<PAGE> 1
EXHIBIT 99(A)
Report of Independent Auditors
Board of Directors
Principal Healthcare Finance Limited
We have audited the accompanying consolidated balance sheets of Principal
Healthcare Finance Limited as of August 31, 2000 and 1999, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended August 31, 2000. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Principal
Healthcare Finance Limited at August 31, 2000 and 1999, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended August 31, 2000, in conformity with accounting principles
generally accepted in the United States.
/s/ Ernst & Young
Chartered Accountants
Jersey, Channel Islands
Date: December 12, 2000
<PAGE> 2
PRINCIPAL HEALTHCARE FINANCE LIMITED
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Year Ended August 31
--------------------
2000 1999
---- ----
(In thousands)
<S> <C> <C>
ASSETS:
Investment in real estate:
Real estate properties ............................................... $ 406,959 $ 413,927
Accumulated depreciation ............................................. (24,689) (18,394)
--------- ---------
382,270 395,533
Zero coupon investment .................................................... 59,640 61,385
Other investments ......................................................... 902 3,541
--------- ---------
442,812 460,459
Cash and short-term investments ........................................... 6,478 6,668
Accounts receivable ....................................................... 36,203 29,184
Cash on deposit as collateral -- restricted ............................... 7,072 20,371
Debt issue costs .......................................................... 33,744 38,429
Cost in excess of tangible assets acquired, net of amortization ........... 12,580 14,025
Other assets .............................................................. 450 530
--------- ---------
Total assets .............................................................. $ 539,339 $ 569,666
========= =========
LIABILITIES:
Accounts payable and other liabilities .................................... $ 21,090 $ 13,912
Borrowings under revolving credit facility ................................ 36,642 19,139
Deferred tax liability .................................................... 19,618 18,491
Long-term borrowings ...................................................... 409,245 459,094
Loans from Worldwide ...................................................... 32,697 41,908
--------- ---------
Total liabilities ......................................................... 519,292 552,544
SHAREHOLDERS' EQUITY:
Class A Common stock $.016 par value:
Authorized -- 60,000,000 shares
Issued and outstanding -- 10,000,000 shares .......................... 161 161
Additional paid-in capital ................................................ 14,472 14,472
Retained earnings ......................................................... 7,448 2,808
Foreign currency translation adjustments .................................. (2,034) (319)
--------- ---------
Total shareholders' equity ................................................ 20,047 17,122
--------- ---------
Total liabilities and shareholders' equity ................................ $ 539,339 $ 569,666
========= =========
</TABLE>
See accompanying notes.
<PAGE> 3
PRINCIPAL HEALTHCARE FINANCE LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended August 31,
---------------------
2000 1999 1998
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Revenue:
Rental income ................................................... $ 59,309 $ 55,693 $ 47,542
Patient service revenue ......................................... 9,833 -- --
Mortgage interest income ........................................ 319 1,007 --
Other investment income ......................................... 6,126 5,100 3,500
-------- -------- --------
75,587 61,800 51,042
Expenses:
Interest ........................................................ 40,338 39,149 34,572
Provisions for depreciation and amortization .................... 11,078 9,839 7,202
Direct cost of patient services ................................. 10,218 -- --
General and administrative ...................................... 6,607 5,880 4,284
-------- -------- --------
68,241 54,868 46,058
Net income from operations ........................................... 7,346 6,932 4,984
Non-operating income ................................................. -- -- 1,406
Net income before income taxes and
extraordinary charge from prepayment of debt ...................... 7,346 6,932 6,390
Provision (benefit) for income taxes:
Current ......................................................... (145) 460 184
Deferred ........................................................ 2,851 2,593 2,099
-------- -------- --------
2,706 3,053 2,283
-------- -------- --------
Net income before extraordinary charge for
prepayment of debt ................................................. 4,640 3,879 4,107
Extraordinary charge from prepayment of debt ......................... -- -- (1,985)
-------- -------- --------
Net income ........................................................... $ 4,640 $ 3,879 $ 2,122
======== ======== ========
Total comprehensive income ........................................... $ 2,925 $ 3,126 $ 2,490
======== ======== ========
</TABLE>
See accompanying notes.
<PAGE> 4
PRINCIPAL HEALTHCARE FINANCE LIMITED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended August 31, 2000, 1999, and 1998
(In thousands)
<TABLE>
<CAPTION>
Accumulated
Class A Class B Additional Retained Other
---------------------- ------------------------- Paid Earnings Comprehensive
Shares Amount Shares Amount in Capital (Deficit) Income
---------- ----------- ------------ ------------ ------------ ----------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at August 31, 1997 4,000 $ 65 6,000 $ 96 $ 14,472 $ (1,697) $ 66
Dividends paid -- -- -- -- -- (668) --
Recapitalization 6,000 96 (6,000) (96) -- -- --
Foreign currency translation adjustment -- -- -- -- -- -- 368
Net income for 1998 -- -- -- -- -- 2,122 --
---------- ----------- ------------ ------------ ------------ ----------- --------------
Balance at August 31, 1998 10,000 161 -- -- 14,472 (243) 434
Dividends paid -- -- -- -- -- (828) --
Foreign currency translation adjustment -- -- -- -- -- -- (753)
Net income for 1999 -- -- -- -- -- 3,879 --
---------- ----------- ------------ ------------ ------------ ----------- --------------
Balance at August 31, 1999 10,000 161 -- -- 14,472 2,808 (319)
Foreign currency translation adjustment -- -- -- -- -- -- (1,715)
Net income for 2000 -- -- -- -- -- 4,640 --
---------- ----------- ------------ ------------ ------------ ----------- --------------
Balance at August 31, 2000 10,000 $ 161 -- $ -- $ 14,472 $ 7,448 $ (2,034)
========== =========== ============ ============ ============ =========== ==============
</TABLE>
See accompanying notes
<PAGE> 5
PRINCIPAL HEALTHCARE FINANCE LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year Ended August 31,
---------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Net income ............................................................. $ 4,640 $ 3,879 $ 2,122
Adjustments to reconcile net income
to cash provided by operating activities:
Depreciation and amortization ....................................... 11,078 9,839 7,202
Deferred tax provision .............................................. 2,851 2,593 2,099
Zero coupon bond interest income .................................... (3,613) (2,611) --
Change in operating assets and liabilities
Accounts receivable .............................................. (12,295) (13,318) (14,726)
Accounts payable and accruals .................................... 2,792 2,082 3,111
Foreign currency translation ........................................... (898) 173 201
--------- --------- ---------
Cash provided by operating activities .................................. 4,555 2,637 9
INVESTING ACTIVITIES
Acquisition of real estate ............................................ (27,120) (50,915) (96,447)
Notes receivable ...................................................... (471) -- (8,696)
Proceeds from notes and loan receivables .............................. 783 8,817 --
Decrease (increase) in cash on deposit as collateral .................. 12,502 (3,828) 1,257
Investment and loans to subsidiaries .................................. -- (932) --
Proceeds from disposal of real estate ................................. -- -- 2,751
Proceeds from disposal of assets held for sale ........................ -- -- 3,017
Other ................................................................. -- -- 999
--------- --------- ---------
Cash used in investing activities ...................................... (14,306) (46,858) (97,119)
FINANCING ACTIVITIES
Proceeds from borrowings .............................................. -- 197,584 256,395
Borrowing under revolving credit facility ............................. 20,544 54,612 116,366
Payments of borrowings ................................................ (4,577) (157,401) (121,121)
Short-term borrowings from (repayments to)
Omega and Worldwide, net ............................................. (4,839) 11,097 (53,596)
Debt issue costs ...................................................... (1,567) (27,722) (14,318)
Early extinguishment of debt .......................................... -- -- (59,382)
Zero coupon investment ................................................ -- (31,808) (27,400)
Dividends paid ........................................................ -- (827) (668)
--------- --------- ---------
Cash provided by financing activities ................................. 9,561 45,535 96,276
--------- --------- ---------
Increase (decrease) in unrestricted cash
and cash equivalents .................................................. (190) 1,314 (834)
Unrestricted cash and cash equivalents at
beginning of period ................................................ 6,668 5,354 6,188
--------- --------- ---------
Unrestricted cash and cash equivalents at
end of period ....................................................... $ 6,478 $ 6,668 $ 5,354
========= ========= =========
</TABLE>
See accompanying notes.
<PAGE> 6
PRINCIPAL HEALTHCARE FINANCE LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICES
ORGANIZATION
Principal Healthcare Finance Limited (the "Company") was formed and
initially funded in June 1995 by Omega Healthcare Investors, Inc. ("Omega"). In
April 1998, Omega Worldwide, Inc. ("Worldwide") acquired a 33.375% interest in
the Company from Omega. The Company is a Jersey, Channel Island based company
organized to purchase and lease back nursing homes in the United Kingdom. The
Company maintains its British pound sterling under accounting principles
generally acceptable in the United Kingdom. The accompanying financial
statements are based on generally accepted accounting principles in the United
States and are stated in U.S. dollars.
The consolidated financial statements of the Company include the
accounts of the Company and all wholly owned subsidiaries after elimination of
all material intercompany accounts and transactions.
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 ate
stated at cost, which approximates the fair value.
INVESTMENT IN REAL ESTATE
Investments in real estate properties are recorded at cost. The cost of
the properties acquired is allocated between land and buildings based generally
upon management's valuation and external appraisals. Depreciation for buildings
is recorded on the straight-line basis, using 40 to 50 year estimated useful
lives.
COSTS IN EXCESS OF TANGIBLE ASSETS ACQUIRED
The excess of the sum of the purchase cost and the deferred tax
liability recognized over the fair value of the real estate and other tangible
assets acquired in connection with the purchase of Quality Care Homes Plc is
amortized on a straight-line basis over a 30-year period. Amortization expense
was approximately $441,000, $450,000 and $452,000 in 2000, 1999 and 1998,
respectively.
IMPAIRMENT OF ASSETS
Impairment losses related to long-lived assets, certain intangible
assets and goodwill related to those assets are recognized when expected future
cash flows are less than the carrying value of the assets. If indicators of
impairment are present, the Company evaluates the carrying value of the related
real estate investment in relationship to the future undiscounted cash flows of
the underlying operations. The Company adjusts the net book value of the leased
assets and long-lived assets to fair value if the sum of the expected future
cash flows is less than book value.
REVENUE RECOGNITION
Rental income is recognized on the straight-line basis over the terms
of the related master leases. Such income includes periodic increases based on
predetermined formulas as defined in the master leases and mortgage loan
agreements.
<PAGE> 7
TRANSLATION
Translation from British pound sterling has been performed under the
provisions of Financial Accounting Standards Board Statement No. 52 which
provides that balance sheet amounts are translated at the year end exchange rate
and income statement amounts are translated at the average annual rate. There
are no material amounts of exchange gains or losses included in the results of
operations for 2000, 1999, and 1998.
PATIENT SERVICE REVENUE
Patient service revenue relates to the operations of the Company's
wholly owned nursing homes and is recorded as the services are provided.
DIRECT COST OF PATIENT SERVICES
Direct cost of patient services directly supports patient service
revenue and includes all operating expenses.
INCOME TAXES
The Company and it's Channel Island resident subsidiaries are subject
to UK income tax at a rate of 23% on their income after deducting related
expenses, including interest. The Company's UK resident subsidiaries are subject
to the UK corporate tax, at a rate of 30%.
COMPREHENSIVE INCOME
Comprehensive income consists of the Company's net income adjusted for
the foreign currency translation adjustment.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
disclosures 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.
PRIOR PERIOD CLASSIFICATIONS
Certain prior year amounts have been reclassified to correspond with
the current year's presentation.
<PAGE> 8
2. REVENUE AND OPERATING PROFIT
Revenue and operating profit for fiscal year 2000 consists of the following:
<TABLE>
<CAPTION>
Finance Care Home
Operations Operations Elimination Total
-----------------------------------------------------
Revenue:
<S> <C> <C> <C> <C>
Rental income .................................. $ 60,617 $ -- $ (1,308) $ 59,309
Patient service revenue ........................ -- 9,833 -- 9,833
Mortgage interest income ....................... 464 -- (145) 319
Other investment income ........................ 6,126 -- -- 6,126
-----------------------------------------------------
67,207 9,833 (1,453) 75,587
Net Operating Expenses ......................... (57,974) (11,720) 1,453 (68,241)
-----------------------------------------------------
Operating Profit (Loss) ........................ $ 9,233 $ (1,887) $ -- $ 7,346
=====================================================
</TABLE>
Finance operations consist of leasing and other financing to providers of long
term care for the elderly and others. Care home operations consist of the
operations of the Company's wholly owned nursing homes. Elimination amounts
consist of rental and interest income of the financing operations from leases
and loans made to the care home operations. The related income and expense from
these leases and loans are eliminated in the process of consolidation.
Revenue and operation income for fiscal year 1999 is solely related to financing
operations
3. REAL ESTATE PROPERTIES
The Company's real estate properties, represented by 241 long-term care
facilities at August 31, 2000, are leased under provision of master leases with
initial terms of 30 years. However, certain leases may be terminated after 10 or
20 years by exercise of a purchase option by the operator or upon giving proper
notice. Purchase options are generally either at fair market value or at
original purchase price increased by a stipulated annual percentage or by
reference for annual increases based upon changes in the Retail Price Index in
the United Kingdom with certain minimum and maximum limits (generally 2% and 5%,
respectively). There are no provisions for payment of contingent rentals by
tenants. Under the terms of the lease, 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 (In thousands):
<TABLE>
<CAPTION>
August 31,
2000 1999
--------------------------
<S> <C> <C>
Buildings........................................................... $ 345,924 $ 351,839
Land................................................................ 61,035 62,088
--------------------------
406,959 413,927
Less accumulated depreciation....................................... (24,689) (18,394)
--------------------------
Total............................................................... $ 382,270 $ 395,533
==========================
</TABLE>
<PAGE> 9
The following table summarizes the changes in real estate properties
and accumulated depreciation during 2000 and 1999 (In thousands):
<TABLE>
<CAPTION>
Real Estate Accumulated
Properties Depreciation
----------------------------
<S> <C> <C>
Balance at August 31, 1998.......................................... $ 377,332 $ (11,391)
Additions for 1999.................................................. 50,915 (7,722)
Other, primarily currency adjustments............................... (14,320) 719
----------------------------
Balance at August 31, 1999.......................................... 413,927 (18,394)
Additions for 2000.................................................. 29,339 (8,413)
Other, primarily currency adjustments............................... (36,307) 2,118
----------------------------
Balance at August 31, 2000.......................................... $ 406,959 $ (24,689)
============================
</TABLE>
The future minimum annual rentals expected to be received for the
remainder of the initial terms of the leases, are as follows (In thousands):
<TABLE>
<CAPTION>
<S> <C>
2001..................................... $ 47,025
2002..................................... 47,937
2003..................................... 48,871
2004..................................... 49,828
2005..................................... 50,808
Thereafter............................... 938,825
------------
$ 1,183,294
============
</TABLE>
4. INVESTMENT CONCENTRATIONS
As of August 31, 2000, all of the Company's real estate investments
were related to long-term care facilities. The Company's real estate investments
are operated by 13 companies, including Idun Health Care Ltd. (a wholly owned
subsidiary of Worldwide) (29.80% of amount invested) and Sun Healthcare (20.06%
of amount invested). The Company facilities are located in England (79.24% of
amount invested), Northern Ireland (14.36% of amount invested) and Scotland
(6.40% of amount invested).
<PAGE> 10
The following is a summary of the amounts invested and the number of
facilities owed at August 31 (In thousands):
<TABLE>
<CAPTION>
2000 1999
Investment Number of Investment Number of
County Amount Facilities Owned Amount Facilities Owned
---------------- -------------------------------------------------------------
<S> <C> <C> <C> <C>
Berkshire..................................................... 4,808 3 $ 5,241 3
Cambridgeshire................................................ 1,159 1 1,264 1
Cleveland..................................................... 5,486 3 5,981 3
Cumbria....................................................... 5,397 2 5,884 2
Derbyshire.................................................... 5,551 4 6,051 4
Durham........................................................ 41,797 23 42,340 19
East Riding of Yorkshire...................................... 987 1 1,076 1
Essex......................................................... 2,157 1 2,351 1
Greater London................................................ 9,724 3 10,600 3
Greater Manchester............................................ 3,526 2 3,844 2
Hampshire..................................................... 957 1 -- --
Hertfordshire................................................. 3,577 1 3,899 1
Jersey........................................................ 7,467 1 -- --
Kent.......................................................... 15,560 13 16,306 12
Lancashire.................................................... 1,975 2 -- --
Leeds......................................................... 2,106 1 2,296 1
Leicestershire................................................ 5,204 2 3,188 1
Lincolnshire.................................................. 5,818 3 6,342 3
Merseyside.................................................... 8,656 16 8,191 4
Newcastle Upon Tyne........................................... 1,958 1 2,135 1
Norfolk....................................................... 14,781 11 13,676 8
Norwich....................................................... 3,134 1 3,417 1
North Humberside.............................................. 4,222 1 4,603 1
North Linconshire............................................. 1,022 1 1,114 1
North Yorkshire............................................... 7,632 6 7,149 4
Northamptonshire.............................................. 2,324 1 2,534 1
Northhumberland............................................... 9,344 4 10,133 4
Nottinghamshire............................................... 19,083 12 20,803 12
Oxfordshire................................................... 5,840 3 6,366 3
Shropshire.................................................... 1,446 1 1,158 1
South Yorkshire............................................... 16,315 13 15,541 11
Staffordshire................................................. 17,104 18 16,338 18
Suffolk....................................................... 9,271 4 10,107 4
Tyne & Wear................................................... 40,865 24 42,413 19
Warwickshire.................................................. 1,285 1 1,401 1
West Midlands................................................. 18,223 12 19,866 12
West Yorkshire................................................ 16,733 5 18,241 5
-------------------------------------------------------------
Total England.............................................. 322,494 202 321,849 168
Antrim........................................................ 19,760 13 21,541 13
Armagh........................................................ 9,635 4 10,504 4
Down.......................................................... 6,889 2 7,510 2
Fermanagh..................................................... 6,838 4 7,454 4
Londonderry................................................... 8,848 6 9,645 6
Tyrone........................................................ 6,460 3 7,042 3
-------------------------------------------------------------
Total Northern Ireland..................................... 58,430 32 63,696 32
Dundee City................................................... 9,636 3 10,505 3
East Lothian.................................................. 7,592 2 8,276 2
Glasgow....................................................... 2,675 1 2,916 1
North Ayrshire................................................ 6,132 1 6,685 1
-------------------------------------------------------------
Total Scotland............................................. 26,035 7 28,382 7
-------------------------------------------------------------
Total......................................................... $ 406,959 241 $ 413,927 207
=============================================================
</TABLE>
<PAGE> 11
Pursuant to leases the Company's tenants provide liquidity deposits and
letters of credit, which generally represent monthly rent for a period of six
months. Additional security from operators is provided by covenants regarding
minimum working capital and net worth, liens on other operating assets of the
operators, provisions for cross default and by corporate guarantees.
As of August 31, 2000, additional security with respect to the lease
with Exceler Health Services Limited was provided in the form of a six-month
letter of credit and a six-month payment guarantee by its ultimate parent, Sun
Healthcare Group, Inc. ("Sun"), which is a public company and NYSE listed. Sun's
payment guarantee is unconditional and non-cancelable for the term of the lease.
Sun files annual, quarterly and current reports, proxy statements and other
information with the Securities and Exchange Commission.
5. BORROWING ARRANGEMENTS
In October 2000, the Company, through a wholly owned subsidiary,
renewed its secured revolving credit facility permitting borrowings of
$73,000,000. As of August 31, 2000, $36,641,000 has been drawn on the facility.
The facility matures on June 29, 2001 with each advance bearing interest at
LIBOR plus 1.5%. At August 31, 2000 and 1999, the interest rate was 8.33% and
6.80%, respectively.
The loan payable to Worldwide at August 31, 2000 consists of a
short-term loan of $10,797,000 which bears interest at 9.25% and is payable on
demand, and $21,900,000 subordinated loan, which bears interest at 12.93% and
matures June 30, 2001. The carrying value of the short-term and subordinated
loan approximates fair value. In connection with the subordinated loan, the
Company provides warrants to acquire 10,000,000 Class A ordinary shares at
(pound)1.50 (approximately $2.19) per share. These warrants expire June 30,
2001.
Another subordinated loan in the amount of $7,300,000, which bears
interest at 12.93% and matures June 30, 2001 is classified as accounts payable
as of August 31, 2000. The carrying value of the subordinated loan approximates
fair value. In connection with the subordinated loan, the Company provides
warrants to acquire 3,333,333 Class A ordinary shares at (pound)1.50
(approximately $2.19) per share. These warrants expire June 30, 2001.
The following is a summary of other long-term borrowings, all of which
are British pound sterling denominated (In thousands):
<TABLE>
<CAPTION>
August 31,
2000 1999
-------------------------
<S> <C> <C>
Mortgage bonds......................................... $ 396,562 $ 432,285
Secured bank loan...................................... 11,544 12,585
Collateralized bank term loan.......................... 1,139 6,266
Subordinated loan...................................... -- 7,958
-------------------------
$ 409,245 $ 459,094
=========================
</TABLE>
Substantially all of the Group's borrowings under the revolving credit
facility, mortgage bonds and bank loans are collateralized by real estate
properties.
On December 12, 1997, the Company completed a $219,000,000
((pound)150,000,000) bond placement issued in two series. The first series of
the bonds with a balance of $146,000,000 ((pound)100,000,0000) have a final
maturity in 2025. The second series of bonds with a balance of $73,000,000
((pound)50,000,000) have a final maturity in 2027. The proceeds were primarily
used to repay certain outstanding borrowings totaling approximately $198,140,000
at the date of the offering. The bonds have a weighted average coupon of 7.52%.
<PAGE> 12
On March 23, 1999, the Company completed a $178,120,000 bond placement
issued in three series. The first series of Class A bonds, with a balance of
$119,720,000 ((pound)82,000,000), have a final maturity in 2027. The second
series Class M bonds, with a balance of $43,800,000 ((pound)30,000,000) have a
maturity of 2029. The third series Class B bonds, with a balance of $14,600,000
((pound)10,000,000), have a final maturity of 2029. The proceeds were primarily
used to repay outstanding borrowings totaling approximately $156,376,000 at the
date of the offering. The bonds have a weighted average coupon of 6.31%. The
bonds were sold at a discount of $587,500 ((pound)402,400). Amortization of the
bond discount is expensed over the life of the bonds and are included in
interest expense and was approximately $31,900 ((pound)20,300) and $14,400
((pound)8,900) during the years ended August 31, 2000 and 1999, respectively.
The secured bank loan matures in June 2001 and bears interest to
maturity at rates fixed at the time each tranche of the loan was drawn down. The
average rate on funds drawn down at August 31, 2000 and 1999 was 8.68% and
8.67%, respectively.
The collateralized bank loan is secured by restricted cash of
$5,929,000, bears interest at 7.5% and matures in October 2001.
The principal payments for each of the five years following August 31,
2000 is set forth below (In thousands):
<TABLE>
<CAPTION>
<S> <C>
2001...................... $ 11,543
2002...................... 1,140
2003...................... --
2004...................... --
2005...................... --
Thereafter................ 396,562
---------
$ 409,245
=========
</TABLE>
The aggregate carrying values and fair values of borrowings at August
31, 2000 and 1999 are set forth below (In thousands):
<TABLE>
<CAPTION>
Carrying Fair
Value Value
-------------------------
<S> <C> <C>
2000..................... $ 490,210 $ 491,812
1999..................... 524,626 526,234
</TABLE>
Fair values are based on the estimates of management and on rates
currently prevailing for comparable loans.
