UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1994
HEALTH EQUITY PROPERTIES INCORPORATED
(Exact name of registrant as specified in its charter)
North Carolina 56-1591771
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
915 West Fourth Street
Post Office Box 348
Winston-Salem, NC 27102
(Address of principal executive offices)
(Zip Code)
(910) 723-7580
(Registrant's 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 the latest practical date.
Common Stock $0.01 Par Value
14,663,964 Shares
<PAGE>
HEALTH EQUITY PROPERTIES INCORPORATED
FORM 10-Q
June 30, 1994
TABLE OF CONTENTS
PART I: FINANCIAL INFORMATION Page
Item 1. Financial Statements
Consolidated Balance Sheets.................. 3
Consolidated Statements of Operations........ 4
Consolidated Statements of
Shareholders' Equity......................... 5
Consolidated Statements of Cash Flows........ 6-7
Notes to Consolidated Financial Statements... 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. 9-13
PART II: OTHER INFORMATION
Items 1 through 3 and Item 5............................ None
Item 4.................................................. 14
Item 6.................................................. 14
SIGNATURE PAGE......................................... 15
<PAGE>
HEALTH EQUITY PROPERTIES INCORPORATED
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1994 AND DECEMBER 31, 1993
June 30, December 31,
1994 1993
(unaudited)
__________ ____________
ASSETS
Nursing home properties:
Land and improvements $ 8,443,201 $ 8,848,707
Buildings and improvements 99,555,083 106,828,059
Furniture and equipment 15,093,560 15,763,025
___________ ____________
123,091,844 131,439,791
Accumulated depreciation (30,350,610) (30,235,507)
___________ ___________
92,741,234 101,204,284
Cash and cash equivalents 10,752,960 6,272,153
Leasehold rights, net 3,753,560 4,576,214
Other assets 5,997,910 5,643,834
___________ __________
$113,245,664 $117,696,485
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Debt:
Notes and mortgages $ 26,262,776 $ 30,190,306
Convertible debentures 900,000 1,355,000
___________ __________
27,162,776 31,545,306
Dividends payable 3,592,671 3,572,404
Other liabilities 1,117,931 1,341,267
___________ __________
31,873,378 36,458,977
___________ __________
Common stock, $0.01 par value;
100,000,000 shares authorized;
14,665,813 shares issued at
June 30, 1994 and 14,583,086
shares issued at December 31,
1993 146,658 145,831
Paid in capital 81,242,363 81,108,412
Less treasury stock of 1,849
shares, at cost (16,735) (16,735)
__________ __________
81,372,286 81,237,508
__________ __________
$113,245,664 $117,696,485
=========== ===========
[FN]
The accompanying notes are an integral part of the
financial statements.
<PAGE>
<TABLE>
HEALTH EQUITY PROPERTIES INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED
JUNE 30, 1994 AND 1993
(unaudited)
<CAPTION>
Three Months Three Months Six
Months Six Months
Ended Ended
Ended Ended
June 30, June 30,
June 30, June 30,
1994 1993
1994 1993
__________ __________
__________ ___________
<S> <C> <C> <C>
<C>
Income:
Base rent $ 4,205,290 $ 4,329,279 $
8,615,408 $ 8,592,807
Additional rent 470,123 512,522
824,710 766,808
Other 156,346 111,399
292,124 228,340
Gain on sale -- --
2,590,418 --
___________ __________
__________ __________
4,831,759 4,953,200
12,322,660 9,587,955
___________ __________
__________ __________
Expenses:
Interest 620,682 682,061
1,318,674 1,328,712
Depreciation 1,116,756 1,141,163
2,280,939 2,271,837
Amortization 468,338 471,171
994,914 940,369
Administrative and other 454,383 403,612
859,421 815,115
__________ _________
_________ _________
2,660,159 2,698,007
5,453,948 5,356,033
__________ _________
_________ _________
Net income $ 2,171,600 $ 2,255,193 $
6,868,712 $ 4,231,922
========== ==========
========== ==========
Per share:
Net income per share $ 0.15 $ 0.16 $
0.47 $ 0.29
========== ==========
========== ==========
Average number of shares
outstanding 14,587,480 14,533,044
14,584,738 14,519,091
========== ==========
========== ==========
<FN>
The accompanying notes are an integral part of the financial
statements.
