10-K: Annual report pursuant to Section 13 and 15(d)

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.




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,

1

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

2

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.


3


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.

4


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,

5

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

6

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

7

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

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: