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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-11316
OMEGA HEALTHCARE INVESTORS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
MARYLAND 38-3041398
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER IDENTIFICATION NO.)
OF INCORPORATION OR ORGANIZATION)
905 W. EISENHOWER CIRCLE, SUITE 110 48103
ANN ARBOR, MICHIGAN (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 734-747-9790
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
<TABLE>
<CAPTION>
NAME OF EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
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<S> <C>
COMMON STOCK, $.10 PAR VALUE NEW YORK STOCK EXCHANGE
8.5% CONVERTIBLE DEBENTURES, DUE 2001 NEW YORK STOCK EXCHANGE
9.25% SERIES A PREFERRED STOCK, $1 PAR VALUE NEW YORK STOCK EXCHANGE
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES AND EXCHANGE ACT
OF 1934 DURING THE PRECEDING 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 BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. [ ]
THE AGGREGATE MARKET VALUE OF THE VOTING STOCK OF THE REGISTRANT HELD BY
NON-AFFILIATES WAS $745,498,000 BASED ON THE $38.8125 CLOSING PRICE PER SHARE
FOR SUCH STOCK ON THE NEW YORK STOCK EXCHANGE ON FEBRUARY 27, 1998.
AS OF FEBRUARY 27, 1998, THERE WERE 19,635,322 SHARES OUTSTANDING.
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF THE REGISTRANT'S ANNUAL REPORT TO SHAREHOLDERS FOR THE YEAR
ENDED DECEMBER 31, 1997, ARE INCORPORATED BY REFERENCE IN PART II OF THIS FORM
10-K.
THE REGISTRANT'S DEFINITIVE PROXY STATEMENT, WHICH WILL BE FILED WITH THE
COMMISSION ON OR ABOUT APRIL 1, 1998, IS INCORPORATED BY REFERENCE IN PART III
OF THIS FORM 10-K.
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PART I
ITEM 1 -- BUSINESS OF THE COMPANY
Omega Healthcare Investors, Inc. (the "Company") was incorporated in the
state of Maryland on March 31, 1992. It is a self-administered real estate
investment trust ("REIT") which invests in income-producing healthcare
facilities, principally long-term care facilities located in the United States.
The Company anticipates providing lease or mortgage financing for healthcare
facilities to qualified operators and acquiring additional healthcare facility
types, including assisted living and acute care facilities. Financing for such
future investments may be provided by borrowings under the Company's bank line
of credit, private placements or public offerings of debt or equity, the
assumption of secured indebtedness, or a combination of these methods. The
Company also may finance acquisitions through the exchange of properties or the
issuance of shares of its capital stock, if such transactions otherwise satisfy
the Company's investment criteria.
Effective September 30, 1994, the Company acquired all the outstanding
common stock of Health Equity Properties Incorporated ("HEP"), a healthcare real
estate investment trust. The total purchase consideration for HEP approximated
$180 million, comprising common stock of $143 million represented by 5,826,000
shares, long-term debt assumed of $26 million, and other obligations,
professional fees and costs incurred in the transaction.
During 1995, the Company became a primary sponsor of Principal Healthcare
Finance Limited ("Principal"), an Isle of Jersey (United Kingdom) company
established to provide capital and medium-term financing on a stable, continuing
basis to the private-sector healthcare industry in the United Kingdom. The
nursing home industry in the United Kingdom, like that in the United States, is
consolidating and capital demand exists. At December 31, 1997, Principal owned
154 properties for which it has invested L215 million (approximately $354
million). The Company also provides services for the administration, marketing,
identification and evaluation of potential investments and the monitoring of the
performance of the healthcare operators financed by Principal.
In November, 1997 the Company formed Omega Worldwide, Inc. (Worldwide), a
company which will provide investment advisory and management services and hold
equity and debt interests in companies engaged in providing sale/leaseback and
other capital financing to healthcare service providers throughout the world. In
connection with the formation of Worldwide, the Company will receive on or about
April 1, 1998, 8.5 million shares of Worldwide common stock and rights to
receive up to 5,000,000 shares of Series B Preferred Stock in exchange for
substantially all of the Company's interests in Principal. The Company's
interests in Principal which will be exchanged for its ownership in Worldwide
include: (a) 3,337,500 ordinary shares of Principal and warrants to purchase 10
million ordinary shares of Principal expiring June 30, 2001 at an exercise price
of L1.50 (approximately $2.40) per share and 554,583 ordinary shares of
Principal expiring December 31, 2000 at an exercise price of L1.00
(approximately $1.60) per share; (b) the Company's right to payment of L15
million (approximately $24 million) from the Sterling denominated subordinated
loan; (c) the Company's interest in a ten-year British pound currency swap
contract under which Omega Worldwide, Inc. will have the right to exchange
L20,000,000 for $31,740,000 on October 15, 2007; (d) and the Amended and
Restated Advisory Services Agreement between the Company and Principal. The
Company will retain 900,000 Class A Voting Shares of Principal.
Omega Worldwide, Inc. has filed a Registration Statement with respect to
rights to acquire 2,250,000 shares of its common stock, 500,000 shares to be
sold in a primary offering and 2.3 million shares to be sold in a secondary
offering by the Company. Each common shareholder of the Company will receive a
pro-rata share of approximately 5.2 million common shares of Omega Worldwide,
Inc. and will be eligible to receive a portion of the 2.25 million rights to
purchase Omega Worldwide, Inc. common stock. The Company will retain a 9%
interest in Omega Worldwide, Inc. The date of the distribution of Omega
Worldwide, Inc. shares has not been set since it depends upon, among other
matters, the date of approval by the Securities and Exchange Commission of the
Registration Statement. As of the date of the distribution, the cost of assets
transferred to Omega Worldwide, Inc., less the net proceeds of the secondary
offering received by the Company, will be charged to shareholders' equity in the
form of a special dividend. Management estimates the special dividend will
approximate $10 million.
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As of December 31, 1997, the Company's portfolio of domestic investments
consisted of 258 long-term care facilities, 3 medical office buildings and 2
rehabilitation hospitals. The Company owns and leases 178 long-term facilities,
3 medical office buildings and 2 rehabilitation hospitals, and provides
mortgages, including participating and convertible participating mortgages, on
80 long-term healthcare facilities. The facilities are located in 26 states and
operated by 29 unaffiliated operators. The Company's gross real estate
investments at December 31, 1997 totaled $779.4 million. During 1997, new
investments approximated $196 million as a result of entering into
sale/leaseback transactions and making mortgage loans and other investments.
At March 6, 1998, the Company employed 26 full-time employees. The
executive offices of the Company are located at 905 West Eisenhower Circle,
Suite 110, Ann Arbor, Michigan 48103. Its telephone number is (734) 747-9790.
INVESTMENT OBJECTIVES
The investment objectives of the Company are to pay regular cash dividends
to shareholders; to provide the opportunity for increased dividends from annual
increases in rental and interest income from revenue participations and from
portfolio growth; to preserve and protect shareholders' capital; and to provide
the opportunity to realize capital growth.
INVESTMENT STRATEGIES AND POLICIES
The Company maintains a diversified portfolio of income-producing
healthcare facilities or mortgages thereon, with a primary focus on long-term
care facilities located in the United States. In evaluating potential
investments, the Company considers such factors as: (i) the quality and
experience of management and the creditworthiness of the operator of the
facility; (ii) the adequacy of the facility's historical, current and forecasted
cash flow to meet operational needs, capital expenditures and lease or debt
service obligations; (iii) the construction quality, condition and design of the
facility; (iv) the geographic area and type of facility; (v) the tax, growth,
regulatory and reimbursement environment of the community in which the facility
is located; (vi) the occupancy and demand for similar healthcare facilities in
the same or nearby communities; and (vii) the payor mix of private, Medicare and
Medicaid patients.
In making investments, the Company generally seeks established,
creditworthy, middle-market healthcare operators which meet the Company's
standards for quality and experience of management. Although the Company has
emphasized long-term care investments, it intends to diversify prudently into
other types of healthcare facilities or other properties. The Company actively
seeks to diversify its investments in terms of geographic location, operators
and facility types.
A fundamental investment strategy of the Company is to obtain contractual
rent escalations under long-term, non-cancelable, triple-net leases (whereby the
tenant is responsible for all maintenance, repairs, taxes and insurance on the
leased properties) and revenue participation through participating mortgage
loans, and to obtain substantial security deposits. Additional security is
typically provided by covenants regarding minimum working capital and net worth,
liens on accounts receivable and other operating assets, and various provisions
for cross-default, cross-collateralization and corporate/personal guarantees,
when appropriate.
The Company prefers to invest in equity ownership of properties. Due to
regulatory, tax or other considerations, the Company sometimes pursues
alternative investment structures, including Convertible Participating and
Participating Mortgages, that are intended to achieve returns comparable to
equity investments. The following summarizes the four primary structures
currently used by the Company:
Purchase/Leaseback. The Company's owned properties are generally
leased under provisions of leases for terms ranging from 5 to 17 years,
plus renewal options. The leases originated by the Company generally
provide for minimum annual rentals which are subject to annual formula
increases (i.e., based upon such factors as increases in the Consumer Price
Index ("CPI") or increases in the revenues of the underlying properties),
with certain fixed minimum and maximum levels. Generally, the operator
holds an option to repurchase the property at set dates at prices based on
specified formulas. The average annualized yield from leases was 11.57% at
January 1, 1998.
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Convertible Participating Mortgage. Convertible Participating
Mortgages are secured by first mortgage liens on the underlying real estate
and personal property of the mortgagor. Interest rates are usually subject
to annual increases based upon increases in the CPI or increases in
revenues of the underlying long-term care facilities, with certain maximum
limits. Convertible Participating Mortgages afford the Company an option to
convert its mortgage into direct ownership of the property, generally at a
point six to nine years from inception; they are then subject to a
leaseback to the operator for the balance of the original agreed term and
for the original agreed participations in revenues or CPI adjustments. This
allows the Company to capture a portion of the potential appreciation in
value of the real estate. The operator has the right to purchase the
Company's option at prices based on specified formulas. The average
annualized yield on these mortgages was approximately 12.75% at January 1,
1998.
Participating Mortgage. Participating Mortgages of the Company are
secured by first mortgage liens on the underlying real estate and personal
property of the mortgagor. Interest rates are usually subject to annual
increases based upon increases in the CPI or increases in revenues of the
underlying long-term care facilities, with certain maximum limits. The
average annualized yield on these investments was approximately 14.36% at
January 1, 1998.
Fixed-Rate Mortgage. These mortgages of the Company, with a fixed
interest rate for the mortgage term, are also secured by first mortgage
liens on the underlying real estate and personal property of the mortgagor.
The average annualized yield on these investments was 11.16% at January 1,
1998.
The table set forth in Item 2 -- Properties, herein, contains information
regarding the Company's real estate properties, their locations, and the types
of investment structures as of December 31, 1997.
BORROWING POLICIES
The Company may incur additional indebtedness, and anticipates attaining
and then maintaining a long-term debt-to-capitalization ratio of approximately
40%. The Company intends to review periodically its policy with respect to its
debt-to-equity ratio and to adapt such policy as its management deems prudent in
light of prevailing market conditions. The Company's strategy generally has been
to match the maturity of its indebtedness with the maturity of its assets, and
to employ long-term, fixed-rate debt to the extent practicable.
The Company will use the proceeds of any additional indebtedness to provide
permanent financing for investments in additional healthcare facilities. The
Company may obtain either secured or unsecured indebtedness, which may be
convertible into capital stock or accompanied by warrants to purchase capital
stock. Where debt financing is present on terms deemed favorable, the Company
generally may invest in properties subject to existing loans, secured by
mortgages, deeds of trust or similar liens on properties.
The Company has an unsecured acquisition line of credit which permits
borrowings of up to $200,000,000, of which approximately $129 million was used
at February 27, 1998. This credit facility provides temporary funds for new
investments in healthcare facilities. The Company expects to periodically
replace funds drawn on the acquisition line through long-term, fixed-rate
borrowings, the issuance of equity linked borrowings, or the issuance of
additional shares of capital stock.
COMPETITION
The Company competes for additional healthcare facility investments with
other healthcare investors, including other real estate investment trusts. The
operators of the facilities compete with other regional or local nursing care
facilities for the support of the medical community, including physicians and
acute care hospitals, as well as the general public. Some significant
competitive factors for the placing of patients in skilled and intermediate care
nursing facilities include quality of care, reputation, physical appearance of
the facilities, services offered, family preferences, physician services and
price.
GOVERNMENT HEALTHCARE REGULATION AND REIMBURSEMENTS
Healthcare is an area of extensive government regulation and dynamic
regulatory change. The Company's lessees and mortgagors are and will continue to
be subject to extensive federal, state and local
3
<PAGE> 5
regulation, including facility inspections, reimbursement policies, and control
over certain expenditures. Changes in laws or regulations, or new
interpretations of existing laws or regulations, can have a dramatic effect on
methods and costs of doing business, as well as the amounts of reimbursement by
government and private third-party payors.
A significant portion of the revenues of the Company's lessees and
mortgagors are and will be dependent upon reimbursement from third-party payors,
including the Medicaid and Medicare programs, post-retirement benefit plans,
private insurance companies and health maintenance organizations. Operators also
are subject to extensive federal, state and local regulations relating to their
operations, and the Company's facilities are subject to periodic inspection by
government and other authorities to assure continual compliance with mandated
procedures, licensure requirements under state law and certification standards
under the Medicare and Medicaid programs.
Since 1976, healthcare regulation through Certificates of Need ("CON") have
tended to limit construction of new long-term care facilities in many states.
Several states in which the Company has investments have repealed CON
legislation, including Indiana, California and Texas, which may adversely affect
customers of the Company.
The levels of revenues and profitability of the Company's lessees and
mortgagors will continue to be affected by the ongoing efforts of third-party
payors to contain or reduce the costs of healthcare. Recent legislation changes
the Medicare payment methodology for skilled nursing facilities effective for
cost reporting years commencing after July 1, 1998. The cost-based system is
replaced by a federal per diem rate that is phased in over four years. The new
per diem rate will be the sole payment for both direct nursing care ("Part A
services") and ancillary services that were previously billed separately from
the cost-based reimbursement system ("Part B services"). Capital costs are also
included in the per diem rate. Many states have also converted to a system based
on prospectively determined fixed rates.
Until 1997, state Medicaid programs were required to reimburse nursing
facilities based on rates that were reasonable and adequate to meet the costs
that must be incurred by efficiently and economically operated facilities in
order to provide services in conformity with federal and state standards and to
assure reasonable access to patients. This law restricted the ability of the
states to reduce Medicaid payments. Congress repealed this requirement in 1997.
Under the new law, states need only publish the methodology used to develop the
proposed rates, along with a justification for the methodology, and allow public
comment. This change could result in reduced Medicaid payments to facilities
operated by the Company's customers. The Company expects that there will
continue to be proposals to limit Medicaid and Medicare reimbursement for
healthcare services in an attempt to reduce the United States federal budget
deficit. Proposals have also been made to limit Medicaid reimbursement for
healthcare services in many of the states in which the Company's facilities are
located. The Company cannot at this time predict whether any of these proposals
will be adopted at the federal or state level or, if adopted and implemented,
what effect, if any, such proposals will have on the lessees or mortgagors of
the Company, and, indirectly, the Company. A significant change in coverage,
reduction in payment rates by third-party payors, or the decline in availability
of funding could have a material adverse effect on the business and financial
condition of the Company's lessees and mortgagors, and, indirectly, the
Company's financial condition.
There can be no assurance that the Medicaid reimbursement programs in each
of the states where the lessees' and mortgagors' facilities are located will
reimburse rent or interest costs of the lessees and mortgagors at increased
levels recognizing the initial sales to or borrowings from the Company. Failure
by these state Medicaid programs to provide reimbursement at current or
increased levels could have an adverse effect upon the cash flow of the
facilities and, hence, on the ability of the Company's lessees and mortgagors to
meet their respective payment obligations to the Company. Additionally, Medicare
regulations provide that effective December 1, 1997, when a facility changes
ownership (by sale or under certain lease transactions), reimbursement for
depreciation and interest will be based on the cost to the owner of record as of
August 5, 1997, less depreciation allowed. Previously, the buyer would use its
cost of purchase up to the original owner's historical cost before depreciation.
Such changes could adversely affect the resale value of the Company's healthcare
facilities.
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Healthcare facilities that participate in Medicare or Medicaid must meet
extensive program requirements, including physical plant and operational
requirements, which are revised from time to time. Such requirements may include
a duty to admit Medicare and Medicaid patients, limiting the ability of the
facility to increase its private pay census beyond certain limits. Medicare and
Medicaid facilities are regularly inspected to determine compliance, and may be
excluded from the programs -- in some cases without a prior hearing -- for
failure to meet program requirements. In 1997, two facilities of the Company in
Alabama were excluded from programs for 68 and 72 days. This had no effect on
the rents received by the Company and the facilities in question have been
reinstated. Other changes in the healthcare industry include continuing trends
toward shorter lengths of hospital stay, increased use of outpatient services,
increased federal, state and third party oversight of healthcare company
operations and business practices, and increased demand for capitated healthcare
services (delivery of services at a fixed price per capita basis to a defined
group of covered parties). The entrance of insurance companies into managed care
programs is also accelerating the introduction of managed care in new
localities, and states and insurance companies continue to negotiate actively
the amounts they will pay for services. Moreover, the percentage of healthcare
services that are reimbursed under Medicare and Medicaid programs continues to
increase as the population ages and as states expand their Medicaid programs.
Continued eligibility to participate in these programs is crucial to a
provider's financial strength. As a result of the foregoing, the revenues and
margins of the operators of the Company's facilities may decrease, resulting in
a reduction of the Company's rent/interest coverage from investments.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
At all times, the Company intends to make and manage its investments
(including the sale or disposition of property or other investments) and to
operate in such a manner as to be consistent with the requirements of the
Internal Revenue Code of 1986, as amended (the "Code") (or regulations
thereunder) to qualify as a REIT, unless, because of changes in circumstances or
changes in the Code (or regulations thereunder), the Board of Directors
determines that it is no longer in the best interests of the Company to qualify
as a REIT. As such, it generally will not pay federal income taxes on the
portion of its income which is distributed to shareholders.
EXECUTIVE OFFICERS OF THE COMPANY
At the date of this report, the executive officers of the Company are:
Essel W. Bailey, Jr. (53) has been President, Chief Executive Officer
and Secretary of the Company since March 1992, and Chairman of the board
since July 1995. Prior to that he was a Managing Director of Omega Capital,
a healthcare investment partnership, from 1986 to 1992. He was previously a
partner in a major Michigan law firm. Mr. Bailey is also a director of
Principal Healthcare Finance Limited and of Vitalink Pharmacy Services,
Inc., an NYSE listed company and the fourth largest institutional pharmacy
serving the long-term care industry in the United States.
James P. Flaherty (50) joined the Company in 1996 and was appointed
Vice President-International of the Company and Managing Director and Chief
Executive of Omega U.K. Limited in January 1997. Before he joined the
Company, he was Chairman of Black Rock Capital Corporation, a leasing and
merchant banking firm he founded in 1994. From April 1991 until December of
1993 Mr. Flaherty was Managing Partner of Pareto Partners, a London based
investment management firm. Prior to 1991, he was employed by American
Express Bank Ltd. in London and Geneva in a number of senior management
capacities and by State National Bank of Connecticut and its successor, The
Connecticut Bank & Trust Co.
F. Scott Kellman (41) joined the Company as Senior Vice
President-Acquisitions in August 1993, and was appointed Executive Vice
President in August 1994. From 1986 to 1989, he was Vice President of
Meritor Savings Bank, the last two years as director of the healthcare
lending unit. From 1989 to 1991, he served as Vice President of Van Kampen
Merritt, Inc., an investment banking subsidiary of Xerox. From 1991 through
1993 he was employed by several investment banking and healthcare
investment firms. In March 1998 he was named Chief Operating Officer of the
Company.
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Susan A. Kovach (38) joined the Company in December 1997 as Vice
President, General Counsel and Secretary. Before she joined the Company,
she was a lawyer with Dykema Gossett PLLC in Detroit, Michigan for 12
years, the last three years as a senior member of the firm.
David A. Stover (52) joined the Company as Vice President and Chief
Financial Officer in September 1994. Mr. Stover is a Certified Public
Accountant and has 23 years' experience with the international accounting
firm of Ernst & Young LLP and its predecessor firms. From 1981 through
1990, he was an audit, tax and consulting partner, spending the last of
those years as area partner-in-charge of services for the firm's healthcare
clients in Western Michigan. From 1992 to 1994, Mr. Stover was principal of
his own consulting firm and, from 1990 to 1992, he was Chief Financial
Officer of International Research and Development Corporation.
OTHER KEY PERSONNEL
Todd Robinson (32), Assistant Vice President and Director of Acquisitions,
is a Certified Public Accountant who joined Omega in June 1995 after five years
with the real estate group at Interstate/Johnson Lane, where he was responsible
for the healthcare portfolio. Prior to joining Interstate, Mr. Robinson was a
tax consultant with Arthur Andersen & Company, LLP.
Laurence Rich (38), Managing Director of Acquisitions, joined the Company
in January 1998 after 5 years working as a lawyer with the firms of Dykema
Gossett PLLC and Pepper, Hamilton & Scheetz. Previously Mr. Rich was Director of
Operations for The Ivanhoe Companies, a residential and commercial land
development and construction company located in West Bloomfield, Michigan from
1988 to 1992, and from 1983 to 1987 was Director of Marketing for Acorn Building
Components, Inc., a national manufacturer of residential and commercial building
products located in Detroit, Michigan. He is a certified public accountant.
Carol Albaugh (35) joined the Company in December 1996 as Controller after
completing her MBA at the University of Michigan. Prior to joining the Company,
she held various progressively responsible positions for nine years at Borders
Group Incorporated, most recently serving as Manager of Financial Planning and
Analysis through March 1996.
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ITEM 2 -- PROPERTIES
At December 31, 1997, the Company's real estate investments were in
long-term care facilities, medical office buildings and rehabilitation
hospitals. The investments are either in the form of purchased facilities, which
are leased to operators, or mortgages on facilities which are operated by the
mortgagors or their affiliates. The facilities are located in 26 states and are
operated by 29 unaffiliated operators. Basic information regarding investments
as of December 31, 1997 is as follows:
<TABLE>
<CAPTION>
NO. OF NO. OF
INVESTMENT STRUCTURE/OPERATOR TOTAL BEDS FACILITIES OCCUPANCY %
- ----------------------------- ---------- ---------- -----------
<S> <C> <C> <C>
PURCHASE/LEASEBACK PROPERTIES
Sun Healthcare Group, Inc................................... 5,557 51 91
Advocat, Inc................................................ 2,959 28 85
Unison Healthcare Corp...................................... 1,664 17 79
Emerald Healthcare Inc...................................... 1,336 31 75
ExtendaCare, Inc............................................ 880 22 74
Alden Management Services, Inc.............................. 870 4 89
Senior Care Properties, Inc................................. 644 3 79
Res-Care, Inc............................................... 596 8 93
Five Star Corporation....................................... 491 6 82
First Health Care Associates................................ 360 1 71
Hunter Management Group, Inc................................ 300 1 91
Complete Care, Inc.......................................... 278 2 81
Meadowbrook Healthcare of N.C............................... 192 2 82
Kansas & Missouri, Inc...................................... 173 1 57
Integrated Health Services, Inc............................. 160 1 67
Liberty Assisted Living Centers, LP......................... 120 1 92
Tutera Evergreen, LLC....................................... 56 1 97
The Graduate Hospital....................................... 0 3 N/A
------ --- ---
16,636 183 84
CONVERTIBLE PARTICIPATING MORTGAGES
Sun Healthcare Group, Inc................................... 546 4 94
Unison Healthcare Corp...................................... 347 3 69
ExtendaCare, Inc............................................ 283 3 98
Premiere HCP III Hillsborough, Inc.......................... 180 1 75
Senior Care Properties, Inc................................. 150 2 82
------ --- ---
1,506 13 81
PARTICIPATING MORTGAGES
Paragon Health Network, Inc................................. 1,863 13 88
North Country Healthcare Associates......................... 652 12 87
ExtendaCare, Inc............................................ 203 3 92
Advocat, Inc................................................ 317 3 89
------ --- ---
3,035 31 88
FIXED-RATE MORTGAGES
Horizon/CMS Healthcare Corp................................. 1,179 11 N/A
Essex Healthcare Corporation................................ 635 6 88
Advocat, Inc................................................ 423 4 92
Tiffany Care Centers........................................ 330 5 80
Emerald Healthcare, Inc..................................... 300 2 97
Quality Care, Inc........................................... 75 1 91
American Healthcare Centers, Inc............................ 100 1 89
</TABLE>
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<TABLE>
<CAPTION>
NO. OF NO. OF
INVESTMENT STRUCTURE/OPERATOR TOTAL BEDS FACILITIES OCCUPANCY %
----------------------------- ---------- ---------- -----------
<S> <C> <C> <C>
Other Mortgages............................................. 601 6 N/A
------ --- ---
3,643 36 90
------ --- ---
Totals................................................. 24,820 263 85
====== === ===
</TABLE>
- -------------------------
N/A -- Data are not reported or not applicable.
The distribution of real estate investments by investment type and state is
as follows:
<TABLE>
<CAPTION>
TOTAL
NUMBER OF TOTAL INVESTMENT INVESTMENT
INVESTMENT STRUCTURE/STATE FACILITIES BEDS ($1,000) YIELD
-------------------------- ---------- ----- ---------- ----------
<S> <C> <C> <C> <C>
PURCHASE/LEASEBACK PROPERTIES
Indiana............................................... 68 3,327 $101,391 12.68%
California............................................ 18 1,453 56,012 9.76
Texas................................................. 14.... 2,099 42,221 11.85
Arkansas.............................................. 12 1,273 37,888 13.55
Illinois.............................................. 9 1,302 42,973 10.84
Alabama............................................... 9 1,121 35,224 12.01
Kentucky.............................................. 9 943 35,995 10.76
North Carolina........................................ 7 891 29,746 10.58
Iowa.................................................. 7 568 15,693 10.82
West Virginia......................................... 6 616 23,184 10.32
Tennessee............................................. 5 606 17,447 11.99
Florida............................................... 4 770 35,643 11.26
Ohio.................................................. 4 453 15,954 10.58
Pennsylvania.......................................... 3 0 30,031 13.14
Washington............................................ 2 319 15,900 11.08
Missouri.............................................. 1 360 9,000 13.15
Kansas................................................ 1 173 2,500 8.77
Massachusetts......................................... 1 135 8,300 10.71
Louisiana............................................. 1 131 4,602 11.25
Colorado.............................................. 1 56 750 13.06
Idaho................................................. 1 40 600 10.71
--- ------ -------- ------
Total............................................ 183... 16,636 561,054 11.57
CONVERTIBLE PARTICIPATING MORTGAGES
Tennessee............................................. 4 546 18,232 14.17
Texas................................................. 3 347 10,200 12.54
Kentucky.............................................. 3 283 10,250 11.09
Florida............................................... 3 330 10,934 12.14
--- ------ -------- ------
Total Convertible Participating..................... 13 1,506 49,616 12.75
PARTICIPATING MORTGAGES
Michigan.............................................. 13 1,863 58,800 15.72
Maine................................................. 11 619 24,183 12.09
Florida............................................... 3 317 7,031 13.42
Kentucky.............................................. 3 203 4,397 11.26
Massachusetts......................................... 1 33 2,096 12.09
--- ------ -------- ------
Total Participating Mortgages....................... 31 3,035 96,507 14.36
</TABLE>
8
<PAGE> 10
<TABLE>
<CAPTION>
TOTAL
NUMBER OF TOTAL INVESTMENT INVESTMENT
INVESTMENT STRUCTURE/STATE FACILITIES BEDS ($1,000) YIELD
-------------------------- ---------- ----- ---------- ----------
<S> <C> <C> <C> <C>
FIXED RATE MORTGAGES
Texas................................................. 9 1,026 9,101 10.75
Ohio.................................................. 7 735 19,141 10.91
Florida............................................... 6 723 25,935 11.61
California............................................ 3 250 2,851 11.18
Missouri.............................................. 5 330 5,296 11.32
Iowa.................................................. 2 250 3,730 10.75
New Mexico............................................ 2 156 1,588 10.75
Utah.................................................. 1 100 1,910 10.75
Nevada................................................ 1 73 496 10.75
Other, primarily construction......................... 2,182 10.75
--- ------ -------- ------
Total Fixed Rate Mortgages....................... 36 3,643 72,230 11.16
--- ------ -------- ------
Total Real Estate Investments.................... 263 24,820 $779,407 11.95%
=== ====== ======== ======
</TABLE>
ITEM 3 -- LEGAL PROCEEDINGS
There were no legal proceedings pending as of December 31, 1997, or as of
the date of this report, to which the Company is a party or to which the
properties are subject, which were likely to have a material adverse effect on
the operations of the Company or on its financial condition.
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to shareholders during the fourth quarter of the
year covered by this report.
PART II
ITEM 5 -- MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's shares of common stock are traded on the New York Stock
Exchange under the symbol OHI. The following table sets forth, for the periods
shown, the high and low prices as reported on the New York Stock Exchange
Composite and dividends per share:
<TABLE>
<CAPTION>
1997 1996
- -------------------------------------------- --------------------------------------------
DIVIDENDS DIVIDENDS
QUARTER HIGH LOW PER SHARE QUARTER HIGH LOW PER SHARE
- ------- ---- --- --------- ------- ---- --- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
First $32.8750 $30.7500 $0.645 First $29.7500 $26.3750 $0.62
Second $33.5625 $30.5000 $0.645 Second $29.1250 $27.1250 $0.62
Third $36.1875 $31.8125 $0.645 Third $30.1250 $27.7500 $0.62
Fourth $38.6250 $35.5000 $0.645 Fourth $33.5000 $29.1250 $0.62
------ -----
$ 2.58 $2.48
</TABLE>
The closing price on February 27, 1998 was $38.8125 per share. As of
February 27, 1998, there were 19,635,322 shares of common stock outstanding with
approximately 3,200 registered holders and approximately 30,000 beneficial
owners.
9
<PAGE> 11
ITEM 6 -- SELECTED FINANCIAL DATA
The following selected financial data with respect to the Company should be
read in conjunction with the Company's Consolidated Financial Statements, which
are incorporated herein by reference to the Company's 1997 Annual Report to
Shareholders, which is included herein as Exhibit 13.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------------------------
1997 1996 1995 1994(1) 1993
---- ---- ---- ------- ----
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
OPERATING DATA
Revenues....................................... $90,820 $73,127 $61,430 $37,747 $20,750
Net Earnings Available to Common (before
Extraordinary Charge from Prepayment of
Debt in 1995)............................. 41,305 34,590 29,490 17,777 11,573
Net Earnings Available to Common............... 41,305 34,590 23,011 17,777 11,573
Per Share Amounts:
Net Earnings (before Extraordinary Charge in
1995)..................................... $ 2.16 $ 2.01 $ 1.83 $ 1.70 $ 1.78
Net Earnings Available to Common, Basic........ 2.16 2.01 1.43 1.70 1.78
Net Earnings Available to Common, Diluted...... 2.16 2.01 1.43 1.70 1.78
Dividends, Preferred(2)........................ 1.16
Dividends, Common(2)........................... 2.58 2.48 2.36 2.20 2.04
Weighted Average Shares Outstanding, Basic..... 19,085 17,196 16,071 10,451 6,513
Weighted Average Shares Outstanding, Diluted... 19,137 17,240 16,081 10,459 6,518
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Cost of Investments....................... $839,827 $643,261 $547,923 $475,961 $231,751
Total Assets.............................. 816,108 634,836 551,188 500,731 243,587
Acquisition Line of Credit................ 58,300 6,000 74,690 20,000 14,500
Long-Term Borrowings...................... 208,966 135,659 120,453 133,602 103,573
Subordinated Convertible Debentures....... 62,485 94,810
Shareholders' Equity...................... 468,221 383,007 347,129 338,543 122,714
</TABLE>
- -------------------------
(1) The Company acquired Health Equity Properties Incorporated on September 30,
1994.
(2) Dividends per share are those declared and paid during such period.
ITEM 7 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information required by this item is incorporated herein by reference
to the caption "Management's Discussion and Analysis" on Pages 8 through 10 of
the Company's Annual Report to Shareholders, included herein as Exhibit 13.
ITEM 8 -- FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is incorporated herein by reference
to the Consolidated Financial Statements included in Pages 11 through 23 of the
Company's Annual Report to Shareholders, included herein as Exhibit 13.
ITEM 9 -- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
10
<PAGE> 12
PART III
ITEM 10 -- DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is contained in Item 1 herein or
incorporated herein by reference to the Company's definitive proxy statement for
the Annual Meeting of Shareholders to be held on May 7, 1998 at 11:00 a.m. EST,
which will be filed on or about April 1, 1998 with the Securities and Exchange
Commission pursuant to Regulation 14A.
ITEM 11 -- EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference
to the Company's definitive proxy statement for the Annual Meeting of
Shareholders to be held on May 7, 1998 at 11:00 a.m. EST, which will be filed on
or about April 1, 1998 with the Securities and Exchange Commission pursuant to
Regulation 14A.
ITEM 12 -- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated herein by reference
to the Company's definitive proxy statement for the Annual Meeting of
Shareholders to be held on May 7, 1998, which will be filed on or about April 1,
1998 with the Securities and Exchange Commission pursuant to Regulation 14A.
ITEM 13 -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by reference
to the Company's definitive proxy statement for the Annual Meeting of
Shareholders to be held on May 7, 1998, which will be filed on or about April 1,
1998 with the Securities and Exchange Commission pursuant to Regulation 14A.
PART IV
ITEM 14 -- EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
(a)(1) Listing of Consolidated Financial Statements -- See Index to
Financial Information on Page F-2 of Exhibit 13 of this report.
(a)(2) Listing of Financial Statement Schedules -- See Index to Financial
Information on Page F-2 of Exhibit 13 of this report.
(a)(3) Listing of Exhibits -- See Index to Exhibits beginning on Page 16 of
this report.
(b) Reports on Form 8-K. The following reports on Form 8-K were filed
during the fourth quarter of 1997:
Form 8-K dated November 10, 1997: Report with the following exhibits:
Bylaws of Omega Healthcare Investors, Inc. as Amended and Restated on
October 15, 1997
Second Amended and Restated Loan Agreement by and among Omega
Healthcare Investors, Inc., the banks signatory hereto and Fleet
Bank, N.A., as agent for such banks, dated September 30, 1997
(c) Exhibits -- See Index to Exhibits beginning on Page 16 of this report.
(d) Financial Statement Schedules -- The following consolidated financial
statement schedules are included herein:
Schedule III Real Estate and Accumulated Depreciation
Schedule IV Mortgage Loan on Real Estate
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable and therefore have been
omitted.
11
<PAGE> 13
SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION
OMEGA HEALTHCARE INVESTORS, INC.
DECEMBER 31, 1997
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E(5) COLUMN F
- ------------------------------- ------------ --------------- ----------------------- ------------------ ---------------
GROSS AMOUNT AT
WHICH CARRIED AT
CLOSE OF PERIOD
INITIAL COST TO ------------------
COMPANY COST CAPITALIZED
--------------- SUBSEQUENT TO
ACQUISITION BUILDINGS
BUILDINGS ----------------------- AND LAND
AND LAND CARRYING IMPROVEMENTS ACCUMULATED
DESCRIPTION(1) ENCUMBRANCES IMPROVEMENTS IMPROVEMENTS COSTS TOTAL DEPRECIATION(6)
-------------- ------------ ------------ ------------ -------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Sun Healthcare Group, Inc.:
Alabama (LTC)................ $ 23,584,956 $ 0 $0 $ 23,584,956 $ 509,221
California (LTC, RH)......... 56,012,510 0 0 56,012,510 335,934
Florida (LTC)................ 10,700,000 0 0 10,700,000 256,692
Florida (LTC)................ 10,796,688 0 0 10,796,688 233,110
Idaho (LTC).................. 600,000 0 0 600,000 14,394
Illinois (LTC)............... 4,900,000 0 0 4,900,000 206,887
Illinois (LTC)............... 3,942,726 0 0 3,942,726 85,127
Indiana (LTC)................ 3,000,000 0 0 3,000,000 126,666
Iowa (LTC)................... 2,700,000 0 0 2,700,000 113,999
Louisiana (LTC).............. 4,602,574 0 0 4,602,574 99,374
Massachusetts (LTC).......... 8,300,000 0 0 8,300,000 199,116
North Carolina (LTC)......... 8,818,000 0 0 8,818,000 910,442
North Carolina (LTC)......... 11,100,131 0 0 11,100,131 1,146,068
North Carolina (LTC)......... 2,327,608 0 0 2,327,608 13,960
Ohio (LTC)................... 10,099,452 0 0 10,099,452 60,571
Tennessee (LTC).............. 7,905,139 0 0 7,905,139 816,191
Texas (LTC).................. 7,100,000 0 0 7,100,000 299,776
Texas (LTC).................. 9,415,056 0 0 9,415,056 203,279
Washington (LTC)............. 5,900,000 0 0 5,900,000 141,540
West Virginia (LTC).......... 17,397,883 0 0 17,397,883 104,343
------------ ---------- -- ------------ -----------
209,202,724 0 0 209,202,724 5,876,690
Advocat, Inc.:
Alabama (LTC)................ 11,638,797 0 0 11,638,797 1,913,325
Arkansas (LTC)............... 37,887,832 0 0 37,887,832 6,228,457
Tennessee (LTC).............. (2) 9,542,121 0 0 9,542,121 1,568,649
Kentucky (LTC)............... (3) 16,149,775 1,816,000 0 17,965,775 1,883,442
Ohio (LTC)................... 5,854,186 0 5,854,186 472,905
West Virginia (LTC).......... 5,283,525 502,338 0 5,785,863 467,386
------------ ---------- ------------ -----------
86,356,236 2,318,338 0 88,674,574 12,534,164
Emerald Healthcare, Inc.:
Illinois (LTC)............... 2,963,578 0 0 2,963,578 436,397
Indiana (LTC)................ 33,782,788 0 0 33,782,788 4,974,645
------------ ---------- ------------ -----------
36,746,366 36,746,366 5,411,042
Unison Healthcare Corp.:
Indiana (LTC)................ 19,760,000 823,839 0 20,583,839 3,101,876
Texas (LTC).................. 13,810,000 138,515 0 13,948,515 1,324,933
------------ ---------- ------------ -----------
33,570,000 962,354 0 34,532,354 4,426,809
Alden Management Services, Inc:
Illinois (LTC)............... 31,000,000 166,475 0 31,166,475 3,334,479
The Graduate Hospital:
Pennsylvania (MOB)........... 30,031,250 0 0 30,031,250 4,557,371
<CAPTION>
COLUMN A COLUMN G COLUMN H COLUMN I
- ------------------------------- ---------- ------------------ -----------------
LIFE ON WHICH
DEPRECIATION
IN LATEST
DATE OF DATE INCOME STATEMENTS
DESCRIPTION(1) RENOVATION ACQUIRED IS COMPUTED
-------------- ---------- -------- -----------------
<S> <C> <C> <C>
Sun Healthcare Group, Inc.: 1940-1995
Alabama (LTC)................ March 31, 1997 33 years
California (LTC, RH)......... October 8, 1997 33 years
Florida (LTC)................ February 28, 1997 33 years
Florida (LTC)................ March 31, 1997 33 years
Idaho (LTC).................. February 28, 1997 33 years
Illinois (LTC)............... August 30, 1996 30 years
Illinois (LTC)............... March 31, 1997 33 years
Indiana (LTC)................ August 30, 1996 30 years
Iowa (LTC)................... August 30, 1996 30 years
Louisiana (LTC).............. March 31, 1997 33 years
Massachusetts (LTC).......... February 28, 1997 33 years
North Carolina (LTC)......... June 30, 1994 39 years
North Carolina (LTC)......... September 30, 1994 29 years
North Carolina (LTC)......... October 8, 1997 33 years
Ohio (LTC)................... October 8, 1997 33 years
Tennessee (LTC).............. September 30, 1994 30 years
Texas (LTC).................. August 30, 1996 30 years
Texas (LTC).................. March 31, 1997 33 years
Washington (LTC)............. March 31, 1997 33 years
West Virginia (LTC).......... October 8, 1997 33 years
Advocat, Inc.: 1948-1995
Alabama (LTC)................ August 14, 1992 31.5 years
Arkansas (LTC)............... August 14, 1992 31.5 years
Tennessee (LTC).............. August 14, 1992 31.5 years
Kentucky (LTC)............... July 1, 1994 33 years
Ohio (LTC)................... July 1, 1994 33 years
West Virginia (LTC).......... July 1, 1994 33 years
Emerald Healthcare, Inc.: 1960-1975
Illinois (LTC)............... April 1, 1996 25 years
Indiana (LTC)................ April 1, 1996 25 years
Unison Healthcare Corp.: 1963-1993
Indiana (LTC)................ December 23, 1992 31.5 years
Texas (LTC).................. December 1, 1993 39 years
Alden Management Services, Inc: 1958-1981
Illinois (LTC)............... September 30, 1994 30 years
The Graduate Hospital: 1929-1984
Pennsylvania (MOB)........... October 28, 1993 27.5 years
</TABLE>
12
<PAGE> 14
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E(5) COLUMN F
- -------------------------------- ------------ --------------- ----------------------- ---------------- ---------------
GROSS AMOUNT AT
WHICH CARRIED AT
CLOSE OF PERIOD
INITIAL COST TO ----------------
COMPANY COST CAPITALIZED
--------------- SUBSEQUENT TO
ACQUISITION BUILDINGS
BUILDINGS ----------------------- AND LAND
AND LAND CARRYING IMPROVEMENTS ACCUMULATED
DESCRIPTION(1) ENCUMBRANCES IMPROVEMENTS IMPROVEMENTS COSTS TOTAL DEPRECIATION(6)
-------------- ------------ ------------ ------------ -------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Res-Care Health Services, Inc.:
Indiana (LTC).................. 20,470,968 0 0 20,470,968 2,293,102
Kentucky (LTC)................. 8,029,032 0 0 8,029,032 899,390
------------ ---------- ------------ -----------
28,500,000 0 0 28,500,000 3,192,492
ExtendaCare, Inc.:
Indiana (LTC).................. 23,553,634 0 0 23,553,634 2,266,746
Five Star Corporation:
Iowa (LTC)..................... 12,993,318 0 0 12,993,318 74,419
Senior Care Properties, Inc.:
Texas (LTC).................... 5,200,000 0 0 5,200,000 441,071
Texas (LTC).................... 6,557,143 0 0 6,557,143 62,922
------------ ---------- -- ------------ -----------
11,757,143 0 0 11,757,143 503,993
Integrated Health Services,
Inc.:
Washington (LTC)............... $ 10,000,000 $ 0 $0 $ 10,000,000 $ 1,070,833
First HealthCare Associates:
Missouri (LTC)................. 9,000,000 0 0 9,000,000 1,158,519
Hunter Management Group Inc.:
Florida (LTC).................. 8,150,000 866 0 8,150,866 779,043
Meadowbrook Healthcare of North
Carolina: (4)
North Carolina (LTC)........... 7,500,000 0 0 7,500,000 788,895
Liberty Assisted Living Centers
LTD
Partnership:
Florida (LTC).................. 5,994,730 760 0 5,995,490 802,712
Miscellaneous Investments:
13,250,000 0 0 13,250,000 1,369,068
------------ ---------- -- ------------ -----------
$557,605,401 $3,448,793 $0 $561,054,194 $48,147,275
============ ========== == ============ ===========
<CAPTION>
COLUMN A COLUMN G COLUMN H COLUMN I
- -------------------------------- ---------- ------------------ -----------------
LIFE ON WHICH
DEPRECIATION
IN LATEST
DATE OF DATE INCOME STATEMENTS
DESCRIPTION(1) RENOVATION ACQUIRED IS COMPUTED
-------------- ---------- -------- -----------------
<S> <C> <C> <C>
Res-Care Health Services, Inc.: 1962-1972
Indiana (LTC).................. September 30, 1994 25-30 years
Kentucky (LTC)................. September 30, 1994 30 years
ExtendaCare, Inc.: 1967-1974
Indiana (LTC).................. January 16, 1996 25 years
Five Star Corporation: 1963-1983
Iowa (LTC)..................... October 7, 1997 33 years
Senior Care Properties, Inc.: 1929-1996
Texas (LTC).................... January 1, 1995 31.5 years
Texas (LTC).................... September 5, 1997 33 years
Integrated Health Services,
Inc.: 1965-1967
Washington (LTC)............... September 1, 1996 20 years
First HealthCare Associates: 1978-1986
Missouri (LTC)................. August 14, 1992 31.5 years
Hunter Management Group Inc.: 1977-1978
Florida (LTC).................. September 13, 1993 39 years
Meadowbrook Healthcare of North
Carolina: 1984-1985
North Carolina (LTC)........... September 30, 1994 31.5 years
Liberty Assisted Living Centers
LTD Partnership: 1989
Florida (LTC).................. September 30, 1994 27 years
Miscellaneous Investments:
1956-1985 Various 20-39 years
</TABLE>
- ------------------
(1) All of the real estate included in this schedule are being used in either
the operation of long-term care facilities (LTC), rehabilitation hospitals
(RH) or medical office buildings (MOB) located in the states indicated.
(2) Certain of the real estate indicated are security for Industrial Development
Revenue Bonds totaling $8,980,000 at December 31, 1997.
(3) Certain of the real estate indicated are security for notes payable totaling
$7,900,628 at December 31, 1997.
(4) Certain of the real estate indicated are security for HUD loans totaling
$5,380,148 at December 31, 1997.
<TABLE>
<CAPTION>
COLUMN E 1995 1996 1997
-------- ---- ---- ----
<S> <C> <C> <C>
(5) Balance at beginning of period.......................... $334,600,764 $357,556,246 $376,177,045
Additions during period:
Acquisitions............................................ 22,747,486 17,700,000 183,229,915
Improvements and other.................................. 207,996 920,799 1,647,234
------------ ------------ ------------
Balance at close of period............................... $357,556,246 $376,177,045 $561,054,194
============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
COLUMN F 1995 1996 1997
-------- ---- ---- ----
<S> <C> <C> <C>
(6) Balance at beginning of period.......................... $ 9,552,587 $20,836,153 $32,884,104
Additions during period:
Provisions for depreciation............................. 11,283,566 12,047,951 15,263,171
----------- ----------- -----------
Balance at close of period............................... $20,836,153 $32,884,104 $48,147,275
=========== =========== ===========
</TABLE>
13
<PAGE> 15
SCHEDULE IV MORTGAGE LOANS ON REAL ESTATE
OMEGA HEALTHCARE INVESTORS, INC.
DECEMBER 31, 1997
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ------------------------------- --------------- ------------------ ------------------------------------------------ --------
FINAL
INTEREST MATURITY PRIOR
DESCRIPTION(1) RATE DATE PERIODIC PAYMENT TERMS LIENS
-------------- -------- -------- ---------------------- -----
<S> <C> <C> <C> <C>
Michigan (13 LTC facilities)... 15.46% August 13, 2007 - Interest payable at 14.46% payable monthly None
- Deferred interest at 1% accrues monthly and is
payable at maturity of the note
- Quarterly amortization of $1,470,000
commencing in the year 2002
Florida (3 LTC facilities)..... 13.10% August 4, 2012 - Interest payable monthly None
- Quarterly amortization of $50,000 commencing
in the year 2002
Florida (4 LTC facilities)..... 11.50% February 28, 2010 - Interest plus $1,700 of principal payable None
monthly
Florida (2 LTC facilities)..... 11.50% June 4, 2006 - Interest plus $1,400 of principal payable None
monthly
Maine (11 LTC facilities)
Massachusetts (1 LTC
facility)..................... 11.81% September 30, 2000 - Interest payable monthly None
- Quarterly payment of $37,500 commencing in
1996
Texas (3 LTC facilities)....... 12.23% December 31, 2005 - Interest payable monthly None
- Annual amortization of $60,000 commencing in
years 1997-1999 and $120,000 commencing in year
2000
Kentucky (3 LTC facilities).... 10.75% July 31, 2011 - Interest payable monthly None
Texas (9 LTC facilities)....... 10.75% Various - Interest plus $84,700 of principal payable None
monthly
Tennessee (2 LTC facilities)... 14.81% April 30, 2001 - Interest payable monthly None
Tennessee (2 LTC facilities)... 13.36% August 1, 2016 - Interest payable monthly None
Ohio (7 LTC facilities)........ 11.00% January 1, 2015 - Interest plus $33,600 of principal payable None
monthly
Other Mortgage Notes:
Various........................ 10.75% to 13.5% 1998 to 2007 - Interest payable monthly None
<CAPTION>
COLUMN A COLUMN F COLUMN G COLUMN H
- ------------------------------- ------------ --------------- ----------------
PRINCIPAL AMOUNT
OF LOANS SUBJECT
FACE CARRYING TO DELINQUENT
AMOUNT OF AMOUNT OF PRINCIPAL OR
DESCRIPTION(1) MORTGAGES MORTGAGES(2)(3) INTEREST
-------------- --------- --------------- ----------------
<S> <C> <C> <C>
Michigan (13 LTC facilities)... $ 58,800,000 $ 58,800,000 None
Florida (3 LTC facilities)..... $ 7,031,250 $ 7,031,250 None
Florida (4 LTC facilities)..... $ 12,891,500 $ 12,863,600 None
Florida (2 LTC facilities)..... $ 11,090,000 $ 11,070,996 None
Maine (11 LTC facilities)
Massachusetts (1 LTC
facility)..................... $ 26,500,000 $ 26,279,402 None
Texas (3 LTC facilities)....... $ 10,200,000 $ 10,200,000 None
Kentucky (3 LTC facilities).... $ 10,250,000 $ 10,250,000 None
Texas (9 LTC facilities)....... $ 10,370,450 $ 9,101,416 None
Tennessee (2 LTC facilities)... $ 8,932,000 $ 8,932,000 None
Tennessee (2 LTC facilities)... $ 9,300,000 $ 9,300,000
Ohio (7 LTC facilities)........ $ 20,031,888 $ 19,141,118 None
Other Mortgage Notes:
Various........................ $ 36,188,898 $ 35,383,225 None
------------ ------------
$221,585,986 $218,353,007
============ ============
</TABLE>
- -------------------------
(1) The mortgage loans included in this schedule represent first mortgages on
facilities used in the delivery of long-term healthcare, such facilities are
located in the states indicated.
(2) The aggregate cost for federal income tax purposes is equal to the carrying
amount.
<TABLE>
<CAPTION>
COLUMN G RECONCILIATION 1995 1996 1997
----------------------- ---- ---- ----
<S> <C> <C> <C> <C>
(3) Balance at beginning of period................... $141,359,387 $158,289,097 $217,474,072
Additions during period -- Placements............ 21,131,000 66,222,620 11,155,491
Deductions during period -- Collection of (850,959) (956,646) (13,365,432)
principal........................................
Conversion to purchase leaseback/other changes... (3,350,331) (6,080,999) 3,088,876
------------ ------------ ------------
Balance at close of period....................... $158,289,097 $217,474,072 $218,353,007
============ ============ ============
</TABLE>
14
<PAGE> 16
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
OMEGA HEALTHCARE INVESTORS, INC.
By: /s/ DAVID A. STOVER
------------------------------------
David A. Stover
Chief Financial Officer
Dated: March 27, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities on the date indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<C> <S> <C>
PRINCIPAL EXECUTIVE OFFICER
/s/ ESSEL W. BAILEY, JR. Chairman, President, Chief March 27, 1998
- ------------------------------------------------ Executive Officer, Secretary and
Essel W. Bailey, Jr. Director
PRINCIPAL FINANCIAL OFFICER and
PRINCIPAL ACCOUNTING OFFICER
/s/ DAVID A. STOVER Vice President, Chief Financial March 27, 1998
- ------------------------------------------------ Officer and Chief Accounting
David A. Stover Officer
DIRECTORS
Director March , 1998
- ------------------------------------------------
Martha A. Darling
/s/ JAMES A. EDEN Director March 27, 1998
- ------------------------------------------------
James A. Eden
/s/ THOMAS F. FRANKE Director March 27, 1998
- ------------------------------------------------
Thomas F. Franke
/s/ HAROLD J. KLOOSTERMAN Director March 27, 1998
- ------------------------------------------------
Harold J. Kloosterman
/s/ BERNARD J. KORMAN Director March 27, 1998
- ------------------------------------------------
Bernard J. Korman
/s/ EDWARD LOWENTHAL Director March 27, 1998
- ------------------------------------------------
Edward Lowenthal
/s/ ROBERT L. PARKER Director March 27, 1998
- ------------------------------------------------
Robert L. Parker
</TABLE>
15
<PAGE> 17
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGES
- ------- ----------- ------------
<C> <S> <C>
3.1 Articles of Incorporation, as amended (Incorporated by
reference to the Registrant's Form 10-Q for the quarter
ended March 31, 1995).......................................
3.2 Amended and Restated Bylaws, as amended October 15, 1997
(Incorporated by reference to Exhibit 3 to the Registrant's
Form 8-K dated November 10, 1997)...........................
4.1 Form of Convertible Debenture (Incorporated by reference to
Exhibit 4.2 to the Company's Form S-3 dated February 3,
1997).......................................................
4.2 Form of Indenture (Incorporated by reference to Exhibit 4.2
to the Company's Form S-3 dated February 3, 1997)...........
4.3 Indenture dated December 27, 1993 (Incorporated by reference
to Exhibit 4.2 to the Company's Form S-3 dated December 29,
1993).......................................................
4.4 First Supplemental Indenture dated January 23, 1996
(Incorporated by reference to Exhibit 4 to the Company's
Form 8-K dated January 19, 1996)............................
4.5 1993 Stock Option and Restricted Stock Plan, as amended
(Incorporated by reference to Exhibit 10.11 to the Company's
Form 10-Q for the quarterly period ended March 31, 1995)....
4.6 Form of Articles Supplementary for Series A Preferred Stock
(Incorporated by reference to Exhibit 4.1 of the Company's
Form 10-Q for the quarterly period ended March 31, 1997)....
4.7 Form of Series A Preferred Stock Certificate (Incorporated
by reference to Exhibit 4.2 of the Company's Form 10-Q for
the quarterly period ended March 31, 1997)..................
10.1 1993 Retirement Plan for Directors, effective March 2, 1993
to (Incorporated by reference Exhibit 10.15 to the Company's
Form 10-K ended for the year December 31, 1992).............
10.2 1993 Deferred Compensation Plan, effective March 2, 1993
(Incorporated by reference to Exhibit 10.16 to the Company's
Form 10-K for the year ended December 31, 1992).............
10.3 Form of Note Exchange Agreement -- 10% Senior Notes due July
15, 2000 (Incorporated by reference to Exhibit 10.1 to the
Company's Form 10-Q for the quarterly period ended September
30, 1995)...................................................
10.4 Form of Note Exchange Agreement -- 7.4% Senior Notes due
July 15, 2000 (Incorporated by reference to Exhibit 10.2 to
the Company's Form 10-Q for the quarterly period ended
September 30, 1995).........................................
10.5 Form of Note Purchase Agreement -- 7.4% Senior Notes due
July 15, 2000 (Incorporated by reference to Exhibit 10.25 to
the Company's Form 10-K for the year ended December 31,
1995).......................................................
10.6 Second Amended and Restated Loan Agreement by and among
Omega Healthcare Investors, Inc., the banks signatory hereto
and Fleet Bank, N.A., as agent for such banks, dated
September 30, 1997 (Incorporated by reference to Exhibit 10
to the Company's Form 8-K dated November 10, 1997)..........
10.7 Purchase Agreement and Agreement of Lease between Delta
Investors I, LLC, Delta Investors II, LLC and subsidiaries
of Regency Health Services, Inc. dated October 7, 1997*.....
11 Statement re: computation of per share earnings*............
12 Ratio of Earnings to Combined Fixed Charges and Preferred
Stock Dividends*............................................
13 Excerpts from Omega Healthcare Investors, Inc. Annual Report
to Shareholders for the period ended December 31, 1997, to
the extent referred to in Part II of this Form 10-K*........
</TABLE>
16
<PAGE> 18
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGES
- ------- ----------- ------------
<C> <S> <C>
21 Subsidiaries of the Registrant*.............................
23 Consent of Independent Auditors*............................
27 Financial Data Schedule*....................................
</TABLE>
- -------------------------
* Exhibits which are filed herewith on the indicated sequentially numbered page.
17
<PAGE> 1
EXHIBIT 10.7
PURCHASE AGREEMENT
AND
AGREEMENT OF LEASE
BETWEEN
DELTA INVESTORS I, LLC,
DELTA INVESTORS II, LLC
AND
SUBSIDIARIES OF REGENCY HEALTH SERVICES, INC.
As of OCTOBER 7, 1997
<PAGE> 2
PURCHASE AGREEMENT AND AGREEMENT OF LEASE
This Purchase Agreement and Agreement of Lease ("Agreement") is entered
into as of October 7, 1997 by and between DELTA INVESTORS I, LLC, a Maryland
limited liability company ("Delta I"), DELTA INVESTORS II, LLC, a Maryland
limited liability company ("Delta II") (the "Purchasers") and each of the
entities identified, and whose capacity as a "Seller" or "Lessee" or both a
"Seller" and a "Lessee" is set forth, on the signature page hereto.
RECITALS
A. Capitalized terms used but not otherwise defined herein have the
respective meanings given them in Article I, below.
B. Sellers are corporations that are wholly owned by Regency Health
Services, Inc. ("Regency").
C. Each Seller is the owner or lessee of certain Real Property,
Personal Property and Related Rights (collectively, as to each Seller, the
"Seller's Assets") which it has agreed to sell either to Delta I or Delta II and
which either Delta I and Delta II has agreed to simultaneously lease back to
such Seller or an Affiliate thereof pursuant to a Facility Lease. The Seller's
Assets to be purchased and leased back by Delta I are listed on Exhibit A-1
attached hereto; the Seller's Assets to be purchased and leased back by Delta II
are listed on Exhibit A-2 attached hereto.
B. Immediately after the consummation of the transactions hereinafter
set forth, Sun Healthcare Group, Inc. ("Sun") will be acquiring all of the
issued and outstanding stock of Regency, and as a condition precedent to Delta I
and Delta II entering into this transaction, Sun has agreed to
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<PAGE> 3
guaranty the obligations and undertakings of the Sellers herein and in the other
Transaction Documents and the payment of all amounts due and the performance of
all obligations of the Sellers and Affiliates of Sellers under the Facility
Leases to which they are parties.
C. As a condition precedent to the obligations of the Sellers and Sun
hereunder and in the other Transaction Documents, Omega Healthcare Investors,
Inc. ("Omega"), as the sole Member of Delta I and Delta II, has agreed to
guaranty the obligations of Delta I and Delta II hereunder and in the other
Transaction Documents to which Delta I or Delta II is a party and will execute
this Agreement for the purpose of setting forth such guaranty.
D. The parties hereto desire to create a definitive Purchase Agreement,
reducing to writing the terms which have been the subject of the negotiations
among them.
NOW THEREFORE, for good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
ARTICLE I
DEFINITIONS
As used in this Agreement, the following capitalized terms have the
respective meaning set forth after them.
Appraisal - An MAI appraisal obtained by Delta I or Delta II.
Assignment - A form of assignment of leasehold interest meeting the
requirements of Section 2.8.
Bill of Sale - A Bill of Sale in the form described in Section 2.5
Closing - The consummation of the transactions contemplated by this
Agreement.
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<PAGE> 4
Closing Date - October 7, 1997, or such other time and date as shall be
agreed upon by the parties for the acquisition and leasing of a Seller's Assets
pursuant to this Agreement.
