leaseback to the operator for the balance of the original agreed term and for the original agreed participations in revenues or CPI adjustments. This allows the Company to capture a portion of the potential appreciation in value of the real estate. The operator has the right to buy out the Company's option at prices based on specified formulas. The average annualized yield on these mortgages was approximately 13.08 % at January 1, 2000.
Participating Mortgage. Participating Mortgages are secured by first mortgage liens on the underlying real estate and personal property of the mortgagor. Interest rates are usually subject to annual increases based upon increases in the CPI or increases in revenues of the underlying long-term care facilities, with certain maximum limits. The average annualized yield on these investments was approximately 13.01% at January 1, 2000.
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 11.17% at January 1, 2000.
The following table summarizes as of December 31, 1999 the years of expiration of the Company's revenues based on the contractual maturity dates of the leases and mortgages:
Mortgage Rent Interest Total % ---- -------- ----- -- (In thousands) 2000 ................. $ - $ - $ - 0% 2001 ................. 3,180 1,846 5,026 4.82 2002 ................. 8,849 9,645 18,494 17.75 2003 ................. 518 3,920 4,438 4.26 2004 ................. 1,221 587 1,808 1.73 Thereafter ........... 63,762 10,690 74,452 71.44 ------ ------ ------ ----- $77,530 $26,688 $104,218 100.00% ======= ======= ======== ====== - ---------------
The table set forth in Item 2
Item 2 -- Properties
At December 31, 1999, the Company's real estate investments were in long-term care facilities, medical office buildings and rehabilitation hospitals. The investments are either in the form of purchased facilities, which are leased to operators, or mortgages on facilities which are operated by the mortgagors or their affiliates. The facilities are located in 28 states and are operated by 24 unaffiliated operators. Basic information regarding investments as of December 31, 1999 is as follows:
(1) Generally represents data for the twelve month period ending September 30, 1999. *Represents Assisted Living Units. N/A - Data not reported or not applicable.
(1) Beds include a total of 361 assisted living units.
Item 3
Item 3 -- Legal Proceedings
There were no legal proceedings pending as of December 31, 1999, or as of the date of this report, to which the Company is a party or to which the properties are subject, which were likely to have a material adverse effect on the operations of the Company or on its financial condition.
Item 4
Item 4 -- Submission of Matters to a Vote of Security Holders
No matters were submitted to shareholders during the fourth quarter of the year covered by this report.
PART II
Item 5
Item 5 -- Market for Registrants' Common Equity and Related Shareholder Matters
The Company's shares of common stock are traded on the New York Stock Exchange under the symbol OHI. The following table sets forth, for the periods shown, the high and low closing prices as reported on the New York Stock Exchange Composite and cash dividends per share:
The closing price on December 31, 1999 was $12.6875 per share. As of December 31, 1999, there were 19,877,371 shares of common stock outstanding with approximately 2,800 registered holders and approximately 26,000 beneficial owners.
Item 6
Item 6 -- Selected Financial Data
The following selected financial data with respect to the Company should be read in conjunction with the Company's Consolidated Financial Statements which are listed herein under Item 14 and are included on pages through.
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(1) Dividends per share are those declared and paid during such period.
Item 7
Item 7 -- Management's Discussion and Analysis of Financial Condition and Results of Operations
"Safe Harbor" Statement Under the United States Private Securities Litigation Reform Act of 1995
Statements contained in this document that are not based on historical fact are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements regarding the Company's future development activities, the future condition and expansion of the Company's markets, the Company's ability to meet its liquidity requirements and the Company's growth strategies, as well as other statements which may be identified by the use of forward-looking terminology such as "may,"
"will," "expect," "estimate," "anticipate," or similar terms, variations of those terms or the negative of those terms. Statements that are not historical facts contained in Management's Discussion and Analysis are forward-looking statements that involve risks and uncertainties that could cause actual results to differ from projected results. Some of the factors that could cause actual results to differ materially include: The financial strength of the operators of the Company's facilities as it affects their continuing ability to meet their obligations to the Company under the terms of the Company's agreements with such operators; changes in the reimbursement levels under the Medicare and Medicaid programs; operators' continued eligibility to participate in the Medicare and Medicaid programs; changes in reimbursement by other third party payors; occupancy levels at the Company's facilities; the availability and cost of capital; the strength and financial resources of the Company's competitors; the Company's ability to make additional real estate investments at attractive yields; and changes in tax laws and regulations affecting real estate investment trusts.
Following is a discussion of the consolidated results of operations, financial position and liquidity and capital resources of the Company, which should be read in conjunction with the consolidated financial statements and accompanying notes.
Results of Operations
Year Ended December 31, 1999 compared to Year Ended December 31, 1998
Revenues for the year ended December 31, 1999 totaled $122,375,000, increasing $13.6 million over 1998 revenues. The 1999 revenue growth stems primarily from additional investments during 1998 and 1999. A partial year of revenues from 1999 investments provided revenue increases of approximately $7.4 million, while a full year of revenues from 1998 investments added $13.5 million to revenues. Revenues for 1999 also include $1.1 million from assets classified as Other Real Estate, $852,000 from prepayment penalties on mortgage payoffs and approximately $1.6 million of the revenue growth which stems from participating incremental revenues which became effective during 1999. A $10.7 million decrease in revenues resulted from the early payoff of mortgages, disposition of real estate and the designation of assets as "held for sale."
Real estate investments of $892.2 million as of December 31, 1999 will provide 2000 annualized revenues of $104.2 million, which reflects no revenues from assets designated as "other real estate" or as "held for sale." Revenues from the investment portfolio will continue at this level until additional 2000 investments are made, if any, and additional escalation provisions commence in 2000. Annualized revenues for 2000 represent a $8.1 million decrease from the 1999 annualized revenues of $112.3 million based on real estate investments of $983.8 million as of January 1, 1999.
Expenses for the year ended December 31, 1999 totaled $72,697,000, increasing approximately $13.9 million over expenses of $58.8 million for 1998. The 1999 provision for depreciation and amortization of real estate totaled $24,211,000, increasing $2.7 million over 1998. This increase stems from a full year provision for 1998 investments, plus a partial year provision for 1999 investments.
Interest expense for the year ended December 31, 1999 was approximately $42,366,000, compared with $31.9 million for 1998. The increase in 1999 is primarily due to higher average outstanding borrowings during the 1999 period offset by lower average interest rates.
General and administrative expenses for 1999 totaled $6,120,000 or approximately 5.0% of revenues as compared to 4.9% for 1998.
No provision for Federal income taxes has been made since the Company intends to continue to qualify as a real estate investment trust under the provisions of Sections 856 through 860 of the Internal Revenue Code of 1986, as amended. Accordingly, the Company will not be subject to Federal income taxes on amounts distributed to shareholders, provided it distributes at least 95% of its real estate investment trust taxable income and meets certain other conditions.
