As filed with the Securities and Exchange Commission on October 8, 1997
Registration No. 333-_______
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-11
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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ELDERTRUST
(Exact name of registrant as specified in its governing instrument)
415 MCFARLAN ROAD, SUITE 202
KENNETT SQUARE, PA 19348
(610) 925-0808
(Address of principal executive offices)
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EDWARD B. ROMANOV, JR.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
ELDERTRUST
415 MCFARLAN ROAD, SUITE 202
KENNETT SQUARE, PA 19348
(610) 925-0808
(Name and address of agent for service)
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Copies to:
J. WARREN GORRELL, JR. MICHAEL F. TAYLOR
GEORGE P. BARSNESS BROWN & WOOD LLP
HOGAN & HARTSON L.L.P. ONE WORLD TRADE CENTER
555 THIRTEENTH STREET, N.W. NEW YORK, NY 10048
WASHINGTON, D.C. 20004-1109 (212) 839-5300
(202) 637-5600
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As
soon as practicable after this Registration Statement becomes effective.
If this form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. |_|
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If this form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. |_| ___________.
If this form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. |_| ___________.
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. |_| -------------------------
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CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF CLASS AMOUNT BEING OFFERING PRICE AGGREGATE OFFERING REGISTRATION
OF SECURITIES BEING REGISTERED REGISTERED (1) PER SHARE (2) PRICE (2) FEE
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Common Shares of Beneficial Interest,
$.01 par value per share 7,820,000 $20.00 $156,400,000 $47,394
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(1) Includes 1,020,000 shares that are issuable upon exercise of the Underwriters' overallotment option.
(2) Estimated solely for the purpose of calculating the registration fee.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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EXPLANATORY NOTE
This Registration Statement contains a Prospectus relating to a public
offering in the United States and Canada (the "U.S. Offering") of an aggregate
of 5,440,000 of common shares of beneficial interest, $.01 par value per share,
of ElderTrust, a Maryland real estate investment trust (the "Common Shares"),
together with separate Prospectus pages relating to a concurrent offering
outside the United States and Canada of an aggregate of 1,360,000 Common Shares
(the "International Offering"). The complete Prospectus for the U.S. Offering
follows immediately. After such Prospectus are the following alternate pages for
the International Offering: a front cover page; an "Underwriting" section; and a
back cover page. All other pages of the Prospectus for the U.S. Offering are to
be used for both the U.S. Offering and the International Offering.
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TABLE OF CONTENTS
PAGE PAGE
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SUMMARY.....................................3 ERISA Risks.......................35
The Company...........................3 THE COMPANY............................36
Risk Factors..........................4 General...........................36
Business and Growth Strategies........6 BUSINESS AND GROWTH
The Initial Investments...............9 STRATEGIES........................37
Term Loans, Construction Loans and USE OF PROCEEDS........................39
Florida Facilities Note...........12 DISTRIBUTIONS..........................40
Construction Loan Commitments.........13 CAPITALIZATION.........................45
Structure and Formation of the DILUTION...............................46
Company ..........................13 SELECTED HISTORICAL AND PRO
The Offering..........................19 FORMA FINANCIAL INFORMATION.......48
Distributions.........................19 MANAGEMENT'S DISCUSSION
Tax Status of the Company.............20 AND ANALYSIS OF
Summary Historical, Pro Forma FINANCIAL CONDITION AND
and Estimated Financial RESULTS OF OPERATIONS.............50
Information.......................21 BUSINESS AND PROPERTIES................54
RISK FACTORS................................23 General...........................54
Substantial Dependence on Initial Investments...............55
Genesis...........................23 Lessees and Initial Properties....58
Risks Relating to Healthcare Genesis Initial Properties........58
Facilities........................23 Senior LifeChoice Corp. Initial
Absence of Arm's Length Properties........................62
Negotiations in the CKHS Initial Properties...............62
Formation Transactions............25 Other Initial Properties..............64
Real Estate Investment Risks..........25 Initial Property Acquisition
Risks Associated with Making Agreements........................65
Loans on Development Term Loans, Construction Loans
Projects..........................27 and Florida Facilities Note.......67
Debt Financing........................27 Purchase Contracts and Options
Conflicts of Interest in Business for Term Loan,
Decisions Affecting the Construction Loan and
Company...........................28 Proposed Multicare Loan
Lack of Operating History and Properties........................72
Inexperience of The Florida Facilities Note...........73
Management in the Day- Construction Loan Commitments
to-Day Operations of a and Related Purchase
REIT; Rapid Growth................29 Contracts.........................74
Risks of Limitations on Changes Mortgage Debt.........................76
in Control and of Ownership Leases ...............................76
Limit.............................29 Bank Credit Facility and Tax
Federal Income Tax Risks..............30 Exempt Financing..................81
Possible Environmental Government Regulation.................82
Liabilities.......................32 Competition...........................85
Competition...........................33 Legal Proceedings.....................85
Shortage of Qualified Healthcare Office Lease..........................85
Personnel.........................33 Employees.............................85
Board May Change Investment MANAGEMENT............................86
Policies..........................33 Trustees, Trustee Nominees And
Influence of Executive Officers Executive Officers................86
and Trustees......................33 Committees of the Board of
Dependence on Key Personnel...........33 Trustees..........................87
Immediate Dilution....................34 Compensation of the Board of
Risks of Ownership of Common Trustees..........................88
Shares............................34 Executive Compensation................88
Absence of Prior Public Market Summary Compensation Table............88
for Common Shares.................35
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Option Grants in Fiscal Year 1997.....89 CERTAIN PROVISIONS OF
1997 Share Option and Incentive MARYLAND LAW AND THE
Plan..............................89 COMPANY'S DECLARATION
Employment and Non- OF TRUST AND BYLAWS..............111
Competition Agreements............91 Classification and Removal of
Incentive Compensation................91 Board of Trustees; Other
Limitation of Liability and Provisions..................111
Indemnification...................91 Changes in Control Pursuant to
Indemnification Agreements............92 Maryland Law................112
CERTAIN RELATIONSHIPS AND Amendments to the Declaration of
RELATED TRANSACTIONS................93 Trust and Bylaws............112
STRUCTURE AND FORMATION Advance Notice of Trustee
OF THE COMPANY......................94 Nominations and New
POLICIES WITH RESPECT TO Business....................113
CERTAIN ACTIVITIES..................99 Anti-Takeover Effect of Certain
Investment Policies...............99 Provisions of Maryland
Financing Policies...............100 Law and of the
Lending Policies.................100 Declaration of Trust and
Conflict of Interest Policies....100 Bylaws......................113
Policies With Respect to Other Maryland Asset Requirements....113
Activities....................101 SHARES AVAILABLE FOR
PARTNERSHIP AGREEMENT..................102 FUTURE SALE......................114
Management.......................102 General.......................114
Sales of Assets..................102 Registration Rights...........114
Removal of the General Partner; FEDERAL INCOME TAX
Transfer of the Company's CONSIDERATIONS...................115
Interests...................102 Taxation of the Company........115
Reimbursement of the Company; Requirements for Qualification as
Transactions with the a REIT......................117
Company and its Affiliates..102 Failure of the Company to
Redemption of Units..............103 Qualify as a REIT...........124
Restrictions on Transfer of Units Taxation of Taxable U.S.
by Limited Partners.........103 Shareholders of the
Issuance of Additional Units and Company Generally...........124
Preference Units...............103 Backup Withholding for
Capital Contributions............104 Company Distributions.......125
Distributions; Allocations of Taxation of Tax-Exempt
Income and Loss.............104 Shareholders of the
Exculpation and Indemnification Company.....................126
of the Company..............104 Taxation of Non-U.S.
Amendment of the Operating Shareholders of the
Partnership Agreement.......104 Company.....................126
Term ............................105 Tax Aspects of the Company's
PRINCIPAL SHAREHOLDERS.................106 Ownership of Interests in
SHARES OF BENEFICIAL the Operating Partnership...129
INTEREST.............................107 Other Tax Consequences for the
General..........................107 Company and its
Common Shares....................107 Shareholders................130
Preferred Shares.................108 ERISA CONSIDERATIONS...............130
Power To Issue Additional Employment Benefit Plans, Tax-
Common Shares and Qualified Pension, Profit
Preferred Shares............108 Sharing or Stock Bonus
Restrictions on Ownership and Plans and IRAs...............130
Transfer....................108 Status of the Company and the
Transfer Agent and Registrar.....110 Operating Partnership
under ERISA..................131
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UNDERWRITING................................133 ADDITIONAL INFORMATION......................136
EXPERTS.....................................136 GLOSSARY....................................137
LEGAL MATTERS...............................136
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Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED OCTOBER 8, 1997
PROSPECTUS
6,800,000 COMMON SHARES
ELDERTRUSTSM
COMMON SHARES OF BENEFICIAL INTEREST
------------------------
ElderTrust (together with its subsidiaries, the "Company") has been
formed to invest in a diversified portfolio of healthcare-related real estate
and mortgages. The Company will be self-administered and self-managed and
expects to qualify as a real estate investment trust ("REIT") for federal income
tax purposes. Upon completion of this offering (the "Offering"), the Company
will invest in an initial portfolio of 21 assisted and independent living
facilities, skilled nursing facilities and medical office and other buildings,
term mortgage and construction loans totaling $19.7 million secured by six
assisted living facilities in lease-up or development and substantially all of
the economic interest in a $7.5 million second mortgage loan. The facilities and
the properties securing the loans are located in eight states in the eastern
United States. The Company has agreed or has the option to purchase the six
assisted living facilities that secure the term mortgage and construction loans,
as well as eight of the nine assisted living development and expansion projects
currently in the planning phase for which the Company will make loan commitments
totaling $53.3 million. The Company has agreed to make three additional term
mortgage and construction loans totaling $19.4 million and to purchase the
assisted living facilities securing these loans, subject to certain terms and
conditions. Approximately 48.4% of the Company's total assets upon completion of
the Offering (excluding the three additional term mortgage and construction
loans) will consist of properties leased to and loans made to consolidated
subsidiaries of Genesis Health Ventures, Inc. ("Genesis"), a leading provider of
healthcare and support services to the elderly. Subsidiaries of Genesis will
operate or manage substantially all of the properties initially being acquired
by the Company, as well as substantially all of the properties that secure the
loans being made by the Company. Approximately $79.3 million of the net proceeds
from the Offering, including initial draws under the proposed bank credit
facility, will be used to acquire properties and other assets from and to make
loans to Genesis.
All of the common shares of beneficial interest, $.01 par value per
share, of the Company (the "Common Shares") offered hereby are being sold by the
Company and will represent approximately _____% of the Company's outstanding
common equity. The remaining common equity in the Company will be beneficially
owned by officers and trustees of the Company and other continuing investors. Of
the 6,800,000 Common Shares being offered hereby, 5,440,000 shares are being
offered initially in the United States and Canada by the U.S. Underwriters and
1,360,000 shares are being offered initially outside the United States and
Canada by the International Managers. See "Underwriting."
Prior to the Offering, there has been no public market for the Common
Shares. It is currently anticipated that the initial public offering price will
be $20.00 per share. See "Underwriting" for a discussion of the factors to be
considered in determining the initial public offering price. The Company will
apply to list the Common Shares on the New York Stock Exchange.
SEE "RISK FACTORS" BEGINNING ON PAGE 23 FOR CERTAIN FACTORS RELEVANT
TO AN INVESTMENT IN THE COMMON SHARES, INCLUDING:
o The substantial dependence on a single operator in the highly regulated
healthcare industry;
o The possibility that the consideration to be paid by the Company for
the properties and other assets to be acquired by the Company may
exceed their fair market value and the absence of third-party
appraisals;
o Risks inherent in real estate investments, including illiquidity of
ownership interests, fluctuations in values of real property, defaults
under or nonrenewals of leases, timely completion of development
projects, and nonpayment of construction and mortgage loans made by the
Company, and the lack of minimum rent payments in certain of the
facility leases;
o Conflicts of interest in connection with the Company's formation,
including the receipt by trustees and officers of the Company of equity
interests, and conflicts of interest involving the Chairman of the
Board of the Company in business decisions affecting the Company;
o The Company has been recently organized and management of the Company
has no prior experience in the day-to-day operations of a REIT;
o Risks associated with rapid growth, including the ability of the
Company to manage its growth effectively;
o Exposure of the Company to possible increases in interest expense under
its proposed bank credit facility, and the possibility that the Company
may not be able to refinance outstanding debt upon maturity or that
indebtedness might be refinanced on less favorable terms;
o Limitations on shareholders' ability to change control of the Company,
including a prohibition on actual or constructive ownership of Common
Shares in excess of 8.6% of the Company's outstanding shares; and
o Taxation of the Company as a regular corporation if it fails to
qualify as a REIT.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT (1) COMPANY (2)
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Per Common Share.................... $ $ $
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Total (3)........................... $ $ $
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(1) The Company has agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act of
1933, as amended. See "Underwriting."
(2) Before deducting estimated expenses of $___________ payable by the Company.
(3) The Company has granted the U.S. Underwriters a 30-day option to purchase
up to an additional 816,000 Common Shares, and has granted the
International Managers a 30-day option to purchase up to an additional
204,000 Common Shares, on the same terms and conditions as set forth above,
solely to cover overallotments, if any. If such option is exercised in
full, the total Price to Public, Underwriting Discount and Proceeds to
Company will be $ , $ and $ , respectively. See "Underwriting."
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The Common Shares are offered by the several Underwriters, subject to
prior sale, when, as and if issued to and accepted by them, subject to approval
of certain legal matters by counsel to the Underwriters and certain other
conditions. The Underwriters reserve the right to withdraw, cancel or modify
such offer and to reject orders in whole or in part. It is expected that
delivery of the Common Shares offered hereby will be made in New York, New York
on or about , 1997.
------------------------
MERRILL LYNCH & CO.
BT ALEX. BROWN
GOLDMAN, SACHS & CO.
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THE DATE OF THIS PROSPECTUS IS , 1997.
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
<PAGE>
[INSERT MAP, CHARTS AND/OR PICTURES]
Certain persons participating in this Offering may engage in transactions that
stabilize, maintain or otherwise affect the price of the Common Shares. Such
transactions may include stabilizing, the purchase of Common Shares to cover
syndicate short positions and the imposition of penalty bids. For a description
of these activities, see "Underwriting."
Information contained in or delivered in connection with this Prospectus
contains "forward-looking statements" relating to, without limitation, future
economic performance, plans and objectives of management for future operations
and projections of revenue and other financial items, which can be identified by
the use of forward-looking terminology such as "may," "will," "should,"
"expect," "anticipate," "estimate" or "continue" or the negative thereof or
other variations thereon or comparable terminology. The cautionary statements
set forth under the caption "Risk Factors" and elsewhere in the Prospectus
identify important factors with respect to such forward-looking statements,
including certain risks and uncertainties, that could cause actual results to
differ materially from those in such forward-looking statements.
<PAGE>
SUMMARY
The following summary is qualified in its entirety by the more
detailed information included elsewhere in the Prospectus. Unless otherwise
indicated, the information contained in this Prospectus assumes that (i) the
initial public offering price is $20.00 per share, (ii) the transactions
described under "Structure and Formation of the Company" are consummated, and
(iii) the Underwriters' overallotment option is not exercised. As used herein,
(i) "Company" means ElderTrust, a Maryland real estate investment trust, and one
or more of its subsidiaries (including ElderTrust Operating Limited Partnership,
a Delaware limited partnership (the "Operating Partnership") and ET Capital
Corp., a Delaware corporation), or, as the context may require, ElderTrust only
or the Operating Partnership only and (ii) "Genesis" means Genesis Health
Ventures, Inc., a Pennsylvania corporation, and its subsidiaries that will lease
or manage a substantial portion of the properties and other assets acquired by
the Company in its formation or, as the context may require, Genesis only or
such subsidiaries of Genesis only. See "Glossary" for the meanings of other
terms used herein. The Company will be the sole general partner of, will own a
substantial majority interest in, and will conduct all of its operations
through, the Operating Partnership and its subsidiaries.
THE COMPANY
The Company has been formed to invest in a diversified portfolio of
healthcare-related real estate and mortgages. The Company will be
self-administered and self-managed and expects to qualify as a REIT for federal
income tax purposes. Upon completion of the Offering, the Company intends to
invest in an initial portfolio of 21 assisted and independent living facilities,
skilled nursing facilities and medical office and other buildings (the "Initial
Properties"), term mortgage loans (the "Term Loans") and construction loans (the
"Construction Loans") totaling $19.7 million secured by six assisted living
facilities in lease-up or development and substantially all of the economic
interest in a $7.5 million second mortgage loan (the "Florida Facilities Note").
The Company also has agreed to or has the option to purchase the six assisted
living facilities that secure the Term Loans and the Construction Loans, as well
as eight of the nine assisted living development and expansion projects
currently in the planning stage for which the Company will make loan commitments
totaling $53.3 million (the "Construction Loan Commitments"). The Company has
agreed to make three additional term mortgage and construction loans totaling
$19.4 million and to purchase the assisted living facilities securing these
loans, subject to certain terms and conditions. The Initial Properties and
properties securing the loans are located in eight states in the eastern United
States. Approximately 48.4% of the Company's total assets upon completion of the
Offering (excluding the three additional term mortgage and construction loans)
will consist of properties leased to or loans made to consolidated subsidiaries
of Genesis, a leading provider of healthcare and support services to the
elderly. Subsidiaries of Genesis will operate or manage substantially all of the
Initial Properties, as well as substantially all of the properties that secure
loans being made by the Company. For the month ended June 30, 1997, the
occupancy of the assisted and independent living facilities (excluding three
assisted living facilities in lease-up), skilled nursing facilities and medical
office and other buildings included in the Initial Properties was 88.2%, 92.9%
and 100.0%, respectively. Approximately $79.3 million of the net proceeds from
the Offering, including initial draws under a proposed bank credit facility,
will be used to acquire properties and other assets from and to make loans to
Genesis.
The Company will lease the Initial Properties pursuant to percentage
rent leases ("Percentage Rent Leases") or minimum rent leases ("Minimum Rent
Leases") (other than the medical office and other buildings, which will be
acquired by the Company subject to the existing tenant leases). Percentage Rent
Leases will be based on a specified percentage of facility revenues with no
required minimum rent. Minimum Rent Leases will provide for base rent, plus
scheduled base rent step-ups and, in the case of certain of the Minimum Rent
Leases, additional rent based upon incremental revenues over the base year. Both
types of leases are triple net leases that require the lessees to pay all
operating expenses, taxes, insurance and other costs, and have initial terms of
10 or 12 years, subject to renewal. Tenant leases of the medical office and
other buildings provide for specified annual rent, subject to increases in rent
in certain of the leases ("Fixed Rent Leases"). The Company expects to realize
an initial annual yield of approximately 10.4% on its investment in Initial
Properties that are subject to Minimum Rent Leases and an initial yield of
approximately 10.4% on its investment in Initial Properties that are subject to
Fixed Rent Leases, based upon the minimum or fixed rent provisions of those
leases. The expected initial annual yield on the Company's investment in Initial
Properties that are subject to Percentage Rent Leases also is approximately
10.4%
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based upon pro forma rent for the properties subject to such leases for
the month ended June 30, 1997, annualized. The Term Loans and Construction Loans
to be made by the Company will have fixed rates of interest based on a spread
over the three-year U.S. Treasury Note rate in effect as of the closing of the
Offering except for one Construction Loan which will have a fixed rate of
interest of 10.5%.
The Company's principal business objective is to maximize growth in
cash available for distribution and to enhance the value of its portfolio in
order to maximize total return to shareholders. The Company's business and
growth strategies to achieve this objective are: (i) to invest in a high quality
portfolio of healthcare-related properties operated or managed by established
operators or in mortgages secured by such properties located in close proximity
to complementary healthcare services and facilities; (ii) to pursue aggressively
opportunities for portfolio growth by providing traditional and innovative REIT
financing to established operators in the healthcare industry, particularly in
the fast growing assisted living segment; (iii) to provide shareholders the
opportunity for increased distributions from annual increases in rental income
and interest income and from portfolio growth; and (iv) to provide shareholders
with stock price appreciation resulting from potential increases in the value of
the Company's investments. There can be no assurance, however, that these
investment objectives will be realized.
The Company intends to focus initially on the acquisition and
financing of assisted living, independent living and skilled nursing facilities
and, to a lesser extent, medical office and other buildings, located in the
eastern United States, although the Company also may make investments in other
types of healthcare facilities and in other geographical areas. The Company
believes that there currently is significant demand for REIT financing capital
in the healthcare industry, particularly in the assisted living segment.
Annual expenditures in the assisted living industry are estimated to
exceed $16 billion in 1997. Sale/leaseback financing is generally viewed as an
effective financing tool for companies whose business includes a combination of
healthcare services and housing for the elderly. Among other benefits, the
lessee typically does not record long-term debt on its balance sheet and the
real estate depreciation expense related to owning the facility is eliminated
from the lessee's financial statements. In general, assisted living represents a
combination of housing, meals and 24-hour a day personal support services
designed to aid elderly residents with activities of daily living, such as
bathing, eating, personal hygiene, grooming and dressing. Certain assisted
living facilities may also provide assistance to residents with low acuity
medical needs, or may offer higher levels of personal assistance for incontinent
residents or residents with Alzheimer's disease or other forms of memory
impairment. In the Company's view, the assisted living industry is emerging as a
preferred alternative to meet the growing demand for a cost-effective setting in
which to care for the elderly who do not require intensive medical attention but
are unable to live independently due to physical or cognitive frailties.
Consumer preferences, the aging of the population, lengthening of life
expectancies and a corresponding larger population of frail elderly are several
factors driving the demand for assisted living.
Upon completion of the Offering, the Company expects to have a secured
bank credit facility of up to $110.0 million (the "Bank Credit Facility"), which
will be used to fund $13.2 million of the purchase price for the Initial
Properties, the Term Loans and the initial draws under the Construction Loans
($29.2 million if the Proposed Multicare Loans are made). The Bank Credit
Facility also will be used for one or more of the following purposes: (i) to
fund the remaining draws under the Construction Loans; (ii) to fund the
Construction Loan Commitments; (iii) to facilitate possible acquisitions or
future developments; (iv) to repay indebtedness; and (v) for working capital and
other general corporate purposes. The Company anticipates rapid growth and,
accordingly, may fund the purchase of additional properties and other
investments from future equity or debt financings, including mortgage
indebtedness, or by reinvestment of proceeds from the sale of properties
(subject to any required distributions under the tax requirements applicable to
REITs). The Company does not have a policy limiting the amount of indebtedness
that the Company may incur.
RISK FACTORS
An investment in the Common Shares involves various risks, and
prospective investors should carefully consider these and other matters
discussed under "Risk Factors" prior to making an investment in the Company.
Such risks include:
4
<PAGE>
o the substantial dependence on Genesis for the successful operation of the
Company's properties, since approximately 48.4 % of the Company's total
assets upon completion of the Offering will consist of properties leased
to and loans made to Genesis. Genesis will operate or manage substantially
all of the Initial Properties, as well as the properties that secure the
loans initially made by the Company. In addition, the Company will make
Construction Loan Commitments totaling $42.9 million to Genesis;
o extensive federal, state and local regulation of the healthcare industry,
including reimbursement policies, regulations concerning capital and other
expenditures, licensing and certification requirements, facility
inspections and transfer restrictions, and the possibility that the
Company will encounter delays in exercising its remedies under leases and
loans made by the Company in the event of defaults because the facility
licenses will be held by lessees or borrowers and not by the Company;
o the possibility that the consideration to be paid by the Company for the
Initial Properties and other assets being acquired by the Company may
exceed their fair market value due to the absence of arm's length
negotiations with respect to certain of the Initial Properties and the
other assets to be acquired by the Company and the absence of third-party
appraisals;
o risks inherent in real estate investments, including illiquidity of
ownership interests, fluctuations in values of real property, defaults
under or renewal or replacement of leases, timely completion of
development projects, nonpayment of construction and mortgage loans made
by the Company and potential environmental risks of owning or making loans
secured by real property, and the lack of minimum rent payments in certain
of the facility leases;
o conflicts of interest in connection with the Company's formation,
including the receipt by officers and trustees of the Company of equity
interests in the Company, and conflicts of interest involving Michael R.
Walker, Chairman of the Board of the Company and Chairman of the Board and
Chief Executive Officer of Genesis, in business decisions affecting the
Company;
o the Company has been recently organized and has no operating history; the
Company will be self-administered and self-managed, however, management of
the Company has not had prior experience in the day-to-day operation of a
REIT;
o risks associated with rapid growth, including the ability of the Company
to manage its growth effectively;
o exposure of the Company to possible increases in interest expense under
its proposed Bank Credit Facility, and the possibility that the Company
may not be able to refinance outstanding debt upon maturity or that
indebtedness might be refinanced on less favorable terms;
o the possible anti-takeover effect of the Company's ability to limit, for
purposes of maintaining its REIT status, the actual or constructive
ownership of Common Shares to 8.6% of the outstanding Common Shares and
certain other provisions contained in the organizational documents of the
Company and the Operating Partnership, any of which could have the effect
of delaying or preventing a transaction or change in control of the
Company that might involve a premium price for the Common Shares or
otherwise would be in the best interests of the Company's shareholders;
o taxation of the Company as a corporation if it fails to qualify as a REIT
for federal income tax purposes, the Company's liability for certain
federal, state and local income taxes in such event, and the resulting
decrease in cash available for distribution;
o immediate dilution of $_____ in the net tangible book value per Common
Share purchased in the Offering (based on the assumed offering price of
$20.00 per share); and
o the absence of a prior public market for the Common Shares and no
assurance that a public market will develop or be sustained.
5
<PAGE>
BUSINESS AND GROWTH STRATEGIES
The Company's principal business objective is to maximize growth in
cash available for distribution and to enhance the value of its portfolio in
order to maximize total return to shareholders. The Company's business and
growth strategies to achieve this objective are: (i) to invest in a high quality
portfolio of healthcare-related properties operated or managed by established
operators or in mortgages secured by such properties located in close proximity
to complementary healthcare services and facilities; (ii) to pursue aggressively
opportunities for portfolio growth by providing traditional and innovative REIT
financing to established operators in the healthcare industry, particularly in
the fast growing assisted living segment; (iii) to provide shareholders the
opportunity for increased distributions from annual increases in rental income
and interest income and from portfolio growth; and (iv) to provide shareholders
with stock price appreciation resulting from potential increases in the value of
the Company's investments. There can be no assurance, however, that these
investment objectives will be realized. See "Business and Growth Strategies" and
"Policies with Respect to Certain Activities."
The Company's strategy includes aligning its investments with
healthcare networks, such as the Genesis ElderCareSM Network described below,
and investing in facilities near other complementary healthcare services and
facilities. The Company believes its strategy will result in a marketing
advantage for operators of its facilities, which may result in higher occupancy
rates and revenues. Substantially all of the initial assisted and independent
living facilities and development projects are located in close proximity to
complementary healthcare services and facilities, such as skilled nursing
facilities operated by Genesis and other healthcare providers. Genesis intends
for residents of assisted living facilities owned by the Company to have access
to long-term care at Genesis-operated skilled nursing facilities located near
the assisted living facility. In addition, since all of the Initial Properties
leased to or managed by Genesis will be part of a Genesis ElderCareSM Network,
Genesis will be available to provide ancillary services needed from time to time
by residents of the facilities leased or managed by Genesis.
The Genesis ElderCareSM Network. Genesis has developed the Genesis
ElderCareSM delivery model of integrated healthcare networks to provide
cost-effective, outcomes-oriented services to the elderly. All of the Initial
Properties leased to or managed by Genesis will be part of a Genesis ElderCareSM
Network. Through these integrated healthcare networks, Genesis provides basic
healthcare and specialty medical services to more than 100,000 customers in five
regional markets in the eastern United States in which over 3 million people
over the age of 65 reside. The networks are located in five principal geographic
markets (Massachusetts/Connecticut/New Hampshire; Eastern Pennsylvania/Delaware
Valley; Southern Delaware/Eastern Shore of Maryland; Baltimore,
Maryland/Washington, D.C.; and Central Florida) and include 155 skilled nursing
facilities with approximately 21,600 beds; 16 primary care physician clinics;
approximately 96 physicians, physician assistants and nurse practitioners; 12
institutional pharmacies and five medical supply distribution centers serving
over 52,000 beds; 28 community based pharmacies; certified rehabilitation
agencies providing services through over 375 contracts; and eight home
healthcare agencies. Genesis' networks also include relationships with
healthcare providers contracting with Genesis for clinical information, managed
care expertise and brand name recognition.
In June 1997, Genesis ElderCare Acquisition Corp. ("Acquisition
Corp."), a wholly owned subsidiary of Genesis ElderCare Corp. which is owned 44%
by Genesis and owned 56% by The Cypress Group L.L.C. and TPG Partners II, L.P.,
commenced a tender offer (the "Tender Offer") for all of the outstanding shares
of common stock of The Multicare Companies, Inc. (together with its
subsidiaries, "Multicare"). Consummation of the Tender Offer is subject to,
among other things, at least a majority of the outstanding Multicare common
stock being tendered and receipt of all regulatory approvals and other consents.
As of June 30, 1997, Multicare operated, among other assets, 124 skilled nursing
facilities, 19 hospital-based subacute units and 11 assisted living facilities.
If the Tender Offer is consummated, Acquisition Corp. will be merged into
Multicare and Multicare, as the surviving entity in the merger, will become a
wholly owned subsidiary of Genesis ElderCare Corp., and all of these facilities
will be managed by Genesis and become part of the Genesis ElderCareSM Network
which will add a sixth principal geographic market (Ohio/Western Pennsylvania).
Genesis' long-term strategy is to provide comprehensive eldercare services, in
collaboration with other providers, in a managed care environment. As part of
its long term strategy, Genesis has established the Genesis ElderCareSM brand
name and has increased awareness of Genesis' eldercare services in the
healthcare market.
6
<PAGE>
The Company expects to achieve growth as follows:
Internal Growth. Management believes the Company's future internal
growth will come from (i) potentially higher occupancy and associated increased
rental income under the Percentage Rent Leases and Minimum Rent Leases due, in
part, to the ability of facility residents to participate in the Genesis
ElderCareSM Network, (ii) future price increases to facility residents and
resulting increases in rental income payable under the Percentage Rent Leases
and Minimum Rent Leases and (iii) adjustments to rents under certain of the
Fixed Rent Leases.
Growth from Draws Under Construction Loans, Construction Loan
Commitments and Facility Purchase Contracts and Options. The Company anticipates
additional growth from (i) increasing draws under the Construction Loans, which
are expected to increase from an initial $5.2 million to approximately $22.2
million in 18 months, (ii) funding of the Construction Loan Commitments, which
are expected to total approximately $44.8 million in 18 months and (iii) the
purchase and leaseback to Genesis, pursuant to purchase contracts that will be
in place as of the closing of the Offering, of the three facilities in lease-up
(the "Lease-up Assisted Living Facilities") and one of the three facilities in
development (the "Initial Assisted Living Development Projects") upon the
earlier of the maturity of the related Term Loan or Construction Loan or at such
time as the facility reaches average monthly occupancy of at least 90% for three
consecutive months ("Stabilized Occupancy"). The Company has an option to
purchase the two remaining Initial Assisted Living Development Projects for
which Construction Loans will be made at the closing of the Offering. The
Company also expects to make three additional Term Loans and Construction Loans
to Multicare and to purchase the three properties that will secure such loans,
if the Multicare acquisition occurs and certain terms and conditions are
satisfied. In addition, the Company has agreed to purchase or has the option to
purchase eight of the nine assisted living development and expansion projects
currently in the preliminary planning phase. See "Business and Properties."
External Growth. The Company's external growth strategy is to become a
significant source of healthcare industry capital. The Company intends to focus
initially on the acquisition and financing of assisted living, independent
living and skilled nursing facilities, and, to a lesser extent, medical office
and other buildings, located in the eastern United States, although the Company
may also make investments in other types of healthcare facilities and in other
geographic regions. The Company believes that there currently is significant
demand for REIT financing capital in the healthcare industry, particularly in
the assisted living segment. Annual expenditures in the assisted living industry
are estimated to exceed $16 billion in 1997, with an estimated compound annual
growth rate of 17%, which should create a significant market opportunity for
REIT financing of new assisted living facilities. The Company also intends to
offer units of limited partnership interest in the Operating Partnership
("Units") to sellers who would otherwise recognize a taxable gain upon a sale of
assets, which also may facilitate sale/leaseback transactions on a tax-deferred
basis. The Company believes that the substantial healthcare industry experience
and numerous relationships of its management and trustees will help the Company
identify, evaluate and complete additional investments.
In making future investments, the Company intends to focus on
established healthcare operators which meet the Company's standards for facility
quality, proximity to complementary healthcare services and facilities and
experience of management. In the assisted living area, the Company intends to
develop relationships with public and privately held third party operators of
assisted living facilities, many of which are known by the Company to have
significant capital requirements for assisted living projects. In the near term,
the Company anticipates that a significant portion of new investments will
involve Genesis as lessee or manager. In this regard, the Company and Genesis
have entered into an agreement for a period of three years from the closing of
the Offering (subject to annual renewal thereafter), pursuant to which Genesis
has granted the Company a right of first refusal to purchase and leaseback to
Genesis any assisted or independent living facility which Genesis determines to
sell and leaseback. The agreement also provides the Company with a right to
offer financing to Genesis and other developers of assisted and independent
living facilities which, once developed, will be operated by Genesis. The
Company believes that its agreement with Genesis will provide it with
opportunities to acquire, and finance the development of, additional assisted
and independent living facilities within the Genesis ElderCareSM healthcare
network. If the Multicare acquisition is completed, Genesis will own or operate
approximately 265 skilled nursing facilities located in 16 states, in addition
to an additional 11 assisted living facilities owned by Multicare. In turn, the
Company has provided Genesis a right of first refusal to lease or manage any
assisted or independent living facility financed or
7
<PAGE>
acquired by the Company within Genesis' markets unless the facility will be
leased or managed by the developing or selling company or an affiliate. Although
there are no current commitments or agreements to do so, the Company also may
acquire from and leaseback to Genesis or Genesis affiliates other skilled
nursing facilities in addition to the four Genesis-owned skilled nursing
facilities included in the Initial Properties.
8
<PAGE>
THE INITIAL INVESTMENTS
The following tables set forth certain information regarding the
Initial Properties, the Term and Construction Loans and the Florida Facilities
Note (collectively, the "Initial Investments"). All of the Initial Properties
will be leased to or managed by Genesis except for The Woodbridge and the
medical office and other buildings. The Company will hold a fee interest in each
of the Initial Properties except for the Windsor Clinic which is subject to a
long-term ground lease. The initial lessees include various wholly owned
subsidiaries of Genesis, Crozer/Genesis ElderCare Limited Partners
("Crozer/Genesis"), a Pennsylvania limited partnership which is owned 50% by
Genesis and 50% by Crozer-Keystone Health System, a Pennsylvania nonprofit
corporation ("CKHS"), Senior LifeChoice, LLC ("SLC"), a privately held
Pennsylvania limited liability company, or a wholly owned subsidiary of SLC, and
a wholly owned subsidiary of the Age Institute of Florida, Inc., a Florida
not-for-profit corporation ("Age Institute of Florida"). See "Business and
Properties -- Leases."
<TABLE>
<CAPTION>
INITIAL PROPERTIES
NUMBER YEAR BUILT/
PROPERTY LOCATION OF BEDS(1) OCCUPANCY(2) RENOVATED
- -------- -------- ---------- ------------ ---------
Assisted Living Facilities:
<S> <C> <C> <C> <C>
Heritage Woods Agawam, MA 122 1.6% 1997
Willowbrook Clarks Summit, PA 70 68.3 1996
Riverview Ridge Wilkes-Barre, PA 105 93.7 1993
Highgate at Paoli Pointe Paoli, PA 82 81.1 1995
The Woodbridge Kimberton, PA 90 51.7 1996
---- -----
Subtotal/Weighted Avg. 469 55.7(8)
---- -----
Independent Living Facility:
Pleasant View Concord, NH 72 89.4 1926
---- -----
Skilled Nursing Facilities(9):
Rittenhouse CC Philadelphia, PA 183 91.0 1930/1993(10)
Lopatcong CC Phillipsburg, NJ 153 95.3 1984/1992(12)
Phillipsburg CC Phillipsburg, NJ 94(13) 87.2 1930/1993(14)
Wayne NRC Wayne, PA 118 90.9 1920/1989(15)
Belvedere NRC Chester, PA 147(16) 92.2 1960/1983(17)
Chapel Manor NRC Philadelphia, PA 240 94.5 1973
Harston Hall NCH Flourtown, PA 196(18) 89.8 1977/1991(19)
Pennsburg Manor NRC Pennsburg, PA 120 96.3 1982
Silverlake NRC Bristol, PA 174 97.4 1969/1988(20)
---- ----
Subtotal/Weighted Avg. 1,425 92.9
----- -----
RENTABLE
SQ. FEET
Medical Office and Other Buildings:
Professional Off. Bldg. I Upland, PA 39,972 100.0 1977
DCMH Med. Off. Bldg.(23) Drexel Hill, PA 60,706(24) 100.0 1984/1987/1997(25)
Salisbury Med. Off. Bldg. Salisbury, MD 10,961 100.0 1984
Windsor Off. Bldg. Windsor, CT 2,100 100.0 1934/1965(27)
Windsor Clinic/Trg. Fac.(29) Windsor, CT 9,662 100.0 1996
Lacey Branch Off. Bldg. Forked River, NJ 4,100 100.0 1996
-------- -----
Subtotal/Weighted Avg. 127,501 100.0
------- -----
Total Initial Properties
</TABLE>
<TABLE>
<CAPTION>
INITIAL PROPERTIES
PURCHASE % OF INITIAL INITIAL RENT
PRICE(3) INVESTMENT LEASE TERM(4) TYPE(5) LESSEE
----------- ------------ ------------- ------- ------
Assisted Living Facilities: (IN THOUSANDS) (YEARS)
<S> <C> <C> <C> <C> <C>
Heritage Woods Agawam, MA $ 11,001 6.3% 10.0 (6) Genesis(7)
Willowbrook Clarks Summit, PA 5,894 3.4 10.0 Percentage Genesis(7)
Riverview Ridge Wilkes-Barre, PA 5,720 3.3 10.0 Percentage Genesis(7)
Highgate at Paoli Pointe Paoli, PA 11,115 6.4 10.0 Minimum Genesis(7)
The Woodbridge Kimberton, PA 11,668 6.7 10.0 Minimum SLC(7)
------ ---- ----
Subtotal/Weighted Avg. 45,398 26.1 10.0
------ ---- ----
Independent Living Facility:
Pleasant View Concord, NH 3,742 2.2 10.0 Percentage Genesis(7)
------- ---- ----
Skilled Nursing Facilities(9):
Rittenhouse CC Philadelphia, PA 8,855 5.1% 10.0 Minimum Genesis(11)
Lopatcong CC Phillipsburg, NJ 13,778 7.9 10.0 Minimum Genesis(11)
Phillipsburg CC Phillipsburg, NJ 6,266 3.6 10.0 Minimum Genesis(11)
Wayne NRC Wayne, PA 6,065 3.5 10.0 Minimum Genesis(11)
Belvedere NRC Chester, PA 8,754 5.0 12.0 Minimum Crozer/Genesis
Chapel Manor NRC Philadelphia, PA 14,689 8.4 12.0 Minimum Crozer/Genesis
Harston Hall NCH Flourtown, PA 6,849 3.9 12.0 Minimum Crozer/Genesis
Pennsburg Manor NRC Pennsburg, PA 8,755 5.0 12.0 Minimum Crozer/Genesis
Silverlake NRC Bristol, PA 8,000 4.6 10.0 Minimum Age Inst. of F1.(21)
------ ---- ----
Subtotal/Weighted Avg. 82,011 47.0 11.0
------ ---- ----
<PAGE>
REMAINING
LEASE TERM (22)
Medical Office and Other Buildings: (YEARS)
Professional Off. Bldg. I Upland, PA 4,000 2.3 1.2 Fixed Physicians
DCMH Med. Off. Bldg.(23) Drexel Hill, PA 7,923 4.6 3.9 Fixed Physicians
Salisbury Med. Off. Bldg. Salisbury, MD 1,349 0.8 1.0(26) Fixed Genesis(26)
Windsor Off. Bldg. Windsor, CT 325 0.2 5.0(28) Fixed Genesis
Windsor Clinic/Trg. Fac.(29) Windsor, CT 1,493 0.8 5.0(28) Fixed Genesis
Lacey Branch Off. Bldg. Forked River, NJ 545 0.2 18.0 Fixed Ocean FSB
----- ---- ----
Subtotal/Weighted Avg. 15,635 9.0 3.6
------- ---- ----
Total Initial Properties $ 146,786 84.3%
======= ====
</TABLE>
9
<PAGE>
<TABLE>
<S> <C>
(1) Based on the operational configuration of the facility.
(2) Represents the average occupancy for the month ended June 30, 1997. The
weighted average occupancy for each property type and for all Initial
Properties is based on the purchase prices for the Initial Properties.
(3) Does not include estimated net capitalized acquisition costs aggregating
approximately $1.0 million. Includes, for certain of the Initial
Properties, mortgage indebtedness being repaid at the closing of the
Offering and assumed mortgage indebtedness totaling $34.2 million as of
December 1, 1997. See "Use of Proceeds" and "Business and Properties --
Mortgage Debt."
(4) Represents the initial lease term under each of the leases for these
facilities, which leases will be entered into as of the closing of the
Offering. The weighted average initial lease term for each facility type is
based on the purchase prices for the facilities.
(5) For the six months ended June 30, 1997, on a pro forma basis, the lease
coverage ratios (net operating income before interest, depreciation, rent
and the subordinated portion of management fees (if any) divided by rent
payments) for the assisted living facility and four skilled nursing
facilities to be leased to Genesis under Minimum Rent Leases was 0.72x,
1.57x, 1.55x, 1.77x and 0.71x, respectively; the lease coverage ratio for
the facility to be leased to SLC under a Minimum Rent Lease was 0.09x; the
lease coverage ratios for the four facilities to be leased to
Crozer/Genesis under Minimum Rent Leases were 1.63x, 1.37x, 2.11x and
1.62x, respectively; and the lease coverage ratio for the facility to be
leased to the Age Institute of Florida under a Minimum Rent Lease was
1.38x. Lease coverage ratios are not provided for facilities that will be
subject to Percentage Rent Leases because rental revenues for those
facilities are based on a fixed percentage of the facility's revenues. See
"Business and Properties -- Leases" for additional information.
(6) Initially, rent equals a fixed base rent with no revenue participation. At
the time the facility reaches Stabilized Occupancy, the lease will
automatically convert into a Percentage Rent Lease.
(7) Genesis will guarantee the performance of its subsidiaries under the
Genesis leases. The Highgate facility initially may be leased by SLC. If
subsequently leased by a subsidiary of SLC, SLC will guarantee the
performance of its subsidiary under such lease.
(8) At June 30, 1997, Heritage Woods, Willowbrook and The Woodbridge were in
the initial lease-up phase. Excluding these facilities, the assisted living
facilities included in the Initial Properties had an average occupancy of
88.2%.
(9) "NRC" means a nursing and rehabilitation center, "NCH" means a nursing and
convalescent home and "CC" means a care center.
(10) The facility was originally built in the 1930's with two expansions in the
1970's. A renovation of interior finishes was completed in 1993. The
Company has agreed to finance an expansion of this facility to be
undertaken by Genesis. See "Business and Properties -- Construction Loan
Commitments."
(11) These facilities initially will be leased by wholly owned subsidiaries of
Genesis, and Genesis will guarantee the obligations of its wholly owned
subsidiaries under these Minimum Rent Leases. However, in the event Genesis
assigns one or more of the leases to a non-wholly owned subsidiary or a
third party, Genesis may not continue to guarantee the applicable leases.
Any such assignment of a Minimum Rent Lease would require the consent of
the Company which may not be unreasonably withheld. The Company will
evaluate the creditworthiness of any assignee in determining whether to
provide its consent. Genesis is currently negotiating an arrangement with a
Philadelphia-based hospital system. If the arrangement is negotiated
successfully, the hospital system would lease-back the Wayne skilled
nursing facility following its sale to the Company and Genesis would manage
the facility. In addition, Genesis would not guarantee the lease.
(12) This facility was originally built in 1984 with an addition of three
skilled nursing beds in 1992. The Company has agreed to finance an
expansion of this facility to be undertaken by Genesis. See "Business and
Properties -- Construction Loan Commitments."
(13) Includes 34 assisted living units.
(14) This facility was originally built during the 1930's with an addition in
1988. A renovation of interior finishes was completed in 1993.
(15) This facility is estimated to have been built circa 1920. Additions were
completed in 1966, 1974 and 1989. During 1989, there was a complete
renovation of the building.
(16) Includes 27 assisted living units.
(17) This facility was built in 1960 and was expanded in 1983.
(18) Includes 76 assisted living units.
(19) This facility was built in 1977 and was expanded in 1991.
(20) This facility opened in 1969, was expanded in 1977 and was renovated in
1988.
(21) This facility will be leased to a wholly owned subsidiary of the Age
Institute of Florida.
(22) For each building, represents the weighted average remaining lease term for
all rentable space in the applicable building as of June 30, 1997. For all
medical office and other buildings, the weighted average remaining lease
term is based on the purchase prices for the buildings.
(23) The property consists of a condominium unit containing six of the eight
floors in the building which is located on the campus of the Delaware
County Memorial Hospital ("DCMH").
(24) The DCMH Medical Office Building is currently undergoing expansion,
including an expansion of two of the six floors included in the condominium
unit which the Company will acquire. This expansion is expected to be
completed in the first quarter of 1998 and will increase the rentable
square feet in the Company's condominium unit to 65,740 square feet. All of
the rentable space to be added to the Company's condominium unit has been
pre-leased.
(25) This building was built in 1984, and a renovation of interior finishes was
completed in 1987. This building is currently undergoing expansion.
(26) Two subsidiaries of Genesis lease approximately 83% of the rentable space
in the Salisbury Medical Office Building. The remaining approximately 17%
of the rentable space in the building is leased by Quest Diagnostics, Inc.,
a corporation unaffiliated with Genesis or the Company. At the closing of
the Offering, Genesis will enter into a new lease with the Company with
respect to the space leased by Genesis in the building. Each of these
leases will have an initial term of five years, subject to renewals. The
lease with Quest Diagnostics, Inc. expires on November 30, 1997. The
Company expects to enter into a new two-year lease with Quest Diagnostics.
(27) This building was originally constructed in 1934 with an addition in 1965.
(28) At the closing of the Offering, Genesis will enter into a new lease with
the Company with respect to all of the rentable space in the Windsor Office
Building and the Windsor Clinic and Training Facility. Each of these leases
will have an initial term of five years, subject to renewals.
</TABLE>
10
<PAGE>
(29) The Windsor Clinic and Training Facility are connected to each other. The
Windsor Clinic consists of 5,490 rentable square feet, and the Windsor
Training Facility includes 4,172 rentable square feet.
11
<PAGE>
TERM LOANS, CONSTRUCTION LOANS AND FLORIDA FACILITIES NOTE
The following table sets forth certain information regarding the Term
Loans, the Construction Loans and substantially all of the economic interest in
the Florida Facilities Note. Facility developments are subject to various risks
and uncertainties. The project owner/borrowers include various wholly owned
subsidiaries of Genesis, Lake Washington, Ltd., a Florida limited partnership in
which Genesis holds a 49% interest ("Lake Washington"), wholly owned
subsidiaries of SLC and a wholly owned subsidiary of the Age Institute of
Florida. There can be no assurance that any of the Initial Assisted Living
Development Facilities that secure the Construction Loans will be completed on a
timely basis or at all. See "Risk Factors -- Risks Associated with Making Loans
on Development Projects." The Company has agreed or has the option to purchase
the six facilities that secure the Term Loans and the Construction Loans at the
end of the loan terms or at such time as each facility achieves Stabilized
Occupancy. See "Business and Properties -- Purchase Contracts and Options for
Term Loan, Construction Loan and Proposed Multicare Loan Properties" for
additional information.
<TABLE>
<CAPTION>
LOAN AMOUNT
EXPECTED TO
SECURITY PROPERTY LOCATION NUMBER OF BE FUNDED % OF INITIAL INTEREST INITIAL
- ----------------- -------- BEDs(1) AT CLOSING INVESTMENTS RATE MATURITY LOAN AMOUNT(3)
--------- ------------ ------------- -------- -------- --------------
(IN THOUSANDS) (YEARS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Term Loans - Lease-up Assisted Living
Facilities
Harbor Place Melbourne, FL 120 $ 4,728 2.7% (2) 2 $4,728
Mifflin Shillington, PA 67 5,164 3.0 (2) 2 5,164
Coquina Center Ormond Beach, FL 80 4,577 2.6 (2) 2 4,577
--- ------- ---- ------
Subtotal/Weighted Avg. 267 14,469 8.3 14,469
--- ------- ---- ------
Construction Loans - Initial Assisted Living
Development Projects:
Oaks Wyncote, PA 52 1,500 0.9 (2) 3 5,380
Montchanin Wilmington, DE 92 2,000 1.2 10.50% 3 9,500
Mallard Landing Salisbury, MD 60 1,702 1.0 (2) 3 7,564
--- ------- ---- ------
Subtotal/Weighted Avg. 214 5,202 3.1 22,444
--- ----- --- ------
Florida Facilities Note(6):
11 skilled nursing facilities Florida 1,219 7,406 4.3 13.00% 10 7,406
facilities
Total Loan Investments 1,690 27,077 15.7 $44,319
----- ------- ----- ------
Total Initial Investments $173,863 100.0%
======== =====
</TABLE>
<TABLE>
<CAPTION>
PURCHASE
DEVELOPMENT CONTRACT/ PROJECT/OWNER
STATUS OPTION BORROWER
----------- -------- -------------
<S> <C> <C> <C> <C>
Term Loans - Lease-up Assisted Living
Facilities
Harbor Place Melbourne, FL Lease-up Contract Lake Washington
Mifflin Shillington, PA Lease-up Contract Genesis (4)
Coquina Center Ormond Beach, FL Lease-up Contract Genesis (4)
Subtotal/Weighted Avg.
Construction Loans - Initial Assisted Living
Development Projects:
Oaks Wyncote, PA Constr. Contract Genesis (4)
Montchanin Wilmington, DE Constr. Option SLC (5)
Mallard Landing Salisbury, MD Zoned Option SLC (5)
Subtotal/Weighted Avg.
Florida Facilities Note(6):
11 skilled nursing facilities Florida N/A N/A Age Inst. of Fl.(7)
facilities
Total Loan Investments
Total Initial Investments
(1) Based on the operational configuration of the facility.
(2) The interests rates on these loans will be set at the time of closing of
the Offering at a fixed rate of interest equal to 400 basis points over the
then applicable three-year U.S. Treasury Note rate, except for the
Construction Loan for the Oaks development project which will have a fixed
interest rate equal to 350 basis points over the then applicable three-year
U.S. Treasury Note rate.
(3) Represents the total committed loan amount under the applicable Term Loan
or Construction Loan.
(4) The project owner/borrower of these projects will
be a wholly owned subsidiary of Genesis. Genesis will guarantee the loans
made to such subsidiaries.
(5) The project owner/borrower of these projects
will be wholly owned subsidiaries of SLC. SLC will guarantee the loans made
to such subsidiaries.
(6) See "Business and Properties -- The Florida
Facilities Note" for additional information. The amount shown in the table
represents the Company's economic interest in the Florida Facilities Note
on a pre-tax basis.
(7) This facility will be leased to a wholly owned subsidiary of the Age
Institute of Florida.
</TABLE>
The above table excludes two additional Term Loans (the "Proposed
Multicare Term Loans") and one Construction Loan (the "Proposed Multicare
Construction Loan," and, together with the Proposed Multicare Term Loans, the
"Proposed Multicare Loans") totaling $19.4 million which the Company expects to
make to wholly owned subsidiaries of Multicare. Multicare will guarantee 20% of
the principal amount of such loans. See "Business and Properties -- Proposed
Multicare Term Loans" and "-- Proposed Multicare Construction Loan."
12
<PAGE>
CONSTRUCTION LOAN COMMITMENTS
In addition to the foregoing, the Company has entered into
Construction Loan Commitments totaling $42.9 million with Genesis and $10.4
million with SLC to provide financing for an additional nine assisted living
development and expansion projects which are in the planning stage. The resident
capacity of these facilities is expected to total approximately 700 to 800.
Eight of these projects will be owned by subsidiaries of Genesis and one will be
owned by a subsidiary of SLC. The Company's obligation to fund the Construction
Loan Commitments for these projects is subject to a number of conditions,
including receipt by Genesis and SLC of all necessary zoning, land use,
building, occupancy, licensing and other required governmental approvals and
authorizations. The Company has contracted to purchase the projects to be owned
by Genesis. See "Business and Properties -- Construction Loan Commitments and
Related Purchase Contracts." There can be no assurance that any of these
development projects will be completed on a timely basis or at all. See "Risk
Factors -- Risks Associated with Making Loans on Development Projects."
STRUCTURE AND FORMATION OF THE COMPANY
Company Structure. At the completion of the Offering all of the
Company's assets will be owned by, and its operations conducted through, the
Operating Partnership and its subsidiaries. The Company will be the sole general
partner of the Operating Partnership and will contribute the net proceeds of the
Offering to the Operating Partnership in exchange for a number of Units equal to
the number of Common Shares sold in the Offering.
Formation of the Company. The formation transactions ("Formation
Transactions") include the following transactions which will have occurred prior
to the Closing of the Offering:
o ElderTrust Realty Group, Inc., a Maryland corporation owned by Messrs.
Michael R. Walker, Chairman of the Board of Trustees of the Company and
Chairman of the Board and Chief Executive Officer of Genesis, and Edward
B. Romanov, Jr., President and Chief Executive Officer and a trustee of
the Company and until recently a Senior Vice President of Genesis, was
formed in June 1997 as the organizational general partner of the Operating
Partnership. The Operating Partnership was formed in July 1997. The
organizational limited partners of the Operating Partnership were Mr.
Romanov, D. Lee McCreary, Jr., Vice President and Chief Financial Officer
of the Company, and ET Partnership, a Pennsylvania general partnership.
The partners of ET Partnership consist of Genesis, Mr. Romanov and MGI
Limited Partnership, a Delaware limited partnership whose general partner
is a corporation owned by Mr. Walker and whose limited partners consist of
Mr. Walker and other executive officers of Genesis.
o The Company was formed in September 1997.
o ET Capital Corp. was formed as a Delaware corporation. The Operating
Partnership owns all of the nonvoting stock of ET Capital Corp.
(representing a 95% equity interest) and Mr. Romanov owns all of the
voting stock of ET Capital Corp. (representing a 5% equity interest).
o The Operating Partnership entered into purchase agreements to acquire for
cash from Genesis and certain other persons their direct or indirect
interests in certain of the 21 Initial Properties and, through ET Capital
Corp., substantially all of the economic interest in the Florida
Facilities Note.
o The Operating Partnership entered into contribution agreements to acquire
for Units from certain other persons (the "Continuing Investors") the
remaining interests in the Initial Properties.
o The Operating Partnership agreed to make Term Loans and a Construction
Loan secured by four assisted living facilities in lease-up or development
to Genesis (including a Term Loan for a facility in which Genesis has a
49% interest), and to acquire the four facilities that secure such loans
at the end of the loan term or at such time as each such facility reaches
Stabilized Occupancy.
13
<PAGE>
o The Operating Partnership agreed to make Construction Loans secured by two
facilities to subsidiaries of SLC, and entered into option agreements
granting it an option to acquire from such subsidiaries of SLC for cash
the facilities that secure such loans at the end of the loan term or at
such time as each such facility reaches Stabilized Occupancy.
o The Operating Partnership has made Construction Loan Commitments with
respect to nine assisted living development and expansion projects in the
planning phase. Pursuant to these Construction Loan Commitments, the
Operating Partnership will agree to purchase for cash eight of these
projects which are owned by Genesis upon the earlier of the maturity of
the related loan or at such time following completion of development as
each such facility reaches Stabilized Occupancy.
o The Operating Partnership agreed to make the Proposed Multicare Loans
secured by three properties in lease-up or development and to purchase the
assisted living facilities securing these loans, subject to certain terms
and conditions.
The following transactions will occur at or immediately prior to the closing of
the Offering:
o The Company will be admitted to the Operating Partnership as an additional
general partner, and ElderTrust Realty Group, Inc. will withdraw as a
general partner of the Operating Partnership.
o The Company will sell 6,800,000 Common Shares in the Offering and will
contribute the net proceeds therefrom to the Operating Partnership in
exchange for Units.
o The Operating Partnership will consummate the acquisition of the Initial
Properties, the funding of the Term Loans and the initial draws under the
Construction Loans and the purchase of substantially all of the economic
interest in the Florida Facilities Note by investing an aggregate amount
of approximately $199.0 million in the form of (i) approximately $139.6
million in cash paid to Genesis and certain other investors to purchase
certain of the Initial Properties or interests therein, to fund the Term
Loans and to acquire the Florida Facilities Note, (ii) ___________ Units
issued to the Continuing Investors to purchase interests in certain of the
Initial Properties, (iii) approximately $7.5 million in cash paid to
lenders to repay mortgage indebtedness secured by certain of the Initial
Properties, (iv) approximately $13.2 million in cash drawn under the Bank
Credit Facility and paid to Genesis and certain other investors to
purchase certain of the Initial Properties or interests therein and to
fund the initial draws under the Construction Loans and (v) approximately
$34.2 million in assumed mortgage indebtedness secured by certain of the
Initial Properties. Subsequent advances under the Construction Loans, the
funding of the Construction Loan Commitments and the subsequent purchases
of the Lease-up Assisted Living Facilities and the Initial Assisted Living
Development Project owned by Genesis, and of the two remaining Initial
Assisted Living Development Projects owned by subsidiaries of SLC, if the
Company elects to purchase such facilities, also will be made through
borrowings under the Bank Credit Facility. In addition, if certain terms
and conditions are satisfied, the Company will fund the Proposed Multicare
Term Loans and the initial draw under the Proposed Multicare Construction
Loan, as well as subsequent advances under the Proposed Multicare
Construction Loan and the subsequent purchases of the assisted living
facilities that secure the Proposed Multicare Loans, if the Company elects
to purchase such facilities, through borrowings under the Bank Credit
Facility.
o Messrs. Walker and Romanov will purchase the interest of Genesis in ET
Partnership at a purchase price equivalent to $_____ per Unit. ET
Partnership will be liquidated and Messrs. Walker and Romanov and MGI
Limited Partnership will receive direct interests in the Operating
Partnership in respect of their respective interests in ET Partnership.
o The Operating Partnership will be recapitalized to reflect the ownership
of interests in the Operating Partnership by the Company, the Continuing
Investors, Messrs. Walker, Romanov and
14
<PAGE>
McCreary and MGI Limited Partnership, and the Operating Partnership will
issue Units to each of its partners to represent these interests. The
Units issued to Mr. Walker and to Mr. Romanov in respect of the Genesis
interest in ET Partnership purchased by Messrs. Walker and Romanov prior
to the liquidation of ET Partnership will be exchanged for Common Shares
on a one-for-one basis.
o Mr. Walker will enter into a non-competition agreement with the Company
(which will not limit in any way any activities related to Mr. Walker's
employment by or interest in Genesis), and Mr. Romanov will enter into an
employment and non-competition agreement with the Company. See "Management
-- Employment and Non-Competition Agreements."
o The Operating Partnership will acquire all of the assets and liabilities
of ElderTrust Realty Group, Inc., which will consist of a lease, a bank
account and certain contract rights and obligations, for cash in the
amount of $100,000. ElderTrust Realty Group, Inc. will then be dissolved.
o As a result of the foregoing transactions, the Company will own
___________ Units, which will represent an approximate ______% interest in
the Operating Partnership after the Offering.
No third-party determination of the value was sought or obtained in
connection with the acquisition by the Company of the Initial Properties, the
Term Loans, the Construction Loans or substantially all of the economic interest
in the Florida Facilities Note. There can be no assurance that the aggregate
value of the cash and Units received by the participants in the Formation
Transactions does not exceed the fair market value of the properties and other
assets acquired by the Company.
Benefits to Related Parties. Genesis and certain affiliates of the
Company will realize certain material benefits in connection with the Formation
Transactions, including the following:
o Genesis will receive $60.6 million in cash from the Company for the nine
Initial Properties or interests therein transferred by Genesis to the
Company in the Formation Transactions. The estimated purchase price for
these facilities and interests is $61.1 million, including $500,000 of
assumed indebtedness. The aggregate book value reflected on Genesis'
financial statements of the Initial Properties to be acquired from Genesis
as of June 30, 1997 was approximately $41.3 million. The Company does not
believe that the book values of the Initial Properties being acquired from
Genesis (which reflect the historical cost of such Initial Properties, net
of accumulated depreciation, where applicable) are equivalent to the fair
market values of such Initial Properties.
o Genesis or an entity in which Genesis owns a 49% interest will receive
$16.0 million in cash from the Company as a result of the funding of the
Term Loans and the initial draw under one of the Construction Loans to be
made by the Company. The Company will be obligated to fund approximately
$3.9 million in subsequent advances under the Construction Loan made to
Genesis.
o The Company also agreed to purchase from Genesis for cash two Lease-up
Assisted Living Facilities and the Initial Assisted Living Development
Project owned by Genesis. The estimated aggregate purchase price of these
facilities is $20.1 million.
o If certain terms and conditions are satisfied, Multicare, in which Genesis
will own indirectly 44% of the interests, will receive approximately $15.9
million in cash from the Company as a result of the funding of the
Proposed Multicare Term Loans and the initial draw under the Proposed
Multicare Construction Loan by the Company. In addition, if such terms and
conditions are satisfied, the Company will be obligated to fund
approximately $3.5 million in subsequent advances under the Proposed
Multicare Construction Loan, and the Company will acquire options to
purchase from Multicare for cash the assisted living facilities that
secure the Proposed Multicare Loans for an estimated aggregate purchase
price of $23.8 million.
15
<PAGE>
o The Company has made Construction Loan Commitments to Genesis totaling
$42.9 million for eight assisted living development and expansion projects
which are owned by Genesis and which are in the planning stage. Pursuant
to these Construction Loan Commitments, the Operating Partnership will
agree to purchase for cash these projects from Genesis upon the earlier of
the maturity of the related loan or at such time following completion of
development as each such project reaches Stabilized Occupancy. The
estimated aggregate purchase price of these facilities upon completion of
development is $50.3 million.
o As a result of the funding by the Company of the initial draw under the
Construction Loan for one of the Initial Assisted Living Development
Projects, Genesis will receive approximately $2.0 million from a
subsidiary of SLC as a repayment by such subsidiary of SLC of a
construction mortgage loan made by Genesis to such subsidiary of SLC with
respect to such Initial Assisted Living Development Project.
o Genesis will receive $7.5 million from ET Capital Corp. as payment of the
purchase price for the Florida Facilities Note.
o As a result of the repayment of debt secured by certain of the Initial
Properties or Lease-up Assisted Living Facilities, Genesis will be
released from guarantees of such indebtedness totaling $4.8 million.
o It is estimated that Genesis will receive approximately $2.0 million in
cash from the Company as reimbursement for expenses incurred by Genesis on
behalf of the Company in connection with the Formation Transactions.
o Genesis will receive $___________ in cash or notes from Messrs. Walker and
Romanov for the interest owned by Genesis in ET Partnership. Mr. Walker
and Mr. Romanov will receive ___________ Units in respect of this interest
upon recapitalization of the Operating Partnership, which Units will be
exchanged for Common Shares on a one-for-one basis substantially
simultaneously with the Closing of the Offering.
o Mr. Walker will receive cash distributions totaling approximately
$___________ from certain entities in which he owns interests and which
own three of the Initial Properties. Mr. Walker also will receive a direct
or indirect interest in ___________ Units in exchange for his ownership
interests in certain of the Initial Properties that are not owned by
Genesis. Such Units, together with Mr. Walker's interest in the Units to
be distributed to MGI Limited Partnership upon the recapitalization of the
Operating Partnership, will have a total value of approximately $_______
million based on the assumed initial public offering price of the Common
Shares. In addition, Mr. Walker will receive approximately $1.9 million in
cash from the Company as repayment of indebtedness. The aggregate book
value as of June 30, 1997 of Mr. Walker's ownership interests in the
Initial Properties being transferred to the Company in which he holds
interests was approximately negative $251,000.
o Messrs. Romanov and McCreary will receive a total of ___________ Units
upon the recapitalization of the Operating Partnership (not including the
Units distributed to Mr. Romanov with respect to the Operating Partnership
interest acquired by Mr. Romanov from Genesis), which Units will have a
total value of approximately $_______ million based on the assumed initial
public offering price of the Common Shares.
o Mr. Walker and Mr. Romanov each will receive $50,000 in cash (representing
a return of their initial investment) indirectly from the Operating
Partnership upon the dissolution of ElderTrust Realty Group, Inc.
following the sale by ElderTrust Realty Group, Inc. of all of its assets
and liabilities to the Operating Partnership.
16
<PAGE>
o Kent P. Dauten, a trustee nominee, will receive a cash distribution
totaling approximately $___________ from one of the entities in which he
owns interests and which owns one of the Initial Properties. He also will
receive an indirect interest in ___________ Units in exchange for his
ownership interests in certain of the Initial Properties that are not
owned by Genesis. Such Units will have a total value of approximately
$___________ based on the assumed initial public offering price of the
Common Shares. The aggregate book value as of June 30, 1997 of Mr.
Dauten's ownership interests in the Initial Properties being transferred
to the Company in which he holds interests was approximately negative
$63,000.
o Three other executive officers of Genesis will receive direct or indirect
interests in ___________ Units in exchange for their ownership interests
in certain of the Initial Properties that are not owned by Genesis. Such
Units will have a total value of approximately $___________ based on the
assumed initial public offering price of the Common Shares. The aggregate
book value as of June 30, 1997 of the three executive officers' ownership
interests in the Initial Properties being transferred to the Company in
which they hold interests was approximately negative $80,000. In addition,
these three executive officers and another executive officer of Genesis
will have an interest in the Units to be distributed to MGI Limited
Partnership upon the recapitalization of the Operating Partnership, which
interest will consist of ___________ Units having a total value of
approximately $___________ based on the assumed initial public offering
price of the Common Shares.
o The Company will issue and sell to Mr. Romanov 200,000 Common Shares in a
private placement at a per share purchase price equal to the initial
public offering price. Mr. Romanov will pay for such shares with a 10-year
recourse promissory note, with interest only payable until maturity at an
annual rate of 7%.
o The three trustee nominees will each receive an award of 2,500 Common
Shares each under the Company's 1997 Share Option and Incentive Plan. The
Company also will grant options to purchase 7,500 Common Shares to each of
the three trustee nominees of the Company under the Company's 1997 Share
Option and Incentive Plan. The options will have an exercise price equal
to the initial public offering price and will vest over three years.
o The Company will grant to Messrs. Walker, Romanov and McCreary options to
purchase 150,000 Common Shares, 300,000 Common Shares, and 25,000 Common
Shares, respectively, under the Company's 1997 Share Option and Incentive
Plan. The options will have an exercise price equal to the initial public
offering price. The options to be granted to Mr. Walker will vest over
three years, one-half of the options to be granted to Mr. Romanov will
vest immediately and one-half will vest over three years and the options
to be granted to Mr. McCreary will vest over five years.
o Mr. Romanov will enter into an employment and non-competition agreement
with the Company. Mr. Walker will enter into a non-competition agreement
with the Company. See "Management -- Employment and Non-Competition
Agreements."
o Commencing 14 months after the Offering, Messrs. Dauten, Walker, Romanov
and McCreary will have registration rights with respect to the Common
Shares issued to them and that may be issued to them in exchange for Units
they receive in the Formation Transactions, as well as, in the case of
Messrs. Walker and Romanov, with respect to the Common Shares to be
acquired by them upon the exchange of the Units distributed to them in
respect of the interest in ET Partnership purchased by them from Genesis.
17
<PAGE>
Organization Chart. As a result of the Offering and the Formation
Transactions, the structure of the Company and the ownership of equity in the
Company will be as shown in the following chart:
SHAREHOLDERS:
% PUBLIC SHAREHOLDERS
% OTHER SHAREHOLDERS (1)
|
|
ELDERTRUST
----------
|
General partner
interest (0.1%)
Mr. Romanov Limited partner Continuing Investors (2)
| interest(____%) |
| | |
| | |
Voting Stock | Limited partner
(5% of equity) | interests (____%)
| | /
| | /
| ELDERTRUST /
| OPERATING /
| LIMITED PARTNERSHIP
| / --------------------
| / |
| Nonvoting Stock / |
| (95% of equity (3)) |
| / |
ET Capital Corp. |
| |
| |
| Initial Properties, Property-Owning
Florida Facilities Subsidiaries, Term Loans, Construction
Note Loans and Construction Loan
Commitments
-------------------------------------
- --------------------------------
(1) Includes (i) 100 Common Shares issued at the time of the Company's
formation, (ii) ___________ Common Shares to be acquired by Messrs. Walker
and Romanov upon exchange of certain Units received by them following the
liquidation of ET Partnership, (iii) 200,000 Common Shares to be issued and
sold to Mr. Romanov in a private placement and (iv) Common Share awards
totaling 2,500 shares each to be made upon completion of the Offering to
the Company's three trustee nominees under the Company's 1997 Share Option
and Incentive Plan. See "Structure and Formation of the Company."
(2) Includes ___________ Units to be issued to Messrs. Romanov and McCreary and
MGI Limited Partnership in connection with the Formation Transactions.
