<PAGE> 1
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
FORM 10-Q
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
------- -------
COMMISSION FILE NUMBER 1-11316
OMEGA HEALTHCARE
INVESTORS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND
(State of Incorporation)
38-3041398
(I.R.S. Employer Identification No.)
905 W. EISENHOWER CIRCLE, SUITE 110, ANN ARBOR, MI 48103
(Address of principal executive offices)
(313) 747-9790
(Telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of March 31, 1996.
COMMON STOCK, $.10 PAR VALUE
(Class)
17,129,810
(Number of shares)
- - --------------------------------------------------------------------------------
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<PAGE> 2
OMEGA HEALTHCARE INVESTORS, INC.
FORM 10-Q
MARCH 31, 1996
INDEX
<TABLE>
<CAPTION>
ITEM PAGE
- - ---- ----
<C> <S> <C>
PART I -- FINANCIAL INFORMATION
1. Condensed Consolidated Financial Statements:
Balance Sheets --
March 31, 1996 (unaudited) and December 31, 1995.................................. 2
Statements of Operations (unaudited) --
Three-month periods ended:
March 31, 1996
March 31, 1995.................................................................. 3
Statements of Cash Flows (unaudited) --
Three-month periods ended:
March 31, 1996
March 31, 1995.................................................................. 4
Notes to Condensed Financial Statements (unaudited)................................. 5
2. Management's Discussion and Analysis of Financial Condition and Results of
Operations........................................................................ 6
PART II -- OTHER INFORMATION
4. Submission of Matters to a Vote of Security Holders................................. 7
6. Exhibits and Reports on Form 8-K.................................................... 8
</TABLE>
1
<PAGE> 3
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OMEGA HEALTHCARE INVESTORS, INC
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
----------- ------------
(UNAUDITED) (SEE NOTE)
<S> <C> <C>
ASSETS
Investments in real estate:
Real estate properties -- net....................................... $ 334,287 $336,720
Mortgage notes receivable........................................... 181,277 158,290
--------- --------
515,564 495,010
Other investments..................................................... 40,296 32,599
--------- --------
555,860 527,609
Cash and short-term investments....................................... 2,983 6,426
Goodwill and non-compete agreements -- net............................ 8,823 9,228
Other assets.......................................................... 10,607 7,925
--------- --------
$ 578,273 $551,188
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Acquisition line of credit............................................ $ 4,500 $ 74,690
Unsecured borrowings.................................................. 86,384 86,384
Secured borrowings.................................................... 24,383 34,069
Subordinated convertible debentures................................... 95,000
Accounts payable and accrued expenses................................. 11,041 8,917
--------- --------
Total liabilities.............................................. 221,308 204,060
Common stock and additional paid-in capital........................... 374,698 362,468
Cumulative net earnings............................................... 64,975 56,784
Cumulative dividends paid............................................. (82,491) (72,071)
Unamortized restricted stock awards................................... (217) (53)
--------- --------
Total shareholders' equity..................................... 356,965 347,128
--------- --------
$ 578,273 $551,188
========= ========
</TABLE>
NOTE -- The balance sheet at December 31, 1995, has been derived from audited
consolidated financial statements at that date but does not include all
of the information and footnotes required by generally accepted
accounting principles for complete financial statements.
See notes to condensed consolidated financial statements.
2
<PAGE> 4
OMEGA HEALTHCARE INVESTORS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
------------------
1996 1995
------- -------
<S> <C> <C>
Revenues
Rental income........................................................... $10,467 $ 9,916
Mortgage interest income................................................ 5,375 4,422
Other investment income................................................. 1,127 107
Other................................................................... 205 76
------- -------
17,174 14,521
Expenses
Depreciation and amortization........................................... 3,392 3,233
Interest................................................................ 4,615 3,509
General and administrative.............................................. 976 890
------- -------
8,983 7,632
------- -------
Net earnings.............................................................. $ 8,191 $ 6,889
======= =======
Net earnings per share.................................................... $0.49 $0.44
===== =====
Dividends paid per share.................................................. $0.62 $0.59
===== =====
Weighted average number of shares outstanding............................. 16,885 15,748
====== ======
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE> 5
OMEGA HEALTHCARE INVESTORS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1996 1995
-------- --------
<S> <C> <C>
Cash Flows from Operating Activities
Net earnings.......................................................... $ 8,191 $ 6,889
Adjustment to reconcile net earnings to cash provided by operations:
Depreciation and amortization...................................... 3,392 3,233
Other noncash items................................................ 142 312
-------- --------
Cash from operating activities available for distribution............... 11,725 10,434
Net change in operating assets and liabilities.......................... 1,534 811
-------- --------
Net cash provided by operating activities............................... 13,259 11,245
Cash Flows from Financing Activities
Dividends paid........................................................ (10,420) (9,280)
Proceeds from Dividend Reinvestment Plan.............................. 12,018 2,422
Payments on acquisition line of credit................................ (70,190)
Payments of senior mortgage notes..................................... (1,047)
Proceeds from subordinated convertible debentures, less issue costs... 92,813
Payments of long-term borrowings...................................... (9,686) (297)
Refund of transaction deposits........................................ (2,310)
Other................................................................. 37
-------- --------
Cash provided by (used in) financing activities......................... 14,535 (10,475)
Cash Flows from Investing Activities
Acquisition of real estate............................................ (375) (5,457)
Placement of mortgage loans........................................... (23,095)
Advance funding of investments........................................ (158) (2,438)
Collections of mortgage notes......................................... 107 566
Fundings of other investments......................................... (7,716)
Other................................................................. (72)
-------- --------
Cash used in investing activities....................................... (31,237) (7,401)
-------- --------
Decrease in Cash and Short-Term Investments............................. $ (3,443) $ (6,631)
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE> 6
OMEGA HEALTHCARE INVESTORS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 1996
NOTE A -- BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three-month period ended March 31,
1996, are not necessarily indicative of the results that may be expected for the
year ending December 31, 1996. For further information, refer to the financial
statements and footnotes thereto included in the Company's annual report on Form
10-K for the year ended December 31, 1995.