Funds from operations (FFO) for the year ended December 31, 1999 totaled $67,482,000, an increase of $2.4 million over the $65.1 million for 1998. FFO is net earnings available to common shareholders, excluding any gains or losses from debt restructuring and the effects of asset dispositions, plus depreciation and amortization associated with real estate investments and charges to earnings for non-cash common stock based compensation. The 1999 increase in cash flow is primarily due to new additions to investments, offset by early payment of mortgages and disposition of real estate assets.
Year Ended December 31, 1998 compared to Year Ended December 31, 1997
Revenues for the year ended December 31, 1998 totaled $108,738,000, increasing $17.9 million over 1997 revenues. The 1998 revenue growth stems primarily from additional investments during 1997 and 1998. A partial year of revenues from 1998 investments provided revenue increases of approximately $9.5 million, while a full year of revenues from 1997 investments added $11.3 million to revenues. Additionally, approximately $2.3 million of the revenue growth stems from participating incremental revenues which became effective during 1998.
Real estate investments of $983.8 million as of December 31, 1998 will provide 1999 annualized revenues of $112.3 million, which reflects no additional revenues for assets held for sale. Revenues will continue at this level until additional 1999 investments are made and additional escalation provisions commence in 1999. Annualized revenues for 1999, excluding assets held for sale, represent a $19.2 million increase over the 1998 annualized revenues of $93.1 million based on real estate investments of $779.4 million as of January 1, 1998.
Expenses for the year ended December 31, 1998 totaled $58,767,000, increasing approximately $12.8 million over expenses of $45.9 million for 1997. The 1998 provision for depreciation and amortization of real estate totaled $21,542,000, increasing $4.6 million over 1997. This increase stems from a full year provision for 1997 investments, plus a partial year provision for 1998 investments.
Interest expense for the year ended December 31, 1998 was approximately $31,860,000, compared with $24.4 million for 1997. The increase in 1998 is primarily due to higher average outstanding borrowings during the 1998 periods, offset partially by interest rate savings from conversions of subordinated debentures and reduced spreads on line of credit borrowings.
General and administrative expenses for 1998 totaled $5,365,000 or approximately 4.9% of revenues as compared to 5.1% for 1997. The 1998 percentage decrease stems primarily from economies of scale resulting from additional investments made in 1998.
No provision for Federal income taxes has been made since the Company intends to continue to qualify as a real estate investment trust under the provisions of Sections 856 through 860 of the Internal Revenue Code of 1986, as amended. Accordingly, the Company will not be subject to Federal income taxes on amounts distributed to shareholders, provided it distributes at least 95% of its real estate investment trust taxable income and meets certain other conditions.
Funds from operations (FFO) for the year ended December 31, 1998 totaled $65,050,000, an increase of $6.3 million over the $58.8 million for 1997. FFO is net earnings available to common shareholders, excluding any gains or losses from debt restructuring and the effects of asset dispositions, plus depreciation and amortization associated with real estate investments and charges to earnings for non-cash common stock based compensation. The 1998 growth in cash flow is primarily due to net additions to investments in 1998 and 1997.
Liquidity and Capital Resources
The Company expects to continue to seek new investments in healthcare properties, primarily long-term care facilities, with the objective of profitable growth and further diversification of the investment portfolio. Permanent financing for future investments is expected to be provided through a combination of private and public offerings of debt and equity securities.
At December 31, 1999, the Company has total assets of $1.01 billion, shareholders' equity of $457.1 million, and long-term debt of $375.4 million, representing approximately 37% of total capitalization. Long-term debt excludes funds borrowed under its acquisition credit agreements. The Company has $250 million available under its revolving credit facilities, of which $166.6 million was drawn at year-end. Proceeds from asset sales and mortgage payments are expected to reduce borrowings on the credit facility by approximately $40 million during 2000.
The Company has approximately $80 million of indebtedness that matures July 15, 2000 and the term of its revolving credit facility expires September 30, 2000. The Company intends to extend the maturity of its revolving credit
facility and to refinance the term indebtedness, and may fix debt represented by the revolving credit facility and liquidate assets to pay such indebtedness or implement a plan which includes a combination of the foregoing. Management believes the Company's liquidity and various sources of available capital are adequate to finance operations, meet debt service requirements and fund future investments.
On January 14, 1999, the Company's Form S-3 registration statement permitting the issuance of up to $300 million related to common stock, unspecified debt, preferred stock and convertible securities was declared effective by the Securities and Exchange Commission.
The Company distributes a large portion of the cash available from operations. The Company's historical policy has been to make distributions on common stock of approximately 80% of FFO. Cash dividends paid totaled $2.80 per share for 1999, compared with $2.68 per share for the year ended December 31, 1998. The dividend payout ratio, that is the ratio of per share amounts for dividends paid to the diluted per share amounts of funds from operations, was approximately 84.3% for 1999 and 1998. The Company believes that cash provided from quarterly operating activities at current levels will continue to be sufficient to fund normal working capital requirements and common stock dividends.
New investments generally are funded from temporary borrowings under the Company's acquisition credit line agreements. Interest cost incurred by the Company on borrowings under the revolving credit line facilities will vary depending upon fluctuations in prime and/or LIBOR rates. With respect to the unsecured acquisition credit line, interest rates depend in part upon changes in the Company's ratings by national agencies. The term of the $200 million unsecured facility expires on September 30, 2000. Borrowings under the facility bear interest at LIBOR plus 1.125% or, at the Company's option, at the prime rate. Borrowings under the $50 million facility bear interest at LIBOR plus 2.00% or, at the Company's option, at the prime rate. The Company expects to periodically replace funds drawn on the revolving credit facilities through fixed-rate long-term borrowings, the placement of convertible debentures, or the issuance of additional shares of common and/or preferred stock. Historically, the Company's strategy has been to match the maturity of its indebtedness with the maturity of its assets and to employ fixed-rate long-term debt to the extent practicable.
Market Risk
The Company is exposed to various market risks, including the potential loss arising from adverse changes in interest rates. The Company does not enter into derivatives or other financial instruments for trading or speculative purposes. The Company seeks to mitigate the effects of fluctuations in interest rates by matching the term of new investments with new long-term fixed rate borrowing to the extent possible.
The market value of the Company's long-term fixed rate borrowings and mortgages are subject to interest rate risk. Generally, the market value of fixed rate financial instruments will decrease as interest rates rise and increase as interest rates fall. The estimated fair value of the Company's total long-term borrowings at December 31, 1999 was $330 million. A 1% increase in interest rates would result in a decrease in fair value of long-term borrowings by approximately $9.0 million. The estimated fair value of the Company's total mortgages portfolio at December 31, 1999 was $231 million. A 1% increase in interest rates would result in a decrease in fair value of the mortgage portfolio by approximately $9.1 million.