(3) The Operating Partnership also owns a promissory note of ET Capital Corp.
with an initial principal balance of approximately $5.6 million. As a
result of the Operating Partnership's ownership of nonvoting stock and debt
of ET Capital Corp., the Company, through the Operating Partnership,
expects to receive most of the after-tax economic benefits of ET Capital
Corp. See "Business and Properties -- The Florida Facilities Note."
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<PAGE>
THE OFFERING
All of the Common Shares offered hereby are being offered by the
Company.
<TABLE>
<CAPTION>
<S> <C>
Common Shares Offered by the Company.................. 6,800,000 shares
Common Shares Outstanding After the Offering (1) ___________ shares
Common Shares and Units Outstanding
After the Offering (1)(2)............................. ___________ shares and Units
Use of Proceeds....................................... To acquire certain of the Initial Properties and
substantially all of the economic interest in
the Florida Facilities Note, to fund Term Loans
and Construction Loans, to repay mortgage
indebtedness secured by certain of the Initial
Properties and Lease-up Assisted Living
Facilities and for working capital and other
general corporate purposes.
Proposed NYSE Symbol.................................. "ETT"
- ----------
(1) Includes (i) 100 Common Shares issued at the time of the Company's
formation, (ii) ___________ Common Shares to be acquired by Messrs. Walker
and Romanov upon exchange of certain Units received by them following the
liquidation of ET Partnership, (iii) 200,000 Common Shares to be issued and
sold to Mr. Romanov in a private placement and (iv) Common Share awards
totaling 2,500 shares each to be made to the Company's three trustee
nominees under the Company's 1997 Share Option and Incentive Plan upon
completion of the Offering. See "Structure and Formation of the Company."
(2) Includes ___________ Units to be issued to Messrs. Romanov and McCreary and
MGI Limited Partnership in connection with the Formation Transactions. All
Units are exchangeable on a one-for-one basis for Common Shares or, at the
option of the Company, cash, subject to certain exceptions and limitations.
Excludes ___________ Common Shares reserved for issuance pursuant to the
1997 Share Option and Incentive Plan.
</TABLE>
DISTRIBUTIONS
Subsequent to the completion of the Offering, the Company intends to
make regular quarterly distributions to the holders of its Common Shares. The
initial distribution, covering a partial quarter commencing on the date of
completion of the Offering and ending on December 31, 1997, is expected to be
$____ per share, which represents a pro rata distribution based on a full
quarterly distribution of $___ per share and an annual distribution of $______
per share (or an annual distribution rate of _______%). The Company does not
intend to reduce the expected distribution per share if the Underwriters'
overallotment option is exercised. The following discussion and the information
set forth in the table and footnotes below should be read in conjunction with
the Pro Forma Estimated Revenues Less Estimated Expenses and notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" included elsewhere in this
Prospectus.
The Company intends initially to distribute annually approximately
____% of estimated Cash Available for Distribution based upon the assumed
initial public offering price of $20.00 per share. The estimate of Cash
Available for Distribution for the 12 months following the closing of the
Offering is based upon pro forma Funds from Operations for the 12 months ended
June 30, 1997, adjusted for certain known events and/or contractual commitments
that either have occurred or will occur as of the date of closing of the
Offering (including giving effect to the use of the net proceeds from the
Offering described elsewhere herein as of such date) and (ii) for certain items
not in accordance with Generally Accepted Accounting Principles ("GAAP")
consisting of (A) revisions to estimated rent revenues from a GAAP basis to
amounts currently being paid or due from lessees or
19
<PAGE>
tenants, (B) pro forma amortization of financing costs and (C) pro forma
amortization of organization costs. No effect was given to any changes in
working capital resulting from changes in current assets and current liabilities
(which changes are not anticipated to be material) or the amount of cash
estimated to be used for (i) investing activities (other than for medical office
building tenant improvements and purchases of office equipment) and (ii)
financing activities (other than scheduled loan principal payments on existing
indebtedness). The estimate of Cash Available for Distribution is being made
solely for the purpose of setting the initial distribution and is not intended
to be a projection or forecast of the Company's results of operations or its
liquidity, nor is the methodology upon which such estimate was made necessarily
intended to be a basis for determining future distributions. Future
distributions by the Company will be at the discretion of the Board of Trustees.
There can be no assurance that any distributions will be made or that the
estimated level of distributions will be maintained by the Company.
The Company anticipates that its distributions will exceed earnings
and profits for federal income tax reporting purposes due to non-cash expenses,
primarily depreciation and amortization, to be incurred by the Company.
Therefore, it is expected that approximately ____% (or $____ per share) of the
distributions anticipated to be paid by the Company for the 12-month period
following the completion of the Offering will represent a return of capital for
federal income tax purposes and in such event will not be subject to federal
income tax under current law to the extent such distributions do not exceed a
shareholder's basis in his Common Shares. The nontaxable distributions will
reduce the shareholder's tax basis in the Common Shares and, therefore, the gain
(or loss) recognized on the sale of such Common Shares or upon liquidation of
the Company will be increased (or decreased) accordingly. The percentage of
shareholder distributions that represents a nontaxable return of capital may
vary substantially from year to year.
The Code generally requires that a REIT distribute annually at least
95% of its net taxable income (excluding any net capital gain). See "Federal
Income Tax Consequences--Requirements for Qualification as a REIT--Annual
Distribution Requirements." The estimated Cash Available for Distribution is
anticipated to be in excess of the annual distribution requirements applicable
to REITs under the Code. Under certain circumstances, the Company may be
required to make distributions in excess of Cash Available for Distribution in
order to meet such distribution requirements. For a discussion of the tax
treatment of distributions to holders of Common Shares, see "Federal Income Tax
Consequences."
TAX STATUS OF THE COMPANY
The Company intends to elect to be taxed as a REIT under Sections 856
through 860 of the Internal Revenue Code of 1986, as amended (the "Code"),
commencing with its taxable year ending December 31, 1997, and believes its
organization and proposed method of operation will enable it to meet the
requirements for qualification as a REIT. To maintain REIT status, an entity
must meet a number of organizational and operational requirements. In addition,
in order to maintain its qualification as a REIT under the Code, the Company
generally will be required each year to distribute at least 95% of its net
taxable income. As a REIT, the Company generally will not be subject to federal
income tax on net income it distributes currently to its shareholders. If the
Company fails to qualify as a REIT in any taxable year, it will be subject to
federal income tax at regular corporate rates. See "Federal Income Tax
Considerations -- Taxation of the Company -- Failure to Qualify" and "Risk
Factors -- Tax Risks -- Failure to Qualify as a REIT." Even if the Company
qualifies for taxation as a REIT, the Company will be subject to certain
federal, state and local taxes on its income and property.
20
<PAGE>
SUMMARY HISTORICAL, PRO FORMA AND ESTIMATED FINANCIAL INFORMATION
The following table sets forth financial information for the Company
which is derived from the Balance Sheet and the Pro Forma Balance Sheet and
Statements of Estimated Revenues Less Estimated Expenses included elsewhere in
this Prospectus. The adjustments for the Offering assume an initial public
offering price of $20.00 per share and that the Underwriters' overallotment
option is not exercised.
Pro forma estimated revenues less estimated expenses is presented for
the year ended December 31, 1996, and the six months ended June 30, 1997, as if
the Offering and the acquisitions of the Initial Investments and related
transactions had occurred, and as if the respective leases had been in effect at
January 1, 1996. The pro forma balance sheet data is presented as of June 30,
1997, as if the Offering and the acquisitions of the Initial Investments and
related transactions had occurred, and as if the respective leases had been in
effect at that date. The pro forma and estimated information incorporates
certain assumptions that are included in the notes to the Pro Forma Balance
Sheet and Statements of Estimated Revenues Less Estimated Expenses included
elsewhere in this Prospectus. The pro forma information does not purport to
represent what the actual financial position or results of operations of the
Company would have been as of or for the periods indicated nor does it purport
to represent the financial position or results of operations for any future
period.
<PAGE>
<TABLE>
<CAPTION>
WITHOUT PROPOSED MULTICARE LOANS WITH PROPOSED MULTICARE LOANS
--------------------------------- ------------------------------
PRO FORMA AT PRO FORMA AT PRO FORMA AT PRO FORMA AT
OR FOR THE SIX OR FOR THE OR FOR THE SIX OR FOR THE
MONTHS ENDED YEAR ENDED MONTHS ENDED YEAR ENDED
HISTORICAL(1) JUNE 30, 1997 DECEMBER 31, 1996 JUNE 30, 1997 DECEMBER 31, 1996
------------- ------------- ----------------- ------------- -----------------
<S> <C> <C> <C> <C> <C>
ESTIMATED REVENUES LESS (dollars in thousands, except per share data)
ESTIMATED EXPENSES:
Revenues $ - $ 8,278 $ 14,752 $ 8,641 $ 14,847
Estimated revenues less
estimated expenses after
minority interest - 2,776 3,814 2,900 3,845
Estimated revenues less
estimated expenses per share -
Common shares outstanding 100
PRO FORMA BALANCE SHEET DATA:
Initial Properties $ - $ 140,908 N/A $ 140,908 N/A
Investment in ET Capital Corp. - 7,406 N/A 7,406 N/A
Loans receivable - 13,647 N/A 23,096 N/A
Other assets - 3,641 N/A 3,641 N/A
Total assets - 178,927 N/A 188,376 N/A
Mortgages payable - 34,391 N/A 34,391 N/A
Bank Credit Facility - 13,224 N/A 22,673 N/A
Minority interest in Operating Partnership -
Total shareholders' equity 100 121,240 N/A 121,240 N/A
OTHER DATA:
Funds from Operations (2) $ - $ 4,799 $ 7,597 $ 4,929 $ 7,630
Weighted average number of
Common Shares and Units
outstanding 100
- ----------
(1) The Company was formed on September 23, 1997 and was capitalized with the
issuance of 100 Common Shares for a purchase price of $100.
(2) The White Paper on Funds from Operations approved by the Board of Governors
of the National Association of Real Estate Investment Trusts ("NAREIT") in
March 1995 defines "Funds from Operations" as net income (loss) (computed
in accordance with GAAP), excluding gains (or losses) from debt
restructuring and sales of properties, plus real estate related
depreciation and amortization and after adjustments for unconsolidated
partnerships and joint ventures ("Funds from Operations"). The Company
believes that Funds from Operations is helpful to investors as a measure of
the
</TABLE>
21
<PAGE>
performance of an equity REIT because, along with cash flow from operating
activities, financing activities and investing activities, it provides
investors with an indication of the ability of the Company to incur and
service debt, to make capital expenditures and to fund other cash needs.
The Company computes Funds from Operations in accordance with standards
established by NAREIT which may not be comparable to Funds from Operations
reported by other REITs that do not define the term in accordance with the
current NAREIT definition or that interpret the current NAREIT definition
differently than the Company. Funds from Operations does not represent cash
generated from operating activities in accordance with GAAP and should not
be considered as an alternative to net income (determined in accordance
with GAAP) as an indication of the Company's financial performance or to
cash flow from operating activities (determined in accordance with GAAP) as
a measure of the Company's liquidity, nor is it indicative of funds
available to fund the Company's cash needs, including its ability to make
cash distributions.
22
<PAGE>
RISK FACTORS
An investment in the Common Shares involves various risks. Prospective
investors should carefully consider the following information in conjunction
with the other information contained in this Prospectus before making a decision
to purchase Common Shares in the Offering.
SUBSTANTIAL DEPENDENCE ON GENESIS
Approximately 48.4% of the Company's total assets upon completion of
the Offering will consist of Initial Investments leased to and loans made to
Genesis. Genesis will operate or manage substantially all of the Initial
Properties, as well as substantially all of the properties that secure loans
being made by the Company upon completion of the Offering. In addition, the
Company will make Construction Loan Commitments totaling $42.9 million to
Genesis. The Company's revenues, therefore, will depend in significant part upon
the revenues derived from, and Genesis' successful operation of, the facilities
leased to or managed by Genesis, as well as the ability of Genesis to complete
successfully and on schedule the development projects securing Construction
Loans and Construction Loan Commitments made to Genesis.
RISKS RELATING TO HEALTHCARE FACILITIES
Government Regulation of Healthcare Industry. The long-term care
segment of the healthcare industry is highly regulated. Operators of skilled
nursing facilities are subject to federal, state and local laws relating to the
delivery and adequacy of medical care, distribution of pharmaceuticals,
equipment, personnel, operating policies, fire prevention, rate-setting and
compliance with building and safety codes and environmental laws. Operators of
skilled nursing facilities also are subject to periodic inspection by
governmental and other authorities to assure continued compliance with various
standards, the continued licensing of the facility under state law,
certification under the Medicare and Medicaid programs and the ability to
participate in other third party payment programs. Many states have adopted
Certificate of Need or similar laws which generally require that the appropriate
state agency approve certain acquisitions of skilled nursing facilities and
determine that a need exists for certain bed additions, new services and capital
expenditures or other changes prior to beds and/or new services being added or
capital expenditures being undertaken. The failure to obtain or maintain any
required regulatory approvals or licenses could prevent an operator from
offering services or adversely affect its ability to receive reimbursement for
services and could result in the denial of reimbursement, temporary suspension
of admission of new patients, suspension or decertification from the Medicaid or
Medicare program, restrictions on the ability to acquire new facilities or
expand existing facilities and, in extreme cases, revocation of the facility's
license or closure of a facility. Federal law also imposes civil and criminal
penalties for submission of false or fraudulent claims, including nursing home
bills and cost reports, to Medicare or Medicaid. There can be no assurance that
lessees of skilled nursing facilities owned by the Company, or the Age Institute
of Florida as the obligor on the Florida Facilities Note, or the provision of
services and supplies by such lessees or the Age Institute of Florida, will meet
or continue to meet the requirements for participation in the Medicaid or
Medicare programs or state licensing authorities or that regulatory authorities
will not adopt changes or new interpretations of existing regulations that would
adversely affect the ability of lessees or borrowers to make rental or loan
payments to the Company.
Both Medicare and the Pennsylvania Medicaid program (which constituted
14.1% and 62.4% of the revenues for the month ended June 30, 1997, respectively,
of the nine skilled nursing facilities included in the Initial Properties)
impose limitations on the amount of reimbursement available for capital-related
costs, such as depreciation, interest and rental expenses, following a change of
ownership, including a sale and leaseback transaction. Under currently
applicable Medicare reimbursement policies, the amount of Medicare reimbursement
available to a skilled nursing facility for rental expenses following a sale and
leaseback transaction may not exceed the amount that would have been reimbursed
as capital costs had the provider retained legal title to the facility. The
Pennsylvania Medicaid program imposes a similar limitation, basing reimbursement
for capital-related costs for new owners (including rent paid by lessees) on the
appraised fair rental value of the facility to the prior owner as determined by
the Pennsylvania Department of Public Welfare. Thus, if rental expenses are
greater than the allowable capital cost reimbursement a skilled nursing facility
would have received had the sale and leaseback transaction not occurred and the
provider retained legal title, the amount of Medicare reimbursement received by
the
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provider will be limited. Medicare will begin a three-year phase out of separate
capital cost reimbursement for skilled nursing facilities beginning July 1, 1998
under provisions of the Balanced Budget Act of 1997, which establish a
prospective payment system for skilled nursing facilities that will factor
capital-related costs into the facility's per diem rates for resident care.
There can be no assurance that reimbursement of the costs of skilled nursing
facilities included in the Initial Properties under current or future
reimbursement methodologies will be adequate to cover the rental payments owed
to the Company.
Although not currently regulated at the federal level (except under
laws of general applicability to businesses, such as work place safety and
income tax requirements), assisted living facilities are increasingly becoming
subject to more stringent regulation and licensing by state and local health and
social service agencies and other regulatory authorities. In general, these
assisted living requirements address, among other things: personnel education,
training and records; facility services, including administration of medication,
assistance with self-administration of medication and limited nursing services;
monitoring of wellness; physical plant inspections; furnishing of resident
units; food and housekeeping services; emergency evacuation plans; and resident
rights and responsibilities, including in certain states the right to receive
certain healthcare services from providers of a resident's choice. In several
states, assisted living facilities also require a Certificate of Need before the
facility can be opened, expand or reduce its resident capacity or make other
significant capital expenditures. Certain of the Initial Properties are licensed
to provide independent living services which generally involve lower levels of
resident assistance. Like skilled nursing facilities and other healthcare
facilities, assisted living facilities are subject to periodic inspection by
government authorities. In most states, assisted living facilities, as well as
skilled nursing and other healthcare facilities, also are subject to state or
local building code, fire code and food service licensure or certification
requirements. Any failure by the Company's lessees or borrowers to meet
applicable regulatory requirements may result in the imposition of fines,
imposition of a provisional or conditional license or suspension or revocation
of a license or other sanctions or adverse consequences, including delays in
opening or expanding a facility. Any failure by the Company's lessees or
borrowers to comply with such requirements could have a material adverse effect
on the Company.
Healthcare operators also are subject to federal and state
anti-remuneration laws and regulations, such as the Medicare/Medicaid
anti-kickback law, which govern certain financial arrangements among healthcare
providers and others who may be in a position to refer or recommend patients to
such providers. These laws prohibit, among other things, the offer, payment,
solicitation or receipt of any form of remuneration in return for the referral
of Medicare and Medicaid patients or the purchasing, leasing, ordering or
arranging for any goods, facilities, services or items for which payment can be
made under Medicare or Medicaid. A violation of the federal anti-kickback law
could result in the loss of eligibility to participate in Medicare or Medicaid,
or in civil or criminal penalties. The federal government, private insurers and
various state enforcement agencies have increased their scrutiny of providers,
business practices and claims in an effort to identify and prosecute fraudulent
and abusive practices. In addition, the federal government has issued fraud
alerts concerning nursing services, double billing, home health services and the
provision of medical supplies to nursing facilities; accordingly, these areas
may come under closer scrutiny by the government. Furthermore, some states
restrict certain business corporations from providing, or holding themselves out
as a provider of, medical care. Possible sanctions for violation of any of these
restrictions or prohibitions include loss of licensure or eligibility to
participate in reimbursement programs and civil and criminal penalties. State
laws vary from state to state, are often vague and have seldom been interpreted
by the courts or regulatory agencies. There can be no assurance that these
federal and state laws will ultimately be interpreted in a manner consistent
with the practices of the Company's lessees or the Age Institute of Florida.
Reliance on Government and Other Third Party Reimbursement. Assisted
living services currently are not generally reimbursable under government
reimbursement programs, such as Medicare and Medicaid. A significant portion of
the revenue derived from the nine skilled nursing facilities included in the
Initial Properties and the 11 skilled nursing facilities securing the Florida
Facilities Note, however, is attributable to government reimbursement programs
such as Medicare and Medicaid. Future budget reductions in government-financed
programs could significantly reduce reimbursement payments, and there can be no
assurance that future payment rates will be sufficient to cover the costs of
providing services to residents of such facilities. The Medicare program is
highly regulated and subject to frequent and substantial changes. In recent
years, changes in the Medicare program have resulted in reduced levels of
payment for a substantial portion of healthcare services. There can be no
assurance that reimbursement levels will not be further reduced in future
periods. The Medicaid program is a federally-mandated, state-run program
providing benefits to low income and other eligible persons and is funded
through a
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combination of state and federal funding. The method of reimbursement for
skilled nursing care under Medicaid varies from state to state, but is typically
based on rates set by the state. Under Medicare and many state Medicaid
programs, rates for skilled nursing facilities are based on facilities costs as
reported to the applicable federal or state agency. The facilities costs for
services purchased from an organization related by ownership or control are
limited to the costs (not charges) of the related organization. Any failure to
comply with these requirements could have a variety of adverse consequences on
the operator of the skilled nursing facility, including recoupment of amounts
overpaid and other sanctions under false claim laws. Although lease and loan
payments to the Company are not directly linked to the level of government
reimbursement, to the extent that changes in these programs have a material
adverse effect on the revenues from such facilities, such changes could have a
material adverse impact on the ability of the lessees of the skilled nursing
facilities included in the Initial Properties, and the Age Institute of Florida
as the borrower under the Florida Facilities Note, to make lease and loan
payments. Healthcare facilities also have experienced increasing pressures from
private payors attempting to control healthcare costs that in some instances
have reduced reimbursement to levels approaching that of government payors.
There can be no assurance that future actions by private third party payors,
including cost control measures adopted by managed care organizations, will not
result in further reductions in reimbursement levels, or that future
reimbursements from any payor will be sufficient to cover the costs of the
facilities' operations.
Potential Delays in Substituting Lessees or Operators. A loss of
license or Medicare/Medicaid certification by a lessee of the Company or by the
Age Institute of Florida, or a default by lessees or borrowers under loans made
by the Company, could result in the Company having to obtain another lessee or
substitute operator for the affected facility or facilities. Because the
facility licenses for the Initial Properties will be held by lessees or
borrowers and not the Company and because under the REIT tax rules the Company
would have to find a new "unrelated" lessee to operate the properties, the
Company may encounter delays in exercising its remedies under leases and loans
made by the Company or substituting a new lessee or operator in the event of any
loss of licensure or Medical/Medicaid certification by a prior lessee or
operator. No assurances can be given that the Company could contract with a new
lessee or successor operator on a timely basis or on acceptable terms and a
failure of the Company to do so could have a material adverse effect on the
Company's financial condition and results of operations.
Limitation on Transfers and Alternative Uses of Healthcare Facilities.
Transfers of operations of certain healthcare facilities are subject to
regulatory approvals not required for transfers of other types of commercial
operations and other types of real estate. In addition, substantially all of the
Initial Properties are special purpose facilities that may not be easily
adaptable to non-healthcare-related uses.
Proximity to Hospitals or Other Healthcare Facilities. Many of the
assisted living facilities, skilled nursing facilities and medical office
buildings included in the Initial Properties are in close proximity to one or
more hospitals. The relocation or closure of a hospital could make the Company's
assisted living facilities, skilled nursing facility or medical office building
in such area less desirable and affect the Company's ability to renew leases and
attract new tenants. See "Business and Properties -- Government Regulation."
ABSENCE OF ARM'S LENGTH NEGOTIATIONS IN THE FORMATION TRANSACTIONS
There have been no arm's length negotiations with respect to the
valuation of certain of the Initial Properties and other assets to be acquired
by the Company and there have been no third party appraisals of any of the
Initial Properties. As a result, the consideration to be paid by the Company for
such properties and assets may exceed their fair market value and the market
value of the Common Shares held by a shareholder may exceed such shareholder's
proportionate share of the aggregate fair value of the Company's net assets. See
"Structure and Formation of the Company."
REAL ESTATE INVESTMENT RISKS
General Risks. The Initial Properties and subsequently acquired
properties, including properties subject to purchase contracts and options, will
be subject to various real estate-related risks. The acquisition of additional
properties may be subject to the ability of the Company to borrow amounts
sufficient to pay the purchase price therefor. There can be no assurance that
the value of any property acquired by the Company will appreciate or that
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the value of properties securing the Term Loans, the Construction Loans or the
Florida Facilities Note will not depreciate. Additional risks of investing in
real estate include the possibilities that the real estate will not generate
income sufficient to meet operating expenses, will generate income and capital
appreciation, if any, at rates lower than those anticipated or will yield
returns lower than those available through investment in comparable real estate
or other investments. Income from properties and yields from investments in such
properties may be affected by many factors, including changes in government
regulation (such as zoning laws), general or local economic conditions (such as
fluctuations in interest rates and employment conditions), the available local
supply of and demand for improved real estate, a reduction in rental income as
the result of the inability to maintain occupancy levels, natural disasters
(such as earthquakes and floods) or similar factors. Further, equity investments
in real estate are relatively illiquid, and, therefore, the ability of the
Company to vary its portfolio in response to changed conditions will be limited.
Risk of Uninsurable Loss. It is the intention of the Company to
secure, or to require Genesis and other lessees, tenants and borrowers to
secure, adequate comprehensive property and liability insurance that covers the
Company as well as the lessee, tenant or borrower. Certain risks may, however,
be uninsurable or not economically insurable, and there can be no assurance that
the Company or a lessee, tenant or borrower will have adequate funds to cover
all contingencies itself. Should such an uninsurable loss occur, the Company
could lose both its invested capital, including its equity interests, and any
anticipated profits relating to such property.
Lease and Loan Defaults and Failure to Renew Lease Terms. Any lease
arrangement, such as the leases between the Company and lessees and tenants of
the Initial Properties and subsequently acquired properties, creates the
possibility that a lessee or tenant may either default on the lease or fail to
exercise an option to renew the lease, and, in such event, the Company may be
unable to lease such property to another lessee or tenant on a timely basis or
at all. Even if the Company could lease such property to another lessee or
tenant, any such replacement lease may be on less favorable terms than those of
the original lease. In such an instance, the Company would continue to be
responsible for payment of any indebtedness it had incurred with respect to such
property. Any such default or non-renewal could result in a reduction in revenue
derived from the affected lease and defaults or non-renewals under several
leases at the same time or defaults under one or more of the Term Loans, the
Construction Loans, the Construction Loan Commitments (once funded) or the
Florida Facilities Note could have a material adverse effect on the Company's
financial condition and results of operations.
Risks Associated with Florida Facilities Note. The Florida Facilities
Note is non-recourse to the Age Institute of Florida and is not guaranteed by
any person or entity. Thus, in the event of a default, ET Capital Corp. will
have no recourse for satisfaction of the debt other than to look to the
collateral. Genesis holds a first priority security interest in all of the
collateral securing the Florida Facilities Note. As of the Offering, the
outstanding balance on the first-position obligation to Genesis will be in the
approximate amount of $40.0 million. In the event of a default on the $40.0
million Age Institute of Florida senior debt held by Genesis, it is possible
that if the collateral were liquidated there would be insufficient equity after
satisfaction of the $40.0 million obligation available to repay the Florida
Facilities Note. Further, the subordination agreement between Genesis and the
Age Institute of Florida relating to the Florida Facilities Note and a $2.5
million pari passu working capital term note (together, the "Subordinated
Notes") will require the Subordinated Note holders to "standstill" in their
exercise of remedies under certain circumstances. Even if the payment
obligations on the $40.0 million debt are not in default, any default on a
Subordinated Note or any other indebtedness of the Age Institute of Florida
would cause a cross default under the senior loan documents and would allow
Genesis or other holder of the $40.0 million of senior indebtedness to enforce
the standstill provisions of the subordination agreement and to foreclose upon
the $40.0 million of senior debt. The Age Institute of Florida has limited
financial resources. The principal source of repayment of the principal amount
of the Florida Facilities Note, therefore, is likely to be from a sale of the 11
skilled nursing facilities that collateralize the $40.0 million of senior debt
and the Subordinated Notes or from a refinancing of the $40.0 million of senior
debt and the Subordinated Notes. There can be no assurance that the Florida
Facilities Note will be repaid in full or that interest payments on the Note
will be paid when due. See "Business and Properties -- The Florida Facilities
Note."
Risks Associated with Percentage Rent Leases. The Percentage Rent
Leases do not require any minimum rent. The revenues to be derived by the
Company under the Percentage Rent Leases, therefore, will depend upon the
ability of Genesis as lessee to operate successfully properties subject to such
leases. See "Conflicts of Interest in Business Decisions Affecting the Company
- -- Ongoing Competition from and Conflicts with Genesis."
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Lack of Industry Diversification. While the Company is authorized to
invest in various types of income-producing real estate, its current strategy is
to acquire and hold, for long-term investment, healthcare-related properties
only. Consequently, the Company currently has chosen not to include in the
Initial Properties any significant non-healthcare related real estate assets,
and, therefore, will be subject to the risks associated with investments in a
single industry.
RISKS ASSOCIATED WITH MAKING LOANS ON DEVELOPMENT PROJECTS
The Company has agreed to make the Term and Construction Loans
totaling $36.9 million, of which $19.7 million will be funded at the closing of
the Offering. In addition, the Company has made Construction Loan Commitments
totaling $53.3 million and has agreed to fund the Proposed Multicare Loans
totaling $19.4 million, subject to certain terms and conditions. Lending on
development projects is generally considered to involve greater risks than the
purchase and leaseback of operating properties. Risks associated with such
lending activities include that development activities may be abandoned,
construction costs of a facility may exceed original estimates possibly making
the facility uneconomical, occupancy rates and rents at a completed facility may
not be sufficient to cover loan or lease payments, permanent financing may not
be available on favorable terms and construction and lease-up may not be
completed on schedule resulting in increased debt service expense and
construction costs. In addition, construction lending activities typically will
require a substantial portion of management's time and attention. Such
activities also are subject to risks relating to the borrower's inability to
obtain, or delays in obtaining, all necessary zoning, land-use, building,
occupancy and other required governmental permits and operations. Further, there
can be no assurance that any of the Term Loans, Construction Loans, the Proposed
Multicare Loans, if made, or the Construction Loan Commitments (once funded)
will be repaid.
DEBT FINANCING
Debt Financing and Existing Debt Maturities. The Company will be
subject to risks normally associated with debt financing, including the risk
that the Company's cash flow will be insufficient to pay distributions at
expected levels and meet required payments of principal and interest, the risk
that existing indebtedness on the Initial Properties or subsequently acquired
properties (which in all cases will not have been fully amortized at maturity)
will not be able to be refinanced or that the terms of such refinancing will not
be as favorable as the terms of existing indebtedness. Upon consummation of the
Offering, the Company expects to have $34.2 million of outstanding indebtedness
which will be secured by certain of the Initial Properties and an additional
$13.2 million outstanding under its Bank Credit Facility ($29.2 million if the
Company makes the Proposed Multicare Loans). See "Business and Properties --
Mortgage Debt." If principal payments due at maturity cannot be refinanced,
extended or paid with proceeds of other capital transactions, such as new equity
capital, the Company expects that its cash flow will not be sufficient in all
years to pay distributions at expected levels and to repay such maturing debt.
Furthermore, if prevailing interest rates or other factors at the time of
refinancing (such as the reluctance of lenders to make commercial real estate
loans) result in higher interest rates upon refinancing, the interest expense
relating to such refinanced indebtedness would increase, which would adversely
affect the Company's cash flow and the amount of distributions it can make to
investors. If a property or properties are mortgaged to secure payment of
indebtedness and the Company is unable to meet mortgage payments, the property
could be foreclosed by or otherwise transferred to the mortgagee with a
consequent loss of income and asset value to the Company. Finally, the fact that
a significant number of the leases that the Company has entered into and expects
to enter into in the future will not require payment of minimum rent may
adversely affect the Company's ability to obtain additional or replacement
financing in the future.
No Limitations on Indebtedness. Upon completion of the Offering, the
Company's debt to market capitalization ratio including amounts expected to be
drawn under the Bank Credit Facility is expected to be approximately ____%
(____% if the Underwriters' overallotment option is exercised in full). See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources." The Company does not have a
policy limiting the amount of debt that the Company may incur. Accordingly, the
Company could become more highly leveraged, resulting in an increase in debt
service that could adversely affect the Company's cash flow and, consequently,
the amount available for distribution to shareholders, and could increase the
risk of default on the Company's indebtedness.
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Risk of Rising Interest Rates and Variable Rate Debt. Upon
consummation of the Offering, the Company, through the Operating Partnership,
expects to enter into the Bank Credit Facility. Advances under the Bank Credit
Facility totaling $13.2 million at the Closing of the Offering ($29.2 million if
the Company makes the Proposed Multicare Loans) and further increasing as draws
are made under outstanding Construction Loans and Construction Loan Commitments
are expected to bear interest at variable rates based upon a specified spread
over the Eurodollar rate. In addition, the Company will assume debt totaling
approximately $486,000 subject to a variable interest rate. The Company, through
the Operating Partnership, may incur other variable rate indebtedness in the
future. Increases in interest rates on such indebtedness could increase the
Company's interest expense, which would adversely affect the Company's cash flow
and its ability to pay expected distributions to investors. Accordingly, the
Company may in the future engage in other transactions to further limit its
exposure to rising interest rates as appropriate and cost effective. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
Tax Exempt Financing. The Company's indebtedness includes
approximately $21.4 million in connection with tax-exempt bond financings (the
"Series 1994 Bonds" and the "Series 1995 Bonds") relating to the Highgate and
Woodbridge assisted living facilities. The underlying Series 1994 and Series
1995 Bonds are subject to various restrictions, conditions and requirements
under the Code and its implementing regulations. In addition, the Series 1994
and Series 1995 Bond financing documents impose certain requirements and
restrictions in connection with the operation of the facilities, including a
requirement that at all times at least 20% of the rental units in the facilities
will be occupied by tenants whose adjusted gross family income does not exceed
50% of the median gross income for the relevant geographic area. If these
requirements and restrictions are not complied with, the tax-exempt status of
the bonds could be terminated and/or the bond obligations under the bond
documents could be accelerated. In the event of a default under the bonds used
to finance the Highgate and Woodbridge facilities, the Company's interest in the
relevant property would be subordinate to the interests of the bondholders.
CONFLICTS OF INTEREST IN BUSINESS DECISIONS AFFECTING THE COMPANY
Failure to Enforce Terms of Agreements and Leases with Genesis.
Michael R. Walker, the Company's Chairman of the Board, is Chairman of the Board
and Chief Executive Officer of Genesis and will continue to serve in such
capacity following completion of the Offering. At June 30, 1997, Mr. Walker
beneficially owned approximately 2.2% of the outstanding common stock of
Genesis. Because he serves as Chairman of both Genesis and the Company, Mr.
Walker will have a conflict of interest with respect to his obligations as a
trustee of the Company with respect to enforcing (i) the terms of the
contribution, loan, purchase and right of first refusal agreements relating to
the various properties and other assets owned by Genesis or in which it holds
interests being transferred by it to the Company or that will be acquired by the
Company from Genesis in the future and (ii) the related leases entered into by
the Company and Genesis. The failure to enforce material terms of these
agreements and leases could result in a monetary loss to the Company, which loss
could have a material adverse effect on the Company's financial condition and
results of operations. The Company's ongoing dependence on Genesis as a lessee
and/or manager of a substantial portion of its properties may deter the Company
from vigorously enforcing the terms of such agreements and operating leases.
Edward B. Romanov, Jr., the Company's President and Chief Executive Officer and
a member of the Company's Board of Trustees, served as Senior Vice President,
Development of Genesis from June 1990 until August 1997. Mr. Romanov has a loan
outstanding from Genesis in the amount of $450,000, which he expects to repay
within 90 days of the closing of the Offering. In addition, Mr. Walker, Mr.
Dauten, a trustee nominee, and three executive officers of Genesis hold
interests in certain properties being transferred to the Company by third
parties other than Genesis.
Tax Consequences Upon Prepayment or Refinancing of Debt or Sale of
Properties. Certain Continuing Investors, including Messrs. Walker and Dauten,
may incur adverse tax consequences upon the prepayment or refinancing of certain
debt securing the Initial Properties or a sale of a property which are different
from the tax consequences to the Company and persons who purchase Common Shares
in the Offering. Consequently, such Continuing Investors may have different
objectives regarding the appropriate timing of such actions. While the Company
will have the exclusive authority under the Agreement of Limited Partnership of
the Operating Partnership (the "Operating Partnership Agreement") to determine
whether, when and on what terms to prepay or refinance debt or to sell a
property, any such decision would require the approval of the Board of Trustees.
Messrs.
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Walker and Dauten will have substantial influence with respect to any such
decision, and such influence could be exercised in a manner not consistent with
the interests of some, or a majority, of the Company's shareholders.
Conflicts Relating to the Operating Partnership. After the Offering,
the Company, as the sole general partner of the Operating Partnership, will have
fiduciary obligations to the other limited partners in the Operating
Partnership, the discharge of which may conflict with the interests of the
Company's shareholders. In addition, those persons holding beneficial interests
in Units (including Messrs. Walker, Dauten, Romanov and McCreary and the three
executive officers of Genesis), as limited partners, will have the right to vote
on amendments to the Operating Partnership Agreement (most of which require
approval by a majority in interest of the limited partners, including the
Company) and such individuals may exercise their voting rights in a manner that
conflicts with the interests of the Company's shareholders.
Ongoing Competition from and Conflicts with Genesis. The Company's
facilities (whether or not operated by Genesis) may compete with facilities
owned and operated by Genesis in certain markets. As a result, Genesis will have
a conflict of interest due to its ownership of certain competing facilities and
its operation and management of a substantial portion of the facilities owned by
the Company. Because the Percentage Rent Leases to be entered into with Genesis
provide for lower operating margins for Genesis than Minimum Rent Leases,
Genesis may also have a conflict of interest to the extent that it is involved
in the placement of private pay residents with acuity levels equally suited to
an assisted living facility or a skilled nursing facility.
LACK OF OPERATING HISTORY AND INEXPERIENCE OF MANAGEMENT IN THE DAY-TO-DAY
OPERATIONS OF A REIT; RAPID GROWTH
The Company has been recently organized and has no operating history.
The Company will be self-administered and self-managed. The Company's Board of
Trustees and executive officers will have overall responsibility for management
of the Company. Although certain of the Company's executive officers and
trustees have extensive experience in the acquisition, development and financing
of real properties and in the operation of healthcare facilities and
publicly-owned corporations, none of the management of the Company has prior
experience in operating a business in accordance with the Code requirements for
maintaining REIT qualification. Failure to maintain REIT status would have an
adverse effect on the Company's ability to make anticipated distributions to
shareholders. There can be no assurance that the past experience of management
will be appropriate to the business of the Company. See "Management." The
Company also anticipates rapid growth. The Company's ability to manage its
growth effectively will require it successfully to identify, structure and
manage new investments.
RISKS OF LIMITATIONS ON CHANGES IN CONTROL AND OF OWNERSHIP LIMIT
Limitations on Changes in Control Contained in the Declaration of
Trust and Bylaws. Certain provisions of the Company's Declaration of Trust and
Bylaws may have the effect of delaying, deferring or preventing a change in
control of the Company or other transaction that could provide the holders of
Common Shares with the opportunity to realize a premium over the then-prevailing
market price of such Common Shares. The Ownership Limit (described under "--
Possible Adverse Consequences of Ownership Limit") also may have the effect of
delaying, deferring or preventing a change in control of the Company or other
transaction even if such a change in control or transaction were in the best
interests of some, or a majority, of the Company's shareholders. The Board of
Trustees will consist of five members as of the closing of the Offering who will
be classified into three classes with each class serving a three-year term. The
staggered terms of the members of the Board of Trustees may adversely affect the
shareholders' ability to effect a change in control of the Company, even if a
change in control were in the best interests of some, or a majority, of the
Company's shareholders. See "Management -- Trustees and Executive Officers." The
Declaration of Trust authorizes the Board of Trustees to cause the Company to
issue up to 20,000,000 preferred shares of beneficial interest, $0.01 par value
per share ("Preferred Shares"), in series, and to establish the preferences,
rights and other terms of any series of Preferred Shares so issued. Such
Preferred Shares may be issued by the Board of Trustees without shareholder
approval, and the preferences, rights and other terms of any such Preferred
Shares may adversely affect the shareholders' ability to effect a change in
control of the Company, even if a change in control were in the best interests
of some, or a majority, of the Company's shareholders. See "Shares of Beneficial
Interest."
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Possible Limitations on Changes in Control Pursuant to Maryland Law.
Under provisions of the Maryland General Corporation Law, as amended ("MGCL"),
as applicable to REITs, certain "business combinations" (including certain
issuances of equity securities) between a Maryland REIT and any person who
beneficially owns ten percent or more of the voting power of the REIT's then
outstanding shares or an affiliate of the trust who, at any time within the
two-year period prior to the date in question, was the beneficial owner of ten
percent or more of the voting power of the then outstanding voting shares of
beneficial interest of the trust (an "Interested Shareholder"), or an affiliate
of the Interested Shareholder, are prohibited for five years after the most
recent date on which the Interested Shareholder becomes an Interested
Shareholder. Thereafter, any such business combination must be approved by the
affirmative vote of at least (i) 80% of all the votes entitled to be cast by
holders of the outstanding voting shares and (ii) two-thirds of the votes
entitled to be cast by holders of voting shares held by the Interested
Shareholder who is (or whose affiliate is) a party to the business combination
unless, among other conditions, the REIT's common shareholders receive a minimum
price (as defined in the MGCL) for their shares and the consideration is
received in cash or in the same form as previously paid by the Interested
Shareholder for its common shares. The Board of Trustees of the Company has not
opted out of the business combination provisions of the MGCL. Consequently, the
five-year prohibition and the super-majority vote requirements will apply to a
business combination involving the Company.
Possible Adverse Consequences of Ownership Limit. To maintain its
qualification as a REIT for federal income tax purposes, not more than 50% in
value of the outstanding shares of beneficial interest of the Company may be
owned, directly or indirectly, by five or fewer individuals (as defined in the
Code, to include certain entities). See "Federal Income Tax Considerations --
Taxation of the Company -- Requirements for Qualification." In addition, for the
Company to maintain REIT status, neither Genesis nor any shareholder who
actually or constructively owns 10% or more of the outstanding stock of Genesis
or any other tenant entity may own actually or constructively 10% or more, in
value or voting rights, of the outstanding shares of beneficial interest of the
Company. To facilitate maintenance of its qualification as a REIT for federal
income tax purposes, the Declaration of Trust generally will prohibit ownership,
directly or by virtue of the attribution provisions of the Code, by any single
shareholder of more than 8.6% of the issued and outstanding Common Shares and
generally will prohibit ownership, directly or by virtue of the attribution
provisions of the Code, by any single shareholder of more than 9.9% of the
issued and outstanding shares of any class or series of the Company's Preferred
Shares (collectively, the "Ownership Limit"). Mr. Romanov may own up to 15.0% of
the Common Shares (the "Excluded Holder Limit"). The Board of Trustees, in its
sole discretion, may waive the ownership limitations with respect to a holder if
the Board is satisfied, based on the advice of counsel or a ruling from the
Internal Revenue Service, that such holder's ownership will not then or in the
future jeopardize the Company's status as a REIT. In view, however, of the
potential risks posed to the Company if a shareholder who owned 10% or more of
the Company also were considered to own 10% or more of Genesis or any other
tenant entity, the Board of Trustees will have less flexibility, as a practical
matter, to grant waivers and exemptions than would be the case if a substantial
portion of the Company's properties were not leased to a single tenant. Absent
any such exemption or waiver, Common Shares acquired or held in violation of the
Ownership Limit will be transferred to a trust for the benefit of a designated
charitable beneficiary, with the person who acquired such Common Shares in
violation of the Ownership Limit not entitled to receive any distributions
thereon, to vote such Common Shares, or to receive any proceeds from the
subsequent sale thereof in excess of the lesser of the price paid therefor or
the amount realized from such sale. A transfer of Common Shares to a person who,
as a result of the transfer, violates the Ownership Limit may be void under
certain circumstances. See "Shares of Beneficial Interest -- Restrictions on
Ownership and Transfer." The Ownership Limit may have the effect of delaying,
deferring or preventing a change in control and, therefore, could adversely
affect the shareholder's ability to realize a premium over the then-prevailing
market price for the Common Shares in connection with such a transaction.
FEDERAL INCOME TAX RISKS
Adverse Consequences of the Company's Failure to Qualify as a REIT.
The Company intends to operate so as to qualify as a REIT under the Code,
commencing with its taxable year ending December 31, 1997. Although management
believes that the Company will be organized and will operate in such a manner,
no assurance can be given that the Company will be organized or will be able to
operate in a manner so as to qualify or remain so qualified. Qualification as a
REIT involves the satisfaction of numerous requirements (some on an annual and
some on a quarterly basis) established under highly technical and complex Code
provisions for which there are only
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limited judicial and administrative interpretations, and involves the
determination of various factual matters and circumstances not entirely within
the Company's control. For example, in order to qualify as a REIT, at least 95%
of the Company's gross income in any year must be derived from qualifying
sources, and the Company must pay distributions to shareholders aggregating
annually at least 95% of its REIT taxable income (excluding capital gains and
certain noncash income). The complexity of these provisions and of the
applicable regulations that have been promulgated under the Code (the "Treasury
Regulations") is greater in the case of a REIT, such as the Company, that holds
its assets in partnership form. No assurance can be given that legislation, new
regulations, administrative interpretations or court decisions will not
significantly change the tax laws with respect to qualification as a REIT or the
federal income tax consequences of such qualification. The Company, however, is
not aware of any pending tax legislation that would adversely affect the
Company's ability to operate as a REIT.
Hogan & Hartson L.L.P., tax counsel to the Company, has rendered an
opinion to the effect that the Company is organized in conformity with the
requirements for qualification as a REIT and its proposed method of operation
will enable it to meet the requirements for qualification and taxation as a
REIT. See "Federal Income Tax Considerations -- Taxation of the Company." Such
legal opinion, however, is based on various assumptions and factual
representations by the Company regarding the Company's business and assets and
the Company's ability to meet the various requirements for qualification as a
REIT, and no assurance can be given that actual operating results will meet
these requirements. Such legal opinion is not binding on the Internal Revenue
Service (the "IRS") or any court. Moreover, the Company's qualification and
taxation as a REIT will depend upon the Company's ability to meet (through
actual annual operating results, distribution levels and diversity of stock
ownership) the various qualification tests imposed under the Code, the results
of which will not be reviewed by tax counsel to the Company.
If the Company were to fail to qualify as a REIT in any taxable year,
the Company would be subject to federal income tax (including any applicable
alternative minimum tax) on its taxable income at regular corporate rates.
Moreover, unless entitled to relief under certain statutory provisions, the
Company also would be disqualified from treatment as a REIT for the four taxable
years following the year during which qualification was lost. This treatment
would significantly reduce the net earnings of the Company available for
investment or distribution to shareholders because of the additional tax
liability to the Company for the years involved. In addition, distributions to
shareholders would no longer be required to be made. See "Federal Income Tax
Considerations -- Taxation of the Company -- Failure of the Company to Qualify
as a REIT."
Special Considerations Related to the Nature of the Company's Assets.
The manner in which the Company will derive income from the assisted and
independent living facilities and skilled nursing facilities will be governed by
special considerations in satisfying the requirements for REIT qualification.
Because the Company would not qualify as a REIT if it directly operated an
assisted or independent living facility, or a skilled nursing facility, the
Company will lease such facilities to a healthcare provider, such as Genesis,
that will operate the facility. It is essential to the Company's qualification
as a REIT that these arrangements be respected as leases for federal income tax
purposes and that the lessees (including Genesis and SLC) not be regarded as
"related parties" of the Company (as determined under the applicable Code
provisions). See "Federal Income Tax Considerations -- Requirements for
Qualification as a REIT -- Income Tests." In the event the leases expire and are
not renewed, the Company will have to find a new "unrelated" lessee to lease and
operate the properties in order to continue to qualify as a REIT. In the event
of a default on either a lease of, or a mortgage secured by, an assisted or
independent living facility or skilled nursing facility, the Company, to
maintain its REIT qualification, would have to engage a new healthcare provider
(which could not include Genesis or its subsidiaries or SLC) to operate the
facility after the Company takes possession of the facility. This requirement
could deter the Company from exercising its remedies in the event of a default
even though such exercise otherwise would be in the Company's best interests.
Although the Company would be permitted to operate the facility for 90 days
after taking possession of the facility pursuant to applicable Treasury
Regulation without jeopardizing its REIT status, the fact that the facility
licenses will be held by lessees or borrowers may preclude the Company from
doing so under applicable healthcare regulatory requirements.
Other Tax Liabilities. Even if the Company qualifies as a REIT, it
will be subject to certain federal, state and local taxes on its income and
property and ET Capital Corp. will be subject to corporate level tax. See
"Federal Income Tax Considerations -- Other Tax Consequences for the Company and
Its Shareholders."
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POSSIBLE ENVIRONMENTAL LIABILITIES
Under federal, state and local laws and regulations relating to
protection of the environment ("Environmental Laws"), a current or previous
owner or operator of real estate may be required to investigate and clean up
hazardous or toxic substances or petroleum product releases at such property and
may be held liable to a governmental entity or to third parties for property
damage and for investigation and clean-up costs incurred by such parties in
connection with the contamination. Such laws typically impose clean-up
responsibility and liability without regard to whether the owner or operator
knew of or caused the presence of the contaminants, and the liability under such
laws has been interpreted to be joint and several unless the harm is divisible
and there is a reasonable basis for allocation of responsibility. In addition,
the owner or operator of a site may be subject to claims by third parties based
on damages and costs resulting from environmental contamination emanating from a
site.
Environmental Laws also govern the presence, maintenance and removal
of asbestos-containing building materials ("ACBM"). Such laws require that ACBM
be properly managed and maintained, that those who may come into contact with
ACBM be adequately apprised or trained and that special precautions, including
removal or other abatement, be undertaken in the event ACBM would be disturbed
during renovation or demolition of a building. Such laws may impose fines and
penalties on building owners or operators for failure to comply with these
requirements and may allow third parties to seek recovery from owners or
operators for personal injury associated with exposure to asbestos fibers.
Independent environmental consultants have conducted or updated
comprehensive environmental assessments at the Initial Properties, the Lease-up
Assisted Living Facilities and the 11 skilled nursing facilities that secure the
Florida Facilities Note. These assessments have included, at a minimum, a visual
inspection of the properties and the surrounding areas, an examination of
current and historical uses of the properties and the surrounding areas and a
review of relevant state, federal and historical documents. Where appropriate,
on a property by property basis, additional testing has been conducted,
including sampling for asbestos, for lead in drinking water, for soil
contamination where underground storage tanks are or were located or where other
past site usages create a potential for site impact, and for contamination in
groundwater.
These environmental assessments have not revealed any environmental
liabilities that the Company believes would have a material adverse effect on
the Company's business, financial condition or results of operations taken as a
whole, nor is the Company aware of any such material environmental liability.
ACBM is suspected in approximately one-third of the properties based on visual
inspection and isolated sampling. Most of these buildings contain only minor
amounts of ACBM in good condition and nearly all of it is non-friable. All ACBM
is currently being properly managed and maintained and other requirements
relating to ACBM are being followed. The presence of ACBM should not present a
significant risk as long as compliance with these requirements continues. For a
few of the Initial Properties, potential offsite sources of contamination, such
as nearby underground storage tanks ("USTs"), are noted. For some of the
properties, previous uses, such as the former presence of USTs, have been noted;
in these cases, documented USTs subject to regulatory requirements were either
removed, replaced, or otherwise brought into compliance.
The Company believes that the Initial Properties, the Lease-up
Assisted Living Facilities and the 11 skilled nursing facilities that secure the
Florida Facilities Note are in compliance in all material respects with
applicable Environmental Laws. The Company believes that the issues identified
in the environmental reports will not have a material adverse effect on the
Company if it continues to comply with Environmental Laws and with the
recommendations set forth in these reports.
Ancillary to the operation of healthcare facilities are, in various
combinations, the handling, use, storage, transportation, disposal and/or
discharge of hazardous, infectious, toxic, radioactive, flammable and other
hazardous materials, wastes, pollutants or contaminants. Such activities may
result in damage to individuals, property or the environment; may interrupt
operations and/or increase their costs; may result in legal liability, damages,
injunctions or fines; may result in investigations, administrative proceedings,
penalties or other governmental agency actions; and may not be covered by
insurance. There can be no assurance that lessees or borrowers of the Company
will not encounter such risks, and such risks may have a material adverse effect
on their ability to make lease or loan payments to the Company.
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COMPETITION
The Company will compete with other healthcare REITs, real estate
partnerships, healthcare providers and other investors, including but not
limited to banks and insurance companies, in the acquisition, leasing and
financing of healthcare facilities. Certain of these investors may have greater
resources than the Company. Genesis and other lessees operating properties that
the Company will own or that secure loans to be made by the Company compete on a
local and regional basis with operators of other facilities that provide
comparable services. Operators compete for residents based on quality of care,
reputation, physical appearance of facilities, services offered, family
preferences, physicians, staff and price. In general, regulatory and other
barriers to competitive entry in the assisted living industry are not
substantial. Moreover, if the development of new assisted living facilities
outpaces demand for these facilities in certain markets, such markets may become
saturated. Such an oversupply of facilities could cause operators of
Company-owned facilities to experience decreased occupancy, depressed margins
and lower operating results, which could have a material adverse effect on their
ability to make lease or loan payments to the Company. The Company will
purchase, or make loans with an obligation to purchase, all of the assisted
living facilities owned by Genesis as of June 30, 1997 (except for a 32-bed
facility as to which the Company will have an option to purchase at fair market
value in cash exercisable within one year after the facility reaches Stabilized
Occupancy).
SHORTAGE OF QUALIFIED HEALTHCARE PERSONNEL
The healthcare industry has at times experienced a shortage of
qualified healthcare personnel. The Company's lessees compete with other
healthcare providers and with non-healthcare providers for both professional and
non-professional employees. While the Company believes that its lessees and
borrowers have been able to retain the services of an adequate number of
qualified personnel to staff the facilities included in the Initial Properties
appropriately and maintain standards of quality care, there can be no assurance
that shortages will not in the future affect the ability of the Company's
lessees or borrowers to attract and maintain an adequate staff of qualified
healthcare personnel. A lack of qualified personnel at a facility could result
in significant increases in labor costs at such facility or otherwise adversely
affect operations at such facility. Any of these developments could adversely
affect the ability of lessees or borrowers to make required lease or loan
payments.
BOARD MAY CHANGE INVESTMENT POLICIES
The Company's Board of Trustees may change the investment and other
policies of the Company without shareholder approval. Such policy changes may
have adverse consequences to the Company.
INFLUENCE OF EXECUTIVE OFFICERS AND TRUSTEES
None of the trustees and executive officers of the Company are selling
any Common Shares in the Offering. Upon completion of the Offering, Messrs.
Walker and Romanov will beneficially own approximately _______% and _______%,
respectively, of the total issued and outstanding Common Shares and
approximately _______% and _______%, respectively of the Units (which after 14
months following completion of the Offering will be redeemable by the holder for
cash or, at the option of the Company, Common Shares on a one-for-one basis).
All trustees and executive officers as a group will beneficially own
approximately _______% of the total issued and outstanding Common Shares and
approximately _______% of the Units to be outstanding upon completion of the
Offering. Accordingly, such persons will have substantial influence on the
Company, which influence might not be consistent with the interests of other
shareholders, and may in the future have a substantial influence on the outcome
of any matters submitted to the Company's shareholders for approval if all of
their Units are exchanged for Common Shares. See "Principal Shareholders."
DEPENDENCE ON KEY PERSONNEL
The Company is dependent on the efforts of its Chairman, Mr. Walker,
and its two executive officers, Messrs. Romanov and McCreary. The loss of their
services could have an adverse effect on the operations of the Company. Mr.
Walker will enter into a non-competition agreement with the Company (which will
not limit in any
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way activities related to Mr. Walker's employment by or interest in Genesis),
and Mr. Romanov will enter into an employment and non-competition agreement with
the Company. See "Management -- Employment and Non-Competition Agreements."
IMMEDIATE DILUTION
As set forth more fully under "Dilution," the pro forma net tangible
book value per share of the assets of the Company after the Offering will be
substantially less than the estimated initial public offering price per share in
the Offering. Accordingly, purchasers of the Common Shares offered hereby will
experience immediate dilution of $_______ in the net tangible book value of the
Common Shares from the estimated initial public offering price. See "Dilution."
RISKS OF OWNERSHIP OF COMMON SHARES
Effect on Price of Common Shares Available for Future Sale. Sales of a
substantial number of restricted Common Shares, or the perception that such
sales could occur, could adversely affect prevailing market prices of the Common
Shares. Subsequent to the Offering, approximately _______ restricted Common
Shares will be issued and outstanding and _______ Units will be issued and
outstanding. The restricted Common Shares and Common Shares issued upon
redemption of Units may be sold in the public market pursuant to registration
rights (subject to the terms and conditions thereof) that the Company has
granted or pursuant to Rule 144 under the Securities Act of 1933, as amended
(the "Securities Act"). In addition, the Company intends to reserve _______
Common Shares for issuance pursuant to the Company's 1997 Share Option and
Incentive Plan, and these Common Shares will be available for sale from time to
time pursuant to exemptions from registration requirements or upon registration.
Options to purchase a total of 497,500 Common Shares are expected to be granted
to the Company's executive officers and trustees upon the completion of the
Offering. See "Management." No prediction can be made about the effect that
future sales of Common Shares will have on the market prices of the Common
Shares. See "Shares Available for Future Sale."
Effect on Common Share Price of Market Conditions. As with other
publicly traded equity securities, the value of the Common Shares will depend
upon various market conditions, which may change from time to time. Among the
market conditions that may affect the value of the Common Shares are the
following: the extent to which a secondary market develops for the Common Shares
following the completion of the Offering; the extent of institutional investor
interest in the Company; the general reputation of healthcare REITs and the
attractiveness of their equity securities in comparison to other equity
securities (including securities issued by other real estate-based companies);
the Company's financial performance; the financial performance of Genesis and
other lessees of the Company's facilities; and general stock and bond market
conditions. Although the offering price of the Common Shares will be determined
by the Company in consultation with the Underwriters, there can be no assurance
that the Common Shares will not trade below the offering price following the
completion of the Offering.
Effect on Common Share Price of Earnings and Cash Distributions. It is
generally believed that the market value of the equity securities of a REIT is
based primarily upon the market's perception of the REIT's growth potential and
its current and potential future cash distributions, whether from operations,
sales or refinancings, and is secondarily based upon the value of the underlying
assets. For that reason, Common Shares may trade at prices that are higher or
lower than the net asset value per Common Share. To the extent the Company
retains operating cash flow for investment purposes, working capital reserves or
other purposes, these retained funds, while increasing the value of the
Company's underlying assets, may not correspondingly increase the market price
of the Common Shares. The failure of the Company to meet the market's
expectation with regard to future earnings and cash distributions likely would
adversely affect the market price of the Common Shares.
Effect on Common Share Price of Market Interest Rates. One of the
factors that will influence the price of the Common Shares will be the dividend
yield on the Common Shares (as a percentage of the price of the Common Shares)
relative to market interest rates. Thus, an increase in market interest rates
may lead prospective purchasers of Common Shares to expect a higher dividend
yield, which would adversely affect the market price of the Common Shares.
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Dependence on External Sources of Capital. In order to qualify as a
REIT under the Code, the Company generally is required each year to distribute
to its shareholders at least 95% of its net taxable income (excluding any net
capital gain). See "Federal Income Tax Considerations -- Taxation of the Company
- -- Annual Distribution Requirements." Because of these distribution
requirements, it is unlikely that the Company will be able to fund all future
capital needs, including capital needs in connection with financing of
additional development projects and acquisitions, from cash retained from
operations. As a result, to fund future capital needs, the Company likely will
have to rely on third-party sources of capital, which may or may not be
available on favorable terms or at all. The Company's access to third-party
sources of capital will depend upon a number of factors, including the market's
perception of the Company's growth potential and its current and potential
future earnings and cash distributions and the market price of the Common
Shares. Moreover, additional equity offerings may result in substantial dilution
of shareholders' interests in the Company, and additional debt financing may
substantially increase the Company's leverage. See "Policies with Respect to
Certain Activities -- Financing Policies."
ABSENCE OF PRIOR PUBLIC MARKET FOR COMMON SHARES
Prior to the completion of the Offering, there has been no public
market for the Common Shares and there can be no assurance that an active
trading market will develop or be sustained or that Common Shares will be resold
at or above the assumed initial public offering price. The offering price of the
Common Shares will be determined by agreement among the Company and the
Underwriters and may not be indicative of the market price for the Common Shares
after the completion of the Offering. The market value of the Common Shares
could be substantially affected by general market conditions, including changes
in interest rates. Moreover, numerous other factors, such as governmental
regulatory action and changes in tax laws, could have a significant impact on
the future market price of the Common Shares.
ERISA RISKS
Depending upon the particular circumstances of an ERISA Plan (as
hereinafter defined), an investment by an ERISA Plan in the Common Shares may
not be appropriate under Employee Retirement Income Security Act of 1974, as
amended ("ERISA"). In deciding whether to purchase Common Shares on behalf of an
ERISA Plan, a fiduciary of an ERISA Plan, in consultation with its advisors,
should carefully consider its responsibilities under ERISA, the prohibited
transaction rules of ERISA and the Code and the effect of regulations issued by
the U.S. Department of Labor defining what constitutes assets of an ERISA Plan.
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THE COMPANY
GENERAL
The Company has been formed to invest in a diversified portfolio of
healthcare-related real estate and mortgages. The Company will be
self-administered and self-managed and expects to qualify as a REIT for federal
income tax purposes. Upon completion of the Offering, the Company intends to
invest in an initial portfolio of 21 Initial Properties, the Term Loans totaling
$14.5 million secured by three assisted living facilities in lease-up,
Construction Loans totaling $5.2 million secured by three assisted living
facilities in development and in ET Capital Corp., which will own the Florida
Facilities Note. The Company also agreed to or has the option to purchase the
six assisted living facilities that secure the Term Loans and Construction
Loans, as well as eight of the nine assisted living development and expansion
projects currently in the planning stage for which the Company will make
Construction Loan Commitments totaling $53.3 million. The Initial Properties and
properties securing the loans are located in eight states in the eastern United
States. Approximately 48.4% of the Company's total assets upon completion of the
Offering will consist of properties leased to and loans made to subsidiaries of
Genesis, a leading provider of healthcare and support services to the elderly.
Subsidiaries of Genesis also will operate or manage substantially all of the
Initial Properties, as well as properties that secure loans made by the Company.
For the month ended June 30, 1997, the occupancy of the assisted and independent
living facilities (excluding three assisted living facilities in lease-up),
skilled nursing facilities and medical office and other buildings included in
the Initial Properties was 88.2%, 92.9% and 100.0%, respectively. Approximately
$79.3 million of the net proceeds from the Offering, including initial draws by
the Company under the Bank Credit Facility, will be used to acquire properties
and other assets from and to make loans to Genesis.
The Operating Partnership is the vehicle through which the Company
will own the Initial Properties, the Term Loans and the Construction Loans. The
Florida Facilities Note will be owned by ET Capital Corp., an entity in which
the Operating Partnership will hold all of the non-voting stock representing 95%
of the economic interest in ET Capital Corp. The ownership and management
structure of the Company is intended to enable the Company to acquire assets in
transactions that may defer some or all of the sellers' tax consequences,
including those acquired in connection with the Company's formation.
The principal executive offices of the Company and the Operating
Partnership are located at ElderTrust, 415 McFarlan Road, Suite 202, Kennett
Square, PA 19348 and its telephone number is (610) 925-0808.
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BUSINESS AND GROWTH STRATEGIES
The Company's principal business objective is to maximize growth in
cash available for distribution and to enhance the value of its portfolio in
order to maximize total return to shareholders. The Company's business and
growth strategies to achieve this objective are: (i) to invest in a high quality
portfolio of healthcare-related properties operated or managed by established
operators or in mortgages secured by such properties located in close proximity
to complementary healthcare services and facilities; (ii) to pursue aggressively
opportunities for portfolio growth by providing traditional and innovative REIT
financing to established operators in the healthcare industry, particularly in
the fast growing assisted living segment; (iii) to provide shareholders the
opportunity for increased distributions from annual increases in rental income
and interest income and from portfolio growth; and (iv) to provide shareholders
with stock price appreciation resulting from potential increases in the value of
the Company's investments. There can be no assurance, however, that these
investment objectives will be realized. See "Policies with Respect to Certain
Activities."
The Company's strategy includes aligning its investments with
healthcare networks, such as the Genesis ElderCareSM Network, and investing in
facilities near other complementary healthcare services and facilities. The
Company believes its strategy will result in a marketing advantage for operators
of its facilities, which may result in higher occupancy rates and revenues.
Substantially all of the initial assisted and independent living facilities and
development projects are located in close proximity to complementary healthcare
services and facilities, such as skilled nursing facilities operated by Genesis
and other healthcare providers. Genesis intends for residents of assisted living
facilities owned by the Company to have access to long-term care at a Genesis
owned skilled nursing facility located near the assisted living facility. In
addition, since all of the Initial Properties leased to or managed by Genesis
will be part of a Genesis ElderCareSM Network, Genesis will be available to
provide ancillary services needed from time to time by residents of the
facilities leased or managed by Genesis.
The Genesis ElderCareSM Network. Genesis has developed the Genesis
ElderCareSM delivery model of integrated healthcare networks to provide
cost-effective, outcomes-oriented services to the elderly. All of the Initial
Properties leased to or managed by Genesis will be part of a Genesis ElderCareSM
Network. Through these integrated healthcare networks, Genesis provides basic
healthcare and specialty medical services to more than 100,000 customers in five
regional markets in the eastern United States in which over 3 million people
over the age of 65 reside. The networks are located in five principal geographic
markets (Massachusetts/Connecticut/New Hampshire; Eastern Pennsylvania/Delaware
Valley; Southern Delaware/Eastern Shore of Maryland; Baltimore,
Maryland/Washington, D.C.; and Central Florida) and include 155 skilled nursing
facilities with approximately 21,600 beds; 16 primary care physician clinics;
approximately 96 physicians, physician assistants and nurse practitioners; 12
institutional pharmacies and five medical supply distribution centers serving
over 52,000 beds; 28 community based pharmacies; certified rehabilitation
agencies providing services through over 375 contracts; and eight home
healthcare agencies. Genesis' networks also include relationships with
healthcare providers contracting with Genesis for clinical information, managed
care expertise and brand name recognition.
In June 1997, Acquisition Corp., a wholly owned subsidiary of Genesis
ElderCare Corp. which is owned 44% by Genesis and owned 56% by The Cypress Group
L.L.C. and TPG Partners II, L.P., commenced the Tender Offer for all of the
outstanding shares of common stock of Multicare. Consummation of the Tender
Offer is subject to, among other things, at least a majority of the outstanding
Multicare common stock being tendered and receipt of all regulatory approvals
and other consents. As of June 30, 1997, Multicare operated, among other assets,
124 skilled nursing facilities, 19 hospital-based subacute units and 11 assisted
living facilities. If the Tender Offer is consummated, Acquisition Corp. will be
merged into Multicare and Multicare, as the surviving entity in the merger, will
become a wholly owned subsidiary of Genesis ElderCare Corp., and all of these
facilities will be managed by Genesis and become part of the Genesis ElderCareSM
Network which will add a sixth principal geographic market (Ohio/Western
Pennsylvania). Genesis' long-term strategy is to continue to expand and develop
its networks and establish new eldercare networks in markets deemed attractive,
to achieve improved outcomes at lower cost via community-based programs,
strategic partnerships, clinical approach/outcomes and information systems and
to provide comprehensive eldercare services in collaboration with other
providers in a managed care environment.
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The Company expects to achieve growth as follows:
Internal Growth. Management believes the Company's future internal
growth will come from (i) potentially higher occupancy and associated increased
rental income under the Percentage Rent Leases and Minimum Rent Leases due, in
part, to the ability of facility residents to participate in the Genesis
ElderCareSM network; (ii) future price increases to facility residents and
resulting increases in rental income payable under the Percentage Rent Leases
and Minimum Rent Leases and (iii) adjustments to rents under certain of the
Fixed Rent Leases.
Growth from Draws Under Construction Loans, Construction Loan
Commitments and Facility Purchase Contracts and Options. The Company anticipates
additional growth from (i) increasing draws under the Construction Loans, which
are expected to increase from an initial $5.2 million to approximately $22.2
million in 18 months, (ii) funding of the Construction Loan Commitments, which
are expected to total approximately $44.8 million in 18 months and (iii) the
purchase and leaseback to Genesis, pursuant to purchase contracts that will be
in place as of the closing of the Offering, of the three Lease-up Assisted
Living Facilities and one Initial Assisted Living Development Project upon the
earlier of the maturity of the related Term Loan or Construction Loan or at such
time as the facility reaches Stabilized Occupancy. The Company has an option to
purchase the two remaining development facilities for which Construction Loans
will be made as of the closing of the Offering. The Company also expects to make
three additional Term Loans and Construction Loans to Multicare and to purchase
the three properties that will secure such loans, if the Multicare acquisition
occurs and certain terms and conditions are satisfied. In addition, the Company
has agreed to purchase or has the option to purchase eight of the nine assisted
living development and expansion projects, currently in the preliminary planning
phase.
External Growth. The Company's external growth strategy is to become a
significant source of healthcare industry capital. The Company intends to focus
initially on the acquisition and financing of assisted and independent living
and skilled nursing facilities and, to a lesser extent, medical office and other
buildings, located in the eastern United States, although the Company may also
make investments in other types of healthcare facilities and in other geographic
regions. The Company believes that there currently is significant demand for
REIT financing capital in the healthcare industry, particularly in the assisted
living segment. In general, assisted living represents a combination of housing,
meals and 24-hour a day personal support services designed to aid elderly
residents with activities of daily living, such as bathing, eating, personal
hygiene, grooming and dressing. Certain assisted living facilities may also
provide assistance to residents with low acuity medical needs, or may offer
higher levels of personal assistance for incontinent residents or residents with
Alzheimer's disease or other forms of memory impairment. In the Company's view,
the assisted living industry is emerging as a preferred alternative to meet the
growing demand for a cost-effective setting in which to care for the elderly who
do not require intensive medical attention but are unable to live independently
due to physical or cognitive frailties.