</TABLE>
<PAGE>
<TABLE>
HEALTH EQUITY PROPERTIES INCORPORATED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED
JUNE 30, 1994 AND 1993
(unaudited)
<CAPTION>
Paid in
Common Capital in
Retained Treasury Total
Stock Excess of Par
Earnings Stock Equity
<S> <C> <C> <C>
<C> <C>
Balance,
January 1, 1993 $ 145,050 $ 85,997,667 $
- - -- $ -- $ 86,142,717
Issuance of 78,104 shares
of common stock, net
of issuance costs 781 692,476
- - -- -- 693,257
Net income for the
six months ended
June 30, 1993 -- --
4,231,922 -- 4,231,922
Cash dividends declared
at $0.49 per share -- (2,894,655)
(4,231,922) -- (7,126,577)
_________ ___________
___________ __________ __________
Balance,
June 30, 1993 $ 145,831 $ 83,795,488 $
- - -- $ -- $ 83,941,319
========= ===========
=========== ========== ==========
Balance,
January 1, 1994 $ 145,831 $ 81,108,412 $
- - -- $ (16,735) $ 81,237,508
Issuance of 82,727 shares
of common stock, net
of issuance costs 827 430,981
- - -- -- 431,808
Net income for the
six months ended
June 30, 1994 -- --
6,868,712 -- 6,868,712
Cash dividends declared
at $0.49 per share -- (297,030)
(6,868,712) -- (7,165,742)
________ ____________
__________ ___________ ___________
Balance,
June 30, 1994 $ 146,658 $ 81,242,363 $
- - -- $ (16,735) $ 81,372,286
======== ===========
=========== ========== ===========
<FN>
The accompanying notes are an integral part of
the financial statements.
</TABLE>
<PAGE>
<TABLE>
HEALTH EQUITY PROPERTIES INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE AND SIX MONTHS ENDED
JUNE 30, 1994 AND 1993
(unaudited)
Increase (Decrease) in Cash and Cash Equivalents
<CAPTION>
Three Months
Three Months Six Months Six Months
Ended
Ended Ended Ended
June 30,
June 30, June 30, June 30,
1994
1993 1994 1993
____________
____________ ____________ ____________
<S> <C> <C>
<C> <C>
Net Income: $ 2,171,600 $
2,255,193 $ 6,868,712 $ 4,231,922
____________
____________ ____________ ____________
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 1,116,756
1,141,163 2,280,939 2,271,837
Amortization 468,338
471,171 994,914 940,369
Gain on sale --
- - -- (2,590,418) --
Other noncash items 24,911
- - -- 24,911 --
(Increase) decrease in rent receivable (83,651)
135,793 (217,141) 323,742
Increase (decrease) in accrued interest
expense 30,389
66,115 (62,366) 17,991
Increase in prepaid expenses (89,749)
(25,503) (158,089) (82,788)
Other 43,095
12,660 (16,322) (221,576)
___________
__________ _________ __________
Total adjustments 1,510,089
1,801,399 256,428 3,249,575
___________
__________ _________ __________
Net cash provided by operating
activities 3,681,689
4,056,592 7,125,140 7,481,497
___________
__________ _________ __________
Cash flows from investing activities:
(Purchase) sale of nursing home properties --
(5,000) 9,685,127 (5,000)
Improvements to nursing home properties (256,002)
(327,208) (1,022,205) (508,813)
Other (7,463)
138,560 16,291 190,962
___________
_________ _________ _________
Net cash provided (used)
by investing activities (263,465)
(193,648) 8,679,213 (322,851)
___________
_________ _________ _________
Cash flows from financing activities:
Proceeds of debt 106,094
3,315,155 780,930 3,315,155
Repayment of debt (74,483)
(1,586,621) (4,708,460) (1,671,127)
Other (261,231)
(439,882) (250,542) (529,849)
Proceeds of stock issuance, net --
88,257 -- 88,257
Dividends paid (3,573,071)
(3,553,721) (7,145,474) (7,107,442)
___________
__________ __________ ___________
Net cash used by financing activities (3,802,691)
(2,176,812) (11,323,546) (5,905,006)
___________
__________ __________ ___________
Net increase (decrease) in
cash and cash equivalents (384,467)
1,686,132 4,480,807 1,253,640
Cash and cash equivalents at
beginning of period 11,137,427
5,839,329 6,272,153 6,271,821
___________
__________ __________ __________
Cash and cash equivalents at end of period $ 10,752,960 $
7,525,461 $ 10,752,960 $ 7,525,461
===========
=========== =========== ===========
Interest expense paid was $590,293 and $1,381,040 for the three
and six months ended June 30, 1994, respectively. Interest paid
was $615,946 and $1,310,721 for the same periods of 1993,
respectively.
