UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------------------------------------
FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 000-23953
OMEGA WORLDWIDE, INC.
(Exact name of registrant as specified in its charter)
Maryland 38-3382537
(State of Incorporation) (IRS Employer Identification No.)
900 Victors Way, Suite 345, Ann Arbor, MI 48108
(Address of principal executive offices)
(734) 887-0300
(Telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--------- ---------
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of June 30, 1999.
Common Stock, $.10 par value 12,264,000
(Class) (Number of shares)
<PAGE>
OMEGA WORLDWIDE, INC.
FORM 10-Q
June 30, 1999
INDEX
Page No.
--------
PART I Financial Information
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets (unaudited)
June 30, 1999 and September 30, 1998 .................. 2
Condensed Consolidated Statements of Operations
(unaudited) - Three-month period ended June 30,
1999, period from April 2, 1998 (Commencement
of Operation) to June 30, 1998, and nine-month
period ended June 30, 1999 ............................ 3
Condensed Consolidated Statements of Cash Flows
(unaudited) - Nine-month period ended June 30,
1999 and period from April 2, 1998
(Commencement of Operation) to June 30, 1998 .......... 4
Notes to Condensed Consolidated Financial
Statements June 30, 1999 (unaudited) .................. 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ......... 9
PART II Other Information
Item 5. Other Information ........................................ 12
Item 6. Exhibits and Reports on Form 8-K ......................... 12
<PAGE>
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
OMEGA WORLDWIDE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
June 30, September 30,
1999 1998
(Unaudited) (See Note)
----------- ----------
ASSETS
<S> <C> <C>
Current Assets:
Cash and short-term investments .................................... $ 7,089 $ 10,281
Restricted cash .................................................... 389 9,330
Temporary advances to Principal Healthcare
Finance Limited .................................................. 14,805 10,477
Other Current Assets ............................................... 979 1,956
---------- ----------
Total Current Assets ............................................. 23,262 32,044
Land and buildings, subject to triple-net lease,
net of accumulated depreciation of $157 at
September 30, 1998 ............................................... - 27,300
Investments in and advances to Principal Healthcare
Finance Limited .................................................. 30,011 27,425
Investments in Principal Healthcare Finance Trust .................... 6,574 -
Other assets ......................................................... 6,011 2,223
---------- ---------
42,596 56,948
---------- ---------
Total Assets ......................................................... $ 65,858 $ 88,992
========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses .............................. $ 1,774 $ 1,901
Accrued income taxes ............................................... 865 433
Non-interest bearing deferred purchase obligation .................. - 28,007
---------- ---------
Total Current Liabilities ........................................ 2,639 30,341
Deferred income taxes ................................................ 306 -
---------- ---------
Total Liabilities .................................................... 2,945 30,341
---------- ---------
Shareholders' Equity:
Preferred Stock $1.00 par value:
Authorized 10,000 shares
Outstanding 260 Class B shares at liquidation value................ 2,600 2,600
Common stock $.10 par value
Authorized 50,000 shares
Outstanding 12,264 and 12,258 shares, respectively ................ 1,226 1,226
Additional paid-in capital .......................................... 52,861 52,861
Retained earnings ................................................... 6,572 1,955
Accumulated other comprehensive income .............................. (346) 9
---------- ---------
Total Shareholders' Equity ......................................... 62,913 58,651
---------- ---------
Total Liabilities and Shareholders' Equity ........................... $ 65,858 $ 88,992
========== =========
</TABLE>
Note - The balance sheet at September 30, 1998 has been derived from
audited consolidated financial statements at that date but does not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements.
See notes to consolidated financial statements.