Contamination - The presence, release or threatened release in
violation of any Environmental Law of any Hazardous Substance , including but
not limited to the existence of any injury or potential injury to public health,
safety, natural resources or the environment associated therewith, or any other
environmental condition at, in, about, under or migrating from or to the Real
Property.
Deed - A deed meeting the requirements of Section 2.8.
Environmental Assessment - A Phase I Environmental Report with respect
to the Real Property included in a Seller's Assets.
Environmental Law - All federal, state and local laws (including,
without limitation, common law), statutes, codes, ordinances, regulations,
rules, orders, permits or decrees relating to the introduction, emission,
discharge or release of Hazardous Substances into the indoor or outdoor
environment (including without limitation air, surface, water, groundwater, land
or soil) or otherwise related to the manufacture, processing, distribution, use,
treatment, storage, transportation or disposal of Hazardous Substances, or to
the investigation, removal, restoration, remediation and/or elimination of, or
other response to, Contamination.
Escrow Agent - Chicago Title Insurance Company.
Escrow Instructions - Written Escrow Instructions to the Escrow Agent
from the Purchasers and the Sellers in the form of Exhibit "B" attached hereto.
Facility - The licensed nursing home or other health care facility
being operated on Real Property covered by this Purchase Agreement, including
such Real Property and associated Personal Property and Related Rights.
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<PAGE> 5
Facility Lease - A lease of Real Property, Personal Property and
Related Rights, substantially in the designated form for the Facility that is
attached hereto as one of Exhibits "C-1" through "C- 4".
Financial Statement - For a fiscal year or other accounting period, a
statement of earnings and retained earnings and of changes in financial position
and profits and loss for such period and for the period from the beginning of
the respective fiscal year to the end of such period and the related balance
sheet as at the end of such period, together with the notes thereto, all in
reasonable detail and setting forth in comparative form the corresponding
figures for the corresponding period in the preceding fiscal year, and prepared
in accordance with GAAP and reported on by a "Big Six" accounting firm or other
qualified certified public accounting firm acceptable to Omega.
GAAP - Generally accepted accounting principles.
Government Authorizations - As defined in Section 3.17(ii).
Guarantor - Sun.
Guaranty - The Amended and Restated Guaranty, dated as of October 7,
1997, between Sun and Omega.
Hazardous Substances - Any and all dangerous, toxic or hazardous
material, substance, pollutant, contaminant, chemical, or waste (including
medical waste), including petroleum products, asbestos and PCBs, defined, listed
or described as such under any Environmental Law.
Lessee - A party identified as a lessee on the signature page hereof.
Letter of Credit Agreement - The Amended and Restated Letter of Credit
Agreement dated as of October 7, 1997 between Omega and Sun.
Permitted Encumbrances - With respect to the Seller's Assets owned by a
Seller, the title exceptions and other matters set forth under its name on
attached Exhibit "D".
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<PAGE> 6
Permitted Exceptions - With respect to the Seller's Assets owned by a
Seller, the liens and encumbrances, including equipment leases, affecting the
Personal Property as of the Closing Date, listed by Facility on attached Exhibit
"E".
Personal Property - All personal property, including without
limitation, furniture, equipment, rugs, carpeting, drapes and linens, owned or
leased by a Seller and located in and upon such Seller's Real Property, or used
in connection with the operation of such Seller's Facility, and the Certificate
of Need with respect to such Facility, if and to the extent in existence as of
the date hereof and transferable by such Seller.
Purchaser - Delta I, with respect to each Facility listed on Exhibit
A-1, and Delta II, with respect to each Facility listed on Exhibit A-2.
Real Property - All of a Seller's right, title and interest in and to
the real property owned by it, the legal description of which is set forth under
its name in the applicable Exhibit "A1" or "A2" attached hereto, including the
buildings, structures, landscaping, paving, fencing, Fixtures (as defined in the
Standard Terms and Conditions) and Improvements (as defined in the Standard
Terms and Conditions) thereon.
Related Rights - As defined in the Standard Terms and Conditions.
Security Agreements - The two Security Agreements between the
Purchasers, as secured parties, and the Lessees, as debtors, granting security
interests in any and all Personal Property of such Lessees that for any reason
was not leased to Lessees on the Closing Date, or thereafter during the term of
the Facility Leases is acquired by such Lessees but is not Lessor's Personal
Property (as defined in the Standard Terms and Conditions), as herein required.
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<PAGE> 7
Seller's Assets - The Real Property, Personal Property and Related
Rights owned or being leased by a Seller .
Standard Terms and Conditions: The Standard Terms and Conditions
attached hereto as Exhibit "F", which are to be incorporated in each Facility
Lease by reference.
State - the State in which a Seller's Assets are located. Surrounding
Area - The area within a one half mile radius of a Facility. Survey -
A current Real Property survey meeting the requirements of
Section 3.16 and delivered in connection with the issuance of the
Title Policy. Title Commitment - The commitment of the Title Company
to issue the Title Policy. Title Company - Chicago Title Insurance
Company. Title Policy - The standard form of ALTA extended coverage
owner's (or, with respect to the assignment of a leasehold interest,
lessee's) policy of
title insurance in use on the Closing Date in the State in which a
Facility is located, with the survey and other standard exceptions deleted,
subject only to Permitted Encumbrances, and with such endorsements as may be
required by Delta I or Delta II if and to the extent available in the State.
Transaction Documents - This Agreement, each Facility Lease, each
Security Agreement, the Guaranty, the Letter of Credit Agreement, each Bill of
Sale, each Deed, and each and every other document, instrument, certificate and
financing statement required by the foregoing documents.
-6-
<PAGE> 8
ARTICLE II
TERMS OF THE SALE AND LEASE
Section 2. 1. Agreement to Sell and Acquire. On the Closing Date, each
Seller listed on Exhibit A-1 shall sell, warrant and convey the Seller's Assets
owned by it to Delta I and Delta I shall purchase the same from each such
Seller, and each Seller listed on Exhibit A-2 shall sell, warrant and convey the
Seller's Assets owned by it to Delta II and Delta II shall purchase the same
from each such Seller, provided, however, that if a Seller's Assets consist of
or include a leasehold interest therein such leasehold interest shall be
assigned to the applicable Purchaser as hereinafter provided.
Section 2.2. Purchase Price. The Purchasers will purchase all of the
Sellers Assets for a total purchase price of Ninety Million Three Hundred Twenty
Two Thousand Dollars ($90,322,000.00) (the "Purchase Price"), which shall be
allocated among the Sellers and Purchasers as set forth on Exhibit "G" attached
hereto. The Purchase Price, adjusted as set forth in this Agreement, shall be
paid in immediately available funds (wire transfer or other form acceptable to
Omega) at the Closing.
Section 2.3. Escrow. The Closing of the transactions contemplated by
this Agreement and the Transaction Documents shall occur through an escrow with
the Escrow Agent. Each Purchaser and Seller shall execute and deliver this
Agreement and the other Transaction Documents to which it is a party into escrow
with the Escrow Agent, along with the Escrow Instructions. The Purchase Price
shall be deposited by the Purchasers into escrow with the Escrow Agent in
immediately available funds for disbursement in accordance with the Escrow
Instructions. The Closing shall be deemed completed when the Escrow Agent
disburses the entire Purchase Price (excluding any agreed-upon holdbacks)
pursuant to the Escrow Instructions and this Agreement.
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<PAGE> 9
Section 2.4. Adjoining Streets. The conveyance to Omega of the Real
Property shall include all right, title and interest, if any, of the Seller
thereof in and to any land lying in the bed of any street opened or proposed in
front of or adjoining the Real Property owned by such Seller to the centerline
thereof, and the Seller thereof shall execute or obtain and deliver to Omega, on
the Closing Date or thereafter, on demand, all proper instruments for the
conveyance of such title.
Section 2.5. Bill of Sale. Each Seller shall convey to Omega the
Personal Property owned by it pursuant to a Bill of Sale, which shall be in the
form attached hereto as Exhibit "H", free and clear of any and all encumbrances
of any nature whatsoever (except the Permitted Exceptions), and shall include an
assignment of all of the right, title and interest of the Seller thereof, if
any, in all warranties, guarantees and sureties relating to the Real Property or
Personal Property as may be provided in the Bill of Sale.
Section 2.6. Permitted Encumbrances. Each Seller shall convey the Real
Property or assign the leasehold interest owned by it to the Purchaser thereof
subject only to the Permitted Encumbrances applicable to such Real Property.
Section 2.7. No Violations. Each Seller shall convey its Seller's
Assets, or assign its leasehold interest, to the Purchaser thereof free of all
known material violations of applicable law or municipal ordinances or of any
material rule or regulation of any federal, state or local government agency or
authority having jurisdiction over such Seller's Assets or use thereof for the
business presently conducted by the Seller thereof, except as disclosed in
Exhibit "I" attached hereto.
Section 2.8. Deed; Assignment. Each Seller holding a fee interest in
Real Property shall convey to the Purchaser thereof good marketable title in fee
simple by a deed in a conventional form used in the State in which such Real
Property is located, and each Seller whose interest in Real Property is a
leasehold shall assign all its right, title and interest in such Real
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<PAGE> 10
Property to the Purchaser thereof, in each case subject only to
Permitted Encumbrances, and each such instrument shall be duly executed and
acknowledged and delivered to the applicable Purchaser in recordable form.
Section 2.9. No Prorations. Each Seller shall be obligated for all Real
Property and Personal Property taxes, assessments, water charges, sewer rents,
utilities or for premiums on existing insurance policies or any other items
relating to its Seller's Assets; it being understood by the parties that each
Seller is responsible for such expenses prior to Closing, and after Closing each
Lessee shall be obligated to pay the same under the terms of the Facility Lease
applicable to such Seller's Assets.
Section 2.10. Expenses. All costs and expenses of conveying all of the
Seller's Assets covered by this Agreement to the Purchasers as contemplated by
this Agreement and the Transaction Documents, including without limitation the
following costs and expenses, shall be paid for by the Sellers thereof:
(i) all taxes, including, without limitation, any transfer taxes,
documentary stamp taxes, and sales and similar taxes, applicable to the sale of
any or all of the Seller's Assets to the Purchasers and the simultaneous
lease-back thereof by the Purchasers to the Lessees, together with interest and
penalties, if any, thereon;
(ii) all recording costs, fees and charges and all escrow fees; (iii) all
legal and accounting fees and disbursements for or to the attorneys and
accountants for Sellers;
(iv) all costs relating to the Title Commitments and Title Policies;
(v) all costs relating to the Surveys;
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<PAGE> 11
(vi) all costs relating to the Appraisals;
(vii) all costs relating to the Environmental Assessments and to any
remediation required thereby;
(viii) all legal fees of legal counsel to the Purchasers and
reasonable disbursements for costs incurred by such counsel;
(ix) the Purchasers' physical inspection costs, including travel
and out-of-pocket expenses and a site inspection fee, not to
exceed $1,000.00 in the aggregate, per Facility;
(x) any prepayment premium, fees or charges, recording fees or
charges, legal fees, reconveyance or release fees or charges,
and other costs associated with the
discharge and payment of any debt against the Seller's Assets, other
than any such debt incurred by the Purchasers; and
(xi) Omega's commitment fee of Six Hundred Sixty Three Thousand One
Hundred Eighty Dollars ($663,180), the receipt of Fifty Thousand
Dollars ($50,000.00) of which is acknowledged by Omega.
Section 2.11. Facility Lease and Transaction Documents. At the Closing,
(a) each Lessee shall enter into a Facility Lease of the Seller's Assets which
are to be leased by such Lessee with the Purchaser thereof and (b) the
Purchasers, Sellers and Lessees shall execute the other Transaction Documents to
which they are parties.
Section 2.12. Guaranty. At the Closing, Sun shall execute and deliver
the Guaranty.
Section 2.13.No Severance; Default. It is a condition precedent to any
liability of any Seller, Lessee or Purchaser under this Agreement that Sun,
Omega, each Seller, each Lessee and
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<PAGE> 12
each Purchaser execute the Transaction Documents to which they
are a party. A material default by any Seller or Lessee hereunder shall
constitute a material default hereunder by all Sellers and Lessees and a
material default hereunder by one Purchaser shall constitute a material default
hereunder by both Purchasers. In the event of a material default by any party,
the non-defaulting party shall have the right, but shall not be required, to
terminate this Agreement (which shall have the effect of terminating all
Transaction Documents) and seek against the defaulting party or any guarantor of
its obligations hereunder such remedies as may be provided by this Agreement and
the Transaction Documents. If the non-defaulting party does not terminate this
Agreement, it shall continue in full force and effect.
Section 2.14. Other Documents. Sellers, Lessees and Purchasers agree
that they will execute and deliver all other documents, and take all actions, as
any party may reasonably request in order to effectuate the purpose and carry
out the terms of this Agreement and the Transaction Documents.
ARTICLE III
CONDITIONS TO THE OBLIGATIONS OF THE PURCHASERS
The obligations of the Purchasers are subject to the following
conditions. If any condition is not fulfilled or waived on the Closing Date to
the satisfaction of the Purchasers, the Purchasers will, at their option, but
without waiving any rights, be relieved of all obligations under this Agreement
and the other Transaction Documents.
Section 3.1. Compliance. Sellers and Lessees must comply in all
material respects with all provisions of this Agreement and the other
Transaction Documents.
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<PAGE> 13
Section 3.2. Conveyance. Each Seller shall convey to the Purchaser
thereof good and marketable fee simple title to, or shall assign to the
Purchaser thereof its leasehold interest in, the Real Property and Related
Rights owned by it, free and clear of all liens and encumbrances except the
Permitted Encumbrances.
Section 3.3. Documents. This Agreement, together with the applicable
Deed, Assignment, Bill of Sale, Facility Lease, other Transaction Documents, and
all other documents to be executed by a Seller or a Lessee must be duly
authorized, validly executed and delivered by all such Sellers and Lessees.
Section 3.4. Recordation. Sellers must have (a) made arrangements for
the Assignments, Deeds and Short Form Memoranda of Facility Lease to be duly
recorded or filed for recordation in the manner required by the laws of the
States in which the Facilities are located, and (b) paid, or arranged to be
paid, all costs and fees to be paid by Sellers pursuant to this Agreement, and
such arrangements must be satisfactory to the Purchasers and their counsel.
Section 3.5. Title Commitment. A "Pro-Forma" Title Policy with respect
to each Facility, issued by the Title Company, must be delivered to the
Purchaser thereof, dated as of the Closing Date, in current form. The Pro-Forma
Title Policy shall provide that the Title Policy, when issued, shall:
(a) insure, as part of the Real Property, any easements required for
ingress and egress or otherwise required for operation of the Real Property;
(b) not take exception to parties in possession except patients
receiving health care services pursuant to written admission agreements;
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<PAGE> 14
(c) be in the amount requested by Purchasers, provided the aggregate
amount of all Title Policies does not exceed the Purchase Price; and
(d) include such endorsements as the Purchaser of the Facility shall
reasonably require and are available in the State.
The Pro-Forma Title Policy shall be accompanied by copies of all
documents affecting the Real Property as disclosed thereby. Title to (or, as the
case may be, the Purchaser's leasehold interest in) to the Real Property shall
be insured subject only to the Permitted Encumbrances. On or prior to the
Closing Date, Sellers shall remove any encumbrances other than Permitted
Encumbrances.
Section 3.6. Facility Lease. Each Lessee must have delivered to the
Escrow Agent a duly executed Facility Lease and Short Form Memorandum of Lease
(together with the other documents or instruments required under the Facility
Lease).
Section 3.7. Insurance. Certificates of insurance must be delivered to
the applicable Purchaser fulfilling the insurance requirements set forth in the
Facility Lease.
Section 3.8. Improvements. Each Lessee must accept the Real Property
leased to it for all purposes under the Facility Lease, and there must be no
material damage to the buildings and improvements thereon. No condemnation or
eminent domain proceedings may be pending with respect to the Real Property.
Section 3.9. Representations. The representations and warranties made
by the Sellers in this Agreement and in the other Transaction Documents to which
any Seller or Lessee is a party and in any certificates delivered by any Seller
must be true and correct in all material aspects on and as of the Closing Date
as if they had been made on the Closing Date.
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<PAGE> 15
Section 3.10. Authority. All corporate proceedings of Sellers and
Lessees in connection with the transactions contemplated herein and all
documents and certificates incident thereto must be satisfactory in form and
substance to Purchasers and their counsel. Purchasers must have received such
other documents and certificates incident to the transaction as Purchasers or
their counsel may reasonably request.
Section 3.11. Opinion. An opinion of counsel for Sellers and Lessees
must be delivered to Purchasers dated as of the Closing Date in the form
attached hereto as Exhibit "J".
Section 3.12. Health Care Law Opinion. Intentionally omitted.
Section 3.13. Financial Statements. Purchasers must have received
Financial Statements reasonably satisfactory to Purchasers.
Section 3.14. Bill of Sale. Each Seller must deliver a Bill of Sale to
the Purchaser of such Seller's Assets, together with any other documents
reasonably required to perfect such Purchaser's ownership interest in the
Personal Property. The Personal Property shall be free and clear of all liens
and encumbrances, other than the Permitted Exceptions. Purchasers shall obtain,
at Sellers' expense, UCC searches in each State and in each county where a
Facility is located and in the state in which each Seller has its principal
place of business, verifying that the Personal Property is free and clear of all
liens and encumbrances other than Permitted Exceptions.
Section 3.15. Financing Statements. Financing Statements executed
pursuant to the provisions of the Security Agreements must be duly filed in each
governmental office in which filing is necessary to perfect the security
interests granted to the Purchasers pursuant to the Security Agreements and with
the New Mexico Secretary of State.
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<PAGE> 16
Section 3.16. Survey. Sellers shall deliver to Purchasers final,
"as-built," surveys of all of the Real Property, showing the Real Property in
reasonable detail, with all encroachments, setbacks, utilities, and easements
shown, including a Surveyor's Certificate in favor of the applicable Purchaser
and the Title Company dated after the date hereof and in form acceptable to
Purchasers. If the legal description of any of the Real Property on the Survey
differs from the legal description contained in the applicable Exhibit hereto,
the legal description set forth on the Survey (subject to the applicable
Purchaser's review and approval) will be used on all Transaction Documents.
Section 3.17. Verification. Each Seller must deliver to the Purchaser
of such Seller's Facility evidence, satisfactory to such Purchaser in its sole
discretion, verifying with respect to such Facility that:
(i) All certificates of need, licenses, permits, franchises, approvals
and provider agreements to (a) lawfully operate all beds contained in
the Facility as they are currently being operated; (b) provide the
services offered at the Facility; and (c) receive payment under the
Medicare and respective State Medicaid programs and for the continued
operation of the Facility as it is currently being operated
("Government Authorizations") have been obtained and are and will
continue to be in full force and effect at Closing;
(ii) There are no outstanding violations of any law, code, rule,
regulation, writ, injunction, decree, certificate, agreement, condition
for participation or standard (or their separate and respective terms
and conditions) affecting the Seller's Assets or the current operations
thereof, or, if any such violations exist, that there is a detailed
explanation of each such violation, together with a Plan of Correction
approved by the body alleging such violation, which Plan of Correction
shall be subject to the applicable Seller's reasonable
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<PAGE> 17
satisfaction and approval, such verification to be provided by
delivering to the applicable Seller copies of the most recent licensure
survey and Plan of Correction.
(iii) That the current zoning of the Real Property allows for use of
the Facility as currently operated, which evidence may include a zoning
endorsement to the Title Policy for such Facility; and
(iv) That with respect to such Facility, all utilities enter the Real
Property from public rights-of-way or from uninterrupted private
utility company easements.
Section 3.18. Environmental. Environmental Assessments, prepared by
environmental consultants acceptable to Purchasers, must be received by
Purchasers stating, with respect to all of the Real Property, that there is no
Contamination and that all of the Real Property is in strict compliance with
Environmental Laws or Purchasers and Lessees have agreed upon such corrective
action as will be taken after Closing with respect to any non-compliance with
such environmental laws.