NOTE B -- FIRST QUARTER REAL ESTATE INVESTMENTS
In January 1996 the Company provided a $4.5 million convertible
participating mortgage loan to ExtendaCare, Inc. This mortgage relates to three
nursing home facilities in Kentucky with a total of 192 beds and an office
building. The Company also placed a $15.8 million participating mortgage loan
related to four nursing home facilities in Florida with 423 beds. The four
facilities are operated by Advocat, Inc. Additionally, the Company advanced $3.5
million to Unison Healthcare, Inc. pending the placement of mortgages on certain
facilities in Texas.
At March 31, 1996, the Company has commitments, subject to certain
conditions, to provide additional financing totaling approximately $41 million.
NOTE C -- ASSET CONCENTRATIONS
As of March 31, 1996, 95% of the Company's total investments relate to
long-term care facilities. Investments with the three largest operators total
38%, represented by 18.8% of total investments with Advocat, Inc (previously
Diversicare Corporation of America), 10.1% with Professional Healthcare
Management Inc., a wholly-owned subsidiary of GranCare, Inc. and 8.2% with
Unison Healthcare, Inc.
The aggregate of investments with publicly traded operators decreased to
52.3% of total investments at March 31, 1996, from 52.5% of total investments at
December 31, 1995. The change reflects additional investments with Advocat and
Unison, coupled with the addition of Regency Healthcare Services, Inc., as an
operator of Company properties through its acquisition of certain facilities
operated by Liberty Healthcare entities. These additions were offset by a
decrease resulting from the Company's initiation of the early termination of
leases and related re-leasing of certain facilities previously operated by
Beverly Enterprises, Inc.
NOTE D -- NET EARNINGS PER SHARE
Net earnings per share is computed based on the weighted average number of
shares of common stock outstanding during the respective periods. The inclusion
of options using the treasury stock method and the assumed conversion of
debentures outstanding is not materially dilutive.
5
<PAGE> 7
OMEGA HEALTHCARE INVESTORS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Revenues for the quarter ended March 31, 1996 totaled $17.2 million, an
increase of $2.7 million over the period ending March 31, 1995. The 1996 revenue
growth stems primarily from additional investments of $96.4 million during the
twelve-month period ended March 31, 1996. Real estate investments of $539
million as of March 31, 1996 have an average yield of approximately 12.2%.
Expenses for the quarter ended March 31, 1996 totaled $8,983,000, an
increase of $1.4 million over expenses of $7.6 million for 1995. The provision
for depreciation and amortization for the three-month period ending March 31,
1996 totaled $3.4 million increasing by $159,000 over the 1995 period as a
result of additional investments.
Interest expense for the quarter ended March 31, 1996 was approximately
$4.6 million, compared with $3.5 million for 1995. The increase in 1996 is
primarily due to higher average borrowings outstanding during the 1996 period,
offset by lower interest rates.
General and administrative expenses for the quarter ending March 31, 1996
totaled approximately $980,000 or approximately 5.7% of revenues as compared to
6.1% for 1995.
No provision for federal income taxes has been made since the Company
intends to continue to qualify as a real estate investment trust under the
provisions of the Internal Revenue Code. Accordingly, the Company will not be
subject to federal income taxes on amounts distributed to shareholders provided
it distributes at least 95% of its real estate investment trust taxable income
and meets certain other conditions.
Net earnings were $8.2 million for the 1996 period, an increase of
approximately 16% over the 1995 period as a result of the various factors
mentioned above. The weighted average outstanding shares increased to 16.9
million shares from 15.7 million shares, as a result of shares issued pursuant
to the Dividend Reinvestment Program.