<FN>
continued.....
<PAGE>
continued from preceding page
Supplemental schedule of non cash financing activities:
During the six months ended June 30, 1994, senior convertible
debentures of $455,000 were converted to 82,727 shares of
common stock and unamortized loan costs of $23,192 were
reclassified to paid in capital.
On April 28, 1994, the FHA Section 232 loans, used to refinance
and rehab the Company's two North Carolina personal care
facilities, were replaced by permanent FHA loans. The loans
total $5,456,500, bear interest at 8.25% annually, self-
amortize over 40 years and are nonrecourse and non-callable.
Nursing home properties were (purchased) sold as follows:
1994 1993
____________ _____________
Fair value of assets
(purchased) sold $ 10,100,000 $ (4,760,000)
Debt assumed 4,150,000
Stock issued 605,000
Selling expenses (414,873) --
____________ ____________
$ 9,685,127 $ (5,000)
============ =============
<FN>
The accompanying notes are an integral part of
the financial statements.
</TABLE>
<PAGE>
HEALTH EQUITY PROPERTIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The financial statements of Health Equity Properties Incorporated
("the Company"), included herein have been prepared for
submission to the Securities and Exchange Commission on Form 10-
Q. The financial statements were prepared by management without
audit, and include all adjustments which are, in the opinion of
management, necessary for a fair presentation of the results of
operations for the six months ended June 30, 1994. The financial
statements were prepared in accordance with generally accepted
accounting principles, however, certain information and note
disclosures normally included have been condensed or omitted
pursuant to the rules and regulations of the Securities and
Exchange Commission. Management believes that the disclosures in
the financial statements are adequate to make the information
presented not misleading. The financial statements should be
read in conjunction with the Company's 1993 Annual Report filed
with the Securities and Exchange Commission on Form 10-K. The
results of operations for the six months ended June 30, 1994, are
not necessarily indicative of the results for a full year.
1. Related Party Transactions
Alden Management Services, Inc. ("Alden"), which leases four
properties, is wholly owned by a director of the company. Alden
paid base rent of $1,846,842 and $2,202,343 for each of the six
months ended June 30, 1994 and 1993, respectively. Alden has a
note outstanding with the Company, with a balance at June 30,
1994 of $476,438 and at December 31, 1993 of $479,316. For the
six months ended June 30, 1994 and 1993, Alden overage rents were
estimated to be $93,460 and $48,888, respectively.
The Company sold one of its Alden leased properties to an Alden
affiliate on March 16, 1994. The property, having a net book
value of $7,094,709, was sold for $10,100,000 resulting in a gain
of $2,590,418 after selling expenses of $414,873. Net proceeds
from the sale were $9,685,127.
2. Commitment
The Company has committed to lend an aggregate of $2,890,000 to
Complete Care, one of the Company's lessees, under two separate
loan commitments. The first loan in the amount of $1,510,000
will be secured by a first mortgage on Complete Care's Heartland
of Elizabeth facility which is a 67 bed nursing home in
Elizabeth, Kentucky. The second loan in the amount of
$1,380,000 will be secured by a first mortgage on Complete Care's
Heartland of Lexington facility which is a nursing home in
Lexington, Kentucky. Both loans will accrue interest at a rate
of 11.63% per annum and will have a term of 25 years. The
Company will also receive additional interest to the extent that
gross revenues exceed gross revenues for a defined base year in
an amount equal to seven percent of such increase. While it is
anticipated that the loans will close in the third quarter of
1994, the commitments are subject to satisfactory documentation.