Annual expenditures in the assisted living industry are estimated to
exceed $16 billion in 1997, with an estimated compound annual growth rate of
17%, which should create a significant market opportunity for REIT financing of
new assisted living facilities. The United States Department of Health and Human
Services estimates that 56.8% of the population 85 and older need help with at
least one activity of daily living and approximately 35% need help with two or
more activities of daily living. This age group is projected to double in
population by the year 2000. According to a recent study, the average resident
of an assisted living facility is 84 years of age and 96% of resident fees are
provided by personal or family funds. The industry is still highly fragmented
but there are now 13 public companies whose primary focus is the development
and/or operation of assisted living facilities. Many of the publicly traded
assisted living companies, as well as assisted living companies that continue to
be privately held, have plans for rapid growth through the development of a
significant number of new-assisted living facilities over the next several
years. Several healthcare companies, such as Genesis, whose focus has been on
the ownership and operation of skilled nursing facilities, have also recognized
the opportunity provided by assisted living and have begun development of
assisted living facilities. All but one of the 13 public assisted living
companies generally have leased between 40% and 60% of their properties from
REITs or development partners. Sale/leaseback financing is generally viewed as
an effective financing tool for companies whose business includes a combination
of healthcare services and housing for the elderly. Among other benefits, the
lessee typically does not record long term debt on its balance sheet and real
estate depreciation expense related to owning the facility is eliminated from
the lessee's financial statements. The Company also intends to offer Units to
sellers who would otherwise recognize a taxable gain upon a sale of assets,
which also may facilitate sale/leaseback transactions on a tax-deferred basis.
38
<PAGE>
The Company believes that the substantial healthcare industry experience and
numerous relationships of its management and trustees will help the Company
identify, evaluate and complete additional investments.
In making future investments, the Company intends to focus on
established healthcare operators which meet the Company's standards for facility
quality, proximity to complementary healthcare services and facilities and
experience of management. In the assisted living area, the Company intends to
develop relationships with public and privately-held third party operators of
assisted living facilities. In the near term, the Company anticipates that a
significant portion of new investments will involve Genesis as lessee or
manager. In this regard, the Company and Genesis have entered into an agreement
for a period of three years from the closing of the Offering (subject to annual
renewal), pursuant to which Genesis has granted the Company a right of first
refusal to purchase and leaseback to Genesis any assisted or independent living
facility which Genesis determines to sell and leaseback. The agreement also
provides the Company with a right to offer financing to Genesis and other
developers of assisted and independent living facilities which, once developed,
will be operated by Genesis. The Company believes that its agreement with
Genesis will provide it with opportunities to acquire, and finance the
development of, additional assisted and independent living facilities within the
Genesis ElderCareSM healthcare network. If the Multicare acquisition is
completed, Genesis will own or operate approximately 265 skilled nursing
facilities located in 16 states, in addition to an additional 11 assisted living
facilities owned by Multicare. In turn, the Company has provided Genesis a right
of first refusal to lease or manage any assisted or independent living facility
financed or acquired by the Company within Genesis' markets unless the facility
will be leased or managed by the developing or selling company or an affiliate.
Although there are no current commitments or agreements to do so, the Company
also may acquire from and leaseback to Genesis or Genesis affiliates other
skilled nursing facilities in addition to the four Genesis-owned skilled nursing
facilities included in the Initial Properties.
USE OF PROCEEDS
The net cash proceeds to the Company from the Offering, after
deducting the estimated underwriting discount and estimated Offering expenses of
$12.5 million, are estimated to be approximately $123.5 million (approximately
$142.5 million if the Underwriters' overallotment option is exercised in full),
based upon the assumed initial public offering price.
The net cash proceeds of the Offering, together with $13.2 million of
borrowings under the Bank Credit Facility, will be used by the Company, as
follows: (i) approximately $100.9 million to acquire 21 of the Initial
Properties or interests therein; (ii) approximately $14.5 million to fund the
Term Loans; (iii) approximately $7.5 million to repay mortgage indebtedness;
(iv) approximately $7.4 million to acquire substantially all of the economic
interest in the Florida Facilities Note and (v) approximately $5.2 million to
fund the Construction Loans. See "Structure and Formation of the Company" and
"Business and Properties -- Bank Credit Facility and Tax-Exempt Financing." The
remaining net proceeds of approximately $1.2 million will be used for working
capital and other general corporate purposes. If the Company makes the Proposed
Multicare Loans, the Company will borrow an additional $15.9 million under the
Bank Credit Facility.
If the Underwriters' overallotment option is exercised in full, the
Company expects to use the additional proceeds (which will be approximately
$19.0 million) to reduce the amounts initially borrowed under the Bank Credit
Facility.
Pending application of the net proceeds of the Offering, the Company
will invest such portion of the net proceeds in interest-bearing accounts and/or
short-term, interest-bearing securities which are consistent with the Company's
intention to qualify for taxation as a REIT.
39
<PAGE>
Certain information regarding the indebtedness to be repaid is set forth as
follows:
DEBT TO BE REPAID WITH A PORTION OF THE OFFERING PROCEEDS
<TABLE>
<CAPTION>
AMOUNT TO BE
PROPERTY MATURITY DATE INTEREST RATE (1) REPAID (1) (2)
- -------- ------------- ----------------- --------------
(in thousands)
<S> <C> <C> <C>
Silverlake NRC July 1, 1998 7.50% $ 5,356
Windsor Off. Bldg. and
Windsor Clinic/Training Facility May 1, 2005 10.25 1,144
Salisbury Med. Off. Bldg. July 30, 2000 10.25 718
Highgate at Paoli Pointe January 1, 2001 11.00 250
------
Total $ 7,468
======
- -------------
(1) The Company estimates that the indebtedness to be repaid with a portion of
the proceeds of the Offering will have a weighted average interest rate of
approximately 8.3% and a weighted average maturity of approximately 1.9
years as of December 1, 1997. Repayment amounts assume that the
indebtedness is repaid on December 1, 1997. Exact repayment amounts may
differ due to amortization.
(2) Represents prepayment of principal only.
</TABLE>
DISTRIBUTIONS
Subsequent to the completion of the Offering, the Company intends to
make regular quarterly distributions to the holders of its Common Shares. The
initial distribution, covering a partial quarter commencing on the date of
completion of the Offering and ending on December 31, 1997, is expected to be
$____ per share, which represents a pro rata distribution based on a full
quarterly distribution of $___ per share and an annual distribution of $______
per share (or an annual distribution rate of _______%). The Company does not
intend to reduce the expected distribution per share if the Underwriters'
overallotment option is exercised. The following discussion and the information
set forth in the table and footnotes below should be read in conjunction with
the Pro Forma Estimated Revenues Less Estimated Expenses and notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" included elsewhere in this
Prospectus.
The Company intends initially to distribute annually approximately
____% of estimated Cash Available for Distribution based upon the assumed
initial public offering price of $20.00 per share. The estimate of Cash
Available for Distribution for the 12 months following the closing of the
Offering is based upon pro forma Funds from Operations for the 12 months ended
June 30, 1997, adjusted for certain known events and/or contractual commitments
that either have occurred or will occur as of the date of closing of the
Offering (including giving effect to the use of the net proceeds from the
Offering described elsewhere herein as of such date) and (ii) for certain
non-GAAP items consisting of (A) revisions to estimated rent revenues from a
GAAP basis to amounts currently being paid or due from lessees or tenants, (B)
pro forma amortization of financing costs and (C) pro forma amortization of
organization costs. No effect was given to any changes in working capital
resulting from changes in current assets and current liabilities (which changes
are not anticipated to be material) or the amount of cash estimated to be used
for (i) investing activities (other than for medical office building tenant
improvements and purchases of office equipment) and (ii) financing activities
(other than scheduled loan principal payments on existing indebtedness). The
estimate of Cash Available for Distribution is being made solely for the purpose
of setting the initial distribution and is not intended to be a projection or
forecast of the Company's results of operations or its liquidity, nor is the
methodology upon which such estimate was made necessarily intended to be a basis
for determining future distributions. Future distributions by the Company will
be at the discretion of the Board of Trustees. There can be no assurance that
any distributions will be made or that the estimated level of distributions will
be maintained by the Company.
The Company anticipates that its distributions will exceed earnings
and profits for federal income tax reporting purposes due to non-cash expenses,
primarily depreciation and amortization, to be incurred by the Company.
Therefore, it is expected that approximately ____% to ___% of the distributions
anticipated to be paid by the Company for the 12-month period following the
completion of the Offering will represent a return of capital for federal income
tax purposes and in such event will not be subject to federal income tax under
current law to the extent such distributions do not exceed a shareholder's basis
in his Common Shares. The nontaxable distributions
40
<PAGE>
will reduce the shareholder's tax basis in the Common Shares and, therefore, the
gain (or loss) recognized on the sale of such Common Shares or upon liquidation
of the Company will be increased (or decreased) accordingly. The percentage of
shareholder distributions that represents a nontaxable return of capital may
vary substantially from year to year.
The Code generally requires that a REIT distribute annually at least
95% of its net taxable income (excluding any net capital gain). See "Federal
Income Tax Consequences -- Requirements for Qualification as a REIT -- Annual
Distribution Requirements." The estimated Cash Available for Distribution is
anticipated to be in excess of the annual distribution requirements applicable
to REITs under the Code. Under certain circumstances, the Company may be
required to make distributions in excess of Cash Available for Distribution in
order to meet such distribution requirements. For a discussion of the tax
treatment of distributions to holders of Common Shares, see "Federal Income Tax
Consequences -- Taxation of Taxable U.S. Shareholders of the Company Generally,"
"-- Taxation of Tax-Exempt Shareholders of the Company," "-- Taxation of
Non-U.S. Shareholders of the Company."
The Company believes that its estimate of Cash Available for
Distribution constitutes a reasonable basis for setting the initial
distribution, and the Company intends to maintain its initial distribution rate
for the 12-month period following the completion of the Offering unless actual
results of operations, economic conditions or other factors differ materially
from the assumptions used in its estimate. The Company's actual results of
operations will be affected by a number of factors, including the revenue and
interest income received from its properties and loans, interest and dividend
income from ET Capital Corp., the operating expenses of the Company, interest
expense, the ability of lessees, tenants and borrowers to meet their financial
obligations and unanticipated capital expenditures. Variations in the net
proceeds from the Offering as a result of a change in the initial public
offering price or the exercise of the Underwriters' overallotment option may
affect Cash Available for Distribution, the payout ratio based on Cash Available
for Distribution and available reserves. No assurance can be given that the
Company's estimate will prove accurate. Actual results may vary substantially
from the estimate.
41
<PAGE>
The following table describes the calculation of pro forma Funds from
Operations for the 12 months ended June 30, 1997 and the adjustments to pro
forma Funds from Operations for the 12 months ended June 30, 1997 in estimating
initial Cash Available for Distribution for the 12 months following the closing
of the Offering:
<TABLE>
<CAPTION>
WITHOUT PROPOSED WITH PROPOSED
MULTICARE LOANS MULTICARE LOANS
(in thousands, except per share data)
<S> <C> <C>
Pro forma estimated revenues less estimated expenses before minority
interest for the year ended December 31, 1996.......................... $ 3,997 $ 4,030
Plus: Pro forma estimated revenues less estimated expenses before
minority interest for the six months ended June 30, 1997............... 2,910 3,040
Less: Pro forma estimated revenues less estimated expenses before
minority interest for the six months ended June 30, 1996............... (1,196) (1,198)
Pro forma estimated revenues less estimated expenses before minority
interest for the 12 months ended June 30, 1997......................... $ 5,711 $ 5,872
Plus: Pro forma real estate depreciation for the 12 months ended
June 30, 1997 (1)..................................................... 3,773 3,773
-------- ---------
Pro forma Funds from Operations for the 12 months ended June 30,
1997 (2).............................................................. $ 9,484 $ 9,645
Adjustments:
Net increases in rental income (3)................................. 717 717
Net increase in interest income (4)................................ 1,451 2,730
Net increase in equity in earnings of ET Capital Corp. (5)......... 147 147
Interest expense adjustment (6).................................... 73 (741)
-------- ---------
Estimated adjusted pro forma Funds from Operations for the 12 months
following the completion of the Offering................................ $ 11,873 $ 12,498
Net effect of straight-line rents (7)............................... 84 84
Pro forma amortization of financing costs for the 12 months
ended June 30, 1997 (8)............................................. 458 458
Non-real estate amortization (9).................................... 5 5
-------- ---------
Estimated pro forma Cash Flow from Operating Activities for the 12
months following completion of the Offering............................. $ 12,420 $ 13,045
Investment Activities:
Estimated recurring medical office building tenant improvements
and purchases of office equipment (10).............................. (126) (126)
Financing Activities:
Scheduled loan principal payments (11).............................. (630) (630)
-------- ---------
Estimated Cash Available for Distribution for the 12 months
following the closing of the Offering............................... $ 11,664 $ 12,289
Company's share of estimated Cash Available for Distribution (12)
Minority interest's share of estimated Cash Available for
Distribution........................................................
Total estimated initial annual cash distributions........................ $ $
Estimated initial annual distribution per share (13)..................... $ $
Payout ratio based on estimated Cash Available for Distribution (14)..... % %
</TABLE>
42
<PAGE>
- ----------
(1) Pro forma real estate depreciation for the year ended December 31, 1996 of
$3.6 million plus pro forma real estate depreciation for the six months
ended June 30, 1997 of $1.9 million minus pro forma real estate
depreciation for the six months ended June 30, 1996 of $1.7 million.
(2) The White Paper on Funds from Operations approved by the Board of Governors
of NAREIT in March 1995 defines Funds from Operations as net income (loss)
(computed in accordance with GAAP), excluding gains (or losses) from debt
restructuring and sales of properties, plus real estate related
depreciation and amortization and after adjustments for unconsolidated
partnerships and joint ventures. The Company believes that Funds from
Operations is helpful to investors as a measure of the performance of an
equity REIT because, along with cash flow from operating activities,
financing activities and investing activities, it provides investors with
an indication of the ability of the Company to incur and service debt, to
make capital expenditures and to fund other cash needs. The Company
computes Funds from Operations in accordance with standards established by
NAREIT which may not be comparable to Funds from Operations reported by
other REITs that do not define the term in accordance with the current
NAREIT definition or that interpret the current NAREIT definition
differently than the Company. Funds from Operations does not represent cash
generated from operating activities in accordance with GAAP and should not
be considered as an alternative to net income (determined in accordance
with GAAP) as an indication of the Company's financial performance or to
cash flow from operating activities (determined in accordance with GAAP) as
a measure of the Company's liquidity, nor is it indicative of funds
available to fund the Company's cash needs, including its ability to make
cash distributions.
(3) Represents the net increase in rental income for the 12-month period
following the closing of the Offering from Minimum Rent Leases and
Percentage Rent Leases that will be in effect as of the closing of the
Offering but were not in effect for all or part of the pro forma 12-month
period ended June 30, 1997. Rent derived from Percentage Rent Leases was
computed based on facility revenues for August 1997 annualized.
(4) Represents the net increase in interest income for the 12-month period
following the closing of the Offering of (a) $925,000 (without the two
proposed Multicare Term Loans) and of $1.9 million (with the two proposed
Multicare Term Loans) relating to Term Loans that will be in effect as of
the closing of the Offering but either were not in existence during the
entire 12-month period ended June 30, 1997 or were or would have been
funded at lower levels than will be the case upon the closing of the
Offering and (b) $526,000 (without the proposed Multicare Construction
Loan) and $806,000 (with the proposed Multicare Construction Loan) relating
to Construction Loan draws which the Company is obligated to fund as of the
closing of the Offering. The interest rate on Term Loan and Construction
Loans will be fixed at the time of closing of the Offering based on a
spread of 350 or 400 basis points over the then applicable three-year U.S.
Treasury Note rate, except for the Construction Loan on the Montchanin
development project will have a fixed rate of interest equal to 10.5%. The
net increase in interest income included in the table was calculated based
on the applicable spread of 350 to 400 basis points over the three-year
U.S. Treasury Note rate in effect on August 26, 1997 for the loans whose
interest rate will be fixed at the time of closing of the Offering and
10.5% for the Construction Loan for the Montchanin facility. No effect is
given for additional Construction Loan draws of approximately $15.1 million
(without the proposed Multicare Construction Loan) and of $18.2 million
(with the proposed Multicare Construction Loan) which are expected to be
drawn by borrowers during the 12-month period immediately following the
closing of the Offering.
(5) Represents the net increase in the Company's equity in the net earnings of
ET Capital Corp. for the 12-month period following the closing of the
Offering due to the Florida Facilities Note not being in existence for the
entire period ended June 30, 1997.
(6) Represents a reduction in interest expense due to amortization of the
related indebtedness over the 12-month period following the closing of the
Offering offset by the additional interest expense incurred on the Bank
Credit Facility to fund the proposed Multicare Construction Loan.
(7) Represents the effect of adjusting straight-line rental revenue included in
pro forma estimated revenues from the straight-line accrual basis to
amounts currently being paid or due from tenants.
(8) Represents pro forma amortization on a straight-line basis over three years
of the $1.4 million commitment fee for the Bank Credit Facility. See
"Business and Properties-- Bank Credit Facility and Tax-Exempt Financing."
(9) Represents pro forma amortization of $25,000 of organization costs on a
straight-line basis over five years.
(10) Represents estimated recurring medical office building tenant improvements
and office equipment purchases.
(11) Represents scheduled loan principal payments for the 12 months following
the closing of the Offering.
43
<PAGE>
(12) The Company's share of estimated Cash Available for Distribution and
estimated initial annual cash distribution to shareholders of the Company
is based on its approximate _______% aggregate partnership interest in the
Operating Partnership.
(13) Based on a total of _______ Common Shares to be outstanding after the
Offering (_______ shares to be sold in the Offering, assuming no exercise
of the Underwriters' overallotment option, and _______ additional Common
Shares to be issued in the Formation Transactions.)
(14) Calculated as estimated initial annual cash distributions to shareholders
of the Company divided by the Company's share of estimated Cash Available
for Distribution for the 12 months following the closing of the Offering.
The payout ratio based on estimated adjusted pro forma Funds from
Operations is ____%.
44
<PAGE>
CAPITALIZATION
The following table sets forth the historical capitalization of the
Company as of September 23, 1997, and on a pro forma basis, as adjusted to give
effect to the Formation Transactions, the Offering and use of the net proceeds
from the Offering as set forth under "Use of Proceeds." The information set
forth in the table should be read in conjunction with the financial statements
and notes thereto, the pro forma financial information and notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 23, 1997
------------------------------------------------------------
WITHOUT PROPOSED WITH PROPOSED
MULTICARE LOANS MULTICARE LOANS
--------------- ---------------
PRO FORMA, PRO FORMA,
HISTORICAL AS ADJUSTED AS ADJUSTED
---------- ----------- -----------
(IN THOUSANDS)
Debt:
<S> <C> <C> <C> <C> <C>
Mortgages payable........................... $ -- $ 34,239 (1) $ 34,239 (1)
Bank Credit Facility........................ -- 13,224 (1) 29,158 (1)
Minority interest in Operating Partnership..... -- -- --
Shareholders' equity:
Preferred Shares, $.01 par value per share,
20,000,000 shares authorized; none issued -- -- --
and outstanding ..........................
Common Shares, $.01 par value per share,
100,000,000 shares authorized; 100 issued -- 121,240 (2) 121,240 (2)
and outstanding; _______ issued and
outstanding, as adjusted..................
Additional Paid-In Capital.................. --
Shareholders' Equity......................
Total Capitalization.................. $ $ $
========= ========= =========
</TABLE>
(1) See notes 7 and 8 of the notes to the pro forma financial statements for
additional information.
(2) Includes (i) 100 Common Shares issued at the time of the Company's
formation, (ii) _______ Common Shares to be acquired by Messrs. Walker and
Romanov upon exchange of certain Units received by them following the
liquidation of ET Partnership, (iii) 200,000 Common Shares to be issued to
Mr. Romanov in a private placement and (iv) Common Share awards totaling
2,500 shares each to be made upon completion of the Offering to the
Company's three trustee nominees under the Company's 1997 Share Option and
Incentive Plan. See "Structure and Formation of the Company." Does not
include (i) _______ Common Shares that may be issued upon the exchange of
Units issued in connection with the Formation Transactions, (ii) 1,020,000
Common Shares subject to the Underwriters' allotment option or (iii)
497,500 Common Shares subject to options to be granted under the Company's
1997 Share Option and Incentive Plan.
45
<PAGE>
DILUTION
As of September 23, 1997, the Company had 100 Common Shares issued and
outstanding. After giving effect to the sale of the Common Shares offered hereby
(at an assumed initial public offering price of $20.00 per Common Share) and the
receipt by the Company of approximately $123.5 million in net proceeds from the
Offering (after deducting the Underwriters' discounts and commissions and other
estimated expenses of the Offering), the pro forma net tangible book value at
September 23, 1997 would have been approximately $_______ million, or $_______
per Common Share. This amount represents an immediate increase in net tangible
book value of $_______ per Common Share to the holders of restricted Common
Shares and Units to be issued in connection with the Formation Transactions and
an immediate dilution in pro forma net tangible book value of $_______ per
Common Share to new investors. The following table illustrates this dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................................. $20.00
Net tangible book value per share prior to the Offering (1)..................... $
-------
Increase in net tangible book value per share attributable to the Offering (2).. -------
Pro forma net tangible book value after the Offering (3)....................... ------
Dilution in net tangible book value per Common Share to purchasers in the Offering (4) $
------
- ----------
(1) Tangible book value per share prior to the Offering is determined by
dividing net tangible book value of the Operating Partnership (based on the
September 23, 1997 net book value of the tangible net assets) by the sum of
the number of Common Shares (i) issued and outstanding and (ii) issuable
(including upon the exchange of all Units to be issued) to investors in the
Formation Transactions.
(2) Based upon the assumed initial public offering price of $20.00 per Common
Share and after deducting Underwriters' discounts and commissions and
estimated expenses of the Offering and the Formation Transactions.
(3) Based on total pro forma net tangible book value of $_______ million
divided by the total number of Common Shares outstanding after the
completion of the Offering (_______ Common Shares) and Common Shares
issuable in exchange for Units _______ Common Shares), and excluding Common
Shares that may be issuable upon exercise of share options. There is no
dilution attributable to the issuance of Common Shares in exchange for
Units to be issued to the Continuing Investors in the Formation
Transactions because such Units would be exchanged for Common Shares on a
one-for-one basis.
(4) Dilution is determined by subtracting net tangible book value per Common
Share after the Offering from the assumed initial public offering price of
$20.00 per Common Share.
</TABLE>
46
<PAGE>
The following table summarizes, on a pro forma basis giving effect to
the Offering and the Formation Transactions, the number of Common Shares to be
sold by the Company in the Offering and the number of restricted Common Shares
and Units to be outstanding upon completion of the Formation Transactions, the
net tangible book value as of September 23, 1997 of the assets contributed by
the investors in the Formation Transactions and the net tangible book value of
the average contribution per share based on total contributions.
<TABLE>
<CAPTION>
CASH/
COMMON SHARES/ BOOK VALUE OF
UNITS ISSUED CONTRIBUTIONS BOOK VALUE
---------------------- ------------------------------ OF
AVERAGE
COMMON CONTRIBUTION
SHARES/ PER SHARE/
UNITS PERCENT $ PERCENT UNIT
--------- ------ --------------- -------- -----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Purchasers in the Offering......................... 6,800,000 % $ 136,000 (1) (1) $ 20.00
Common Shares issued in the Formation Transactions. (2) (2)
Units issued in the Formation Transactions.........
--------- ------ --------------- -------- -----------
Total.......................................... 100.0% $ 100.0% $
========= ====== ================ ======== ===========
- ----------
(1) Before deducting Underwriters' discounts and commissions and other
estimated expenses of the Offering.
(2) Based on the September 23, 1997 net book value of the assets, adjusted for
the Formation Transactions.
</TABLE>
47
<PAGE>
SELECTED HISTORICAL AND PRO FORMA FINANCIAL INFORMATION
The following table sets forth financial information for the Company
which is derived from the Balance Sheet and the Pro Forma Balance Sheet and
Statements of Estimated Revenues Less Estimated Expenses included elsewhere in
this Prospectus. The adjustments for the Offering assume an initial public
offering price of $20.00 per share and that the Underwriters' overallotment
option is not exercised.
Pro forma estimated revenues less estimated expenses is presented for
the year ended December 31, 1996, and the six months ended June 30, 1997, as if
the Offering and the acquisitions of the Initial Investments and related
transactions had occurred, and as if the respective leases had been in effect at
January 1, 1996. The pro forma balance sheet data is presented as of June 30,
1997, as if the Offering and the acquisitions of the Initial Investments and
related transactions had occurred, and as if the respective leases had been in
effect at that date. The pro forma and estimated information incorporates
certain assumptions that are included in the notes to the Pro Forma Balance
Sheet and Statements of Estimated Revenues Less Estimated Expenses included
elsewhere in this Prospectus. See "Pro Forma Balance Sheet and Statements of
Estimated Revenues Less Estimated Expenses." The pro forma information does not
purport to represent what the actual financial position or results of operations
of the Company would have been as of or for the periods indicated nor does it
purport to represent the financial position or results of operations for any
future period.
<TABLE>
<CAPTION>
WITHOUT PROPOSED MULTICARE LOANS WITH PROPOSED MULTICARE LOANS
---------------------------------- -----------------------------------
PRO FORMA AT PRO FORMA AT PRO FORMA AT PRO FORMA AT
OR FOR THE SIX OR FOR THE OR FOR THE SIX OR FOR THE
MONTHS ENDED YEAR ENDED MONTHS ENDED YEAR ENDED
HISTORICAL(1) JUNE 30, 1997 DECEMBER 31, 1996 JUNE 30, 1997 DECEMBER 31, 1996
------------- ------------- ----------------- ------------- -----------------
ESTIMATED REVENUES LESS (dollars in thousands, except per share data)
ESTIMATED EXPENSES:
<S> <C> <C> <C> <C> <C>
Revenues $ - $ 8,278 $ 14,752 $ 8,641 $ 14,847
Estimated revenues less
estimated expenses after
minority interest - 2,776 3,814 2,900 3,845
Estimated revenues less
estimated expenses per share -
Common shares outstanding 100
PRO FORMA BALANCE SHEET DATA:
Initial Properties $ - $ 140,908 N/A $ 140,908 N/A
Investment in ET Capital Corp. - 7,406 N/A 7,406 N/A
Loans receivable - 13,647 N/A 23,096 N/A
Other assets - 3,641 N/A 3,641 N/A
Total assets - 178,927 N/A 188,376 N/A
Mortgages payable - 34,391 N/A 34,391 N/A
Bank Credit Facility - 13,224 N/A 22,673 N/A
Minority interest in Operating Partnership -
Total shareholders' equity 100 121,240 N/A 121,240 N/A
OTHER DATA:
Funds from Operations (2) $ - $ 4,799 $ 7,597 $ 4,929 $ 7,630
Weighted average number of
Common Shares and Units
outstanding 100
</TABLE>
48
<PAGE>
- ----------
(1) The Company was formed on September 23, 1997 and was capitalized with the
issuance of 100 Common Shares for a purchase price of $100.
(2) The White Paper on Funds from Operations approved by the Board of Governors
of NAREIT in March 1995 defines Funds from Operations as net income (loss)
(computed in accordance with GAAP), excluding gains (or losses) from debt
restructuring and sales of properties, plus real estate related
depreciation and amortization and after adjustments for unconsolidated
partnerships and joint ventures. The Company believes that Funds from
Operations is helpful to investors as a measure of the performance of an
equity REIT because, along with cash flow from operating activities,
financing activities and investing activities, it provides investors with
an indication of the ability of the Company to incur and service debt, to
make capital expenditures and to fund other cash needs. The Company
computes Funds from Operations in accordance with standards established by
NAREIT which may not be comparable to Funds from Operations reported by
other REITs that do not define the term in accordance with the current
NAREIT definition or that interpret the current NAREIT definition
differently than the Company. Funds from Operations does not represent cash
generated from operating activities in accordance with GAAP and should not
be considered as an alternative to net income (determined in accordance
with GAAP) as an indication of the Company's financial performance or to
cash flow from operating activities (determined in accordance with GAAP) as
a measure of the Company's liquidity, nor is it indicative of funds
available to fund the Company's cash needs, including its ability to make
cash distributions.
49
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company was formed in Maryland on September 23, 1997, and intends
to make an election and to qualify under the Code as a REIT commencing with its
taxable year ending December 31, 1997.
Substantially all of the Company's revenues are expected to be derived
from: (i) rents received under Percentage, Minimum and Fixed Rent Leases of
healthcare-related real estate; (ii) interest earned from Term and Construction
Loans and the Florida Facilities Note; and (iii) interest earned from the
temporary investment of funds in short-term instruments. The Percentage Rent
Leases provide for rents based on a specified percentage of facility operating
revenues with no required minimum rent. The Minimum Rent Leases provide for (i)
base rent (increasing each year by 1.5%) and additional rent based upon a
specified percentage of annual revenues over revenues for the first year of the
lease, (ii) base rent, increasing each year by the lesser of 5% of the increase
in facility revenues for the immediately preceding year or one-half of the
increase in the Consumer Price Index for the immediately preceding year, or
(iii) in the case of the assisted living facilities secured by the Proposed
Multicare Loans, if the Company makes such loans and purchases and leases back
such facilities to Multicare, base rent, increasing each year by 2.5%. Both
types of leases are triple net leases that require the lessees to pay all
operating expenses, taxes, insurance and other costs (including a portion of
capitalized expenditures). The Fixed Rent Leases are with existing tenants in
the medical office and other buildings included in the Initial Properties and
provide for specified annual rents, subject to increase in certain of the
leases. Interest on the Term and Construction Loans will be at a fixed rate of
10.5% or at rates based on the three-year U.S. Treasury Note rate plus 350 or
400 basis points. The Company has agreed to or has options to purchase the
assisted living facilities securing the Term and Construction Loans included in
the Initial Investments, and these facilities also will be leased back to the
sellers (or to Genesis in the case of the Lease-up Assisted Living Facility in
which Genesis holds a 49% interest) pursuant to Percentage Rent Leases or
Minimum Rent Leases. In addition, subject to certain terms and conditions, the
Company expects to make the Proposed Multicare Loans at fixed interest rates of
10.5%. The Company has agreed to purchase the assisted living facilities
securing the Proposed Multicare Loans, subject to certain terms and conditions,
and these facilities will be leased back to Multicare pursuant to Minimum Rent
Leases.
The Company will incur operating and administrative expenses,
including principally compensation expense for its executive officers and other
employees, office rental and related occupancy costs. The Company will be
self-administered and managed by its executive officers and staff, and will not
engage a separate advisor or pay an advisory fee for administrative or
investment services, although the Company will engage legal, accounting, tax and
financial advisors as needed from time to time.
The Company also expects to leverage its portfolio of real estate
equity investments and will incur long and short-term indebtedness, and related
interest expense, from time to time. The Board of Trustees will consider a
number of factors when evaluating the Company's level of indebtedness and when
making decisions regarding the incurrence of indebtedness. See "Risk Factors --
No Limitations on Debt."
The Company intends to declare and pay distributions to its
shareholders in amounts not less than the amounts required to maintain REIT
status under the Code and, in general, in amounts exceeding taxable income. The
Company's ability to pay distributions will depend upon its cash available for
distribution.
NONRECURRING COMPENSATION EXPENSE
With respect to the issuance of Units to certain officers of the
Company in connection with the formation of the Company (see "Structure and
Formation of the Company"), the Company has recognized compensation expense of
approximately $_______ million based on the fair market value of such Units,
which will be reported in the Company's statement of operations for the period
from September 23, 1997 (the date of its formation) to December 31, 1997. This
expense is a nonrecurring item and, accordingly, has not been reflected in the
pro forma statements of estimated revenues less estimated expenses.
50
<PAGE>
RESULTS OF OPERATIONS
The Company has had no operations prior to September 23, 1997 (the
date of its formation) through the date of this Prospectus. The Company's future
results of operations will depend upon the acquisition of the Initial
Investments and the terms of any subsequent investments the Company may make.
PRO FORMA ESTIMATED REVENUES LESS ESTIMATED EXPENSES
YEAR ENDED DECEMBER 31, 1996
The Company estimates that after giving effect to the Offering and the
acquisition of the Initial Investments and related transactions, revenues would
have been $14.8 million and net income would have been $3.8 million, or $_______
per share, for the year ended December 31, 1996. Depreciation, amortization and
other non-cash expenses would have been $3.8 million.
SIX MONTHS ENDED JUNE 30, 1997
The Company estimates that after giving effect to the Offering and the
acquisition of the Initial Investments and related transactions, revenues would
have been $8.3 million and net income would have been $2.8 million, or $_______
per share, for the six months ended June 30, 1997. Depreciation, amortization
and other non-cash expenses would have been $2.0 million.
Certain of the Initial Properties were under development or in the
lease-up phase during the year ended December 31, 1996 and/or the six months
ended June 30, 1997. The pro forma statements of estimated revenues less
estimated expenses have been prepared assuming the Company made Term or
Construction Loans on these properties; however, these properties are now
operational and will be acquired at the time of the Offering and leased back to
the sellers under Minimum Rent Leases or Percentage Rent Leases. In addition,
the Term and Construction Loans the Company will fund either would not have been
in existence during part of the periods or would have been funded at lower
levels (due to the earlier stage of development of the related facilities) than
will be the case upon closing of the Offering, and the Florida Facilities Note
was not in existence until September 1, 1996. For these and other reasons, the
pro forma estimated revenues less estimated expenses do not purport to present
what the Company's results of operations or cash available for distribution
would actually have been if the Offering and related transactions had occurred
on January 1, 1996 or to project the Company's results of operations for any
future period.
LIQUIDITY AND CAPITAL RESOURCES
Management believes that the net proceeds of this Offering, together
with the Bank Credit Facility, will be sufficient to consummate the purchase of
the Initial Investments, to fund the Term Loans, to fund the initial and
subsequent draws under the Construction Loans, to fund the Construction Loan
Commitments and to fund the Proposed Multicare Loans. Management believes the
Company will have adequate remaining credit under the Bank Credit Facility to
meet its liquidity needs for the twelve-month period following the Offering. See
"Business and Properties -- Initial Investments," "-- Loans," "-- Construction
Loan Commitments" and "-- Bank Credit Facility and Tax-Exempt Financing."
The Company may, under certain circumstances, borrow additional
amounts in connection with the renovation or expansion of its Initial
Properties, the acquisition of additional properties or funding of additional
loans, or, as necessary, to meet certain distribution requirements imposed on
REITs under the Code. See "Policies with Respect to Certain Activities --
Investment Policies" and "-- Financing Policies." The Company may raise
additional capital by issuing, in public or private transactions, equity or debt
securities, but the availability and terms of any such issuance will depend upon
market and other conditions. There can be no assurance that such additional
financing or capital will be available on terms acceptable to the Company.
Under the terms of the Percentage Rent and Minimum Rent Leases, the
lessees are responsible for all operating expenses taxes, property and casualty
insurance and other costs. See "Business and Properties -- Initial Investments."
As a result of these arrangements, the Company does not believe it will be
responsible for any major
51
<PAGE>
expenses in connection with the Initial Properties subject to Percentage Rent
Leases or Minimum Rent Leases during the terms of the respective leases. The
Company anticipates entering into similar leases with respect to additional
properties. After the expiration or termination of the terms of the respective
leases, or in the event a lessee is unable to meet its obligations, the Company
anticipates that any expenditures it might become responsible for in maintaining
the Initial Properties subject to Percentage Rent Leases or Minimum Rent Leases
will be funded by cash from operations and, in the case of major expenditures,
possibly by borrowings. To the extent that unanticipated expenditures or
significant borrowings are required, the Company's cash available for
distribution and liquidity may be adversely affected.
The Company is negotiating with a commercial bank to obtain the Bank
Credit Facility which would be used to pay a portion of the purchase price for
the Initial Properties, the Term Loans and the initial draws under the
Construction Loans and which would be available to fund the remaining draws
under the Construction Loans, to fund the Construction Loan Commitments, to
facilitate possible acquisitions or future developments, to repay indebtedness
and for working capital needs and other general corporate purposes. Based on the
Company's expected needs, management is seeking a secured facility for up to
$110.0 million on terms and conditions that are customary in the industry for
such arrangements and considered appropriate based on the Company's anticipated
capital structure and operations. Management believes that the Company will be
able to obtain the necessary Bank Credit Facility on acceptable terms and that
the full amount of the Bank Credit Facility will be available upon closing of
the Offering. While the terms of the facility will not be determined until
negotiations are completed and a commitment is obtained, it is expected that
interest under the Bank Credit Facility will be based on short-term Eurodollar
rates, plus a margin that will be determined by the Company's debt to asset
ratio at certain times. In addition, it is expected that the Company will pay an
annual fee on the unused portion of funds available for borrowing under the Bank
Credit Facility and that the Bank Credit Facility will have a term of thirty-six
months. The Company intends to renew the Bank Credit Facility or to repay the
outstanding balance at maturity from the proceeds of a refinancing or from the
sale of debt or equity securities. There can be no assurance, however, that the
lenders will renew the Bank Credit Facility on terms favorable to the Company or
that the Company will be able to sell debt or equity securities at that time.
See "Risk Factors -- Risks of Leverage and Default." The Company may enter into
interest rate swaps in order to mitigate the effect of a rising interest rate
environment on the cost of the Bank Credit Facility.
In addition to the purchase of the Initial Investments, the Company
has agreements or options to purchase the six assisted living facilities in
lease-up or in development, as well as eight of the nine assisted living
development and expansion projects currently in the planning stage for which the
Company will make Construction Loan Commitments totaling $53.3 million. The
Company expects to use draws on the Bank Credit Facility to fund these
commitments, as well as subsequent draws under the Construction Loans which are
expected to increase by approximately $61.9 million to approximately $67.1
million in 18 months after the Offering. There can be no assurance that the nine
development and expansion projects in the planning stage will be completed on a
timely basis or at all or that the Company will be able to purchase or make
construction loans on any additional properties.
Management believes that inflation should not have a material adverse
effect on the operating expenses of the Company because such expenses are
relatively insignificant as a percentage of revenues.
FUNDS FROM OPERATIONS
The White Paper on Funds from Operations approved by the Board of
Governors of NAREIT in March 1995 defines Funds from Operations as net income
(loss) (computed in accordance with GAAP), excluding gains (or losses) from debt
restructuring and sales of properties, plus real estate related depreciation and
after adjustments for unconsolidated partnerships and joint ventures. The
Company believes that Funds from Operations is helpful to investors as a measure
of the performance of an equity REIT because, along with cash flow from
operating activities, financing activities and investing activities, it provides
investors with an indication of the ability of the Company to incur and service
debt, to make capital expenditures and to fund other cash needs. The Company
computes Funds from Operations in accordance with standards established by
NAREIT which may not be comparable to Funds from Operations reported by other
REITs that do not define the term in accordance with the current NAREIT
definition or that interpret the current NAREIT definition differently than the
Company. Funds from Operations does not represent cash generated from operating
activities in accordance with GAAP and should not be considered as an
alternative to net income (determined in accordance with GAAP) as an indication
of the
52
<PAGE>
Company's financial performance or to cash flow from operating activities
(determined in accordance with GAAP) as a measure of the Company's liquidity,
nor is it indicative of funds available to fund the Company's cash needs,
including its ability to make cash distributions.
On a pro forma basis after giving effect to the Offering, pro forma
Funds from Operations for the six months ended June 30, 1997 and for the year
ended December 31, 1996, respectively, are as follows:
<TABLE>
<CAPTION>
PRO FORMA
WITHOUT MULTICARE PROPOSED LOANS WITH MULTICARE PROPOSED LOANS
-------------------------------- -----------------------------
SIX MONTHS ENDED YEAR ENDED SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1997 DECEMBER 31, 1996 JUNE 30, 1997 DECEMBER 31, 1996
------------- ----------------- ------------- -----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Estimated revenues less estimated
expenses before minority interest
$2,190 $3,997 $3,040 $4,030
Add:
Real estate depreciation 1,889 3,600 1,889 3,600
----- ----- ----- -----
Funds from Operations $4,799 $7,597 $4,929 $7,630
===== ===== ===== =====
</TABLE>
53
<PAGE>
BUSINESS AND PROPERTIES
GENERAL
The Company has been formed to invest in a diversified portfolio of
healthcare-related real estate and mortgages. As part of the Formation
Transactions, the Company will acquire or fund the 21 Initial Properties, the
Term Loans, the Construction Loans and substantially all of the economic
interest in the Florida Facilities Note. The Initial Properties (other than the
medical office and other buildings, which will each be acquired subject to
existing leases) will each be leased to Genesis, SLC, Crozer/Genesis or the Age
Institute of Florida, directly or through one or more subsidiaries, pursuant to
long-term, triple net leases. The Company also has agreed or has the option to
purchase the six assisted living facilities in lease-up or development, as well
as eight of the nine assisted living development and expansion projects
currently in the planning phase for which the Company will make Construction
Loan Commitments totaling $53.3 million. In addition, the Company has agreed to
make the Proposed Multicare Loans totaling $19.4 million, subject to certain
terms and conditions.
54
<PAGE>
INITIAL INVESTMENTS
The Initial Investments consist of the Initial Properties, the Term Loans
and Construction Loans, Construction Loans Commitments and substantially all of
the Florida Facilities Note. The following table sets forth certain information
regarding the Initial Properties. All of the Initial Properties will be leased
to or managed by Genesis except for The Woodbridge and the medical office and
other buildings. The Company will hold a fee interest in each of the Initial
Properties except for the Windsor Clinic which is subject to a long-term ground
lease.
<TABLE>
<CAPTION>
INITIAL PROPERTIES
NUMBER YEAR BUILT/
PROPERTY LOCATION OF BEDS(1) OCCUPANCY(2) RENOVATED
- -------- -------- ---------- ------------ ---------
Assisted Living Facilities:
<S> <C> <C> <C> <C>
Heritage Woods Agawam, MA 122 1.6% 1997
Willowbrook Clarks Summit, PA 70 68.3 1996
Riverview Ridge Wilkes-Barre, PA 105 93.7 1993
Highgate at Paoli Pointe Paoli, PA 82 81.1 1995
The Woodbridge Kimberton, PA 90 51.7 1996
---- -----
Subtotal/Weighted Avg. 469 55.7(8)
---- -----
Independent Living Facility:
Pleasant View Concord, NH 72 89.4 1926
---- -----
Skilled Nursing Facilities(9):
Rittenhouse CC Philadelphia, PA 183 91.0 1930/1993(10)
Lopatcong CC Phillipsburg, NJ 153 95.3 1984/1992(12)
Phillipsburg CC Phillipsburg, NJ 94(13) 87.2 1930/1993(14)
Wayne NRC Wayne, PA 118 90.9 1920/1989(15)
Belvedere NRC Chester, PA 147(16) 92.2 1960/1983(17)
Chapel Manor NRC Philadelphia, PA 240 94.5 1973
Harston Hall NCH Flourtown, PA 196(18) 89.8 1977/1991(19)
Pennsburg Manor NRC Pennsburg, PA 120 96.3 1982
Silverlake NRC Bristol, PA 174 97.4 1969/1988(20)
---- ----
Subtotal/Weighted Avg. 1,425 92.9
----- -----
RENTABLE
SQ. FEET
Medical Office and Other Buildings:
Professional Off. Bldg. I Upland, PA 39,972 100.0 1977
DCMH Med. Off. Bldg.(23) Drexel Hill, PA 60,706(24) 100.0 1984/1987/1997(25)
Salisbury Med. Off. Bldg. Salisbury, MD 10,961 100.0 1984
Windsor Off. Bldg. Windsor, CT 2,100 100.0 1934/1965(27)
Windsor Clinic/Trg. Fac.(29) Windsor, CT 9,662 100.0 1996
Lacey Branch Off. Bldg. Forked River, NJ 4,100 100.0 1996
-------- -----
Subtotal/Weighted Avg. 127,501 100.0
------- -----
Total Initial Properties
</TABLE>
<TABLE>
<CAPTION>
INITIAL PROPERTIES
PURCHASE % OF INITIAL INITIAL RENT
PRICE(3) INVESTMENT LEASE TERM(4) TYPE(5) LESSEE
----------- ------------ ------------- ------- ------
Assisted Living Facilities: (IN THOUSANDS) (YEARS)
<S> <C> <C> <C> <C> <C>
Heritage Woods Agawam, MA $ 11,001 6.3% 10.0 (6) Genesis(7)
Willowbrook Clarks Summit, PA 5,894 3.4 10.0 Percentage Genesis(7)
Riverview Ridge Wilkes-Barre, PA 5,720 3.3 10.0 Percentage Genesis(7)
Highgate at Paoli Pointe Paoli, PA 11,115 6.4 10.0 Minimum Genesis(7)
The Woodbridge Kimberton, PA 11,668 6.7 10.0 Minimum SLC(7)
------ ---- ----
Subtotal/Weighted Avg. 45,398 26.1 10.0
------ ---- ----
Independent Living Facility:
Pleasant View Concord, NH 3,742 2.2 10.0 Percentage Genesis(7)
------- ---- ----
Skilled Nursing Facilities(9):
Rittenhouse CC Philadelphia, PA 8,855 5.1% 10.0 Minimum Genesis(11)
Lopatcong CC Phillipsburg, NJ 13,778 7.9 10.0 Minimum Genesis(11)
Phillipsburg CC Phillipsburg, NJ 6,266 3.6 10.0 Minimum Genesis(11)
Wayne NRC Wayne, PA 6,065 3.5 10.0 Minimum Genesis(11)
Belvedere NRC Chester, PA 8,754 5.0 12.0 Minimum Crozer/Genesis
Chapel Manor NRC Philadelphia, PA 14,689 8.4 12.0 Minimum Crozer/Genesis
Harston Hall NCH Flourtown, PA 6,849 3.9 12.0 Minimum Crozer/Genesis
Pennsburg Manor NRC Pennsburg, PA 8,755 5.0 12.0 Minimum Crozer/Genesis
Silverlake NRC Bristol, PA 8,000 4.6 10.0 Minimum Age Inst. of F1.(21)
------ ---- ----
Subtotal/Weighted Avg. 82,011 47.0 11.0
------ ---- ----
REMAINING
LEASE TERM (22)
Medical Office and Other Buildings: (YEARS)
Professional Off. Bldg. I Upland, PA 4,000 2.3 1.2 Fixed Physicians
DCMH Med. Off. Bldg.(23) Drexel Hill, PA 7,923 4.6 3.9 Fixed Physicians
Salisbury Med. Off. Bldg. Salisbury, MD 1,349 0.8 1.0(26) Fixed Genesis(26)
Windsor Off. Bldg. Windsor, CT 325 0.2 5.0(28) Fixed Genesis
Windsor Clinic/Trg. Fac.(29) Windsor, CT 1,493 0.8 5.0(28) Fixed Genesis
Lacey Branch Off. Bldg. Forked River, NJ 545 0.2 18.0 Fixed Ocean FSB
----- ---- ----
Subtotal/Weighted Avg. 15,635 9.0 3.6
------- ---- ----
Total Initial Properties $ 146,786 84.3%
======= ====
</TABLE>
55
<PAGE>
(1) Based on the operational configuration of the facility.
(2) Represents the average occupancy for the month ended June 30, 1997. The
weighted average occupancy for each property type and for all Initial
Properties is based on the purchase prices for the Initial Properties.
(3) Does not include estimated net capitalized acquisition costs aggregating
approximately $1.0 million. Includes, for certain of the Initial
Properties, mortgage indebtedness being repaid at the closing of the
Offering and assumed mortgage indebtedness totaling $34.2 million as of
December 1, 1997. See "Use of Proceeds" and "-- Mortgage Debt."
(4) Represents the initial lease term under each of the leases for these
facilities, which leases will be entered into as of the closing of the
Offering. The weighted average initial lease term for each facility type is
based on the purchase prices for the facilities.
(5) For the six months ended June 30, 1997, on a pro forma basis, the lease
coverage ratios (net operating income before interest, depreciation, rent
and the subordinated portion of management fees (if any) divided by rent
payments) for the assisted living facility and four skilled nursing
facilities to be leased to Genesis under Minimum Rent Leases was 0.72x,
1.57x, 1.55x, 1.77x and 0.71x, respectively; the lease coverage ratio for
the facility to be leased to SLC under a Minimum Rent Lease was 0.09x; the
lease coverage ratios for the four facilities to be leased to
Crozer/Genesis under Minimum Rent Leases were 1.63x, 1.37x, 2.11x and
1.62x, respectively; and the lease coverage ratio for the facility to be
leased to the Age Institute of Florida under a Minimum Rent Lease was
1.38x. Lease coverage ratios are not provided for facilities that will be
subject to Percentage Rent Leases because rental revenues for those
facilities are based on a fixed percentage of the facility's revenues. See
"-- Leases" for additional information.
(6) Initially, rent equals a fixed base rent with no revenue participation. At
the time the facility reaches Stabilized Occupancy, the lease will
automatically convert into a Percentage Rent Lease.
(7) Genesis will guarantee the performance of its subsidiaries under the
Genesis leases. The Highgate facility initially may be leased by SLC. If
subsequently leased by a subsidiary of SLC, SLC will guarantee the
performance of its subsidiary under such lease.
(8) At June 30, 1997, Heritage Woods, Willowbrook and The Woodbridge were in
the initial lease-up phase. Excluding these facilities, the assisted living
facilities included in the Initial Properties had an average occupancy of
88.2%.
(9) "NRC" means a nursing and rehabilitation center, "NCH" means a nursing and
convalescent home and "CC" means a care center.
(10) The facility was originally built in the 1930's with two expansions in the
1970's. A renovation of interior finishes was completed in 1993. The
Company has agreed to finance an expansion of this facility to be
undertaken by Genesis. See "-- Construction Loan Commitments."
(11) These facilities initially will be leased by wholly owned subsidiaries of
Genesis, and Genesis will guarantee the obligations of its wholly owned
subsidiaries under these Minimum Rent Leases. However, in the event Genesis
assigns one or more of the leases to a non-wholly owned subsidiary or a
third party, Genesis may not continue to guarantee the applicable leases.
Any such assignment of a Minimum Rent Lease would require the consent of
the Company which may not be unreasonably withheld. The Company will
evaluate the creditworthiness of any assignee in determining whether to
provide its consent. Genesis is currently negotiating an arrangement with a
Philadelphia-based hospital system. If the arrangement is negotiated
successfully, the hospital system would lease-back the Wayne skilled
nursing facility following its sale to the Company and Genesis would manage
the facility. In addition, Genesis would not guarantee the lease.
(12) This facility was originally built in 1984 with an addition of three
skilled nursing beds in 1992. The Company has agreed to finance an
expansion of this facility to be undertaken by Genesis. See "--
Construction Loan Commitments."
(13) Includes 34 assisted living units.
(14) This facility was originally built during the 1930's with an addition in
1988. A renovation of interior finishes was completed in 1993.
(15) This facility is estimated to have been built circa 1920. Additions were
completed in 1966, 1974 and 1989. During 1989, there was a complete
renovation of the building.
(16) Includes 27 assisted living units.
(17) This facility was built in 1960 and was expanded in 1983.
(18) Includes 76 assisted living units.
(19) This facility was built in 1977 and was expanded in 1991.
(20) This facility opened in 1969, was expanded in 1977 and was renovated in
1988.
(21) This facility will be leased to a wholly owned subsidiary of the Age
Institute of Florida.
(22) For each building, represents the weighted average remaining lease term for
all rentable space in the applicable building as of June 30, 1997. For all
medical office and other buildings, the weighted average remaining lease
term is based on the purchase prices for the buildings.
(23) The property consists of a condominium unit containing six of the eight
floors in the building which is located on the campus of DCMH.
(24) The DCMH Medical Office Building is currently undergoing expansion,
including an expansion of two of the six floors included in the condominium
unit which the Company will acquire. This expansion is expected to be
completed in the first quarter of 1998 and will increase the rentable
square feet in the Company's condominium unit to 65,740 square feet. All of
the rentable space to be added to the Company's condominium unit has been
pre-leased.
(25) This building was built in 1984, and a renovation of interior finishes was
completed in 1987. This building is currently undergoing expansion.
56
<PAGE>
(26) Two subsidiaries of Genesis lease approximately 83% of the rentable space
in the Salisbury Medical Office Building. The remaining approximately 17%
of the rentable space in the building is leased by Quest Diagnostics, Inc.,
a corporation unaffiliated with Genesis or the Company. At the closing of
the Offering, Genesis will enter into a new lease with the Company with
respect to the space leased by Genesis in the building. Each of these
leases will have an initial term of five years, subject to renewals. The
lease with Quest Diagnostics, Inc. expires on November 30, 1997. The
Company expects to enter into a new two-year lease with Quest Diagnostics.
(27) This building was originally constructed in 1934 with an addition in 1965.
(28) At the closing of the Offering, Genesis will enter into a new lease with
the Company with respect to all of the rentable space in the Windsor Office
Building and the Windsor Clinic and Training Facility. Each of these leases
will have an initial term of five years, subject to renewals.
(29) The Windsor Clinic and Training Facility are connected to each other. The
Windsor Clinic consists of 5,490 rentable square feet, and the Windsor
Training Facility includes 4,172 rentable square feet.
57
<PAGE>
LESSEES AND INITIAL PROPERTIES
The following is a description of the lessees of the Initial
Properties to be acquired by the Company. Unless otherwise indicated, all
information is given as of June 30, 1997. Genesis and Multicare are subject to
the reporting requirements of the Securities and Exchange Commission (the "SEC")
and file annual reports containing audited financial information and quarterly
reports for the first three quarters of each fiscal year containing unaudited
financial information with the SEC. With respect to such companies, the
information provided is derived, for the limited purposes of this Prospectus,
from filings made with the SEC or has been furnished to the Company by Genesis
or Multicare. Privately held companies have provided the Company with the
information contained herein about each company. The Company has evaluated the
creditworthiness of the lessees based on a review of financial and other
information made available to it. While the Company believes the information has
been provided in good faith and has no reason to believe that any of such
information is inaccurate in any material respect, the Company has not made and
will not make an independent investigation of such information.
GENESIS INITIAL PROPERTIES
Genesis, headquartered in Kennett Square, Pennsylvania, is a leading
provider of healthcare and support services to the elderly. Genesis has
developed the Genesis ElderCareSM delivery model of integrated healthcare
networks to provide cost-effective, outcomes-oriented services to the elderly.
Through these integrated healthcare networks, Genesis provides basic healthcare
and specialty medical services to more than 100,000 customers in five regional
markets in the eastern United States in which over 3 million people over the age
of 65 reside. As of June 30, 1997, the networks included: 155 skilled nursing
facilities with approximately 21,600 beds; 16 primary care physician clinics;
approximately 96 physicians, physician assistants and nurse practitioners; 12
institutional pharmacies and five medical supply distribution centers serving
over 52,000 beds; 28 community based pharmacies; certified rehabilitation
agencies providing services through over 375 contracts; and eight home
healthcare agencies. Genesis ElderCareSM services focus on the central medical
and physical issues facing the more medically demanding elderly. By integrating
the talents of physicians with case management, comprehensive discharge planning
and, where necessary, home support services, Genesis provides cost-effective
care management to achieve superior outcomes and return customers to the
community. Genesis believes that its orientation toward achieving improved
customer outcomes through its eldercare networks has resulted in increased
utilization of specialty medical services, high occupancy of available beds,
enhanced quality payor mix and a broader base of repeat customers.
Of the total 21 Initial Properties, two assisted living facilities and
one independent living facility are being acquired from and will be leased-back
to wholly owned subsidiaries of Genesis pursuant to Percentage Rent Leases and
four skilled nursing facilities are being acquired from and leased-back to
wholly owned subsidiaries of Genesis pursuant to Minimum Rent Leases. Genesis
initially will guarantee the performance of its wholly owned subsidiaries under
these leases. However, in the event Genesis assigns one or more of the leases to
a non-wholly owned subsidiary or a third party, Genesis will not continue to
guarantee the applicable lease. Any such assignment would require the consent of
the Company which may not be unreasonably withheld. The Company will evaluate
the creditworthiness of any assignee in determining whether to provide its
consent. The obligations of Genesis under the guarantees are not subordinated to
any indebtedness of Genesis, but the guarantees are unsecured and may be
structurally subordinated to secured indebtedness of Genesis to the extent of
the assets securing such indebtedness. In addition, the guarantees do not limit
Genesis' ability to incur additional secured indebtedness. The Company also will
lease back to Crozer/Genesis four skilled nursing facilities being acquired from
CKHS. These leases will not be guaranteed by Genesis. See " -- Leases." The
Company will acquire the Lacey Branch Office Building and Professional Office
Building I from Genesis. Genesis also is the principal tenant of three of the
office buildings being acquired by the Company.
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SUMMARY CONSOLIDATED FINANCIAL DATA OF GENESIS
The following table sets forth certain summary consolidated financial
data for Genesis at and for the periods indicated.
<TABLE>
<CAPTION>
AT OR FOR THE
NINE MONTHS ENDED AT OR FOR THE
JUNE 30, YEAR ENDED SEPTEMBER 30,
--------------------- --------------------------------------------
1997 1996 1996 1995 1994
(in thousands, except ratio, per share and operating data)
SUMMARY OF OPERATIONS DATA
<S> <C> <C> <C> <C> <C>
Net revenues $ 816,270 $460,354 $ 671,469 $486,393 $388,616
Income from operations before depreciation,
amortization, lease expense, interest and
debenture conversion expense 145,500 87,313 128,269 93,253 69,373
Depreciation and amortization 31,618 17,883 25,374 18,793 14,982
Lease expense 21,506 11,948 18,638 13,798 11,376
Interest expense, net 28,506 19,104 24,926 20,366 15,305
Debenture conversion expense - 1,245 1,245 -
Earnings before extraordinary items,
cumulative effect of an accounting
change and debenture conversion expense 40,558 24,556 37,966 25,531 17,691
Net income $ 40,005 $ 23,759 $ 37,169 $ 23,608 $17,673
Per common share data (fully diluted): (1)
Earnings before extraordinary items,
cumulative effect of an accounting
change and debenture conversion expense $ 1.13 $ 0.91 $ 1.31 $ 1.03 $ 0.84
Net income $ 1.11 $ 0.88 $ 1.29 $ 0.97 $ 0.84
Weighted average shares of common stock
and equivalents 36,275 29,359 31,130 28,452 24,820
OTHER FINANCIAL DATA
Operating income before capital costs
as a percent of revenue (2) 17.8% 19.0% 19.1% 19.2% 17.8%
Earnings before income taxes, extraordinary
items, cumulative effect of an accounting
change and debenture conversion expense
as a percent of revenue 7.8% 8.3% 8.8% 8.3% 7.1%
Long-term debt to equity ratio 1.08 .59 .66 1.4 1.3
Capital Expenditures $47,138 $26,151 $ 38,645 $ 24,719 $ 18,784
OPERATING DATA
Payor mix (as a percent of patient service revenue):
Private and other 39% 39% 39% 38% 41%
Medicare 24 23 25 21 16
Medicaid 37 38 36 41 43
Average owned/leased health center beds 15,168 9,062 9,429 8,268 7,530
Occupancy percentage in owned / leased
eldercare centers 90.9% 92.5% 92.6% 91.9% 91.9%
Average managed life care units and
health center beds 6,101 5,195 5,030 10,374 9,922
BALANCE SHEET DATA
Working capital $220,827 $227,599 $ 155,491 $132,274 $ 66,854
Total assets 1,375,151 878,348 950,669 600,389 511,698
Long-term debt 644,725 295,897 338,933 308,052 250,807
Shareholders' equity 599,530 500,238 514,608 221,548 195,466
- -----------------------
(1) Reflects a three for two stock split on the common stock effective March
29, 1996.
(2) Capital costs include depreciation and amortization, lease expense,
interest expense and debenture conversion expense.
The consolidated financial statements of Genesis as of September 30,
1996 and 1995 and for each of the years in the three-year period ended September
30, 1996, appear in Genesis' 1996 Annual Report to Shareholders which is
incorporated by reference in its Annual Report on Form 10-K for the year ended
September 30, 1996. The unaudited
</TABLE>
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consolidated financial statements of Genesis as of June 30, 1997, and for the
three-and nine-month periods ended June 30, 1997 and 1996 appear Genesis'
quarterly report on Form 10-Q for the quarterly period ended June 30, 1997. The
Company will provide without charge to each person to whom a copy of this
Prospectus is delivered, upon the written or oral request of such person, a copy
of the financial statements of Genesis referred to above. Written requests for
such copies should be directed to ElderTrust, Attention: D. Lee McCreary, Jr.,
Vice President and Chief Financial Officer, 415 McFarlan Road, Suite 202,
Kennett Square, PA 19348.
In June 1997, Acquisition Corp., a wholly owned subsidiary of Genesis
ElderCare Corp. which is owned 44% by Genesis and owned 56% by The Cypress Group
L.L.C. and TPG Partners II, L.P., commenced the Tender Offer for all of the
outstanding shares of common stock of Multicare. Consummation of the Tender
Offer is subject to, among other things, at least a majority of the outstanding
Multicare common stock being tendered and receipt of all regulatory approvals
and other consents. As of June 30, 1997, Multicare operated, among other assets,
124 skilled nursing facilities, 19 hospital-based subacute units and 11 assisted
living facilities. If the Tender Offer is consummated, Acquisition Corp. will be
merged into Multicare and Multicare, as the surviving entity in the merger, will
become a wholly owned subsidiary of Genesis ElderCare Corp., and all of these
facilities will be managed by Genesis and become part of the Genesis ElderCareSM
Network which will add a sixth principal geographic market (Ohio/Western
Pennsylvania). The total net revenues and net income of Genesis for the nine
months ended June 30, 1997 adjusted on a pro forma basis for the merger of
Acquisition Corp. and Multicare, if consummated, are approximately $1.3 billion
and $38.0 million, respectively.
Set forth below is information regarding the Initial Properties being
acquired from Genesis.
GENESIS - ASSISTED LIVING FACILITIES
Heritage Woods. Heritage Woods is a two-story, apartment style 78,226
square foot assisted living facility located on 16.7 acres of land in Agawam,
Massachusetts. The Heritage Woods facility was developed by Genesis and has an
operational configuration for 122 residents. The Heritage Woods facility is
located adjacent to a Genesis "campus" containing four skilled nursing
facilities, each of which is owned and operated by Genesis and which include in
excess of 500 beds for skilled nursing patients. The facility opened in May 1997
and is in the initial lease-up phase.
Willowbrook. Willowbrook is a three-story, apartment style 39,300
square foot assisted living facility located on approximately two acres of land
in Clarks Summit, Pennsylvania. The Willowbrook facility was developed by
Genesis and has an operational configuration for 70 residents. The facility is
adjacent to an existing Genesis skilled nursing facility containing 120 beds.
The Willowbrook facility opened in June 1996.
Riverview Ridge. Riverview Ridge is a two-story, apartment style
approximately 33,000 square foot assisted living facility located on 2.2 acres
of land in Wilkes-Barre, Pennsylvania. The facility is located adjacent to a
Genesis skilled nursing facility containing 122 beds. The Riverview Ridge
facility is currently leased by a partnership which is owned 51% by Genesis and
49% by a third party, which third party also owns the fee interest in the land
on which the Riverview Ridge facility is located. Prior to the closing of the
Offering, Genesis will acquire the remaining 49% interest in the partnership
which holds the leasehold interest in the land and the facility, and the Company
will purchase the entire leasehold interest from Genesis and will purchase the
fee interest from the third party. The facility has an operational configuration
for 105 residents and opened in 1993.
GENESIS - INDEPENDENT LIVING FACILITY
Pleasant View. Pleasant View is a four-story, 93,724 square foot
independent living facility located on approximately 12 acres of land in
Concord, New Hampshire. The facility is located adjacent to a Genesis skilled
nursing facility containing 180 beds. The Pleasant View facility is a converted
mansion built in 1926, and the property includes a 3,284 square foot carriage
house. The facility has an operational configuration for 72 residents and was
acquired by Genesis in 1995.
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GENESIS - SKILLED NURSING FACILITIES
Rittenhouse Care Center. The Rittenhouse Care Center is a five-story,
183 bed, 88,450 square foot skilled nursing facility located on 0.4 acres of
land in Philadelphia, Pennsylvania. This facility was originally constructed
during the 1930's with two expansions in the 1970's. A renovation of interior
finishes was completed in 1993. The Company has agreed, pursuant to one of the
Construction Loan Commitments, to finance a renovation and expansion of the
Rittenhouse Care Center. Upon completion of this renovation and expansion, the
Rittenhouse facility will have 150 skilled nursing beds which will be leased to
Genesis pursuant to a Minimum Rent Lease and 45 assisted living units which will
be leased to Genesis pursuant to a Percentage Rent Lease. See "-- Construction
Loan Commitments." At June 30, 1997, the payor mix for this facility was
approximately 7% Medicare, 90% Medicaid and 3% private and other. This facility
competes for patients with other facilities in the Philadelphia metropolitan
area including several skilled nursing facilities operated by Genesis and not
owned by the Company.
Lopatcong Care Center. Lopatcong Care Center is a two-story, 57,152
square foot skilled nursing facility located on 2.5 acres of land in
Phillipsburg, New Jersey. This facility was built in 1984 and has 153 beds. At
June 30, 1997, the payor mix for this facility was approximately 5% Medicare,
78% Medicaid and 17% private and other. The Lopatcong Care Center competes for
patients with several other facilities including the Phillipsburg Care Center as
well as with two other Genesis skilled nursing facilities in Phillipsburg, New
Jersey.
Phillipsburg Care Center. Phillipsburg Care Center is a three-story,
46,741 square foot skilled nursing facility located on 1.4 acres of land in
Phillipsburg, New Jersey. This facility was built in the 1930's with an addition
in 1988 and has 94 beds, including 34 beds licensed for assisted living. A
renovation of interior finishes was completed in 1993. At June 30, 1997, the
payor mix for this facility was approximately 12% Medicare, 44% Medicaid, 5% SSI
and 39% private pay and other. The Phillipsburg Care Center competes for
patients with several other facilities including the Lopatcong Care Center and
two other Genesis skilled nursing facilities located in Phillipsburg, New
Jersey.
Wayne Nursing and Rehabilitation Center. Wayne Nursing and
Rehabilitation Center is a one-story, 118 bed, skilled nursing facility located
in Wayne, Pennsylvania. The facility is estimated to have been built circa 1920
with additions completed in 1966, 1974 and 1989. During 1989, there was a
complete renovation of the building. At June 30, 1997, the payor mix of this
facility was approximately 5% Medicare, 67% Medicaid and 28% private pay or
other. The Wayne facility competes for patients with the Harston Hall Nursing
and Convalescent Center and several other facilities in its market area
including at least five other skilled nursing facilities operated by Genesis and
not owned by the Company.
GENESIS - MEDICAL OFFICE AND BANK BUILDINGS
Professional Office Building I. Professional Office Building I ("POB
I") is a 39,972 square foot medical office building located on 0.7 acres of land
in Upland, Pennsylvania adjacent to the Crozer-Chester Medical Center, an acute
care hospital. POB I is 100% leased and its primary tenants consist of resident
physicians with Crozer-Chester Medical Center.
The Company will acquire the building and a leasehold interests in the
land on which POB I is located from Genesis for $4.0 million in cash. Genesis
acquired the building in June 1997 from CKHS for $4.0 million and entered into a
40-year ground lease with Crozer-Chester Medical Center, a Pennsylvania
nonprofit organization ("CCMC") which is an affiliate of CKHS and which owns the
land on which POB I is located as well as the adjacent hospital.
Annual rent under the ground lease with CCMC is fixed at $75,000 per
year, net to CCMC. Pursuant to its terms, the ground lease will be automatically
extended for an additional 40 years, unless the Company gives at least 12 months
prior written notice that it does not wish to extend the term. CCMC and the
Company also may mutually agree to extend the term of the ground lease for an
additional 40 years. If the term is not so extended and the ground lease
expires, CCMC is obligated to pay the Operating Partnership the then book value
(i.e., cost less depreciation) of all improvements then existing on the
property.
POB I will be managed by CKHS pursuant to a ten-year management
agreement between the Company and CKHS (subject to renewal). CCMC has a right of
first refusal, exercisable for 30 days, if the Company receives and
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pursues a written, bona fide offer from a third party to purchase its interest
in the building and leasehold. If CCMC receives and pursues an offer to purchase
the land or any portion of the overall tract which includes not more than POB I,
POB II (which is adjacent to POB I) and/or the parking garage adjacent to POB
II, the Company has the right to elect to purchase such property within 30 days
of receipt of such offer from CCMC upon the same terms and conditions as offered
by the third party.
Lacey Branch Office Building. The Lacey branch office building is a
4,100 square foot building located on 2.0 acres of land in Forked River, New
Jersey. Ocean Federal Savings Bank, a federally chartered savings bank, is the
sole tenant of the building which was constructed in 1996. The Lacey branch
office building is subject to a mortgage held by Ocean Federal Savings Bank,
which will be assumed by the Company.
SENIOR LIFECHOICE CORP. INITIAL PROPERTIES
Senior LifeChoice Corp. ("Senior LifeChoice") is a privately held
Pennsylvania corporation whose principal stockholders include Michael R. Walker
and Gregory M. Stevens, who served as chief financial officer of Genesis from
1989 to 1992. Three other executive officers of Genesis also hold interests in
Senior LifeChoice. Senior LifeChoice currently owns an 88% interest in the
Highgate at Paoli Pointe assisted living facility and a 97.5% interest in The
Woodbridge assisted living facility. The Company will acquire 100% of the
interests in these two facilities, which will be leased-back to and operated by
SLC, which is an affiliate of Senior LifeChoice and of which Mr. Stevens is the
managing member, pursuant to Minimum Rent Leases. None of Genesis' current
directors or executive officers has an interest in SLC. At June 30, 1997, SLC
had total assets of $3.2 million and members' equity of $500,000. For the six
months ended June 30, 1997, SLC had a net loss of $277,000.
Set forth below is certain information regarding the Initial Properties
being acquired from Senior LifeChoice.
