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, 1999.
[ ] 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)
Maryland 38-3041398
(State or other jurisdiction (I.R.S. Employer Identification No.)
or organization)
900 Victors Way, Suite 350 48108
Ann Arbor, Michigan (Zip Code)
(Address of Principal Executive
Offices)
Registrant's telephone number, including area code: 734-887-0200
Securities Registered Pursuant to Section 12(b) of the Act:
Name of Exchange on
Title of Each Class Which Registered
------------------- ----------------
Common Stock, $.10 Par Value 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
8.625% Series B Preferred Stock, $1 Par Value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 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. [X]
The aggregate market value of the voting stock of the registrant held by
non-affiliates was $244,815,000 based on the $12.6875 closing price per share
for such stock on the New York Stock Exchange on December 31, 1999.
As of December 31, 1999 there were 19,877,371 shares outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant's definitive Proxy Statement, which will be filed with the
Commission on or before February 29, 2000, 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 revolving
line of credit, private placements or public offerings of debt or equity, the
assumption of secured indebtedness, or a combination of these methods. The
Company also may finance acquisitions through the exchange of properties or the
issuance of shares of its capital stock, if such transactions otherwise satisfy
the Company's investment criteria.
During 1995, the Company became a primary sponsor of Principal Healthcare
Finance Limited ("Principal"), an Isle of Jersey (United Kingdom) company
established to provide sale/leaseback and mortgage financing to the
private-sector healthcare industry in the United Kingdom.
In November 1997, the Company formed Omega Worldwide, Inc. ("Worldwide"), a
company which provides asset management services and management advisory
services, as well as equity and debt capital to the healthcare industry,
particularly residential healthcare services to the elderly. On April 2, 1998
the Company contributed substantially all of its Principal assets to Worldwide
in exchange for approximately 8.5 million shares of Worldwide common stock and
260,000 shares of Series B preferred stock. Of the 8,500,000 shares of Worldwide
received by the Company, approximately 5,200,000 were distributed on April 2,
1998 to the shareholders of the Company on the basis of one Worldwide share for
every 3.77 common shares of the Company held by shareholders of the Company on
the record date of February 1, 1998. Of the remaining 3,300,000 shares of
Worldwide received by the Company, 2,300,000 shares were sold by the Company on
April 3, 1998 for net proceeds of approximately $16,250,000 in a secondary
offering pursuant to a registration statement of Worldwide. The market value of
the distribution to shareholders approximated $39 million or $1.99 per share. A
non-recurring gain of $30.2 million was recorded on the distribution and
secondary offerings of Worldwide common shares during 1998. (See Note 10 to the
Consolidated Financial Statements).
As of December 31, 1999, the Company holds an $8,015,000 investment in
Worldwide represented by 1,163,000 shares of common stock and 260,000 shares of
Preferred stock. It also holds a $1,615,000 investment in Principal represented
by 990,000 ordinary shares of Principal.
The Company and Worldwide have entered into an Opportunity Agreement to
provide each other with rights to participate in certain transactions and make
certain investments. The Opportunity Agreement provides, subject to certain
terms, that, regardless of whether the following kinds of investments (each a
"REIT Opportunity") first come to the attention of the Company or Worldwide, the
Company will have the right to: make any investment within the United States (a)
in real estate, real estate mortgages, real estate derivatives or entities that
invest exclusively in or have a substantial portion of their assets in any of
the foregoing, so long as the Company's REIT status would not be jeopardized by
the investment; and (b) that, if made by a REIT, would not result in the
termination of the REIT's status as a REIT under Sections 856 through 860 of the
Internal Revenue Code ("Code"). However, Worldwide will have the right,
regardless of whether the following kinds of investments (each a "Worldwide
Opportunity") first come to the attention of the Company or Worldwide, to: (a)
provide advisory services and/or management services to any healthcare
investors, wherever located; (b) acquire or make debt and/or equity investments
(through a joint venture or otherwise) in any healthcare investor or in
healthcare real estate-related assets outside the United States; (c) make
investments in any entity conducting healthcare operations; and (d) make any
other real estate, finance or other investments not customarily undertaken by a
qualified REIT. If Worldwide declines to pursue a Worldwide Opportunity, it must
offer that opportunity to the Company, and if the Company declines to pursue a
REIT Opportunity, it must offer that opportunity to Worldwide. Each of the
Company and Worldwide may participate, in its discretion, in any REIT
Opportunity or Worldwide Opportunity that the other requests be pursued jointly.
The terms upon which each of the Company and Worldwide elect to participate in
such an opportunity will be negotiated in good faith and must be mutually
acceptable to the respective boards of directors of the Company and Worldwide,
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with the affirmative votes of the independent directors of the board of
directors of the Company and Worldwide. Each of the Company and Worldwide has
agreed to notify the other of and make available to the other investment
opportunities developed by such party or of which such party becomes aware but
is unable or unwilling to pursue. The Opportunity Agreement has a term of ten
years and automatically renews for successive five-year terms unless terminated.
In response to an opportunity offered to the Company by Worldwide, the Company
acquired the equivalent of up to 9.9% of the common shares of Principal
Healthcare Finance Trust ("the Trust"), an Australian Unit Trust, which owns 40
nursing home facilities and 475 assisted living units in New South Wales.
As of December 31, 1999, the Company's portfolio of domestic investments
consisted of 211 long-term care facilities, 3 medical office buildings and 2
rehabilitation hospitals. The Company owns and leases 147 long-term facilities,
3 medical office buildings and 2 rehabilitation hospitals, and provides
mortgages, including participating and convertible participating mortgages on 64
long-term healthcare facilities. The facilities are located in 28 states and
operated by 24 unaffiliated operators. The Company's gross real estate
investments at December 31, 1999 totaled $892 million.
The Company initiated a plan during 1998 to dispose of certain properties
judged to have limited incremental potential and to re-deploy the proceeds from
sale. Following a review of the portfolio, assets identified for sale had a cost
of $95 million, a net carrying value of $83 million, and annualized revenues of
approximately $11.4 million. After consideration of the results of sales and
other developments identified as part of the continuing evaluation of the assets
held for sale, the Company recorded a provision for impairment of $6.8 million
to adjust the carrying value of those assets judged to be impaired to their
estimated fair value, less cost of disposal. During 1998, the Company completed
sales of two groups of assets, yielding sales proceeds of $42,036,000. Gains
realized in the dispositions approximated $2.8 million.
During 1999, new investments approximated $103 million as a result of
entering into sale/leaseback transactions and making mortgage loans and other
investments. Also during 1999, the Company completed asset sales yielding net
proceeds of $18.2 million. In 1999 a loss of $10.5 million was recognized on
these assets. In the 1999 fourth quarter, management initiated a plan for
additional asset sales. The assets identified as for sale in 1999 had a cost of
$33.8 million, a net carrying amount of $28.6 million and annualized revenue of
approximately $3.4 million. As a result of this review, the Company recorded a
provision for impairment of $19.5 million to adjust the carrying value of assets
targeted for sale to their estimated fair value, less cost of disposal. The
Company is committed to sell the remaining facilities as soon as practicable.
At January 15, 1999 the Company employed 28 full-time employees. The
executive offices of the Company are located at 900 Victors Way, Suite 350, Ann
Arbor, Michigan, 48108. Its telephone number is (734) 887-0200.
Investment Objectives
The investment objectives of the Company are to pay regular cash dividends
to shareholders; to provide the opportunity for increased dividends from annual
increases in rental and interest income from revenue participations and from
portfolio growth; to preserve and protect shareholders' capital; and to provide
the opportunity to realize capital growth.
Given the current challenging operating environment and the Company's
limited access to new equity capital, the Company may invest through joint
ventures or partnerships with capital partners rather than directly.
Investment Strategies and Policies
The Company maintains a diversified portfolio of income-producing healthcare
facilities or mortgages thereon, with a primary focus on long-term care
facilities located in the United States. In making investments, the Company
generally seeks and intends to focus on established, creditworthy, middle-market
healthcare operators which meet the Company's standards for quality and
experience of management. Although the Company has emphasized long-term care
investments, it intends to diversify prudently into other types of healthcare
facilities or other properties. The Company seeks to diversify its investments
in terms of geographic locations, operators and facility types.
In evaluating potential investments, the Company considers such factors as:
(i) the quality and experience of management and the credit worthiness of the
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operator of the facility; (ii) the facility's historical, current and forecasted
cash flow and its adequacy to meet operational needs, capital expenditures and
lease or debt service obligations, while providing a competitive return on
investment to the Company; (iii) the construction quality, condition and design
of the facility; (iv) the geographic area and type of facility; (v) the tax,
growth, regulatory and reimbursement environment of the community in which the
facility is located; (vi) the occupancy and demand for similar healthcare
facilities in the same or nearby communities; and (vii) the payor mix of
private, Medicare and Medicaid patients.
A fundamental investment strategy of the Company is to obtain contractual
rent escalations under long-term, non-cancelable, "triple-net" leases and
revenue participation through participating mortgage loans, and to obtain
substantial liquidity deposits. Additional security is typically provided by
covenants regarding minimum working capital and net worth, liens on accounts
receivable and other operating assets, and various provisions for cross-default,
cross-collateralization and corporate/personal guarantees, when appropriate.
The Company prefers to invest in equity ownership of properties. Due to
regulatory, tax or other considerations, the Company sometimes pursues
alternative investment structures, including convertible participating and
participating mortgages, that achieve returns comparable to equity investments.
The following summarizes the four primary structures currently used by the
Company:
Purchase/Leaseback. The Company's owned properties are generally leased
under provisions of leases for terms ranging from 8 to 17 years, plus renewal
options. The leases originated by the Company generally provide for minimum
annual rentals which are subject to annual formula increases (i.e., based upon
such factors as increases in the Consumer Price Index ("CPI") or increases in
the revenues of the underlying properties), with certain fixed minimum and
maximum levels. Generally, the operator holds an option to repurchase at set
dates at prices based on specified formulas. The average annualized yield from
leases was 11.42% at January 1, 2000.
Convertible Participating Mortgage. Convertible Participating Mortgages are
secured by first mortgage liens on the underlying real estate and personal
property of the mortgagor. Interest rates are usually subject to annual
increases based upon increases in the CPI or increases in revenues of the
underlying long-term care facilities, with certain maximum limits. Convertible
Participating Mortgages afford the Company an option to convert its mortgage
into direct ownership of the property, generally at a point six to nine years
from inception; they are then subject to a leaseback to the operator for the
balance of the original agreed term and for the original agreed participations
in revenues or CPI adjustments. This allows the Company to capture a portion of
the potential appreciation in value of the real estate. The operator has the
right to buy out the Company's option at prices based on specified formulas. The
average annualized yield on these mortgages was approximately 13.08 % at January
1, 2000.
Participating Mortgage. Participating Mortgages are secured by first
mortgage liens on the underlying real estate and personal property of the
mortgagor. Interest rates are usually subject to annual increases based upon
increases in the CPI or increases in revenues of the underlying long-term care
facilities, with certain maximum limits. The average annualized yield on these
investments was approximately 13.01% at January 1, 2000.
Fixed-Rate Mortgage. These Mortgages have a fixed interest rate for the
mortgage term and are secured by first mortgage liens on the underlying real
estate and personal property of the mortgagor. The average annualized yield on
these investments was 11.17% at January 1, 2000.
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The following table summarizes as of December 31, 1999 the years of
expiration of the Company's revenues based on the contractual maturity dates of
the leases and mortgages:
Mortgage
Rent Interest Total %
---- -------- ----- --
(In thousands)
2000 ................. $ - $ - $ - 0%
2001 ................. 3,180 1,846 5,026 4.82
2002 ................. 8,849 9,645 18,494 17.75
2003 ................. 518 3,920 4,438 4.26
2004 ................. 1,221 587 1,808 1.73
Thereafter ........... 63,762 10,690 74,452 71.44
------ ------ ------ -----
$77,530 $26,688 $104,218 100.00%
======= ======= ======== ======
- ---------------
The table set forth in Item 2 -- Properties, herein, contains information
regarding the Company's real estate properties, their locations, and the types
of investment structures as of December 31, 1999.
Borrowing Policies
The Company may incur additional indebtedness and anticipates it will
generally maintain a long-term debt-to-capitalization ratio in the range of 40%
to 45%. 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 (the revolving
credit facility) which permits borrowings of up to $200,000,000 and a secured
acquisition line of credit which permits borrowings of up to $50,000,000. These
credit facilities provide temporary funds for new investments in healthcare
facilities. The Company intends to periodically replace funds drawn on the
acquisition lines through long-term, fixed-rate borrowings, the issuance of
equity linked borrowings, or the issuance of additional shares of capital stock.
The Company has approximately $80 million of indebtedness that matures July
15, 2000 and the term of its unsecured revolving credit facility expires
September 30, 2000. The Company intends to extend the maturity of its revolving
credit facility and to refinance the term indebtedness and may fix debt
represented by the revolving credit facility and liquidate assets to pay such
indebtedness or implement a plan which includes a combination of the foregoing.
There can be no assurance the Company will be able to successfully extend the
maturity of its unsecured line of credit or implement other alternatives, and
any failure to do so could lead to an Event of Default under certain of the
Company's indebtedness. Industry turmoil and continuing adverse economic
conditions could cause the terms on which the Company can obtain additional
borrowings to become unfavorable. If the Company is in need of capital to repay
indebtedness as it matures, the Company may be required to liquidate investments
in properties at times which may not permit realization of the maximum recovery
on such investments. This also could result in adverse tax consequences to the
Company.
Item 7 -- Management's Discussion and Analysis of Financial Condition and
Results of Operations contains additional information concerning liquidity and
capital resources.
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Government Healthcare Regulation and Reimbursements
The healthcare industry is highly regulated by federal, state and local law,
and is directly affected by state and local licensure, fines and loss of
certification to participate in the Medicare and Medicaid programs, as well as
potential criminal penalties. The Balanced Budget Act of 1997 (Budget Act)
enacted a number of anti-fraud and abuse provisions and contains civil monetary
penalties for an operator's violation of the anti-kickback laws. The Budget Act
also imposes an affirmative duty on operators to ensure they do not employ or
contract with persons excluded from the Medicare or other governmental programs.
It also provides a minimum ten-year period for exclusion for participation in
federal healthcare programs for operators convicted of a prior healthcare
offense.
Governmental investigations and enforcement of healthcare laws have
increased dramatically and are expected to continue to increase. The increase in
governmental investigations could have adverse effects on an operator's results
of operations, liquidity and financial condition which could also adversely
affect an operator's ability to make timely rent or interest payments to the
Company. Additionally, the Budget Act, future healthcare legislation or other
changes in administration or interpretation of governmental healthcare programs
may have a material adverse effect on the liquidity, financial condition or
results of operations of the Company's operators, which could also have a
material adverse effect on their ability to make rent and interest payments to
the Company.
Potential Reduction in Revenues of Lessees/Borrowers Due to Healthcare
Reform. All of the Company's properties are used as healthcare facilities, and
therefore, the Company is directly affected by the risk associated with the
healthcare industry. The Company's lessees and mortgagors derive a substantial
portion of their net operating revenues from third party payers, including the
Medicare and Medicaid programs. Such programs are highly regulated and subject
to frequent and substantial changes. Effective January 1, 1999, the majority of
skilled nursing facilities shifted from payments based on reimbursable cost to a
prospective payment system (PPS) for services provided to Medicare
beneficiaries. Implementation of PPS will affect each long-term care facility to
a different degree depending upon the amount of revenue it derives from Medicare
patients. Long-term care facilities may need to restructure their operations to
operate profitably under the new Medicare PPS reimbursement.
In addition, private payers, including managed care payers, are
increasingly demanding discounted fee structures and the assumption by
healthcare providers of all or a portion of the financial risk of operating a
healthcare facility. Efforts to impose greater discounts and more stringent cost
controls are expected to continue. Any changes in reimbursement policies which
reduce reimbursement levels could adversely affect revenues of the Company's
lessees and borrowers and thereby adversely affect those lessees' and borrowers'
abilities to make their monthly lease or debt payments to the Company.
The possibility that the healthcare facilities will not generate income
sufficient to meet operating expenses or will yield returns lower than those
available through investments in comparable real estate or other investments are
additional risks of investing in healthcare related real estate. Income from
properties and yields from investments in such properties may be affected by
many factors, including changes in governmental regulation (such as zoning
laws), general or local economic conditions (such as fluctuations in interest
rates and employment conditions), the available local supply and demand for
improved real estate, a reduction in rental income as the result of an inability
to maintain occupancy levels, natural disasters (such as earthquakes and floods)
or similar factors.
Real estate investments are relatively illiquid and, therefore, tend to
limit the ability of the Company to vary its portfolio promptly in response to
changes in economic or other conditions. All of the Company's properties are
"special purpose" properties that could not be readily converted to general
residential, retail or office use. Healthcare facilities that participate in
Medicare and/or Medicaid programs must meet extensive program requirements,
including physical plant and operational requirements, which are revised from
time to time. Such requirements may include a duty to admit Medicare and
Medicaid patients, limiting the ability of the facility to increase its private
pay census beyond certain limits. Medicare and Medicaid facilities are regularly
inspected to determine compliance and may be excluded from the programs -- in
some cases without a prior hearing -- for failure to meet program requirements.
Transfers of nursing homes and other healthcare-related facilities between
operators are subject to regulatory approvals not required for transfers of
other types of commercial operations and other types of real estate. Thus, if
the operation of any of the Company's properties becomes unprofitable due to
competition, age of improvements or other factors such that the lessee or
borrower becomes unable to meet its obligations on the lease or mortgage loan,
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the liquidation value of the property may be substantially less, particularly
relative to the amount owing on any related mortgage loan, than would be the
case if the property were readily adaptable to other uses.
Other changes in the healthcare industry include continuing trends toward
shorter lengths of stay, increased use of outpatient services, increased
federal, state and third party regulation and 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. Finally, healthcare regulation through
Certificates of Need ("CON") has 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 California and Texas. 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.
Potential Risks from Bankruptcies
Generally, the Company's lease arrangements with a single operator who
operates more than one of the Company's facilities is pursuant to a single
master lease (a "Master Lease" or collectively, the "Master Leases"). Although
each lease or Master Lease provides that the Company may terminate the Master
Lease upon the bankruptcy or insolvency of the tenant, the Bankruptcy Reform Act
of 1978 ("Bankruptcy Code") provides that a trustee in a bankruptcy or
reorganization proceeding under the Bankruptcy Code (or debtor-in-possession in
a reorganization under the Bankruptcy Code) has the power and the option to
assume or reject the unexpired lease obligations of a debtor-lessee. In the
event that the unexpired lease is assumed on behalf of the debtor-lessee, all
the rental obligations thereunder generally would be entitled to a priority over
other unsecured claims. However, the court also has the power to modify a lease
if a debtor-lessee in a reorganization were required to perform certain
provisions of a lease that the court determined to be unduly burdensome. It is
not possible to determine at this time whether or not any lease or Master Lease
contains any such provisions. If a lease is rejected, the lessor has a general
unsecured claim limited to any unpaid rent already due plus an amount equal to
the rent reserved under the lease, without acceleration, for the greater of one
year or 15% of the remaining term of such lease, not to exceed three years. If
any lease is rejected, the Company may also lose the benefit of any
participation interest or conversion right.
Generally, with respect to the Company's mortgage loans, the imposition of
an automatic stay under the Bankruptcy Code precludes lenders from exercising
foreclosure or other remedies against the debtor. A mortgagee also is treated
differently from a landlord in three key respects. First, the mortgage loan is
not subject to assumption or rejection because it is not an executory contract
or a lease. Second, the mortgagee's loan may be divided into (1) a secured loan
for the portion of the mortgage debt that does not exceed the value of the
property and (2) a general unsecured loan for the portion of the mortgage debt
that exceeds the value of the property. A secured creditor such as the Company
is entitled to the recovery of interest and costs only if and to the extent that
the value of the collateral exceeds the amount owed. If the value of the
collateral is less than the debt, a lender such as the Company would not receive
or be entitled to any interest for the time period between the filing of the
case and confirmation. If the value of the collateral does exceed the debt,
interest and allowed costs may not be paid during the bankruptcy proceeding, but
accrue until confirmation of a plan or reorganization or some other time as the
court orders. Finally, while a lease generally would either be rejected or
assumed with all of its benefits and burdens intact, the terms of a mortgage,
including the rate of interest and timing of principal payments, may be modified
if the debtor is able to effect a "cramdown" under the Bankruptcy Code.
The receipt of liquidation proceeds or the replacement of an operator that
has defaulted on its lease or loan could be delayed by the approval process of
any federal, state or local agency necessary for the transfer of the property or
the replacement of the operator licensed to manage the facility. In addition,
certain significant expenditures associated with real estate investment (such as
real estate taxes and maintenance costs) are generally not reduced when
circumstances cause a reduction in income from the investment. In order to
protect its investments, the Company may take possession of a property or even
become licensed as an operator, which might expose the Company to successorship
liability to government programs or require indemnity of subsequent operators to
whom it might transfer the operating rights and licenses. Should such events
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occur, the Company's income and cash flows from operations would be adversely
affected. See Note 3 - Mortgage Notes Receivable and Note 4 - Concentration of
Risk to the Company's consolidated financial statements with respect to certain
of the Company's tenants and mortgagors.
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.
Possible Change of Investment Strategies and Policies and Capital Structure
The Board of Directors, without the approval of the shareholders, may alter
the Company's investment strategies and policies if they determine in the future
that such a change is in the best interests of the Company and its shareholders.
The methods of implementing the Company's investment strategies and policies may
vary as new investments and financing techniques are developed.
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. (55) has been President and Chief Executive Officer of
the Company since March 1992, and Chairman of the Board of Directors 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 was formerly a director of Evergreen
Healthcare, Inc., which was a NYSE Company engaged in the operation of long-term
healthcare facilities, and of Vitalink Pharmacy Services Inc., a NYSE listed
company and the operator of institutional pharmacies serving the long-term care
industry in the United States. Mr. Bailey serves as President, Chief Executive
Officer and a director of Omega Worldwide Inc. and is the Managing Director of
Principal Healthcare Finance Limited and Principal Healthcare Finance Trust.
F. Scott Kellman (43) joined the Company as Senior Vice
President-Acquisitions in August 1993, and was appointed Executive Vice
President in August 1994 and Chief Operating Officer in March 1998. 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 September 1991 to December 1992, he was employed by Philadelphia
First Group, and from January 1993 through August of 1993 he was the Chief
Operating Officer of Medical REIT. Since April 1998 Mr. Kellman also has been a
Vice President of Omega Worldwide Inc.
David A. Stover (54) 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
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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. From April 1998 through February 1999, Mr. Stover
was the Vice President and Chief Financial Officer of Omega Worldwide Inc.
James P. Flaherty (52) joined the Company in 1996 and was appointed Vice
President-International and Managing Director 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. Since April 1998 Mr. Flaherty also
has been Chief Operating Officer of Omega Worldwide Inc.
Susan A. Kovach (40) 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. Since April 1998 Ms. Kovach has served as Vice
President, General Counsel and Secretary of Omega Worldwide Inc.
Laurence Rich (40) joined the Company in January 1998 after five years as a
lawyer with the firms of Dykema Gossett PLLC and Pepper, Hamilton & Scheetz. He
was appointed Vice President of Acquisitions in January 1999. 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.
Other Key Personnel
Carol Albaugh (37), Controller, joined the Company in December 1996 after
completing her MBA at the University of Michigan. Prior to joining the Company,
she held various progressively responsible positions at Borders Group
Incorporated, most recently serving as Manager of Financial Planning and
Analysis through March 1996.
Mike Clark (45), Managing Director of Information Technology, joined the
Company in May 1998. Prior to joining the Company, he was the Vice President of
Information Technology for Argonaut Relocation Services. Mr. Clark has over
20 years experience in all aspects of information technology, with particular
expertise in information modeling and database design. He holds a B.S. in
chemical engineering from the University of Michigan.
Thomas Peterson (40), Managing Director -- Acquisitions, joined the Company
in May 1998 after 13 years of investment banking and financial advisory
experience. Prior to joining the Company, he served as a Principal with
Cornerstone Resources in New York, a venture capital and financial advisory
firm, and from 1993 to 1996 as a Vice President for First Albany Corporation.
Prior to 1993, he managed various financial advisory and investment banking
activities, ultimately serving as a partner in a senior services company. He has
an MBA in finance from the State University of New York at Albany.
Stephen E. Kile (34), Credit and Compliance Manager, joined the Company
in June, 1998. Prior to joining the Company, he was the Controller for Arbor
Intelligent Systems and a Commercial Lending Officer and Credit Analyst with
Comerica Bank. Mr. Kile holds an MBA from the University of Michigan.
Jonathan M. Veniar (50) Managing Director, joined the Company in December
1999. Prior to joining the Company, he was Vice President of Acquisitions for
the Arnold Palmer Golf Management Company in San Francisco, California. Mr.
Veniar received his MBA, with a concentration in finance, from Rutgers
University in Newark, New Jersey.
8
<PAGE>
Item 2 -- Properties
At December 31, 1999, the Company's real estate investments were in
long-term care facilities, medical office buildings and rehabilitation
hospitals. The investments are either in the form of purchased facilities, which
are leased to operators, or mortgages on facilities which are operated by the
mortgagors or their affiliates. The facilities are located in 28 states and are
operated by 24 unaffiliated operators. Basic information regarding investments
as of December 31, 1999 is as follows:
<TABLE>
<CAPTION>
No. Of No. Of
Investment Structure/Operator Beds Facilities Occupancy % (1)
----------------------------- ---- ---------- ---------------
<S> <C> <C> <C>
Purchase/Leaseback
Sun Healthcare Group, Inc ................................ 5,410 50 91
Advocat, Inc ............................................. 2,976 28 80
RainTree Healthcare Corporation .......................... 1,780 18 81
Integrated Health Services, Inc .......................... 1,581 11 82
TLC Healthcare, Inc ...................................... 1,260 9 81
Alden Management Services, Inc ........................... 868 4 81
USA Healthcare, Inc ...................................... 668 8 73
Alterra Healthcare Corporation (f.k.a. Alternative
Living Services) ....................................... 361 * 10 N/A
Hunter Management Group, Inc ............................. 300 1 81
HQM of Floyd County, Inc ................................. 283 3 97
Peak Medical of Idaho, Inc ............................... 224 2 78
Eldorado Care Center, Inc. & Magnolia Manor, Inc ......... 171 2 78
Kansas & Missouri, Inc ................................... 120 1 88
Liberty Assisted Living Centers, LP ...................... 120 1 89
Tutera Evergreen, LLC .................................... 57 1 85
Tenet Healthcare Corp .................................... 0 3 N/A
------ ----- -----
16,179 152 84
Convertible Participating Mortgages
Colony of North Carolina/Sun Healthcare Group, Inc ....... 546 4 94
Integrated Health Services, Inc .......................... 180 1 82
Senior Care Properties, Inc .............................. 150 2 70
----- ----- -----
876 7 87
Participating Mortgages
Mariner Post-Acute Network ............................... 2,310 16 85
Integrated Health Services, Inc .......................... 1,144 9 91
Advocat, Inc ............................................. 317 3 67
TLC Healthcare, Inc ...................................... 75 1 95
----- ----- -----
3,846 29 86
Fixed Rate Mortgages
Texas Health Enterprises/HEA Mgmt. Group, Inc ............ 679 5 64
Essex Healthcare Corporation ............................. 633 6 82
Advocat, Inc ............................................. 423 4 74
Emerald Healthcare, Inc .................................. 300 2 92
Tiffany Care Centers, Inc ................................ 319 5 79
Integrated Health Services, Inc .......................... 160 2 92
Covenant Care, Inc ....................................... 150 1 69
TLC Healthcare, Inc ...................................... 100 1 84
Rocky Mountain Health Care ............................... 86 1 76
Senior Care Properties, Inc .............................. 76 1 83
----- ----- -----
2,926 28 77
----- ----- -----
Total ............................................. 23,827 216 84
====== ===== =====
</TABLE>
(1) Generally represents data for the twelve month period ending September 30,
1999.
*Represents Assisted Living Units.
N/A - Data not reported or not applicable.
9
<PAGE>
<TABLE>
<CAPTION>
Total
Number of Total Investment Investment
Investment Structure/State Facilities Beds (1) (in $1,000) Yield
- -------------------------- ---------- -------- ----------- -----
<S> <C> <C> <C> <C>
Purchase/Leaseback Properties:
Florida ........................................ 9 1,469 $74,643 11.17 %
Illinois ....................................... 12 1,736 66,067 10.57
California ..................................... 18 1,454 65,913 10.22
Texas .......................................... 14 1,874 50,499 12.36
Pennsylvania ................................... 5 413 49,931 13.06
Ohio ........................................... 7 649 39,908 10.77
Arkansas ....................................... 12 1,281 39,361 14.10
Alabama ........................................ 9 1,152 35,932 12.70
West Virginia .................................. 7 734 30,579 10.82
Kentucky ....................................... 9 757 26,963 12.80
Arizona ........................................ 4 378 24,029 9.74
Indiana ........................................ 8 523 23,026 11.99
North Carolina ................................. 5 709 22,709 10.61
Washington ..................................... 3 362 21,574 11.53
Tennessee ...................................... 6 636 21,553 12.13
Colorado ....................................... 5 314 17,504 9.60
Iowa ........................................... 8 668 17,213 10.61
Missouri ....................................... 2 286 12,302 10.20
Idaho .......................................... 3 264 11,100 10.33
Massachusetts .................................. 1 135 8,300 11.47
Kansas.. ....................................... 2 154 5,919 9.63
New Hampshire .................................. 1 68 5,800 10.61
Louisiana ...................................... 1 131 4,603 11.97
Oklahoma ....................................... 1 32 3,177 10.37
--- ------ ------- -----
Total Purchase/Leaseback .................... 152 16,179 678,605 11.42
Convertible Participating Mortgages:
Tennessee ...................................... 4 546 21,560 14.20
Florida ........................................ 3 330 10,796 10.86
- --- ------ -----
Total Convertible Participating Mortgages ... 7 876 32,356 13.08
Participating Mortgages:
Michigan ....................................... 13 1,863 46,240 15.47
Florida ........................................ 8 917 35,899 10.97
North Carolina ................................. 3 447 12,560 15.47
Georgia ........................................ 2 304 12,000 10.08
Texas .......................................... 2 240 8,633 10.20
Indiana ........................................ 1 75 4,438 10.40
-- ----- ------- -----
Total Participating Mortgages ............... 29 3,846 119,770 13.01
Fixed Rate Mortgages:
Florida ........................................ 6 723 25,860 11.62
Ohio ........................................... 6 633 16,656 11.01
Texas .......................................... 6 755 7,033 9.73
Missouri ....................................... 5 319 5,122 11.45
Iowa ........................................... 2 250 3,589 12.00
Utah ........................................... 1 86 1,886 11.00
California ..................................... 1 87 1,056 9.00
Nevada ......................................... 1 73 289 9.00
- -- --- ----
Total Fixed Rate Mortgages .................. 28 2,926 61,491 11.17
-- ----- ------ -----
Total Real Estate Investments ............... 216 23,827 $892,222 11.68 %
=== ====== ======== =====
</TABLE>
(1) Beds include a total of 361 assisted living units.
10
<PAGE>
Item 3 -- Legal Proceedings
There were no legal proceedings pending as of December 31, 1999, or as of
the date of this report, to which the Company is a party or to which the
properties are subject, which were likely to have a material adverse effect on
the operations of the Company or on its financial condition.
Item 4 -- 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 closing prices as reported on the New York Stock
Exchange Composite and cash dividends per share:
<TABLE>
<CAPTION>
1999 1998
------------------------------------------- -------------------------------------------
Dividends Dividends
Quarter High Low Per Share Quarter High Low Per Share
--------- ------- ------- ---------- ---------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
First $30.5000 $21.1875 $ 0.70 First $ 39.9375 $ 37.9375 $ 0.67
Second 28.6875 21.3750 0.70 Second 39.7500 33.8125 0.67
Third 25.8125 19.8125 0.70 Third 35.6250 27.4375 0.67
Fourth 21.0000 12.5625 0.70 Fourth 32.6250 28.0625 0.67
------- -----
$ 2.80 $ 2.68
</TABLE>
The closing price on December 31, 1999 was $12.6875 per share. As of
December 31, 1999, there were 19,877,371 shares of common stock outstanding with
approximately 2,800 registered holders and approximately 26,000 beneficial
owners.
11
<PAGE>
Item 6 -- Selected Financial Data
The following selected financial data with respect to the Company should be
read in conjunction with the Company's Consolidated Financial Statements which
are listed herein under Item 14 and are included on pages F-1 through F-20.
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Operating Data
Revenues ......................................... $122,375 $108,738 $ 90,820 $ 73,127 $ 61,430
Net Earnings Available to Common (before
loss on assets sold and held for sale
in 1999, gain on asset dispositions
in 1998 and Extraordinary Charge in 1995) ...... 40,047 41,777 41,305 34,590 29,490
Net Earnings Available to Common ................. 10,040 68,015 41,305 34,590 23,011
Per Share Amounts:
Net Earnings (before loss on assets sold
and held for sale in 1999, gain on asset
dispositions in 1998 and Extraordinary
Charge in 1995):
Basic ....................................... $2.01 $2.09 $2.16 $2.01 $1.83
Diluted ..................................... 2.01 2.08 2.16 2.01 1.83
Net Earnings Available to Common:
Basic .......................................... 0.51 3.39 2.16 2.01 1.43
Diluted ........................................ 0.51 3.39 2.16 2.01 1.43
Dividends, Common Stock (1) ...................... 2.80 2.68 2.58 2.48 2.36
Dividends, Series A Preferred (1) ................ 2.31 2.31 1.16
Dividends, Series B Preferred (1) ................ 2.16 1.08
Weighted Average Shares Outstanding, Basic ....... 19,877 20,034 19,085 17,196 16,071
Weighted Average Shares Outstanding, Diluted ..... 19,877 20,041 19,137 17,240 16,081
</TABLE>
<TABLE>
<CAPTION>
December 31,
------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Balance Sheet Data
Cost of Investments .................... $953,927 $1,025,586 $839,927 $643,261 $547,923
Other Real Estate ...................... 65,847 - - - -
Assets Held for Sale ................... 36,406 35,289 - - -
Total Assets ........................... 1,013,851 1,032,645 816,108 634,836 551,188
Acquisition Line of Credit ............. 166,600 123,000 58,300 6,000 74,690
Long-Term Borrowings ................... 326,947 333,354 208,966 135,659 120,453
Subordinated Convertible Debentures .... 48,405 48,405 62,485 94,810 -
Shareholders' Equity ................... 457,081 505,762 468,221 383,007 347,129
</TABLE>
- ----------
(1) 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
"Safe Harbor" Statement Under the United States Private Securities Litigation
Reform Act of 1995
Statements contained in this document that are not based on historical fact
are "forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements include statements
regarding the Company's future development activities, the future condition and
expansion of the Company's markets, the Company's ability to meet its liquidity
requirements and the Company's growth strategies, as well as other statements
which may be identified by the use of forward-looking terminology such as "may,"
12
<PAGE>
"will," "expect," "estimate," "anticipate," or similar terms, variations of
those terms or the negative of those terms. Statements that are not historical
facts contained in Management's Discussion and Analysis are forward-looking
statements that involve risks and uncertainties that could cause actual results
to differ from projected results. Some of the factors that could cause actual
results to differ materially include: The financial strength of the operators of
the Company's facilities as it affects their continuing ability to meet their
obligations to the Company under the terms of the Company's agreements with such
operators; changes in the reimbursement levels under the Medicare and Medicaid
programs; operators' continued eligibility to participate in the Medicare and
Medicaid programs; changes in reimbursement by other third party payors;
occupancy levels at the Company's facilities; the availability and cost of
capital; the strength and financial resources of the Company's competitors; the
Company's ability to make additional real estate investments at attractive
yields; and changes in tax laws and regulations affecting real estate investment
trusts.
Following is a discussion of the consolidated results of operations,
financial position and liquidity and capital resources of the Company, which
should be read in conjunction with the consolidated financial statements and
accompanying notes.
Results of Operations
Year Ended December 31, 1999 compared to Year Ended December 31, 1998
Revenues for the year ended December 31, 1999 totaled $122,375,000,
increasing $13.6 million over 1998 revenues. The 1999 revenue growth stems
primarily from additional investments during 1998 and 1999. A partial year of
revenues from 1999 investments provided revenue increases of approximately $7.4
million, while a full year of revenues from 1998 investments added $13.5 million
to revenues. Revenues for 1999 also include $1.1 million from assets classified
as Other Real Estate, $852,000 from prepayment penalties on mortgage payoffs and
approximately $1.6 million of the revenue growth which stems from participating
incremental revenues which became effective during 1999. A $10.7 million
decrease in revenues resulted from the early payoff of mortgages, disposition of
real estate and the designation of assets as "held for sale."
Real estate investments of $892.2 million as of December 31, 1999 will
provide 2000 annualized revenues of $104.2 million, which reflects no revenues
from assets designated as "other real estate" or as "held for sale." Revenues
from the investment portfolio will continue at this level until additional 2000
investments are made, if any, and additional escalation provisions commence in
2000. Annualized revenues for 2000 represent a $8.1 million decrease from the
1999 annualized revenues of $112.3 million based on real estate investments of
$983.8 million as of January 1, 1999.
Expenses for the year ended December 31, 1999 totaled $72,697,000,
increasing approximately $13.9 million over expenses of $58.8 million for 1998.
The 1999 provision for depreciation and amortization of real estate totaled
$24,211,000, increasing $2.7 million over 1998. This increase stems from a full
year provision for 1998 investments, plus a partial year provision for 1999
investments.
Interest expense for the year ended December 31, 1999 was approximately
$42,366,000, compared with $31.9 million for 1998. The increase in 1999 is
primarily due to higher average outstanding borrowings during the 1999 period
offset by lower average interest rates.
General and administrative expenses for 1999 totaled $6,120,000 or
approximately 5.0% of revenues as compared to 4.9% for 1998.
No provision for Federal income taxes has been made since the Company
intends to continue to qualify as a real estate investment trust under the
provisions of Sections 856 through 860 of the Internal Revenue Code of 1986, as
amended. Accordingly, the Company will not be subject to Federal income taxes on
amounts distributed to shareholders, provided it distributes at least 95% of its
real estate investment trust taxable income and meets certain other conditions.
Funds from operations (FFO) for the year ended December 31, 1999 totaled
$67,482,000, an increase of $2.4 million over the $65.1 million for 1998. FFO is
net earnings available to common shareholders, excluding any gains or losses
from debt restructuring and the effects of asset dispositions, plus depreciation
and amortization associated with real estate investments and charges to earnings
for non-cash common stock based compensation. The 1999 increase in cash flow is
primarily due to new additions to investments, offset by early payment of
mortgages and disposition of real estate assets.
13
<PAGE>
Year Ended December 31, 1998 compared to Year Ended December 31, 1997
Revenues for the year ended December 31, 1998 totaled $108,738,000,
increasing $17.9 million over 1997 revenues. The 1998 revenue growth stems
primarily from additional investments during 1997 and 1998. A partial year of
revenues from 1998 investments provided revenue increases of approximately $9.5
million, while a full year of revenues from 1997 investments added $11.3 million
to revenues. Additionally, approximately $2.3 million of the revenue growth
stems from participating incremental revenues which became effective during
1998.
Real estate investments of $983.8 million as of December 31, 1998 will
provide 1999 annualized revenues of $112.3 million, which reflects no additional
revenues for assets held for sale. Revenues will continue at this level until
additional 1999 investments are made and additional escalation provisions
commence in 1999. Annualized revenues for 1999, excluding assets held for sale,
represent a $19.2 million increase over the 1998 annualized revenues of $93.1
million based on real estate investments of $779.4 million as of January 1,
1998.
Expenses for the year ended December 31, 1998 totaled $58,767,000,
increasing approximately $12.8 million over expenses of $45.9 million for 1997.
The 1998 provision for depreciation and amortization of real estate totaled
$21,542,000, increasing $4.6 million over 1997. This increase stems from a full
year provision for 1997 investments, plus a partial year provision for 1998
investments.
Interest expense for the year ended December 31, 1998 was approximately
$31,860,000, compared with $24.4 million for 1997. The increase in 1998 is
primarily due to higher average outstanding borrowings during the 1998 periods,
offset partially by interest rate savings from conversions of subordinated
debentures and reduced spreads on line of credit borrowings.
General and administrative expenses for 1998 totaled $5,365,000 or
approximately 4.9% of revenues as compared to 5.1% for 1997. The 1998 percentage
decrease stems primarily from economies of scale resulting from additional
investments made in 1998.
No provision for Federal income taxes has been made since the Company
intends to continue to qualify as a real estate investment trust under the
provisions of Sections 856 through 860 of the Internal Revenue Code of 1986, as
amended. Accordingly, the Company will not be subject to Federal income taxes on
amounts distributed to shareholders, provided it distributes at least 95% of its
real estate investment trust taxable income and meets certain other conditions.
Funds from operations (FFO) for the year ended December 31, 1998 totaled
$65,050,000, an increase of $6.3 million over the $58.8 million for 1997. FFO is
net earnings available to common shareholders, excluding any gains or losses
from debt restructuring and the effects of asset dispositions, plus depreciation
and amortization associated with real estate investments and charges to earnings
for non-cash common stock based compensation. The 1998 growth in cash flow is
primarily due to net additions to investments in 1998 and 1997.
Liquidity and Capital Resources
The Company expects to continue to seek new investments in healthcare
properties, primarily long-term care facilities, with the objective of
profitable growth and further diversification of the investment portfolio.
Permanent financing for future investments is expected to be provided through a
combination of private and public offerings of debt and equity securities.
At December 31, 1999, the Company has total assets of $1.01 billion,
shareholders' equity of $457.1 million, and long-term debt of $375.4 million,
representing approximately 37% of total capitalization. Long-term debt excludes
funds borrowed under its acquisition credit agreements. The Company has $250
million available under its revolving credit facilities, of which $166.6 million
was drawn at year-end. Proceeds from asset sales and mortgage payments are
expected to reduce borrowings on the credit facility by approximately $40
million during 2000.
The Company has approximately $80 million of indebtedness that matures July
15, 2000 and the term of its revolving credit facility expires September 30,
2000. The Company intends to extend the maturity of its revolving credit
14
<PAGE>
facility and to refinance the term indebtedness, and may fix debt represented by
the revolving credit facility and liquidate assets to pay such indebtedness or
implement a plan which includes a combination of the foregoing. Management
believes the Company's liquidity and various sources of available capital are
adequate to finance operations, meet debt service requirements and fund future
investments.
On January 14, 1999, the Company's Form S-3 registration statement
permitting the issuance of up to $300 million related to common stock,
unspecified debt, preferred stock and convertible securities was declared
effective by the Securities and Exchange Commission.
The Company distributes a large portion of the cash available from
operations. The Company's historical policy has been to make distributions on
common stock of approximately 80% of FFO. Cash dividends paid totaled $2.80 per
share for 1999, compared with $2.68 per share for the year ended December 31,
1998. The dividend payout ratio, that is the ratio of per share amounts for
dividends paid to the diluted per share amounts of funds from operations, was
approximately 84.3% for 1999 and 1998. The Company believes that cash provided
from quarterly operating activities at current levels will continue to be
sufficient to fund normal working capital requirements and common stock
dividends.
New investments generally are funded from temporary borrowings under the
Company's acquisition credit line agreements. Interest cost incurred by the
Company on borrowings under the revolving credit line facilities will vary
depending upon fluctuations in prime and/or LIBOR rates. With respect to the
unsecured acquisition credit line, interest rates depend in part upon changes in
the Company's ratings by national agencies. The term of the $200 million
unsecured facility expires on September 30, 2000. Borrowings under the facility
bear interest at LIBOR plus 1.125% or, at the Company's option, at the prime
rate. Borrowings under the $50 million facility bear interest at LIBOR plus
2.00% or, at the Company's option, at the prime rate. The Company expects to
periodically replace funds drawn on the revolving credit facilities through
fixed-rate long-term borrowings, the placement of convertible debentures, or the
issuance of additional shares of common and/or preferred stock. Historically,
the Company's strategy has been to match the maturity of its indebtedness with
the maturity of its assets and to employ fixed-rate long-term debt to the extent
practicable.
Market Risk
The Company is exposed to various market risks, including the potential loss
arising from adverse changes in interest rates. The Company does not enter into
derivatives or other financial instruments for trading or speculative purposes.
The Company seeks to mitigate the effects of fluctuations in interest rates by
matching the term of new investments with new long-term fixed rate borrowing to
the extent possible.
The market value of the Company's long-term fixed rate borrowings and
mortgages are subject to interest rate risk. Generally, the market value of
fixed rate financial instruments will decrease as interest rates rise and
increase as interest rates fall. The estimated fair value of the Company's total
long-term borrowings at December 31, 1999 was $330 million. A 1% increase in
interest rates would result in a decrease in fair value of long-term borrowings
by approximately $9.0 million. The estimated fair value of the Company's total
mortgages portfolio at December 31, 1999 was $231 million. A 1% increase in
interest rates would result in a decrease in fair value of the mortgage
portfolio by approximately $9.1 million.
The Company is subject to risks associated with debt or preferred equity
financing, including the risk that existing indebtedness may not be refinanced
or that the terms of such refinancing may not be as favorable as the terms of
current indebtedness. If the Company were unable to refinance its indebtedness
on acceptable terms, it might be forced to dispose of properties on
disadvantageous terms, which might result in losses to the Company and might
adversely affect the cash available for distribution to shareholders. If
interest rates or other factors at the time of the refinancing result in higher
interest rates upon refinancing, the Company's interest expense would increase,
which might affect the Company's ability to make common stock distributions to
its shareholders.
The majority of the Company's borrowings were completed pursuant to
indentures which limit the amount of indebtedness the Company may incur.
Accordingly, in the event that the Company is unable to raise additional equity
or borrow money because of these limitations, the Company's ability to acquire
15
<PAGE>
additional properties may be limited. If the Company is unable to acquire
additional properties, its ability to increase the distributions with respect to
common shares, as it has done in the past, will be limited to management's
ability to increase funds from operations, and thereby cash available for
distribution, from the existing properties in the Company's portfolio.
Year 2000 Compliance
The Company is not aware of any significant adverse effects of Year 2000 on
its systems and operations.
Item 8 -- Financial Statements and Supplementary Data
The consolidated financial statements and report of independent auditors are
filed as part of this report on pages F-1 through F-20.
The summary of quarterly results of operations for the years ended December
31, 1999 and 1998 is included in unaudited Note 15 to the financial statements
which is incorporated herein by reference in response to Item 302 of Regulation
S-K.
Item 9 -- Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
16
<PAGE>
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 April 18, 2000 at 11:00 a.m.
EST, which will be filed on or before February 29, 2000 with the Securities and
Exchange Commission pursuant to Regulation 14A.
Item 11 -- Executive Compensation
The information required by this item is incorporated herein by reference to
the Company's definitive proxy statement for the Annual Meeting of Shareholders
to be held on April 18, 2000, which will be filed on or before February 29, 2000
with the Securities and Exchange Commission pursuant to Regulation 14A.
Item 12 -- Security Ownership of Certain Beneficial Owners and Management
The information required by this item is incorporated herein by reference to
the Company's definitive proxy statement for the Annual Meeting of Shareholders
to be held on April 18, 2000, which will be filed on or before February 29, 2000
with the Securities and Exchange Commission pursuant to Regulation 14A.
Item 13 -- Certain Relationships and Related Transactions
The information required by this item is incorporated herein by reference to
the Company's definitive proxy statement for the Annual Meeting of Shareholders
to be held on April 18, 2000, which will be filed on or before February 29, 2000
with the Securities and Exchange Commission pursuant to Regulation 14A.
17
<PAGE>
PART IV
Item 14 -- Exhibits, Financial Statements, Financial Statement Schedules and
Reports on Form 8-K
(a)(1) Listing of Consolidated Financial Statements
Page
Title of Document Number
----------------- ------
Report of Independent Auditors .................................... F-1
Consolidated Balance Sheets as of December 31, 1999 and 1998 ...... F-2
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998 and 1997 ................................ F-3
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1999, 1998 and 1997 .................... F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997 ................................ F-5
Notes to Consolidated Financial Statements ........................ F-6
(a)(2) Listing of Financial Statement Schedules. The following consolidated
financial statement schedules are included herein:
Schedule III -- Real Estate and Accumulated Depreciation
Schedule IV -- Mortgage Loans on Real Estate
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been omitted.
(a)(3) Listing of Exhibits -- See Index to Exhibits beginning on Page I-1 of
this report.
(b) Reports on Form 8-K. There were no 8-K filings in the fourth quarter of
1999.
(c) Exhibits -- See Index to Exhibits beginning on Page I-1 of this report.
(d) Financial Statement Schedules -- The following consolidated financial
statement schedules are included herein:
Schedule III Real Estate and Accumulated Depreciation
Schedule IV Mortgage Loans on Real Estate
18
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Omega Healthcare Investors, Inc.