3. Proposed Merger
On June 17, 1994, the Company entered into a definitive merger
agreement with Omega Healthcare Investors, Inc. ("Omega"),
pursuant to which the Company would be merged into Omega. The
merger is subject to certain conditions, including the approval
of the transaction by the shareholders of the Company and by the
shareholders of Omega. Upon consummation of the merger, each
outstanding share of the Company's common stock will be converted
into the right to receive .393 shares (the "Exchange Ratio") of
Omega common stock. The Exchange Ratio was determined by
dividing the cumulative average closing price per share of the
Company's common stock on the New York Stock Exchange for the ten
trading days ending June 15, 1994 by the cumulative average
closing price per share of Omega's common stock for the same
period. The Company will incur certain costs relating to the
merger for legal, accounting, financial advisory, printing and
other services estimated at approximately $3 million, most of
which will be incurred whether or not the merger is consummated.
As a result of entering into the definitive merger agreement
described above, the Company ceased work on or about July 7, 1994
relating to a potential sale of 45 of the Company's properties
located in Indiana . The Company has incurred certain costs
relating to the proposed transaction, including $1.8 million in
compensation costs, pursuant to the Company's 1994 compensation
goals, and approximately $300,000 in transactional costs, most of
which are anticipated to be expensed during the third quarter of
1994.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Health Equity Properties Incorporated ("Company") operates as a
real estate investment trust (REIT) for federal income tax
purposes.
RESULTS OF OPERATIONS
The Company is the lessor of 73 nursing homes and three personal
care facilities. Rental income, which includes base and
additional rent, accounts for substantially all of the Company's
income and is derived from the leases of the Company's
facilities. The leases have a base rate, with some provisions
for rental increases. For the six months ended June 30, 1994,
the Company had base rental income of $8,615,408 compared to
$8,592,807 for the same period of 1993. The increase is due to
the purchase of a 106 bed adult assisted living facility in
Florida in June 1993, and corresponding rent increases due to
improvements made on existing properties. However, the increase
is offset by a decrease in base rent for the second quarter of
1994 due to the sale of one of the Company's Alden Management
Services, Inc. ("Alden") leased properties on March 16, 1994.
The Company anticipates that revenues from base rent will
continue to be lower in the third quarter of 1994; however,
interest income is expected to be higher in the third quarter due
to the investment in mortgage loans discussed below in further
detail in Liquidity and Capital Resources.
In June 1993, the Company entered into new leases on its two
North Carolina personal care facilities with the current lessee.
The Company and the lessee agreed to rehab the properties with
part of the proceeds of a Federal Housing Administration Section
232 loan. The details of the loan are discussed below. Under
the terms of the new leases, between March 1, 1993 and the
scheduled completion of the rehab, February 1994, the rent
remained the same as the rent at the end of the previous lease
term. The improvements are completed and the annual base rent
has increased by approximately 45% from $594,000 to $860,000.
The initial term of the new leases is for 10 years, expiring
February 2003 and includes provisions for additional rent.
Additional rent was $824,710 for the six months ended June 30,
1994, up from $766,808 for the same period of 1993. In the
normal course of business, additional rent is estimated and
accrued by the Company at the end of each quarter and payments
are received in the following quarter. Leases with respect to 66
of the 76 properties provide additional rent based on revenues
from operations of the facility. Additional rent under all such
leases range from 5.5% to 7% of gross revenues attributable to
such property in excess of gross revenues of such property earned
during the base period, subject to certain limitations. Alden's
gross revenues from public pay patients are excluded from the
above calculation. Instead, additional rent from public pay
revenues is equal to 7% of the increase in public pay revenues
over the preceding year. Alden's public pay revenues are treated
differently due to reimbursement policies in Illinois. Due to
the timing of Illinois' reimbursements, Alden's additional rent
paid to the Company will tend to fluctuate. In 1993, Alden's
additional rent represented 14% of the Company's total additional
rent. Due to the sale discussed above, Alden's additional rent
is anticipated to be lower in 1994. Leases with respect to 7 of
the properties provide for additional rent based on increases in
the Cost of Living Index multiplied by the base rent, subject to
a maximum of 3% over the prior year's total rent paid. With
respect to the remaining 3 leases, the base rent increases by 6%
annually in lieu of additional rent.