SLC - ASSISTED LIVING FACILITIES
Highgate at Paoli Pointe. Highgate at Paoli Pointe is a four-story,
apartment style assisted living facility located on 2.0 acres of land in Paoli,
Pennsylvania. The facility is located adjacent to a condominium retirement
community and is located within approximately three miles of a Genesis skilled
nursing facility. The facility is recently constructed, has an operational
configuration for 82 residents and opened in 1995. Pursuant to the terms of a
regulatory agreement entered into between the partnership which owns Highgate at
Paoli Point and the Chester County Industrial Development Authority, SLC is
required to lease at least 20% of the residential units in the facility to
persons whose adjusted family income does not exceed 50% of the median gross
income for families in the geographic region surrounding the facility.
The Woodbridge. The Woodbridge is a four-story, apartment style
assisted living facility located on 8.5 acres of land in Kimberton,
Pennsylvania. The facility is located adjacent to a condominium retirement
community and is located within fifteen miles of a Genesis skilled nursing
facility. The facility is recently constructed and has an operational
configuration for 90 residents. The facility opened in 1996 and is in the
initial lease-up phase. Pursuant to the terms of a regulatory agreement entered
into between the partnership which owns Highgate at Paoli Point and the Chester
County Industrial Development Authority, SLC is required to lease at least 20%
of the residential units in the facility to persons whose adjusted family income
does not exceed 50% of the median gross income for families in the geographic
region surrounding the facility.
SLC or a subsidiary of SLC will lease The Woodbridge from the Company.
A subsidiary of Genesis will lease Highgate at Paoli Pointe from the Company.
See "-- Leases."
CKHS INITIAL PROPERTIES
Set forth below is certain information regarding the Initial Properties
being acquired from CKHS.
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CROZER/GENESIS - SKILLED NURSING FACILITIES
In August 1997, Genesis and CKHS formed Crozer/Genesis, which is 50%
owned by each of Genesis and CKHS. As part of the Formation Transactions, the
Company will purchase from CKHS and lease back to Crozer/Genesis four skilled
nursing facilities included in the Initial Properties pursuant to a single
Minimum Rent Lease covering all four facilities.
Belvedere Nursing and Rehabilitation Center. The Belvedere Nursing and
Rehabilitation Center is a two-story, 53,000 square foot skilled nursing
facility located on 4.4 acres of land in Chester, Pennsylvania. This facility
was built in 1960 and expanded in 1983 and has 147 beds, including 27 beds
licensed for assisted living. This facility competes for patients with other
facilities in the Philadelphia metropolitan area including several skilled
nursing facilities operated by Genesis and not owned by the Company. At June 30,
1997, the payor mix for this facility was approximately 8% Medicare, 49%
Medicaid and 43% private pay and other.
Chapel Manor Nursing and Rehabilitation Center. Chapel Manor Nursing
and Rehabilitation Center is a three-story, 88,000 square foot skilled nursing
facility located on 3.7 acres of land in Philadelphia, Pennsylvania. This
facility was built in 1973 and has 240 beds. This facility competes for patients
with other facilities in the Philadelphia metropolitan area including several
skilled nursing facilities operated by Genesis and not owned by the Company. At
June 30, 1997, the payor mix for this facility was approximately 9% Medicare,
76% Medicaid and 15% private pay and other.
Harston Hall Nursing and Convalescent Home. Harston Hall Nursing and
Convalescent Home is a three-story, 58,600 square foot skilled nursing facility
located on 9.9 acres of land in Flourtown, Pennsylvania. This facility was built
in 1977 and expanded in 1991 and has 196 beds, including 76 beds licensed for
assisted living. The Harston Hall facility competes for patients with the Wayne
Nursing and Rehabilitation Center and several other facilities in its market
including at least one other skilled nursing facilities operated by Genesis and
not owned by the Company. At June 30, 1997, the payor mix for this facility was
approximately 6% Medicare, 51% Medicaid, 16% SSI and 27% private pay and other.
Pennsburg Manor Nursing and Rehabilitation Center. Pennsburg Manor
Nursing and Rehabilitation Center is a three-story, 42,831 square foot skilled
nursing facility located on 6.1 acres of land in Pennsburg, Pennsylvania. This
facility was built in 1982 and has 120 beds. The Pennsburg Manor facility
competes for patients with several other facilities in its market area including
at least six skilled nursing facilities operated by Genesis and not owned by the
Company. At June 30, 1997, the payor mix for this facility was approximately 8%
Medicare, 61% Medicaid and 31% private pay and other.
Genesis will operate these facilities pursuant to a 12-year management
contract (with renewal if Crozer/Genesis continues to lease the facilities)
between Genesis and Crozer/Genesis. Commencing on September 1, 1997, Genesis
will receive a management fee with respect to the Chapel Manor and Harston Hall
facilities equal to 2.5% of the net revenues from such facilities. Following
completion of the Offering, Genesis will receive a fee equal to 5.4% of the net
operating revenues generated by all four of the facilities leased to
Crozer/Genesis. Commencing in the sixth year of the term, the management fee
will equal 5% of the net operating revenues generated by all four of the
facilities leased by Crozer/Genesis. Commencing on September 1, 1997 with
respect to the Chapel Manor and Harston Hall facilities and on the date of the
closing of the Offering with respect to the Belvedere and Pennsburg Manor
facilities, and continuing for a period of 24 months from such date for each
such facility, up to 30% of the management fee payable to Genesis with respect
to each such facility will be subordinated to lease payments due to the Company
with respect to such facility. In the event that the financial covenants for any
facility are not met or satisfied at the end of the 24-month period applicable
to such facility, then up to 30% of the management fee payable with respect to
such facility shall continue to be subordinated to lease payments due to the
Company with respect to such facility, and such subordination shall continue
until such time as the financial covenants for the applicable facility are met
or satisfied. See "-- Leases -- Crozer/Genesis Minimum Rent Leases." Any
management fees deferred pursuant to the subordination provisions of the
management agreement between Crozer/Genesis and Genesis shall thereafter be paid
monthly from monies generated by the applicable facility (provided that
following such payments, the financial covenants for such facility will be met
or satisfied) until the deferred fees are paid in full.
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Pursuant to an agreement between Genesis and CKHS, Genesis will make
available to Crozer/Genesis a line of credit of up to $5 million until such time
as Crozer/Genesis receives new licenses for the four facilities to be leased by
Crozer/Genesis from the Company, at which time the obligation of Genesis to fund
such line of credit will be reduced to $3 million. Any amounts payable to
Genesis by Crozer/Genesis under this line of credit will not be subordinated to
the lease payment obligations of Crozer/Genesis under its Minimum Rent Lease
with the Company and will be secured by a first lien on accounts receivable.
Crozer/Genesis also will enter into Network Services Agreements with
Genesis for the four facilities for a term of 12 years (with renewal if
Crozer/Genesis continues to lease the facilities). Pursuant to the terms of
these agreements, Genesis, among other things, will make available to the
facilities admissions through contracts negotiated by Genesis with health
maintenance organizations and other insurers. Genesis will receive a fee equal
to $50 per month (subject to adjustment for inflation) for each bed in these
facilities provided that the total amount of such fees together with the amount
payable to Genesis under the management agreement between Crozer/Genesis and
Genesis may not exceed 6% of the total net operating revenues for the four
facilities. Fees payable to Genesis under the Network Services Agreement will
not be subordinated to lease payments payable to the Company.
CKHS - MEDICAL OFFICE BUILDING CONDOMINIUM UNIT
Delaware County Memorial Office Building. The Company will acquire a
condominium unit containing six of the eight floors of a medical office building
located on the campus of DCMH. The condominium unit initially will contain
60,740 square feet of rentable office space and will increase to 65,700 rentable
square feet upon completion of the current expansion of the DCMH medical office
building in the first quarter of 1998 In addition to the expansion project, a
portion of the rentable space in the planned condominium unit is currently
undergoing renovation, and all such renovations are expected be completed within
18 months. All of the office space in the planned condominium unit which is
currently rentable is leased, primarily to resident physicians with DCMH, and it
is expected that all additional space that becomes available in the DCMH medical
office building upon completion of the expansion and the renovations will be
fully leased to new or existing tenants as such space becomes available.
Pursuant to the condominium declaration and bylaws, the Company, as the
owner of approximately 65% of the space in the condominium building, will
control the DCMH medical office building condominium association, subject to
certain rights of CKHS, as the minority owner in the condominium, to approve
certain major transactions. The DCMH medical office building (including the
Company's condominium unit) will be managed by CKHS pursuant to a ten-year
management agreement between the condominium association (subject to renewals).
CKHS has a right of first refusal, exercisable for 30 days, if the Company
receives and pursues a written, bona fide offer from a third party to purchase
the condominium unit. If CKHS receives and pursues an offer to purchase the land
or any part of the DCMH medical office building not included in the Company's
condominium unit, the Company has the right to elect to purchase such property
within 30 days of receipt of such offer from CKHS upon the same terms and
conditions as offered by the third party.
OTHER INITIAL PROPERTIES
The Initial Properties also include one skilled nursing facility, two
medical office buildings and a clinic being acquired from third parties other
than Genesis. Each of the medical office buildings and clinic will be acquired
by the Company subject to the existing leases. Genesis is the principal tenant
in each of these buildings. Messrs. Walker and Stevens and one other current
executive officer of Genesis each own a one-sixth interest in the Salisbury
Medical Office Building and Mr. Walker owns a 50% managing partner interest in
the entity which owns the Windsor Office Building and the Windsor Clinic. Set
forth below is certain information regarding these properties.
OTHER INITIAL PROPERTIES - SKILLED NURSING FACILITY
Silverlake Nursing and Rehabilitation Center. Silverlake Nursing and
Rehabilitation Center is a two-story, 174 bed skilled nursing facility located
in Bristol, Pennsylvania. This facility was built in 1969, expanded in 1977 and
renovated in 1988. This facility is owned by a wholly-owned subsidiary of The
AGE Institute, a Pennsylvania nonprofit corporation, with which Genesis has had
a long-standing relationship. The Company will purchase the stock of The AGE
Institute subsidiary that owns the Silverlake Facility and lease the facility to
a newly formed subsidiary of
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The Age Institute of Florida, which is also a
subsidiary of The AGE Institute, under a Minimum Rent Lease. The facility will
continue to be managed by Genesis pursuant to a long-term management contract
between Genesis and the Age Institute of Florida. All but 3 1/2% of the 6%
management fee payable to Genesis will be subordinated to the lease payment
obligations under the Minimum Rent Lease entered into by the Age Institute of
Florida subsidiary and the Company. The Silverlake facility competes for
patients with several other facilities in its market area, including at least
five skilled nursing facilities operated by Genesis and not owned by the
Company. At June 30, 1997, the payor mix for this facility was approximately 8%
Medicare, 80% Medicaid and 12% private pay and other.
OTHER INITIAL PROPERTIES - MEDICAL OFFICE BUILDINGS
Salisbury Medical Office Building. The Salisbury Medical Office
Building is a 10,961 square foot office building located on 1.4 acres of land in
Salisbury, Maryland. Messrs. Walker and Stevens and one other current executive
officer of Genesis each own a one-sixth interest in the Salisbury Medical Office
Building, which was built in 1984. Mr. Walker holds a note which is secured by
the Salisbury Medical Office Building Property in the amount of approximately
$733,000. This note will be paid off by the Operating Partnership in connection
with the acquisition of the property. In addition, the entity which owns the
Salisbury Medical Office Building made two loans to Mr. Romanov totaling
$450,000. One of these loans was previously repaid by Mr. Romanov and the other
will be repaid by Mr. Romanov at or prior to the closing of the Offering. See
"Certain Relationships and Related Transactions."
Windsor Office Building. The Windsor Office Building is a 2,100 square
foot office building located on 0.3 acres of land in Windsor, Connecticut which
serves as a regional headquarters office of Genesis. The office building was
built in 1934. Mr. Walker owns a 50% managing partner interest in the Windsor
Office Building. In addition, Mr. Walker is the lender under a $1.2 million loan
secured by the Windsor Office Building and Windsor Clinic properties. This loan
will be repaid by the Operating Partnership in connection with the acquisition
of these properties.
Windsor Clinic and Training Facility. The Windsor Clinic and Training
Facility are connected buildings located on a piece of land adjacent to the
Windsor Office Building. The Windsor Clinic and Training Facility include 9,662
rentable square feet and were built in 1996. Mr. Walker owns a 50% managing
partner interest in the Windsor Clinic and Training Facility. The lessees in
these buildings are two subsidiaries of Genesis. A portion of land on which the
Windsor Clinic building is situated is leased from Genesis pursuant to a
long-term, triple net ground lease at an annual rent of $1.00, and the Company
will acquire this leasehold interest and assume the ground lease obligations.
INITIAL PROPERTY ACQUISITION AGREEMENTS
The Company will acquire each of the Initial Properties pursuant to an
acquisition agreement between the Company and the current owner of an Initial
Property or one or more acquisition agreements among the Company and the holders
of all interests in the current owner of an Initial Property (each an "Initial
Property Acquisition Agreement"). These acquisitions are subject to all of the
terms and conditions of such agreements. The following is a summary of certain
provisions of such agreements, does not purport to be complete and is qualified
in its entirety by reference to such agreements. Copies of the forms of the
Initial Property Acquisition Agreements, along with the Initial Property
Acquisition Agreements entered into with Genesis, have been filed as exhibits to
the Registration Statement of which this Prospectus forms a part.
The transfer of the ownership of each Initial Property is subject to
the completion of the Offering as well as the normal and customary conditions to
the closing of business transactions. In the case of the four Initial Properties
which are skilled nursing facilities being acquired from CKHS and leased to
Crozer/Genesis, the closing of the acquisition of such facilities by the Company
is not expected to occur until December 1, 1997. In the case of the six Initial
Properties with respect to which the Company will assume outstanding mortgage
indebtedness, the consents of the mortgagees are also required. The Company
believes that all such consents will be obtained prior to the consummation of
the Offering. However, there is a possibility that the transfer of title to such
properties may have to be delayed for a short period while documents are
finalized. The Operating Partnership will assume certain debt obligations
relating to specific Initial Properties and all obligations relating to each
Initial Property which arise after the transfer thereof to the Company. The
acquisition of the ownership of three of the Initial Properties is structured as
a purchase by the Operating Partnership of ownership interests in the current
owners thereof, rather than the transfer of assets by such
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owners. As a result of this structure, the Operating Partnership will succeed to
all liabilities, whether known or unknown, contingent or otherwise, of the
current owners.
The Initial Property Acquisition Agreements contain representations and
warranties from each transferor of an Initial Property or an interest in an
Initial Property, as applicable, regarding matters such as title to the
applicable Initial Property and, where applicable, the interest being
transferred, the absence of liens and encumbrances thereon, title to personal
property utilized at the Initial Property, leases or other occupancy agreements
and the rents payable thereunder, environmental matters and other
representations and warranties customarily found in similar documents. These
representations and warranties will survive the closing of the Offering for a
period of at least one year except for representations and warranties relating
to environmental matters which will survive the closing of the Offering for a
period of at least two years. With respect to those Initial Properties to be
acquired from Genesis, Genesis will indemnify the Company against a breach of a
representation and warranty contained in the Initial Property Acquisition
Agreements relating to such Initial Properties, provided that Genesis'
indemnification obligations will be limited, on an aggregate basis, to 20% of
the purchase price of such properties. With respect to the Initial Property
known as Salisbury Medical Office Building, the liability of the six current
holders of equity interests in this Initial Property for a breach of a
representation and warranty will be several and not joint and will also be
limited to 20% of the aggregate purchase price of such property. With respect to
the Initial Properties known as Windsor Office Building and Windsor Clinical
Training Facility, the current owner of these properties will be liable for a
breach of a representation and warranty; this liability will be limited to 20%
of the purchase price of each such property on a property by property basis.
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TERM LOANS, CONSTRUCTION LOANS AND FLORIDA FACILITIES NOTE
The following table sets forth certain information regarding the Term
Loans, the Construction Loans and the Florida Facilities Note. Facility
developments are subject to various risks and uncertainties. The project/owner
borrowers include subsidiaries of Genesis, Lake Washington, subsidiaries of SLC
and a subsidiary of the Age Institute of Florida. There can be no assurance that
any of the Initial Assisted Living Development Facilities that secure the
Construction Loans will be completed on a timely basis or at all. See "Risk
Factors -- Risks Associated with Making Loans on Development Projects." The
Company has agreed or has the option to purchase five of the six facilities that
secure the Term Loans and the Construction Loans at the end of the loan terms or
at such time as each facility achieves Stabilized Occupancy. See "-- Purchase
Contracts and Options for Term Loan, Construction Loan and Proposed Multicare
Loan Properties."
<TABLE>
<CAPTION>
LOAN AMOUNT
EXPECTED TO BE
SECURITY PROPERTY LOCATION NUMBER OF FUNDED AT % OF INITIAL INTEREST INITIAL
- ----------------- -------- BEDS(1) CLOSING INVESTMENTS RATE MATURITY LOAN AMOUNT (3)
------- ------- ----------- ---- -------- ---------------
(IN THOUSANDS) (YEARS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Term Loans - Lease-up Assisted Living Facilities
Harbor Place Melbourne, FL 120 $ 4,728 2.7% (2) 2 $ 4,728
Mifflin Shillington, PA 67 5,164 3.0 (2) 2 5,164
Coquina Center Ormond Beach, FL 80 4,577 2.6 (2) 2 4,577
--- ------- ----- ------
Subtotal/Weighted Avg. 267 14,469 8.3 14,469
--- ------- ----- ------
Construction Loans - Initial Assisted Living
Development Projects:
Oaks Wyncote, PA 52 1,500 0.9 (2) 3 5,380
Montchanin Wilmington, DE 92 2,000 1.2 10.50% 3 9,500
Mallard Landing Salisbury, MD 60 1,702 1.0 (2) 3 7,564
--- ------- ----- ------
Subtotal/Weighted Avg. 214 5,202 3.1 22,444
--- ------- ----- ------
Florida Facilities Note(6):
11 skilled nursing facilities Florida 1,219 7,406 4.3 13.00% 10 7,406
Total Loan Investments 1,690 27,077 15.7% $44,319
----- -------- ----- ------
Total Initial Investments $173,863 100.0%
========
</TABLE>
<TABLE>
<CAPTION>
PURCHASE
DEVELOPMENT CONTRACT/ PROJECT/OWNER
STATUS OPTION BORROWER
------ ------ --------
Term Loans - Lease-up Assisted Living Facilities
<S> <C> <C> <C> <C>
Harbor Place Melbourne, FL Lease-up Contract Lake Washington
Mifflin Shillington, PA Lease-up Contract Genesis (4)
Coquina Center Ormond Beach, FL Lease-up Contract Genesis (4)
Subtotal/Weighted Avg.
Construction Loans - Initial Assisted Living
Development Projects:
Oaks Wyncote, PA Constr. Contract Genesis (4)
Montchanin Wilmington, DE Constr. Option SLC (5)
Mallard Landing Salisbury, MD Zoned Option SLC (5)
Subtotal/Weighted Avg.
Florida Facilities Note(6):
11 skilled nursing facilities Florida N/A N/A Age Inst. of Fl.
Total Loan Investments
- -------------------------------------------
(1) Based on the operational configuration of the facility.
(2) The interests rates on these loans will be set at the time of closing of
the Offering at a fixed rate of interest equal to 400 basis points over the
then applicable three-year U.S. Treasury Note rate, except for the
Construction Loan for the Oaks development project which will have a fixed
interest rate equal to 350 basis points over the then applicable three-year
U.S. Treasury Note rate.
(3) Represents the total committed loan amount under the applicable Term Loan
or Construction Loan.
(4) The project owner/borrower of these projects will be a wholly owned
subsidiary of Genesis. Genesis will guarantee the loans made to such
subsidiaries.
(5) The project owner/borrower of these projects will be wholly owned
subsidiaries of SLC. SLC will guarantee the loans made to such
subsidiaries.
(6) See "Business and Properties -- The Florida Facilities Note" for additional
information. The amount shown in the table represents the Company's
economic interest in the Florida Facilities Note on a pre-tax basis.
(7) This facility will be leased to a wholly owned subsidiary of the Age
Institute of Florida.
</TABLE>
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The above table excludes the Proposed Multicare Loans totaling $19.4
million which the Company expects to make to wholly owned subsidiaries of
Multicare. Multicare will guarantee 20% of the principal amount of such loans.
There can be no assurance that the Company will fund the Proposed Multicare
Loans. See "-- Proposed Multicare Term Loans" and "-- Proposed Multicare
Construction Loan."
TERM LOANS - LEASE-UP ASSISTED LIVING FACILITIES
The Company will make the Term Loans with respect to the three Lease-up
Assisted Living Facilities owned by Genesis or in which Genesis has an interest
upon completion of the Offering. The three Lease-up Assisted Living Facilities
are recently completed or nearly complete development projects. The notes
relating to the Term Loans will bear interest at fixed rates equal to the rate
on three-year U.S. Treasury Notes in effect at the closing of the Offering plus
400 basis points. The Term Loans will be fully secured by the real estate, as
improved, as well as by related collateral. Each Term Loan will be due and
payable upon the maturity of the Term Loan (which will occur two years from the
date of the Term Loan, subject to the right of Genesis, upon payment of a 0.5%
fee, to extend the term in each case for up to one additional year) or at such
time as the facility reaches Stabilized Occupancy. The Company has agreed to
purchase from and leaseback to Genesis the three properties securing the Term
Loans. See "-- Purchase Contracts and Options for Term Loan, Construction Loan
and Proposed Multicare Loan Properties." Genesis will guarantee these loans.
Set forth below is information regarding the Lease-up Assisted Living
Facilities that secure the Term Loans.
GENESIS - LEASE-UP ASSISTED LIVING FACILITIES
Harbor Place. Harbor Place is a two-story, apartment style 40,000
square foot assisted living facility located on 6.0 acres of land in Melbourne,
Florida. The facility is located within approximately three miles of a 179 bed
skilled nursing facility owned and operated by Genesis. The Harbor Place
facility is 49% owned by Genesis and 51% owned by a third party who developed
the property. The facility has an operational configuration for 120 residents
and opened in December 1996.
Mifflin. Mifflin is a three-story, apartment style approximately 43,000
square foot assisted living facility located on approximately 12 acres of land
in Shillington, Pennsylvania. The facility is adjacent to an existing Genesis
skilled nursing facility containing 136 beds. The facility is currently located
on the same parcel of land as the adjacent skilled nursing facility, which
parcel will be subdivided by Genesis prior to the purchase of the Mifflin
facility by the Company. The Mifflin facility is being developed by Genesis. The
facility, which has an operational configuration for 67 residents, is scheduled
to open in October 1997.
Coquina Center. Coquina Center is a two-story, apartment style 44,716
square foot assisted living facility located on 6.9 acres of land in Ormond
Beach, Florida. The facility is located adjacent to a 120-bed skilled nursing
facility owned and operated by Genesis. The Coquina Center facility is being
developed by Genesis. The facility, which has an operational configuration for
80 residents, is scheduled to open in October 1997.
PROPOSED MULTICARE TERM LOANS
Each of the two Proposed Multicare Term Loans will have a fixed annual
rate of interest of 10.5% and will mature two years from the date of the loan
for the facility, subject to the right of Multicare to extend the term for up to
two one-year extension periods in the event the facility has not reached
Stabilized Occupancy as of the second anniversary of the loan (or at the end of
the first one-year extension period, if applicable). Multicare will guarantee
20% of the principal amount of the Proposed Multicare Term Loans. Pursuant to
the Proposed Multicare Term Loans to be made with respect to two assisted living
facilities owned by subsidiaries of Multicare, the Company will have the
obligation to acquire each such assisted living facility from Multicare during
the term of the applicable Proposed Multicare Term Loan at such time as the
applicable facility reaches Stabilized Occupancy. See "-- Purchase Contracts and
Options for Term Loan, Construction Loan and Proposed Multicare Properties."
In the event Genesis' acquisition of Multicare is consummated, Genesis
will manage all Multicare assisted living facilities, including the two
facilities which secure the Proposed Multicare Term Loans, pursuant to a
management agreement between Multicare and Genesis. Genesis will receive a fee
in the amount of 6% of the net operating revenues generated by all the Multicare
facilities managed by it, subject to certain subordination provisions in favor
of creditors of Multicare other than the Company. The management fee will not be
subordinated to lease payments or loan payments payable by Multicare to the
Company.
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Set forth below is information regarding the assisted living facilities
owned by subsidiaries of Multicare that will secure the Proposed Multicare Term
Loans, if they are made by the Company.
Lehigh Manor. Lehigh Manor is a two-story, apartment style 58,618
square foot assisted living facility located on 8.5 acres of land in Macungie,
Pennsylvania. The facility will have an operational configuration for 70 units,
including 14 beds in an Alzheimer's unit. The facility is located adjacent to a
130-bed skilled nursing facility owned by Multicare. The Lehigh Manor facility
is being developed by Multicare and opened in September 1997.
Berkshire Manor. Berkshire Manor is a two-story, apartment style 54,554
square foot assisted living facility located on 9.8 acres of land in Reading,
Pennsylvania. The facility will have an operational configuration for 64 units,
including 14 beds in an Alzheimer's unit. The facility is located adjacent to a
130-bed skilled nursing facility owned by Multicare. The Berkshire Manor
facility is being developed by Multicare and opened in September 1997.
CONSTRUCTION LOANS - INITIAL ASSISTED LIVING DEVELOPMENT PROJECTS
CONSTRUCTION LOANS
The Company through the Operating Partnership will make Construction
Loans to develop three assisted living facilities, one of which the Company has
agreed to acquire from Genesis and two of which the Company has an option to
purchase from SLC. In each case, the Construction Loan will be in the amount of
90% of the total project costs, based on an approved budget for each project.
The remaining 10% of the budgeted costs will be covered by an owner's equity
contribution in land, cash or other form acceptable to the Company. Each
Construction Loan will be evidenced by a Construction Mortgage Note, and will be
secured by the property, as improved, as well as by other assets of the borrower
in connection with the project, such as, but not limited to, assignments of
agreements affecting real estate as well as an assignment of the Residential
Living Agreements entered into in connection with the project.
GENESIS - INITIAL ASSISTED LIVING DEVELOPMENT PROJECT
Genesis formed its own development group in 1990. The development group
currently has four project managers who provide various development services in
the areas of land acquisition, zoning, oversight of design, bidding and
construction management. The Genesis development group has developed over $170
million of construction projects, including eight assisted living facilities,
three continuing care retirement communities, the Genesis corporate headquarters
currently under construction, two regional, institutional pharmacy buildings and
certain capital improvements at Genesis' facilities. Genesis' construction of
assisted living facilities has generally focused on locations in close proximity
to Genesis' skilled nursing facilities. In developing assisted living
facilities, Genesis considers various factors, including population, income and
age demographics, the estimated level of market need, the breadth of Genesis'
existing strategic relationships in the primary market area, target site
visibility, proximity to complementary healthcare services, availability of
adequately trained personnel and probability of acquiring an acceptable site and
receiving zoning approval. The primary milestones in the development process are
(i) marketing study and financial feasibility analysis, (ii) site acquisition,
(iii) subdivision and/or zoning and site plan approval and (iv) completion of
construction and licensing approval. Following site acquisition, subdivision and
zoning approvals generally take six months to nine months to receive, and
facility construction and licensing generally take one year. Depending on the
size of a facility and market conditions a facility should reach Stabilized
Occupancy within 12 to 24 months following opening. The timing and cost of a
facility varies considerably based on a variety of site-specific and regional
cost factors.
The Company will make one Construction Loan to Genesis to fund
construction of the Initial Assisted Living Development Project owned by
Genesis. The note will bear interest at a fixed rate equal to the rate on
three-year U.S. Treasury Notes in effect as of the closing of the Offering plus
350 basis points, and will mature on the third anniversary of the Construction
Loan, subject to the right of Genesis, upon payment of a 0.5% fee, to extend the
term for up to two one-year extension periods in the event the facility has not
reached Stabilized Occupancy as
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<PAGE>
of such third anniversary (or at the end of the first one-year extension period,
if applicable). Payment of all sums due under the Construction Loan, as well as
the full and timely performance of the borrower's obligations and completion of
the improvements on the property will be guaranteed by Genesis.
Pursuant to the Construction Loan, the Company will be obligated to
acquire the Initial Assisted Living Development Project owned by Genesis upon
the earlier of the maturity of the Construction Loan (as extended if Genesis
elects to extend the maturity of the Construction Loan as described above) or at
such time as the facility reaches Stabilized Occupancy. See "-- Purchase
Contracts and Options for Term Loan, Construction Loan and Proposed Multicare
Loan Properties."
Set forth below is information regarding the Initial Assisted Living
Development Project owned by Genesis.
The Oaks. The Oaks assisted living development project consists of two,
two-story, 27 foot high wings which are being added to an existing three-story
mansion located on 4.5 acres of land in Wyncote, Pennsylvania. Upon completion,
the Oaks facility will include approximately 40,400 square feet of space and
will have an operational configuration for 52 residents, including residents
with Alzheimer's disease or other forms of memory impairment. The mansion will
be used as the main entrance and will be renovated to include common living
areas and staff offices. The Oaks is located within ten miles of three skilled
nursing facilities owned and operated by Genesis. Construction of this project
commenced in August 1997 and is expected to be completed in July 1998. The
estimated cost of this project is $5.2 million, and the Company's loan
commitment is $4.7 million.
SLC - INITIAL ASSISTED LIVING DEVELOPMENT PROJECTS
To date, SLC or affiliated entities have developed and completed
construction of two assisted living development projects, both of which are
being acquired by the Company as Initial Properties.
Genesis recently made a construction loan to a subsidiary of SLC to
fund the construction of the Montchanin Initial Assisted Living Development
Project. At the closing of the Offering, the Company will make a Construction
Loan to this subsidiary of SLC which will use the funds provided in the initial
draw under such Construction Loan to repay the loan made by Genesis, and the
Company also will make a Construction Loan to another subsidiary of SLC to fund
construction of the Mallard Landing Initial Assisted Living Development Project.
The notes for the Construction Loans will bear interest at a fixed rate equal to
10 1/2%, in the case of the Montchanin facility, and at a fixed rate of interest
equal to the rate on three-year U.S. Treasury Notes in effect as of the closing
of the Offering plus 400 basis points, in the case of the Mallard Landing
facility, and each of these notes will mature on the third anniversary of each
Construction Loan, subject to the right of the applicable subsidiary of SLC,
upon payment of a 0.5% fee, to extend the term for up to two one-year extension
periods in the event the applicable facility has not reached Stabilized
Occupancy as of such third anniversary (or at the end of the first one-year
extension period, if applicable). Payment of all sums due under the Construction
Loans, as well as the full and timely performance of the borrowers' obligations
and completion of the improvements on the properties, will be guaranteed by SLC.
Pursuant to the Construction Loans, the Company will have the option to
acquire each of the two Initial Assisted Living Development Projects owned by
subsidiaries of SLC upon the maturity of the applicable Construction Loan for
the project (as extended if the applicable subsidiary of SLC elects to extend
the maturity of such Construction Loan as described above) or at any time prior
to such maturity after the facility reaches Stabilized Occupancy. In the event
the Company exercises its option to acquire either of these facilities during an
extension period, the Company will rebate to the applicable subsidiary of SLC a
pro rata portion of the 0.5% extension fee for such extension period. Upon
acquisition of either of the Initial Living Development Projects owned by
subsidiaries of SLC, the Company will leaseback the facility to SLC or a
subsidiary of SLC under a Minimum Rent Lease and SLC will manage the facility.
All management fees payable to SLC with respect to these facilities will be
subordinated to the obligations of such subsidiaries of SLC under the leases
with the Company. See "-- Leases -- SLC Minimum Rent Leases."
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Certain of the funds used by SLC to pursue these Initial Assisted
Living Development Projects were provided by Genesis pursuant to one or more
loans to SLC. Sources of funds available to SLC to make payments on or to repay
these loans will be its operating income from the two Initial Properties that it
will lease from the Company and the gain after repayment of a portion of the
Genesis loan, if any, realized by SLC upon the sale to the Company of the two
Initial Assisted Living Development Projects owned by SLC and any other assisted
living development projects sold by SLC in the future. In addition, the Minimum
Rent Leases with subsidiaries of SLC will include covenants requiring SLC to
maintain a net worth equal to at least $5 million, including any Units received
by SLC from its members and any subordinated loans outstanding to SLC from
Genesis for development purposes under the subordinated loans and valuing SLC's
assets at fair market value net of taxes.
Set forth below is information regarding the Initial Assisted Living
Development Projects owned by subsidiaries of SLC.
Montchanin. This assisted living development project, located on 6.1
acres of land in Wilmington, Delaware, consists of a three-story, apartment
style facility with an operational configuration for 92 residents, including
residents with Alzheimer's disease or other forms of memory impairment. The
facility is located adjacent to a condominium retirement community which is
under construction and is located within ten miles of a Genesis skilled nursing
facility. Construction of this project commenced in June 1997 and is expected to
be completed in the second quarter of 1998. The estimated cost of this project
is $10.5 million, and the Company's loan commitment is $9.5 million.
Mallard Landing. The Mallard Landing assisted living development
project is an apartment style assisted living facility, together with a 15,000
square foot attached community center, to be located on 8.7 acres of land in
Salisbury, Maryland. The facility will have an operational configuration for 60
residents. The Mallard Landing facility is located within three miles of a
Genesis skilled nursing facility containing approximately 300 beds. The Company
has committed to finance the development of the assisted living facility and the
community center, which will be used by residents of the assisted living
facility and an independent living condominium project to be located on an
adjoining 20 acre tract of land. The independent living condominium project, as
well as a medical office building to be constructed on two acres to be
subdivided from the original 30 acre parcel and occupied by Genesis following
completion of construction, will be financed by a third party lender. Zoning
approvals for this project were obtained in July 1997 and construction of the
assisted living facility and the attached community center are expected to
commence in the first or second quarter of 1998. The estimated cost of the
assisted living facility and the community center is $6.7 million, and the
Company's loan commitment is $6.0 million.
PROPOSED MULTICARE CONSTRUCTION LOAN
The Company expects to make one construction loan to Multicare to fund
construction of an assisted living facility being developed by Multicare. The
note will bear interest at a fixed annual rate of 10.5%, and will mature on the
third anniversary of the loan, subject to the right of Multicare to extend the
term for up to three one-year extension periods in the event the facility has
not reached Stabilized Occupancy as of such third anniversary (or at the end of
the first one-year extension period, if applicable). Multicare will guarantee
20% of the principal amount of the Proposed Multicare Construction Loan.
Pursuant to the Proposed Multicare Construction Loan, the Company will have the
obligation to acquire the assisted living facility being developed by a
subsidiary of Multicare at any time prior to maturity of the Proposed Multicare
Construction Loan (as extended if the subsidiary of Multicare elects to extend
the maturity of the loan as described above) after the facility reaches
Stabilized Occupancy. See "-- Purchase Contracts and Options for Term Loan,
Construction Loan and Proposed Multicare Loan Properties."
Genesis will manage all Multicare assisted living facilities, including
the facility securing the Proposed Multicare Construction Loan, pursuant to a
management agreement between Multicare and Genesis. Genesis will receive a fee
in the amount of 6% of the net operating revenues generated by all the Multicare
facilities managed by
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Genesis, subject to certain subordination provisions in favor of creditors of
Multicare other than the Company. The management fee will not be subordinated to
lease payments or loan payments payable by Multicare to the Company.
Set forth below is information regarding the assisted living facility
being developed by a subsidiary of Multicare.
Sanatoga Manor. Sanatoga Manor will be a two-story, apartment style
58,618 square foot assisted living facility located on 4.09 acres of land in
Pottstown, Pennsylvania. The facility will have an operational configuration for
70 residents, including 14 beds in an Alzheimer's unit. The facility is located
adjacent to a 130-bed skilled nursing facility owned by Multicare. Construction
of this project commenced in the second quarter of 1997 and is expected to be
completed in the second quarter of 1998. The estimated cost of this project is
$7.2 million, and the Company's loan commitment is $6.5 million.
PURCHASE CONTRACTS AND OPTIONS FOR TERM LOAN, CONSTRUCTION LOAN AND PROPOSED
MULTICARE LOAN PROPERTIES
The Company has agreed to purchase and leaseback the four assisted
living facilities that will secure Term and Construction Loans made to Genesis
and to Lake Washington in which Genesis owns a 49% interest (i) upon the earlier
of the maturity of the applicable Term Loan (which maturity shall occur on the
second anniversary of the date of such Term Loan, subject to the right of
Genesis, upon payment of a 0.5% fee, to extend the term for one additional year
in the event the applicable Lease-up Assisted Living Facility has not reached
Stabilized Occupancy as of such second anniversary of the date of such Term
Loan), or at such time as the applicable Lease-up Assisted Living Facility
reaches Stabilized Occupancy, for the Lease-up Assisted Living Facilities, and
(ii) upon the earlier of the maturity of the Construction Loan for the Initial
Assisted Living Development Project (which maturity shall occur on the third
anniversary of the date of the Construction Loan for such project, subject to
the right of Genesis, upon payment of a 0.5% fee, to extend the term for up to
one-year extension periods in the event the project has not reached Stabilized
Occupancy as of such third anniversary of the date of the Construction Loan (or
at the end of the first one-year extension period, if applicable)) or at such
time as the facility reaches Stabilized Occupancy, for the Initial Assisted
Living Development Project. The cash purchase price for each Lease-up Assisted
Living Facility will be an amount which will result in an initial annual yield
of 12.0% to the Company (determined by capitalizing at such rate either (i) in
the case of a facility which has reached Stabilized Occupancy as of the date of
purchase by the Company, an assumed net operating income for such facility,
based on actual gross revenues and operating expenses for such facility during
the three months ended immediately prior to the purchase of such facility by the
Company, annualized and adjusted to reflect a long-term occupancy of 92%, less
an assumed 5% management fee, or (ii) in the case of a facility which has not
reached Stabilized Occupancy as of the date of purchase by the Company, the
actual net operating income for such facility for the three months ended
immediately prior to the purchase of such facility by the Company, annualized,
less an assumed 5% management fee). The cash purchase price for the Initial
Assisted Living Development Project to be acquired by the Company from Genesis
will be an amount which will result in an annual yield to the Company equal to
the rate on ten-year U.S. Treasury Notes as of the date of the purchase of such
Initial Assisted Living Development Project plus 525 basis points (determined by
capitalizing at such rate either (i) if the facility has reached Stabilized
Occupancy as of the date of purchase by the Company, an assumed net operating
income for the facility, based on actual gross revenues and operating expenses
for the facility for the three months ended immediately prior to the purchase of
the facility by the Company, annualized and adjusted to reflect a long-term
occupancy of 92%, less an assumed 5% management fee, or (ii) if the facility has
not reached Stabilized Occupancy as of the date of purchase by the Company, the
actual net operating income for such facility for the three months ended
immediately prior to the purchase of the facility by the Company, annualized,
less an assumed 5% management fee). The purchase agreements for each of these
facilities will be substantially similar to the purchase agreements entered into
by the Company and Genesis with respect to the assisted living facilities being
acquired for Genesis which are Initial Properties. See "-- Initial Property
Acquisition Agreements." The facility leases for each of the facilities
leased-back to Genesis will be Percentage Rent Leases. See "-- Leases --
Percentage Rent Leases."
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The Company also has an option to purchase from and leaseback the two
facilities that will secure Construction Loans made to subsidiaries of SLC on
the maturity of the applicable Construction Loan (which maturity shall occur on
the third anniversary of the date of such Construction Loan, subject to the
right of such subsidiaries of SLC, upon payment of a 0.5% fee, to extend the
term for up to two one-year extension periods in the event the applicable
Initial Assisted Living Development Project has not reached Stabilized Occupancy
as of such third anniversary of the date of such Construction Loan (or at the
end of the first one-year extension period, if applicable)) or at such time
prior to maturity of the Construction Loan for the project (as extended as
described above, if applicable) as the facility reaches Stabilized Occupancy.
The option agreements provide for a cash purchase price of $13.0 million for the
Montchanin facility and $9.0 million for the Mallard Landing facility. The
option agreements for each of these facilities will be substantially similar to
the purchase agreements entered into by the Company and Senior LifeChoice with
respect to the assisted living facilities being acquired from Senior LifeChoice
which are Initial Properties. See "-- Initial Property Acquisition Agreements."
If acquired by the Company, these facilities would be leased to subsidiaries of
SLC under Minimum Rent Leases. See "-- Leases -- SLC Minimum Rent Leases."
The Company will have an obligation to purchase from and leaseback the
three facilities that will secure the Proposed Multicare Loans, if the Company
makes such loans to Multicare, (i) for the facilities in lease-up, at or prior
to the maturity of the Proposed Multicare Term Loan for the applicable facility
(which maturity shall occur on the third anniversary of the date of the Proposed
Multicare Term Loan for such facility, subject to the right of the applicable
subsidiaries of Multicare to extend the term for up to three one-year extension
periods in the event the applicable facility has not reached Stabilized
Occupancy as of such third anniversary of the date of the Proposed Multicare
Term Loan (or the end of the first one-year extension period, if applicable),
but not earlier than such time as the applicable facility reaches Stabilized
Occupancy, and (ii) for the project under development, at or prior to the
maturity of the Proposed Multicare Construction Loan for the project (which
maturity shall occur on the third anniversary of the date of the Proposed
Multicare Construction Loan for such project, subject to the right of the
applicable subsidiary of Multicare to extend the term for up to three one-year
extension periods in the event the project has not reached Stabilized Occupancy
as of such third anniversary of the date of the Proposed Multicare Construction
Loan (or the end of the first one-year extension period if applicable), but not
earlier than such time as the facility reaches Stabilized Occupancy; provided,
however, that Multicare will not be obligated to sell any facility if the
purchase price for the facility would be less than the applicable loan amount.
The purchase agreements provide for a cash purchase price in an amount which
will result in an annual yield of 10.5% to the Company (based on actual gross
revenues and operating expenses for such facility during the three months ended
immediately prior to the purchase of such facility by the Company, annualized
and adjusted to reflect a long-term occupancy of 92%, less an assumed 5%
management fee). Other terms of the purchase agreements for each of these
facilities will be substantially similar to the purchase agreements entered into
by the Company and Genesis with respect to the assisted living facilities being
acquired from Genesis which are Initial Properties. See "-- Initial Property
Acquisition Agreements." If acquired by the Company, these facilities would be
leased to Multicare under Minimum Rent Leases. See "-- Leases -- Multicare
Minimum Rent Leases."
THE FLORIDA FACILITIES NOTE
Upon completion of the Offering, ET Capital Corp. will purchase the
Florida Facilities Note, which is a $7.5 million working capital term note, from
Genesis. The maker of the Florida Facilities Note is the Age Institute of
Florida. ET Capital Corp. will borrow 75% of the funds to purchase the Florida
Facilities Note from the Operating Partnership, and will execute a term note in
favor of the Operating Partnership in the original principal amount of $5.625
million. The remaining funds required to purchase the Florida Facilities Note
will be contributed to ET Capital Corp. by the Operating Partnership and Mr.
Romanov in exchange for nonvoting stock (representing 95% of the equity in ET
Capital Corp.) and voting stock (representing 5% of the equity in ET Capital
Corp.), respectively. ET Capital Corp.'s note to the Company will bear interest
at a rate of 13% per annum with interest only payable quarterly until the note
is paid in full. As a result of its ownership of all of the nonvoting stock in
ET Capital Corp., the Company will have a 95% economic interest in the Florida
Facilities Note, and Mr. Romanov will have a 5% economic interest in the Florida
Facilities Note through his ownership of all of the outstanding voting stock of
ET Capital Corp.
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The Florida Facilities Note is a non-recourse obligation of the Age
Institute of Florida, secured by a second lien on 11 Florida skilled nursing
facilities owned by the Age Institute of Florida and a second lien on accounts
receivable and other working capital assets. These lien positions will be
shared, pari passu, by Genesis with respect to a separate, $2.5 million working
capital term note made by the Age Institute of Florida and retained by Genesis
(the "Retained Note"). The Florida Facilities Note matures on November 1, 2007.
Payments of interest only, at a fixed annual rate of 13% are due quarterly from
the Age Institute of Florida until the Florida Facilities Note is paid in full.
The Florida Facilities Note contains a yield maintenance provision in the event
of prepayment. ET Capital Corp. and its assignees will have an option to
purchase the Retained Note from Genesis, at par, for one year following the
closing of the Offering.
The first lien on the 11 skilled nursing facilities is held by Genesis
to secure a $45.0 million loan made by Genesis in August 1996 to finance the Age
Institute of Florida's acquisition of 11 skilled nursing facilities (the
"Acquisition Loan"), which Genesis manages pursuant to a long-term management
contract. The Acquisition Loan matures on August 31, 2001 (subject to extension
by the Age Institute of Florida for five years). Interest only is payable until
maturity, with interest and a portion of principal payable during any extension
period. Effective as of the closing of the Offering, the principal amount of the
Acquisition Loan will be reduced from $45.0 million to $40.0 million and the
interest rate will be reduced from 10 1/4% (subject to cost-of-living
adjustment) to a fixed rate of 8 1/4%. Genesis then intends to sell the $40.0
million Acquisition Loan to a third party. After giving effect to the foregoing,
the debt service coverage ratio on the Florida Facilities Note and the Retained
Note for the six months ended June 30, 1997 (after debt service on the $40.0
million Acquisition Loan and the subordination of 2 1/2% of the 6% management
fee) would have been 1.68x. After giving effect to the full 6% management fee,
the debt service coverage ratio would have been .78x, or a short-fall of
$510,000. Genesis has agreed not to terminate its management agreement as long
as at least 3 1/2% of its 6% management fee is being paid on a current basis.
Any portion of the management fee not paid would accrue and be payable in full
at such time as the Age Institute of Florida is current on both the Florida
Facilities Note and the Retained Note. At June 30, 1997, the payor mix for the
11 Age Institute of Florida owned skilled nursing facilities was approximately
11% Medicare, 73% Medicaid and 16% private pay and other, and such facilities
had a weighted average occupancy of 89.8%. See "Risk Factors -- Risks Associated
with Florida Facilities Note."
CONSTRUCTION LOAN COMMITMENTS AND RELATED PURCHASE CONTRACTS
In addition to the current Term and Construction Loans, the Company has
entered into the Construction Loan Commitments totaling $42.9 million with
Genesis and $10.4 million with SLC to provide financing for an additional nine
assisted living development or expansion projects which are in the planning
phase. The estimated cost of completion of these projects is $59.2 million. Of
these nine assisted living development or expansion projects, four are located
in Pennsylvania, two are located in New Jersey, two are located in Florida and
one is located in New Hampshire. The resident capacity of these facilities is
expected to total approximately 700 to 800. One of the projects involves the
addition of assisted living units to an existing skilled nursing facility owned
by the Company and operated by Genesis. Six of these projects are located
adjacent to existing skilled nursing facilities owned and operated by Genesis.
The remaining two projects are located within five miles of one or more Genesis
skilled nursing facilities. The Construction Loan Commitments provide for a
fixed rate of interest equal to 350 basis points over the three-year U.S.
Treasury Note rate in effect at the time the closing of the loan occurs.
One of the projects for which Construction Loan Commitments will be
made consists of an $8.2 million renovation and expansion of the 183 bed
Rittenhouse skilled nursing facility, which is one of the Initial Properties.
Upon completion of the planned renovation and expansion, the Rittenhouse
facility will contain 150 skilled nursing beds and 45 assisted living units. The
assisted living units will be located on the top two floors of the facility,
segregated from the skilled nursing beds. During construction, Genesis will
continue to operate the facility as a skilled nursing facility pursuant to a
Minimum Rent Lease entered into by the Company and Genesis. During the term of
the construction loan made by the Company pursuant to the Construction Loan
Commitment, the minimum rent payable by Genesis under such Minimum Rent Lease
will increase by 1.5% each year without regard to the revenues for such
facility. Upon completion of the renovation and expansion of Rittenhouse, the
Company will be obligated to purchase the improvements. The purchase price of
the improvements relating to the assisted living
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units will result in an initial annual yield on the Company's investment equal
to 525 basis points over the ten-year U.S. Treasury Note rate as of the date the
Company becomes obligated to acquire such improvements. The purchase agreement
for these improvements will be substantially similar to the purchase agreements
entered into by the Company and Genesis with respect to the assisted living
facilities being acquired from Genesis which are Initial Properties. See "--
Initial Properties Acquisition Agreements." After the Company purchases the
improvements, it will enter into two new, separate leases with Genesis with
respect to the Rittenhouse facility. One of these leases will be a Percentage
Rent Lease with respect to the assisted living units which will provide for the
payment of percentage rent by Genesis at a rate based on the purchase price paid
by the Company for the improvements. The second lease will be a new Minimum Rent
Lease with respect to the skilled nursing beds.
In addition to Rittenhouse, seven of the projects will be new assisted
living facilities developed by Genesis and one will be a new assisted living
facility developed by SLC. Upon completion of development, the Company will be
obligated to purchase the seven facilities being developed by Genesis. The
purchase price for each of these facilities will be an amount which will result
in an annual yield on the Company's investment equal to 525 basis points over
the ten-year U.S. Treasury Note rate as of the date the Company becomes
obligated to acquire such facility (determined by capitalizing at such rate
either (i) in the case of a facility which has reached Stabilized Occupancy as
of the date of purchase by the Company, an assumed net operating income for such
facility, based on actual gross revenues for such facility during the three
months ended immediately prior to the purchase of such facility by the Company,
annualized and adjusted to reflect a long-term average occupancy level of 92%,
less an assumed 5% management fee, or (ii) in the case of a facility which has
not reached Stabilized Occupancy as of the date of purchase by the Company, the
actual net operating revenues for such facility for the three months ended
immediately prior to the purchase of such facility by the Company, annualized
less an assumed 5% management fee). The purchase agreements for each of the
facilities to be acquired from Genesis will be substantially similar to the
purchase agreements entered into by the Company and Genesis with respect to the
assisted living facilities being acquired from Genesis which are Initial
Properties. See "-- Initial Properties Acquisition Agreements." Upon acquisition
of any such project from Genesis, the Company will leaseback the facility to a
subsidiary of Genesis under a Percentage Rent Lease at a percentage rate based
on the purchase price paid by the Company for the facility. See "-- Leases --
Genesis Percentage Rate Leases." The Company does not have a contract to acquire
the assisted living project being developed by SLC.
The Company's obligation to fund the Construction Loan Commitments for
these projects is subject to a number of conditions, including approval of
project budgets and operating projections, approval of acceptable contracts for
Construction and receipt by Genesis or SLC of all necessary zoning, land use,
building, occupancy, licensing and other required governmental approvals and
authorizations. See "Risk Factors -- Risks Associated with Making Loans on
Development Projects."
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MORTGAGE DEBT
The following table sets forth certain information regarding the debt
obligations that will be assumed by the Company upon completion of the Offering.
<TABLE>
<CAPTION>
INTEREST RATE AS PRINCIPAL
OF JUNE 30, BALANCE AS OF ANNUAL DEBT BALANCE DUE
PROPERTY 1997 (1) JUNE 30, 1997 SERVICE MATURITY DATE ON MATURITY
- -------- ---- ------------- ------- ------------- -----------
(in thousands) (in thousands) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
The Woodbridge (2)
Bonds Due 2005 8.00% (F) $ 885 $ 71 September 1, 2005 $ 170
Bonds Due 2025 8.50 (F) 9,060 770 September 1, 2025 880
Belvedere NRC/
Chapel NRC (3) 11.00 (F) 11,483 1,524 August 1, 2009 --
Highgate at Paoli Pointe
Series A Bonds (4) 8.05 (F) 9,680 823 January 1, 2024 840
Riverview Ridge (5) 9.00 (F) 2,750 248 December 31, 2002 2,540
Lacey Bank Bldg. (6) 8.25 (V)(7) 486 -- July 1, 2017 --
------------ ----------- -----------
Total $ 34,344 $ 3,436 $ 4,430
============ =========== ===========
- ---------------------------------------
(1) "F" denotes fixed rate and "V" denotes variable rate.
(2) The bonds may be redeemed with the bond issuer's approval upon payment of a
3%, 2% and 1% redemption premium of the balance prepaid during the years
ending August 31, 2006, 2007 and 2008, respectively, and no premium
thereafter. The bonds due 2025 are subject to sinking fund redemption prior
to maturity at a redemption price equal to certain specified principal
amounts (commencing on September 1, 1999 at $50,000 increasing to $880,000
on September 1, 2025) plus accrued interest.
(3) The loan may be prepaid upon payment of a prepayment penalty calculated
under yield maintenance agreement based upon the rate payable on U.S.
Treasury obligations due closest to the maturity date.
(4) The Series A bonds may be redeemed with the bond issuer's approval upon
payment of a 3%, 2% and 1% redemption premium of the balance prepaid during
the years ending July, 2005, 2006 and 2007, respectively, and no premium
thereafter. The Series A Bonds are subject to sinking fund redemption prior
to maturity at a redemption price equal to certain specified principal
amounts (commencing on January 1, 2000 at $130,000 increasing to $840,000
on January 1, 2024) plus accrued interest.
(5) The note may be prepaid in full upon payment of a prepayment penalty.
During the period ending October 18, 2005, a prepayment penalty will be
assessed equal to the greater of 1% of the outstanding balance or a yield
maintenance amount based upon the U.S. Treasury securities bearing interest
at 9 3/8% due February 2006. A penalty equal to 3%, 2% and 1% of the
prepaid balance will be payable if prepayment occurs in the years ending
October 18, 2006, 2007 and 2008, respectively.
(6) The note may be prepaid upon payment of a penalty equal to 3%, 2% and 1% of
the original balance if prepayment occurs in the first through
twenty-fourth, twenty-fifth through thirty-sixth and thirty seventh through
sixtieth months, respectively, from June 7, 1996.
(7) The interest rate on the note is adjusted after each 60 month period. The
new rate is made by reference to the weekly 5-year U.S. Treasury Constant
Maturities Index. The maximum rate adjustment is 3% at any change date with
a maximum rate adjustment of 6% over the loan term.
</TABLE>
LEASES
The leases for three of the four assisted living facilities and the one
independent living facility being acquired from and leased-back to wholly owned
subsidiaries of Genesis will be Percentage Rent Leases with no
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minimum rent. The lease for the remaining assisted living facility being
acquired from and leased-back to a wholly owned subsidiary of Genesis will
provide for the payment of minimum rent until such facility reaches Stabilized
Occupancy, at which time the lease will convert automatically into a Percentage
Rent Lease with no minimum rent. The leases to be entered into with subsidiaries
of Genesis for the two Lease-up Assisted Living Facilities and the Initial
Assisted Living Development Projects that the Company has agreed to acquire from
Genesis also will be Percentage Rent Leases. The leases for the four skilled
nursing facilities being acquired from and leased-back to wholly owned
subsidiaries of Genesis will be Minimum Rent Leases, as well as the lease for
the Highgate facility which will be acquired from Senior LifeChoice and
leased-back to Genesis. The leases for the remaining seven Initial Properties
(other than the medical office and other buildings) being leased to third
parties other than Genesis, as well as the remaining Initial Assisted Living
Development Projects, if the Company elects to purchase such facilities, also
will be Minimum Rent Leases. The medical office and other buildings included in
the Initial Properties will be acquired by the Company subject to the existing
leases with various tenants. If the Company elects to purchase the three
assisted living facilities which secure the Proposed Multicare Loans, then the
leases for these facilities will be Minimum Rent Leases. Copies of the forms of
the Percentage Rent Leases and Minimum Rent Leases have been filed as exhibits
to the Registration Statement of which this Prospectus forms a part. The
following is a summary of certain provisions of such agreements, does not
purport to be complete and is qualified in its entirety by reference to such
agreements.
GENESIS PERCENTAGE RENT LEASES
The initial terms of the Percentage Rent Leases are ten years, and
Genesis (through one or more wholly owned subsidiaries), as the tenant under
each such Percentage Rent Lease, has the option to extend the term for up to two
consecutive five-year periods, provided that Genesis must exercise its option to
extend with respect to all, but not less than all, of the facilities which are
subject to Percentage Rent Leases or Minimum Rent Leases with the Company and
which commence on the same date. No assurance can be given that the options to
extend the lease terms will be exercised by Genesis. Genesis also will have a
right of first refusal with respect to any facility, on a facility-by-facility
basis, which is subject to a Percentage Rent Lease or a Minimum Rent Lease and
for which the Company receives an offer to purchase or lease which the Company
is prepared to accept during the term of the lease (as extended) and for one
year thereafter.
The Percentage Rent Leases provide for the payment of Percentage Rent
at a rate equal to between approximately 21% and 42% of gross revenues derived
from each property (excluding any revenues derived from ancillary healthcare
services provided by Genesis or its affiliates to residents of the applicable
facility) subject to a Percentage Rent Lease. Genesis is required to use
reasonable efforts to produce maximum revenues at each facility subject to a
Percentage Rent Lease by designing and implementing a comprehensive marketing
strategy program to attain the highest occupancy level compatible with a
competitive rate structure.
Each Percentage Rent Lease is a "triple net" lease, and Genesis,
directly or indirectly, is responsible thereunder, in addition to the Percentage
Rent, for all additional charges, including every fine, penalty, interest and
cost which may be added for non-payment or late payment thereof, all taxes,
assessments, levies, fees, water and sewer rents and charges, all governmental
charges with respect to the applicable property and all utility and other
charges incurred in the operation of the applicable property. Each Percentage
Rent Lease requires the Genesis subsidiary to maintain adequate insurance on the
applicable leased property, naming the Company or its affiliates and any
mortgagees as additional insureds. In addition, each Percentage Rent Lease
requires the Genesis subsidiary to indemnify the Company and its affiliates
against certain liabilities in connection with the applicable leased property.
The Percentage Rent Leases with Genesis will include default provisions
customary for leases for facilities of the types to be leased by Genesis,
including defaults for the failure to pay rent or otherwise satisfy all
obligations under the applicable Percentage Rent Lease. The Percentage Rent
Leases also will include a default for any failure by the lessee to maintain an
average occupancy of 78% or greater for four consecutive quarters. Certain of
the Percentage Rent Leases and Minimum Rent Leases with Genesis will be
cross-defaulted with respect to monetary defaults.
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Each Genesis subsidiary is required, at its expense, to maintain each
property leased by it in good order and repair, in accordance with standards
promulgated in each Percentage Rent Lease. In addition, during the last four
years of the term (as extended, if applicable), each Genesis subsidiary is
required to expend a minimum of $3,000 per residential unit in each assisted
living or independent living facility covered by a Percentage Rent Lease as
capital expenditures to maintain the applicable property. The Company is not
required to repair, rebuild or maintain any leased property or to pay for any
addition, modification or improvement.
The obligations of each Genesis subsidiary under the Percentage Rent
Leases and the Highgate Minimum Rent Lease are guaranteed by Genesis. The
Genesis guarantees are unsecured and may be structurally subordinated to secured
indebtedness of Genesis. The guarantees do not limit Genesis' ability to incur
additional secured indebtedness. In addition, Genesis will deposit with the
Company as a security deposit an amount equal to one-sixth of the estimated
Percentage Rent payable with respect to the first year under each Percentage
Rent Lease based on the operating budget for such year. Interest on the security
deposit will be paid quarterly to Genesis at rate equal to the rate on 90-day
U.S. Treasury Bills for the applicable period. A Percentage Rent Lease may not
be assigned by Genesis without the consent of the Company, which the Company may
withhold in its sole discretion. Genesis will operate and self-manage each of
the facilities it leases from the Company.
GENESIS MINIMUM RENT LEASES
The initial term of each of the Minimum Rent Leases with Genesis is ten
years, and Genesis (through one or more wholly owned subsidiaries), as the
tenant under each such Minimum Rent Lease, has the option to extend the term for
up to two consecutive five-year periods, provided that Genesis must exercise its
option to extend with respect to all, but not less than all, of the facilities
which are subject to Minimum Rent Leases or Percentage Rent Leases with the
Company and which commence on the same date. No assurance can be given that the
options to extend the lease terms will be exercised by Genesis. Genesis also
will have a right of first refusal with respect to any facility, on
facility-by-facility basis which is subject to a Minimum Rent Lease or a
Percentage Rent Lease and for which the Company receives an offer to purchase or
lease which the Company is prepared to accept during the term of the lease (as
extended) and for one year thereafter.
Each Minimum Rent Leases with Genesis (other than with respect to
Highgate at Paoli Pointe) provides for the payment of Minimum Rent during the
first lease year at an amount based on an annual yield for the Company equal to
the rate on ten-year U.S. Treasury Notes as of the first day of such Minimum
Rent Lease plus 350 basis points for each facility. The Minimum Rent Lease for
Highgate provides for the payment of minimum rent during the first lease year of
$1.2 million. Minimum Rent for each facility will increase each year by an
amount equal to the lesser of (i) 5% of the increase in the gross revenues for
such facility (excluding any revenues derived from ancillary healthcare services
provided by Genesis or its affiliates to residents of the applicable facility)
during the immediately preceding year or (ii) one-half of the increase in the
Consumer Price Index during the immediately preceding year.
Each Minimum Rent Lease is a "triple net" lease, and Genesis, directly
or indirectly, is responsible thereunder, in addition to the Minimum Rent, for
all additional charges, including every fine, penalty, interest and cost which
may be added for non-payment or late payment thereof, all taxes, assessments,
levies, fees, water and sewer rents and charges, all governmental charges with
respect to the applicable property and all utility and other charges incurred in
the operation of the applicable property. Each Minimum Rent Lease requires the
Genesis subsidiary to maintain adequate insurance on the applicable leased
property, naming the Company or its affiliates and any mortgagees as additional
insureds. In addition, each Minimum Rent Lease requires the Genesis subsidiary
to indemnify the Company and its affiliates against certain liabilities in
connection with the applicable leased property. The Minimum Rent Leases with
Genesis will include default provisions customary for leases of skilled nursing
facilities, including defaults for the failure to pay rent or otherwise satisfy
all obligations under the applicable Minimum Rent Lease. Certain of the Minimum
Rent Leases and Percentage Rent Leases with Genesis will be cross-defaulted with
respect to monetary defaults.
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Each Genesis subsidiary is required, at its expense, to maintain each
property leased by it in good order and repair, in accordance with standards
promulgated in each Minimum Rent Lease. In addition, during the last four years
of the term (as extended, if applicable), each Genesis subsidiary is required to
expend a minimum of $2,000 per skilled nursing bed and $3,000 per assisted
living unit in each skilled nursing facility covered by a Minimum Rent Lease as
capital expenditures to maintain the applicable property. The Company is not
required to repair, rebuild or maintain any leased property or to pay for any
addition, modification or improvement.
The obligations of each Genesis subsidiary under the Minimum Rent
Leases are guaranteed by Genesis. However, in the event Genesis assigns one or
more of its Minimum Rent Leases to a non-wholly owned subsidiary or a third
party, Genesis may not continue to guarantee the applicable lease. Any such
assignment of a Minimum Rent Lease by Genesis would require the consent of the
Company which may not be unreasonably withheld. Genesis is currently negotiating
an arrangement with a Philadelphia-based hospital system. If the arrangement is
negotiated successfully, the hospital system would lease-back the Wayne skilled
nursing facility following its sale to the Company and Genesis would manage the
facility. In addition, Genesis would not guarantee the lease. The Genesis
guarantees are unsecured and may be structurally subordinated to secured
indebtedness of Genesis. The guarantees do not limit Genesis' ability to incur
additional secured indebtedness. In addition, Genesis will deposit with the
Company as a security deposit an amount equal to one-sixth of the estimated
Minimum Rent payable with respect to the first year under each Minimum Rent
Lease. Interest on the security deposit will be paid quarterly to Genesis at
rate equal to the rate on 90-day U.S. Treasury Bills for the applicable period.
Genesis will operate and self-manage each of the facilities it leases from the
Company.
For the six months ended June 30, 1997, on a pro forma basis, the lease
coverage ratios (net operating income before interest, depreciation and rent
divided by rent payments) for the skilled nursing facilities to be leased to
Genesis under Minimum Rent Leases (Rittenhouse CC, Lopatcong CC, Phillipsburg CC
and Wayne NRC) were 1.57x, 1.55x, 1.77x and 0.71x, respectively. For such
period, the lease coverage ratio for Highgate was 0.72x.
SLC MINIMUM RENT LEASES
The initial term of the Minimum Rent Lease for the Woodbridge facility
with the subsidiary of SLC that will lease the facility is ten years, and the
lessee, under such Minimum Rent Lease, has the option to extend the term for an
additional ten-year term, provided that such lessee exercises its option by
giving notice to the Company during the eighth lease year. No assurance can be
given that the lessee will exercise its option to extend the lease term. The
Minimum Rent Lease for the Woodbridge facility provides for the payment of
minimum rent during the first lease year of $1.2 million, which will increase by
1.5% annually. The Minimum Rent Lease for the Woodbridge facility also provides
for the payment of incremental percentage rent beginning in the second lease
year at a rate equal to 5% of increased gross revenues during any lease year
over the gross revenues during the first lease year for each facility
("Incremental Percentage Rent"). The Minimum Rent Lease for the Woodbridge
facility will include default provisions customary for leases of assisted living
facilities, including defaults for the failure to pay rent or otherwise satisfy
all obligations under the applicable Minimum Rent Lease.
Under the Minimum Rent Lease for The Woodbridge, the lessee is
required, at its expense, to maintain each leased property in good order and
repair, in accordance with standards set forth in each Minimum Rent Lease. In
addition, in the event that the terms of such Minimum Rent Lease are not
extended, then, during each of the last two years of the term, the lessee will
be required to make minimum capital expenditures equal to the greater of (i) the
average of capital expenditures made during the sixth through eighth lease years
and (ii) $750 per residential unit in the facility to maintain the property or
to restore such property to the condition in which it was leased to such lessee
at the beginning of the term. The lessee, at its expense and subject to certain
approval rights of the Company, may make additions, modifications or
improvements to each property covered by the Minimum Rent Lease. Any such
addition, modification or improvement will become the property of the Company
upon expiration or termination of the Minimum Rent Lease. The Company may, in
certain circumstances, require the lessee to remove any such addition,
modification or improvement and restore the applicable property to the condition
in which it was leased to such lessee at the beginning of the term. The Company
and its affiliates are not required to repair, rebuild or maintain any leased
property or to pay for any addition, modification or improvement proposed by any
lessee.
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The Minimum Rent Lease for the Woodbridge facility provides that SLC
must maintain a net worth equal to at least $5 million, including any Units
contributed to SLC by its members and the amounts under the subordinated loans
made by Genesis to SLC to fund development activities by SLC. SLC will deposit
with the Company as a security deposit an amount equal to six months of the
Minimum Rent payable with respect to the first year under each Minimum Rent
Lease. This amount may be reduced to an amount equal to three months of the
then-applicable Minimum Rent at such time as the operating income (after
deducting an assumed 6% management fee) produced by the Woodbridge facility for
four consecutive quarters exceeds 120% of the Minimum Rent payable with respect
to each quarter for the first lease year for such facility. The remaining terms
of the Minimum Rent Leases with SLC will be substantially similar to the terms
of the Minimum Rent Leases with Genesis.
For the six months ended June 30, 1997, on a pro forma basis, the lease
coverage ratio (net operating income before interest, depreciation and rent
divided by rent payments) for the Woodbridge facility was 0.09x.
The Company has an option to acquire the Mallard Landing and Montchanin
facilities for which the Company will make Construction Loans as of the closing
of the Offering. If the Company exercises its option to purchase these
facilities, the Company will lease-back the facilities to subsidiaries of SLC
under Minimum Rent Leases. The minimum rent payable during the first year of
each lease will be fixed to yield the Company a return on its investment equal
to 400 basis points over the ten-year U.S. Treasury Note rate in effect at the
time each lease is entered into. The rent payment will increase by 1.5% per
year. The Minimum Rent Leases also will provide for the payment of incremental
percentage rent beginning in the second lease year at a rate equal to 5% of
incremental gross revenues over the gross revenues during the first lease year
for each facility. Other terms of the Minimum Rent Leases for the Mallard
Landing and Montchanin facilities would be substantially the same as those
contained in the Minimum Rent Lease for the Woodbridge facility.
CROZER/GENESIS MINIMUM RENT LEASE
The initial term of the Minimum Rent Lease with Crozer/Genesis is 12
years, which term may be extended for one or more additional five-year terms by
the mutual agreement of the Company and Crozer/Genesis made at least ten months
prior to the expiration of the then-existing term. No assurance can be given
that Crozer/Genesis will agree to extend the lease term for the facilities.
The Minimum Rent Lease with Crozer/Genesis provides for the payment of
Minimum Rent during the first lease year of $4.2 million. Minimum Rent will
increase each year by an amount equal to the lesser of (i) 5% of the increase in
the aggregate gross revenues for the facilities during the immediately preceding
year or (ii) one-half of the increase in the Consumer Price Index during the
immediately preceding year. Crozer/Genesis will deposit with the Company as a
security deposit an amount equal to one-fourth of the Minimum Rent payable with
respect to the first year under each Minimum Rent Lease, which security deposit
will bear interest at rate equal to the rate on 90-day U.S. Treasury Bills.
During the last four years of the lease term (as extended) the lessee is
required to make capital expenditures of at least $2,000 per skilled nursing bed
and $3,000 per assisted living unit to maintain the applicable property or to
restore such property to the condition in which it was leased to the tenant at
the beginning of the term. The remaining terms of the Minimum Rent Lease with
Crozer/Genesis will be substantially similar to the terms of the Minimum Rent
Leases with Genesis. Each facility leased to Crozer/Genesis will be managed by
Genesis. See "-- CKHS Initial Properties -- Crozer/Genesis Skilled Nursing
Facilities."
For the six months ended June 30, 1997, on a pro forma basis, the lease
coverage ratios (net operating income before interest, depreciation, rent and
the subordinated portion of management agreements to be entered into with
Genesis as of the closing of the Offering divided by rent payments) for the
facilities to be leased to Crozer/Genesis under the Minimum Rent Lease
(Belvedere NRC, Chapel Manor NRC, Harston Hall NCH and Pennsburg Manor NRC) were
1.63x, 1.37x, 2.11x and 1.62x, respectively.
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AGE INSTITUTE OF FLORIDA MINIMUM RENT LEASE
The initial term of the Minimum Rent Lease with the Age Institute of
Florida is ten years, and the Age Institute of Florida has the option to extend
the term for up to two consecutive five-year periods. No assurance can be given
that the options to extend the lease terms will be exercised by the Age
Institute of Florida. The Age Institute of Florida also will have a right of
first refusal with respect to the facility in the event the Company receives an
offer to purchase or lease the facility which the Company is prepared to accept
during the term of the lease (as extended) and for one year thereafter.
The Minimum Rent Lease with the Age Institute of Florida provides for
the payment of Minimum Rent during the first lease year at an amount based on
achieving an annual yield for the Company equal to the rate on ten-year U.S.
Treasury Notes as of the first day of such Minimum Rent Lease plus 400 basis
points. Minimum Rent will increase each year by an amount equal to the lesser of
(i) 5% of the increase in the gross revenues for the facility during the
immediately preceding year or (ii) one-half of the increase in the Consumer
Price Index during the immediately preceding year. The remaining terms of the
Minimum Rent Lease with the Age Institute of Florida will be substantially
similar to the terms of the Minimum Rent Leases with Genesis.
For the six months ended June 30, 1997, on a pro forma basis, the lease
coverage ratio (net operating income before interest, depreciation, rent and the
subordinated portion of management agreement to be entered into with Genesis as
of the closing of the Offering divided by rent payments) for the facility to be
leased to a subsidiary of the Age Institute of Florida under a Minimum Rent
Lease (Silverlake NRC) was 1.38x.
MULTICARE MINIMUM RENT LEASES
The initial term of any Minimum Rent Lease with Multicare will be ten years, and
Multicare will have the option to extend the term for up to two five-year
extension periods upon 12 months notice to the Company. No assurance can be
given that Multicare will exercise the option to extend the lease terms. Minimum
Rent for the first lease year under any Minimum Rent Lease with Multicare will
be established by multiplying the purchase price for the applicable facility
times 10.5%, and Minimum Rent under each of the Minimum Rent Leases with
Multicare will increase by 2.5% annually. During each of the last four years of
the term (as extended, if applicable), the applicable subsidiary of Multicare is
required to make minimum capital expenditures equal to $3,000 per residential
unit in each assisted living facility covered by a Minimum Rent Lease. The
remaining terms of the Minimum Rent Lease with Multicare will be substantially
similar to the terms of the Minimum Rent Leases with Genesis.
MEDICAL OFFICE AND OTHER BUILDING LEASES
The Company will acquire each of the medical office and other buildings
included in the Initial Properties subject to existing leases. The existing
leases generally provide for the payment of a fixed amount as base rent during
each year, subject to increases in rent in certain of the leases. Genesis is the
principal tenant of three of the medical office and other buildings included in
the Initial Properties.
BANK CREDIT FACILITY AND TAX EXEMPT FINANCING
The Bank Credit Facility. Concurrently with the completion of the
Offering, the Company expects to have in place revolving line of credit of up to
$110.0 million. The Bank Credit Facility is expected to consist of two $55.0
million tranches (the "Tranche A Facility" and the "Tranche B Facility"), to be
a senior secured obligation of the Company and to have a term of three years.
The Tranche A Facility would be available to fund the acquisition of certain of
the Initial Properties and additional growth opportunities, to refinance
existing indebtedness, to fund the Term Loans and for working capital purposes
and general corporate purposes (subject to a maximum of 25% of the unused
commitments under the Bank Credit Facility from time to time). The Tranche B
Facility would be available to fund Construction Loans which are guaranteed by
Genesis. At the closing of the Offering, the Company expects to draw down
approximately $29.2 million under the Bank Credit Facility.
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The Company's ability to borrow under the Tranche A Facility would be
governed by a borrowing base calculation. The borrowing base would be equal to
55% of the appraised value or purchase price of unencumbered properties plus
cash and cash equivalents and less unsecured indebtedness. The Tranche A
Facility would be secured by the Tranche A investments included in the borrowing
base. The Company's ability to borrow under the Tranche B Facility also would be
governed by a borrowing base calculation. The borrowing base would be equal to
90% of the Tranche B Construction Loans. The Tranche B Facility would be secured
by the Construction Loans. The Bank Credit Facility would be subject to the
Company's compliance with a number of customary financial and other covenants on
an ongoing basis, including liability to gross asset value of the borrowing base
and related net asset value ratios, debt service coverage ratios, limitations on
additional indebtedness and shareholder distributions and a minimum net worth
requirement. The Bank Credit Facility documentation would also contain customary
defaults, and would include cross-defaults to other debt of the Operating
Partnership and the Company in excess of $5 million in the aggregate. The Bank
Credit Facility would bear interest at variable rates at specified spreads over
Eurodollar rates based on different levels of borrowings.
The lender has not yet issued a commitment to provide the Bank Credit
Facility. In the event a commitment is so issued, the Company's acceptance of
this credit undertaking will be subject to final approval and satisfactory
completion of the Offering, completion by the lender of its due diligence and
preparation and execution of an acceptable credit agreement and related
documentation.
Tax Exempt Financing. The Company's indebtedness includes approximately
$19.6 million of Series 1994 Bonds and Series 1995 Bonds relating to the
Highgate and Woodbridge assisted living facilities. The underlying Series 1994
and Series 1995 Bonds are subject to various restrictions, conditions, and
requirements under the Code and its implementing regulations. In addition, the
Series 1994 and Series 1995 Bond financing documents impose certain requirements
and restrictions in connection with the operation of the facilities, including a
requirement that at all times at least 20% of the rental units in the facilities
will be occupied by tenants whose adjusted gross family income does not exceed
50% of the median gross income for the relevant geographic area.
GOVERNMENT REGULATION
Government Regulation of Healthcare Industry. The long-term care
segment of the healthcare industry is highly regulated. Operators of skilled
nursing facilities are subject to federal, state and local laws relating to the
delivery and adequacy of medical care, distribution of pharmaceuticals,
equipment, personnel, operating policies, fire prevention, rate-setting and
compliance with building and safety codes and environmental laws. Operators of
skilled nursing facilities also are subject to periodic inspection by
governmental and other authorities to assure continued compliance with various
standards, the continued licensing of the facility under state law,
certification under the Medicare and Medicaid programs and the ability to
participate in other third party payment programs. Many states have adopted
Certificate of Need or similar laws which generally require that the appropriate
state agency approve certain acquisitions of skilled nursing facilities and
determine that a need exists for certain bed additions, new services and capital
expenditures or other changes prior to beds and/or new services being added or
capital expenditures being undertaken. The failure to obtain or maintain any
required regulatory approvals or licenses could prevent an operator from
offering services or adversely affect its ability to receive reimbursement for
services and could result in the denial of reimbursement, temporary suspension
of admission of new patients, suspension or decertification from the Medicaid or
Medicare program, restrictions on the ability to acquire new facilities or
expand existing facilities and, in extreme cases, revocation of the facility's
license or closure of a facility. Federal law also imposes civil and criminal
penalties for submission of false or fraudulent claims, including nursing home
bills and cost reports, to Medicare or Medicaid. There can be no assurance that
lessees of skilled nursing facilities owned by the Company, or the Age Institute
of Florida as the obligor on the Florida Facilities Note, or the provision of
services and supplies by such lessees or the Age Institute of Florida, will meet
or continue to meet the requirements for participation in the Medicaid or
Medicare programs or state licensing authorities or that regulatory authorities
will not adopt changes or new interpretations of existing regulations that would
adversely affect the ability of lessees or borrowers to make rental or loan
payments to the Company.
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Both Medicare and the Pennsylvania Medicaid program (which constituted
14.1% and 62.4% of the revenues for the month ended June 30, 1997, respectively,
of the nine skilled nursing facilities included in the Initial Properties)
impose limitations on the amount of reimbursement available for capital-related
costs, such as depreciation, interest and rental expenses, following a change of
ownership, including a sale and leaseback transaction. Under currently
applicable Medicare reimbursement policies, the amount of Medicare reimbursement
available to a skilled nursing facility for rental expenses following a sale and
leaseback transaction may not exceed the amount that would have been reimbursed
as capital costs had the provider retained legal title to the facility. The
Pennsylvania Medicaid program imposes a similar limitation, basing reimbursement
for capital-related costs for new owners (including rent paid by lessees) on the
appraised fair rental value of the facility to the prior owner as determined by
the Pennsylvania Department of Public Welfare. Thus, if rental expenses are
greater than the allowable capital cost reimbursement a skilled nursing facility
would have received had the sale and leaseback transaction not occurred and the
provider retained legal title, the amount of Medicare reimbursement received by
the provider will be limited. Medicare will begin a three-year phase out of
separate capital cost reimbursement for skilled nursing facilities beginning
July 1, 1998 under provisions of the Balanced Budget Act of 1997, which
establish a prospective payment system for skilled nursing facilities that will
factor capital-related costs into the facility's per diem rates for resident
care. There can be no assurance that reimbursement of the costs of skilled
nursing facilities included in the Initial Properties under current or future
reimbursement methodologies will be adequate to cover the rental payments owed
to the Company.
Although not currently regulated at the federal level (except under
laws of general applicability to businesses, such as work place safety and
income tax requirements), assisted living facilities are increasingly becoming
subject to more stringent regulation and licensing by state and local health and
social service agencies and other regulatory authorities. In general, these
assisted living requirements address, among other things: personnel education,
training and records; facility services, including administration of medication,
assistance with self-administration of medication and limited nursing services;
monitoring of wellness; physical plant inspections; furnishing of resident
units; food and housekeeping services; emergency evacuation plans; and resident
rights and responsibilities, including in certain states the right to receive
certain healthcare services from providers of a resident's choice In several
states, assisted living facilities also require a Certificate of Need before the
facility can be opened, expand or reduce its resident capacity or make other
significant capital expenditures. Certain of the Initial Properties are licensed
to provide independent living services which generally involve lower levels of
resident assistance. Like skilled nursing facilities and other healthcare
facilities, assisted living facilities are subject to periodic inspection by
government authorities. In most states, assisted living facilities, as well as
skilled nursing and other healthcare facilities, also are subject to state or
local building code, fire code and food service licensure or certification
requirements. Any failure by the Company's lessees or borrowers to meet
applicable regulatory requirements may result in the imposition of fines,
imposition of a provisional or conditional license or suspension or revocation
of a license or other sanctions or adverse consequences, including delays in
opening or expanding a facility. Any failure by the Company's lessees or
borrowers to comply with such requirements could have a material adverse effect
on the Company.
Healthcare operators also are subject to federal and state
anti-remuneration laws and regulations, such as the Medicare/Medicaid
anti-kickback law, which govern certain financial arrangements among healthcare
providers and others who may be in a position to refer or recommend patients to
such providers. These laws prohibit, among other things, the offer, payment,
solicitation or receipt of any form of remuneration in return for the referral
of Medicare and Medicaid patients or the purchasing, leasing, ordering or
arranging for any goods, facilities, services or items for which payment can be
made under Medicare or Medicaid. A violation of the federal anti-kickback law
could result in the loss of eligibility to participate in Medicare or Medicaid,
or in civil or criminal
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penalties. The federal government, private insurers and various state
enforcement agencies have increased their scrutiny of providers, business
practices and claims in an effort to identify and prosecute fraudulent and
abusive practices. In addition, the federal government has issued fraud alerts
concerning nursing services, double billing, home health services and the
provision of medical supplies to nursing facilities; accordingly, these areas
may come under closer scrutiny by the government. Furthermore, some states
restrict certain business corporations from providing, or holding themselves out
as a provider of, medical care. Possible sanctions for violation of any of these
restrictions or prohibitions include loss of licensure or eligibility to
participate in reimbursement programs and civil and criminal penalties. State
laws vary from state to state, are often vague and have seldom been interpreted
by the courts or regulatory agencies. There can be no assurance that these
federal and state laws will ultimately be interpreted in a manner consistent
with the practices of the Company's lessees or the Age Institute of Florida.
Reliance on Government and Other Third Party Reimbursement. Assisted
living services currently are not generally reimbursable under government
reimbursement programs, such as Medicare and Medicaid. A significant portion of
the revenue derived from the nine skilled nursing facilities included in the
Initial Properties and the 11 skilled nursing facilities securing the Florida
Facilities Note, however, is attributable to government reimbursement programs
such as Medicare and Medicaid. Future budget reductions in government-financed
programs could significantly reduce reimbursement payments, and there can be no
assurance that future payment rates will be sufficient to cover the costs of
providing services to residents of such facilities. The Medicare program is
highly regulated and subject to frequent and substantial changes. In recent
years, changes in the Medicare program have resulted in reduced levels of
payment for a substantial portion of healthcare services. There can be no
assurance that reimbursement levels will not be further reduced in future
periods. The Medicaid program is a federally-mandated, state-run program
providing benefits to low income and other eligible persons and is funded
through a combination of state and federal funding. The method of reimbursement
for skilled nursing care under Medicaid varies from state to state, but is
typically based on rates set by the state. Under Medicare and many state
Medicaid programs, rates for skilled nursing facilities are based on facilities
costs as reported to the applicable federal or state agency. The facilities
costs for services purchased from an organization related by ownership or
control are limited to the costs (not charges) of the related organization. Any
failure to comply with these requirements could have a variety of adverse
consequences on the operator of the skilled nursing facility, including
recoupment of amounts overpaid and other sanctions under false claim laws.
Although lease and loan payments to the Company are not directly linked to the
level of government reimbursement, to the extent that changes in these programs
have a material adverse effect on the revenues from such facilities, such
changes could have a material adverse impact on the ability of the lessees of
the skilled nursing facilities included in the Initial Properties, and the Age
Institute of Florida as the borrower under the Florida Facilities Note, to make
lease and loan payments. Healthcare facilities also have experienced increasing
pressures from private payors attempting to control healthcare costs that in
some instances have reduced reimbursement to levels approaching that of
government payors. There can be no assurance that future actions by private
third party payors, including cost control measures adopted by managed care
organizations, will not result in further reductions in reimbursement levels, or
that future reimbursements from any payor will be sufficient to cover the costs
of the facilities operations.
Potential Delays in Substituting Lessees or Operators. A loss of
license or Medicare/Medicaid certification by a lessee of the Company or by the
Age Institute of Florida, or a default by lessees or borrowers under loans made
by the Company, could result in the Company having to obtain another lessee or
substitute operator for the affected facility or facilities. Because the
facility licenses for the Initial Properties will be held by lessees or
borrowers and not the Company and because under the REIT tax rules the Company
would have to find a new "unrelated" lessee to operate the properties, the
Company may encounter delays in exercising its remedies under leases and loans
made by the Company or substituting a new lessee or operator in the event of any
loss of licensure or Medical/Medicaid certification by a prior lessee or
operator. No assurances can be given that the Company could contract with a new
lessee or successor operator on a timely basis or on acceptable terms and a
failure of the Company to do so could have a material adverse effect on the
Company's financial condition and results of operations.
Limitation on Transfers and Alternative Uses of Healthcare Facilities.
Transfers of operations of certain healthcare facilities are subject to
regulatory approvals not required for transfers of other types of commercial
operations and other types of real estate. In addition, substantially all of the
Initial Properties are special purpose facilities that may not be easily
adaptable to non-healthcare-related uses.
Proximity to Hospitals or Other Healthcare Facilities. Many of the
assisted living facilities, skilled nursing facilities and medical office
buildings included in the Initial Properties are in close proximity to one or
more hospitals. The relocation or closure of a hospital could make the Company's
assisted living facilities, skilled
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nursing facility or medical office building in such area less desirable and
affect the Company's ability to renew leases and attract new tenants. See "Risk
Factors-- Government Regulation."
COMPETITION
The Company will compete with other healthcare REITs, real estate
partnerships, healthcare providers and other investors, including but not
limited to banks and insurance companies, in the acquisition, leasing and
financing of healthcare facilities. Certain of these investors may have greater
resources than the Company. Genesis and other lessees operating properties the
Company will own or that secure loans to be made by the Company compete on a
local and regional basis with operators of other facilities that provide
comparable services. Operators compete for residents based on quality of care,
reputation, physical appearance of facilities, services offered, family
preferences, physicians, staff and price. In general, regulatory and other
barriers to competitive entry in the assisted living industry are not
substantial. Moreover, if the development of new assisted living facilities
outpaces demand for these facilities in certain markets, such markets may become
saturated. Such an oversupply of facilities could cause operators to experience
decreased occupancy, depressed margins and lower operating results. The Company
will purchase, or make loans with an obligation to purchase, all of the assisted
living facilities owned by Genesis as of June 30, 1997 (except for a 32-bed
facility as to which the Company will have an option to purchase at fair market
value in cash exercisable within one year after the facility achieves Stabilized
Occupancy). See "Risk Factors -- Conflicts of Interest in Business Transactions
Affecting the Company -- Ongoing Competition from and Conflicts with Genesis."
LEGAL PROCEEDINGS
Neither the Company nor any of the Initial Properties is presently
subject to any material litigation nor, to the Company's knowledge, is any
litigation threatened against the Company, or any of the Initial Properties,
other than routine actions for negligence arising in the ordinary course of
business, some of which are expected to be covered by liability insurance and
all of which collectively are not expected to have a material adverse effect on
the liquidity, results of operations, or business or financial condition of the
Company.
OFFICE LEASE
The Company has entered into a lease with an unaffiliated third party
with respect to certain office space occupied by the Company as its headquarters
at 415 McFarlan Road, Suite 202, Kennett Square, Pennsylvania. This lease has a
term of one year and provides for a monthly rental payment by the Company equal
to $1,662.50 per month. The Company has the option to lease additional space in
the same building (which option may only be exercised for a lease to include at
least an additional 50% of space) for a term of three years. The lease provides
that the Company's landlord is responsible for all taxes, utilities and other
charges associated with the leased property, and the lease contains certain
other provisions which are standard for leases of its type.
EMPLOYEES
Upon completion of the Offering, the Company expects to have five
employees.
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MANAGEMENT
TRUSTEES, TRUSTEE NOMINEES AND EXECUTIVE OFFICERS
Pursuant to an amendment to the Company's Declaration of Trust to be
adopted immediately prior to the completion of the Offering, the Board of
Trustees of the Company will be expanded effective immediately following the
completion of the Offering to include the trustee nominees named below, each of
whom has been nominated for election and has consented to serve. Upon election
of the trustee nominees, a majority of trustees will not be employees or
affiliates of the Company or Genesis. In connection with the expansion of the
Board of Trustees, and upon completion of the offering, the Board of Trustees
will be divided into three classes of trustees. The initial terms of the first,
second and third classes will expire in 1998, 1999 and 2000, respectively.
Beginning in 1998, trustees of each class will be chosen for three-year terms
upon the expiration of their current terms and each year one class of trustees
will be elected by the shareholders. The Company believes that classification of
the Board of Trustees will help to assure the continuity and stability of the
Company's business strategies and policies as determined by the Board of
Trustees. Holders of Common Shares will have no right to cumulative voting in
the election of trustees. Consequently, at each annual meeting of shareholders,
the holders of a majority of the Common Shares will be able to elect all of the
successors of the class of trustees whose term expires at that meeting.
Information concerning the current trustees, trustee nominees and
executive officers of the Company is set forth below.
<TABLE>
<CAPTION>
NAME AGE POSITION TERM
---- --- -------- ----
<S> <C> <C> <C>
Michael R. Walker........ 48 Chairman of the Board of Trustees 2000
Edward B. Romanov, Jr.... 45 President, Chief Executive Officer and Trustee 1999
D. Lee McCreary, Jr...... 40 Vice President and Chief Financial Officer
Kent P. Dauten........... 42 Trustee Nominee 1998
Rodman W. Moorhead, III.. 54 Trustee Nominee 1999
Timothy T. Weglicki...... 46 Trustee Nominee 2000
</TABLE>
Michael R. Walker is the Chairman of the Board of Trustees of the
Company. Mr. Walker currently serves as the Chairman and Chief Executive Officer
of Genesis, and he has served in those capacities since he founded Genesis in
1985. In 1981, Mr. Walker co-founded Health Group Care Centers ("HGCC"). At
HGCC, he served as Chief Financial Officer and, later, as President and Chief
Operating Officer. Prior to its sale in 1985, HGCC operated nursing homes with
4,500 nursing beds in 12 states. From 1978 to 1981, Mr. Walker was the Vice
President and Treasurer of AID Healthcare Centers, Inc. ("AID"). AID, which
owned and operated 20 nursing centers, was co-founded in 1977 by Mr. Walker as
the nursing home division of Hospital Affiliates International. Mr. Walker holds
a Master of Business Administration from Temple University and a Bachelor of
Arts in Business Administration from Franklin and Marshall College. Mr. Walker
serves on the Board of Directors of Renal Treatment Centers, Inc. and on the
Board of Trustees of Universal Health Realty Income Trust, a real estate
investment trust focused on healthcare-related investments.
Edward B. Romanov, Jr. is the President and Chief Executive Officer
and a Trustee of the Company. Mr. Romanov served as Senior Vice President,
Development of Genesis from June 1990 until June 1997. From January 1994 until
June 1997, Mr. Romanov also had responsibility for merger and acquisition
activity by Genesis. During such period, he successfully negotiated the
acquisition of several healthcare companies by Genesis with total assets in
excess of $500 million. From June 1990 through May 1995, Mr. Romanov was a
financial consultant to Genesis, pursuant to a consulting and services agreement
between Genesis and American Community Environments Corporation of which he was
an employee. Prior to joining Genesis, Mr. Romanov was founder and President of
WesTerra Construction, WesTerra Capital Company and WesTerra Development,
through which Mr. Romanov developed and financed real estate projects. Mr.
Romanov holds both a Master of Business Administration and a Bachelor of Science
degree from Lehigh University.
D. Lee McCreary, Jr. is Vice President and Chief Financial Officer of
the Company. From September 1994 until May 1997, Mr. McCreary was Vice
President-Tax Services at Siegfried Schieffer & Seitz, a Wilmington,
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Delaware-based regional accounting firm ("Siegfried"). Prior to joining
Siegfried, he was a partner at Price Waterhouse LLP, where he worked for over 14
years providing tax consulting services for companies in the healthcare, real
estate and financial services industries. Mr. McCreary is a certified public
accountant and a member of both the American Institute of Certified Public
Accountants and the Maryland Association of Certified Public Accountants. He
holds a Bachelor of Science degree from the University of Delaware.
Kent P. Dauten has served as President of Keystone Capital, Inc., a
venture capital firm, and as President of HIMSCORP, INC., a medical records
company, since March 1994. From January 1993 to March 1994, he was Senior Vice
President of Madison Dearborn Partners, Inc. and from September 1979 to December
1992, he was Senior Vice President of First Chicago Venture Capital. Mr. Dauten
currently serves as a director of Health Management Associates, Inc. of Naples,
Florida, a NYSE-listed health management firm and formerly was a director of
Genesis. Mr. Dauten holds a Master of Business Administration from the Harvard
Business School and a Bachelor of Arts in Economics from Dartmouth College.
Rodman W. Moorhead, III has been employed since 1973 by E. M. Warburg,
Pincus & Co., LLC, a specialized financial services firm in New York, where he
currently serves as Senior Managing Director. He is a director of Coventry
Corporation, a multi-market health maintenance organization, NeXstar
Pharmaceuticals, Inc., a novel human therapy and drug delivery company,
Transkaryotic Therapies, Inc., a gene therapy company, Xomed Surgical Products,
a surgical sponge and wound care products company and several private companies.
He is a Trustee of The Taft School and a member of the Overseers' Committee on
University Resources, Harvard College. Mr. Moorhead holds a Master of Business
Administration from the Harvard Business School and a Bachelor of Arts in
Economics from Harvard University.
Timothy T. Weglicki has been with ABS Partners, L.P., and ABS Capital
Partners, a private equity fund as a general partner since December 1993. Prior
to joining ABS Partners, he was a Managing Director of Alex. Brown & Sons Inc.,
where he established and headed its Capital Markets Group and prior thereto
headed the firm's Equity Division, Corporate Finance Department, and Health Care
Investment Banking Group. He is a director of VitalCom, Inc., a wireless patient
monitoring company, and several privately held companies. Mr. Weglicki holds an
M.B.A. from the Wharton Graduate School of Business and a Bachelor of Arts
degree from The Johns Hopkins University.
COMMITTEES OF THE BOARD OF TRUSTEES
Audit Committee. The Audit Committee will make recommendations
concerning the engagement of independent public accountants, review with the
independent public accountants the plans and results of the audit engagement,
approve professional services provided by the independent public accountants,
review the independence of the independent public accountants, consider the
range of audit and non-audit fees and review the adequacy of the Company's
internal accounting controls. The membership of the Audit Committee will consist
of only Independent Trustees as long as they continue in office. An individual
is deemed an "Independent Trustee" if such individual is not an affiliate of the
Company and is not an employee of the Company. Upon completion of the Offering,
the members of the Audit Committee will be Messrs. Dauten, Moorhead and
Weglicki.
Executive Committee. The Executive Committee will have the authority
within certain parameters to acquire, dispose of and finance investments for the
Company (including the issuance by the Operating Partnership of additional Units
or other equity interests) and approve the execution of contracts and
agreements, including those related to the borrowing of money by the Company,
and generally exercise all other powers of the Board of Trustees except as
prohibited by law. Upon completion of the Offering, the members of the Executive
Committee will be Messrs. Walker and Romanov.
Compensation Committee. The Compensation Committee will determine
compensation for the Company's executive officers. The Compensation Committee
will review and make recommendations concerning proposals by management with
respect to compensation, bonus, employment agreements and other benefits and
policies respecting such matters for the executive officers of the Company. Upon
completion of the Offering the members of the Compensation Committee will be
Messrs. Walker, Moorhead and Weglicki.
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Share Option Committee. The Share Option Committee will administer the
ElderTrust 1997 Share Option and Incentive Plan, including the grant of options
and bonus shares thereunder. Upon completion of the Offering, the members of the
Share Option Committee will be Messrs. Moorhead and Weglicki.
The Board of Trustees will not have a nominating committee and the
entire Board of Trustees will perform the function of such a committee.
COMPENSATION OF THE BOARD OF TRUSTEES
The Company will reimburse the trustees for travel expenses incurred
in connection with attending meetings of the Board of Trustees and committee
meetings. In lieu of trustees' fees, each of the non-employee trustees of the
Company (other than the Chairman of the Board) will receive share bonus awards
of 2,500 Common Shares upon completion of the Offering. Each of the non-employee
trustees of the Company (other than the Chairman of the Board) also will receive
ten-year share option grants for 7,500 Common Shares at a per share option
exercise price equal to the initial public offering price, effective upon
completion of the Offering. These options will vest over three years. The
Chairman of the Board will be granted a ten-year share option for 150,000 Common
Shares at a per share option exercise price equal to the initial public offering
price, effective upon completion of the Offering. The options granted to the
Company's chairman will vest over three years. Mr. Walker will enter into a
non-competition agreement with the Company. See "-- Employment and
Non-Competition Agreements."
EXECUTIVE COMPENSATION
The following table sets forth the annual base salary levels and other
compensation expected to be paid in 1997 following completion of the Offering to
the Company's Chief Executive Officer and to the Company's other executive
officer (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL LONG TERM
COMPENSATION COMPENSATION
1997 BASE SHARE UNIT ALL OTHER
NAME PRINCIPAL POSITION(S) SALARY ($)(1) OPTIONS (#)(2) AWARDS (#)(3) COMPENSATION ($)
- ---- --------------------- ------------- --------------- -------------- ----------------
<S> <C> <C> <C> <C> <C>
Edward B. Romanov, Jr...... President, Chief Executive $ 250,000 300,000 100,000 $ (4)
Officer and Trustee ------
D. Lee McCreary, Jr........ Vice President and Chief 120,000 25,000 12,000 (4)
Financial Officer ------
</TABLE>
- --------------
(1) Does not include bonuses that may be paid to the above individuals. See "--
Incentive Compensation."
(2) Represents Units issued to Messrs. Romanov and McCreary in the Formation
Transactions.
(3) These options will be granted effective upon the closing of the Offering
under the Company's 1997 Share Option and Incentive Plan at an exercise
price equal to the initial public offering price. See "-- 1997 Share Option
and Incentive Plan."
(4) Represents the estimated amount of dividends to be credited to the
executive officer's account in 1997 on dividend equivalent rights to be
granted to the executive officer upon completion of the Offering under the
1997 Share Option and Incentive Plan for a number of Common Shares equal to
three times the executive officer's 1997 base salary divided by the initial
public offering price. See " -- 1997 Share Option and Incentive Plan."
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OPTION GRANTS IN FISCAL YEAR 1997
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL RATES OF
INDIVIDUAL SHARE PRICE APPRECIATION
GRANTS FOR OPTION PERIOD
PERCENT OF -------------------------
SHARES OF TOTAL OPTIONS
COMMON STOCK TO BE GRANTED EXERCISE OR
UNDERLYING OPTIONS TO EMPLOYEES BASE PRICE EXPIRATION
NAME TO BE GRANTED (1) IN FISCAL YEAR ($/SH) (2) DATE 5%($) 10%($)
- ---- ----------------- ---------------- ----------- --------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
Edward B. Romanov, Jr.... 300,000 92.3% $20.00 (3) $3,773,500 $9,562,500
D. Lee McCreary, Jr...... 25,000 7.7 20.00 (3) 314,500 797,000
</TABLE>
- -----------
(1) Of the 300,000 options to be granted to Mr. Romanov, options for 150,000
shares will vest immediately and options for 150,000 shares will vest over
three years. The options to be granted to Mr. McCreary will vest over five
years.
(2) Based on the assumed initial public offering price. The exercise price per
share will equal the initial public offering price.
(3) The expiration date of the options is the ten year anniversary of the
closing date of the Offering.
1997 SHARE OPTION AND INCENTIVE PLAN
Prior to the completion of the Offering, the Company will adopt the
ElderTrust 1997 Share Option and Incentive Plan (the "Plan") to provide
incentives to attract and retain executive officers, trustees, employees and
other key personnel. The Plan will be administered by the Share Option Committee
of the Board of Trustees (the "Committee"). The maximum number of shares
available for issuance under the Plan will be 9.9% of the total number of Common
Shares and Units (other than Units owned by the Company) outstanding from time
to time (initially, _______ shares).
Share Options. The Plan permits the granting of (i) options to
purchase Common Shares intended to qualify as incentive options ("Incentive
Options") under Section 422 of the Code and (ii) options that do not so qualify
("Non-Qualified Options"). The option exercise price of each option will be
determined by the Committee but may not be less than 100% of the fair market
value of the Common Shares on the date of grant in the case of Incentive
Options, and may not be less than 25% of the fair market value of the Common
Shares on the date of grant in the case of Non-Qualified Options. Plan
participants may elect, with the consent of the Committee, to receive discounted
Non-Qualified Options in lieu of cash compensation.
The term of each option will be fixed by the Committee and may not
exceed ten years from the date of grant in the case of an Incentive Option. The
Committee will determine at what time or times each option may be exercised and,
subject to the provisions of the Plan, the period of time, if any, after
retirement, death, disability or termination of employment during which options
may be exercised. Options may be made exercisable in installments, and the
exercisability of options may be accelerated by the Committee.
Upon exercise of options, the option exercise price must be paid in
full either in cash or by certified or bank check or other instrument acceptable
to the Committee or, if the Committee so permits, by delivery of Common Shares
already owned by the optionee or delivery of a promissory note. The exercise
price may also be delivered to the Company by a broker pursuant to irrevocable
instructions to the broker from the optionee.
At the discretion of the Committee, options granted under the Plan may
include a "re-load" feature pursuant to which an optionee exercising an option
by the delivery of shares of Common Shares would automatically be granted an
additional option (with an exercise price equal to the fair market value of the
Common Shares on the date the additional option is granted) to purchase that
number of Common Shares equal to the number delivered to exercise the original
option.
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To qualify as Incentive Options, options must meet additional federal
tax requirements, including limits on the value of shares subject to Incentive
Options which first become exercisable in any one calendar year, and a shorter
term and higher minimum exercise price in the case of certain large
shareholders.
Restricted Shares. The Committee may also award Common Shares to
participants, subject to such conditions and restrictions as the Committee may
determine. These conditions and restrictions may include the achievement of
certain performance goals and/or continued employment with the Company through a
specified restricted period. If the performance goals and any other restrictions
are not attained, the participants would forfeit their restricted Common Shares.
The purchase price of restricted Common Shares will be determined by the
Committee.
Deferred Common Shares The Committee may also award deferred Common
Share units which are ultimately payable in the form of unrestricted Common
Shares. The deferred Common Share may be subject to such conditions and
restrictions as the Committee may determine. These conditions and restrictions
may include the achievement of certain performance goals and/or continued
employment with the Company through a specified restricted period. If the
performance goals and other restrictions are not attained, the participants will
forfeit their deferred Common Share units. During the deferral period, subject
to terms and conditions imposed by the Committee, the deferred Common Share
units may be credited with dividend equivalent rights.
Unrestricted Common Shares. The Committee may also grant shares (at no
cost or for a purchase price determined by the Committee) which are free from
any restrictions under the Plan. Unrestricted Common Shares may be issued to
participants in recognition of past services or other valid consideration, and
may be issued in lieu of cash compensation to be paid to such participants.
Performance Share Awards. The Committee may also grant performance
shares awards to participants entitling the participants to receive Common
Shares upon the achievement of individual or Company performance goals and such
other conditions as the Committee shall determine.
Dividend Equivalent Rights. The Committee may grant dividend
equivalent rights, which entitle the recipient to receive credits for dividends
that would be paid if the recipient had held a specified number of Common
Shares. Dividend equivalent rights may be granted as a component of another
award or as a freestanding award. Dividend equivalent rights credited under the
Plan may be paid currently or be deemed to be reinvested in additional Common
Shares, and may thereafter accrue additional dividend equivalent rights at fair
market value at the time of deemed reinvestment. Dividend equivalent rights may
be settled in cash, shares or a combination thereof, in a single installment or
installments, as specified in the award. Awards payable in cash on a deferred
basis may provide for crediting and payment of interest equivalents.
Adjustments for Share Dividends, Mergers and Similar Events. The
Committee will make appropriate adjustments in outstanding awards to reflect
Common Share dividends, splits and similar events. In the event of a merger,
liquidation, sale of the Company or similar event, the Committee, in its
discretion, may provide for substitution or adjustment of outstanding awards, or
may terminate all awards with payment of cash or in-kind consideration.
Change of Control. The Committee may provide in each award agreement
that the award becomes fully vested and non-forfeitable if, after a Change of
Control of the Company (as defined in the Plan), the participant's employment is
terminated by the Company (or its successor) without cause, or if the
participant voluntarily resigns for "good reason" (as defined in the Plan).
Amendments and Termination. The Board of Trustees may at any time
amend or discontinue the Plan and the Committee may at any time amend or cancel
outstanding awards for the purpose of satisfying changes in law or for any other
lawful purpose. However, no such action may be taken which adversely affects any
rights under an outstanding award without the holder's consent. Further, Plan
amendments may be subject to approval by the Company's shareholders if and to
the extent required by the Code to preserve the qualified status of Incentive
Options or to preserve tax deductibility of compensation earned under options.
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EMPLOYMENT AND NON-COMPETITION AGREEMENTS
The Company will enter into an employment agreement with Edward B.
Romanov, Jr. as its President and Chief Executive Officer that will continue in
effect until the third anniversary of the closing of the Offering and thereafter
will be automatically renewed for successive two year terms, unless otherwise
terminated. Mr. Romanov's annual base salary currently is $250,000, subject to
increase by the Board of Trustees. Mr. Romanov's employment agreement entitles
him to receive additional bonus compensation as may be determined by the
Company's Board of Trustees in its sole discretion. In addition, Mr. Romanov
will receive options to purchase 300,000 Common Shares and dividend equivalent
rights with respect to 37,500 Common Shares. Mr. Romanov's employment agreement
may be terminated by the Company at any time for Cause (as defined in his
employment agreement), upon the vote of not less than two-thirds of the entire
Board of Trustees. Mr. Romanov may terminate his employment agreement on 30
days' notice upon the occurrence of certain events, including an election by the
Company not to renew the term of the agreement, as described above. In the event
that the Company terminates Mr. Romanov's employment agreement without Cause, or
Mr. Romanov terminates his employment agreement as described in the preceding
sentence, Mr. Romanov is entitled to severance compensation equal to two times
his then current annual base salary and bonus. If Mr. Romanov becomes disabled,
he will continue to receive all of his compensation and benefits for six months,
less any amounts received under any disability insurance provided by the
Company. If the disability continues for six months and for periods aggregating
12 months in any 24 month period, the Company may terminate Mr. Romanov's
employment. Mr. Romanov's employment agreement also contains provisions which
are intended to limit him from competing with the Company throughout the term of
the agreement and for a period of two years thereafter. In particular, Mr.
Romanov may not establish, engage, own, manage, operate, join or control or
participate in the establishment, ownership (other than as the owner of less
than 1% of the stock of a corporation whose shares are publicly traded),
management, operation or control of, or be a director, trustee, officer,
employee, salesman, agent or representative of, or be a consultant to, any
person or entity in any business in competition with the Company, at any
location within 100 miles of any office or facility owned, leased or operated by
Company.
Mr. Walker also will enter into a similar non-competition agreement
with the Company restricting such activities by Mr. Walker in his individual
capacity at any location within 10 miles of any office or facility owned, leased
or operated by the Company during the period that Mr. Walker serves as Chairman
or as a trustee of the Company and for one year thereafter, provided that any
activity engaged in by Mr. Walker as an officer, director or employee of, or any
interest of Mr. Walker as a shareholder in, Genesis will not in any way be
limited by such provisions. Mr. Walker's non-competition agreement also will
provide that he may retain his board position with Universal Health Realty
Income Trust and that he may develop office and similar development projects not
related to the healthcare business.
INCENTIVE COMPENSATION
The Company intends to establish an incentive compensation plan for
key officers of the Company and its subsidiaries. This plan will provide for
payment of cash bonuses to participating officers after evaluating the officer's
performance and the overall performance of the Company. The Chief Executive
Officer will make recommendations to the Compensation Committee of the Board of
Trustees, which will make the final determination of the award of bonuses. The
Compensation Committee will determine such bonuses, if any, for the Chief
Executive Officer.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The Maryland REIT Law permits a Maryland REIT to include in its
Declaration of Trust a provision limiting the liability of its trustees and
officers to the trust and its shareholders for money damages except for
liability resulting from (a) actual receipt of an improper benefit or profit in
money, property or services, to the extent of the amount of the benefit or
profit in money, property or services actually received, or (b) a judgment or
other final adjudication adverse to the trustee or officer entered in a
proceeding based on a finding in the proceeding that the trustee's or officer's
action or failure to act was material to the cause of action adjudicated in the
proceeding and was committed in bad faith or was the result of active and
deliberate dishonesty. The Declaration of Trust of the Company contains a
provision that eliminates such liability to the maximum extent permitted by
Maryland law.
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The Declaration of Trust of the Company authorizes it, to the maximum
extent permitted by Maryland law, to obligate itself to indemnify and to pay or
reimburse reasonable expenses in advance of final disposition of a proceeding to
(a) any present or former trustee or officer or (b) any individual who, while a
trustee of the Company and at the request of the Company, serves or has served
as a director, officer, partner, trustee, employee or agent of another
corporation, partnership, joint venture, trust, employee benefit plan or any
other enterprise from and against any claim or liability to which such person
may become subject or which such person may incur by reason of his or her status
as a present or former trustee or officer of the Company. The Bylaws of the
Company obligate it, to the maximum extent permitted by Maryland law, to
indemnify and to pay or reimburse reasonable expenses in advance of final
disposition of a proceeding to (a) any present or former trustee or officer who
is made party to the proceeding by reason of his or her service in that capacity
or (b) any individual who, while a trustee or officer of the Company and at the
request of the Company, serves or has served another corporation, partnership,
joint venture, trust, employee benefit plan or any other enterprise as a
trustee, director, officer or partner of such corporation, partnership, joint
venture, trust, employee benefit plan or other enterprise and who is made a
party to the proceeding by reason of his or her service in that capacity,
against any claim or liability to which he or she may become subject by reason
of such status. The Declaration of Trust and Bylaws also permit the Company to
indemnify and advance expenses to any employee or agent of the Company. The
Bylaws require the Company to indemnify a trustee or officer (or any former
trustee or officer) who has been successful, on the merits or otherwise, in the
defense of any proceeding to which he or she is made a party by reason of his or
her service in that capacity.
The Maryland REIT Law permits a Maryland REIT to indemnify and advance
expenses to its trustees, officers, employees and agents to the same extent as
permitted by the MGCL for directors and officers of Maryland corporations. The
MGCL permits a corporation to indemnify its present and former directors and
officers, among others, against judgments, penalties, fines, settlements and
reasonable expenses actually incurred by them in connection with any proceeding
to which they may be made a party by reason of their service in those or other
capacities unless it is established that (a) the act or omission of the director
or officer was material to the matter giving rise to the proceeding and (i) was
committed in bad faith or (ii) was the result of active and deliberate
dishonesty, (b) the director or officer actually received an improper personal
benefit in money, property or services or (c) in the case of any criminal
proceeding, the director or officer had reasonable cause to believe that the act
or omission was unlawful. However, under the MGCL, a Maryland corporation may
not indemnify for an adverse judgment in a suit by or in the right of the
corporation. In accordance with the MGCL, the Bylaws of the Company require it,
as a condition to advancing expenses, to obtain (a) a written affirmation by the
Trustee or officer of his or her good faith belief that he or she has met the
standard of conduct necessary for indemnification by the Company as authorized
by the Bylaws and (b) a written statement by or on his or her behalf to repay
the amount paid or reimbursed by the Company if it shall ultimately be
determined that the standard of conduct was not met.
The Operating Partnership Agreement also provides for indemnification
of the Company and its officers and Trustees to the same extent that
indemnification is provided to officers and trustees of the Company in its
Declaration of Trust, and limits the liability of the Company and its officers
and trustees to the Operating Partnership and its respective partners to the
same extent that the liability of the officers and trustees of the Company to
the Company and its shareholders is limited under the Company's Declaration of
Trust.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to trustees, officers or persons controlling the
registrant pursuant to the foregoing provisions, the registrant has been
informed that in the opinion of the SEC such indemnification is against public
policy as expressed in the Securities Act and is therefore unenforceable.
INDEMNIFICATION AGREEMENTS
The Company intends to enter into indemnification agreements with each
of its trustees and officers prior to completion of the Offering. The
indemnification agreements will require, among other things, that the Company
indemnify its trustees and officers to the fullest extent permitted by law and
advance to its trustees and executive officers all related expenses, subject to
reimbursement if it is subsequently determined that indemnification is not
permitted.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Genesis currently leases the Windsor Office Building and the Windsor
Clinic and Training Facility from a partnership which is owned by among others,
Michael R. Walker, Chairman of the Board of Directors and Chief Executive
Officer of Genesis and Chairman of the Board of Trustees of the Company.
Payments under these two leases have approximated $197,000 per year during each
of the past three fiscal years. The Company will purchase these two office
buildings in the Formation Transactions.
The Windsor Office Building and Windsor Clinic and Training Facility
secure a $1.1 million mortgage held by Mr. Walker since May 1995. The interest
rate on such mortgage is 10.25%. The mortgage is payable in monthly principal
and interest installments of $11,780, with a balloon payment of the outstanding
balance due May 2005. This indebtedness will be repaid in full upon completion
of the Offering using a portion of the net proceeds from the Offering.
Genesis currently is involved in certain lease transactions with
Salisbury Medical Office Building General Partnership ("SMOBGP"). This
partnership is owned by, among others, Michael R. Walker. Genesis rents space in
the Salisbury Medical Office Building which is used as a medical clinic and
therapy clinic pursuant to two leases with SMOBGP. Payments under the leases
have approximated $169,000 during each of the past three fiscal years. The
Company will purchase all of the outstanding general partnership interests in
SMOBGP in the Formation Transactions.
The Salisbury Medical Office Building secures a $742,000 mortgage held
by Mr. Walker since August 1995. The interest rate on such mortgage is 10.25%.
The mortgage is payable in monthly principal and interest installments of
$7,362, with a balloon payment of $674,000 due April 30, 2000. This indebtedness
will be repaid in full upon completion of the Offering using a portion of the
net proceeds from the Offering.
In June 1995, SMOBGP made two loans totaling $450,000 to Mr. Romanov.
The loans mature in May 1998 and provide for the payment of interest only until
maturity at an annual interest rate of 11 1/2%. One loan for $250,000 has been
repaid. The second loan for $200,000 will be repaid by Mr. Romanov prior to
completion of the Offering.
In October 1997, the Company agreed to issue and sell to Mr. Romanov
200,000 Common Shares at a per share price equal to the initial public offering
price. Mr. Romanov will pay for such shares with a recourse, 10-year promissory
note with interest only payable quarterly until maturity at an annual interest
rate of 7%.
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STRUCTURE AND FORMATION OF THE COMPANY
Company Structure. At the completion of the Offering all of the
Company's assets will be owned by, and its operations conducted through, the
Operating Partnership and its subsidiaries. The Company will be the sole general
partner of the Operating Partnership and will contribute the net proceeds of the
Offering to the Operating Partnership in exchange for a number of Units equal to
the number of Common Shares sold in the Offering.
Formation of the Company. The formation transactions include the
following transactions which will have occurred prior to the Closing of the
Offering:
o ElderTrust Realty Group, Inc., a Maryland corporation owned by
Messrs. Michael R. Walker, Chairman of the Board of Trustees of
the Company and Chairman of the Board and Chief Executive Officer
of Genesis, and Edward B. Romanov, Jr., President and Chief
Executive Officer and a trustee of the Company and until recently
a Senior Vice President of Genesis, was incorporated on June 5,
1997 as the organizational general partner of the Operating
Partnership. The Operating Partnership was formed on July 30,
1997. The organizational limited partners of the Operating
Partnership were Mr. Romanov, D. Lee McCreary, Jr., Vice President
and Chief Financial Officer of the Company, and ET Partnership, a
Pennsylvania general partnership. The partners of ET Partnership
consist of Genesis, Mr. Romanov and MGI Limited Partnership, a
Delaware limited partnership whose general partner is a
corporation owned by Mr. Walker and whose limited partners consist
of Mr. Walker and other executive officers of Genesis.
o ElderTrust filed its Declaration of Trust with the State
Department of Assessments and Taxation of Maryland on September
23, 1997.
o ET Capital Corp. was formed as a Delaware corporation. The
Operating Partnership owns all of the nonvoting stock of ET
Capital Corp. (representing a 95% equity interest) and Mr. Romanov
owns all of the voting stock of ET Capital Corp. (representing a
5% equity interest).
o The Operating Partnership entered into purchase agreements to
acquire for cash from Genesis and certain other persons their
direct or indirect interests in certain of the 21 Initial
Properties and, through ET Capital Corp., substantially all of the
economic interest in the Florida Facilities Note.
o The Operating Partnership entered into contribution agreements to
acquire for Units from the Continuing Investors the remaining
interests in the Initial Properties.
o The Operating Partnership agreed to make Term Loans and a
Construction Loan secured by four assisted living facilities in
lease-up or development to Genesis (including a Term Loan for a
facility in which Genesis has a 49% interest), and to acquire from
Genesis for cash three of the four facilities that secure such
loans at the end of the loan term or at such time as each such
facility reaches Stabilized Occupancy.
o The Operating Partnership agreed to make Construction Loans
secured by two facilities to subsidiaries of SLC, and entered into
option agreements granting it an option to acquire from such
subsidiaries of SLC for cash the facilities that secure such loans
at the end of the loan term or at such time as each such facility
reaches Stabilized Occupancy.
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o The Operating Partnership has made Construction Loan Commitments
with respect to nine assisted living development and expansion
projects in the planning phase. Pursuant to these Construction
Loan Commitments, the Operating Partnership will agree to
purchase for cash seven of these projects which are owned by
Genesis upon the earlier of the maturity of the related loan or
at such time following completion of development as each such
facility reaches Stabilized Occupancy.
o The Operating Partnership agreed to make the Proposed Multicare
Loans secured by three properties in lease-up or development and
to purchase the assisted living facilities securing these loans,
subject to certain terms and conditions.
The following transactions will occur at or immediately prior to the closing of
the Offering:
o The Company will be admitted to the Operating Partnership as an
additional general partner, and ElderTrust Realty Group, Inc.
will withdraw as a general partner of the Operating Partnership.
o The Company will sell 6,800,000 Common Shares in the Offering and
will contribute the net proceeds therefrom to the Operating
Partnership in exchange for Units.
o The Operating Partnership will consummate the acquisition of the
Initial Properties, the funding of the Term Loans and the initial
draws under the Construction Loans and the purchase of
substantially all of the economic interest in the Florida
Facilities Note by investing an aggregate amount of approximately
$199.0 million in the form of (i) approximately $139.6 million in
cash paid to Genesis and certain other investors to purchase
certain of the Initial Properties or interests therein, to fund
the Term Loans and to acquire the Florida Facilities Note, (ii)
___________ Units issued to the Continuing Investors to purchase
interests in certain of the Initial Properties, (iii)
approximately $7.5 million in cash paid to lenders to repay
mortgage indebtedness secured by certain of the Initial
Properties, (iv) approximately $13.2 million in cash drawn under
the Bank Credit Facility and paid to Genesis and certain other
investors to purchase certain of the Initial Properties or
interests therein and to fund the initial draws under the
Construction Loans and (v) approximately $34.2 million in assumed
mortgage indebtedness secured by certain of the Initial
Properties. Subsequent advances under the Construction Loans, the
funding of the Construction Loan Commitments and the subsequent
purchases of the Lease-up Assisted Living Facilities and the
Initial Assisted Living Development Project owned by Genesis, and
of the two remaining Initial Assisted Living Development Projects
owned by subsidiaries of SLC, if the Company elects to purchase
such facilities, also will be made through borrowings under the
Bank Credit Facility. In addition, if certain terms and
conditions are satisfied, the Company will fund the Proposed
Multicare Term Loans and the initial draw under the Proposed
Multicare Construction Loan, as well as subsequent advances under
the Proposed Multicare Construction Loan and the subsequent
purchases of the assisted living facilities that secure the
Proposed Multicare Loans, if the Company elects to purchase such
facilities, through borrowings under the Bank Credit Facility.
o Messrs. Walker and Romanov will purchase the interest of Genesis
in ET Partnership at a purchase price equivalent to $___ per
Unit. ET Partnership will be liquidated and Messrs. Walker and
Romanov and MGI Limited Partnership will receive direct interests
in the Operating Partnership in respect of their respective
interests in ET Partnership.
o The Operating Partnership will be recapitalized to reflect the
ownership of interests in the Operating Partnership by the
Company, the Continuing Investors, Messrs. Walker, Romanov and
McCreary and MGI Limited Partnership, and the Operating
Partnership will issue Units to each of its partners to represent
these interests. The Units issued to Mr. Walker and to Mr.
Romanov in respect of the Genesis interest in ET Partnership
purchased by Messrs. Walker and Romanov prior to the liquidation
of ET Partnership will be exchanged for Common Shares on a
one-for-one basis.
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o Mr. Walker will enter into a non-competition agreement with the
Company (which will not limit in any way any activities related to
Mr. Walker's employment by or interest in Genesis), and Mr.
Romanov will enter into an employment and non-competition
agreement with the Company. See "Management -- Employment and
Non-Competition Agreements."
o The Operating Partnership will acquire all of the assets and
liabilities of ElderTrust Realty Group, Inc., which will consist
of a lease, a bank account and certain contract rights and
obligations, for cash in the amount of $100,000. ElderTrust Realty
Group, Inc. will then be dissolved.
o As a result of the foregoing transactions, the Company will own
_______ Units, which will represent an approximate _______%
interest in the Operating Partnership after the Offering.
No third-party determination of the value was sought or obtained in
connection with the acquisition by the Company of the Initial Properties, the
Term Loans, the Construction Loans or substantially all of the economic interest
in the Florida Facilities Note. There can be no assurance that the aggregate
value of the cash and Units received by the participants in the Formation
Transactions does not exceed the fair market value of the properties and other
assets acquired by the Company.
Benefits to Related Parties. Genesis and certain affiliates of the
Company will realize certain material benefits in connection with the Formation
Transactions, including the following:
o Genesis will receive $60.6 million in cash from the Company for
the nine Initial Properties or interests therein transferred by
Genesis to the Company in the Formation Transactions. The
estimated purchase price for these facilities and interests is
$61.1 million, including $500,000 of assumed indebtedness. The
aggregate book value reflected on Genesis' financial statements of
the Initial Properties to be acquired from Genesis as of June 30,
1997 was approximately $41.3 million. The Company does not believe
that the book values of the Initial Properties being acquired from
Genesis (which reflect the historical cost of such Initial
Properties, net of accumulated depreciation, where applicable) are
equivalent to the fair market values of such Initial Properties.
o Genesis or an entity in which Genesis owns a 49% interest will
receive $16.0 million in cash from the Company as a result of the
funding of the Term Loans and the initial draw under one of the
Construction Loans to be made by the Company. The Company will be
obligated to fund approximately $3.9 million in subsequent
advances under the Construction Loan made to Genesis.
o The Company also agreed to purchase from Genesis for cash two
Lease-up Assisted Living Facilities and the Initial Assisted
Living Development Project owned by Genesis. The estimated
aggregate purchase price of these facilities is $20.1 million.
o If certain terms and conditions are satisfied, Multicare, in which
Genesis will own indirectly 44% of the interests, will receive
approximately $15.9 million in cash from the Company as a result
of the funding of the Proposed Multicare Term Loans and the
initial draw under the Proposed Multicare Construction Loan by the
Company. In addition, if such terms and conditions are satisfied,
the Company will be obligated to fund approximately $3.5 million
in subsequent advances under the Proposed Multicare Construction
Loan, and the Company will acquire options to purchase from
Multicare for cash the assisted living facilities that secure the
Proposed Multicare Loans for an estimated aggregate purchase price
of $23.8 million.
o The Company has made Construction Loan Commitments to Genesis
totaling $42.9 million for eight assisted living development and
expansion projects which are owned by Genesis and which are in the
planning stage. Pursuant to these Construction Loan Commitments,
the Operating Partnership will agree to purchase for cash these
projects from Genesis upon the earlier of the maturity of the
related loan or at such time following completion of development
as each such project reaches Stabilized Occupancy. The estimated
aggregate purchase price of these facilities upon completion of
development is $50.3 million.
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o As a result of the funding by the Company of the initial draw
under the Construction Loan for one of the Initial Assisted Living
Development Projects, Genesis will receive approximately $2.0
million from a subsidiary of SLC as a repayment by such subsidiary
of SLC of a construction mortgage loan made by Genesis to such
subsidiary of SLC with respect to such Initial Assisted Living
Development Project.
o Genesis will receive $7.5 million from ET Capital Corp. as payment
of the purchase price for the Florida Facilities Note.
o As a result of the repayment of debt secured by certain of the
Initial Properties or Lease-up Assisted Living Facilities, Genesis
will be released from guarantees of such indebtedness totaling
$4.8 million.
o It is estimated that Genesis will receive approximately $2.0
million in cash from the Company as reimbursement for expenses
incurred by Genesis on behalf of the Company in connection with
the Formation Transactions.
o Genesis will receive $_______ in cash or notes from Messrs. Walker
and Romanov for the interest owned by Genesis in ET Partnership.
Mr. Walker and Mr. Romanov will receive _______ Units in respect
of this interest upon recapitalization of the Operating
Partnership, which Units will be exchanged for Common Shares on a
one-for-one basis substantially simultaneously with the Closing of
the Offering.
o Mr. Walker will receive cash distributions totaling approximately
$_______ from certain entities in which he owns interests and
which own three of the Initial Properties. Mr. Walker also will
receive a direct or indirect interest in _______ Units in exchange
for his ownership interests in certain of the Initial Properties
that are not owned by Genesis. Such Units, together with Mr.
Walker's interest in the Units to be distributed to MGI Limited
Partnership upon the recapitalization of the Operating
Partnership, will have a total value of approximately $_______
million based on the assumed initial public offering price of the
Common Shares. In addition, Mr. Walker will receive approximately
$1.9 million in cash from the Company as repayment of
indebtedness. The aggregate book value as of June 30, 1997 of Mr.
Walker's ownership interests in the Initial Properties being
transferred to the Company in which he holds interests was
approximately negative $251,000.
o Messrs. Romanov and McCreary will receive a total of _______ Units
upon the recapitalization of the Operating Partnership (not
including the Units distributed to Mr. Romanov with respect to the
Operating Partnership interest acquired by Mr. Romanov from
Genesis), which Units will have a total value of approximately
$_______ million based on the assumed initial public offering
price of the Common Shares.
o Mr. Walker and Mr. Romanov each will receive $50,000 in cash
(representing a return of their initial investment) indirectly
from the Operating Partnership upon the dissolution of ElderTrust
Realty Group, Inc. following the sale by ElderTrust Realty Group,
Inc. of all of its assets and liabilities to the Operating
Partnership.
o Kent P. Dauten, a trustee nominee, will receive a cash
distribution totaling approximately $_______ from one of the
entities in which he owns interests and which owns one of the
Initial Properties. He also will receive an indirect interest in
_______ Units in exchange for his ownership interests in certain
of the Initial Properties that are not owned by Genesis. Such
Units will have a total value of approximately $_______ based on
the assumed initial public offering price of the Common Shares.
The aggregate book value as of June 30, 1997 of Mr. Dauten's
ownership interests in the Initial Properties being transferred to
the Company in which he holds interests was approximately negative
$63,000.
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o Three other executive officers of Genesis will receive direct or
indirect interests in _______ Units in exchange for their
ownership interests in certain of the Initial Properties that are
not owned by Genesis. Such Units will have a total value of
approximately $_______ based on the assumed initial public
offering price of the Common Shares. The aggregate book value as
of June 30, 1997 of the three executive officers' ownership
interests in the Initial Properties being transferred to the
Company in which they hold interests was approximately negative
$80,000. In addition, these three executive officers and another
executive officer of Genesis will have an interest in the Units to
be distributed to MGI Limited Partnership upon the
recapitalization of the Operating Partnership, which interest will
consist of _______ Units having a total value of approximately
$_______ based on the assumed initial public offering price of the
Common Shares.
o The Company will issue and sell to Mr. Romanov 200,000 Common
Shares in a private placement at a per share purchase price equal
to the initial public offering price. Mr. Romanov will pay for
such shares with a 10-year recourse promissory note, with interest
only payable until maturity at an annual rate of 7%.
o The three trustee nominees will each receive an award of 2,500
Common Shares each under the Company's 1997 Share Option and
Incentive Plan. The Company also will grant options to purchase
7,500 Common Shares to each of the three trustee nominees of the
Company under the Company's 1997 Share Option and Incentive Plan.
The options will have an exercise price equal to the initial
public offering price and will vest over three years.
o The Company will grant to Messrs. Walker, Romanov and McCreary
options to purchase 150,000 Common Shares, 300,000 Common Shares,
and 25,000 Common Shares, respectively, under the Company's 1997
Share Option and Incentive Plan. The options will have an exercise
price equal to the initial public offering price. The options to
be granted to Mr. Walker will vest over three years, one-half of
the options to be granted to Mr. Romanov will vest immediately and
one-half will vest over three years and the options to be granted
to Mr. McCreary will vest over five years.
o Mr. Romanov will enter into an employment and non-competition
agreement with the Company. Mr. Walker will enter into a
non-competition agreement with the Company. See "Management --
Employment and Non-Competition Agreements."
o Commencing 14 months after the Offering, Messrs. Dauten, Walker,
Romanov and McCreary will have registration rights with respect to
the Common Shares issued to them and that may be issued to them in
exchange for Units they receive in the Formation Transactions, as
well as, in the case of Messrs. Walker and Romanov, with respect
to the Common Shares to be acquired by them upon the exchange of
the Units distributed to them in respect of the interest in ET
Partnership purchased by them from Genesis.
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POLICIES WITH RESPECT TO CERTAIN ACTIVITIES
The following is a discussion of the anticipated policies with respect
to investments, financing and certain other activities of the Operating
Partnership and the Company. Upon consummation of the Offering, these policies
will be determined by the Board of Trustees of the Company and may be amended or
revised from time to time at the discretion of the Board of Trustees without
notice to or a vote of the shareholders of the Company, or the limited partners
of the Operating Partnership, except that changes in certain policies with
respect to conflicts of interest must be consistent with legal requirements.
INVESTMENT POLICIES
Investments in Real Estate or Interests in Real Estate and Investments
in Mortgages. The Company currently plans to conduct all of its investment
activities through the Operating Partnership. The Company's principal business
objective is to maximize growth in cash available for distribution and to
enhance the value of its portfolio in order to maximize total return to
shareholders. The Company's business and growth strategies to achieve this
objective are: (i) to invest in a high quality portfolio of healthcare-related
properties operated or managed by established operators or mortgages secured by
such properties located in close proximity to complimentary healthcare services
and facilities, (ii) to pursue aggressively opportunities for portfolio growth
through REIT financing to established operators in the healthcare industry,
particularly in the fast growing assisted living segment, (iii) to provide
shareholders the opportunity for increased distributions from annual increases
in rental income and interest income and from portfolio growth and (iv) to
provide shareholders with stock price appreciation resulting from potential
increases in the value of the Company's investments. There can be no assurance,
however, that these investment objectives will be realized. See "Business and
Growth Strategies" and "Policies with Respect to Certain Activities."
The Company intends to acquire a diversified portfolio of
income-producing healthcare facilities or mortgages thereon, with a primary
initial focus on assisted living facilities located primarily in the eastern
United States. In evaluating potential investments, the Company will consider
such factors as (i) the quality and experience of management and the
creditworthiness of the operator of the facility: (ii) the facility's
historical, current and forecasted cash flow and its adequacy to meet
operational needs, capital expenditures and lease or debt service obligations,
while providing a competitive return on investment to the Company; (iii) the
construction quality, conditions and design of the facility; (iv) the geographic
areas and type of facility; (v) the tax, growth, regulatory and reimbursement
environment of the community in which the facility is located; (vi) the
occupancy and demand for similar health care facilities in the same or nearby
communities and (vii) in the case of skilled nursing facilities, the payor mix
of private, Medicare and Medicaid patients.
In making future investments, the Company intends to focus on
established, creditworthy, healthcare operators which meet the Company's
standards for network resources and quality and experience of management.
Although the Company initially will emphasize assisted living investments, it
may seek to diversify prudently into other types of healthcare facilities, such
as retirement facilities, congregate care facilities, continuing care retirement
communities, and additional independent living facilities, skilled nursing
facilities and medical office buildings. The Company also may seek to diversify
its investments in terms of geographic location, operators and, subject to the
foregoing, facility types. Nonetheless, substantially all of the Initial
Properties will be leased to or managed by Genesis, and it is anticipated that a
significant portion of new investments also will involve Genesis as tenant or
manager. In addition, Genesis will manage the 11 skilled nursing facilities that
secure the Florida Facilities Note.
There are no limitations on the amount or percentage of the Company's
total assets that may be invested in any one property. Additionally, no limits
have been set on the concentration of investments in any one location, operator
or facility type.
The Company may participate with other entities in property ownership
through joint ventures or other types of co-ownership. Equity investments may be
subject to existing mortgage financing and other indebtedness or such financing
or indebtedness may be incurred in connection with acquiring investments. Any
such financing or indebtedness will have priority over the Company's equity
interest in such property.
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The Company does not intend to invest in the securities of others for
the purpose of exercising control. Where appropriate, and subject to REIT
qualification rules, the Operating Partnership may sell certain of its
properties.
The Company may determine to finance acquisitions through the exchange
of properties of the issuance of shares of its capital stock to others, if such
transactions otherwise satisfy the Company's investment criteria. The Company
also has authority to repurchase or otherwise reacquire its Common Shares or any
other securities and may determine to do so in the future.
To the extent that the Company's Board of Trustee determines to obtain
additional capital, the Company may raise such capital through additional equity
offerings, debt financing or retention of cash flow (subject to provisions of
the Code concerning the taxability of undistributed income of "real estate
investment trusts") or a combinations of these methods. See "Borrowing Policies"
for further information concerning the Company's policies regarding debt
financing.
Securities of or Interests in Persons Primarily Engaged in Real Estate
Activities and Other Issuers. Subject to the gross income and asset tests
necessary for REIT qualification, the Company also may invest in securities of
entities engaged in real estate activities or securities of other issuers. The
Company may acquire all or substantially all of the securities or assets of
other REITs or similar entities where such investments would be consistent with
the Company's investment policies. In any event, the Company does not intend
that its investments in securities will require it or the Operating Partnership
to register as an "investment company" under the Investment Company Act of 1940,
as amended.
FINANCING POLICIES
The Company does not have a policy limiting the amount of indebtedness
that the Company may incur. In addition, the Declaration of Trust and Bylaws do
not limit the amount or percentage of indebtedness that the Company may incur.
The Company has not established any limit on the number or amount of mortgages
that may be placed on any single property or on its portfolio as a whole.
The Board of Trustees will consider a number of factors when
evaluating the Company's level of indebtedness and when making decisions
regarding the incurrence of indebtedness, including the purchase price of
properties to be acquired with debt financing, the estimated market value of its
properties upon refinancing and the ability of particular properties and the
Company as a whole to generate cash flow to cover expected debt service. See
"Risk Factors-No Limitations on Debt" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations-Liquidity and Capital
Resources."
LENDING POLICIES
The Company may consider offering purchase money financing in
connection with the sale of properties where the provision of such financing
will increase the value received by the Company for the property sold.
CONFLICT OF INTEREST POLICIES
Conflicts of Interest Involving Trustees. Mr. Walker, the Chairman of
the Board of Trustees, also serves as Chairman of the Board of Directors and
Chief Executive Officer of Genesis. At June 30, 1997, Mr. Walker beneficially
owned approximately 2.2% of the outstanding common stock of Genesis. Because he
serves as Chairman of both Genesis and the Company, Mr. Walker may be subject to
certain conflicts of interest in fulfilling his responsibilities to the Company
and its shareholders. See "Risk Factors -- Conflicts of Interest in Business
Decisions Affecting the Company." Under Maryland law, any contract or other
transaction between a corporation and any of its directors or any other
corporation, firm or other entity in which any of its directors is a director or
has a material financial interest may be void or voidable. However, the MGCL
provides that any such contract or transaction will not be void or voidable if
(a) the contract or transaction is authorized, approved or ratified, after
disclosure of, or with knowledge of, the common directorship or interest, by the
affirmative vote of a majority of
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disinterested directors (even if the disinterested directors constitute less
than a quorum) or by the affirmative vote of a majority of the votes cast by
disinterested shareholders, or (b) it is fair and reasonable to the corporation.
While the Maryland REIT Law does not have a comparable provision for trustees, a
court may apply the principles of the MGCL to contracts or transactions between
the Company and its trustees. The Company believes that a requirement of
disinterested director approval of such transactions, including transactions
with Genesis, will help to eliminate or minimize certain potential conflicts of
interest. Therefore, without the approval of a majority of the disinterested
trustees, the Company and its subsidiaries will not (i) acquire from or sell to
any trustee, officer or employee of the Company, or any entity in which a
trustee, officer or employee of the Company serves as a director or owns more
than a 1% interest, or acquire from or sell to any affiliate of any of the
foregoing, any assets or other property of the Company or its subsidiaries, (ii)
make any loan to or borrow from any of the foregoing persons, or (iii) engage in
any other material transaction with any of the foregoing persons.
Policies Applicable to All Trustees. Under Maryland law, each trustee
will be obligated to offer to the Company any opportunity (with certain limited
exceptions) which comes to him and which the Company could reasonably be
expected to have an interest in developing or acquiring. In addition, under
Maryland law, any contract or other transaction between a corporation and any
director or any other corporation, firm or other entity in which the director is
a director or has a material financial interest may be void or voidable unless
approved as described above.
Leased Office Space. Genesis is the principal tenant of three office
properties owned by the Company. The Company believes Genesis is paying fair
market rent for this space. The disinterested members of the Board of Trustees
will annually review and approve the rates charged to Genesis for such office
space.
POLICIES WITH RESPECT TO OTHER ACTIVITIES
The Company may, but does not presently intend to, make investments
other than as previously described. The Company will make investments only
through the Operating Partnership. The Company will have authority to offer its
Common Shares or other equity or debt securities of the Operating Partnership in
exchange for property and to repurchase or otherwise reacquire its Common Shares
or any other securities and may engage in such activities in the future.
Similarly, the Operating Partnership may offer additional Units or other equity
interests in the Operating Partnership that are exchangeable into Common Shares
or Preferred Shares, in exchange for property. The Operating Partnership also
may make loans to joint ventures in which it may participate in the future.
Neither the Company nor the Operating Partnership will engage in trading,
underwriting or the agency distribution or sale of securities of other issuers.
At all times, the Company intends to cause the Operating Partnership to make
investments in such a manner as to be consistent with the requirements of the
Code to qualify as a REIT unless, because of circumstances or changes in the
Code (or the regulations promulgated thereunder), the Board of Trustees
determines that it is no longer in the best interests of the Company to continue
to qualify as a REIT. The Company's policies with respect to such activities may
be reviewed and modified from time to time by the Company's trustees without
notice to or the vote of its shareholders.
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PARTNERSHIP AGREEMENT
The following summary of the Operating Partnership Agreement,
including the descriptions of certain provisions thereof set forth elsewhere in
this Prospectus, is qualified in its entirety by reference to the Operating
Partnership Agreement, which is filed as an exhibit to the Registration
Statement of which this Prospectus is a part.
MANAGEMENT
The Operating Partnership was formed on July 30, 1997, as a limited
partnership under the Delaware Revised Uniform Limited Partnership Act (the
"Partnership Act"). Following completion of the Offering, the Company will be
the sole general partner of the Operating Partnership and expects at all times
to own a majority interest in the Operating Partnership.
The Company, as the general partner of the Operating Partnership, will
have the exclusive power and authority to conduct the business of the Operating
Partnership, subject to the consent of the limited partners in certain limited
circumstances. Limited partners will have no right or authority to act for or to
bind the Operating Partnership. No limited partner may take part in the conduct
or control of the business or affairs of the Operating Partnership by virtue of
being a holder of Units. In particular, the limited partners expressly
acknowledge in the Operating Partnership Agreement that the Company, as general
partner, is acting on behalf of the Operating Partnership's limited partners and
the Company's shareholders collectively, and is under no obligation to consider
the tax consequences to limited partners when making decisions for the benefit
of the Operating Partnership.
SALES OF ASSETS
Under the Operating Partnership Agreement, the Company, as general
partner, will have the exclusive authority to determine whether, when and on
what terms the assets of the Operating Partnership (including the Properties)
will be sold. A sale of all or substantially all of the assets of the Operating
Partnership (or a merger of the Operating Partnership with another entity)
generally requires an affirmative vote of the holders of a majority of the
outstanding Units (excluding Units held directly or indirectly by the Company).
REMOVAL OF THE GENERAL PARTNER; TRANSFER OF THE COMPANY'S INTERESTS
The Operating Partnership Agreement provides that the limited partners
may not remove the Company as general partner of the Operating Partnership with
or without cause. In addition, the Company may not transfer any of its interests
as general or limited partner in the Operating Partnership, except in connection
with a merger or sale of all or substantially all of the Company's assets
(subject to certain conditions).
Under the Operating Partnership Agreement, a sale of all or
substantially all of the assets of the Company (or a merger of the Company with
another entity) generally requires an affirmative vote of the holders of a
majority of the outstanding Units (including Units held directly or indirectly
by the Company). The Company expects at all times to own a majority of the
outstanding Units and thus to control any such vote. In addition, the Operating
Partnership Agreement does not require the consent of the limited partners to
approve a transaction in which another entity acquires control (or all of the
outstanding Common Shares) of the Company as long as all limited partners
receive or have the right to receive the same consideration for their interests
as they would have received had they exercised the Units Redemption Right (as
defined below) with respect to their Units immediately prior to such
acquisition.
REIMBURSEMENT OF THE COMPANY; TRANSACTIONS WITH THE COMPANY AND ITS AFFILIATES
The Company will not receive any compensation for its services as
general partner of the Operating Partnership. The Company, however, as a partner
in the Operating Partnership, has the same right to allocations and
distributions as other partners in the Operating Partnership. In addition, the
Operating Partnership will reimburse the Company for all expenses it incurs
relating to its activities as general partner, its continued existence and
qualification as a REIT and all other liabilities incurred by the Company in
connection with the pursuit of its
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business and affairs (including expenses incurred by the Company in connection
with the issuance of Common Shares or other securities of the Company). Except
as expressly permitted by the Operating Partnership Agreement, affiliates of the
Company will not engage in any transactions with the Operating Partnership
except on terms that are fair and reasonable and no less favorable to the
Operating Partnership than would be obtained from an unaffiliated third-party.
REDEMPTION OF UNITS
Subject to certain limitations in the Operating Partnership Agreement,
holders of Units generally will have the right to require the redemption of
their Units at any time 14 months after the Closing of the Offering (the "Unit
Redemption Right"). Unless the Company elects to assume and perform the
Operating Partnership's obligation with respect to the Unit Redemption Right, as
described below, the limited partner will receive cash from the Operating
Partnership in an amount equal to the market value of the Units to be redeemed.
The market value of a Unit for this purpose will be equal to the average of the
closing trading price of a Common Share on the NYSE for the ten trading days
before the day on which the redemption notice was given. In lieu of the
Operating Partnership's acquiring the Units for cash, the Company will have the
right to elect to acquire the Units directly from a limited partner exercising
the Unit Redemption Right, in exchange for either cash or Common Shares, and,
upon such acquisition, the Company will become the owner of such Units. Upon
exercise of the Unit Redemption Right, the limited partner's right to receive
distributions for the Units so redeemed or exchanged will cease. At least 1,000
Units (or all remaining Units owned by the limited partner if less than 1,000
Units) must be redeemed each time the Unit Redemption Right is exercised. No
redemption or exchange can occur if delivery of Common Shares would be
prohibited either under the provisions of the Company's Declaration of Trust
designed to protect the Company's qualification as a REIT or under applicable
Federal or state securities laws as long as the Common Shares are publicly
traded. See "Shares of Beneficial Interest." The Company will at all times
reserve and keep available out of its authorized but unissued Common Shares,
solely for the purpose of effecting the issuance of Common Shares pursuant to
the Unit Redemption Right, a sufficient number of Common Shares as shall from
time to time be sufficient for the redemption of all outstanding Units not owned
by the Company.
RESTRICTIONS ON TRANSFER OF UNITS BY LIMITED PARTNERS
The Operating Partnership Agreement imposes certain restrictions on
the transfer of Units. The Operating Partnership Agreement provides that for a
period of 14 months after the Closing of the Offering, no limited partner shall,
without the prior written consent of the Company (which may be withheld in the
sole discretion of the Company), sell, assign, distribute or otherwise transfer
all or any part of his, her or its interest in the Operating Partnership except,
(i) in the case of an individual, to a member of his or her immediate family (or
to a trust formed for the benefit of such individual or members of his or her
immediate family or to a partnership, limited liability company, joint venture,
corporation or other business entity comprised, directly or indirectly, only of
such individual or members of his or her immediate family) (ii) in the case of a
trust, partnership, limited liability company, joint venture, corporation or
other business entity, to its beneficiaries, partners, owners or stockholders,
as the case may be, (iii) by gift, (iv) by operation of law, (v) to another
limited partner or (vi) pursuant to certain pledges or other collateral
transfers effected by a limited partner to secure the repayment of a loan. See
"Shares of Beneficial Interest -- Restrictions on Ownership and Transfer."
ISSUANCE OF ADDITIONAL UNITS AND PREFERENCE UNITS
The Company is authorized at any time, without the consent of the
limited partners, to cause the Operating Partnership to issue additional Units
to the Company, to the limited partners or to other persons for such
consideration and on such terms and conditions as the Company deems appropriate.
If Units are issued to the Company, then the Company must issue a corresponding
number of Common Shares and must contribute to the Operating Partnership the
proceeds, if any, received by the Company from such issuance. In addition, the
Operating Partnership Agreement provides that the Operating Partnership may also
issue preferred units and other partnership interests of different classes and
series (collectively, "Preference Units") having such rights, preferences and
other privileges, variations and designations as may be determined by the
Company. Any such Preference Units may have terms, provisions and rights which
are preferential to the terms, provisions and rights of the Units. Preference
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Units, however, may be issued to the Company only in connection with an offering
of securities of the Company having substantially similar rights and the
contribution of the proceeds therefrom to the Operating Partnership. No limited
partner has preemptive, preferential or similar rights with respect to capital
contributions to the Operating Partnership or the issuance or sale of any
partnership interests therein.
CAPITAL CONTRIBUTIONS
No partner of the Operating Partnership will be required to make
additional capital contributions to the Operating Partnership, except that the
Company is generally required to contribute net proceeds of the sale of Common
Shares (and other equity interests) of the Company to the Operating Partnership.
Except for limited partners (which will not include the Company) who enter into
one or more Deficit Restoration Obligation Agreements with the Operating
Partnership), no limited or general partner will be required to pay to the
Operating Partnership any deficit or negative balance which may exist in its
account.
DISTRIBUTIONS; ALLOCATIONS OF INCOME AND LOSS
The Operating Partnership Agreement generally provides for the
quarterly distribution of "Available Cash" (as defined below), as determined in
the manner provided in the Operating Partnership Agreement, to the partners of
the Operating Partnership in proportion to their percentage interests in the
Operating Partnership (which for any partner is determined by the number of
Units it owns relative to the total number of Units outstanding). "Available
Cash" is generally defined as net cash flow from operations plus any reduction
in reserves and minus interest and principal payments on debt, capital
expenditures, any additions to reserves and other adjustments. Neither the
Company nor the limited partners are entitled to any preferential or
disproportionate distributions of Available Cash with respect to the Units.
EXCULPATION AND INDEMNIFICATION OF THE COMPANY
The Operating Partnership Agreement generally provides that the
Company, as general partner of the Operating Partnership, will incur no
liability to the Operating Partnership or any limited partner for losses
sustained, liabilities incurred, or benefits not derived as a result of errors
in judgment or for any mistakes of fact or law or for anything which it may do
or refrain from doing in connection with the business and affairs of the
Operating Partnership if the Company or such other general partner carried out
its duties in good faith. The Company's liability in any event is limited to its
interest in the Operating Partnership. Without limiting the foregoing, the
Company has no liability for the loss of any limited partner's capital. In
addition, the Company is not responsible for any misconduct, negligent act or
omission of any consultant, contractor, or agent of the Operating Partnership or
of the Company and has no obligation other than to use good faith in the
selection of all such contractors, consultants, and agents.
The Operating Partnership Agreement also requires the Operating
Partnership to indemnify the Company, the Trustees and officers of the Company,
and such other persons as the Company may from time to time designate against
any loss or damage, including reasonable legal fees and court costs incurred by
such person by reason of anything it may do or refrain from doing for or on
behalf of the Operating Partnership or in connection with its business or
affairs unless it is established that: (i) the act or omission of the
indemnified person was material to the matter giving rise to the proceeding and
either was committed in bad faith or was the result of active and deliberate
dishonesty; (ii) the indemnified person actually received an improper personal
benefit in money, property or services; or (iii) in the case of any criminal
proceeding, the indemnified person had reasonable cause to believe that the act
or omission was unlawful. Any such indemnification claims must be satisfied
solely out of the assets of the Operating Partnership.
AMENDMENT OF THE OPERATING PARTNERSHIP AGREEMENT
Amendments to the Operating Partnership Agreement may be proposed by
the Company or by limited partners owning at least 25% of the then outstanding
Units. Generally, the Operating Partnership Agreement may be amended with the
approval of the Company, as general partner, and limited partners (including the
Company)
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holding a majority of the Units. Certain provisions regarding, among other
things, the rights and duties of the Company as general partner (e.g.,
restrictions on the Company's power to conduct businesses other than owning
Units) or the dissolution of the Operating Partnership, may not be amended
without the approval of a majority of the Units not held by the Company. Certain
amendments that would, among other things, (i) convert a limited partner's
interest into a general partner's interest, (ii) modify the limited liability of
a limited partner, (iii) alter the interest of a partner in profits or losses,
or the right to receive any distributions (except as permitted under the
Operating Partnership Agreement with respect to the admission of new partners or
the issuance of additional Units), or (iv) alter the Unit Redemption Right, must
be approved by the Company and each limited partner that would be adversely
affected by such amendment.
TERM
The Operating Partnership will be dissolved and its affairs wound up
upon the earliest of (i) December 31, 2096, (ii) the withdrawal of the Company
as general partner without the permitted transfer of the Company's interest to a
successor general partner (except in certain limited circumstances), (iii) the
sale of all or substantially all of the Operating Partnership's assets and
properties, (iv) the entry of a decree of judicial dissolution of the Operating
Partnership pursuant to the provisions of the Partnership Act, (v) the entry of
a final non-appealable judgment ruling that the general partner is bankrupt or
insolvent (except that, in either such case, in certain circumstances the
limited partners (other than the Company) may vote to continue the Operating
Partnership and substitute a new general partner in place of the Company), (vi)
prior to January 1, 2047, with the consent of holders (including the Company) of
90% of the outstanding Units or (vii) on or after January 1, 2047, on election
by the Company, in its sole and absolute discretion.
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PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of Common Shares (or Common Shares for which Units are
exchangeable) by (i) each trustee (and trustee nominee) of the Company, (ii)
each executive officer of the Company, (iii) all trustees, trustee nominees and
executive officers of the Company as a group, and (iv) each person or entity
which is expected to be the beneficial owner of 5% or more of the outstanding
Common Shares immediately following completion of the Offering. Except as
indicated below, all of such Common Shares are owned directly, and the indicated
person or entity has sole voting and investment power.
<TABLE>
<CAPTION>
NUMBER OF SHARES AND UNITS PERCENTAGE OF ALL PERCENT OF ALL
BENEFICIALLY OWNED AFTER COMMON SHARES COMMON
NAME OF BENEFICIAL OWNER(1) THE OFFERING AND UNITS SHARES (2)
---------------------------- ------------ --------- ----------
<S> <C> <C> <C>
Michael R. Walker................................ % %
Edward B. Romanov, Jr............................
Kent P. Dauten...................................
Rodman W. Moorhead, III..........................
Timothy T. Weglicki..............................
D. Lee McCreary, Jr..............................
All trustees, trustee nominees and executive
officers as a group (6 persons)...............
</TABLE>
- ---------------
* Less than 1%.
(1) Address: c/o ElderTrust, 415 McFarlan Road, Suite 202, Kennett Square,
Pennsylvania 19348.
(2) Assumes that all Units held by the person are presented to the Operating
Partnership for redemption and acquired by the Company for Common Shares.
The total number of Common Shares outstanding used in calculating the
percentage assumes that none of the Units held by other persons are
similarly acquired for Common Shares.
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SHARES OF BENEFICIAL INTEREST
The summary of the terms of the shares of beneficial interest of the
Company set forth below does not purport to be complete and is subject to and
qualified in its entirety by reference to the Declaration of Trust and Bylaws of
the Company, copies of which are exhibits to the Registration Statement of which
this Prospectus is a part.
GENERAL
The Declaration of Trust of the Company provides that the Company may
issue 100 million Common Shares and 20 million Preferred Shares. As of September
23, 1997, 100 Common Shares were issued and outstanding.
Under the Maryland REIT Law, a shareholder is not liable for
obligations of the Company. The Declaration of Trust provides that no
shareholder shall be liable for any debt or obligation of the Company by reason
of being a shareholder nor shall any shareholder be subject to any personal
liability in tort, contract or otherwise to any person in connection with the
property or affairs of the Company by reason of being a shareholder. The
Company's Bylaws further provide that the Company shall indemnify each present
or former shareholder against any claim or liability to which the shareholder
may become subject by reason of being or having been a shareholder and that the
Company shall reimburse each shareholder for all reasonable expenses incurred by
him or her in connection with any such claim or liability. However, with respect
to tort claims, contractual claims where shareholder liability is not so
negated, claims for taxes and certain statutory liability, the shareholders may,
in some jurisdictions, be personally liable to the extent that such claims are
not satisfied by the Company. Inasmuch as the Company carries public liability
insurance which it considers adequate, any risk of personal liability to
shareholders is limited to situations in which the Company's assets plus its
insurance coverage would be insufficient to satisfy the claims against the
Company and its shareholders.
COMMON SHARES
All Common Shares offered hereby will be duly authorized, fully paid
and nonassessable. Subject to the preferential rights of any other shares of
beneficial interest and to the provisions of the Declaration of Trust regarding
restrictions on transfers of shares of beneficial interest, holders of Common
Shares are entitled to receive distributions if, as and when authorized and
declared by the Board of Trustees out of assets legally available therefor and
to share ratably in the assets of the Company legally available for distribution
to its shareholders in the event of its liquidation, dissolution or winding-up
after payment of, or adequate provision for, all known debts and liabilities of
the Company. The Company currently intends to pay regular quarterly
distributions.
Subject to the provisions of the Company's Declaration of Trust
regarding restrictions on transfer of shares of beneficial interest, each
outstanding Common Share entitles the holder to one vote on all matters
submitted to a vote of shareholders, including the election of trustees, and,
except as provided with respect to any other class or series of shares of
beneficial interest, the holders of Common Shares will possess the exclusive
voting power. There is no cumulative voting in the election of trustees, which
means that the holders of a majority of the outstanding Common Shares can elect
all of the trustees then standing for election, and the holders of the remaining
shares of beneficial interest, if any, will not be able to elect any trustees.
Holders of Common Shares have no preferences, conversion, sinking
fund, redemption rights or preemptive rights to subscribe for any securities of
the Company. Subject to the exchange provisions of the Company's Declaration of
Trust regarding restrictions on transfer, Common Shares have equal distribution,
liquidation and other rights.
Pursuant to the Maryland REIT Law, a Maryland real estate investment
trust generally cannot dissolve, amend its declaration of trust or merge, unless
approved by the affirmative vote or written consent of shareholders holding at
least two-thirds of the shares entitled to vote on the matter unless a lesser
percentage (but not less than a majority of all of the votes entitled to be cast
on the matter) is set forth in the trust's Declaration of Trust. The Company's
Declaration of Trust provides that the Board of Trustees, with the approval of a
majority of the votes cast
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at a meeting of shareholders, may amend the Declaration of Trust from time to
time to increase or decrease the aggregate number of shares or the number of
shares of any class that the Company has authority to issue. The Declaration of
Trust also provides that a merger transaction may be approved, at a meeting of
the shareholders called for that purpose, by the affirmative vote of the holders
of not less than sixty-six and two-thirds percent (66 2/3%) of the shares then
outstanding and entitled to vote thereon. Under the Maryland REIT Law, a
declaration of trust may permit the trustees by a two-thirds vote to amend the
declaration of trust from time to time to qualify as a REIT under the Code or
the Maryland REIT Law without the affirmative vote or written consent of the
shareholders. The Company's Declaration of Trust permits such action by the
Board of Trustees.
PREFERRED SHARES
The Declaration of Trust authorizes the Board of Trustees to issue 20
million Preferred Shares and to classify any unissued Preferred Shares or to
reclassify any previously classified but unissued Preferred Shares of any series
from time to time, in one or more series. Prior to issuance of shares of each
series, the Board of Trustees is required by the Maryland REIT Law and the
Declaration of Trust of the Company to set, subject to the provisions of the
Declaration of Trust regarding the restriction on transfer of shares of
beneficial interest, the terms, preferences, conversion or other rights, voting
powers, restrictions, limitations as to dividends or other distributions,
qualifications and terms or conditions of redemption for each such series. Thus,
the Board could authorize the issuance of Preferred Shares with terms and
conditions which could have the effect of delaying, deferring or preventing a
transaction or a change in control of the Company that might involve a premium
price for holders of Common Shares or otherwise be in their best interest. As of
the date hereof, no Preferred Shares are outstanding and the Company has no
present plans to issue any Preferred Shares.
POWER TO ISSUE ADDITIONAL COMMON SHARES AND PREFERRED SHARES
The Company believes that the power of the Board of Trustees to issue
additional authorized but unissued Common Shares or Preferred Shares in one or
more series will provide the Company with increased flexibility in structuring
possible future financings and acquisitions and in meeting other needs which
might arise. Authorized but unissued Common Shares or Preferred Shares will be
available for issuance without further action by the Company's shareholders,
unless such action is required by applicable law or the rules of any stock
exchange or automated quotation system on which the Company's securities may be
listed or traded.
RESTRICTIONS ON OWNERSHIP AND TRANSFER
For the Company to qualify as a REIT under the Code, no more than 50%
in value of its outstanding shares of beneficial interest may be owned, actually
or constructively, by five or fewer individuals (as defined in the Code to
include certain entities) during the last half of a taxable year (other than the
first year for which an election to be treated as a REIT has been made) or
during a proportionate part of a shorter taxable year. In addition, if the
Company, or an owner of 10% or more of the Company, actually or constructively
owns 10% or more of a tenant of the Company (or a tenant of any partnership in
which the Company is a partner), the rent received by the Company (either
directly or through any such partnership) from such tenant will not be
qualifying income for purposes of the REIT gross income tests of the Code. A
REIT's shares also must be beneficially owned by 100 or more persons during at
least 335 days of a taxable year of twelve months or during a proportionate part
of a shorter taxable year (other than the first year for which an election to be
treated as a REIT has been made).
Because the Board of Trustees believes it is desirable for the Company
to qualify as a REIT, the Declaration of Trust, subject to certain exceptions,
provides that no holder may own, or be deemed to own by virtue of the
attribution provisions of the Code, more than the Ownership Limit or the
Excluded Holder Limit, as applicable. In connection with the Excluded Holder
Limit of 15% of the Common Shares that applies with respect to Mr. Romanov, Mr.
Romanov has entered into an agreement with the Company for the benefit of the
Company and certain designated charitable beneficiaries that restricts Mr.
Romanov's ownership of (i) a tenant of the Company or (ii) any entity that would
cause the Company to be deemed to own more than 10% of a tenant of the Company
and providing that if, at any time, for any reason, Mr. Romanov's ownership of
interests in a tenant of the Company resulted in the actual or constructive
ownership by the Company of 10% or more of any tenant of the
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Company, than a number of shares of the Company owned by Mr. Romanov necessary
to reduce the Company's actual or constructive ownership of such tenant to less
than 10% will automatically and irrevocably be transferred to a designated
charitable beneficiary. The ownership attribution rules under the Code are
complex and may cause Common Shares owned actually or constructively by a group
of related individuals and/or entities to be owned constructively by one
individual or entity. As a result, the acquisition of less than 8.6% of the
Common Shares (or the acquisition of an interest in an entity that owns,
actually or constructively, Common Shares) by an individual or entity, could,
nevertheless cause that individual or entity, or another individual or entity,
to own constructively in excess of 8.6% of the outstanding Common Shares and
thus subject such Common Shares to the Ownership Limit. The Board of Trustees
may grant an exemption from the Ownership Limit or the Excluded Holder Limit
with respect to one or more persons who would not be treated as "individuals"
for purposes of the Code if it is satisfied, based upon the advice of counsel or
a ruling from the IRS, that such ownership will not cause a person who is an
individual to be treated as owning Shares in excess of the Ownership Limit or
the Excluded holder Limit, as applicable, applying the applicable constructive
ownership rules, and such ownership would not result in the Company otherwise
failing to qualify as a REIT (including, but not limited to, ownership that
would result in the Company owning interests in a tenant as described in Section
856(d)(2)(B) of the Code. As a condition of such waiver, the Board of Trustees
may require undertakings or representations from the applicant with respect to
preserving the REIT status of the Company.
The Board of Trustees of the Company will have the authority to
increase the Ownership Limit with respect to Common Shares from time to time,
but will not have the authority to do so to the extent that after giving effect
to such increase, five beneficial owners of Common Shares could beneficially own
in the aggregate more than 49.5% of the outstanding Common Shares.
The Declaration of Trust further prohibits (a) any person from
actually or constructively owning shares of beneficial interest of the Company
that would result in the Company being "closely held" under Section 856(h) of
the Code or otherwise cause the Company to fail to qualify as a REIT and (b) any
person from transferring shares of beneficial interest of the Company if such
transfer would result in shares of beneficial interest of the Company being
owned by fewer than 100 persons.
Any person who acquires or attempts or intends to acquire actual or
constructive ownership of shares of beneficial interest of the Company that will
or may violate any of the foregoing restrictions on transferability and
ownership is required to give notice immediately to the Company and provide the
Company with such other information as the Company may request in order to
determine the effect of such transfer on the Company's status as a REIT.
If any purported transfer of shares of beneficial interest of the
Company or any other event would otherwise result in any person violating the
Ownership Limit or the other restrictions in the Declaration of the Trust, then
any such purported transfer will be void and of no force or effect with respect
to the purported transferee (the "Prohibited Transferee") as to that number of
shares that exceeds the Ownership Limit (referred to as "excess shares") and the
Prohibited Transferee shall acquire no right or interest (or, in the case of any
event other than a purported transfer, the person or entity holding record title
to any such shares in excess of the Ownership Limit (the "Prohibited Owner")
shall cease to own any right or interest) in such excess shares. Any such excess
shares described above will be transferred automatically, by operation of law,
to a trust, the beneficiary of which will be a qualified charitable organization
selected by the Company (the "Beneficiary"). Such automatic transfer shall be
deemed to be effective as of the close of business on the Business Day (as
defined in the Declaration of Trust) prior to the date of such violating
transfer. Within 20 days of receiving notice from the Company of the transfer of
shares to the trust, the trustee of the trust (who shall be designated by the
Company and be unaffiliated with the Company and any Prohibited Transferee or
Prohibited Owner) will be required to sell such excess shares to a person or
entity who could own such shares without violating the Ownership Limit, and
distribute to the Prohibited Transferee an amount equal to the lesser of the
price paid by the Prohibited Transferee for such excess shares or the sales
proceeds received by the trust for such excess shares. In the case of any excess
shares resulting from any event other than a transfer, or from a transfer for no
consideration (such as a gift), the trustee will be required to sell such excess
shares to a qualified person or entity and distribute to the Prohibited Owner an
amount equal to the lesser of the fair market value of such excess shares as of
the date of such event or the sales proceeds received by the trust for such
excess shares. In either case, any proceeds in excess of the amount
distributable to the Prohibited Transferee or Prohibited Owner, as applicable,
will be distributed to the Beneficiary. Prior to a sale of any such excess
shares by the trust,
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the trustee will be entitled to receive, in trust for the Beneficiary, all
dividends and other distributions paid by the Company with respect to such
excess shares, and also will be entitled to exercise all voting rights with
respect to such excess shares. Subject to Maryland law, effective as of the date
that such shares have been transferred to the trust, the trustee shall have the
authority (at the trustee's sole discretion and subject to applicable law) (i)
to rescind as void any vote cast by a Prohibited Transferee prior to the
discovery by the Company that such shares have been transferred to the trust and
(ii) to recast such vote in accordance with the desires of the trustee acting
for the benefit of the Beneficiary. However, if the Company has already taken
irreversible corporate action, then the trustee shall not have the authority to
rescind and recast such vote. Any dividend or other distribution paid to the
Prohibited Transferee or Prohibited Owner (prior to the discovery by the Company
that such shares had been automatically transferred to a trust as described
above) will be required to be repaid to the trustee upon demand for distribution
to the Beneficiary. If the transfer to the trust as described above is not
automatically effective (for any reason) to prevent violation of the Ownership
Limit, then the Declaration of Trust provides that the transfer of the excess
shares will be void.
In addition, shares of beneficial interest of the Company held in the
trust shall be deemed to have been offered for sale to the Company, or its
designee, at a price per share equal to the lesser of (i) the price per share in
the transaction that resulted in such transfer to the trust (or, in the case of
a devise or gift, the market value at the time of such devise or gift) and (ii)
the market value of such shares on the date of the Company, or its designee,
accepts such offer. The Company shall have the right to accept such offer until
the trustee has sold the shares of beneficial interest held in the Trust. Upon
such a sale to the Company, the interest of the Beneficiary in the shares sold
shall terminate and the trustee shall distribute the net proceeds of the sale to
the Prohibited Owner.
The foregoing restrictions on transferability and ownership will not
apply if the Board of Trustees determines that it is no longer in the best
interests of the Company to attempt to qualify, or to continue to qualify, as a
REIT.
All certificates representing shares of beneficial interest shall bear
a legend referring to the restrictions described above.
All persons who own, directly or by virtue of the attribution
provisions of the Code, more than 5% (or such other lower percentage as provided
in the rules and regulations promulgated under the Code) of the lesser of the
number or value of the outstanding shares of beneficial interest of the Company
must give a written notice to the Company within 30 days after the end of each
taxable year. In addition, each shareholder will, upon demand, be required to
disclose to the Company in writing such information with respect to the direct,
indirect and constructive ownership of shares of beneficial interest as the
Board of Trustees deems reasonably necessary to comply with the provisions of
the Code applicable to a REIT, to comply with the requirements of any taxing
authority or governmental agency or to determine any such compliance.
These ownership limitations could have the effect of delaying,
deferring or preventing a takeover or other transaction in which holders of
some, or a majority, of Common Shares might receive a premium for their Common
Shares over the then prevailing market price or which such holders might believe
to be otherwise in their best interest.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Shares is ChaseMellon
Shareholder Services, Inc.
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CERTAIN PROVISIONS OF MARYLAND LAW AND THE COMPANY'S
DECLARATION OF TRUST AND BYLAWS
The following summary of certain provisions of Maryland law and of the
Declaration of Trust and Bylaws of the Company does not purport to be complete
and is subject to and qualified in its entirety by reference to Maryland law and
the Declaration of Trust and Bylaws of the Company, copies of which are exhibits
to the Registration Statement of which this Prospectus is a part.
The Declaration of Trust and Bylaws of the Company contain certain
provisions that could make more difficult an acquisition or change in control of
the Company by means of a tender offer, a proxy contest or otherwise. These
provisions are expected to discourage certain types of coercive takeover
practices and inadequate takeover bids and to encourage persons seeking to
acquire control of the Company to negotiate first with the Board of Trustees.
The Company believes that the benefits of these provisions outweigh the
potential disadvantages of discouraging such proposals because, among other
things, negotiation of such proposals might result in an improvement of their
terms. See also "Shares of Beneficial Interest -- Restrictions on Ownership and
Transfer."
CLASSIFICATION AND REMOVAL OF BOARD OF TRUSTEES; OTHER PROVISIONS
Immediately prior to the closing of the Offering, the Company's
Declaration of Trust will be amended to provide for the Board of Trustees to be
divided into three classes of Trustees, with each class to consist as nearly as
possible of an equal number of Trustees. The term of office of the first class
of trustees will expire at the 1998 annual meeting of shareholders; the term of
the second class of trustees will expire at the 1999 annual meeting of
shareholders; and the term of the third class of trustees will expire at the
2000 annual meeting of shareholders. At each annual meeting of shareholders, the
class of trustees to be elected at such meeting will be elected for a three-year
term, and the trustees in the other two classes will continue in office. Because
shareholders will have no right to cumulative voting for the election of
trustees, at each annual meeting of shareholders the holders of a majority of
the Common Shares will be able to elect all of the successors to the class of
trustees whose term expires at that meeting.
The Company's Declaration of Trust also provides that, except for any
trustees who may be elected by holders of a class or series of shares of
beneficial interest other than the Common Shares, Trustees may be removed only
for cause and only by the affirmative vote of shareholders holding at least a
majority of the shares then outstanding and entitled to be cast for the election
of trustees. Vacancies on the Board of Trustees may be filled by the concurring
vote of a majority of the remaining trustees and, in the case of a vacancy
resulting from the removal of a trustee by the shareholders, by a majority of
the votes entitled to be cast for the election of trustees. Under Maryland law,
trustees may fill any vacancy only until the next annual meeting of
shareholders. A vote of shareholders holding at least two-thirds of all the
votes entitled to be cast thereon is required to amend, alter, change, repeal or
adopt any provisions inconsistent with the foregoing classified board and
trustee removal provisions. These provisions may make it more difficult and
time-consuming to change majority control of the Board of Trustees of the
Company and, thus, may reduce the vulnerability of the Company to an unsolicited
proposal for the takeover of the Company or the removal of incumbent management.
Because the Board of Trustees will have the power to establish the
preferences and rights of additional series of shares of beneficial interest
without a shareholder vote, the Board of Trustees may afford the holders of any
series of senior shares of beneficial interest preferences, powers and rights,
voting or otherwise, senior to the rights of holders of Common Shares. The
issuance of any such senior shares of beneficial interest could have the effect
of delaying, deferring or preventing a change in control of the Company. The
Board of Trustees, however, currently does not contemplate the issuance of any
shares of beneficial interest other than Common Shares.
See "Management -- Limitation of Liability and Indemnification" for a
description of the limitations on liability of trustees and officers of the
Company and the provisions for indemnification of trustees and officers provided
for under applicable Maryland law and the Declaration of Trust.
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CHANGES IN CONTROL PURSUANT TO MARYLAND LAW
Maryland Business Combination Law. Under the MGCL, as applicable to
real estate investment trusts, certain "business combinations" (including
certain issuances of equity securities) between a Maryland real estate
investment trust and any Interested Shareholder or an affiliate of the
Interested Shareholder are prohibited for five years after the most recent date
on which the Interested Shareholder becomes an Interested Shareholder.
Thereafter, any such business combination must be recommended by the Board of
Trustees of such Trust and approved by the affirmative vote of at least (i) 80%
of all the votes entitled to be cast by holders of the outstanding shares of
voting stock and (ii) two-thirds of the votes entitled to be cast by holders of
voting stock held by the Interested Shareholder who is (or whose affiliate is) a
party to the business combination unless, among other conditions, the trust's
common shareholders receive a minimum price (as defined in the MGCL) for their
shares and the consideration is received in cash or in the same form as
previously paid by the Interested Shareholder for its common shares.
Maryland Control Share Acquisition Law. In addition, also under the
MGCL, as applicable to real estate investments trusts, "control shares" acquired
in a "control share acquisition" have no voting rights except to the extent
approved by a vote of two-thirds of the votes entitled to be cast on the matter,
excluding shares owned by the acquiror, by officers or by trustees who are
employees of the trust. "Control shares" are voting shares which, if aggregated
with all other such shares previously acquired by the acquiror or in respect of
which the acquiror is able to exercise or direct the exercise of voting power
(except solely by virtue of a revocable proxy), would entitle the acquiror to
exercise voting power in electing trustees within one of the following ranges of
voting power: (i) one-fifth or more but less than one-third; (ii) one-third or
more but less than a majority; or (iii) a majority or more of all voting power.
Control shares do not include shares the acquiring person is then entitled to
vote as a result of having previously obtained shareholder approval. A "control
share acquisition" means the acquisition of control shares, subject to certain
exceptions.
A person who has made or proposes to make a control share acquisition,
upon satisfaction of certain conditions (including an undertaking to pay
expenses), may compel the board of trustees of the trust to call a special
meeting of shareholders to be held within 50 days of demand to consider the
voting rights of the shares. If no request for a meeting is made, the trust may
itself present the question at any shareholders meeting.
If voting rights are not approved at the meeting or if the acquiring
person does not deliver an acquiring person statement as required by the
statute, then, subject to certain conditions and limitations, the trust may
redeem any or all of the control shares (except those for which voting rights
have previously been approved) for fair value determined, without regard to the
absence of voting rights for the control shares, as of the date of the last
control share acquisition by the acquiror or of any meeting of shareholders at
which the voting rights of such shares are considered and not approved. If
voting rights for control shares are approved at a shareholders meeting and the
acquiror becomes entitled to vote a majority of the shares entitled to vote, all
other shareholders may exercise appraisal rights. The fair value of the shares
as determined for purposes of such appraisal rights may not be less than the
highest price per share paid by the acquiror in the control share acquisition.
The control share acquisition statute does not apply (a) to shares
acquired in a merger, consolidation or share exchange if the trust is a party to
the transaction or (b) to acquisitions approved or exempted by the declaration
of trust or bylaws of the trust. As permitted by the MGCL, the Bylaws provide
that the control share provisions of the MGCL do not apply to the Company.
However, the Board of Trustees, through its exclusive power to amend the Bylaws,
may elect to adopt these provisions in the future.
AMENDMENTS TO THE DECLARATION OF TRUST AND BYLAWS
The Declaration of Trust, including its provisions on classification
of the Board of Trustees, restrictions on transferability of Common Shares and
removal of trustees, may be amended only by a resolution adopted by the Board of
Trustees and approved at an annual or special meeting of the shareholders by the
affirmative vote of the holders of not less than two-thirds of all of the votes
entitled to be cast on the matter. However, amendments relating to changes in
the number of authorized shares of beneficial interest of the Company require
the approval of holders of a majority of all votes cast at a meeting of
shareholders at which a quorum is present.
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The Bylaws of the Company provide that the trustees have the exclusive
right to amend the Bylaws.
ADVANCE NOTICE OF TRUSTEE NOMINATIONS AND NEW BUSINESS
The Bylaws of the Company provide that (i) with respect to an annual
meeting of shareholders, nominations of persons for election to the Board of
Trustees and the proposal of business to be considered by shareholders may be
made only (A) pursuant to the Company's notice of the meeting, (B) by the Board
of Trustees or (C) by a shareholder who is entitled to vote at the meeting and
has complied with the advance notice procedures set forth in the Bylaws and (ii)
with respect to special meetings of the shareholders, only the business
specified in the Company's notice of meeting may be brought before the meeting
of shareholders and nominations of persons for election to the Board of Trustees
may be made only (A) pursuant to the Company's notice of the meeting, (B) by the
Board of Trustees or (C) provided that the Board of Trustees has determined that
trustees shall be elected at such meeting, by a shareholder who is entitled to
vote at the meeting and has complied with the advance notice provisions set
forth in the Bylaws.
ANTI-TAKEOVER EFFECT OF CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE
DECLARATION OF TRUST AND BYLAWS
The business combination provisions of the MGCL (and the control share
acquisition provisions of the MGCL if they ever become applicable to the
Company), the provisions of the Declaration of Trust on classification of the
Board of Trustees and removal of Trustees, the provisions for amending the
Declaration of Trust and Bylaws and the advance notice provisions of the Bylaws
could delay, defer or prevent a transaction or a change in control of the
Company that might involve a premium price for holders of Common Shares or
otherwise be in their best interests. The Declaration of Trust, as in effect,
provides that a merger, consolidation or sale of all or substantially all of the
assets of the Company must be approved, at a meeting called for that purpose, by
the affirmative vote of the holders of not less than two-thirds of the then
outstanding shares entitled to vote thereon.
MARYLAND ASSET REQUIREMENTS
To maintain its qualification as a Maryland real estate investment
trust, the Maryland REIT Law requires that the Company hold, either directly or
indirectly, at least 75% of the value of its assets in real estate assets,
mortgages or mortgage related securities, government securities, cash and cash
equivalent items, including high-grade short-term securities and receivables.
The Maryland REIT Law also prohibits using or applying land for farming,
agricultural, horticultural or similar purposes.
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SHARES AVAILABLE FOR FUTURE SALE
GENERAL
Upon the completion of the Offering, the Company will have outstanding
_______ Common Shares (_______ shares if the Underwriters' overallotment option
is exercised in full). In addition, _______ Common Shares are reserved for
issuance upon exchange of Units. The Common Shares issued in the Offering will
be freely tradable by persons other than "affiliates" of the Company without
restriction under the Securities Act, subject to the limitations on ownership
set forth in this Prospectus. See "Shares of Beneficial Interest." The 200,000
Common Shares purchased by Mr. Romanov in the private placement, the Common
Share awards of 2,500 shares each to be made to the three trustee nominees and
the _______ Common Shares to be issued to Messrs. Walker and Romanov in exchange
for the Units received by Messrs. Walker and Romanov in respect of the interest
of Genesis in ET Partnership, which interest will be purchased by Messrs. Walker
and Romanov from Genesis prior to the liquidation of ET Partnership and the
recapitalization of the Operation Partnership from Genesis, as well as any
Common Shares acquired in redemption of Units (collectively, the "Restricted
Common Shares"), will be "restricted" securities under the meaning of Rule 144
promulgated under the Securities Act ("Rule 144") and may not be sold in the
absence of registration under the Securities Act unless an exemption from
registration is available, including exemptions contained in Rule 144. As
described below under "-- Registration Rights," the Company has granted certain
holders registration rights with respect to their Restricted Common Shares.
In general, under Rule 144 as currently in effect, if one year has
elapsed since the later of the date of acquisition of Restricted Common Shares
from the Company or any "affiliate" of the Company, as that term is defined
under the Securities Act, the acquiror or subsequent holder thereof is entitled
to sell within any three-month period a number of shares that does not exceed
the greater of 1% of the then outstanding Common Shares or the average weekly
trading volume of the Common Shares during the four calendar weeks immediately
preceding the date on which notice of the sale is filed with the SEC. Sales
under Rule 144 also are subject to certain manner of sales provisions, notice
requirements and the availability of current public information about the
Company. If two years have elapsed since the date of acquisition of Restricted
Common Shares from the Company or from any "affiliate" of the Company, and the
acquiror or subsequent holder thereof is deemed not to have been an affiliate of
the company at any time during the 90 days immediately preceding a sale, such
person is entitled to sell such shares in the public market under Rule 144(k)
without regard to the volume limitations, manner of sale provisions, public
information requirements or notice requirements.
The Company and the executive officers and trustees (including trustee
nominees) of the Company will be required, as a condition to the Underwriters'
participation in the Offering, to agree that they will not, without the consent
of the Representative (as defined below), offer, sell, contract to sell or
otherwise dispose of any Common Shares (including any Common Shares acquired
upon redemption of Units) for 14 months following the Closing. See
"Underwriting."
Prior to the Offering, there has been no public market for the Common
Shares. Trading of the Common Shares on the New York Stock Exchange is expected
to commence immediately following completion of the Offering. No prediction can
be made as to the effect, if any, that future sales or shares of the
availability of shares for future sale, will have on the market price prevailing
from time to time. Sales of substantial amounts of Common Shares (including
Common Shares issued upon the exercise of options), or the perception that such
sales could occur, could adversely affect prevailing market prices of the Common
Shares. See "Risk Factors -- Risks of Ownership of Common Shares" and
"Partnership Agreement -- Transfer of Interests."
REGISTRATION RIGHTS
The Company will grant demand registration rights to Messrs. Walker
and Romanov with respect to Restricted Common Shares owned by them as of the
Closing of the Offering. The Company also will grant demand registration rights
to any shareholder with respect to any Restricted Common Shares acquired by such
shareholder in redemption of Units. The Company will bear all expenses incident
to these registration requirements, except for any underwriting discounts or
commissions or transfer taxes, if any, relating to the such Restricted Common
Shares.
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In addition, the Company will adopt the ElderTrust 1997 Share Option
and Incentive Plan for the purpose of attracting and retaining highly qualified
trustees, executive officers and other key employees. See "Management -- 1997
Share Option and Incentive Plan" and "-- Compensation of Board of Trustees." The
Company intends to grant options to purchase approximately 497,500 Common Shares
to trustees and executive officers upon the completion of the Offering. Promptly
following the completion of the Offering, the Company expects to file a
registration statement with the SEC with respect to the Common Shares issuable
under the ElderTrust 1997 Share Option and Incentive Plan, which shares may be
resold without restriction, unless held by affiliates.
FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes the federal income tax
considerations reasonably anticipated to be material to a prospective
shareholder in the Company in connection with the ownership of Common Shares.
The following description is for general information only, is not exhaustive of
all possible tax considerations, and is not intended to be (and should not be
construed as) tax advice. For example, this summary does not give a detailed
discussion of any state, local or foreign tax considerations. In addition, the
discussion is intended to address only those federal income tax considerations
that are generally applicable to all shareholders in the Company. It does not
discuss all aspects of federal income taxation that might be relevant to a
specific shareholder in light of its particular investment or tax circumstances.
The description does not purport to deal with all aspects of taxation that may
be relevant to shareholders subject to special treatment under the federal
income tax laws, including, without limitation, insurance companies, financial
institutions or broker-dealers, tax-exempt organizations (except to the extent
discussed under the heading "-- Taxation of Tax-Exempt Shareholders of the
Company") or foreign corporations and persons who are not citizens or residents
of the United States (except to the extent discussed under the heading "--
Taxation of Non-U.S. Shareholders of the Company").
The information in this section is based on the Code, current,
temporary and proposed Treasury Regulations thereunder, the legislative history
of the Code (taking into account certain changes in law that are effective for
taxable years starting after August 5, 1997), current administrative
interpretations and practices of the IRS (including its practices and policies
as endorsed in private letter rulings, which are not binding on the IRS except
with respect to a taxpayer that receives such a ruling), and court decisions,
all as of the date hereof. No assurance can be given that future legislation,
Treasury Regulations, administrative interpretations and practices and court
decisions will not significantly change the current law or adversely affect
existing interpretations of current law. Any such change could apply
retroactively to transactions preceding the date of the change. The Company has
not requested, and does not plan to request, any rulings from the IRS concerning
the tax treatment of the Company or the Operating Partnership. Thus, no
assurance can be provided that the statements set forth herein (which do not
bind the IRS or the courts) will not be challenged by the IRS or will be
sustained by a court if so challenged.
As used in this section, the term "Company" refers solely to
ElderTrust.
EACH PROSPECTIVE PURCHASER OF COMMON SHARES IS URGED TO CONSULT WITH
ITS OWN TAX ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES TO IT OF THE
OWNERSHIP AND DISPOSITION OF COMMON SHARES OF AN ENTITY ELECTING TO BE TAXED AS
A REIT IN LIGHT OF ITS SPECIFIC TAX AND INVESTMENT SITUATIONS AND THE SPECIFIC
FEDERAL, STATE, LOCAL AND FOREIGN TAX LAWS APPLICABLE TO IT.
TAXATION OF THE COMPANY
The Company plans to make an election to be taxed as a REIT under
Sections 856 through 860 of the Code, commencing with its taxable year ending
December 31, 1997. The Company believes that, commencing with its taxable year
ending December 31, 1997, it will be organized and will operate in such a manner
as to qualify for taxation as a REIT under the Code, and the Company intends to
continue to operate in such a manner, but no assurance can be given that it will
continue to operate in such a manner so as to qualify or remain qualified.
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These sections of the Code and the corresponding Treasury Regulations
are highly technical and complex. The following sets forth the material aspects
of the rules that govern the federal income tax treatment of a REIT and its
shareholders. This summary is qualified in its entirety by the applicable Code
provisions, rules and Treasury Regulations promulgated thereunder, and
administrative and judicial interpretations thereof.
Hogan & Hartson L.L.P. has acted as tax counsel to the Company in
connection with the Company's election to be taxed as a REIT. In the opinion of
Hogan & Hartson L.L.P., commencing with the Company's taxable year ending
December 31, 1997, the Company will be organized in conformity with the
requirements for qualification as a REIT, and its proposed method of operation
should enable it to meet the requirements for qualification and taxation as a
REIT under the Code. It must be emphasized that this opinion is conditioned upon
certain representations made by the Company as to factual matters relating to
the organization and operation of the Company and the Operating Partnership. In
addition, this opinion is based upon the factual representations of the Company
concerning its business and properties as set forth in this Prospectus and will
assume that the actions described in this Prospectus are completed in a timely
fashion. Moreover, such qualification and taxation as a REIT depends upon the
Company's ability to meet on a ongoing basis (through actual annual operating
results, distribution levels and diversity of share ownership) the various
qualification tests imposed under the Code discussed below, the results of which
will not be reviewed by Hogan & Hartson L.L.P. Accordingly, no assurance can be
given that the actual results of the Company's operations for any particular
taxable year will satisfy such requirements. Further, the anticipated income tax
treatment described in this Prospectus may be changed, perhaps retroactively, by
legislative, administrative or judicial action at any time. See "-- Failure of
the Company to Qualify as a REIT."
If the Company qualifies for taxation as a REIT, it generally will not
be subject to federal corporate income taxes on its net income that is
distributed currently to shareholders. This treatment substantially eliminates
the "double taxation" (at the corporate and shareholder levels) that generally
results from investment in a regular corporation. However, the Company will be
subject to federal income tax as follows.
o The Company will be taxed at regular corporate rates on any
undistributed REIT taxable income, including undistributed net
capital gains.
o Under certain circumstances, the Company may be subject to the
"alternative minimum tax" on its items of tax preference.
o If the Company has (i) net income from the sale or other
disposition of "foreclosure property" which is held primarily for
sale to customers in the ordinary course of business or (ii) other
nonqualifying income from foreclosure property, it will be subject
to tax at the highest corporate rate on such income.
o If the Company has net income from prohibited transactions (which
are, in general, certain sales or other dispositions of property
held primarily for sale to customers in the ordinary course of
business other than foreclosure property or sales to which Section
1033 applies), such income will be subject to a 100% tax.
o If the Company should fail to satisfy the 75% gross income test or
the 95% gross income test (each as discussed below), but has
nonetheless maintained its qualification as a REIT because certain
other requirements have been met, it will be subject to a 100% tax
on an amount equal to (a) the gross income attributable to the
greater of the amount by which the Company fails the 75% or 95%
test multiplied by (b) a fraction intended to reflect the
Company's profitability.
o If the Company should fail to distribute during each calendar year
at least the sum of (i) 85% of its REIT ordinary income for such
year (ii) 95% of its REIT capital gain net income for such year
and (iii) any undistributed taxable income from prior periods, the
Company would be subject to a 4% excise tax on the excess of such
required distribution over the amounts actually distributed.
o With respect to any asset (a "Built-In Gain Asset") acquired by
the Company from a corporation which is or has been a C
corporation (i.e., generally a corporation subject to full
corporate-level tax) in
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a transaction in which the basis of the Built-In Gain Asset in the
hands of the Company is determined by reference to the basis of
the asset in the hands of the C corporation, if the Company
recognizes gain on the disposition of such asset during the
ten-year period (the "Recognition Period") beginning on the date
on which such asset was acquired by the Company, then, to the
extent of the "Built-In Gain" (i.e., the excess of (a) the fair
market value of such asset over (b) the Company's adjusted basis
in such asset, determined as of the beginning of the Recognition
Period), such gain will be subject to tax at the highest regular
corporate rate pursuant to Treasury Regulations that have not yet
been promulgated. The results described above with respect to the
recognition of Built-In Gain assume that the Company will make the
election described in IRS Notice 88-19.
REQUIREMENTS FOR QUALIFICATION AS A REIT
Organizational Requirements. The Code defines a REIT as a corporation,
trust or association (i) that is managed by one or more trustees or directors,
(ii) the beneficial ownership of which is evidenced by transferable shares, or
by transferable certificates of beneficial interest, (iii) that would be taxable
as a domestic corporation, but for Sections 856 through 859 of the Code, (iv)
that is neither a financial institution nor an insurance company subject to
certain provisions of the Code, (v) the beneficial ownership of which is held by
100 or more persons, (vi) during the last half of each taxable year not more
than 50% in value of the outstanding shares of which is owned, actually or
constructively, by five or fewer individuals (as defined in the Code to include
certain entities) and (vii) that meets certain other tests, described below,
regarding the nature of its income and assets. The Code provides that conditions
(i) to (iv), inclusive, must be met during the entire taxable year and that
condition (v) must be met during at least 335 days of a taxable year of twelve
months, or during a proportionate part of a taxable year of less than twelve
months. Conditions (v) and (vi) will not apply until after the first taxable
year for which an election is made to be taxed as a REIT. For purposes of
conditions (v) and (vi), pension funds and certain other tax-exempt entities are
treated as individuals, subject to a "look-through" exception in the case of
condition (vi).
The Company believes that it will have issued sufficient Common Shares
with sufficient diversity of ownership in the Offering to allow it to satisfy
conditions (v) and (vi) above. In addition, the Company's Declaration of Trust
provides for restrictions regarding the transfer and ownership of Common Shares,
which restrictions are intended to assist the Company in continuing to satisfy
the share ownership requirements described in (v) and (vi) above. Such ownership
and transfer restrictions are described in "Shares of Beneficial Interest --
Restrictions on Ownership and Transfer." These restrictions, however, may not
ensure that the Company will, in all cases, be able to satisfy the share
ownership requirements described above. If the Company fails to satisfy such
share ownership requirements, the Company's status as a REIT will terminate. See
"-- Failure of the Company to Qualify as a REIT." Treasury Regulations require
that the Company each year demand from certain record owners of its shares
certain information in order to assist the Company in ascertaining that the
share ownership requirements described above are satisfied. If the Company were
to fail to comply with these Treasury Regulation requirements for any year, it
would be subject to a $25,000 penalty. If the Company's failure to comply were
due to intentional disregard of the requirements, the penalty would be increased
to $50,000. However, if the Company's failure to comply were due to reasonable
cause and not willful neglect, no penalty would be imposed. If the Company
complies with the regulatory rules on ascertaining its actual owners but does
not know, or would not have known by exercising reasonable diligence, whether it
failed to meet the requirement that it not be closely held, the Company will be
treated as having met the requirement. These rules were enacted as part of the
Taxpayer Relief Act of 1997 (the "1997 Act") and are a change to the prior law,
which provided that a REIT would be disqualified if it failed to comply with
these Treasury Regulations.
In addition, a corporation may not elect to become a REIT unless its
taxable year is the calendar year. The Company will have a calendar taxable
year.
In order to qualify as a REIT, the Company cannot have at the end of
any taxable year any undistributed "earnings and profits" that are attributable
to a "C corporation" taxable year. The Company itself will be a newly formed
entity and will make a REIT election for its first taxable year. Hence, the
Company itself will not have any undistributed "C corporation earnings and
profits."
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Ownership of Partnership Interests. In the case of a REIT which is a
partner in a partnership, Treasury Regulations provide that the REIT will be
deemed to own its proportionate share of the assets of the partnership and will
be deemed to be entitled to the income of the partnership attributable to such
share of assets. In addition, the character of the assets and gross income of
the partnership shall retain the same character in the hands of the REIT for
purposes of Section 856 of the Code, including satisfying the gross income tests
and the asset tests. Thus, the Company's proportionate share of the assets and
items of income of the Operating Partnership and any subsidiaries of the
Operating Partnership that are partnerships or limited liability companies
("LLCs") will be treated as assets and items of income of the Company for
purposes of applying the requirements described herein. A summary of the rules
governing the federal income taxation of partnerships and their partners is
provided below in "-- Tax Aspects of the Company's Ownership of Interests in the
Operating Partnership." The Company will have direct control of the Operating
Partnership and intends to operate the Operating Partnership in a manner
consistent with the requirements for qualification as a REIT.
Income Tests. In order to maintain qualification as a REIT, the
Company annually must satisfy two gross income requirements.
o First, at least 75% of the Company's gross income (excluding gross
income from "prohibited transactions") for each taxable year must
be derived directly or indirectly from investments relating to
real property or mortgages on real property (including "rents from
real property" and, in certain circumstances, interest from
mortgage loans secured by real property) or from certain types of
temporary investments.
o Second, at least 95% of the Company's gross income (excluding
gross income from "prohibited transactions") for each taxable year
must be derived from such real property investments, dividends,
interest and gain from the sale or disposition of stock or
securities, including certain hedging instruments (or from any
combination of the foregoing).
Rents received by the Company will qualify as "rents from real
property" in satisfying the gross income requirements for a REIT described above
only if several conditions are met.
o First, the amount of rent must not be based in whole or in part on
the income or profits of any person. However, an amount received
or accrued generally will not be excluded from the term "rents
from real property" solely by reason of being based on a fixed
percentage or percentages of receipts or sales.
o Second, rents received from a tenant will not qualify as "rents
from real property" in satisfying the gross income tests if the
REIT, or an actual or constructive owner of 10% or more of the
REIT, actually or constructively owns 10% or more of such tenant
(a "Related Party Tenant").
o Third, if rent attributable to personal property leased in
connection with a lease of real property, is greater than 15% of
the total rent received under the lease, then the portion of rent
attributable to such personal property will not qualify as "rents
from real property" (the "15% Personal Property Test").
o Finally, for rents received to qualify as "rents from real
property," the REIT generally must not operate or manage the
property, or furnish or render services to the tenants of such
property, other than through an independent contractor from whom
the REIT derives no revenue. The REIT may, however, directly
perform certain services that are "usually or customarily
rendered" in connection with the rental of space for occupancy
only and are not otherwise considered "rendered to the occupant"
of the property and, pursuant to the 1997 Act, may provide certain
de minimis services to its tenants. To the extent that services
(other than those customarily furnished or rendered in connection
with the rental of real property) are rendered to the tenants of
the property by the independent contractor, the cost of the
services must be borne by the independent contractor.
The Company will not (i) charge rent for any property that is based in
whole or in part on the income or profits of any person (except by reason of
being based on a fixed percentage of receipts or sales, as described above, or
unless the Board of Trustees determines, in its discretion, that the rent
received from a particular tenant under such an arrangement is not material and
will not jeopardize the Company's status as a REIT), (ii) rent any property
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to a Related Party Tenant (unless the Board of Trustees determines in its
discretion that the rent received from such Related Party Tenant is not material
and will not jeopardize the Company's status as a REIT), (iii) derive rental
income attributable to personal property (other than personal property leased in
connection with the lease of real property, the amount of which is less than 15%
of the total rent received under the lease) or (iv) perform services considered
to be rendered to the occupant of the property, other than through an
independent contractor from whom the Company derives no revenue.
Pursuant to the Percentage Rent Leases, Genesis or a subsidiary of
Genesis will lease from the Operating Partnership (i) two of the Initial
Properties which are assisted living facilities and one of the Initial
Properties which is an independent living facility, (ii) the three Lease-up
Assisted Living Facilities which the Company has agreed to acquire from Genesis
or from an entity in which Genesis has a 49% interest and (iii) the Initial
Assisted Living Development Project which the Company has agreed to acquire from
Genesis. The lease for the remaining assisted living facility being acquired
from and leased-back to a subsidiary of Genesis will provide for the payment of
Minimum Rent until such facility reaches Stabilized Occupancy, at which time the
lease will convert automatically into a Percentage Rent Lease with no minimum
rent. The Percentage Rent Leases provide that Genesis, directly or indirectly,
will be obligated to pay to the Operating Partnership (i) Percentage Rent (as
defined below) and (ii) Additional Rent (as defined below) (collectively
"Rent"). "Percentage Rent" is calculated by multiplying a specified fixed
percentage by the revenue generated with respect to the leased property
(adjusted to exclude: (a) revenues from professional fees or charges by
physicians and all providers of ancillary services, including, without
limitation, physical therapy services, whether or not such providers are
employees of the tenant; (b) non-operating revenues, such as interest income or
income from the sale of assets not sold in the ordinary course of business; (c)
federal, state or local excise taxes imposed upon, and any tax based upon or
measured by, such revenues which is added to or made a part of the amount billed
to the resident, client or other recipient of such services or goods, whether
included in the billing or stated separately; (d) contractual allowances
(relating to any period during the term) for billings not paid by or received
from the appropriate governmental agencies or third party providers; and (e) all
proper patient billing credits and adjustments (including, without limitation,
allowances for uncollectable accounts) according to generally accepted
accounting principles relating to healthcare accounting) (as adjusted, "Facility
Revenues"). Percentage Rent is required to be paid each month in advance, with
adjustments to be made quarterly and annually based on actual results.
Pursuant to the Minimum Rent Leases, a tenant will lease from the
Operating Partnership (i) two of the Initial Properties which are assisted
living facilities, (ii) all of the Initial Properties which are skilled nursing
facilities and (iii) any Lease-up Assisted Living Facilities on Initial Assisted
Living Development Projects which are not leased to Genesis or a subsidiary of
Genesis. The Minimum Rent Leases provide that the tenant will be obligated to
pay to the Operating Partnership "Rent" consisting of (i) Minimum Rent (as
defined below), (ii) Incremental Percentage Rent and (iii) Additional Rent.
"Minimum Rent" is set at the beginning of the term and escalates based on the
Consumer Price Index, a fixed percentage increase per year or a fixed percentage
of the increase in the gross revenues for a facility during the immediately
preceding year. Incremental Percentage Rent is calculated by multiplying a
specified fixed percentage by the increased gross revenues for a facility over a
specified base amount. Minimum Rent is to be paid each month in advance, and
Incremental Percentage Rent is required to be paid quarterly, with adjustments
to be made annually based on actual results.
For both Percentage Rent Leases and Minimum Rent Leases, "Additional
Rent" includes adjustments equal to the difference between the tenant's payment
of estimated Percentage Rent or Incremental Percentage Rent, as the case may be,
during a particular period and the actual Percentage Rent or Incremental
Percentage Rent, as applicable, payable with respect to such period and certain
other costs a tenant agrees to pay under the applicable lease.
The leases of the medical and other office buildings included in the
Initial Properties do not provide for any rent payments based on a tenant's
revenues.
In order for Rent to constitute "rents from real property," the leases
must be respected as true leases for federal income tax purposes and not treated
as service contracts, joint ventures or some other type of arrangement. The
determination of whether the leases are true leases depends on an analysis of
all the surrounding facts and circumstances. In making such a determination,
courts have considered a variety of factors, including the following: (i) the
intent of the parties; (ii) the form of the agreement; (iii) the degree of
control over the property
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that is retained by the property owner (e.g., whether the lessee has substantial
control over the operation of the property or whether the lessee was required
simply to use its best efforts to perform its obligations under the agreement);
and (iv) the extent to which the property owner retains the risk of loss with
respect to the property (e.g., whether the lessee bears the risk of increases in
operating expenses or the risk of damage to the property) or the potential for
economic gain (e.g., appreciation) with respect to the property.
In addition, Code section 7701(e) provides that a contract that
purports to be a service contract (or a partnership agreement) is treated
instead as a lease of property if the contract is properly treated as such,
taking into account all relevant factors, including whether or not: (i) the
service recipient is in physical possession of the property; (ii) the service
recipient controls the property; (iii) the service recipient has a significant
economic or possessory interest in the property (e.g., if the property's use is
likely to be dedicated to the service recipient for a substantial portion of the
useful life of the property, the recipient shares the risk that the property
will decline in value, the recipient shares in any appreciation in the value of
the property, the recipient shares in savings in the property's operating costs
or the recipient bears the risk of damage to or loss of the property); (iv) the
service provider does not bear any risk of substantially diminished receipts or
substantially increased expenditures if there is nonperformance under the
contract; (v) the service provider does not use the property concurrently to
provide significant services to entities unrelated to the service recipient; and
(vi) the total contract price does not substantially exceed the rental value of
the property for the contract period. Since the determination of whether a
service contract should be treated as a lease is inherently factual, the
presence or absence or any single factor may not be dispositive in every case.
The Percentage Rent Leases and the Minimum Rent Leases have been
structured with the intent to qualify as true leases for federal income tax
purposes. Investors should be aware, however, that there are no controlling
Treasury Regulations, published rulings or judicial decisions involving leases
with terms substantially the same as the Percentage Rent Leases or the Minimum
Rent Leases that discuss whether such leases constitute true leases for federal
income tax purposes. Therefore, there can be no assurance that the IRS might not
assert a contrary position. If the Percentage Rent Leases or the Minimum Rent
Leases are recharacterized as service contracts or partnership agreements,
rather than true leases, part or all of the payments that the Operating
Partnership receives from the lessee would not be considered rent or would not
otherwise satisfy the various requirements for qualification as "rents from real
property." In that case, the Company likely would not be able to satisfy either
the 75% or 95% gross income test and, as a result, would lose its REIT status.
As indicated above, "rents from real property" must not be based in
whole or in part on the income or profits of any person. Each of the Percentage
Rent and the Incremental Percentage Rent should qualify as "rents from real
property" since it is based on percentages of receipts or sales which
percentages are fixed at the time the leases are entered into, provided the
leases (i) are not renegotiated during the term of the leases in a manner that
has the effect of basing Percentage Rent or Incremental Percentage Rent on
income or profits and (ii) are not in reality used as a means of basing rent on
income or profits. More generally, the Percentage Rent and the Incremental
Percentage Rent, as applicable, will not qualify as "rent from real property"
if, considering the Percentage Rent Leases or the Minimum Rent Leases and all
the surrounding circumstances, the arrangement does not conform with normal
business practice but is in reality used as a means of basing rent on income or
profits. Because each of the Percentage Rent and the Incremental Percentage
Rent, as applicable, is based on fixed percentages of the gross revenues from
the facilities that are established in the Percentage Rent Leases and the
Minimum Rent Leases, and the Company has represented that the percentages (i)
will not be renegotiated during the terms of the leases in a manner that has the
effect of basing rent on income or profits and (ii) conform with normal business
practice, the Percentage Rent and the Incremental Percentage Rent, as
applicable, should not be considered based in whole or in part on the income or
profits of any person. Furthermore, the Company has represented that, with
respect to other properties that it acquires in the future, it will not charge
rent for any property that is based in whole or in part on the income or profits
of any person (except by reason of being based on a fixed percentage of gross
revenues, as described above). Neither the Percentage Rent and the Incremental
Percentage Rent, as applicable, nor Additional Rent are based on the income or
net profits of any person, and therefore should qualify as "rents from real
property."
The Company may lease certain items of personal property in connection
with the lease of an assisted living facility, a skilled nursing facility or an
independent living facility property. The 15% Personal Property Test provides
that if a lease provides for the rental of both real and personal property and
the portion of the rent
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attributable to personal property is 15% or less of the total rent due under the
lease, then all rent paid pursuant to such lease qualifies as "rent from real
property." If, however, a lease provides for the rental of both real and
personal property, and the portion of the rent attributable to personal property
exceeds 15% of the total rent due under the lease, then the portion of the rent
that is attributable to personal property does not qualify as "rent from real
property." The amount of rent attributable to personal property is that amount
which bears the same ratio to total rent for the taxable year as the average of
the adjusted tax bases of the personal property at the beginning and end of the
year bears to the average of the aggregate adjusted tax bases of both the real
and personal property at the beginning and end of such year. The Company has
represented that with respect to each lease that includes a lease of items of
personal property, the amount of rent attributable to personal property with
respect to such lease, determined as set forth above, will not exceed 15% of the
total rent due under the lease.
If any of the leased Initial Properties which are assisted living
facilities, skilled nursing facilities or independent living facilities or any
of the leased Initial Assisted Living Development Projects were to be operated
directly by the Operating Partnership or a subsidiary partnership or LLC as a
result of a default by the lessee under the applicable lease, such property
would constitute foreclosure property for three years following its acquisition
(or for up to an additional three years if an extension is granted by the IRS),
provided that (i) the Operating Partnership or its subsidiary partnership or LLC
conducts operations through an independent contractor (which would not include
Genesis and its affiliates) within 90 days after the date the property is
acquired, (ii) the Operating Partnership or its subsidiary partnership or LLC
does not undertake any construction on the foreclosed property other than
completion of improvements that were more than 10% complete before default
became imminent and (iii) foreclosure was not regarded as foreseeable at the
time the Company entered into such leases. For as long as any of these
properties constitute foreclosure property, the income from the properties would
be subject to tax at the maximum corporate rates, but it would qualify under the
75% and 95% gross income tests. However, if any of these properties does not
constitute foreclosure property at any time in the future, income earned from
the disposition or operation of such property will not qualify under the 75% and
95% gross income tests.
Through the Operating Partnership, which is not an "independent
contractor," the Company may provide certain services with respect to the
Initial Properties or the Lease-up Assisted Living Facilities or Initial
Assisted Living Development Projects, but the Company believes (and has
represented) that all such services would be considered "usually or customarily
rendered" in connection with the rental of space for occupancy only, so that the
provision of such services would not jeopardize the qualification of rent from
the Initial Properties or the Lease-up Assisted Living Facilities or Initial
Assisted Living Development Projects as "rents from real property." In the case
of any services that are not "usual and customary" under the foregoing rules,
the Company intends to employ "independent contractors" to provide such
services.
Except for interest on obligations secured by real property, such as
the Construction Loans and the Term Loans, "interest" will not qualify under the
75% gross income test (but will qualify under the 95% gross income test). For
interest received from the Construction Loans and the Term Loans to qualify for
both the 75% and 95% gross income test, the Loans must be secured by real
property and the loans must be treated as debt for federal income tax purposes.
In this regard, the Construction Loans and the Term Loans are secured by real
property, the terms of each of the Loans are typical of a debt instrument, and
the Company believes that the fair market value of the real property securing
each of the Term Loans and the Construction Loans will exceed the principal
amount of the Loan at the time the Loan is made by the Company. (Interest on
loans, whether secured by real property or not, that is based on the income or
profits of any person will not qualify under either the 75% or the 95% gross
income test. The Company, however, does not anticipate making any loans where
interest payable is based upon the income or profits of any person.)
If the Company fails to satisfy one or both of the 75% or 95% gross
income tests for any taxable year, it may nevertheless qualify as a REIT for
such year if it is entitled to relief under certain provisions of the Code.
These relief provisions generally will be available if the Company's failure to
meet such tests were due to reasonable cause and not due to willful neglect, the
Company attaches a schedule of the sources of its income to its federal income
tax return and any incorrect information on the schedule was not due to fraud
with intent to evade tax. It is not possible, however, to state whether in all
circumstances the Company would be entitled to the benefit of these relief
provisions. For example, if the Company fails to satisfy the gross income tests
because non-qualifying income that the Company intentionally incurs exceeds the
limits on such income, the IRS could conclude
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that the Company's failure to satisfy the tests was not due to reasonable cause.
If these relief provisions are inapplicable to a particular set of circumstances
involving the Company, the Company will not qualify as a REIT. As discussed
above under "-- Taxation of the Company," even if these relief provisions apply,
a tax would be imposed with respect to the excess net income.
Any gain realized by the Company on the sale of any property held as
inventory or other property held primarily for sale to customers in the ordinary
course of business (including the Company's share of any such gain realized by
the Operating Partnership) will be treated as income from a "prohibited
transaction" that is subject to a 100% penalty tax. Such prohibited transaction
income may also have an adverse effect upon the Company's ability to satisfy the
income tests for qualification as a REIT. Under existing law, whether property
is held as inventory or primarily for sale to customers in the ordinary course
of a trade or business is a question of fact that depends on all the facts and
circumstances with respect to the particular transaction. The Operating
Partnership intends to hold the Initial Properties and the Initial Assisted
Living Development Projects for investment with a view to long-term
appreciation, to engage in the business of acquiring, developing, owning and
operating the Initial Properties and the Lease-up Assisted Living Facilities and
Initial Assisted Living Development Projects (and other properties) and to make
such occasional sales of the Initial Properties or the Lease-up Assisted Living
Facilities or Initial Assisted Living Development Projects as are consistent
with the Operating Partnership's investment objectives. There can be no
assurance, however, that the IRS might not contend that one or more of such
sales is subject to the 100% penalty tax.
Asset Tests. The Company, at the close of each quarter of its taxable
year, must also satisfy three tests relating to the nature of its assets.
o First, at least 75% of the value of the Company's total assets
must be represented by real estate assets including (i) its
allocable share of real estate assets held by partnerships in
which the Company owns an interest (including its allocable share
of the assets held directly or indirectly through the Operating
Partnership) and (ii) stock or debt instruments held for not more
than one year purchased with the proceeds of a stock offering or
long-term (at least five years) debt offering of the Company,
cash, cash items and government securities.
o Second, not more than 25% of the Company's total assets may be
represented by securities other than those in the 75% asset class.
o Third, of the investments included in the 25% asset class, the
value of any one issuer's securities owned by the Company may not
exceed 5% of the value of the Company's total assets, and the
Company may not own more than 10% of any one issuer's outstanding
voting securities.
The Operating Partnership owns 100% of the nonvoting stock of ET
Capital Corp. and a note issued by ET Capital Corp. The Company believes that
the Company's pro rata share of the value of the securities of ET Capital Corp.
does not exceed 5% of the total value of the Company's assets. There can be no
assurance, however, that the IRS will not contend either that the value of the
securities of ET Capital Corp. held by the Company (through the Operating
Partnership) exceeds the 5% value limitation or that nonvoting stock of ET
Capital Corp. held by the Operating Partnership should be considered "voting
stock" for this purpose.
After initially meeting the asset tests at the close of any quarter,
the Company will not lose its status as a REIT for failure to satisfy the asset
tests at the end of a later quarter solely by reason of changes in asset values.
If the failure to satisfy the asset tests results from an acquisition of
securities or other property during a quarter (including, for example, as a
result of the Company increasing its interest in the Operating Partnership as a
result of the exercise of a Unit Redemption Right or an additional capital
contribution of proceeds of an offering of Common Shares by the Company), the
failure can be cured by disposition of sufficient nonqualifying assets within 30
days after the close of that quarter. The Company intends to maintain adequate
records of the value of its assets to ensure compliance with the asset tests and
to take such other actions within 30 days after the close of any quarter as may
be required to cure any noncompliance. If the Company fails to cure
noncompliance with the asset tests within such time period, the Company would
cease to qualify as a REIT.
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As discussed above, the assets held by the Company include the
Construction Loans and the Term Loans. For these Loans to qualify as "real
estate assets" for the purpose of the asset test, the Loans must be secured by
real property and the loans must be treated as debt for federal income tax
purposes. As discussed above, the Construction Loans and the Term Loans are
secured by real property, the terms of each of the Loans are typical of a debt
instrument and the Company believes that the fair market value of the real
property securing each of the Term Loans and the Construction Loans will exceed
the principal amount of the Loan at the time the Loan is made or acquired, as
applicable, by the Company.
Annual Distribution Requirements. The Company is required to
distribute dividends (other than capital gain dividends) to its shareholders in
an amount at least equal to (i) the sum of (a) 95% of the Company's "REIT
taxable income" (computed without regard to the dividends paid deduction and the
Company's net capital gain) and (b) 95% of the net income (after tax), if any,
from foreclosure property, minus (ii) the sum of certain items of noncash
income. In addition, if the Company disposes of any Built-In Gain Asset during
its Recognition Period, the Company will be required, pursuant to Treasury
Regulations which have not yet been promulgated, to distribute at least 95% of
the Built-In Gain (after tax), if any, recognized on the disposition of such
asset. Such distributions must be paid in the taxable year to which they relate,
or in the following taxable year if declared before the Company timely files its
tax return for such year and if paid on or before the first regular dividend
payment date after such declaration.
To the extent that the Company does not distribute all of its net
capital gain or distributes at least 95%, but less than 100%, of its "REIT
taxable income," as adjusted, it will be subject to tax thereon at regular
ordinary and capital gain corporate tax rates. The Company, however, may
designate some or all of its retained net capital gain, so that, although the
designated amount will not be treated as distributed for purposes of this tax, a
shareholder would include its proportionate share of such amount in income, as
long-term capital gain, and would be treated as having paid its proportionate
share of the tax paid by the Company with respect to such amount. The
shareholder's basis in its shares would be increased by the amount the
shareholder included in income and decreased by the amount of the tax the
shareholder is treated as having paid. The Company would make an appropriate
adjustment to its earnings and profits. For a more detailed description of the
tax consequences to a shareholder of such a designation, see "-- Taxation of
Taxable U.S. Shareholders of the Company Generally." The Company intends to make
timely distributions sufficient to satisfy these annual distribution
requirements. In this regard, the Operating Partnership Agreement authorizes the
Company, as managing general partner, to take such steps as may be necessary to
cause the Operating Partnership to distribute to its partners an amount
sufficient to permit the Company to meet these distribution requirements.
It is expected that the Company's REIT taxable income will be less
than its cash flow due to the allowance of depreciation and other non-cash
charges in computing REIT taxable income. Accordingly, the Company anticipates
that it will generally have sufficient cash or liquid assets to enable it to
satisfy the distribution requirements described above. It is possible, however,
that the Company, from time to time, may not have sufficient cash or other
liquid assets to meet these distribution requirements due to timing differences
between (i) the actual receipt of income and actual payment of deductible
expenses and (ii) the inclusion of such income and deduction of such expenses in
arriving at taxable income of the Company. If such timing differences occur, in
order to meet the distribution requirements, the Company may find it necessary
to arrange for short-term, or possibly long-term, borrowings or to pay dividends
in the form of taxable share dividends.
A portion of the cash to be used by the Company to fund distributions
is expected to come from ET Capital Corp. through payments of dividends on the
stock of ET Capital Corp. held by the Operating Partnership. ET Capital Corp.
pays federal and state income tax at the applicable corporate rates. To the
extent that ET Capital Corp. is required to pay federal, state or local taxes,
the cash available for distribution by the Company to its shareholders will be
reduced accordingly.
Under certain circumstances, the Company may be able to rectify a
failure to meet the distribution requirement for a year by paying "deficiency
dividends" to shareholders in a later year, which may be included in the
Company's deduction for dividends paid for the earlier year. Thus, the Company
may be able to avoid being taxed on amounts distributed as deficiency dividends;
however, the Company will be required to pay interest based upon the amount of
any deduction taken for deficiency dividends.
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Furthermore, if the Company should fail to distribute during each
calendar year at least the sum of (i) 85% of its REIT ordinary income for such
year, (ii) 95% of its REIT capital gain income for such year and (iii) any
undistributed taxable income from prior periods, the Company would be subject to
a 4% excise tax on the excess of such required distribution over the amounts
actually distributed.
FAILURE OF THE COMPANY TO QUALIFY AS A REIT
If the Company fails to qualify for taxation as a REIT in any taxable
year, and if the relief provisions do not apply, the Company will be subject to
tax (including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Distributions to shareholders in any year in which the
Company fails to qualify will not be deductible by the Company nor will they be
required to be made. As a result, the Company's failure to qualify as a REIT
would significantly reduce the cash available for distribution by the Company to
its shareholders. In addition, if the Company fails to qualify as a REIT, all
distributions to shareholders will be taxable as ordinary income to the extent
of the Company's current and accumulated earnings and profits, and, subject to
certain limitations of the Code, corporate distributees may be eligible for the
dividends received deduction. Unless entitled to relief under specific statutory
provisions, the Company also will be disqualified from taxation as a REIT for
the four taxable years following the year during which qualification was lost.
It is not possible to state whether in all circumstances the Company would be
entitled to such statutory relief.
TAXATION OF TAXABLE U.S. SHAREHOLDERS OF THE COMPANY GENERALLY
As used herein, the term "U.S. Shareholder" means a holder of Common
Shares who (for United States federal income tax purposes) (i) is a citizen or
resident of the United States, (ii) is a corporation, partnership or other
entity created or organized in or under the laws of the United States or of any
political subdivision thereof or (iii) is an estate or trust the income of which
is subject to United States federal income taxation regardless of its source.
Distributions Generally. As long as the Company qualifies as a REIT,
distributions made by the Company out of its current or accumulated earnings and
profits (and not designated as capital gain dividends) will constitute dividends
taxable to its taxable U.S. Shareholders as ordinary income.
U.S. Shareholders that are corporations, however, may be required to
treat up to 20% of certain capital gain dividends as ordinary income. In
addition, such distributions will not be eligible for the dividends received
deduction in the case of such U.S. Shareholders.
Distributions made by the Company that are properly designated by the
Company as capital gain dividends will be taxable to taxable U.S. Shareholders
as gains from the sale or exchange of a capital asset held for more than one
year (to the extent that they do not exceed the Company's actual net capital
gain for the taxable year) without regard to the period for which a U.S.
Shareholder has held his shares in the Company. It is not clear whether, for a
U.S. Shareholder who is an individual or an estate or trust, such amounts will
be taxable at the rate applicable to mid-term capital gains (i.e., gains from
the sale of capital assets held for more than one year but not more than 18
months) or at the rate applicable to long-term capital gains (i.e., gains from
the sale of capital assets held for more than 18 months). This uncertainty may
be clarified by future legislation or regulations.
Generally, for an individual or an estate or trust, the maximum tax
rate applicable to mid-term capital gains is 28% and the maximum tax rate
applicable to long-term capital gains is 20%. However, for such taxpayers: (i)
mid-term capital gains resulting from sales of depreciable real property are
taxed at the rate applicable to ordinary income to the extent that prior
depreciation deductions with respect to the property were claimed in excess of
the depreciation that would have been allowed if computed on a straight-line
basis; and (ii) long-term capital gains resulting from sales of depreciable real
property are taxed at a maximum rate of 25% to the extent of the depreciation
deductions taken with respect to such property. The IRS has authority to issue
regulations pursuant to which the capital gain dividends received by a taxable
U.S. Shareholder that is an individual or an estate or trust could be subject
these special rates.
To the extent that the Company makes distributions (not designated as
capital gain dividends) in excess of its current and accumulated earnings and
profits, such distributions will be treated first as a tax-free return of
capital
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to each U.S. Shareholder, reducing the adjusted basis which such U.S.
Shareholder has in its Common Shares for tax purposes by the amount of such
distribution (but not below zero), with distributions in excess of a U.S.
Shareholder's adjusted basis in its Common Shares taxable as capital gains
(provided that the Common Shares have been held as a capital asset). Dividends
declared by the Company in October, November, or December of any year and
payable to a shareholder of record on a specified date in any such month shall
be treated as both paid by the Company and received by the shareholder on
December 31 of such year, provided that the dividend is actually paid by the
Company on or before January 31 of the following calendar year. Shareholders may
not include in their own income tax returns any net operating losses or capital
losses of the Company.
Capital Gain Distributions. Distributions made by the Company that are
properly designated by the Company as capital gain dividends will be taxable to
taxable U.S. Shareholders as long-term capital gains (to the extent that they do
not exceed the Company's actual net capital gain for the taxable year) without
regard to the period for which a U.S. Shareholder has held his Common Shares.
U.S. Shareholders that are corporations may, however, be required to treat up to
20% of certain capital gain dividends as ordinary income.
Passive Activity Loss and Investment Limitations. Distributions made
by the Company and gain arising from the sale or exchange by a U.S. Shareholder
of Common Shares will not be treated as passive activity income, and, as a
result, U.S. Shareholders generally will not be able to apply any "passive
losses" against such income or gain. Dividends from the Company (to the extent
they do not constitute a return of capital) generally will be treated as
investment income for purposes of the investment income limitation. Under
recently enacted legislation, net capital gain from the disposition of Common
Shares and capital gain dividends generally will be excluded from investment
income.
Certain Dispositions of Shares. Upon any sale or other disposition of
Common Shares, a U.S. Shareholder will recognize gain or loss for federal income
tax purposes in an amount equal to the difference between (i) the amount of cash
and the fair market value of any property received on such sale or other
disposition and (ii) the holder's adjusted basis in such Common Shares for tax
purposes. Such gain or loss will be capital gain or loss if the Common Shares
have been held by the U.S. Shareholder as a capital asset.
In the case of a U.S. Shareholder who is an individual or an estate or
trust, such gain or loss will be mid-term capital gain or loss if such shares
have been held for more than one year but not more than 18 months and long-term
capital gain or loss if such shares have been held for more than 18 months. In
the case of a U.S. Shareholder that is a corporation, such gain or loss will be
long-term capital gain or loss if such shares have been held for more than one
year. In general, any loss recognized by a U.S. Shareholder upon the sale or
other disposition of shares in the Company that have been held for six months or
less (after applying certain holding period rules) will be treated as a
long-term capital loss, to the extent of distributions received by such U.S.
Shareholder from the Company which were required to be treated as long-term
capital gains.
The Company may designate its net capital gain so that with respect to
retained net capital gains, a U.S. Shareholder would include its proportionate
share of such gain in income as long-term capital gain and would be treated as
having paid its proportionate share of the tax paid by the Company with respect
to the gain. The U.S. Shareholder's basis in its shares would be increased by
its share of such gain and decreased by its share of such tax. With respect to
such long-term capital gain of a U.S. Shareholder that is an individual or an
estate or trust, the IRS, as described above in this section, has authority to
issue regulations that could apply the special tax rate applicable generally to
the portion of the long-term capital gains of an individual or an estate or
trust attributable to deductions for depreciation taken with respect to
depreciable real property.
BACKUP WITHHOLDING FOR COMPANY DISTRIBUTIONS
The Company will report to its U.S. Shareholders and the IRS the
amount of dividends paid during each calendar year, and the amount of tax
withheld, if any. Under the backup withholding rules, a shareholder may be
subject to backup withholding at the rate of 31% with respect to dividends paid
unless such holder (a) is a corporation or comes within certain other exempt
categories and, when required, demonstrates this fact or (b) provides a taxpayer
identification number, certifies as to no loss of exemption from backup
withholding and otherwise complies with applicable requirements of the backup
withholding rules. A U.S. Shareholder that does not
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provide the Company with its correct taxpayer identification number may also be
subject to penalties imposed by the IRS. Any amount paid as backup withholding
will be creditable against the shareholder's income tax liability. In addition,
the Company may be required to withhold a portion of capital gain distributions
to any shareholders who fail to certify their non-foreign status to the Company.
See "-- Taxation of Non-U.S. Shareholders of the Company."
TAXATION OF TAX-EXEMPT SHAREHOLDERS OF THE COMPANY
The IRS has ruled that amounts distributed as dividends by a qualified
REIT do not constitute unrelated business taxable income ("UBTI") when received
by a tax-exempt entity. Based on that ruling, provided that a tax-exempt
shareholder (except certain tax-exempt shareholders described below) has not
held its Common Shares as "debt financed property" within the meaning of the
Code and such Common Shares are not otherwise used in a trade or business, the
dividend income from the Company will not be UBTI to a tax-exempt shareholder.
Similarly, income from the sale of Common Shares will not constitute UBTI unless
such tax-exempt shareholder has held such Common Shares as "debt financed
property" within the meaning of the Code or has used the Common Shares in a
trade or business.
For tax-exempt shareholders that are social clubs, voluntary employee
benefit associations, supplemental unemployment benefit trusts or qualified
group legal services plans exempt from federal income taxation under Code
Sections 501(c)(7), (c)(9), (c)(17) or (c)(20), respectively, income from an
investment in the Company will constitute UBTI unless the organization is able
to properly deduct amounts set aside or placed in reserve for certain purposes
so as to offset the income generated by its investment in the Company. Such
prospective shareholders should consult their own tax advisors concerning these
"set aside" and reserve requirements.
Notwithstanding the above, however, a portion of the dividends paid by
a "pension-held REIT" shall be treated as UBTI as to any trust which (i) is
described in Section 401(a) of the Code, (ii) is tax-exempt under Section 501(a)
of the Code and (iii) holds more than 10% (by value) of the interests in the
REIT. Tax-exempt pension funds that are described in Section 401(a) of the Code
are referred to below as "qualified trusts." A REIT is a "pension-held REIT" if
(i) it would not have qualified as a REIT but for the fact that Section
856(h)(3) of the Code provides that stock owned by qualified trusts shall be
treated for purposes of the "not closely held" requirement as owned by the
beneficiaries of the trust (rather than by the trust itself) and (ii) either (a)
at least one such qualified trust holds more than 25% (by value) of the
interests in the REIT or (b) one or more such qualified trusts, each of which
owns more than 10% (by value) of the interests in the REIT, hold in the
aggregate more than 50% (by value) of the interests in the REIT. The percentage
of any REIT dividend treated as UBTI is equal to the ratio of (i) the UBTI
earned by the REIT (treating the REIT as if it were a qualified trust and
therefore subject to tax on UBTI) to (ii) the total gross income of the REIT. A
de minimis exception applies where the percentage is less than 5% for any year.
The provisions requiring qualified trusts to treat a portion of REIT
distributions as UBTI will not apply if the REIT is able to satisfy the "not
closely held" requirement without relying upon the "look-through" exception with
respect to qualified trusts.
Based on the anticipated ownership of Common Shares immediately
following the Offering, and as a result of certain limitations on transfer and
ownership of Common Shares contained in the Declaration of Trust, the Company
does not expect to be classified as a "pension-held REIT."
TAXATION OF NON-U.S. SHAREHOLDERS OF THE COMPANY
The rules governing United States federal income taxation of the
ownership and disposition of Common Shares by persons that are, for purposes of
such taxation, nonresident alien individuals, foreign corporations, foreign
partnerships or foreign estates or trusts (collectively, "Non-U.S.
Shareholders") are complex, and no attempt is made herein to provide more than a
brief summary of such rules. Accordingly, the discussion does not address all
aspects of United States federal income taxation that may be applicable to
Non-U.S. Shareholders and does not address state, local or foreign tax
consequences that may be relevant to a Non-U.S. Shareholder in light of its
particular circumstances. In addition, this discussion is based on current law,
which is subject to change, and assumes that the Company qualifies for taxation
as a REIT. Prospective Non-U.S. Shareholders should consult with
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their own tax advisers to determine the impact of federal, state, local and
foreign income tax laws with regard to an investment in Common Shares, including
any reporting requirements.
Distributions by the Company. Distributions by the Company to a
Non-U.S. Shareholder that are neither attributable to gain from sales or
exchanges by the Company of United States real property interests nor designated
by the Company as capital gains dividends will be treated as dividends of
ordinary income to the extent that they are made out of current or accumulated
earnings and profits of the Company. Such distributions ordinarily will be
subject to withholding of United States federal income tax on a gross basis
(that is, without allowance for deductions) at a 30% rate or such lower rate as
may be specified by an applicable income tax treaty, unless the dividends are
treated as effectively connected with the conduct by the Non-U.S. Shareholder of
a United States trade or business. Dividends that are effectively connected with
such a trade or business will be subject to tax on a net basis (that is, after
allowance for deductions) at graduated rates, in the same manner as domestic
shareholders are taxed with respect to such dividends, and are generally not
subject to withholding. Any such dividends received by a Non-U.S. Shareholder
that is a corporation may also be subject to an additional branch profits tax at
a 30% rate or such lower rate as may be specified by an applicable income tax
treaty.
Pursuant to current Treasury Regulations, dividends paid to an address
in a country outside the United States are generally presumed to be paid to a
resident of such country for purposes of determining the applicability of
withholding discussed above and the applicability of a tax treaty rate. Under
proposed Treasury Regulations not currently in effect, however, a Non-U.S.
Shareholder who wishes to claim the benefit of an applicable treaty rate would
be required to satisfy certain certification and other requirements. Under
certain treaties, lower withholding rates generally applicable to dividends do
not apply to dividends from a REIT, such as the Company. Certain certification
and disclosure requirements must be satisfied to be exempt from withholding
under the effectively connected income exemption discussed above.
Distributions in excess of current or accumulated earnings and profits
of the Company will not be taxable to a Non-U.S. Shareholder to the extent that
they do not exceed the adjusted basis of the shareholder's Common Shares, but
rather will reduce the adjusted basis of such Common Shares. To the extent that
such distributions exceed the adjusted basis of a Non-U.S. Shareholder's Common
Shares, they will give rise to gain from the sale or exchange of its Common
Shares, the tax treatment of which is described below. As a result of a
legislative change made by the Small Business Job Protection Act of 1996, it
appears that the Company will be required to withhold 10% of any distribution in
excess of the Company's current and accumulated earnings and profits.
Consequently, although the Company intends to withhold at a rate of 30% on the
entire amount of any distribution (or a lower applicable treaty rate), to the
extent that the Company does not do so, any portion of a distribution not
subject to withholding at a rate of 30% (or a lower applicable treaty rate) will
nevertheless be subject to withholding at a rate of 10%. However, the Non-U.S.
Shareholder may seek a refund of such amounts from the IRS if it subsequently
determined that such distribution was, in fact, in excess of current or
accumulated earnings and profits of the Company and that the amount withheld
exceeded the Non-U.S. Shareholder's United States tax liability, if any, with
respect to the distribution.
Distributions to a Non-U.S. Shareholder that are designated by the
Company at the time of distribution as capital gains dividends (other than those
arising from the disposition of a United States real property interest)
generally will not be subject to United States federal income taxation, unless
(i) investment in the Common Shares is effectively connected with the Non-U.S.
Shareholder's United States trade or business, in which case the Non-U.S.
Shareholder will be subject to the same treatment as domestic shareholders with
respect to such gain (except that a shareholder that is a foreign corporation
may also be subject to the 30% branch profits tax, as discussed above), or (ii)
the Non-U.S. Shareholder is a nonresident alien individual who is present in the
United States for 183 days or more during the taxable year and has a "tax home"
in the United States, in which case the nonresident alien individual will be
subject to a 30% tax on the individual's capital gains.
Under the Foreign Investment in Real Property Tax Act ("FIRPTA")
distributions to a Non-U.S. Shareholder that are attributable to gain from sales
or exchanges by the Company of United States real property interests will cause
the Non-U.S. Shareholder to be treated as recognizing such gain as income
effectively connected with a United States trade or business. Non-U.S.
Shareholders would thus generally be taxed at the same rates applicable to
domestic shareholders (subject to a special alternative minimum tax in the case
of nonresident alien individuals). Also, such gain may be subject to a 30%
branch profits tax in the hands of a Non-U.S. Shareholder
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that is a corporation, as discussed above. The Company is required to withhold
35% of any such distribution. That amount is creditable against the Non-U.S.
Shareholder's United States federal income tax liability.
Sale of Common Shares. Gain recognized by a Non-U.S. Shareholder upon
the sale or exchange of Common Shares generally will not be subject to United
States taxation unless such shares constitute a "United States real property
interest" within the meaning of FIRPTA. The Common Shares will not constitute a
"United States real property interest" as long as the Company is a "domestically
controlled REIT." A "domestically controlled REIT" is a REIT in which at all
times during a specified testing period less than 50% in value of its shares is
held directly or indirectly by Non-U.S. Shareholders. The Company believes that
at the closing of the Offering it will be a "domestically controlled REIT," and
therefore that the sale of Common Shares will not be subject to taxation under
FIRPTA. However, because the Common Shares are expected to become publicly
traded, no assurance can be given that the Company will continue to be a
"domestically controlled REIT." Notwithstanding the foregoing, gain from the
sale or exchange of Common Shares not otherwise subject to FIRPTA will be
taxable to a Non-U.S. Shareholder if the Non-U.S. Shareholder is a nonresident
alien individual who is present in the United States for 183 days or more during
the taxable year and has a "tax home" in the United States. In such case, the
nonresident alien individual will be subject to a 30% United States withholding
tax on the amount of such individual's gain.
Even if the Company does not qualify as or ceases to be a
"domestically-controlled REIT," gain arising from the sale or exchange by a
Non-U.S. Shareholder of Common Shares would not be subject to United States
taxation under FIRPTA as a sale of a "United States real property interest" if
(i) the Common Shares are "regularly traded" (as defined by applicable Treasury
Regulations) on an established securities market (e.g., the New York Stock
Exchange) and (ii) such Non-U.S. Shareholder owned 5% or less of the value of
the Common Shares throughout the five-year period ending on the date of the sale
or exchange. If gain on the sale or exchange of Common Shares were subject to
taxation under FIRPTA, the Non-U.S. Shareholder would be subject to regular
United States federal income tax with respect to such gain in the same manner as
a U.S. Shareholder (subject to any applicable alternative minimum tax, a special
alternative minimum tax in the case of nonresident alien individuals and the
possible application of the 30% branch profits tax in the case of foreign
corporations), and the purchaser of the Common Shares would be required to
withhold and remit to the IRS 10% of the purchase price.
Backup Withholding Tax and Information Reporting. Backup withholding
tax (which generally is a withholding tax imposed at the rate of 31% on certain
payments to persons that fail to furnish certain information under the United
States information reporting requirements) and information reporting will
generally not apply to distributions paid to Non-U.S. Shareholders outside the
United States that are treated as (i) dividends subject to the 30% (or lower
treaty rate) withholding tax discussed above, (ii) capital gains dividends or
(iii) distributions attributable to gain from the sale or exchange by the
Company of United States real property interests. As a general matter, backup
withholding and information reporting will not apply to a payment of the
proceeds of a sale of Common Shares by or through a foreign office of a foreign
broker. Information reporting (but not backup withholding) will apply, however,
to a payment of the proceeds of a sale of Common Shares by a foreign office of a
broker that (a) is a United States person, (b) derives 50% or more of its gross
income for certain periods from the conduct of a trade or business in the United
States or (c) is a "controlled foreign corporation" (generally, a foreign
corporation controlled by United States shareholders) for United States tax
purposes, unless the broker has documentary evidence in its records that the
holder is a Non-U.S. Shareholder and certain other conditions are met, or the
shareholder otherwise establishes an exemption. Payment to or through a United
States office of a broker of the proceeds of a sale of Common Shares is subject
to both backup withholding and information reporting unless the shareholder
certifies under penalty of perjury that the shareholder is a Non-U.S.
Shareholder, or otherwise establishes an exemption. A Non-U.S. Shareholder may
obtain a refund of any amounts withheld under the backup withholding rules by
filing the appropriate claim for refund with the IRS.
The United States Treasury has recently issued proposed regulations
regarding the withholding and information reporting rules discussed above. In
general, the proposed Treasury Regulations do not alter the substantive
withholding and information reporting requirements but unify current
certification procedures and forms and clarify and modify reliance standards. If
finalized in their current form, the proposed Treasury Regulations would
generally be effective for payments made after December 31, 1997, subject to
certain transition rules.
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TAX ASPECTS OF THE COMPANY'S OWNERSHIP OF INTERESTS IN THE OPERATING PARTNERSHIP
General. Substantially all of the Company's investments will be held
indirectly through the Operating Partnership. In general, partnerships are
"pass-through" entities which are not subject to federal income tax. Rather,
partners are allocated their proportionate shares of the items of income, gain,
loss, deduction and credit of a partnership, and are potentially subject to tax
thereon, without regard to whether the partners receive a distribution from the
partnership. The Company will include in its income its proportionate share of
the foregoing partnership items for purposes of the various REIT income tests
and in the computation of its REIT taxable income. Moreover, for purposes of the
REIT asset tests, the Company will include its proportionate share of assets
held through the Operating Partnership. See "-- Requirements for Qualification
as a REIT -- Ownership of Partnership Interests."
Entity Classification. If the Operating Partnership were treated as an
association, the entity would be taxable as a corporation and therefore would be
subject to an entity level tax on its income. In such a situation, the character
of the Company's assets and items of gross income would change and would
preclude the Company from qualifying as a REIT (see "-- Requirements for
Qualification as a REIT -- Asset Tests" and "-- Income Tests"). The same result
could occur if any subsidiary partnership or LLC of the Operating Partnership
failed to qualify for treatment as a partnership.
Prior to January 1, 1997, an organization formed as a partnership or
an LLC was treated as a partnership for federal income tax purposes rather than
as a corporation only if it had no more than two of the four corporate
characteristics that the Treasury Regulations in effect at that time used to
distinguish a partnership from a corporation for tax purposes. These four
characteristics were (i) continuity of life, (ii) centralization of management,
(iii) limited liability and (iv) free transferability of interests. Under final
Treasury Regulations which became effective January 1, 1997, the four factor
test has been eliminated and an entity formed as a partnership or as an LLC will
be taxed as a partnership for federal income tax purposes, unless it
specifically elects otherwise. The Treasury Regulations provide that the IRS
will not challenge the classification of an existing partnership or LLC for tax
periods prior to January 1, 1997 so long as (1) the entity had a reasonable
basis for its claimed classification, (2) the entity and all its members
recognized the federal income tax consequences of any changes in the entity's
classification within the 60 months prior to January 1, 1997 and (3) neither the
entity nor any member of the entity had been notified in writing on or before
May 8, 1996 that the classification of the entity was under examination by the
IRS.
Hogan & Hartson L.L.P., tax counsel to the Company, is of the opinion,
based upon certain factual assumptions and representations described in the
opinion, that the Operating Partnership will be treated as a partnership for
federal income tax purposes (and not as an association taxable as a
corporation).
Partnership Allocations. Although a partnership agreement will
generally determine the allocation of income and loss among partners, such
allocations will be disregarded for tax purposes if they do not comply with the
provisions of Section 704(b) of the Code and the Treasury Regulations
promulgated thereunder. Generally, Section 704(b) and the Treasury Regulations
promulgated thereunder require that partnership allocations respect the economic
arrangement of the partners.
If an allocation is not recognized for federal income tax purposes,
the item subject to the allocation will be reallocated in accordance with the
partners' interests in the partnership, which will be determined by taking into
account all of the facts and circumstances relating to the economic arrangement
of the partners with respect to such item. The allocations of taxable income and
loss provided for in the Operating Partnership Agreement is intended to comply
with the requirements of Section 704(b) of the Code and the Treasury Regulations
promulgated thereunder.
Tax Allocations with Respect to the Properties. Pursuant to Section
704(c) of the Code, income, gain, loss and deduction attributable to appreciated
or depreciated property (such as the Initial Properties and the Lease-up
Assisted Living Facilities and Initial Assisted Living Development Projects)
that is contributed to a partnership in exchange for an interest in the
partnership, must be allocated in a manner such that the contributing partner is
charged with, or benefits from, respectively, the unrealized gain or unrealized
loss associated with the property at the time of the contribution. The amount of
such unrealized gain or unrealized loss is generally equal to the difference
between the fair market value of contributed property at the time of
contribution and the adjusted tax
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basis of such property at such time (a "Book-Tax Difference"). Such allocations
are solely for federal income tax purposes and do not affect the book capital
accounts or other economic or legal arrangements among the partners. The
Operating Partnership will receive contributions of appreciated property
(including the Initial Properties and the Lease-up Assisted Living Facilities
and Initial Assisted Living Development Projects). Consequently, the Operating
Partnership Agreement requires that such allocations be made in a manner
consistent with Section 704(c) of the Code.
In general, the partners in the Operating Partnership who contributed
depreciable assets having adjusted tax bases less than their fair market values
at the time of contribution will be allocated depreciation deductions for tax
purposes which are lower than such deductions would be if determined on a pro
rata basis. In addition, in the event of the disposition of any of the
contributed assets which have such a Book-Tax Difference, all income
attributable to such Book-Tax Difference generally will be allocated to such
partners. These allocations will tend to eliminate the Book-Tax Difference over
the life of the Operating Partnership. However, the special allocation rules of
Section 704(c) of the Code do not always entirely eliminate the Book-Tax
Difference on an annual basis or with respect to a specific taxable transaction
such as a sale. Thus, the carryover basis of the contributed assets in the hands
of the Operating Partnership may cause the Company to be allocated lower
depreciation and other deductions, and possibly an amount of taxable income in
the event of a sale of such contributed assets in excess of the economic or book
income allocated to it, as a result of such sale. Such an allocation might cause
the Company to recognize taxable income in excess of cash proceeds, which might
adversely affect the Company's ability to comply with the REIT distribution
requirements. See "-- Taxation of the Company -- Annual Distribution
Requirements."
Treasury Regulations under Section 704(c) of the Code provide
partnerships with a choice of several methods of accounting for Book-Tax
Differences, including retention of the "traditional method" or the election of
certain methods which would permit any distortions caused by a Book-Tax
Difference to be entirely rectified on an annual basis or with respect to a
specific taxable transaction such as a sale. The Operating Partnership and the
Company have determined to use the "traditional method" for accounting for
Book-Tax Differences with respect to the properties initially contributed to the
Operating Partnership. This method is generally the most favorable method from
the perspective of the limited partners at the time of the contribution and will
be less favorable from the perspective of the Company to the extent it
subsequently contributes cash (such as the proceeds of this Offering) to the
Operating Partnership.
OTHER TAX CONSEQUENCES FOR THE COMPANY AND ITS SHAREHOLDERS
The Company and its shareholders may be subject to state or local
taxation in various state or local jurisdictions, including those in which it or
they transact business or reside. The state and local tax treatment of the
Company and its shareholders may not conform to the federal income tax
consequences discussed above. Consequently, prospective shareholders should
consult their own tax advisors regarding the effect of state and local tax laws
on an investment in the Company.
ERISA CONSIDERATIONS
EMPLOYMENT BENEFIT PLANS, TAX-QUALIFIED PENSION, PROFIT SHARING OR STOCK BONUS
PLANS AND IRAS
Each fiduciary of an employee benefit plan subject to ERISA (an "ERISA
Plan") should carefully consider whether an investment in the Common Shares is
consistent with its fiduciary responsibilities under ERISA. In particular, the
fiduciary requirements of Part 4 of Title I of ERISA require an ERISA Plan's
investment, inter alia, to be (i) for the exclusive purpose of providing
benefits to the ERISA Plan's participants and their beneficiaries and defraying
reasonable expenses of administering the ERISA Plan, (ii) prudent and solely in
the interests of the participants and beneficiaries of the ERISA Plan, (iii)
diversified in order to minimize the risk of large losses, unless it is clearly
prudent not to do so, and (iv) authorized under the terms of the governing
documents of the ERISA Plan. In addition, a fiduciary of an ERISA Plan should
not cause or permit such ERISA Plan to enter into transactions prohibited under
Section 406 of ERISA or Section 4975 of the Code. In determining whether an
investment in the Common Shares is prudent for purposes of ERISA, the
appropriate fiduciary of an ERISA Plan should consider whether such investment
is reasonably designed, as part of an ERISA Plan's investment portfolio
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for which the fiduciary has responsibility, to further the purposes of the ERISA
Plan, taking into consideration the risk of loss and opportunity for gain (or
other return) associated with the investment, the diversification, cash flow and
funding requirements of the ERISA Plan and the liquidity and current return of
the ERISA Plan's investment portfolio. A fiduciary should also take into account
the nature of the Company's business, the length of the Company's operating
history, the terms of the management agreements, the fact that certain
investment properties may not have been identified yet, other matters described
under "Risk Factors" and the possibility of UBTI.
The fiduciary of an ERISA Plan, or of an IRA or a qualified pension,
profit sharing or stock bonus plan, or medical savings account which is not
subject to ERISA but is subject to Section 4975 of the Code ("Other Plans"),
should ensure that the purchase of Common Shares will not constitute a
prohibited transaction under ERISA or the Code.
STATUS OF THE COMPANY AND THE OPERATING PARTNERSHIP UNDER ERISA
The following section discusses certain principles that apply in
determining whether the fiduciary requirements of ERISA and the prohibited
transaction provisions of ERISA and the Code apply to an entity because one or
more investors in the entity's equity interests is an ERISA Plan or Other Plan.
The fiduciary of an ERISA Plan should also consider the relevance of these
principles to ERISA's prohibition on improper delegation of control over or
responsibility for Plan assets and ERISA's imposition of co-fiduciary liability
on a fiduciary who participates in, permits (by action or inaction) the
occurrence of or fails to remedy a known breach by another fiduciary.
If the underlying assets of the Company are deemed to be assets of an
ERISA Plan ("Plan Assets"), (i) the prudence standards and other provisions of
Part 4 of Title I of ERISA and the prohibited transaction provisions of ERISA
and the Code would be applicable to any transactions involving the Company's
assets and (ii) persons who exercise any authority or control over the Company's
assets, or who provide investment advice for a fee or other compensation to the
Company, would be (for purposes of ERISA and the Code) fiduciaries of ERISA
Plans and Other Plans that acquire Common Shares. The United States Department
of Labor (the "DOL"), which has administrative responsibility over ERISA Plans
and certain Other Plans, has issued a regulation defining plan assets for
certain purposes (the "DOL Regulation"). The DOL Regulation generally provides
that when an ERISA Plan acquires a security that is an equity interest in an
entity and that security is neither a "publicly-offered security" nor a security
issued by an investment company registered under the 1940 Act, the assets of the
ERISA Plan include both the equity interest and an undivided interest in each of
the underlying assets of the entity, unless it is established either that the
entity is an "operating company" (as defined in the DOL Regulation) or that
equity participation in the entity by "benefit plan investors" is not
significant.
The DOL Regulation defines a "publicly-offered security" as a security
that is "widely held," "freely transferable" and either part of a class of
securities registered under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), or sold pursuant to an effective registration statement under
the Securities Act (provided the securities are registered under the Exchange
Act within 120 days, or such later time as may be allowed by the SEC (the
"registration period"), after the end of the fiscal year of the issuer during
which the offering to the public occurred). The Common Shares are being sold in
an offering registered under the Securities Act and the Company intends to
register the Common Shares under the Exchange Act within the registration
period.
The DOL Regulation provides that a security is "widely held" only if
it is part of a class of securities that is owned by 100 or more investors
independent of the issuer and of one another. A security will not fail to be
"widely held" because the number of independent investors falls below 100
subsequent to the initial public offering as a result of events beyond the
issuer's control.
The DOL Regulation provides that whether a security is "freely
transferable" is a factual question to be determined on the basis of all
relevant facts and circumstances. The DOL Regulation further provides that where
a security is part of an offering in which the minimum investment is $10,000 or
less, certain restrictions ordinarily will not, alone or in combination, affect
a finding that such securities are "freely transferable." The Offering will not
impose a minimum investment requirement. The restrictions on transfer enumerated
in the DOL Regulation as ordinarily not affecting a finding that the securities
are "freely transferable" include: (i) any restriction on or
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prohibition against any transfer or assignment that would result in a
termination or reclassification of the Company for federal or state tax
purposes, or that would otherwise violate any state or federal law or court
order; (ii) any requirement that advance notice of a transfer or assignment be
given to the Company; (iii) any requirement that either the transferor or
transferee, or both, execute documentation setting forth representations as to
compliance with any restrictions on transfer that are among those enumerated in
the DOL Regulation as not affecting free transferability; (iv) any
administrative procedure that established an effective date, or an event (such
as completion of the Offering) prior to which a transfer or assignment will not
be effective; (v) any prohibition against transfer or assignment to an
ineligible or unsuitable investor; (vi) any limitation or restriction on
transfer or assignment that is not imposed by the issuer or a person acting for
or on behalf of the issuer; (vii) any restriction or substitution of an assignee
as a limited partner of a partnership, including a general partner consent
requirement, provided that the economic benefits of ownership of the assignee
may be transferred or assigned without regard to such restriction or consent
(other than any restriction described in the DOL Regulation); and (viii) any
requirement that not less than a minimum number of shares of such security be
transferred or assigned by any investor, provided that such requirement does not
prevent transfer of all of the then remaining shares or units held by an
investor. The Company believes that the restrictions imposed under the
Declaration of Trust on the transfer of Common Shares are of the type of
restrictions on transfer generally permitted under the DOL Regulation or are not
otherwise material and should not result in the failure of the Common Shares to
be "freely transferable" within the meaning of the DOL Regulation. See "Shares
of Beneficial Interest -- Restrictions on Transfer." The Company also believes
that certain restrictions on transfer that derive from the securities laws, from
contractual arrangements with the Underwriters in connection with the Offering
and from certain provisions should not result in the failure of the Common
Shares to be "freely transferable." See "Underwriting." Furthermore, the Company
is not aware of any other facts or circumstances limiting the transferability of
the Common Shares that are not included among those enumerated as not affecting
their free transferability under the DOL Regulation, and the Company does not
expect to impose in the future (or to permit any person to impose on its behalf)
any other limitations or restrictions on transfer that would not be among the
enumerated permissible limitations or restrictions.
Assuming (i) that the Common Shares are "widely held" within the
meaning of the DOL Regulation and (ii) that no facts and circumstances other
than those referred to in the preceding paragraph exist that restrict
transferability of the Common Shares, the Company believes that, under the DOL
Regulation, the Common Shares should be considered "publicly-offered securities"
and, therefore, that the underlying assets of the Company should not be deemed
to be plan assets of any ERISA Plan or Other Plan that invests in the Common
Shares.
In addition, the Declaration of Trust provides that if, in the future,
the Board of Trustees authorizes the creation of any class of equity interests
other than Common Shares, and such class of equity interests will not be
"publicly-offered securities," the Board of Trustees will limit the equity
participation in such class by "benefit plan investors" so that their
participation will not become "significant." For these purposes, the DOL
Regulation provides that equity participation becomes "significant" once 25
percent or more of the value of the class is held by "benefit plan investors,"
and the term "benefit plan investors" means any employee benefit plan (as
defined in ERISA section 3(3)) or any plan described in section 4975(e) of the
Code, or any entity whose underlying assets include benefit plan investments.
The DOL Regulation will also apply in determining whether the
underlying assets of the Operating Partnership will be deemed to be plan assets.
The partnership interests in the Operating Partnership will not be publicly
offered securities. Nevertheless, if the Common Shares constitute publicly
offered securities, the Company believes that the indirect investment in the
Operating Partnership by ERISA Plans or Other Plans through their ownership of
the Common Shares will not cause the assets of the Operating Partnership to be
treated as plan assets. Similarly, the Operating Partnership Agreement provides
that no interests in the Operating Partnership may be acquired by "benefit plan
investors" if immediately after such acquisition investment in the Operating
Partnership by "benefit plan investors" would be "significant."
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UNDERWRITING
Subject to the terms and conditions in the United States purchase
agreement (the "U.S. Purchase Agreement"), between the Company and each of the
underwriters named below (the "U.S. Underwriters"), and concurrently with the
sale of 1,360,000 Common Shares to the International Managers (as defined
below), the Company has agreed to sell to each of the U.S. Underwriters, for
whom Merrill Lynch, Pierce, Fenner & Smith Incorporated, BT Alex. Brown
Incorporated and Goldman, Sachs & Co. are acting as representatives (the "U.S.
Representatives"), and each of the U.S. Underwriters has severally agreed to
purchase from the Company, the respective number of Common Shares set forth
below opposite their respective names:
NUMBER OF
UNDERWRITER COMMON SHARES
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.............................. ---------
BT Alex. Brown Incorporated........................... ---------
Goldman, Sachs & Co................................... ---------
Total................................... 5,440,000
=========
The Company has also entered into a purchase agreement (the
"International Purchase Agreement" and, together with the U.S. Purchase
Agreement, the "Purchase Agreements") with certain underwriters outside the
United States and Canada (the "International Managers" and, together with the
U.S. Underwriters, the "Underwriters") for whom Merrill Lynch International, BT
Alex. Brown International, a division of Bankers Trust International PLC and
Goldman Sachs International are acting as lead managers. Subject to the terms
and conditions set forth in the International Purchase Agreement and
concurrently with the sale of 5,440,000 Common Shares to the U.S. Underwriters
pursuant to the U.S. Purchase Agreement, the Company has agreed to sell to the
International Managers, and the International Managers have severally agreed to
purchase from the Company, an aggregate of 1,360,000 Common Shares. The initial
public offering price per share and the total underwriting discount per share
are identical under the U.S. Purchase Agreement and the International Purchase
Agreement.
In each Purchase Agreement, the several U.S. Underwriters and the
several International Managers have agreed, respectively, subject to the terms
and conditions set forth in such Purchase Agreement, to purchase all of the
Common Shares being sold pursuant to such Purchase Agreement if any of such
Common Shares are purchased. Under certain circumstances, the commitments of
non-defaulting U.S. Underwriters or International Managers (as the case may be)
may be increased. The sale of Common Shares pursuant to the U.S. Purchase
Agreement and the International Purchase Agreement are conditioned upon each
other.
The U.S. Representatives have advised the Company that the U.S.
Underwriters propose initially to offer the Common Shares to the public at the
public offering price per share set forth on the cover page of this Prospectus,
and to certain dealers at such price less a concession not in excess of $______
per share. The U.S. Underwriters may allow, and such dealers may re-allow, a
discount not in excess of $______ per share on sales to certain other dealers.
After the date of this Prospectus, the initial public offering price, concession
and discount may be changed.
The Company has been informed that the U.S. Underwriters and the
International Managers have entered into an agreement (the "Intersyndicate
Agreement") providing for the coordination of their activities. Under the terms
of the Intersyndicate Agreement, the U.S. Underwriters and the International
Managers are permitted to sell Common Shares to each other for purposes of
resale at the initial public offering price, less an amount not greater than the
selling concession. Under the terms of the Intersyndicate Agreement, the
International Managers and any dealer to whom they sell Common Shares will not
offer to sell or sell Common Shares to persons who are United States persons or
Canadian persons or to persons they believe intend to resell to persons who are
United States persons or Canadian persons, and the U.S. Underwriters and any
dealer to whom they sell Common Shares will not offer to sell or sell Common
Shares to persons who are non-United States and non-Canadian persons or to
persons
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they believe intend to resell to non-United States and non-Canadian persons,
except in each case for transactions pursuant to such agreement.
The Company has granted to the U.S. Underwriters an option,
exercisable for 30 days after the date of this Prospectus, to purchase up to
816,000 additional Common Shares to cover overallotments, if any, at the initial
public offering price, less the underwriting discount set forth on the cover
page of this Prospectus. If the U.S. Underwriters exercise this option, each
U.S. Underwriter will have a firm commitment, subject to certain conditions, to
purchase approximately the same percentage thereof which the number of Common
Shares to be purchased by it shown in the foregoing table bears to such Common
Shares initially offered hereby. The Company also has granted an option to the
International Managers, exercisable during the 30-day period after the date of
this Prospectus, to purchase up to 204,000 additional Common Shares to cover
overallotments, if any, on terms similar to those granted to the U.S.
Underwriters.
Until the distribution of the Common Shares is completed, rules of the
SEC may limit the ability of the Underwriters and certain selling group members
to bid for and purchase the Common Shares. As an exception to these rules, the
U.S. Representatives are permitted to engage in certain transactions that
stabilize the price of the Common Shares. Such transactions consist of bids or
purchases for the purpose of pegging, fixing or maintaining the price of the
Common Shares.
If the Underwriters create a short position in the Common Shares in
connection with the Offering, i.e., if they sell more Common Shares than are set
forth on the cover page of this Prospectus, the U.S. Representatives and the
International Managers, respectively, may reduce that short position by
purchasing Common Shares in the open market. The U.S. Representatives and the
International Managers, respectively, may also elect to reduce any short
position by exercising all or part of the overallotment option described above.
The U.S. Representatives and the International Managers, respectively,
may also impose a penalty bid on certain Underwriters and selling group members.
This means that if the U.S. Representatives or the International Managers
purchase Common Shares in the open market to reduce the Underwriters' short
position or to stabilize the price of the Common Shares, they may reclaim the
amount of the selling concession from the Underwriters and selling group members
who sold those shares as part of the Offering.
In general, purchases of a security for the purpose of stabilization
or to reduce a short position could cause the price of the security to be higher
than it might be in the absence of such purchases. The imposition of a penalty
bid might also have an effect on the price of a security to the extent that it
were to discourage resales of the security.
Neither the Company nor any of the Underwriters makes any
representation or prediction as to the direction or magnitude of any effect that
the transactions described above may have on the price of the Common Shares. In
addition, neither the Company nor any of the Underwriters makes any
representation that the U.S. Representatives or the International Managers will
engage in such transactions or that such transactions, once commenced, will not
be discontinued without notice.
In the Purchase Agreements, the Company has agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act. Insofar as indemnification of the Underwriters for liabilities
arising under the Securities Act may be permitted pursuant to the foregoing
provision, the Company has been informed that in the opinion of the SEC such
indemnification is against public policy as expressed in the Securities Act and
is therefore unenforceable.
At the request of the Company, the U.S. Underwriters have reserved up
to 10% of the shares offered hereby for sale at the initial public offering
price to trustees, officers and employees of the Company, its and their business
affiliates and related parties who have expressed an interest in purchasing
shares. Such purchases will be made under the same terms and conditions as will
be initially offered by the U.S. Underwriters to others in the Offering. The
number of shares available to the general public will be reduced to the extent
these persons purchase the reserved shares. Any reserved shares that are not so
purchased by such persons at the completion of the Offering will be offered by
the U.S. Underwriters to the general public on the same terms as the other
shares offered by this Prospectus.
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The Company, its trustees and executive officers, the Operating
Partnership and the Continuing Investors have agreed, subject to certain
exceptions, not to sell, offer or contract to sell, grant any option for the
sale of, or otherwise dispose of any Common Shares or Units or any securities
convertible into or exchangeable for Common Shares or Units for a period of 14
months from the date of the Prospectus, without the prior written consent of
Merrill Lynch, Pierce, Fenner & Smith Incorporated. The Company has granted
certain registration rights to Messrs. Walker and Romanov and the Continuing
Investors pursuant to which such persons may require the Company to file a
registration statement with the SEC with respect to Common Shares owned by
Messrs. Walker and Romanov or received by the Continuing Investors in exchange
for their Units after the expiration of such 14-month period.
The Underwriters do not intend to confirm sales to any account over
which they exercise discretionary authority.
Prior to the Offerings, there has been no public market for the Common
Shares of the Company. The initial public offering price will be determined
through negotiations between the Company and the U.S. Representatives. Among the
factors to be considered in such negotiations, in addition to prevailing market
conditions, will be dividend yields and financial characteristics of publicly
traded REITs that the Company and the U.S. Representatives believe to be
comparable to the Company, the expected results of operations of the Company
(which will be based on the results of operations of the Initial Investments),
estimates of the future business potential and earnings prospects of the Company
as a whole and the current state of the real estate market in the Company's
primary markets and the economy as a whole.
The Company will apply for listing of the Common Shares on the New
York Stock Exchange under the symbol "ETT." In order to meet one of the
requirements for listing the Common Shares on the New York Stock Exchange, the
Underwriters will undertake to sell lots of 100 or more Common Shares to a
minimum of 2,000 beneficial holders.
The Company will pay to Merrill Lynch, Pierce, Fenner & Smith
Incorporated an advisory fee equal to 0.5% of the gross proceeds received from
the sale of Common Shares to public investors in the Offering for financial
advisory services rendered in connection with the Company's formation as a REIT.
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EXPERTS
The balance sheet of ElderTrust as of September 23, 1997 has been
included herein and in the Registration Statement in reliance on the report of
KPMG Peat Marwick LLP, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing.
LEGAL MATTERS
The validity of the Common Shares will be passed upon for the Company
by Hogan & Hartson L.L.P., Washington, DC. In addition, the description of
Federal Income Tax Considerations under the heading "Federal Income Tax
Considerations" is based upon the opinion of Hogan & Hartson L.L.P. Certain
legal matters will be passed upon for the Underwriters by Brown & Wood LLP, New
York, New York. In addition to providing services to the Company, Hogan &
Hartson L.L.P. also provides legal services to Genesis, including in connection
with certain of the Formation Transactions.
ADDITIONAL INFORMATION
The Company has filed with the SEC a Registration Statement on Form
S-11 (of which this Prospectus is a part) under the Securities Act with respect
to the securities offered hereby. This Prospectus does not contain all
information set forth in the Registration Statement, certain portions of which
have been omitted as permitted by the rules and regulations of the SEC.
Statements contained in this Prospectus as to the content of any contract or
other document are not necessarily complete, and in each instance reference is
made to the copy of such contract or other document filed as an exhibit to the
Registration Statement, each such statement is qualified in all respects by such
reference and the exhibits and schedules hereto. For further information
regarding the Company and the Common Shares offered hereby, reference is hereby
made to the Registration Statement and such exhibits and schedules, which may be
obtained from the SEC at its principal office at 450 Fifth Street, N.W.,
Washington, D.C. 20549, upon payment of the fees prescribed by the SEC. The SEC
maintains a website at http://www.sec.gov containing reports, proxy and
information statements and other information regarding registrants, including
the Company, that file electronically with the SEC. In addition, the Company
intends to file an application to list the Common Shares on the NYSE and, if the
Common Shares are listed on the NYSE, similar information concerning the Company
can be inspected and copies at the offices of the New York Stock Exchange, 20
Broad Street, New York, New York 10005.
The Company intends to furnish its shareholders with annual reports
containing audited financial statements and a report thereon by independent
certified public auditors.
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GLOSSARY
The following are definitions of certain terms used in this
Prospectus. Unless the context otherwise requires, the following terms shall
have the meanings set forth below for purposes of this Prospectus.
"ACBM" means asbestos-containing building materials.
"Acquisition Corp." means Genesis ElderCare Acquisition Corp., a
wholly owned subsidiary of Genesis ElderCare Corp. which is owned 44% by Genesis
and owned 56% by The Cypress Group, L.L.C. and TPG Partners II, L.P.
"Acquisition Loan" means the $45.0 million loan made by Genesis in
August 1996 to finance the Age Institute of Florida's acquisition of 11 skilled
nursing facilities.
"Additional Rent" means, for both Percentage Rent Leases and Minimum
Rent Leases, adjustments equal to the difference between the tenant's payment of
estimated Percentage Rent or Incremental Percentage Rent, as the case may be,
during a particular period and the actual Percentage Rent or Incremental
Percentage Rent, as applicable, payable with respect to such period and certain
other costs a tenant agrees to pay under the applicable lease.
"Age Institute of Florida" means the Age Institute of Florida, Inc., a
Florida not-for-profit corporation.
"Available Cash" means, generally, net cash flow from operations plus
any reduction in reserves and minus interest and principal payments on debt,
capital expenditures, any additions to reserves and other adjustments.
"Bank Credit Facility" means the Company's proposed secured bank
credit facility in the amount of up to $110.0 million.
"Beneficiary" means the qualified charitable organization selected by
the Company as the beneficiary of the trust which will automatically receive any
shares purportedly transferred to a Prohibited Transferee in violation of the
Ownership Limit or other restrictions in the Declaration of Trust.
"Book-Tax Difference" means the difference between the fair market
value of contributed property at the time of contribution and the adjusted tax
basis of such property at such time.
"Built-In Gain Asset" means any asset acquired by the Company from a
corporation which is or has been a C corporation (i.e., generally a corporation
subject to full corporate-level tax).
"Bylaws" means the Bylaws of the Company.
"CCMC" means Crozer Chester Medical Center, a Pennsylvania nonprofit
organization.
"CKHS" means Crozer-Keystone Health System, a Pennsylvania nonprofit
corporation.
"Code" means the Internal Revenue Code of 1986, as amended.
"Committee" means the Share Option Committee of the Board of Trustees
of the Company.
"Common Shares" means the common shares of beneficial interest, $.01
par value per share, of the Company.
"Company" means ElderTrust, a Maryland real estate investment trust,
and one or more of its subsidiaries (including the Operating Partnership and ET
Capital Corp.), or, as the context may require, ElderTrust only or the
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Operating Partnership only.
"Construction Loan Commitments" means financing commitments made by
the Company for nine assisted living development and expansion projects which
are in the planning stage.
"Construction Loans" means construction loans made by the Company to
provide funding for the development and construction of the Initial Assisted
Living Development Projects.
"Continuing Investors" means certain persons contributing interests in
the Initial Properties to the Operating Partnership in exchange for Units.
"Crozer/Genesis" means Crozer/Genesis ElderCare Limited Partners, a
Pennsylvania limited partnership.
"DCMH" means the Delaware County Memorial Hospital.
"Declaration of Trust" means the Declaration of Trust of the Company,
as amended from time to time, and as filed with the State Department of
Assessments and Taxation of Maryland.
"DOL" means the United States Department of Labor.
"DOL Regulation" means a regulation, issued by the DOL, defining plan
assets for certain purposes under ERISA.
"Environmental Laws" means the federal, state and local laws and
regulations relating to protection of the environment.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"ERISA Plan" means an employee benefit plan subject to ERISA.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Excluded Holder Limit" means the 15.0% limit on the amount of Common
Shares which may be owned by Mr. Romanov.
"Facility Revenues" means revenue generated with respect to the
applicable leased property (adjusted to exclude: (a) revenues from professional
fees or charges by physicians and all providers of ancillary services,
including, without limitation, physical therapy services, whether or not such
providers are employees of the tenant; (b) non-operating revenues, such as
interest income or income from the sale of assets not sold in the ordinary
course of business; (c) federal, state or local excise taxes imposed upon, and
any tax based upon or measured by, such revenues which is added to or made a
part of the amount billed to the resident, client or other recipient of such
services or goods, whether included in the billing or stated separately; (d)
contractual allowances (relating to any period during the Term) for billings not
paid by or received from the appropriate governmental agencies or third party
providers; and (e) all proper patient billing credits and adjustments
(including, without limitation, allowances for uncollectable accounts) according
to generally accepted accounting principles relating to healthcare accounting).
"15% Personal Property Test" means the test under the Code to
determine whether rent attributable to personal property leased in connection
with a lease of real property is greater than 15% of the total rent received
under the lease.
"FIRPTA" means the Foreign Investment in Real Property Tax Act.
"Fixed Rent Leases" means the tenant leases for the medical office and
other buildings which provide for specified annual rent, subject to increases in
rent in certain of the leases.
138
<PAGE>
"Florida Facilities Note" means the $7.5 million note of the Age
Institute of Florida to be purchased by ET Capital Corp. from Genesis and in
which the Operating Partnership will have substantially all of the economic
interest."
"Formation Transactions" means all of the transactions described under
"Structure and Formation of the Company -- Formation Transactions."
"Funds from Operations" means net income (loss) (computed in
accordance with GAAP), excluding gains (or losses) from debt restructuring and
sales of properties, plus real estate related depreciation and amortization and
after adjustments for unconsolidated partnerships and joint ventures. The
Company believes that Funds from Operations is helpful to investors as a measure
of the performance of an equity REIT because, along with cash flow from
operating activities, financing activities and investing activities, it provides
investors with an indication of the ability of the Company to incur and service
debt, to make capital expenditures and to fund other cash needs. The Company
computes Funds from Operations in accordance with standards established by
NAREIT which may not be comparable to Funds from Operations reported by other
REITs that do not define the term in accordance with the current NAREIT
definition or that interpret the current NAREIT definition differently than the
Company. Funds from Operations does not represent cash generated from operating
activities in accordance with GAAP and should not be considered as an
alternative to net income (determined in accordance with GAAP) as an indication
of the Company's financial performance or to cash flow from operating activities
(determined in accordance with GAAP) as a measure of the Company's liquidity,
nor is it indicative of funds available to fund the Company's cash needs,
including its ability to make cash distributions.
"GAAP" means Generally Accepted Accounting Principles.
"Genesis" means Genesis Health Ventures, Inc., a Pennsylvania
corporation, and its subsidiaries that will lease or manage a substantial
portion of the properties and other assets acquired by the Company in its
formation or, as the context may require, Genesis only or such subsidiaries of
Genesis only.
"Incentive Options" means options to purchase Common Shares which are
granted under the Plan and which are intended to qualify as incentive options
under Section 422 of the Code.
"Incremental Percentage Rent" means, with respect to certain of the
Minimum Rent Leases, incremental percentage rent equal to a specified percentage
of increased gross revenues during any lease year over the gross revenues during
the first lease year for a facility.
"Independent Trustee" means an individual serving as a trustee who is
not an affiliate of the Company and is not an employee of the Company.
"Initial Assisted Living Development Projects" means assisted living
facilities in development subject to Construction Loans.
"Initial Investments" means the Company's investments in the Initial
Properties, the Term and Construction Loans and the Florida Facilities Note.
"Initial Properties" means the 21 assisted and independent living
facilities, skilled nursing facilities and medical office and other buildings
being acquired by the Company in the Formation Transactions.
"Initial Property Acquisition Agreement" means each of the acquisition
agreements between the Company and the current owner of an Initial Property and
the acquisition agreements among the Company and the holders of all interests in
the current owner of an Initial Property.
"Interested Shareholder" means any person who beneficially owns ten
percent or more of the voting power of the Company's then outstanding shares or
an affiliate of the Company who, at any time within the two-year period prior to
the date in question, was the beneficial owner of ten percent or more of the
voting power of the then
139
<PAGE>
outstanding voting shares of beneficial interest of the Company.
"International Purchase Agreement" means the purchase agreement among
the Company and the International Managers.
"International Managers" means the underwriters outside the United
States and Canada named in this Prospectus for whom Merrill Lynch International,
BT Alex. Brown International, a division of Bankers Trust International PLC and
Goldman Sachs International are acting as lead managers.
"Intersyndicate Agreement" means the agreement between the U.S.
Underwriters and the International Managers providing for the coordination of
their activities.
"IRS" means the Internal Revenue Service.
"Lake Washington" means Lake Washington, Ltd., a Florida limited
partnership in which Genesis owns a 49% interest.
"Lease-up Assisted Living Facilities" means assisted living facilities
in lease-up subject to Term Loans.
"MGCL" means the Maryland General Corporation Law.
"Minimum Rent" means the rent which is set at the beginning of the
term of a Minimum Rent Lease and escalates based on the Consumer Price Index, a
fixed percentage increase per year or a fixed percentage of the increase in the
gross revenues for a facility during the immediately preceding year.
"Minimum Rent Leases" means the long-term, triple net leases for
certain of the Initial Properties which are skilled nursing or assisted living
facilities and which will provide for base rent, plus scheduled base rent
step-ups and, in the case of certain of the Minimum Rent Leases, additional rent
based upon incremental revenues over the base year.
"Multicare" means The Multicare Companies, Inc. and its subsidiaries.
"Named Executive Officers" means the Company's Chief Executive Officer
and the Company's other executive officer.
"NAREIT" means the National Association of Real Estate Investment
Trusts.
"1997 Act" means the Taxpayer Relief Act of 1997.
"Non-Qualified Options" means options to purchase Common Shares which
are granted under the Plan and which are not intended to qualify as incentive
options under Section 422 of the Code.
"Non-U.S. Shareholders" means persons that are, for United States
federal income taxation purposes, nonresident alien individuals, foreign
corporations, foreign partnerships or foreign estates or trusts.
"Offering" means the offering of Common Shares of the Company pursuant
to and as described in this Prospectus.
"Operating Partnership" means ElderTrust Operating Limited
Partnership, a Delaware limited partnership.
"Operating Partnership Agreement" means the Agreement of Limited
Partnership of the Operating Partnership, as amended from time to time.
"Other Plans" means an IRA or a qualified pension, profit sharing or
stock bonus plan, or medical savings
140
<PAGE>
account which is not subject to ERISA but is subject to Section 4975 of the
Code.
"Ownership Limit" means the restrictions in the Declaration of Trust
which generally will prohibit ownership, directly or by virtue of the
attribution provisions of the Code, by any single shareholder of more than 8.6%
of the issued and outstanding Common Shares and generally will prohibit
ownership, directly or by virtue of the attribution provisions of the Code, by
any single shareholder of more than 9.9% of the issued and outstanding shares of
any class or series of the Company's Preferred Shares.
"Partnership Act" means the Delaware Revised Uniform Limited
Partnership Act.
"Percentage Rent" means the rent calculated by multiplying a specified
fixed percentage by the Facility Revenues.
"Percentage Rent Leases" means the long-term, triple net leases for
certain of the Initial Properties which are assisted living or independent
living facilities and which will be based on a specified percentage of facility
revenues with no required minimum rent.
"Plan" means the ElderTrust 1997 Share Option and Incentive Plan.
"Plan Assets" means assets of an ERISA Plan.
"POB I" means Professional Office Building I.
"Preference Units" means preferred units and other partnership
interests of different classes and series having such rights, preferences and
other privileges, variations and designations as may be determined by the
Company and which may be issued by the Operating Partnership under the Operating
Partnership Agreement.
"Preferred Shares" means the preferred shares of beneficial interest,
$0.01 par value per share, of the Company.
"Prohibited Owner" means a person or entity holding record title to
any shares in excess of the Ownership Limit.
"Prohibited Transferee" means a transferee of a purported transfer of
shares of beneficial interest of the Company which would result in any person
violating the Ownership Limit or the other restrictions in the Declaration of
the Trust.
"Proposed Multicare Construction Loan" means the Construction Loan
which the Company expects to make to a wholly owned subsidiary of Multicare
which will not be guaranteed by Multicare.
"Proposed Multicare Loans" means the Proposed Multicare Term Loans and
the Proposed Multicare Construction Loan.
"Proposed Multicare Term Loans" means the two Term Loans which the
Company expects to make to wholly owned subsidiaries of Multicare which will not
be guaranteed by Multicare.
"Prospectus" means this prospectus, as the same may be amended.
"Purchase Agreement" means the purchase agreement between the Company
and the Underwriters.
"Recognition Period" means the ten-year period beginning on the date
on which the Company acquires a Built-In Gain Asset.
"REIT" means a real estate investment trust as defined under Sections
856 through 860 of the Code and
141
<PAGE>
applicable Treasury regulations.
"Related Party Tenant" means a tenant of the Company which also is an
actual or constructive owner of 10% or more of the Company, or of which the
Company actually or constructively owns 10% or more.
"Rent" means, with respect to a Percentage Rent Lease, (i) Percentage
Rent and (ii) Additional Rent, and, with respect to a Minimum Rent Lease, (i)
Minimum Rent, (ii) Incremental Percentage Rent and (iii) Additional Rent.
"Restricted Common Shares" means Common Shares which are "restricted"
securities under the meaning of Rule 144 or any Common Shares acquired in
redemption of Units.
"Retained Note" means the $2.5 million working capital term note made
by the Age Institute of Florida and retained by Genesis.
"Rule 144" means Rule 144 promulgated under the Securities Act.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Senior LifeChoice" means Senior LifeChoice Corp., a privately held
Pennsylvania corporation.
"Series 1994 Bonds" and "Series 1995 Bonds" mean, together, the
tax-exempt bond financings relating to the Highgate and Woodbridge assisted
living facilities.
"SLC" means Senior LifeChoice, LLC, a privately held Pennsylvania
limited liability company.
"SMOBGP" means Salisbury Medical Office Building General Partnership,
a Pennsylvania general partnership.
"Stabilized Occupancy" means average monthly occupancy for a facility
of at least 90% for three consecutive months.
"Subordinated Notes" means the Florida Facilities Note and the
Retained Note.
"Tender Offer" means the tender offer by Acquisition Corp. for all of
the outstanding shares of common stock of Multicare.
"Term Loans" means term mortgage loans made by the Company with
respect to the Lease-up Assisted Living Facilities.
"Tranche A Facility" means a tranche of the Bank Credit Facility which
would be available to fund the acquisition of certain of the Initial Properties
and additional growth opportunities, refinance existing indebtedness, fund Term
Loans, for working capital purposes and general corporate purposes (subject to a
maximum of 25% of the unused commitments under the Bank Credit Facility from
time to time).
"Tranche B Facility" means a tranche under the Bank Credit Facility
which would be available to fund Construction Loans which are guaranteed by
Genesis.
"Treasury Regulations" means the applicable regulations that have been
promulgated under the Code.
"U.S. Shareholder" means a holder of Common Shares who (for United
States federal income tax purposes) (i) is a citizen or resident of the United
States, (ii) is a corporation, partnership or other entity created or organized
in or under the laws of the United States or of any political subdivision
thereof or (iii) is an estate or trust
142
<PAGE>
the income of which is subject to United States federal income taxation
regardless of its source.
"UBTI" means unrelated business taxable income.
"Underwriters" means the U.S. Underwriters and the International
Managers.
"Unit" means a unit of partnership interest in the Operating
Partnership.
"U.S. or United States" means the United States of America (including
the District of Columbia), its territories, possessions and other areas subject
to its jurisdiction.
"U.S. Purchase Agreement" means the purchase agreement among the
Company and the U.S. Underwriters.
"Unit Redemption Right" means the right of holders of Units to require
the redemption of their Units at any time more than 14 months after the closing
of the Offering.
"U.S. Representatives" means Merrill Lynch, Pierce, Fenner & Smith
Incorporated, BT Alex. Brown Incorporated and Goldman, Sachs & Co.
"USTs" means underground storage tanks.
"U.S. Underwriters" means the underwriters for the United States and
Canada named in this Prospectus for whom the U.S. Representatives are acting as
representatives.
143
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
NUMBER
ELDERTRUST
Independent Auditors' Report F-1
Balance Sheet as of September 23, 1997 F-2
Notes to Balance Sheet F-3
Pro Forma Balance Sheet and Statements of Estimated Revenues
Less Estimated Expenses F-7
Notes to Pro Forma Balance Sheet and Statements of Estimated
Revenues Less Estimated Expenses F-12
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
ElderTrust:
We have audited the accompanying balance sheet of ElderTrust as of September 23,
1997. This balance sheet is the responsibility of the Company's management. Our
responsibility is to express an opinion on this balance sheet based upon our
audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the balance sheet is free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the balance sheet. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall balance sheet presentation. We believe that our audit
of the balance sheet provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of ElderTrust as of September 23,
1997, in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Washington, DC
September 24, 1997
F-1
<PAGE>
ELDERTRUST
Balance Sheet
September 23, 1997
- --------------------------------------------------------------------------------
ASSETS
- --------------------------------------------------------------------------------
Cash $ 100
- --------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
Preferred shares of beneficial interest, $.01 par value:
20,000,000 shares authorized; none issued or outstanding $ -
Common shares of beneficial interest, $.01 par value:
100,000,000 shares authorized; 100 issued and outstanding 1
Additional paid in-capital 99
- --------------------------------------------------------------------------------
Total shareholders' equity $ 100
- --------------------------------------------------------------------------------
See accompanying notes to balance sheet.
F-2
<PAGE>
ELDERTRUST
Notes to Balance Sheet
September 23, 1997
- --------------------------------------------------------------------------------
(1) ORGANIZATION
ElderTrust was formed in the State of Maryland on September 23, 1997
and issued a total of 100 shares to the Company's chief executive
officer for a total consideration of $100. The Company is in the
process of an initial public offering pursuant to which it plans to
issue approximately 6,800,000 additional shares (the "Offering"). The
Company intends to file a Form S-11 registration statement with the
Securities and Exchange Commission in connection with the proposed
offering of shares to the public.