2
<PAGE>
OMEGA WORLDWIDE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
Period from
April 2, 1998
Three Months (Commencement Nine Months
Ended of Operation) to Ended
June 30, 1999 June 30, 1998 June 30, 1999
------------- ------------- -------------
<S> <C> <C> <C>
Revenues:
Fee income - Principal Healthcare Finance Limited ...................... $ 1,271 $ 811 $ 3,593
Fee income - Principal Healthcare Finance Trust ........................ 202 - 202
Interest Income:
Principal Healthcare Finance Limited ................................. 1,126 788 3,569
Short-term investments ............................................... 117 179 588
Rent income ............................................................ - - 3,908
Other income ........................................................... 24 - 74
-------- --------- ---------
2,740 1,778 11,934
Expenses:
Direct costs of services provided ....................................... 636 524 1,904
General and administrative .............................................. 400 231 1,204
Allocated expenses from Omega Healthcare Investors, Inc. ................ 196 151 582
Imputed and other interest .............................................. 85 - 2,635
Provision for depreciation .............................................. 13 - 640
-------- --------- ---------
1,330 906 6,965
-------- --------- ---------
Earnings before equity earnings, gain on dilution and taxes .............. 1,410 872 4,969
Equity in earnings of Principal Healthcare Finance Limited ................ 309 168 760
Equity in earnings of Principal Healthcare Finance Trust .................. 280 - 280
Equity in earnings (loss) of Essex Healthcare Corporation ................. 5 - (366)
Gain on dilution of interest in Principal Healthcare Finance Trust ........ 951 - 951
-------- --------- ---------
Earnings before income taxes .............................................. 2,955 1,040 6,594
Provision for income taxes ................................................ (843) (296) (1,977)
--------- --------- ---------
Earnings before preferred stock dividends ................................. 2,112 744 4,617
Preferred stock dividends ................................................. (52) (52) (156)
-------- --------- ---------
Net earnings available to common shareholders ............................. $ 2,060 $ 692 $ 4,461
======== ========= =========
Earnings per common share, Basic .......................................... $ 0.16 $ 0.06 $ 0.36
======== ========= =========
Earnings per common share, Diluted ........................................ $ 0.16 $ 0.06 $ 0.36
======== ========= =========
Average shares outstanding, Basic ......................................... 12,264 12,256 12,260
======== ========= =========
Average shares outstanding, Diluted ....................................... 12,264 12,260 12,260
======== ========= =========
Total comprehensive income, net of taxes .................................. $ 1,765 $ 824 $ 4,265
======== ========= =========
</TABLE>
Note - The Company began operations on April 2, 1998. Accordingly, nine months
for the prior year are consistent with the period from April 2, 1998
(Commencement of Operations) to June 30, 1998.
See notes to consolidated financial statements.
3
<PAGE>
OMEGA WORLDWIDE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
(In Thousands)
<TABLE>
<CAPTION>
Period from
April 2, 1998
Nine Months (Commencement of
Ended Operation) to
June 30, 1999 June 30, 1998
------------- -------------
<S> <C> <C>
Operating activities:
Net earnings ...................................................... $ 4,617 $ 744
Adjustments to reconcile net earnings to cash
provided by operating activities:
Equity in earnings of Principal Healthcare Finance
Limited ....................................................... (760) (168)
Equity in earnings of Principal Healthcare Finance
Trust ......................................................... (280) -
Equity in loss of Essex Healthcare Corporation .................. 366 -
Gain on dilution of interest in Principal Healthcare
Finance Trust ................................................. (951) -
Imputed interest expense ........................................ 1,146 -
Depreciation and amortization ................................... 762 37
Other non-cash charges .......................................... 171 -
Payments of federal and foreign taxes ............................. (875) -
Net change in operating assets and liabilities .................... (1,206) 241
Foreign currency translation ...................................... 19 -
-------- --------
Net cash provided by operating activities ............................ 3,009 854
Cash flows from financing activities:
Proceeds from revolving warehouse facility ........................ 34,502 -
Other ............................................................. (117) -
Proceeds from issuance of common stock ............................ - 27,375
Cash contributed by Omega in exchange of
liabilities assumed ............................................. - 837
-------- --------