We have audited the accompanying consolidated balance sheets of Omega
Healthcare Investors, Inc. and subsidiaries as of December 31, 1999 and 1998 and
the related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1999. Our
audits also included the financial statement schedules listed in the Index at
Item 14(a). These financial statements and schedules are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedules based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Omega Healthcare Investors, Inc. and subsidiaries at December 31, 1999 and 1998,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedules, when considered in relation
to the basic financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
/s/ Ernst & Young LLP
Detroit, Michigan
January 21, 2000
F-1
<PAGE>
OMEGA HEALTHCARE INVESTORS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
1999 1998
------------------
(In Thousands)
<S> <C> <C>
ASSETS
Investments in real estate:
Real estate properties - net ....................................... $ 612,751 $ 586,993
Mortgage notes receivable .......................................... 213,617 340,455
------- -------
826,368 927,448
Other real estate - net .............................................. 65,847 -
Other investments .................................................... 61,705 41,753
------ ------
953,920 969,201
Assets held for sale ................................................. 36,406 35,289
Cash and short-term investments ...................................... 4,105 1,877
Non-compete agreements and goodwill - net ............................ 3,013 4,422
Other assets ......................................................... 16,407 21,856
------ ------
Total assets .................................................... $1,013,851 $1,032,645
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Acquisition lines of credit ........................................ $ 166,600 $ 123,000
Unsecured Notes due 2000 ........................................... 81,381 81,381
6.95% Unsecured Notes due 2002 ..................................... 125,000 125,000
6.95% Unsecured Notes due 2007 ..................................... 100,000 100,000
Other long-term borrowings ......................................... 20,566 26,973
Subordinated convertible debentures due 2001 ....................... 48,405 48,405
Accrued expenses and other liabilities ............................. 14,818 22,124
------ ------
Total liabilities ............................................... 556,770 526,883
Shareholders' equity:
Preferred Stock $1.00 par value:
Authorized - 10,000 shares
Issued and outstanding - 2,300 shares Class A
with an aggregate liquidation preference of $57,500 ......... 57,500 57,500
Issued and outstanding - 2,000 shares Class B
with an aggregate liquidation preference of $50,000 ......... 50,000 50,000
Common stock $.10 par value:
Authorized - 100,000 shares in 1999 and 50,000 shares in 1998
Issued and outstanding - 19,877 shares in 1999 and
20,057 shares in 1998 ....................................... 1,988 2,006
Additional paid-in capital ........................................ 447,304 452,439
Cumulative net earnings ........................................... 232,105 212,434
Cumulative dividends paid ......................................... (331,341) (266,054)
Stock option loans ................................................ (2,499) (2,863)
Unamortized restricted stock awards ............................... (526) (461)
Accumulated other comprehensive income ............................ 2,550 761
----- ---
Total shareholders' equity ...................................... 457,081 505,762
------- -------
Total liabilities and shareholders' equity ...................... $1,013,851 $1,032,645
========== ==========
</TABLE>
See accompanying notes.
F-2
<PAGE>
OMEGA HEALTHCARE INVESTORS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998 1997
---- ---- ----
(In thousands, except per share amounts)
<S> <C> <C> <C>
Revenue:
Rental income ................................................... $76,389 $72,072 $54,073
Mortgage interest income ........................................ 36,369 30,399 28,727
Other investment income ......................................... 6,770 5,652 6,888
Other real estate income ........................................ 1,151 - -
Miscellaneous ................................................... 1,696 615 1,132
----- --- -----
122,375 108,738 90,820
Expenses:
Depreciation and amortization ................................... 24,211 21,542 16,910
Interest ........................................................ 42,366 31,860 24,423
General and administrative ...................................... 6,120 5,365 4,636
----- ----- -----
72,697 58,767 45,969
------ ------ ------
Earnings before gain (loss) on asset dispositions ................. 49,678 49,971 44,851
Gain (loss) on asset dispositions:
Gain on distribution of Omega Worldwide, Inc. ................... - 30,240 -
Loss on assets sold and held for sale - net ..................... (30,007) (4,002) -
------- ------ ------
Net earnings ...................................................... 19,671 76,209 44,851
Preferred stock dividends ......................................... (9,631) (8,194) (3,546)
------ ------ ------
Net earnings available to common .................................. $ 10,040 $ 68,015 $ 41,305
======== ======== ========
Net Earnings Available to Common per share:
Basic net earnings before gain (loss) on asset dispositions ..... $2.01 $2.09 $2.16
===== ===== =====
Diluted net earnings before gain (loss) on asset dispositions ... $2.01 $2.08 $2.16
===== ===== =====
Basic net earnings .............................................. $0.51 $3.39 $2.16
===== ===== =====
Diluted net earnings ............................................ $0.51 $3.39 $2.16
===== ===== =====
Weighted Average Shares Outstanding:
Basic ........................................................... 19,877 20,034 19,085
====== ====== ======
Diluted ......................................................... 19,877 20,041 19,137
====== ====== ======
Total comprehensive income ........................................ $ 21,460 $ 76,970 $ 44,851
======== ======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE>
OMEGA HEALTHCARE INVESTORS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Common Additional Cumulative
Stock Paid-in Preferred Net
Par Value Capital Stock Earnings
--------- ------- ----- --------
<S> <C> <C> <C> <C>
Balance at December 31, 1996 (18,175 Shares) ....................... $ 1,817 $ 404,311 $ 91,374
Issuance of common stock:
Grant of restricted stock (39 shares at an average of
$34.488 per share) net of provision charged to operations ....... 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 ............................................. 44,851
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 57,500 136,225
Issuance of common stock:
Grant of restricted stock (3 shares at an average of $38.112
per share) net of provision charged to operations .............. 42
Dividend Reinvestment Plan (58 shares) .......................... 6 1,826
Conversion of debentures, net of issue costs (522 shares) ....... 52 13,810
Stock options exercised (151 shares) ............................ 15 3,780
Acquisition of real estate (8 shares) ........................... 1 282
Stock option loans from directors, officers and employees
Shares purchased and retired (156 shares) ....................... (15) (4,515)
Issuance of preferred stock ...................................... (2,000) 50,000
Net earnings for 1998 ............................................ 76,209
Distribution of common shares of Omega Worldwide, Inc.
Common dividends paid ($2.68 per share)
Preferred dividends paid (Series A of $2.312 per share and
Series B of $1.078 per share)
Unrealized Gain on Omega Worldwide, Inc.
------------------------------------------------------
Balance at December 31, 1998 (20,057 shares) ....................... 2,006 452,439 107,500 212,434
Issuance of common stock:
Grant of restricted stock (1 shares at an average of $29.709
per share) net of provision charged to operations ................ 270
Dividend Reinvestment Plan (113 shares) ........................... 11 2,370
Acquisition of real estate (8 shares) ............................. 1 301
Payments on stock option loans from directors, officers and employees
Shares purchased and retired (320 shares) ........................ (30) (8,076)
Net earnings for 1999 ............................................. 19,671
Common dividends paid ($2.80 per share)
Preferred dividends paid (Series A of $2.313 per share and
Series B of $2.156 per share)
Unrealized Gain on Omega Worldwide, Inc.
------------------------------------------------------
Balance at December 31, 1999 (19,877 shares) ...................... $ 1,988 $ 447,304 $ 107,500 $ 232,105
======================================================
F-4
<PAGE>
Accumulated
Unamortized Stock Other
Cumulative Restricted Option Comprehensive
Dividends Stock Awards Loans Income
--------- ------------ ----- ------
Balance at December 31, 1996 (18,175 Shares) ..................... $(114,393) $ (102)
Issuance of common stock:
Grant of restricted stock (39 shares at an average of
$34.488 per share) net of provision charged to operations ..... (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
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) ..................... (165,824) (841)
Issuance of common stock:
Grant of restricted stock (3 shares at an average of $38.112
per share) net of provision charged to operations ............. 380
Dividend Reinvestment Plan (58 shares)
Conversion of debentures, net of issue costs (522 shares)
Stock options exercised (151 shares)
Acquisition of real estate (8 shares)
Stock option loans from directors, officers and employees ...... $ (2,863)
Shares purchased and retired (156 shares)
Issuance of preferred stock
Net earnings for 1998
Distribution of common shares of Omega Worldwide, Inc. ........... (39,062)
Common dividends paid ($2.68 per share) .......................... (53,693)
Preferred dividends paid (Series A of $2.312 per share and
Series B of $1.078 per share) .................................... (7,475)
Unrealized Gain on Omega Worldwide, Inc. ......................... $ 761
---------------------------------------------------------
Balance at December 31, 1998 (20,057 shares) ...................... (266,054) (461) (2,863) 761
Issuance of common stock:
Grant of restricted stock (1 shares at an average of $29.709
per share) net of provision charged to operations ................ (65)
Dividend Reinvestment Plan (113 shares)
Acquisition of real estate (8 shares)
Payments on stock option loans from directors,
officers and employees ......................................... 67
Shares purchased and retired (320 shares) ........................ 297
Net earnings for 1999
Common dividends paid ($2.80 per share) .......................... (55,655)
Preferred dividends paid (Series A of $2.313 per share and
Series B of $2.156 per share) ................................... (9,632)
Unrealized Gain on Omega Worldwide, Inc. ......................... 1,789
-----------------------------------------------------------
Balance at December 31, 1999 (19,877 shares) ...................... $(331,341) $ (526) $(2,499) $ 2,550
===========================================================
</TABLE>
See accompanying notes.
F-4
<PAGE>
OMEGA HEALTHCARE INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Operating activities
Net earnings ...................................................... $ 19,671 $76,209 $44,851
Adjustment to reconcile net earnings to cash provided
by operating activities:
Depreciation and amortization .................................... 24,211 21,543 16,910
Cash collected on assets held for sale ........................... 2,774 1,281 -
Provision for impairment loss and loss on sales,
less realized gains ............................................. 30,007 4,002 -
Other non-cash charges ........................................... 763 898 1,232
Gain on distribution of Omega Worldwide .......................... - (30,240) -
Funds from operations available for distribution
and investment .................................................... 77,426 73,693 62,993
------ ------ ------
Net change in operating assets and liabilities ..................... (3,114) (3,980) (2,562)
------ ------ ------
Net cash provided by operating activities .......................... 74,312 69,713 60,431
Cash flows from financing activities
Proceeds of acquisition lines of credit ........................... 43,600 64,700 52,300
Proceeds from unsecured note offering ............................. - 125,000 100,000
Proceeds from preferred stock offering ............................ - 50,000 57,500
Payments of bank term loan ........................................ - - (25,000)
Payments of long-term borrowings .................................. (1,078) (612) (6,578)
Receipts from Dividend Reinvestment Plan .......................... 2,381 1,832 1,681
Dividends paid .................................................... (65,287) (61,168) (51,431)
Purchase of Company common stock .................................. (8,106) (3,545) -
Costs of raising capital .......................................... - (3,290) (4,702)
Other ............................................................. (957) 356 (587)
---- --- ----
Net cash (used in) provided by financing activities ................ (29,447) 173,273 123,183
Cash flows from investing activities
Acquisition of real estate ........................................ (79,844) (157,474) (184,877)
Placement of mortgage loans ....................................... (22,987) (125,850) (11,155)
Proceeds from sale of real estate investments - net ............... 18,198 37,771 -
Investment in Principal Healthcare Finance Limited ................ - - (760)
Net proceeds from sale of Omega Worldwide shares .................. - 16,938 -
Funding of other investments - net ................................ (14,714) (17,488) (6,237)
Collection of mortgage principal .................................. 54,749 3,748 13,365
Other ............................................................. 1,961 746 306
----- --- ---
Net cash used in investing activities .............................. (42,637) (241,609) (189,358)
------- -------- --------
Increase (decrease) in cash and short-term investments ............. 2,228 1,377 (5,744)
Cash and short-term investments at beginning of year ............... 1,877 500 6,244
----- --- -----
Cash and short-term investments at end of year ..................... $ 4,105 $ 1,877 $ 500
======= ======= =====
</TABLE>
See accompanying notes.
F-5
<PAGE>
OMEGA HEALTHCARE INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization
Omega Healthcare Investors, Inc., a Maryland corporation ("the Company"), is
a self-administered real estate investment trust (REIT). From the date the
Company commenced operations in 1992, it has invested primarily in long-term
care facilities, which include nursing homes, assisted living facilities and
rehabilitation hospitals. It currently has investments in 216 income-producing
healthcare facilities, with a principal focus on diversified investments in
long-term care facilities located in the United States.
Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries after elimination of all material intercompany
accounts and transactions.
Real Estate Investments
Investments in leased real estate properties and mortgage notes are recorded
at cost and original mortgage amount, respectively. The cost of the properties
acquired is allocated between land and buildings based generally upon
independent appraisals. Depreciation for buildings is recorded on the
straight-line basis, using estimated useful lives ranging from 20 to 39 years.
Other Real Estate Investments and Assets Held for Sale
In the ordinary course of its business activities, the Company periodically
evaluates investment opportunities and extends credit to customers. It also is
regularly engaged in lease and loan extensions and modifications. Additionally,
the Company actively monitors and manages its investment portfolio with the
objectives of improving credit quality and increasing returns. In connection
with portfolio management, it engages in various collection and foreclosure
activities.
When the Company acquires real estate pursuant to a foreclosure proceeding,
it is classified as other real estate and recorded at the lower of cost or fair
value generally based on appraisal. Additionally, when a formal plan to sell
real estate is adopted, the real estate is classified as "assets held for sale,"
with the net carrying amount adjusted to the lower of cost or estimated fair
value, less cost of disposal. Residual income from the investment and
depreciation of the facilities are excluded from operations after management has
committed to a plan to sell the asset.
Impairment of Assets
Provisions for impairment losses related to long-lived assets are recognized
when expected future cash flows are less than the carrying values of the assets.
If indicators of impairment are present, the Company evaluates the carrying
value of the related real estate investments in relationship to the future
undiscounted cash flows of the underlying facilities. The Company adjusts the
net carrying value of leased properties, assets held for sale and other
long-lived assets to fair value, if the sum of the expected future cash flow or
sales proceeds is less than carrying value.
Cash and Short-Term Investments
Short-term investments consist of highly liquid investments with a maturity
date of three months or less when purchased. These investments are stated at
cost which approximates fair value.
F-6
<PAGE>
OMEGA HEALTHCARE INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Investments in Equity Securities
Marketable securities held as available-for-sale are stated at fair value
with unrealized gains and losses for the securities reported in accumulated
other comprehensive income. Realized gains and losses and declines in value
judged to be other-than-temporary on securities held as available-for-sale are
included in investment income. The cost of securities sold is based on the
specific identification method. Interest and dividends on securities
available-for-sale are included in investment income.
Deferred Financing Costs
Deferred financing costs are amortized on a straight-line basis over the
terms of the related borrowings. Amortization of financing costs totaling
$1,342,000, $1,042,000 and $829,000 in 1999, 1998, and 1997, respectively, is
classified as interest expense in the Consolidated Statements of Operations.
Unamortized deferred financing costs applicable to debt which is converted to
common stock are charged to paid-in capital at the date of conversion.
Non-Compete Agreements and Goodwill
Non-compete agreements and the excess of the purchase price over the value
of tangible net assets acquired (i.e., goodwill) are amortized on a
straight-line basis over periods ranging from five to ten years. Non-compete
agreements, which have cost of $4,982,000 became fully amortized and were
eliminated in 1999 by a charge to accumulated amortization. Accumulated
amortization was $3,363,000 and $6,935,000 at December 31, 1999 and 1998,
respectively.
Revenue Recognition
Rental income and mortgage interest income is recognized as earned over the
terms of the related master leases and mortgage notes, respectively. Such income
includes periodic increases based on pre-determined formulas as defined in the
master leases and mortgage loan agreements. Certain mortgage agreements include
provisions for deferred interest which is not payable by the borrower until
maturity of the related note. The portion of deferred interest recognized as
earned approximates $600,000 for each of the three years in the period ended
December 31, 1999.
Federal and State Income Taxes
As a qualified real estate investment trust, the Company will not be subject
to Federal income taxes on its income, and no provisions for Federal income
taxes have been made. The reported amounts of the Company's assets and
liabilities as of December 31, 1999 exceeds the tax basis of assets by
approximately $63 million.
Earnings per Share
Basic earnings per share is computed based on the weighted average number of
common shares outstanding during the respective periods. Average shares
outstanding for basic earnings per share were 19,877,000, 20,034,000 and
19,085,000 for 1999, 1998 and 1997, respectively. The calculation of diluted
earnings per share amounts reflects the dilutive effect of stock options (none
for 1999, 5,999 shares for 1998 and 52,394 shares for 1997). The assumed
conversion of debentures is anti-dilutive for all periods presented.
F-7
<PAGE>
OMEGA HEALTHCARE INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Stock Based Compensation
The Company grants stock options to employees and directors with an exercise
price equal to the fair value of the shares at the date of the grant. In
accordance with the provisions of APB Opinion No. 25, Accounting for Stock
Issued to Employees, compensation expense is not recognized for these stock
option grants.
Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Risks and Uncertainties
The Company is subject to certain risks and uncertainties affecting the
healthcare industry as a result of healthcare legislation and growing regulation
by federal, state and local governments. Additionally, the Company is subject to
risks and uncertainties as a result of changes affecting operators of nursing
home facilities due to the desire of governmental agencies and insurers to limit
the growth in cost of healthcare services. (See Note 4 - Concentration of Risk).
NOTE 2 -- PROPERTIES
Leased Property
The Company's real estate properties, represented by 147 long-term care
facilities, 3 medical office buildings and 2 rehabilitation hospitals at
December 31, 1999, are leased under provisions of master leases with initial
terms ranging from 8 to 17 years, plus renewal options. Substantially all of the
master leases provide for minimum annual rentals which are subject to annual
increases based upon increases in the Consumer Price Index or increases in
revenues of the underlying properties, with certain maximum limits. Under the
terms of the leases, the lessee is responsible for all maintenance, repairs,
taxes and insurance on the leased properties.
A summary of the Company's investment in real estate properties is as
follows:
December 31,
------------
1999 1998
---- ----
(In thousands)
Buildings......................... $648,306 $615,846
Land.............................. 30,299 27,532
-------- --------
678,605 643,378
Less accumulated depreciation..... (65,854) (56,385)
--------- --------
Total........................ $612,751 $586,993
======== ========
F-8
<PAGE>
OMEGA HEALTHCARE INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table summarizes the changes in real estate properties and
accumulated depreciation during 1999, 1998, and 1997:
<TABLE>
<CAPTION>
Real Estate Accumulated
Properties Depreciation
---------- ------------
(In thousands)
<S> <C> <C>
Balance at December 31, 1996......................... $376,177 $32,884
Additions/provisions for 1997...................... 184,877 15,263
-------- --------
Balance at December 31, 1997......................... 561,054 48,147
Additions/provisions for 1998...................... 157,474 19,749
Disposals and transfer to assets held for sale..... (75,150) (11,511)
-------- --------
Balance at December 31, 1998......................... 643,378 56,385
Additions/provisions for 1999...................... 79,844 21,119
Disposals and transfer to assets held for sale..... (44,617) (11,650)
--------- --------
Balance at December 31, 1999......................... $678,605 $ 65,854
======== ========
</TABLE>
The future minimum rentals expected to be received for the remainder of the
initial terms of the leases are as follows:
(In thousands)
2000............ $ 75,697
2001............ 75,263
2002............ 69,891
2003............ 63,887
2004............ 62,784
Thereafter...... 387,607
--------
$735,129
========
Assets Sold or Held For Sale
In July 1998, management initiated a plan to dispose of certain properties
judged to have limited incremental potential and to re-deploy the proceeds from
sale. Following a review of the portfolio, assets identified for sale had a cost
of $95 million, a net carrying value of $83 million, and annualized revenues of
approximately $11.4 million. The Company recorded a provision for impairment of
$6.8 million to adjust the carrying value of those assets judged to be impaired
to their fair value, less cost of disposal. During 1998, the Company completed
sales of two groups of assets, yielding sales proceeds of $42,036,000. Gains
realized in the dispositions approximated $2.8 million.
During 1999, the Company completed sales yielding net proceeds of $18.2
million. In addition, management initiated a plan in the 1999 fourth quarter for
additional asset sales to be completed in 2000. The additional assets identified
as for sale had a cost of $33.8 million, a net carrying amount of $28.6 million
and annualized revenue of approximately $3.4 million. As a result of this
review, the Company recorded a provision for impairment of $19.5 million to
adjust the carrying value of assets targeted for sale to their fair value, less
cost of disposal. The Company is committed to sell the remaining facilities as
soon as practicable. In 1999 a loss of $10.5 million was also recognized on real
estate dispositions. The loss stems from one tenant exercising its purchase
option to acquire three custodial care facilities and one skilled nursing
facility from the Company, as well as the sale of two facilities in Kentucky
that were rejected by Sun Healthcare Group, Inc. in its comprehensive property
agreement with the Company.
F-9
<PAGE>
OMEGA HEALTHCARE INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Other Real Estate
The Company owns 10 facilities located in Massachusetts and Connecticut
with 1,052 licensed beds, which are operated for the Company's own account. The
facilities were acquired by the Company on July 14, 1999 in lieu of foreclosure
and are currently being managed by Genesis Health Ventures, Inc. At December 31,
1999, the Company had invested approximately $65.8 million in these facilities.
Accumulated depreciation and depreciation expense for these facilities was
$898,000 for the year ended December 31, 1999. The Company presently is
considering negotiating a lease or leases with new operator(s) or selling one or
more of the facilities. Income from investments classified as other real estate
approximated $1,151,000, including $1,050,000 from these facilities for the
period from July 15 through December 31, 1999.
NOTE 3 -- MORTGAGE NOTES RECEIVABLE
The following table summarizes the changes in mortgage notes for the years
ended December 31, 1999 and 1998:
1999 1998
---- ----
(In thousands)
Balance at January 1..................... $340,455 $ 218,353
New mortgage notes..................... 22,987 125,850
Collection of principal................ (54,749) (3,748)
Conversion/reclassification............ (95,076) -
--------- ---------
Balance at December 31................... $213,617 $ 340,455
========= =========
Mortgage notes receivable relate to 64 long-term care facilities. The
mortgage notes are secured by first mortgage liens on the borrowers' underlying
real estate and personal property. Through December 31, 1999, required principal
payments have been made pursuant to the terms of the underlying mortgage
agreements. The mortgage notes receivable relate to facilities located in 13
states, operated by 12 independent healthcare operating companies.
The Company carefully monitors compliance with mortgages and when necessary
has initiated collection, foreclosure and other proceedings with respect to
certain outstanding loans and expects that certain mortgagors may seek
protection under the Bankruptcy Code. However, based on management's current
review of its outstanding mortgage loans, no provision for loss on collection is
considered necessary.
The following are the three primary mortgage structures currently used by
the Company:
Convertible Participating Mortgages are secured by first mortgage liens on
the underlying real estate and personal property of the mortgagor. Interest
rates are usually subject to annual increases based upon increases in the CPI or
increases in revenues of the underlying long-term care facilities, with certain
maximum limits. Convertible Participating Mortgages afford the Company an option
to convert its mortgage into direct ownership of the property, generally at a
point six to nine years from inception; they are then subject to a leaseback to
the operator for the balance of the original agreed term and for the original
agreed participation in revenues or CPI adjustments. This allows the Company to
capture a portion of the potential appreciation in value of the real estate. The
operator has the right to buy out the Company's option at formula prices.
F-10
<PAGE>
OMEGA HEALTHCARE INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Participating Mortgages are secured by first mortgage liens on the
underlying real estate and personal property of the mortgagor. Interest rates
are usually subject to annual increases based upon increases in the CPI or
increases in revenues of the underlying long-term care facilities, with certain
maximum limits.
Fixed-Rate Mortgages, with a fixed interest rate for the mortgage term, are
also secured by first mortgage liens on the underlying real estate and personal
property of the mortgagor.
