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, 2000
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, 2000.
Common Stock, $.10 par value 12,308,500
(Class) (Number of shares)
<PAGE>
OMEGA WORLDWIDE, INC.
FORM 10-Q
June 30, 2000
INDEX
<TABLE>
<CAPTION>
Page No.
--------
PART I Financial Information
<S> <C> <C>
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets
June 30, 2000 (unaudited) and September 30, 1999 ................................... 2
Condensed Consolidated Statements of Operations (unaudited) -
Three-month and Nine-month periods ended June 30, 2000 and 1999 .................... 3
Condensed Consolidated Statements of Cash Flows (unaudited) -
Nine-month periods ended June 30, 2000 and 1999 .................................... 4
Notes to Condensed Consolidated Financial Statements
June 30, 2000 (unaudited) .......................................................... 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations .............................................................. 12
Item 3. Quantitative and Qualitative Disclosure About Market Risk ............................ 14
PART II Other Information
Item 5. Other Information .................................................................... 15
Item 6. Exhibits and Reports on Form 8-K ..................................................... 15
</TABLE>
<PAGE>
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
OMEGA WORLDWIDE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
June 30, September 30,
2000 1999
(Unaudited) (See Note)
----------- ----------
ASSETS
<S> <C> <C>
Current Assets:
Cash and short-term investments ......................................$ 5,438 $ 5,738
Restricted cash ...................................................... 3,461 389
Patient receivables .................................................. 7,563 -
Other current assets ................................................. 6,135 915
----- ---
Total Current Assets .............................................. 22,597 7,042
Plant, property and equipment, net of accumulated depreciation ......... 12,729 -
Investments in and advances to Principal Healthcare Finance Limited .... 42,614 48,842
Investments in Principal Healthcare Finance Trust ...................... 6,742 6,619
Prepaid rent ........................................................... 5,111 -
Rent deposits .......................................................... 3,941 -
Other assets ........................................................... 3,496 5,909
----- -----
74,633 61,370
------ ------
Total Assets ...........................................................$ 97,230 $ 68,412
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Short-term debt .....................................................$ 11,479 $ -
Accounts payable and accrued expenses ................................ 16,911 1,177
Accrued income taxes ................................................. 706 1,880
Deferred income ...................................................... - 1,215
------ -----
Total Current Liabilities .......................................... 29,096 4,272
Long-term debt ......................................................... 2,921 -
Other long-term liabilities ............................................ 379 -
----- -----
Total Liabilities .................................................... 32,396 4,272
------ -----
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 $.10 par value
Authorized 50,000 shares
Outstanding 12,308 shares and 12,266 at June 30, 2000
and September 30, 1999 respectively ............................. 1,231 1,227
Additional paid-in capital .......................................... 53,083 52,893
Retained earnings ................................................... 8,059 7,418
Accumulated other comprehensive income(loss) ........................ (139) 2
------ -----
Total Shareholders' Equity ........................................ 64,834 64,140
------ ------
Total Liabilities and Shareholders' Equity .............................$ 97,230 $ 68,412
======== ========
</TABLE>
Note - The balance sheet at September 30, 1999, 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 condensed consolidated financial statements.