Section 3.19. Engineer's Reports. Written reports as to the physical
condition of all of the Improvements, in form acceptable to Purchasers and
prepared by structural engineers satisfactory to Purchasers, must be received by
Purchasers or Purchasers and Lessees have agreed upon such corrective action as
will be taken after Closing with respect to any structural problems identified
in such reports.
Section 3.20. Assumed Names. Each Seller must have furnished to the
Purchaser of its Facility a list of all assumed or fictitious names under which,
to such Seller's knowledge, the Facility owned by it has been operated during
the twelve (12) months prior to the date on which the parties enter into this
Agreement.
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<PAGE> 18
Section 3.21 Other Leases. The following leases:
Lease dated February 28, 1997 between Omega and Mediplex
Management of Palm Beach County, Inc.(Sun Health
of the Palm Beaches)
Lease dated February 28, 1997 between Omega and Mediplex
of Massachusetts, Inc. (Milford Meadows)
Lease dated February 28, 1997 between Omega and Sunrise
Healthcare Corporation (Holly Hills)
Lease dated March 25, 1997 between Omega and Sunrise
Healthcare Corporation (Laurelwood)
must be amended by the parties thereto to (a) increase the First Extension Term
and Second Extension Term (as defined therein) from ten (10) to fourteen (14)
years; (b) Change the definition of the term "Related Leases" to include all of
the leases listed above on Exhibit A-1 hereto, and (c) add the following
definition: "Transaction Documents: As defined in the Purchase Agreement." In
addition, the Laurelwood lease must be amended to change the Expiration Date to
February 28, 2011.
ARTICLE IV
REPRESENTATIONS, WARRANTIES AND COVENANTS OF
SELLERS AND LESSEES
To induce Purchasers to enter into this Agreement and the other
Transaction Documents, to purchase the Seller's Assets from Sellers and to lease
the Seller's Assets as provided herein, each Seller represents, warrants and
covenants to Omega as of the date hereof, and as of the Closing Date, as follows
with respect to itself and to the Facility or Facilities owned by it and being
conveyed to a Purchaser in accordance with the terms hereof:
Section 4.1. Organization. Seller is a corporation duly organized,
validly existing and in good standing under the laws of the State set opposite
its name on the signature page of this
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<PAGE> 19
Agreement, and properly qualified to do business and in good standing in the
State in which the Facility or Facilities it owns is or are located.
Section 4.2. Financial Statements. To Seller's knowledge, no material
adverse change has occurred in the operation, physical condition, licensing, or
financial results of the Facility or Facilities owned by it following any
statements or reports delivered to Purchasers pertaining thereto. The Financial
Statements for the Seller and Facility are true and correct copies of the
Facility Financial Statements furnished to Purchasers by Seller. The Financial
Statements prepared by Seller and its Affiliates:
(a) are in all material respects prepared in accordance with the books
and records of the applicable entities and any consolidated subsidiaries;
(b) are in all material respects true and complete statements of the
financial conditions and results of operations of the applicable entities and
any consolidated subsidiaries as, at and for the periods therein specified, all
prepared in accordance with GAAP applied on a basis consistent with the
financial statements of prior years;
(c) contain and reflect all material adjustments so as to present a
fair and accurate statement of the results of operations and financial
conditions for the periods covered by said Financial Statements on the basis of
the applicable methods of accounting; and (d) contain and reflect reserves, if
any, for contingent and known liabilities and for all reasonably anticipated
losses and costs in excess of the expected receipts.
Section 4.3. Facility. The Facility or Facilities owned or leased by
the Seller is or are (or shall be as of the Closing) duly licensed. Except as
disclosed on Exhibit "K" attached hereto and made a part hereof, each such
Facility is fully-equipped with all necessary equipment, properly
-18-
<PAGE> 20
licensed, and in compliance with all applicable laws, ordinances, rules and
regulations, operating as a Medicare and Medicaid provider under a valid
Provider Agreement therefor.
Section 4.4. Improvements. To Seller's knowledge and except as
disclosed in the Survey, the Environmental Assessment and the reports described
in Section 3.19:
(a) The buildings and improvements on the Real Property owned by the
Seller have been constructed in substantial compliance with the requirements of
all material laws, ordinances, rules, regulations and restrictions of record
applicable thereto, except as disclosed on Exhibit "L" attached hereto, and
except as disclosed to the Title Company all bills for labor and materials in
connection with the construction thereof have been paid in full or provided for;
(b) All public utilities, including, but not limited to, water, sewer,
gas and electricity, to the extent necessary for the operation of the Facility
or Facilities owned by the Seller, have been connected to the Facility or
Facilities and are adequate for the intended use of the Facility or Facilities;
(c) Means of ingress and egress, streets, parking and drainage
facilities are available to service the Facility or Facilities owned by the
Seller and will be adequate for the continuation of the current use of such
Facility or Facilities;
(d) All permits, licenses, conditional use permits and other
certificates (including, if issued in the applicable jurisdiction, permanent,
unconditional certificates of occupancy) and certificates of need or any other
governmental approvals or authorizations, which are necessary to permit the use
of the Facility or Facilities owned by the Seller in accordance with the
provisions of this Agreement and the other Transaction Documents and the
Facility Lease or Leases, have been obtained and are in full force and effect,
and Seller has not received any notice of any default
-19-
<PAGE> 21
under any such permits and licenses, other than deficiencies, if any, cited in
the most recent State surveys of the Facility or Facilities, complete and
correct copies of which have been provided to Purchasers, as to each of which
deficiencies a Plan of Correction approved by the applicable Purchaser has been
submitted and accepted by the State. There are no unresolved citations which
have been issued to Seller by any local public health, Medicare or Medicaid
agencies (except for any citations that may have been issued in the ordinary
course and are being duly appealed and would not have a material adverse effect
on the Purchaser if such appeal were determined in a manner adverse to the
Seller or Lessee thereof), and except as disclosed to Purchasers there are no
temporary or permanent waivers which have been issued to Seller as to any
condition or fact respecting the Facility or Facilities under the laws or
regulations of the foregoing;
(e) Except as disclosed on Exhibit "M" attached hereto, under
applicable zoning and use laws, ordinances, rules and regulations, the current
use of the Facility owned by the Seller may be continued;
(f) No event has occurred and no condition exists which would ripen
into an Event of Default under a Facility Lease with respect to the Facility or
Facilities owned by the Seller either with or without notice or lapse of time,
or both.
Section 4.5. No Proceedings. No actions, suits, claims or proceedings
have been instituted or threatened against or affecting Seller at law or in
equity or before any federal, state or municipal governmental department or
agency or instrumentality thereof, which action, suit, claim or proceeding, if
decided adversely to Seller, would have a material adverse affect on the
operation of its business or its financial condition. All litigation pending
against Seller with respect to the Facility is described in detail in Exhibit
"N".
-20-
<PAGE> 22
Section 4.6. Personal Property. As of the Closing Date, upon delivery
of the Bill of Sale, the Purchaser thereof will be the owner of the Personal
Property free and clear of all liens, encumbrances, pledges or leases, other
than the Permitted Exceptions.
Section 4.7. No Defects. Except as disclosed in the engineer's report
under Section 3.19 and in the Environmental Assessment, 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 the Facility or
Facilities owned by it which would materially impair the continuation of the
current use of such Facility or Facilities or the value of such Facility or
Facilities, and the same are in good working order and condition. Except as
disclosed in the engineer's report under Section 3.19 and in the Environmental
Assessment, Seller has no knowledge of any latent or patent material defect or
deficiency with regard to the plumbing, electrical, mechanical or other systems
of the Facility or Facilities owned by it which would materially impair the
continuation of the current use of such Facility or the value of such Facility,
and (except as shown on Exhibit "O") the same are in good working order. Each
Seller shall inform the Purchaser of its Facility or Facilities of any latent or
patent defect in the structures, roofs, soils, furniture, fixtures or equipment,
or the plumbing, electrical, mechanical or other systems, of such Facility or
Facilities which comes to such Seller's attention between the execution of this
Agreement and the Closing Date.
Section 4.9. No Encroachments. To Seller's knowledge, there exist no
encroachments onto the Real Property owned by it or by the Real Property owned
by it onto any adjoining property, other than as reflected in the Survey with
respect to such Real Property and approved by the Purchaser thereof.
-21-
<PAGE> 23
Section 4.10. No Condemnation. Seller knows of no pending, contemplated
or threatened condemnation of the Real Property or Related Rights owned by it or
any part thereof.
Section 4.11. Insurance. Each Lessee shall have as of the Closing Date
policies of insurance which satisfy the requirements of its Lease; and there
have been no gaps or lapses in the insurance coverage at any time during
ownership by Seller of the Facility or Facilities owned by it.
Section 4.12. Taxes. To the best of Seller's knowledge, all taxes,
including, but not limited to, employee withholding taxes and individual taxes,
for all periods prior to the Closing with respect to its Seller's Assets have
been paid or the Purchaser thereof has been given satisfactory evidence that
reasonable reserves for their payment have been established.
Section 4.13. No Defaults. The transactions contemplated by this
Agreement and the Transaction Documents will not constitute or result in any
default or event that, with a notice or lapse of time, or both, would be a
default, breach or violation of any lease, mortgage, deed of trust, covenant or
other agreement, instrument or arrangement by which the Seller's Assets will be
bound as of the Closing Date. No consent or joinder by any governmental agency
or any other person is required for the execution of this Agreement and the
other Transaction Documents by Seller, for the performance of Seller's
obligations as herein contemplated, except as set forth in Exhibit "P".
Section 4.14. No Assessments. To the best of Seller's knowledge, no
assessments for public improvements have been made or threatened against the
Facility or Facilities owned by it which are not of record and which remain
unpaid, including, without limitation, those for extension and/or continuation
of sewer and water lines and mains, retaining walls, streets, sidewalks and
curbs.
-22-
<PAGE> 24
Section 4.15. Non-Foreign Persons. Seller is not a "foreign person" as
that term is defined in Section 1445 of the United States Internal Revenue Code
of 1986, as amended.
Section 4.16. No Release of Discharge. To Seller's knowledge, and
except as disclosed in the Environmental Assessment, the land on which the
Facility or Facilities owned by it is located has not been used as a landfill,
and there is no Contamination.
Section 4.17. No Hazardous Substances. Except as disclosed in the
Environmental Assessment and approved by the Purchaser thereof, none of the
following is used, generated, transported, treated, constructed, deposited,
stored, disposed, placed or located in, on or under the Real Property owned by
Seller in violation of an Environmental Law or in a condition or quantity that
would give rise to any affirmative cleanup or other remedial obligation under an
Environmental Law:
(a) asbestos;
(b) ureaformaldehyde foam insulation;
(c) transformers or other equipment which contain dialectic fluid
containing levels of polychlorinated biphenyls in excess of fifty (50) parts per
million; or
(d) any other chemical, material, substance or other matter of any kind
whatsoever.
Section 4.18. Information is Accurate. All written information
heretofore or hereafter given prior to Closing by Seller to the Purchasers
concerning Seller and the Facility or Facilities owned by it is true and
complete in all material respects.
Section 4.19. Representations are True. No warranty or representation
by Seller set forth herein, or in any certificate or other document furnished to
a Purchaser by Seller, contains any
-23-
<PAGE> 25
untrue statement of material fact or omits to state a material fact necessary to
make the warranty or representation not misleading in light of the circumstances
under which it was made.
Section 4.20. No Commissions. Sellers and Purchasers represent and
warrant to each other that no real estate commission, finder's fee or the like
is due and owing to any person other than Omega in connection with this
Agreement. Sellers jointly and severally agree to save, indemnify and hold
Purchasers harmless from and against any and all claims, liabilities or
obligations for brokerage, finder's fees or the like in connection with this
Agreement or the transactions contemplated hereby, asserted by any person on the
basis of any statement or act alleged to have been made or taken by any Seller.
Purchasers jointly and severally agree to save, indemnify and hold the Sellers
harmless from and against any and all claims, liabilities or obligations for
brokerage, finder's fees or the like in connection with this Agreement or the
transactions contemplated hereby, asserted by any person on the basis of any
statement or act alleged to have been made or taken by Purchasers.
Section 4.21. Survival. In addition to the foregoing representations,
warranties and covenants, it shall be a condition to Purchasers' obligations
hereunder that each Seller and Lessee shall represent and warrant as of the
Closing Date that to its knowledge each of the conditions to the obligations of
the Purchasers under this Agreement and the other Transaction Documents for
which it is responsible under the terms hereof which have not been waived by
Purchasers has been fulfilled as of the Closing Date. The representations,
warranties and covenants contained in or to be made pursuant to this Agreement
and the other Transaction Documents shall be deemed to be continuing and shall
survive the Closing. If Omega discovers after the Closing any material
-24-
<PAGE> 26
violation of any of the foregoing representations, warranties or covenants,
such violation shall be a default hereunder and an Event of Default under and as
defined in the Facility Lease.
ARTICLE V
MISCELLANEOUS
Section 5.1. Indemnity. Sellers agree, with counsel selected by Omega
and reasonably acceptable to Sellers, to defend Purchasers and their members
against, and to indemnify, protect and hold Purchasers and their members
harmless from and against, any and all claims, demands, obligations, losses,
liabilities, damages, recoveries and deficiencies (including but not limited to
interest, penalties, attorneys' fees, costs and expenses) which Purchasers or
their members may suffer as a result of the untruth of any of the
representations and breach of the warranties of any Seller herein or given
pursuant hereto, or which Purchasers or their members may suffer as a result of
any default by any Seller in the performance of any of its commitments,
covenants or conditions under this Agreement and the other Transaction
Documents, or with respect to the ownership and operation of the Seller's Assets
prior to the Closing Date, or (notwithstanding the inclusion thereof in the list
of Permitted Encumbrances onExhibit D) with respect to the Deed of Trust dated
November 8, 1993 from Braswell Enterprises, Inc., as Trustor, for the benefit of
C. Allen Braswell, Braswell Management, Inc., Dorothy Braswell and Cecil Mays,
as Beneficiary, which encumbers the Facilities known as: Laurel Park, St.
Theresa Rehabilitation Center, Sierra Vista, Olive Vista, Vista Knoll and
Claremont. The rights of the Purchasers and their members expressed in this
Agreement are without prejudice to any other remedies at law or in equity which
they may have. Purchasers and Omega agree, with counsel selected by Sellers and
Lessees and reasonably acceptable to Omega and Purchasers, to defend Sellers and
Lessees against, and to indemnify, protect and hold Sellers and
-25-
<PAGE> 27
Lessees harmless from and against, any and all claims, demands, obligations,
losses, liabilities, damages, recoveries and deficiencies (including but not
limited to interest, penalties, attorneys' fees, costs and expenses) which
Sellers or Lessees may suffer as a result of any default by either Purchaser or
Omega in the performance of any of its commitments, covenants or conditions
under this Agreement and the other Transaction Documents. The rights of the
Sellers and Lessees expressed in this Agreement are without prejudice to any
other remedies at law or in equity which they may have.
Section 5.2. Defense. Upon receiving notice of a claim which is the
subject of the indemnity provisions of Section 5.1, Sellers shall jointly defend
and contest the claim at their own cost and expense.
Section 5.3. Risk of Loss. Each Seller shall bear the risk of loss or
damage to any of the Seller's Assets owned by it from fire or other casualty
until the Closing Date. In the event of any damage to or destruction of all or
any part of any of the Seller's Assets by fire or other casualty, whether or not
insured, or the taking of all or any part of the Seller's Assets by power of
eminent domain or deed in lieu thereof, prior to the Closing Date, the Purchaser
thereof may, at its option:
(a) terminate this Agreement and all of its obligations
hereunder with respect to the Facility or Facilities that was damaged or
destroyed, in which event the Purchase Price shall be reduced by the portion
thereof allocated to the Facility or Facilities as to which this Agreement is
terminated; or
(b) elect to proceed with the purchase of the damaged or
destroyed Facility or Facilities, in which event the applicable Seller shall
deliver possession of such Facility or Facilities to
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<PAGE> 28
Omega at the close of the escrow together with: (i) all insurance proceeds
received by such Seller(s) in connection with the damage or destruction; and
(ii) an assignment of all rights and claims of such Seller(s) under any
applicable insurance policies.
If the applicable Purchaser or Purchasers elect to proceed
with the purchase of the Facility or Facilities, such election shall be
conditioned upon the agreement of the applicable Seller(s) thereof to fully
cooperate with and assist such Purchaser or Purchasers in adjusting any loss and
perfecting and pursuing any claims under any applicable insurance policy or
policies.
Section 5.4. Statements. All statements contained in any certificate or
other instrument delivered by or on behalf of a Seller or Lessee pursuant to
this Agreement and the other Transaction Documents, or in connection with the
transaction contemplated hereby, shall be deemed representations and warranties
by such Seller or Lessee with respect to any matters of fact set forth therein.
Section 5.5. Attorneys' Fees. If any legal action, arbitration or other
proceeding is brought for the enforcement or interpretation of this Agreement,
or because of an alleged or actual dispute, breach, default or misrepresentation
in connection with any of the provisions of this Agreement, the prevailing party
shall be entitled to recover reasonable attorneys' fees and other costs incurred
in that action or proceeding, and in any post judgment proceedings or appeals,
in addition to any other relief to which it may be entitled.
Section 5.6. No Assignment. Neither this Agreement nor the rights,
duties or obligations arising hereunder shall be assignable or delegable by any
Seller or Lessee without the express prior written consent of Purchasers. All
the terms and provisions of this Agreement and the other
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<PAGE> 29
Transaction Documents shall be binding upon and inure to the benefit of and be
enforceable by Purchasers and each and every Seller and their respective
permitted successors and assigns.
Section 5.7. No Third Party Beneficiaries. Nothing in this Agreement,
whether express or implied, is intended to confer any rights or remedies on any
persons other than Purchasers, their members, Sellers, Lessees and their
respective permitted successors and assigns. Nothing in this Agreement is
intended to relieve or discharge the obligation or liability of any third
persons to any party to this Agreement, nor shall any provisions give any third
persons any right of subrogation or action over or against any party to this
Agreement.
Section 5.8. Public Announcements. Any public announcement concerning
this Agreement before the Closing Date or any of the terms hereof may be made
only with the prior written approval of Purchasers and Sellers.
Section 5.9. Exhibits. All exhibits, schedules, and documents referred
to in or attached to this Agreement are integral parts of this Agreement as if
fully set forth herein.
Section 5.10. Further Assurances. Sellers shall give further assurances
and execute further documents as are necessary or desirable to effectuate the
purpose of this Agreement and the other Transaction Documents.
Section 5.11. Notices. Except as required by law for the posting of
notices, all notices, requests, demands and other communications hereunder must
be in writing and shall be personally served or mailed (by registered or
certified mail, return receipt requested and postage prepaid), or delivered by a
national overnight delivery service such as Federal Express or D.H.L., or by
facsimile transmission addressed to the respective parties, as follows:
(a) if to any Seller or Lessee:
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<PAGE> 30
c/o Sunrise Healthcare Corporation
101 Sun Lane N. E.
Albuquerque, New Mexico 87109
ATTN: Mr. Warren McInteer
Telephone No.: (505) 821-3355
Fax No.: (505) 822-0747
with a copy to:
The Nathanson Group
1411 Fourth Avenue, Suite 905
Seattle, Washington 98101
ATTN: Randi S. Nathanson, Esq.
Telephone No.: (206) 623-6239
Fax No.: (206) 623-1738
(b) if to Omega:
Omega Healthcare Investors, Inc.
905 W. Eisenhower Circle, Suite 1 10
Ann Arbor, Michigan 48103
ATTN: Essel W. Bailey, Jr.
Telephone No.: (313) 747-9790
Fax No.: (313) 996-0020
with a copy to:
Dykema Gossett PLLC
1577 North Woodward Ave.
Bloomfield, Michigan 48304-2820
ATTN: Fred J. Fechheimer, Esq.
Telephone No.: (248) 540-0743
Fax No.: (248) 540-0763
In the event of service by mail, service shall be deemed to be complete
on the day of actual delivery as shown by the addressee's certified mail receipt
or at the expiration of five (5) days after such mailing, whichever is earlier
in time. In the event of service by personal delivery, overnight
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<PAGE> 31
delivery or facsimile transmission, service shall be deemed to be complete on
the day of the confirmed receipt or refusal of the receipt thereof.