Cash provided by operating activities available for distribution (FAD) for
the period ending March 31, 1996 was $11,725,000, an increase of $1.3 million
(12%) over the 1995 three-month period. FAD is net earnings, excluding any gains
or losses from debt restructuring and sales of property, plus depreciation and
amortization associated with real estate investments, amortization of deferred
financing cost and the net effect of all other non-cash items included in net
earnings. Funds From Operations (FFO) totaled $11,737,000 ($.70 per share) for
the 1996 quarter, increasing $1,485,000 (14.5%) as compared to $10,252,000
($0.65 per share) for the three months ended March 31, 1995. FFO is net
earnings, excluding any gains or losses from debt restructuring and sales of
property, plus depreciation and amortization associated with real estate
investments and charges to earnings for non-cash compensation. While there
generally is very little difference between FAD and FFO for healthcare REITS,
both of these measures of cash flow are used by analysts and investors as
benchmarks for measuring profitability and capacity to sustain dividend
payments.
LIQUIDITY AND CAPITAL RESOURCES
The Company continually seeks new investments in healthcare real estate
properties, primarily long-term care facilities, with the objective of
profitable growth and further diversification of the investment portfolio.
Permanent financing for future investments is expected to be provided through a
combination of both private placement and public offerings of debt and/or equity
securities. In January 1996, the Company completed the placement of $95 million
of 8.5% Convertible Subordinated Debentures due 2001. Net proceeds were used to
repay certain borrowings, including $75 million under the acquisition line of
credit and $9.6 million of secured borrowings, and to fund real estate
investments. The debentures are convertible into shares of common stock at a
price of $28.625 per share representing a premium of 105% of the market price of
the Company's stock on the date the debentures were sold. At March 31, 1996,
3,319,000 shares of common stock are reserved for possible issuance upon
conversion.
6
<PAGE> 8
OMEGA HEALTHCARE INVESTORS, INC.
As of March 31, 1996, the Company has a strong financial position with
total assets of $578 million, shareholders' equity of $357 million, and
long-term borrowings of $206 million representing 36% of the total
capitalization. The Company anticipates eventually attaining and then
maintaining a long-term debt-to-capitalization ratio of approximately 40%. The
Company has available permitted additional borrowings of $95.5 million under its
line of credit arrangement. Management believes the Company's liquidity and
various sources of available capital are adequate to finance operations, fund
future investments in additional facilities, and meet debt service requirements.
The Company distributes a large portion of the cash available from
operations. Cash dividends paid totaled $0.62 per share for the quarter ended
March 31, 1996, compared with $0.59 per share for 1995. Additionally, on April
16, 1996, a $0.62 per share dividend was declared, payable on May 15, 1996 to
shareholders of record on May 2, 1996. The current $0.62 per quarter rate
represents an annualized rate of $2.48 per share.
PART II -- OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(A) THE COMPANY'S ANNUAL MEETING OF SHAREHOLDERS WAS HELD ON APRIL 16,
1996.
(B) THE FOLLOWING DIRECTORS WERE RE-ELECTED AT THE MEETING FOR A THREE-YEAR
TERM:
Essel W. Bailey, Jr.
Harold J. Kloosterman
The following directors were not elected at the meeting but their term
of office continued after the meeting:
James E. Eden
Thomas F. Franke
Bernard J. Korman
Edward Lowenthal
Robert L. Parker
(C) THE RESULTS OF THE VOTE WERE AS FOLLOWS:
<TABLE>
<CAPTION>
NAME FOR WITHHELD
- - ------------------------- ---------- --------
<S> <C> <C>
Essel W. Bailey, Jr. 15,288,247 73,824
Harold J. Kloosterman 15,289,522 72,549
</TABLE>
(D) NOT APPLICABLE
7
<PAGE> 9
OMEGA HEALTHCARE INVESTORS, INC.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS -- THE FOLLOWING EXHIBIT IS FILED HEREWITH:
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- -----------------------------------------------------------------------
<S> <C>
27 Financial Data Schedule
99.1 Subordination of Management Agreement and Management Fees by and
between Diversicare Management Services Co. and Emerald Healthcare,
Inc. The Agreement subordinates to Omega's payments all management
contracts and fees payable by Emerald to Advocat (the parent of
Diversicare). In addition, under the Agreement, a default under the
Emerald Mortgage constitutes a default under all other agreements
between the Registrant and Advocat with respect to the operation by
Advocat of approximately 3,400 licensed beds.
</TABLE>
(B) REPORTS ON FORM 8-K. THE FOLLOWING REPORTS ON FORM 8-K WERE FILED SINCE
DECEMBER 31, 1995:
Items Reported
Form 8-K dated January 19, 1996 -- Report in connection with the
issuance of Subordinated Convertible Debentures which includes only
exhibits required under Item 7 of the form as follows: Placement Agency
Agreement dated January 19, 1996, First Supplemental Indenture dated
January 23, 1996, and Statement of Eligibility of Trustee on Form T-1
dated January 22, 1996.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OMEGA HEALTHCARE INVESTORS, INC.
