<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
for the year ended December 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
for the transition period from _________to_________
Commission File No. 001-13807
ElderTrust
(Exact name of registrant as specified in its charter)
Maryland 23-2932973
(State or other jurisdiction (I.R.S. Employer Identification
of incorporation Number)
or organization)
101 East State Street, Suite 100, Kennett Square PA 19348
(Address of principal executive offices) (Zip Code)
(610) 925-4200
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of Each Class on which registered
- - ------------------------------------- -----------------------
Common shares of beneficial interest New York Stock Exchange
$.01 par value per share
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports); and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment of this
Form 10-K. [ ]
The aggregate market value of voting shares held by non-affiliates of the
Registrant on February 28, 1999 was $52,273,557 based on the reported closing
sales price of such shares on the New York Stock Exchange for that date. As of
February 28, 1999, there were 7,201,100 total common shares outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive proxy statement for the annual
shareholders' meeting to be held on May 20, 1999, are incorporated by reference
into Part III of this Form 10-K.
<PAGE>
ELDERTRUST
1998 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Page
Cautionary Statements Regarding Forward-Looking Statements 1
PART I
Item 1. Business 1
Item 2. Properties 51
Item 3. Legal Proceedings 54
Item 4. Submission of Matters to a Vote of Security Holders 54
PART II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters 54
Item 6. Selected Financial Data 55
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 56
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 72
Item 8. Financial Statements and Supplementary Data 74
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 95
PART III
Item 10. Directors and Executive Officers of the Registrant 95
Item 11. Executive Compensation 95
Item 12. Security Ownership of Certain Beneficial Owners
and Management 95
Item 13. Certain Relationships and Related Transactions 95
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 95
i
<PAGE>
Cautionary Statements Regarding Forward-Looking Statements
This Form 10-K contains certain "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934 with respect to results of operations
and businesses of ElderTrust and its consolidated subsidiaries (collectively,
the "Company"). All statements, other than statements of historical facts,
included in this Form 10-K, are forward-looking statements within the meaning of
the Securities and Exchange Acts. In general, these statements are identified by
the use of forward-looking words or phrases, including "intended," "will,"
"should," "may," "continues," "continued," "estimate," "estimated," "expects,"
"expected," "anticipates," and "anticipated" or the negative or variations
thereof or similar terminology. Because forward-looking statements involve risks
and uncertainties, the Company's actual results could differ materially from
those expressed or implied by these forward-looking statements. The statements
set forth under the caption "Business - Risk Factors" and elsewhere in this Form
10-K, including statements contained in "Business" concerning investments and
growth strategies, the Company's transactions with Genesis Health Ventures, Inc.
("Genesis"), government regulation and the impact of Medicare and Medicaid
Prospective Payment programs on the Company's lessees and borrowers, certain
statements contained in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" concerning the Company's ability to meet
its liquidity needs and Year 2000 compliance and other statements contained
herein regarding matters that are not historical facts identify important
factors with respect to these forward-looking statements that could cause actual
results to differ materially from those in these forward-looking statements.
These forward-looking statements represent the Company's judgment as of the date
of this Form 10-K. Although the Company believes that the expectations reflected
in these forward-looking statements are reasonable, there can be no assurance
that such expectations will prove to be correct. All subsequent written and oral
forward-looking statements attributable to the Company are expressly qualified
in their entirety by the cautionary statements. The Company disclaims, however,
any intent or obligation to update its forward-looking statements.
PART I
ITEM 1. BUSINESS
General
The Company is a self-managed and self-administered real estate
investment trust ("REIT") that invests principally in senior housing and other
healthcare facilities, primarily skilled nursing facilities, assisted and
independent living facilities (or "senior living centers") and medical and other
office buildings. ElderTrust was formed in the State of Maryland on September
23, 1997 and completed its initial public offering (the "Offering") on January
30, 1998, pursuant to which it issued 6,957,500 common shares. Net proceeds to
ElderTrust of $114.2 million from the Offering were contributed to a 94% owned
subsidiary, ElderTrust Operating Limited Partnership (the "Operating
Partnership"), which principally used the proceeds to fund the formation
transactions and certain acquisitions. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Formation Transactions and
Acquisitions." ElderTrust is the sole general partner of the Operating
Partnership and conducts all of its operations through the Operating
Partnership.
1
<PAGE>
The Company had no real estate investments prior to January 30, 1998.