Net cash provided by financing activities ............................ 34,385 28,212
Cash flows from investing activities:
Acquisition of real estate by subsidiary .......................... (49,288) -
Temporary advances, net -
Principal Healthcare Finance Limited ......................... (6,418) (10,477)
Principal Healthcare Finance Trust ........................... 13,631 -
Investment in -
Principal Healthcare Finance Trust ........................... (1,108) -
Baneberry Healthcare Ltd ..................................... (1,622) -
Tamaris Plc stock ............................................ (2,884) -
Dividends from Principal Healthcare Finance
Limited ......................................................... 272 -
Decrease (increase) in restricted cash ............................ 5,831 (9,330)
(Secured loan to) repayment of loan from
individual ...................................................... 102 (817)
Other ............................................................. 898 (61)
-------- --------
Net cash used in investing activities ................................ (40,586) (20,685)
-------- --------
Increase (decrease) in cash and short-term investments ............... (3,192) 8,381
Cash and short-term investments at beginning of period ............... 10,281 -
-------- --------
Cash and short-term investments at June 30, 1999 and 1998 ............ $ 7,089 $ 8,381
======== ========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
OMEGA WORLDWIDE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
June 30, 1999
Note A - Organization and Significant Accounting Policies
ORGANIZATION
On April 2, 1998, the registration statement of Omega Worldwide, Inc. (the
"Company") became effective, and it offered 3,750,000 shares of common stock to
the public at $7.50 per share. The Company received $27,375,000, net of issuance
costs of $750,000. Shares offered included 500,000 shares in a primary offering
and 3,250,000 shares in a rights offering. Operations commenced upon the
effectiveness of the initial public offering. Additionally, except for $1,000
invested by Omega Healthcare Investors, Inc. ("Omega") at the date of formation
(November 1997), there were no cash flow activities of the Company from the date
of formation to the date operations commenced.
Immediately prior to the offering of shares by the Company, Omega
contributed substantially all of its investment in Principal Healthcare Finance
Limited ("Principal-UK") to the Company. Assets contributed by Omega, which were
recorded by the Company at Omega's accounting basis, included a $23,805,000
subordinated loan to Principal-UK, 33.375% of the common stock of Principal-UK
with a carrying value of $5,297,000, 10,556,250 warrants and other net assets
totaling $150,000. Omega also assigned its interest in a management agreement
with Principal-UK in which the Company receives an annual fee of 0.9% of
Principal-UK's assets (as defined) for providing certain advisory services. In
exchange, Omega received 8,500,000 shares of common stock and 260,000 shares of
Class B preferred stock. Of the common stock received by Omega, approximately
5,200,000 shares were distributed pro rata to Omega's shareholders, and
approximately 2,300,000 were sold pursuant to the Company's registration
statement. Omega retained approximately 9.5% of the Company's common stock.
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements for
the Company have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the three-month and
nine-month periods ended June 30, 1999, are not necessarily indicative of the
results that may be expected for the year ending September 30, 1999. For further
information, refer to the financial statements and footnotes thereto in the
Company's annual report on Form 10-K for the period ended September 30, 1998.
CONSOLIDATION AND SUBSIDIARIES
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries after elimination of all material
inter-company accounts and transactions. Prior to April 1, 1999, the Company
owned 100% of Principal Healthcare Finance Trust ("Principal-Australia"). As
more fully explained in Note D and the report on 8-K dated April 1, 1999, the
result of newly issued shares of Principal-Australia was the dilution of the
Company's ownership percentage to 47%.
Principal-Australia's financial results prior to April 1, 1999 are included
in the Company's results on a consolidated basis, while Principal-Australia's
results for the current quarter are included in the Company's results using the
equity method of accounting. In all periods, the results of Principal-Australia
are reported on a one-month lag basis, as Principal-Australia has an August 31
year end.
5
<PAGE>
Subsidiaries that are not majority owned by the Company are reported using
the equity method of accounting. These results are recorded using a one-month
lag. Investments in publicly traded companies that do not result in the Company
exercising control (usually less than 20% ownership) are recorded at fair market
value. Changes in fair market value are reflected in Accumulated Other
Comprehensive Income.