2
<PAGE>
OMEGA WORLDWIDE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
------------------ -----------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Patient services revenue ........................................ $ 36,890 $ - $ 98,656 $ -
Fee income - Principal Healthcare Finance Limited ............... 1,283 1,271 3,958 3,593
Fee income - Principal Healthcare Finance Trust ................. 256 202 753 202
Interest Income:
Principal Healthcare Finance Limited .......................... 1,127 1,126 3,537 3,569
Short-term investments ........................................ 58 117 167 588
Rent income ..................................................... - - - 3,908
Other income .................................................... 1 24 21 74
------ ---- ------ -----
39,615 2,740 107,092 11,934
Expenses:
Direct cost of patient services .................................. 38,376 - 103,062 -
Direct costs of asset management ................................. 744 636 2,007 1,904
Allocated expenses from Omega Healthcare Investors, Inc. ......... 129 196 507 582
Imputed and other interest ....................................... 247 85 855 2,635
Provision for depreciation ....................................... 24 13 67 640
General and administrative ....................................... 382 400 1,058 1,204
Non-recurring expenses ........................................... 437 - 437 -
----- ----- ----- -----
40,339 1,330 107,993 6,965
------ ----- ------- -----
Earnings (loss) before equity earnings and taxes ................... (724) 1,410 (901) 4,969
Equity in earnings of Principal Healthcare Finance Limited ......... 403 309 1,016 760
Equity in earnings of Principal Healthcare Finance Trust ........... 112 280 297 280
Equity in earnings (loss) of Essex Healthcare Corporation .......... 61 5 24 (366)
Gain on dilution of interest in Principal Healthcare Finance Trust . - 951 - 951
----- ---- ---- ----
Earnings (loss) before income taxes ................................ (148) 2,955 436 6,594
Income tax (provision) benefit ..................................... 208 (843) 205 (1,977)
--- ---- --- ------
Earnings before preferred stock dividends .......................... 60 2,112 641 4,617
Preferred stock dividends .......................................... (52) (52) (156) (156)
--- --- ---- ----
Net earnings ....................................................... $ 8 $ 2,060 $ 485 $ 4,461
======= ====== ======== =======
Earnings per common share, basic ................................... $ - $ 0.16 $ 0.04 $ 0.36
======= ====== ======== ======
Earnings per common share, diluted ................................. $ - $ 0.16 $ 0.04 $ 0.36
======= ====== ======== ======
Average shares outstanding, basic .................................. 12,308 12,264 12,291 12,260
======= ====== ======== ======
Average shares outstanding, diluted ................................ 12,309 12,264 12,292 12,260
======= ====== ======== ======
Total comprehensive income, net of taxes ........................... $ 198 $ 1,765 $ 500 $ 4,265
======= ====== ======== ======
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
OMEGA WORLDWIDE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
(In Thousands)
<TABLE>
<CAPTION>
Nine Months Ended
June 30,
-----------------
2000 1999
---- ----
<S> <C> <C>
Operating activities:
Net earnings ............................................................................ $ 641 $ 4,617
Adjustments to reconcile net earnings to cash provided by operating activities:
Equity in earnings of Principal Healthcare Finance Limited ............................ (1,016) (760)
Equity in earnings of Principal Healthcare Finance Trust .............................. (297) (280)
Equity in (earnings) loss of Essex Healthcare Corporation ............................. (24) 366
Gain on dilution of interest in Principal Healthcare Finance Trust .................... - (951)
Straight-line rent adjustment ......................................................... 2,575 -
Depreciation and amortization ......................................................... 1,295 762
Payments of federal and foreign income taxes .......................................... (2,126) (875)
Imputed interest ...................................................................... - 1,146
Net change in operating assets and liabilities ........................................ (10,605) (1,016)
------- ------
Net cash provided by (used in) operating activities ........................................ (9,557) 3,009
Cash flows from financing activities:
Proceeds from short-term borrowings, net of repayments .................................. 6,304 34,502
Proceeds from (repayments of) long-term borrowings ...................................... (1,055) 102
(Increase) decrease in restricted cash .................................................. (3,072) 5,831
------ -----
Net cash provided by financing activities .................................................. 2,177 40,435
Cash flows from investing activities:
Repayments from (temporary advances to) Principal Healthcare Finance Limited ............ 7,244 (6,418)
Repayment of temporary advances from Principal Healthcare Finance Trust ................. - 13,631
Cash received in acquisition of operating companies by Idun Health Care Limited
net of cash consideration paid ......................................................... 857 -
Acquisition of plant, property and equipment by subsidiaries ............................ (1,323) (49,288)
Dividends from affiliates ............................................................... 174 272
Investment in Tamaris, plc stock ........................................................ - (2,884)
Investment in Principal Healthcare Finance Trust ........................................ - (1,108)
Investment in Baneberry Healthcare Ltd. ................................................. - (1,622)
Other ................................................................................... 128 781
---- ----
Net cash provided by (used in) investing activities ........................................ 7,080 (46,636)
----- -------
Decrease in cash and short-term investments ................................................ (300) (3,192)
Cash and short-term investments at beginning of period ..................................... 5,738 10,281
----- ------
Cash and short-term investments at end of period ........................................... $ 5,438 $ 7,089
======= =======
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
OMEGA WORLDWIDE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
June 30, 2000
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 most 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, 10,556,361 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 9.9% 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 accounting principles
generally accepted in the United States 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 accounting principles generally accepted in the United States 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, 2000, are not necessarily indicative of the results that may be
expected for the year ending September 30, 2000. For further information, refer
to the financial statements and footnotes thereto in the Company's annual
report, Form 10-K/A for the period ended September 30, 1999.