The Company's consolidated assets consist primarily of the assets of the
Operating Partnership and its consolidated subsidiaries (collectively, the
"Company"). As of December 31, 1998, skilled nursing facilities and senior
living centers comprised approximately 93% of the Company's consolidated
investments in real estate properties and loans. At December 31, 1998, the
Company's consolidated assets primarily consisted of:
o a diversified portfolio of 22 healthcare properties aggregating
$176.1 million in assets, consisting of seven assisted living
facilities, eight skilled nursing facilities, one independent living
facility and six medical and other office buildings, which are leased
back to the prior owners or other third parties;
o term loans totaling $27.5 million collateralized by five assisted
living facilities on which construction had been recently completed
but which were still in transition to occupancy levels required under
purchase option agreements; and
o construction loans totaling $20.4 million collateralized by three
assisted living facilities and one independent living facility under
construction.
Additionally, at December 31, 1998 the Company's investments in
unconsolidated entities in which it accounts for its investments using the
equity method of accounting (the Company's "Equity Investees") consisted of:
o a 95% nonvoting equity interest in an entity which owns a $7.8
million second mortgage note;
o a 99% limited partnership interest in an entity which holds leasehold
and purchase option rights for seven skilled nursing facilities; and
o a 99% limited member interest in two entities which each hold an
assisted living facility.
See "Business - Investments."
Genesis Health Ventures, Inc. ("Genesis") was co-registrant in the
Company's Offering. Approximately 70% of the Company's consolidated assets at
December 31, 1998 consisted of real estate properties leased to and loans on
real estate properties made to Genesis or entities in which Genesis accounts for
its investment using the equity method of accounting ("Genesis Equity
Investees"), under agreements as manager, tenant or borrower. Revenues recorded
by the Company in connection with these leases and borrowings aggregated $14.0
million in 1998. In addition, the Company's Equity Investees also have leased
properties or provided mortgages on properties to Genesis or Genesis Equity
Investees. As a result of these relationships, the Company's revenues and
ability to meet its obligations depends, in significant part, upon:
2
<PAGE>
o the ability of Genesis and Genesis Equity Investees to meet their
lease and loan obligations;
o the revenues derived from, and the successful operation of, the
facilities leased to or managed by Genesis or Genesis Equity
Investees; and
o the ability of these entities to complete successfully and on
schedule the development projects securing construction loans made by
the Company to them.
The Company has no control over these entities and can make no
assurance that any of these entities will have sufficient income or assets to
enable them to satisfy their obligations under the leases or loans made to them.
See "Business - Transactions with Genesis" and "Business - Risk Factors."
Contemporaneously with the closing of the Offering, the Company entered
into a $140 million bank credit facility (the "Credit Facility") with Deutsche
Bank Securities ("Deutsche Bank") which expired January 29, 1999. The Company
used the Credit Facility principally to fund a portion of the initial formation
transactions, additional acquisitions during 1998 and for working capital
purposes. The original expiration date of the Credit Facility was extended on
January 29, 1999 to April 30, 1999, and the availability under the Credit
Facility was reduced to $100 million. During this extension period, the Company
notified Deutsche Bank that it was in violation of certain restrictive covenants
under the Credit Facility which occurred principally as a result of the
Company's equity value (market value of outstanding shares) being less than $70
million as of February 4, 1999. As a result, additional borrowings were not
permitted under the Credit Facility while a technical default existed.
On March 31, 1999, the term of the Credit Facility was extended from
April 30, 1999 to January 1, 2000 through an amendment which also waived the
Company's defaults under the Credit Facility and provided for available
borrowings up to an aggregate of $100.5 million. The Company had $95.8 million
of indebtedness outstanding under the Credit Facility at March 31, 1999,
including the $1.0 million extension fee in connection with this amendment. The
interest rate on borrowings outstanding under the Credit Facility will increase
from 180 basis points over the one-month London Interbank Borrowing Rate
("LIBOR") to 275 basis points effective June 1, 1999. The weighted average
interest rate on borrowings outstanding under the Credit Facility at March 31,
1999 was 6.8%, including the 180 basis point adjustment.