Note B - Asset Concentrations
In prior periods where Principal-Australia was reported on the consolidated
basis of accounting, 100% of the consolidated group's real estate investments
were owned by Principal-Australia. All of Principal-Australia's real estate
investments are long-term care facilities located in Australia. All the
properties are leased by Principal-Australia to Moran Health Care Group
(Australia) Pty Limited, currently the largest operator of aged care homes in
Australia.
Note C - Principal Healthcare Finance Limited (Principal-UK)
The following summarizes selected unaudited financial information of
Principal-UK in accordance with United States generally accepted accounting
principles (in thousands):
<TABLE>
<CAPTION>
Three-Month Three-Month Nine-Month
Period Ended Period Ended Period Ended
Selected Operating Results for the periods: May 31, 1999 May 31, 1998 May 31, 1999
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Rent income ................................ $ 13,705 $ 12,584 $ 40,810
Interest income ............................ 1,347 1,313 4,438
Other income ............................... - 64 52
-------- -------- --------
Total revenues ......................... 15,052 13,961 45,300
Expenses:
Interest expense ........................... (9,635) (9,426) (29,165)
Depreciation and amortization .............. (2,535) (1,869) (7,214)
General and administrative ................. (1,413) (1,395) (4,271)
-------- -------- --------
Total expenses (13,583) (12,690) (40,650)
-------- -------- --------
Income from operations before income taxes .... 1,469 1,271 4,650
Provision for income taxes .................... (484) (710) (2,218)
-------- -------- --------
Net income from operations .................... $ 985 $ 561 $ 2,432
======== ======== ========
Selected Balance Sheet Information as of: May 31, 1999 August 31, 1998
------------ ---------------
Investments in real estate subject to
triple-net lease, net of depreciation ...... $ 384,475 $ 365,941
Total assets .................................. 558,206 479,541
Non-recourse debt borrowings .................. 461,532 396,282
Total liabilities ............................. 542,054 464,717
Total stockholders' equity .................... 16,152 14,824
</TABLE>
The effective tax rate is 48%, which differs from the UK tax rate
primarily because the provision for depreciation and amortization is not
deductible for tax purposes in the United Kingdom. The Company's
proportionate share of Principal-UK's earnings for the three-month periods
ended May 31, 1999 and 1998 are approximately $329,000 and $187,000,
respectively, and $812,000 for the nine-month period ended May 31, 1999.
Additionally, the Company had recorded a charge against earnings of
approximately $20,000 and $19,000 for the three-month periods ended May 31,
1999 and 1998, respectively, and $52,000 for the nine-month period ended
6
<PAGE>
May 31, 1999, representing amortization over a ten-year period of the excess
of the Company's investment in Principal-UK over its proportionate share
of Principal-UK's underlying equity. In January 1999, the Company received
$267,000, representing a 5-pence annual dividend declared by Principal-UK's
Board of Directors.
Note D - Principal Healthcare Finance Trust (Principal-Australia)
The following summarizes selected unaudited financial information of
Principal-Australia in accordance with United States generally accepted
accounting principles (in thousands):
Three-Month
Period Ended
Selected Operating Results for the period: May 31, 1999
------------
Revenues:
Rent income ................................ $ 2,794
Interest income ............................ 105
-------
Total revenues ......................... 2,899
Expenses:
Interest expense ........................... (1,493)
Depreciation and amortization .............. (550)
General and administrative ................. (261)
-------
Total expenses ......................... (2,304)
-------
Income from operations ........................ $ 595
=======
Selected Balance Sheet Information as of: May 31, 1999
------------
Investments in real estate subject to
triple-net lease, net of depreciation ...... $ 88,207
Total assets .................................. 109,807
Non-recourse debt borrowings .................. 76,080
Total liabilities ............................. 95,102
Total unit holders' equity .................... 14,705
As more fully described in the Form 8-K dated April 1, 1999, on April 1
Principal-Australia sold 7,500,000 newly issued shares to Omega and AMP Life
Limited, as well as 875,000 additional shares to the Company. Prior to dilution,
the Company owned 100% of Principal-Australia. Issuance of the new shares
reduced the Company's ownership to 47% of shares outstanding. The transaction
created a one-time gain on dilution of interest in Principal-Australia of
$951,000, resulting in after tax earnings available to common shareholders of
$628,000, or $0.05 per share.