The gain on sale of $2,590,418 for the six months ended June 30,
1994 is due to the sale on March 16, 1994 of one of the Company's
Alden leased properties. The sales price was $10.1 million, with
net proceeds of approximately $9.7 million. Proceeds of
approximately $4.5 million were used to repay debt and the
remaining proceeds will be used for general corporate purposes.
The sale will not affect REIT status, that is, the Company's
historical dividend rate will continue to be sufficient to assure
that 95% of the Company's taxable income is distributed to its
shareholders. Also, the Company does not anticipate that the
gain will generate taxes for the Company due to loss
carryforwards and the special treatment of dividends by REITs.
In Indiana, the State published new proposed rules governing
Medicaid reimbursement on or about July 1, 1994. The proposed
rules became effective on August 9, 1994. The application of the
new rules could result in reduced Medicaid reimbursements to some
providers and the Company understands that the providers intend
to challenge the new rules in Federal Court. Leases with respect
to four of the Company's facilities in Indiana leased by Res-
Care, Inc. contain provisions permitting the terms and conditions
of the lease to be renegotiated in the event a change in Medicaid
reimbursement has a material and adverse effect on the economic
feasibility of the lease agreements. Because of the newness and
complexity of the new rules, the Company is unable to assess at
this time whether or not the impact of the new rules, if
implemented, would permit Res-Care to reduce its rent under the
foregoing lease provision. The Company does not anticipate at
this time, however, that any rent reduction would be material to
the Company's gross revenues.
Other income for the six months ended June 30, 1994 was $292,124,
up from $228,340 for the same period of 1993. Other income is
primarily interest income on the Company's cash reserves and
notes receivable. The increase in other income is due to
increased interest income from cash reserves. Cash reserves were
higher in 1994 due to the sale of the Alden property.
Interest expense for the six months ended June 30, 1994 was
$1,318,674, compared with $1,328,712 for the same period of 1993.
The decrease in interest expense is due primarily to the
conversion of $455,000 of the Company's 14% Senior Convertible
Redeemable Debentures offset by an increase in interest expense
due to the June 1993 Florida acquisition and the FHA refinancings
discussed below. The Company has limited exposure to rising
interest rates since most debt has fixed rates and no debt
matures until 2000. The mortgage assumed in the June 1993
acquisition, however, is an adjustable rate mortgage, with an
adjustment scheduled June 1996.
Amortization of capitalized expenses was $994,914 for the six
months ended June 30, 1994 up from $940,369 for the same period
of 1993. The increase is due to the increase in loan costs
associated with the FHA refinancings. Depreciation expense for
the six months ended June 30, 1994 was $2,280,939 compared to
$2,271,837 for the same period of 1993. The increase is due to
the Company's purchase of one nursing home and improvements made
to the Company's existing homes. Administrative and other
expense was $859,421for the six months ended June 30, 1994
compared to $815,115 for the same period of 1993. Administrative
and other expense is anticipated to be higher in 1994 over 1993
due to the increase in securities expense associated with the
increased shares outstanding and increased expenses related to
the Company's terminations of potential acquisitions, under the
terms of the merger agreement discussed below.
For the six months ended June 30, 1994, the Company had net
income of $6,868,712 or $0.47 per share compared to net income of
$4,231,922 or $0.29 per share for the same period of 1993. Net
income from operations, excluding the gain from sale of
$2,590,418 or $0.18 per share, was $4,278,294 or $0.29 per share.