CONSOLIDATION AND SUBSIDIARIES
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries after elimination of all material intercompany
accounts and transactions. The Company's policy is to report the results of its
subsidiaries and equity method investees on a one-month lag basis. This allows
time to produce accounts in a local GAAP and then convert to an U.S. GAAP basis.
The Company's wholly owned subsidiary, Idun, began operations on November 1,
1999. To reflect activities for a eight-month period and adopt reporting on a
one-month lag basis, profit and loss results for the seven-month period ended
May 31, 2000, as well as an estimated loss from operations for an additional
month are included in the Company's results for the nine-month period ended June
30, 2000.
5
<PAGE>
Until April 1, 1999, the Company owned 100% of Principal Healthcare Finance
Trust ("Principal-Australia"). As more fully explained in Form 8-K dated April
1, 1999, newly issued shares of Principal-Australia were issued to independent
investors resulting in the dilution of the Company's ownership to 47%.
Principal-Australia's financial results are included in the Company's results on
a consolidated basis prior to April 1, 1999, and thereafter are included in the
results using the equity method of accounting.
The Company reports the results of those subsidiaries which it has over 20%
ownership, but in which it does not hold a majority interest, using the equity
method of accounting, using a one-month lag basis. Investments in public
companies over which the Company does not exercise control are recorded at fair
market value. Temporary changes in fair market value are charged to accumulated
other comprehensive income, while permanent reductions in fair market value are
charged to operations.
RESTRICTED CASH
The Company has pledged $1.2 million of cash with a bank as collateral
guaranteeing the Company's performance under short-term purchase and sale of
foreign currency hedge positions. The cash is restricted for periods no greater
than 30 days and is classified as restricted on the balance sheet. This is in
addition to restricted cash of $1.9 million supporting Idun's debt (See Note H)
and $389,000 of other restricted cash.
PATIENT SERVICE REVENUE
Patient service revenue relates to the operations of Idun Health Care
Limited ("Idun") and is recorded as the services are provided.
PATIENT SERVICE EXPENSE
Patient service expense directly supports patient service revenue and
includes all operating expenses, excluding depreciation, of Idun.
STRAIGHT-LINE RENT EXPENSE
Idun Health Care Limited's subsidiaries are the lessees of several
long-term leases. Rent expense differs from cash rental payments and is
recognized as the total rent payable over the initial term of the related lease
amortized on a straight-line basis. Such expense includes the adjustment in the
rental payments based upon predetermined minimum formulas as defined in the
master lease and is reported as a component of patient service expense.
NON-RECURRING EXPENSES
The Company on February 23, 2000 announced that it had engaged Warburg
Dillon Reed LLC to assist in exploring ways to boost shareholder value. The cost
of services from Warburg Dillon Reed LLC, legal advice related to the process
and the costs of investor banker services specific to the Company's United
Kingdom investment totaled $473,000 during the quarter ended June 30, 2000.
PRIOR PERIOD CLASSIFICATION
Certain prior quarter amounts have been reclassified to correspond with
the current quarter's presentation.
Note B - Asset Concentrations
Until April 1, 1999, Principal-Australia was reported on the consolidated
basis of accounting and 100% of the consolidated group's real estate investments
were owned by Principal-Australia. During the period it was consolidated, all of
Principal-Australia's real estate investments were long-term care facilities
located in Australia which were and continue to be leased to Moran Health Care
Group (Australia) Pty Limited, the largest operator of aged care homes in
Australia. Subsequently, Principal (Australia) has added two additional tenants.