The outstanding principal amount of mortgage notes receivable follow:
<TABLE>
<CAPTION>
December 31,
------------
1999 1998
---- ----
(In thousands)
<S> <C> <C>
Participating mortgage note due 2007; interest at 15.47%
payable monthly (excluding 1.0% deferred interest) ........... $ 58,800 $ 58,800
Participating mortgage note due 2003; interest at 10.2%
payable monthly .............................................. 37,500 37,500
Participating mortgage note due 2008; interest at 9.79%
payable monthly .............................................. 12,000 12,000
Participating mortgage note due 2012; interest at 13.75%
payable monthly, plus amortization of $50,000 per quarter
commencing in 2002 ........................................... 7,031 7,031
Participating mortgage note due 2004; interest at 10.25%
payable monthly .............................................. - 67,000
Participating mortgage note due 2000; interest at 11.87%
payable monthly plus amortization of $37,500 quarterly ....... - 26,003
Convertible participating mortgage note due 2001; monthly
interest payments at 15.69% with principal due at maturity ... 8,932 8,932
Convertible participating mortgage note due 2016, monthly
interest payments at 13.50% .................................. 8,127 8,127
Convertible participating mortgage note due 2011; monthly
interest payments at 10.92% .................................. - 10,250
Convertible participating mortgage note due 2005; interest
at 12.44% payable monthly, plus annual amortization of
$60,000 through 1999 and $120,000 thereafter ................. - 10,074
Mortgage notes due 2015; monthly payments of $189,004,
including interest at 11.01% ................................. 16,656 18,738
Mortgage note due 2010; monthly payment of $124,826,
including interest at 11.50% ................................. 12,825 12,847
Mortgage note due 2006; monthly payment of $107,382,
including interest at 11.50% ................................. 11,035 11,053
Other mortgage notes .......................................... 20,975 32,223
Other convertible participating mortgage notes ................ 15,297 15,430
Other participating mortgage notes ............................ 4,439 4,447
----- -----
$213,617 $340,455
======== ========
</TABLE>
On December 30, 1999, the Company provided notice as to an Event of Default
and acceleration of the due date to the mortgagor of the $58,800,000
participating mortgage note. The total obligation outstanding is $63.3 million.
At that date the mortgagor was current with respect to principal and interest
payments due on the loan but had failed to fully comply with certain covenants
and to pay certain property taxes. The Company is currently pursuing collection
and foreclosure to realize upon its security for the loan and has initiated a
foreclosure action. Additionally, on January 13, 2000, the Company offset
security deposits of $2.4 million against unpaid current and deferred interest.
On January 18, the mortgagor filed with the Bankruptcy Court of Wilmington,
Delaware for protection under Chapter 11 of the Bankruptcy Code. While the
Company's collection actions have been stayed as a result of the bankruptcy
filing by the mortgagor, the Company believes the security for its loan will be
adequate for collection of amounts due.
F-11
<PAGE>
OMEGA HEALTHCARE INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The stated interest rates indicated above for Participating Mortgages and
Convertible Participating Mortgages are subject to annual increases based upon
increases in the Consumer Price Index or increases in revenues of the underlying
long-term care facilities, with certain maximum limits. Certain of the mortgage
notes, designated as "Convertible Participating," also permit the Company to
convert the note into ownership of the related real and personal property.
Conversions would generally result in purchase/leaseback transactions with
annual economic benefit to the Company substantially the same as under the
mortgage notes.
The estimated fair value of the Company's mortgage loans at December 31,
1999 is approximately $230,781,000. Fair value is based on the estimates by
management using rates currently prevailing for comparable loans.
NOTE 4 -- CONCENTRATION OF RISK
As of December 31, 1999, 92% of the Company's real estate investments are
related to long-term care facilities. The Company's facilities are located in 28
states and are operated by 24 independent healthcare operating companies.
Investing in long-term healthcare facilities involves certain risks
stemming from government legislation and regulation of operators of the
facilities. The Company's tenants/mortgagors depend on reimbursement legislation
which will provide them adequate payments for services because a significant
portion of their revenue is derived from government programs funded under
Medicare and Medicaid. The Medicare program recently implemented a Prospective
Payment System for skilled nursing facilities, which replaced cost-based
reimbursements and significantly reduced payments for services provided.
Additionally, certain State Medicaid programs have implemented similar
prospective payment systems. The reduction in payments to nursing home operators
pursuant to the Medicare and Medicaid payment changes has negatively affected
the revenues of the Company's nursing home facilities.
Most of the Company's nursing home investments were designed exclusively to
provide long-term healthcare services. These facilities are also subject to
detailed and complex specifications for the physical characteristics as mandated
by various governmental authorities. If the facilities cannot be operated as
long-term care facilities, finding alternative uses may be difficult. The
Company's triple-net leases require its tenants to comply with regulations
affecting its facilities and the Company regularly monitors compliance by
tenants with healthcare facilities' regulations. Nevertheless, if tenants fail
to perform their obligations, the Company may be required to do so in order to
maintain the value of its investments.
Approximately 80% of the Company's real estate investments are operated by
7 public companies, including Sun Healthcare Group, Inc. (27.3%), Integrated
Health Services, Inc. (18.1%), Advocat, Inc. (12.5%), RainTree Healthcare
Corporation (8.3%), Mariner Post-Acute Network (6.6%), Alterra Healthcare
Corporation (formerly Alternative Living Services)(3.8%),and Tenet Healthcare
Corp.(3.4%). Of the remaining 17 operators, none operate investments in
facilities representing more than 5% of the total real estate investments.
The Company's largest tenant, Sun Healthcare Group, Inc. (Sun), recently
filed for reorganization under Chapter 11 of the Bankruptcy Code. Prior to the
bankruptcy filing by Sun, the Company completed a comprehensive property
agreement with Sun related to the facilities leased by Sun. This agreement,
which has been approved by the Court, confirmed the existing economic terms of
lease agreements between the Company and Sun with respect to 50 healthcare
properties, representing $219 million in investments and $23.2 million in annual
rental revenues.
F-12
<PAGE>
OMEGA HEALTHCARE INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Many of the public nursing home companies operating the Company's
facilities have recently reported significant operating and impairment losses.
Integrated Healthcare Services, Inc., RainTree Healthcare Corp. and Mariner Post
Acute Network, Inc. also have announced that they did not make interest payments
on some of their subordinated debt obligations. Advocat, Inc. recently announced
a restatement of its financial statements. The Company has initiated discussions
with all operators who are experiencing financial difficulties, as well as state
officials who regulate its properties. It also has proactively initiated various
other actions to protect its interest under its leases and mortgages. Management
believes there are presently no indicators of impairment on leased real estate
or losses on mortgages.
NOTE 5 - ADDITIONAL SECURITY
The Company obtains liquidity deposits and letters of credit from
substantially all operators pursuant to its leases and mortgages. These
generally represent the initial monthly rental and mortgage interest income for
periods ranging from three to six months with respect to certain of the
investments. Additional security for rental and mortgage interest revenue from
operators is provided by covenants regarding minimum working capital and net
worth, liens on accounts receivable and other operating assets of the operators,
provisions for cross default, provisions for cross-collateralization and by
corporate/personal guarantees.
NOTE 6 -- BORROWING ARRANGEMENTS
The Company has a $200,000,000 unsecured revolving line of credit facility,
under which borrowings bear interest at LIBOR plus 1.125% or, at the Company's
option, at the prime rate. Borrowings of approximately $117 million are
outstanding at December 31, 1999. The underlying revolving credit agreement
contains various covenants and expires on September 30, 2000. The banks have
waived non-compliance with a covenant requirement as to tangible net worth
through the earlier of the date of an amendment to the existing agreement or May
31, 2000. The Company is currently in negotiations to extend the maturity of the
line of credit. Permitted borrowings under the agreement are based upon levels
of eligible real estate investments. LIBOR based borrowings under this facility
bear interest at a weighted-average rate of 7.30% at December 31, 1999 and 6.63%
at December 31, 1998.
The Company also has a $50,000,000 secured revolving line of credit, under
which borrowings bear interest at LIBOR plus 2.00% or, at the Company's option,
at the prime rate. This credit agreement contains various covenants and expires
on March 31, 2002. The agreement permits the Company to extend the term of the
commitment for up to three additional years following timely annual notice to
the bank. LIBOR based borrowings under this facility bear interest at a
weighted-average rate of 8.44% at December 31, 1999. Investments with an
original cost of approximately $78 million are pledged as collateral for this
revolving line of credit facility.
F-13
<PAGE>
OMEGA HEALTHCARE INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following is a summary of long-term borrowings:
<TABLE>
<CAPTION>
December 31,
------------
1999 1998
---- ----
(In thousands)
<S> <C> <C>
Unsecured borrowings:
6.95% Notes due June 2002........................... $125,000 $125,000
6.95% Notes due August 2007......................... 100,000 100,000
Unsecured Notes due July 2000....................... 81,381 81,381
Subordinated Convertible Debentures due 2001........ 48,405 48,405
Other............................................... 4,615 5,189
-------- --------
359,401 359,975
Secured borrowings:
Industrial Development Revenue Bonds................ 8,595 8,795
Mortgage notes payable to bank...................... 7,356 7,635
HUD loans........................................... - 5,354
------- --------
15,951 21,784
------- --------
Total long-term borrowings........................ $375,352 $381,759
======== ========
</TABLE>
In 1998, the Company completed a $125 million public offering of unsecured
6.95% notes. The notes were priced to yield 7.04% with interest paid
semi-annually. In 1997, the Company completed a $100 million public offering of
unsecured 6.95% notes due 2007. The notes were priced to yield 6.99% with
interest paid semi-annually.
In 1996, the Company issued $95 million of 8.5% Subordinated Convertible
Debentures (the Debentures) due January 24, 2001. The Debentures are convertible
at any time into shares of Common Stock at a conversion price of $26.962 per
share. The Debentures are unsecured obligations of the Company and are
subordinate in right and payment to the Company's senior unsecured indebtedness.
As of December 31, 1999, there were 1,794,107 shares reserved for issuance under
the Debentures.
In 1995, the Company issued 10% and 7.4% Unsecured Notes due July 15, 2000
in exchange for certain secured borrowings. The effective interest rate for the
unsecured notes is 8.8%, with interest-only payments due semi-annually through
July 2000.
Real estate investments with an original cost of approximately $25 million
are pledged as collateral for outstanding secured borrowings. Long-term secured
borrowings are payable in aggregate monthly installments of approximately
$153,000, including interest at rates ranging from 6.5% to 10.0%.
Assuming none of the Company's borrowing arrangements are refinanced,
converted or prepaid prior to maturity, required principal payments for each of
the five years following December 31, 1999 and the aggregate due thereafter are
set forth below:
(In thousands)
2000............ $89,107
2001............ 48,945
2002............ 125,585
2003............ 640
2004............ 690
Thereafter...... 110,385
--------
$375,352
========
F-14
<PAGE>
OMEGA HEALTHCARE INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The estimated fair values of the Company's long-term borrowings is
approximately $329,775,000 at December 31, 1999 and $367,993,000 at December 31,
1998. Fair values are based on the estimates by management using rates currently
prevailing for comparable loans.
NOTE 7 -- FINANCIAL INSTRUMENTS
At December 31, 1999 and 1998, the carrying amounts and fair values of the
Company's financial instruments are as follows:
<TABLE>
<CAPTION>
1999 1998
----------------- ------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
(In thousands)
<S> <C> <C> <C> <C>
Assets:
Cash and short-term investments......... $ 4,105 $ 4,105 $ 1,877 $ 1,877
Mortgage notes receivable............... 213,617 230,781 340,455 369,416
Other investments....................... 58,907 58,056 41,753 41,925
--------- -------- --------- --------
Totals............................... $ 276,629 $292,942 $ 384,085 $413,218
========= ======== ========= ========
Liabilities:
Acquisition lines of credit............. $ 166,600 $166,600 $ 123,000 $123,000
6.95% Notes............................. 225,000 181,832 225,000 215,073
Senior Unsecured Notes.................. 81,381 81,054 81,381 79,220
Subordinated Convertible Debentures..... 48,405 47,402 48,405 46,727
Other long-term borrowings.............. 20,566 19,487 26,973 26,973
--------- -------- --------- --------
Totals............................... $ 541,952 $496,375 $ 504,759 $490,993
========= ======== ========= ========
</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 (See Note 1 - Risks and Uncertainties). The use of
different market assumptions and estimation methodologies may have a material
effect on the reported estimated fair value amounts. Accordingly, the estimates
presented above are not necessarily indicative of the amounts the Company would
realize in a current market exchange.
NOTE 8 -- RETIREMENT ARRANGEMENTS
The Company has a 401(k) Profit Sharing Plan covering all eligible
employees. Under the Plan, employees are eligible to make contributions, and the
Company, at its discretion, may match contributions and make a profit sharing
contribution.
In 1993, the Company adopted the 1993 Retirement Plan for Directors, which
covered all members of the Board of Directors, and the 1993 Deferred
Compensation Plan, which covered all eligible employees and members of the Board
of Directors. The Retirement Plan for Directors and participation by the
directors in the Deferred Compensation Plan was terminated effective December
31, 1997. Accumulated benefits to the Directors under both plans were settled
and paid in 1998.
The Deferred Compensation Plan is an unfunded plan under which the Company
may award units that result in participation in the dividends and future growth
in the value of the Company's common stock. The total number of units permitted
by the plan is 200,000, of which 90,850 units have been awarded and 42,600 are
outstanding at December 31, 1999. Units awarded to eligible participants vest
over a period of five years based on the participant's initial service date.
Provisions charged to operations with respect to these retirement
arrangements totaled $123,000, $346,000, and $667,000 in 1999, 1998, and 1997,
respectively.
F-15
<PAGE>
OMEGA HEALTHCARE INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 9 -- SHAREHOLDERS' EQUITY AND STOCK OPTIONS
On May 12, 1999, the Company's Board of Directors authorized the adoption of
a shareholder rights plan. The plan is designed to require a person or group
seeking to gain control of the Company to offer a fair price to all the
Company's shareholders. The rights plan will not interfere with any merger,
acquisition or business combination that the Company's Board of Directors finds
is in the best interest of the Company and its shareholders.
In connection with the adoption of the rights plan, the board declared a
dividend distribution of one right for each common share outstanding on May 24,
1999. The rights will not become exercisable unless a person acquires 10% or
more of the Company's common stock, or begins a tender offer that would result
in the person owning 10% or more of the Company's common stock. At that time,
each right would entitle each shareholder other than the person who triggered
the rights plan to purchase either the Company's common stock or stock of an
acquiring entity at a discount to the then market price. The plan was not
adopted in response to any specific attempt to acquire control of the Company.
In January 1998, the Company adopted a stock purchase assistance plan,
whereby the Company extends credit to directors and employees to purchase the
Company's stock through the exercise of stock options. These loans are secured
by the shares acquired and are repayable under full recourse promissory notes.
The plan provides for repayment of a portion of the notes from annual incentive
compensation. The notes are otherwise repayable in their entirety at the
earliest to occur of five years from the date of the note or 90 days after
termination of employment. At December 31, 1999 a total of $2,499,337 is
outstanding, payable by participants who have loans bearing interest at 6.95% at
amounts ranging from $5,025 to $299,955.
On April 28, 1998, the Company received gross proceeds of $50 million from
the issuance of 2 million shares of 8.625% Series B Cumulative Preferred Stock
("Preferred Stock") at $25 per share. Dividends on the Preferred Stock are
cumulative from the date of original issue and are payable quarterly commencing
on August 15, 1998. On April 7, 1997, the Company received gross proceeds of
$57.5 million from the issuance of 2.3 million shares of 9.25% Series A
Cumulative Preferred Stock ("Preferred Stock") at $25 per share. Dividends on
the Series A Preferred Stock are cumulative from the date of original issue and
are payable quarterly. At December 31, 1999, the aggregate liquidation
preference of preferred stock issued is $107,500,000.
Under the terms of the 1993 Amended and Restated Stock Option and Restricted
Stock Plan, the Company reserved 1,100,000 shares of common stock for grants to
be issued during a period of up to 10 years. Options are exercisable at the
market price at the date of grant, expire in 10 to 11 years from the date of
grant, and vest over 3 years. Directors, officers and employees are eligible to
participate in the Plan. Options for 545,152 shares have been granted to 40
eligible participants. Additionally, 86,453 shares of restricted stock have been
granted under the provisions of the Plan. The market value of the restricted
shares on the date of the award was recorded as unearned compensation-restricted
stock, with the unamortized balance shown as a separate component of
shareholders' equity. Unearned compensation is amortized to expense generally
over the vesting period, with charges to operations of $635,000, $612,000, and
$402,000 in 1999, 1998, and 1997, respectively.
At December 31, 1999, options currently exercisable (231,590) have a
weighted average exercise price of $27.570. There are 468,395 shares available
for future grants as of December 31, 1999.
F-16
<PAGE>
OMEGA HEALTHCARE INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following is a summary of activity under the plan. Exercise prices and
all other option data for grants prior to April 2, 1998 have been adjusted based
on a formula reflecting the per share value of the distribution of Omega
Worldwide, Inc.
<TABLE>
<CAPTION>
Stock Options
-------------
Weighted
Number of Average
Shares Exercise Price Price
------ -------------- -----
<S> <C> <C> <C>
Outstanding at December 31, 1996 ...... 278,000 $19.866- 28.212 $23.169
Granted during 1997 ................. 444,250 29.740- 34.795 32.895
Exercised ........................... (11,524) 19.866- 24.215 22.180
-------- --------------- --------
Outstanding at December 31, 1997 ...... 710,726 19.866- 34.795 29.265
Granted during 1998 ................. 84,000 28.938- 37.205 35.342
Exercised ........................... (151,200) 19.866- 30.210 23.605
Canceled ............................ (67,599) 24.215- 35.500 33.462
------- --------------- --------
Outstanding at December 31, 1998 ...... 575,927 19.866-37.205 31.144
Granted during 1999 ................. 101,500 15.250-30.188 27.483
Canceled ............................ (312,164) 28.938-36.676 33.099
-------- -------------- ------
Outstanding at December 31, 1999 ...... 365,263 $15.250-$37.205 $ 28.542
======= =============== ========
</TABLE>
In 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation." This standard prescribes a fair value based method of accounting
for employee stock options or similar equity instruments and requires certain
pro forma disclosures. For purposes of the pro forma disclosures required under
Statement 123, the estimated fair value of the options is amortized to expense
over the option's vesting period. Based on the Company's option activity, net
earnings and net earnings per share on a pro forma basis does not differ
significantly from that determined under APB 25. The estimated weighted average
fair value of options granted in 1999, 1998 and 1997 was $168,000, $220,000 and
$1.3 million, respectively. In determining the estimated fair value of the
Company's stock options as of the date of grant, a Black-Scholes option pricing
model was used with the following weighted-average assumptions: risk-free
interest rates of 6.5% in 1999, 6% in 1998 and 6.5% in 1997; a dividend yield of
10% in 1999 and 6.75% in 1998 and 1997; volatility factors of the expected
market price of the Company's common stock based on actual volatility in 1999
and 15% in 1998 and 1997; and a weighted-average expected life of the options of
8 years for each of the three years.
During 1999, the Company offered holders of options the opportunity to
accelerate the expiration date of options in consideration of a cash payment.
Twenty-two employees who were holders of options for 431,830 shares accepted the
offer and were paid a total of $38,000. Options for 157,000 shares granted in
1999 and canceled in 1999 under this arrangement are excluded from the above
table for 1999 and from the calculation for the weighted average fair value of
options granted in 1999.
The Black-Scholes options valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
F-17
<PAGE>
OMEGA HEALTHCARE INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 10 -- PRINCIPAL HEALTHCARE FINANCE LIMITED AND OMEGA
WORLDWIDE, INC.
In 1995 the Company sponsored the organization of Principal Healthcare
Finance Limited ("Principal"), an Isle of Jersey company, whose purpose is to
invest in nursing homes and long-term care facilities in the United Kingdom.
Prior to the April 2, 1998 contribution to Omega Worldwide, Inc. ("Worldwide")
as explained below, the Company had invested $30.7 million in Principal, of
which $23.8 million was represented by a (pound)15 million subordinated note due
December 31, 2000, and $6.9 million was represented by an equity investment. The
Company had also provided investment advisory and management services to
Principal and had advanced temporary loans to Principal from time to time.
In November 1997, the Company formed Worldwide, and on April 2, 1998 it
contributed substantially all of its Principal assets to Worldwide in exchange
for approximately 8.5 million shares of Worldwide common stock and 260,000
shares of Series B preferred stock. Of the 8,500,000 shares of Worldwide
received by the Company, approximately 5,200,000 were distributed on April 2,
1998 to the Company's shareholders on the basis of one Worldwide share for every
3.77 common shares of the Company held by shareholders of the Company on the
record date of February 1, 1998. Of the remaining 3,300,000 shares of Worldwide
received by the Company, 2,300,000 shares were sold by the Company on April 3,
1998 for net proceeds of approximately $16,250,000 in a Secondary offering
pursuant to a registration statement of Worldwide. The market value of the
distribution to shareholders approximated $39 million or $1.99 per share. The
Company recorded a non-recurring gain of $30.2 million on the distribution and
secondary offerings of Worldwide common shares during 1998. As of December 31,
1999, the Company holds 1,163,000 shares of Worldwide common stock and 260,000
shares of its preferred stock. The market value of the Company's investment in
Worldwide is $8,015,000. The Company also holds a $1,615,000 investment in
Principal, represented by 990,000 ordinary shares of Principal.
The Company has guaranteed repayment of Worldwide borrowings pursuant to its
$25 million revolving credit facility. The Company receives a 1% annual fee and
an unused fee of 25 basis points in consideration for providing its guarantee.
At December 31, 1999 borrowings of $11.8 million were outstanding under
Worldwide's revolving credit facility. Additionally, the Company has a Services
Agreement with Worldwide, which provides for the allocation of indirect costs
incurred by the Company to Worldwide. The allocation of indirect costs is based
on the relationship of assets under the Company's management to the combined
total of those assets and assets under Worldwide's management. Indirect costs
allocated to Worldwide for 1999 and 1998 were $754,000 and $490,000,
respectively.
F-18
<PAGE>
OMEGA HEALTHCARE INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 11 -- DIVIDENDS
In order to qualify as a real estate investment trust, the Company must,
among other requirements, distribute at least 95% of its real estate investment
trust taxable income to its shareholders. Per share distributions by the Company
were characterized in the following manner for income tax purposes:
Common 1999 1998 1997
------ ---- ---- ----
Ordinary income..................... $ 2.100 $ 2.275 $ 2.425
Return of capital................... 0.700 0.191 0.155
Long-term capital gain.............. - 0.214 -
------- -------- -------
Total dividends paid........... $ 2.800 $ 2.680 $ 2.580
======== ======== ========
Common Non-Cash
Return of capital................... $ - $ 0.461 $ -
Long-term capital gain.............. - 1.529 -
------- -------- -------
Total non-cash distribution ... $ - $ 1.990 $ -
======= ======== =======
Series A Preferred
Ordinary income..................... $ 2.313 $ 2.313 $ 1.156
======== ======== ========
Series B Preferred
Ordinary income..................... $ 2.156 $ 1.078 $ -
======== ======== =======
NOTE 12 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Following are details of changes in operating assets and liabilities (excluding
the effects of noncash expenses), and other noncash transactions:
<TABLE>
<CAPTION>
For the year ended December 31,
1999 1998 1997
--------------------------------------
(In thousands)
<S> <C> <C> <C>
Increase (decrease) in cash from changes in operating assets
and liabilities:
Operating assets, including $517 and $2,896 transferred
to held for sale in 1999 and 1998, respectively .............. $ (568) $ (8,183) $ (4,361)
Accrued interest ................................................ 589 (70) 1,431
Other liabilities ............................................... (3,135) 4,273 368
------ ----- ---
$ (3,114) $ (3,980) $ (2,562)
======= ======= =======
Other noncash investing and financing transactions:
Acquisition of real estate:
Value of real estate acquired ................................... $ 302 $ 283 $ 2,430
Common stock issued ............................................. (302) (283) (2,430)
Common stock issued for conversion of debentures ................... - 13,862 31,648
Interest paid during the period ...................................... 40,434 30,888 22,122
</TABLE>
F-19
<PAGE>
OMEGA HEALTHCARE INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 13 -- LITIGATION
The Company is subject to various legal proceedings, claims and other
actions arising out of the normal course of business. While any legal proceeding
or claim has an element of uncertainty, management believes that the outcome of
each lawsuit, claim or legal proceeding that is pending or threatened, or all of
them combined, will not have a material adverse effect on its consolidated
financial position or results of operations.
NOTE 14 -- SUBSEQUENT EVENTS
A quarterly dividend of $.50 per common share was declared by the Board of
Directors on January 19, 2000, payable on February 15, 2000 to shareholders of
record on January 28, 2000. In addition, the Board declared regular quarterly
dividends of $.578 per share and $.539 per share to be paid on February 15, 2000
to Series A and Series B Cumulative Preferred shareholders of record on January
28, 2000, respectively.
NOTE 15 - SUMMARY OF QUARTERLY RESULTS (UNAUDITED)
The following summarizes quarterly results of operations for the years ended
December 31, 1999 and 1998.
<TABLE>
<CAPTION>
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
(In thousands, except per share)
<S> <C> <C> <C> <C>
1999
Revenues .................................................... $ 30,023 $ 30,767 $ 31,303 $ 30,282
Net earnings available to common before
loss on asset dispositions .............................. 10,417 10,602 9,947 9,081
Net earnings (loss) available to common ..................... 10,417 10,602 9,947 (20,926)
Net Earnings Available to Common per share:
Basic net earnings before loss on asset dispositions .... $ 0.52 $ 0.53 $ 0.50 $ 0.46
Diluted net earnings before loss on asset dispositions .. 0.52 0.53 0.50 0.46
Basic net earnings (loss) ............................... 0.52 0.53 0.50 (1.05)
Diluted net earnings (loss) ............................. 0.52 0.53 0.50 (1.05)
Cash dividends paid on common stock ......................... 0.70 0.70 0.70 0.70
1998
Revenues .................................................... $26,268 $27,926 $28,434 $26,110
Net earnings available to common before
loss on asset dispositions .............................. 10,817 10,676 10,750 9,534
Net earnings available to common ............................ 10,817 40,916 10,750 5,532
Net Earnings Available to Common per share:
Basic net earnings before loss on asset dispositions .... $ 0.55 $ 0.53 $ 0.53 $ 0.47
Diluted net earnings before loss on asset dispositions .. 0.55 0.53 0.53 0.47
Basic net earnings ...................................... 0.55 2.03 0.53 0.27
Diluted net earnings .................................... 0.55 2.03 0.53 0.27
Cash dividends paid on common stock ......................... 0.67 0.67 0.67 0.67
</TABLE>
Note: During the three-month period ended December 31, 1999, the Company
recognized a loss of $30,000 related to assets sold during the period and a
provision for impairment of assets held for sale (See Note 2 -Properties).
During the three-month period ended June 30, 1998, the Company realized a
$30,240 gain on the distribution of Omega Worldwide, Inc. Additionally,
during the three-month period ended December 31, 1998, the Company recognized
a net $4,002 loss on asset dispositions and provision for impairment.
F-20
<PAGE>
SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION
OMEGA HEALTHCARE INVESTORS, INC.
December 31, 1999
<TABLE>
<CAPTION>
(4)
Gross Amount at
Which Carried at
Initial Cost Cost Capitalized Close of Period Life on Which
to Company Subsequent to --------------- Depreciation
------------- Acquisition Buildings in Latest
Buildings -------------------- and Land (5) Income
and Land Carrying Improvements Accumulated Date of Date Statements
Description (1) Encumbrance Improvements Improvements Costs Total Depreciation Renovation Acquired is Computed
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Sun Healthcare Group,
Inc.: 1964-1995
Alabama (LTC) $23,584,957 $23,584,957 $1,867,882 March 31, 1997 33 years
California (LTC, RH) 65,912,924 65,912,924 4,006,079 October 8, 1997 33 years
Florida (LTC) 10,796,688 10,796,688 855,017 March 31, 1997 33 years
Florida (LTC) 10,700,000 10,700,000 872,992 February 28, 1997 33 years
Idaho (LTC) 600,000 600,000 48,953 February 28, 1997 33 years
Illinois (LTC) 4,900,000 4,900,000 517,379 August 30, 1996 30 years
Illinois (LTC) 3,942,726 3,942,726 312,235 March 31, 1997 33 years
Indiana (LTC) 3,000,000 3,000,000 316,762 August 30, 1996 30 years
Louisiana (LTC) 4,602,574 4,602,574 364,490 March 31, 1997 33 years
Massachusetts (LTC) 8,300,000 8,300,000 677,180 February 28, 1997 33 years
North Carolina (LTC) 19,970,418 19,970,418 3,313,938 June 4, 1994 39 years
North Carolina (LTC) 2,739,021 2,739,021 171,374 October 8, 1997 33 years
Ohio (LTC) 11,884,567 11,884,567 726,917 October 8, 1997 33 years
Tennessee (LTC) 7,942,374 7,942,374 1,320,020 September 30, 1994 30 years
Texas (LTC) 9,415,056 9,415,056 745,602 March 31, 1997 33 years
Washington (LTC) 5,900,000 5,900,000 480,936 March 31, 1997 33 years
West Virginia (LTC) 24,793,444 24,793,444 1,480,172 October 8, 1997 33 years
---------- ---------- ---------
218,984,749 218,984,749 18,077,928
Integrated Health Services,
Inc: 1979-1993
Florida (LTC) 10,000,000 10,000,000 565,998 January 13, 1998 33 years
Florida (LTC) 29,000,000 29,000,000 1,461,712 March 31, 1998 33 years
Illinois (LTC) 14,700,000 14,700,000 809,377 January 13, 1998 33 years
New Hampshire (LTC) 5,800,000 5,800,000 328,279 January 13, 1998 33 years
Ohio (LTC) 16,000,000 16,000,000 806,462 March 31, 1998 33 years
Pennsylvania (LTC) 14,400,000 14,400,000 815,037 January 13, 1998 33 years
Pennsylvania (LTC) 5,500,000 5,500,000 277,221 March 31, 1998 33 years
Washington (LTC) 10,000,000 10,000,000 1,831,898 September 1, 1996 20 years
---------- ---------- ---------
105,400,000 105,400,000 6,895,984
Advocat, Inc.: 1972-1994
Alabama (LTC) 11,638,797 707,998 12,346,795 2,638,383 August 14, 1992 31.5 years
Arkansas (LTC) 37,887,832 1,473,599 39,361,431 8,615,565 August 14, 1992 31.5 years
Kentucky (LTC) (3) 14,897,402 1,816,000 16,713,402 2,292,281 July 1, 1994 33 years
Ohio (LTC) 5,854,186 5,854,186 788,285 July 1, 1994 33 years
Tennessee (LTC) (2) 9,542,121 9,542,121 2,155,012 August 14, 1992 31.5 years
West Virginia (LTC) 5,283,525 502,338 5,785,863 802,162 July 1, 1994 33 years
--------- ------- --------- -------
85,103,863 4,499,935 89,603,798 17,291,688
RainTree Healthcare
Corporation: 1980-1994
Arizona (LTC) 24,029,032 24,029,032 692,262 December 31, 1998 33 years
Colorado (LTC) 14,170,968 14,170,968 408,257 December 31, 1998 33 years
Indiana (LTC) 8,383,671 8,383,671 1,771,217 December 23, 1992 31.5 years
Texas (LTC) 27,141,483 27,141,483 2,424,773 December 1, 1993 39 years
---------- ---------- ---------
73,725,154 73,725,154 5,296,509
TLC Healthcare, Inc.: 1972-1996
Illinois (LTC) 1,281,412 1,281,412 35,451 January 7, 1999 33 years
Illinois (LTC) 5,118,775 5,118,775 80,684 June 1, 1999 33 years
Missouri (LTC) 12,301,560 12,301,560 340,326 January 7, 1999 33 years
Ohio (LTC) 2,648,252 2,648,252 73,265 January 7, 1999 33 years
Texas (LTC) 4,942,000 4,942,000 77,888 June 30, 1999 33 years
Texas (LTC) 6,557,143 6,557,143 439,130 September 5, 1997 33 years
Texas (LTC) 2,442,858 2,442,858 128,446 March 4, 1998 33 years
--------- --------- -------
35,292,000 35,292,000 1,175,190
Alterra Healthcare
Corporation:
Colorado (AL) 2,583,440 2,583,440 40,721 June 14, 1999 33 years
F-21
<PAGE>
Indiana (AL) 11,641,805 11,641,805 183,503 June 14, 1999 33 years
Kansas (AL) 3,418,670 3,418,670 53,886 June 14, 1999 33 years
Ohio (AL) 3,520,747 3,520,747 55,495 June 14, 1999 33 years
Oklahoma (AL) 3,177,993 3,177,993 50,093 June 14, 1999 33 years
Tennessee (AL) 4,068,652 4,068,652 64,132 June 14, 1999 33 years
Washington (AL) 5,673,693 5,673,693 89,431 June 14, 1999 33 years
--------- --------- ------
34,085,000 34,085,000 537,261
Alden Management
Services, Inc.: 1978
Illinois 31,000,000 23,937 31,023,937 5,353,577 September 30, 1994 30 years
Tenet Healthcare Corp.:
Pennsylvania (MOB) 30,031,250 30,031,250 6,742,705 October 28, 1993 27.5 years
USA Healthcare, Inc.: 1974-1997
Iowa(LTC) 14,344,797 168,000 14,512,797 851,168 October 7, 1997 33 years
Iowa(LTC) 2,700,000 2,700,000 285,086 August 30, 1996 30 years
--------- -------- --------- -------
17,044,797 168,000 17,212,797 1,136,254
Peak Medical of Idaho,
Inc.:
Idaho (LTC) 10,500,000 10,500,000 241,638 March 26, 1999 33 years
HQM of Floyd County,
Inc.:
Kentucky (LTC) 10,250,000 10,250,000 63,010 June 30, 1997 33 years
Hunter Management Group,
Inc.: 1984
Florida (LTC) 8,150,000 866 8,150,866 1,182,565 September 13, 1993 39 years
Liberty Assisted Living
Center:
Florida (AL) 5,994,730 760 5,995,490 1,249,286 September 30, 1994 27 years
Eldorado Care Center,
Inc. & Magnolia Manor,
Inc.: 1995-1998
Illinois (LTC) 5,100,000 5,100,000 129,034 February 1, 1999 33 years
Kansas & Missouri, Inc.:
Kansas (LTC) 2,500,000 2,500,000 431,447 September 30, 1994 30 years
Tutera Evergreen, LLC.: 1976
Colorado (LTC) 750,000 750,000 49,353 June 3, 1994 30 years
------- ---------- ------ ------- ------
$673,911,543 $4,693,498 $0 $678,605,041 $65,853,429
============ ========== == ============ ===========
</TABLE>
(1) All of the real estate included in this schedule are being used in either
the operation of long term care facilities (LTC), assisted living
facilities (AL), rehabilitation hospital (RH) or medical office buildings
(MOB) located in the states indicated.
(2) Certain of the real estate indicated are security for Industrial Development
Revenue bonds totaling $8,595,000 at December 31, 1999.
(3) Certain of the real estate indicated are security for notes payable totaling
$7,355,843 at December 31, 1999.
<TABLE>
<CAPTION>
Year Ended December 31,
(4) 1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of period $376,177,045 $561,054,194 $643,378,340
Additions during period:
Acquisitions 183,229,915 157,474,363 79,676,000
Improvements and other 1,647,234 - 168,000
Disposals and transfers - (75,150,217) (44,617,299)
------------ ----------- -----------
Balance at close of period $561,054,194 $643,378,340 $678,605,041
============ ============ ============
(5) 1997 1998 1999
---- ---- ----
Balance at beginning of period $32,884,104 $48,147,275 $56,385,853
Additions during period:
Provisions for depreciation 15,263,171 19,749,781 21,119,252
Dispositions and transfers - (11,511,203) (11,651,676)
---------- ----------- -----------
Balance at close of period $48,147,275 $56,385,853 $65,853,429
=========== =========== ===========
</TABLE>
F-22
<PAGE>
SCHEDULE IV MORTGAGE LOANS ON REAL ESTATE
OMEGA HEALTHCARE INVESTORS, INC.
December 31, 1999
<TABLE>
<CAPTION>
Principal
Amount of
Loans
Carrying Subject to
Periodic Amount of Delinquent
Interest Final Maturity Payment Prior Face Amount Mortgages(2) Principal
Description (1) Rate Date Terms Liens of Mortgages (3) Or Interest
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Michigan (13 LTC facilities) 16.07% August 13, 2007 Interest payable at None $58,800,000 $58,800,000 None (4)
15.07% payable monthly
North Carolina (3 LTC Deferred interest at 1%
facilities) 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) 13.75% August 4, 2012 Interest payable monthly None 7,031,250 7,031,250 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 None 12,891,500 12,824,800 None
principal payable monthly
Florida (2 LTC facilities) 11.50% June 4, 2006 Interest plus $1,700 of None 11,090,000 11,034,886 None
principal payable monthly
Texas (6 LTC facilities) 9.00% to various Interest plus $55,000 of None 8,608,894 7,033,335 None
10.00% principal payable monthly
Tennessee (2 LTC facilities) 15.69% April 29, 2001 Interest payable monthly None 8,932,000 8,932,000 None
Tennessee (2 LTC facilities) 12.71% August 1, 2016 Interest payable monthly None 12,650,000 12,627,634 None
Ohio (6 LTC facilities) 11.01% January 1, 2015 Interest plus $38,100 of None 18,238,752 16,655,788 None
principal payable monthly
Georgia (2 LTC facilities) 9.79% March 13, 2008 Interest payable monthly None 12,000,000 12,000,000 None
Florida (5 LTC facilities)
Texas (2 LTC facilities) 10.20% December 3, 2003 Interest payable monthly None 37,500,000 37,500,000 None
Other Mortgage Notes:
Various 9.00% to 2001 to 2010 Interest payable monthly None 30,471,931 29,176,952 $5,882,009 (5)
13.00% ---------- ----------
$218,214,327 $213,616,645
============ ============
</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.
F-23
<PAGE>
<TABLE>
<CAPTION>
(3) Year Ended December 31,
-----------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of period $ 217,474,072 $ 218,353,007 $ 340,455,332
Additions during period - Placements 11,155,491 125,850,000 22,986,500
Deductions during period - Collection of principal (13,365,432) (3,747,675) (54,748,620)
Conversion to purchase leaseback/other changes 3,088,876 - (95,076,567)
--------- ----------- -----------
Balance at close of period $ 218,353,007 $ 340,455,332 $ 213,616,645
============= ============= ============
</TABLE>
(4) At December 31, 1999 no amounts were delinquent. However, the Company
accelerated the due date and initiated a foreclosure action against the
mortgagor due to failure to fully comply with certain covenants. See Note 3
(Mortgage Notes Receivable) to the consolidated financial statements.
(5) A mortgagor with a mortgage on two facilities in Florida declared bankruptcy
on July 8, 1999. The bankruptcy court has ordered that all amounts owed to
the Company (including default rate interest, late charges, attorney's fees
and court costs), bear interest at an annual rate of 10% and that the
mortgagor make monthly payments of $40,000 on a timely basis. As of
December 31, 1999, the mortgagor had complied with the court order.
F-23
<PAGE>
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
OMEGA HEALTHCARE INVESTORS, INC.
By: /s/ David A. Stover
------------------------
David A. Stover
Chief Financial Officer
Dated: January 24, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities on the date indicated.
Signatures Title Date
---------- ----- ----
PRINCIPAL EXECUTIVE OFFICER
/s/ ESSEL W. BAILEY, JR. Chairman, President, January 24, 2000
- ------------------------- Chief Executive Officer
Essel W. Bailey, Jr. and Director
PRINCIPAL FINANCIAL OFFICER and
PRINCIPAL ACCOUNTING OFFICER
/s/ DAVID A. STOVER Vice President, Chief January 24, 2000
- ------------------- Financial Officer and
David A. Stover Chief Accounting Officer
DIRECTORS
/s/ MARTHA A. DARLING Director January 24, 2000
- ---------------------
Martha A. Darling
/s/ JAMES A. EDEN Director January 24, 2000
- -----------------
James A. Eden
/s/ THOMAS F. FRANKE Director January 24, 2000
- -------------------
Thomas F. Franke
/s/ HENRY H. GREER Director January 24, 2000
- ------------------
Henry H. Greer
/s/ Director January 24, 2000
- ---------------------
Harold J. Kloosterman
/s/ BERNARD J. KORMAN Director January 24, 2000
- ---------------------
Bernard J. Korman
/s/ EDWARD LOWENTHAL Director January 24, 2000
- --------------------
Edward Lowenthal
/s/ ROBERT L. PARKER Director January 24, 2000
- --------------------
Robert L. Parker
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description
------ -----------
3.1 Articles of Incorporation, as amended
(Incorporated by reference to the Registrant's
Form 10-Q for the quarter ended March 31, 1995)
3.2 Articles of Amendment to the Company's Articles
of Incorporation, as amended (Incorporated by
reference to the Company's Form 10-Q for
the quarterly period ended September 30, 1999)
3.3 Amended and Restated Bylaws, as amended April 20,
1999 (Incorporated by reference to Exhibit 3.1 to
the Company's Form 8-K dated April 20, 1999)
4.1 Rights Agreement, dated as of May 12, 1999,
between Omega Healthcare Investors, Inc. and
First Chicago Trust Company, as Rights Agent,
including Exhibit A thereto (Form of Articles
Supplementary relating to the Series A Junior
Participating Preferred Stock) and Exhibit B
thereto (Form of Right Certificate) (Incorporated
by reference to Exhibit 4 to the Company's Form
8-K dated April 20, 1999)
4.2 Form of Convertible Debenture (Incorporated by
reference to Exhibit 4.2 to the Company's Form
S-3 dated February 3, 1997)
4.3 Form of Indenture (Incorporated by reference to
Exhibit 4.2 to the Company's Form S-3 dated
February 3, 1997)
4.4 Indenture dated December 27, 1993 (Incorporated
by reference to Exhibit 4.2 to the Company's Form
S-3 dated December 29, 1993)
4.5 First Supplemental Indenture dated January 23,
1996 (Incorporated by reference to Exhibit 4 to
the Company's Form 8-K dated January 19, 1996)
4.6 1993 Stock Option and Restricted Stock Plan, as
amended and restated (Incorporated by reference
to Exhibit A to the Company's Proxy Statement
dated April 6, 1998)
4.7 Form of Articles Supplementary for Series A
Preferred Stock (Incorporated by reference to
Exhibit 4.1 of the Company's Form 10-Q for the
quarterly period ended March 31, 1997)
4.8 Articles Supplementary for Series B Preferred
Stock (Incorporated by reference to Exhibit 4 to
the Company's Form 8-K dated April 27, 1998)
4.9 Form of Supplemental Indenture No. 1 dated as of
June 1, 1998 relating to the 6.95% Notes due 2002
(Incorporated by reference to Exhibit 4 to the
Company's Form 8-K dated June 9, 1998)
10.1 1993 Deferred Compensation Plan, effective March
2, 1993 (Incorporated by reference to Exhibit
10.16 to the Company's Form 10-K for the year
ended December 31, 1992)
10.2 Form of Note Exchange Agreement -- 10% Senior
Notes due July 15, 2000 (Incorporated by
reference to Exhibit 10.1 to the Company's Form
10-Q for the quarterly period ended September 30,
1995)
10.3 Form of Note Exchange Agreement-- 7.4% Senior
Notes due July 15, 2000 (Incorporated by
reference to Exhibit 10.2 to the Company's Form
10-Q for the quarterly period ended September
30, 1995)
10.4 Form of Note Exchange Agreement -- 7.4% Senior
Notes due July 15, 2000 (Incorporated by
reference to Exhibit 10.25 to the Company's Form
10-K for the year ended December 31, 1995)
10.5 Second Amended and Restated Loan Agreement by and
among Omega Healthcare Investors, Inc., the banks
signatory hereto and Fleet Bank, N.A., as agent
for such banks, dated September 30, 1997
(Incorporated by reference to Exhibit 10 to the
Company's Form 8-K dated November 10, 1997)
I-1
<PAGE>
10.6 First Amendment of Purchase Agreement, Master
Lease Agreement, Facility Leases and Guaranty
between Delta Investors I, LLC and Sun Healthcare
Group, Inc. and Delta Investors II, LLC and Sun
Healthcare Group, Inc. (Incorporated by reference
to Exhibits 99.1 and 99.2 to the Company's Form
8-K dated April 30, 1998)
10.7 Form of Loan Agreement by and among Omega
Healthcare Investors, Inc. and certain of its
subsidiaries and the Provident Bank dated March
31, 1999 (Incorporated by reference to the
Company's Form 10-Q for the quarterly period
ended March 31, 1999)
10.8 Forbearance Agreement by and between Delta
Investors I, LLC, Delta Investors II, LLC, Omega
Healthcare Investors, Inc., OHI (Illinois),
Inc. and Sun Healthcare Group, Inc. dated October
13, 1999*
11 Statement re: computation of per share earnings*
12 Ratio of Earnings to Combined Fixed Charges and
Preferred Stock Dividends*
21 Subsidiaries of the Registrant*
23 Consent of Ernst & Young LLP*
27 Financial Data Schedule*
- ---------
* Exhibits which are filed herewith on the indicated sequentially numbered page.
I-2
FORBEARANCE AGREEMENT
This Forbearance Agreement ("Agreement") is made and entered into on
October 13, 1999 by and between the entities identified on the signature page
hereof (each a "Lessee" and collectively "Lessees"); DELTA INVESTORS I, LLC , a
Michigan limited liability company, DELTA INVESTORS II, LLC, a Michigan limited
liability company, OMEGA HEALTHCARE INVESTORS, INC., a Maryland corporation and
OHI (ILLINOIS), INC., an Illinois corporation (each a "Lessor" and collectively
"Lessors"); and SUN HEALTHCARE GROUP, INC., a Delaware corporation
("Guarantor").
R E C I T A L S:
A. Lessees, each of which is a subsidiary or second tier subsidiary of
Guarantor, and Lessors are parties to the Leases and Subleases identified on
attached Exhibit A (each a "Lease" and collectively, the "Leases"). The Leases
relate to certain health care facilities also identified on Exhibit A (each a
"Facility" and collectively, the "Facilities"). The obligations of the Lessees
under the Leases are secured by the Security Agreements and other Agreements
identified on attached Exhibit B (each a "Security Agreement" and collectively,
the "Security Agreements"). Guarantor has executed the Guaranty with respect to
all of the Leases except the Complete Care Lease.
B. On or about May 28, 1999, the Lessors forwarded to the respective
Lessees and other persons required to receive notices under the applicable
Leases ("Other Persons"), and the Lessees and Other Persons received Notices of
Default pursuant to which the Lessors advised the Lessees and Other Persons that
the Lessees had failed to pay certain Minimum Rent and Additional Charges (as
defined in the Leases), and that the failure to cure these defaults within the
time set forth in the Notices of Default would constitute Events of Default
under all of the Leases, except the Complete Care Leases. The Lessees
acknowledge that on or about September 3, 1999, the Lessors forwarded to the
Lessees and to Other Persons, and the Lessees and Other Persons received,
Notices of Termination pursuant to which the Lessors advised the Lessees and
Other Persons that (I) the Lessees had not cured all of the defaults described
in the Notices of Default, and (II) pursuant to the terms of the Leases (a)
Events of Default had occurred under the Leases, other than the Complete Care
Leases, and (b) as a result of the Events of Default, the Leases, other than the
Complete Care Leases, would terminate on September 13, 1999.
C. Lessors contend that all of the Leases, except for the Complete Care
Lease, were terminated effective September 13, 1999 pursuant to the Notices of
Default and Notices of Termination identified in Recital B. Lessors further
contend that Lessors are entitled to immediate possession of the Leased
Properties. Lessees and Guarantor contend that the Notices of Default and
Notices of Termination were ineffective, and that all of the Leases continue in
full force and effect.
D. Guarantor and Lessees are currently experiencing financial
difficulties, and anticipate that they will file a Case or Cases under Chapter
11 of the United States Bankruptcy Code on or before October 15, 1999
("Filing"). The date on which Guarantor and the Lessees actually file such Case
or Cases is hereinafter referred to as the "Filing Date" and such Case or Cases
are hereinafter referred to as the "Case or Cases."
<PAGE>
E. The parties hereto wish to set forth in writing certain agreements
which they have reached concerning (i) the continued occupancy of the Facilities
between the date hereof and the Filing Date, (ii) certain actions to be taken by
the parties after the Filing Date, (iii) certain agreements with respect to the
transition of operations of the Rejected Lease Facilities, and (iv) the
amendment and clarification of certain provisions of the Leases.
NOW, THEREFORE, the parties hereto hereby agree as follows:
1. DEFINITIONS
Terms, if not defined elsewhere herein, shall have the meanings
assigned to them in the Recitals or in this Section and include the plural as
well as the singular, all references to designated "Sections" and other
subdivisions are to the designated Sections and other subdivisions of this
Agreement and the words "herein," "hereof" and "hereunder" and other words of
similar import refer to this Agreement as a whole and not to any particular
Section or other subdivision:
Affiliate: Any Person which, directly or indirectly,
Controls or is Controlled by or is under common Control
with another Person.
Amended Delta I Facility Leases: The Original Delta I Facility
Leases and the February/March 1997 Leases.
Assumed Manor Care Leases: The Manor Care Leases so designated
on Exhibit A.
Assumption and Rejection Order: The Order of the Bankruptcy
Court to be entered granting the Motion to Assume and
Reject as contemplated by Sections III and V hereof. The
Assumption and Rejection Order shall be in all material
respects in the form attached hereto as Exhibit C.
Bankruptcy Court: The United States Bankruptcy Court having
jurisdiction over the Case or Cases.