The Company is subject to risks associated with debt or preferred equity financing, including the risk that existing indebtedness may not be refinanced or that the terms of such refinancing may not be as favorable as the terms of current indebtedness. If the Company were unable to refinance its indebtedness on acceptable terms, it might be forced to dispose of properties on disadvantageous terms, which might result in losses to the Company and might adversely affect the cash available for distribution to shareholders. If interest rates or other factors at the time of the refinancing result in higher interest rates upon refinancing, the Company's interest expense would increase, which might affect the Company's ability to make common stock distributions to its shareholders.
The majority of the Company's borrowings were completed pursuant to indentures which limit the amount of indebtedness the Company may incur. Accordingly, in the event that the Company is unable to raise additional equity or borrow money because of these limitations, the Company's ability to acquire
additional properties may be limited. If the Company is unable to acquire additional properties, its ability to increase the distributions with respect to common shares, as it has done in the past, will be limited to management's ability to increase funds from operations, and thereby cash available for distribution, from the existing properties in the Company's portfolio.
Year 2000 Compliance
The Company is not aware of any significant adverse effects of Year 2000 on its systems and operations.
Item 8
Item 8 -- Financial Statements and Supplementary Data
The consolidated financial statements and report of independent auditors are filed as part of this report on pages through.
The summary of quarterly results of operations for the years ended December 31, 1999 and 1998 is included in unaudited Note 15 to the financial statements which is incorporated herein by reference in response to Item 302 of Regulation S-K.
Item 9
Item 9 -- Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
PART III
Item 10
Item 10 -- Directors and Executive Officers of the Registrant
The information required by this item is contained in Item 1 herein or incorporated herein by reference to the Company's definitive proxy statement for the Annual Meeting of Shareholders to be held on April 18, 2000 at 11:00 a.m. EST, which will be filed on or before February 29, 2000 with the Securities and Exchange Commission pursuant to Regulation 14A.
Item 11
Item 11 -- Executive Compensation
The information required by this item is incorporated herein by reference to the Company's definitive proxy statement for the Annual Meeting of Shareholders to be held on April 18, 2000, which will be filed on or before February 29, 2000 with the Securities and Exchange Commission pursuant to Regulation 14A.
Item 12
Item 12 -- Security Ownership of Certain Beneficial Owners and Management
The information required by this item is incorporated herein by reference to the Company's definitive proxy statement for the Annual Meeting of Shareholders to be held on April 18, 2000, which will be filed on or before February 29, 2000 with the Securities and Exchange Commission pursuant to Regulation 14A.
Item 13
Item 13 -- Certain Relationships and Related Transactions
The information required by this item is incorporated herein by reference to the Company's definitive proxy statement for the Annual Meeting of Shareholders to be held on April 18, 2000, which will be filed on or before February 29, 2000 with the Securities and Exchange Commission pursuant to Regulation 14A.
PART IV
Item 14
Item 14 -- 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 .................................... Consolidated Balance Sheets as of December 31, 1999 and 1998 ...... Consolidated Statements of Operations for the years ended December 31, 1999, 1998 and 1997 ................................ Consolidated Statements of Shareholders' Equity for the years ended December 31, 1999, 1998 and 1997 .................... Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997 ................................ Notes to Consolidated Financial Statements ........................
(a)(2) Listing of 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
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 and therefore have 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. There were no 8-K filings in the fourth quarter of 1999.
(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, 1999 and 1998 and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1999. Our audits also included the financial statement schedules listed in the Index at Item 14(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 consolidated 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, 1999 and 1998, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, 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.
/s/ Ernst & Young LLP
Detroit, Michigan January 21, 2000
OMEGA HEALTHCARE INVESTORS, INC.
CONSOLIDATED BALANCE SHEETS
See accompanying notes.
OMEGA HEALTHCARE INVESTORS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
See accompanying notes.
OMEGA HEALTHCARE INVESTORS, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (In thousands, except per share amounts)
See accompanying notes.
OMEGA HEALTHCARE INVESTORS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
See accompanying notes.
OMEGA HEALTHCARE INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization
Omega Healthcare Investors, Inc., a Maryland corporation ("the Company"), is a self-administered real estate investment trust (REIT). From the date the Company commenced operations in 1992, it has invested primarily in long-term care facilities, which include nursing homes, assisted living facilities and rehabilitation hospitals. It currently has investments in 216 income-producing healthcare facilities, with a principal focus on diversified investments in long-term care facilities located in the United States.
Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries after elimination of all material intercompany accounts and transactions.
Real Estate Investments
Investments in leased real estate properties and mortgage notes are recorded at cost and original mortgage amount, respectively. The cost of the properties acquired is allocated between land and buildings based generally upon independent appraisals. Depreciation for buildings is recorded on the straight-line basis, using estimated useful lives ranging from 20 to 39 years.
Other Real Estate Investments and Assets Held for Sale
In the ordinary course of its business activities, the Company periodically evaluates investment opportunities and extends credit to customers. It also is regularly engaged in lease and loan extensions and modifications. Additionally, the Company actively monitors and manages its investment portfolio with the objectives of improving credit quality and increasing returns. In connection with portfolio management, it engages in various collection and foreclosure activities.
When the Company acquires real estate pursuant to a foreclosure proceeding, it is classified as other real estate and recorded at the lower of cost or fair value generally based on appraisal. Additionally, when a formal plan to sell real estate is adopted, the real estate is classified as "assets held for sale," with the net carrying amount adjusted to the lower of cost or estimated fair value, less cost of disposal. Residual income from the investment and depreciation of the facilities are excluded from operations after management has committed to a plan to sell the asset.
Impairment of Assets
Provisions for impairment losses related to long-lived assets are recognized when expected future cash flows are less than the carrying values of the assets. If indicators of impairment are present, the Company evaluates the carrying value of the related real estate investments in relationship to the future undiscounted cash flows of the underlying facilities. The Company adjusts the net carrying value of leased properties, assets held for sale and other long-lived assets to fair value, if the sum of the expected future cash flow or sales proceeds is less than carrying value.
Cash and Short-Term Investments
Short-term investments consist of highly liquid investments with a maturity date of three months or less when purchased. These investments are stated at cost which approximates fair value.
OMEGA HEALTHCARE INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Investments in Equity Securities
Marketable securities held as available-for-sale are stated at fair value with unrealized gains and losses for the securities reported in accumulated other comprehensive income. Realized gains and losses and declines in value judged to be other-than-temporary on securities held as available-for-sale are included in investment income. The cost of securities sold is based on the specific identification method. Interest and dividends on securities available-for-sale are included in investment income.
Deferred Financing Costs
Deferred financing costs are amortized on a straight-line basis over the terms of the related borrowings. Amortization of financing costs totaling $1,342,000, $1,042,000 and $829,000 in 1999, 1998, and 1997, respectively, is classified as interest expense in the Consolidated Statements of Operations. Unamortized deferred financing costs applicable to debt which is converted to common stock are charged to paid-in capital at the date of conversion.