The Company has had no operations. Upon consummation of the Offering,
the Company intends to begin operations by 1) purchasing a diversified
portfolio of healthcare properties, consisting primarily of assisted
living and skilled nursing facilities which will be leased back to the
current owners or other third parties; 2) making construction loans
collateralized by healthcare properties under construction and making
term loans collateralized by healthcare properties on which
construction has been recently completed, but which are still in
transition to occupancy levels required under purchase/leaseback
agreements, and 3) acquiring a 95% interest in an entity which will
acquire a second mortgage loan.
(2) FEDERAL INCOME TAXES
At the earliest possible date, the Company intends to qualify as a
real estate investment trust under the Internal Revenue Code of 1986,
as amended. Accordingly, it will not be subject to federal income
taxes on amounts distributed to shareholders provided it distributes
at least 95 percent of its taxable income and meets certain other
conditions. The Company may, however, be subject to state or local
taxation in various jurisdictions.
(3) PLANNED TRANSACTIONS
The Company intends to contribute the proceeds of the Offering to an
operating partnership in exchange for the sole general partner
interest. The operating partnership will use the contributions from
the Company and borrowings under a proposed bank credit facility to
purchase 21 healthcare properties for an aggregate cost of $146.8
million and to fund construction and term loans on 6 healthcare
properties with an aggregate balance of $19.7 million. In addition,
the Company will make a $5.6 million loan to ET Capital Corp. (ET
Capital) and will invest an additional $1.8 million to acquire a 95%,
nonvoting equity interest in ET Capital. ET Capital will use proceeds
from the loan and the contributed capital from the Company and the
Company's chief executive officer to purchase a $7.5 miilion working
capital term note from Genesis Health Ventures, Inc. ("Genesis") which
is secured by a second lien on 11 skilled nursing facilities and
related accounts receivable and other working capital assets. Nine of
the properties to be purchased with an aggregate cost of $62.1 million
are owned by Genesis and will be leased back to affiliates of Genesis
or other third parties under long-term operating leases. Approximately
$11.2 million of the construction and term loans will be purchased
from Genesis. Affiliates of Genesis will be the borrowers on the
construction and term loans, and Genesis manages the properties
securing the working capital term note. The Chairman and chief
executive officer of Genesis is chairman of the board of directors of
the Company.
F-3
<PAGE>
- --------------------------------------------------------------------------------
(3) CONTINUED
The operating partnership has agreements to purchase the properties
and the construction, term and second mortgage loans, subject to
certain terms and conditions including, among other things, successful
completion of the Offering and obtaining a bank credit facility. The
Company is negotiating with a commercial bank for a secured bank
credit facility which would be used to pay a portion of the purchase
price of the properties and to fund the construction and term loans
and which would be available for working capital needs and other
general corporate purposes. Management believes that the Company will
be able to obtain sufficient credit on acceptable terms.
The Company has agreed to reimburse actual costs incurred on its
behalf by Genesis upon consummation of the Offering. These costs
relate to organizing the Company, negotiating property acquisitions,
performing due diligence related to the properties, performing
corporate work in contemplation of the Offering, and preparing the
registration statement. This amount is estimated to be approximately
$2,000,000 and will be payable upon the closing of the Offering from
the proceeds of the Offering.
The Company and Genesis have entered into an agreement for a period of
three years from the closing of the Offering (subject to annual
renewal), pursuant to which Genesis has granted the Company a right of
first refusal to purchase and leaseback to Genesis any assisted living
facility which Genesis determines to sell and leaseback. The agreement
also provides the Company with a right to offer financing to Genesis
and other developers of assisted and independent living facilities
which, once developed, will be operated by Genesis. The Company has
provided Genesis with a first right of refusal to lease or manage any
assisted or independent living facility financed or acquired by the
Company within Genesis' markets unless the facility will be leased or
managed by the developing or selling company or an affiliate.
(4) EMPLOYEE BENEFIT PLANS AND RELATED MATTERS
The Company's board of directors intends to adopt deferred
compensation and retirement plans and has adopted a share option and
incentive plan. The Company has reserved 9.9% of the total number of
common shares and operating partnership units outstanding from time to
time for issuance under the share option and incentive plan. As of the
effective date of the Offering, the Company intends to grant options
to purchase 497,500 shares. These options will generally vest over
three to five years. The Company intends to adopt the intrinsic value
approach to accounting for stock-based compensation.
In September, 1997, the Company awarded its president and chief
executive officer and its chief financial officer 112,600 limited
partnership units in the operating partnership in consideration for
services rendered in connection with the formation of the Company. The
operating partnership recognized compensation expense equal to the
estimated fair market value of the units awarded which will be
reported in the Company's statement of operations upon completion of
the Offering. These units are redeemable beginning fourteen months
after completion of the Offering for either cash or, at the option of
the Company, common shares on a one-for-one basis.
F-4
<PAGE>
- --------------------------------------------------------------------------------
(4) CONTINUED
The Company will enter into an employment agreement with its president
and chief executive officer upon consummation of the offering. The
agreement will have an initial term of three years, subject to
automatic renewal for subsequent two year terms, and will cover
matters including compensation, disability and termination. The
agreement will also contain provisions which are intended to limit the
president from competing with the Company throughout the term of the
agreement and for a period of two years thereafter.
The Company will also enter into a non-competition agreement with the
chairman of the board of directors. The agreement will be in effect
during the period that he serves as chairman and for a period of one
year thereafter.
F-5
<PAGE>
- --------------------------------------------------------------------------------
ELDERTRUST
PRO FORMA BALANCE SHEET AND STATEMENTS OF ESTIMATED REVENUES
LESS ESTIMATED EXPENSES
(UNAUDITED)
The unaudited pro forma balance sheet is based on the balance sheet of the
Company included elsewhere in the Prospectus, has been prepared as if the
Company were formed on June 30, 1997 and gives effect to the Offering,
investment in the Operating Partnership and acquisition of the Initial
Investments as if they had occurred on June 30, 1997. The unaudited pro forma
statements of estimated revenues less estimated expenses for the year ended
December 31, 1996, and six months ended June 30, 1997, give effect to the
Offering, the Initial Investments and the respective leases as if they had been
in effect on January 1, 1996 and January 1, 1997. The pro forma adjustments are
based upon available information and certain estimates and assumptions that
management of the Company believes are reasonable. The unaudited pro forma
balance sheet and statements of estimated revenues less estimated expenses do
not purport to present what the Company's financial position or results of
operations and cash available for distribution would actually have been if the
Offering and related transactions had occurred on June 30, 1997, January 1, 1996
or January 1, 1997, or to project the Company's financial position or results of
operations for any future period.
The unaudited pro forma balance sheet and statements of estimated revenues less
estimated expenses should be read in conjunction with the balance sheet of the
Company and related notes thereto, and other financial information pertaining to
the Company, including "Capitalization" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations," included elsewhere
in this Prospectus.
F-6
<PAGE>
ELDERTRUST
PRO FORMA BALANCE SHEET
JUNE 30, 1997
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS ELDERTRUST,
EXISTING FOR THE ADJUSTED
RENTAL OFFERING AND FOR THE OFFERING
ELDERTRUST PROPERTIES THE INITIAL AND THE
(HISTORICAL) (HISTORICAL) INVESTMENTS INITIAL INVESTMENTS
------------- ------------ ------------ -------------------
<S> <C> <C> <C> <C>
ASSETS
Initial properties $ - $ 13,481 $ 127,427 (2) $ 140,908
Investment in ET Capital Corp. - - 7,406 (4) 7,406
Loans receivable - - 13,647 (3) 13,647
Cash and cash equivalents - 1,050 123,480 (1) 13,325
(88,792)(2)
3,331 (2)
(1,050)(2)
(13,647)(3)
(7,406)(4)
(3,641)(5)
Other assets - 595 (595)(2) 3,641
3,641 (5)
------- -------- ---------- -----------
Total assets $ - $ 15,126 $ 163,801 $ 178,927
======== ======== ========== ==========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Mortgages payable $ - 8,834 (8,343)(2) 34,391
33,900 (2)
Bank credit facility - 13,224 (2) 13,224
(315)(2)
Accounts payable and accrued
expenses - 315 3,331 (2) 3,331
Minority interest - - (2)
(11)
</TABLE>
ELDERTRUST, ADJUSTED FOR
THE OFFERING,
PRO FORMA THE INITIAL
ADJUSTMENTS INVESTMENTS
FOR THE AND THE
PROPOSED PROPOSED
MULTICARE LOANS MULTICARE LOANS
--------------- ------------------------
ASSETS
Initial properties $ - $ 140,908
Investment in ET Capital Cor - 7,406
Loans receivable 9,449 (10) 23,096
Cash and cash equivalents - 13,325
Other assets - 3,641
--------- -------------
Total assets $ 9,449 $ 188,376
========= ============
LIABILITIES AND SHAREHOLDERS'
EQUITY
Mortgages payable $ - 34,391
Bank credit facility 9,449 (10) 22,673
Accounts payable and accrued
expenses - 3,331
Minority interest -
F-7
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
SHAREHOLDERS' EQUITY
Preferred shares of beneficial interest,
$.01 par value:
20,000,000 shares authorized; none issued
Common shares of beneficial interest,
$.01 par value:
100,000,000 shares authorized; 100 issued
and outstanding (historical)
_______ issued and outstanding (pro forma) - - (1)
(6)
Additional paid-in-capital - - (1) -
(6)
Note receivable-officer - - (4,000)(6) (4,000) - (4,000)
Owners' equity 5,977 (5,977)(2) - - -
----- ---------- ------------ ------------ -------- ---------
Total liabilities and shareholders' equity $ - $15,126 $ $ $ 9,449 $
===== ========== ==++======== =========== ======= ========
</TABLE>
See notes to unaudited pro forma balance sheet and
statements of estimated revenues less estimated expenses.
F-8
<PAGE>
<TABLE>
<CAPTION>
ELDERTRUST
PRO FORMA STATEMENT OF ESTIMATED REVENUES LESS ESTIMATED EXPENSES
SIX MONTHS ENDED JUNE 30, 1997
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
PRO FORMA
ADJUSTMENTS ELDERTRUST,
EXISTING FOR THE ADJUSTED
RENTAL OFFERING AND FOR THE OFFERING
ELDERTRUST PROPERTIES THE INITIAL AND THE
(HISTORICAL) (HISTORICAL) INVESTMENTS INITIAL INVESTMENTS
----------- ----------- ------------ -------------------
<S> <C> <C> <C> <C> <C>
Estimated revenues:
Rental revenues $ - $ 1,503 $ 5,858 (2) $ 7,361
Interest income - 48 777 (3) 919
(48)(2)
140 (6)
----------- ----------- ---------- ------------------
Total estimated revenues - 1,551 6,727 8,278
----------- ----------- ---------- ------------------
Estimated expenses:
Property operating expenses - 594 (136)(2) 458
Administrative expenses - - 1,098 (9) 1,098
Interest - 362 (63)(2) 2,246
229 (5)
1,141 (7)
577 (8)
Depreciation
- 275 (60)(2) 2,006
1,791 (2)(5)
------------ ----------- ---------- ------------------
Total estimated expenses - 1,231 4,577 5,808
------------ ----------- ---------- ------------------
Estimated revenues less estimated expenses
before equity in earnings of ET
Capital Corp. and minority interest - 320 2,150 2,470
-
Equity in earnings of ET Capital Corp. - - 440 440
------------ -------------- ---------- -------------------
Estimated revenues less estimated expenses
before minority interest - 320 2,590 2,910
Minority interest -
Estimated revenues less estimated expenses
after minority interest $ - $ $ $
============ ============== ========== ==================
Estimated revenues less estimated expenses
per share - $
============ ==================
ELDERTRUST,
ADJUSTED FOR
THE OFFERING,
PRO FORMA THE INITIAL
ADJUSTMENTS INVESTMENTS
FOR THE AND THE
PROPOSED PROPOSED
MULTICARE LOANS MULTICARE LOANS
--------------- ---------------
<S> <C> <C>
Estimated revenues:
Rental revenues $ - $ 7,361
Interest income 363(10) 1,290
-------------- ---------------
Total estimated revenues 363 8,641
-------------- ---------------
Estimated expenses:
Property operating expenses - 458
Administrative expenses - 1,098
Interest 233(10) 2,479
Depreciation - 2,006
--------------- ---------------
Total estimated expenses 233 6,041
--------------- ---------------
Estimated revenues less estimated expenses
before equity in earnings of ET
Capital Corp. and minority interest 130 2,600
Equity in earnings of ET Capital Corp. - 440
--------------- --------------
Estimated revenues less estimated expenses
before minority interest 130 3,040
Minority interest
--------------- --------------
Estimated revenues less estimated expenses $ $
after minority interest =============== ==============
Estimated revenues less estimated expenses
per share $ $
=============== ==============
F-9
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Weighted average number of common shares of
beneficial interest outstanding 100
============ =========== ================ ============ ===========
</TABLE>
See notes to unaudited pro forma balance sheet and
statements of estimated revenues less estimated expenses.
F-10
<PAGE>
<TABLE>
<CAPTION>
ELDERTRUST
PRO FORMA STATEMENT OF ESTIMATED REVENUES LESS ESTIMATED EXPENSES
YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
PRO FORMA
ADJUSTMENTS ELDERTRUST,
EXISTING FOR THE ADJUSTED
RENTAL OFFERING AND FOR THE OFFERING
ELDERTRUST PROPERTIES THE INITIAL AND THE
(HISTORICAL) (HISTORICAL) INVESTMENTS INITIAL INVESTMENTS
----------- ------------ ------------ -------------------
<S> <C> <C> <C> <C>
Estimated revenues:
Rental revenues $ - $ 2,955 $ 10,707 (2) $ 13,662
Interest income - 58 810 (3) 1,098
(58)
280 (6)
----------- ------------ ---------- --------------------
Total estimated revenues - 3,013 11,739 14,752
----------- ------------ ---------- --------------------
Estimated expenses:
Property operating expenses - 1,203 (262)(2) 941
Administrative expenses - - 2,200 (9) 2,196
Interest - 692 (130)(2) 4,088
458 (5)
1,924 (7)
1,144 (8)
Depreciation and amortization - 544 (124)(2) 3,821
3,401 (2)(5)
----------- ------------ ---------- --------------------
Total estimated expenses 2,439 8,611 11,050
----------- ------------ ---------- --------------------
Estimated revenues less estimated expenses
before equity in earnings of ET Capital Corp.
and minority interest - 574 3,128 3,702
Equity in earnings of ET Capital Corp. - 294 294
----------- ------------ ---------- --------------------
Estimated revenues less estimated expenses
before minority interest - 574 3,422 3,996
Minority interest in estimated revenues less
estimated expenses -
----------- ------------ ---------- --------------------
Estimated revenues less estimated expenses
after minority interest $ - $ $ $
=========== ============ ========== ====================
Estimated revenues less estimated expenses
per share - $
=========== ====================
</TABLE>
<TABLE>
<CAPTION>
ELDERTRUST,
ADJUSTED FOR
THE OFFERING,
PRO FORMA THE INITIAL
ADJUSTMENTS INVESTMENTS
FOR THE AND THE
PROPOSED PROPOSED
MULTICARE LOANS MULTICARE LOANS
--------------- ---------------
<S> <C> <C>
Estimated revenues:
Rental revenues $ - $ 13,662
Interest income 95 (10) 1,185
--------------- ----------------
Total estimated revenues 95 14,847
--------------- ----------------
Estimated expenses:
Property operating expenses - 941
Administrative expenses - 2,200
Interest 61 (10) 4,149
Depreciation and amortization - 3,821
--------------- ----------------
Total estimated expenses 61 11,111
--------------- ----------------
Estimated revenues less estimated expenses before
equity in earnings of ET Capital Corp. and
minority interest 34 3,736
Equity in earnings of ET Capital Corp. - 294
--------------- ----------------
Estimated revenues less estimated expenses
before minority interest 34 4,030
Minority interest in estimated revenues less
estimated expenses
--------------- ----------------
Estimated revenues less estimated expenses
after minority interest $ $
=============== ================
Estimated revenues less estimated expenses per
share $ $
=============== ================
</TABLE>
F-11
<PAGE>
<TABLE>
<S> <C>
Weighted average number of common shares of
beneficial interest outstanding 100
=================== ========== =========== ========== ==========
</TABLE>
See notes to unaudited pro forma balance sheet and
statements of estimated revenues less estimated expenses.
F-12
<PAGE>
- --------------------------------------------------------------------------------
ELDERTRUST
NOTES TO PRO FORMA BALANCE SHEET AND STATEMENTS
OF ESTIMATED REVENUES LESS ESTIMATED EXPENSES
(UNAUDITED)
(DOLLARS IN THOUSANDS)
(A) Background and Basis of Presentation
------------------------------------
ElderTrust (together with its subsidiaries, the "Company") has been formed
to invest in a diversified portfolio of healthcare-related real estate and
mortgages. The Company will be self-administered and self-managed and
expects to qualify as a REIT for federal income tax purposes. Upon
completion of the Offering, the Company intends to make Initial Investments
consisting of a portfolio of 21 assisted and independent living facilities,
skilled nursing facilities and medical office and other buildings in
operation (the "Initial Properties"), term mortgage and construction loans
secured by six assisted living facilities in lease-up or development and a
95% interest in ET Capital Corp. (ET Capital), a company which will acquire
a $7.5 million note secured by a second lien on 11 skilled nursing
facilities and related patient receivables (the Florida Facilities Note").
In addition, subject to completion of a proposed merger and receipt of
various approvals and consents, the Company expects to make three additional
term and construction loans to subsidiaries of The Multicare Companies, Inc.
(the "Proposed Multicare Loans").
The assisted, independent living and skilled nursing facilities included in
the Initial Properties will be leased back to the sellers or joint ventures
between the sellers and others under long-term operating leases which will
be Percentage Rent Leases or Minimum Rent Leases. Rental revenues under the
Percentage Rent Leases will be based on a specified percentage of facility
operating revenues. Rental revenues under the Minimum Rent Leases will be
based on (i) base rent (increasing each year by 1.5%) and additional rent
based upon a specified percentage of annual revenues over revenues for the
first year of the lease or (ii) base rent, increasing each year by the
lesser of 5% of the increase in facility revenues for the immediately
preceding year or one-half of the increase in the Consumer Price Index for
the immediately preceding year, or (iii) in the case of the assisted living
facilities secured by the Proposed Multicare Loans, if the Company makes
such loans or elects to purchase and leaseback such facilities to Multicare,
base rent, increasing each year by 2.5%. Both types of leases are triple net
leases that require the lessees to pay all operating expenses, taxes and
insurance. The medical office and other buildings included in the Initial
Properties (the "Existing Rental Properties") are subject to existing tenant
leases that provide for specified annual rents, subject to increases in
certain leases. The Company has agreed to or has options to purchase the six
assisted living facilities securing the term and construction loans included
in the Initial Investments, subject to certain terms and conditions, and
these facilities will also be leased back to the sellers pursuant to
Percentage Rent Leases or Minimum Rent Leases. The Company also has agreed
to purchase the assisted living facilities that would secure the Proposed
Multicare Loans and lease them back to the sellers.
The accompanying unaudited pro forma balance sheet is provided to illustrate
the effects of the Offering, the acquisition and funding of the Initial
Investments, the possible funding of the Proposed Multicare Loans and
related transactions on the Company. It reflects how the balance sheet might
have appeared if the Company had been formed and the Initial Investments had
been made on June 30, 1997, with the potential impact of the Proposed
Multicare Loans presented separately. The accompanying pro forma statements
of estimated revenues less estimated expenses for the year ended December
31, 1996, and the six months ended June 30, 1997, give effect to the
Offering, the Initial Investments, the possible funding of the Proposed
Multicare Loans and related transactions and the various tenant leases as if
they had been in effect on January 1, 1996 and January 1, 1997,
respectively. The statements include historical revenues and expenses of the
Existing Rental Properties, adjustments to record the estimated rental
revenues under the Percentage Rent Leases and Minimum Rent Leases, the
Company's equity in the estimated earnings of ET Capital, estimated interest
income under the term mortgage and construction loans and the Proposed
Multicare Loans and estimated expenses and adjustments to give effect to
matters directly attributable to the Offering and related transactions. The
pro forma adjustments are explained in detail in note B. As more fully
discussed therein, certain of the Initial Properties (Willowbrook, Heritage
Woods and Lacey Bank) were under development or in the lease-up
F-13
<PAGE>
- --------------------------------------------------------------------------------
ELDERTRUST
NOTES TO PRO FORMA BALANCE SHEET AND STATEMENTS
OF ESTIMATED REVENUES LESS ESTIMATED EXPENSES, CONTINUED
(UNAUDITED)
(DOLLARS IN THOUSANDS)
(A) Background and Basis of Presentation, continued
-----------------------------------------------
stage during the pro forma periods. The pro forma statements of estimated
revenues less estimated expenses have been prepared assuming that the
Company made construction or term loans on these properties; however, these
properties are now operating and will be acquired at the time of the
Offering and leased back to the lessees under Minimum or Percentage Rent
Leases. In addition, the term and construction loans the Company will fund
either were not in existence during part of the pro forma periods or would
have been funded at lower levels (due to the earlier stage of development of
the related facilities) than will be the case upon closing of the Offering,
and the Florida Facilities Note was not in existence until September 1,
1996. For these and other reasons, the unaudited pro forma balance sheet and
statements of estimated revenues less estimated expenses do not purport to
present what the Company's financial position or results of operations would
actually have been if the Offering and related transactions had occurred on
June 30, 1997 or January 1, 1996 or to project the Company's financial
position or results of operations for any future period.
(B) Pro Forma Adjustments
---------------------
The accompanying unaudited pro forma balance sheet as of June 30, 1997, and
unaudited pro forma statements of estimated revenues less estimated expenses
for the year ended December 31, 1996, and the six months ended June 30,
1997, reflect various adjustments which are required to give effect to the
Offering, of the Initial Investments and related transactions and to record
estimated rental revenues from Percentage Rent Leases and Minimum Rent
Leases, equity in the estimated net earnings of ET Capital, estimated
interest on loans receivable and estimated expenses. Explanations of the
adjustments are as follows:
(1) Record issuance of 6,800,000 shares of common shares of beneficial
interest at an assumed price of $20 per share. The estimated transaction
expenses of the offering, including the underwriting discount and
estimated offering expenses totaling $12,520 and Common Share awards to
Trustees have been reflected as a offset to additional paid-in capital.
The Units issued to management upon formation have been reflected as an
increase to minority interest. The resulting cash proceeds of the
Offering total $123,480.
(2) Record the acquisition of the Initial Properties, eliminate assets and
liabilities of the Existing Rental Properties which will not be acquired
or assumed by the Company and record related depreciation and rental
revenues.
F-14
<PAGE>
- --------------------------------------------------------------------------------
ELDERTRUST
NOTES TO PRO FORMA BALANCE SHEET AND STATEMENTS
OF ESTIMATED REVENUES LESS ESTIMATED EXPENSES, CONTINUED
(UNAUDITED)
(DOLLARS IN THOUSANDS)
(B) Pro Forma Adjustments, continued
--------------------------------
The aggregate cost of the Initial Properties is $140,908, consisting of
$88,792 paid from proceeds of the Offering, $13,224 paid from borrowings on
the Bank Credit Facility, $34,391 in debt assumed and $4,501 paid by
issuance of ________ limited partnership units in the Operating Partnership,
representing a ___% minority interest in the Company. The aggregate cost of
the Initial Properties is allocated as follows:
Buildings $
Land improvements
Land ------
Less historical book value of existing
rental properties 13,481
------
$
======
Buildings and land improvements are depreciated using the straight-line
method over the estimated useful lives of the assets, generally 15 to 35
years.
Rental revenues from the Initial Properties (excluding the Existing Rental
Properties) are estimated based on terms of the applicable Percentage Rent
Leases and Minimum Rent Leases for properties which were open and operating
during the periods. However, Percentage Rent Leases are assumed to commence
only upon the earlier of three years from the date at which construction of
the facility commenced or at the date the facility reached Stabilized
Occupancy. The pro forma adjustments to rental revenues for the Initial
Properties are summarized as follows:
Assumed
Lease
Commencement Period Ended
------------
Date December 31, 1996 June 30, 1997
------------ ----------------- -------------
Revenues from Minimum Rent Lease Properties:
Crozer/Genesis Skilled
Nursing Facilities 1/96 $ 4,164 2,110
Highgate at Paoli Pointe 1/96 1,152 585
The Woodbridge 8/96 606 614
Rittenhouse CC 1/96 872 443
Lopatcong NRC 1/96 1,357 689
Phillipsburg CC 1/96 617 313
Wayne NRC 1/96 597 303
Silverlake NRC 1/96 808 410
Heritage Woods 6/97 - 88
--------- -------
10,173 5,555
---------- --------
F-15
<PAGE>
ELDERTRUST
NOTES TO PRO FORMA BALANCE SHEET AND STATEMENTS OF ESTIMATED REVENUES
LESS ESTIMATED EXPENSES, CONTINUED
(UNAUDITED)
(DOLLARS IN THOUSANDS)
(B) Pro Forma Adjustments, continued
--------------------------------
Revenues from Percentage Rent Lease Properties:
Pleasant View (20.8%) 1/96 369 190
Riverview Ridge (41.7%) 1/96 650 332
--------------- -----------
1,019 522
--------------- -----------
Net change in revenues from Existing
Rental Properties (485) (229)
--------------- -----------
$ 10,707 $ 5,858
=============== ===========
The net change in revenues from Existing Rental Properties is due to (i)
an increase in revenues from leasing owner-occupied space in two medical
office buildings to the current owner under fixed rent leases and (ii) a
decrease in revenues due to the Company not acquiring two floors of space
in one of the buildings. Property operating expenses were also reduced for
the estimated effect of the reduction in space.
(3) Record loans receivable and related interest income. Loans receivable
consist of the following:
Construction loans $ 4,407
Term loans 9,240
-------
$13,647
=======
Interest income on construction and term loans is based on the three year
United States Treasury Bill rate plus 3.5%. The following is a summary of
the estimated income on construction and term loans based on the estimated
loan commencement dates indicated (representing the commencement date of
construction of the related facility if after January 1996 in the case of
construction loans, and the commencement date of operations of the related
facility for the term loans) and estimated draws required to fund
development costs incurred during the year ended December 31, 1996 and six
months ended June 30, 1997:
F-16
<PAGE>
ELDERTRUST
NOTES TO PRO FORMA BALANCE SHEET AND STATEMENTS OF ESTIMATED
REVENUES LESS ESTIMATED EXPENSES, CONTINUED
(UNAUDITED)
(DOLLARS IN THOUSANDS)
(B) Pro Forma Adjustments, continued
--------------------------------
<TABLE>
<CAPTION>
Pro Forma
Commencement Period Ended
Date December 31, 1996 June 30, 1997
---- ----------------- -------------
Construction Loans
------------------
<S> <C> <C> <C>
Harbor Place 1/96 221 73
Mifflin 10/96 3 41
Coquina Center 10/96 19 89
Heritage Woods 1/96 107 191
Term Loans
----------
Willowbrook 1/96 460 224
Harbor Place 3/97 - 159
-------------- ------------
$ 810 $ 777
============== ============
</TABLE>
As indicated above, a number of the Initial Properties were under
development or in the lease-up stage during the year ended December 31,
1996, and/or the six months ended June 30, 1997, and accordingly, the
construction and term loans either were not in existence or were funded at
lower levels (due to the earlier stages of development of the related
facilities) than will be the case upon closing of the Offering, and the
Florida Facilities Note described in note 4 was not in existence until
September 1, 1996. As a result, and because of the assumed level of net
offering proceeds, the Company's cash balances average $36,768 during the
year ended December 31, 1996 and $22,954 during the six months ended June
30, 1997, and are substantially higher during the periods than they are
anticipated to be in future periods. The Company has not assumed that it
will earn income from the investment of these balances during the pro forma
periods.
F-17
<PAGE>
ELDERTRUST
NOTES TO PRO FORMA BALANCE SHEET AND STATEMENTS OF ESTIMATED
REVENUES LESS ESTIMATED EXPENSES, CONTINUED
(UNAUDITED)
(DOLLARS IN THOUSANDS)
(B) Pro Forma Adjustments, continued
--------------------------------
(4) Record investment in ET Capital and related estimated earnings. ET
Capital will acquire from Genesis the Florida Facilities Note. The
Company will make a loan of $5,625 to ET Capital which will bear
interest at 13% and will invest $1,781 to acquire a 95%, nonvoting
equity interest in ET Capital. The Company will account for its
investment using the equity method. The Company's equity in the earnings
of ET Capital in the statements of estimated revenues less estimated
expenses includes interest on the loan of $244 during the year ended
December 31, 1996, and $363 during the six months ended June 30, 1996,
and the Company's 95% share of estimated net earnings of ET Capital,
which are summarized as follows:
<TABLE>
<CAPTION>
Period Ended
December 31, 1996 June 30,1997
----------------- ------------
<S> <C> <C>
Interest income on Florida Facilities Note 325 $ 488
Interest expense on loan from the Company (244) (363)
Income taxes (28) (44)
-------------- ----------
Net income $ 53 $ 81
============== ==========
</TABLE>
Interest income on the Florida Facilities Note and interest expense on the
loan from the Company are recorded only from September 1, 1996, the date
the Florida Facilities Note was acquired by Genesis.
(5) Record other assets and related amortization. Other assets consist of
the following:
Bank Credit Facility commitment fee $ 1,375
Reserve Funds 2,209
Organization costs 25
Other assets 32
-------
$ 3,641
=======
Deferred costs are amortized using the straight-line method over the
period benefited by the expenditures. The Bank Credit Facility
commitment fee is amortized to interest expense using the straight-line
method over the anticipated term of the bank credit facility (three
years). Organization costs are amortized over five years.
(6) Record note receivable from sale of 200,000 common shares of beneficial
interest to the Company's president and chief executive officer (at an
assumed price of $20 per share) and related interest income. The note
will bear interest at 7% and require quarterly payments of interest only
until maturity ten years from the date of issuance.
(7) Record interest expense on debt assumed by the Company . The debt
assumed matures at various dates to 2021 and provides for interest at
stated rates ranging from 8% to 11%. The aggregate contract value of the
debt was $33,077 at June 30, 1997; the recorded amount of $34,391 is the
present value of future amounts payable in accordance with the loan
terms discounted at a weighted average market rate of 8.5%.
F-18
<PAGE>
ELDERTRUST
NOTES TO PRO FORMA BALANCE SHEET AND STATEMENTS OF ESTIMATED
REVENUES LESS ESTIMATED EXPENSES, CONTINUED
(UNAUDITED)
(DOLLARS IN THOUSANDS)
(B) Pro Forma Adjustments, continued
--------------------------------
(8) Record interest expense on borrowings under the Bank Credit Facility. As
described in 2 above, it is assumed that the Facility will be used to
fund $13,224 of the cost of the Initial Properties. These borrowings are
assumed to bear interest at a variable rate based on a specified spread
over short-term Eurodollar rates (6.66% based on the specified spread
over the average daily Eurodollar rate for the year ended December 31,
1996 and 6.92 % based on the specified spread over the average daily
Eurodollar rate for the six months ended June 30, 1997). A 1/8%
fluctuation in the assumed interest rate would change interest expense
by $165 and $83 for the year ended December 31, 1996 and the six months
ended June 30, 1997, respectively.
(9) Administrative expenses of $2,200 for the year ended December 31, 1996
and $1,098 for the six months ended June 30, 1997 consist of
compensation and related benefits, professional fees, travel, rent and
other administrative costs.
(10)Record Multicare construction loans receivable and related interest
income and interest expense. Interest income on the construction loans
is based on a fixed interest rate of 11%. The following is a summary of
the estimated income on the construction loans based on the estimated
loan commencement dates indicated (representing the commencement date of
construction of the related facility) and draws required to fund
development costs incurred during the year ended December 31, 1996 and
the six months ended June 30, 1997:
<TABLE>
<CAPTION>
Pro Forma
Commencement Period Ended
Date ------------
---- December 31, 1996 June 30, 1997
----------------- -------------
Construction Loans
------------------
<S> <C> <C> <C>
Park Lane Commons at
Lehigh Manor 3/96 $ 45 $ 186
Park Lane Commons at
Berkshire Manor 3/96 41 157
Park Lane Commons at
Sanatoga Manor 3/96 13 37
----------------- -----------
$ 99 $ 380
================= ===========
</TABLE>
The Multicare construction loans receivable are funded by additional draws under
the Bank Credit Facility. Interest expense on these draws is estimated to be $61
and $233 for the year ended December 31, 1996 and the six months ended June 30,
1997, respectively.
(11) Record issuance of 112,000 limited partnership units in Operating
Partnership (representing a minority interest of _____% in the Company) to
officers of the Company at an assumed value of $20 per unit. The units will be
issued in consideration for services relating to the formation of the Company
and, accordingly, the Company will recognize compensation expense equal to the
fair value of the units ($2,240,000). This expense is a nonrecurring item and,
accordingly, has not been included in the statements of estimated revenues less
estimated expenses.
F-19
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
============================================================== ====================================================
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN
AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING MADE BY THIS PROSPECTUS. IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR
ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE 6,800,000 COMMON SHARES
AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE
COMMON SHARES IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO
WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. ELDERTRUST SM
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN COMMON SHARES
IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS OF BENEFICIAL INTEREST
SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY
SINCE THE DATE HEREOF.
-----------------------
SUMMARY TABLE OF CONTENTS
PAGE
Summary..............................................
Risk Factors.........................................
The Company..........................................
Business and Growth Strategies.......................
Use of Proceeds......................................
Distributions........................................
Capitalization.......................................
Dilution.............................................
Selected Combined Financial Data.....................
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Business and Properties..............................
Management........................................... -----------------------
Certain Relationships and Transactions...............
Structure and Formation of the Company............... PROSPECTUS
Policies with Respect to Certain Activities -----------------------
Partnership Agreement................................
Principal Shareholders...............................
Shares of Beneficial Interest........................
Certain Provisions of Maryland Law and the
Company's Declaration of Trust and Bylaws
Shares Available for Future Sale..................... MERRILL LYNCH & CO.
Federal Income Tax Considerations....................
ERISA Considerations................................. BT ALEX. BROWN
Underwriting.........................................
Experts.............................................. GOLDMAN, SACHS & CO.
Legal Matters........................................
Additional Information...............................
Glossary.............................................
Index to Financial Statements........................ F-1
---------------------
, 1997
UNTIL , 1997 (25 DAYS AFTER THE COMMENCEMENT OF
THIS OFFERING), ALL DEALERS EFFECTING TRANSACTIONS IN THE
COMMON SHARES, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS
DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
============================================================= ====================================================
</TABLE>
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED OCTOBER 8, 1997
PROSPECTUS
6,800,000 COMMON SHARES
ELDERTRUSTSM
COMMON SHARES OF BENEFICIAL INTEREST
------------------------
ElderTrust (together with its subsidiaries, the "Company") has been formed
to invest in a diversified portfolio of healthcare-related real estate and
mortgages. The Company will be self-administered and self-managed and expects to
qualify as a real estate investment trust ("REIT") for federal income tax
purposes. Upon completion of this offering (the "Offering"), the Company will
invest in an initial portfolio of 21 assisted and independent living facilities,
skilled nursing facilities and medical office and other buildings, term mortgage
and construction loans totaling $19.7 million secured by six assisted living
facilities in lease-up or development and substantially all of the economic
interest in a $7.5 million second mortgage loan. The facilities and the
properties securing the loans are located in eight states in the eastern United
States. The Company has agreed or has the option to purchase the six assisted
living facilities that secure the term mortgage and construction loans, as well
as eight of the nine assisted living development and expansion projects
currently in the planning phase for which the Company will make loan commitments
totaling $53.3 million. The Company has agreed to make three additional term
mortgage and construction loans totaling $19.4 million and to purchase the
assisted living facilities securing these loans, subject to certain terms and
conditions. Approximately 48.4% of the Company's total assets upon completion of
the Offering (excluding the three additional term mortgage and construction
loans) will consist of properties leased to and loans made to consolidated
subsidiaries of Genesis Health Ventures, Inc. ("Genesis"), a leading provider of
healthcare and support services to the elderly. Subsidiaries of Genesis will
operate or manage substantially all of the properties initially being acquired
by the Company, as well as substantially all of the properties that secure the
loans being made by the Company. Approximately $79.3 million of the net proceeds
from the Offering, including initial draws under the proposed bank credit
facility, will be used to acquire properties and other assets from and to make
loans to Genesis.
All of the common shares of beneficial interest, $.01 par value per share,
of the Company (the "Common Shares") offered hereby are being sold by the
Company and will represent approximately _____% of the Company's outstanding
common equity. The remaining common equity in the Company will be beneficially
owned by officers and trustees of the Company and other continuing investors. Of
the 6,800,000 Common Shares being offered hereby, 5,440,000 shares are being
offered initially in the United States and Canada by the U.S. Underwriters and
1,360,000 shares are being offered initially outside the United States and
Canada by the International Managers. See "Underwriting."
Prior to the Offering, there has been no public market for the Common
Shares. It is currently anticipated that the initial public offering price will
be $20.00 per share. See "Underwriting" for a discussion of the factors to be
considered in determining the initial public offering price. The Company will
apply to list the Common Shares on the New York Stock Exchange.
SEE "RISK FACTORS" BEGINNING ON PAGE 23 FOR CERTAIN FACTORS RELEVANT TO AN
INVESTMENT IN THE COMMON SHARES, INCLUDING:
o The substantial dependence on a single operator in the highly regulated
healthcare industry;
o The possibility that the consideration to be paid by the Company for the
properties and other assets to be acquired by the Company may exceed their
fair market value and the absence of third-party appraisals;
o Risks inherent in real estate investments, including illiquidity of
ownership interests, fluctuations in values of real property, defaults
under or nonrenewals of leases, timely completion of development projects,
and nonpayment of construction and mortgage loans made by the Company, and
the lack of minimum rent payments in certain of the facility leases;
o Conflicts of interest in connection with the Company's formation, including
the receipt by trustees and officers of the Company of equity interests,
and conflicts of interest involving the Chairman of the Board of the
Company in business decisions affecting the Company;
o The Company has been recently organized and management of the Company has
no prior experience in the day-to-day operations of a REIT;
o Risks associated with rapid growth, including the ability of the Company to
manage its growth effectively;
o Exposure of the Company to possible increases in interest expense under its
proposed bank credit facility, and the possibility that the Company may not
be able to refinance outstanding debt upon maturity or that indebtedness
might be refinanced on less favorable terms;
o Limitations on shareholders' ability to change control of the Company,
including a prohibition on actual or constructive ownership of Common
Shares in excess of 8.6% of the Company's outstanding shares; and
o Taxation of the Company as a regular corporation if it fails to qualify as
a REIT.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
=============================================================================================================================
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT (1) COMPANY (2)
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Common Share................ $ $ $
- ----------------------------------------------------------------------------------------------------------------------------
Total (3)....................... $ $ $
=============================================================================================================================
</TABLE>
(1) The Company has agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act of
1933, as amended. See "Underwriting."
(2) Before deducting estimated expenses of $_____________ payable by the
Company.
(3) The Company has granted the U.S. Underwriters a 30-day option to purchase
up to an additional 816,000 Common Shares, and has granted the
International Managers a 30-day option to purchase up to an additional
204,000 Common Shares, on the same terms and conditions as set forth above,
solely to cover overallotments, if any. If such option is exercised in
full, the total Price to Public, Underwriting Discount and Proceeds to
Company will be $ , $ and $ , respectively. See "Underwriting."
------------------------
The Common Shares are offered by the several Underwriters, subject to prior
sale, when, as and if issued to and accepted by them, subject to approval of
certain legal matters by counsel to the Underwriters and certain other
conditions. The Underwriters reserve the right to withdraw, cancel or modify
such offer and to reject orders in whole or in part. It is expected that
delivery of the Common Shares offered hereby will be made in New York, New York
on or about , 1997.
------------------------
MERRILL LYNCH INTERNATIONAL
BT ALEX. BROWN INTERNATIONAL, A DIVISION
OF BANKERS TRUST INTERNATIONAL PLC
------------------------
GOLDMAN SACHS INTERNATIONAL
------------------------
THE DATE OF THIS PROSPECTUS IS , 1997.
<PAGE>
UNDERWRITING
Subject to the terms and conditions in the international purchase
agreement (the "International Purchase Agreement"), between the Company and each
of the underwriters named below (the "International Managers"), and concurrently
with the sale of 5,440,000 Common Shares to the U.S. Underwriters (as defined
below), the Company has agreed to sell to each of the International Managers,
for whom Merrill Lynch International, BT Alex. Brown International, a division
of Bankers Trust International PLC and Goldman Sachs International are acting as
lead managers (the "Lead Managers"), and each of the International Managers has
severally agreed to purchase from the Company, the respective number of Common
Shares set forth below opposite their respective names:
NUMBER OF
UNDERWRITER COMMON SHARES
----------- -------------
Merrill Lynch International..................
---------
BT Alex. Brown International, a division of ---------
Bankers Trust International PLC...........
Goldman Sachs International.................. ---------
Total............................. 1,360,000
=========
The Company has also entered into a purchase agreement (the "U.S.
Purchase Agreement" and, together with the International Purchase Agreement, the
"Purchase Agreements") with certain underwriters outside the United States and
Canada (the "U.S. Underwriters" and, together with the International
Underwriters, the "Underwriters") for whom Merrill Lynch, Pierce, Fenner & Smith
Incorporated, BT Alex. Brown Incorporated and Goldman, Sachs & Co. are acting as
representatives. Subject to the terms and conditions set forth in the U.S.
Purchase Agreement and concurrently with the sale of 1,360,000 Common Shares to
the International Managers pursuant to the International Purchase Agreement, the
Company has agreed to sell to the U.S. Underwriters, and the U.S. Underwriters
have severally agreed to purchase from the Company, an aggregate of 5,440,000
Common Shares. The initial public offering price per share and the total
underwriting discount per share are identical under the U.S. Purchase Agreement
and the International Purchase Agreement.
In each Purchase Agreement, the several U.S. Underwriters and the
several International Managers have agreed, respectively, subject to the terms
and conditions set forth in such Purchase Agreement, to purchase all of the
Common Shares being sold pursuant to such Purchase Agreement if any of such
Common Shares are purchased. Under certain circumstances, the commitments of
non-defaulting U.S. Underwriters or International Managers (as the case may be)
may be increased. The sale of Common Shares pursuant to the U.S. Purchase
Agreement and the International Purchase Agreement are conditioned upon each
other.
The Lead Managers have advised the Company that the International
Managers propose initially to offer the Common Shares to the public at the
public offering price per share set forth on the cover page of this Prospectus,
and to certain banks, brokers and dealers (the "Selling Group") at such price
less a concession not in excess of $______ per share. The International Managers
may allow, and such dealers may re-allow with the consent of Merrill Lynch
International, a discount not in excess of $______ per share on sales to certain
other International Managers and members of the Selling Group. After the date of
this Prospectus, the initial public offering price, concession and discount may
be changed.
The Company has been informed that the U.S. Underwriters and the
International Managers have entered into an agreement (the "Intersyndicate
Agreement") providing for the coordination of their activities. Under the terms
of the Intersyndicate Agreement, the U.S. Underwriters and the International
Managers are permitted to sell Common Shares to each other for purposes of
resale at the initial public offering price, less an amount not greater than the
selling concession. Under the terms of the Intersyndicate Agreement, the
International Managers and any dealer to whom they sell Common Shares will not
133
<PAGE>
offer to sell or sell Common Shares to persons who are United States persons or
Canadian persons or to persons they believe intend to resell to persons who are
United States persons or Canadian persons, and the U.S. Underwriters and any
dealer to whom they sell Common Shares will not offer to sell or sell Common
Shares to persons who are non-United States and non-Canadian persons or to
persons they believe intend to resell to non-United States and non-Canadian
persons, except in each case for transactions pursuant to such agreement.
The Company has granted to the International Managers an option,
exercisable for 30 days after the date of this Prospectus, to purchase up to
204,000 additional Common Shares to cover overallotments, if any, at the initial
public offering price, less the underwriting discount set forth on the cover
page of this Prospectus. If the International Managers exercise this option,
each International Manager will have a firm commitment, subject to certain
conditions, to purchase approximately the same percentage thereof which the
number of Common Shares to be purchased by it shown in the foregoing table bears
to such International Managers' initial amount reflected in the foregoing table.
The Company also has granted an option to the U.S. Underwriters, exercisable
during the 30-day period after the date of this Prospectus, to purchase up to
816,000 additional Common Shares to cover overallotments, if any, on terms
similar to those granted to the International Managers.
Each of the Company and the International Managers has represented and
agreed that (a) it has not offered or sold, and prior to the date six months
after the date of this Prospectus will not offer or sell any Common Shares to
persons in the United Kingdom except to persons whose ordinary activities
involve them in acquiring, holding, managing or disposing of investments (as
principal or agent) for the purpose of their businesses or otherwise in
circumstances which do not constitute an offer to the public in the United
Kingdom for the purposes of the Public Offers of Securities Regulation 1995, (b)
it has complied and will comply with all applicable provisions of the Financial
Services Act 1986 with respect to anything done by it in relation to the Common
Shares in, from or otherwise involving the United Kingdom and (c) it has only
issued or passed on and will only issue or pass on in the United Kingdom any
document received by it in connection with the issue or sale of the Common
Shares to a person who is of a kind described in Article II(3) of the Financial
Services Act 1986 (Investment Advertisements) (Exemptions) Order 1995 or is a
person to whom the document may otherwise lawfully be issued or passed on.
Until the distribution of the Common Shares is completed, rules of the
SEC may limit the ability of the Underwriters and certain selling group members
to bid for and purchase the Common Shares. As an exception to these rules, the
U.S. Representatives are permitted to engage in certain transactions that
stabilize the price of the Common Shares. Such transactions consist of bids or
purchases for the purpose of pegging, fixing or maintaining the price of the
Common Shares.
If the Underwriters create a short position in the Common Shares in
connection with the Offering, i.e., if they sell more Common Shares than are set
forth on the cover page of this Prospectus, the U.S. Representatives and the
International Managers, respectively, may reduce that short position by
purchasing Common Shares in the open market. The U.S. Representatives and the
International Managers, respectively, may also elect to reduce any short
position by exercising all or part of the overallotment option described above.
The U.S. Representatives and the International Managers, respectively,
may also impose a penalty bid on certain Underwriters and selling group members.
This means that if the U.S. Representatives or the International Managers
purchase Common Shares in the open market to reduce the Underwriters' short
position or to stabilize the price of the Common Shares, they may reclaim the
amount of the selling concession from the Underwriters and selling group members
who sold those shares as part of the Offering.
In general, purchases of a security for the purpose of stabilization or
to reduce a short position could cause the price of the security to be higher
than it might be in the absence of such purchases. The imposition of a penalty
bid might also have an effect on the price of a security to the extent that it
were to discourage resales of the security.
Neither the Company nor any of the Underwriters makes any representation
or prediction as to the direction or magnitude of any effect that the
transactions described above may have on the price of the Common Shares. In
addition, neither the Company nor any of the Underwriters makes any
representation that the U.S. Representatives or the International Managers will
engage in such transactions or that such transactions, once commenced, will not
be discontinued without notice.
In the Purchase Agreements, the Company has agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act. Insofar as indemnification of the Underwriters for liabilities
arising under the Securities Act may be permitted pursuant to the foregoing
provision, the Company has been
134
<PAGE>
informed that in the opinion of the SEC such indemnification is against public
policy as expressed in the Securities Act and is therefore unenforceable.
At the request of the Company, the U.S. Underwriters have reserved up
to 10% of the shares offered hereby for sale at the initial public offering
price to trustees, officers and employees of the Company, its and their business
affiliates and related parties who have expressed an interest in purchasing
shares. Such purchases will be made under the same terms and conditions as will
be initially offered by the U.S. Underwriters to others in the Offering. The
number of shares available to the general public will be reduced to the extent
these persons purchase the reserved shares. Any reserved shares that are not so
purchased by such persons at the completion of the Offering will be offered by
the U.S. Underwriters to the general public on the same terms as the other
shares offered by this Prospectus.
The Company, its trustees and executive officers, the Operating
Partnership and the Continuing Investors have agreed, subject to certain
exceptions, not to sell, offer or contract to sell, grant any option for the
sale of, or otherwise dispose of any Common Shares or Units or any securities
convertible into or exchangeable for Common Shares or Units for a period of 14
months from the date of the Prospectus, without the prior written consent of
Merrill Lynch, Pierce, Fenner & Smith Incorporated. The Company has granted
certain registration rights to Messrs. Walker and Romanov and the Continuing
Investors pursuant to which such persons may require the Company to file a
registration statement with the SEC with respect to Common Shares owned by
Messrs. Walker and Romanov or received by the Continuing Investors in exchange
for their Units after the expiration of such 14-month period.
The Underwriters do not intend to confirm sales to any account over
which they exercise discretionary authority.
Prior to the Offerings, there has been no public market for the Common
Shares of the Company. The initial public offering price will be determined
through negotiations between the Company and the U.S. Representatives. Among the
factors to be considered in such negotiations, in addition to prevailing market
conditions, will be dividend yields and financial characteristics of publicly
traded REITs that the Company and the U.S. Representatives believe to be
comparable to the Company, the expected results of operations of the Company
(which will be based on the results of operations of the Initial Investments),
estimates of the future business potential and earnings prospects of the Company
as a whole and the current state of the real estate market in the Company's
primary markets and the economy as a whole.
The Company will apply for listing of the Common Shares on the New York
Stock Exchange under the symbol "ETT." In order to meet one of the requirements
for listing the Common Shares on the New York Stock Exchange, the Underwriters
will undertake to sell lots of 100 or more Common Shares to a minimum of 2,000
beneficial holders.
The Company will pay to Merrill Lynch, Pierce, Fenner & Smith
Incorporated an advisory fee equal to 0.5% of the gross proceeds received from
the sale of Common Shares to public investors in the Offering for financial
advisory services rendered in connection with the Company's formation as a REIT.
135
<PAGE>
<TABLE>
<S> <C>
============================================================== ====================================================
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN
AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING MADE BY THIS PROSPECTUS. IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR
ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE 6,800,000 COMMON SHARES
AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE
COMMON SHARES IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO
WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. ELDERTRUST SM
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN COMMON SHARES
IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS OF BENEFICIAL INTEREST
SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY
SINCE THE DATE HEREOF.
-----------------------
SUMMARY TABLE OF CONTENTS
PAGE
Summary..............................................
Risk Factors.........................................
The Company..........................................
Business and Growth Strategies.......................
Use of Proceeds......................................
Distributions........................................
Capitalization.......................................
Dilution.............................................
Selected Combined Financial Data.....................
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Business and Properties..............................
Management........................................... -----------------------
Certain Relationships and Transactions...............
Structure and Formation of the Company............... PROSPECTUS
Policies with Respect to Certain Activities -----------------------
Partnership Agreement................................
Principal Shareholders...............................
Shares of Beneficial Interest........................
Certain Provisions of Maryland Law and the
Company's Declaration of Trust and Bylaws
Shares Available for Future Sale..................... MERRILL LYNCH INTERNATIONAL
Federal Income Tax Considerations....................
ERISA Considerations................................. BT ALEX. BROWN INTERNATIONAL, A
Underwriting......................................... DIVISION OF BANKERS TRUST
Experts.............................................. INTERNATIONAL PLC
Legal Matters........................................
Additional Information............................... GOLDMAN SACHS INTERNATIONAL
Glossary.............................................
Index to Financial Statements........................ F-1
---------------------
, 1997
UNTIL , 1997 (25 DAYS AFTER THE COMMENCEMENT OF
THIS OFFERING), ALL DEALERS EFFECTING TRANSACTIONS IN THE
COMMON SHARES, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS
DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
============================================================= ====================================================
</TABLE>
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 30. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table itemizes the expenses incurred by the Company in
connection with the Offering. All amounts are estimated except for the
Registration Fee and the NASD Fee.
Registration Fee.................................................. $47,394
NASD Fee.......................................................... 16,140
New York Stock Exchange Listing Fee............................... *
Printing and Engraving Expenses................................... *
Legal Fees and Expenses........................................... *
Accounting Fees and Expenses...................................... *
Blue Sky Fees and Expenses........................................ *
Environmental and Engineering Expenses............................ *
Miscellaneous..................................................... *
--------
TOTAL ................................................... $ *
========
Indemnification Insurance Costs (see Item 33)..................... *
--------
- --------------------
*To be completed by amendment.
ITEM 31. SALES TO SPECIAL PARTIES
See Item 32.
ITEM 32. RECENT SALES OF UNREGISTERED SECURITIES
1. On September 23, 1997, the Company was capitalized with the issuance
to Mr. McCreary of 100 Common Shares for an aggregate purchase price of $100.
The issuance of such Common Shares was effected in reliance on an exemption from
registration under Section 4(2) of the Securities Act. See "Structure and
Formation of the Company."
2. On June 30, 1997, the Operating Partnership was capitalized with the
issuance of a general partnership interest to ElderTrust Realty Group, Inc. in
exchange for a capital contribution in the amount of $200 and with the issuance
of a limited partnership interest to ET Partnership in exchange for a capital
contribution in the amount of $200,000. The issuance of such limited partnership
interests in the Operating Partnership was effected in reliance on an exemption
from registration under Section 4(2) of the Securities Act, and Regulation D
promulgated thereunder. See "Structure and Formation of the Company."
3. On September 10, 1997, the Operating Partnership issued additional
limited partnership interests to Messrs. Romanov and McCreary in exchange for
capital contributions in the aggregate amount of $200. The issuance of such
limited partnership interests in the Operating Partnership was effected in
reliance on an exemption from registration under Section 4(2) of the Securities
Act, and Regulation D promulgated thereunder. See "Structure and Formation of
the Company."
4. Immediately prior to the closing of the Offering, ET Partnership will
be dissolved and the Operating Partnership will be recapitalized and will issue
Units to (i) Messrs. Romanov and McCreary and the former partners in ET
Partnership (including Messrs. Walker and Romanov in respect of the Genesis
interest in ET Partnership which will be purchased by Messrs. Walker and Romanov
immediately prior to the dissolution of ET Partnership) in respect of the
limited partnership interests in the Operating Partnership previously issued to
such partners and (ii) the Continuing Investors in exchange for the interests of
the Continuing Investors in certain of the Initial Properties. Messrs. Romanov
and McCreary will receive a total of 112,000 Units in respect of the limited
partnership interests in the Operating Partnership issued to them on September
10, 1997. The number of Units to be
II-1
<PAGE>
issued to the former partners in ET Partnership (including Messrs. Walker and
Romanov in respect of the Genesis interest in ET Partnership which will be
purchased by Messrs. Walker and Romanov immediately prior to the dissolution of
ET Partnership) in respect of the limited partnership interest in the Operating
Partnership previously issued to ET Partnership will be determined based upon
the initial public offering price per Common Share in the Offering. Immediately
following completion of the Offering, the Units issued to Messrs. Walker and
Romanov in respect of the Genesis interest in ET Partnership will be exchanged
for Common Shares on a one-for-one basis pursuant to the Unit Redemption Right
as provided in the Operating Partnership Agreement. The number of Units to be
issued to the Continuing Investors in the Formation transactions will be
determined at the time the final preliminary prospectus relating to the Offering
(the "Final Preliminary Prospectus") is circulated to prospective investors and
will be a number of Units having an aggregate value equal to $4,400,600, based
on a per Unit value equal to the midpoint of the price range per Common Share
set forth in the Final Preliminary Prospectus. The issuance of such Units and
Common Shares to Messrs. Romanov and McCreary, the former partners in ET
Partnership (including Messrs. Walker and Romanov in respect of the Genesis
interest in ET Partnership which will be purchased by Messrs. Walker and Romanov
immediately prior to the dissolution of ET Partnership) and the Continuing
Investors will be effected in reliance on an exemption from registration under
Section 4(2) of the Securities Act, and Regulation D promulgated thereunder. See
"Structure and Formation of the Company."
ITEM 33. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's officers and directors are and will be indemnified under
Maryland and Delaware law, the Declaration of Trust and Bylaws of the Company
and the Partnership Agreement of the Operating Partnership against certain
liabilities. The Declaration of Trust of the Company requires it to indemnify
its directors and officers to the fullest extent permitted from time to time
under Maryland law.
The Declaration of Trust of the Company authorizes it, to the maximum
extent permitted by Maryland law, to obligate itself to indemnify and to pay or
reimburse reasonable expenses in advance of final disposition of a proceeding to
(a) any present or former trustee or officer or (b) any individual who, while a
trustee of the Company and at the request of the Company, serves or has served
as a director, officer, partner, trustee, employee or agent of another
corporation, partnership, joint venture, trust, employee benefit plan or any
other enterprise from and against any claim or liability to which such person
may become subject or which such person may incur by reason of his or her status
as a present or former trustee or officer of the Company. The Bylaws of the
Company obligate it, to the maximum extent permitted by Maryland law, to
indemnify and to pay or reimburse reasonable expenses in advance of final
disposition of a proceeding to (a) any present or former trustee or officer who
is made party to the proceeding by reason of his service in that capacity or (b)
any individual who, while a trustee or officer of the Company and at the request
of the Company, serves or has served another real estate investment trust,
corporation, partnership, joint venture, trust, employee benefit plan or any
other enterprise as a trustee, director, officer or partner of such real estate
investment trust, corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise and who is made a party to the proceeding by
reason of his service in that capacity, against any claim or liability to which
he may become subject by reason of such status. The Declaration of Trust and
Bylaws also permit the Company to indemnify and advance expenses to any person
who served as a predecessor of the Company in any of the capacities described
above and to any employee or agent of the Company or a predecessor of the
Company. The Bylaws require the Company to indemnify a trustee or officer who
has been successful, on the merits or otherwise, in the defense of any
proceeding to which he is made a party by reason of his service in that
capacity.
The Maryland REIT Law permits a Maryland real estate investment trust to
indemnify and advance expenses to its trustees, officers, employees and agents
to the same extent as permitted by the MGCL for directors and officers of
Maryland corporations. The MGCL permits a corporation to indemnify its present
and former directors and officers, among others, against judgments, penalties,
fines, settlements and reasonable expenses actually incurred by them in
connection with any proceeding to which they may be made a party by reason of
their service in those or other capacities unless it is established that (a) the
act or omission of the director or officer was material to the matter giving
rise to the proceeding and (i) was committed in bad faith or (ii) was the result
of active and deliberate dishonesty, (b) the director or officer actually
received an improper personal benefit in money, property or services or (c) in
the case of any criminal proceeding, the director or officer had reasonable
cause to believe that the act or omission was unlawful. However, under the MGCL,
a Maryland corporation may not indemnify for an adverse judgment in a suit by or
in the right of the corporation. In accordance with the MGCL, the Bylaws of the
Company require it, as a condition to advancing expenses, to obtain (a) a
written affirmation by the
II-2
<PAGE>
director or officer of his good faith belief that he has met the standard of
conduct necessary for indemnification by the Company as authorized by the Bylaws
and (b) a written statement by or on his behalf to repay the amount paid or
reimbursed by the Company if it shall ultimately be determined that the standard
of conduct was not met.
ITEM 34. TREATMENT OF PROCEEDS FROM STOCK BEING REGISTERED
Not Applicable.
ITEM 35. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements, all of which are included in the Prospectus:
ELDERTRUST
Independent Auditors' Report
Balance Sheet as of September 23, 1997
Notes to Balance Sheet
Pro Forma Balance Sheet and Statements of Estimated Revenues
Less Estimated Expenses
Notes to Pro Forma Balance Sheet and Statements of Estimated
Revenues Less Estimated Expenses
(b) Exhibits
1.1* Form of U.S. Purchase Agreement
1.2* Form of International Purchase Agreement
3.1* Form of Amended and Restated Declaration of Trust of the Company
3.2* Form of Bylaws of the Company
5.1* Opinion of Hogan & Hartson L.L.P. regarding the validity of the
securities being registered 8.1* Opinion of Hogan & Hartson
L.L.P. regarding tax matters 10.1* Form of Second Amended and
Restated Agreement of Limited Partnership of the Operating
Partnership 10.2* Form of Registration Rights Agreement between
the Company and the persons named therein 10.3* 1997 Share Option
and Incentive Plan
10.4* Form of Plan of Asset Transfer and Contribution Agreement
10.5* Form of Asset Transfer Agreement
10.6* Employment and Non-Competition Agreement between the Company and
Edward B. Romanov, Jr.
10.7* Walker
10.8* Form of Indemnification Agreement
10.9* Asset Transfer Agreements between ElderTrust Operating Limited
Partnership and Genesis Health Ventures, Inc. (Heritage Woods,
Willowbrook, Riverview Ridge, Pleasant View, Rittenhouse,
Lopatcong, Phillipsburg, Wayne, POB I and Lacey Bank Building)
10.10* Minimum Rent Leases between ElderTrust Operating Limited
Partnership and Genesis Health Ventures, Inc. (Heritage Woods,
Highgate at Paoli Pointe, Rittenhouse, Lopatcong, Phillipsburg,
Wayne, Salisbury Medical Office Building, and Windsor Office
Building and Windsor Clinic and Training Facility)
10.11* Percentage Rent Leases between ElderTrust Operating Limited
Partnership and Genesis Health Ventures, Inc.
10.12* Term Loan Agreements between ElderTrust Operating Limited
Partnership Agreement and Genesis Health Ventures, Inc. (Mifflin
and Coquina Center)
10.13* Construction Loan Agreement between ElderTrust Operating Limited
Partnership Agreement and Genesis Health Ventures, Inc. (Oaks)
10.14* Form of Loan Commitments between ElderTrust Operating Limited
Partnership Agreement and Genesis Health Ventures, Inc.
10.15* Right of First Offer Agreement between ElderTrust Operating
Limited Partnership and Genesis Health Ventures, Inc.
II-3
<PAGE>
10.16* Option Agreement to purchase Holton Point facility between
ElderTrust Operating Limited Partnership and Genesis Health
Ventures, Inc.
10.17* Plan of Asset Transfer and Contribution Agreement among
ElderTrust Operating Limited Partnership, GHV Associates and the
partners in GHV Associates dated as of September 25, 1997.
10.18* Plan of Asset Transfer and Contribution Agreement among
ElderTrust Operating Limited Partnership and the partners in
Salisbury Medical Office Building General Partnership dated as of
September 25, 1997.
10.19* Stock Purchase Agreement between the Company and Edward B.
Romanov, Jr. dated as of October 8, 1997
21.1* List of Subsidiaries
23.1* Consent of Hogan & Hartson L.L.P. (included as part of Exhibit
5.1)
23.2 Consent of KPMG Peat Marwick LLP
23.4* Consent of Hogan & Hartson L.L.P. (included as part of Exhibit
8.1)
23.5* Consent of Kent P. Dauten
23.6* Consent of Rodman W. Moorhead, III
23.7* Consent of Timothy T. Weglicki
24.1 Power of Attorney (included in the Signature Page at page II-6)
27.1 Financial Data Schedule
- ---------------------------------
*To be filed by amendment.
II-4
<PAGE>
ITEM 36. UNDERTAKINGS
The Registrant hereby undertakes:
(1) For purposes of determining any liability under the Securities Act
of 1933, as amended (the "Act"), the information omitted from the form of
Prospectus filed as part of the Registration Statement in reliance upon rule
430A and contained in the form of Prospectus filed by the Registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Act shall be deemed to be part of the
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) The undersigned registrant hereby undertakes to provide to the
Underwriter at the closing specified in the Underwriting Agreement certificates
in such denominations and registered in such names as required by the
Underwriter to permit prompt delivery of each purchaser.
(4) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable ground to believe that it meets all
of the requirements for filing on Form S-11 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in Kennett Square, Pennsylvania on this 8th day of October,
1997.
ELDERTRUST
By: /s/ Edward B. Romanov, Jr.
-------------------------------------
Edward B. Romanov, Jr.
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated as of the 8th day of October, 1997.
Each person whose signature appears below hereby constitutes and
appoints Michael R. Walker and Edward B. Romanov, Jr., and each of them, as his
attorney-in-fact and agent, with full power of substitution and resubstitution
for him in any and all capacities, to sign any or all amendments or
post-effective amendments to this Registration Statement, or any Registration
Statement for the same offering that is to be effective upon filing pursuant to
Rule 462(b) under the Securities Act of 1933, and to file the same, with
exhibits thereto and other documents in connection therewith or in connection
with the registration of the Common Shares under the Securities Exchange Act of
1934, as amended, with the Securities and Exchange Commission, granting unto
such attorney-in-fact and agent full power and authority to do and perform each
and every act and thing requisite and necessary in connection with such matters
and hereby ratifying and confirming all that such attorney-in-fact and agent or
his substitutes may do or cause to be done by virtue hereof.
SIGNATURE TITLE
--------- -----
/s/ Edward B. Romanov, Jr. President, Chief Executive Officer and
- -------------------------- Trustee
Edward B. Romanov, Jr. (principal executive officer)
/s/ D. Lee McCreary, Jr. Chief Financial Officer
- -------------------------- (principal financial officer and
D. Lee McCreary, Jr. principal accounting officer)
/s/ Michael R. Walker Chairman of the Board of Trustees
- --------------------------
Michael R. Walker
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
<S> <C> <C>
EXHIBIT NO. PAGE NO.
- ---------- -------
1.1* Form of U.S. Purchase Agreement
1.2* Form of International Purchase Agreement
3.1* Form of Amended and Restated Declaration of Trust of the Company
3.2* Form of Bylaws of the Company
5.1* Opinion of Hogan & Hartson L.L.P. regarding the validity
of the securities being registered
8.1* Opinion of Hogan & Hartson L.L.P. regarding tax matters
10.1* Form of Second Amended and Restated Agreement of Limited Partnership
of the Operating Partnership
10.2* Form of Registration Rights Agreement between the Company and the
persons named therein
10.3* 1997 Share Option and Incentive Plan
10.4* Form of Plan of Asset Transfer and Contribution Agreement
10.5* Form of Asset Transfer Agreement
10.6* Employment and Non-Competition Agreement between the Company and
Edward B. Romanov, Jr.
10.7* Non-Competition Agreement between the Company and Michael R. Walker
10.8* Form of Indemnification Agreement
10.9* Asset Transfer Agreements between ElderTrust Operating Limited Partnership
and Genesis Health Ventures, Inc. (Heritage Woods, Willowbrook, Riverview Ridge,
Pleasant View, Rittenhouse, Lopatcong, Phillipsburg, Wayne, POB I and Lacey Bank
Building)
10.10* Minimum Rent Leases between ElderTrust Operating Limited Partnership
and Genesis Health Ventures, Inc. (Heritage Woods, Highgate at Paoli Pointe,
Rittenhouse, Lopatcong, Phillipsburg, Wayne, Salisbury Medical Office Building,
and Windsor Office Building and Windsor Clinic and Training Facility)
10.11* Percentage Rent Leases between ElderTrust Operating Limited Partnership
and Genesis Health Ventures, Inc.
10.12* Term Loan Agreements between ElderTrust Operating Limited Partnership
Agreement and Genesis Health Ventures, Inc. (Mifflin and Coquina Center)
10.13* Construction Loan Agreement between ElderTrust Operating Limited Partnership
Agreement and Genesis Health Ventures, Inc. (Oaks)
10.14* Form of Loan Commitments between ElderTrust Operating Limited Partnership
Agreement and Genesis Health Ventures, Inc.
10.15* Right of First Offer Agreement between ElderTrust Operating Limited Partnership
and Genesis Health Ventures, Inc.
10.16* Option Agreement to purchase Holton Point facility between
ElderTrust Operating Limited Partnership and Genesis Health
Ventures, Inc.
10.17* Plan of Asset Transfer and Contribution Agreement among
ElderTrust Operating Limited Partnership, GHV Associates and the
partners in GHV Associates dated as of September 25, 1997.
10.18* Plan of Asset Transfer and Contribution Agreement among
ElderTrust Operating Limited Partnership and the partners in
Salisbury Medical Office Building General Partnership dated as of
September 25, 1997.
10.19* Stock Purchase Agreement between the Company and Edward B. Romanov, Jr.
dated as of October 8, 1997
21.1* List of Subsidiaries
23.1* Consent of Hogan & Hartson L.L.P. (included as part of Exhibit 5.1)
23.2 Consent of KPMG Peat Marwick LLP
23.4* Consent of Hogan & Hartson L.L.P. (included as part of Exhibit 8.1)
23.5* Consent of Kent P. Dauten
</TABLE>
<PAGE>
<TABLE>
<S> <C>
23.6* Consent of Rodman W. Moorhead, III
23.7* Consent of Timothy T. Weglicki
24.1 Power of Attorney (included in the Signature Page at page II-6)
27.1 Financial Data Schedule
- ---------------------------------
*To be filed by amendment.
</TABLE>
ACCOUNTANTS' CONSENT
The Board of Directors
ElderTrust:
We consent to the use of our report on the balance sheet of ElderTrust as of
September 23, 1997 included herein and to the reference to our firm under the
heading "Experts" in the prospectus.
/s/KPMG Peat Marwick, LLP
----------------------------------------
KPMG Peat Marwick, LLP
Washington, D.C.
October 6, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001043236
<NAME> ElderTrust
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> SEP-23-1997
<PERIOD-END> SEP-23-1997
<EXCHANGE-RATE> 1
<CASH> 100
<SECURITIES> 0
<RECEIVABLES> 0
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<CURRENT-ASSETS> 100
<PP&E> 0
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<TOTAL-ASSETS> 100
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 1
<OTHER-SE> 99
<TOTAL-LIABILITY-AND-EQUITY> 1
<SALES> 0
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<CGS> 0
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