6
<PAGE>
Note C - Principal Healthcare Finance Limited (Principal-UK)
The following summarizes selected financial information of Principal-UK in
accordance with accounting principles generally accepted in the United States
(in thousands):
<TABLE>
<CAPTION>
Three-Month Period Ended Nine-Month Period Ended
May 31, May 31, May 31, May 31,
Selected Operating Results for the period: 2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Rent income ....................................... $ 15,150 $ 13,705 $ 45,459 $ 40,810
Interest income ................................... 129 1,347 403 4,438
Other income ...................................... 1,130 - 3,618 52
----- ----- ----- ----
Total revenues ............................... 16,409 15,052 49,480 45,300
Expenses:
Interest expense .................................. (10,083) (9,635) (30,675) (29,165)
Depreciation and amortization ..................... (2,772) (2,535) (8,320) (7,214)
General and administrative ........................ (1,428) (1,413) (4,940) (4,271)
------ ------ ------ ------
Total expenses ................................ (14,283) (13,583) (43,935) (40,650)
------- ------- ------- -------
Income from operations before income taxes .............. 2,126 1,469 5,545 4,650
Provision for income taxes .............................. (850) (484) (2,310) (2,218)
----- ---- ------ ------
Net income from operations .............................. $ 1,276 $ 985 $ 3,235 $ 2,432
========= ========= ======== ========
Average exchange rate ($ per(pound)) .................... 1.5654 1.6071 1.5948 1.6392
Selected Balance Sheet Information as of: May 31, 2000 August 31, 1999
------------ ---------------
Investments in real estate subject to
triple-net lease, net of depreciation ................. $ 393,645 $ 395,533
Total assets ............................................ 558,555 569,666
Non-recourse debt borrowings ............................ 465,820 478,233
Total liabilities ....................................... 539,421 552,544
Total stockholders' equity .............................. 19,134 17,122
Exchange rate ($ per(pound)) ............................ 1.4961 1.5916
</TABLE>
The functional currency of Principal-UK is the British pound sterling. In
accordance with FASB 52, the balance sheet amounts are translated at the period
end exchange rate and the income statement amounts are translated at the average
exchange rate for the period.
The effective tax rates are 42% and 48% for the nine-month periods ending
May 31, 2000 and 1999, respectively. These rates differ 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, 2000
and 1999 are approximately $423,000 and $329,000 respectively, and approximately
$1,076,000 and $812,000 for the nine-month periods ended May 31, 2000 and 1999,
respectively. Additionally, the Company had recorded a charge against earnings
of approximately $20,000 for the three-month periods ended May 31, 2000 and
1999, respectively, and approximately $60,000 and $52,000 for the nine-month
periods ended May 31, 2000 and 1999, respectively, 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.
7
<PAGE>
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):
<TABLE>
<CAPTION>
Three-Month Period Ended Nine-Month Period Ended
Selected Operating Results for the period ended: May 31, 2000 May 31, 1999 May 31, 2000 May 31, 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Rent income .................................................... $ 2,935 $ 2,805 $ 8,839 $ 6,713
Interest income ................................................ 368 104 689 247
Other income ................................................... 10 - 32 -
---- ---- ---- ----
Total revenues ............................................. 3,313 2,909 9,560 6,960
Expenses:
Interest expense ............................................... (2,250) (1,502) (6,541) (3,835)
Depreciation and amortization .................................. (490) (487) (1,488) (1,087)
Amortization of debt issue and organizational costs ........... (30) (63) (142) (63)
General and administrative ..................................... (305) (262) (757) (641)
---- ---- ---- ----
Total expenses ............................................. (3,075) (2,314) (8,928) (5,626)
------ ------ ------ ------
Income from operations ............................................ $ 238 $ 595 $ 632 $ 1,334
======== ======== ======== ========
Average Exchange Rate ($ per A$) .................................. 0.5983 0.6448 0.6249 0.6278
Selected Balance Sheet Information as of: May 31, 2000 August 31, 1999
------------ ---------------
Investments in real estate subject to
triple-net lease, net of depreciation .......................... $ 85,996 $ 85,652
Total assets ...................................................... 116,377 96,986
Non-recourse debt borrowings ...................................... 94,819 75,815
Total liabilities ................................................. 102,771 82,215
Total unit holders' equity ........................................ 13,606 14,771
Exchange Rate ($ per A$) .......................................... 0.5768 0.6381
</TABLE>
The functional currency of Principal-Australia is the Australian dollar. In
accordance with FASB 52, the balance sheet amounts are translated at the period
end exchange rate and the income statement amounts are translated at the average
exchange rate for the period.