Base Rent Allocable to the Assumed Manor Care Leases: The
Initial Base Rent Allocable to the Assumed Manor Care
Leases,
1. If the Effective Date is prior to January 1,
2000, prorated for the period from the
Effective Date through December 31, 1999 by
multiplying the Initial Base Rent Allocable
to the Assumed Manor Care Leases by a
fraction in which the numerator is the
number of days in such period and the
denominator is 365;
<PAGE>
2. increased for the period commencing on the
later of (i) January 1, 2000 and (ii) the
Effective Date and ending on December 31,
2000 by the lesser of (y) one and one-half
times the increase in the Cost of Living
Index (as defined in the Qualicorp Lease)
during the preceding Lease Year and (z) two
and one-half percent (2.5%) of the Initial
Base Rent Allocable to the Assumed Manor
Care Leases (prorated for such period on a
per diem basis if such period commences
after January 1, 2000);
3. increased thereafter on each January 1
during the Fixed Term (as defined in the
Qualicorp Lease) and, if Lessee exercises
its right to renew the Term (as defined in
the Qualicorp Lease), the First Extension
Term (as defined in the Qualicorp Lease),
for the following twelve (12) month period
(or, as to the First Extension Term, pro
rata for the period between January 1 of
the last Lease Year of the First Extension
Term and the expiration of the First
Extension Term) by the lesser of (i) one
and one-half times the increase in the Cost
of Living Index during the preceding twelve
(12) month period and (ii) two and one-half
percent (2.5%) of the Base Rent Allocable
to the Assumed Manor Care Leases for the
immediately preceding twelve (12) month
period; and
4. if Lessee exercises its right to renew the
Term for the Second Extension Term (as
defined in the Qualicorp Lease), increased
on January 1 during the first Lease Year of
the Second Extension Term, for the following
twelve (12) month period (or, as to the last
Lease Year in the Second Extension Term,
pro rata for the period between January 1 of
such Lease Year (as defined in the Qualicorp
Lease) and the Expiration Date (as defined
in the Qualicorp Lease)) to the greater
of (i) the Fair Market Value Rent (as
defined in the Qualicorp Lease) for the
Elkhart, Indiana and Danville, Illinois
Leased Properties and (ii) the then current
Base Rent Allocable to the Assumed Manor
Care Leases, increased by the lesser of (x)
one and one-half times the increase in the
Cost of Living Index during the preceding
twelve (12) month period and (y) two and
one-half percent (2.5%) of the Base Rent
Allocable to the Assumed Manor Care Leases
for the immediately preceding twelve (12)
month period.
Business Day: Each Monday, Tuesday, Wednesday, Thursday and
Friday which is not a day on which national banks in the
City of New York, New York are authorized, or obligated, by
law or executive order, to close.
Complete Care Lease: The Lease so described on Exhibit A.
Control (and its corollaries "Controlled by" and "under common
Control with"): Possession, directly or indirectly, of the
power to direct or cause the direction of the management
and policies of a Person, through the ownership of voting
securities, partnership interests or other equity interests.
<PAGE>
Delta I: Delta Investors I, LLC, a Michigan limited liability
company, the sole member of which is Omega Healthcare
Investors, Inc.
Delta I Letter of Credit Agreement: The Amended and Restated
Letter of Credit Agreement dated as of February 28, 1997
between Omega Healthcare Investors, Inc. and Guarantor with
respect to the February/March 1997 Leases.
Delta I Master Lease: The Delta I Master Lease Agreement and
the Original Delta I Facility Leases.
Delta I Master Lease Agreement: The Master Lease Agreement
between Delta I and the Original Delta I Lessees, dated as
of October 7, 1997, as amended by the First Delta I Amendment
and the Second Delta Amendment.
Delta II: Delta Investors II, LLC, a Michigan limited
liability company, the sole member of which is Omega
Healthcare Investors, Inc.
Delta II Facility Leases: The Leases so described on Exhibit A
Delta II Master Lease: The Delta II Master Lease Agreement
and the Delta II Facility Leases.
Delta II Master Lease Agreement: The Master Lease Agreement
between Delta II and the Original Delta II Lessees, dated as
of October 7, 1997, as amended by the First Delta II
Amendment and the Second Delta Amendment.
Effective Date: The date after entry of the Assumption and
Rejection Order on which all of Lessees' Effective Date
Obligations have been satisfied.
Facility: As defined in each of the Leases.
February/March 1997 Leases: The Leases so described on
Exhibit A.
First Delta I Amendment: The First Amendment of Purchase
Agreement, Master Lease Agreement, Facility Leases and
Guaranty dated April 24, 1998, among Delta I, Guarantor and
the Original Delta I Lessees.
First Delta II Amendment: The First Amendment of Purchase
Agreement, Master Lease Agreement, Facility Leases and
Guaranty dated April 24, 1998, among Delta II, Guarantor and
the Delta II Lessees.
Forbearance Period: The period commencing on the date hereof
and ending when and if this Agreement is terminated in
accordance with its terms.
Guaranty: The Amended and Restated Guaranty executed by
Guarantor in favor of Lessors as of October 7, 1997, as
amended by the First Delta I Amendment, the First Delta II
Amendment and the Second Delta Amendment.
<PAGE>
Initial Base Rent Allocable to the Assumed Manor Care
Leases: Nine Hundred Thirty Three Thousand Eighty Four
Dollars ($933,084.00).
Leased Property: Any and all of the property, real and
personal, tangible and intangible, leased pursuant to a
Lease; and, if defined in a Lease, with respect to such Lease
as so defined.
Lessees' Effective Date Obligations: (1) Satisfaction of
Lessees' Monetary Obligations; (2) Lessees' transfer and
relinquishment of the Rejected Lease Assets as required by
this Agreement; (3) Lessees' execution of the agreements
that it is required by this Agreement to execute; and
(4)Guarantor's and Lessees' release of Lessors as set
forth in Section XI.A. hereof.
Lessees' Monetary Obligations: (i) The obligation of the
Liberty Lessees to make an additional security deposit of
Sixty Nine Thousand Six Hundred Twenty Six and 85/100 Dollars
($69,626.85) as set forth in Section VIII.D. hereof; (ii)
the obligation of the Lessees to pay Lessors Two Hundred
Fourteen Thousand Two Hundred Fifty Eight and 42/100 Dollars
($214,258.42) to cure the monetary defaults set forth in
attached Exhibit D; (iii) the obligation of the Lessees under
the Sun Delta I Master Lease, the Sun Delta II Master Lease
and the Sun Liberty Master Lease to pay to the Lessors
thereunder the Sun Delta I Master Lease Minimum Rent
Increase, the Sun Delta II Master Lease Minimum Rent Increase
and the Sun Liberty Master Lease Minimum Rent Increase,
respectively, for the period from November 1, 1999 through
the Effective Date; and (iv) the obligation of the Lessee
under the Rejected Leases to pay Base Rent pursuant to
Section IX.B.3 if any amount thereof shall be unpaid as of
the Effective Date.
Liberty Leases: The Leases so described on Exhibit A.
Manor Care Leases: The Leases so described on Exhibit A.
Motion Filing Date: The date of filing with the Bankruptcy
Court of the Motion to Assume or Reject.
Motion to Assume and Reject: A motion to be filed by the
Lessees and Guarantor within five (5) Business Days of the
Filing Date which shall seek entry of the Assumption and
Rejection Order. The Motion to Assume and Reject shall be
prepared by counsel for the Lessees and shall be reasonably
acceptable to counsel for Lessors.
Notice: Any written notice given by any party hereto in
accordance with the notice provisions set forth in Section
XII hereof.
Operations Transfer Agreement: An agreement in all material
respects in the form attached hereto as Exhibit E which
shall, except as otherwise set forth herein, govern the
transfer of operations of a Rejected Lease Facility from
Lessee to Transferee.
Original Delta I Facility Leases: The Leases so described on
Exhibit A.
Person: Any natural person, trust, partnership, corporation,
joint venture, limited liability company or other legal
entity.
<PAGE>
Qualicorp Lease: The Lease so described on Exhibit A.
Qualicorp Letter of Credit Agreement: The Letter of
Credit Agreement dated June 1, 1997 by and among Omega
Healthcare Investors, Inc., OHI (Illinois), Inc. and
Guarantor entered into with respect to the Qualicorp Lease.
Rejected Lease: Each Lease specified to be rejected in
Section III hereof.
Rejected Lease Assets: With respect to each Rejected Lease,
all of the real and personal property covered thereby
or by any Security Agreement executed by the Lessee
thereunder in favor of the Lessor thereunder, including
without limitation the Leased Property (with respect to the
Rejected Manor Care Leases and as defined therein) and the
Demised Premises (with respect to the Complete Care Lease
and as defined therein), all tangible personal property,
furniture, fixtures and equipment owned by a Lessee and used
or held for use in connection with or otherwise relating
to the operation of the Rejected Lease Facility or
Facilities, and all plans and specifications relating to the
buildings and improvements included in the Leased Property
or Demised Premises covered thereby, to the extent in the
possession of the Lessees; all of the books and records of a
Facility covered thereby, including patient medical and
financial records and employee records; to the extent
assignable, all intangible personal property of every type,
nature and description relating to a Facility covered
thereby, including utility deposits, warranties, consents,
authorizations, licenses and permits issued by third parties
(provided that Lessees shall retain any such licenses and
permits which they are required to maintain during the
period for which the Lessees retain operational control and
responsibility for the applicable Rejected Facility
hereunder); and all inventories of every type, nature
and description whatever (specifically including all
pharmacy supplies, kitchen supplies, linens and housekeeping
supplies, medical and nursing supplies, office supplies, and
other supplies and foodstuffs) owned by the Lessee on the
Effective Date which inventories are located at or held for
use in any of the Facilities covered by a Rejected Lease.
Notwithstanding anything to the contrary herein, all of the
following items are excluded from the term "Rejected Lease
Assets:" cash, accounts receivable, all leased equipment
and leased motor vehicles (other than equipment and motor
vehicles leased from Affiliates of Lessees and Guarantor),
the KRONOS time clock, the Omnicell medical supply dispensing
units, all computers and computer-related equipment located
at a Facility and all computer software used on such
equipment.
Rejected Lease Facility: Any Facility subject to a Rejected
Lease.
Second Delta Amendment: The First Amendment of Security
Agreements and Second Amendment of Purchase Agreement,
Master Lease Agreement, Facility Leases and Guaranty among
Omega Healthcare Investors, Inc., Delta I, Delta II and
Guarantor, dated June 15, 1998.
Sun Delta I Master Lease: The Delta I Master Lease, as amended
as provided in Section V hereof and assumed pursuant
the Assumption and Rejection Order.
<PAGE>
Sun Delta I Master Lease Minimum Rent Increase: The accrued
and unpaid amount of the increase in the Minimum Rent
payable under the Delta I Master Lease, effective as of
November 7, 1998, for the Term thereof and any extensions
thereof, subject to annual increases and adjustments as set
forth in the Sun Delta I Master Lease, pursuant to the
Agreement Regarding Post-Closing Matters dated October 7,
1997 among the Original Delta I Lessees, Regency Health
Services, Inc., Guarantor, Delta I and Delta II, which
increase annualized for the Lease Year 1998 is Four Hundred
Thirty Nine and 04/100 Dollars ($439.04), annualized for
the Lease Year 1999 is Four Hundred Fifty and 36/10
Dollars ($450.36) and for the Lease Year 2000 shall be
adjusted in the same fashion as Base Rent is adjusted.
Sun Delta II Master Lease: The Delta II Master Lease, as
amended as provided in Section V hereof and assumed pursuant
to the Assumption and Rejection Order.
Sun Delta II Master Lease Minimum Rent Increase: The accrued
and unpaid amount of the increase in the Minimum Rent payable
under the Delta II Master Lease, effective as of November
7, 1998, for the Term thereof and any extensions thereof,
subject to annual increases and adjustments as set forth in
the Sun Delta II Master Lease, pursuant to the Agreement
Regarding Post-Closing Matters dated October 7, 1997 among
the Original Delta I Lessees, Regency Health Services, Inc.,
Guarantor, Delta I and Delta II, which increase annualized
for the Lease Year 1998 is Seventeen Thousand Sixty Seven
and 99/100 Dollars ($17,067.99), annualized for the Lease
Year 1999 is Seventeen Thousand Five Hundred Six and
68/100 Dollars ($17,506.68) and for the Lease Year 2000 shall
be adjusted in the same fashion as Base Rent is adjusted.
Sun Leases: Collectively, the Sun Delta I Master Lease, the
Sun Delta II Master Lease, the Sun Liberty Master Lease and
the Sun Qualicorp Lease.
Sun Liberty Master Lease: The Liberty Leases, as amended as
provided in Section V hereof and assumed as provided in
the Assumption and Rejection Order.
Sun Liberty Master Lease Minimum Rent Increase: The accrued
and unpaid amount of the increase in the Minimum Rent
payable under the Liberty Leases, effective as of November
7, 1998, for the Term thereof and any extensions thereof,
subject to annual increases and adjustments as set forth in
the Liberty Leases, pursuant to the Agreement Regarding
Post-Closing Matters dated October 7, 1997 among the
Original Delta I Lessees, Regency Health Services, Inc.,
Guarantor, Delta I and Delta II, which increase annualized
for the Lease Year 1998 is Eight Thousand Seven Hundred
Thirty Four and 02/100 Dollars ($8,734.02), annualized for
the Lease Year 1999 is Eight Thousand Nine Hundred Fifty
Eight and 43/100 Dollars ($8,958.43)and for the Lease
Year 2000 shall be adjusted in the same fashion as Minimum
Rent is adjusted.
Sun Qualicorp Lease: The Qualicorp Lease, amended as
provided in Section V hereof and assumed as provided in the
Assumption and Rejection Order.
Sun Transaction Documents: The documents listed on attached
Exhibit F.
Trade Name: The name or names under which a Facility is
conducting business on the date hereof.
<PAGE>
Transferee: A person or entity designated by the Lessor (which
may be such Lessor) under a Rejected Lease to which such
Lessor wishes a Lessee under a Rejected Lease to transfer
possession of, or certain management rights with respect to,
the Rejected Lease Facility or Facilities.
2. AGREEMENT TO FORBEAR
1. During the Forbearance Period, the Lessors shall forbear from
commencing any judicial or other action for the purpose of
pursuing remedies, including, without limitation, the recovery
of possession of any Leased Property, on the basis of any
default prior to the date of this Agreement by any Lessee
under any Lease or any default in existence by Guarantor under
the Guaranty. This Agreement shall, at the option of the
Lessors, terminate upon:
1. The failure of any one or more of the Lessees to
commence a Case on or before October 15, 1999;
2. The failure of the Lessees to obtain the Assumption
and Rejection Order on or before the earlier of
1. 45 days after the Motion Filing Date, or
2. the entry of a final DIP Financing Order
which provides that the lender's security
interest primes any of the collateral of any
of the Lessors under the Security
Agreements; or
3. The election of Lessors to terminate this Agreement
pursuant to Section IX hereof; or
4. Lessees' failure to satisfy Lessees' Effective Date
Obligations as and when required herein.
2. Upon execution of this Agreement by all parties, Lessors
shall immediately take all steps reasonably appropriate
under applicable law to withdraw any and all notices to quit
(or the equivalent) that have been served upon Lessees on or
prior to the date hereof, and shall immediately dismiss any
and all lawsuits commenced against any Lessee or Guarantor
with respect to the Leases, and during the Forbearance Period
in addition to its agreement to forbear as set forth in
Section II.A., above, shall also forbear from causing
or permitting any notice to quit (or the equivalent) to be
served upon any Lessee, provided, however, that Guarantor and
each Lessee waives and agrees (which waiver and agreement
shall survive the termination of this Agreement
notwithstanding Section II.G, hereof) that it shall not
assert such withdrawal or any failure to serve such
notice to quit (or the equivalent) during the Forbearance
Period in any action brought by a Lessor as a defense to any
action by Lessor.
<PAGE>
3. During the Forbearance Period, Guarantor and each Lessee
shall forbear from commencing any judicial or other actions
adverse to any Lessor with respect to any of the Leases,
other than the Filing, or, if applicable, seeking any
relief adverse to Lessor in any now pending action with
respect thereto, provided, however, that such agreement to
forbear shall not apply to (i) any default by any Lessor under
any Lease occurring after the date hereof if such default is
not cured within the applicable cure or grace period set
forth in the Lease, or (ii) any default by any Lessor under
this Agreement which is not cured within ten (10) days after
written notice thereof, each of which defaults may be the
subject of a separate legal action but shall not affect the
rights or obligations of the Lessees and Guarantor
hereunder.
4. Each party to this Agreement hereby waives and agrees
(which waiver and agreement shall survive the termination
of this Agreement notwithstanding Section II.G, hereof)
that it shall not assert at any time that the failure during
the Forbearance Period of any other party to this Agreement
to commence any action or proceed with any steps taken prior
to the Forbearance Period that are or may be required under
applicable law prior to the commencement of any action is a
defense to any claim by another party arising out of or in
connection with any or all of the Leases. The intent of the
parties is that compliance during the Forbearance Period with
the forbearance agreements set forth in Section II.A, Section
II.B and Section II.C shall not prejudice or be a waiver of
the rights or claims of any of the parties hereto should the
Forbearance Period terminate as set forth in Section II.A.
5. On the Effective Date, Lessors' agreement to forbear as
provided herein shall be absolute and unconditional and cannot
be terminated, provided, however, that except as provided in
Section XI hereof, nothing contained herein shall be construed
as limiting the rights and remedies of any of the Lessors with
respect to any default or Event of Default which occurs under
the Sun Leases or the Security Agreements, as amended, after
entry of the Assumption and Rejection Order.
6. Guarantor and Lessees agree (which agreement shall survive
the termination of this Agreement notwithstanding Section
II.G, hereof) that neither the acceptance during the
Forbearance Period by any Lessor of any rent or other payment
by any Lessee with respect to any Lease, the continued
possession during the Forbearance Period of Leased Property
covered by a Lease by the Lessee thereof, nor the performance
by a Lessee during the Forbearance Period of any of the
obligations set forth in any Lease without objection from
the Lessor thereunder, shall constitute a waiver or
otherwise prejudice either the contention of the Lessors that
such Lease has been terminated or the contention of Guarantor
and the Lessees that such Lease has not been terminated and is
in full force and effect, but the foregoing reservation shall
be null and void after the Effective Date.
<PAGE>
7. In the event this Agreement terminates pursuant to the terms
hereof, from and after such termination no party hereto shall
have any rights or obligations arising out of or in connection
with this Agreement, and no party shall be deemed to have
waived any of its rights or been released from any of its
obligations with respect to the Leases or the Guaranty or in
any way be prejudiced by its execution of, or its performance
of any of its obligations under, this Agreement.
3. REJECTION OF LEASES
Guarantor and the Lessees shall (i) file the Motion to Assume and
Reject within five (5) Business Days of the Filing Date, and (ii) use
good faith efforts to obtain entry of the Assumption and Rejection
Order on or before the earlier of (y) forty-five (45) days after the
Motion Filing Date or (z) the entry of a final DIP Financing Order
which provides that the security interest of the lender primes the
collateral of one or more of the Lessors under a Security Agreement,
unless extended in writing by the Lessors. During the Forbearance
Period and from and after the Effective Date, Lessors shall support
entry of the Assumption and Rejection Order and shall not oppose entry
of the orders filed by Lessees and their Affiliates on the date the
Case or Cases are filed with respect to DIP financing, cash collateral
arrangements and debtors' cash management, or any orders filed by
Lessees and their Affiliates thereafter relating to the same subject
matter provided in each case such subsequent orders are not at variance
in any material respect that adversely affects Lessors, the Leases, the
Facilities covered by the Leases or the rights of the Lessors under the
Leases or this Agreement, with the orders sought on the day the Case or
Cases are filed copies of which have been provided to Lessors prior to
the date of this Agreement. The Motion to Assume and Reject shall seek,
among other things, authorization to reject the following Leases:
LESSOR LESSEE LEASE DATE
1. Omega Healthcare Investors, Inc. SunBridge Healthcare June 1, 1990
(successor by merger to Health Corporation (successor
Equity Properties, Inc.) by assignment to Complete
Care, Inc.)
2. Omega Healthcare Investors, Inc. SunBridge Healthcare February 28, 1997
(with respect to the Facility in Austin, Corporation Texas and the
Facility in Mason City, Iowa)
4. CERTAIN AGREEMENTS REGARDING REJECTED LEASE FACILITIES
1. BASE RENT WITH RESPECT TO REJECTED LEASE FACILITIES AFTER FILING OF
MOTION TO ASSUME AND REJECT.
<PAGE>
1. Provided that the Motion to Assume and Reject is
filed within the period specified in Paragraph II.A.
hereof, for the period from and after the date on
which the Motion to Assume and Reject is filed
through the earlier of (i) the forty-fifth day
following the Motion Filing Date and (ii) the
Effective Date ("Accrual Period") the Base Rent(as
defined in each Rejected Lease) shall with respect
to the Rejected Lease Facilities accrue but except
as provided in Section IV.A.2. hereof and Section IX
hereof shall not be payable ("Accrued Rent").In the
event any Accrued Rent shall have been paid by any
Lessee on or before the date hereof, upon the
Effective Date the amount so paid shall be credited
first against any unpaid Base Rent payable with
respect to the Rejected Lease Facilities for any
period after the expiration of the Accrual Period,
if any, and then to the Lessees' Monetary
Obligations.
2. Upon the Effective Date Lessors shall have waived all
claims to the Accrued Rent, but if Lessors exercise
their right to terminate this Agreement as provided
in Section II.A., Lessors shall retain their claims
for payment of the Accrued Rent.
2. TRANSFER OF THE REJECTED LEASE ASSETS
1. On the date upon which Lessees are required to
satisfy Lessees' Effective Date Obligations as
set forth in Section IX hereof, the Lessee under each
Rejected Lease shall relinquish possession of the
Rejected Lease Assets to the Transferee under such
Rejected Lease, as is and where is, in the condition
of the Rejected Lease Assets on the date hereof,
without any representations or warranties whatsoever,
including without limitation without any
representations with respect to title or the
condition of title to the Rejected Lease Assets,
the condition of the Rejected Lease Assets or the
compliance of the Rejected Lease Facilities with
applicable laws, regulations or administrative
orders, provided that if any Rejected Lease Assets
shall be damaged or destroyed between the date
hereof and the Effective Date, the Lessee under
the applicable Rejected Lease shall undertake such
repair and restoration thereof as may be required
by the applicable Lease and be reasonably feasible
during the time period between the date of such
damage or destruction and the Effective Date and
shall deliver to the Lessor thereunder such proceeds
of insurance as such Lessee shall have received,
and assign to Lessor such additional insurance
proceeds as Lessee is entitled to receive, with
respect to such damage or destruction, minus such
portion of such proceeds as may have been paid by
such Lessee for repairs and restoration of such
damage or destruction.
2. On the date upon which Lessees are required to
satisfy Lessees' Effective Date Obligations as set
forth in Section IX hereof, (i) the Lessee and Lessor
under each Rejected Lease shall properly execute and
deliver to each other an appropriate instrument in
recordable form acknowledging termination of the
Rejected Lease and release of the obligations of the
Lessee and Lessor thereunder, (ii) the Lessee under
each Rejected Lease shall properly execute and
deliver to the Lessor thereunder a quitclaim of its
interests in and to the Rejected Lease Assets and
(iii) the Affiliates of the Lessee under each
Rejected Lease shall release any security interest
they may have in the Rejected Lease Assets.
<PAGE>
3. ECONOMIC RISK AND REWARD FROM AND AFTER THE EFFECTIVE DATE.
The Lessor of each of the Rejected Lease Facilities shall be
entitled to all revenues, and shall be liable for all expenses
and liabilities, which in each case with respect to such
Rejected Lease Facility relate to the period from and after
the Effective Date or such earlier date on which the
applicable Lessee transfers operational responsibility for
such Rejected Lease Facility to the applicable Lessor or
Transferee pursuant to the request of such Lessor and the
terms of the Operations Transfer Agreement as provided in this
Agreement.
4. INTERIM MANAGEMENT OF REJECTED LEASE FACILITIES.
1. At the request of the Lessor of a Rejected Lease
Facility, from and after the Effective Date, the
Lessee of the Rejected Lease Facility shall manage
the Rejected Lease Facility pursuant to an
interim management agreement ("Interim Management
Agreement") reasonably acceptable to the parties,
the term of which shall not exceed six (6) months,
provided, however, that if an appeal is taken from
the Assumption and Rejection Order, the term of such
Interim Management Agreement shall be extended until
the earlier of (i) the date on which this Agreement
is terminated or (ii) the date on which the
Assumption and Rejection Order becomes final and
non-appealable. Except as provided in Section
IV.D.2. below, the Lessee will be paid a
management fee equal to a percentage of the gross
revenues of the Rejected Lease Facility (net of
any recoupments or charge-backs), which percentage
has been agreed upon by the parties to this
Agreement. The Lessor shall have the right to
terminate the Interim Management Agreement at
any time upon five (5) days Notice to Lessee. The
Interim Management Agreement shall require that
Lessor provide Lessee with all working capital
required for the operation of the Rejected Lease
Facility, and shall require that the Lessor
indemnify, defend, and hold Lessee harmless from any
and all claims and expenses accruing with respect to
the Rejected Lease Facility after the Effective Date,
except for claims arising from willful misconduct or
negligence of the Lessee.