6. CAPITAL STOCK
The Company has issued warrants to subscribe for additional shares as follows:
<TABLE>
<CAPTION>
Number of Exercise Expiration
Shares Price Date
------ ----- ----
<S> <C> <C> <C>
Class A ordinary shares 1,667,000 (pound) 1.00 June 30, 2001
Class A ordinary shares 750,000 (pound) 1.10 June 30, 2001
Class A ordinary shares 13,333,333 (pound) 1.50 June 30, 2001
</TABLE>
<PAGE> 13
At the Extraordinary General Meeting held 6 November 2000, the expiry
dates of the (pound)1.00 and (pound)1.10 warrants were extended to June 30,
2001. As to the (pound)1.00 and (pound)1.10 warrants, no values were assigned at
the date of extension because the underlying securities were issued at their
fair value at that date. As to the (pound)1.50 warrants, the Company believes
that the coupon rate for the subordinated debt was the prevailing market rate on
the date of the loan, and therefore, the face amount of the subordinated loans
approximated its fair value on the date of issuance. In addition, the exercise
price on these warrants significantly exceeded the fair value of the stock on
the date of issuance since the warrants enabled the purchase of shares at
(pound)1.50, while the current value of the shares at the time was approximately
(pound)1.00. Based on these factors at the date of the borrowing, no value was
ascribed to the warrants when they were issued.
7. INCOME TAXES
The provision for income taxes is as follows (In thousands):
<TABLE>
<CAPTION>
Year ended August 31,
2000 1999 1998
<S> <C> <C> <C>
Current................................................ $ (145) $ 460 $ 184
Deferred............................................... 2,851 2,593 2,099
----------------------------------------
$ 2,706 $ 3,053 $ 2,283
========================================
</TABLE>
The effective tax rate differs from the UK income tax rate, primarily
due to depreciation and amortization expense, which is not deductible for tax
purposes in the UK.
The primary components of the Company's deferred tax liability are as
follows (In thousands):
<TABLE>
<CAPTION>
August 31,
2000 1999
---------------------------
<S> <C> <C>
Deferred tax liability
Accounts receivable.................................... $ 7,402 $ 2,639
Real estate............................................ 12,060 15,682
Other.................................................. 156 170
---------------------------
$ 19,618 $ 18,491
===========================
</TABLE>
8. RELATED PARTY TRANSACTIONS
The Company has an agreement with Worldwide under which Worldwide
provides investment advice, portfolio monitoring, administration and advisory
services to the Company. The Company pays an annual fee of 0.9% of the book
value of the Company's invested assets (as defined) to Worldwide. The Company
paid approximately $5,026,000, $4,479,000 and $3,295,000 during fiscal years
2000, 1999 and 1998. respectively.
During fiscal year 2000, four purchase/leaseback transaction with
County Healthcare Limited, a company in which a director of the Company has an
ownership interest, were completed at a purchase price of approximately
$6,218,000. The leases have a term of thirty years and an initial yield of
10.25%. In conjunction with these four transaction, four unsecured loans
totaling $438,000 were made to County Healthcare Limited at an interest rate of
10.25%. These transactions were approved unanimously by the disinterested
directors.
During fiscal year 1999, two purchase/leaseback transaction with County
Healthcare Limited, a company in which a director of the Company has an
ownership interest, were completed at a purchase price of approximately
$5,265,000. The leases have a term of thirty years and an initial yield of
10.50%. These transactions were approved unanimously by the disinterested
directors.
<PAGE> 14
Rental income received from Idun Health Care Ltd. (a wholly owned
subsidiary of Worldwide) for the year ended August 31, 2000 is approximately
$1,375,000.
Interest expense on the short-term loan from Worldwide for the years
ended August 31, 2000, 1999 and 1998 is approximately $1,479,000, $1,615,000 and
$903,000, respectively.
Interest expense on the subordinated loan from Worldwide for the years
ended August 31, 2000, 1999 and 1998 is approximately $3,023,000, $2,963,000 and
$2,991,000, respectively.
9. NON-OPERATING INCOME
In July 1998, Principal sold its entire ownership interest in Baneberry
Healthcare Limited (Baneberry) which it acquired as part of Baneberry's
formation in November 1997. The Company realized sale proceeds of approximately
$4,000,000, resulting in a gain of approximately $1,900,000, which is included
in non-operating income in 1998. Of its ownership interest sold, 19.9% was sold
to Worldwide, and included in non-operating income is approximately $500,000
related to the Worldwide sale.
