<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement [_] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
Medical Income Properties 2B limited Partnership
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
--Enter Company Name Here--
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[_] No Filing Fee Required.
[_] $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
-------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
-------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
-------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
-------------------------------------------------------------------------
(5) Total fee paid:
-------------------------------------------------------------------------
[X] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
-------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
-------------------------------------------------------------------------
(3) Filing Party:
-------------------------------------------------------------------------
(4) Date Filed:
-------------------------------------------------------------------------
Notes:
<PAGE>
MEDICAL INCOME PROPERTIES 2B LIMITED PARTNERSHIP
7000 Central Parkway, Suite 850
Atlanta, Georgia 30328
March 12, 1997
Dear Limited Partner:
The enclosed materials solicit your consent to the sale of the operating
assets of Medical Income Properties 2B Limited Partnership (the "Partnership")
to Omega Healthcare Investors, Inc. ("Omega"), and the distribution of the
Partnership's remaining assets to the Limited Partners. If the transaction is
consummated, it is anticipated that the holders of Limited Partner Units of the
Partnership (the "Units") would receive approximately $921 for each Unit, of
which approximately $725 would be paid within 30 days of the closing date upon
surrender of Limited Partnership Certificates; up to $153 per Unit within one
year of the closing date, and up to $43 per Unit within 40 months of the closing
date in connection with the dissolution of the Partnership. Additional
information about the proposed transaction is set forth in the accompanying
Consent Solicitation Statement.
The managing general partner of the Partnership, QualiCorp Management, Inc.
(the "MGP"), has approved the Purchase and Sale Agreement by and among Omega,
the MGP, and the Partnership (the "Sale Agreement") subject to the consent of
the holders of a majority of the Units. The investment banking firm of The
Robinson-Humphrey Company, Inc. has reviewed the terms of the transaction for
the MGP and has opined that the consideration to be received by the Limited
Partners under the Sale Agreement is fair from a financial point of view. THE
---
MGP RECOMMENDS THAT YOU VOTE YOUR UNITS TO CONSENT TO THE SALE AND DISSOLUTION
- ------------------------------------------------------------------------------
OF THE PARTNERSHIP FOR THE REASONS SET FORTH UNDER "SALE OF PARTNERSHIP ASSETS -
- --------------------------------------------------------------------------------
BACKGROUND AND REASONS FOR THE SALE" IN THE ATTACHED CONSENT SOLICITATION
- -------------------------------------------------------------------------
STATEMENT.
- ---------
PLEASE SIGN, DATE AND MAIL THE ENCLOSED REPLY CARD IN THE ENCLOSED POSTAGE-
PAID ENVELOPE. A vote may be revoked or changed at any time prior to March 28,
1997, the date set for the tabulation of the vote on the proposed transaction,
by providing written notice to the MGP at 7000 Central Parkway, Suite 850,
Atlanta, Georgia 30328 or by executing a later-dated Reply Card.
The transaction cannot proceed without the consent of the holders of a
majority of the Units. Consequently, it is important that you submit your Reply
Card prior to the March 28, 1997 tabulation date. The sale of the Partnership's
operating assets pursuant to the Sale Agreement is also conditioned on the
closing of the sale of the operating assets of three other partnerships which
are also managed by the Managing General Partner or an affiliated company, RWB
Medical Income Properties 1 Limited Partnership, Medical Income Properties 2A
Limited Partnership and RWB Medical Properties Limited Partnership IV, each of
which has entered into substantially similar facility acquisition agreements
with Omega. Accordingly, if each of the other partnerships does not sell its
operating assets to Omega, or if Omega fails to purchase the operating assets of
each of the other partnerships, the Partnership's transaction will not close,
the distributions will not be made, and the Partnership will not be dissolved.
Please do not send your Limited Partnership certificates to the Partnership
or the Exchange Agent at this time. If the sale is approved and consummated,
you will receive further instructions regarding the procedure for exchanging the
certificates evidencing your Units for cash.
Very truly yours,
/s/ John M. DeBlois
----------------------------------------
John M. DeBlois
Chairman of the Board
QualiCorp Management, Inc.,
Managing General Partner
================================================================================
PLEASE COMPLETE, SIGN, DATE AND RETURN
THE ENCLOSED REPLY CARD TODAY.
<PAGE>
MEDICAL INCOME PROPERTIES 2B LIMITED PARTNERSHIP
SOLICITATION OF CONSENT OF LIMITED PARTNERS
THIS CONSENT SOLICITATION IS DATED MARCH 12, 1997
VOTING ON THE PROPOSAL DESCRIBED BELOW
WILL CLOSE ON MARCH 28, 1997
QualiCorp Management, Inc. (the "Managing General Partner"), the managing
general partner of Medical Income Properties 2B Limited Partnership (the
"Partnership"), hereby solicits the written consent of the limited partners of
the Partnership (the "Limited Partners"):
To sell substantially all of the assets of the Partnership to Omega
Healthcare Investors, Inc., a real estate investment trust ("Omega"), pursuant
to the terms and conditions of the Purchase and Sale Agreement by and among the
Partnership, the Managing General Partner and Omega (the "Sale Agreement") to
distribute the Partnership's net assets and to dissolve the Partnership, all as
set forth in the Consent Solicitation Statement.
It is anticipated that the total cash distributions for each Limited
Partner Unit of the Partnership (the "Units") resulting from the sale will be
approximately $921. The Board of Directors of the Managing General Partner has
fixed the date of first mailing of the Consent Solicitation Statement as the
record date for determining the Limited Partners having the right to receive
notice of, and to vote on, the proposal described herein, and only holders of
record of Units at the close of business on such date are entitled to notice of
and to vote on the proposal. A list of Limited Partners entitled to vote
pursuant to the Consent Solicitation will be available during ordinary business
hours at the Partnership's executive offices, 7000 Central Parkway, Suite 850,
Atlanta, Georgia 30328, for ten days prior to March 28, 1997, for examination by
any Limited Partner for purposes germane to the Consent Solicitation. In
addition, in accordance with the Partnership's Limited Partnership Agreement,
the Managing General Partner will mail to any Limited Partner a list of the
names and addresses of, and number of Units held by, the Limited Partners upon
payment of a reasonable fee as determined by the Managing General Partner and
receipt of a representation from the requesting Limited Partner that it will not
sell or disclose the list to anyone or use the list for commercial purposes
unrelated to the Partnership.
By Order of the Managing General Partner
/s/ John M. DeBlois
-------------------------------------------
John M. DeBlois
Chairman of the Board of Directors and Secretary
QualiCorp Management, Inc.
Managing General Partner
Atlanta, Georgia
March 12, 1997
================================================================================
THE MANAGING GENERAL PARTNER RECOMMENDS THAT YOU VOTE "YES" TO APPROVE THE SALE
- -------------------------------------------------------------------------------
AGREEMENT AND THE SUBSEQUENT TERMINATION OF THE PARTNERSHIP.
- ---------
YOUR VOTE IS IMPORTANT. PLEASE SIGN AND MAIL PROMPTLY THE ENCLOSED REPLY CARD
-----------------------------------------------------
WHICH IS BEING SOLICITED BY THE MANAGING GENERAL PARTNER OF THE PARTNERSHIP.
A RETURN ENVELOPE, WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES, IS
ENCLOSED FOR THAT PURPOSE.
<PAGE>
CONSENT SOLICITATION STATEMENT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
CONSENT SOLICITATION STATEMENT 2
Voting in the Consent Solicitation 2
Solicitation Expenses 2
PROPOSED SALE OF PARTNERSHIP ASSETS AND SUBSEQUENT
DISSOLUTION OF PARTNERSHIP 3
General Overview 3
Anticipated Distributions 4
Recommendation of the Managing General Partner 5
Background and Reasons for the Sale 5
Opinion of Financial Advisor 8
The Sale Agreement 10
The Other Sellers 16
Interest of Certain Persons in the Transactions 17
TAX SECTION OF CONSENT SOLICITATION 18
Summary Of Federal Income Tax Consequences 18
Taxation Of Partnerships In General 19
Basis Of Partnership Interests 19
Allocation Of Income, Gain, Loss And Deductions
Among The Partners 19
Sales Of Partnership Properties 20
Liquidation Of The Partnership 20
Alternative Minimum Tax 21
Conclusion 21
INFORMATION FOR LIMITED PARTNERS 23
Dissenters' Rights 23
Exchange of Limited Partnership Certificates 23
Operations Following the Sale and Effect of the Sale on
Limited Partners 23
THE PARTNERSHIP 24
Summary Historical Financial and Operating Data 24
Description of Business 24
Legal Proceedings 26
Security Ownership of Certain Beneficial Owners and Management 26
Comparative Per-Unit Data 27
Information Concerning the Units 27
Management's Discussion and Analysis of Financial
Condition and Results of Operations for the Years
Ended December 31, 1996, 1995, 1994 and 1993 27
Experts 28
INDEX TO FINANCIAL STATEMENTS 30
SALE AGREEMENT APPENDIX A
FAIRNESS OPINION APPENDIX B
</TABLE>
<PAGE>
CONSENT SOLICITATION STATEMENT
This Consent Solicitation Statement is being furnished by the Board of
Directors of QualiCorp Management, Inc., the managing general partner (the
"MGP") of Medical Income Properties 2B Limited Partnership, a Delaware limited
partnership (the "Partnership"), to limited partners of the Partnership (the
"Limited Partners") for the solicitation of written consents from the Limited
Partners in connection with the proposal to sell substantially all of the
operating assets of the Partnership (the "Sale") and dissolve the Partnership
following the distributions to the Limited Partners, all as described in greater
detail herein.
The Partnership provides a range of long-term care services in the one
nursing home it owns, Edwardsville Care Center East in Edwardsville, Illinois.
In addition, the Partnership provides long-term care services in three homes
owned and operated pursuant to joint ventures with Medical Income Properties 2A
Limited Partnership, Medical Park Convalescent Center in Decatur, Alabama
(45.45% interest owned by the Partnership, with the majority interest owned by
Medical Income Properties 2A Limited Partnership), Renaissance Place-Katy in
Katy, Texas (50% interest owned by the Partnership) and Renaissance Place-Humble
in Humble, Texas (50% interest owned by the Partnership). The principal
executive offices of the Partnership and the MGP are located at 7000 Central
Parkway, Suite 850, Atlanta, Georgia 30328, and their telephone number at such
address is (770) 668-1080. For most Limited Partners, a toll free telephone
number is available at (800) 226-0024.
This Consent Solicitation Statement is first being mailed to Limited
Partners on or about March 12, 1997.
VOTING IN THE CONSENT SOLICITATION
RECORD DATE; UNITS ENTITLED TO VOTE. Only holders of record of Partnership
units (the "Units") at the close of business on March 12, 1997 (the "Record
Date"), the date on which this Consent Solicitation Statement was first mailed
to Limited Partners, are entitled to notice of and to vote in the Consent
Solicitation. As of the Record Date, there were 10,907 Units outstanding and
entitled to vote in the Consent Solicitation. Each Unit is entitled to one
vote.
VOTE REQUIRED FOR APPROVAL. Under the Partnership's Amended and Restated
Articles of Limited Partnership and Delaware law, the affirmative consent of the
holders of a majority of the issued and outstanding Units must be received by
March 28, 1997, the date set by the MGP for tabulating the consents, or by such
later date as may be determined by the MGP for approval of the Sale Agreement.
Abstentions and broker non-votes will count as a vote AGAINST the proposal
described herein. As of the date of this Consent Solicitation Statement
QualiCorp, Inc., the parent corporation of the MGP ("QualiCorp"), held 44 Units,
which constitutes less than one half of one percent of the Units outstanding on
such date. QualiCorp will execute consents to the transaction with respect to
each of the Units owned by it.
REPLY CARDS. All properly executed Reply Cards returned to the MGP will be
voted in accordance with the specifications thereon, or, if no specifications
are made, will be voted FOR approval of the proposal described herein. Any
Reply Card may be revoked by a Limited Partner by delivering written notice to
the MGP stating that the Reply Card is revoked or by execution of a later-dated
Reply Card.
SOLICITATION EXPENSES
The Partnership will bear the cost of the solicitation of consents from the
Limited Partners, which costs are estimated by the MGP not to exceed
approximately $75,000, including printing costs, postage and legal, accounting
and investment banker fees. In addition to solicitation by mail, the directors,
officers and employees of the MGP and the Partnership and their representatives
may solicit consents from Limited Partners by telephone, fax or telegram or in
person. Such persons will not be additionally compensated, but will be
reimbursed for their reasonable, out-of-pocket expenses incurred in connection
with such solicitation. Arrangements will also be made with brokerage firms,
nominees, fiduciaries and other custodians for the forwarding of solicitation
materials to the beneficial owners of Units held of record by such entities, and
the Partnership will reimburse such persons for their
<PAGE>
reasonable out-of-pocket expenses in connection therewith. The Robinson-Humphrey
Company, Inc. ("Robinson-Humphrey") will assist in the solicitation of consents
by the MGP for a fee of $12,500, plus reimbursement of reasonable out-of-pocket
expenses, all of which will be paid by the Partnership. However, Robinson-
Humphrey will receive the $12,500 fee only if responses with respect to more
than 80% of the Units are received. See "Opinion of Financial Advisor."
PROPOSED SALE OF PARTNERSHIP ASSETS
AND SUBSEQUENT DISSOLUTION OF PARTNERSHIP
GENERAL OVERVIEW
The following is a brief summary of the material aspects of the Sale. This
summary is qualified in all respects by the Purchase and Sale Agreement
effective as of February 3, 1997 (the "Sale Agreement"), by and among the
Partnership, the MGP and Omega Healthcare Investors, Inc. ("Omega"), which is
attached as Appendix A to this Consent Solicitation Statement and is
----------
incorporated herein by this reference.
The Sale Agreement provides for the sale to Omega of the Partnership's
ownership interests in the Facilities, including the real property on which the
Facilities are located (the "Real Property") and the personal property and
intangible assets related to the operation of the Facilities. The Sale will not
include any assumption by Omega of the Partnership's debts or the payment of any
trade payables, and the Partnership will retain all of its cash or cash
equivalents and accounts receivable.
Omega is a real estate investment trust investing in and providing
financing to the long-term care industry. As of November 30, 1996, its
portfolio included 221 healthcare facilities with more than 20,000 licensed beds
located in 26 states. As a real estate investment trust, Omega is restricted by
law from operating the facilities that it owns. Therefore, Omega leases the
health care facilities owned by it to third party operators. Upon consummation
of the Sale, Omega intends to lease the Partnership's Facilities to one or more
independent third-party operators who have not yet been identified (the "New
Operator").
Consummation of the Sale is not dependent upon Omega's ability to locate
----------------
the New Operator. If the New Operator has not been identified as of the date of
closing (the "Closing Date") or, even if identified, if the New Operator has not
received applicable government permits, licenses or approvals to operate one or
more of the Facilities (the "Regulatory Approvals"), the Sale and the
distributions of funds to the Partnership will nonetheless occur as
contemplated. In this event, the Partnership would enter into a lease agreement
with Omega or, if identified, the New Operator, to lease such facilities for a
period which will not extend beyond December 31, 1997 (the "Interim Leasing
Agreement"). The Partnership's current manager, Atrium Living Centers, Inc.
("Atrium") has agreed to manage the Facilities for Omega pursuant to a
management agreement between the Partnership and Atrium with funding for
operations and management fees to be provided by Omega. See "Interim Operating
Arrangements."
Closing of the Sale Agreement is subject to a number of conditions,
including the closing of facility acquisition agreements between Omega and three
other partnerships managed by wholly-owned subsidiaries of QualiCorp (the "Other
Sellers" - the Partnership and the Other Sellers are sometimes collectively
referred to herein as the "Sellers"). For a description of the Other Sellers,
see "The Other Sellers." The Sellers own a total of 11 long-term care
facilities that are subject to purchase by Omega (collectively, along with the
Sale, the "Asset Sales"). Approval for the sale of the assets and subsequent
dissolution of RWB Medical Properties Limited Partnership IV has already been
obtained. Contemporaneously with this Consent Solicitation, the consents of the
holders of the remaining Other Sellers, RWB Medical Income Properties 1 Limited
Partnership and Medical Income Properties 2A Limited Partnership, are being
solicited for the approval of the respective Asset Sales and the eventual
dissolution of each such entity. Because consummation of each Asset Sale is
contingent upon consummation of the others, if the limited partners of RWB
Medical Income Properties 1 Limited Partnership and Medical Income Properties 2A
Limited Partnership do not approve the sale of the assets of those entities, or
if each Asset Sale is not otherwise consummated, the Sale will not be
consummated, the distributions described herein will
<PAGE>
not be made and the Partnership will not be terminated pursuant to this Consent
Solicitation, regardless of whether the Limited Partners approve the Proposal
described herein.
ANTICIPATED DISTRIBUTIONS
Those Limited Partners who purchased their Units in the initial public
offering and have held them since that time have already received periodic
distributions of $277.63 per Unit.
Based on the MGP's analysis of the Sale Agreement and of the assets to be
retained by the Partnership following the Sale, taking into account all
liabilities or obligations which must be paid by the Partnership, together with
an analysis of the obligations of the Partnership in the Sale Agreement to
indemnify Omega against certain losses following the Sale, the MGP believes that
the total sales consideration of $12,377,275 will be reduced by accrued expenses
of $325,207 for vacation pay, sick pay, taxes and trust fund obligations as
provided in the Sale Agreement, by $1,741,052 of closing costs, brokerage fees,
third party settlements and other obligations, and by $1,898,867 for the payment
of debt, resulting in estimated net proceeds from the sale of $8,412,149. These
net proceeds will be augmented by estimated current assets in excess of current
liabilities of $1,629,269 which will increase the total amount available for
distribution to $10,041,418 which will be distributed to the Limited Partners in
three installments as follows:
1. FIRST INSTALLMENT. All Limited Partners will receive a check in the
amount of $725 per Unit, payable within 30 business days of the
closing and surrender of Partnership certificates (an anticipated
aggregate distribution to all of the Limited Partners of $7,909,761);
2. SECOND INSTALLMENT. A second distribution of approximately $153 per
Unit is anticipated to be made within one year of the closing. This
distribution is primarily attributable to the collection of accounts
receivable in the period subsequent to the closing less the payment of
accounts payable and other liabilities (an anticipated aggregate
distribution to all of the Limited Partners of $1,668,632); and
3. FINAL INSTALLMENT. A final distribution of up to $43 per Unit is
anticipated to be made following the expiration of the Partnership's
representations and warranties to Omega and any additional period
required to finally resolve any claims for indemnification against the
Partnership brought prior to the termination of such period (an
anticipated aggregate distribution to all of the Limited Partners of
$463,025). See "The Sale Agreement - Indemnification and Joint
Account." The MGP anticipates that the final distribution will be
made approximately 40 months following the closing.
The amount of the First Installment is based on the amount of consideration
to be received for certain of the Partnership's assets and the Partnership's
cash reserves as of such date, less the payment of Partnership indebtedness,
expenses associated with the sale, and estimated liabilities to third-parties,
and less the amount placed into a joint signature bank account (hereinafter
referred to as the "Joint Account") with NationsBank or another FDIC insured
bank with offices in Atlanta, Georgia selected by the Partnership and reasonably
acceptable to Omega (the "Bank") to be held and disbursed in accordance with an
agreement (the "Letter Agreement") for the purposes of securing the indemnity
and certain other obligations of the Partnership under the Sale Agreement that
will survive the Closing. The amount of indebtedness, expenses and obligations
are estimated by the Partnership to be Three Million Nine Hundred Sixty Five
Thousand One Hundred Twenty Six Dollars ($3,965,126). The amount to be
deposited in the Joint Account will be Three Hundred Ninety Five Thousand Four
Hundred Fifty Dollars ($395,450).
The Second Installment represents the MGP's good faith estimate of the
amount of accounts receivable that will be collected by the Partnership, offset
by the anticipated amount of remaining accounts payable and other liabilities of
the Partnership. Although the amount and date of payment of the Second
Installment is not determinable, the MGP believes, based on an analysis of
historical collection rates, that it is probable that the Second Installment
will be paid in the amount and at the time contemplated herein. The amount of
the Second
<PAGE>
Installment may also be affected by the amount of claims for indemnification, if
any, made by Omega prior to the estimated date of payment of the Second
Installment.
Following the expiration of the representations and warranties of the
Partnership and the resolution of any claims for indemnity against the
Partnership made prior to such expiration, the Joint Account will be terminated
and all funds remaining therein, together with any other funds retained by the
Partnership, less administrative expenses, will be distributed to the Limited
Partners as the Final Installment based on the terms of the Partnership
Agreement. There can be no exact determination of the amount of the Final
Installment, if any, nor of the date on which the Final Installment will be
made, although the MGP believes, based on all the facts and circumstances known
to the MGP as of the time of this Consent Solicitation Statement, that all or
substantially all of the estimated Final Installment will be paid within 40
months of the Effective Time (as hereinafter defined). The estimated 40-month
period relates primarily to statutory periods within which representatives of
the Medicare and Medicaid programs are permitted to make assessments against the
Partnership for funds received under those programs.
The MGP will provide each Limited Partner with updated summaries of the
status of the anticipated payment of the Second Installment and the Final
Installment at least annually. See "Operations Following the Sale and Effect of
the Sale on Limited Partners."
RECOMMENDATION OF THE MANAGING GENERAL PARTNER
For the reasons described below, the MGP, acting pursuant to the unanimous
approval of its directors, has approved the Sale Agreement, the distribution of
the remaining net assets in cash, and the subsequent dissolution of the
Partnership and recommends that the Limited Partners consent to the Sale
Agreement, the distributions, and the subsequent dissolution of the Partnership.
As described in further detail below, the MGP believes that the terms of the
Sale are fair and reasonable, and are in the best interests of the Partnership
and its Limited Partners.
BACKGROUND AND REASONS FOR THE SALE
BACKGROUND. The Partnership was organized in 1987. From its inception,
the business plan of the Partnership was to sell or finance its properties
within five to ten years after the acquisition of such properties, to distribute
the proceeds of such sales or financings to the Limited Partners and to
terminate upon the sale and liquidation of all of its properties and
investments. The MGP has continually evaluated the possible sale of some or all
of the Partnership's assets in the ordinary course of business.
Recently, legislative initiatives have been proposed that, if passed, would
effect significant changes in the national and state health care systems. Among
the proposals under consideration are various restructurings or cut-backs in the
Medicare and Medicaid programs. Although it is not certain which, if any, of
such proposals will be adopted, or, if adopted, what effect, if any, such
proposals would have on the business of the Partnership, the MGP believes that
certain of the initiatives proposed, if adopted, could adversely affect the
business of the Partnership. In addition, various cost containment measures
adopted by the government and private pay sources have limited, or in the future
could limit, the scope and amount of reimbursable health care expenses and
increases in reimbursement rates for medical services, including certain of the
expenses incurred or services offered by the Partnership.
In fact, cost containment mechanisms both by governmental and third-party
payors have already begun to restrict the scope and amount of reimbursable
health care expenses. As a result of the federal government's recent decision
to increase the minimum wage to $4.75 per hour in 1996 and $5.15 per hour in
1997, the Partnership has been required to increase the hourly wage of many
employees previously compensated at less than the new minimum wage in order to
remain competitive in the labor market. The Partnership has also experienced a
"ripple effect" in wages for some employees who had been paid slightly more than
the new minimum wage. Accordingly, the increase in the minimum wage and
consequent increases in other hourly wages have adversely impacted the
Partnership, and will in the future continue to adversely impact the
Partnership, unless Medicare and Medicaid reimbursement rates are increased to
cover such increases. To date, the State of Alabama has increased its
<PAGE>
reimbursement rates to reimburse actual expenses due to the 1996 minimum wage
increase to $4.75. Although the States of Illinois and Texas have recently
increased their reimbursement rates, these increases were not related to, and do
not reimburse providers for, the 1996 minimum wage increase. None of the states
are committed to reimbursing nursing home expenses due to the 1997 increases in
the minimum wage to $5.15 per hour, and there is considerable doubt as to
whether such increases will be forthcoming.
In light of the uncertain future of the health care system and the effect
of cost containment measures and wage increases on the business of the
Partnership, as outlined above, the MGP has become increasingly concerned that,
as federal and state governments continue to attempt to control escalating
health care costs, additional measures could be adopted that would impair the
profitability of the Partnership. In order to remain competitive in the current
environment, health care providers larger than the Partnership have begun to
diversify to provide therapy services, pharmaceuticals, and medical and other
supplies. The Partnership currently contracts with third parties for the
provision of such services. The MGP believes that in order for the Partnership
to remain profitable, it would have to provide such services and supplies itself
without continued reliance upon third-party vendors. However, even if the
Partnership had the ability and resources to support such diversification, any
effort to develop new lines of business to preserve and enhance the
Partnership's profitability in the long-term would likely have short-term start-
up costs and debt service requirements which would adversely affect the
profitability of the Partnership and distributions to its investors in the short
to intermediate term. In addition, even if successfully developed, there is no
assurance that the Partnership would be able to operate such new lines of
business profitably.
In response to the concerns outlined above, the MGP determined to conduct a
valuation of the Partnership's assets in early 1996. At the same time, based on
similar concerns, the managing general partners of the Other Sellers determined
to seek a valuation of those entities' assets. Commencing in January 1996,
representatives of the Partnership and the Other Sellers had discussions with
various investment bankers concerning a potential valuation for Units. In
February, 1996, Robinson-Humphrey was retained by the Sellers to value the
various Sellers' assets and advise the Sellers as to the possible sale of their
assets. As a result of the valuation and the MGP's concerns about the
Partnership's capacity to continue to compete effectively in the rapidly-
changing health care environment, the MGP asked Robinson-Humphrey to seek
potential purchasers of the Partnership's assets. In the first quarterly report
to the Limited Partners in 1996, the MGP informed the Limited Partners that an
investment banking firm had been retained to conduct such a valuation and advise
the Partnership of a possible sale of assets. By letter dated June 10, 1996, to
the Limited Partners, the MGP informed the Limited Partners that it had
determined to seek a buyer of the Partnership's assets based on the Robinson-
Humphrey valuation. The MGP based its decision to seek a purchaser for the
Partnership's assets on its belief that the Partnership did not have adequate
resources to continue to grow the business of the Partnership in the manner that
would be necessary to maintain its level of profitability in the changing
competitive health care environment.
Robinson-Humphrey advised the Sellers that they were likely to obtain a
higher price from a large company with a significant presence in the nursing
home industry, but that such a large company would likely not be interested in
acquiring individual assets, and that the larger the asset group offered for
sale, the higher the price per facility was likely to be. Accordingly,
Robinson-Humphrey solicited indications from those companies that it believed
would be interested in purchasing all of the assets of the Sellers. Pursuant to
Robinson-Humphrey's solicitation, eighteen potential purchasers requested
additional information regarding the proposed sale. Of the eighteen potential
purchasers, five submitted written indications of interest in acquiring the
assets. Starting in April 1996, Robinson-Humphrey had various discussions with
representatives of each of the parties, and ultimately, two initial proposals
for the acquisition of all of the Sellers' operating assets were received in a
price range deemed appropriate by Robinson-Humphrey. However, the party making
the lower of these initial proposals also introduced unacceptable financing
conditions. The Partnership entered into negotiations with the party making the
better proposal, and entered into a letter of intent with that party. Later,
that party withdrew from negotiations after learning of a threatened change in
Alabama's Medicaid reimbursement policy that would have affected all nursing
homes in Alabama.
By a letter dated October 22, 1996, the Partnership informed Limited
Partners that the aforementioned negotiations and letter of intent had been
abandoned, but that the Partnership would engage Robinson-Humphrey to renew its
efforts to sell the assets of the Partnership in the near future. During
November 1996, Robinson-Humphrey again solicited interest in the purchase of the
Partnership's assets, and received four additional written
<PAGE>
expressions of interest in further discussions. Two proposals were made, but the
Omega proposal was deemed to be the most serious offer capable of being accepted
and to be in the best interest of the Partnership.
Omega is one of the largest healthcare real estate investment trusts in the
United States. As a real estate investment trust, Omega cannot operate nursing
homes owned by it and, as a result, Omega typically leases its properties to
third-party operators. Omega's lessees include some of the largest long-term
care providers in the United States. Virtually all of Omega's lessees have
substantially more resources available to operate the Partnership assets more
competitively than the Partnership.
Based on the terms of the Omega proposal, including the absence of
contingencies similar to those demanded by the other potential purchaser, the
managing general partners of the Sellers commenced discussions with Omega in
December 1996 concerning the sale of substantially all of the assets of the
Sellers, including the Partnership. In mid-December, following the MGP's
consultation with Robinson-Humphrey regarding an exclusive negotiation period
with Omega, the MGP and Omega agreed to negotiate exclusively with one another
for a thirty (30) day period. In December, 1996 the Board of Directors of the
MGP met to approve the execution of a term sheet for the exclusive negotiation
period. Subsequently, the MGP negotiated the Sale Agreement and conducted
certain financial due diligence investigations with respect to Omega.
Negotiations were completed and the Sale Agreement was executed effective on
February 3, 1997. The execution of the Sale Agreement was announced to the
Limited Partners by letter dated February 6, 1997. Robinson-Humphrey acted as
financial advisor to the Partnership in connection with the negotiation,
approval by the Board of Directors and execution by the MGP on behalf of the
Partnership of the Sale Agreement. No independent representative of the Limited
Partners of the Partnership was retained by the Partnership or the MGP to
participate in the negotiation of the terms of the Sale Agreement with Omega.
The terms of the Sale are the result of arms-length negotiations between
the MGP and Omega and were approved by the Board of Directors of the MGP at a
meeting held on January 31, 1997. At the meeting, the Board received
presentations concerning, and reviewed carefully the terms and conditions of,
the proposed Sale with Partnership management with legal counsel and the
Partnership's financial advisor, Robinson-Humphrey. As part of the meeting, the
Board of Directors considered, among other things, the historical Limited
Partnership trading prices and trading information for the Units and information
presented by Robinson-Humphrey, including an analysis of other comparable
companies being sold in the nursing home industry, an analysis of comparable
publicly-traded nursing home companies, and an asset analysis. The MGP and
Robinson-Humphrey also discussed the Partnership's results of operations for
1995 and 1996, as well as its growth potential for succeeding years.
REASONS FOR ENTERING INTO THE SALE AGREEMENT WITH OMEGA. In approving the
Sale Agreement and recommending such approval to the Limited Partners, the MGP,
acting through its Board of Directors, considered the following principal
factors in addition to the factors listed above:
1. The sale consideration to be received by the Limited Partners of $725
cash payable within 30 days of Closing, plus an estimated $196 payable
over time in the second and third installments in relationship to the
historical trading ranges for Units and that, as a result of the Sale,
the Limited Partners would receive immediate cash in an amount equal
to more than two times the average prior trading value for the Units
(excluding trades made after the MGP disclosed its efforts to sell all
Partnership assets) and would be eligible to receive additional
distributions in the future following the collection of accounts
receivable and expiration of the Partnership's representations and
warranties;
2. Financial and other information concerning the financial strength of
Omega;
3. The terms, other than the financial terms, of the proposed Sale;
4. The likelihood of the Sale being approved by appropriate regulatory
authorities;
5. The relative strengths of each entity;
6. The difficulties faced by the Partnership in taking advantage of new
opportunities in the health care industry if the Sale were not
consummated;
<PAGE>
7. Industry conditions generally, including the ongoing trend of
consolidations in health care in response to health care reform
movements; and
8. The opinion of Robinson-Humphrey that the consideration to be received
by the Limited Partners pursuant to the Sale Agreement is fair to the
Limited Partners from a financial point of view.
OPINION OF FINANCIAL ADVISOR
BACKGROUND. The managing general partners of the Sellers engaged Robinson-
Humphrey to consult with and advise them concerning the sale of assets of the
Sellers, to solicit offers for the sale of such assets, to assist in the
negotiation of such sale, and to render fairness opinions at or about the date
of the various facility acquisition agreements to each of the Sellers with
respect to the fairness, from a financial point of view, to the Limited Partners
of such Sellers regarding the consideration to be received pursuant to the Asset
Sales by each Seller.
The terms of Robinson-Humphrey's engagement were set forth in a letter
agreement dated February 6, 1996 (the "Robinson-Humphrey Engagement Letter").
Under the terms of the Robinson-Humphrey Engagement Letter, the Sellers paid
Robinson-Humphrey a retainer of $50,000 upon engagement plus a fee of $15,000
upon renewal (the "Retainer") and fees aggregating $100,000 upon delivery of
fairness opinions to the various Sellers (the "Opinion Fees"). The Opinion Fees
are payable by the Sellers even if the Limited Partners reject the Sale or the
Sale does not occur for any other reason. The Sellers also agreed to pay
Robinson-Humphrey a proxy solicitation fee of $12,500 (the "Proxy Solicitation
Fees") each upon the receipt of responses of greater than 80% of the outstanding
limited partner units of the Sellers. See "Solicitation Expenses." If the
Asset Sales occur either during the term of Robinson-Humphrey's engagement or
within six months of the termination of such engagement to a party of which
Robinson-Humphrey notified the Sellers, then Robinson-Humphrey will also receive
a success fee (the "Success Fee") equal to 1.5% of the first $50 million in
total consideration, 2.5% of any additional consideration up to $60 million and
3% of any additional consideration in excess of $60 million. If the Asset Sales
are consummated and the Success Fee is paid by the Sellers, then the amount
previously paid in connection with the Retainer, Opinion Fees and Proxy Fees
will be deducted from the Success Fee. The Robinson-Humphrey Engagement Letter
also provides that the Sellers will reimburse Robinson-Humphrey for its
reasonable out-of-pocket expenses up to $15,000 and will indemnify Robinson-
Humphrey against certain liabilities and expenses, including certain liabilities
under the Federal Securities laws. The Partnership's share of the Robinson-
Humphrey Success Fee and expenses is based on its pro rata share of the gross
purchase price and is estimated to be approximately $211,600 in the event all of
the fees are earned and expenses of $15,000 are incurred.
Robinson-Humphrey is a recognized investment banking firm and, as a
customary part of its investment banking activities, is regularly engaged in the
valuation of businesses and their securities in connection with acquisition and
mergers, negotiated underwritings, private placements, and valuations for
corporate and other purposes. The MGP selected Robinson-Humphrey primarily
because of its expertise and reputation, and secondarily because of its
availability to complete the assignment on a timely basis. Prior to its
engagement pursuant to the Robinson-Humphrey Engagement Letter, Robinson-
Humphrey had never performed services for any of the Sellers or any of their
affiliated companies.
THE OPINION. On February 12, 1997, Robinson-Humphrey delivered its
Fairness Opinion to the Board of Directors of the MGP, to the effect that, as of
such date, the consideration to be received by the Limited Partners as set forth
in the Sale Agreement was fair to such Limited Partners from a financial point
of view (the "Fairness Opinion"). No limitations were imposed by the MGP upon
Robinson-Humphrey with respect to the investigations made or the procedures
followed by it in rendering its opinions or on the conclusions it should reach,
nor did Robinson-Humphrey determine or recommend the amount of consideration to
be paid pursuant to the Sale.
THE FAIRNESS OPINION OF ROBINSON-HUMPHREY, DATED FEBRUARY 12, 1997, WHICH
SETS FORTH ASSUMPTIONS MADE AND MATTERS CONSIDERED, APPEARS AS APPENDIX B TO
----------
THIS CONSENT SOLICITATION STATEMENT. THE LIMITED PARTNERS ARE URGED TO READ THE
FAIRNESS OPINION IN ITS ENTIRETY. ROBINSON-HUMPHREY'S FAIRNESS OPINION WAS
DIRECTED ONLY TO THE FAIRNESS, FROM A FINANCIAL POINT OF VIEW, OF THE
CONSIDERATION TO BE RECEIVED BY THE LIMITED PARTNERS OF THE PARTNERSHIP.
ROBINSON-HUMPHREY'S FAIRNESS OPINION WAS DELIVERED FOR THE INFORMATION OF THE
PARTNERSHIP AND DOES NOT CONSTITUTE A RECOMMENDATION AS TO HOW ANY LIMITED
PARTNER
<PAGE>
SHOULD VOTE ON THE SALE AND SUBSEQUENT DISSOLUTION OF THE PARTNERSHIP. THIS
SUMMARY OF THE FAIRNESS OPINION OF ROBINSON-HUMPHREY IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE OPINION.
In rendering its Fairness Opinion, Robinson-Humphrey reviewed and analyzed:
(1) the Sale Agreement; (2) financial and operating information with respect to
the business, operations and prospects of the Partnership furnished to Robinson-
Humphrey by the MGP; (3) a comparison of the historical financial results and
present financial condition of the Partnership with those of other companies
that Robinson-Humphrey deemed relevant; (4) an analysis of financial and stock
market information of selected publicly-traded companies that Robinson-Humphrey
deemed comparable to the Partnership; and (5) a comparison of the financial
terms of the Sale with the financial terms of certain other recent transactions
that Robinson-Humphrey deemed relevant. In addition, Robinson-Humphrey held
discussions with the management of the Partnership and of the MGP concerning the
business and operations, assets, present condition and future prospects of the
Partnership and undertook such other studies, analyses and investigations as it
deemed appropriate but did not make an independent appraisal of the assets of
the Partnership.
In rendering its Fairness Opinion, Robinson-Humphrey assumed and relied
upon, without independent verification, the accuracy and completeness of the
financial and other information furnished by the Partnership and MGP. Robinson-
Humphrey further relied upon the assurances of the management of the Partnership
and MGP that they were not aware of any facts that would make such information
inaccurate or misleading. Robinson-Humphrey did not conduct a physical
inspection of all the properties and facilities of each of the partnerships.
Robinson-Humphrey's Fairness Opinion was based upon market, economic and other
conditions as they existed, and which were capable of being evaluated, as of the
date of the Fairness Opinion.
In connection with the preparation of the Fairness Opinion, Robinson-
Humphrey performed certain financial and comparative analyses, including those
described below. The summary set forth below includes all of the financial
analyses used by Robinson-Humphrey and deemed by it to be material but does not
purport to be a complete description of the analyses performed by Robinson-
Humphrey in arriving at its opinion. The preparation of a fairness opinion
involves various determinations as to the most appropriate and relevant methods
of financial analysis and the application of those methods to the particular
circumstances, and therefore, such an opinion is not readily susceptible to
summary description. Furthermore, in arriving at its Fairness Opinion,
Robinson-Humphrey did not attribute any particular weight to any analysis or
factor considered by it, but rather made qualitative judgments as to the
significance and relevance of each analysis and factor. Accordingly, Robinson-
Humphrey believes its analyses must be considered as a whole and that
considering any portions of such analyses without considering all analyses and
factors could create a misleading or incomplete view of the process underlying
the opinion. In addition, analyses relating to the value of businesses do not
purport to be appraisals or to reflect the price at which businesses may
actually be sold. No public company used as a comparison is identical to the
Partnership. An analysis of the results of such a comparison is not
mathematical; rather, it involves complex considerations and judgments
concerning differences in financial and operating characteristics of the
comparable companies and other factors that could affect the value of the
companies to which the Partnership is being compared.
The generally accepted financial analyses Robinson-Humphrey used in
reaching its opinions included (1) comparisons with selected publicly-traded
companies, which consisted of reviewing market statistics and financial and
operating information with respect to selected companies considered to have
businesses similar to that of the Partnership; (2) analysis of other selected
transactions, which consisted of reviewing operating statistics and purchase
price information with respect to selected acquisitions of assets or businesses
similar to those of the Partnership; and (3) analysis of asset values based on
the appraised value of the Partnership's Facilities and the net tangible asset
value of the Partnership. The material portions of these analyses (which are
all of the material valuation methodologies performed by Robinson-Humphrey) as
represented in its Fairness Opinion are summarized below.