<PAGE>
2. From and after the Effective Date, if an Interim
Management Agreement has been entered into, the
Lessee under a Rejected Lease Facility at the request
of the Lessor thereunder shall transfer operational
responsibility for such Facility to the Transferee
pursuant to a submanagement agreement
("Submanagement Agreement") with Transferee
reasonably acceptable to the parties.
The Submanagement Agreement will provide that
Transferee will manage and perform all functions
relating to the operation of the Rejected Lease
Facility, except for those functions which Lessee
is required to perform as the licensee of the
Rejected Lease Facility. If a Submanagement Agreement
is entered into, the management fee payable to Lessee
under the Interim Management Agreement shall
automatically be changed to One Hundred Dollars
($100.00) per month above the submanagementfee (which
submanagement fee will be paid to the Lessee and
passed through to the Transferee). Lessor shall
remain responsible for providing all working
capital required with respect to the Rejected Lease
Facility, and the indemnification given to Lessee
under the Interim Management Agreement shall be
expanded to include any and all acts and omissions
of the Transferee including operation of the
Rejected Lease Facility under the Lessee's licenses
and provider agreements.
3. Any Interim Management Agreement and Submanagement
Agreement entered into as set forth above shall
automatically terminate upon Transferee obtaining the
necessary licenses for the operation of the Rejected
Lease Facility, provided that notwithstanding such
termination, in accordance with the Operations
Transfer Agreement the Lessee of the Rejected Lease
Facility shall allow the Lessor or Transferee
thereof to operate under the relevant Lessees'
Medicare and Medicaid Provider numbers (the "Prior
Provider Numbers") until such time as the Lessor or
Transferee, in accordance with applicable law,
either (i) obtains a Medicare and Medicaid provider
number in its own name or (ii) is authorized by the
applicable state or federal governmental
authority to bill under the Prior Provider Numbers
for services rendered by it after the Effective Date,
provided that in no event shall such obligation of
the Lessee of such Rejected Lease Facility require
that such Lessee assume pursuant to Section 365 of
the Bankruptcy Code any provider agreement to
which such Lessee or any of its Affiliates may be a
party.
<PAGE>
4. Prior to the Effective Date, the Lessee under a
Rejected Lease Facility at the request of the Lessor
thereunder shall transfer operational responsibility
for such Facility to the applicable Lessor or
Transferee pursuant to an Operations Transfer
Agreement and a management agreement between Lessee
and Transferee (the "Transferee Management
Agreement") reasonably acceptable to the parties.
The Transferee Management Agreement will provide
that Transferee will manage and perform all
functions relating to the operation of the Rejected
Lease Facility, except for those functions which
Lessee is required to perform as the licensee of the
Rejected Lease Facility. If a Transferee Management
Agreement is entered into prior to the Effective Date
hereafter, the Lessor shall bear all economic risks
of and be entitled to all economic reward from the
Rejected Lease Facility, as more particularly set
forth in Subsection 4.C. hereof. Without limiting the
foregoing, if a Transferee Management Agreement is
entered into prior to the Effective Date, thereafter
Lessor shall provide Lessee with all working capital
required for the operation of the Rejected Lease
Facility, and Lessor shall indemnify, defend and
hold Lessee harmless from any and all claims and
expenses accruing with respect to the Rejected Lease
Facility, except for claims arising from willful
misconduct or negligence of the Lessee. If a
Transferee Management Agreement is entered into,
the Lessee shall permit the Lessor to make all
decisions required of the Lessee under the Transferee
Management Agreement, except for those decisions
which Lessee is required to make as the licensee of
the Rejected Lease Facility. If from or after the
Effective Date Lessor and Lessee enter into an
Interim Management Agreement pursuant to Subsection
4.D.1., any Transferee Management Agreement shall
automatically become a Submanagement Agreement
governed by Subsections 4.D.2. and 4.D.3.
5. COOPERATION WITH RESPECT TO OPERATIONS BETWEEN LESSOR AND LESSEE PRIOR
TO EFFECTIVE DATE
Commencing with the execution of this Agreement, the Lessee,
Lessor and Transferee (when identified) of a Rejected Lease
Facility shall work cooperatively with each other to design
and implement a program
1. to insure patients and employees that the rejection of the
Rejected Lease and the resulting change in management will not
adversely affect them,
2. to encourage all patients to remain patients of the Facility, and
3. to encourage all employees of such Facility (whether
employed by the Lessee or employed under a contract
with an Affiliate of the Lessee) to remain employees
of the Facility.
Notwithstanding the foregoing, Lessee shall have no liability
to Lessor or Transferee if patients or employees leave or
operation of the Facility is otherwise adversely affected by
the Case or Cases.
6. OPERATIONS TRANSFER AGREEMENT
On the Effective Date or such earlier date upon which the
Lessor of a Rejected Lease Facility requests that the Lessee
thereunder turn over operational responsibility for such
Facility to a Transferee, such Lessee and Transferee shall
enter into an Operations Transfer Agreement. With the support
of Lessors, Guarantor and Lessees shall use good faith efforts
to obtain timely approval of the Bankruptcy Court with respect
to any provisions of the Operations Transfer Agreement as to
which such approval is required.
7. TRADE NAMES
The Lessee under a Rejected Lease shall be deemed to have
assigned to the Lessor under such Rejected Lease the exclusive
right to use without objection from any Affiliate of such
Lessee the Rejected Lease Facility or Facilities' Trade Name
or Trade Names, excluding the names "Sun" or "Mediplex" or any
derivatives or variations thereof, in perpetuity in the
markets in which such Rejected Lease Facility or Facilities
are located, but without any representation that any Lessor
shall have the right to use any such Trade Name or Trade
Names, and no Lessee shall use such Rejected Lease Facility or
Facility Trade Names in any business that competes with such
Facility or Facilities.
<PAGE>
8. HIGHLAND HILLS (FOUR SEASONS NURSING CENTER)
Guarantor and Lessees agree that any and all fines, penalties
as of the date hereof and any interest that may be due thereon
with respect to the Manor Care Lease applicable to the Four
Seasons Nursing Center at Austin, Texas (a/k/a "Highland
Hills"), shall be paid as and when due.
5. SUN LEASES
1. INDUCEMENT FOR OMEGA CONSENTING TO ASSUMPTION OF LEASES
Lessees and Guarantor agree and acknowledge that the
willingness of the Lessors to consent to the assumption of the
Sun Leases and to waive their position that all of the Leases
have been terminated is specifically conditioned upon their
agreement, and the finding of the Bankruptcy Court in the
Assumption and Rejection Order, that, except as provided in
Section XI and Section XII hereof, a default by one or more of
the Lessees under any of the Sun Leases which is not cured
after any required notice and within any applicable cure
period shall, at Lessors' option, be an Event of Default under
each of the Sun Leases, and that the Sun Leases (i) constitute
true and bona fide leases, (ii) are each part of and subject
to one of the four (4) Master Leases, i.e., the Sun Liberty
Master Lease, Sun Qualicorp Lease, Sun Delta I Master Lease,
and Sun Delta II Master Lease, (iii) are collectively
integrated and cross-defaulted pursuant to provisions therein
specifically found to be enforceable and (iv) on and after the
Effective Date the Sun Leases will collectively be integrated
and the cross-default provisions contained therein will be
enforceable.
2. ASSUMPTION OF LEASES
The Motion to Assume and Reject shall seek, among other
things, authorization to assume the Sun Leases. On the date
upon which Lessees are required to satisfy Lessees' Effective
Date Obligations as set forth in Section IX hereof, Lessors
and Lessees shall execute appropriate instruments in form
reasonably acceptable to the parties pursuant to which Lessees
assume the Sun Leases and Lessors acknowledge such assumption.
3. LEASE AMENDMENTS
1. INTEGRATION OF ASSUMED MANOR CARE LEASES AND QUALICORP LEASE
<PAGE>
The Assumption and Rejection Order shall provide that
as of the Effective Date the Leased Property under
the Assumed Manor Care Leases shall be integrated
into and become subject to the Sun Qualicorp Lease,
provided, however, that the options to purchase
contained in the Assumed Manor Care Leases shall
continue in full force and effect, and any and all
obligations and liabilities of the Lessee under the
Assumed Manor Care Leases shall become obligations
and liabilities of such Lessee under the Sun
Qualicorp Lease.
2. ADDITION OF FEBRUARY/MARCH 1997 LEASES TO DELTA I MASTER LEASE AGREEMENT
The Assumption and Rejection Order shall provide that
as of the Effective Date the February/March 1997
Leases, amended as set forth below, shall become
subject to the Sun Delta I Master Lease.
3. AMENDMENTS TO SPECIFIC LEASES
Upon the assumption thereof, pursuant to the
Assumption and Rejection Order the following Leases
shall be amended as hereinafter set forth as of the
Effective Date:
1. FEBRUARY/MARCH 1997 LEASES
(1)Each of the February/March 1997 Leases shall be amended as follows:
(1) The definition of "Related Leases" shall be changed to include all
of the Amended Delta I Facility Leases;
(2) The renewal options shall be changed to be the same as the
renewal options under the Original Delta I Facility Leases;
(3) The Standard Terms and Conditions shall be the
Standard Terms and Conditions of the Original
Delta I Facility Leases, subject to Section V.B.3.d. hereof.
2. DELTA I MASTER LEASE AGREEMENT AND DELTA II MASTER LEASE AGREEMENT
The Delta I Master Lease Agreement shall be
amended to include the February/March
Leases, as amended, as Facility Leases
thereunder, and the Delta I Master Lease
Agreement and the Delta II Master Lease
Agreement shall be amended to incorporate
the Sun Delta I Master Lease Minimum Rent
Increase and the Sun Delta II Master Lease
Minimum Rent Increase, respectively,
thereunder.
3. LIBERTY LEASES
The Liberty Leases shall be amended to
incorporate the Sun Liberty Leases Minimum Rent Increase.
<PAGE>
4. QUALICORP LEASE
The Qualicorp Lease shall be amended as follows:
(1) The Leased Property under the Assumed Manor Care Leases shall become
subject to the Sun Qualicorp Lease;
(2) From and after the Effective Date, the Base Rent shall be the sum
of the Base Rent payable under the Qualicorp Lease prior to
amendment and the Base Rent Allocable to the Assumed Manor Care Leases.
5. ADDITIONAL AMENDMENTS
The Sun Leases shall be further amended as may reasonably be required
in order to correct and confirm inter-document, intra-document and exhibit
references and conform definitions of terms used in such Sun Leases in order
to carry out the intent of this Agreement.
6. GUARANTY; ACCOUNTS RECEIVABLE
1. Guarantor and Lessees shall use good faith efforts to seek the
restructuring of Lessees as part of the plan of reorganization
of the Lessees and Guarantor in the Case or Cases, such that:
1. The Facilities covered by the Sun Leases are leased
to one or more entities ("Sun Leases Subsidiaries")
whose only business is leasing and operating such
Facilities, the terms and conditions of such lease or
leases with respect to each Facility to be the same
as the terms and conditions of the Sun Lease
applicable to such Facility;
2. The Sun Leases Subsidiaries are owned by one or more
single-purpose entities which own only the Sun Leases
Subsidiaries (each such entity a "Parent");
<PAGE>
3. The Parent will execute a guaranty of payment and
performance with respect to such lease or all such
leases (and if more than one Parent, the Parents will
execute a joint and several guaranty of payment and
performance with respect to all such Leases) the
terms and conditions of which in all material
respects shall be the same as the terms and
conditions of the Guaranty, except that it shall
(i) exclude the Rejected Leases, and (ii)
require compliance with the financial covenants
imposed by the principal working capital lenders upon
the ultimate parent of Lessees upon the effective
date of the plan of reorganization with respect to
the Case or Cases, as the same may be amended,
modified or restated from time to time during the
term of such guaranty, provided, however, that in
the event that during the term of the guaranty there
are no such covenants, Guarantor and Lessees shall in
good faith negotiate reasonable financial covenants
applicable to the Guarantor that shall provide
reasonable assurance to the Lessors that the
financial condition of Guarantor shall be adequate
to enable it to perform its obligations under the
guaranty; and
4. Upon completion of the restructuring described in
this Section VI.A., the Guaranty shall be released.
2. If approval of the restructuring described in Section VI.A is
denied by any regulatory agency or agencies with respect to a
Sun Lease Facility or Sun Lease Facilities over which it has
jurisdiction ("Denied Facilities"), then such restructuring
shall be completed as required herein with respect to all
Lessees under the Sun Leases, and all Sun Lease Facilities as
to which such denial of approval is inapplicable, and the
Guaranty shall be reinstated with respect to the Sun Leases
covering the Denied Facilities pursuant to the plan of
reorganization applicable to Guarantor.
3. If Guarantor and Lessees determine in good faith that the
restructuring described in Section VI.A shall not be part of
the plan of reorganization of Guarantor and Lessees, then
Guarantor and Lessees agree that the Guaranty shall be
reinstated with respect to all of the Sun Leases and amended
to require compliance with the financial covenants
imposed by the principal working capital lenders upon the
ultimate parent of Lessees upon the effective date of the
plan of reorganization with respect to the Case or Cases as
such covenants may be amended, modified or restated from
time to time during the term of such guaranty, and in the
event there are no such covenants, to provide that
Guarantor and Lessees shall in good faith negotiate reasonable
financial covenants applicable to the Guarantor that
shall provide reasonable assurance to the Lessors that the
financial condition of Guarantor shall be adequate to
enable it to perform its obligations under the Guaranty.
4. In any event, Guarantor and Lessees agree that unless the
Guarantor under the reinstated Guaranty is the ultimate
parent of all of the Lessees under the Sun Leases, if at
any time after the effective date of the plan of
reorganization applicable to a Lessee under a Sun Lease, but
only during the Term of such Sun Lease, such Lessee shall
grant a security interest in the accounts receivable of the
Facility or Facilities covered by such Sun Lease to any party
other than the Lessor under such Sun Lease ("Third Party
A/R Lien"), such Lessee shall at such time also use good
faith efforts to grant the Lessor under such Sun Lease a
security interest in the accounts receivable of such
Facility or Facilities, provided, however, that the security
interest granted to such Lessor shall be subordinate to
such Third Party A/R Lien and be subject to such subordination
and intercreditor agreements as the holder of such
Third Party A/R Lien may in its sole discretion require.
<PAGE>
5. For purposes of this Section VI, the obligations imposed on
Lessees to act in "good faith" or to use "good faith efforts"
shall not require the Lessees to take any action or position
that they determine in their reasonable judgment would
adversely affect (i) a restructuring by the Guarantor, the
Lessees or any of their Affiliates, or (ii) the ability of
Guarantor, the Lessees or any of their Affiliates to
effectuate such a restructuring, in the Case or Cases.
7. SECURITY AGREEMENTS
On the date on which Lessees are required to satisfy Lessees' Effective
Date Obligations as set forth in Section IX hereof, (i) Lessors and
Lessees shall execute and deliver such amendments to the Security
Agreements and financing statements related thereto as may be
appropriate as a consequence of the lease amendments to be executed
pursuant to Section V hereof and the change of name of SunRise
Healthcare Corporation to SunBridge Healthcare Corporation, and (ii)
the Lessor under the Sun Manor Care Leases shall execute and deliver a
UCC termination statement releasing the Lessor's security interest in
accounts receivable under the Sun Manor Care Leases.
8. SECURITY DEPOSITS
1. Complete Care Lease. The Lessor under the Complete Care
Lease currently holds a Letter of Credit in the amount of One
Hundred Sixty Two Thousand Dollars ($162,000.00) (the
"Complete Care Letter of Credit") as security for the
performance of the obligations of the Lessees under the
Complete Care Lease (the "Complete Care Lessees"). Upon the
earlier to occur of (i) any event which entitles the Complete
Care Lessor to draw upon the Complete Care Letter of
Credit under the Complete Care Lease (other than the
Bankruptcy Related Events (as defined in Section XI hereof)or
an Event of Default arising out of a default under the
Complete Care Lease that occurred prior to the date of this
Agreement), (ii) the Effective Date, or (iii) the entry of
any other order by the Bankruptcy Court authorizing
rejection of the Complete Care Lease, the Complete Care
Lessor shall be entitled to draw upon the Complete Care
Letter of Credit, and shall be entitled to retain the entire
proceeds thereof.
2. Delta I Master Lease
1. Delta I currently holds no security deposit with
respect to the Delta I Master Lease; following the
entry of the Assumption and Rejection Order, no
security deposit shall be required with respect to
the Original Delta I Facility Leases, except if and
to the extent required under the terms of those
Leases.
2. Delta I currently holds Letters of Credit totaling
Six Hundred Sixty Nine Thousand Three Hundred Seventy
Five Dollars ($669,375.00) (the "February /March 1997
Letters of Credit") pursuant to the Delta I Letter of
Credit Agreement. These Letters of Credit relate to
the February/March 1997 Leases which are being
incorporated into the Sun Delta I Master Lease.
Following the Effective Date, Delta I shall continue
to hold the February/March 1997 Letters of Credit in
accordance with the terms of the Delta I Letter of
Credit Agreement.
<PAGE>
3. Delta II Master Lease.
Delta II currently holds no security deposit with respect to
the Delta II Master Lease; following the entry of the
Assumption and Rejection Order, no security deposit shall be
required with respect to the Sun Delta II Facility Leases,
except if and to the extent required under the terms of those
Leases.
4. Liberty Leases.
The Lessors under the Liberty Leases (the "Liberty Lessors")
currently hold cash security deposits (the "Liberty Cash
Deposits") pursuant to the terms of the Cash Deposit
Agreements identified on Exhibit B (the "Liberty Cash Deposit
Agreements") in the amount of Six Hundred Four Thousand Five
Hundred Forty Six and 15/100 Dollars ( $604,546.15). The
Liberty Cash Deposit Agreements require a total deposit of Six
Hundred Seventy Four Thousand One Hundred Seventy Three
Dollars ($674,173.00), and on the Effective Date, the Liberty
Cash Deposit shall be restored to the required amount by the
Lessees under the Liberty Leases. Thereafter, the Liberty
Lessors shall continue to hold the Liberty Cash Deposit in
accordance with the Liberty Cash Deposit Agreements.
5. Manor Care Leases.
The Lessors under the Manor Care Leases (the "Manor Care
Lessors") currently hold a Letter of Credit in the amount of
Four Hundred Sixty Four Thousand Six Hundred Seventy Five
Dollars ($464,675.00) (the "Manor Care Letter of Credit") as
security for the performance of the obligations of the Lessees
under the Manor Care Leases (the "Manor Care Lessees"). Upon
the earlier to occur of (i) any event which entitles the Manor
Care Lessors to draw upon the Manor Care Letter of Credit
under the existing Security Agreements (other than the
Bankruptcy Related Events (as defined in Section XI hereof) or
an Event of Default arising out of a default under the Manor
Care Leases that occurred prior to the date of this
Agreement), (ii) the Effective Date, or (iii) the entry of any
other Order by the Bankruptcy Court authorizing the rejection
of one or more of the Manor Care Leases, the Manor Care
Lessors shall be entitled to draw upon the Manor Care Letter
of Credit, and shall be entitled to retain the entire proceeds
thereof. The Manor Care Lessees shall not be obligated to make
any new security deposit in connection with the Assumed Manor
Care Leases.
6. Qualicorp Lease.
The Lessors under the Qualicorp Lease currently hold a Letter
of Credit in the amount of One Million Four Hundred Forty
Three Thousand Seven Hundred Fifty Dollars ($1,443,750.00)
(the "Qualicorp Letter of Credit") pursuant to the Qualicorp
Letter of Credit Agreement. The Qualicorp Lessors shall
continue to hold the Qualicorp Letter of Credit in accordance
with the terms of the Qualicorp Letter of Credit Agreement.
<PAGE>
Lessors acknowledge and agree that the amounts received pursuant to
Paragraphs VIII(A) and (E) above and the relinquishment of the Rejected Lease
Assets as provided herein are the only damages Lessors will be entitled to
receive as a result of the rejection of the Rejected Leases if the Effective
Date shall have occurred.
9. SATISFACTION OF LESSEES' EFFECTIVE DATE OBLIGATIONS; STAY
1. ENTRY OF ASSUMPTION AND REJECTION ORDER WITHOUT STAY
If (i) the Assumption and Rejection Order is entered prior to
Lessor's termination of the Forbearance Agreement pursuant to
Sections II.A. 1 or Section II.A.2 hereof, and (ii)
implementation of the Assumption and Rejection Order is not
stayed by an appeal from the Assumption and Rejection Order or
a motion to reconsider entry of the Assumption and Rejection
Order, then Lessees shall satisfy Lessees' Effective Date
Obligations on the second Business Day following the tenth
(10th) day after the date on which the Assumption and
Rejection Order is entered or such earlier date on which the
parties may agree in writing, notwithstanding that an appeal
of the Assumption and Rejection Order or a motion to
reconsider the same may have been filed.
2. EFFECT OF STAY
1. If (i) the Assumption and Rejection Order is entered
prior to Lessor's termination of the Forbearance
Agreement pursuant to Sections II.A. 1 or Section
II.A.2 hereof and (ii) implementation of the
Assumption and Rejection Order is stayed upon appeal
of the Assumption and Rejection Order or the filing
of a motion to reconsider entry of the Assumption and
Rejection Order ("Stay"):
1. Any party to this Agreement may by Notice to
the other parties to this Agreement given on
or before the tenth (10th) day after the
effective date of the Stay ("10 Day Period")
terminate this Agreement, effective upon the
giving of such Notice;
2. If this Agreement is not terminated within
the 10 Day Period pursuant to Section
IX.B.1.a. above, and if the Stay is not
lifted on or before the one hundred and
twentieth (120th) day after the effective
date of the Stay ("120 Day Period"), then
any party to this Agreement may by Notice to
the other parties to this Agreement given
within ten (10) days after the expiration of
the 120 Day Period (the "Second 10 Day
Period") terminate this Agreement, effective
upon the giving of such Notice;
<PAGE>
3. If this Agreement is not terminated within
the 10 Day Period or the Second 10 Day
Period pursuant to Section IX.B.1.a or
Section IX.B.1.b. above, respectively, then
any party to this Agreement may by Notice to
all other parties to this Agreement
terminate this Agreement (effective upon the
giving of such Notice) if
(1) the District Court which considered
the appeal remands the proceeding
back to the Bankruptcy Court for
further non-ministerial proceedings
or vacates the Assumption and
Rejection Order, or
(2) the District Court denies the
appeal, the District Court's ruling
is appealed to the Appellate Court
for the Third Circuit and a stay is
entered with respect to that appeal;
4. If this Agreement is not terminated within
the 10 Day Period or the Second 10 Day
Period pursuant to Section IX.B.1.a or
Section IX.B.1.b. above, respectively, or
pursuant to Section IX.B.1.C. above:
(1) This Agreement shall terminate at the option
of Lessors, effective upon the giving of
Notice to all other parties, if
(1) The Stay is lifted, and Lessees
fail to satisfy Lessees' Effective
Date Obligations within the time
and as required by Section IX.B.2.,
hereof;
(2) Guarantor and Lessees
propose or support any plan
of reorganization which if
confirmed would (a) require
rejection of any of the Sun
Leases or (b) materially
and adversely affect (i)
any of the Facilities
leased under the Sun Leases
or (ii) the ability of a
Lessee under a Sun Lease to
perform its obligations
under such Lease;
(3) Any Facility covered by a
Sun Lease suffers (i) loss
of licensure or (ii)
decertification from
participation in the
Medicare and/or Medicaid
programs.
(2) Without the termination of the Agreement, the
obligation of a Lessor to forbear, as set
forth in Section II hereof, shall
terminate at the option of Lessors,
effective upon the giving of Notice to all
other parties:
<PAGE>
(1) With respect to any Facility
covered by a Sun Lease to which
such Lessor is a party as to
which any Regulatory Agency (as
defined in Section XII hereof)
sets forth in writing a failure
of such Facility or the Lessee
thereof to comply with an
applicable law, regulation or
administrative order with respect
to which the scope and severity
of the potential penalty for
such non-compliance is one or
more of (i) loss of licensure,
(ii) decertification of the
Facility from participation in
the Medicare and/or Medicaid
programs, (iii) appointment of
a temporary manager or (iv)
denial of payment for new
admissions (such Facility a
"Threatened Facility" and such
failure a "Regulatory Failure"),
and the Lessee of the Threatened
Facility fails to cure the
Regulatory Failure within the
period of time required by such
Regulatory Agency or, if longer,
the period of time set forth in
a Plan of Correction accepted by
such Regulatory Agency, and
(2) With respect to the Sun Lease
under which the Threatened
Facility is leased, but only
as to the Threatened Facility,
provided, however, that
notwithstanding the termination
of such forbearance, no Event of
Default under such Sun Lease that
exists because of, or arises or
may arise out of, the Regulatory
Failure shall constitute an Event
of Default with respect to any
other Facility under such Sun
Lease or under any other Sun
Lease.