Section 5.12. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF MICHIGAN, EXCEPT THAT AS
TO EACH FACILITY THE LAWS OF THE STATE SHALL GOVERN THIS AGREEMENT TO THE EXTENT
NECESSARY (I) TO OBTAIN THE BENEFIT OF THE RIGHTS AND REMEDIES SET FORTH HEREIN
WITH RESPECT TO THE FACILITY AND (II) FOR PROCEDURAL REQUIREMENTS WHICH MUST BE
GOVERNED BY THE LAWS OF THE STATE.
Section 5.13. Counterparts. This Agreement and the other Transaction
Documents may be executed simultaneously in one or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
Section 5.14. Captions. The captions of sections and subsections of
this Agreement have been inserted solely for convenience and reference, and
shall not control or affect the meaning or construction of any of the provisions
of this Agreement.
Section 5.15. Entire Agreement. This Agreement, the other Transaction
Documents and the exhibits hereto and thereto constitute the entire agreement
between Purchasers and Sellers pertaining to the subject matter contained in
them, and supersede all prior agreements, representations and understandings of
the parties. No supplement, modification or amendment of this Agreement will be
binding unless expressed as such and executed in writing by each Purchaser and
Seller. No waiver of any of the provisions of this Agreement will be deemed or
constitute a waiver of any other
-30-
<PAGE> 32
provision, whether or not similar, nor will any waiver constitute a continuing
waiver. No waiver will be binding unless expressed as such in a document
executed by the party granting the waiver.
-31-
<PAGE> 33
SIGNATURE PAGES TO PURCHASE AGREEMENT
AND AGREEMENT OF LEASE
IN WITNESS WHEREOF, the parties hereby execute this Agreement as of the
day and year first set forth above.
DELTA INVESTORS I, LLC, a Maryland
limited liability company
By: Omega Healthcare Investors, Inc.,
a Maryland corporation
By: ______________________________
F. Scott Kellman, Executive
Vice President
DELTA INVESTORS II, LLC, a Maryland
limited liability company
By: Omega Healthcare Investors, Inc.,
a Maryland corporation
By: ______________________________
F. Scott Kellman, Executive
Vice President
SELLERS:
Beckley Health Care Corp., a West Virginia
corporation
Braswell Enterprises, Inc., a California
corporation
Care Enterprises, Inc., a Delaware
corporation
Care Enterprises West, a Utah corporation
Putnam Health Care Corp., a West Virginia
corporation
Regency Health Services, Inc., a Delaware
corporation
Regency - North Carolina, Inc., a North
Carolina corporation
Regency Rehab Properties, Inc., a
California corporation
Salem Health Care Corp., a West Virginia
corporation
-32-
<PAGE> 34
LESSEES:
Care Enterprises West, a Utah corporation
Circleville Health Care Corp., an Ohio
corporation
Coalinga Rehabilitation Center, a
California corporation
Dunbar Health Care Corp., a West Virginia
corporation
Fullerton Rehabilitation Center, a
California corporation
Marion Health Care Corp., an Ohio
corporation
Meadowbrook Rehabilitation Center, a
California corporation
Newport Beach Rehabilitation Center, a
California corporation
Regency Rehab Hospitals, Inc., a
California corporation
San Bernardino Rehabilitation Hospital,
Inc., a California corporation
Shandin Hills Rehabilitation Center,
a California corporation
Vista Knoll Rehabilitation Center,
Inc., a California corporation
By:__________________________________________
David A. Grant, Vice President
MEGA HEALTHCARE INVESTORS, INC., a
Maryland corporation (solely for the purpose
of guaranteeing the obligations of the
Purchasers hereunder pursuant to Recital C)
By:__________________________________________
F. Scott Kellman, Executive Vice President
SUN HEALTHCARE GROUP, INC., a Delaware
corporation (solely for the purpose of
delivering the guaranty pursuant to
Paragraph 2.12)
By:_________________________________________
Warren McInteer, Vice President
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<PAGE> 35
EXHIBITS
--------
A-1 Seller's Assets to be Purchased by Delta I (including legal descriptions)
A-2 Seller's Assets to be Purchased by Delta II (including legal descriptions)
B. Escrow Instructions
C-1 Facility Lease Form for Continental Rehab Hospital of San Diego
C-2 Facility Lease Form for St. Theresa
C-3 Facility Lease Form for All Other Facilities to be purchased by Delta I
C-4 Facility Lease Form for All Other Facilities to be purchased by Delta II
D. Permitted Encumbrances
E. Permitted Exceptions
F. Standard Terms and Conditions
G. Purchase Price Schedule
H. Bill of Sale
I. Violations of Laws, Rules, Regulations and Ordinances (if any)
J. Form of Opinion of Legal Counsel for Seller
K. Schedule of License or Permit Irregularities (if any)
L. Schedule of Construction Regulatory Exceptions
M. Zoning
N. Schedule of Facility Litigation (if any)
O. Schedule of Construction Deficiencies (if any)
P. Required Consents and Joinders
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<PAGE> 1
EXHIBIT 11
STATEMENT RE: COMPUTATION OF PER-SHARE EARNINGS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1997 1996 1995
---- ---- ----
(IN THOUSANDS EXCEPT
PER-SHARE DATA)
<S> <C> <C> <C>
Net earnings available to common before extraordinary
charge from prepayment of debt......................... $41,305 $34,590 $29,490
======= ======= =======
Net earnings.............................................. $41,305 $34,590 $23,011
======= ======= =======
Average shares outstanding................................ 19,085 17,196 16,071
Basic per-share amounts:
Net earnings.............................................. $2.16 $2.01 $1.43
======= ======= =======
Net earnings before extraordinary charge.................. $2.16 $2.01 $1.83
======= ======= =======
Average shares outstanding................................ 19,085 17,196 16,071
Stock option incremental shares........................... 52 44 10
------- ------- -------
Average shares outstanding, diluted.................... 19,137 17,240 16,081
======= ======= =======
Diluted per-share amounts:
Net earnings.............................................. $2.16 $2.01 $1.43
======= ======= =======
Net earnings before extraordinary charge.................. $2.16 $2.01 $1.83
======= ======= =======
Diluted assuming conversion of debt:
Net earnings.............................................. $41,305 $34,590
Add interest expense associated with Convertible
Debentures............................................. 6,279 7,778
------- -------
Total.................................................. $47,584 $42,368
======= =======
Average shares outstanding................................ 19,085 17,196
Assumed conversion of debentures.......................... 2,583 3,095
Stock option incremental shares........................... 52 72
------- -------
Total.................................................. 21,720 20,363
======= =======
Per-share amount (antidilutive)........................... $2.19 $2.08
======= =======
</TABLE>
<PAGE> 1
EXHIBIT 12
RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
The ratio of earnings to combined fixed charges and preferred stock
dividends are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Ratio of Earnings to Combined Fixed Charges and Preferred
Stock Dividends(1)....................................... 2.60X 2.66X 2.92X 2.69X 3.51X
</TABLE>
- -------------------------
(1) For purposes of calculating the ratio of earnings to combined fixed charges
and preferred stock dividends, net earnings (before extraordinary charge
from prepayment of debt in 1995) has been added to fixed charges and that
sum has been divided by such fixed charges. Fixed charges consist of
interest expense, amortization of deferred financing costs and, starting
with the period ended December 31, 1997, preferred stock dividends for the
Series A Cumulative Preferred Stock, which is the only series of preferred
stock outstanding at December 31, 1997.
<PAGE> 1
EXHIBIT 13
RESPONSE TO ITEM 14(a)(1) AND (2) AND 14(d)
INFORMATION INCORPORATED BY REFERENCE FROM
ANNUAL REPORT TO SHAREHOLDERS
LISTING OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
INDEX TO FINANCIAL INFORMATION
YEAR ENDED DECEMBER 31, 1997
OMEGA HEALTHCARE INVESTORS, INC.
ANN ARBOR, MICHIGAN
F-1
<PAGE> 2
INDEX TO FINANCIAL INFORMATION
The following consolidated financial statements of Omega Healthcare
Investors, Inc. and subsidiaries, included on pages 11 through 22 of the Annual
Report of the registrant to its shareholders for the year ended December 31,
1997, are incorporated by reference in Item 8:
Consolidated Balance Sheets -- December 31, 1997 and 1996.
Consolidated Statements of Operations -- Years ended December 31, 1997,
1996 and 1995.
Consolidated Statements of Shareholders' Equity -- Years ended December
31, 1997, 1996 and 1995.
Consolidated Statements of Cash Flows -- Years ended December 31, 1997,
1996 and 1995.
Notes to Consolidated Financial Statements -- December 31, 1997.
The following consolidated financial statement schedules of Omega
Healthcare Investors, Inc. and subsidiaries are included in Item 14(d):
Schedule III Real Estate and Accumulated Depreciation
Schedule IV Mortgage Loan on Real Estate
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are are not
required under the related instructions or are inapplicable and therefore have
been omitted.
F-2
<PAGE> 3
MANAGEMENT'S DISCUSSION AND ANALYSIS
OMEGA HEALTHCARE INVESTORS, INC.
"SAFE HARBOR" STATEMENT UNDER THE
UNITED STATES PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Statements that are not historical facts contained in Management's
Discussion and Analysis are forward-looking statements that involve risks and
uncertainties that could cause actual results to differ from projected results.
Some of the factors that could cause actual results to differ materially
include: the financial strength of the operators of the Company's facilities as
it affects their continuing ability to meet their obligations to the Company
under the terms of the Company's agreements with such operators; changes in
operators or ownership of operators; government policy relating to the
healthcare industry, including changes in the reimbursement levels under the
Medicare and Medicaid programs; operators' continued eligibility to participate
in the Medicare and Medicaid programs; changes in reimbursement by other third
party payors; occupancy levels at the Company's facilities; the availability
and cost of capital; the strength and financial resources of the Company's
competitors; the Company's ability to make additional real estate investments
at attractive yields and changes in tax laws and regulations affecting real
estate investment trusts.
Following is a discussion of the consolidated results of operations,
financial position and liquidity and capital resources of the Company which
should be read in conjunction with the consolidated financial statements and
accompanying notes.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Revenues for the year ended December 31, 1997 totaled $90,820,000,
increasing $17.7 million over 1996 revenues. The 1997 revenue growth stems
primarily from additional investments during 1996 and 1997. A partial year of
revenues from 1997 investments provided revenue increases of approximately $9.8
million, while a full year of revenues from 1996 investments added $5.1 million
to revenues. Additionally, approximately $1.9 million of the revenue growth
stems from participating incremental revenues which became effective during
1997.
Real estate investments of $779.4 million as of December 31, 1997 will
provide 1998 annualized revenues of $93.1 million. Revenues will continue at
this level until additional 1998 investments are made and additional escalation
provisions commence in 1998. Annualized revenues for 1998 represent a $20.1
million increase over the 1997 annualized revenues of $73.0 million based on
real estate investments of $593.7 million as of January 1, 1997.
The following table summarizes the years of expiration of the Company's
revenues based on the contractual maturity dates of the leases and mortgages:
<TABLE>
<CAPTION>
MORTGAGE
RENT INTEREST TOTAL %
------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
1998 $ 243 $ 243 0.28%
1999 $ 2,462 29 2,491 2.85%
2000 1,026 3,328 4,354 4.98%
2001 3,268 1,825 5,093 5.83%
2002 8,224 9,462 17,686 20.23%
Thereafter 45,511 12,026 57,537 65.83%
------------------------------------------------------------
$60,491 $26,913 $87,404 100.00%
============================================================
</TABLE>
The total excludes approximately $5.7 million of annualized revenues from Unison
(see Note 5).
Expenses for the year ended December 31, 1997 totaled $45,969,000,
increasing approximately $7.4 million over expenses of $38.5 million for 1996.
The 1997 provision for depreciation and amortization of real estate totaled
$16,910,000, increasing $3.2 million over 1996. This increase stems from a full
year provision for 1996 investments, plus a partial year of provision for 1997
investments.
Interest expense for the year ended December 31, 1997 was approximately
$24,423,000, compared with $20.8 million for 1996. The increase in interest
expense is primarily due to an increase in average outstanding borrowings on the
acquisition line of credit, partially offset by lower rates.
F-3
<PAGE> 4
General and administrative expenses for 1997 totaled $4.6 million or
approximately 5.1% of revenues as compared to 5.5% for 1996. The 1997 percentage
decrease stems primarily from economies of scale resulting from additional
investments made in 1997.
No provision for Federal income taxes has been made since the Company
intends to continue to qualify as a real estate investment trust under the
provisions of Sections 856 through 860 of the Internal Revenue Code of 1986, as
amended. Accordingly, the Company will not be subject to Federal income taxes on
amounts distributed to shareholders provided it distributes at least 95% of its
real estate investment trust taxable income and meets certain other conditions.
Funds from operations (FFO) for the year ended December 31, 1997 totaled
$58,815,000 an increase of $9.8 million over the $49.0 million for 1996. FFO is
net earnings available to common shareholders, 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 common stock based compensation. The 1997 growth in cash flow is
primarily due to the additional investments in 1997 and 1996 and the increase in
operating earnings before provisions for depreciation and amortization.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Revenues for the year ended December 31, 1996 totaled $73,127,000,
increasing $11.7 million over 1995 revenues. The 1996 revenue growth stems
primarily from additional investments during 1995 and 1996. A partial year of
revenues from 1996 investments provided revenue increases of approximately $6.1
million, while a full year of revenues from 1995 investments added $3.8 million
to revenues. Additionally, approximately $1.4 million of the revenue growth
stems from participating incremental revenues which became effective during
1996.
Total real estate investments of $594 million as of December 31, 1996 will
provide 1997 annualized operating revenues of $73.0 million. Revenues will
continue at this level until additional 1997 investments are made and additional
escalation provisions commence in 1997. Annualized revenues for 1997 represent
an $10.5 million increase over the 1996 annualized revenues of $62.5 million
based on investments of $516 million as of January 1, 1996.
Expenses for the year ended December 31, 1996 totaled $38,537,000,
increasing $6.6 million over expenses of $31.9 million for 1995. The 1996
provision for depreciation and amortization of real estate totaled $13,693,000,
increasing $698,000 over 1995. This increase stems from additional investments
funded in 1995 and 1996.
Interest expense for the year ended December 31, 1996 was approximately
$20,836,000, compared with $15.3 million for 1995. The increase in interest
expense is due to higher average borrowings of approximately $88 million, offset
by lower interest rates and reduced amortization of debt issue costs.
General and administrative expenses for 1996 totaled $4,008,000 or
approximately 5.5% of revenues as compared to 5.9% for 1995. The 1996 percentage
decrease relates to economies of scale stemming from additional investments made
in 1996 and 1995.
Funds from operations available for distribution for 1996 were $48,989,000,
an increase of $5.5 million from the $43.5 million for 1995. Funds from
operations for the year ended December 31, 1996 totaled $49,008,000, an increase
of $6.0 million over the $43.0 million for 1995. The 1996 growth in cash flow is
primarily due to the additional investments in 1996 and 1995 and the related
increase in operating earnings before provisions for depreciation and
amortization.
LIQUIDITY AND CAPITAL RESOURCES
The Company continually seeks new investments in healthcare properties,
primarily long-term care facilities, with the objective of profitable growth and
further diversification of the investment portfolio. Permanent financing for
future investments is expected to be provided through a combination of private
and public offerings of debt and equity securities. Management believes the
Company's liquidity and sources of available capital are adequate to finance
operations, fund future investments, and meet debt service requirements.
At December 31, 1997, the Company has a strong financial position with
total assets of $816.1 million, shareholders' equity of $468.2 million, and
long-term debt of $271.5 million, representing approximately 33% of total
capitalization. Long-term debt excludes funds borrowed under its acquisi-
F-4
<PAGE> 5
tion credit agreement. The Company anticipates eventually attaining and then
maintaining a long-term debt-to-capitalization ratio of approximately 40%. The
Company has a $200 million acquisition credit facility, of which $58.3 million
was drawn at year end and an additional $64.8 million was subsequently drawn
through February 19, 1998.
In February 1997, the Company filed a Form S-4 shelf registration statement
with the Securities and Exchange Commission registering common stock totaling
$100 million to be issued in connection with future property acquisitions.
Additionally, on August 29, 1997 the Company filed a Form S-3 registration
statement with the Securities and Exchange Commission permitting the issuance of
up to $200 million related to common stock, unspecified debt, preferred stock
and convertible securities.
The Company has demonstrated a strong capacity to access the capital
markets, raising more than $1 billion in capital since it was organized in 1992.
The Company has raised more than $450 million in equity, including $130 million
from the initial public offering in 1992, $73 million from a follow-on common
stock offering in 1994, $165 million from the HEP acquisition in 1994 and two
additional offerings, the latest being the $57.5 million issuance of preferred
stock in April 1997. Over $600 million of debt capital has been raised, some of
which has been used to retire secured borrowing debt with higher interest rates.
In 1996, the Company completed a placement of $95 million of 8.5% Convertible
Subordinated Debentures due 2001. In August 1997 the Company completed a $100
million 10-year senior note offering priced to yield 6.99%. In September 1997
the Company executed a Second Amended and Restated Loan Agreement with its banks
which provides for total borrowings of up to $200 million, reduces interest
rates from previous levels, and extends the term of the agreement to September
2000.
The Company distributes a large portion of the cash available from
operations. Cash dividends paid totaled $2.58 per share for 1997 compared with
$2.46 per share for the year ended December 31, 1996. The dividend pay-out
ratio, that is the ratio of per share amounts for dividends paid to the diluted
per share amount of funds from operations, was approximately 86% for 1997,
compared with 89% for 1996, and 88% for 1995. The Company believes that cash
provided from quarterly operating activities at current levels will continue to
be sufficient to fund normal working capital requirements and pay 1998 dividends
at a quarterly rate of $0.67 per share as declared at the January 15, 1998 Board
of Directors meeting. Approximately 45-50% of incremental cash flow from
operations is retained annually through gradual reductions in the dividend
payout ratio, to fund additional investments and provide financial flexibility.
New investments generally are funded from borrowings under the Company's
acquisition credit agreement. Interest cost incurred by the Company on
borrowings under the acquisition line will vary depending upon fluctuations in
prime and/or LIBOR rates, and upon changes in the Company's ratings by national
agencies. Borrowings bear interest at LIBOR plus 1.00% or, at the Company's
option at the prime rate. The Company expects to periodically replace funds
drawn on the acquisition credit agreement through fixed-rate long-term
borrowings, the placement of convertible debentures, or the issuance of
additional shares of capital stock. Historically, the Company's strategy has
been to match the maturity of its indebtedness with the maturity of its assets
and to employ fixed-rate long-term debt to the extent practicable.
YEAR 2000 IMPLICATIONS
The Company has assessed its current computer software for proper
functioning with respect to dates in the year 2000 and thereafter. The year 2000
issue and related costs are not expected to have a material impact on the
operations of the Company.
F-5
<PAGE> 6
CONSOLIDATED BALANCE SHEETS
OMEGA HEALTHCARE INVESTORS, INC.
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
---------------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Investments in real estate:
Real estate properties - net $ 512,907 $ 343,293
Mortgage notes receivable 218,353 217,474
---------------------
731,260 560,767
Investment in Principal Healthcare Finance Limited 30,730 29,970
Other investments 29,790 19,640
---------------------
791,780 610,377
Cash and short-term investments 500 6,244
Non-compete agreements and goodwill - net 5,981 7,605
Other assets 17,847 10,610
---------------------
TOTAL ASSETS $ 816,108 $ 634,836
=====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Acquisition line of credit $ 58,300 $ 6,000
6.95% Notes 100,000
Bank term loan 25,000
Senior notes 81,381 81,381
Other long-term borrowings 27,585 29,278
Subordinated convertible debentures 62,485 94,810
Accrued expenses and other liabilities 18,136 15,360
---------------------
TOTAL LIABILITIES 347,887 251,829
Shareholders' equity:
Preferred stock $1.00 par value:
Authorized - 10,000 shares
Issued and outstanding - 2,300 shares Class A in 1997
with an aggregate liquidation preference of $ 57,500 $ 57,500
Common stock $.10 par value:
Authorized - 50,000 shares
Issued and outstanding - 19,475 shares
in 1997 and 18,175 shares in 1996 1,947 1,817
Additional paid-in capital 439,214 404,311
Cumulative net earnings 136,225 91,374
Cumulative dividends paid (165,824) (114,393)
Unamortized restricted stock awards (841) (102)
---------------------
TOTAL SHAREHOLDERS' EQUITY 468,221 383,007
---------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 816,108 $ 634,836
=====================
</TABLE>
See accompanying notes.