For the six months ended June 30, 1994, the Company generated
funds from operations of $7,579,058 compared to $7,444,128 for
the same period of 1993. Funds from operations is defined by the
National Association of Real Estate Investment Trusts ("NAREIT"),
as net income (computed in accordance with generally accepted
accounting principles) less gains or plus losses from debt
restructuring and sales of property, plus depreciation and
amortization expenses. Thus, funds from operations does not
include the funds generated from the sale of the Alden leased
property. Net cash from operations was $7,125,140 for the six
months ended June 30, 1994, down from $7,481,497 for the same
period of 1993. Net cash provided by operating activities is
funds from operations adjusted by changes in certain balance
sheet accounts, such as accrued interest. The decrease in net
cash provided by operating activities is due primarily to the
timing of additional rent receipts.
On June 17, 1994 the Company entered into a definitive merger
agreement with Omega Healthcare Investors, Inc. ("Omega"),
discussed below, pursuant to which the Company would be merged
into Omega. As a result of entering into the merger, the Company
terminated certain activities relating to a potential sale of 45
of the Company's Indiana properties. The termination process of
this transaction was completed on or about July 6, 1994. The
Company has incurred certain costs relating to the proposed
transaction, including $1.8 million in compensation costs and
approximately $300,000 in transactional costs, most of which are
anticipated to be expensed and paid during the third quarter of
1994. Due to these expenses, net income, funds from operations
and cash provided by operating activities will be materially
impacted in the third quarter of 1994.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1994, the Company had cash and cash equivalents of
$10,752,960 as compared with $6,272,153 at December 31, 1993.
The increase is due primarily to the proceeds from the sale of
the Alden leased property. The Company's cash reserves are
invested in commercial paper and bank deposits with initial
maturities of less than 90 days. The Company anticipates funding
the Complete Care mortgages in the amount of $2,890,000,
discussed below, during the third quarter of 1994. Also due to
the termination of the potential sale of Indiana properties
discussed above, approximately $2.1 million for related expenses
will be paid during the third quarter of 1994.
As of June 30, 1994, the Company had secured debt of $26,262,776,
compared with $30,190,306 at December 31, 1993. The decrease is
due to the paydown of debt from the proceeds of the sale.
Approximately $3 million and $1.5 million of the proceeds from
the sale was used to repay debt with annual interest rates of
11.25% and 12%, respectively. Due to these paydowns, the Company
no longer has any remaining balloon debt. Approximately 74% of
the Company's properties are pledged as collateral and the
secured debt is approximately 38% of the book value of the
properties. The Company had unsecured debt of $900,000 at June
30, 1994 compared to $1,355,000 at December 31, 1993. The
decrease was the result of the conversion of $455,000 of the
Company's 14% Senior Convertible Redeemable Debentures issued in
August 1990. The Company's secured debt to equity ratio is
approximately 0.3:1 at June 30, 1994 compared to 0.4:1 at
December 31, 1993.
On June 28, 1993, the Company received FHA Section 232 loans to
refinance and rehab its two North Carolina personal care
facilities. The loans total approximately $5.5 million, of which
$2.2 million was used in the rehab process. The rehab was
completed February 18, 1994 and on April 28, 1994 the
construction loans were replaced by permanent FHA loans that bear
interest at 8.25% per annum, will self-amortize over 40 years and
are nonrecourse and non-callable.
The Company has obtained a $5 million line of credit from a bank.
The three year line has an annual interest rate of prime plus
one-half percent. As of June 30, 1994 no funds have been drawn on
the line of credit.
The Company has committed to lend an aggregate of $2,890,000 to
Complete Care, one of the Company's lessees, under two separate
loan commitments. The first loan in the amount of $1,510,000
will be secured by a first mortgage on Complete Care's Heartland
of Elizabeth facility which is a 67 bed nursing home in
Elizabeth, Kentucky. The second loan in the amount of
$1,380,000 will be secured by a first mortgage on Complete Care's
Heartland of Lexington facility which is a nursing home in
Lexington, Kentucky. Both loans will accrue interest at a rate
of 11.63% per annum and will have a term of 25 years. The
Company will also receive additional interest to the extent that
gross revenues exceed gross revenues for a defined base year in
an amount equal to seven percent of such increase. While it is
anticipated that the loans will close in the third quarter of
1994, the commitments are subject to satisfactory documentation.
On June 17, 1994, the Company entered into a definitive merger
agreement with Omega, pursuant to which the Company would be
merged into Omega. The merger is subject to certain conditions,
including the approval of the transaction by the shareholders of
the Company and by the shareholders of Omega. Upon consummation
of the merger, each outstanding share of the Company's common
stock will be converted into the right to receive .393 shares
(the "Exchange Ratio") of Omega common stock. The Exchange
Ratio was determined by dividing the cumulative average closing
price per share of the Company's common stock on the New York
Stock Exchange for the ten trading days ending June 15, 1994 by
the cumulative average closing price per share of Omega's common
stock for the same period. The Company will incur certain costs
relating to the merger for legal, accounting, financial advisory,
printing and other services estimated at approximately $3
million, most of which costs will be incurred whether or not the
merger is consummated.
Under the terms of the merger agreement, the Company is
restricted in certain business activities pending consummation of
the merger, including a prohibition from pursuing any acquisition
or disposition transactions. As a result, the Company has
terminated potential acquisition discussions with several
parties. In addition, the Company terminated certain activities
relating to a potential sale of 45 of the Company's properties
located in the state of Indiana. The termination process of this
transaction was completed on or about July 6, 1994. The Company
has incurred certain costs relating to the proposed transaction,
including $1.8 million in compensation costs and approximately
$300,000 in transactional costs, most of which are anticipated to
be expensed during the third quarter of 1994.
In the event the merger is not consummated, the Company will need
substantial lead time to reactivate its acquisition activities.
In addition, because of the costs described above relating to the
merger and the termination of the proposed sale of Indiana
properties, a substantial portion of the Company's cash reserves
intended for acquisition activities may be utilized to cover the
foregoing costs. As a result, a period of time covering several
quarters of operation may be necessary before the Company's
operations return to current performance levels. Under certain
circumstances, the termination of the merger agreement would
result in the payment of a $3.75 million termination fee (the
"Termination Fee") by one party to the other. In the event the
Company was required to pay the Termination Fee to Omega, the
negative impact to the Company from a termination of the merger
agreement would be materially greater. On the other hand, a
termination resulting in the payment of the Termination Fee by
Omega to the Company would materially reduce the detrimental
impact of the termination.
All of the Company's properties are subject to net leases that
pass the responsibility of the operating expenses, taxes and
insurance, and repairs and maintenance to the lessees. Under
five of the Company's leases, in the event specified capital
improvements are made during specified terms of the lease, the
Company is responsible for the unamortized portion of the
improvements upon the termination of the lease. Based on the
Company's inspection of these properties management does not
anticipate that the Company has more than minimal exposure with
respect to these items for the foreseeable future.
The Company's internal sources of liquidity include its cash
reserves and cash flow generated from operating activities after
the payment of debt amortization, reserves for improvements and
dividends. The Company's external sources of liquidity are
provided by potential debt and equity financing. Management
believes that internal sources of liquidity are adequate to cover
the Company's anticipated needs through December 31, 1996. In
addition, because the primary responsibility for improvements to
the Company's facilities lies with the lessees, management
anticipates that reserves are adequate to cover any such needs.
The Company may be dependent upon external sources of liquidity
to satisfy obligations due beyond 1996.
The Company distributes a large portion of its cash available
from operations. Cash dividends declared equalled $3,592,671
($0.245 per share) for the second quarter of 1994. Funds from
operations were $3,781,605 while net cash provided by operating
activities was $3,682,841. The Company's pay-out ratio, that is,
the ratio of the dividend to funds from operations, was 95% for
the second quarter of 1994. To qualify as a REIT, the Company is
required to distribute at least 95% of its taxable income to
shareholders each year. The Company does not anticipate a
problem complying with this requirement for the foreseeable
future. The Company will use cash flow from operations in excess
of dividends for working capital and to retire indebtedness. The
dividends of the Company are based upon funds from operations.
As result of non-cash expenses, primarily depreciation and
amortization, funds from operations and cash distributions have
exceeded the Company's earnings and profits in past years.