Note E - Essex Healthcare Corporation
On April 2, 1998, Omega contributed to the Company its holdings in the
preferred stock of Essex Healthcare Corporation ("Essex"), an Atlanta-based
private operator of skilled nursing facilities. The preferred stock was valued
at approximately $39,000. Essex's primary activities are in Ohio, where it
operates 13 long-term care and assisted living facilities (approximately 1,400
beds). It also manages 32 facilities (approximately 1,400 beds) primarily in
Indiana. On July 30, 1998, the Company acquired 55,000 shares of Essex's common
stock for $500,000 and converted its preferred stock into 1,940 shares of common
stock. The Company holds approximately 47% of the outstanding common shares of
Essex. The Company accounts for this investment using the equity method.
The Company's proportionate share of Essex's earnings for the three-month
period and share of Essex's loss for the nine-month period ended May 31, 1999 is
approximately $5,000 of earnings and $366,000 of loss, respectively.
7
<PAGE>
Note F - Net Earnings Per Share
Net earnings per share is computed based on the weighted average number of
common shares outstanding during the period. Diluted earnings per share amounts
reflect the dilutive effect of stock options (683 shares and 4,174 shares for
the three-month periods ended June 30, 1999 and 1998, respectively, and 1,103
shares for the nine-month period ended June 30, 1999). The assumed conversion of
shares of preferred stock is anti-dilutive.
Note G - Credit Facilities
In November 1998, the Company entered into a revolving credit agreement
with a bank for borrowings up to $25 million. Omega provided a guarantee to the
banks in consideration of a fee of 1%, plus an annual 25 basis point facility
fee. The agreement is scheduled to expire on September 30, 2000. The Company
also pays to the banks an unused facility fee of 0.30%. Borrowings under the
facility bear interest at LIBOR plus 1.1875% or, at the Company's option, at the
prime rate. At June 30, 1999, the Company has no outstanding borrowings under
the credit facility.
Note H - Related Party Transactions
Pursuant to the provisions of a services agreement between Omega and the
Company, indirect costs incurred by Omega, including compensation of shared
executive officers and related support personnel, and costs incurred by Omega
for rent, insurance, telephone, utilities, supplies, maintenance and travel, are
allocated to the Company based upon the relationship of assets under the
Company's management to the combined total of those assets and Omega's assets.
Assets and costs in the formula are on a one-quarter lag basis. Allocated
expenses during the three-month and nine-month periods ended June 30, 1999 were
approximately $196,000 and $582,000, respectively. Such allocations are based on
estimates and formulas that management believes to be reasonable.
Temporary advances to Principal-UK in the amount of $14,805,000 and
$10,477,000 are outstanding at June 30, 1999 and 1998. Interest on the temporary
advances is 9.25%, paid monthly. Interest arising from temporary advances to
Principal-UK is included in interest income for the three-month periods ended
June 30, 1999 and 1998 is $373,000 and $64,000, respectively, and for the
nine-month period ended June 30, 1999 is $1,311,000. A subordinated loan to
Principal-UK in the amount of $23,805,000 is outstanding at June 30, 1999 and
1998, respectively. Interest on the subordinated loan is 12.18% at June 30, 1999
and 11.83% at June 30, 1998, paid semi-annually. Interest arising from the
subordinated loan to Principal-UK included in interest income for the
three-month periods ended June 30, 1999 and 1998 is $753,000 and $724,000,
respectively, and for the nine-month period ended June 30, 1999 is $2,258,000.