F-6
<PAGE> 7
CONSOLIDATED STATEMENT OF OPERATIONS
OMEGA HEALTHCARE INVESTORS, INC.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
----------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
REVENUE:
Rental income $54,073 $42,688 $40,335
Mortgage interest income 28,727 24,692 18,621
Other investment income 6,888 5,213 2,158
Miscellaneous 1,132 534 316
----------------------------------------
90,820 73,127 61,430
EXPENSES:
Depreciation and amortization 16,910 13,693 12,995
Interest 24,423 20,836 15,325
General and administrative 4,636 4,008 3,620
----------------------------------------
45,969 38,537 31,940
----------------------------------------
Net earnings before extraordinary charge 44,851 34,590 29,490
Extraordinary charge from prepayment of debt 6,479
----------------------------------------
Net earnings 44,851 34,590 23,011
Preferred stock dividends 3,546
----------------------------------------
Net earnings Available to Common $41,305 $34,590 $23,011
========================================
PER SHARE:
Net earnings before extraordinary charge $2.16 $2.01 $1.83
Net earnings available to Common, Basic $2.16 $2.01 $1.43
Net earnings available to Common, Diluted $2.16 $2.01 $1.43
========================================
Weighted average number of shares outstanding, basic 19,085 17,196 16,071
Weighted average number of shares outstanding, diluted 19,137 17,240 16,081
</TABLE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL
COMMON STOCK PAID-IN PREFERRED
PAR VALUE CAPITAL STOCK
-------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Balance at January 1, 1995 $ 1,570 $ 337,524
Issuance of common stock:
Grant of restricted stock (7,699 shares at
$24.25 per share), net of provisions charged
to operations 1 187
Dividend Reinvestment Plan 96 23,183
Stock options exercised 1 163
Redemption of common stock and other (2) (254)
Net earnings for 1995
Common Dividends paid ($2.36 per share)
-------------------------------------------
Balance at December 31, 1995 1,666 360,803
Issuance of common stock:
Grant of restricted stock (7,995 shares at
26.625 per share), net of provisions charged
to operations 1 212
Proceeds from November 1996 equity offering,
less offering costs of $325 100 30,075
Dividend Reinvestment Plan 48 12,755
Conversion of debentures, net of issue costs 1 181
Stock options exercised 1 223
Other 0 62
Net earnings for 1996
Common Dividends paid ($2.48 per share)
-------------------------------------------
Balance at December 31, 1996 (18,175 shares) 1,817 404,311
Issuance of common stock:
Grant of restricted stock (20,105 shares at $32.125
per share and 18,914 shares at $37.00 per share),
net of provisions charged to operations (39 shares) 4 1,310
Dividend Reinvestment Plan (53 shares) 5 1,676
Conversion of debentures, net of issue costs
(1,129 shares) 113 31,535
Stock options exercised (12 shares) 1 270
Acquisition of real estate (67 shares) 7 2,423
Issuance of preferred stock (2,311) $ 57,500
Net earnings for 1997
Common Dividends paid ($2.58 per share)
Preferred Dividends paid ($1.156 per share)
===========================================
Balance at December 31, 1997 (19,475 shares) $ 1,947 $ 439,214 $ 57,500
-------------------------------------------
<CAPTION>
UNAMORTIZED
CUMULATIVE CUMULATIVE RESTRICTED
NET EARNINGS DIVIDENDS STOCK AWARDS
--------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Balance at January 1, 1995 $ 33,773 $ (34,246) $ (78)
Issuance of common stock:
Grant of restricted stock (7,699 shares at
$24.25 per share), net of provisions charged
to operations 25
Dividend Reinvestment Plan
Stock options exercised
Redemption of common stock and other
Net earnings for 1995 23,011
Common Dividends paid ($2.36 per share) (37,825)
--------------------------------------------
Balance at December 31, 1995 56,784 (72,071) (53)
Issuance of common stock:
Grant of restricted stock (7,995 shares at
26.625 per share), net of provisions charged
to operations (49)
Proceeds from November 1996 equity offering,
less offering costs of $325
Dividend Reinvestment Plan
Conversion of debentures, net of issue costs
Stock options exercised
Other
Net earnings for 1996 34,590
Common Dividends paid ($2.48 per share) (42,322)
--------------------------------------------
Balance at December 31, 1996 (18,175 shares) 91,374 (114,393) (102)
Issuance of common stock:
Grant of restricted stock (20,105 shares at $32.125
per share and 18,914 shares at $37.00 per share),
net of provisions charged to operations (39 shares) (739)
Dividend Reinvestment Plan (53 shares)
Conversion of debentures, net of issue costs
(1,129 shares)
Stock options exercised (12 shares)
Acquisition of real estate (67 shares)
Issuance of preferred stock
Net earnings for 1997 44,851
Common Dividends paid ($2.58 per share) (48,772)
Preferred Dividends paid ($1.156 per share) (2,659)
--------------------------------------------
Balance at December 31, 1997 (19,475 shares) $ 136,225 $(165,824) $ (841)
--------------------------------------------
</TABLE>
See accompanying notes.
F-7
<PAGE> 8
CONSOLIDATED STATEMENTS OF CASH FLOWS
OMEGA HEALTHCARE INVESTORS, INC.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
-----------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net earnings $ 44,851 $ 34,590 $ 23,011
Adjustments to reconcile net earnings to cash
provided by operating activities:
Depreciation and amortization 16,910 13,693 12,995
Extraordinary charge from prepayment of debt 6,479
Other non-cash charges 1,232 706 1,052
-----------------------------------------
Funds available for distribution and investment 62,993 48,989 43,537
Net change in operating assets and liabilities (2,562) 5,897 1,298
-----------------------------------------
Net cash provided by operating activities 60,431 54,886 44,835
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of unsecured note offering 100,000
Proceeds from issuance of preferred stock offering 57,500
Proceeds from issuance of common stock 30,500
Proceeds from issuance of Subordinated
Convertible Debentures 95,000
Proceeds (payments) of bank term loan (25,000) 25,000
Proceeds (payments) of acquisition line of credit 52,300 (68,690) 54,690
Prepayment of Senior Mortgage Notes (88,504)
Proceeds from Senior Unsecured Notes 81,381
Payments of long-term borrowings (6,578) (9,794) (9,202)
Cost of raising capital (4,702) (3,048) (800)
Receipts from Dividend Reinvestment Plan 1,681 12,803 23,279
Dividends paid (51,431) (42,322) (37,825)
Other (587) 327 (2,358)
-----------------------------------------
Net cash provided by financing activities 123,183 39,776 20,661
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of real estate (184,877) (18,621) (22,955)
Placement of mortgage loans (11,155) (66,222) (21,131)
Funding of other investments (6,237) (13,037) 3,350
Investment in Principal Healthcare Finance Limited (760) 2,108 (32,078)
Collection of mortgage principal 13,365 957 851
Other 306 (29) (58)
-----------------------------------------
Net cash used in investing activities (189,358) (94,844) (72,021)
-----------------------------------------
Decrease in cash and short-term investments (5,744) (182) (6,525)
Cash and short-term investments at beginning of year 6,244 6,426 12,951
-----------------------------------------
Cash and short-term investments at end of year $ 500 $ 6,244 $ 6,426
=========================================
</TABLE>
See accompanying notes.
F-8
<PAGE> 9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OMEGA HEALTHCARE INVESTORS, INC.
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Omega Healthcare Investors, Inc. (the "Company") was incorporated on March
31, 1992, in the State of Maryland to (a) own and lease, and (b) provide
mortgage financing secured by income-producing healthcare facilities, with a
principal focus on diversified investments in long-term care facilities located
primarily in the United States.
The Company's operations commenced on August 14, 1992, the date of the
closing of the Company's initial public offering. It has elected to be taxed as
a real estate investment trust under Sections 856 through 860 of the Internal
Revenue Code of 1986, as amended. The Company intends to continue to qualify as
such and, therefore, will distribute at least 95% of its real estate investment
trust taxable income to its shareholders.
In 1995, the Company began to provide advisory services to Principal
Healthcare Finance Limited, a Company which owns and leases nursing homes in the
United Kingdom. (See Note 4.)
CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries after elimination of all material intercompany
accounts and transactions.
REAL ESTATE INVESTMENTS
As of December 31, 1997 the Company's real estate investments include
interests in 3 medical office buildings, 2 rehabilitation hospitals and 258
long-term care facilities, operated by 29 independent operators.
Investments in real estate properties and mortgage notes are recorded at
cost and original mortgage amount, respectively. The cost of the properties
acquired is allocated between land and buildings based generally upon
independent appraisals. Depreciation for buildings is recorded on the
straight-line basis, using estimated useful lives ranging from 20 to 39 years.
The Company considers the need to provide for reserves for potential losses on
its investments based on management's periodic review of its portfolio. On the
basis of this review to date, a provision for losses on investments has not been
deemed necessary.
CASH AND SHORT-TERM INVESTMENTS
Short-term investments consist of highly liquid investments with a maturity
date of three months or less when purchased. These investments are stated at
cost which approximates fair value.
NON-COMPETE AGREEMENTS AND GOODWILL
Non-compete agreements and the excess of the purchase price over the value
of tangible net assets acquired (i.e., goodwill from the purchase of Health
Equity Properties Incorporated) is amortized on a straight-line basis over
periods ranging from five to ten years. Accumulated amortization was $5,277,000
and $3,653,000 at December 31, 1997 and 1996, respectively.
DEFERRED FINANCING COSTS
Deferred financing costs are amortized on a straight-line basis over the
terms of the related borrowings. Amortization of financing costs totaling
$829,000, $524,000 and $1,072,000 in 1997, 1996, and 1995, respectively, is
classified as interest expense in the Consolidated Statements of Operations.
Unamortized deferred financing costs applicable to debt which is converted to
common stock are charged to paid-in capital at the date of conversion.
REVENUE RECOGNITION
Rental income and mortgage interest income is recognized as earned over the
terms of the related master leases and mortgage notes, respectively. Such income
includes periodic increases based on pre-determined formulas as defined in the
master leases and mortgage loan agreements. Certain mortgage agreements include
provisions for deferred interest which is not payable by the borrower until
maturity of the related note. The portion of deferred interest recognized as
earned approximates $614,000, $608,000 and $602,000 in 1997, 1996, and 1995,
respectively.
F-9
<PAGE> 10
FEDERAL AND STATE INCOME TAXES
As a qualified real estate investment trust, the Company will not be
subject to Federal income taxes on its income, and no provisions for Federal
income taxes have been made. The reported amounts of the Company's assets and
liabilities as of December 31, 1997 exceeds the tax basis of assets by
approximately $70 million.
EARNINGS PER SHARE
Net earnings per share is computed based on the weighted average number of
common shares outstanding during the respective periods. Per share amounts for
prior periods have been restated as required by Financial Accounting Standards
Board Statement No. 128. Among the changes stemming from the new pronouncement
is a requirement to present both basic and diluted per share amounts. Diluted
earnings per share amounts reflect the dilutive effect of stock options of
52,394 shares, 44,240 shares and 9,501 shares for 1997, 1996, and 1995,
respectively. The assumed conversion of debentures is not materially dilutive.
STOCK BASED COMPENSATION
The Company grants stock options to employees and directors with an
exercise price equal to the fair value of the shares at the date of the grant.
In accordance with the provisions of APB Opinion No. 25, Accounting for Stock
Issued to Employees, compensation expense is not recognized for these stock
option grants.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. REAL ESTATE PROPERTIES
The Company's real estate properties, represented by 178 long-term care
facilities, 3 medical office buildings and 2 rehabilitation hospitals at
December 31, 1997, are leased under provisions of master leases with initial
terms ranging from 8 to 17 years, plus renewal options. Substantially all of the
master leases provide for minimum annual rentals which are subject to annual
increases based upon increases in the Consumer Price Index or increases in
revenues of the underlying properties, with certain maximum limits. Under the
terms of the leases, the lessee is responsible for all maintenance, repairs,
taxes and insurance on the leased properties.
A summary of the Company's investment in real estate properties is as
follows:
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
----------------------
(IN THOUSANDS)
<S> <C> <C>
Buildings $539,274 $363,404
Land 21,780 12,773
----------------------
561,054 376,177
Less accumulated depreciation (48,147) (32,884)
----------------------
Total $512,907 $343,293
======================
</TABLE>
The following table summarizes the changes in real estate properties and
accumulated depreciation during 1997, 1996 and 1995:
<TABLE>
<CAPTION>
REAL ESTATE ACCUMULATED
PROPERTIES DEPRECIATION
-------------------------
(IN THOUSANDS)
<S> <C> <C>
Balance at January 1, 1995 $334,601 $9,553
Additions/provision for 1995 22,955 11,283
----------------------
Balance at December 31, 1995 357,556 20,836
Additions/provision for 1996 18,621 12,048
----------------------
Balance at December 31, 1996 376,177 32,884
Additions/provision for 1997 184,877 15,263
----------------------
Balance at December 31, 1997 $561,054 $48,147
======================
</TABLE>
F-10
<PAGE> 11
The future minimum rentals expected to be received for the remainder of the
initial terms of the leases are as follows:
<TABLE>
<S> <C>
(IN THOUSANDS)
1998 $ 59,769
1999 59,641
2000 57,816
2001 57,280
2002 52,489
Thereafter 278,753
---------
$565,748
=========
</TABLE>
The foregoing amounts exclude approximately $4.3 million of annual rents from
properties previously leased to Unison (see Note 5).
3. MORTGAGE NOTES RECEIVABLE
Mortgage notes receivable relate to 80 long-term care facilities. The
mortgage notes are secured by first mortgage liens on the borrowers' underlying
real estate and personal property. On an ongoing basis, management reviews
mortgage notes for collectibility. Based on management's review, no provision
for loss is considered necessary. The following table summarizes the changes in
mortgage notes during 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
-----------------------
(IN THOUSANDS)
<S> <C> <C>
Balance at January 1 $217,474 $158,290
New mortgage notes 11,155 66,222
Collection of principal (13,365) (957)
Conversion/reclassification 3,089 (6,081)
-----------------------
Balance at December 31 $218,353 $217,474
=======================
</TABLE>
The face amount of mortgage notes receivable follow:
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
---------------------------
(IN THOUSANDS)
<S> <C> <C>
Participating mortgage note due 2007; interest at 14.13% payable monthly,
plus amortization of $1,470,000 per quarter commencing in 2002 $ 58,800 $ 58,800
Participating mortgage note due 2012; interest at 13.09% payable monthly,
plus amortization of $50,000 per quarter commencing in 2002 7,031 7,031
Participating mortgage note due 2000; interest at 11.80% payable monthly
plus amortization of $37,500 quarterly 26,279 26,425
Convertible participating mortgage note due 2005;
interest at 12.23% payable monthly, plus annual amortization
of $60,000 for 1997 to 1999, and $120,000 commencing in 2000 10,200 10,200
Convertible participating mortgage note due 2001;
monthly interest payments at 14.79% with principal due at maturity 8,932 8,932
Convertible participating mortgage note due 2011;
monthly interest payments at 10.75% 10,250
Convertible participating mortgage notes due 2000 and 2016;
monthly interest payments at 13.40% 9,300 9,300
Mortgage notes due 2015;
monthly payments of $207,570, including interest at 11.06% 19,141 19,481
Mortgage note due 2010;
monthly payment of $124,826, including interest at 11.50% 12,864 12,880
Mortgage note due 2006;
monthly payment of $107,382, including interest at 11.50% 11,071 11,084
Other mortgage notes 29,154 37,977
Other convertible participating mortgage notes 10,934 4,941
Other participating mortgage notes 4,397 10,423
---------------------------
$218,353 $217,474
===========================
</TABLE>
F-11
<PAGE> 12
The stated interest rates indicated above for Participating Mortgages and
Convertible Participating Mortgages are subject to annual increases based upon
increases in the Consumer Price Index or increases in revenues of the underlying
long-term care facilities, with certain maximum limits. Certain of the mortgage
notes, designated as "Convertible Participating" also permit the Company to
convert the note into ownership of the related real and personal property.
Conversions would generally result in purchase/leaseback transactions with
annual economic benefit to the Company substantially the same as under the
mortgage notes.
The estimated fair value of the Company's mortgage loans at December 31,
1997 is approximately $248,433,000. Fair value is based on the estimates of
management and on rates currently prevailing for comparable loans.
On the basis of contractual provisions of the various agreements, the
principal balances of mortgage notes receivable as of December 31, 1997 are
expected to mature or to be converted to purchase/leaseback transactions
approximately as follows: $4,368,000 in 1998, $2,064,000 in 1999, $29,358,000 in
2000, $13,664,000 in 2001, $61,657,000 in 2002, and $107,242,000 thereafter.
4. INVESTMENT IN PRINCIPAL HEALTHCARE FINANCE LIMITED AND OMEGA WORLDWIDE, INC.
In July, 1995, the Company formed and provided the initial funding for
Principal Healthcare Finance Limited ("Principal"), an Island of Jersey based
company organized to purchase and lease back nursing homes in the United
Kingdom. The Company's initial funding for Principal included approximately
$24,000,000 in the form of a Sterling denominated subordinated loan due December
31, 2000. The Company manages and provides advisory services to Principal under
a renewable contract. In October 1996, Principal completed a private placement
of equity to unaffiliated investors. Following the completion of that placement,
the Company owns directly or indirectly non-voting ordinary shares of Principal,
with total equity investment approximating $7,000,000. The Company's non-voting
ownership interest is stated on the basis of cost. At December 31, 1997,
Principal owns and leases 154 nursing homes acquired at a cost of approximately
$354 million.
In July, 1997, the Company provided Principal a guarantee of borrowings of
up to (pound)46 million (approximately $75 million), pending its placement of
permanent financing for the purchase of nursing home facilities from a public
company which operated nursing homes in the United Kingdom. Principal has
borrowed substantially all the funds available subject to such guarantee. The
Company received a fee for this guarantee of approximately $360,000 and the
nursing home facilities have been leased to third party nursing home operators.
Principal completed permanent financing for these facilities on February 27,
1998, thereby removing the requirement for the Company's guarantee.
In November 1997 the Company formed Omega Worldwide, Inc., a company which
will provide investment advisory services to and hold equity and debt interests
in real estate companies engaged in providing sale/leaseback and other capital
financing to healthcare providers throughout the world. In connection with the
formation of Omega Worldwide, Inc., the Company will receive 8.5 million shares
of Omega Worldwide, Inc. common stock in exchange for substantially all of the
interests which the Company now has with respect to Principal, including: (a)
3,337,500 Class A voting ordinary shares of Principal and warrants to purchase
10 million Class B non-voting ordinary shares of Principal expiring June 30,
2001 at an exercise price of (pound)1.50 (approximately $2.40) per share and
554,583 Class A ordinary shares of Principal expiring December 31, 2000 at an
exercise price of (pound)1.00 (approximately $1.60) per share; (b) the Company's
right to payment of (pound)15 million (approximately $24 million) from the
Sterling denominated subordinated loan; (c) the Company's interest in a ten-year
British pound currency swap contract under which Omega Worldwide, Inc. will have
the right to exchange (pound)20,000,000 for $31,740,000 on October 15, 2007; and
(d) the Advisory Services Agreement between the Company and Principal.