2. If a Stay is issued and this Agreement is not
terminated pursuant to Section IX.B.I, the date on or
before which Lessees shall satisfy Lessees' Effective
Date Obligations shall be the second Business Day
following the date on which the Stay is lifted. For
purposes of this Section IX, if a Stay is issued and
lifted, and a new Stay is issued on or prior to the
earlier of the (i) Effective Date, or (ii) the second
Business Day after the day on which the original Stay
is lifted, a Stay shall be deemed to have been
continuously in effect.
3. Notwithstanding the provisions of Section IV.A, if a
Stay is issued and this Agreement is not terminated
pursuant to Section IX.B.1, Base Rent with respect to
the Rejected Lease Facilities for the period from and
after the end of the Accrual Period through the
earlier of (i) the termination of this Agreement or
(ii) the Effective Date shall be payable, as and when
due according to the terms of such Rejected Leases,
at the rate of fifty percent (50%) of the Base Rent
with respect to the Rejected Lease Facilities, and
the remaining fifty percent (50%) of such Base Rent
shall be waived by the Lessors of such Rejected
Leases for such period.
3. Guarantor and Lessees shall (i) oppose any motion to
reconsider the Assumption and Rejection Order and (ii) seek
affirmation of the Assumption and Rejection Order upon any
appeal thereof.
<PAGE>
10. RIGHT OF FIRST OFFER
Provided that (1) the Sun Leases are assumed pursuant to a final and
non-appealable Assumption and Rejection Order, (2) a plan of
reorganization is confirmed with respect to each of the Lessees and
Guarantor and (3) no uncured material Event of Default exists under the
applicable Sun Lease (s), the Lessees of the Sun Leases shall have a
right of first offer on the following terms and conditions:
1. In the event any Lessor or Lessors (such Lessor, or
collectively, such Lessors "Seller") shall wish to sell a
Facility or Facilities then subject to an Sun Lease or Sun
Leases ("Designated Assets") at any time during the Fixed
Term of such Sun Lease, it shall first in writing offer to
enter into negotiations for such sale with the Lessee or
Lessees thereof or any Affiliate of such Lessee or Lessees
("Seller's Notice"). If such Lessee or Lessees or an
Affiliate thereof ("Buyer") shall within ten (10) days from
receipt of Seller's Notice give Seller Notice (as defined in
the applicable Lease)("Buyer's Notice") that it wishes to
enter into good faith negotiations for the purchase of the
Designated Assets ("Notice of Interest") within the specified
time period, Seller and Buyer shall enter into good
faith negotiations for a period of thirty (30) days from
Lessor's receipt of the Notice of Interest ("Negotiation
Period") for the sale and purchase of the Designated Assets.
If during the Negotiation Period a written agreement
with respect to the purchase and sale of the Designated Assets
("Purchase Agreement") is executed by Seller and Buyer, Seller
shall sell and Buyer shall purchase the Designated Assets on
the terms and conditions set forth in the Purchase Agreement.
If (i) a Notice of Interest is not given as set forth above,
for a period of one (1) year after the expiration of the time
within which a Notice of Interest was required to be given,
or (ii) a Notice of Interest is given but Seller and Buyer do
not execute a Purchase Agreement during the Negotiation
Period, for a period of one (1) year from the expiration of
the Negotiation Period, if Seller in its sole discretion
continues to desire to sell the Designated Assets, Seller
shall be free to sell the Designated Assets to any third
party for a Cash Price that is not less than ninety eight
percent (98%) of a Cash Price offered unconditionally by
written notice to Seller by Buyer during the Negotiation
Period, free from any claim of any right to purchase the
Designated Assets by Buyer, Guarantor or any Affiliate of
Buyer or Guarantor. For purposes of the preceding sentence,
a "Cash Price" shall be the amount to be received by Seller
in cash or equivalent upon the closing of the sale net of
prorations and expenses to be borne by Seller. If the
Designated Assets are not sold within such one (1) year
period, before entering into negotiations with any third
party for the sale of the Designated Assets Seller shall
first offer to enter into negotiations for the sale thereof
to Buyer pursuant to the process described above. Any sale to
a third party shall be subject to the leasehold rights of the
applicable Lessee(s).
2. The foregoing right of first offer is not assignable by the
Lessee to which it is given hereunder except to an Affiliate
of such Lessee.
<PAGE>
3. The foregoing right of first offer shall simultaneously and
automatically terminate as to any Sun Lease with respect to
which the right of first offer would otherwise be applicable,
upon termination of such Sun Lease, and the foregoing right of
first offer shall not under any circumstances be extended,
modified or in any way altered except by a writing executed by
the Lessor of the Sun Lease to which such right applies.
11. RELEASES AND WAIVERS
1. Upon the Effective Date, Guarantor and each Lessee does for
itself and its successors and assigns forever release and
discharge each Lessor and its current and former officers,
directors, partners, shareholders, attorneys, agents, parents,
Affiliates, employees, successors and assigns from any and all
actions, causes of action, claims, debts, demands, duties,
expenses, judgments, liabilities and obligations whatever,
whether known or unknown, which the releasing party has, has
had or may have against any or all Lessors and the above
described persons and entities, whether presently known or
unknown, whether from contract or tort, from the beginning of
time to the Effective Date, arising out of or connected with,
directly or indirectly, any of the Leases.
<PAGE>
2. Except for the Lessees' Monetary Obligations, Lessors
acknowledge and agree that the Lessees have paid Lessors
all Base Rent, Minimum Rent and other monetary amounts owing
to Lessors under the Leases through the date hereof. Upon the
Effective Date, other than with respect to amounts owing
under the Rejected Leases which shall be handled as set
forth in Section IV hereof and amounts owing for the period
between the date of this Agreement and the Effective
Date under the Leases that pursuant to Section V hereof are to
be assumed, each Lessor for itself and its successors
and assigns shall forever release and discharge each Lessee
and Guarantor and their current and former officers,
directors, partners, shareholders, attorneys, agents,
parents, Affiliates, employees, successors and assigns, from
any and all actions, claims, debts, demands, duties, expenses,
judgments, liabilities and obligations whatever,whether known
or unknown, whether from contract or tort, from the beginning
of time to the Effective Date, arising out of or connected
with, directly or indirectly, any of the Leases or the
Guaranty, including without limitation amounts owing under
the Leases by Lessees to Lessors through the Effective Date,
provided, however, that except as provided in Section XII
hereof, the foregoing release of each Lessee and Guarantor
with respect to non-monetary obligations shall apply only to
non-monetary obligations of the Lessees under the Leases on
or before the date of this Agreement, and as to non-monetary
defaults that are subject to the provisions of Section XII
hereof there is no release. In addition, upon the Effective
Date, Lessors shall have waived (i) their claims that all of
the Leases, other than the Complete Care Leases (as to which
no claim of termination has been made by the applicable
Lessor), have been terminated (and shall have withdrawn all
issued notices of termination with respect to the Leases),
(ii)any and all damage claims relative to the Rejected Leases,
(iii) any and all liens against the accounts receivable
related to the Facilities governed by the Sun Leases or
Rejected Leases and (iv), notwithstanding any provision of
any Lease to the contrary, the right to claim that any of the
following conditions concerning, actions taken by or against,
or transactions entered into by, any Lessee, Guarantor or
Affiliate thereof that exist or occur during the Cases or
pursuant to a plan of reorganization in the Cases requires
the consent of any Lessor, or constitutes, or gives rise to,
a default or an Event of Default under any of the Leases:
(a) the insolvency or financial condition of any of the
foregoing, the commencement of a case under Title 11, United
States Code, the appointment of or taking possession by a
trustee, custodian or receiver, or any other act of
insolvency, (b) the liquidation, dissolution, merger,
consolidation or sale of substantially all assets, or the
beginning of any process related thereto, (c) the assignment,
pledge or encumbrance of any property, (d) the sale, pledge,
hypothecation or transfer of any stock, (e) the acceleration
of any obligation for borrowed money as a result of the
commencement of any case under Title 11, United States Code,
(f) the entry into any financing transaction, including
without limitation exit financing under any plan of
reorganization or debtor in possession financing or (g)
any restructuring, whether pursuant to a plan of
reorganization or otherwise, of the corporate or capital
structure, or ownership, of such entities, including
without limitation transfers of ownership of the stock
or assets of any of the foregoing (as to such matters in
clause (iv), "Bankruptcy Related Events").
12. PHYSICAL PLANT REQUIREMENTS
1. As used in this Section, the following terms shall
mean as follows:
Actual Knowledge: The actual knowledge of the administrator of
the Facility in question or, if at the applicable time there is no administrator
of such Facility, the person then acting in such capacity.
Citation: Any physical plant deficiency set forth in writing
with respect to any Facility by any Regulatory Agency with respect to which the
scope and severity of the potential penalty for such deficiency is one or more
of the following: loss of licensure, decertification of the Facility from
participation in the Medicare and/or Medicaid programs, appointment of a
temporary manager or denial of payment for new admissions, provided the Lessee
of such Facility has Actual Knowledge thereof.
Pendency of the Case: With respect to each Case, the period
beginning on the date hereof and continuing through the earliest of (i) any
party obtaining a post-confirmation judgment against the Lessee or Lessees to
which such Case pertains; (ii) the "Effective Date" as defined in the confirmed
plan of reorganization with respect to such Case; (iii) dismissal of such Case;
and (iv) conversion of such Case to a Chapter 7.
Physical Plant Abeyance Period: The Forbearance Period,
or if the Assumption and Rejection Order is entered, with respect to each
Case, the Pendency of the Case.
Physical Plant Requirements: All obligations of Lessees
under the Sun Leases relating to the maintenance, repair and improvement of
the Facilities covered thereby.
Regulatory Agency: Any governmental body or agency, or
Medicare intermediary, having regulatory oversight over a Facility or a
Lessee.
<PAGE>
Tier A Improvements: The physical plant improvements set
forth on attached Exhibit G.
2. The obligations imposed on the Lessee in each Sun Lease
relating to Physical Plant Requirements shall continue in full
force and effect throughout the Pendency of the Case with
respect to the Lessee thereunder.
3. Notwithstanding any provisions to the contrary in the Sun
Leases, the Lessees under the Sun Leases shall make the Tier A
improvements within six (6) months from the Effective Date,
subject to delays beyond the reasonable control of such
Lessees.
4. During the Physical Plant Abeyance Period, notwithstanding any
provisions of any Sun Lease to the contrary, the rights of the
Lessors of the Sun Leases with respect to the following
matters shall be as follows:
1. In the event any Facility covered by a Sun Lease has
prior to the date hereof received, or shall during
the period from the date hereof to the Effective Date
receive, a Citation, the obligations imposed on the
Lessee in each Sun Lease relating thereto shall
continue in full force and effect throughout the
Pendency of the Case with respect to the Lessee
thereunder, but the Lessor's rights during the
Pendency of the Case in the event of a breach thereof
shall be subject to the limitations set forth in
Section XI.D.3
2. In the event that any Facility covered by a Sun
Lease shall receive a Citation with respect to such
Facility during the Pendency of the Case but after
the Effective Date, the failure of the Lessee under
such Sun Lease to cure the condition that is the
subject of the Citation within the period of time
required by the issuer of the Citation or, if longer,
the period of time set forth in a Plan of Correction
accepted by the issuer of the Citation, shall
constitute an Event of Default under such Sun Lease,
and in the event such Event of Default is not cured
within thirty (30) days following Notice of such
Event of Default from the Lessor under such
Sun Lease to the Lessee thereunder, the Lessor
thereunder shall have the right to terminate such Sun
Lease with respect to the cited Facility, which right
shall be exercisable upon ten (10) days' prior
Notice to such Lessee, provided, however, that an
Event of Default described in this Section XI.D.2.
shall not constitute an Event of Default with
respect to any other Facility under such Sun Lease
or under any other Sun Lease.
<PAGE>
3. In the event that any Facility covered by a Sun
Lease shall receive a Citation during the Pendency
of the Case and prior to the Effective Date, the
Lessor under such Sun Lease shall not have the
right to (Y) declare an Event of Default with respect
to such default, or (Z) take any other action with
respect to terminating the Lease as a consequence
of such default until the expiration of the Physical
Plant Abeyance Period, provided, however, that
nothing herein contained shall prevent or restrict
a Lessor from seeking an order of the Bankruptcy
Court compelling Lessee to cure the condition that
is the subject of the Citation with respect to any
such default within the period of time required by
the issuer of the Citation or, if longer, the
period of time set forth in a Plan of Correction
accepted by the issuer of the Citation
5. Upon expiration of the Physical Plant Abeyance Period, if
(i) a default with respect to a Physical Plant Requirement
shall exist or thereafter occur, (ii) Notice of such default
is given to the applicable Lessee after expiration of the
Physical Plant Abeyance Period and (iii) such default is not
cured within the applicable cure period provided in
such Sun Lease (which cure period shall run from the date of
the Notice given after the expiration of the Physical
Plan Abeyance Period whether or not a Notice of default has
been given to such Lessee prior to the expiration of the
Physical Plant Abeyance Period), the Lessor under the Lease
as to which such default exists shall have the right to
declare the same to be an Event of Default thereunder, and
upon such declaration such Lessor and the Lessors of all
other Sun Leases shall have the rights and remedies provided
in the Sun Leases and by law with respect to such Event
of Default.
13. NOTICES
All notices, certificates or other communications hereunder shall be
sufficiently given and shall be deemed given upon confirmed receipt or refusal
of receipt if sent by certified mail, return receipt requested, postage prepaid,
overnight delivery or facsimile transmission, with proper address as indicated
below. Any of the parties hereto may, by written notice given to each of the
other parties, designate any address or addresses to which notices, certificates
or other communications shall be sent when required as contemplated by this
Agreement. Until otherwise provided by the respective parties, all notices,
certificates and communications to each of them shall be addressed as follows:
(a) if to Guarantor and Lessees:
Sun Healthcare Group, Inc.
101 Sun Avenue NE
Albuquerque, NM 87109
Attn: President
Telephone No.: (505) 798-5607
Facsimile No.: (505) 798-6635
With copy to: Sun Healthcare Group, Inc.
101 Sun Avenue NE
Albuquerque, NM 87109
Attn: General Counsel and Matthew Patrick
Telephone No.: (505) 798-5607
Facsimile No.: (505) 798-6635
<PAGE>
And a copy to: The Nathanson Group PLLC
(which shall not 1411 Fourth Avenue, Suite 905
constitute notice): Seattle, WA 98101
Attn: Randi S. Nathanson
Telephone No.: (206) 623-6239
Facsimile No.: (206) 623-1738
(b) If to Lessors:
Omega Healthcare Investors, Inc.
900 Victors Way, Suite 350
Ann Arbor, Michigan 48108
Attn: F. Scott Kellman and Susan Allene Kovach
Telephone No.: (734) 887-0200
Facsimile No.: (734) 887-0201
With copy to Dykema Gossett PLLC
(which shall not 1577 North Woodward Avenue, Suite 300
constitute notice): Bloomfield Hills, Michigan 48304
Attn: Fred J. Fechheimer
Telephone No.: (248) 203-0743
Facsimile No.: (248) 203-0763
And copy to
(which shall not
constitute notice): Greenberg Traurig
227 W. Monroe
Suite 3500
Chicago, IL 60606
Attn: Keith J. Shapiro
Telephone No.: (312) 456-8405
Facsimile No.: (312) 456-8435
14. INTENTIONALLY DELETED
15. MISCELLANEOUS
1. Entire Agreement. There are no oral or written agreements or
representations between the parties hereto affecting this
Agreement. Except as elsewhere expressly provided to the
contrary herein, this Agreement supersedes any and all
previous negotiations, arrangements, representations,
agreements and understandings, if any, between Lessors,
Guarantor and Lessees with respect to the subject matter of
this Agreement.
2. Amendments in Writing. No provision of this Agreement may be
amended except by an agreement in writing signed by Lessors,
Guarantor and Lessees.
<PAGE>
3. Counterparts. This Agreement may be executed in separate
counterparts, each of which shall be considered an original
when each party has executed and delivered to the other one or
more copies of this Agreement.
4. Headings. The headings in this Agreement are for convenience
of reference only and shall not limit or otherwise affect the
meaning hereof.
5. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the state of
Michigan, except as to matters which, under applicable
procedural conflicts of laws rules require the application of
laws of another state.
SIGNATURE PAGES FOLLOW
<PAGE>
IN WITNESS WHEREOF the parties hereto have executed this Agreement as
of the __ day of October, 1999.
DELTA INVESTORS I, LLC
By: OMEGA HEALTHCARE INVESTORS, INC.
Its Sole Member
By: /s/ F. SCOTT KELLMAN
----------------------------
F. Scott Kellman
Its: Chief Operating Officer
DELTA INVESTORS II, LLC
By: OMEGA HEALTHCARE INVESTORS, INC.
Its Sole Member
By: /s/ F. SCOTT KELLMAN
-----------------------------
F. Scott Kellman
Its: Chief Operating Officer
OMEGA HEALTHCARE INVESTORS, INC.
By: /s/ F. SCOTT KELLMAN
----------------------------
F. Scott Kellman
Its: Chief Operating Officer
OHI (ILLINOIS), INC.
<PAGE>
By: /s/ F. SCOTT KELLMAN
------------------------------
F. Scott Kellman
Its: Chief Operating Officer
SUN HEALTHCARE GROUP, INC.,
a Delaware corporation
By: /s/ MATTHEW PATRICK
------------------------------
Matthew Patrick
Its: Vice President and Treasurer
SIGNATURES OF LESSEES ON FOLLOWING PAGE
<PAGE>
LESSEES:
Care Enterprises, Inc., a
Delaware corporation Care
Enterprises West, a Utah
corporation Circleville
Health Care Corp., an Ohio
corporation Beckley Health
Care Corp., a West Virginia
corporation Braswell
Enterprises, Inc., a
California corporation
Coalinga Rehabilitation
Center, a Delaware
corporation Dunbar Health
Care Corp., a Delaware
corporation Fullerton
Rehabilitation Center, a
California corporation
Marion Health Care Corp., a
Delaware corporation
Meadowbrook Rehabilitation
Center, a California
corporation Mediplex
Management of Palm Beach
County, Inc., a Florida
corporation Newport Beach
Rehabilitation Center, a
California corporation
Putnam Health Care Corp., a
West Virginia corporation
Regency Rehab Hospitals,
Inc., a California
corporation Regency-North
Carolina, Inc., a North
Carolina corporation
Regency-Tennessee, Inc., a
Tennessee corporation San
Bernardino Rehabilitation
Hospital, Inc., a
California corporation
Salem Health Care Corp., a
West Virginia corporation
Shandin Hills
Rehabilitation Center, a
California corporation
SunBridge Healthcare
Corporation, a New Mexico
corporation Vista Knoll
Rehabilitation Center,
Inc., a California
corporation
By: /s/ Matthew Patrick
---------------------
Their: Agent
<PAGE>
LIST OF EXHIBITS
EXHIBIT A - Leases and Subleases and Names of Health Care Facilities
EXHIBIT B - Security Agreements
EXHIBIT C - Assumption and Rejection Order
EXHIBIT D - Schedule of Amounts Owed
EXHIBIT E - Operations Transfer Agreement
EXHIBIT F - Sun Transaction Documents
EXHIBIT G - Tier A Improvements
<TABLE>
<CAPTION>
EXHIBIT 11
STATEMENT RE: COMPUTATION OF PER-SHARE EARNINGS
Year Ended December 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net earnings available to common before gains or
losses on asset dispositions ........................ $ 40,047 $ 41,777 $ 41,305
========= ======== ========
Net earnings .......................................... $ 10,040 $ 68,015 $ 41,305
========= ======== ========
Average shares outstanding ............................ 19,877 20,034 19,085
Basic per-share amounts:
Net earnings .......................................... $ 0.51 $ 3.39 $ 2.16
========= ======== ========
Net earnings before gains or losses on asset
dispositions ........................................ $ 2.01 $ 2.09 $ 2.16
========== ======== ========
Average shares outstanding ............................ 19,877 20,034 19,085
Stock option incremental shares ....................... 0 7 52
------- -------- --------
Average shares outstanding, diluted ................ 19,877 20,041 19,137
======= ======== ========
Diluted per-share amounts:
Net earnings .......................................... $ 0.51 $ 3.39 $ 2.16
========= ======== ========
Net earnings before asset dispositions ................ $ 2.01 $ 2.08 $ 2.16
========= ======== ========
Diluted assuming conversion of debt:
Net earnings before gains or losses on asset
dispositions ........................................ $ 40,047 $ 41,777 $ 41,305
Add interest expense associated with Convertible
debentures ......................................... 4,381 4,714 6,279
--------- -------- --------
Total ......................................... $ 44,428 $ 46,491 $ 47,584
========= ======== ========
Average shares outstanding ............................ 19,877 20,034 19,085
Assumed conversion of debentures ...................... 1,794 1,899 2,583
Stock option incremental shares ....................... 0 7 52
-------- -------- --------
Total ......................................... 21,671 21,940 21,720
======== ======== ========
Per-share amount (antidilutive) ....................... $ 2.05 $ 2.12 $ 2.19
======== ======== ========
</TABLE>
EXHIBIT 12
RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS (1)
The ratio of earnings to combined fixed charges and preferred stock
dividends are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Ratio of Earnings to Combined Fixed Charges
and Preferred Stock Dividends (1) ........... 1.77X 2.04X 2.48X 2.66X 2.92X
</TABLE>
- ----------
(1) For purposes of calculating the ratio of earnings to combined fixed charges
and preferred stock dividends, net earnings (before non-recurring items) has
been added to fixed charges, and that sum has been divided by such fixed
charges. Fixed charges consist of interest expense and amortization of
deferred financing costs, and for each of the three years ended December 31,
1997, 1998 and 1999, cumulative preferred stock dividends are included
starting as of the dates of issuance of the Series A Cumulative Preferred
Stock and Series B Cumulative Preferred Stock.
EXHIBIT 21
LIST OF SUBSIDIARIES
OMEGA HEALTHCARE INVESTORS, INC.
Jurisdiction of
Names Incorporation
----- --------------
Bayside Street, Inc. ........... Maryland
Delta Investors I, LLC ......... Maryland
Delta Investors II, LLC ........ Maryland
Jefferson Clark, Inc ........... Maryland
OHI (Clemmons), Inc. ........... North Carolina
OHI (Connecticut), Inc. ........ Connecticut
OHI (Florida), Inc. ............ Florida
OHI (Greensboro), Inc. ......... North Carolina
OHI (Illinois), Inc. ........... Illinois
OHI (Iowa), Inc. ............... Iowa
OHI (Kansas), Inc. ............. Kansas
OHI of Kentucky, Inc. .......... Maryland
OHI of Texas, Inc. ............. Maryland
OHIMA, Inc. .................... Massachusetts
Omega Healthcare of
Apalachicola, Inc. .......... Florida
Omega (Kansas), Inc. ........... Kansas
OS Leasing ..................... Kentucky
Sterling Acquisition Corp. ..... Kentucky
Sterling Acquisition Corp.II ... Kentucky
Exhibit 23
Consent of Independent Auditors
We consent to the incorporation by reference in (1) Registration Statement No.
33-308415 on Form S-3 dated July 19, 1996 related to the Dividend Reinvestment
and Common Stock Purchase Plan, (2) Shelf Registration Statement No. 33-32119 on
Form S-4 dated February 4, 1997, (3) Registration Statement No. 333-69807 dated
December 29, 1998 related to the 1993 Amended and Restated Stock Option and
Restricted Stock Plan, and (4) Shelf Registration Statement No. 333-69675 on
Form S-3 dated January 14, 1999, of our report dated January 21, 2000 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, 1999.
/s/ Ernst & Young LLP
Detroit, Michigan
January 24, 2000
<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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 4,105
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,013,851
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 1,013,851
<SALES> 0
<TOTAL-REVENUES> 122,375
<CGS> 0
<TOTAL-COSTS> 66,577
<OTHER-EXPENSES> 6,120
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 42,366
<INCOME-PRETAX> 19,671
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,671
<EPS-BASIC> 0.51
<EPS-DILUTED> 0.51
</TABLE>