COMPARISON WITH SELECTED COMPANIES. Robinson-Humphrey compared selected
financial data and market information for the Partnership to the corresponding
financial data and market information for 18 selected public companies in the
health care industry (the "Public Health Care Companies"). Robinson-Humphrey
used this analysis to derive implied equity values (i.e., the value of the total
equity of the Partnership implied by multiplying certain ratios derived from
selected companies other than the Partnership by the Partnership's own
<PAGE>
financial data) for the Partnership. This comparison showed, among other things,
that based on closing stock prices on February 10, 1997, (1) the average ratio
of price to earnings for the last 12 months was 17.8x for the Public Health Care
Companies; (2) the average ratio of price to projected calendar 1996 earnings
was 16.6x for the Public Health Care Companies; (3) the average ratio of market
value to book value was 2.1x for the Public Health Care Companies; (4) the
average ratio of firm value (firm value equals equity value plus total debt less
cash) to revenues for the last 12 months was 1.12x for the Public Health Care
Companies; (5) the average ratio of firm value to earnings before interest and
taxes ("EBIT") for the last 12 months was 11.8x for the Public Health Care
Companies; and (6) the average ratio of firm value to earnings before interest,
taxes, depreciation and amortization ("EBITDA") for the last 12 months was 8.4x
for the Public Health Care Companies. In addition to applying these multiples
directly, Robinson-Humphrey took into consideration the Partnership's smaller
size relative to the comparable companies and applied a discount (the "Small
Company Discount") to these multiples. Based upon the above multiples, Robinson-
Humphrey calculated an average implied equity value for the Partnership of
approximately $8,500,000 based on a direct comparison, and $6,400,000, assuming
a Small Company Discount of 25%.
ANALYSIS OF SELECTED TRANSACTIONS. Robinson-Humphrey analyzed 11
acquisitions and mergers occurring since 1993 involving health care companies,
using publicly available information. In each such acquisition, Robinson-
Humphrey calculated the implied equity value as a multiple of earnings for the
last 12 months, as well as the implied firm value as a multiple of revenues for
the last 12 months, EBIT for the last 12 months, and EBITDA for the last 12
months. The resulting average multiples were as follows: earnings, 19.9x;
revenues, 1.22x; EBIT, 14.1x; and EBITDA, 10.5x. Based upon the multiples for
these transactions, Robinson-Humphrey calculated an average implied equity value
for the Partnership of approximately $10,700,000 based on a direct comparison,
and $8,000,000 assuming a Small Company Discount of 25%.
ASSET VALUATION ANALYSIS. Robinson-Humphrey used two techniques to analyze
the Partnership's asset value: (i) appraised value of the Partnership's
Facilities and (ii) net tangible asset value of the Partnership at September 30,
1996. The appraised value of the Facilities as of December 31, 1996, was
approximately $9,500,000, and the net tangible asset value of the Partnership at
December 31, 1996, was approximately $8,900,000.
THE SALE AGREEMENT
GENERAL. The Sale Agreement provides that, upon satisfaction or waiver of
conditions to the Sale, the Partnership will sell, and Omega will purchase,
substantially all of the operating assets of the Partnership, including the
Facilities, the Real Property, all buildings and improvements thereon, and the
personal and intangible property used in connection with the Facilities,
including equipment, vehicles, furniture, fixtures, inventories of food and
supplies, books, records, licenses, franchises, permits and trade names. As
part of the Sale, Omega will assume certain contract obligations of the
Partnership related to the operation of the Facilities, but Omega will not
assume any debt or trade payables. The Partnership will retain all cash and
cash equivalents and accounts receivable of the Partnership as of the Effective
Time. The Sale Agreement is reproduced in its entirety as Appendix A to this
----------
Consent Solicitation Statement, and all references in this Consent Solicitation
Statement to the Sale Agreement are qualified by reference thereto. All
exhibits to the Sale Agreement have been omitted from Appendix A, but may be
----------
obtained from the MGP upon request.
EFFECTIVE TIME OF THE SALE. The Sale will become effective (the "Effective
Time") at the closing of the transaction, which will occur as promptly as
practical after the requisite Limited Partner approval has been obtained and all
the conditions to the closing of the Sale have been satisfied or waived,
including the consummation of the sale of the operating assets of the Other
Sellers to Omega. It is currently anticipated that all conditions, other than
the closing of the Asset Sales, will have been satisfied prior to the date on
which the vote is taken. The Effective Time is anticipated to occur on or
before April 30, 1997.
CONSIDERATION. At the Effective Time, Omega will pay the Partnership,
subject to certain adjustments based on certain accrued vacation and sick pay
for employees at the Facilities, as outlined in the Sales Agreement, Twelve
Million Three Hundred Seventy Seven Thousand Two Hundred Seventy Five Dollars
($12,377,275) for the Partnership's operating assets. The Partnership will
either use a portion of the proceeds to pay Partnership
<PAGE>
indebtedness or the Partnership will direct Omega to use a portion of the sale
price to pay Partnership indebtedness which encumbers Partnership properties.
The Partnership has received an opinion from Robinson-Humphrey that such
consideration is fair to the Limited Partners from a financial perspective. See
"Opinion of Financial Advisor."
REPRESENTATIONS AND WARRANTIES. The Sale Agreement contains various
representations and warranties of the Partnership and the MGP relating to, among
other things: (a) organization and similar matters; (b) the authorization,
execution, delivery, performance and enforceability of the Sale Agreement; (c)
financial statements; (d) the absence of certain material adverse changes; (e)
required licenses, permits and authorizations; (f) compliance with certain laws;
(g) resident relations and services; (h) books and records; (i) real property;
(j) the absence of certain union-related activity; (k) tax matters; (l)
environmental matters; (m) litigation matters; (n) the absence of certain kinds
of illegal payments; (o) facilities; (p) inventories; (q) admission agreements;
(r) patient rosters; (s) contracts; (t) insurance; (u) employee fringe benefits;
and (v) employee benefit plans and matters relating to the Employment Retirement
Income Security Act of 1974, as amended.
OPERATIONS PENDING CLOSING. Pursuant to the Sale Agreement, the
Partnership has agreed that, during the period following the date of the Sale
Agreement and prior to the Effective Time, and, if necessary, during the time of
the Interim Operating Agreement, they will:
(a) Furnish Omega with certain documents, information and updates of
certain information concerning the Real Property, the Facilities, and
the operation of the Facilities, including title insurance, security
interests, surveys, environmental matters, government authorizations,
financial statements, litigation, and certain other matters;
(b) Conduct the business and operations of the Facilities in the ordinary
course with due regard for the proper maintenance and repair of the
Facilities, the timely filing of tax returns and Medicare and Medicaid
cost reports for the Facilities, and the payment of accounts payable
related to the Facilities;
(c) Take all reasonable action to preserve the goodwill and occupancy
levels of the Facilities;
(d) Except in the ordinary course of business, make no material changes in
the Facilities or the operation thereof;
(e) Use its reasonable efforts to retain the goodwill of employees of the
Facilities, and promptly notify Omega of any known union organizing or
contract negotiations at any of the Facilities;
(f) Maintain insurance upon the Facilities;
(g) Except in the ordinary course of business, maintain compensation
levels for employees without increases;
(h) Not enter into written employment agreements;
(i) Except in the ordinary course of business, not enter into certain
types of commitments without Omega's approval;
(j) Allow Omega, the New Operator and their representatives, upon
appropriate notice, access to the Facilities and the Partnership's
books and records during normal business hours for the purposes of
performing certain audits, investigations and inspections, all to be
performed with a representative of the Partnership present;
(k) Take all reasonable actions to maintain substantial compliance with
all laws applicable to the Facilities; and
(l) Use its best efforts to cause all conditions to the consummation of
the Sale to be satisfied.
The Partnership has also agreed that after the Closing Date it will:
(a) At no cost to the Partnership, reasonably cooperate with Omega in the
event Omega is required to include audited financial statements with
respect to the Facilities in its filings with the SEC;
<PAGE>
(b) Take any and all reasonably necessary actions to complete the transfer
of the Partnership's assets to Omega as provided in the Sale
Agreement;
(c) Retain funds in an amount sufficient to satisfy its remaining
financial obligations including its obligations under the
indemnification provisions of the Sale Agreement; and
(d) Timely file annual cost reports for the Facilities, together with
appropriate supporting documentation, with Medicare, Medicaid and any
other third party payor.
Omega has agreed that during the period following the date of the Sale
Agreement and prior to the Effective Time, it will:
(a) Provide the Partnership and the MGP timely notice of, and permit the
cure of, any conditions or circumstances unsatisfactory to it that
could prevent or inhibit the Sale from being consummated;
(b) Proceed with all due diligence to conduct such investigations with
respect to the Partnership's assets as it deems reasonably necessary;
(c) Obtain all licenses, permits, consents and approvals required or
desirable in order for it to consummate the Sale, or, where
applicable, obtain assurances reasonably satisfactory to it that the
same will be received in a timely manner;
(d) Advise the Partnership and the MGP which, if any, of the Facilities
the New Operator will assume responsibility for operating at the
Effective Time; and
(e) Use its best efforts to cure any circumstances within its control that
would prevent or inhibit the Sale from being timely consummated;
Omega has further agreed that after the Closing Date it will:
(a) Provide the Partnership, or cause the New Operator to provide the
Partnership, with access during normal business hours to the
Facilities and any books or records which it needs in connection with
tax and other government filings, litigation and certain other
administrative matters;
(b) Take such other reasonable steps requested by the Partnership
necessary to complete and consummate the Sale Agreement;
(c) Ensure the maintenance of patient records for three (3) years after
the Closing Date and, upon proper notice, provide the Partnership with
access thereto; and
(d) For two (2) months following the Closing Date, cause the New Operator
to use commercially reasonable efforts to collect accounts receivable
for the Partnership for the period prior to and including the Closing
Date.
AGREEMENT NOT TO SOLICIT ADDITIONAL OFFERS. The MGP and the Partnership
have agreed that from the date of the Sale Agreement until the earlier of the
Effective Time or the termination of the Sale Agreement, neither will directly
or indirectly initiate, solicit, or take any action to facilitate any
alternative acquisition proposal involving the Partnership or its assets.
CONDITIONS TO CLOSING OF THE SALE. The respective obligations of the
Partnership, the MGP and Omega to consummate the Sale are subject to a number of
conditions, including among others:
(a) Approval of the Sale by the holders of more than 50% of the Units held
by the Limited Partners;
(b) Approval of the Sale by the Board of Directors of Omega;
(c) The compliance by all parties with the provisions of the Sale
Agreement applicable to them and the truth of each party's
representations and warranties as of the closing;
<PAGE>
(d) Approval of the Sale by the appropriate governmental authorities and
receipt of all required licenses and permits for operation of the
Facilities, or an indication satisfactory to Omega that the same will
be forthcoming in a timely manner;
(e) Delivery by the Partnership of certain title commitments or insurance
policies for each of the facilities, surveys, environmental site
assessments and UCC searches, and Omega's satisfaction with the same;
(f) The delivery of the Facilities in the same condition as of the date of
the Sale Agreement, reasonable wear and tear excepted;
(g) The absence of any undisclosed defaults and materially adverse events
by the Partnership; and
(h) Upon request by Omega or the New Operator, the Partnership's entrance
into the Interim Leasing Agreement and execution of the Interim
Management Agreement concurrently with the Closing.
CONSUMMATION OF OTHER ASSET SALES. The closing of the Sale Agreement is
also conditioned upon the closing of the sale of the operating assets of each of
the Other Sellers to Omega. See "Sale of Partnership Assets - General." Omega
and the MGP negotiated the cross-closing contingency because Omega desires to
purchase all of the operating assets of the Sellers, and is not willing to
purchase them separately for the overall consideration offered by it for all of
the assets. The managing general partners of the Sellers agreed to the cross-
closing contingency of the Asset Sales, because, based on their experience in
negotiating the sale of the Sellers' assets and the advice of Robinson-Humphrey,
they believed that they would be unable to find purchasers for the individual
assets of the Sellers who would be willing to pay as much for the individual
assets as Omega was willing to pay for such assets collectively. See
"Background and Reasons For the Sale."
The closings of the other Asset Sales are subject to a number of
conditions, in addition to the cross-closing contingency. The conditions to
closing of the other Asset Sales are substantially similar to the conditions to
the closing of the Sale. See "The Sale Agreement - Conditions to Closing of the
Sale."
INTERIM OPERATING AGREEMENTS. In order for Omega to be taxed a real estate
investment trust, Omega cannot operate the health care facilities it owns.
Therefore, Omega customarily leases the operation and management of its health
care facilities to third party operators, many of whom are among the largest
health care operators in the United States. Omega intends to lease the
operation of the Facilities to the New Operator, but Omega's ability or
inability to procure the New Operator will not have any effect on the ability of
the parties to consummate the Sale. In the event that Omega is unable to
procure the New Operator prior to the Effective Time, or in the event the New
Operator, if identified, has not received the Regulatory Approvals prior to the
Effective Time, the Partnership will enter into the Interim Leasing Agreement
with Omega or, if identified, the New Operator, to permit Omega more time to
locate the New Operator and/or for the New Operator to receive the Regulatory
Approvals.
INTERIM LEASING AGREEMENT. The Interim Leasing Agreement, if entered into
-------------------------
by the Partnership and Omega or the New Operator, will provide that (a) the
Partnership will have no financial responsibility for funding the operations of
the Facilities during the term of the Interim Leasing Agreement; (b) the rent
payable under the Interim Leasing Agreement will be equal to the cash flow
generated by operation of the Facilities under the Interim Leasing Agreement;
and (c) the Interim Leasing Agreement shall terminate no later than December 31,
1997. If the Partnership enters into the Interim Leasing Agreement, Atrium has
agreed to manage the Facilities for the Partnership and Omega pursuant to the
terms of an Interim Management Agreement prepared and agreed to by Atrium, the
Partnership and Omega.
INTERIM MANAGEMENT AGREEMENT. The Interim Management Agreement, if entered
----------------------------
into by the Partnership and Atrium for the benefit of Omega, will provide that
Atrium will receive a monthly management fee during the term of the agreement
equal to a certain percentage of the adjusted gross income of the Facilities,
such percentage to be determined based on the total number of facilities Atrium
is managing for the Partnership and the Other Sellers as outlined in the Sale
Agreement. The Interim Management Agreement, if entered into by the Partnership
and Atrium, will terminate on or before the termination of the Interim Lease
Agreement.
<PAGE>
RIGHT TO TERMINATE. The Sale Agreement may be terminated without any
further liability or obligation of either party (except with respect to
liability for damages resulting from willful breaches of representations,
warranties, covenants, or agreements) as follows:
BY THE PARTNERSHIP AND OMEGA at any time by mutual consent of Omega and the
----------------------------
Partnership.
BY THE PARTNERSHIP (a) Upon Omega's failure to meet its obligations
------------------
pursuant to the conditions to closing the sale; or (b) as the result of certain
kinds of material adverse changes in Omega's representations, warranties, or
disclosures pursuant to the Sale Agreement.
BY OMEGA (a) upon the Partnership's failure to meet its obligations
--------
pursuant to the conditions to closing the Sale; (b) as the result of certain
kinds of material adverse changes in the Partnership's representations,
warranties, or disclosures pursuant to the Sale Agreement; or (c) in the event a
material portion of any of Real Property or the Facilities is damaged by fire or
other casualty, or is taken or condemned by public or quasi-public authorities,
unless the estimated cost of repairs to be made by the Partnership is less than
$100,000 and the damage to the property as of the closing will not interfere
with the operation of such Facility.
BY THE PARTNERSHIP OR OMEGA (a) if the required percentage of Units have
---------------------------
not been voted in favor of the Sale or if such approval is not obtained by July
15, 1997; (b) in the event of a material breach by the other party, provided
that the terminating party is not in breach; (c) in the event the Sale has not
been consummated on or before July 31, 1997; (d) if any permanent injunction or
order of a court or other competent authority preventing the consummation of the
Sale has become final or non-appealable; or (e) otherwise in accordance with the
Sale Agreement.
CONSEQUENCES TO THE PARTNERSHIP RELATED TO FAILURE TO CLOSE THE SALE. In
the event that 1) the Sale is not consummated because the Limited Partners fail
to approve the Sale Agreement and the transactions contemplated thereby, 2) a
material adverse change in information contained in the Partnership's
representations and warranties due to certain types of events occurring after
the signing of the Sale Agreement, or 3) a material breach of the Sale Agreement
by the Partnership, Omega will be entitled to the lesser of One Hundred Twenty
Five Thousand Dollars ($125,000) or reimbursement of its documented, out-of-
pocket expenses. However, the maximum amount Omega may receive in the event the
Partnership commits the breaches listed above, together with amounts received by
Omega for any similar breaches committed by the Other Sellers, will not exceed
One Hundred Twenty Five Thousand Dollars ($125,000).
In the event that the Sale is not consummated because the MGP 1) withdraws,
modifies or amends the MGP's recommendation of the approval of the Sale
Agreement by the Limited Partners, 2) accepts and recommends an alternative
acquisition proposal put forth by any third party, or 3) announces, and fails to
withdraw within ten (10) days, the MGP's intention to recommend an acquisition
proposal other than the Sale Agreement to the Limited Partners, then Omega will
be paid by the Partnership, as Omega's sole remedy, Four Hundred Six Thousand
Eight Hundred Dollars ($406,800) as liquidated damages. Such amount would be
paid on the earlier to occur of consummation of the other acquisition or one
hundred twenty (120) days after termination of the Sale Agreement.
RIGHT OF FIRST REFUSAL. If the Sale Agreement is terminated because the
requisite approval for any of the Asset Sales, including the required approval
of the Limited Partners, is not received and, if at the time of termination the
Partnership has not accepted a competing acquisition proposal, the Partnership
has agreed to grant Omega a right of first refusal to purchase any Facility
owned by the Partnership on the same terms as set forth in a written offer from
a third party for the purchase of the Facility received by the Partnership prior
to December 31, 1997.
REGULATORY APPROVALS. The Sale is subject to various federal, state and
local regulatory approvals:
HART-SCOTT-RODINO APPROVAL. If prior to the Closing Date Omega has not
--------------------------
identified the New Operator, or, if identified, the New Operator has not entered
into operating leases for the Facilities with Omega, the Sale will still be
consummated, but the Partnership will enter into the Interim Operating
Agreements with Omega or the New Operator, and approvals under the Hart-Scott-
Rodino Antitrust Improvements Act of 1976 (the "HSR Act") will not be required.
<PAGE>
However, in the event that the New Operator has been identified and has
entered into operating leases for the Facilities with Omega at the Effective
Time, consummation of each Asset Sale, including the Sale, is subject to the
pre-acquisition notification requirements of the HSR Act and expiration or early
termination of the waiting period requirement thereunder. Under the HSR Act,
the Federal Trade Commission (the "FTC") evaluates the anti-competitive effects
of transactions meeting the threshold for a HSR Act filing. Companies filing
under the HSR Act must wait at least 30 days following the filing prior to
consummating the transaction, and such period may be extended by the FTC if it
requests additional information. On the other hand, the FTC may grant early
termination of the waiting period at the request of the parties to a
transaction. The federal government may seek an injunction to block a
transaction if it believes that the transaction would violate federal antitrust
laws.
OTHER FEDERAL, STATE AND LOCAL REGULATORY APPROVALS. If prior to the
---------------------------------------------------
Closing Date Omega has not identified the New Operator, or, if identified, the
New Operator has not entered into operating leases for the Facilities with Omega
at the Effective Time, then the Sale will be consummated, but the Partnership
will enter into the Interim Operating Agreements with Omega or the New Operator,
and the approval of various federal, state and local government agencies will
not be required.
In the event that the New Operator has been identified and has entered into
operating leases for the Facilities with Omega at the Effective Time, then the
approval of various federal, state and local governmental agencies will be
required in connection with each Asset Sale, including the Sale, in order for
Omega to own the purchased facilities and for them to be operated by their
respective lessees. In particular, each state in which any Seller operates
requires the prior approval of the applicable state regulatory authorities
before the sale of a long-term care facility in such state may be consummated.
New Operator will be required to apply to receive Medicare Provider Agreements
with respect to the facilities acquired. As of the date of this Consent
Solicitation Statement, all required regulatory approvals have not yet been
obtained, but the MGP anticipates that all regulatory approvals, or, where
applicable under the Sale Agreement, assurances of forthcoming regulatory
approval satisfactory to Omega, and/or New Operator will be received prior to
the Effective Time.
INDEMNIFICATION AND JOINT ACCOUNT. The Sale Agreement provides that the
Partnership will indemnify and hold Omega and Omega's assigns, including the New
Operator, harmless from and against any and all damages, losses, liabilities,
costs, actions, suits, proceedings, demands, assessments, and judgments,
including, but not limited to, reasonable attorney's fees and reasonable costs
and expenses of litigation, arising out or in any manner related to (i)
obligations relating to the ownership of the Partnership's assets and the
operation of the Facilities which existed or accrued immediately prior to the
Closing Date; (ii) any operating contracts that the New Operator does not
assume; (iii) any misrepresentation of a material fact, breach of warranty or
nonfulfillment of any agreement under the Sale Agreement or from any
misrepresentations in any certificate furnished or to be furnished to Omega or
the New Operator thereunder; (iv) any failure in connection with the Sale
Agreement to comply with the requirements of any laws or regulations relating to
bulk sales or transfers; and (v) any sums due by the Partnership for Medicare
and Medicaid adjustments arising from the operation of Facilities conveyed
pursuant to this Agreement. Notwithstanding the foregoing, however, Omega has
agreed that it shall be responsible for the first $25,000 of claims against the
Partnership with respect to each Facility, except for claims relating to title
to Seller's Assets, Seller's authority to enter into the Sale Agreement or
claims for money by third party payors or reimbursers.
The Partnership's liability for breach of representations and warranties,
excluding any claims relating to the willful dishonesty or fraud by the
Partnership, title to the Partnership's Assets or the Partnership's authority to
enter into the Sale Agreement, will be limited to Eight Hundred Ninety Five
Thousand Four Hundred Fifty Dollars ($895,450), but there will be no limit on
the Partnership's liability for any other claims against the Partnership under
the Sale Agreement.
The Sale Agreement also provides that Omega or the New Operator, if
identified prior to the Closing and reasonably satisfactory to Seller, will
indemnify the Partnership and its officers and directors from all damages,
losses, liabilities, costs, actions, suits, proceedings, demands, assessments,
and judgments, including reasonable attorney's fees and reasonable costs and
expenses of litigation, arising out of or in any manner related to (i) any and
all obligations relating to the ownership of Seller's Assets and the operation
of the Facilities from and after the Closing Date, including any obligations
which arise or accrue following the Closing Date; (ii) any misrepresentation of
a material fact, breach of warranty or nonfulfillment of any agreement on the
part of Omega
<PAGE>
under the Sale Agreement or from any misrepresentations in any certificate
furnished or to be furnished to Purchaser hereunder; and (iii) any claim that
Omega or the New Operator failed to pay employees vacation or sick pay which
accrued prior to the Closing Date with respect to employees whose accrued
vacation and sick pay was taken into account in computing the adjustment to the
Purchase Price.
THE JOINT ACCOUNT AND LETTER AGREEMENT.
--------------------------------------
At the Effective Time, the Partnership will deposit Three Hundred Ninety
Five Thousand Four Hundred Fifty Dollars ($395,450) into the Joint Account
pursuant to the Letter Agreement with Omega which will secure certain of the
Partnership's obligations under the Sale Agreement. In addition, the MGP will
hold an amount greater than Five Hundred Thousand Dollars ($500,000) (the
"Additional Reserves") to secure the Partnership's remaining obligations to
Omega or others, including indemnification and certain other obligations under
the Sale Agreement.
The funds deposited in the Joint Account will be used to satisfy indemnity
claims of Omega until such funds are depleted before an indemnified claim may be
made against the Partnership. At the expiration of all relevant indemnity
periods, any remaining funds in the Joint Account plus all earnings thereon but
less all administrative expenses related thereto will be returned to the
Partnership. The indemnity obligations of the Partnership for certain
representations and warranties will survive for a period of 12 months following
the Effective Time. Other representations and warranties, particularly with
respect to Medicare and Medicaid cost reports, will remain outstanding for a
period of three years following the dates on which such reports are finalized,
plus any additional time required to finally determine any claim for indemnity
made prior to the termination of such period. The indemnity obligation of the
Partnership with respect to any claims by a person or entity arising from acts
or omissions of the Partnership or the employees, agents or contractors of the
Partnership in the operation of the Facilities prior to the closing, together
with any tax liabilities or other liabilities to any governmental authority or
third party payors or service providers against the Partnership will survive
until the expiration of the applicable statute of limitations and until any
claim for indemnity made prior thereto is finally resolved. The Partnership's
liability to parties other than Omega, such as third party payors is not limited
by the Sale Agreement.
Pursuant to the terms of the Letter Agreement, funds in the Joint Account
shall be withdrawn to pay indemnity and certain other obligations of the
Partnership upon the presentation of joint signatures of representatives from
Omega and the Partnership. Up to One Hundred Nineteen Thousand Three Hundred
Twelve Dollars and Fifty Cents ($119,312.50) may be paid out of the fund to
satisfy amounts owed by the Partnership for depreciation recapture, as
determined by Medicare and Medicaid (the "Recapture Liability"). Any amount
owed pursuant to the Recapture Liability in excess of One Hundred Nineteen
Thousand Three Hundred Twelve Dollars and Fifty Cents ($119,312.50) will be paid
by the Partnership out of its other assets.
Upon the later of one year following the Closing Date or the expiration of
certain time periods related to the filing of Medicare and Medicaid
reimbursement claims by the Partnership, Omega and the Partnership shall agree
to an amount, if any, which will be retained in the Joint Account to secure the
Partnership's payment of any remaining liability claims against the Partnership
under the Sale Agreement as of such date (the "Remaining Claims") and any funds
in the Joint Account in excess of such amount will be disbursed to the
Partnership. Upon resolution of the Remaining Claims, if any, the funds
remaining in the Joint Account, less administrative expenses, shall be disbursed
by the Partnership and the Joint Account shall be closed.
THE OTHER SELLERS
The MGP and RWB Management Corporation, another subsidiary of QualiCorp,
serve as managing general partners of four limited partnerships, including the
Partnership. The other limited partnerships are RWB Medical Income Properties 1
Limited Partnership, Medical Income Properties 2A Limited Partnership and RWB
Medical Properties Limited Partnership IV.
<PAGE>
INTEREST OF CERTAIN PERSONS IN THE TRANSACTIONS
The MGP and QualiCorp are currently parties to an Employment Agreement with
John H. Stoddard, pursuant to which Mr. Stoddard has been employed as President
of both companies. Mr. Stoddard is one of the directors of the MGP and of
QualiCorp. Mr. Stoddard's Employment Agreement extends to May 1, 1998, although
he has indicated that he will relinquish his employment rights under the
Employment Agreement within ninety (90) days of the Closing Date without
additional cost to the Partnership. The MGP anticipates that he will continue
to work for the Partnership as a consultant through and including the survival
period contemplated in the Sale Agreement. See "Operations Following the Sale
and Effect of the Sale on Limited Partners."
No directors or officers of the MGP, officers of the Partnership, or
officers or directors of affiliates of the Partnership or MGP, have been, or are
expected to be, offered either employment or Board positions with Omega
following consummation of the Sale. It is currently anticipated that operating
personnel of the Facilities will be largely unchanged.
Neither the MGP nor any affiliate thereof will receive any distributions as
a result of the Sale, except that QualiCorp will be entitled to distributions
pursuant to its ownership of 44 Units, although the MGP will receive
distributions pursuant to the liquidation of the RWB Medical Properties Limited
Partnership IV, based solely on the terms of the limited partnership agreement
of such Seller. As of December 31, 1996, QualiCorp, the parent corporation of
the managing general partners of each of the Sellers, was owed approximately
$157,000 by the Partnership, for services provided and cost reimbursements. All
amounts owed to QualiCorp by the Partnership will be satisfied prior to any
distributions to limited partners of the Sellers. John M. DeBlois, a director
of the MGP, is the majority shareholder of QualiCorp.
[REMAINDER OF PAGE LEFT BLANK INTENTIONALLY]
<PAGE>
TAX SECTION OF CONSENT SOLICITATION
SUMMARY OF FEDERAL INCOME TAX CONSEQUENCES
The following summarizes the federal income tax provisions relating to the
proposed transactions. Management has received an opinion from special counsel
for each Partnership addressing certain Federal income tax consequences of the
proposed sale of substantially all of the assets of each Partnership and the
liquidation of each Partnership. The opinion is to the effect that if the sale
of assets by each Partnership and the liquidation of each Partnership occur as
set forth in the Sale Agreement and as otherwise described in this Consent
Solicitation, it is more likely than not that:
a. The proposed sale of assets will result in the recognition of gain or
loss by each Partnership computed by comparing the amount realized by
each Partnership on the sale of each of the assets to each
Partnership's adjusted basis in each of the assets sold;
b. The gain and/or loss recognized on the sale of the assets by each
Partnership will pass through to the partners of each Partnership in
accordance with the terms of each Partnership Agreement;
c. A portion of any gain recognized is projected by the Partnership to be
characterized as ordinary income and a portion as short term and/or
long term capital gain;
d. The satisfaction of liabilities out of the proceeds of the sale of the
assets may reduce each partner's basis in its Partnership interest;
e. Cash received by the partners of each Partnership in complete
liquidation of their Partnership interests will result in the
recognition of taxable gain or loss. The amount of such gain or loss
will be the difference between the cash received and each partner's
basis in the Partnership interests surrendered in exchange therefor;
f. The character of any gain or loss recognized by the partners on the
liquidation of each Partnership will be capital gain or loss, subject
to the application of Section 751 of the Internal Revenue Code.
g. During the years of sale and liquidation, each Partnership may have
income or loss from its remaining operations which may result in
ordinary income or loss to the partners in those years. Each
Partnership may make distributions in the year of sale prior to the
distributions in complete liquidation which would reduce each
partner's basis in its partnership interest. If the amount of the
distribution exceeds a partner's basis in its partnership interest,
said partner will recognize gain equal to the excess of the cash
received over the partner's basis in its partnership interest.
The opinion received is subject to the following qualifications. A tax
opinion of special counsel is not binding upon the Internal Revenue Service or
the Courts. It is uncertain whether the Internal Revenue Service would issue a
favorable ruling on the proposed sale transaction and no such ruling has been
attempted to be obtained. An opinion of special counsel does not provide the
same degree of assurance with respect to the consequences of the transaction as
would a ruling from the Internal Revenue Service. Thus, in the absence of a
ruling from the IRS, there can be no assurance that the IRS will not challenge
any of the special counsel's opinions.
The special counsel's opinion is subject to a number of assumptions and
qualifications that are critical to the opinion and is based on numerous factual
assumptions, representations and assurances made by the Partnership, management
of the Partnership, its advisors, and entities in control of the Partnership.
If such factual information, representations, warranties, or assumptions are not
true when made or subsequently change, the special counsel's opinion may be
inapplicable. The opinions are based upon existing law and applicable current
and proposed regulations, other published IRS positions and court decisions,
which are subject to change either prospectively or retroactively. The special
counsel has expressed no opinion concerning the consequences of the proposed
sale or liquidation to the partners under any applicable state, local, or non-
U.S. tax laws. Further, the tax opinion of the special counsel expressly
excludes a review of tax consequences other than federal income tax consequences
to the partners of this transaction. In addition, the special counsel's opinion
does not cover partners
<PAGE>
of special tax status such as non-U.S. persons, tax-exempt partners, partners
that are corporations, or other non-individual status entities, partners whose
tax year is not the calendar year, alternative minimum tax considerations or
other non-federal income tax matters. Finally, the special counsel's opinion
expressly assumes the tax status of each Partnership as a partnership for
federal income tax purposes as opposed to an association taxable as a
corporation. The special counsel's opinion is limited to matters set forth
above. No other opinion can be inferred beyond the matters expressly stated
therein. Because of all of the above, partners should consult their own tax
advisors with respect to all of the tax consequences of the proposed
transactions.
TAXATION OF PARTNERSHIPS IN GENERAL
An entity classified as a partnership for federal income tax purposes is
not subject to federal income tax. Instead, income or loss "flows through" from
the partnership to its partners who are taxable in their individual capacities
on their allocable shares of partnership items of income, gain, loss, deduction
and credit ("taxable income or loss"). However, the partnership is a tax
reporting entity that must make an annual return of partnership taxable income
or loss. The tax treatment of partnership items of taxable income or loss is
generally determined at the partnership level. Each partner is required to
treat partnership items on its return in a manner consistent with the treatment
of such items on the partnership return and may be penalized for intentional
disregard of the consistency requirement. This consistency requirement may be
waived if the partner files a statement identifying the inconsistency or shows
that it resulted from an incorrect schedule furnished by the partnership.
Each partner generally must account for its allocable share of partnership
taxable income or loss in computing its income tax, whether or not any actual
cash distribution is made to such partner during its taxable year. A partner's
basis in its partnership interest is increased by its allocable share of
partnership taxable income. It is this basis increase that generally allows
distributions of taxable income to the partners to be made without recognition
of gain, since the basis increase generally offsets corresponding decreases in
basis that result from such distributions. As a result, a partner is generally
not taxed on distributions of cash or property received from a partnership,
except to the extent that any money distributed exceeds the partner's adjusted
basis in its partnership interest immediately before the distribution.
BASIS OF PARTNERSHIP INTERESTS
A partner's basis in its interest is equal to its cost for such interest
(i.e., the amount of money actually contributed by the partner to the
- -----
partnership or paid to another to purchase the interest), reduced (but not below
zero) by its allocable share of partnership distributions, taxable losses and
expenditures of the partnership not deductible in computing its taxable income
and not properly chargeable to its capital account, and increased by its
allocable share of partnership taxable profits, income of the partnership exempt
from tax and additional contributions to the partnership. For purposes of
determining basis, an increase in a partner's share of partnership liabilities
is treated as a contribution of money by that partner to the partnership.
Conversely, a decrease in its share of partnership liabilities is treated as a
distribution of money to it.
Generally, a limited partner may not take liabilities into account in
determining its basis except to the extent of any additional capital
contribution it is required to make under the partnership agreement. However,
in the case of a limited partnership, if a partnership asset is subject to a
liability for which no partner has any personal liability ( a "nonrecourse
liability"), in general, the partner's allocable share of the non-recourse
liability will be taken into account to determine basis.
ALLOCATION OF INCOME, GAIN, LOSS AND DEDUCTION AMONG THE PARTNERS
A partner's distributive share of a partnership's taxable income or loss
generally is determined by reference to the allocation of such items in the
partnership agreement. However, if the allocation under the partnership
agreement is determined not to have "substantial economic effect," then the
partnership agreement may not govern, and the partner's allocable share will be
determined according to the partner's interest in the
<PAGE>
partnership taking into account all the facts and circumstances. An allocation
is considered to have "substantial economic effect" if the allocation may
actually affect the dollar amount of the partner's shares of the total
partnership income or loss independent of tax consequences. Management believes
that the allocations made under the Partnership Agreements for the partnership
have substantial economic effect.
SALES OF PARTNERSHIP PROPERTIES
The sale of each Partnership's assets will be a taxable event to the
Partnership and to the partners. Gain or loss on the sale is measured by the
difference between the adjusted basis of the assets disposed and the amount
realized. On a sale, the amount realized is the sum of any money received, plus
the fair market value of any property received, plus the amount of liabilities
from which the Partnership is discharged as a result of the sale or disposition
(which includes the amount of any nonrecourse liability to which the transferred
property is subject). The adjusted basis of such property is generally its cost
less deductions, allowed or allowable, for depreciation. In general, gains from
the sale or other disposition of partnership properties which are treated as
long-term capital gains are taxed at the partner level at a lower rate than
ordinary income and short-term capital gains.
Since a partnership's gain on a sale of property will be measured by the
difference between the sales proceeds (including the amount of any indebtedness
to which the property is subject) and the adjusted basis of the property, the
amount of tax payable by a partner in respect of its share of such gain may in
some cases exceed its share of the cash proceeds therefrom.
A substantial portion of the assets to be sold (including buildings, land,
furniture, fixtures and equipment) which were held for more than one year and
are not "dealer property," are expected to be treated as "section 1231 assets."
Section 1231 assets are property used in the trade or business of a character
which is subject to the allowance for depreciation, held for more than one year,
and real property used in the trade or business held for more than one year.
Gains or losses from the sale of section 1231 assets would be combined with any
other section 1231 gains or losses incurred in that year, and the section 1231
gains or losses would be allocated to the partners as provided in the
partnership agreement and combined with any other section 1231 gains or losses
incurred by the partner in that year. The partner's net section 1231 gains or
losses would be taxed as capital gains or constitute ordinary losses. If a
partnership is deemed a "dealer" and its investment in any property that
constitutes the partnership is considered not to be a capital asset or section
1231 asset, any gain or loss on the sale of such property would be treated as
ordinary income or loss. Each partnership has attempted to operate in such a
manner so as not to be deemed a "dealer."
A portion of a partner's gain recognized on disposition of a partnership's
buildings and furniture, fixtures and equipment may be subject to recapture as
ordinary income under the provisions of sections 1245 or 1250 of the Internal
Revenue Code of 1986, as amended. Such recapture gain will be recognized in the
year of the disposition.
A non-corporate partner's share of any losses from the sale of Partnership
properties which is treated as a capital loss is deductible in any year only to
the extent of the partner's long and short-term capital gains for that year.
Any excess of capital losses over capital gains is deductible by a non-corporate
partner up to $3,000 ($1,500 in the case of a separate return for a married
individual) although the unused portion of such capital losses could be carried
over to later years, and deducted as a long-term or short-term capital loss
until fully exhausted.
LIQUIDATION OF THE PARTNERSHIP
Generally, upon the liquidation of a partnership, gain will be recognized
by and taxable to a partner to the extent the amount of cash and marketable
securities distributed to it exceeds its basis in the partnership at the time of
the distribution. Gain or loss on the liquidation of a partnership interest
generally is considered to be capital gain or loss.
An exception to such treatment is provided in Code section 751, which
states that the proceeds of a sale, exchange or liquidation of a partnership
interest will be considered an amount realized from the sale or exchange of
property other than a capital asset to the extent that such proceeds are
attributable to the partnership's "unrealized receivables" or to "substantially
appreciated inventory." The term "unrealized receivables" includes
<PAGE>
amounts not previously includible in income under the partnership's method of
accounting, rights to payment for services rendered or to be rendered and for
goods delivered or to be delivered and a partner's pro rata share of any
potential Code section 1245 or 1250 income, short-term obligations, market
discount bonds, franchises, trademarks and trade names and several other
categories of property which would be treated as amounts received from the sale
or exchange of property other than a capital asset. Thus, the difference between
the amount realized that is attributable to a partnership's "section 751
property" and the adjusted basis to the partner of such "section 751 property"
is treated as ordinary income or loss to the partner. The difference between the
remainder, if any, of the partner's adjusted basis for its partnership interest
and the balance, if any, of the amount realized, is the partner's capital gain
or loss on the liquidation of the partnership interest.
Capital loss will be recognized in the event only cash and unrealized
receivables are distributed, and only to the extent the partner's adjusted basis
for its interest exceeds the sum of money distributed and the partnership's
adjusted basis for unrealized receivables.
In addition, each partner may be in receipt of income or loss from the
normal operations of a partnership during the year of dissolution. Such income
may constitute ordinary income or loss.
There are three commonly encountered limitations on a partner's ability to
take into account its share of a partnership's loss in computing its individual
tax liability. A partner is entitled to deduct its share of the partnership's
loss only after satisfying all three rules. A partner's deductible share of
losses is limited to its basis in its partnership interest. The at-risk rules
limit a partner's deductible share of losses to the amount it is considered to
be economically at-risk in the venture. If a partner's share of the
partnership's losses are considered "passive losses," the partner must combine
them with its passive losses from other sources and is allowed to deduct the
total only to the extent of its passive income from all sources. Losses that
are disallowed due to any of these three limitations are deductible in the year
of the termination of a partnership interest and would offset any gain from
liquidation.