Fees from services provided to Principal-UK for the three-month and
nine-month periods ended June 30, 1999 are $1,271,000 and $3,593,000. Fees from
services provided to Principal-Australia for the three-month period ended June
30, 1999 are $202,000.
Interest expense relating to a bridge loan from Omega totaled $103,000
during the three-month period ended December 31, 1998. This loan was repaid in
full prior to December 31, 1998, and no additional interest expense was incurred
by the Company for this loan subsequent to January 1, 1999.
8
<PAGE>
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
"Safe Harbor" Statements under the United States Private Securities
Litigation Reform Act of 1995. Statements that are not historical facts
contained in Management's Discussion and Analysis are forward-looking statements
that involve risks and uncertainties that could cause actual results to differ
from projected results. Some of the factors that could cause actual results to
differ materially include: the financial strength of the operators of the
facilities owned by the Company's investees, as it affects their continuing
ability to meet their obligations under the terms of the lease agreements;
changes in operators or ownership of operators; governmental policies relating
to the healthcare industry, including changes in reimbursement levels;
operators' continued eligibility to participate in government sponsored payment
programs; changes in reimbursement by other third-party payors; occupancy levels
at the facilities; the ability and cost of capital of the Company and its
investees; the strength and financial resources of competitors of the Company
and investees to make additional real estate investments at attractive yields;
and the ability to obtain debt and equity at reasonable costs.
Following is a discussion and analysis of the Company's consolidated
results of operations, financial condition and liquidity and capital resources.
The discussion should be read in conjunction with the unaudited consolidated
financial statements and accompanying footnotes.
Results of Operations
The Company generates income from three primary sources: (1) Fee income
from providing investment advisory and management services; (2) Interest income
from providing financing to companies in the healthcare and healthcare financing
industries; and (3) Equity in earnings of companies in the healthcare and
healthcare financing industries.
Revenues
Advisory fees are earned from Principal-UK and Principal-Australia based on
assets (as defined) under management by the Company and its subsidiaries. Assets
subject to fees from Principal-UK increased from (British pound)220 million at
April 2, 1998 to (British pound)325 million at May 31, 1999. Equivalent U.S.
dollar amounts based on exchange rates in effect on those dates were $367
million and $520 million, respectively. Prior to this quarter, fee income
from Principal-Australia was eliminated in consolidation, but with the
dilution of the Company's interest to 47% (see below) they are now reported
separately. Principal-Australia assets under management for the quarter
were approximately A$137 million (US$90 million).
Interest income from Principal-UK has increased from prior years based on
increased advances to fund, temporarily, acquisitions by Principal-UK. Interest
income on short-term investments has declined, due to the repayment of the
Company's short-term debt.
Expenses
Direct costs of services provided are the costs associated with generating
fee income from Principal-UK and Principal-Australia. The increase from the
prior year is due to the opening of Omega Australia to service
Principal-Australia. The increase in general and administrative expenses and
allocated expenses from Omega are reflective of the Company's growth and
increased usage of the services provided by Omega. The total of the two as a
percentage of revenues is 22% for the quarters ended June 30, 1999 and 1998.
Other
Equity in earnings of Principal-UK increased from $168,000 in the quarter
ended June 30, 1998 to $309,000 in the most recent period. The Company's
ownership percentage in Principal-UK has remained constant at 33.375%. The
increase in income is due to improved performance of Principal-UK as its leased
assets and their rents have increased. In addition, Principal-UK has also
increased net income by improved spreads. Spreads at Principal-UK (and
Principal-Australia) generally improve annually due to the escalation clauses in
each lease which are generally tied to inflation indexes, while debt is at fixed
rates. Last year the rent increase was 3.76% for Principal-UK, while
Principal-Australia has not yet reached the one-year anniversary of its leases.
9
<PAGE>
The equity in loss of Essex of $370,000 in the six months ending March 31,
1999 was largely due to non-recurring costs associated with an unfavorable
decision by a third-party payor. The current quarter has improved to breakeven
result. Management continues to make progress in structuring operations to be
profitable under the new Medicare pay structure and in improving the performance
at the several skilled nursing facilities that were acquired when they were
unprofitable.