Registrant
<TABLE>
<S> <C> <C> <C>
By: ESSEL W. BAILEY, JR. President
------------------------------------------
ESSEL W. BAILEY, JR. Date: May 8, 1996
By: DAVID A. STOVER Chief Financial Officer
------------------------------------------
DAVID A. STOVER
</TABLE>
8
<PAGE> 10
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- - ------ ------------------------------------------------------------------------------------
<C> <S>
27 Financial Data Schedule
99.1 Subordination of Management Agreement and Management Fees by and between Diversicare
Management Services Co. and Emerald Healthcare, Inc. The Agreement subordinates to
Omega's payments all management contracts and fees payable by Emerald to Advocat
(the parent of Diversicare). In addition, under the Agreement, a default under the
Emerald Mortgage constitutes a default under all other agreements between the
Registrant and Advocat with respect to the operation by Advocat of approximately
3,400 licensed beds.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) THE
CONDENSED CONSOLIDATED BALANCE SHEET AND CONDENSED CONSOLIDATED STATEMENT OF
OPERATIONS FILED AS PART OF THE QUARTERLY REPORT ON FORM 10-Q AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH (B) QUARTERLY REPORT ON FORM 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 2,983
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 578,273
<CURRENT-LIABILITIES> 0
<BONDS> 210,267
0
0
<COMMON> 0
<OTHER-SE> 356,965
<TOTAL-LIABILITY-AND-EQUITY> 578,273
<SALES> 0
<TOTAL-REVENUES> 17,174
<CGS> 0
<TOTAL-COSTS> 3,392
<OTHER-EXPENSES> 976
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,615
<INCOME-PRETAX> 8,191
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,191
<EPS-PRIMARY> .49
<EPS-DILUTED> .49<F1>
<FN>
<F1>EPS-DILUTED NOT SEPARATELY REPORTED BECAUSE INCLUSION OF OPTIONS USING TREASURY
STOCK METHOD AND THE ASSUMED CONVERSION OF DEBENTURES OUTSTANDING IS NOT
MATERIALLY DILUTIVE.
</FN>
</TABLE>
<PAGE> 1
EXHIBIT 99.1
SUBORDINATION OF MANAGEMENT AGREEMENT
AND MANAGEMENT FEES
This Subordination of Management Agreement and Management Fees
("Subordination Agreement") is made as of February 20, 1996, by DIVERSICARE
MANAGEMENT SERVICES CO., A TENNESSEE CORPORATION ("Manager"), whose address is
277 Mallory Station, Suite 130, Franklin, Tennessee 37057 and EMERALD -- CEDAR
HILLS, INC., A FLORIDA CORPORATION ("Emerald -- Cedar"), EMERALD -- GOLFVIEW,
INC., A FLORIDA CORPORATION ("Emerald -- Golfview"), EMERALD -- SOUTHERN PINES,
INC., A FLORIDA CORPORATION ("Emerald -- Southern Pines"), AND EMERALD --
GOLFCREST, INC., A FLORIDA CORPORATION ("Emerald -- Golfcrest") (each a
"Borrower" and collectively, the "Borrowers") and each having its address is 226
Palofax Place, Third Floor, Pensacola, Florida 32598-1831 and EMERALD
HEALTHCARE, INC., A FLORIDA CORPORATION ("Emerald Healthcare"), having its
address is 226 Palofax Place, Third Floor, Pensacola, Florida 32598-1831 for the
benefit of OMEGA HEALTHCARE INVESTORS, INC., A MARYLAND CORPORATION ("Lender"),
whose address is 905 W. Eisenhower Circle, Suite 110, Ann Arbor, Michigan 48103.
RECITALS:
A. Concurrently herewith, Lender has made a loan (the "Loan") in the
aggregate amount of Fifteen Million Eight Hundred Thousand Dollars
($15,800,000.00) to the Borrowers, and to evidence the obligations of Borrowers
to repay the Loan, Borrowers have executed and delivered to Lender three
Mortgage Notes of even date herewith (each a "Mortgage Note" and collectively,
the "Mortgage Notes") in the amount of the Loan, which Mortgage Notes are
secured by certain real and personal property consisting of four licensed health
care facilities and related operations located in the State of Florida (each a
"Mortgaged Property" and collectively the "Mortgaged Properties"). Emerald
Healthcare has guaranteed the Mortgaged Notes.
B. In connection with the Loan, Borrowers and Lender have entered into
certain Loan Agreements of even date herewith (each a "Loan Agreement" and
collectively, the "Loan Agreements"). As security for the Loan, Borrowers, as
mortgagor, has, among other things granted to Lender four Mortgages, Security
Agreements and Fixture Filings of even date herewith (each a "Mortgage" and
collectively, the "Mortgages"), each Mortgage covering one of the Mortgaged
Properties.