ALTERNATIVE MINIMUM TAX
The above summary of the federal income tax provisions relating to the
proposed transactions has not taken into account the federal alternative minimum
tax. This tax was designed to ensure that at least some tax is paid by high
income taxpayers who obtain benefits from large exemptions and deductions. A
taxpayer's alternative minimum tax liability is determined by adjusting its
regular tax liability for alternative minimum tax preference items. Both of the
proposed transactions may result in alternative minimum tax preference items
flowing through to the partners.
CONCLUSION
The preceding is intended only as special counsel's summary of income tax
consequences relating to the proposed sale of assets by the Partnership and the
Partnership's liquidation. The partners of the Partnership should consult their
own tax advisors with respect to all matters discussed herein and their own
particular tax circumstances.
THE FOREGOING DISCUSSION IS INTENDED ONLY AS A SUMMARY OF THE MATERIAL
FEDERAL INCOME TAX CONSEQUENCES OF THE SALE AND DOES NOT PURPORT TO BE A
COMPLETE ANALYSIS OR LISTING OF ALL POTENTIAL TAX EFFECTS RELEVANT TO A DECISION
OF WHETHER TO VOTE IN FAVOR OF THE SALE. THE DISCUSSION DOES NOT ADDRESS THE
TAX CONSEQUENCES THAT MAY BE RELEVANT TO A PARTICULAR LIMITED PARTNER WHO IS
SUBJECT TO SPECIAL TREATMENT UNDER CERTAIN FEDERAL INCOME TAX LAWS NOR ANY
CONSEQUENCES ARISING UNDER THE LAWS OF ANY STATE, LOCALITY OR FOREIGN
JURISDICTION. THE DISCUSSION IS BASED UPON THE INTERNAL REVENUE CODE OF 1986,
AS AMENDED, TREASURY REGULATIONS THEREUNDER AND ADMINISTRATIVE RULINGS AND COURT
DECISIONS AS OF THE DATE HEREOF. ALL OF THE FOREGOING ARE SUBJECT TO CHANGE,
AND ANY SUCH CHANGE COULD AFFECT THE CONTINUING VALIDITY OF THIS DISCUSSION.
THE
<PAGE>
LIMITED PARTNERS ARE URGED TO CONSULT AND RELY ON THEIR OWN TAX ADVISORS
CONCERNING THE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF THE SALE TO
THEM.
[REMAINDER OF PAGE LEFT BLANK INTENTIONALLY]
<PAGE>
INFORMATION FOR LIMITED PARTNERS
DISSENTERS' RIGHTS
Under Delaware statutory law and the Partnership's Limited Partnership
Agreement, no Limited Partner is entitled to exercise dissenter's rights with
respect to the Sale and subsequent dissolution of the Partnership.
EXCHANGE OF LIMITED PARTNERSHIP CERTIFICATES
Upon consummation of the Sale, holders of certificates representing Units
(the "Certificates") outstanding at the Effective Time will, upon surrender
thereof (duly endorsed, if required) to the designated Exchange Agent, be
entitled to receive Sale consideration as outlined in "Sale of Partnership
Assets - Consideration." The Exchange Agent will provide you with instructions
-----------------------------------------------------
regarding exchanging Certificates for cash, including Lost Certificates.
- ------------------------------------------------------------------------
After the Sale has closed, the Exchange Agent will mail a letter of
transmittal with instructions to all owners of record of the Units as of the
Effective Time describing in detail the process for surrendering Certificates in
exchange for the anticipated distributions. Certificates should NOT be
surrendered until the letter of transmittal and instructions are received. NO
DISTRIBUTIONS WILL BE MADE TO A UNIT HOLDER UNTIL HIS OR HER UNITS OR A LOST
CERTIFICATE AFFIDAVIT HAVE BEEN DELIVERED IN ACCORDANCE WITH THE INSTRUCTIONS IN
THE LETTER OF TRANSMITTAL.
OPERATIONS FOLLOWING THE SALE AND EFFECT OF THE SALE ON LIMITED PARTNERS
Following the consummation of the Sale and the termination of the Interim
Operating Agreements, if any, the Limited Partners will not have any interest in
the Facilities or Omega, except to the extent that individual Limited Partners
have an independent equity or other interest in Omega. Following payment of the
Final Installment, the dissolution of the Partnership will be completed, and the
Limited Partners will have no further interest in the Partnership.
Upon consummation of the transactions contemplated by the Sale Agreement,
the Partnership will use Sale proceeds to pay off its debt and other payables
associated with the operations of the Partnership and the Facilities. Based on
the existing debts of the Partnership, the anticipated expenses related to the
Sale and current and historical accounts payable, the MGP believes that these
payments will total approximately Three Million Nine Hundred Sixty Five Thousand
One Hundred Twenty Six Dollars ($3,965,126) without estimating the cost of
settlement of third-party payor cost reports. Thereafter, representatives of
the Partnership and Omega will endeavor to collect outstanding accounts
receivable of the Partnership, which the MGP anticipates will total
approximately One Million Six Hundred Sixty Eight Thousand Six Hundred Thirty
Two Dollars ($1,668,632) based on the amount of accounts receivable on the date
of this Consent Solicitation Statement, anticipated accounts receivable as of
the Closing Date and historical collection rates. The Partnership has agreed to
deposit the sum of Three Hundred Ninety Five Thousand Four Hundred Fifty Dollars
($395,450) into the Joint Account in order to secure the indemnification and
certain other obligations of the Partnership in the Sale Agreement. See "The
Sale Agreement - Indemnification and Joint Account."
In order to reduce expenses and maximize the final distributions to the
Limited Partners, the Partnership will begin to wind down its affairs following
consummation of the Sale. Annual Reports containing audited financial
statements and informing the former Limited Partners of the status of the
distributions will be sent to the former Limited Partners until the Final
Installment has been paid, although the MGP anticipates that distributions of
quarterly reports to Limited Partners containing unaudited financial statements
will be discontinued following the Effective Time. The Partnership will
continue to maintain books and records and file tax returns until the affairs of
the Partnership have been settled. Initially following the Sale, the
Partnership will retain a limited number of personnel. The MGP anticipates that
eventually John H. Stoddard, the President of the MGP, will perform consulting
services for the Partnership on an as-needed basis until the final distributions
have been made. See "Interests of Certain Persons in the Transaction."
<PAGE>
THE PARTNERSHIP
SUMMARY HISTORICAL FINANCIAL AND OPERATING DATA
The following selected financial information of the Partnership for the
years ended December 31, 1996, 1995, 1994, and 1993, has been derived from the
Partnership's financial statements, which have been audited by Self & Maples,
P.A. for such periods. All such financial information should be read in
conjunction with the financial statements of Partnership and the notes thereto
included elsewhere herein.
(000's omitted except for per share data and distributions)
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
Summary of Operations:
Total Revenue $ 3,448 $ 3,433 $ 3,059 $ 2,989
Operating Income (222) (216) 36 264
Net Income 582 331 459 615
Per Share Data:
Net Income per Limited
Partner Unit 49.62 28.23 39.14 52.44
Financial Condition:
Total Assets 11,087 11,206 10,954 10,597
Bond, Notes and Capitalized
Lease Obligations 704 763 816 879
Partners' Capital 8,949 8,836 8,974 8,954
Distributions per Limited
Partner Unit:
First Quarter 10.00 10.00 7.50 7.50
Second Quarter 10.00 10.00 10.00 7.50
Third Quarter 10.00 10.00 10.00 7.50
Fourth Quarter 10.00 10.00 10.00 7.50
</TABLE>
DESCRIPTION OF BUSINESS
GENERAL. The Partnership is a Delaware limited partnership which was
organized on April 29, 1987. The Partnership is one of a series of three limited
partnerships as represented by the registration statement filed with the
Securities and Exchange Commission on October 22, 1986 (the Effective Date),
providing for the sale of $10,000,000 of limited partnership units (the Units),
with an option to increase the offering by an additional $10,000,000. The
offering closed on January 31, 1988, upon the sale of 10,907 units for an
aggregate purchase price of $10,907,000.
The purpose of the Partnership is to engage in the business of acquiring
and holding for investment income-producing health care related properties,
primarily nursing homes, and operating such properties as skilled and
intermediate care nursing homes. As of December 31, 1996, the Partnership owned
a 100% interest of one nursing home, a 45.45% interest in a nursing home in
Decatur, Alabama and a 50% interest in two joint venture nursing homes in the
Houston, Texas area. The Partnership employed approximately 88 employees as of
February 12, 1996.
BUSINESS STRATEGY. The Partnership intends to hold its real property
investments until such time as a sale or other disposition appears to be
advantageous. Such factors as potential capital appreciation, industry trends,
cash flow and federal income tax consequences to the Limited Partners will be
considered before Partnership property dispositions are made.
<PAGE>
LONG TERM CARE INDUSTRY. The long term care industry is composed of many
facilities offering services to subacute, skilled, assisted living, and personal
care residents. The Partnership's nursing homes are considered to be in the
skilled segment of the industry, although several of its homes offer subacute
services. Subacute services have allowed many providers to expand their
services and at the same time become more profitable. In addition, providers
have taken advantage of these higher returns to consolidate their operations
either through initial public offerings or through merging with one another.
Subacute, however, is not for everyone. Many companies have established a
different criteria, including minimum population levels, in order to operate a
subacute program in a profitable manner. This is necessary due to the shorter
lengths of stay of patients and the need to obtain more and more admissions to
fill the shorter stay beds. Even with higher costs in the nursing and service
departments, nursing home industry subacute care is considered to be more cost
effective in caring for patients than hospital care.
Historically, nursing homes have derived their revenues from Medicare,
Medicaid and private pay patients. In the past few years, the industry has seen
an increase in private insurance patients and to a greater extent, contractual
services from Health Maintenance Organizations (HMO's) and Preferred Provider
Organizations (PPO's).
The industry has always faced a challenge in staffing facilities,
particularly with regard to Registered Nurses, Licensed Practical Nurses and
Certified Nurse Aides. Depending upon the geographic area, the Partnership
competes with hotels, motels and restaurants for other employees, including
dietary and housekeeping staff. The Partnership owns nursing facilities in the
States of Illinois, Texas and Alabama. Each state reimburses nursing facilities
on a prospective basis, although Alabama is the only state which bases
reimbursement on the nursing facilities' actual cost. Texas and Illinois use
average cost derived from all filed cost reports. Texas reimburses nursing
facilities on a patient specific need called Texas Index of Level of Effort
(TILE). Illinois pays nursing facilities based upon different cost parameters,
including paying additional incentives based on facility services provided.
Approximately fifty percent of the Partnership's operating costs consist of
employee salaries and benefits. In 1995 a federal law was passed which
increased the minimum wage level to $4.75 per hour in 1996 and to $5.15 per hour
in 1997. Management of the Partnership has already responded to these
increases, and to a corresponding "ripple effect" for wages of employees paid
above the new minimum wage, by increasing wages accordingly. To date, the State
of Texas and the State of Illinois have not agreed to increase reimbursement
rates to compensate for the federally mandated increase in the minimum wage.
Although the States of Texas and Illinois have recently increased their
reimbursement rates, these increases were not intended to, and have not,
compensated providers, including the Partnership, for the minimum wage
increases. The State of Alabama increased its reimbursement rates in response
to the 1996 minimum wage increase, but Alabama has not agreed to compensate
providers, including the Partnership, for the 1997 minimum wage increase or for
"ripple effect" wage increases made necessary by the 1997 minimum wage increase.
See "Background and Reasons For the Sale."
The federal government has been discussing changes in Medicare and Medicaid
as it looks for ways to downsize government. The Medicaid program could be
impacted through block grant or level funding programs which would cap federal
funding. If federal funding were capped, and a state wished to retain the
current level of services, significant additional funding would be required,
particularly if the Omnibus Budget Reconciliation Act regulations were not
repealed. The Medicare program is being examined by the federal government for
possible changes, including the implementation of cost limits on ancillary
services (such as therapy programs, equipment and diagnostic services), capital
cost reductions, a continued freeze of the routine cost limits and perhaps a
prospective payment system. The potential impact of such changes, either alone
or in combination, cannot be determined at this time. See "Background and
Reasons For the Sale."
Information regarding industry segments is not applicable to the
Partnership's business.
SEASONALITY. The Partnership's revenue and operating income fluctuate from
quarter to quarter and tend to be higher in the first and second quarter of each
fiscal year. This seasonality is due primarily to the state Medicaid programs
in which the Partnership operates, rate increases and census cycles.
ROUTINE SERVICES. All of the nursing facilities operated by the
Partnership are licensed as skilled care facilities by the appropriate
regulatory agencies. Routine services include the provision of skilled care
services and assistance with activities of daily living, depending upon the
needs of each resident. Skilled nursing care is
<PAGE>
rendered 24 hours per day by registered or licensed nurses and nurses aides.
ANCILLARY SERVICES. The Partnership provides a variety of rehabilitative
services at its facilities for residents. These services include physical,
speech, occupational, and respiratory therapy programs. The Partnership
continues to expand these services as the needs of its residents and the
requirements of third-party payor programs warrants. In addition, the
Partnership has added subacute care programs to several of its facilities.
PROPERTIES. The Partnership originally purchased a 100% interest in one
nursing home, a minority interest in one nursing home and a joint venture
interest in two nursing homes. The latter three nursing homes were purchased
jointly with Medical Income Properties 2A Limited Partnership. At December 31,
1996, the Partnership owned interests in four Facilities. The following table
presents information related to the Facilities:
<TABLE>
<CAPTION>
Average Daily Census
-------------------------------------
No. of Type of
Date of Licensed Medical Year Ended December 31,
Property Acquisition Beds Real Estate 1996 1995 1994 1993 1992
- -------- ----------- ---- ----------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Edwardsville Care
Center East Long Term
Edwardsville, Illinois 3/1/88 120 Care Facility 110 110 112 113 115
</TABLE>
In addition, the Partnership has invested in joint ventures consisting of three
nursing homes with Medical Income Properties 2A Limited Partnership:
<TABLE>
<CAPTION>
Owner- Avg. Daily Census
Date of No. of ship -----------------
Property Acquisition Beds Description % 1996 1995 1994 1993 1992
- -------- ----------- ---- ----------- ------ ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Medical Park Long Term
Decatur, Alabama 7/1/88 183 Care Facility 45.45% 174 170 175 178 179
(45.45% Interest)
Renaissance Place Long-term
Katy, Texas 5/1/88 130 Care Facility 50% 117 121 112 118 116
Renaissance Place Long-term
Humble, Texas 5/1/88 120 Care Facility 50% 115 116 115 113 113
</TABLE>
For a further description of the Partnership's purchase and sale of the
properties, see Notes 1(f), 2, 3, 4, 5 and 12 to the Partnership's Audited
Financial Statements.
LEGAL PROCEEDINGS
At December 31, 1996, there were no material pending legal actions against
the Partnership. As discussed in Note 9 to the Partnership's Audited Financial
Statements, however, the Partnership does have certain contingent liabilities.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
No person or group is known by the Partnership to own beneficially more
than 5% of the outstanding Units. No executive officers and directors of the
MGP owned any Units as of the date of this Consent Solicitation Statement. As
of such date, QualiCorp held 44 Units, which constitutes less than one-half of
one percent of the issued and outstanding Units.
<PAGE>
COMPARATIVE PER-UNIT DATA
The following sets forth certain data concerning the historical net
earnings, distributions and book value per Unit for the Partnership. The
information presented below should be read in conjunction with the financial
statements of the Partnership included elsewhere in this Consent Solicitation
Statement.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1993 1994 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Income (Loss) Per Unit $ 52.44 $ 39.14 $ 28.23 $ 49.62
Cash Distribution Per Unit 30.00 37.50 40.00 40.00
Book Value Per Unit 825.04 826.68 814.91 824.53
</TABLE>
INFORMATION CONCERNING THE UNITS
In general, the market for limited partnership units, especially real
estate limited partnership units, is very limited. Nevertheless, the MGP
becomes aware of some transfers of Units after they occur as a result of the
review of transfer documents submitted to the Partnership from the purchaser or
broker, which documents sometimes include the applicable sale price. To the
extent the MGP becomes aware of sale prices for Units, such prices may, but do
not necessarily, include various transfer fees and commissions.
During the period from July 1995 until July 5, 1996, the MGP is aware of
several trades, from a low price of $285 per Unit to a high price of $450 per
Unit. The last transfer of the Units of which the MGP is aware occurred in
January, 1997, for $650 per Unit. At February 12, 1997, the Partnership had
1,011 Limited Partners of record who held 10,907 Units.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, 1994 AND 1993
LIQUIDITY AND CAPITAL RESOURCES. Cash and equivalents increased during the
year to $269,249, an increase of $227,886 over 1995. This improvement was due
primarily to improvement in the payments being received from the State of
Illinois for its Medicaid program. Medicare receivables, however, increased
during the year due to increased intermediary reviews of specific ancillary
charges.
Distributions from joint ventures increased during the year to $876,302,
while total distributions during 1995 were $330,905. The Partnership spent
$12,408 on improvements and equipment at its Edwardsville facility during 1996
and expects similar amounts to be spent in 1997.
In 1996, the Partnership paid distributions to its limited partners
totaling $40.00 per unit. This distribution equaled a 4% return on the initial
investment of $1,000 per unit. Although the Partnership expects to continue to
make distributions to its limited partners based on the cash flow generated from
operations after considering cash required for debt obligations, necessary
improvements to the property and working capital reserves, no assurance can be
given that distributions will be made in the future.
RESULTS OF OPERATIONS
FISCAL YEAR 1996 COMPARED TO 1995. Net income for 1996 was $581,970, as
---------------------------------
compared to $331,053 for 1995. The increase in earnings was due to an increase
in the Partnership's share of joint venture income, which is derived from the
results of operations of the Texas facilities (the "Texas Joint Venture") and
the Medical Park facility in Alabama (the "Alabama Joint Venture") (together,
the Alabama and Texas Joint Ventures are hereinafter referred to as the "Joint
Ventures"). The operations of the wholly owned Edwardsville Care Center
<PAGE>
East facility improved during 1996 over 1995 due to better expense control on
slightly higher revenue, even though ancillary volume was down in 1996 from
1995.
Professional care of patients totaled $1,888,947 versus $1,981,961 due to
lower salary and wages paid as well as lower ancillary contract service fees.
The ancillary volume was impacted during the year due to fewer Medicare A
patients being served in the Edwardsville Care Center East facility. General
and Administrative costs were $136,455 higher in 1996 than 1995 due to higher
management fees, property management fees paid to QualiCorp, higher salaries and
wages, auditing, legal expense and cost reimbursement. Employee health and
welfare expense declined between years due to lower incentive compensation,
employee physical examination expense and tax rates.
Other income (expense) improved from 1995 to 1996 due to significantly
improved operating income of the Joint Venture partners and lower interest
expense incurred on debt obligations. The Joint Venture operating income is
derived from three nursing home properties. The Texas Joint Venture Humble
facility's net income increased from $137,279 to $461,265 due to improved room
and board rates and higher ancillary services. Revenue increased between years
$751,219 while expenses increased only $427,233, of which $313,672 was due to
ancillary contract expense. The Texas Joint Venture Katy property profit
increased to $653,851, $30,727 over 1995 levels. This property has outstanding
programs which are devoted to enabling patients to be discharged to their homes.
Net Income for the Medical Park nursing home, which is devoted to providing high
quality care, improved to $816,707 in 1996 from $714,840 in 1995.
FISCAL YEAR 1995 COMPARED TO 1994. Net income for the year was $331,053,
---------------------------------
compared to $459,086 for 1994. The decrease in earnings was due to an operating
loss of $215,675 at the Edwardsville East nursing facility. The facility had an
operating income in the prior year of $36,082. During the year, net revenue
from resident service increased $375,000. This increase was due in part to a
higher level of care provided to residents through an expanded therapy program.
In addition, the nursing home received a Medicaid rate increase in August 1995
of $4.11 per patient day.
Professional care of residents increased $600,711 over the 1994 level due
to higher labor costs of $162,000 and therapy services expenses of $484,000.
Household and Plant expenses were $30,066 over 1994 due to higher maintenance,
utilities and supply costs. General and Administrative costs decreased between
years $19,087 due to lower insurance costs, partially offset by higher salary
costs and fees.
Other income (expense) was affected by the need to borrow operating funds.
Net interest expense increased $97,000 over the previous year. The
Partnership's share of joint venture income rose between years by $231,000 due
to improved earnings at the Renaissance Place-Katy nursing home and Medical Park
nursing home. The operating results at both facilities improved over the prior
year due to increased Medicare utilization and expanded therapy programs. The
Renaissance Place-Humble facility operating net income was $122,259 lower than
1994 due to higher salary costs, therapy costs, and maintenance expenses.
FISCAL YEAR 1994 COMPARED TO 1993. Net income for the year was $459,086,
---------------------------------
compared to $614,975 for 1993. The decrease in earnings was due to a decrease
in the Illinois Medicaid rate of $5.52 per patient per day in September 1993 for
Edwardsville Care Center East along with higher labor and increased therapy
services costs. In addition, general and administrative costs increased
$81,814. This increase was due to increased workers compensation insurance
charges which rose by almost $100,000 over the previous year.
Other income (expense) was $423,004. This represented an increase of
$71,586 over the previous year, even though the Partnership's share of joint
venture income declined by $78,041 between years. This decline in joint venture
earnings was due in part to increased cost in patient care for salaries and
wages, and higher ancillary service costs in the Texas facilities. Interest
income increased due to higher interest rates. Provider fees decreased due to
changes made in the Illinois program.
EXPERTS
The audited consolidated financial statements of the Partnership appearing
in this Consent Solicitation Statement have been audited by Self & Maples, P.A.
as set forth in their report thereon included in the Consent
<PAGE>
Solicitation Statement. Such financial statements have been included in this
Consent Solicitation Statement in reliance upon the authority of such firm as
experts in accounting and auditing.
[REMAINDER OF PAGE LEFT BLANK INTENTIONALLY]
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditor's Report..................................................................... F-1
Balance Sheets For the Years Ended December 31, 1996 and 1995.................................... F-2
Statements of Operations For the Years Ended December 31, 1996, 1995 and 1994.................... F-3
Statements of Partners' Capital For the Years Ended December 31, 1996, 1995 and 1994............. F-4
Statements of Cash Flows For the Years Ended December 31, 1996, 1995 and 1994.................... F-5
Notes to Financial Statements.................................................................... F-7
Independent Auditors' Report of Additional Information........................................... F-19
Schedule of Valuation and Qualifying Accounts and Reserves For Allowances
For Doubtful Accounts For the Years Ended December 31, 1996, 1995 and 1994....................... F-20
Schedule of Consolidated Supplementary Income Statement Information For the
Years Ended December 31, 1996, 1995 and 1994..................................................... F-21
Schedule of Real Estate and Accumulated Depreciation For the Year Ended December
31, 1996......................................................................................... F-22
The Alabama Joint Venture Financial Statements for the Years Ended December 31,
1996, 1995, and 1994............................................................................. F-23
The Texas Joint Venture Financial Statements for the Years Ended December 31, 1996,
1995, and 1994................................................................................... F-42
</TABLE>
<PAGE>
[LETTERHEAD OF SELF & MAPLES, P.A. APPEARS HERE]
INDEPENDENT AUDITOR'S REPORT
To the Partners
Medical Income Properties 2B Limited Partnership
We have audited the accompanying balance sheets of Medical Income Properties 2B
Limited Partnership as of December 31, 1996 and 1995 and the related statements
of operations, partners' capital and cash flows or each of the three years in
the three-year period ended December 31, 1996. These financial statements are
the responsibility of the Partnership's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain a 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 financial position of Medical Income Properties 2B
Limited Partnership as of December 31, 1996 and 1995 and the results of its
operations and its cash flows for each of the three years in the three-year
period ended December 31, 1996 in conformity with generally accepted accounting
principles.
SELF & MAPLES, P.A.
Oneonta, Alabama
January 24, 1997, except for Note 14, as to which the date is February 3, 1997
F-1
<PAGE>
MEDICAL INCOME PROPERTIES 2B LIMITED PARTNERSHIP
BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
<S> <C> <C>
ASSETS
------
Current assets
Cash and cash equivalents $ 269,249 $ 41,363
Patient accounts receivable, net of allowance for doubtful accounts 616,404 780,238
of $102,349 in 1996 and $54,188 in 1995
Estimated third-party payor settlements 203,628 316,962
Prepaid expenses and other assets 54,122 42,144
----------- -----------
Total current assets 1,143,403 1,180,707
----------- -----------
Investment in joint ventures 7,087,148 7,034,698
Property and equipment, net of accumulated depreciation 2,855,196 2,988,787
Deferred financing costs, less accumulated amortization of $1,743
in 1996 and $1,525 in 1995 1,744 1,962
----------- -----------
Total assets $11,087,491 $11,206,154
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
---------------------------------
Current liabilities
Current maturities of long-term debt $ 63,388 $ 57,447
Accounts payable 334,901 235,152
Accrued payroll and payroll taxes 73,433 47,516
Accrued vacation 32,722 31,082
Accrued insurance 10,657 28,384
Accrued real estate taxes 75,096 76,143
Accrued management fees 13,906 13,371
Patient deposits and trust liabilities 48,244 37,010
Other accrued expenses 4,949 387
Due to affiliates 840,835 1,137,913
----------- -----------
Total current liabilities 1,498,131 1,664,405
Long- term debt, net of current maturities 640,309 705,550
----------- -----------
Total liabilities 2,138,440 2,369,955
----------- -----------
Partners' capital (deficit)
Limited partners 8,993,158 8,888,206
General partners (44,107) (52,007)
----------- -----------
Total partners' capital 8,949,051 8,836,199
=========== ===========
Total liabilities and partners' capital $11,087,491 $11,206,154
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-2
<PAGE>
MEDICAL INCOME PROPERTIES 2B LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
-------------- -------------- --------------
<S> <C> <C> <C>
Revenues:
Net patient service revenue $ 3,443,725 $ 3,428,541 $ 3,053,550
Other revenue 4,345 4,147 5,791
-------------- -------------- --------------
Total revenue 3,448,070 3,432,688 3,059,341
-------------- -------------- --------------
Operating expenses:
Professional care of patients 1,888,947 1,981,961 1,381,250
Dietary 276,675 265,966 263,409
Household and plant 323,317 342,433 312,367
General and administrative 853,203 716,748 735,835
Employee health and welfare 182,010 190,721 180,033
Depreciation and amortization 146,217 150,534 150,365
-------------- -------------- --------------
Total operating expenses 3,670,369 3,648,363 3,023,259
-------------- -------------- --------------
Operating income (loss) (222,299) (215,675) 36,082
-------------- -------------- --------------
Other income (expenses)
Interest income - - 55,313
Interest expense (58,603) (92,668) (51,027)
Provider fees (65,880) (65,700) (55,397)
Partnership share of joint venture income 928,752 705,096 474,115
-------------- -------------- --------------
Total other income (expenses) 804,269 546,728 423,004
-------------- -------------- --------------
Net income $ 581,970 $ 331,053 $ 459,086
============== ============== ==============
Net income attributable to limited partners (93%) $ 541,232 $ 307,879 $ 426,950
Net income attributable to general partners (7%) 40,738 23,174 32,136
-------------- -------------- --------------
$ 581,970 $ 331,053 $ 459,086
============== ============== ==============
Net income per limited partnership unit outstanding $ 49.62 $ 28.23 $ 39.14
============== ============== =============
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
MEDICAL INCOME PROPERTIES 2B LIMITED PARTNERSHIP
STATEMENTS OF PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
LIMITED PARTNERS GENERAL
UNITS AMOUNT PARTNERS TOTAL
--------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
Partners' capital (deficit) at December 31, 1993 10,907 $8,998,669 $(43,692) $8,954,977
Distributions to partners ($37.50 per limited partnership
unit outstanding) - (409,011) (30,786) (439,797)
Net income - 426,950 32,136 459,086
-------- ---------- -------- ----------
Partners' capital (deficit) at December 31, 1994 10,907 9,016,608 (42,342) 8,974,266
Distributions to partners $40.00 per limited partnership
unit outstanding) - (436,281) (32,839) (469,120)
Net income - 307,879 23,174 331,053
-------- ---------- -------- ----------
Partners' capital (deficit) at December 31, 1995 10,907 8,888,206 (52,007) 8,836,199
Distributions to partners ($40.00 per limited partnership
unit outstanding) - (436,280) (32,838) (469,118)
Net income - 541,232 40,738 581,970
-------- ---------- -------- ----------
Partners' capital (deficit) at December 31, 1996 10,907 $8,993,158 $(44,107) $8,949,051
======== ========== ======== ==========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
MEDICAL INCOME PROPERTIES 2B LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
-------------- -------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Cash received from patient care $ 3,708,915 $ 3,186,524 $ 2,762,115
Interest and dividends received - - 55,313
Other operating receipts 4,345 4,147 5,791
Cash paid to suppliers and employees (3,399,289) (3,516,545) (2,670,505)
Interest paid (58,603) (92,668) (51,027)
Provider fees (65,880) (65,700) (55,397)
-------------- ------------ ------------
Net cash provided (used) by operations 189,488 (484,242) 46,290
-------------- ------------ ------------
Cash flows from investing activities:
Capital expenditures (12,408) (52,424) (64,813)
Distributions from joint-ventures 876,302 330,905 276,354
-------------- ------------ ------------
Net cash provided (used) by investing activities 863,894 278,481 211,541
-------------- ------------ ------------
Cash flows from financing activities:
Principal payments on long-term obligations (59,300) (53,492) (63,206)
Distributions to partners (469,118) (469,120) (439,797)
Net related party transactions (297,078) 644,286 110,592
-------------- ------------ ------------
Net cash provided (used) by financing activities (825,496) 121,674 (392,411)
-------------- ------------ ------------
Net increase (decrease) in cash and cash equivalents 227,886 (84,087) (134,580)
Cash and cash equivalents, beginning of year 41,363 125,450 260,030
-------------- ------------ ------------
Cash and cash equivalents, end of year $ 269,249 $ 41,363 $ 125,450
============== ============ ============
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
MEDICAL INCOME PROPERTIES 2B LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
-------------- -------------- --------------
<S> <C> <C> <C>
RECONCILIATION OF NET INCOME (LOSS) TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Net income (loss) $ 581,970 $ 331,053 $ 459,086
------------ ------------ ------------
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Depreciation and amortization 146,217 150,534 150,365
Partnership share of joint venture income (928,752) (705,096) (474,115)
Provision for losses on accounts receivable 15,177 7,625 16,445
(INCREASE) DECREASE IN:
Patient accounts receivable, net 148,657 130,735 (321,421)
Estimated third-party payor settlements 113,334 (258,259) (58,703)
Prepaid expenses and other assets (11,978) 23,537 (1,779)
INCREASE (DECREASE) IN:
Accounts payable 99,749 26,905 116,354
Accrued expenses 13,880 (74,560) 90,004
Estimated third-party payor settlements - (122,118) 72,244
Other liabilities 11,234 5,402 (2,190)
------------ ------------ ------------
Total adjustments (392,482) (815,295) (412,796)
------------ ------------ ------------
Net cash provided (used) by operating activities $ 189,488 $ (484,242) $ 46,290
============ ============ ============
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
MEDICAL INCOME PROPERTIES 2B LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
(a) Organization
------------
Medical Income Properties 2B Limited Partnership (the
Partnership) is a Delaware limited partnership formed on April
29, 1987 that is engaged in the business of acquiring, operating
and holding for investment purposes, income-producing, health
care related properties, primarily nursing homes. The Partnership
is one of a series of three partnerships as represented by the
Partnership Prospectus (Prospectus) dated October 22, 1986,
providing for the sale of 10,000 units at $1,000 per unit (with
an option to increase to 20,000 units per partnership). The
Partnership's first closing on the sale of units was on July 16,
1987. The offering closed on January 31, 1988. For the period
April 29, 1987 (inception) to April 28, 1988, the Partnership was
in the development stage. On March 1, 1988, the Partnership began
acquiring property.
The general partners are QualiCorp Management, Inc. (a
wholly-owned subsidiary of QualiCorp, Inc.) and QualiCorp
Capital, Inc.
(b) Allocation of Net Profits and Net Losses
----------------------------------------
Net profits and net losses shall be determined and allocated as
of December 31 of each year, as follows:
. Net profits (losses) (exclusive of net profits (losses)
attributable to the sale or disposition of Partnership
properties) are allocated 93% to the limited partners and 7%
to the general partners.
. Net profits attributable to the sale or disposition of a
Partnership property shall be allocated as follows:
. First, to limited partners with negative balances in
their capital accounts in proportion to such negative
balances, to the extent of the total of such negative
balances;
. Second, 1% to the general partners and 99% to the
limited partners until the capital account of each
limited partner is equal to his capital investment; and
F-7
<PAGE>
MEDICAL INCOME PROPERTIES 2B LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
. Third, the balance, if any, 85% to the limited partners
and 15% to the general partners.
. Net losses attributable to the sale or disposition of a
Partnership property shall be allocated in a manner similar
to above, except that limited and general partner accounts
would be reduced pro rata to the amount of their respective
capital investments, then, pro rata to zero, and for any
remaining loss, 93% to the limited partners and 7% to the
general partners.
(C) CASH DISTRIBUTIONS
------------------
Cash distributions shall be made quarterly within 45 days after
the end of the quarter. Cash flow shall be distributed 93% to the
limited partners and 7% to the general partners. Sale or
financing proceeds shall be distributed first to creditors and
then to the limited partners to the extent of their original
capital contribution and then the remainder shall be distributed
85% to the limited partners and 15% to the general partners.
(D) PER UNIT INFORMATION
--------------------
Limited partnership information per unit is based on the number
of units outstanding of 10,907 in 1996, 1995, and 1994.
(E) PATIENT SERVICE REVENUE
-----------------------
Patient service revenue is recorded at the nursing homes'
established rates with contractual adjustments ($1,888,312 in
1996, $1,832,743 in 1995, and $1,014,629 in 1994), provision for
uncollectible accounts, (bad debt expense of $ 15,177 in 1996,
$7,625 in 1995, and $16,445 in 1994) and other discounts deducted
to arrive at net patient service revenue.
Net patient revenue includes amounts estimated by management to
be reimbursable by Medicare, Medicaid and other third-party
programs under the provisions of cost and prospective payment
reimbursement formulas in effect. Amounts received under these
programs are generally less than the established billing rates of
the nursing homes and the difference is reported as a contractual
adjustment and deducted from gross revenue.
The nursing homes recognize currently estimated final settlements
due from or to third party programs. Final determination of
amounts earned is subject to audit by the intermediaries.
Differences between estimated provisions and final settlement
will be reflected as charges or credits to operating revenues in
the year the cost reports are finalized.
F-8
<PAGE>
MEDICAL INCOME PROPERTIES 2B LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(F) PROPERTY AND EQUIPMENT
----------------------
Property and equipment is stated at cost. Depreciation of the
buildings is provided over their estimated useful lives of thirty
years on the straight-line method. Equipment and other personal
property are depreciated over five to seven years on the
straight-line method.
(G) INCOME TAXES
------------
Taxable income is allocated to the individual partners and,
therefore, no income taxes have been provided for in these
financial statements.
(H) CASH EQUIVALENTS POLICY
-----------------------
For the purposes of the statement of cash flows, the Partnership
considers all highly liquid debt instruments with an original
maturity of three months or less to be cash equivalents.
(I) UNINSURED CASH BALANCES
-----------------------
The Partnership maintains cash balances in several banks. Cash
accounts at banks are insured by the FDIC for up to $100,000. The
amount in excess of insured limits was approximately $1,360,579
(inclusive of unconsolidated joint ventures) at December 31,
1996. A portion of commingled funds discussed in Note 6, may be
at risk, but the amount in excess of FDIC limits related to the
Partnership is not determinable.
(J) USES OF ESTIMATES
-----------------
Management uses estimates and assumptions in preparing financial
statements in accordance with generally accepted accounting
principles. Those estimates and assumptions affect the reported
amounts of assets and liabilities, the disclosure of contingent
assets and liabilities, and the reported revenues and expenses.
Actual results could vary from the estimates that were assumed in
preparing the financial statements.
NOTE 2. ACQUISITIONS
On March 1, 1988, the Partnership acquired Edwardsville -East Nursing
Home, located in Illinois, for $3,750,000 plus capitalized acquisition
costs and fees of $276,595. The Partnership assumed $1,133,690 of debt
with the purchase.
F-9
<PAGE>
MEDICAL INCOME PROPERTIES 2B LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
The acquisition has been accounted for under the purchase method of
accounting. Consequently, only operations subsequent to the
acquisition date have been included in the accompanying financial
statements.
NOTE 3. INVESTMENTS IN JOINT VENTURES
-----------------------------
The Partnership has invested in two joint ventures with Medical Income
Properties 2A Limited Partnership (MIP2A). These joint ventures are
accounted for under the equity method.
THE TEXAS JOINT VENTURE
-----------------------
On May 1, 1988, the Partnership purchased 50% of Renaissance Place -
Katy Nursing Home located in Texas for $2,736,250 plus capitalized
acquisition costs and fees of $254,645. The seller took back a note
for $300,000 ($150,000 was the Partnership's share) due May 1, 1993
that has subsequently been paid.
On May 1, 1988, the Partnership purchased 50% of Renaissance Place -
Humble Nursing Home located in Texas for $2,243,750 plus capitalized
acquisition costs and fees of $114,406.
THE ALABAMA JOINT VENTURE
-------------------------
On July 1, 1988, the Partnership purchased 45.45% of Medical Park
Nursing Home located in Alabama for $2,317,950 plus capitalized
acquisition costs and fees of $172,379.
The condensed balance sheet information for the investments in joint
ventures as of December 31, 1996 and 1995 and operating statement
information for each of the years in the three-year period ending
December 31, 1996 is as follows:
<TABLE>
<CAPTION>
KATY 1996 1995
- ---- ---- ----
<S> <C> <C>
Current assets $2,501,874 $1,684,094
Long-term assets 4,771,630 5,048,138
---------- ----------
Total assets $7,273,504 $6,732,232
========== ==========
Current liabilities 860,008 684,328
Long-term liabilities - -
Equity 6,413,496 6,047,904
---------- ----------
Total liabilities
and equity $7,273,504 $6,732,232
========== ==========
</TABLE>
F-10
<PAGE>
MEDICAL INCOME PROPERTIES 2B LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<S> <C> <C> <C>
Katy (con't.)
- ----
Partnership's investment
at December 31,
1996 and 1995 $3,206,748 $3,023,952
========== ==========
1996 1995 1994
---- ---- ----
Revenues $5,039,616 $4,985,129 $3,700,538
Expenses 4,385,765 4,362,005 3,505,169
---------- ---------- -----------
Net income $ 653,851 $ 623,124 $ 195,369
========== ========== ===========
HUMBLE 1996 1995
- ------ ---- ----
Current assets $1,498,372 $1,140,926
Long-term assets 3,377,314 3,651,762
---------- ----------
Total assets $4,875,686 $4,792,688
========== ==========
Current liabilities 677,478 703,933
Long-term liabilities 631,250 691,850
Equity 3,566,958 3,396,905
---------- ----------
Total liabilities
and equity $4,875,686 $4,792,688
========== ==========
Partnership's investment
at December 31,
1996 and 1995 $1,783,479 $1,698,453
========== ==========
1996 1995 1994
---- ---- ----
Revenues $4,415,307 $3,664,088 $3,373,417
Expenses 3,954,042 3,526,809 3,113,890
---------- ---------- -----------
Net income $ 461,265 $ 137,279 $ 259,527
========== ========== ===========
MEDICAL PARK 1996 1995
- ------------ ---- ----
Current assets $1,699,553 $2,370,621
Long-term assets 5,369,994 5,308,640
---------- ----------
Total assets $7,069,547 $7,679,261
========== ==========
Current liabilities 743,586 713,232
Long-term liabilities 1,704,860 1,868,527
Equity 4,621,101 5,097,502
---------- ----------
Total liabilities
and equity $7,069,547 $7,679,261
========== ==========
</TABLE>
F-11
<PAGE>
MEDICAL INCOME PROPERTIES 2B LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<S> <C> <C> <C>
Medical Park (con't.)
- ------------
Partnership's investment
at December 31,
1996 and 1995 $2,100,682 $2,317,207
========== ==========
1996 1995 1994
---- ---- ----
Revenues $6,396,385 $5,907,763 $5,137,870
Expenses 5,579,678 5,192,923 4,595,148
---------- ---------- -----------
Net income $ 816,707 $ 714,840 $ 542,722
========== ========== ===========
</TABLE>
See Note 9 for contingency.
NOTE 4. PROPERTY AND EQUIPMENT
----------------------
Property and equipment consisted of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Land $ 90,000 $ 90,000
Buildings and improvements 3,812,869 3,817,099
Furniture and equipment 302,317 285,680
----------- -----------
Total 4,205,186 4,192,779
Accumulated depreciation
and amortization (1,349,990) (1,203,992)
----------- -----------
Net property and equipment $ 2,855,196 $ 2,988,787
=========== ===========
</TABLE>
NOTE 5. LONG-TERM DEBT
-------------
Long-term debt consisted of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Industrial Revenue Bonds payable at
a variable rate of interest (7.755%
at December 31, 1996 and 8.225% at
December 31, 1995) with monthly
principal and interest payments
of $9,645 through April 1, 2005.
The interest rate is adjusted every
May 1 and November 1, secured by
real estate. $ 703,697 $ 762,997
Less amounts due in one year
or less 63,388 57,447
---------- ----------
$ 640,309 $ 705,550
========== ==========
</TABLE>
F-12
<PAGE>
MEDICAL INCOME PROPERTIES 2B LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
The aggregate annual maturities of long-term debt for the succeeding
five fiscal years are as follows:
<TABLE>
<S> <C>
1997 $ 63,388
1998 68,482
1999 73,986
2000 79,932
2001 86,356
Thereafter 331,553
-----------
$ 703,697
===========
</TABLE>
NOTE 6. RELATED PARTY TRANSACTIONS
---------------------------
QualiCorp, Inc. charged the Partnership $84,896 in 1996, $80,278 in
1995, and $86,348 in 1994 for administrative expenses (primarily
salaries). QualiCorp, Inc. also charged the Partnership $132,974 for
property management fees in 1996.
Details of the amounts due to affiliates at December 31 are as
follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Due to QualiCorp, Inc. $156,787 $ 48,917
Due to The Texas Joint Venture -
Katy 184,075 184,075
Humble 26,556 26,556
Due to The Alabama Joint Venture -
Medical Park 473,417 382,517
Due to affiliates of the general partner - 495,848
-------- ----------
Due to affiliates $840,835 $1,137,913
======== ==========
</TABLE>
During the year ended December 31, 1995, the General Partners
established a pooled investment account in which the General Partners
and the partnerships in which they act as general partners could
participate. This account was used by those entities to invest
overnight cash balances, and borrow funds when an entity needed
temporary access to funds. Each entity received its share of interest
earned monthly, and was charged interest on any funds borrowed.
The Articles of Limited Partnership of the partnerships involved state
that no General Partner shall have the authority to cause those
partnerships to make loans other than in connection with the purchase,
sale or disposition of partnership property. The Articles of Limited
Partnership of those partnerships also state that the
F-13
<PAGE>
MEDICAL INCOME PROPERTIES 2B LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
partnerships' funds may not be commingled with any other entities'
funds except as necessary for the operation of those partnerships.
At December 31, 1995, the Partnership had borrowed $495,848 from the
other entities, and had paid interest of $13,116 from this
arrangement.
See Footnote 12 for sale of affiliated assets.
NOTE 7. INCOME TAXES
No provision for income taxes is made in the financial statements
since taxable income is reported in the income tax returns of the
partners.
Differences between the net income as reported in the financial
statements and Federal taxable income arise from the nature and timing
of certain revenue and expenses items. The following is a
reconciliation of reported net income and Federal taxable income.
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net income as reported $581,970 $331,053 $459,086
Adjustments:
Depreciation differences 17,720 41,967 59,055
Bad debt reserve 33,238 46,191 37,093
Vacation accrual 14,263 15,019 12,775
Insurance deductible - (51,636) -
Nondeductible travel
and entertainment 14,080 16,165 7,134
-------- -------- --------
Federal taxable income $661,271 $398,759 $575,143
======== ======== ========
Federal taxable income
per limited partnership
unit outstanding $56.38 $34.00 $49.04
======== ======== =======
</TABLE>
NOTE 8. CONTRACTUAL AGREEMENTS
----------------------
In 1988, the Partnership entered into a management agreement whereby
the Manager is required to perform certain services. The agreement had
an initial five-year term with one additional five-year option that
was exercised in 1993. Fees were based on 6% of gross collected
operating revenues through June 30, 1992. Thereafter they were based
on 5% of gross collected operating revenues, but not less than
$140,000 in a calendar year and are increased by an inflation factor
after 1992. The Manager has a right of first refusal to match a bona
fide offer made by an outside party to purchase or lease the nursing
home. The management agreement, as amended, contained a termination
clause.
F-14
<PAGE>
MEDICAL INCOME PROPERTIES 2B LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
The management agreement was amended on January 1, 1995. The amendment
calls for a fixed monthly management fee of $13,371 with a cost of
living factor equal to the greater of 4% per annum or the increase in
the Consumer Price Index or such other measure mutually agreeable to
the parties. The agreement expires December 31, 1998. The termination
on sale clause was amended to base the fee on a sum equal to the
discounted present value of the monthly management fee as of the date
of termination of the agreement times the number of months remaining
in the management agreement discounted to the date of termination at
an annual interest rate of ten percent (10%). In addition, the parties
agreed to terminate the Manager's right of first refusal.
Commencing January 1, 1996, the Management Agreement was extended for
a period of up to a maximum of eighteen months by one month for every
month after January 1, 1996 in which the parties are engaged in the
process of attempting to sell the Facilities. In the event of a sale
of the Facilities, the termination on sale fee described above would
be discounted to the date of termination at an annual rate of ten
percent (10%) and then further discounted by a factor of thirty-three
and one-third percent (33 1/3%).
Management fees charged to the partnership were $166,875 in 1996,
$160,456 in 1995, and $154,285 in 1994.
NOTE 9. CONTINGENCY
-----------
On May 1, 1990, the Texas Joint Venture, of which the Partnership owns
50%, began self insuring its workmen's compensation claims for two
nursing home facilities located in Texas. Accrued liabilities have
been estimated to cover all asserted and unasserted claims and
assessments and funds have been escrowed to cover such claims.
The Partnership maintains insurance or reserves which it believes are
adequate to meet the needs of the Partnership. While the Partnership
has been named as a defendant in several lawsuits, nothing has come to
the attention of the Partnership which leads it to believe that it is
exposed to a risk of material loss not covered by insurance or
reserves.
The real estate owned by The Texas Joint Venture and The Alabama Joint
Venture is mortgaged as security on debt incurred by the Partnership's
joint venture partner Medical Income Properties 2A Limited partnership
(MIP2A). This debt is also secured by all other real estate owned by
MIP2A. The total outstanding debt secured by all these properties is
$3,805,555.
F-15
<PAGE>
MEDICAL INCOME PROPERTIES 2B LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
NOTE 10. CONCENTRATIONS IN REVENUE SOURCES
---------------------------------
The Partnership provides patient care services under various third
party agreements. The principal sources of revenue under these
contracts are derived primarily through the Medicaid and Medicare
programs, as well as contracts with private pay patients who do not
qualify for assistance from the other programs. The percentage of the
Joint Venture's income from each of these sources for the years ended
December 31, 1996, 1995, and 1994 is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Private pay patients 12.05% 11.34% 11.71%
Medicaid 48.03% 47.47% 62.82%
Medicare 39.92% 41.19% 25.47%
------- ------- -------
Total 100.00% 100.00% 100.00%
======= ======= =======
</TABLE>
The percentage attributable to private pay patients includes only
amounts due for services where the primary payer is a private source.
The Medicaid and Medicare percentages include amounts due from those
programs as well as the patient's financial responsibility incurred
under these contracts.
NOTE 11. FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial Accounting Statement No. 107, Disclosures about Fair Value
of Financial Instruments ("FAS 107") requires disclosure of fair value
information about financial instruments, whether or not recognized on
the face of the balance sheet, for which it is practicable to estimate
the value. The assumptions used in the estimation of the fair value of
the Company's financial instruments are detailed below. Where quoted
prices are not available, fair values are based on estimates using
discounted cash flows and other valuation techniques. The use of
discounted cash flows can be significantly affected by the assumptions
used, including the discount rate and estimates of future cash flows.
The following disclosures should not be considered a surrogate of the
liquidation value of the Company, but rather represents a good-faith
estimate of the increase or decrease in value of financial instruments
held by the Company since purchase, origination or issuance. The
following methods and assumptions were used by the Company in
estimating the fair value of its financial instruments:
Long-term Debt: For variable rate notes, fair values are based on
carrying values.
The other financial instruments of the Company are short-term
assets and liabilities whose carrying amounts reported in the
F-16
<PAGE>
MEDICAL INCOME PROPERTIES 2B LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
balance sheet approximate fair value. These items include cash,
accounts receivable and accounts payable.
NOTE 12. SUBSEQUENT EVENT
----------------
On February 3, 1997, Medical Income Properties 2B Limited Partnership
entered into a purchase agreement with Omega Healthcare Investors,
Inc. to sell all of the real and personal property of the nursing home
facilities.
The purchase price is allocated among the facilities as follows:
<TABLE>
<S> <C>
Edwardsville - East Nursing Home
(120 beds) $ 2,383,000
Medical Park Convalescent Center
(183 beds) - 45.45% ownership 4,522,275
Renaissance Place - Katy (130 beds) -
50% ownership 2,984,500
Renaissance Place - Humble (120 beds) -
50% ownership 2,487,500
-----------
Proceeds from sale $12,377,275
===========
</TABLE>
Proceeds from the sale will be reduced by expenses incurred as a
result of the sale, cash offsets for liabilities assumed by the buyer
and existing indebtedness. These payments should approximate
$3,965,000.
The closing could take place as early as March 31, 1997 and can be
extended by the Partnership until April 30, 1997. If conditions
precedent to either party's obligation to close are not satisfied or
waived, the closing can be extended to a date no later than July 31,
1997. Approximately $395,450 of these proceeds will be set aside in a
joint signature account for the purpose of securing all of the
seller's obligations under the purchase agreement. These funds will be
available to the Partnership in the event that these obligations do
not exceed the funds held in escrow.
In addition, a separate amount of proceeds of approximately $500,000
will also be held in reserve by the Partnership pending final
settlement of third-party cost reports and other contingencies.
This agreement can be terminated by mutual consent of the parties and
other conditions precedent.
In conjunction with the above sale, Omega Healthcare Investors, Inc.
has agreed to a similar purchase of assets from RWB Medical Properties
Limited Partnership IV, of which an officer of QualiCorp, Inc. owns
either directly or indirectly a 21.53% interest. This
F-17
<PAGE>
MEDICAL INCOME PROPERTIES 2B LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
sale relates to a 131 bed nursing home in Patterson, Louisiana and the
purchase price for the assets is $5,350,000.
F-18
<PAGE>
[LETTERHEAD OF SELF & MAPLES, P.A. APPEARS HERE]
INDEPENDENT AUDITORS' REPORT
ON ADDITIONAL INFORMATION
To the Partners
Medical Income Properties 2B Limited Partnership
Our report on our audits of the basic financial statements of Medical Income
Properties 2B Limited Partnership for 1996 appears on page 1. Those audits were
made for the purpose of forming an opinion on the basic financial statements
taken as a whole. The Schedule of Valuation and Qualifying Accounts and Reserves
for Allowances for Doubtful Accounts, Schedule of Consolidated Supplementary
Income Statement Information, and Schedule of Real Estate and Accumulated
Depreciation are presented for purposes of additional analysis and are not
required parts of the basic financial statements. Such information has been
subjected to the auditing procedures applied to the audits of the basic
financial statements, and in our opinion, is fairly stated in all material
respects in relation to the financial statements taken as a whole.
SELF & MAPLES, P.A.
Oneonta, Alabama
January 24, 1997, except for Note 14, as to which the date is
February 3, 1997
F-19
<PAGE>
MEDICAL INCOME PROPERTIES 2B LIMITED PARTNERSHIP
SCHEDULE VIII
VALUATION AND QUALIFYING ACCOUNTS
AND RESERVES FOR ALLOWANCES FOR DOUBTFUL ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
--------- -------- ---------
<S> <C> <C> <C>
Balance at beginning of year $ 54,188 $ 35,327 $ 25,015
Charged to patient service revenues 32,984 11,236 (6,133)
Write-offs 15,177 7,625 16,445
--------- -------- --------
Balance at end of year $ 102,349 $ 54,188 $ 35,327
========= ======== ========
</TABLE>
F-20
<PAGE>
MEDICAL INCOME PROPERTIES 2B LIMITED PARTNERSHIP
SCHEDULE X
CONSOLIDATED SUPPLEMENTARY INCOME STATEMENT INFORMATION
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Professional care of patients
Nursing salaries and wages $ 986,150 $ 1,016,764 $ 854,741
Ancillary service expense 678,357 713,913 230,229
Supplies 89,567 108,192 113,202
Temporary labor 939 8,423 40,476
General and administrative
Salaries and wages 93,837 87,897 77,150
Accounting and auditing 46,552 42,807 42,463
Insurance 150,623 161,912 198,425
Property tax 73,649 76,239 76,446
Management fees 166,875 160,456 154,285
Property management fees 132,974 - -
Cost reimbursement 84,896 80,278 86,348
Dietary
Food cost 134,948 128,930 133,949
Household and plant
Repairs and maintenance 10,212 23,852 12,053
Utilities 126,040 120,078 115,921
Depreciation $ 145,999 $ 150,316 $ 150,147
========== =========== ==========
</TABLE>
F-21
<PAGE>
MEDICAL INCOME PROPERTIES 2B LIMITED PARTNERSHIP
SCHEDULE XI
REAL ESTATE AND ACCUMULATED DEPRECIATION
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
INITIAL COST COSTS CAPITALIZED GROSS AMOUNT AT WHICH CARRIED
TO PARTNERSHIP(A) SUBSEQUENT TO AS OF DECEMBER 31, 1996(B)
ACQUISITION
BUILDING AND CARRYING BUILDING AND
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS IMPROVEMENTS COST LAND IMPROVEMENTS TOTAL
- ------------------ ---------------- ----------------------- -------------------------- ---------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
EDWARDSVILLE-EAST $703,697 $90,000 $3,660,000 $ 178,591 $ 276,595 $ 90,000 $ 4,115,186 $4,205,186
================ ======================= ========================== =======================================
<CAPTION>
LIFE ON WHICH
DEPRECIATION
IN LATEST
STATEMENT OF
ACCUMULATED DATE OF DATE OPERATION IS
DESCRIPTION DEPRECIATION CONSTRUCTION ACQUIRED COMPUTED
- ------------------- ------------ -------------------------------------------------------
<S> <C> <C> <C> <C>
EDWARDSVILLE-EAST $ 1,349,990 1987 05/01/88 5 TO 30 YEARS
============
</TABLE>
(A) The initial cost to the Partnership represents the original purchase price
of the properties.
(B) The aggregate cost of real estate owned at December 31, 1996 for Federal
Income tax purposes was approximately $4,140,355.
(C) Reconciliation of real estate owned at December 31, 1996, 1995, and 1994:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ------------- -----------
<S> <C> <C> <C>
Balance at beginning of period $4,192,779 $4,140,355 $4,075,542
Additions 12,407 52,424 64,813
Reductions 0 0 0
------------ ------------ -----------
Balance at end of period $4,205,186 $4,192,779 $4,140,355
============ ============ ===========
</TABLE>
(D) Reconciliation of accumulated depreciation:
<TABLE>
<S> <C> <C> <C>
Balance at beginning of period $1,203,992 $1,053,675 $ 903,528
Depreciation expense 145,998 150,317 150,147
Reductions 0 0 0
------------- ------------ -----------
Balance at end of period $1,349,990 $1,203,992 $1,053,675
============= ============ ===========
</TABLE>
F-22
<PAGE>
[LETTERHEAD OF SELF & MAPLES, P.A. APPEARS HERE]
INDEPENDENT AUDITORS' REPORT
To the Partners
The Alabama Joint Venture
We have audited the balance sheets of The Alabama Joint Venture as of December
31, 1996 and 1995 and the related statements of operations, partners' capital
and cash flows for each of the three years in the three-year period ended
December 31, 1996. These financial statements are the responsibility of the
Joint Venture's management. Our responsibility is to express an opinion on the
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 financial position of The Alabama Joint Venture as of
December 31, 1996 and 1995 and the results of its operations and its cash flows
for each of the three years in the three-year period ended December 31, 1996 in
conformity with generally accepted accounting principles.
SELF & MAPLES, P.A.
Oneonta, Alabama
January 24, 1997, except for Note 12, as to which the date is
February 3, 1997
F-23
<PAGE>
THE ALABAMA JOINT VENTURE
BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
------------ ------------
ASSETS
------
<S> <C> <C>
Current assets
Cash and cash equivalents $ 491,979 $ 297,621
Marketable securities 250,100 955,515
Patient accounts receivable, net of
allowance for doubtful accounts of
$38,502 in 1996 and $42,684 in 1995 511,724 643,798
Interest receivable 1,320 2,213
Estimated third-party payor settlements 429,090 445,824
Prepaid expenses and other assets 15,340 25,650
------------ ------------
Total current assets 1,699,553 2,370,621
Property and equipment, net of accumulated
depreciation and amortization 4,383,681 4,372,881
Due from affiliates 980,471 925,792
Deferred financing costs, net of
accumulated amortization of $14,780
in 1996 and $10,655 in 1995 5,842 9,967
------------ ------------
Total assets $ 7,069,547 $ 7,679,261
============ ============
LIABILITIES AND PARTNERS' CAPITAL
---------------------------------
Current liabilities
Current maturities of long-term debt 163,667 163,667
Accounts payable 254,902 317,881
Accrued payroll and payroll taxes 86,000 70,764
Accrued vacation 86,243 71,814
Accrued insurance 8,489 11,812
Accrued management fees 24,833 23,877
Estimated third-party payor settlements 58,291 -
Patient deposits and trust liabilities 39,668 31,787
Other accrued expenses 21,493 21,630
------------ ------------
Total current liabilities 743,586 713,232
Long-term debt, net of current maturities 1,704,860 1,868,527
------------ ------------
Total liabilities 2,448,446 2,581,759
------------ ------------
Partners' capital 4,621,101 5,097,502
------------ ------------
Total liabilities and partners' capital $ 7,069,547 $ 7,679,261
============ ============
</TABLE>
See accompanying notes to financial statements.
F-24
<PAGE>
THE ALABAMA JOINT VENTURE
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Revenues
Net patient service revenue $ 6,393,242 $ 5,903,666 $ 5,132,454
Other revenue 3,143 4,097 5,416
------------ ------------ ------------
Total revenue 6,396,385 5,907,763 5,137,870
------------ ------------ ------------
Operating expenses
Professional care of
patients 3,025,669 2,698,179 2,073,096
Dietary 517,954 479,390 454,212
Household and plant 483,065 476,219 461,555
General and administrative 753,975 727,852 764,525
Employee health and welfare 253,917 236,830 236,575
Depreciation and
amortization 232,160 252,043 262,019
------------ ------------ ------------
Total operating expenses 5,266,740 4,870,513 4,251,982
------------ ------------ ------------
Operating income 1,129,645 1,037,250 885,888
------------ ------------ ------------
Other income (expenses)
Interest income 54,842 72,267 28,673
Interest expense (184,787) (211,684) (188,846)
Provider fees (182,993) (182,993) (182,993)
------------ ------------ ------------
Total other income
(expenses) (312,938) (322,410) (343,166)
------------ ------------ ------------
Net income $ 816,707 $ 714,840 $ 542,722
============ ============ ============
</TABLE>
See accompanying notes to financial statements.
F-25
<PAGE>
THE ALABAMA JOINT VENTURE
STATEMENTS OF PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
MEDICAL INCOME PROPERTIES
LIMITED PARTNERSHIPS
--------------------
2A 2B TOTAL
------------ ------------ -------------
<S> <C> <C> <C>
Partners' capital at
December 31, 1993 $ 2,245,570 $ 1,871,684 $ 4,117,254
Distributions to
partners (103,645) (86,355) (190,000)
Net income 296,055 246,667 542,722
Unrealized loss on
marketable securities
available for sale (9,479) (7,898) (17,377)
------------ ------------ -------------
Partners' capital at
December 31, 1994 2,428,501 2,024,098 4,452,599
Distributions to
partners (49,095) (40,905) (90,000)
Net income 389,945 324,895 714,840
Unrealized gain on
marketable securities
available for sale 10,944 9,119 20,063
------------ ------------ -------------
Partners' capital at
December 31, 1995 2,780,295 2,317,207 5,097,502
Distributions to
partners (703,695) (586,305) (1,290,000)
Net Income 445,514 371,193 816,707
Unrealized loss on
marketable securities
available for sale (1,695) (1,413) (3,108)
------------ ------------ -------------
Partners' capital at
December 31, 1996 $ 2,520,419 $ 2,100,682 $ 4,621,101
============ ============ =============
</TABLE>
See accompanying notes to financial statements.
F-26
<PAGE>
THE ALABAMA JOINT VENTURE
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Cash received from patient care $ 6,600,341 $ 5,201,651 $ 5,105,784
Interest received 58,042 69,594 19,780
Other operating receipts 3,143 4,097 5,416
Cash paid to suppliers and
employees (5,052,207) (4,479,328) (3,888,461)
Interest paid (184,787) (211,684) (188,846)
Provider fees (182,993) (182,993) (182,993)
------------- ------------- -------------
Net cash provided (used) by operations 1,241,539 401,337 870,680
------------- ------------- -------------
Cash flows from investing activities:
Capital expenditures (238,835) (130,636) (84,163)
Purchases of marketable securities - (252,099) (988,791)
Maturities of marketable securities 700,000 293,993 -
------------- ------------- -------------
Net cash provided (used) by investing
activities 461,165 (88,742) (1,072,954)
------------- ------------- -------------
Cash flows from financing activities:
Payments on long-term debt and
lease obligations (163,667) (165,037) (169,444)
Distributions to partners (1,290,000) (90,000) (190,000)
Net related party transactions (54,679) (160,872) (220,513)
------------- ------------- -------------
Net cash provided (used) by
financing activities (1,508,346) (415,909) (579,957)
------------- ------------- -------------
Net increase (decrease) in cash and
cash equivalents 194,358 (103,314) (782,231)
Cash and cash equivalents, beginning
of year 297,621 400,935 1,183,166
------------- ------------- -------------
Cash and cash equivalents, end of year $ 491,979 $ 297,621 $ 400,935
============= =========== ============
</TABLE>
See accompanying notes to financial statements.
F-27
<PAGE>
THE ALABAMA JOINT VENTURE
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- -------------- -------------
<S> <C> <C> <C>
RECONCILIATION OF NET INCOME TO NET
- -----------------------------------
CASH PROVIDED BY OPERATING ACTIVITIES
- -------------------------------------
Net income $ 816,707 $ 714,840 $ 542,722
----------- -------------- -------------
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 232,160 252,043 262,019
Provision for losses on accounts receivable 33,872 32,956 41,660
(Increase) decrease in:
Patient accounts receivable, net 98,202 (253,138) (205,764)
Interest receivable, securities premium amortization,
and securities discount accretion 3,200 54 (8,894)
Estimated third-party payor settlements 16,734 (413,954) 137,435
Prepaid expenses and other assets 10,310 29,869 (25,571)
Increase (decrease) in:
Accounts payable (62,979) 158,732 71,936
Accrued expenses 27,161 (56,318) 10,303
Estimated third-party payor settlements 58,291 (70,606) 31,885
Other liabilities 7,881 6,859 12,949
----------- -------------- -------------
Total adjustments 424,832 (313,503) 327,958
----------- -------------- -------------
Net cash provided (used) by operating activities $1,241,539 $ 401,337 $ 870,680
=========== ============== =============
Supplemental schedule of noncash investing and financing activities:
Unrealized (gain) loss on marketable securities available for sale $ 3,108 $ (20,063) $ 17,377
=========== ============== =============
</TABLE>
See accompanying notes to financial statements.
F-28
<PAGE>
THE ALABAMA JOINT VENTURE
NOTES TO FINANCIAL STATEMENTS
Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
(a) Organization
------------
The Alabama Joint Venture was formed on July 1, 1988, and is
engaged in the business of acquiring, operating and holding for
investment purposes, income-producing, health care related
properties, primarily nursing homes. The joint venture partners
are Medical Income Properties 2A Limited Partnership (MIP2A) and
Medical Income Properties 2B Limited Partnership (MIP2B). Medical
Income Properties 2A Limited Partnership owns 54.55% of the Joint
Venture while Medical Income Properties 2B Limited Partnership
owns 45.45% of the Joint Venture. Both partners are part of a
series of three Delaware limited partnerships as represented by a
Partnership Prospectus dated October 22, 1986. The Alabama Joint
Venture currently owns and operates one nursing home in Alabama.
(b) Allocation of Net Profits and Net Losses
----------------------------------------
Net profits and net losses are shared according to the partners'
ownership percentages; 54.55% to Medical Income Properties 2A and
45.45% to Medical Income Properties 2B.
(c) Cash Distributions
------------------
Cash distributions are made quarterly within 45 days after the
end of the quarter. Cash flow is distributed to the partners
according to their ownership percentages. Sale or financing
proceeds will be distributed first to creditors and then to the
partners according to their ownership percentages.
(d) Patient Service Revenue
-----------------------
Patient service revenue is recorded at the nursing home's
established rates with contractual adjustments ($1,615,337 in
1996, $1,536,130 in 1995 and $774,913 in 1994), provision for
uncollectible accounts, (bad debt expense of $33,872 in 1996,
$32,956 in 1995 and $41,660 in 1994) and other discounts deducted
to arrive at net patient service revenue.
Net patient service revenue includes amounts estimated by
management to be reimbursable by Medicare, Medicaid and other
third-party programs under the provisions of cost and prospective
payment reimbursement formulas in effect. Amounts received under
these programs are generally less than the established billing
rates of the nursing homes and the difference is reported as a
contractual adjustment and deducted from gross revenue.
F-29
<PAGE>
THE ALABAMA JOINT VENTURE
NOTES TO FINANCIAL STATEMENTS
The nursing home recognizes currently estimated final settlements
due from or to third party programs. Final determination of
amounts earned is subject to audit by the intermediaries.
Differences between estimated provisions and final settlement are
reflected as charges or credits to operating revenues in the year
the cost reports are finalized.
(e) Property and Equipment
----------------------
Property and equipment are stated at cost. Depreciation of the
buildings is provided over their estimated useful lives of thirty
years on the straight-line method. Equipment and other personal
property are depreciated over five to seven years on the
straight-line method.
(f) Income Taxes
------------
Taxable income is allocated to the partners and, therefore, no
income taxes have been provided for in these financial
statements.
(g) Cash Equivalents Policy
-----------------------
For the purposes of the statements of cash flows, the Joint
Venture considers all highly liquid debt instruments with an
original maturity of three months or less to be cash equivalents.
(h) Uninsured Cash Balances
-----------------------
The Joint Venture maintains cash balances in several banks. Cash
accounts at banks are insured by the FDIC for up to $100,000.
Amounts in excess of insured limits were approximately $359,216
at December 31, 1996 and $161,873 at December 31, 1995. The 1996
and 1995 amounts do not include the total of commingled funds
discussed in Note 8, since the amount in excess of FDIC limits
related to these funds is not determinable.
(i) Marketable Securities
---------------------
The classification of marketable securities is determined at the
date of purchase. Gains or losses on the sale of securities are
recognized on a specific identification basis. Marketable
securities represent an investment of excess funds as a part of
the Joint Venture's cash management policies. These securities
are considered to be available for sale under Statement of
Financial Accounting Standards No. 115 and are, thus, stated at
fair value. Unrealized gains and losses are
F-30
<PAGE>
THE ALABAMA JOINT VENTURE
NOTES TO FINANCIAL STATEMENTS
recognized as a component of partners' capital as is required by
SFAS No. 115.
(i) Uses of Estimates
-----------------
Management uses estimates and assumptions in preparing financial
statements in accordance with generally accepted accounting
principles. Those estimates and assumptions affect the reported
amounts of assets and liabilities, the disclosure of contingent
assets and liabilities, and the reported revenues and expenses.
Actual results could vary from the estimates that were assumed in
preparing the financial statements.
Note 2. ACQUISITIONS
------------
On July 1, 1988, the Joint Venture purchased Medical Park Nursing Home
(183 beds) located in Alabama for $5,100,000 plus capitalized
acquisition costs and fees of $379,272.
Note 3. MARKETABLE SECURITIES
---------------------
Marketable securities consist of U.S. Treasury securities. The
following schedule summarizes marketable securities activity for the
years ended December 31, 1996 and 1995.
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Beginning balance, at amortized cost $ 952,829 $ 996,509
Purchase of marketable securities - 252,095
Redemption of investments (700,000) (293,993)
Net amortization of premiums and
accretion of discounts (2,305) (1,782)
--------- ---------
Amortized cost 250,524 952,829
Gross unrealized gain (loss) (424) 2,686
--------- ---------
Fair value $ 250,100 $ 955,515
========= =========
The maturities of investment securities at December 31, 1996 were as
follows:
Due in one year or less $ 250,524
=========
</TABLE>
F-31
<PAGE>
THE ALABAMA JOINT VENTURE
NOTES TO FINANCIAL STATEMENTS
Note 4. PROPERTY AND EQUIPMENT
----------------------
Property and equipment consisted of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Land $ 400,000 $ 400,000
Buildings and improvements 5,473,692 5,256,767
Furniture and equipment 585,827 563,917
---------- ----------
Total 6,459,519 6,220,684
Accumulated depreciation
and amortization (2,075,838) (1,847,803)
---------- ----------
Net property and equipment $4,383,681 $4,372,881
========== ==========
</TABLE>
Note 5. LONG-TERM DEBT
--------------
Long-term at debt December 31 was as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Mortgage notes with interest
at prime plus 1% (9.25% at
December 31, 1996 and 9.5% at
December 31, 1995) payable
in 60 payments of $13,639 plus
interest through April 26,
1998, with a balloon pay-
ment due May 26, 1998 $1,868,527 $2,032,194
Less amounts due in one year
or less 163,667 163,667
---------- ----------
$1,704,860 $1,868,527
========== ==========
</TABLE>
The aggregate annual maturities of long-term debts are as follows:
<TABLE>
<S> <C>
1997 $ 163,667
1998 1,704,860
----------
$1,868,527
==========
</TABLE>
The mortgage note is secured by all real estate owned by the Joint
Venture, as well as the real estate owned by The Texas Joint Venture.
Both the Joint Venture and The Texas Joint Venture are jointly owned
by the Medical Income Properties 2A Limited Partnership (MIP2A) and
the Medical Income Properties 2B Limited Partnership (MIP2B). The
General Partner of MIP2A and MIP2B has guaranteed the debt, as well as
pledged its stock and partnership interest. The management company
(See Note 6) has also guaranteed the debt and entered into a negative
pledge agreement whereby it will not pledge, transfer or encumber its
stock while the loan is
F-32
<PAGE>
THE ALABAMA JOINT VENTURE
NOTES TO FINANCIAL STATEMENTS
outstanding. All management fees are subordinate to the debt. The loan
document contains restrictive covenants associated with ratio and
earnings requirements. Management is not aware of any conditions that
exist that would cause them to be in noncompliance with these
requirements.
Note 6. CONTRACTUAL AGREEMENTS
----------------------
On July 1, 1988, the Joint Venture entered into a management agreement
whereby the Manager was required to perform certain services. The
agreement had an initial five-year term with one additional five-year
option. Fees were based on 6% of gross collected operating revenues
through June 30, 1993. Thereafter they were based on 5% of gross
collected operating revenues, but not less than $250,000 in a calendar
year and were increased by an inflation factor after 1992. These fees
are subordinated to the outstanding mortgage debt (See Note 5). The
Manager has a right of first refusal to match a bona fide offer made
by an outside party to purchase or lease the nursing home. The
management agreement, as amended, contained a termination clause.
The management agreement was amended on January 1, 1995. The amendment
calls for a fixed monthly management fee of $23,877 with a cost of
living factor equal to the greater of 4% per annum or the increase in
the Consumer Price Index or such other measure mutually agreeable to
the parties. The agreement expires December 31, 1998. The termination
on sale clause was amended to base the fee on a sum equal to the
discounted present value of the monthly management fee as of the date
of termination of the agreement times the number of months remaining
in the management agreement discounted to the date of termination at
an annual interest rate of ten percent (10%). In addition, the parties
agreed to terminate the Manager's right of first refusal.
Commencing January 1, 1996, the Management Agreement was extended for
a period of up to a maximum of eighteen months by one month for every
month after January 1, 1996 in which the parties are engaged in the
process of attempting to sell the Facility. In the event of a sale of
the Facility, the termination on sale fee described above would be
discounted to the date of termination at an annual rate of ten percent
(10%) and then further discounted by a factor of thirty-three and one-
third percent (33 1/3%).
Management fees charged to the Joint Venture were $297,990 in 1996,
$286,529 in 1995, and $275,509 in 1994.
F-33
<PAGE>
THE ALABAMA JOINT VENTURE
NOTES TO FINANCIAL STATEMENTS
Note 7. INCOME TAXES
------------
No provision for income taxes is made in the financial statements
since taxable income is reported in the income tax returns of the
partners.
Differences between the net income as reported in the financial
statements and Federal taxable income arise from the nature and timing
of certain revenue and expense items. The following is a
reconciliation of reported net income and Federal taxable income.
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net income as reported $ 816,707 $ 714,840 $ 542,722
Adjustments:
Depreciation differences (1,935) 27,157 49,037
Bad debt reserve (4,182) (23,316) 41,000
Nondeductible travel and
entertainment 3,407 2,534 1,753
Accrued insurance - (8,000) -
Vacation accrual 14,429 1,204 7,376
--------- --------- ---------
Federal taxable income $ 828,426 $ 714,419 $ 641,888
========= ========= =========
</TABLE>
Note 8. RELATED PARTY TRANSACTIONS
--------------------------
Amounts due from affiliates at December 31 are stated as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Due from MIP2A $ 507,054 $ 447,954
Due from MIP2B 473,417 382,517
Due from affiliates of the general
partner - 95,321
--------- ---------
Due from affiliates $ 980,471 $ 925,792
========= =========
</TABLE>
During the year ended December 31, 1995, the General Partners
established a pooled investment account in which the General Partners
and the partnerships in which they act as general partners could
participate. This account was used by those entities to invest
overnight cash balances, and borrow funds when an entity needed
temporary access to funds. Each entity received its share of interest
earned monthly, and was charged interest on any funds borrowed.
The Articles of Limited Partnership of the joint venture partners
state that no General Partner shall have the authority to cause the
joint venture partners to make loans other than in connection with the
purchase, sale or disposition of partnership property. The
F-34
<PAGE>
THE ALABAMA JOINT VENTURE
NOTES TO FINANCIAL STATEMENTS
Articles of Limited Partnership also state the joint venture partners'
funds may not be commingled with any other entities' funds except as
necessary for the operation of the partnerships.
At December 31, 1995, the Joint Venture had loaned $95,321 to the
other entities, and had earned interest of $9,633 from this
arrangement.
See Footnote 12 for sale of affiliated assets.
Note 9. CONTINGENCY
-----------
The real estate owned by The Alabama Joint Venture is mortgaged as
security on debt incurred by a joint venture partner - Medical Income
Properties 2A Limited partnership (MIP2A). This debt is also secured
by all other real estate owned by MIP2A. The total outstanding debt
secured by all these properties is $3,805,555.
Note 10. CONCENTRATIONS IN REVENUE SOURCES
---------------------------------
The Joint Venture provides patient care services under various third
party agreements. The principal sources of revenue under these
contracts are derived primarily through the Medicaid and Medicare
programs, as well as contracts with private pay patients who do not
qualify for assistance from the other programs. The percentage of the
Joint Venture's income from each of these sources for the years ended
December 31, 1996, 1995, and 1994 is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Patients and sponsors 10.28% 14.25% 19.54%
Medicaid 55.54% 49.53% 61.49%
Medicare 34.18% 36.22% 18.97%
------ ------ ------
Total 100.00% 100.00% 100.00%
====== ====== ======
</TABLE>
The percentage attributable to private pay patients includes only
amounts due for services where the primary payer is a private source.
The Medicaid and Medicare percentages include amounts due from those
programs as well as the patient's financial responsibility incurred
under these contracts.
Note 11. FAIR VALUE OF FINANCIAL INSTRUMENTS
-----------------------------------
Financial Accounting Statement No. 107, Disclosures about Fair Value
of Financial Instruments ("FAS 107") requires disclosure of fair value
information about financial instruments, whether or not recognized on
the face of the balance sheet, for which it is practicable to estimate
the value. The assumptions used in the estimation of the fair value of
the Company's financial instruments
F-35
<PAGE>
THE ALABAMA JOINT VENTURE
NOTES TO FINANCIAL STATEMENTS
are detailed below. Where quoted prices are not available, fair values
are based on estimates using discounted cash flows and other valuation
techniques. The use of discounted cash flows can be significantly
affected by the assumptions used, including the discount rate and
estimates of future cash flows. The following disclosures should not
be considered a surrogate of the liquidation value of the Company, but
rather represents a good-faith estimate of the increase or decrease in
value of financial instruments held by the Company since purchase,
origination or issuance. The following methods and assumptions were
used by the Company in estimating the fair value of its financial
instruments:
Investment securities available from sale: These securities are
being carried at fair market value as determined by quoted market
prices.
Long-term Debt: For variable rate notes, fair values are based on
carrying values.
The other financial instruments of the Company are short-term
assets and liabilities whose carrying amounts reported in the
balance sheet approximate fair value. These items include cash,
accounts receivable and accounts payable.
Note 12. SUBSEQUENT EVENT
----------------
On February 3, 1997, Medical Income Properties 2A Limited Partnership
and Medical Income Properties 2B Limited Partnership, the general
partners of The Alabama Joint Venture, entered into a purchase
agreement with Omega HealthCare Investors, Inc. to sell all of the
real and personal property of the 183 bed nursing home known as
Medical Park Convalescent Center.
The purchase price allocated to Medical Park is $9,950,000. The
closing could take place as early as March 31, 1997 and can be
extended by the Partnership until April 30, 1997. If conditions
precedent to either party's obligation to close are not satisfied or
waived, the closing can be extended to a date no later than July 31,
1997. Approximately $362,000 of these proceeds will be set aside in a
joint signature account for the purpose of securing all of the
seller's obligations under the purchase agreement. These funds will be
available to the Partnership in the event that these obligations do
not exceed the funds held in escrow.
In addition, a separate amount of proceeds of approximately $397,000
will also be held in reserve by the Alabama Joint Venture pending
final settlement of third-party cost reports and other contingencies.