Non-Compete Agreements and Goodwill
Non-compete agreements and the excess of the purchase price over the value of tangible net assets acquired (i.e., goodwill) are amortized on a straight-line basis over periods ranging from five to ten years. Non-compete agreements, which have cost of $4,982,000 became fully amortized and were eliminated in 1999 by a charge to accumulated amortization. Accumulated amortization was $3,363,000 and $6,935,000 at December 31, 1999 and 1998, respectively.
Revenue Recognition
Rental income and mortgage interest income is 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 as defined in the master leases and mortgage loan agreements. Certain mortgage agreements include provisions for deferred interest which is not payable by the borrower until maturity of the related note. The portion of deferred interest recognized as earned approximates $600,000 for each of the three years in the period ended December 31, 1999.
Federal and State Income Taxes
As a qualified real estate investment trust, the Company will not be subject to Federal income taxes on its income, and no provisions for Federal income taxes have been made. The reported amounts of the Company's assets and liabilities as of December 31, 1999 exceeds the tax basis of assets by approximately $63 million.
Earnings per Share
Basic earnings per share is computed based on the weighted average number of common shares outstanding during the respective periods. Average shares outstanding for basic earnings per share were 19,877,000, 20,034,000 and 19,085,000 for 1999, 1998 and 1997, respectively. The calculation of diluted earnings per share amounts reflects the dilutive effect of stock options (none for 1999, 5,999 shares for 1998 and 52,394 shares for 1997). The assumed conversion of debentures is anti-dilutive for all periods presented.
OMEGA HEALTHCARE INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Stock Based Compensation
The Company grants stock options to employees and directors with an exercise price equal to the fair value of the shares at the date of the grant. In accordance with the provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees, compensation expense is not recognized for these stock option grants.
Accounting Estimates
The preparation of financial statements in conformity with generally accepted accounting principles 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.
Risks and Uncertainties
The 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, the Company is subject to risks and uncertainties as a result of changes affecting operators of nursing home facilities due to the desire of governmental agencies and insurers to limit the growth in cost of healthcare services. (See Note 4 - Concentration of Risk).
NOTE 2 -- PROPERTIES
Leased Property
The Company's real estate properties, represented by 147 long-term care facilities, 3 medical office buildings and 2 rehabilitation hospitals at December 31, 1999, are leased under provisions of master leases with initial terms ranging from 8 to 17 years, plus renewal options. Substantially all of the master leases provide for minimum annual rentals which are subject to annual increases based upon increases in the Consumer Price Index or increases in revenues of the underlying properties, with certain maximum limits. Under the terms of the leases, the lessee is responsible for all maintenance, repairs, taxes and insurance on the leased properties.
A summary of the Company's investment in real estate properties is as follows:
December 31, ------------ 1999 1998 ---- ---- (In thousands) Buildings......................... $648,306 $615,846 Land.............................. 30,299 27,532 -------- -------- 678,605 643,378 Less accumulated depreciation..... (65,854) (56,385) --------- -------- Total........................ $612,751 $586,993 ======== ========
OMEGA HEALTHCARE INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table summarizes the changes in real estate properties and accumulated depreciation during 1999, 1998, and 1997:
The future minimum rentals expected to be received for the remainder of the initial terms of the leases are as follows:
(In thousands) 2000............ $ 75,697 2001............ 75,263 2002............ 69,891 2003............ 63,887 2004............ 62,784 Thereafter...... 387,607 -------- $735,129 ========
Assets Sold or Held For Sale
In July 1998, management initiated a plan to dispose of certain properties judged to have limited incremental potential and to re-deploy the proceeds from sale. Following a review of the portfolio, assets identified for sale had a cost of $95 million, a net carrying value of $83 million, and annualized revenues of approximately $11.4 million. The Company recorded a provision for impairment of $6.8 million to adjust the carrying value of those assets judged to be impaired to their fair value, less cost of disposal. During 1998, the Company completed sales of two groups of assets, yielding sales proceeds of $42,036,000. Gains realized in the dispositions approximated $2.8 million.
During 1999, the Company completed sales yielding net proceeds of $18.2 million. In addition, management initiated a plan in the 1999 fourth quarter for additional asset sales to be completed in 2000. The additional assets identified as for sale had a cost of $33.8 million, a net carrying amount of $28.6 million and annualized revenue of approximately $3.4 million. As a result of this review, the Company recorded a provision for impairment of $19.5 million to adjust the carrying value of assets targeted for sale to their fair value, less cost of disposal. The Company is committed to sell the remaining facilities as soon as practicable. In 1999 a loss of $10.5 million was also recognized on real estate dispositions. The loss stems from one tenant exercising its purchase option to acquire three custodial care facilities and one skilled nursing facility from the Company, as well as the sale of two facilities in Kentucky that were rejected by Sun Healthcare Group, Inc. in its comprehensive property agreement with the Company.
OMEGA HEALTHCARE INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Other Real Estate
The Company owns 10 facilities located in Massachusetts and Connecticut with 1,052 licensed beds, which are operated for the Company's own account. The facilities were acquired by the Company on July 14, 1999 in lieu of foreclosure and are currently being managed by Genesis Health Ventures, Inc. At December 31, 1999, the Company had invested approximately $65.8 million in these facilities. Accumulated depreciation and depreciation expense for these facilities was $898,000 for the year ended December 31, 1999. The Company presently is considering negotiating a lease or leases with new operator(s) or selling one or more of the facilities. Income from investments classified as other real estate approximated $1,151,000, including $1,050,000 from these facilities for the period from July 15 through December 31, 1999.
NOTE 3 -- MORTGAGE NOTES RECEIVABLE
The following table summarizes the changes in mortgage notes for the years ended December 31, 1999 and 1998:
1999 1998 ---- ----
(In thousands) Balance at January 1..................... $340,455 $ 218,353 New mortgage notes..................... 22,987 125,850 Collection of principal................ (54,749) (3,748) Conversion/reclassification............ (95,076) - --------- --------- Balance at December 31................... $213,617 $ 340,455 ========= =========
Mortgage notes receivable relate to 64 long-term care facilities. The mortgage notes are secured by first mortgage liens on the borrowers' underlying real estate and personal property. Through December 31, 1999, required principal payments have been made pursuant to the terms of the underlying mortgage agreements. The mortgage notes receivable relate to facilities located in 13 states, operated by 12 independent healthcare operating companies.
The Company carefully monitors compliance with mortgages and when necessary has initiated collection, foreclosure and other proceedings with respect to certain outstanding loans and expects that certain mortgagors may seek protection under the Bankruptcy Code. However, based on management's current review of its outstanding mortgage loans, no provision for loss on collection is considered necessary.