C. Manager and Borrowers have executed and delivered four management
services agreements, each dated as of February 20, 1996 (each a "Management
Agreement" and collectively, the "Management Agreements"), each providing for
the management and operation of a licensed nursing home facility (each a
"Facility" and collectively, the "Facilities") located on the Mortgaged
Properties. The Management Agreement provides, among other things, for the
payment to Manager of certain management fees ("Management Fees").
D. Lender wishes to be assured that (i) the Management Agreements and the
Management Fees payable thereunder to Manager will be, in all respects,
subordinate to the Mortgage Notes, the Mortgages, and the other Loan Documents
(as defined in the Loan Agreements), and (ii) upon the occurrence of certain
events under the Loan Documents, Lender will have the right to terminate Manager
as the manager of the Facilities.
E. Lender further wishes to have the right to require the Manager to
acquire the Loan and Manager wishes to have the right to require the Lender to
sell the Loan upon the occurrence of certain events during the term of the
Management Agreement, the occurrence of which events indicate the potential for
an Operational Default, as defined below.
F. Following an Operational Default and foreclosure of Borrowers' interests
in the Facilities or sale of the Loan to the Manager, Lender, as mortgagee of
the Mortgaged Properties, does not wish to be bound to any of the obligations of
Borrowers under the Management Agreements or be responsible under the Management
Agreements in any capacity.
1
<PAGE> 2
SUBORDINATION OF MANAGEMENT AGREEMENT
AND MANAGEMENT FEES -- (CONTINUED)
RECITALS -- (CONTINUED)
G. Manager is willing to subordinate its rights under the Management
Agreements as described herein provided that (i) Lender agrees to be bound by
the Management Agreements in all circumstances other than under the terms of
this Agreement and (ii) Lender grants to Manager the rights to acquire the
Lender's interest in the Notes, the Mortgages and the other Loan Documents, on
the terms and for the price described below.
NOW, THEREFORE, in consideration of the extension of the term of the
Management Agreements, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, each of the
undersigned hereby agree as follows:
1. Defined Terms. Defined terms used in this Subordination Agreement which
are not otherwise defined herein shall have the meanings as set forth in the
Loan Agreements and the other Loan Documents. An "Operational Default" means any
Event of Default under any of the Agreements described in Exhibit "A" attached
hereto, other than any Event of Default arising solely by reason of (i) a cross
default to agreements between Omega and affiliates of Borrower relating to
nursing home facilities (other than the Facilities), including those located in
the State of Indiana the agreements for which are described in Exhibit "B" to
this Subordination Agreement ("Indiana Default") or (ii) Borrowers' material
default under any of the Management Agreements ("Borrower's Default"), or (iii)
any Event of Default under any of the Agreements described in Exhibit "A"
attached hereto arising by reason of the acts or omissions of Borrowers. The
term "foreclosure" includes a deed in lieu of foreclosure.
2. Subordination of Management Agreement. Each Management Agreement and any
renewals, amendments, extensions, replacements, consolidations or substitutions
thereof, is and shall be subject and subordinate at all times to the Mortgage
Notes, the Mortgages, the Loan Agreements and the other Loan Documents and all
extensions, modifications, renewals, or restatements thereof.
3. Subordination of Management Fees. The obligation for the payment of
Management Fees by Borrowers under the Management Agreements shall
unconditionally be, and remains at all times while Lender is the holder of the
Notes and the mortgagee under the Mortgages to the Mortgage Notes, subordinate
to the obligations of Borrowers under the Mortgage Notes, the Mortgages, the
Loan Agreements and the other Loan Documents. So long as (a) no Operational
Default exists under the Notes, the Loan Agreements, the Mortgages or the other
Loan Documents, and (b) Manager is not in default of its obligations under this
Subordination Agreement, then nothing herein shall prevent the payment of a
Management Fee by Borrower to Manager as provided in and subject to the
Management Agreements. Upon an Operational Default, Lender shall have the right
upon notice to Manager to require Borrowers to suspend the payment of Management
Fees effective immediately upon notice. The occurrence of an Indiana Default
(without the occurrence of an Operational Default) shall not affect Manager's
right to receive payment of Management Fees as provided in and subject to the
Management Agreements.
4. Right to Cancel. Notwithstanding any other provisions to the contrary,
upon (a) an Operational Default, or (b) the occurrence of an event of a default
under this Subordination Agreement by Manager, Lender shall have the right, in
each case, upon written notice to Manager and a reasonable right to cure (60
days being deemed a reasonable cure period), to cancel all of the Management
Agreements, effective immediately upon such notice and the expiration of the
cure period. Manager and Borrower acknowledge and agree that the Management
Agreement shall automatically terminate without notice at such time as Lender,
or its nominee or designee, obtains possession or control of the Facilities by
reason, in whole or in part of an Operational Default. The occurrence of an
Indiana Default (without the occurrence of an Operational Default) and/or a
foreclosure under the Mortgages thereafter shall not give Lender any rights of
termination of the Management Agreement.
2
<PAGE> 3
SUBORDINATION OF MANAGEMENT AGREEMENT
AND MANAGEMENT FEES -- (CONTINUED)
RECITALS -- (CONTINUED)
5. Notices; Reporting Obligations. (a) Each of Manager and Owner shall
furnish to Omega copies of any notice each such party provides to the other
pursuant to any of the Management Agreements. Notice to Omega shall be given at
substantially the same time as notice to Manager or Owner, as applicable. All
notices, requests, demands and other communications hereunder shall be in
writing and shall be deemed to have been duly given if personally delivered or
mailed, registered or certified mail, postage prepaid, or by national overnight
delivery service such as Federal Express or DHL, or by facsimile transmission
("Fax") and properly addressed as follows:
Omega Healthcare Investors, Inc.
905 W. Eisenhower Circle, Suite 110
Ann Arbor, Michigan 48103
Attention: Essel W. Bailey, Jr.
Phone No.: (313) 747-9790
Fax No.: (313) 996-0020
with a copy to:
Argue Pearson Harbison & Myers
801 South Flower Street, Suite 500
Los Angeles, California 90017-4699
Attention: William A. Jones, Esq.
Phone No.: (213) 622-3100
Fax No. : (213) 622-7881
(b) Manager shall furnish to Lender copies of each report it furnishes
to Owner. Such reports shall be furnished to Lender at substantially the
same time as they are furnished to Owner.
(c) Manager shall provide Lender with notice of any working capital
advance or any other advance (in excess of $1,000) for any purpose it makes
under any Management Agreement, together with a summary explanation of the
amount of the advance and the reasons for each such advance. Notices of
advances shall be delivered to Omega promptly and in no event later than 14
days following each such advance.
(d) Manager shall provide Lender with notice of any partial or
complete non-payment of its Management Fee under any Management Agreements
with any of the Borrowers. Such notice shall be delivered to Omega promptly
and in no event later than 14 days following the end of the calendar month
in which such partial or complete non-payment of the Management Fee
occurred.
(e) Lender shall furnish Manager with 30 day's prior notice before
accepting any deed in lieu of foreclosure.
6. Obligations Concerning the Purchase of the Notes. (a) The following
("Purchase Event") shall constitute an event which gives Lender the right to
require Manager to purchase and gives Manager the right to require Lender to
sell, Lender's interest in the Notes, the Mortgages, the Loan Agreements, the
Liquidity Deposits and the other Loan Documents:
(i) The complete non-payment of the Management Fees under all of
the Management Agreements for a period of twelve (12) consecutive
months.
(b) Upon the occurrence of a Purchase Event, Lender shall have the
continuing right to require Manager to purchase Lender's interest in the
Notes, Mortgages, Loan Agreement and the Other Loan
3
<PAGE> 4
SUBORDINATION OF MANAGEMENT AGREEMENT
AND MANAGEMENT FEES -- (CONTINUED)
RECITALS -- (CONTINUED)
Documents ("Lender's Loan"), and Manager shall have the continuing right to
purchase the Lender's Loan, for a purchase price ("Purchase Price") equal
to the sum of:
(i) The adjusted principal amount of the Loan; and
(ii) All accrued and unpaid interest on the Loan, including
interest which has accrued in excess of the pay rate under the Notes.
The adjusted principal amount of the Loan shall mean the principal balance
of the Loan reduced by annual distributions during years 1, 2 and 3 of the term
of the Management Agreements after the distributions pursuant to Sections 5(v)
of the Management Agreements in excess of $100,000 (not to exceed, including the
amounts actually used to pay down the Liquidity Deposit Note, the Working
Capital Note and the Mortgage Note, $2,300,000 in the aggregate).
(c) Manager shall complete the purchase of the Lender's Loan within
one hundred eighty (180) days of the date of delivery to Manager and to
Advocat of Lender's notice of election to require the purchase of Lender's
Loan. If Manager exercises its rights to acquire the Lender's Loan, Manager
shall complete the purchase of the Lender's Loan within ninety (90) days of
the date of delivery to Lender of Manager's notice of election to require
the sale to Manager of Lender's Loan.
(d) All expenses relating to the purchase and sale shall be paid by
Manager, including, but not limited to, any transfer tax, sales tax, the
premium for the title insurance policies, surveys, and Lender's attorneys'
fees. In connection with such transfer, Lender shall represent and warrant
to Manager its ownership of the Lender's Loan, its right to sell and
transfer the Lender's Loan, and the principal balance of Lender's Loan, but
otherwise shall not be obligated to make any representations or warranties
to Manager concerning Lender's Loan. Manager shall pay the purchase price
for Lender's Loan to Lender in immediately available funds. Upon any such
purchase, the Management Agreements shall be ipso facto modified, without
necessity of any further action on the part of the Borrowers or Manager as
follows:
(i) The term of the Management Agreements shall be cancelable by
Manager on 30 days notice;
(ii) The Manager's obligations to fund working capital is
terminated; and
(iii) The subordination of Management Fees for periods after the
purchase is terminated.