Omega Worldwide, Inc. has filed a Registration Statement with respect to
rights to acquire 2,250,000 shares of its common stock and 2.3 million shares to
be sold in a secondary offering by the Company. Each common shareholder of the
Company will receive a pro-rata share of approximately 5.2 million common shares
of Omega Worldwide, Inc. and will be eligible to receive a portion of the 2.25
million rights to purchase Omega Worldwide, Inc. common stock. The Company will
retain a 9% interest in Omega Worldwide, Inc. The date of the distribution of
Omega Worldwide, Inc. shares has not been set since it depends upon, among other
matters, the date of approval by the Securities and Exchange Commission. As of
the date of the distribution, the cost of assets transferred to Omega Worldwide,
Inc., less the net proceeds of the secondary offering received by the Company,
will be charged to shareholders' equity in the form of a special dividend.
Management estimates the special dividend will approximate $15 million.
F-12
<PAGE> 13
5. CONCENTRATION OF RISK
As of December 31, 1997, 94% of the Company's real estate investments
related to long-term care facilities. The Company's facilities are located in 26
states and are operated by 29 independent healthcare operating companies.
Approximately 63% of the Company's real estate investments are operated by 7
public companies: Sun Healthcare Group, Inc., (29.2%), Advocat, Inc. (14.5%),
Paragon Health Network, Inc. (formerly GranCare, Inc.) (7.5%), Unison Healthcare
Corp. (5.7%), Res-Care, Inc. (3.7%), Integrated Health Services, Inc. (1.4%) and
CMS Health South (formerly Horizon/CMS Healthcare Corp.) (1.4%). Of the
remaining 22 independent operators, none operate investments in facilities
representing more than 6.2% of the total real estate investments.
As of December 31, 1997, Unison Healthcare Corp. (Unison), was in default
of certain provisions of its lease agreements and mortgages with the Company. In
January, 1998, BritWill I and BritWill II, two subsidiaries of Unison, filed for
bankruptcy protection from creditors. The Company leased to these subsidiaries
fourteen facilities located in Indiana and Texas, and has made a mortgage loan
that is secured by first mortgages on six facilities located in Texas. The
Company's total investment approximates $45 million related to approximately
2,000 beds. Prior to bankruptcy filings by the Unison subsidiaries, the Company
terminated the leases and accelerated the mortgage loan indebtedness due to
non-payment of rents and interest totaling approximately $1.5 million. The
Company also has instituted foreclosure proceedings with respect to the
mortgages and filed suit in federal court in Texas against Unison and the
Chairman of the Board of Directors of Unison to enforce their respective
guarantees to the Company of obligations under the leases and the mortgage loan
documents. To date in the bankruptcy proceeding the parties have stipulated that
the Unison subsidiaries will pay to the Company a monthly payment for occupancy
in an amount equal to the rent that would have been payable by the BritWill
subsidiaries under the leases. In January, 1998, the Company applied $1.6
million of security deposits to the mortgage interest and principal outstanding.
The Company continues to hold approximately $2.3 million in liquidity and
security deposits to secure obligations under the leases and the mortgage loan
documents and continues to pursue its remedies against Unison and its chairman
under their respective guarantees. Annual rents and interest from the Unison
subsidiaries total approximately 5.9% of annualized revenues at December 31,
1997.
6. LIQUIDITY DEPOSITS AND ADDITIONAL SECURITY
Liquidity deposits and letters of credit received from certain operators
pursuant to leases and mortgages total $26,835,000 at December 31, 1997. These
generally represent the initial monthly rental and mortgage interest income for
periods ranging from three to six months with respect to certain of the
investments. The deposits consist of $13,965,000 held by the company, $5,047,000
held by escrow agents, and $7,823,000 in the form of letters of credit.
Additional security for rental and mortgage interest revenue from operators
is provided by covenants regarding minimum working capital and net worth, liens
on accounts receivable and other operating assets of the operators, provisions
for cross default, provisions for cross collateralization and by
corporate/personal guarantees.
7. BORROWING ARRANGEMENTS
On September 30, 1997, the Company consummated an amended and restated loan
agreement for a $200,000,000 unsecured revolving line of credit facility. Under
the restated agreement, which expires in September, 2000, the Company may use
the equivalent of $50,000,000 of the commitment for Sterling denominated
borrowings. Borrowings under the facility bear interest at LIBOR plus 1.00% or,
at the Company's option at the prime rate. Permitted borrowings under the
agreement are based upon levels of eligible real estate investments. Borrowings
of $58,300,000 at December 31, 1997 bear interest at a rate of 7.04% and
borrowings of $6,000,000 at December 31, 1996 bear interest at 7.43%.
F-13
<PAGE> 14
The following is a summary of long-term borrowings:
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
-------------------------
(IN THOUSANDS)
<S> <C> <C>
Unsecured borrowings:
6.95% Notes due August 2007 $100,000
Bank term loan due October 2000 25,000
Senior Unsecured Notes due July 2000 81,381 81,381
Subordinated Convertible Debentures 62,485 94,810
Other 5,324 5,000
-------------------------
249,190 206,191
Secured borrowings:
Industrial Development Revenue Bonds 8,980 9,150
HUD loans 5,380 6,968
Mortgage notes payable to bank 7,901 8,160
-------------------------
22,261 24,278
-------------------------
Total long-term borrowings $271,451 $230,469
=========================
</TABLE>
In 1995, the Company exchanged 9.88% Senior Subordinated Collateralized
Mortgage Accrual Notes and 7.11% Senior Mortgage Collateralized Notes for 10%
and 7.4% Unsecured Notes due July 15, 2000. The effective interest rate for the
new unsecured notes is 8.8%, with interest-only payments due semi-annually
through July 2000.
On January 24, 1996, the Company issued $95 million of 8.5% Convertible
Subordinated Debentures (the Debentures) due 2001. The Debentures are
convertible at any time into shares of Common Stock at a conversion price of
$28.625 per share. The Debentures are unsecured obligations of the Company and
are subordinate in right and payment to the Company's senior unsecured
indebtedness. As of December 31, 1997 there were 2,182,882 shares reserved for
issuance under the Debentures.
On August 5, 1997 the Company completed a $100 million public offering of
unsecured 6.95% notes due 2007. The notes were priced to yield 6.99% with
interest paid semi-annually.
Real estate investments with an original cost of approximately $33,259,000
are secured by outstanding secured borrowings totaling $22,261,000 at December
31, 1997. These borrowings are payable in aggregate monthly installments of
approximately $215,000, including interest at rates ranging from 8.3% to 9.7%.
Assuming none of the Company's borrowing arrangements are refinanced,
converted or prepaid prior to maturity, required principal payments for each of
the five years following December 31, 1997 and the aggregate due thereafter are
set forth below:
<TABLE>
<S> <C>
(IN THOUSANDS)
1998 $ 1,033
1999 673
2000 89,130
2001 63,057
2002 619
Thereafter 116,939
----------
$ 271,451
==========
</TABLE>
The estimated fair values of the Company's long-term borrowings is
approximately $270,539,000 at December 31, 1997 and $236,128,000 at December 31,
1996. Fair values are based on the estimates of management and on rates
currently prevailing for comparable loans.
8. FINANCIAL INSTRUMENTS
At December 31, 1997 and 1996, the carrying amounts and fair values of the
Company's financial instruments are as follows:
F-14
<PAGE> 15
<TABLE>
<CAPTION>
1997 1996
----------------------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
----------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS:
Cash and short-term investments $ 500 $ 500 $ 6,244 $ 6,244
Mortgage notes receivable 218,353 248,433 217,474 245,700
Principal Healthcare Finance Limited 30,730 31,852 29,970 32,291
Other investments 29,790 30,628 19,640 20,400
----------------------------------------------
$279,373 $311,413 $273,328 $304,635
LIABILITIES:
6.95% Notes $100,000 $ 95,275
Acquisition line of credit 58,300 58,300 $ 6,000 $ 6,465
Bank term loan 25,000 26,935
Senior Unsecured Notes 81,381 83,320 81,381 86,194
Subordinated Convertible Debentures 62,485 64,107 94,810 94,810
Other long-term borrowings 27,585 27,837 29,278 28,189
----------------------------------------------
$329,751 $328,839 $236,469 $242,593
</TABLE>
Fair value estimates are subjective in nature and are dependent on a number
of important assumptions, including estimates of future cash flows, risks,
discount rates and relevant comparable market information associated with each
financial instrument. The use of different market assumptions and estimation
methodologies may have a material effect on the reported estimated fair value
amounts. Accordingly, the estimates presented above are not necessarily
indicative of the amounts the Company would realize in a current market
exchange.
On October 15, 1997, the Company entered into a 10-year forward contract to
exchange (pound)20,000,000 at a rate of $1.587 per British Pound Sterling. This
contract was entered into in order to hedge the currency risk associated with
the Company's investment in Principal. The carrying value of the investment in
Principal is based on the rate established in the forward exchange contract.
Foreign exchange rate contracts mitigate the risk of currency movements because
any gain or loss on the contract offsets any losses or gains, respectively, on
the investment in Principal and other assets denominated in British Pounds
Sterling.
9. RETIREMENT ARRANGEMENTS
The Company has a 401(k) Profit Sharing Plan covering all eligible
employees. Under the Plan, employees are eligible to make contributions, and the
Company, at its discretion, may match contributions and make a profit sharing
contribution.
In 1993, the Company adopted the 1993 Retirement Plan for Directors, an
unfunded plan covering all members of the Board of Directors upon completion of
not less than five years service on the Board. The benefits payable upon
retirement from the Board are based on years of service and the director fees in
effect as of the date the director ceases to be a member of the Board.
In 1993, the Company also adopted the 1993 Deferred Compensation Plan which
covers all eligible employees and members of the Board. Under this unfunded
plan, the Company may award units which result in participation in the dividends
and future growth in the value of Company's common stock. The total number of
units permitted by the plan is 200,000. Units awarded to eligible participants
(59,000 units and 63,500 at December 31, 1997 and 1996, respectively) vest over
a period of five years based on the participant's initial service date.
Provisions charged to operations with respect to these retirement
arrangements totaled $667,000 in 1997, $654,000 in 1996, and $366,000 in 1995.
10. SHAREHOLDERS' EQUITY AND STOCK OPTIONS
In April, 1997 the Company issued 2.3 million shares of 9.25% Series A
Cumulative Preferred Stock at $25 per share. Dividends on the Preferred Stock
are cumulative from the date of original issue and are payable quarterly. The
Preferred Stock, which carries a liquidation preference of $25 per share, is
redeemable on or after July 1, 2002 at the option of the Company, at a
redemption price of $25 per share plus dividends accrued and unpaid at the
redemption date. Holders of Series A Preferred Stock generally have no voting
rights.
Under the terms of the 1993 Stock Option and Restricted Stock Plan as
amended in 1995, the company reserved 750,000 shares of common stock for grants
to be issued during a period of up to 10 years. Directors, officers, and key
employees are eligible to participate in the Plan. The Company
F-15
<PAGE> 16
has submitted for shareholder approval an amendment to the Plan to increase the
number of shares available under the Plan to 1,100,000. Options for 739,415
shares have been granted to eligible participants, including options for
approximately 57,000 shares granted in December, 1997 subject to shareholder
approval of the 1998 amendment. Additionally, 67,263 shares of restricted stock
have been granted under the provisions of the Plan. The market value of the
restricted shares on the date of the award has been recorded as unearned
compensation-restricted stock, with the unamortized balance shown as a separate
component of shareholders' equity. Unearned compensation is amortized to expense
over the vesting period, with charges to operations of $402,000, $240,000 and
$253,000 in 1997, 1996 and 1995, respectively.
The following is a summary of activity under the plan.
<TABLE>
<CAPTION>
STOCK OPTIONS
----------------------------------------------
NUMBER OF WEIGHTED
SHARES EXERCISE PRICE AVERAGE PRICE
----------------------------------------------
<S> <C> <C> <C>
Outstanding at January 1, 1995 199,750 $21.125-$25.750 $23.630
Granted during 1995 48,000 24.250-26.625 24.789
Exercised (7,666) 21.125-25.750 21.636
Canceled (9,084) 21.125-25.750 23.401
---------------------------------------------
Outstanding at December 31, 1995 231,000 21.125-26.625 23.946
Granted during 1996 83,500 26.625-30.000 26.838
Exercised (9,499) 21.500-25.750 23.671
Canceled (27,001) 24.250-26.625 25.812
---------------------------------------------
Outstanding at December 31, 1996 278,000 21.125-30.000 24.637
Granted during 1997 444,250 31.625-37.000 34.980
Exercised (11,524) 21.125-25.750 23.586
---------------------------------------------
Outstanding at December 31, 1997 710,726 $21.125-$37.000 $31.009
=============================================
</TABLE>
At December 31, 1997, options currently exercisable (208,808) have a
weighted average exercise price of $24.205. There were no shares available for
future grants as of December 31, 1997. At December 31, 1996 options currently
exercisable (155,162) have a weighted average exercise price of $23.42. Shares
available for future grants as of December 31, 1996 were 426,591.
In 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation." This standard prescribes a fair value based method of accounting
for employee stock options or similar equity instruments and requires certain
pro forma disclosures. For purposes of the pro forma disclosures required under
Statement 123, the estimated fair value of the options is amortized to expense
over the option's vesting period. Based on the Company's option activity, net
earnings and net earnings per share on a pro forma basis does not differ
significantly from that determined under APB 25. The estimated weighted average
fair value of options granted in 1997 and 1996 was $1.3 million and $0.2
million, respectively. In determining the estimated fair value of the Company's
stock options as of the date of grant, a Black-Scholes option pricing model was
used with the following weighted-average assumptions: risk-free interest rates
of 6.5%; a dividend yield of 6.75%; volatility factors of the expected market
price of the Company's common stock at 15%; and a weighted-average expected life
of the options of 8 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
11. DIVIDENDS
In order to qualify as a real estate investment trust, the Company must,
among other requirements, distribute at least 95% of its real estate investment
trust taxable income to its shareholders. Per share common dividend payments by
the Company were characterized in the following manner for income tax purposes:
<TABLE>
<CAPTION>
1997 1996 1995
-----------------------------------
<S> <C> <C> <C>
Ordinary income $2.4252 $2.232 $2.124
Return of capital .1548 .248 .236
-----------------------------------
Total dividends paid $2.58 $2.48 $2.36
===================================
</TABLE>
F-16
<PAGE> 17
12. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Following are details of changes in operating assets and liabilities
(excluding the effects of noncash expenses), and other noncash transactions:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
1997 1996 1995
-------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Increase (decrease) in cash from
changes in operating assets
and liabilities:
Operating assets $(4,361) $ (211) $ (97)
Accrued interest 1,431 5,462 1,091
Other liabilities 368 646 304
-------------------------------
$(2,562) $ 5,897 $ 1,298
===============================
Other noncash investing and
financing transactions:
Acquisition of real estate:
Value of real estate acquired $ 2,430
Common stock issued (2,430)
Common stock issued for
conversion of debentures 31,648 $ 182
Interest paid during the period 22,122 13,939 $13,171
</TABLE>
13. EXTRAORDINARY CHARGE FOR PREPAYMENT OF DEBT
During 1995, the Company entered into three transactions to prepay various
secured borrowings. The Company consummated a $100,000,000 unsecured line of
credit to replace a $60,000,000 secured line of credit. Also, as discussed in
Note 7, the Company redeemed its outstanding senior mortgage notes through the
issuance of unsecured notes. The prepayment of these borrowings resulted in an
extraordinary charge of $6,479,000, representing the fees and costs associated
with the prepayment and the write-off of unamortized deferred financing costs.
14. LITIGATION
The Company is subject to certain legal proceedings and claims which arise
in the ordinary course of its business. In the opinion of management, the amount
of ultimate liability, if any, with respect to these actions will not materially
affect the consolidated financial position.
15. COMMITMENTS
The Company has commitments, subject to certain conditions, to provide
additional financing totaling approximately $68 million as of December 31, 1997.
16. SUBSEQUENT EVENTS
A quarterly dividend of $.67 per common share was declared by the Board of
Directors on January 22, 1998, payable on February 13, 1998 to shareholders of
record on January 30, 1998. In addition, the Board declared a regular quarterly
dividend of $.578 per share to be paid on February 13, 1998 to Series A
Cumulative Preferred shareholders of record on January 30, 1998.
On January 27, 1998 the Board of Directors set the record date of February
1, 1998 for the distribution of Omega Worldwide, Inc. shares (see Note 4).
On January 14, 1998, the Company purchased five nursing homes containing
628 nursing beds in Florida, Illinois, Pennsylvania and New Hampshire for a
total of $44,900,000. Simultaneously, the Company entered into lease agreements
with Lyric Health Care Holdings, Inc., a wholly-owned subsidiary of Lyric Health
Care LLC, an affiliate of Integrated Health Services, Inc. (NYSE: IHS). The
initial term of the lease is thirteen years, at initial rents of $4,490,000
annually.
On February 27, 1998, Principal completed financing of (pound)61 million
related to it's acquisition of certain nursing homes during June, 1997, thereby
removing the requirement for the Company's guarantee of up to (pound)46 million
of Principal's borrowings (see Note 4).
F-17
<PAGE> 18
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Omega Healthcare Investors, Inc.
We have audited the accompanying consolidated balance sheets of Omega
Healthcare Investors, Inc. and subsidiaries as of December 31, 1997, and 1996
and the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the three years in the period ended December 31, 1997.
These financial statements are the responsibility of the Company'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 audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Omega
Healthcare Investors, Inc. and subsidiaries at December 31, 1997 and 1996, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
Ernst & Young LLP
February 9, 1998 (except for Note 16
as to which the date is February 27, 1998)
Detroit, Michigan
F-18
<PAGE> 1
EXHIBIT 21
LIST OF SUBSIDIARIES
OMEGA HEALTHCARE INVESTORS, INC.
<TABLE>
<CAPTION>
JURISDICTION OF
NAMES INCORPORATION
----- ---------------
<S> <C>
Bayside Street, Inc. ....................................... Maryland
OHI (Kansas), Inc. ......................................... Kansas
OHI (Illinois), Inc. ....................................... Illinois
OHI (Florida), Inc. ........................................ Florida
OHI (Clemmons), Inc. ....................................... North Carolina
OHI (Greensboro), Inc. ..................................... North Carolina
Sterling Acquisition Corp. ................................. Kentucky
Sterling Acquisition Corp. II............................... Kentucky
OS Leasing.................................................. Kentucky
Omega (UK) Limited.......................................... London, England
Delta Investors I, LLC...................................... Maryland
Delta Investors II, LLC..................................... Maryland
Jefferson Clark, Inc........................................ Maryland
OHI (Iowa), Inc............................................. Iowa
</TABLE>
<PAGE> 1
EXHIBIT 23
CONSENT AND REPORT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in (1) Registration Statement
No. 33-67084 dated August 6, 1993 related to the 1993 Stock Option and
Restricted Stock Plan, (2) Registration Statement No. 33-308415 on Form S-3
dated July 19, 1996 related to the Dividend Reinvestment and Common Stock
Purchase Plan, (3) Shelf Registration Statement No. 33-34763 on Form S-3 dated
August 29, 1997, and (4) Shelf Registration Statement No. 33-32119 on Form S-4
dated February 4, 1997, of our report dated February 9, 1998 (except for Note
16, as to which the date is February 27, 1998) with respect to the consolidated
financial statements and schedules of Omega Healthcare Investors, Inc. included
in this annual Report (Form 10-K) for the year ended December 31, 1997.
We consent to the incorporation by reference in this Annual Report (Form
10-K) of Omega Healthcare Investors, Inc. of our report dated February 9, 1998
(except for Note 16, as to which the date is February 27, 1998), included in the
1997 Annual Report to Shareholders of Omega Healthcare Investors, Inc.
Our audits also included the financial statement schedules of Omega
Healthcare Investors, Inc. listed in Item 14(a). These schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audits. In our opinion, the financial statement schedules
referred to above, when considered in relation to the basic financial statements
taken as a whole, present fairly in all material respects the information set
forth therein.
/s/ Ernst & Young
March 25, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS FILED AS PART OF THE ANNUAL REPORT ON FORM
10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH INFORMATION IN FORM
10-K.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
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0
0
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</TABLE>