3
<PAGE>
The Company has entered into discussions with other potential sources
to replace the Credit Facility with new financing which would provide longer
term funding to support the Company's objectives. The Company currently does not
have availability under the Credit Facility to fund acquisitions. If the Company
is unable to raise additional capital through equity fiancing, or is unable to
increase its borrowing capacity, the Company may be limited in its ability to
fully implement its growth strategy. Additionally, if the Company is unable to
obtain replacement financing by January 1, 2000, or is unable to negotiate a
further extension to the current credit facility at that time, Deutsche Bank
could exercise its right to foreclose on the collateral securing the Credit
Facility, which would have a significant adverse affect on the Company's ability
to continue its operations and meet its obligations, including payment of
quarterly shareholder distributions. See "Business - Risk Factors" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and capital Resources."
To qualify as a REIT, the Company must distribute to its shareholders
each year at least 95% of its net taxable income, excluding any net capital
gain. If the Company is unable to make required shareholder distributions, then
the Company may be unable to qualify as a REIT and be subject to federal income
taxes. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources" and "Business - Risk
Factors."
Investments
Investment Policies
In determining whether to invest in a facility or fund construction
loans, the Company focuses on:
o the experience of the operator;
o the financial and operational feasibility of the property;
o the net short and long-term supply/demand balance within the
marketplace for the proposed investment;
o the financial strength of the borrower or lessee;
o the security available to support the financing; and
o the amount of capital committed to the property by the borrower or
lessee.
The Company conducts market research and analysis for potential
investments. In addition, the Company reviews the value of the properties,
interest rates and debt service coverage requirements of debt to be assumed and
the anticipated sources for repayment of such debt.
The Company's investments primarily take the form of operating lease
transactions, permanent mortgage loans and construction financings.
Substantially all of the Company's mortgage loans are provided as part of an
overall transaction that results in the Company buying the underlying property
from, and leasing the property back to, the operator. The Company typically
4
<PAGE>
provides construction financing up to the lesser of 80% of the estimated value
of the property or 90% of its cost. The Company's policy is to structure
long-term financings to maximize returns. The Company believes that appropriate
new investments will be available in the future regardless of interest rate
fluctuations. However, there can be no assurance that suitable investments will
continue to be identified or that such investments can be consummated on
acceptable terms. See "Business - Business and Growth Strategies" and "Business
- - - Risk Factors."
Mortgage loans and operating leases are normally secured by the
underlying real estate, guarantees and/or cash deposits. As of December 31,
1998, cash deposits aggregating $3.5 million were held by the Company as
security for operating leases, permanent mortgage loans and construction loan
obligations. In addition, the leases and loans are generally cross-defaulted and
the loans are cross-collateralized with any other mortgage loans, leases, or
other agreements between the operator or any affiliate of the operator and the
Company, which were entered into simultaneously. Economic terms of the Company's
operating leases include fixed and minimum rent leases, which normally include
annual rate increases, and percentage rent leases. Percentage rent leases
require rents based upon a fixed percentage of facility revenues throughout the
lease term. See "Business - Investments - Owned Properties - Operating Leases."
The Company monitors its investments through a variety of methods. The
monitoring process includes a review and analysis of the facility, borrower or
lessee, and guarantor financial statements; periodic site visits; property
reviews; and meetings with operators. Such reviews of operators and facilities
generally encompass licensure and regulatory compliance materials and reports,
contemplated building improvements and other material developments. The
Company's lessees and borrowers are subject to various regulations. See
"Business - Government Regulations" and "Business - Risk Factors."
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.
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 Company may sell certain of its properties.
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 ElderTrust or its consolidated
subsidiaries to register as investment companies under the Investment Company
Act of 1940, as amended.
5
<PAGE>
To the extent that the Company's board of trustees determines it
necessary 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 Internal Revenue Code of 1986, as amended (the "Tax
Code"), concerning the taxability of undistributed REIT income, or a combination
of these methods. See "Business - Financing Policies" for further information
concerning the Company's policies regarding debt financing.
The Company may sell some or all of its investments to Genesis or a
third party in the future. Under lease agreements with Genesis or Genesis Equity
Investees, these entities have the right of first refusal on offers the Company
receives to purchase or lease any of its properties it desires to sell. See
"Business - Risk Factors." 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.
The Company may, but does not presently intend to, make investments
other than as described above. The Company will have the authority and may
determine it necessary to offer its common shares or other equity or debt
securities 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 Company may offer additional units of the Operating
Partnership or other equity interests in the Operating Partnership that are
exchangeable into common or preferred shares of ElderTrust in exchange for
property. The Company also may make loans to joint ventures in which it may
participate in the future. The Company will not engage in trading, underwriting
or the agency distribution or sale of securities of other issuers. At all times,
the Company intends to make investments in such a manner as to be consistent
with the requirements of the Tax Code to qualify as a REIT unless, because of
circumstances or changes in the Tax Code (or the regulations promulgated
thereunder), the board of trustees determines that it is no longer in the best
interests of the Company to qualify as a REIT.