The Company has two other investments in skilled nursing home operators,
both located in the UK. Investments in Baneberry Healthcare Ltd. and Tamaris Plc
represent less than 20% of the shares outstanding of these companies and are
held as investments. The Company does not record income or loss from these
operators, except to the extent of dividends received. The investment loss of
Baneberry approximates market value. As Tamaris is traded on the London exchange
and market value information is readily available, fluctuations in market value
are reported as adjustments to total comprehensive income.
As more fully described in the Form 8-K dated April 1, 1999, on April 1
Principal-Australia sold 7,500,000 newly issued shares to Omega and AMP, as well
as 875,000 additional shares to the Company, diluting the Company's ownership to
47%. The transaction created the one-time gain on dilution of interest in
Principal-Australia of $951 thousand, resulting in after tax earnings available
to common shareholders of $628 thousand, or $0.05 per share.
The Company's effective tax rate varies from the federal statutory rate of
34% due to state taxes, tax benefits realized from the initial formation of the
Company and the benefit of available foreign tax credits.
Liquidity and Capital Resources
As of June 30, 1999, the Company had cash and short-term investments of $7
million and the availability of $25 million under the Company's bank revolving
credit facility. These funds are in excess of short-term operating requirements
of the Company and are available for further investments or expansion of the
Company's operations into other geographical areas.
Market Risk
The Company is exposed to various market risks. Market risk is the
potential loss arising from adverse changes in market interest rates and prices,
such as short-term borrowing and foreign currency exchange rates. The Company
does not enter into derivatives or other financial instruments for trading or
speculative purposes. The Company enters into forward foreign currency contracts
principally to hedge currency fluctuations in its investments denominated in
foreign currencies, thereby limiting the Company's risk that would otherwise
result from changes in exchange rates. At June 30, 1999, the Company had
outstanding a ten-year British pound sterling forward currency swap to exchange
BPS 20,000,000 for $31,740,000 to mature on October 15, 2007, and a five-year
Australian dollar forward currency swap to exchange A$15,000,000 for $9,330,000
to mature on July 3, 2003. From time to time, the Company may also obtain hedges
for its foreign currency exposure relative to temporary loans to Principal and
the Trust. Because of the Company's foreign exchange contracts, its sensitivity
to foreign exchange currency exposure is considered low.
Year 2000 Implications
The Year 2000 compliance issue concerns the inability of certain systems and
devices to properly store dates beyond December 31, 1999. This could result in
system failures, malfunctions or miscalculations that disrupt normal operations.
This issue affects most companies and organizations to large and small degrees,
at least to the extent that potential exposures must be evaluated.
The Company is reviewing risks with regard to the ability of the impact of
outside vendors' ability to operate, including Omega's services under the
Services Agreement, and the impact of tenants' ability to operate. Based upon
10
<PAGE>
information available from technology vendors to date, Omega does not believe
that there are issues which could have a material effect upon its internal
operations, its technology infrastructure, information systems and software
applications. In those cases where there are compliance issues, these are
considered to be minor in nature and remedies are already identified.
Expenditures for such remedies will not be material.
With respect to the Company's other material outside vendors, such as its
banks, the Company's assessment will cover the compliance efforts of significant
vendors, the effects of potential non-compliance, and remedies that may mitigate
or obviate such effects as to the Company's business and operations. Based upon
its assessment of outside vendors, the Company does not believe that there are
issues which could have a material effect on its operations.
With respect to the tenants and properties, the Company's subsidiaries and
investees are making assessments covering their tenants' compliance efforts, the
possibility of any interface difficulties or electromechanical problems relating
to compliance by material vendors, the effects of potential non-compliance, and
remedies that may mitigate or obviate such effects. Based upon responses from
tenant surveys to date, the Company does not believe that there are
tenant/property-related issues which could have a material effect upon its
operations.