The following are the three primary mortgage structures currently used by the Company:
Convertible Participating Mortgages are secured by first mortgage liens on the underlying real estate and personal property of the mortgagor. Interest rates are usually subject to annual increases based upon increases in the CPI or increases in revenues of the underlying long-term care facilities, with certain maximum limits. Convertible Participating Mortgages afford the Company an option to convert its mortgage into direct ownership of the property, generally at a point six to nine years from inception; they are then subject to a leaseback to the operator for the balance of the original agreed term and for the original agreed participation in revenues or CPI adjustments. This allows the Company to capture a portion of the potential appreciation in value of the real estate. The operator has the right to buy out the Company's option at formula prices.
OMEGA HEALTHCARE INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Participating Mortgages are secured by first mortgage liens on the underlying real estate and personal property of the mortgagor. Interest rates are usually subject to annual increases based upon increases in the CPI or increases in revenues of the underlying long-term care facilities, with certain maximum limits.
Fixed-Rate Mortgages, with a fixed interest rate for the mortgage term, are also secured by first mortgage liens on the underlying real estate and personal property of the mortgagor.
The outstanding principal amount of mortgage notes receivable follow:
On December 30, 1999, the Company provided notice as to an Event of Default and acceleration of the due date to the mortgagor of the $58,800,000 participating mortgage note. The total obligation outstanding is $63.3 million. At that date the mortgagor was current with respect to principal and interest payments due on the loan but had failed to fully comply with certain covenants and to pay certain property taxes. The Company is currently pursuing collection and foreclosure to realize upon its security for the loan and has initiated a foreclosure action. Additionally, on January 13, 2000, the Company offset security deposits of $2.4 million against unpaid current and deferred interest. On January 18, the mortgagor filed with the Bankruptcy Court of Wilmington, Delaware for protection under Chapter 11 of the Bankruptcy Code. While the Company's collection actions have been stayed as a result of the bankruptcy filing by the mortgagor, the Company believes the security for its loan will be adequate for collection of amounts due.
OMEGA HEALTHCARE INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The stated interest rates indicated above for Participating Mortgages and Convertible Participating Mortgages are subject to annual increases based upon increases in the Consumer Price Index or increases in revenues of the underlying long-term care facilities, with certain maximum limits. Certain of the mortgage notes, designated as "Convertible Participating," also permit the Company to convert the note into ownership of the related real and personal property. Conversions would generally result in purchase/leaseback transactions with annual economic benefit to the Company substantially the same as under the mortgage notes.
The estimated fair value of the Company's mortgage loans at December 31, 1999 is approximately $230,781,000. Fair value is based on the estimates by management using rates currently prevailing for comparable loans.
NOTE 4 -- CONCENTRATION OF RISK
As of December 31, 1999, 92% of the Company's real estate investments are related to long-term care facilities. The Company's facilities are located in 28 states and are operated by 24 independent healthcare operating companies.
Investing in long-term healthcare facilities involves certain risks stemming from government legislation and regulation of operators of the facilities. The Company's tenants/mortgagors depend on reimbursement legislation which will provide them adequate payments for services because a significant portion of their revenue is derived from government programs funded under Medicare and Medicaid. The Medicare program recently implemented a Prospective Payment System for skilled nursing facilities, which replaced cost-based reimbursements and significantly reduced payments for services provided. Additionally, certain State Medicaid programs have implemented similar prospective payment systems. The reduction in payments to nursing home operators pursuant to the Medicare and Medicaid payment changes has negatively affected the revenues of the Company's nursing home facilities.
Most of the Company's nursing home investments were designed exclusively to provide long-term healthcare services. These facilities are also subject to detailed and complex specifications for the physical characteristics as mandated by various governmental authorities. If the facilities cannot be operated as long-term care facilities, finding alternative uses may be difficult. The Company's triple-net leases require its tenants to comply with regulations affecting its facilities and the Company regularly monitors compliance by tenants with healthcare facilities' regulations. Nevertheless, if tenants fail to perform their obligations, the Company may be required to do so in order to maintain the value of its investments.
Approximately 80% of the Company's real estate investments are operated by 7 public companies, including Sun Healthcare Group, Inc. (27.3%), Integrated Health Services, Inc. (18.1%), Advocat, Inc. (12.5%), RainTree Healthcare Corporation (8.3%), Mariner Post-Acute Network (6.6%), Alterra Healthcare Corporation (formerly Alternative Living Services)(3.8%),and Tenet Healthcare Corp.(3.4%). Of the remaining 17 operators, none operate investments in facilities representing more than 5% of the total real estate investments.
The Company's largest tenant, Sun Healthcare Group, Inc. (Sun), recently filed for reorganization under Chapter 11 of the Bankruptcy Code. Prior to the bankruptcy filing by Sun, the Company completed a comprehensive property agreement with Sun related to the facilities leased by Sun. This agreement, which has been approved by the Court, confirmed the existing economic terms of lease agreements between the Company and Sun with respect to 50 healthcare properties, representing $219 million in investments and $23.2 million in annual rental revenues.
OMEGA HEALTHCARE INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Many of the public nursing home companies operating the Company's facilities have recently reported significant operating and impairment losses. Integrated Healthcare Services, Inc., RainTree Healthcare Corp. and Mariner Post Acute Network, Inc. also have announced that they did not make interest payments on some of their subordinated debt obligations. Advocat, Inc. recently announced a restatement of its financial statements. The Company has initiated discussions with all operators who are experiencing financial difficulties, as well as state officials who regulate its properties. It also has proactively initiated various other actions to protect its interest under its leases and mortgages. Management believes there are presently no indicators of impairment on leased real estate or losses on mortgages.
NOTE 5 - ADDITIONAL SECURITY
The Company obtains liquidity deposits and letters of credit from substantially all operators pursuant to its leases and mortgages. These generally represent the initial monthly rental and mortgage interest income for periods ranging from three to six months with respect to certain of the investments. 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 6 -- BORROWING ARRANGEMENTS
The Company has a $200,000,000 unsecured revolving line of credit facility, under which borrowings bear interest at LIBOR plus 1.125% or, at the Company's option, at the prime rate. Borrowings of approximately $117 million are outstanding at December 31, 1999. The underlying revolving credit agreement contains various covenants and expires on September 30, 2000. The banks have waived non-compliance with a covenant requirement as to tangible net worth through the earlier of the date of an amendment to the existing agreement or May 31, 2000. The Company is currently in negotiations to extend the maturity of the line of credit. Permitted borrowings under the agreement are based upon levels of eligible real estate investments. LIBOR based borrowings under this facility bear interest at a weighted-average rate of 7.30% at December 31, 1999 and 6.63% at December 31, 1998.