F-36
<PAGE>
THE ALABAMA JOINT VENTURE
NOTES TO FINANCIAL STATEMENTS
Proceeds from the sale will be reduced by expenses incurred as a
result of the sale, cash offsets for liabilities assumed by the buyer
and existing indebtedness. These payments should approximate
$3,516,000.
This agreement can be terminated by mutual consent of the parties and
other conditions precedent.
In conjunction with the above sale, Omega HealthCare Investors, Inc.
has agreed to a similar purchase of assets from RWB Medical Properties
Limited Partnership IV, of which an officer of QualiCorp, Inc. owns
either directly or indirectly a 21.53% interest. This sale relates to
a 131 bed nursing home in Patterson, Louisiana and the purchase price
for the assets is $5,350,000.
F-37
<PAGE>
[LETTERHEAD OF SELF & MAPLES, P.A. APPEARS HERE]
INDEPENDENT AUDITORS' REPORT
ON ADDITIONAL INFORMATION
To the Partners
The Alabama Joint Venture
Our report on our audits of the basic financial statements of The Alabama
Joint Venture for 1996 appears on page 1. Those audits were made for the
purpose of forming an opinion on the basic financial statements taken as a
whole. The Schedule of Valuation and Qualifying Accounts and Reserves for
Allowances for Doubtful Accounts, Schedule of Consolidated Supplementary
Income Statement Information, and Schedule of Real Estate and Accumulated
Depreciation are presented for purposes of additional analysis and are not
required parts of the basic financial statements. Such information has been
subjected to the auditing procedures applied to the audits of the basic
financial statements, and in our opinion, is fairly stated in all material
respects in relation to the financial statements taken as a whole.
SELF & MAPLES, P.A
Oneonta, Alabama
January 24, 1997, except for Note 12, as to which the date is
February 3, 1997
F-38
<PAGE>
THE ALABAMA JOINT VENTURE
SCHEDULE VIII
VALUATION AND QUALIFYING ACCOUNTS
AND RESERVES FOR ALLOWANCES FOR DOUBTFUL ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ---------
<S> <C> <C> <C>
Balance at beginning of year $ 42,684 $ 66,000 $ 25,000
Charged to patient service
revenue (38,054) (56,272) (660)
Write-offs 33,872 32,956 41,660
---------- ---------- ---------
Balance at end of year $ 38,502 $ 42,684 $ 66,000
========== ========== =========
</TABLE>
F-39
<PAGE>
THE ALABAMA JOINT VENTURE
SCHEDULE X
SUPPLEMENTARY INCOME STATEMENT INFORMATION
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Professional care of patients
Salaries and wages $ 1,808,353 $ 1,657,908 $ 1,553,602
Ancillary service expense 821,795 629,505 175,645
Supplies 109,716 123,550 88,497
General and administrative
Salaries and wages 121,619 118,380 122,197
Accounting and auditing 58,340 49,491 50,456
Insurance 180,348 155,990 215,447
Property tax 25,496 25,491 25,586
Management fees 297,990 286,529 275,509
Dietary
Food cost 252,802 228,560 210,041
Household and plant
Repairs and maintenance 30,625 52,658 54,880
Utilities 128,941 112,945 103,983
Depreciation $ 228,035 $ 247,918 $ 257,894
============ ============ ============
</TABLE>
F-40
<PAGE>
THE ALABAMA JOINT VENTURE
SCHEDULE XI
REAL ESTATE AND ACCUMULATED DEPRECIATION
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
INITIAL COST COSTS CAPITALIZED
TO PARTNERSHIP(A) SUBSEQUENT TO
ACQUISITION
BUILDING AND CARRYING
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS IMPROVEMENTS COST
- --------------------- ---------------------- ------------------------- ----------------------------
<S> <C> <C> <C> <C> <C>
MEDICAL PARK $1,868,527 $400,000 $4,700,000 $980,247 $379,272
====================== ========================== ============================
<CAPTION>
LIFE ON WHICH
GROSS AMOUNT AT WHICH CARRIED DEPRECIATION
AS OF DECEMBER 31, 1996(B) IN LATEST
STATEMENT OF
BUILDING AND ACCUMULATED DATE OF DATE OPERATION IS
DESCRIPTION LAND IMPROVEMENTS TOTAL DEPRECIATION CONSTRUCTION ACQUIRED COMPUTED
- --------------------- -------------------------------------------------------- ------------------------------------------
<S> <S> <C> <C> <C> <C> <C> <C>
MEDICAL PARK $400,000 $6,059,519 $6,459,519 $2,075,838 1987 05/01/88 5 TO 30 YEARS
========================================================
</TABLE>
(A) The initial cost to the Partnership represents the original purchase price
of the properties.
(B) The aggregate cost of real estate owned at December 31, 1996 for Federal
Income tax purposes was approximately $6,441,218.
(C) Reconciliation of real estate owned at December 31, 1996, 1995, and 1994:
<TABLE>
<CAPTION>
1996 1995 1994
-------------- ---------------- --------------
<S> <C> <C> <C>
Balance at beginning of period $6,220,684 $6,090,048 $6,005,887
Additions 238,835 130,636 84,161
Reductions 0 0 0
-------------- ---------------- --------------
Balance at end of period $6,459,519 $6,220,684 $6,090,048
============== ================ ==============
</TABLE>
(D) Reconciliation of accumulated depreciation:
<TABLE>
<S> <C> <C> <C>
Balance at beginning of period $1,847,803 $1,594,024 $1,341,992
Depreciation expense 228,035 253,779 252,032
Reductions 0 0 0
-------------- ---------------- --------------
Balance at end of period $2,075,838 $1,847,803 $1,594,024
============== ================ ==============
</TABLE>
F-41
<PAGE>
[LETTERHEAD OF SELF & MAPLES, P.A.]
INDEPENDENT AUDITORS' REPORT
To the Partners
The Texas Joint Venture
We have audited the balance sheets of The Texas Joint Venture as of
December 31, 1996 and 1995 and the related statements of operations,
partners' capital and cash flows for each of the three years in the
three-year period ended December 31, 1996. These financial statements
are the responsibility of the Joint Venture's management. Our
responsibility is to express an opinion on the financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits
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 financial position of The Texas
Joint Venture as of December 31, 1996 and 1995 and the results of its
operations and its cash flows for each of the three years in the
three-year period ended December 31, 1996 in conformity with generally
accepted accounting principles.
SELF & MAPLES, P.A.
Oneonta, Alabama
January 24, 1997, except for Note 12, as to which the date is
February 3, 1997
F-42
<PAGE>
THE TEXAS JOINT VENTURE
BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
<S> <C> <C>
ASSETS
------
Current assets
Cash and cash equivalents $ 770,794 $ 447,196
Marketable securities 2,190,840 1,409,670
Patient accounts receivable, net of allowance
for doubtful accounts of $106,750
in 1996 and $132,796 in 1995 849,065 717,552
Interest receivable 16,304 4,826
Estimated third-party payor settlements 137,964 202,244
Prepaid expenses and other assets 35,279 43,532
------------- -------------
Total current assets 4,000,246 2,825,020
Property and equipment, net of
accumulated depreciation 7,718,372 8,110,133
Due from affiliates 423,087 576,998
Deferred financing costs, net of
accumulated amortization of
$18,935 in 1996 and $13,651 in 1995 7,485 12,769
------------- -------------
Total assets $ 12,149,190 $ 11,524,920
============= =============
LIABILITIES AND PARTNERS' CAPITAL
---------------------------------
Current liabilities
Current maturities of long-term debt $ 60,600 $ 60,600
Accounts payable 697,963 588,225
Accrued payroll and payroll taxes 164,591 139,197
Accrued vacation 105,438 93,309
Accrued insurance 200,788 200,952
Accrued management fees 32,634 31,379
Estimated third-party payor settlements 149,694 -
Patient deposits and trust liabilities 97,367 117,005
Other accrued expenses 28,411 157,594
------------- -------------
Total current liabilities 1,537,486 1,388,261
Long-term debt, net of current maturities 631,250 691,850
------------- -------------
Total liabilities 2,168,736 2,080,111
------------- -------------
Partners' capital 9,980,454 9,444,809
------------- -------------
Total liabilities and partners' capital $ 12,149,190 $ 11,524,920
============= =============
</TABLE>
See accompanying notes to financial statements.
F-43
<PAGE>
THE TEXAS JOINT VENTURE
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
---------- ------------ ------------
<S> <C> <C> <C>
Revenues
Net patient service revenue $9,325,900 $ 8,647,019 $ 7,072,940
Other revenue 2,102 2,198 1,015
---------- ------------ ------------
Total revenue 9,328,002 8,649,217 7,073,955
---------- ------------ ------------
Operating expenses
Professional care of
patients 4,966,189 4,812,691 3,604,449
Dietary 628,473 616,733 586,512
Household and plant 637,129 618,775 571,882
General and administrative 1,248,000 1,063,756 1,051,234
Employee health and welfare 350,952 355,508 324,545
Depreciation and
amortization 440,475 450,189 449,049
---------- ------------ ------------
Total operating expenses 8,271,218 7,917,652 6,587,671
---------- ------------ ------------
Operating income 1,056,784 731,565 486,284
---------- ------------ ------------
Other income (expenses)
Interest income 126,921 107,160 39,215
Interest expense (68,589) (78,322) (70,603)
---------- ------------ ------------
Total other income (expense) 58,332 28,838 (31,388)
---------- ------------ ------------
Net income $1,115,116 $ 760,403 $ 454,896
========== ============ ============
</TABLE>
See accompanying notes to financial statements.
F-44
<PAGE>
THE TEXAS JOINT VENTURE
STATEMENTS OF PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
MEDICAL INCOME PROPERTIES
LIMITED PARTNERSHIP
-------------------
2A 2B TOTAL
------------ ------------ ------------
<S> <C> <C> <C>
Partners' capital at
December 31, 1993 $ 4,591,062 $ 4,591,062 $ 9,182,124
Distributions to
partners (189,999) (189,999) (379,998)
Net income 227,448 227,448 454,896
Unrealized loss on
marketable securities
available for sale (14,007) (14,008) (28,015)
------------ ------------ ------------
Partners' capital at
December 31, 1994 4,614,504 4,614,503 9,229,007
Distributions to
partners (290,000) (290,000) (580,000)
Net income 380,202 380,201 760,403
Unrealized gain on
marketable securities
available for sale 17,699 17,700 35,399
------------ ------------ ------------
Partners' capital at
December 31, 1995 4,722,405 4,722,404 9,444,809
Distributions to
partners (290,000) (290,000) (580,000)
Net income 557,558 557,558 1,115,116
Unrealized gain on
marketable securities
available for sale 264 265 529
------------ ------------ ------------
Partners' capital at
December 31, 1996 $ 4,990,227 $ 4,990,227 $ 9,980,454
============ ============ ============
</TABLE>
See accompanying notes to financial statements.
F-45
<PAGE>
THE TEXAS JOINT VENTURE
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Cash received from patient care $ 9,416,614 $ 8,404,007 $ 7,066,092
Interest received 77,586 91,364 -
Other operating receipts 2,102 2,198 1,015
Cash paid to suppliers and
employees (7,831,212) (7,362,426) (5,972,586)
Interest paid (68,589) (78,322) (70,603)
------------- ------------- -------------
Net cash provided (used) by operations 1,596,501 1,056,821 1,023,918
------------- ------------- -------------
Cash flows from investing activities:
Capital expenditures (43,430) (301,045) (352,677)
Purchases of marketable securities (1,642,784) (503,438) (1,381,702)
Maturities of marketable securities 900,000 500,000 -
------------- ------------- -------------
Net cash provided (used) by investing
activities (786,214) (304,483) (1,734,379)
------------- ------------- -------------
Cash flows from financing activities:
Payments on long-term debt and
lease obligations (60,600) (65,177) (71,908)
Distributions to partners (580,000) (580,000) (379,998)
Net related party transactions 153,911 (410,680) 55,651
------------- ------------- -------------
Net cash provided (used) by financing
activities (486,689) (1,055,857) (396,255)
------------- ------------- -------------
Net increase (decrease) in cash
and cash equivalents 323,598 (303,519) (1,106,716)
Cash and cash equivalents, beginning
of year 447,196 750,715 1,857,431
------------- ------------- -------------
Cash and cash equivalents, end of year $ 770,794 $ 447,196 $ 750,715
============= ============= =============
</TABLE>
See accompanying notes to financial statements.
F-46
<PAGE>
THE TEXAS JOINT VENTURE
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
RECONCILIATION OF NET INCOME TO
- -------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES
- -----------------------------------------
Net income $ 1,115,116 $ 760,403 $ 454,896
------------ ------------ ------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 440,475 450,189 449,049
Provision for losses on accounts
receivable 41,582 108,332 67,766
(Increase) decrease in:
Patient accounts receivable, net (173,095) (185,722) (78,414)
Interest receivable, securities
premium amortization and
securities discount accretion (49,335) (4,283) (39,215)
Estimated third-party payor
settlements 64,280 (177,135) 3,800
Prepaid expenses and other assets 8,253 4,746 (2,972)
Increase (decrease) in:
Accounts payable 109,738 37,306 187,004
Accrued expenses (90,569) 66,161 (47,627)
Estimated third-party payor
settlements 149,694 - -
Other liabilities (19,638) (3,176) 29,631
------------ ------------ ------------
Total adjustments 481,385 296,418 569,022
------------ ------------ ------------
Net cash provided (used) by operations $ 1,596,501 $ 1,056,821 $ 1,023,918
============ ============ ============
Supplemental schedule of noncash investing and financing activities:
Unrealized gain (loss) on marketable
securities available for sale $ 529 $ 35,399 $ (28,015)
============ ============ ============
</TABLE>
See accompanying notes to financial statements.
F-47
<PAGE>
THE TEXAS JOINT VENTURE
NOTES TO FINANCIAL STATEMENTS
Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
(a) Organization
------------
The Texas Joint Venture was formed on April 29, 1988, and is
engaged in the business of acquiring, operating and holding for
investment purposes, income-producing, health care related
properties, primarily nursing homes. The joint venture partners
are Medical Income Properties 2A Limited Partnership and Medical
Income Properties 2B Limited Partnership. Each partner owns 50% of
the Joint Venture. Both partners are part of a series of three
Delaware limited partnerships as represented by a Partnership
Prospectus dated October 22, 1986. The Texas Joint Venture
currently owns and operates two nursing homes in Texas.
(b) Allocation of Net Profits and Net Losses
----------------------------------------
Net profits and net losses are shared equally by the partners.
(c) Cash Distributions
------------------
Cash distributions are made quarterly within 45 days after the end
of the quarter. Cash flow shall be distributed equally to the
partners. Sale or financing proceeds will be distributed first to
creditors and then to the partners equally.
(d) Patient Service Revenue
-----------------------
Patient service revenue is recorded at the nursing homes'
established rates with contractual adjustments ($3,502,579 in
1996, $4,015,882 in 1995 and $2,929,956 in 1994), provision for
uncollectible accounts, (bad debt expense of $41,632 in 1996,
$108,332 in 1995 and $67,766 in 1994) and other discounts deducted
to arrive at net patient service revenue.
Net patient revenue includes amounts estimated by management to be
reimbursable by Medicare, Medicaid and other third-party programs
under the provisions of cost and prospective payment reimbursement
formulas in effect. Amounts received under these programs are
generally less than the established billing rates of the nursing
homes and the difference is reported as a contractual adjustment
and deducted from gross revenue.
The nursing homes recognize currently estimated final settlements
due from or to third-party programs. Final determination of
amounts earned is subject to audit by the intermediaries.
Differences between estimated provisions and
F-48
<PAGE>
THE TEXAS JOINT VENTURE
NOTES TO FINANCIAL STATEMENTS
final settlement will be reflected as charges or credits to
operating revenues in the year the cost reports are finalized.
(e) Property and Equipment
----------------------
Property and equipment are stated at cost. Depreciation of the
buildings is provided over their estimated useful lives of thirty
years on the straight-line method. Equipment and other personal
property are depreciated over five to seven years on the straight-
line method.
(f) Income Taxes
------------
Taxable income is allocated to the partners and, therefore, no
income taxes have been provided for in these financial statements.
(g) Cash Equivalents Policy
-----------------------
For the purposes of the statements of cash flows, the Joint
Venture considers all highly liquid debt instruments with an
original maturity of three months or less to be cash equivalents.
(h) Uninsured Cash Balances
-----------------------
The Joint Venture maintains cash balances in several banks. Cash
accounts at banks are insured by the FDIC for up to $100,000.
Amounts in excess of insured limits were approximately $531,586 at
December 31, 1996 and $274,391 at December 31, 1995. The 1995
amount includes the total of commingled funds discussed in Note
8., since the amount in excess of FDIC limits related to these
funds is not determinable.
(i) Marketable Securities
---------------------
The classification of marketable securities is determined at the
date of purchase. Gains or losses on the sale of securities are
recognized on a specific identification basis. Marketable
securities represent an investment of excess funds as a part of
the Joint Venture's cash management policies. These securities
are considered to be available for sale under Statement of
Financial Accounting Standards No. 115 and are, thus, stated at
fair value. Unrealized gains and losses are recognized as a
component of partners' capital as is required by SFAS No. 115.
F-49
<PAGE>
THE TEXAS JOINT VENTURE
NOTES TO FINANCIAL STATEMENTS
(j) Uses of Estimates
-----------------
Management uses estimates and assumptions in preparing financial
statements in accordance with generally accepted accounting
principles. Those estimates and assumptions affect the reported
amounts of assets and liabilities, the disclosure of contingent
assets and liabilities, and the reported revenues and expenses.
Actual results could vary from the estimates that were assumed in
preparing the financial statements.
Note 2. ACQUISITIONS
------------
On May 1, 1988, the Joint Venture purchased Renaissance Place - Katy
Nursing Home located in Texas for $5,472,500 plus capitalized
acquisition costs and fees of $509,290. The seller took back a note
for $300,000 due May 1, 1992, that has subsequently been paid.
On May 1, 1988, the Joint Venture purchased Renaissance Place - Humble
Nursing Home located in Texas for $4,487,500 plus capitalized
acquisition costs and fees of $228,812.
Note 3. MARKETABLE SECURITIES
---------------------
Marketable securities consist of U.S. Treasury securities. The
following schedule summarizes marketable securities activity for the
years ended December 31, 1996 and 1995.
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Beginning balance, amortized cost $1,402,286 $1,394,565
Purchase of marketable securities 1,642,784 503,438
Redemption of investments (900,000) (500,000)
Net amortization of premiums and
accretion of discounts 37,857 4,283
---------- ----------
Amortized cost 2,182,927 1,402,286
Gross unrealized gain (loss) 7,913 7,384
---------- ----------
Fair value $2,190,840 $1,409,670
========== ==========
The maturities of investment securities at December 31, 1996 were as
follows:
Due in one year or less $ 500,713
Due in two years or less 1,682,214
----------
$2,182,927
==========
</TABLE>
F-50
<PAGE>
THE TEXAS JOINT VENTURE
NOTES TO FINANCIAL STATEMENTS
Note 4. PROPERTY AND EQUIPMENT
----------------------
Property and equipment consisted of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Land $ 950,000 $ 950,000
Buildings and improvements 9,550,624 9,525,253
Furniture and equipment 1,136,348 1,118,289
----------- -----------
Total 11,636,972 11,593,542
Accumulated depreciation (3,918,600) (3,483,409)
----------- -----------
Net property and equipment $7,718,372 $8,110,133
=========== ==========
</TABLE>
Note 5. LONG-TERM DEBT
--------------
Long-term debt at December 31 was as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Mortgage note with a variable
rate of interest (9.25% at
December 31, 1996 and 9.5% at
December 31, 1995) with monthly
principal and interest payments of
$5,050 through April 26, 1998, with
a balloon payment due May 26, 1998. $ 691,850 $ 752,450
Less amounts due in one year
or less 60,600 60,600
---------- ----------
$ 631,250 $ 691,850
========== ==========
The aggregate annual maturities of long-term debts are as follows:
1997 $ 60,600
1998 631,250
---------
$ 691,850
=========
</TABLE>
The mortgage note is secured by all real estate owned by the Joint
Venture, as well as the real estate owned by The Alabama Joint Venture.
Both the Joint Venture and The Alabama Joint Venture are jointly owned
by the Medical Income Properties 2A Limited Partnership (MIP2A) and the
Medical Income Properties 2B Limited Partnership (MIP2B). The General
Partner of MIP2A and MIP2B has guaranteed the debt, as well as pledged
its stock and partnership interest. The management company (See Note 6)
has also guaranteed the debt and entered into a negative pledge
agreement whereby it will not pledge, transfer or encumber its stock
while the loan is outstanding. All management fees are subordinate to
the debt. The loan document contains restrictive covenants associated
with ratio
F-51
<PAGE>
THE TEXAS JOINT VENTURE
NOTES TO FINANCIAL STATEMENTS
and earnings requirements. Management is not aware of any conditions
that exist that would cause them to be in noncompliance with these
requirements.
Note 6. CONTRACTUAL AGREEMENTS
----------------------
On May 1, 1988, the Joint Venture entered into a management agreement
whereby the Manager is required to perform certain services. The
agreement had an initial five-year term with one additional five-year
option that was exercised in 1993. Fees were based on 6% of gross
collected operating revenues through June 30, 1992. Thereafter they
were based on 5% of gross collected operating revenues, but not less
than $324,000 in a calendar year and were increased by an inflation
factor after 1992. These fees are subordinated to the outstanding
mortgage debt (See Note 5). The Manager has a right of first refusal
to match a bona fide offer made by an outside party to purchase or
lease the nursing home. The management agreement, as amended,
contained a termination clause.
The management agreement was amended on January 1, 1995. The amendment
calls for a fixed monthly management fee of $31,379 with a cost of
living factor equal to the greater of 4% per annum or the increase in
the Consumer Price Index or such other measure mutually agreeable to
the parties. The agreement expires December 31, 1998. The termination
on sale clause was amended to base the fee on a sum equal to the
discounted present value of the monthly management fee as of the date
of termination of the agreement times the number of months remaining in
the management agreement discounted to the date of termination at an
annual interest rate of ten percent (10%). In addition, the parties
agreed to terminate the Manager's right of first refusal.
Commencing January 1, 1996, the Management Agreement was extended for a
period of up to a maximum of eighteen months by one month for every
month after January 1, 1996 in which the parties are engaged in the
process of attempting to sell the Facilities. In the event of a sale
of the Facilities, the termination on sale fee described above would be
discounted to the date of termination at an annual rate of ten percent
(10%) and then further discounted by a factor of thirty-three and one-
third percent (33 1/3%).
Management fees charged to the Joint Venture were $391,610 in 1996,
$376,548 in 1995, and $362,065 in 1994.
Note 7. INCOME TAXES
------------
No provision for income taxes is made in the financial statements since
taxable income is reported in the tax returns of the partners.
F-52
<PAGE>
THE TEXAS JOINT VENTURE
NOTES TO FINANCIAL STATEMENTS
Differences between the net income as reported in the financial
statements and Federal taxable income arise from the nature and timing
of certain revenue and expense items. The following is a
reconciliation of reported net income and Federal taxable income.
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net income as reported $ 1,115,116 $ 760,403 $ 454,896
Adjustments:
Depreciation differences 37,528 56,349 74,970
Bad debt reserve (26,045) 75,856 16,294
Nondeductible travel and
entertainment 9,231 9,770 6,430
Accrued insurance - (80,000) -
Vacation accrual 12,128 23,280 15,272
------------ ---------- ----------
Federal taxable income $ 1,147,958 $ 845,658 $ 567,862
============ ========== ==========
</TABLE>
Note 8. RELATED PARTY TRANSACTIONS
--------------------------
Details of the amounts due from affiliates at December 31 are as follows:
1996 1995
---- ----
Due from MIP2A $ 212,456 $ 212,456
Due from MIP2B 210,631 210,631
Due from affiliates of the general
partner - 153,911
---------- ----------
Due from affiliates $ 423,087 $ 576,998
========== ==========
During the year ended December 31, 1995, the General Partners
established a pooled investment account in which the General Partners
and the partnerships in which they act as general partners could
participate. This account was used by those entities to invest
overnight cash balances, and borrow funds when an entity needed
temporary access to funds. Each entity received its share of interest
earned monthly, and was charged interest on any funds borrowed.
The Articles of Limited Partnership of the joint venture partners state
that no General Partner shall have the authority to cause the joint
venture partners to make loans other than in connection with the
purchase, sale or disposition of partnership property. The Articles of
Limited Partnership also state the joint venture partners' funds may
not be commingled with any other entities' funds except as necessary
for the operation of the partnerships.
F-53
<PAGE>
THE TEXAS JOINT VENTURE
NOTES TO FINANCIAL STATEMENTS
At December 31, 1995, the Joint Venture had loaned $153,911 to the
other entities, and had earned interest of $24,238 from this
arrangement.
See Footnote 12 for sale of affiliated assets.
Note 9. CONTINGENCY
-----------
On May 1, 1990, the Joint Venture began self insuring its workmen's
compensation claims for its two nursing home facilities. Accrued
liabilities have been estimated to cover all asserted and unasserted
claims and assessments and funds have been escrowed to cover such
claims. The Joint Venture maintains insurance or reserves that it
believes are adequate to meet the needs of the Joint Venture.
While the Joint Venture Partners have been named as a defendant in
several lawsuits, nothing has come to the attention of the Joint
Venture that leads it to believe that it is exposed to a risk of
material loss not covered by insurance or reserves.
The real estate owned by The Texas Joint Venture is mortgaged as
security on debt incurred by a joint venture partner - Medical Income
Properties 2A Limited partnership (MIP2A). This debt is also secured
by all other real estate owned by MIP2A. The total outstanding debt
secured by all these properties is $3,805,555.
Note 10. CONCENTRATIONS IN REVENUE SOURCES
---------------------------------
The Joint Venture provides patient care services under various third
party agreements. The principal sources of revenue under these
contracts are derived primarily through the Medicaid and Medicare
programs, as well as contracts with private pay patients who do not
qualify for assistance from the other programs. The percentage of the
Joint Venture's income from each of these sources for the years ended
December 31, 1996, 1995, and 1994 is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Private pay patients 15.07% 18.05% 19.42%
Medicaid 39.62% 38.99% 47.81%
Medicare 45.31% 42.96% 32.77%
--------- --------- ---------
Total 100.00% 100.00% 100.00%
========= ========= =========
</TABLE>
The percentage attributable to private pay patients includes only
amounts due for services where the primary payer is a private source.
The Medicaid and Medicare percentages include amounts due from those
programs as well as the patient's financial responsibility incurred
under these contracts.
F-54
<PAGE>
THE TEXAS JOINT VENTURE
NOTES TO FINANCIAL STATEMENTS
Note 11. FAIR VALUE OF FINANCIAL INSTRUMENTS
-----------------------------------
Financial Accounting Statement No. 107, Disclosures about Fair Value of
Financial Instruments ("FAS 107") requires disclosure of fair value
information about financial instruments, whether or not recognized on
the face of the balance sheet, for which it is practicable to estimate
the value. The assumptions used in the estimation of the fair value of
the Company's financial instruments are detailed below. Where quoted
prices are not available, fair values are based on estimates using
discounted cash flows and other valuation techniques. The use of
discounted cash flows can be significantly affected by the assumptions
used, including the discount rate and estimates of future cash flows.
The following disclosures should not be considered a surrogate of the
liquidation value of the Company, but rather represents a good-faith
estimate of the increase or decrease in value of financial instruments
held by the Company since purchase, origination or issuance. The
following methods and assumptions were used by the Company in
estimating the fair value of its financial instruments:
Investment securities available from sale: These securities are
being carried at fair market value as determined by quoted market
prices.
Long-term Debt: For variable rate notes, fair values are based on
carrying values.
The other financial instruments of the Company are short-term
assets and liabilities whose carrying amounts reported in the
balance sheet approximate fair value. These items include cash,
accounts receivable and accounts payable.
Note 12. SUBSEQUENT EVENT
----------------
On February 3, 1997, Medical Income Properties 2A Limited Partnership
and Medical Income Properties 2B Limited Partnership, the general
partners of The Texas Joint Venture, entered into a purchase agreement
with Omega HealthCare Investors, Inc. to sell all of the real and
personal property of the nursing home facilities.
F-55
<PAGE>
THE TEXAS JOINT VENTURE
NOTES TO FINANCIAL STATEMENTS
The purchase price is allocated among the facilities as follows:
Renaissance Place - Katy (130 beds) $ 5,969,000
Renaissance Place - Humble (120 beds) 4,975,000
-----------
Proceeds from sale $10,944,000
===========
Proceeds from the sale will be reduced by expenses incurred as a result
of the sale, cash offsets for liabilities assumed by the buyer and
existing indebtedness. These payments should approximate $2,505,000.
The closing could take place as early as March 31, 1997 and can be
extended by the Partnership until April 30, 1997. If conditions
precedent to either party's obligation to close are not satisfied or
waived, the closing can be extended to a date no later than July 31,
1997. Approximately $365,000 of these proceeds will be set aside in a
joint signature account for the purpose of securing all of the seller's
obligations under the purchase agreement. These funds will be
available to the Partnership in the event that these obligations do not
exceed the funds held in escrow.
In addition, a separate amount of proceeds of approximately $400,000
will also be held in reserve by the Alabama Joint Venture pending final
settlement of third-party cost reports and other contingencies.
This agreement can be terminated by mutual consent of the parties and
other conditions precedent.
In conjunction with the above sale, Omega HealthCare Investors, Inc.
has agreed to a similar purchase of assets from RWB Medical Properties
Limited Partnership IV, of which an officer of QualiCorp, Inc. owns
either directly or indirectly a 21.53% interest. This sale relates to
a 131 bed nursing home in Patterson, Louisiana and the purchase price
for the assets is $5,350,000.
F-56
<PAGE>
[LETTER HEAD OF SELF & MAPLES, P.A. APPEARS HERE]
INDEPENDENT AUDITORS' REPORT
ON ADDITIONAL INFORMATION
To the Partners
The Texas Joint Venture
Our report on our audits of the basic financial statements of
The Texas Joint Venture for 1996 appears on page 1. Those
audits were made for the purpose of forming an opinion on the
basic financial statements taken as a whole. The Schedule
of Valuation and Qualifying Accounts and Reserves for
Allowances for Doubtful Accounts, Schedule of Consolidated
Supplementary Income Statement Information, and Schedule
of Real Estate and Accumulated Depreciation are presented
for purposes of additional analysis and are not required
parts of the basic financial statements. Such information
has been subjected to the auditing procedures applied
to the audits of the basic financial statements, and in
our opinion, is fairly stated in all material respects in
relation to the financial statements taken as a whole.
SELF & MAPLES, P.A.
Oneonta, Alabama
January 24, 1997, except for Note 12, as to which the date is
February 3, 1997
F-57
<PAGE>
THE TEXAS JOINT VENTURE
SCHEDULE VIII
VALUATION AND QUALIFYING ACCOUNTS
AND RESERVES FOR ALLOWANCES FOR DOUBTFUL ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Balance at beginning of year $ 132,796 $ 56,941 $ 40,647
Charged to patient service
revenues (67,678) (32,477) (51,472)
Write-offs 41,632 108,332 67,766
---------- ---------- ----------
Balance at end of year $ 106,750 $ 132,796 $ 56,941
========== ========== ==========
</TABLE>
F-58
<PAGE>
THE TEXAS JOINT VENTURE
SCHEDULE X
CONSOLIDATED SUPPLEMENTARY INCOME STATEMENT INFORMATION
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Professional care of patients
Nursing salaries and wages $ 2,442,501 $ 2,469,846 $ 2,197,347
Ancillary services expense 1,830,025 1,714,698 940,266
Supplies 138,992 151,705 107,170
Temporary labor 4,380 83,851 32,084
General and administrative
Salaries and wages 236,614 207,708 192,944
Accounting and auditing 87,134 64,745 69,999
Insurance 132,282 13,436 48,076
Property tax 249,483 237,917 223,764
Management fees 391,610 376,548 362,065
Dietary
Food 298,273 291,648 279,660
Household and plant
Repairs and maintenance 73,771 103,388 73,199
Utilities 190,141 165,204 175,535
Depreciation $ 435,191 $ 444,905 $ 443,765
============ ============ ============
</TABLE>
F-59
<PAGE>
THE TEXAS JOINT VENTURE
SCHEDULE XI
REAL ESTATE AND ACCUMULATED DEPRECIATION
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
INITIAL COST COSTS CAPITALIZED GROSS AMOUNT AT WHICH CARRIED
TO PARTNERSHIP(A) SUBSEQUENT TO AS OF DECEMBER 31, 1996(B)
ACQUISITION
BUILDING BUILDING
AND CARRYING AND
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS IMPROVEMENTS COST LAND IMPROVEMENTS
- ------------------------- --------------- -------------------------- --------------------------- --------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
RENAISSANCE PLACE-KATY $ 0 $650,000 $4,822,500 $503,346 $509,290 $650,000 $5,835,136
RENAISSANCE PLACE-HUMBLE 691,850 300,000 4,187,500 435,524 228,812 300,000 4,851,836
------------- -------------------------- --------------------------- --------------------------
$691,850 $950,000 $9,010,000 $938,870 $738,102 $950,000 $10,686,972
============= ========================== =========================== ==========================
<CAPTION>
LIFE OF WHICH
DEPRECIATION
IN LATEST
STATEMENT OF
ACCUMULATED DATE OF DATE OPERATION IS
DESCRIPTION TOTAL DEPRECIATION CONSTRUCTION ACQUIRED COMPUTED
- ----------------------- --------------- --------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
RENAISSANCE PLACE-KATY $ 6,485,136 2,082,569 1984 05/01/88 5 TO 30 YEARS
RENAISSANCE PLACE-HUMBLE 5,151,836 1,836,031 1987 05/01/88 5 TO 50 YEARS
--------------- --------------
$11,636,972 $3,918,600
=============== ==============
</TABLE>
(A) The initial cost to the Partnership represents the original purchase price
of the properties.
(B) The aggregate cost of real estate owned at December 31, 1996 for Federal
Income tax purposes was approximately $11,636,972.
(C) Reconciliation of real estate owned at December 31, 1996, 1995, and 1994:
<TABLE>
<CAPTION>
1996 1995 1994
------------ -------------- --------------
<S> <C> <C> <C>
Balance at beginning of period $11,593,542 11,292,495 $10,939,816
Additions 43,430 301,047 352,679
Reductions 0 0 0
------------ ----------- -----------
Balance at end of period $11,636,972 11,593,542 $11,292,495
============ =========== ===========
</TABLE>
(D) Reconciliation of accumulated depreciation:
<TABLE>
<S> <C> <C> <C>
Balance at beginning of period $3,479,409 $3,038,503 $2,594,737
Depreciation expense 439,191 440,906 443,766
Reductions 0 0 0
---------- ---------- ----------
Balance at end of period $3,918,600 $3,479,409 $3,038,503
========== ========== ==========
</TABLE>
F-60
<PAGE>
APPENDIX A
PURCHASE AGREEMENT
OMEGA HEALTHCARE INVESTORS, INC.
AND
MEDICAL INCOME PROPERTIES 2B LIMITED PARTNERSHIP
AND
QUALICORP MANAGEMENT, INC.
DATED: FEBRUARY 3, 1997
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE 1.................................................................... 1
PURCHASE AND SALE............................................................ 1
1.01. The Facilities....................................................... 1
--------------
1.02. Personal Property.................................................... 1
-----------------
1.03. Consumables.......................................................... 2
-----------
1.04. Delivery of Information to Certain Persons........................... 2
------------------------------------------
1.05 Temporary Operation of the Facilities ............................... 3
-------------------------------------
1.06. Transition Agreement................................................. 3
--------------------
ARTICLE II................................................................... 3
PURCHASE PRICE............................................................... 3
2.01. Purchase Price....................................................... 4
--------------
ARTICLE III.................................................................. 4
CLOSING...................................................................... 4
3.01. The Closing.......................................................... 4
-----------
ARTICLE IV................................................................... 5
COSTS AND PRORATIONS......................................................... 5
4.01. Transfer Taxes....................................................... 5
--------------
4.02. Sales Taxes.......................................................... 5
-----------
4.03. Title Insurance...................................................... 5
---------------
4.04. Surveys/UCC-1 Searches............................................... 5
----------------------
4.05. Environmental Reports/Remediation.................................... 5
---------------------------------
4.06. Revenues and Expenses................................................ 5
---------------------
4.07. Taxes/Prorations..................................................... 5
----------------
4.08. Utilities............................................................ 6
---------
4.09. Attorney's Fees...................................................... 6
---------------
4.10. Recording Costs...................................................... 6
---------------
4.11. Releases............................................................. 6
--------
4.12. Environmental Adjustment............................................. 6
------------------------
4.13. Prorations Regarding Contracts....................................... 6
------------------------------
ARTICLE V.................................................................... 6
POSSESSION................................................................... 6
5.01. Possession........................................................... 6
----------
ARTICLE VI................................................................... 7
SELLER'S REPRESENTATIONS AND WARRANTIES...................................... 7
6.01. Status of Seller..................................................... 7
----------------
6.02. Validity and Conflicts............................................... 7
----------------------
6.03. Authority............................................................ 7
---------
6.04. The Seller Financial Statements...................................... 7
-------------------------------
6.05. Absence of Adverse Change............................................ 8
-------------------------
6.06. The Licenses......................................................... 8
------------
6.07. Compliance with Law.................................................. 8
-------------------
</TABLE>
<PAGE>
<TABLE>
<S> <C>
6.08. Residents.......................................................... 9
---------
6.09. Books and Records.................................................. 9
-----------------
6.10. Title.............................................................. 9
-----
6.11. Unions............................................................. 9
------
6.12. Taxes and Tax Returns.............................................. 9
---------------------
6.13. Environmental Issues............................................... 10
--------------------
6.14. Necessary Action................................................... 10
----------------
6.15. Litigation......................................................... 11
----------
6.16. Sensitive Payments................................................. 11
------------------
6.17. The Facilities..................................................... 11
--------------
6.18. Inventories........................................................ 12
-----------
6.19. The Facility Agreements............................................ 12
-----------------------
6.20. Patient Roster..................................................... 12
--------------
6.21. Operating Contracts................................................ 12
-------------------
6.22. Disclosure......................................................... 12
----------
6.23. Insurance.......................................................... 13
---------
6.24. Fringe Benefits.................................................... 13
---------------
6.25. ERISA.............................................................. 13
-----
ARTICLE VII................................................................ 13
PURCHASER REPRESENTATIONS AND WARRANTIES................................... 13
7.01. Status of Purchaser................................................ 13
-------------------
7.02. Validity and Conflicts............................................. 13
----------------------
7.03. Authority.......................................................... 14
---------
7.04. Necessary Action................................................... 14
----------------
ARTICLE VIII............................................................... 15
BROKER; INVESTMENT BANKER.................................................. 15
ARTICLE IX................................................................. 15
SELLER COVENANT............................................................ 15
9.01. Pre Closing........................................................ 15
-----------
9.02. Closing- Date...................................................... 20
-------------
9.03. Post Closing....................................................... 21
------------
ARTICLE X.................................................................. 22
PURCHASER COVENANTS........................................................ 22
10.02. Closing Date...................................................... 24
------------
10.03. Post Closing...................................................... 25
------------
ARTICLE XI................................................................. 26
MUTUAL COVENANTS........................................................... 26
11.01. General Covenants................................................. 26
-----------------
11.02. Hart-Scott-Rodino Filing.......................................... 27
------------------------
11.03. HSR Consent/Regulatory Approval................................... 27
-------------------------------
11.04. Public Announcements.............................................. 27
--------------------
ARTICLE XII................................................................ 27
CONDITIONS................................................................. 27
12.01. Purchaser Conditions.............................................. 27
--------------------
12.02. Seller Conditions................................................. 29
-----------------
</TABLE>
<PAGE>
<TABLE>
<S> <C>
ARTICLE XIII............................................................... 30
TERMINATION................................................................ 30
13.01. Termination....................................................... 30
-----------
13.02. Opportunity to Cure............................................... 31
-------------------
13.03. Termination....................................................... 31
-----------
13.04. Right of First Refusal............................................ 33
----------------------
ARTICLE XIV................................................................ 33
OPERATIONAL PROVISIONS..................................................... 33
14.01. Employees: Schedule of Employee Benefits.......................... 33
----------------------------------------
14.02. Accounting Patient Trust Funds and Patient Prepaid Accounts....... 34
-----------------------------------------------------------
14.03. Indemnity for Trust Funds and Prepaid Funds....................... 34
-------------------------------------------
14.04. Accounts Receivable............................................... 34
-------------------
14.05. Alabama Workers' Compensation Rebate.............................. 35
------------------------------------
ARTICLE XV................................................................. 35
INDEMNIFICATION............................................................ 35
15.01. Seller's Indemnification.......................................... 35
------------------------
15.02. New Operator...................................................... 36
------------
15.03. Procedure......................................................... 37
---------
15.04. Basket............................................................ 37
------
ARTICLE XVI................................................................ 37
MISCELLANEOUS.............................................................. 37
16.01. Notices........................................................... 37
-------
16.02. Allocation of Purchase Price...................................... 38
----------------------------
16.03. Employee Recruitment.............................................. 39
--------------------
16.04. Assignment........................................................ 39
----------
16.05. Sole Agreement.................................................... 39
--------------
16.06. Captions.......................................................... 39
--------
16.07. Severability...................................................... 39
------------
16.08. Counterparts...................................................... 39
------------
16.09. Knowledge Defined................................................. 39
-----------------
16.10. Expenses.......................................................... 40
--------
16.11. Third Party Beneficiary........................................... 40
-----------------------
16.12. Attorneys' Fees................................................... 40
---------------
16.13. Construction...................................................... 40
------------
16.14. Survival.......................................................... 40
--------
16.15. Exhibits.......................................................... 40
--------
16.16. Governing Law..................................................... 40
-------------
16.17. Exclusivity....................................................... 41
-----------
16.18. Confidential...................................................... 41
------------
16.19. Arbitration of Disputes Following................................. 41
---------------------------------
SCHEDULE OF EXHIBITS:................................................. 43
EXHIBIT A-1........................................................... 43
EXHIBIT A-2:.......................................................... 43
EXHIBIT A-3:.......................................................... 43
EXHIBIT A-4:.......................................................... 43
</TABLE>
<PAGE>
<TABLE>
<S> <C>
EXHIBIT 1.02:......................................................... 43
EXHIBIT 1.02 (A):..................................................... 43
EXHIBIT 1.05 (c):..................................................... 43
EXHIBIT 2.01:......................................................... 43
EXHIBIT 4.13:......................................................... 43
EXHIBIT 6.06:......................................................... 43
EXHIBIT 6.07:......................................................... 43
EXHIBIT 6.07(b):...................................................... 43
EXHIBIT 6.10:......................................................... 43
EXHIBIT 6.11:......................................................... 43
EXHIBIT 6.13.......................................................... 43
EXHIBIT 6.15:......................................................... 43
EXHIBIT 6.17:......................................................... 43
EXHIBIT 6.19:......................................................... 43
EXHIBIT 6.20:......................................................... 43
EXHIBIT 6.21:......................................................... 43
EXHIBIT 6.23.......................................................... 43
EXHIBIT 6.24.......................................................... 43
EXHIBIT 6.25.......................................................... 43
EXHIBIT 9.02(d):...................................................... 43
EXHIBIT 9.02 (f):..................................................... 43
EXHIBIT 9.02(g):...................................................... 43
EXHIBIT 9.02(h):...................................................... 43
EXHIBIT 10.01(a):..................................................... 43
EXHIBIT 10.02(f):..................................................... 43
</TABLE>
<PAGE>
PURCHASE AND SALE AGREEMENT
---------------------------
This Purchase and Sale Agreement ("Agreement") is made and entered into
this 3rd day of February, 1997 (the "Effective Date"), by and between MEDICAL
INCOME PROPERTIES 2B LIMITED PARTNERSHIP, a Delaware limited partnership
("Seller"), QUALICORP MANAGEMENT, INC., a Delaware corporation ("General
Partner") and OMEGA HEALTHCARE INVESTORS, INC., a Maryland corporation
("Purchaser").