Because these early evaluations have been conducted by the Company's own
personnel or by selected inquiries of its vendors and tenants in connection with
their routine servicing operations, the Company believes that its expenditures
for assessing Year 2000 issues, though difficult to quantify, have not been
material. In addition, the Company is not aware of any issues that will require
material expenditures by the Company in the future.
Based upon current information, the Company believes that the risk posed by
foreseeable Year 2000 related problems with internal systems (including both
information and non-information systems) is minimal. Year 2000 related problems
with software applications and internal operational programs are unlikely to
cause more than minor disruptions in the Company's operations. Year 2000 related
problems at certain of its third-party service providers, such as its banks,
payroll processor, and telecommunications provider is marginally greater,
though, based on current information, the Company does not believe any such
problems would have a material effect on its operations. For example, Year 2000
related problems at such third-party service providers could delay the
processing of financial transactions and could disrupt the Company's internal
and external communications.
The Company believes that the risk posed by Year 2000 related problems at
properties of its subsidiaries and investees or with its tenants is marginally
greater, though, based on current information, the Company does not believe any
such problems would have a material effect on its operations. Year 2000 related
problems at certain governmental agencies and third-party payers could delay the
processing of tenant financial transactions, though, based upon current
information, the Company does not believe any such problems would have a
material long-term effect on its operations. Year 2000 related problems with the
electromechanical systems at its properties are unlikely to cause more than
minor disruptions in the Company's operations.
The Company and Omega intend to complete outstanding assessments, to
implement identified remedies and to continue to monitor Year 2000 issues, and
will develop contingency plans if, and to the extent deemed, necessary. However,
based upon current information and barring developments, the Company does not
anticipate developing any substantive contingency plans with respect to Year
2000 issues. In addition, the Company has no plans to seek independent
verification or review of its assessments.
While the Company and Omega believe that they will be Year 2000 compliant by
December 31, 1999, there can be no assurance that the Company and Omega will be
successful in identifying and assessing all compliance issues, or that the
Company's efforts to remedy all Year 2000 compliance issues will be effective
such that they will not have a material adverse effect on the Company's business
or results of operations.
11
<PAGE>
PART II - OTHER INFORMATION
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits - the following exhibits are filed herewith:
Exhibit Description
------- -----------
27 Financial Data Schedule
(b) Reports on Form 8-K:
The following report on Form 8-K was filed since March 31, 1999:
Current report on Form 8-K dated April 16, 1999 with the following
exhibits:
Form of Transaction Documents
Subscription Deed, Principal Healthcare Finance Unit Trust
No.1 Subscription Deed, Principal Healthcare Finance Unit
Trust No.2 Deed of Loan, PHF No.1 Pty Limited, AMP Life
Limited, Omega Worldwide, Inc. Principal Healthcare Finance
Unit Trust No.1, Term of 2004 Options Principal Healthcare
Finance Unit Trust No.2, Term of 2004 Options Advisory
Agreement
12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
OMEGA WORLDWIDE, INC.
Registrant
By /s/ ESSEL W. BAILEY, Jr.
---------------------------
Essel W. Bailey, Jr.
August 2, 1999 President and Chief Executive Officer
By /s/ EDWARD C. NOBLE
------------------------
Edward C. Noble
August 2, 1999 Chief Financial Officer
13
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Sep-30-1999
<PERIOD-START> Apr-01-1999
<PERIOD-END> Jun-30-1999
<CASH> 7,478
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 15,784
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 65,858
<CURRENT-LIABILITIES> 2,639
<BONDS> 0
0
2,600
<COMMON> 1,225
<OTHER-SE> 59,088
<TOTAL-LIABILITY-AND-EQUITY> 65,858
<SALES> 0
<TOTAL-REVENUES> 2,740
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,245
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 85
<INCOME-PRETAX> 2,955
<INCOME-TAX> 843
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,060
<EPS-BASIC> .16
<EPS-DILUTED> .16
</TABLE>