If the Company is unable to raise additional capital through equity
financing, or is unable to increase its borrowing capacity, the Company may be
limited in its ability to fully implement its growth strategy. Additionally, if
the Company is unable to obtain replacement financing by January 1, 2000, or is
unable to negotiate a further extension to the current credit facility at that
time, Deutsche Bank could exercise its right to foreclose on the collateral
securing the Credit Facility, which would have a significant adverse affect on
the Company's ability to continue its operations and meet its obligations,
including payment of quarterly shareholder distributions. See "Business - Risk
Factors" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources."
6
<PAGE>
The board of trustees may change the investment policies and activities
of the Company at any time without a vote of shareholders. There can be no
assurance that the Company's investment objectives will be realized. See
"Business - Risk Factors."
Investment Portfolio
The Company is a self-managed and self-administered real estate
investment trust that invests principally in senior housing and healthcare
facilities. As such, the Company has one reportable business segment. All the
Company's facilities and business activities are contained within the United
States. The Company has significant transactions with Genesis and Genesis Equity
Investees. See "Business - Transactions with Genesis."
The Company's consolidated investments in real estate properties and
loans at December 31, 1998 are reflected in the following table:
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------------------------------
Percentage Number Number Investment Number Number
of of of per of of
Type of Facility Investments(1) Portfolio Facilities Beds(2) Bed (3) Operators(4) States(5)
- - ------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Owned Properties:
Assisted Living
Facilities $ 83,522 35.8% 7 676 $ 123,553 2 2
Independent Living
Facilities 4,074 1.7 1 72 56,583 1 1
Skilled Nursing
Facilities 81,160 34.9 8 1,251 64,876 3 2
Medical Office and
Other Buildings 16,366 7.0 6 - - 3 4
------------------------------------------------
Total Owned Properties 185,122 79.4 22 1,999
------------------------------------------------
Term and Construction Loans:
Assisted Living
Facilities 45,845 19.7 8 597 76,792 3 3
Independent Living
Facilities 2,054 0.9 1 147 13,973 1 1
------------------------------------------------
Total Term and
Construction Loans 47,899 20.6 9 744
------------------------------------------------
Totals $233,021 100.0% 31 2,743
=================================================
</TABLE>
(1) Includes investments in real estate properties and loans on real estate
properties aggregating $228.5 million, before reductions for accumulated
depreciation, and credit enhancements on three owned properties which
aggregated $4.5 million.
(2) Based upon the number of private and semi-private beds available at time of
acquisition.
(3) Investment per Bed was computed by using the respective facility investment
amount divided by number of beds available at time of acquisition for each
respective facility.
7
<PAGE>
(4) Genesis or Genesis Equity Investees managed 18 of the owned properties and
seven of the properties underlying the term and construction loans, under
management agreements with the tenants. See "Business - Transactions with
Genesis" and "Item 2 Properties."
(5) The Company has investments in properties located in eight states, occupied
by seven different tenants.
Owned Properties
Assisted Living Facilities
Assisted living facilities provide services to aid in activities of
daily living, such as bathing, meals, security, transportation, recreation,
medication supervision and limited therapeutic programs. More intensive medical
needs of the resident are often met within assisted living facilities by home
health providers, close coordination with the resident's physician and skilled
nursing facilities. Assisted living facilities are increasingly successful as
lower cost, less institutional alternatives for the health problems of the
elderly or medically frail.
Independent Living Facilities
Independent living facilities offer specially designed residential
units for active and ambulatory elderly residents and provide various ancillary
services. These facilities offer residents an opportunity for an independent
lifestyle with a range of social and health services.
Skilled Nursing Facilities
Skilled nursing facilities provide inpatient skilled nursing and
custodial services as well as rehabilitative, restorative and transitional
medical services. In some instances, nursing facilities supplement hospital care
by providing specialized care for medically complex patients whose conditions
require intense medical and therapeutic services, but who are medically stable
enough to have these services provided in facilities that are less expensive
than acute care hospitals.