The Company also has a $50,000,000 secured revolving line of credit, under which borrowings bear interest at LIBOR plus 2.00% or, at the Company's option, at the prime rate. This credit agreement contains various covenants and expires on March 31, 2002. The agreement permits the Company to extend the term of the commitment for up to three additional years following timely annual notice to the bank. LIBOR based borrowings under this facility bear interest at a weighted-average rate of 8.44% at December 31, 1999. Investments with an original cost of approximately $78 million are pledged as collateral for this revolving line of credit facility.
OMEGA HEALTHCARE INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following is a summary of long-term borrowings:
In 1998, the Company completed a $125 million public offering of unsecured 6.95% notes. The notes were priced to yield 7.04% with interest paid semi-annually. In 1997, the Company completed a $100 million public offering of unsecured 6.95% notes due 2007. The notes were priced to yield 6.99% with interest paid semi-annually.
In 1996, the Company issued $95 million of 8.5% Subordinated Convertible Debentures (the Debentures) due January 24, 2001. The Debentures are convertible at any time into shares of Common Stock at a conversion price of $26.962 per share. The Debentures are unsecured obligations of the Company and are subordinate in right and payment to the Company's senior unsecured indebtedness. As of December 31, 1999, there were 1,794,107 shares reserved for issuance under the Debentures.
In 1995, the Company issued 10% and 7.4% Unsecured Notes due July 15, 2000 in exchange for certain secured borrowings. The effective interest rate for the unsecured notes is 8.8%, with interest-only payments due semi-annually through July 2000.
Real estate investments with an original cost of approximately $25 million are pledged as collateral for outstanding secured borrowings. Long-term secured borrowings are payable in aggregate monthly installments of approximately $153,000, including interest at rates ranging from 6.5% to 10.0%.
Assuming none of the Company's borrowing arrangements are refinanced, converted or prepaid prior to maturity, required principal payments for each of the five years following December 31, 1999 and the aggregate due thereafter are set forth below:
(In thousands) 2000............ $89,107 2001............ 48,945 2002............ 125,585 2003............ 640 2004............ 690 Thereafter...... 110,385 -------- $375,352 ========
OMEGA HEALTHCARE INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The estimated fair values of the Company's long-term borrowings is approximately $329,775,000 at December 31, 1999 and $367,993,000 at December 31, 1998. Fair values are based on the estimates by management using rates currently prevailing for comparable loans.
NOTE 7 -- FINANCIAL INSTRUMENTS
At December 31, 1999 and 1998, the carrying amounts and fair values of the Company's financial instruments are as follows:
Fair value estimates are subjective in nature and are dependent on a number of important assumptions, including estimates of future cash flows, risks, discount rates and relevant comparable market information associated with each financial instrument (See Note 1 - Risks and Uncertainties). The use of different market assumptions and estimation methodologies may have a material effect on the reported estimated fair value amounts. Accordingly, the estimates presented above are not necessarily indicative of the amounts the Company would realize in a current market exchange.
NOTE 8 -- RETIREMENT ARRANGEMENTS
The Company has a 401(k) Profit Sharing Plan covering all eligible employees. Under the Plan, employees are eligible to make contributions, and the Company, at its discretion, may match contributions and make a profit sharing contribution.
In 1993, the Company adopted the 1993 Retirement Plan for Directors, which covered all members of the Board of Directors, and the 1993 Deferred Compensation Plan, which covered all eligible employees and members of the Board of Directors. The Retirement Plan for Directors and participation by the directors in the Deferred Compensation Plan was terminated effective December 31, 1997. Accumulated benefits to the Directors under both plans were settled and paid in 1998.
The Deferred Compensation Plan is an unfunded plan under which the Company may award units that result in participation in the dividends and future growth in the value of the Company's common stock. The total number of units permitted by the plan is 200,000, of which 90,850 units have been awarded and 42,600 are outstanding at December 31, 1999. Units awarded to eligible participants vest over a period of five years based on the participant's initial service date.
Provisions charged to operations with respect to these retirement arrangements totaled $123,000, $346,000, and $667,000 in 1999, 1998, and 1997, respectively.
OMEGA HEALTHCARE INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 9 -- SHAREHOLDERS' EQUITY AND STOCK OPTIONS
On May 12, 1999, the Company's Board of Directors authorized the adoption of a shareholder rights plan. The plan is designed to require a person or group seeking to gain control of the Company to offer a fair price to all the Company's shareholders. The rights plan will not interfere with any merger, acquisition or business combination that the Company's Board of Directors finds is in the best interest of the Company and its shareholders.
In connection with the adoption of the rights plan, the board declared a dividend distribution of one right for each common share outstanding on May 24, 1999. The rights will not become exercisable unless a person acquires 10% or more of the Company's common stock, or begins a tender offer that would result in the person owning 10% or more of the Company's common stock. At that time, each right would entitle each shareholder other than the person who triggered the rights plan to purchase either the Company's common stock or stock of an acquiring entity at a discount to the then market price. The plan was not adopted in response to any specific attempt to acquire control of the Company.
In January 1998, the Company adopted a stock purchase assistance plan, whereby the Company extends credit to directors and employees to purchase the Company's stock through the exercise of stock options. These loans are secured by the shares acquired and are repayable under full recourse promissory notes. The plan provides for repayment of a portion of the notes from annual incentive compensation. The notes are otherwise repayable in their entirety at the earliest to occur of five years from the date of the note or 90 days after termination of employment. At December 31, 1999 a total of $2,499,337 is outstanding, payable by participants who have loans bearing interest at 6.95% at amounts ranging from $5,025 to $299,955.
On April 28, 1998, the Company received gross proceeds of $50 million from the issuance of 2 million shares of 8.625% Series B Cumulative Preferred Stock ("Preferred Stock") at $25 per share. Dividends on the Preferred Stock are cumulative from the date of original issue and are payable quarterly commencing on August 15, 1998. On April 7, 1997, the Company received gross proceeds of $57.5 million from the issuance of 2.3 million shares of 9.25% Series A Cumulative Preferred Stock ("Preferred Stock") at $25 per share. Dividends on the Series A Preferred Stock are cumulative from the date of original issue and are payable quarterly. At December 31, 1999, the aggregate liquidation preference of preferred stock issued is $107,500,000.
Under the terms of the 1993 Amended and Restated Stock Option and Restricted Stock Plan, the Company reserved 1,100,000 shares of common stock for grants to be issued during a period of up to 10 years. Options are exercisable at the market price at the date of grant, expire in 10 to 11 years from the date of grant, and vest over 3 years. Directors, officers and employees are eligible to participate in the Plan. Options for 545,152 shares have been granted to 40 eligible participants. Additionally, 86,453 shares of restricted stock have been granted under the provisions of the 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 shareholders' equity. Unearned compensation is amortized to expense generally over the vesting period, with charges to operations of $635,000, $612,000, and $402,000 in 1999, 1998, and 1997, respectively.
At December 31, 1999, options currently exercisable (231,590) have a weighted average exercise price of $27.570. There are 468,395 shares available for future grants as of December 31, 1999.