On April 1, 1999, 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,
as more fully described in the Form 8-K dated April 1, 1999. Prior to this date,
the Company owned 100% of Principal-Australia. Issuance of the new shares
reduced the Company's ownership to 47% of shares outstanding.
Note E - Acquisition of Idun Health Care Limited ("Idun")
At October 31, the Company, through its wholly owned subsidiary, Idun
Health Care Limited, acquired the operating subsidiaries of Tamaris, plc, a
nursing home operating company in the United Kingdom. The 48 subsidiaries
acquired operate 119 nursing homes located throughout England, Scotland and
Northern Ireland. The fair market value of the net assets at the date of
acquisition was $9.5 million. Fixed assets included in the $9.5 million amount
have been written down by $5.2 million to report net assets equal to the
purchase price.
8
<PAGE>
Pro forma information for the Company, as if the Idun purchase had been
made as of October 1, 1998, is as follows:
<TABLE>
<CAPTION>
Pro forma operating results for the period ended:
(in thousands, except per share data) Nine-Month Three-Month Nine-Month
Period Ended Period Ended Period Ended
June 30, 2000 June 30, 1999 June 30, 1999
------------- ------------- -------------
<S> <C> <C> <C>
Revenues .................................................... $ 116,708 $ 36,355 $ 106,080
Net earnings available to common shareholders ............... (936) 2,026 5,171
Earnings per common share, basic ............................ (0.08) 0.16 0.42
Earnings per common share, diluted .......................... (0.08) 0.16 0.42
Average exchange rate ($ per(pound)) ........................ 1.5948 1.6356 1.6392
</TABLE>
The functional currency of Idun is the British pound sterling. In
accordance with FASB 52, the balance sheet amounts are translated at the period
end exchange rate and the income statement amounts are translated at the average
exchange rate for the period. The cash component of the Company's equity
investment in Idun was the subject of a foreign currency hedge using forward
purchase agreements from the date of acquisition until June 2000. The cash
benefit of this transaction totaling $447,000 is reflected as a reduction in
accumulated other comprehensive income (loss) as required by FASB 52.
Idun's results are included in the Company's consolidated results for the
entire three-month period ended June 30, 2000.
Note F - Essex Healthcare Corporation
The Company holds approximately 47% of the outstanding common shares of
Essex Healthcare Corporation ("Essex"), an Atlanta-based private operator of
skilled nursing facilities. Essex's primary activities are in Ohio, where it
operates 68 long-term care and assisted living facilities (approximately 4,300
beds). It also manages 55 facilities (approximately 2,900 beds) in Indiana,
Wisconsin, Michigan and Texas. The Company accounts for this investment using
the equity method.
The Company's proportionate share of Essex's income for the three-month
periods ending May 31, 2000 and 1999 is approximately $61,000 and $5,000,
respectively, and income of approximately $24,000 and a loss of $366,000 for the
nine-month periods ended May 31, 2000 and 1999, respectively.
Note G - Earnings Per Share
Earnings per share are 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 (824 and 683 shares for the
three-month periods ending June 30, 2000 and 1999, respectively and 1,081 and
1,103 shares for the nine-month periods ending June 30, 2000 and 1999,
respectively). The assumed conversion of shares of preferred stock is
antidilutive.
9
<PAGE>
Note H - Credit Facilities
The Company had no outstanding indebtedness at September 30, 1999. At
June 30, 2000, the Company's outstanding indebtedness consists of the following
(in thousands):
<TABLE>
<S> <C>
(1) Credit agreement (8.01% interest at June 30, 2000) ................. $ 8,850
(2) Loan due on demand (8.37% interest at June 31, 2000) ............... 1,870
(3) Loan due February 2003 (8.34% interest at June 30, 2000) ........... 1,516
(4) Loan due February 2017 (8.34% interest at June 30, 2000) ........... 1,731
(5) Loan due April 2018 (5.50% interest at June 30, 2000) .............. 433
---
14,400
Less current maturities ................................................ (11,479)
-------
Long-term debt ......................................................... $ 2,921
=======
</TABLE>
1) In November 1998, the Company entered into a bank credit agreement. The
agreement has been modified four times as of June 29, 2000. The current
agreement calls for repayments of $2 million in July 2000 and quarterly
repayments of $2 million each beginning September 30, 2000 until the full
amount is repaid in June 2001. Borrowings under the agreement bear interest
at LIBOR plus 3.25%. Omega provided a guarantee to the banks in
consideration of a fee of 1%, plus an annual 25 basis point facility fee.
No further borrowings may be made under this agreement.
2) Idun has a loan with a bank that is secured by the business and assets of a
nursing home subsidiary and carries an interest rate of 2.5% above the
bank's base lending rate.
3) Idun has a loan with a bank that is secured by the business and assets of a
nursing home company and carries a floating interest rate of LIBOR plus 2%.
The loan is being amortized over its life and requires quarterly payments
of approximately $165,000.
4) Idun has a loan with a bank that is secured by the business and assets of a
nursing home company and carries a floating interest rate of LIBOR plus 2%.
The loan is being amortized over its life and requires quarterly payments
of approximately $25,000.
5) Idun has an unsecured bank loan of approximately $433,000. The interest
rate on this loan is at a bank's base rate less .5%.
None of the loans of Idun is guaranteed by the Company. Cash of $1,870,000
included in Restricted Cash will be used for partial payment of an as yet
undetermined combination of items 2, 3 and 4 above.
Note I - 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 periods ending June 30, 2000 and 1999 were
approximately $129,000 and $196,000, respectively, and for the nine-month
periods ended June 30, 2000 and 1999 were approximately $507,000 and $582,000,
respectively. Such allocations are based on estimates and formulas that
management believes to be reasonable. The service agreement has expired. The
Company and Omega are currently negotiating a new arrangement which will exclude
certain previously provided services, most significantly, those of shared
executives.
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Omega holds preferred shares in the Company of $2.6 million at June 30,
2000. The preferred shares are entitled to cumulative undeclared dividends of
$468,000 prior to any distribution to common shareholders.
Temporary unsecured advances to Principal-UK in the amounts of $11,124,000
and $18,368,000 are outstanding at June 30, 2000 and September 30, 1999,
respectively. 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, 2000 and 1999 is $351,000 and
$373,000, respectively, and for the nine-month periods ended June 30, 2000 and
1999 is $1,201,000 and $1,311,000, respectively.
A subordinated loan to Principal-UK in the amount of $23,805,000 is
outstanding at June 30, 2000 and September 30, 1999, respectively. Interest on
the subordinated loan is 12.55% at June 30, 2000 and 12.18% at June 30, 1999,
paid semi-annually. Interest arising from the subordinated loan to Principal-UK
included in interest income for the three-month periods ended June 30, 2000 and
1999 is $776,000 and $753,000, respectively, and for the nine-month periods
ended March 31, 2000 and 1999 is $2,336,000 and $2,258,000, respectively.
Fees from services provided to Principal-UK for the three-month periods
ended June 30, 2000 and 1999 are $1,283,000 and $1,271,000, respectively, and
for the nine-month periods ended June 30, 2000 and 1999 are $3,958,000 and
$3,593,000, respectively.
Fees from services provided to Principal-Australia for the three-month
period ended June 30, 2000 and 1999 are $256,000 and $202,000, respectively, and
for the nine-month periods ended June 30, 2000 are 1999 are $753,000 and
$202,000, respectively.
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Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
"Safe Harbor" Statement under the United States Private Securities
Litigation Reform Act of 1995. Statements 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; government policy relating to
the healthcare industry, including changes in the reimbursement levels;
operators' continued eligibility to participate in the government sponsored
payment programs; changes in reimbursement by other third-party payors;
occupancy levels at the facilities; the availability and cost of capital of the
Company and its investees; the strength and financial resources of competitors
of the Company and investees; the ability of investees to make additional real
estate investments at attractive yields; and the ability of investees to obtain
debt and equity capital 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
In prior years the Company generated 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. In the first quarter of the
current fiscal year, the Company added a fourth income source when it acquired
through its wholly-owned subsidiary, Idun Health Care Ltd. ("Idun"), 119 nursing
homes in the United Kingdom. Company results for the nine months include eight
months of Idun's operations since the date of acquisition.
Prior to April 1, 1999 Principal-Australia was reported on a consolidated
basis; currently, Principal-Australia, now 47% owned, is reported under the
equity method.
Revenues
Patient services revenue from the Idun operations was $36,890,000 for the
quarter and $98,656,000 for the eight months of Idun's operations. The average
occupancy for the quarter was 87.6% and for the eight months, 87.0%. The
occupancy rate for the quarter indicates improvement from previous results, part
of which is the result of increased marketing focus throughout Idun but
specifically in the England homes that have lower occupancy than those in
Scotland and Northern Ireland. Also contributing to the increase is the seasonal
nature of placements from local funding agencies, which increase activity with
the start of their fiscal year in April. The Company acquired Idun with the
intention of bringing occupancy up to levels required for profitability and is
directing significant resources to this end.
Fee income for the quarter from Principal Finance Healthcare Limited
(Principal-UK) of $1,283,000 is essentially equal to the amount reported in the
prior year. The current quarter income consists of $1,137,000 of current fees,
and $146,000 net of favorable adjustments related to renegotiation during the
quarter related to prior periods. Assets subject to the 0.90% fee are defined
contractually and are based on UK GAAP. At June 30, 2000 they totaled (pound)310
million. Year-to-date fee income from Principal-UK is up 10% reflecting the
increase in assets of 8% since June 1999 and the $146,000 favorable adjustment
above. Fee income from Principal Healthcare Finance Trust
("Principal-Australia") increased due to the combined impact of now charging
fees to the newly unconsolidated entity and an increase in the market value of
rental assets of A$46.2 million.
Interest income from Principal-UK for the quarter and year-to-date is
consistent with the comparable periods last year. The impact of the annual
interest rate increase for the subordinated debt is $32,000 for the quarter and
$87,000 year-to-date. The rate on temporary advances remains fixed at 9.25%, but
the amount outstanding has declined from $17,371,000 at June 30, 1999 to
$11,124,000 on June 30, 2000.
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Expenses
Cost of patient services is incurred in running the Idun subsidiary's
nursing homes in the United Kingdom. They exceed patient service revenues due to
staff cost pressures. Minimum wage increases and increased costs of temporary
services and overtime have pushed costs up faster than government-determined
fees. In addition, the long-term nature of the Company's operating leases with
scheduled rent increases results in significant ($340,000 per month) non-cash
rent expense. The Idun nursing homes were unprofitable under previous
management. The Company has made progress during the last eight months and
expects to further streamline operations and improve management practices in the
year ahead.
Despite the increase in levels of assets managed, the total of direct cost
of asset management, allocated expenses and general and administrative costs
year-to-date has declined by $118,000 from the comparable period last year. The
current quarter is $23,000 higher than last year. The allocation from Omega
Healthcare Investors, Inc. has declined as a result of a decline in overall cost
and negotiated adjustments to previously billed amounts. Future allocations will
be significantly reduced, as Omega will no longer be providing the services of
shared executives for the Company. Principal-Australia incurred most of the
interest and depreciation expense in the prior year and is no longer
consolidated. Interest expense in the current year arose from financing required
to fund the operations of the Idun nursing home businesses acquired.
Non-recurring expenses were incurred in the current period for advice in
pursuing the strategic alternatives, including a possible merger or sale
transaction. As announced July 27, 2000, the Company continues to pursue
strategic alternatives to maximize shareholder value but to date no party has
expressed an interest in acquiring or merging with the Company. Each party which
did provide a preliminary indication of interest has elected not to pursue any
such transaction.