Medical Office and Other Buildings
The medical office and other buildings provide office space primarily
to practicing physicians and other healthcare professionals, principally in
connection with services rendered by these physicians at an adjacent acute care
facility.
8
<PAGE>
Operating Leases
Each of the Company's skilled nursing and senior housing facilities,
which includes the land (if owned), buildings, improvements and related rights,
is leased pursuant to a long-term lease. These leases generally have a fixed
term of 5 to 12 years and contain multiple five to ten-year renewal options.
Some of these leases provide for rents based on a specified percentage of
facility operating revenues with no required minimum rent ("percentage rent
leases"). Other leases provide for 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 ("minimum rent leases"). Both types of leases are triple net
leases that require the lessees to pay all operating expenses, taxes, insurance,
maintenance and other costs, including a portion of capitalized expenditures.
The base rents for the renewal periods are generally fixed rents set at a spread
above the Treasury yield for the corresponding period. The remaining leases
("fixed rent leases") are with tenants in the medical and other office buildings
and provide for specified annual rents, subject to annual increases in some of
the leases. Generally, these leases are for a five year period. Some of the
lessees subject to fixed rent leases are required to repair, rebuild and
maintain the leased properties.
The net consolidated carrying value of the Company's leased properties
aggregated $176.1 million at December 31, 1998, excluding credit enhancements
aggregating $4.5 million on three properties. Credit enhancements consisted of
$3.5 million in bond and operating reserve funds required in connection with
outstanding debt issues on three facilities and letters of credit aggregating $1
million on two of the three facilities.
The Company is obligated, or has an option, to purchase eight assisted
living facilities underlying term and construction loans. These facilities will
generally be leased back to the sellers pursuant to percentage or minimum rent
leases. See "Term and Construction Loans" below.
Term and Construction Loans
Term Loans
The Company has investments in five term loans that are structured to
provide the Company with interest income and will generally be used to acquire
the underlying property when the facilities achieve stabilized occupancy. All of
the $27.5 million of term loans as of December 31, 1998 were first mortgage
loans. The borrower under each of these loans is Genesis or Genesis Equity
Investees. The interest rate on the Company's investments in term loans for
operating facilities ranges from 9.5% to 10.5% per annum on the outstanding
balances. The yield to the Company on term loans depends upon a number of
factors, including the stated interest rate, average principal amount
outstanding during the term of the loan, the amount of the commitment fee
charged at the inception of the loan, and any interest rate adjustments. The
term loans for operating facilities at December 31, 1998 are generally subject
to two year terms and provide for one-year extension periods with increased
interest of 50 basis points for each extension period, and a balloon payment of
the outstanding principal balance at the end of the term.
9
<PAGE>
The Company is obligated to purchase from and leaseback the five
facilities to the current borrowers under these loans upon the earlier of the
maturity of the related loan or at such time as the facilities reach average
monthly occupancy of at least 90% for three consecutive months. The purchase
price for these facilities is based upon each facility's net operating income at
the acquisition date and a formula agreed to on the original transaction
commencement date. See "Business - Transactions with Genesis." The Company may
be limited in its ability to fund these purchases. See "Management's Discussion
and Analysis of Results of Operations and Financial Condition - Liquidity and
Capital Resources."
Construction Loans
The Company provides construction financing on healthcare facilities
under development. Generally, the construction loans require the Company to
purchase and lease back the facility underlying the loan under a long-term
operating lease when the facility achieves stabilized occupancy. The rates on
the outstanding balances of the Company's construction financings generally
range from 350 to 400 basis points over the three-year Treasury rates in effect
at the time the loan is executed. The construction financing period commences
upon initial funding and terminates upon the earlier of the term of the
construction loan, generally two to three years, or achievement of average
monthly occupancy of at least 90% for three consecutive months, which generally
occurs within 12 to 18 months after completion of the development project.
During the term of the construction financing, funds are advanced pursuant to
draw requests made by the operator in accordance with the terms and conditions
of the applicable financing agreement. These terms may require, among other
things, a site visit by a Company representative prior to the advancement of
funds. Monthly interest payments are made on the total amount of the proceeds
advanced during the development period. During the construction financing
period, the Company generally requires additional security and collateral in the
form of either payment and performance bonds and/or completion guarantees by
either one, or a combination of, the operator's general contractor or parent
entity, other affiliates of the operator, or one or more of the individual
principals of the operator.