Portions of the Company's dividend which are not attributable to
earnings and profits represent a return of capital and are not
subject to federal income tax to the extent they do not exceed
the shareholders' basis in their shares.
At its first quarter 1993 meeting, the Board of Directors
determined that the quarterly dividend should remain at the
current level of $0.245 per share. The Company anticipates
operations will continue to support the dividend of $0.245. A
primary objective of the Company continues to be increasing the
cash flow available for distribution on a per share basis;
maintaining the dividend at the current level would have the
benefit of reducing the Company's pay-out ratio. Under the terms
of the merger agreement, the Company may not declare its third
quarter dividend in September in accordance with its normal
schedule. If the merger is not consummated prior to November 1
(the anticipated record date for Omega's third quarter dividend),
the Company may then declare a third quarter dividend.
The Company does not anticipate that President Clinton's
healthcare plan will materially impact its nursing homes or their
operators. Nursing homes are ideally situated in the middle of
the chain of healthcare providers. As less seriously ill persons
are moved from nursing homes into facilities providing less
services (personal care or assisted living facilities) at a lower
cost, more seriously ill patients will be moved from hospitals
into nursing homes where necessary services can be provided at a
lower cost. The impact of the healthcare plan should be
favorable to the nursing home industry.
The Company's lessees occasionally have difficulties from the
problems affecting state reimbursement plans, such as inadequate
funding and artificially low reimbursement rates. In addition,
the State of Indiana recently published new rules governing
Medicaid reimbursement as discussed above under Results of
Operations. The Company does not anticipate at this time,
however, that such problems will be of sufficient impact to
impair the ability of the lessees to meet their obligations under
the leases.
INFLATION
Except for the inflationary impact on the administrative
expenses, inflation should have minimal effects on the Company.
The additional rent provided for in the leases is based on
increases in gross revenues and percentage increases in the
Consumer Price Index. Most debt has fixed rates; therefore the
increase in interest rates is not likely to have a material
impact; however, the Company does have limited exposure on the
adjustable rate mortgage assumed in 1993. The primary concern
regarding inflation and interest rate fluctuations is the ongoing
ability of the Company to purchase properties at reasonable
prices, as well as the ability of its lessees to operate the
properties in a profitable manner and the ability of the Company
to find replacement financing at similar interest rates as the
existing debt comes due.
ENVIRONMENTAL MATTERS
Pursuant to the terms of the Leases, the Company does not have
control over the operational activities of the lessees, nor does
it monitor lessees with respect to environmental matters.
Generally, the owner of real property with latent hazardous waste
problems may be liable for such problems even if such problems
were not caused by the current landowner. The Company has
obtained environmental reports from time to time covering some of
the properties. Such reports indicate that as of the date of
such reports these properties did not have any identifiable
concerns which would materially impact their value. The Company
has not obtained environmental reports with respect to its
<PAGE>
remaining properties and does not obtain environmental studies in
the ordinary course of business. Most of the leases for the
Company's facilities require the lessee to comply with applicable
laws but do not require the lessee to indemnify the Company with
respect to environmental losses. The current lease form used by
the Company, however, which has been entered into by the Company
with respect to several of its facilities, specifically requires
the lessee to indemnify the Company on environmental losses.
<PAGE>
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
As reported under Item 5 - Other Matters in the Company's Report
on Form 10-Q for the quarter ended March 31, 1994, the Company
held its Annual Meeting of Shareholders on April 28, 1994. The
description of action taken, reported in the Company's Report on
Form 10-Q dated May 13, 1994, is incorporated herein by
reference.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
None
b. Reports on Form 8-K
On April 12, 1994, the registrant electronically
filed its report on Form 8-K reporting the sale
of one facility.
On June 23, 1994, the registrant electronically
filed its report on Form 8-K reporting the
execution of a definitive merger agreement with
Omega Healthcare Investors, Inc.
<PAGE>
SIGNATURE
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 thereunto duly authorized.
HEALTH EQUITY PROPERTIES INCORPORATED
(Registrant)
By: William G. Benton
President and
Chief Executive Officer
By: Deborah O. Robinson
Chief Accounting Officer
Date: August 11, 1994