7. Allocations of Certain Items.
(a) Upon a foreclosure of the Lender's Loan following an Operational
Default that is based upon Manager's failure to operate one or more of the
Facilities subject to a Management Agreement as a prudent manager, Manager
shall promptly reimburse Borrowers for the full amount of Medicare and
Medicaid recapture and reimburse R. Brent Maggio's ("Maggio's") for tax
liabilities related to income taxes paid on income used to reduce the
Liquidity Deposit Note, the Working Capital Note and the Mortgage Note on
his federal income tax returns and, if any, Maggio's Florida state income
tax returns. Such payment shall be made within 60 days of the determination
of the recapture obligations and the tax liabilities made by Lovelace, Roby
& Co. under Section 7(d) below.
(b) Upon a foreclosure of the Lender's Loan following a Borrower's
Default or an Indiana Default (or an Operational Default other than as
described in Section 7(a) above), then Borrowers shall bear the recapture
and other obligations described in Section 7(a) above.
(c) Upon a foreclosure following an Operational Default or Borrowers'
Default (i) arising out of an adverse change in reimbursement policies or
payments generally affecting operators of nursing homes in the State of
Florida, (ii) an Act of God, or (iii) any other event not reasonably within
the control of
4
<PAGE> 5
SUBORDINATION OF MANAGEMENT AGREEMENT
AND MANAGEMENT FEES -- (CONTINUED)
RECITALS -- (CONTINUED)
Manager as to an Operational Default or Borrower as to a Borrower's
Default, then Borrower, Manager and Lender shall each bear one-third of
the Borrower's recapture and other obligations and Maggio's tax
obligations described in Section 7(a) above.
(d) The amounts needed to satisfy the recapture obligations of
Borrowers and tax liabilities of Maggio shall be determined in good faith
by Lovelace, Roby & Co., certified public accountants, whose determinations
shall be binding on the parties and Maggio, absent manifest error.
Borrowers' recapture obligations include recapture obligations passed
through to the shareholder(s) of Borrowers on his (their) federal income
tax returns and state of Florida income tax returns, if any.
8. Certain Adjustments following Operational Default or Purchase of
Lender's Loan.
(a) Upon any purchase by Manager of Lender's Loan, Lender shall assign
to Manager or the purchaser of the Lender's Loan designated by Manager the
Liquidity Deposit and any guarantees of the Lender's Loan in Lenders
possession.
(b) If the Manager's purchase of Lender's Loan is occasioned by reason
of an Operational Default of the types described in Section 7(a) and 7(c)
above, then R. Brent Maggio and Emerald Healthcare, Inc. shall be released
from their guarantees of Lender's Loan effective upon such transfer, and
the Liquidity Deposit shall be returned to Borrowers by Lender (net of the
principal amount outstanding of the Borrowers' Liquidity Deposit Note
included in the adjusted principal amount).
9. Representations. Manager hereby specifically agrees, represents and
acknowledges to Lender the following:
(a) Manager has reviewed and consents to and approves the terms and
conditions of the Loan Agreement and the other Loan Documents. Manager
hereby waives, relinquishes and subordinates its rights under the
Management Agreement and any claims arising under the Management Agreement
for the payment of Management Fees, in favor of the rights of Lender
hereunder and under the terms of the Loan Agreement and the other Loan
Documents as extended, renewed, modified, supplemented or replaced, to the
extent provided herein.
(b) Lender has no obligation to satisfy or perform any of the terms,
conditions, obligations or duties contained in the Management Agreement.
Manager shall continue to look solely to Borrower for any and all
indemnifications, duties and obligations under the Management Agreement.
Lender has no fiduciary duty to Manager whatsoever, and Borrower is not,
under any circumstance, the Lender's agent in the performance of
obligations under the Management Agreement.
(c) Manager, as the manager under the Management Agreement, shall
fully cooperate with Lender and Borrower in order to enable Borrower to
provide copies to Lender of all financial statements, reports or notices
required by the terms and conditions of the Loan Agreement and the other
Loan Documents.
(d) Manager may not amend or modify the Management Agreement without
Lender's prior written consent.
10. No Other Agreements. This Subordination Agreement constitutes the sole
and only agreement between Manager, Borrower and Lender respecting the matters
set forth herein, and any promise, representation, inducement or condition,
concerning or respecting this subordination which is not expressly set forth
herein, shall be of no force and effect. Manager and Borrower represent to each
other, and for the benefit of Lender, with the understanding that Lender is
relying upon the representations and warranties set forth in this Subordination
Agreement, that except as expressly set forth herein, there are no other oral or
written agreements, promises, representations, inducements or conditions between
the parties involving, directly or indirectly, the subject matter set forth
herein.
5
<PAGE> 6
SUBORDINATION OF MANAGEMENT AGREEMENT
AND MANAGEMENT FEES -- (CONCLUDED)
RECITALS -- (CONCLUDED)
11. Binding Effect. All of the covenants contained herein shall be binding
upon and shall inure to the benefit of the successors and assigns of the
Manager, Borrower and Lender.