Other
Equity in earnings of Principal-UK increased from $309,000 in the prior
year quarter to $403,000 in the current year quarter. The year-to-date increase
is $256,000. 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 and the more
favorable long-term finance rates achieved with the securitization in March
1999. Equity in earnings of Principal-Australia is affected by the A$182 million
financing completed in September 1999. Not all of the proceeds have yet been
reinvested in rental properties due to the newness of our product in the market.
Although we are pursuing numerous prospects, the return on temporary investment
is not adequate to cover the interest expense.
The change in the Medicare payment structure enacted last year in the
United States resulted in the prior year loss of $366,000 for Essex Healthcare
Corporation in the nine-month period. Essex management continues to make
progress in structuring operations to be profitable under this payment structure
and in improving performance at the several skilled nursing facilities that were
acquired when they were unprofitable. In addition, it has doubled its beds this
year to take advantage of the benefit of economies of scale.
The Company's effective tax rate on a year-to-date basis varies from the
federal statutory rate of 34% due to the benefit of available foreign tax
credits on equity in earnings of Principal Healthcare Finance Limited which is
reported after UK tax expense.
Liquidity and Capital Resources
The Company has outstanding, at quarter end, $8,850,000 of debt under its
line of credit agreement with Fleet Bank, N.A. and Harris Trust and Savings
Bank. In the month of June, $2 million was repaid on the loan and it requires
repayment in full by June 30, 2001. The Company anticipates the need to invest
approximately $4 million of additional capital in Idun for unpaid liabilities
acquired with the purchase from Tamaris and required capital improvements over
the next nine months. Cash on hand and expected availability of restricted funds
total $6.6 million at June 30. Company cash flows from fees and interest income
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approximated $2.0 million on an annual basis. The remaining cash is expected to
be generated by repayments of advances from the Company to Principal-UK.
Principal-UK currently generates sufficient cash flow to repay adequate amounts
over the period, and all tenants continue to pay rents on a timely basis. The
continued cash flow from Principal-UK is subject to several risks, most notably
the ability of the Principal-UK tenants to continue to meet rent requirements
despite the impact of current wage pressures on their operations. Principal-UK
also is required to refinance (pound)5 million of subordinated debt with an
unrelated party when it comes due in December 2000. There can be no assurance
that Principal-UK will be able to refinance such subordinated debt or otherwise
continue to generate sufficient cash flow to repay prior advances from the
Company. In such event, the Company may need other sources of capital to both
meet the required loan repayments and make additional capital investments in
Idun.
Year 2000 Implications
The Company is not aware of any significant adverse effects of year 2000 on its
systems and operations
Item 3. Quantitative and Qualitative Disclosure About 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 March 31, 2000, the Company had
outstanding a British pound sterling forward currency swap to exchange
(pound)20,000,000 for $31,740,000 to mature on October 15, 2007, and an
Australian dollar forward currency swap to exchange A$11.0 million Australian
dollars for $6,749,000 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-UK and Idun. Because of the Company's foreign exchange
contracts, its sensitivity to foreign exchange currency exposure is considered
low.
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PART II - OTHER INFORMATION
Item 5. Other Information
As announced on July 27, 2000, James E. Eden, a Director of the Company
since its inception, has been elected as Chairman of the Board of the
Company, replacing Robert L. Parker, who retired as Chairman but remains a
Director. The Company also announced that the Board of Directors replaced
Essel W. Bailey, Jr., as Chief Executive Officer and President. Mr. Bailey
continues as a Director of the Company. The Board of Directors appointed
James P. Flaherty, who is the Chief Operating Officer of the Company, as
President and a Director. Jacques Aigrain resigned as Director effective
June 30, 2000.
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits - the following exhibits are filed herewith:
Exhibit Description
------- -----------
10.7 Admendment #4 to Loan Agreement dated June 29, 2000, among
the Company, Fleet Bank N.A., as agent and a bank and
Harris Trust and Savings Bank.
27 Financial Data Schedule
(b) Reports on Form 8-K - None were filed.
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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/ JAMES P. FLAHERTY
---------------------------
James P. Flaherty
August 3, 2000 President
By /s/ EDWARD C. NOBLE
-------------------------
Edward C. Noble
August 3, 2000 Chief Financial Officer
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