ARTICLE 1
PURCHASE AND SALE
On the terms and subject to the conditions set forth herein, Seller does
hereby agree to sell to Purchaser and Purchaser does hereby agree to acquire
from Seller the following:
1.01 The Facilities. The real property owned by Seller and situated in
--------------
the States of Alabama, Illinois and Texas and more particularly described in
Exhibits A-1 through A-4 (the "Real Property") and the improvements thereon that
comprise the following skilled nursing facilities (the "Facilities"):
Edwardsville Care Center East (100% interest owned by Seller)
Edwardsville, Illinois
Number of Licensed Beds: 120
Medical Park Convalescent Center (54.55% interest owned by Seller)
Decatur, Alabama
Number of Licensed Beds: 183
Renaissance Place-Katy (50% interest owned by Seller)
Katy, Texas
Number of Licensed Beds: 130
Renaissance Place-Humble (50% interest owned by Seller)
Humble, Texas
Number of Licensed Beds: 120
1.02 Personal Property. All equipment, furniture, fixtures, inventory
-----------------
(including linens, dietary supplies and housekeeping supplies but specifically
excluding food and other consumable inventories), contract rights, and other
tangible personal property owned by Seller and located on the Real Property and
Facilities, including, but not limited to, motor vehicles, entitlements,
telephone numbers and those items of personal property listed on Exhibit 1.02
(collectively the "Personal Property"), it being understood by the parties that
the only items of Personal Property reflected on Exhibit 1.02 are items which
were acquired at an initial purchase price of greater than $100.00.
Notwithstanding the foregoing, the "Personal Property" specifically excludes (i)
cash, cash equivalents or accounts receivable relating to the period prior to
the Closing Date, as defined below and (ii) those items of personal property
identified on Exhibit 1.02(A).
<PAGE>
1.03 Consumables. The food and other consumable inventories located at
-----------
the Facilities on the Closing Date (the "Consumables").
Hereinafter the Facilities, the Real Property, the Personal Property and
the Consumables will sometimes be collectively referred to as the "Seller's
Assets." Except as specifically set forth herein, Purchaser is not acquiring or
assuming any of the liabilities whatsoever, including, without limitation, those
of Seller with respect to the Seller's Assets. This shall be a sale and purchase
of the Seller's Assets collectively and not separately. Purchaser is acquiring
the Seller's Assets without any express or implied warranties, including the
warranties of merchantability and fitness for a particular purpose, other than
those specifically stated in this Agreement.
1.04 Delivery of Information to Certain Persons. Purchaser intends to
------------------------------------------
enter into one or more master leases (collectively, the "Master Lease") with one
or more corporations experienced in operating licensed nursing homes such as the
Facilities (collectively, the "New Operator"). Purchaser is hereby authorized to
deliver to one or more corporations that may become the New Operator as
described herein all information which Seller makes available to Purchaser
concerning the Facilities. Purchaser's entry into the Master Lease is not a
condition to Purchaser's obligations hereunder.
Temporary Operation of the Facilities.
-------------------------------------
(a) If as of the Closing Date Purchaser has entered into a Master
Lease with respect to one or more of the Facilities, and the New Operator has
not obtained the Regulatory Approvals required for the operation of one or more
of the Facilities covered by the Master Lease, then if permitted by state law
New Operator shall operate the Facilities under a management or operating
agreement using Seller's licenses or if requested by the New Operator, Seller
will enter into an interim operating agreement (the "Interim Operating
Agreement") with the New Operator with respect to those Facilities covered by
the Master Lease for which Regulatory Approvals have not been obtained. The
Interim Operating Agreement shall (i) impose no financial obligations on Seller,
except to the extent of funds advanced by the New Operator or funds received
from the operation of the Facilities covered by the Interim Operating Agreement,
(ii) shall terminate as to each Facility on the earlier of December 31, 1997 or
the last day of the month during which all Regulatory Approvals applicable to
that Facility are received, and (iii) otherwise be in form and substance
reasonably satisfactory to both New Operator and Seller.
(b) If as of the Closing Date Purchaser has not entered into a
Master Lease with respect to one or more of the Facilities, then Purchaser, as
lessor, and Seller, as lessee, will enter into an interim master lease (the
"Interim Master Lease") with respect to those Facilities as to which Purchaser
has not entered into a Master Lease. The Interim Master Lease shall be on
Purchaser's standard form master lease, modified, however, to reflect that (i)
Seller shall have no financial obligations thereunder, except to the extent of
funds advanced by Purchaser or funds received from the operation of the
Facilities covered by the Interim Master Lease, (ii) the rent payable under the
Interim Master Lease shall be the cash flow generated from the operation of the
Facilities, and (iii) the Interim Master Lease shall terminate as to each
Facility covered thereby on the earlier of December 31, 1997 or the last day of
the month
2
<PAGE>
during which Purchaser enters into a Master Lease with respect to that Facility
and all Regulatory Approvals applicable to that Facility are received.
(c) If an Interim Operating Agreement is entered into with Seller
pursuant to Section 1.05(a), or if an Interim Master Lease is entered into with
Seller pursuant to Section 1.05 (b), simultaneously therewith Seller shall enter
into an interim management agreement (the "Interim Management Agreement") with
Atrium Living Centers, Inc., a Delaware corporation ("Atrium"), with respect to
those Facilities covered by the Interim Operating Agreement or Interim Master
Lease, as applicable. Within fifteen (15) days from the date hereof, Purchaser
and Atrium shall agree upon the form of the Interim Management Agreement, and
the form shall be attached to this Agreement as Exhibit 1.05 (c). The Interim
Management Agreement shall expire as to each Facility covered thereby on the
date of termination of the Interim Operating Agreement or Interim Master Lease
as to that Facility. The Interim Management Agreement shall provide for a
monthly management fee payable to Atrium: (i) of four percent (4%) of Accrued
Gross Income of the Facilities which Atrium is managing under the Interim
Management Agreement if the number of Facilities which Atrium is managing, plus
the number of Facilities which Atrium, Atrium Living Centers of Florida, Inc., a
Florida corporation, or Atrium Living Centers of Alabama, Inc., an Alabama
corporation, under the comparable Sections of Seller's Affiliates' Purchase
Agreement is eight or more, or (ii) of five percent (5%) of Accrued Gross Income
of the Facilities which Atrium is managing under the Interim Management
Agreement if the number of Facilities which Atrium is managing, plus the number
of Facilities which Atrium, Atrium Living Centers of Florida, Inc., a Florida
corporation, or Atrium Living Centers of Alabama, Inc., an Alabama corporation,
under the comparable Sections of Seller's Affiliates' Purchase Agreement is
between four and seven, or (iii) Atrium's actual cost not to exceed eight
percent (8%) of Accrued Gross Income of the Facilities which Atrium is managing
under the Interim Management Agreement if the number of Facilities which Atrium
is managing, plus the number of Facilities which Atrium, Atrium Living Centers
of Florida, Inc., a Florida corporation, or Atrium Living Centers of Alabama,
Inc., an Alabama corporation, under the comparable Sections of Seller's
Affiliates' Purchase Agreement is one, two or three. The term "Accrued Gross
Income of the Facilities" shall mean the monthly accrued gross revenues from all
sources of each Facility less usual and customary contractual adjustments from
gross revenues attributable to third-party payor rates or contracts with others,
less allowances for collection of doubtful accounts or bad debts and less the
amount of provider fees, if any, which are chargeable to a Facility for the same
monthly period.
1.06 Transition Agreement. On or before the Closing Date, or if New
--------------------
Operator has not been identified by that date, on or before the expiration of
the term of the Interim Management Agreement, Seller and Atrium shall enter into
a Transition Agreement with New Operator in form and substance reasonably
satisfactory to Seller, Atrium and New Operator, providing for the smooth
transfer of operations at the Facilities from the Seller to the New Operator.
ARTICLE II
PURCHASE PRICE
3
<PAGE>
2.01 Purchase Price. The purchase price for Seller's Assets shall
--------------
be Twelve Million Three Hundred Seventy-Seven Thousand Two Hundred Twenty-Five
and no/100 Dollars ($12,377,225) and shall be payable in cash at the Closing
described in Article III below and subject to the adjustments as set forth in
this Agreement. Three Hundred Ninety-Five Thousand Four Hundred Fifty and 00/100
Dollars ($395,450.00) of the purchase price shall be deposited in an account
with Nationsbank, or another FDIC insured bank selected by Seller with offices
------------
in Atlanta, Georgia and reasonably acceptable to Purchaser, to be held and
disbursed in accordance with a Letter Agreement substantially in the form of
Exhibit 2.01 (the "Letter Agreement") for the purposes of securing all of
Seller's or General Partner's obligations under this Agreement and other
documents executed in connection herewith, which obligations survive the Closing
including, without limitation, Seller's obligations under Section 15.01. The
purchase price shall be allocated among the Facilities as set forth in Paragraph
16.02.
ARTICLE III
CLOSING
3.01 The Closing. The purchase and sale of the Seller's Assets
-----------
shall occur on the earlier of (i) the last day of the month during which
satisfaction or waiver of the conditions to Closing set forth in Paragraphs
12.01 and 12.02 occurs, or (ii) March 31, 1997 (the Closing Date"). The Closing
Date may be extended to April 30, 1997 by Seller upon written notice to
Purchaser prior to March 31, 1997 solely for the purpose of obtaining (i) the
approval of Seller's limited partners (the "Limited Partners"), or (ii)
obtaining the approval of the transactions contemplated by Seller's Affiliates'
Purchase Agreements (as defined below) by the limited partners of each of
Seller's Affiliates (as defined below). Closing shall occur at such place as may
be agreed upon by the parties. Notwithstanding the foregoing, although both
parties are committed to using best efforts to close by the dates set forth
above, if one or more of the conditions precedent to either party's obligation
to close is not satisfied or waived by the dates set forth above, the Closing
Date shall be automatically postponed until the last day of the month which is
at least three (3) business days after the last condition precedent is satisfied
or waived but, in any event, not later than July 31, 1997.
4
<PAGE>
ARTICLE IV
COSTS AND PRORATIONS
The costs of the transaction and the expenses related to the ownership
and operation of the Seller's Assets shall be allocated among Seller and
Purchaser as follows:
4.01 Transfer Taxes. All State and County transfer or excise taxes
--------------
due on the transfer of title to the Real Property and the Facilities to
Purchaser and all assessments and taxes related to the recording of the deeds,
shall be paid by Seller.
4.02 Sales Taxes. Any sales tax due on the transfer of title to the
-----------
Personal Property to Purchaser shall be paid by Seller.
4.03 Title Insurance. Seller shall pay the cost of the "Title
---------------
Commitments" and the premiums for ALTA extended coverage owner's policies of
title insurance for the Facilities.
4.04 Surveys/UCC-1 Searches. Seller shall pay the cost of the
----------------------
"Surveys" and the "UCC Search Reports" (as such terms are defined below) for
each of the Facilities.
4.05 Environmental Reports/Remediation. Seller shall pay for the
---------------------------------
cost for a Phase I environmental assessment for each of the Facilities, for any
additional assessments recommended in the original Phase I reports, and for the
cost of remediation of any environmental condition revealed in such
environmental assessments. Notwithstanding anything to the contrary contained in
this Section 4.05, Purchaser may in its sole discretion waive the requirement of
Seller to provide any additional assessments or reports recommended in the
original Phase I environmental assessments. Irrespective of any such waiver by
Purchaser, Seller shall cause the original Phase I environmental assessments and
any additional assessments or reports provided by Seller, to be certified to
Purchaser and to New Operator, when New Operator is identified, for reliance by
Purchaser and New Operator thereon. The delivery of such certification by Seller
shall be a condition precedent to Purchaser's obligation to close the
transaction contemplated by this Agreement.
4.06 Revenues and Expenses. All revenues (including but not limited
---------------------
to payments due from the residents or patients of the Facilities) and expenses
(including but not limited to payroll and employee benefits) related to the
ownership or operation of the Seller's Assets shall be prorated as of the
Closing Date, with Seller responsible therefor for the period prior to the
Closing Date and with Purchaser or New Operator responsible therefor for the
period from and after the Closing Date. All accounts receivable shall be handled
in the manner provided for in Section 14.04 below. Purchaser has no duty to
operate any Facility from and after the Closing Date, such operations to be
accomplished solely by Seller during the term of the Interim Operating Agreement
or Interim Master Lease (if applicable) and by the New Operator thereafter.
4.07 Taxes/Prorations. Real and Personal Property taxes, assessments
----------------
and similar charges shall be prorated as of the Closing Date pursuant to the
local custom of the State where the Facility is located, with Seller responsible
therefor for the period prior to the Closing Date and with (i) Seller pursuant
to the Interim Operating Agreement or Interim
5
<PAGE>
Master Lease, or (ii) New Operator pursuant to the Master Lease responsible
therefor for the period from and after the Closing Date, as applicable to each
of the Seller or New Operator.
4.08 Utilities. Seller shall arrange for final statements with
---------
respect to all utilities serving the Real Property and each Facility as of the
Closing Date and shall pay all fees identified thereon and Purchaser shall
arrange for all such utilities to be billed in the name of the (i) Seller
pursuant to the Interim Operating Agreement or Interim Master Lease, or (ii) New
Operator pursuant to the Master Lease from and after the Closing Date and the
Seller or New Operator, as applicable, shall pay all fees due therefor from and
after the Closing Date. Seller shall retain its right to any deposits which may
have been made with any utility company and Purchaser shall replace or cause
Atrium or New Operator, as applicable, to replace said deposits with funds of
its own or, in the case of Atrium, funds advanced by Purchaser or New Operator.
4.09 Attorney's Fees. Seller and Purchaser shall each pay their own
---------------
attorneys' fees.
4.10 Recording Costs. All recording fees related to the recording of
---------------
the deeds shall be paid in accordance with the local custom of the State in
which the Facility is located.
4.11 Releases. Seller shall pay the cost of obtaining and recording
--------
any releases necessary to delivery title to the Seller's Assets in accordance
with the terms of this Agreement.
4.12 Environmental Adjustment. An amount to be determined by the
------------------------
parties shall be deducted from the purchase price at Closing to cove potential
costs to be incurred by Purchaser for any remediation of environmental problems
at, on or affecting the Facilities, including without limitation, the removal of
any asbestos from the Facilities ("Environmental Adjustment"). In the event that
Seller and Purchaser do not agree prior to February 15, 1997 on the amount of
the Environmental Adjustment, either party may terminate this Agreement and
neither party shall have any further rights or obligations hereunder.
4.13 Prorations Regarding Contracts. All amounts paid by Seller
------------------------------
prior to the Closing Date for contracts for goods or services to be received or
incurred for the benefit of the Facilities after the Closing Date ("Prepaid
Contracts") shall be a credit to Seller at Closing. Exhibit 4.13 sets forth a
list of such Prepaid Contracts as of the date of this Agreement and Exhibit 4.13
shall be updated by Seller as of the Closing Date. Notwithstanding anything in
this Agreement to the contrary, Purchaser assumes no liability for payables of
the Facilities prior to the Closing Date or after the Closing Date if applicable
to goods or services provided to the Facilities prior to the Closing Date, and
Seller shall pay all such amounts.
ARTICLE V
POSSESSION
5.01 Possession. At Closing Purchaser shall be entitled to possession of
----------
the Seller's Assets, subject only to the rights of the patients and residents of
the Facilities and any liens and encumbrances permitted hereunder. Seller shall
retain possession of the Consumables and the
6
<PAGE>
inventory during the term of the Interim Operating Agreement or Interim Master
Lease, if any, and shall deliver a like quantity and quality of Consumables and
inventory to New Operator upon the termination date of the Interim Operating
Agreement or Interim Master Lease, as applicable.
ARTICLE VI
SELLER'S REPRESENTATIONS AND WARRANTIES
Seller hereby warrants and represents to Purchaser and to any assignee of
Purchaser of this Agreement or Purchaser's rights under Seller's warranties,
representations, covenants and indemnifications under this Agreement that,
except as otherwise specifically set forth in the Seller Disclosure Schedule
addressed and delivered to Purchaser as provided for in Section 9.01 (w) below:
6.01 Status of Seller. Seller is a limited partnership duly organized,
----------------
validly existing and in good standing under the laws of the State of Delaware,
and duly qualified to do business as a foreign partnership in the States of
Alabama, Illinois and Texas.
6.02 Validity and Conflicts. This Agreement is and all documents to be
----------------------
executed by Seller pursuant hereto will be, the valid and binding obligations of
Seller, enforceable in accordance with their respective terms, except as the
enforceability thereof may be limited by bankruptcy, insolvency, reorganization,
moratorium or other similar laws relating to the enforcement of creditors'
rights generally and by general principles of equity (regardless of whether such
enforceability is considered in a proceeding in equity or at law). The execution
of this Agreement and the consummation of the transactions contemplated herein
in accordance with the terms hereof have been (i) approved by all necessary
action of the General Partner of Seller as may be required under the General
Partner's articles of incorporation and bylaws, and (ii) approved by all
necessary action of Seller as may be required under Seller's Partnership
Agreement ("Charter Documents"), except that the approval of Limited Partners is
required as specified in Section 9.01(u) below ("Seller's Limited Partners'
Approval"), and do not and will not result in a breach of the terms and
conditions of nor constitute a default under or violation of Seller's Charter
Documents or any law, regulation, court order, mortgage, note, bond, indenture,
agreement, license or other instrument or obligation to which Seller is now a
party or by which any of Seller's assets may be bound or affected.
6.03 Authority. Subject to the Regulatory Approvals, Seller has full
---------
partnership power and authority to execute and to deliver this Agreement and all
related documents, and, subject to Seller's Limited Partners' Approval, to carry
out the transactions contemplated herein and therein. Seller has full
partnership power and authority (i) to own and operate the Facilities as the
same are presently owned and operated by it and (ii) to conduct its business as
the same is now being conducted.
6.04 The Seller Financial Statements. True and correct copies of the
-------------------------------
financial statements for the Seller and for the Facilities, as requested by
Purchaser and relating to the operations of the Facilities and of the Seller for
the years 1993, 1994 and 1995 and for the fiscal quarter ended September 30,
1996 (the "Seller Financial Statements") have been previously delivered to
Purchaser. Except as otherwise noted therein or in Seller Disclosure
7
<PAGE>
Schedule, the Seller Financial Statements have been prepared in accordance with
generally accepted accounting principles ("GAAP") consistently applied, fairly
represent the financial condition, and accurately set forth in all material
respects as and to the extent required by GAAP the results of the operations of
the Seller and/or the Facilities for the periods covered thereby subject to
customary year end adjustments. Any financial statements prepared by Seller
subsequent to the date of the Seller Financial Statements or the date hereof
will fairly represent the financial condition, and will accurately set forth in
all material respects the results of the operations of the Facilities for the
periods covered thereby and will be provided to Purchaser within ten (10) days
after the completion thereof.
6.05 Absence of Adverse Change. Since the date of the Seller Financial
-------------------------
Statements there has not been any material adverse change in the financial
condition, business, assets, liabilities, results of operations or prospects of
the Seller or of the Facilities, taken as a whole, whether in the ordinary
course of business or otherwise.
6.06 The Licenses. Seller has all material licenses, permits and
------------
authorizations necessary for the lawful operation of the Facilities, as
presently operated (the "Seller Licenses"). True and correct copies of the
licenses issued most recently by the applicable health care authority with
respect to the operation of the Facilities are attached hereto as Exhibit 6.06.
Seller has not received written or verbal notice of any action or proceeding
which has been initiated or is proposed to be initiated by the appropriate state
or federal agency having jurisdiction thereof, to either revoke, withdraw or
suspend any of the Seller Licenses or to terminate the participation of any of
the Facilities in either the Medicare or Medicaid Programs or any judicial or
administrative agency judgment or decision not to renew any of the Seller
Licenses or any licensure or certification action of any other type.
6.07 Compliance with Law.
-------------------
(a) Set forth in Exhibit 6.07 is a list of the most recent licensure
or certification survey for each of the Facilities, copies of which have
been delivered to Purchaser as of the date hereof. Each of the Facilities
and its and their current operation and use are in compliance with all
applicable municipal, county, state and federal laws, regulations,
ordinances, and orders and with all applicable municipal health, and
building laws and regulations (including, without limitation, the building
and life safety codes) where the failure to comply therewith would have a
material adverse effect on the business, property, condition (financial or
otherwise) or operation thereof;
(b) To the best of Seller's knowledge, there are no outstanding
cited deficiencies or other written requirements imposed by any
governmental authority having jurisdiction over any of the Facilities
requiring conformity to any applicable statute, regulation, ordinance or
bylaw, which have not been corrected as of the date hereof or which shall
not have been corrected on or prior to the Closing except to the extent
that either a waiver has been issued by the appropriate authority, in which
case a copy of such waivers shall be included in Exhibit 6.07(b), or if not
so corrected will not have a material adverse effect on the financial
condition or results of the operations of the affected Facility;
8
<PAGE>
(c) Seller has not received written or, to Seller's knowledge,
verbal notice from any licensing or certifying, agency supervising or
having authority over the Facilities, requiring them to be reworked or
redesigned or additional furniture, fixtures, equipment or inventory to be
provided thereat so as to conform to or comply with any existing law, code
or standard except where the requirement either (i) has been fully
satisfied prior to the date hereof, (ii) will be satisfied by Seller prior
to the Closing Date, (iii) will be in the process of being satisfied in the
ordinary course of Seller's business pursuant to the terms of a Plan of
Correction or other documentation submitted to and approved by the
appropriate authority or (iv) will be the subject of a valid written waiver
issued by the applicable licensing or certifying agency; and
(d) Seller has no knowledge that any of the Facilities
participating in the Medicare or Medicaid Programs is not in substantial
compliance with all Conditions and Standards of Participation in those
Programs, except as set forth in Exhibit 6.07(b).
6.08 Residents. Except for notice provisions that are required by law or
---------
which are contained in the admissions agreement provided to Purchaser, there are
no agreements not terminable at will with residents or patients of any of the
Facilities operated by Seller which provide for the provision of the care
routinely provided at said Facility for the duration of the resident's stay at
said Facility for no consideration nor will Seller enter into any such
agreements between the date hereof and the Closing Date.
6.09 Books and Records. All of the books and records of the Facilities,
-----------------
including resident records, patient trust fund records and records concerning
all resident prepaid accounts, are true and correct in all material respects.
6.10 Title. Seller has good title to the percentage interest in each
-----
Facility as set forth in Section 1.01 of this Agreement (and undivided fee title
with respect to the Real Property of the Facilities in which Seller owns a 100%
interest as set forth in Section 1.01 of this Agreement) of the Seller's Assets
free and clear of all liens, charges and encumbrances other than the liens
provided for in Section 9.02 (e) and those liens, charges, encumbrances and
other items reflected in the Title Commitment, the Survey and the UCC Search.
Except as disclosed in Exhibit 6.10, Seller is not leasing any of Seller's
Assets.
6.11 Unions. Except as set forth in Exhibit 6.11, there are no union
------
contracts in effect between Seller, on the one hand, and the employees of any of
the Facilities, on the other hand. To the knowledge of Seller, none of Seller's
employees who are not currently members of a labor union are actively seeking
the formation of a labor union at any of the Facilities. Seller is not a party
to any labor dispute. The Seller Disclosure Schedule shall contain a summary of
all grievances brought by members of any union representing employees of any of
the Facilities for the last three (3) years.
6.12 Taxes and Tax Returns. All tax returns, reports and filings of any
---------------------
kind or nature, as to or affecting the Facilities, required to be filed by
Seller prior to date of execution of this Agreement have been properly completed
and timely filed, or extensions for the filing
9
<PAGE>
thereof have been timely secured, with all such filings being in material
compliance with all applicable requirements and all taxes due with respect to
Seller have been timely paid.
6.13 Environmental Issues. To the best of Seller's knowledge, except in
--------------------
accordance, and in compliance, with any and all applicable local, state and
federal governmental laws, regulations and requirements (collectively, the
"Environmental Laws") relating to environmental and occupational health and
safety matters, and hazardous materials, substances or wastes (as defined from
time to time under any applicable Environmental Laws), Seller has not released
into the environment or discharged, placed or disposed of any such hazardous
materials, substances or wastes or caused the same to be so released into the
environmental or discharged, laced or disposed of at, on or under any of the
Facilities other than to the extent the same will not have a material adverse
affect on the condition, financial or otherwise, of the affected Facility. To
the best of Seller's knowledge, with respect to the Facilities, (i) except to
the extent permitted by applicable Environmental Laws, no hazardous materials,
substances or wastes are located on or at the Facilities or have been released
into the environment or discharged, placed or disposed of in, on or under the
Facilities, (ii) except to the extent permitted by applicable Environmental
Laws, no underground storage tanks are or have been located at the Facilities,
(iii) none of the Facilities is located on property which was used as a dump for
waste material, and (iv) each of the Facilities complies with, and at all times
during the period of its operation by Seller has complied with, all
Environmental Laws in all material respects. Seller has not received any written
notice from any governmental authority or any written complaint from any third
party with respect to its alleged noncompliance with, or potential liability
under, any Environmental Laws at any of the Facilities which remains unresolved
as of the date hereof. All written assessments prepared by or on behalf of
Seller of the hazardous waste conditions at the Facilities which are in the
possession of Seller have been made available to Purchaser. Notwithstanding the
foregoing, the foregoing representations and warranties are subject to any
environmental condition existing at any of the Facilities of which Purchaser
receives notice pursuant to the information provided to it in any environmental
assessment prepared in connection with the purchase of the Facilities or in the
Phase I Environmental Assessment Reports identified on Exhibit 6.13 which were
previously delivered to Purchaser.
6.14 Necessary Action. Except for the Regulatory Approvals (as defined
----------------
below) and Seller's Limited Partners' Approval, Seller has duly and properly
taken or obtained or caused to be taken or obtained, or prior to Closing will
have duly and properly taken or obtained or caused to be taken or obtained, all
action necessary for Seller (i) to enter into and to deliver this Agreement and
any and all documents and agreements executed by Seller in connection herewith
or in furtherance hereof and (ii) to carry out the terms hereof and thereof and
the transaction contemplated herein and therein. Except for Regulatory Approvals
and Seller's Limited Partners' Approval, no other action by or on behalf of
Seller is or will be necessary to authorize the execution, delivery and
performance of this Agreement and any documents and agreements executed by
Seller in connection herewith or the transactions contemplated herein. Other
than consents for the assignment of any Operating Contracts as provided for in
Section 6.21 below, no consent of any other third party is or will be necessary
nor any other action by or on behalf of Seller is or will be necessary, to
authorize the execution, delivery and performance of tills Agreement and any
documents and agreements executed by Seller in connection herewith or
consummation of the transactions contemplated herein and
10
<PAGE>
Regulatory Approvals for which Purchaser is responsible under the terms hereof.
Seller agrees to cooperate with Purchaser and/or New Operator if either or both
of them determine that HSR Consent is necessary.
6.15 Litigation. Except as set forth in Exhibit 6.15, there is no, nor
----------
has Seller or its General Partner received ,written notice of any, litigation,
administrative investigation or other proceeding pending or, to the best of
Seller's or its General Partner's knowledge based on written notice with respect
thereto, threatened by any governmental authority having jurisdiction over the
Facilities where the amount claimed exceeds $10,000 in any single action or
$25,000 in the aggregate. Neither Seller nor its General Partner is a party to
nor is Seller or its General Partner nor any of the Facilities bound by any
orders, judgments, injunctions, decrees or settlement agreements under which it
or they may have continuing obligations as of the date hereof or as of the
Closing Date and which are likely to materially restrict or affect the present
business operations of any or all of the Facilities. To Seller's knowledge, the
right or ability of Seller to consummate the transaction contemplated herein has
not been challenged by any governmental agency or any other person.
6.16 Sensitive Payments. Neither Seller nor its General Partner has (i)
------------------
made any contributions, payments or gifts to or for the private use of any
governmental official, employee or agent where either the payment or the purpose
of such contribution, payment or gift is illegal under the laws of the United
States or the jurisdiction in which made, (ii) established or maintained any
unrecorded fund or asset for any purpose or made any false or artificial entries
on its books, (iii) given or received any payments or other forms of
remuneration in connection with the referral of patients which would violate the
Medicare/Medicaid Anti-kickback Law, Section 1128(b) of the Social Security Act,
42 USC Section 1320a-7b(b) or any analogous state statute or (iv) made any
payments to any person with the intention or understanding that any part of such
payment was to be used for any purpose other than that described in the
documents supporting the payment.
6.17 The Facilities. Each of the Facilities is duly licensed to operate
--------------
the number of beds set forth opposite its name in Article I and, in the case of
all of the Facilities, is duly certified to participate in Medicare and
Medicaid. The Personal Property is all of the property necessary for the lawful
operation of the Facilities at their current occupancy levels. There is no
action pending, or to the knowledge of Seller, recommended by the appropriate
state or federal agencies having jurisdiction thereof which, if decided
adversely to Seller, would have a material adverse effect on the affected
Facility, its operations or business. To the best of Seller's knowledge, the
building and improvements constituting each Facility have been constructed in
compliance with the requirements of all laws at the time of construction and all
ordinances, rules, regulations and restrictions of record applicable thereto,
and all bills for labor and materials in connection with the construction
thereof have been paid in full or irrevocably provided for. Except as disclosed
in Exhibit 6.17, Seller has no knowledge of any latent or patent material defect
or deficiency with regard to the structures, roofs, soils, furniture, fixtures
or equipment of any facility which would materially impair the use or value of
such Facility, and the same are in good working order and condition. Seller has
no knowledge of any latent or patent material defect or deficiency, with regard
to the plumbing, mechanical, electrical or other systems of any Facility which
would materially impair the use or value of such Facility, and the same are in
good working order and condition.
11
<PAGE>
6.18 Inventories. At Closing each of the Facilities shall have an
-----------
inventory of perishable and non-perishable food, central supplies, linens,
housekeeping supplies, kitchen supplies, and nursing supplies sufficient in
condition and at such quantity levels as may be required under all applicable
laws and, to the extent there exists no applicable laws which specifically
identify the condition and/or required quantity levels for any such supplies or
inventory, then such inventory and supplies shall be in such condition and at
such levels as is customarily maintained by Seller.
6.19 The Facility Agreements. Attached hereto as Exhibit 6.19 is a true
-----------------------
and correct copy of the form of admission agreement entered into by Seller with
each of the current residents/patients of the Facilities. At Closing Seller
shall deliver to Purchaser duly executed assignments of all admission agreements
(the "Admission Agreements") in effect for each of the Facilities as provided
for in Section 9.02 (h) below.
6.20 Patient Roster. Attached hereto as Exhibit 6.20 is a true and
--------------
correct patient roster which identifies by Facility each of the residents and
patients of the Facilities, the daily rate paid by each of the patients and
residents, and with respect to the private pay residents and patients, the date
through which each of them has paid.
6.21 Operating Contracts. Set forth in Exhibit 6.21 is a true and
-------------------
correct list of the operating contracts to which Seller is a party in connection
with its operations at the Facilities (the "Operating Contacts"). Each of the
Operating Contracts is in full force and effect and none of the Operating
Contracts has been modified or amended except as set forth in Exhibit 6.21.
Seller is not in default of any of its material obligations under the Operating
Contracts nor has Seller any knowledge of any material default or any action or
omission which, with the passage of time or the giving of notice or both, would
constitute a material default under the Operating Contracts by any other party
thereto. At Closing Seller shall deliver to Purchaser a duly executed assignment
of any of the Operating Contracts which Purchaser elects to assume pursuant to
Section 10.01(e). In the event the consent of the other contracting party shall
be required for said assignment, Seller shall timely request in writing said
consent; provided, however, if Seller is unable to secure any such consent, the
delivery of such consent shall not be deemed a condition precedent to the
Closing unless the Operating Contract for which Seller failed to obtain the
consent is material to the operations of the Facilities by Purchaser following
the Closing. If Seller is unable to secure any such consent with respect to an
Operating Contract which is material to the operations of the Facilities, the
lack of said consent shall be deemed the failure of a Purchaser's condition
precedent hereunder and, in such event, Purchaser shall have the right to either
waive the requirement for said consent or terminate this Agreement by written
notice delivered to Seller within five (5) business days following, Purchaser's
receipt of written notice from Seller that said consent cannot be obtain.
6.22 Disclosure. Subject to the terms of the Seller Disclosure Schedule,
----------
as it may be amended pursuant to this Agreement, no representation or warranty
by or on behalf of Seller contained in this Agreement and no statement contained
in any certificate, list, exhibit, or other instrument furnished or to be
furnished to Purchaser pursuant hereto contains or will contain any untrue
statement of a material fact, or omits or will omit to state any material facts
which
12
<PAGE>
are necessary in order to make the statements contained herein or therein, in
light of the circumstances under which they were made, not misleading.
6.23 Insurance. Seller's Assets have been continuously covered since
---------
January 1, 1994 by insurance policies covering physical damage, general
liability, professional liability and worker's compensation, which policies are
on an occurrence basis. Attached as Exhibit 6.23 are descriptions of each such
policy and certificates of insurance evidencing such coverage.
6.24 Fringe Benefits. Attached as Exhibit 6.24 is a list of all fringe
---------------
benefits applicable to any and all employees of the Facilities ("Employees").
Unless designated on Exhibit 6.24, all of the fringe benefits are applicable to
all Employees and there are no other fringe benefits applicable to any Employees
other than listed on Exhibit 6.24.
6.25 ERISA. Except as set forth in Exhibit 6.25, Seller has in effect no
-----
employee pension or defined benefit plans, profit sharing plans, defined
contribution plans, retirement plans, or other like plans or programs covering
any of the Employees, and Seller has made no commitments or agreements to place
in effect or extend any such plans for the benefit of the Employees. Seller has
not contributed to, and has no withdrawal liability with respect to any multi-
employer plan as that term is defined by the Employee Retirement Income Security
Act of 1974, as amended ("ERISA"). To the best of Seller's knowledge, Seller is
in compliance with ERISA and no "reportable event" within the meaning of ERISA
has occurred. Attached hereto as part of Exhibit 6.25 are copies of any such
benefits plans and any actuarial studies in Seller's possession relating to any
such benefit plans contained in Exhibit 6.25.
Notwithstanding anything contained herein to the contrary, except for those
representations and warranties that by their terms relate to a specific period
of time and except as may be expressly stated in the Seller Disclosure Schedule,
as it may be amended hereunder, all of the foregoing representations and
warranties shall be materially applicable, true, correct and complete, both as
of the date hereof and as of the Closing Date, and Seller shall, as stated in
Section 9.02 (a) of this Agreement, certify in writing at Closing that each and
all said representations and warranties are materially true, correct and
complete as of and with respect to that date.
ARTICLE VII
PURCHASER REPRESENTATIONS AND WARRANTIES
Purchaser hereby warrants and represents to Seller that, except as
otherwise specifically set forth in the Purchaser Disclosure Schedule addressed
and delivered to Seller as provided for in Section 10.01 (i) below:
7.01 Status of Purchaser. Purchaser is a corporation duly organized,
-------------------
validly existing and in good standing under the laws of the State of Maryland.
7.02 Validity and Conflicts. This Agreement is, and all documents to be
----------------------
executed by Purchaser pursuant hereto will be, the valid and binding obligations
of Purchaser, enforceable in accordance with their respective terms, except as
the enforceability thereof may
13
<PAGE>
be limited by bankruptcy, insolvency, reorganization, moratorium or other
similar laws relating to the enforcement of creditors' rights generally and by
general principles of equity (regardless of whether such enforceability is
considered in a proceeding in equity or at law). The execution of this Agreement
and the consummation of the transactions contemplated herein have been approved
by the Board of Directors of Purchaser and do not and will not result in a
breach of the terms and conditions of nor constitute a default under or
violation of the Charter Documents or Bylaws of Purchaser or any law,
regulation, court order, mortgage, note, bond, indenture, agreement, license or
other instrument or obligation to which Purchaser is now a party or by which any
of their assets may be bound or affected, subject, however, to Purchaser
obtaining the HSR Consent, if required, and Regulatory Approvals for which it is
responsible under the terms hereof.
7.03 Authority. Subject to obtaining the HSR Consent, if required, and
---------
Regulatory Approvals which Purchaser is required to use its best efforts to
secure, and Purchaser's board of directors approving this Agreement, and the
transactions contemplated hereby, Purchaser has full corporate power and
authority to execute and to deliver this Agreement and all related documents,
and to carry out the transactions contemplated herein and therein.
7.04 Necessary Action. Purchaser has duly and properly taken or obtained
----------------
or caused to be taken or obtained, or prior to Closing will have duly and
properly taken or obtained or caused to be taken or obtained, all action
necessary for Purchaser (i) to enter into and to deliver this Agreement and any
and all documents and agreements executed by Purchaser in connection herewith or
in furtherance hereof and (ii) to carry out the terms hereof and thereof and the
transactions contemplated herein and therein, which action shall include, but
not be limited to, obtaining the consent of the Board of Directors of Purchaser
and the HSR Consent, if required, and Regulatory Approvals. No consent of any
other third party is or will be necessary nor any other action by or on behalf
of Purchaser is or will be necessary, to authorize the execution, delivery and
performance of this Agreement and any documents and agreements executed by
Purchaser in connection herewith or consummation of the transactions
contemplated herein, other than Regulatory Approvals (as defined below). Each
party shall mutually cooperate in the procurement of any Regulatory Approvals;
provided, however, nothing herein shall be construed as a guarantee by either
Purchaser or Seller that it will be able to secure the Regulatory Approvals, and
the foregoing Purchaser's representation and warranty shall be limited to the
representation and warranty that it will use its best efforts to secure the
Regulatory Approvals as provided in Section 11.03 below.
Notwithstanding anything contained herein to the contrary, except for those
that by their terms relate to a specific period of time, all of the foregoing
representations and warranties shall be materially applicable, true, correct and
complete, both as of the date hereof and as of the Closing Date, and Purchaser
shall, as stated in Section 10.02 (b) of this Agreement, certify in writing at
Closing that each and all said representations and warranties are materially
true, correct and complete as of and with respect to that date.
14
<PAGE>
ARTICLE VIII
BROKER; INVESTMENT BANKER
Seller has utilized the services of The Robinson-Humphrey Company, Inc., an
investment banker, in connection with this Agreement and the transactions
contemplated herein. Except for the fee payable to The Robinson-Humphrey
Company, Inc., the payment of which is the sole responsibility of Seller, each
party hereby represents, covenants and warrants to the other that it has
employed no other broker, finder or investment banker in connection with the
transaction contemplated herein. Each party agrees to pay any commission,
finder's fee or investment banker's fee which may be due on account of the
transaction contemplated herein to any broker, finder or investment banker
employed by it, and to indemnify the other party hereto against any claim for
any commission, finder's fee or investment banker's fee made by any broker,
finder or investment banker allegedly employed by it and from and against any
and all costs and expenses incurred in connection therewith, including, but not
limited to, reasonable attorneys fees and costs.
ARTICLE IX
SELLER COVENANT
9.01 Pre Closing. Seller covenants that between the date hereof and the
-----------
Closing and during the term of the Interim Operating Agreement or Interim
Master Lease, if any, except as contemplated by this Agreement or with the
consent of Purchaser, which consent shall not be unreasonably withheld,
conditioned or delayed:
(a) Within five (5) days following the Effective Date, Seller shall
order (i) an update to each title insurance policy previously delivered to
Purchaser by Seller as set forth in Exhibit 9.01(a) through the national
office of Lawyers Title Insurance Corporation (the "Title Company"), for
each facility with a value equal to the amount of the Purchase Price
allocated by Seller to such facility (the "Title Commitments"), (ii) a UCC-
1 search report in the name of Seller and each of the Facilities conducted
at the state and county level ("UCC Search Reports"), and (iii) order an
ALTA/ACSM survey of each of the Facilities prepared by a surveyor
acceptable to Purchaser (the "Surveys"). The Title Commitments shall run
in favor of Purchaser, but shall commit the Title Company to provide
lessee's policies for New Operator if ordered by Purchaser prior to
December 31, 1997. Purchaser or New Operator shall be responsible for
payment of the additional premium, if any, attributable to the commitment
to issue a lessee's policy or any policy issued pursuant thereto. The
Surveys shall show thereon: (a) the location of all boundaries, existing
fences, easements, pipelines, rights-of-way, and public roads and highways
which are of record or visible on the ground, (b) vicinity map showing the
Real Property surveyed in reference to nearby highways or major street
intersections, (c) flood zone designation (with proper annotation based on
Federal Flood Insurance Rate Maps or the state or local equivalent, by
scaled map location and graphic plotting only), (d) all setback, height and
bulk restrictions of record or disclosed by applicable zoning or building
codes (in addition to those recorded in subdivision maps), (e) exterior
dimensions of all buildings at ground level, (f) exterior footprint of all
buildings, or gross floor area of all buildings at ground level, (g) all
substantial physical improvement (in addition to
15
<PAGE>
buildings) such as signs, parking structures, swimming pools, etc., (h)
parking areas and, if striped, the striping and the type (e-g. handicapped,
motorcycle, regular etc.) and the number of parking spaces, (i) indication
of access to a public way such as curb cuts and driveways marked, (j)
location of all utilities serving or exiting on the Real Property as
evidenced by on-site observation or as determined by records provided by
Seller, utility companies and/or other appropriate sources (with reference
to the source of information), (k) the number of acres and net square
footage contained within the boundaries of the Real Property, (1) the
location and dimensions of any protrusions from and encroachments on the
Real Property, and (m) such other requirements as may be necessary
including, without limitation, evidence that each Facility complies with
the applicable zoning classification for the associated Real Property in
order to permit the Title Company to issue the Title Insurance Policies
without the so-called "standard exceptions". The Surveys shall be certified
to the Purchaser, Seller, and the Title Company. The surveyor shall include
in its certification its Registration Number, address, telephone number,
the job number and that the Survey meets all ALTA/ACSM requirements and
that the Survey was made on the ground as per the field notes shown thereon
and that, except as shown thereon, there are no visible easements, rights-
of-way, party walls, conflicts, or visible encroachments by any
improvements onto an easement or neighboring property or by any
improvements on adjoining property onto the Real Property and that the Real
Property has direct access to an adjacent public street;
(b) Seller will operate the Facilities only in the ordinary course
and with due regard to the proper maintenance and repair of the Real
Property or Personal Property in order to maintain and repair the Real
Property and the Personal Property substantially in the same condition as
they were in at the date hereof, ordinary wear and tear, insured casualty
loss and taking by eminent domain excepted;
(c) Seller will take all reasonable action to preserve the goodwill
and the present occupancy levels of the Facilities;
(d) Except in the ordinary course of business, Seller will not make
any material change in the operation of the Facilities nor sell or agree to
sell any items of machinery, equipment or other fixed assets of any of the
Facilities nor otherwise enter into any agreements materially affecting any
of the Facilities;
(e) Seller will use its reasonable efforts to retain the goodwill of
the employees at each of the Facilities and will provide Purchaser and New
Operator (or Atrium, if applicable) with notice in the event of any known
union organizing activities or if contract negotiations are commenced at
the Facilities after the date hereof;
(f) Seller will maintain in force the existing insurance coverage or
comparable insurance coverage, in all material respects, with respect to
the Facilities;
(g) Except in the ordinary course of business, Seller will not
increase the compensation or bonuses payable or to become payable to any of
the employees at any
16
<PAGE>
of the Facilities or grant any severance benefits to any such employees
other than in accordance with the provisions set forth in the Seller
Disclosure Schedule;
(h) Seller will not enter into any written employment agreements with
any current or prospective employees of the Facilities;
(i) Without the prior written approval of Purchaser, Seller will not,
except in the ordinary course of business, enter into any lease, tenancy,
contract or other commitment affecting any of the Sellees Assets or incur
any additional indebtedness or amend, extend or renew any current debt
instruments, whether in the ordinary course of business or otherwise,
unless, however, neither Purchaser, New Operator nor any of the Facilities
shall be obligated, following the Closing, for any such indebtedness or
debt instruments;
(j) Seller will provide Purchaser within ten (10) days following the
mutual execution of this Agreement with copies of the following, documents
relating to the Real Property and each of the Facilities to the extent the
same are in Seller's possession or reasonable control (collectively, the
"Property Documents"): all environmental reports, structural reports and
geological reports, governmental licenses, permits and approvals, service
and maintenance contracts not previously delivered as part of the Operating
Contracts, existing surveys of the Real Property including any as-built
surveys for the improvements, wetland reports, soils reports, architectural
drawings, plans and specifications, engineering tests and reports. In the
event Purchaser or its accountants or New Operator and its accountants
determines that any additional documents or information will be necessary
in order for Purchaser or New Operator to comply with any requirements of
the Securities and Exchange Commission ("SEC") applicable to Purchaser or
New Operator, Seller agrees to cooperate in good faith in order to obtain
copies of the same, provided that said cooperation shall be at no cost or
expense to Seller;
(k) During normal business hours, Seller will provide Purchaser and
New Operator and their agents with access on 24 hours notice to the Real
Property and the Facilities, provided Purchaser, New Operator and their
agents do not interfere with the operation of the Facilities and at such
times Seller shall permit Purchaser, New Operator and their agents to
inspect the books and records related to each Facility (which may be
unaudited) covering a period of not less than two years prior to the date
hereof and conduct an audit of said books and records and inspect the
physical and structural condition of each Facility, the Real Property and
the Personal Property, all with a representative of Seller being present.
Said books and records shall include, but not be limited to, leases,
accounts payable records, rent rolls, operating statements, inventory of
personal property and all other contracts and agreements which relate to
Seller's Assets;
(1) Seller will file all returns, reports and filings of any kind or
nature, with respect to the Facilities, or will secure timely extensions
for the filing thereof, required to be filed by Seller including, but not
limited to, state and federal tax returns and Medicare and Medicaid cost
reports and to timely pay all taxes or other obligations
17
<PAGE>
which are due and payable with respect thereto, except to the extent that
the same are being duly contested in good faith in accordance with
applicable law and such contest does not materially affect Seller or the
Facilities;
(m) Seller will operate the Facilities in substantial compliance with
all applicable municipal, county, state and federal laws, regulations,
ordinances, and orders as now in effect (including, without limitation, all
applicable building, zoning, and life safety codes with respect thereto)
where the failure to comply therewith would have a material adverse effect
on the business, property, condition (financial or otherwise) or operation
thereof, as presently operated;
(n) Seller will take all reasonable action to achieve substantial
compliance, with any laws, regulations, ordinances, standards and orders
applicable to the Facilities which are enacted or issued after execution of
this Agreement and prior to the Closing where the failure to comply
therewith would have a material adverse effect on the business, property,
condition (financial or otherwise) or operation thereof, as presently
operated;
(o) Seller will provide Purchaser with (I) true and correct copies of
financial statements for Seller and for the Facilities for the entire
calendar year 1996 as soon as available, and (II) copies of monthly
financial statements for each of the Facilities prepared in the ordinary
course of business between the date hereof and the Closing Date, it being
acknowledged that such monthly financial statements are not prepared in
accordance with GAAP;
(p) Seller will provide Purchaser with copies of all licensure or
certification surveys for the Facilities received by Seller and the related
Plans of Correction prepared by Seller between the date hereof and the
Closing Date;
(q) Seller will pay as and when due the accounts payable related to
the Facilities which arise in the ordinary course of their business, except
to the extent that the amount owing is being duly contested by Seller and
such contest does not materially affect Seller or the Facilities;
(r) Unless specifically prohibited by law, Seller will use its best
efforts to cause all of the conditions to Closing set forth in Sections
12.01 and 12.02 which are with Seller's control to be satisfied prior to
the Closing Date and Seller will not take any action inconsistent with its
obligations under this Agreement or which could hinder or delay the
consummation of the transactions contemplated by this Agreement or which
would cause any representation, warranty or covenant made by Seller in this
Agreement or in any certificate, list, exhibit, or other instrument
furnished or to be furnished pursuant hereto, or in connection with the
transaction contemplated hereby, to be untrue in any material respect as of
the Closing Date;
(s) Seller and the General Partner and any officer, director,
employee, advisor or others authorized to act on any of their behalf (i)
will not, directly or indirectly, initiate, solicit, authorize or encourage
discussions relating to any alternative
18
<PAGE>
acquisition proposal or similar transaction, involving any of the Seller's
Assets, including, without limitation, a merger or other business
combination or the purchase of any ownership interests in the Seller, other
than the transactions contemplated by this Agreement (any such proposal
shall be referred to as an "Acquisition Proposal"); (ii) will not
participate in negotiations in connection with or in furtherance of any
Acquisition Proposal or permit any other person other than Purchaser and
its representatives to have any access to the Facilities, or furnish to any
person other than Purchaser and its representatives any non-public
information with respect to the Seller's Assets; (iii) will immediately
cease and cause to be terminated any existing activities, discussions or
negotiations with any parties, other than Purchaser, conducted on or before
the date of this Agreement with respect to any Acquisition Proposal; and
(iv) will immediately provide to Purchaser written notice of any
Acquisition Proposal which notice shall include the name of the party
seeking to initiate, continue or renew activities, discussions or
negotiations regarding an Acquisition Proposal; provided, however, that
nothing contained in this Section 9.01(s) shall prohibit Seller or the
General Partner from taking any action otherwise prohibited by this Section
9.01(s) if Seller or the General Partner determines, upon the receipt of a
written opinion of its outside counsel, that it is necessary to take such
action in order to fulfill its fiduciary duties to the Limited Partners;
(t) Seller will provide to Purchaser copies of all material documents
which relate to, and, upon request, with verbal or written updates
concerning the status of, any litigation filed as of the date hereof or
filed from and after the date hereof by or against Seller or its General
Partner and which may affect the Facilities after the date of this
Agreement but prior to the Closing Date where the amount claimed or
assessed is judged by the General Partner as likely to exceed $10,000.00;
provided, however, neither Seller nor its General Partner shall be required
to deliver any documents to Purchaser which, by reason of said delivery,
would result in the waiver or relinquishment of the attorney-client
privilege held by Seller or its General Partner;
(u) Seller and the General Partner (i) as promptly as practicable,
but in no event later than five (5) business days after the date the SEC
clears the Consent Solicitation (as that term is defined below), will take
all actions necessary in accordance with applicable law and the Partnership
Agreement to solicit and seek to obtain the requisite consent of the
Limited Partners as required by applicable law and the terms of the
Partnership Agreement to consider and vote upon the approval of this
Agreement and the transactions contemplated by this Agreement; (ii) will
recommend that the Limited Partners approve this Agreement and the
transactions contemplated by this Agreement; (iii) will use their best
efforts to seek to obtain such approval, including, without limitation, by
having the Consent Solicitation (as defined below) cleared by the SEC for
mailing to the Limited Partners; (iv) within fourteen (14) days after the
date of this Agreement, will prepare and file with the SEC a consent
solicitation statement (the "Consent Solicitation') with respect to the
solicitation by the General Partner of the counsel of the Limited Partners
to this Agreement and the transactions contemplated by this Agreement; and
(v) will cause the Consent Solicitation (A) to comply as to form in all
material respects with the applicable provisions of the Securities and
Exchange Act of 1934, as amended (the "1934 Act"),
19
<PAGE>
and the rules and regulations thereunder and (B) to include the
recommendation of the General Partner that the Limited Partners approve
this Agreement and the transactions contemplated by this Agreement; Seller
will provide Purchaser with a copy of the Consent Solicitation at the time
Seller sends the Consent Solicitation to its Limited Partners; Seller will
provide Purchaser with a draft of the Consent Solicitation and any proposed
amendments thereto prior to their submission to the SEC for Purchaser's
review and comment;
(v) Seller will not agree to do or to cause to be done any of the
acts which it has covenanted not to do under this Section 9.01; and
(w) Within fifteen (15) days following the mutual execution of this
Agreement, Seller will deliver to Purchaser a disclosure schedule addressed
to Purchaser which sets forth in reasonable detail any exceptions to any of
the representations and warranties made by Seller hereunder (the "Seller
Disclosure Schedule").
9.02 Closing Date. On the Closing Date, Seller will deliver to Purchaser
------------
the following:
(a) A certificate of General Partner dated as of the Closing Date,
certifying on behalf of Seller in such detail as Purchaser may reasonably
specify the fulfillment of the conditions set forth in Sections 12.01 (a)
and (b);
(b) A certificate from General Partner certifying that a majority in
interest of the limited partners of the Sellers have authorized and
approved the sale of the Facilities;
(c) Certificates of Organization and Certificates of Authority to
Transact Business in a foreign state with respect to Seller issued within
the 30 days prior to the Closing Date by the Secretary of State (or other
authorized official) in each of the States where the Facilities are located
and in the State of Seller's incorporation or formation;
(d) An opinion or opinions of counsel to Seller dated as of the
Closing Date in substantially the form attached hereto as Exhibit 9.02 (d);
(e) Subject to Section 10.01 (a) below, fee simple title to the
percentage interest owned by Seller in the Facilities as set forth in
Section 1.01, to be conveyed by Warranty Deed as referred to in Section
9.02 (f) below, free and clear of all liens and encumbrances other than the
following:
(i) Liens for real and personal property taxes which are not yet
due and payable; and
(ii) Such liens, encumbrances and restrictions as may be approved
or deemed approved by Purchaser pursuant to Section 10.01(a).
20
<PAGE>
(f) A duly executed Warranty Deed in form and substance reasonably
acceptable to Purchaser with respect to each parcel of Real Property and a
Bill of Sale in form and substance in accordance with Exhibit 9.02 (f)
attached hereto with respect to all of the Personal Property for each of
the Facilities;
(g) A counterpart of an assignment and assumption agreement with
respect to the Operating Contracts described in Section 6.21 to the extent
Purchaser or New Operator elects to assume the same in accordance with the
provisions of Section 10.01, but only if the Operating Contracts are
assumable by Purchaser, which agreement shall be in the form and substance
of Exhibit 9.02 (g) attached hereto;
(h) A counterpart of an assignment and assumption agreement with
respect to the Admission Agreements described in Section 6.19, in the form
and substance of Exhibit 9.02 (h) attached hereto;
(i) Such other documents or instruments as may be reasonably
necessary to convey title to the Seller's Assets to Purchaser in accordance
with the terms hereof;
(j) Possession of the Seller's Assets in such condition and repair as
shall comply with the terms hereof;
(k) The original certificates of title to any motor vehicles included
within the Personal Property;
(1) The Benefits Schedule (as defined in Section 14.01); and
(m) A counterpart of the Letter Agreement (as defined in Section
2.01).
In addition, on the Closing Date, the Seller shall take the following actions:
(n) Pay the closing costs for which it is responsible under Article
IV; and
(o) Adjust the Purchase Price by a credit to Purchaser for the
accrued Benefit Pay (as defined below) and accrued sick pay of each
Facility in accordance with the provisions of Section 14.01.
9.03 Post Closing. Seller covenants and agrees that after the Closing
------------
Date it will:
(a) At no cost to Seller, reasonably cooperate with Purchaser in the
event Purchaser is required to include audited financial statements with
respect to the Facilities in its filings with the SEC.
(b) Take such actions and properly execute and deliver to Purchaser
such further instruments of assignment, conveyance and transfer as, in the
reasonable opinion of counsel for Purchaser and Seller, may be reasonably
necessary to assure,
21
<PAGE>
complete and evidence the transfer and conveyance of Seller's Assets, as
contemplated herein.
(c) Seller shall retain and not disburse to any general or limited
partner, Five Hundred Thousand and 00/100 Dollars ($500,000.00) less any
amounts paid out to satisfy any Claims (as defined below) against Seller in
liquid assets (i) until the Medicare/Medicaid Release Date (as defined in
the Letter Agreement), and (ii) after the Medicare/Medicaid Release Date,
an amount which the parties shall reasonably determine appropriate to
assure Purchaser, or its assigns, that Seller will be able to satisfy its
obligations under Section 15.01 with respect to any Claims which are not
yet resolved. Funds maintained in the joint signature account pursuant to
Section 2.01 of this Agreement shall not be included toward Sellers
obligation to maintain liquid assets as set forth in the preceding
sentence. Notwithstanding anything in this Section 9.03(c) to the contrary,
Seller may use such funds for payment of operational payables and expenses
of the Facilities and the expenses of winding up its business, provided
--------
however, in no event shall the amount of such funds retained be an amount
-------
less than Four Hundred Thousand and 00/100 Dollars ($400,000.00).
(d) File the annual cost reports for the Facilities within the
periods required by Medicare, Medicaid and any other third party payor and
provide any additional documentation to support the amounts claimed under
such cost reports within such time periods.
ARTICLE X
PURCHASER COVENANTS
10.01 Pre-Closing. Purchaser covenants that between the date hereof and
the Closing except as contemplated by this Agreement or with the consent of
Seller, which consent shall not be unreasonably withheld, conditioned or
delayed:
(a) Within ten (10) days after its receipt of the Title Commitments
and all documents referred therein to as any exception to title, the
Surveys and the UCC Search Report, Purchaser shall advise Seller in
writing, of its objections, if any, to, each Title Commitment, Survey and
UCC Search Report. Seller agrees to use reasonable best faith efforts to
cure any defects in title, and in any event will from the proceeds of the
sale pay any encumbrances which may be satisfied by the payment of money.
Within ten (10) days after Seller's receipt of Purchaser's title
objections, UCC search and Survey objections, Seller shall advise Purchaser
whether it will be able to correct the defects to which Purchaser has
objected. If Seller notifies Purchaser that Seller, using reasonable best
faith efforts, is unable to correct some or all of the title, survey or
lien defects objected to by Purchaser, Purchaser shall have five (5) days
to advise Seller of its decision to close, notwithstanding the defects, or
of its election to terminate this Agreement, in which case neither party
shall have any first rights or obligations hereunder. Any matter reflected
on the Title Commitments or Surveys provided to Seller which has not been
objected to by Purchaser in accordance with the terms hereof, shall be
deemed accepted by Purchaser. If Purchaser elects to purchase the
22
<PAGE>
Facilities notwithstanding Seller's inability to correct any matter
objected to, then all such matters so objected to shall be deemed accepted
by Purchaser hereunder:
(b) Purchaser acknowledges receipt of the Phase I Environmental
Assessment Reports identified on Exhibit 6.13. Seller will promptly order
updates of those Phase I Environmental Assessment Reports identified on
Exhibit 6.13 and has previously ordered Phase I Environmental Assessment
Reports as to those Facilities which are not covered by the Phase I
Environmental Assessment Reports identified on Exhibit 6.13. Within five
(5) business days of receipt of the updated Phase I Environmental
Assessment Reports and the new Phase I Environmental Assessment Reports,
Purchaser will notify Seller in writing of any additional Environmental
studies or investigations which Purchaser requires. The updated Phase I
Environmental Assessment Reports and the new Phase I Environmental
Assessment Reports will be from companies reasonably acceptable to
Purchaser and will be certified to Purchaser and to the New Operator as
soon as the New Operator is identified.
(c) Purchaser will proceed with all due diligence to conduct such
investigations with respect to Seller's Assets as it deems to be reasonably
necessary in connection with its purchase thereof, including, but not
limited to, zoning investigations, soil studies, environmental assessments,
seismic assessments, wetlands reports, review of all Property Documents
provided by Seller, investigations of each of the Facility's operating
books an records and structural inspections, provided, however, no studies
or investigations conducted at the Real Property will be physically
intrusive on the Real Property or the Facilities unless Seller consents
thereto (the "Feasibility Review") and, provided further that, Purchaser
shall maintain the confidentiality of any documents or information obtained
by it during the course of its Feasibility Review and shall return the same
to Seller in the event the transaction provided for herein fails close for
any reason whatsoever. Notwithstanding the foregoing, Purchaser may
disclose any such documents and information to its lawyers, accountants,
lenders, appraisers and other professionals advising Purchaser so long as
each of them agrees to treat such documents and information confidentially.
Any access to the Real Property and/or the Facilities which is provided to
the Purchaser in order to conduct its Feasibility Review shall be subject
to the terms and conditions of Section 9.01 (k) above;
(d) Purchaser will proceed with all due diligence to obtain the HSR
Consent, if required, and Regulatory Approvals for which it is responsible
under the terms hereof, including without limitation, obtaining from the
applicable governmental licensing authorities assurances, reasonably
satisfactory to Purchaser, that Purchaser will receive all necessary
operating licenses, as provided in Section 12.01 (c) below;
(e) Within ten (10) days after receipt of the exhibits as set
forth in Section 16.15 hereof, Purchaser will advise Seller in writing
which, if any of the Operating Contracts it or New Operator will assume as
of the Closing Date and which of the Operating Agreements it is electing to
assume are deemed by Purchaser to be material to the operations of the
Facilities for purposes of Section 6.21 above;
23
<PAGE>
(f) Unless specifically prohibited by law, Purchaser will use its
best efforts to cause all of the conditions to Closing set forth in
Sections 12.01 and 12.02 which are within its control to be satisfied prior
to the Closing Date and Purchaser will not take any action inconsistent
with its obligations under this Agreement or which could hinder or delay
the consummation of the transactions contemplated by this Agreement or
which is intended to cause any representation, warranty or covenant made by
Purchaser in this Agreement or in any certificate, list, exhibit, or other
instrument furnished or to be furnished pursuant hereto, or in connection
with the transaction contemplated hereby, to be untrue in any material
respect as of the Closing Date;
(g) Purchaser (i) will furnish such information concerning Purchaser
as is necessary in order to cause the Consent Solicitation, insofar as it
relates to Purchaser, to be prepared in accordance with all applicable
requirements of the 1934 Act and the rules and regulations promulgated
thereunder; and (ii) will promptly advise Seller if at any time prior to
any meeting of the Limited Partners any information provided by Purchaser
to Seller in the Consent Solicitation becomes inaccurate or incomplete in
any material respect and will provide to Seller the information needed to
correct such inaccuracy or omission;
(h) Purchaser will not agree to do or to cause to be done any of the
acts which it has covenanted not to do under this Section 10.01;
(i) Within fifteen (15) days following the mutual execution of this
Agreement, Purchaser will deliver to Seller a disclosure schedule addressed
to Seller which sets forth in reasonable detail any exceptions to any of
the representations and warranties made by Purchaser hereunder (the
"Purchaser Disclosure Schedule"); and
(j) Purchaser will proceed with all due diligence to secure the
Regulatory Approvals and HSR Consent, if required, for which it is
responsible under the terms hereof.
10.02 Closing Date. On the Closing Date, Purchaser will deliver or cause
------------
New Operator to deliver the following:
(a) The purchase price in accordance with Article II and any other
adjustments set forth in this Agreement and subject to Section 12.01 (d)
hereof;
(b) A certificate of a responsible officer of Purchaser dated as of
the Closing Date certifying on behalf of Purchaser in such detail as Seller
may reasonably specify the fulfillment of the conditions set forth in
Sections 12.02 (a) and (b);
(c) Resolutions of Purchaser's Board of Directors, certified by the
Secretary of Purchaser authorizing and approving the transactions
contemplated herein;
(d) A counterpart of an assignment and assumption agreement with
respect to the Operating Contracts described in Section 6.21 to the extent
New Operator elects to assume the same in accordance with the provisions of
Section 10.01;
24
<PAGE>
(e) A counterpart of an assignment and assumption agreement with
respect to the Admission Agreements described in Section 6.20;
(f) An opinion or opinions of counsel to Purchaser dated as of the
Closing Date in substantially the form attached hereto as Exhibit 10.02;
(g) Pay the closing costs for which it is responsible under Article
IV;
(h) A counterpart of the Letter Agreement (as defined in Section
2.01).
10.03 Post Closing. After the Closing Date, Purchaser will:
------------
(a) Provide Seller, or cause New Operator to provide Seller, with
access during normal business hours to the Facilities and any books or
records which Seller may need to file or to defend tax returns or other
governmental filings or any litigation or administrative actions filed
prior to or subsequent to the Closing Date which relate to the period prior
to the Closing Date as well as for purposes of pursuing collection of third
party payments due Seller for the period prior to the Closing Date; Seller
shall have the ability to photocopy accounts receivable records and such
other records of residents and the Facilities as may be commercially
reasonable and provided that Seller shall limit its documentary and
photocopy requests to periods relating, prior to the Closing Date;
(b) Take such actions and properly execute and deliver such further
instruments as Seller may reasonably request to assure, complete and
evidence the transaction provided for in this Agreement;
(c) Cause New Operator and/or Atrium to retain all patient records
for the Facilities which are in existence 8 of the Closing for a period of
not less than three (3) years and, upon reasonable advance notice to
Purchaser, allow Seller access to said patient records and;
(d) For two (2) months after the Closing Date, cause New Operator to
use commercially reasonable efforts to collect, for the account of Seller,
the accounts receivable for each Facility for the period prior to and
including the Closing Date. Seller shall provide New Operator with a
completed aged trial balance of the accounts receivable as of the Closing
Date, on or as soon as reasonably practical after the Closing Date. On the
15th day of the calendar month immediately following the applicable
calendar month during such two (2) month period, following the provision to
New Operator of such trial balance of accounts receivable, New Operator
shall provide Seller with a detail of the accounts receivable collected, if
any, during the preceding calendar month, accompanied by copies of
remittance advises and shall pay to Seller the aggregate amount collected
on behalf of Seller. Without Seller's consent, New Operator shall not
compromise or settle for less than full value of any of the accounts
receivable. New Operator's obligation hereunder will be to collect the
accounts receivable in the ordinary and normal course of business in
accordance with customary
25
<PAGE>
practices and new Operator shall not have any obligation to institute
litigation, employ counsel or any collection agency, employ any other
extraordinary means of collection or take any other action or proceeding
against any resident or patient of the Facilities or any other person
liable for such accounts receivable. Seller agrees that it shall not
institute litigation or employ a collection agency against any person to
collect any such accounts receivable while such person is a resident or
patient of any Facility. Sellers' commitment with respect to litigation
does not apply to collection efforts with respect to Medicare, Medicaid or
third party payors, including, anyone who may have misappropriated the
funds of any resident. Purchaser agrees to cause New Operator to provide
reasonable access, at reasonable times, for Seller's designated agents, to
the Facilities' books and records and personnel to assist Seller in
Seller's efforts to collect its accounts receivables so long as such access
is not disruptive to the normal operations of the Facilities.
ARTICLE XI
MUTUAL COVENANTS
11.01 General Covenants. Following the execution of this Agreement,
-----------------
Seller and Purchaser agree:
(a) If any event should occur which would prevent fulfillment of the
conditions to the obligations of any party hereto to consummate the
transactions contemplated by this Agreement, to use its or their reasonable
efforts to cure the same as expeditiously as possible;
(b) To cooperate fully with each other in preparing, filing,
prosecuting, and taking any other actions which are or may be reasonable
and necessary to obtain the consent of any governmental instrumentality or
any third party, to accomplish the transactions contemplated by this
Agreement;
(c) To deliver such other instruments of title, certificates,
consents, endorsements, assignments, assumptions and other documents or
instruments, as may be reasonably necessary to carry out and/or to comply
with the terms of this Agreement and the transactions contemplated herein;
(d) To confer on a regular basis with the other, report on material
operational matters and promptly advise the other orally and in writing of
any change or event having a material adverse effect the consummation of
the transactions contemplated herein, or which would constitute a material
breach of any of the representations, warranties or covenants of such party
contained herein;
(e) To promptly provide the other (or its counsel) with copies of all
other filings made by such party with any state or federal governmental
entity in connection with this Agreement or the transactions contemplated
hereby;
26
<PAGE>
11.02 Hart-Scott-Rodino Filing. If Purchaser determines that a filing, is
------------------------
required under the HSR Act as a consequence of the transactions contemplated
herein or as a consequence of the Master Lease, Seller agrees to cooperate with
such filing.
11.03 HSR Consent/Regulatory Approval. Purchaser and Seller will use their
-------------------------------
best efforts to obtain prior to the Closing Date all consents, approvals and
licenses necessary to permit the consummation of the transactions contemplated
by this Agreement, including, but not limited to, such licensure and
certification approval in the States of Alabama, Illinois and Texas as may be
necessary to enable Purchaser to lawfully own and/or New Operator to operate the
Facilities from and after the Closing Date (the "Purchase Regulatory
Approvals"), and Purchaser, with Seller's cooperation, will use its best efforts
to obtain prior to the Closing Date the consent as may be required under HSR Act
(as that term is defined above) (the "HSR Consent"). Purchaser will use its best
efforts to cause New Operator to obtain such licensure and certification
approval in the States of Alabama, Illinois and Texas as may be necessary to
enable New Operator to lawfully operate the facilities from and after the
Closing Date (the "New Operator Regulatory Approvals") and to obtain the HSR
Consent. The Purchaser Regulatory Approvals and the New Operator Regulatory
Approvals are collectively referred to as the "Regulatory Approvals".
11.04 Public Announcements. Each party shall consult with the other, and
--------------------
shall use best efforts to agree upon, the form and content, prior to issuing any
press release, public announcement or statement with respect to this Agreement
or the transactions contemplated hereby.
ARTICLE XII
CONDITIONS
12.01 Purchaser Conditions. All obligations of Purchaser under this
--------------------
Agreement are subject to the fulfillment, prior to or as of the Closing Date (or
such earlier date as may be provided for below) of each of the following
conditions any one or more of which may be waived in writing by Purchaser:
(a) The representations and warranties of Seller contained in this
Agreement or in any certificate or document delivered in connection with
this Agreement or the transaction contemplated herein shall be true and
correct in all material respects at and as of the Closing Date as though
such representations and warranties were then again made, other than any
representations or warranties which specifically relate to an earlier
period, which shall have been true as of the date thereof.
(b) Seller shall have performed all of its obligations under this
Agreement that are to be performed by it prior to or as of the Closing
Date, including without limitation, the provisions of Section 9.02 hereof.
(c) If a Master Lease has been entered into, Purchaser, Seller and
the New Operator shall have received the Regulatory Approvals and shall have
satisfied any and all conditions to the effectiveness thereof; provided,
however, notwithstanding
27
<PAGE>
anything to the contrary contained herein, with respect to any licenses
which may be required for Purchaser's operation of the Facilities as
skilled nursing facilities by the New Operator, it shall not be a condition
to Purchaser's obligations hereunder to obtain prior to the Closing Date a
license "in-hand" but rather that Purchaser or New Operator shall have
received prior to the Closing Date assurances from the applicable
governmental licensing authorities assurances, reasonably satisfactory to
Purchaser, that New Operator will receive a license following the Closing
with an effective date as of September 1, 1997 or earlier. If Purchaser is
unable to obtain said assurances for the issuance of operating licenses for
the Facilities, Purchaser agrees to permit Seller a reasonable opportunity
to attempt to obtain, on behalf of Purchaser, said assurances for the
operating licenses before this condition shall be deemed not satisfied.
Following the expiration of the Feasibility Period, Purchaser agrees to
provide to Seller, upon Seller's request (which requests shall not be made
more often than weekly), an update as to Purchaser's progress in obtaining
licensure approval.
(d) Purchaser shall be satisfied in its sole discretion with the
results of its Feasibility Review, including but not limited to Purchaser's
review and approval of (i) the physical condition of the Real Property and
the structural condition of the Facilities, (ii) the financial performance
and financial prospects of each of the Facilities, (iii) the results of the
Phase I Reports to be obtained by Seller with respect to the Real Property
and the Facilities, (iv) all Property Documents required to be delivered by
Seller hereunder, (v) the zoning of each of the Facilities in order to
confirm that the development of the Facilities and the current operation
thereof are in compliance with all applicable zoning laws and that said
zoning laws would impose no conditions which would limit the right or
ability of Purchaser to rebuild or repair the same in the event of any
damage or destruction thereto, and (vi) the MAI appraisals which Purchaser
intends to obtain with respect to each of the Facilities. In the event
Purchaser has not advised Seller in writing on or before thirty (30) days
after the execution of this Agreement (such thirty (30) day period referred
to as the "Feasibility Period") of its objections to the results of its
Feasibility Review and its election to terminate this Agreement by reason
of a failure of this condition, then Purchaser shall deposit Two Hundred
Three Thousand Four Hundred and 00/100 Dollars ($203,400.00) with the Title
Company as an amount money deposit (the "Deposit"). The Deposit shall be
applied at Closing to the purchase price of each Facility on a pro rata
basis that the purchase price of each Facility bears to the total purchase
price allocated as set forth in Section 16.02 hereof (the "Allocated
Deposit"). Nothing herein shall be construed as amending or modifying in
any manner the representations or warranties of Seller set forth in this
Agreement, which representations and warranties shall be separate from and
unaffected by Purchaser's Feasibility Review except as to any
representations or warranties which, during the course of Purchaser's
Feasibility Review, Purchaser obtains knowledge of the falsity or
inaccuracy and advises Seller in writing thereof.
(e) Other than with respect to a default identified in the Seller
Disclosure Schedule as of the date of this Agreement or any defaults
identified after the date of this Agreement in amendments to the Seller
Disclosure Schedule, Seller shall not be in default, where said default
cannot be cured by the Closing Date, under any mortgage,
28
<PAGE>
contract, lease or other agreement to which Seller is a party or by which
Seller is bound and which materially affects or relates to the Real
Property, the Personal Property or the Facilities. In the event there are
any amendments or updates to the Seller Disclosure Schedule, Seller shall
notify Purchaser in writing and should Purchaser reasonably determine that
any such amendment would have a material adverse affect on any of the
Facilities or the operation thereof by Purchaser, Purchaser shall have the
right, exercised by written notice delivered to Seller within five (5)
business days following Purchaser's receipt of said amendment or update, to
terminate this Agreement.
(f) A title insurance policy or marked-up title commitment for each
Facility providing for extended owners coverage and issued without the so-
called "standard exceptions" shall have been issued to Purchaser with
respect to each of the Facilities subject only to those exceptions not
otherwise objected to or deemed accepted by Purchaser pursuant to Section
10.01 (b) and containing such endorsements as may be necessary in order to
address any objections of Purchaser to the Title Commitment as provided
above and with a total value equal to the amount of the purchase price
allocated to each parcel of Real Property as provided herein (the "Title
Insurance Policies").
(g) Purchaser shall have approved the Surveys within the ten (10) day
period provided for in Section 10.01 (a).
(h) Purchaser shall have approved the results of the UCC Searches
within the ten (10) day period provided for in Section 10.01 (a).
(i) Concurrently with or prior to the Closing hereunder, (A) if
requested by New Operator, Seller shall have entered into the Interim
Operating Agreement, (B) if requested by Purchaser, Seller shall have
entered into the Interim Master Lease, and (C) if an Interim Operating
Agreement or Interim Master Lease has been entered into, Seller shall have
entered into the Interim Management Agreement with Atrium.
(j) Concurrently with the Closing hereunder, Purchaser and RWB
Medical Income Properties I Limited Partnership, RWB Medical Properties IV
Limited Partnership and Medical Income Properties 2A Limited Partnership
(collectively referred to as the "Seller's Affiliates") shall have closed
the purchase of the facilities owned by each of Seller's Affiliates by
Purchaser in accordance with the terms and conditions of those certain
Purchase Agreements by and between Purchaser and each of Seller's
Affiliates of even date herewith ("Seller's Affiliates' Purchase
Agreements"). Any default by Purchaser hereunder shall be a default by
Purchaser under the Seller's Affiliates' Purchase Agreements and any
default by Seller hereunder shall be a default by Seller under the Seller's
Affiliates' Purchase Agreements.