12. Amendments Must Be Written. This Subordination Agreement may not be
amended by the conduct or further agreement of the Manager, Borrower and Lender,
except by written agreement executed by Manager, Borrower and Lender which
specifically provides that it is an amendment hereto.
13. Governing Law. This Agreement shall be construed in each and every
respect in accordance with the laws of the State of Florida. If any provision
herein is in conflict with such laws, or is otherwise unenforceable for any
reason whatsoever, such provision shall be deemed null and void to the extent of
such conflict or unenforceability, and it shall be severed from and shall not
invalidate any other provision of this Subordination Agreement.
14. No Waiver. The waiver or non-enforcement by Lender of any breach of any
provision of this Subordination Agreement shall not be deemed a continuing
waiver or a waiver of any subsequent breach of the same or any provision of this
instrument.
15. No Assignment. Except as may be otherwise expressly permitted under the
Loan Agreement and the other Loan Documents, Manager may not directly or
indirectly sell, assign or otherwise transfer its interests or obligations under
any Management Agreement or hereunder without the written consent of Lender, its
successors or assigns.
16. Transition. If Lender or its nominee or designee obtains possession or
control of the Facilities or forecloses the Mortgage (in either case, as the
result of an Operational Default), Manager agrees to extend all reasonable
cooperation to any party in order to accomplish an orderly transition of
management and, if requested by such party, Manager shall continue to manage the
Facilities on an "at will" basis, until such time as an orderly transfer of
management has been accomplished. Manager shall be entitled to reasonable
compensation for any services provided under this Paragraph 12.
17. Modifications to Management Agreement. Upon any purchase by Manager of
the Lender's Loan, the terms of this Agreement and Management Agreements shall
be modified to reflect the provisions of Section 6(d) above.
18. Cross-Default. An Operational Default constitutes an Event of Default
under any and all of the agreements described in Exhibit "C" attached hereto
(the "Advocat Transaction Documents"), entitling Omega to exercise and enforce
all of its rights and remedies under any or all of such agreements.
19. No Interest in Collateral. Manager represents and warrants to Lender
that it has no interest in the Collateral described in the Security Agreement
except for a license from Borrower to use the Collateral in connection with the
operation of each Facility for the Primary Intended Use, subject to the terms of
the Loan Agreement and the other Loan Documents. If Lender or its nominee or
designee obtains possession or control of the Facilities, Manager's interest in
the Collateral, if any, shall automatically terminate with respect to the
Facilities.
6
<PAGE> 7
IN WITNESS WHEREOF, the undersigned have executed this Subordination
Agreement as of the date first above written.
OMEGA HEALTHCARE INVESTORS, INC.,
a Maryland corporation
By:
--------------------------------------
F. SCOTT KELLMAN,
Executive Vice President
DIVERSICARE MANAGEMENT SERVICES CO.,
a Tennessee corporation
By:
--------------------------------------
MARY MARGARET HAMLETT
Executive Vice President
EMERALD GOLFVIEW, INC.
a Florida corporation
By:
--------------------------------------
R. BRENT MAGGIO
President
EMERALD GOLFCREST, INC.
a Florida corporation
By:
--------------------------------------
R. BRENT MAGGIO
President
EMERALD-SOUTHERN PINES, INC.
a Florida corporation
By:
--------------------------------------
R. BRENT MAGGIO
President
EMERALD- CEDAR HILLS, INC.
a Florida corporation
By:
--------------------------------------
R. BRENT MAGGIO
President
EMERALD HEALTHCARE, INC.
a Florida corporation
By:
--------------------------------------
R. BRENT MAGGIO
President
7
<PAGE> 8
EXHIBIT A
FLORIDA LOAN DOCUMENTS
<TABLE>
<C> <S>
1. Loan Agreement.
2. Mortgage Note.
3. Pledge Agreement.
4. Maggio Loan Guaranty.
5. Security Agreement.
6. Letter of Credit Agreement.
</TABLE>
<PAGE> 9
EXHIBIT B
INDIANA DOCUMENTS
<TABLE>
<C> <S>
1. Agreement to Lease.
2. Master Lease.
3. Maggio Lease Guaranty.
4. Pledge Agreement.
5. Security Agreement.
6. Loan Agreement.
7. Medium Term Note.
8. Additional Medium Term Note.
9. Short Term Note.
10. Maggio Loan Guaranty.
</TABLE>
<PAGE> 10
EXHIBIT C
<TABLE>
<C> <S>
1. 1992 Master Lease.
2. 1992 Master Lease Documents.
3. Amended Florida Loan Agreement.
4. Florida Loan Documents.
5. Guaranty-Diversicare.
6. Florida Lease.
7. Florida Lease Documents.
8. 1994 Advocat Guaranty.
9. Advocat Sterling Guaranty.
10. Kentucky Lease Documents.
11. Sublease Documents.
</TABLE>