OMEGA HEALTHCARE INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following is a summary of activity under the plan. Exercise prices and all other option data for grants prior to April 2, 1998 have been adjusted based on a formula reflecting the per share value of the distribution of Omega Worldwide, Inc.
In 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation." This standard prescribes a fair value based method of accounting for employee stock options or similar equity instruments and requires certain pro forma disclosures. For purposes of the pro forma disclosures required under Statement 123, the estimated fair value of the options is amortized to expense over the option's vesting period. Based on the Company's option activity, net earnings and net earnings per share on a pro forma basis does not differ significantly from that determined under APB 25. The estimated weighted average fair value of options granted in 1999, 1998 and 1997 was $168,000, $220,000 and $1.3 million, respectively. In determining the estimated fair value of the Company's stock options as of the date of grant, a Black-Scholes option pricing model was used with the following weighted-average assumptions: risk-free interest rates of 6.5% in 1999, 6% in 1998 and 6.5% in 1997; a dividend yield of 10% in 1999 and 6.75% in 1998 and 1997; volatility factors of the expected market price of the Company's common stock based on actual volatility in 1999 and 15% in 1998 and 1997; and a weighted-average expected life of the options of 8 years for each of the three years.
During 1999, the Company offered holders of options the opportunity to accelerate the expiration date of options in consideration of a cash payment. Twenty-two employees who were holders of options for 431,830 shares accepted the offer and were paid a total of $38,000. Options for 157,000 shares granted in 1999 and canceled in 1999 under this arrangement are excluded from the above table for 1999 and from the calculation for the weighted average fair value of options granted in 1999.
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 the Company's 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.
OMEGA HEALTHCARE INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 10 -- PRINCIPAL HEALTHCARE FINANCE LIMITED AND OMEGA WORLDWIDE, INC.
In 1995 the Company sponsored the organization of Principal Healthcare Finance Limited ("Principal"), an Isle of Jersey company, whose purpose is to invest in nursing homes and long-term care facilities in the United Kingdom. Prior to the April 2, 1998 contribution to Omega Worldwide, Inc. ("Worldwide") as explained below, the Company had invested $30.7 million in Principal, of which $23.8 million was represented by a (pound)15 million subordinated note due December 31, 2000, and $6.9 million was represented by an equity investment. The Company had also provided investment advisory and management services to Principal and had advanced temporary loans to Principal from time to time.
In November 1997, the Company formed Worldwide, and on April 2, 1998 it contributed substantially all of its Principal assets to Worldwide in exchange for approximately 8.5 million shares of Worldwide common stock and 260,000 shares of Series B preferred stock. Of the 8,500,000 shares of Worldwide received by the Company, approximately 5,200,000 were distributed on April 2, 1998 to the Company's shareholders on the basis of one Worldwide share for every 3.77 common shares of the Company held by shareholders of the Company on the record date of February 1, 1998. Of the remaining 3,300,000 shares of Worldwide received by the Company, 2,300,000 shares were sold by the Company on April 3, 1998 for net proceeds of approximately $16,250,000 in a Secondary offering pursuant to a registration statement of Worldwide. The market value of the distribution to shareholders approximated $39 million or $1.99 per share. The Company recorded a non-recurring gain of $30.2 million on the distribution and secondary offerings of Worldwide common shares during 1998. As of December 31, 1999, the Company holds 1,163,000 shares of Worldwide common stock and 260,000 shares of its preferred stock. The market value of the Company's investment in Worldwide is $8,015,000. The Company also holds a $1,615,000 investment in Principal, represented by 990,000 ordinary shares of Principal.
The Company has guaranteed repayment of Worldwide borrowings pursuant to its $25 million revolving credit facility. The Company receives a 1% annual fee and an unused fee of 25 basis points in consideration for providing its guarantee. At December 31, 1999 borrowings of $11.8 million were outstanding under Worldwide's revolving credit facility. Additionally, the Company has a Services Agreement with Worldwide, which provides for the allocation of indirect costs incurred by the Company to Worldwide. The allocation of indirect costs is based on the relationship of assets under the Company's management to the combined total of those assets and assets under Worldwide's management. Indirect costs allocated to Worldwide for 1999 and 1998 were $754,000 and $490,000, respectively.
OMEGA HEALTHCARE INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 11 -- DIVIDENDS
In order to qualify as a real estate investment trust, the Company must, among other requirements, distribute at least 95% of its real estate investment trust taxable income to its shareholders. Per share distributions by the Company were characterized in the following manner for income tax purposes:
Common 1999 1998 1997 ------ ---- ---- ---- Ordinary income..................... $ 2.100 $ 2.275 $ 2.425 Return of capital................... 0.700 0.191 0.155 Long-term capital gain.............. - 0.214 - ------- -------- ------- Total dividends paid........... $ 2.800 $ 2.680 $ 2.580 ======== ======== ======== Common Non-Cash Return of capital................... $ - $ 0.461 $ - Long-term capital gain.............. - 1.529 - ------- -------- ------- Total non-cash distribution ... $ - $ 1.990 $ - ======= ======== ======= Series A Preferred Ordinary income..................... $ 2.313 $ 2.313 $ 1.156 ======== ======== ======== Series B Preferred Ordinary income..................... $ 2.156 $ 1.078 $ - ======== ======== =======
NOTE 12 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Following are details of changes in operating assets and liabilities (excluding the effects of noncash expenses), and other noncash transactions:
OMEGA HEALTHCARE INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 13 -- LITIGATION
The Company is subject to various legal proceedings, claims and other actions arising out of the normal course of business. While any legal proceeding or claim has an element of uncertainty, management believes that the outcome of each lawsuit, claim or legal proceeding that is pending or threatened, or all of them combined, will not have a material adverse effect on its consolidated financial position or results of operations.
NOTE 14 -- SUBSEQUENT EVENTS
A quarterly dividend of $.50 per common share was declared by the Board of Directors on January 19, 2000, payable on February 15, 2000 to shareholders of record on January 28, 2000. In addition, the Board declared regular quarterly dividends of $.578 per share and $.539 per share to be paid on February 15, 2000 to Series A and Series B Cumulative Preferred shareholders of record on January 28, 2000, respectively.
NOTE 15 - SUMMARY OF QUARTERLY RESULTS (UNAUDITED)
The following summarizes quarterly results of operations for the years ended December 31, 1999 and 1998.
Note: During the three-month period ended December 31, 1999, the Company recognized a loss of $30,000 related to assets sold during the period and a provision for impairment of assets held for sale (See Note 2 -Properties). During the three-month period ended June 30, 1998, the Company realized a $30,240 gain on the distribution of Omega Worldwide, Inc. Additionally, during the three-month period ended December 31, 1998, the Company recognized a net $4,002 loss on asset dispositions and provision for impairment.
SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION OMEGA HEALTHCARE INVESTORS, INC. December 31, 1999
(1) All of the real estate included in this schedule are being used in either the operation of long term care facilities (LTC), assisted living facilities (AL), rehabilitation hospital (RH) or medical office buildings (MOB) located in the states indicated. (2) Certain of the real estate indicated are security for Industrial Development Revenue bonds totaling $8,595,000 at December 31, 1999. (3) Certain of the real estate indicated are security for notes payable totaling $7,355,843 at December 31, 1999.
SCHEDULE IV MORTGAGE LOANS ON REAL ESTATE OMEGA HEALTHCARE INVESTORS, INC. December 31, 1999
(1) The mortgage loans included in this schedule represent first mortgages on facilities used in the delivery of long-term healthcare, such facilities are located in the states indicated.
(2) The aggregate cost for federal income tax purposes is equal to the carrying amount.
(4) At December 31, 1999 no amounts were delinquent. However, the Company accelerated the due date and initiated a foreclosure action against the mortgagor due to failure to fully comply with certain covenants. See Note 3 (Mortgage Notes Receivable) to the consolidated financial statements.
(5) A mortgagor with a mortgage on two facilities in Florida declared bankruptcy on July 8, 1999. The bankruptcy court has ordered that all amounts owed to the Company (including default rate interest, late charges, attorney's fees and court costs), bear interest at an annual rate of 10% and that the mortgagor make monthly payments of $40,000 on a timely basis. As of December 31, 1999, the mortgagor had complied with the court order.
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/ David A. Stover ------------------------ David A. Stover Chief Financial Officer Dated: January 24, 2000
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/ ESSEL W. BAILEY, JR. Chairman, President, January 24, 2000 - ------------------------- Chief Executive Officer Essel W. Bailey, Jr. and Director
PRINCIPAL FINANCIAL OFFICER and PRINCIPAL ACCOUNTING OFFICER
/s/ DAVID A. STOVER Vice President, Chief January 24, 2000 - ------------------- Financial Officer and David A. Stover Chief Accounting Officer
DIRECTORS
/s/ MARTHA A. DARLING Director January 24, 2000 - --------------------- Martha A. Darling
/s/ JAMES A. EDEN Director January 24, 2000 - ----------------- James A. Eden
/s/ THOMAS F. FRANKE Director January 24, 2000 - ------------------- Thomas F. Franke
/s/ HENRY H. GREER Director January 24, 2000 - ------------------ Henry H. Greer
/s/ Director January 24, 2000 - --------------------- Harold J. Kloosterman
/s/ BERNARD J. KORMAN Director January 24, 2000 - --------------------- Bernard J. Korman
/s/ EDWARD LOWENTHAL Director January 24, 2000 - -------------------- Edward Lowenthal
/s/ ROBERT L. PARKER Director January 24, 2000 - -------------------- Robert L. Parker
INDEX TO EXHIBITS
Exhibit Number Description ------ -----------
3.1 Articles of Incorporation, as amended (Incorporated by reference to the Registrant's Form 10-Q for the quarter ended March 31, 1995) 3.2 Articles of Amendment to the Company's Articles of Incorporation, as amended (Incorporated by reference to the Company's Form 10-Q for the quarterly period ended September 30, 1999) 3.3 Amended and Restated Bylaws, as amended April 20, 1999 (Incorporated by reference to Exhibit 3.1 to the Company's Form 8-K dated April 20, 1999) 4.1 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 Right Certificate) (Incorporated by reference to Exhibit 4 to the Company's Form 8-K dated April 20, 1999) 4.2 Form of Convertible Debenture (Incorporated by reference to Exhibit 4.2 to the Company's Form S-3 dated February 3, 1997) 4.3 Form of Indenture (Incorporated by reference to Exhibit 4.2 to the Company's Form S-3 dated February 3, 1997) 4.4 Indenture dated December 27, 1993 (Incorporated by reference to Exhibit 4.2 to the Company's Form S-3 dated December 29, 1993) 4.5 First Supplemental Indenture dated January 23, 1996 (Incorporated by reference to Exhibit 4 to the Company's Form 8-K dated January 19, 1996) 4.6 1993 Stock Option and Restricted Stock Plan, as amended and restated (Incorporated by reference to Exhibit A to the Company's Proxy Statement dated April 6, 1998) 4.7 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) 4.8 Articles Supplementary for Series B Preferred Stock (Incorporated by reference to Exhibit 4 to the Company's Form 8-K dated April 27, 1998) 4.9 Form of Supplemental Indenture No. 1 dated as of June 1, 1998 relating to the 6.95% Notes due 2002 (Incorporated by reference to Exhibit 4 to the Company's Form 8-K dated June 9, 1998) 10.1 1993 Deferred Compensation Plan, effective March 2, 1993 (Incorporated by reference to Exhibit 10.16 to the Company's Form 10-K for the year ended December 31, 1992) 10.2 Form of Note Exchange Agreement -- 10% Senior Notes due July 15, 2000 (Incorporated by reference to Exhibit 10.1 to the Company's Form 10-Q for the quarterly period ended September 30, 1995) 10.3 Form of Note Exchange Agreement-- 7.4% Senior Notes due July 15, 2000 (Incorporated by reference to Exhibit 10.2 to the Company's Form 10-Q for the quarterly period ended September 30, 1995) 10.4 Form of Note Exchange Agreement -- 7.4% Senior Notes due July 15, 2000 (Incorporated by reference to Exhibit 10.25 to the Company's Form 10-K for the year ended December 31, 1995) 10.5 Second Amended and Restated Loan Agreement by and among Omega Healthcare Investors, Inc., the banks signatory hereto and Fleet Bank, N.A., as agent for such banks, dated September 30, 1997 (Incorporated by reference to Exhibit 10 to the Company's Form 8-K dated November 10, 1997)
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10.6 First Amendment of Purchase Agreement, Master Lease Agreement, Facility Leases and Guaranty between Delta Investors I, LLC and Sun Healthcare Group, Inc. and Delta Investors II, LLC and Sun Healthcare Group, Inc. (Incorporated by reference to Exhibits 99.1 and 99.2 to the Company's Form 8-K dated April 30, 1998) 10.7 Form of Loan Agreement by and among Omega Healthcare Investors, Inc. and certain of its subsidiaries and the Provident Bank dated March 31, 1999 (Incorporated by reference to the Company's Form 10-Q for the quarterly period ended March 31, 1999) 10.8 Forbearance Agreement by and between Delta Investors I, LLC, Delta Investors II, LLC, Omega Healthcare Investors, Inc., OHI (Illinois), Inc. and Sun Healthcare Group, Inc. dated October 13, 1999* 11 Statement re: computation of per share earnings* 12 Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends* 21 Subsidiaries of the Registrant* 23 Consent of Ernst & Young LLP* 27 Financial Data Schedule*
- --------- * Exhibits which are filed herewith on the indicated sequentially numbered page.
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