12.02 Seller Conditions. All obligations of Seller under this
-----------------
Agreement are subject to the fulfillment, prior to or as of the Closing Date, of
each of the following conditions any one or more of which may be waived by
Seller in writing:
29
<PAGE>
(a) The representations and warranties of Purchaser contained in
this Agreement or in any certificate or document delivered in connection
with this Agreement or the transaction contemplated herein shall be true
and correct at and as of the Closing Date as though such representations
and warranties were then again made, other than any representations or
warranties which specifically relate to an earlier period, which shall have
been true as of the date thereof.
(b) Purchaser shall have performed all of its obligations under this
Agreement that are to be performed by it prior to or as of the Closing
Date.
ARTICLE XIII
TERMINATION
13.01 Termination. This Agreement may be terminated by Purchaser or
-----------
Seller upon the following conditions:
(a) By mutual consent of the parties;
(b) By Purchaser if the conditions to Closing set forth in Section
12.01 have not been satisfied or waived by the Closing Date or such earlier
date as may be provided for therein;
(c) By Seller if the conditions to Closing set forth in Section 12.02
have not been satisfied or waived by the Closing Date;
(d) By Purchaser or Seller at any time after the date that the
Limited Partners ultimately and finally fail to approve this Agreement and
the transactions contemplated by this Agreement in accordance with
applicable law and the Partnership Agreement or if such approval is not
obtained prior to July 15, 1997;
(e) (I) By Purchaser in the event of a material adverse change in
the information contained in Seller's Disclosure Schedule or
representations and warranties as a result of the amending or updating
thereof by Seller due to events occurring subsequent to the execution of
this Agreement and which were (i) not otherwise required to be disclosed
hereunder, and (ii) not caused by Seller's failure to perform pursuant to
Section 9.01;
(II) By Seller in the event of a material adverse change in the
information contained in Purchaser's Disclosure Schedule or representations
and warranties as a result of the amending or updating thereof by Purchaser
due to events occurring subsequent to the execution of this Agreement and
which were (i) not otherwise required to be disclosed hereunder, and (ii)
not caused by Purchaser's failure to perform pursuant to Section 10.01;
30
<PAGE>
(f) By Purchaser in event that prior to the Closing Date a material
portion of any of the Real Property or the Facilities is damaged or
destroyed by fire or other casualty or has been taken or condemned by any
public or quasi-public authority under the power or eminent domain;
provided, however, that in the event the estimated cost to repair any such
damage is less than or equal to One Hundred Thousand Dollars ($100,000.00)
per Facility and such loss or damage does not or will not at Closing
materially interfere with the operation of the Facility, then neither party
shall have the right to terminate this Agreement, and Seller shall
expeditiously repair the damage, and provided further that if Purchaser
fails to exercise its termination rights hereunder, then it shall be
conclusively deemed to have waived said right and Seller shall assign to
Purchaser all of its rights to any insurance proceeds or condemnation award
and all claims in connection therewith and the amount of any deductible
under any insurance policy covering such casualty shall be a credit against
the Purchase Price at Closing. In event Purchaser exercises its termination
rights hereunder, parties shall have no further rights or obligations
hereunder; and/or
(g) By a non-defaulting party, in the event of a material breach
by the other party;
(h) By Purchaser if (i) the General Partner. shall have withdrawn,
modified or amended its recommendations of this Agreement and the
transactions contemplated by this Agreement; (ii) the General Partner shall
have recommended that the Limited Partners accept or approve an Acquisition
Proposal by a person other than Purchaser or an affiliate of Purchaser; or
(iii) a public announcement with respect to a proposal, plan or intention
to effect an Acquisition Proposal shall have been made by any person other
than Purchaser or an affiliate of Purchaser and Seller shall have failed to
publicly reject or oppose such proposed Acquisition Proposal within ten
(10) days of the public announcement of such proposal, plan or intention;
and/or
(i) By Purchaser if Seller shall receive and approve an Acquisition
Proposal by the earlier of (i) the date of the Limited Partners Approval or
(ii) June 30, 1997.
13.02 Opportunity to Cure. Neither party to this Agreement may claim
-------------------
termination or pursue any other remedy referred to in this Section 13 on account
of a breach of a condition, covenant or warranty by the other, without first
giving such other party written notice of such breach and not less than ten (10)
days within which to cure such breach. The Closing Date shall be postponed if
necessary to afford such opportunity to cure. Notwithstanding anything contained
in this Section 13.02 to the contrary, Seller shall have no opportunity to cure
Seller's default pursuant to Section 13.01(h) or 13.01(i).
13.03 Termination.
-----------
(a) In the event of termination of this Agreement by mutual consent
of the parties under Section 13.01 (a), Purchaser shall be entitled to immediate
return of the Deposit, and neither party shall have any further rights or
obligations hereunder.
31
<PAGE>
(b) In the event that Purchaser terminates this Agreement under
Section 13.01 (b), following a material default by Seller not cured following
written notice within the applicable cure period, Purchaser shall be entitled to
the immediate return of the Deposit and shall be entitled to commence an action
for damages for Seller's default. Further, if Seller's default occurs after the
Limited Partners have approved the transaction contemplated by this Agreement,
Purchaser shall also be entitled to seek specific performance of Seller's
obligations hereunder.
(c) In the event that Seller terminates this Agreement under Section
13.01(c), following a material default by Purchaser not cured following written
notice within the applicable cure period, Seller shall receive the Deposit as
liquidated damages, and neither party shall have any further rights or
obligations hereunder.
(d) In the event that either party terminates this Agreement under
Section 13.01 (d), Purchaser shall be entitled to immediate return of the
Deposit and Seller will pay Purchaser, as Purchaser's sole remedy, in
immediately available funds not later than two (2) days after receiving a
written demand from Purchaser an amount equal to the lesser of (i) One Hundred
and Twenty Five Thousand Dollars ($125,000.00), or (ii) Purchaser's documented
out-of-pocket expenses (including attorney's' fees) incurred in connection with
this Agreement and the transaction contemplated herein; provided, however, that
the maximum amount payable to Purchaser under clauses (i) and (ii) of this
section 13.03(d) and the comparable sections in Seller's Affiliates' Purchase
Agreements shall not exceed One Hundred and Twenty-Five Thousand Dollars
($125,000.00).
(e) (i) In the event that Purchaser terminates this Agreement under
Section 13.01(e)(I), Purchaser shall be entitled to immediate return of the
Deposit and neither party shall have any further rights or obligations
hereunder; provided, however, that if the material adverse change is the result
of acts by Seller, Seller shall also pay Purchaser an amount equal to the lesser
of (i) One Hundred and Twenty Five Thousand Dollars ($125,000.00), or (ii)
Purchaser's documented out-of-pocket expenses (including attorney's' fees)
incurred in connection with this Agreement and the transaction contemplated
herein; provided, however, that the maximum amount payable to Purchaser under
clauses (i) and (ii) of this section 13.03(e) and the comparable sections in
Seller's Affiliates' Purchase Agreements shall not exceed One Hundred and
Twenty-Five Thousand Dollars ($125,000.00).
(ii) In the event that Seller terminates this Agreement under Section
13.01 (e)(II), Seller shall receive the Deposit as liquidated damages, and
neither party shall have any further rights or obligations hereunder.
(f) In the event that Purchaser terminates this Agreement under
Section 13.01 (f), Purchaser shall be entitled to immediate return of the
Deposit, and neither party shall have any further rights or obligations
hereunder.
(g) (i) In the event that Seller terminates this Agreement under
section 13.01 (g), Seller shall receive the Deposit as liquidated damages, and
neither party shall have any further rights or obligations hereunder.
32
<PAGE>
(ii) In the event that Purchaser terminates this Agreement under
Section 13.01(g), Purchaser shall have the same rights and remedies as set forth
in Section 13.03(b) following a termination of this Agreement by Purchaser under
Section 13.01 (b).
(h) In the event that Purchaser terminates this Agreement under
either Sections 13.01(h) or 13.01(i), Purchaser shall be entitled to the
immediate return of the Deposit and Seller will pay to Purchaser as Purchaser's
sole remedy, in immediately available funds, an amount equal to Four Hundred Six
Thousand Eight Hundred and 00/100 Dollars ($406,800.00) as liquidated damages on
the earlier to occur of the consummation of an Acquisition Proposal with another
party, or one hundred twenty (120) days after the termination.
13.04 Right of First Refusal. If this Agreement is terminated because
----------------------
Seller's Limited Partners fail to approve it, or if this Agreement is terminated
because the limited partners of one or more of Seller's Affiliates fails to
approve the Seller's Affiliates' Purchase Agreement, and if at the time of
termination Seller has not accepted an Acquisition Proposal, Purchaser shall
have a right of first refusal to purchase any Facility on the same terms as set
forth in a bona fide offer from a third party for the purchase of such Facility
received by Seller prior to December 31, 1997. Seller shall provide written
notice of the receipt of such bona fide offer and a copy of such offer (with
name(s) of purchasing party redacted if necessary) within five (5) business days
of Seller's receipt thereof. Purchaser shall have seven (7) business days from
receipt of such notice to inform Seller in writing of Purchaser's intent to
enter into a purchase agreement on the same terms as the bona fide offer.
Failure of Purchaser to inform Seller in writing of its intentions within such
seven (7) day period shall be deemed a rejection of such bona fide by Purchaser.
Seller agrees that Purchaser may record an affidavit of interest in the real
estate records of the county in which any Facility is located evidencing
Purchaser's right of first refusal as set forth herein, but Purchaser shall
discharge that affidavit of interest promptly on the earlier of December 31,
1997 or upon Seller's acceptance of a bona fide offer from a third party as to
which Purchaser has not exercised its right of first refusal. If Purchaser fails
to discharge the affidavit of interest within the time set forth above, and
thereafter does not discharge it within ten (10) days of receipt of written
notice from Seller of its failure to do so, Purchaser shall promptly pay Seller
$100,000.00 as liquidated damages. The right of first refusal provided for in
this Section 13.04 is in addition to, and not a limitation on, Seller's remedies
under Section 13.03(h).
ARTICLE XIV
OPERATIONAL PROVISIONS
14.01 Employees: Schedule of Employee Benefits.
----------------------------------------
(a) At Closing Seller shall deliver to Purchaser a schedule (the
"Benefits Schedule") which reflects all accrued vacation pay due to and/or
coming due to the employees of each of the Facilities as of the Closing
Date (the "Benefit Pay"). At Closing the Purchase Price shall be adjusted
as set forth in Section 9.02(o) of this Agreement for such Benefit Pay,
Purchaser shall pay, or cause New Operator or Atrium to pay, from and after
the Closing Benefit Pay to the employees of the Facility
33
<PAGE>
as and when due in accordance with Purchaser's personnel policies. New
Operator agrees to honor, for purposes of its benefit package, the length
of service each employee at a Facility has with Seller. The provisions of
this Section 14.01 shall survive the Closing.
(b) At Closing the Purchase Price shall be adjusted as set forth in
Section 9.02(o) of this Agreement for accrued sick pay due to and/or coming
due to the employees of each of the Facilities as of the Closing Date. Such
adjustment shall be in the amount obtained by multiplying (i) the total
amount of sick pay incurred by each Facility for the calendar year ending
1996 by (ii) a fraction, the numerator of which is the number of days
Seller owned the Facilities in the calendar year 1997 and the denominator
of which is 365. Purchaser shall pay, or cause New Operator or Atrium to
pay, from and after the Closing sick pay to the employees of the Facility
as and when due in accordance with Purchaser's personnel policies. New
Operator agrees to honor, for purposes of its benefit package, the length
of service each employee at a Facility has with Seller. The provisions of
this Section 14.01 shall survive the Closing.
14.02 Accounting Patient Trust Funds and Patient Prepaid Accounts. At
-----------------------------------------------------------
the Closing Seller shall provide New Operator with an accounting of all patient
trust funds (the "Patient Trust Funds") being held by Seller as of the Closing
Date and of all fees and expenses which have been prepaid by residents/patients
and have not been applied as of the Closing Date (the "Patient Prepaid Funds").
Such accounting shall set forth the names of the residents/patients or
prospective residents/patients for whom such funds are held, the amounts held on
behalf of each resident/patient or prospective resident/patient and the Seller's
warranty that the accounting is true, correct and complete. Seller shall, by
separate check, deliver to New Operator or Atrium, as manager under the Atrium
Management Agreement, at the Closing Date, such Patient Trust Funds and Patient
Prepaid Funds and, subject to Section 14.03 below, New Operator or Atrium shall
thereafter be responsible for such Patient Trust Funds and Patient Prepaid
Funds, to the extent so transferred by Seller.
14.03 Indemnity for Trust Funds and Prepaid Funds. Notwithstanding the
-------------------------------------------
foregoing, Seller will indemnify and hold New Operator and Atrium harmless from
all liabilities, claims and demands in the event the amount of the Patient Trust
Funds and Patient Prepaid Funds transferred to New Operator or Atrium, as
provided in Section 14.02, did not represent the full amount of such Patient
Trust Funds and Patient Prepaid Funds then or thereafter shown to have been
delivered to Seller and outstanding as of the Closing Date. New Operator or
Atrium, as appropriate, will indemnify, defend and hold Seller harmless from all
liabilities, claims and demands in the event a claim is made against Seller by a
patient with respect to his/her Patient Trust Funds and/or Patient Prepaid Funds
but only if said Patient Trust Funds and/or Patient Prepaid Funds with respect
to the patient making said claim were actually transferred to New Operator or
Atrium pursuant to the terms of Section 14.02 above.
14.04 Accounts Receivable. Seller shall retain its right, title and
-------------------
interest in and to all unpaid amounts and accounts receivable with respect to
the Facilities which relate to any period prior to the Closing Date, including,
but not limited to, amounts or accounts receivable arising from rate
adjustments, Medicare or Medicaid or any other third party payor under payments,
insurance proceeds, rebates or any other monies which relate to the period prior
to
34
<PAGE>
the Closing Date even if such adjustments or payments occur after the Closing
Date. Seller shall remain liable for any overpayments made to Seller prior to
the Closing Date whether such overpayment is received by Seller prior to or
after the Closing Date for which payment is due to Medicare, Medicaid or any
other third party payor after the Closing Date. If, following the Closing Date,
Purchaser or New Operator receives payment from any federal or state agency or
other third party payor or from any patient or resident, which represents
payment for services rendered by Seller prior to the Closing Date, then
Purchaser shall promptly forward, or cause New Operator to promptly forward,
such payments to Seller in accordance with the following provisions:
(a) If such payments either specifically indicate on the accompanying
remittance advice, or if the parties agree, that they relate to the period
prior to the Closing Date, a copy of the applicable remittance advice and
the payment received shall be forwarded to Seller by New Operator; and
(b) If such payments indicate on the accompanying remittance advice,
or if the parties agree, that they relate to the period on or after the
Closing Date, they shall be retained by New Operator.
(c) If such payments indicated on the accompanying remittance advice,
or if the parties agree, that they relate to periods both prior to and
after the Closing Date, the portion thereof which relates to the period on
and after the Closing Date shall be retained by New Operator and the
balance shall be remitted to Seller.
(d) Any payments received by New Operator during the first forty-
five (45) days after the Closing Date which fail to designate the period to
which they relate, will first be the property of Seller to reduce the pre-
Closing Date balances, with any excess applied to balances due for services
rendered by New Operator after the Closing Date. Thereafter all non-
designated payments will first be applied to any post-Closing Date
balances, with the excess, if any, remitted to Seller.
14.05 Alabama Workers' Compensation Rebate. Purchaser acknowledges
------------------------------------
that Seller may be due a certain rebate from the State of Alabama for
prepayments of worker's compensation insurance if the Facilities located in
Alabama remain under their current worker's compensation insurance program until
October 1, 1997. Purchaser agrees to use its best efforts to cause New Operator
to maintain such worker's compensation insurance program and to forward to
Seller any payments received by New Operator after the Closing Date for the
portion of such rebates applicable to the period prior to the Closing Date in
accordance with the procedures set forth in Section 14.04.
ARTICLE XV
INDEMNIFICATION
15.01 Seller's Indemnification. Subject to the limitations contained
------------------------
herein and in Section 15.04, Seller shall indemnify and hold Purchaser and its
assigns, including New Operator, harmless from and against any and all damages,
losses, liabilities, costs, actions,
35
<PAGE>
suits, proceedings, demands, assessments, and judgments, including, but not
limited to, reasonable attorney's fees and reasonable. costs and expenses of
litigation, arising out of or in any manner related to any of the following:
(a) Except as otherwise provided in this Agreement, any and all
obligations relating to the ownership of Seller's Assets and the operation
of the Facilities which exist immediately prior to the Closing Date,
-------------------------------------------------
including, but not limited to, any obligations under the Operating
Contracts which Purchaser assumes at Closing and all sick pay and/or
vacation pay, retirement and severance benefits and bonuses which are
claimed by any employee of Seller to have accrued prior to the Closing Date
provided, however, that Seller shall have no liability, for any accrued
vacation or sick pay for employees whose accrued vacation and sick pay was
taken into account in computing the adjustment to the Purchase Price under
Section 14.01.
(b) Any of the Operating Contracts which New Operator does not
assume in writing;
(c) Any misrepresentation of a material fact, breach of warranty or
nonfulfillment of any agreement on the part of Seller under this Agreement
or from any misrepresentations in any certificate furnished or to be
furnished to Purchaser or New Operator hereunder;
(d) Any failure by Seller in connection with the transaction
contemplated herein to comply with the requirements of any laws or
regulations relating to bulk sales or transfers; and
(e) Any sums due by Seller for Medicare and Medicaid adjustments
arising from the operation of Facilities conveyed pursuant to this
Agreement.
For purposes of Section 15.01(a), an obligation shall be deemed to
"exist" immediately prior to the Closing Date if it relates to events which
occurred prior to the Closing Date even if it is not asserted until after
the Closing Date.
Notwithstanding the foregoing, Seller's liability for all claims under
Section 15.01(c) shall not exceed in the aggregate Eight Hundred Ninety-Five
Thousand Four Hundred Fifty and 00/ 100 Dollars ($895,450.00), except for claims
relating to title to Seller's Assets, Seller's authority to enter into this
Agreement or the transactions contemplated by this Agreement or acts of willful
dishonesty or fraud by Seller. There shall be no limit, except as provided in
Section 15.04, on Seller's liability for claims under Sections 15.01 (a), (b),
(d) or (e).
15.02 New Operator. Subject to the limitations contained in Section
------------
15.03, Purchaser shall indemnify and hold Seller harmless from and against any
and all damages, losses, liabilities, costs, actions, suits, proceedings,
demands, assessments, and judgments, including, but not limited to, reasonable
attorney's fees and reasonable costs and expenses of litigation, arising out of
or in any manner related to any of the following:
36
<PAGE>
(a) Except as otherwise provided in this Agreement, any and all
obligations relating, to the ownership of Seller's Assets and the operation
of these Facilities from and after the Closing Date, including, but not
limited to, any obligations under the Operating Contracts which New
Operator elects to assume and all holiday and sick pay, retirement and
severance benefits and bonuses, which are claimed by any employee of New
operator to have accrued following the Closing Date;
(b) Any misrepresentation of a material fact, breach of warranty or
nonfulfillment of any agreement on the part of Purchaser under this
Agreement or from any misrepresentations in any certificate furnished or to
be furnished to Purchaser hereunder; and
(c) Any claim that Purchaser or New Operator failed to pay the
employees vacation or sick pay which accrued prior to the Closing Date with
respect to employees whose accrued vacation and sick pay was taken into
account in computing the adjustment to the Purchase Price under Section
14.101.
15.03 Procedure. In the event a party (the "Indemnified Party")
---------
asserts that the other party (the "Indemnitor") is subject to an indemnification
claim pursuant to Sections 15.01 or 15.02 ("Claim"), the Indemnified Party shall
promptly notify the Indemnitor in writing of such Claim arising, which notice
shall describe the Claim in sufficient detail in order to permit the Indemnitor
to evaluate the nature and cause of the Claim. In the event the asserted Claim
arises or is in connection with a claim, suit, or demand filed by a third party,
the Indemnitor shall be entitled to defend against such Claim with counsel
reasonably satisfactory to the Indemnified Party. The Indemnified Party may
continue to employ counsel of its own, but such costs shall be borne by the
Indemnified Party as long as the Indemnitor continues to so defend. If the
Indemnitor fails to respond or does not admit responsibility for
indemnification, the Indemnified Party may take such necessary steps to defend
itself and any reasonable costs associated therewith may be included as part of
the asserted Claim for indemnification. For all Claims that are not Claims
arising from a third party, Indemnitor shall notify the Indemnified Party as to
its assertion of whether such Claim is covered by this Article, including
specific reasons for non-coverage, within 30 days of receipt of written notice
from the Indemnified Party describing, the Claim in reasonable detail.
15.04 Basket. Notwithstanding anything contained in this Section 15 to
------
the contrary, Purchaser shall be responsible for the first Twenty-Five Thousand
Dollars ($25,000.00) of Claims against each Facility, except for Claims relating
to title to Seller's Assets, Seller's authority to enter into the transactions
contemplated by this Agreement or any claims for money by third party payors or
reimburses. In no event shall a Claim against a Facility be included in or
applied against the basket of another Facility.
ARTICLE XVI
MISCELLANEOUS
16.01 Notices. Any notice, request or other communication to be given
-------
by any party hereunder shall be in writing and shall be sent by registered or
certified mail, postage prepaid, by overnight delivery, hand delivery or
facsimile transmission to the following address:
37
<PAGE>
To Seller and John H. Stoddard
General Partner: RWB Management Corp.
7000 Central Park-Way, Suite 850
Atlanta, Georgia
Telephone No.: 770-668-1080
Facsimile No.: 770-668-0136
With copy to Leon H. Rittenberg, Jr., Esquire
(which shall not Baldwin & Haspel
constitute notice): 2200 Energy Central
1100 Poydras Street
New Orleans, Louisiana 70163
Telephone No.: (504) 585-7711
Facsimile No.: (504) 585-7751
To Purchaser: Omega Healthcare Investors, Inc.
901 West Eisenhower, Suite 110
Ann Arbor, Michigan 48103
Attn: F. Scott Keliman
Telephone No.: (313) 747-9790
Facsimile No.: (313) 996-0020
With copy to Dykema Gossett PLLC
(which shall not 1577 N. Woodward, Suite 300
constitute notice): Bloomfield Hills, NE 48304
Attn: Fred J. Fechheimer
Telephone No.: 810/540-0743
Facsimile No.: 810/540-0763
Notices shall be deemed given three (3) business days after deposit in the
mail as provide herein or upon actual receipt if sent by overnight delivery,
facsimile transmission or hand delivery.
16.02 Allocation of Purchase Price. The purchase price shall be
----------------------------
allocated among the four (4) Facilities as follows:
<TABLE>
<S> <C>
Medical Park Convalescent Center: $4,522,275
Renaissance Place-Katy: $2,984,500
Renaissance Place-Humble $2,487,500
Edwardsville Care Center East $2,383,000
</TABLE>
The allocation of the purchase price for each of the Facilities shall be further
allocated between the value of the Real Property and the Personal Property as
mutually agreed upon the parties
38
<PAGE>
prior to the Closing Date and each party agrees to timely file tax form 8594 in
accordance with the allocations so agreed to.
16.03 Employee Recruitment. As a matter which shall survive the
--------------------
Closing hereunder, neither Seller nor any of its subsidiaries or affiliates
shall, for a period of 120 days following the Closing Date, solicit any of the
employees or independent contractors of Purchaser at any of the Facilities or
induce any such persons to terminate their employment or contractual
relationships with Purchaser.
16.04 Assignment. No party may assign, directly or indirectly, its
----------
rights or obligations hereunder without the prior written consent of the other
parties. Notwithstanding the foregoing, Purchaser shall also have the right, on
written notice to Seller, to (i) assign its rights hereunder to the New Operator
as required to enter into and cause the term of the Master Lease to commence, or
(ii) assign its ownership interest in any of the Facilities to any third party.
16.05 Sole Agreement. This Agreement may not be amended or modified in
--------------
any respect whatsoever except by instrument in writing signed by the parties
hereto. This Agreement, the disclosure schedules for each of the parties, the
documents executed and delivered pursuant hereto and the Confidentiality
Agreements constitute the entire agreement between the parties hereto with
respect to -the subject matter hereof and supersede all prior negotiations,
discussions, writings and agreements between them.
16.06 Captions. The captions of this Agreement are for convenience of
--------
reference only and shall not define or limit any of the terms or provisions
hereof.
16.07 Severability. Should any one or more of the provisions of this
------------
agreement determined to be invalid, unlawful or unenforceable in any respect,
the validity, legality and enforceability of the remaining provisions hereof
shall not in any way be affected or impaired thereby.
16.08 Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be an original; but such counterparts shall
together constitute but one and the same instrument.
16.09 Knowledge Defined. To the extent that any of the representations
-----------------
and warranties contained in this Agreement are limited by the phrases "to the
knowledge of' or "Purchaser has no knowledge of" or words or phrases of similar
import, the same shall mean to the actual knowledge of any of the corporate
officers or directors or general partners of the party or its subsidiaries
making said representation or warranty. To the extent that any of the
representations and warranties contained in this Agreement refer to verbal
notice to a party such notice shall be deemed to have been received if delivered
to any officer of such party or to an officer of one of its subsidiaries.
Notwithstanding anything in this Section 16.9 to the contrary, the phrase
"Seller's knowledge" or such similar phrases shall include the actual knowledge
of any of the corporate officers or directors of Atrium and the actual knowledge
of any administrator(s) of any of the Facilities.
39
<PAGE>
16.10 Expenses. Each party shall bear its own costs and expenses
--------
(including legal fees and expenses) incurred in connection with this Agreement
and other transactions contemplated hereby.
16.11 Third Party Beneficiary. Nothing in this Agreement express or
-----------------------
implied is intended to and shall not be construed to confer upon or create in
any person (other than the parties hereto) any rights or remedies under or by
reason of this Agreement, including without limitation, any right to enforce
this Agreement. Notwithstanding the foregoing, the New Operator is an intended
Third Party Beneficiary of this Agreement.
16.12 Attorneys' Fees. In the event of a dispute between the parties
---------------
hereto with respect to the interpretation or enforcement of the terms hereof,
the prevailing party in any action resulting therefrom shall be entitled to
collect from the other its reasonable costs and attorneys' fees, including its
costs and fees on appeal.
16.13 Construction. The parties have participated jointly in the
------------
negotiation and drafting of this Agreement. In the event an ambiguity or
question of intent or interpretation arises, this Agreement shall be construed
as if drafted jointly by the parties and no presumption or burden of proof shall
arise favoring or disfavoring any party by virtue of the authorship of any of
the provisions of this Agreement. Any reference to any federal, state or local
statute or law shall be deemed also to refer to all rules and regulations
promulgated thereunder, unless the context requires otherwise. The word
"including" shall mean "including without limitation."
16.14 Survival. The representations, warranties, covenants or
--------
conditions set forth herein shall survive the Closing for a period of one year
after the Closing; provided, however, that in the event that, at anytime during
that one year period, any claim is made for a breach thereof, the same shall
survive until a final non-appealable resolution thereof. Purchaser and New
Operator shall make no claims for indemnification against Seller under Section
15.01(c) of this Agreement after one (1) year after the Closing Date except for
claims related to title to Seller's Assets, Seller's authority to enter into the
transactions contemplated by this Agreement and any claims for money by third
party payors or reimbursers.
16.15 Exhibits. The parties acknowledge that a number of exhibits have
--------
been attached to this Agreement in blank with references thereon that said
exhibits shall be provided by Seller. Within fifteen (15) days following the
mutual execution of this Agreement, Seller agrees to deliver to Purchaser, for
Purchaser's review and approval, complete copies of said exhibits. Within five
(5) days following, receipt of said exhibits, Purchaser shall review the
exhibits provided and notify Seller of its approval or disapproval thereof,
provided that any such approval shall not be unreasonably withheld. If Purchaser
disapproves any such exhibits, Purchaser shall have the right to terminate this
Agreement by written notice to Seller.
16.16 Governing Law. THIS AGREEMENT AND THE TRANSACTION DOCUMENTS
-------------
SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF
MICHIGAN. SELLER CONSENTS TO IN PERSONAM JURISDICTION BEFORE THE STATE AND
FEDERAL COURTS OF THE STATE OF MICHIGAN AND THE STATE WHERE THE FACILITY IS
40
<PAGE>
LOCATED, AND AGREES THAT ALL DISPUTES CONCERNING THIS AGREEMENT MAY BE HEARD, AT
PURCHASER'S OPTION, IN THE STATE AND FEDERAL COURTS LOCATED IN EITHER OF THE
STATES OF MICHIGAN OR THE STATE WHERE THE FACILITY IS LOCATED. EACH PARTNER OF
THE SELLER AGREES THAT SERVICE OF PROCESS MAY BE EFFECTED UPON SUCH PARTNER
UNDER ANY METHOD PERMISSIBLE UNDER THE LAWS OF THE STATE OF MICHIGAN OR THE
STATE WHERE THE FACILITY IS LOCATED AND IRREVOCABLY WAIVES ANY OBJECTION TO
VENUE IN THE STATE AND FEDERAL COURTS OF THE STATE OF MICHIGAN OR THE STATE
WHERE THE FACILITY IS LOCATED.
16.17 Exclusivity. Prior to the Closing Date and subject to the
-----------
fiduciary duties of Seller or its General Partner, Seller and its partners,
affiliates, agents and employees shall not negotiate with or discuss the sale,
financing or other disposition of the Facilities, or take any steps to initiate,
consummate, encourage or document the sale, financing or other disposition of
any of the Facilities to any other person or entity until the earlier of (i)
date on which Purchaser notifies Seller that Purchaser is withdrawing from the
transactions contemplated hereby or (ii) material breach by Purchaser that is
not cured by Purchaser within any applicable grace and cure period, upon
expiration of such grace and cure period.
16.18 Confidential. The terms of that certain letter by and between
------------
Seller and Purchaser dated November 19, 1996 relating to the confidentiality of
certain information is incorporated herein. However, subject to the provisions
of Section 11.04, each party may issue such press releases or public statements
relating to the transactions contemplated hereby as it determines appropriate or
required by law.
16.19 Arbitration of Disputes Following. If a controversy shall arise
---------------------------------
between the parties hereto following Closing relating to this Agreement, any
other agreement between the parties, any instrument or document delivered
pursuant to or in connection with the Agreement, or the transactions
contemplated by this Agreement (hereinafter, a "Controversy") which the parties
are unable to settle between themselves, the Controversy shall be determined by
arbitration. Such arbitration shall be conducted by three arbitrators selected
in accordance with the procedures of the American Arbitration Association and in
accordance with its rules and procedures. The decision of the arbitrators shall
be final and binding, and enforceable in any court of competent jurisdiction.
Such decision shall set forth in writing, the basis for the decision, and in
rendering such decision, the arbitrators shall not add to, subtract from or
otherwise modify the provisions of this Agreement and any other agreements,
documents and instruments executed pursuant to or in connection with this
Agreement. The expense of the arbitration shall be divided equally between
Seller and Purchaser unless otherwise specified in award. The prevailing party,
as determined by the arbitrators, shall be entitled to recover its costs and
expenses including attorney fees. Such arbitration shall be conducted in
Atlanta, Georgia. In any such arbitration, the parties shall be entitled to
conduct discovery in the same manner as permitted under Federal Rules of Civil
Procedure 27 through 37. No provision in this Section 16.19 shall limit the
right of any party to this Agreement to obtain provisional or ancillary remedies
from a court of competent jurisdiction before, after, or during the pendency of
any arbitration. The exercise of such a remedy does not waive the right of any
party to
41
<PAGE>
arbitration. The Section shall not apply to any Controversy which may arise
between the parties prior to the Closing.
IN WITNESS WHEREOF, the parties hereby execute this Agreement as of the day
and year first set forth therein.
SELLER:
MEDICAL INCOME PROPERTIES 2B LIMITED
PARTNERSHIP, a Delaware limited partnership
By: QualiCorp Management, Inc., a Delaware
corporation
Its: Managing General Partner
By: /s/ John H. Stoddard
---------------------------
John H. Stoddard
Its: President
GENERAL PARTNER:
QUALICORP MANAGEMENT, INC., a Delaware
corporation.
By: /s/ John H. Stoddard
---------------------------
John H. Stoddard
Its: President
PURCHASER:
OMEGA HEALTHCARE INVESTORS, INC.,
a Maryland corporation
By: /s/ Todd P. Robinson
---------------------------
Todd P. Robinson
Its: AVP
--------------------------
42
<PAGE>
SCHEDULE OF EXHIBITS:
<TABLE>
<S> <C>
EXHIBIT A-1: Legal Description of Real Property (Edwardsville Care Center East)
EXHIBIT A-2: Legal Description of Real Property (Medical Park Convalescent Home)
EXHIBIT A-3: Legal Description of Real Property (Renaissance Place-Katy)
EXHIBIT A-4: Legal Description of Real Property (Renaissance Place-Humble)
EXHIBIT 1.02: Inventory of Personal Property
EXHIBIT 1.02 (A): Inventory of Excluded Personal Property
EXHIBIT 1.05 (c): Form of Management Agreement
EXHIBIT 2.01: Escrow Agreement
EXHIBIT 4.13: Prepaid Contracts
EXHIBIT 6.06: Copies of Licenses and Permits
EXHIBIT 6.07: List of Most Recent Licensure or Certification Surveys
EXHIBIT 6.07(b): Waivers for Cited Deficiencies
EXHIBIT 6.10: Seller's Assets Which are Subject to Leases
EXHIBIT 6.11: Union Contracts
EXHIBIT 6.13: Phase I Environmental Reports Delivered by Seller
EXHIBIT 6.15: Litigation
EXHIBIT 6.17: Facility Defects
EXHIBIT 6.19: Form of Admission Agreement
EXHIBIT 6.20: Patient Roster
EXHIBIT 6.21: List of Operating Contracts
EXHIBIT 6.23: Insurance Policies and Certificates
EXHIBIT 6.24: Fringe Benefits
EXHIBIT 6.25: Benefit Plans
EXHIBIT 9.02(d): Form of Legal Opinion from Seller's Counsel
EXHIBIT 9.02(f): Bill of Sale
EXHIBIT 9.02(g): Form of Operating Contracts Assignment and Assumption Agreement
EXHIBIT 9.02(h): Form of Admission Agreements Assignment and Assumption Agreement
EXHIBIT 10.01(a): List of Title Policies Delivered by Seller
EXHIBIT 10.02(f): Form of Legal Opinion from Purchaser's Counsel
</TABLE>
43
<PAGE>
APPENDIX B
February 12, 1997
Board of Directors
Medical Income Properties 2B Limited Partnership
7000 Central Parkway
Suite 850
Atlanta, Georgia 30328
To the Members of the Board:
We understand that Medical Income Properties 2B Limited Partnership (the
"Partnership") has entered into Asset Purchase Agreement (the "Proposed
Transaction") with Omega Healthcare Investors, Inc. ("Omega"), pursuant to which
the Buyer shall acquire substantially all of the operating assets of the
Partnership in exchange for cash and the assumption of certain liabilities. In
addition, we understand that, after consummation of the Proposed Transaction,
the Partnership intends to make certain distributions to its limited partners
(the "Limited Partners") consisting of such cash proceeds and the Partnership's
net working capital (upon collection), all as offset by the Partnerships
obligations, including the repayment of its outstanding indebtedness, the
payment of transaction-related expenses and the payment of other expenses of the
Partnership. A detailed description of the Proposed Transaction, including the
detailed description of the consideration to be received by the Partnership (the
"Consideration"), is provided in the Asset Purchase Agreement (the "Agreement").
We have been requested by the Partnership to render our opinion (the
"Opinion") with respect to the fairness, from a financial point of view, to the
Limited Partners of the Consideration to be received by the Limited Partners in
the Proposed Transaction.
In arriving at our Opinion, we reviewed and analyzed: (1) the Agreement,
(2) financial and operating information with respect to the business, operations
and prospects of the Partnership furnished to us by QualiCorp Management, Inc.,
the managing general partner of the Partnership ("QualiCorp"), (3) a comparison
of the historical financial results and present financial condition of the
Partnership with those of other companies which we deemed relevant, (4) an
analysis of financial and stock market information for selected publicly-traded
companies which we deemed comparable to the Partnership, and (5) a comparison of
the financial terms of the Proposed Transaction with the financial terms of
certain other recent transactions which we deemed relevant. In addition, we
held discussions with the management of QualiCorp concerning the business and
operations, assets, present condition and future prospects of the Partnership
and undertook such other studies, analyses and investigations as we deemed
appropriate.
We have relied upon the accuracy and completeness of the financial and
other information used by us in arriving at our Opinion without independent
verification. In arriving at our Opinion, we have not conducted a physical
inspection of the properties and facilities of the Partnership. We have not made
nor obtained any evaluations or appraisals of the assets or liabilities of the
Partnership. Our Opinion is necessarily based upon market, economic and other
conditions as they exist and can be evaluated as of the date of this lette r.
We have acted as financial advisor to QualiCorp in connection with the
Proposed Transaction, and we will receive a fee for our services which is in
significant part contingent upon the consummation
<PAGE>
of the Proposed Transaction. In addition, the Partnership has agreed to
indemnify us for certain potential liabilities arising out of the rendering of
this Opinion.
Based upon and subject to the foregoing, we are of the Opinion as of the
date hereof that, from a financial point of view, the Consideration to be
received by the Limited Partners in the Proposed Transaction is fair to the
Limited Partners.
Very truly yours,
/s/ The Robinson-Humphrey Company, Inc.
---------------------------------------
THE ROBINSON-HUMPHREY COMPANY, INC.
<PAGE>
REPLY CARD
CONSENT SOLICITATION
LIMITED PARTNERSHIP UNITS
MEDICAL INCOME PROPERTIES 2B LIMITED PARTNERSHIP
THIS CONSENT IS SOLICITED BY THE MANAGING GENERAL PARTNER
The following proposal is submitted for approval by written consent to the
holders of limited partnership units (the "Units") of Medical Income Properties
2B Limited Partnership (the "Partnership") by the managing general partner of
the Partnership, QualiCorp Management, Inc. (the "Managing General Partner"):
To sell substantially all of the assets of the Partnership
to Omega Healthcare Investors, Inc., a real estate
investment trust ("Omega"), pursuant to the terms and
conditions of the Purchase and Sale Agreement by and among
the Partnership, the Managing General Partner and Omega, to
distribute the Partnership's net assets and to dissolve the
Partnership, all as set forth in the Consent Solicitation
Statement.
THE UNDERSIGNED LIMITED PARTNER HEREBY VOTES HIS OR HER UNITS FOR THE ABOVE
PROPOSAL AS FOLLOWS:
CONSENT WITHHOLD CONSENT ABSTAIN
(YES) (NO) (NO VOTE)
----- ----- -----
<PAGE>
A PROPERLY-EXECUTED AND DATED REPLY CARD MUST BE RECEIVED BY MARCH 28, 1997, TO
BE INCLUDED IN THE TABULATION OF CONSENTS.
THE MANAGING GENERAL PARTNER URGES THE LIMITED PARTNERS TO CONSENT TO THE
PROPOSAL.
Please sign this Reply Card
exactly as the registered name
appears on the label affixed to
this Reply Card.
----------------------------------
(Signature)
----------------------------------
(Signature)
Note: When signing as attorney,
trustee, administrator or guard-
ian, please give your title as
such. In the case of joint ten-
ants, each joint owner must sign.
Date: ____________________________
PROPERLY EXECUTED BALLOTS WHICH DO NOT INDICATE A VOTE WILL BE COUNTED AS VOTES
FOR THE PROPOSAL DESCRIBED HEREIN