At December 31, 1998, the Company had four outstanding construction
loans aggregating $20.4 million. The interest rate on the Company's investments
in construction loans ranges from 9% to 15% per annum on the outstanding
balances.
At December 31, 1998, the Company was committed to providing additional
construction funding of approximately $6.1 million on the four ongoing projects
for which it had outstanding construction loans. The Company was also committed
to providing funding of approximately $1.6 million to a lessee of one of the
Company's properties for renovations to the facility. The following is a
rollforward of the Company's construction loan commitments during 1998:
10
<PAGE>
<TABLE>
<CAPTION>
Development Ongoing
Projects Projects
--------------- -----------
(in thousands)
<S> <C> <C>
Construction loan commitments, January 30, 1998 $44,700 $27,798
Commitments entered into during 1998 - 1,700
Commitments funded during 1998 - (21,791)
Commitments which expired during 1998 (44,700) -
--------------- -----------
Construction loan commitments, December 31, 1998 (a) - $ 7,707
=============== ===========
</TABLE>
(a) This amount is expected to be funded during 1999.
The construction loan commitments outstanding for development projects
related to providing financing for nine assisted living projects which were in
the planning stage, which included $37.3 million in commitments to Genesis or
Genesis Equity Investees. These construction loan commitments expired during
1998. The Company expects to fund its construction loan commitments during 1999
with cash flow from operations and funds available under the Credit Facility.
See "Management's Discussion and Analysis of Results of Operations and Financial
Condition - Liquidity and Capital Resources."
The Company has the obligation to purchase from and leaseback to
Genesis or Genesis Equity Investees, under tenant or management agreements, two
of the four facilities underlying its construction loans, upon the earlier of
the maturity of the related construction loan or at such time as the facilities
achieve average monthly occupancy of at least 90% for three consecutive months.
The purchase price for these facilities is based upon each facility's net
operating income at the acquisition date and a formula agreed to on the original
transaction commencement date. See "Business - Transactions with Genesis." The
Company also has the option to purchase and leaseback one of the two remaining
facilities from an unaffiliated company for $13.0 million upon the earlier of
the maturity of the related construction loan or at such time as the facility
achieves average monthly occupancy of at least 90% for three consecutive months.
The Company may be limited in its ability to fund these purchases. See
"Management's Discussion and Analysis of Results of Operations and Financial
Condition - Liquidity and Capital Resources."
Investments in the Company's Equity Investees
The Company has several investments in entities in which the
controlling interest is owned by Mr. Edward B. Romanov, Jr., the Company's
President and Chief Executive Officer. As a result, the Company records its
investments in and results of operations from these entities using the equity
method of accounting in its consolidated financial statements included in this
Form 10-K.
11
<PAGE>
ET Capital Corp.
The Company has a nonvoting 95% equity interest in an unconsolidated
entity, ET Capital Corp. ("ET Capital"). The remaining voting 5% equity interest
in ET Capital is owned by Mr. Romanov. As of December 31, 1998, ET Capital owned
a $7.8 million second mortgage note with AGE Institute of Florida, which it
acquired from Genesis. This note is secured by a second lien on 11 Florida
skilled nursing facilities owned by AGE Institute of Florida and a second lien
on accounts receivable and other working capital assets. This note matures on
September 30, 2008 with payments of interest only, at a fixed annual rate of 13%
due quarterly until the note is paid in full.
The Company recorded income of $156,000 related to the portion of its
equity interest in ET Capital's results of operations for the year ended
December 31, 1998. ET Capital has notes receivable of $12.5 million and
long-term debt of $9.7 million payable to the Company at December 31, 1998. See
Note 6 to the Company's consolidated financial statements included in this Form
10-K.
ET Capital has notes receivable aggregating $4.7 million at December
31, 1998 from two of the Company's Equity Investees and one of the Company's
consolidated subsidiaries. These loans mature in December 2001 and bear interest
at 12% per annum with interest and principal payable monthly. ET Capital's
long-term debt includes two demand promissory notes payable to the Company
aggregating $5.9 million at December 31, 1998 in connection with the above
second mortgage note transaction. These notes bear interest at a weighted
average rate of 12.1% per annum with interest only payable quarterly. In
addition, ET Capital has loans payable to the Company aggregating $3.8 million,
bearing interest at 15% and maturing at various dates from April 2008 to
December 2011.
ET Sub-Meridian Limited Partnership, L.P.
During September 1998, the Company acquired a 99% limited partnership
interest in ET Sub-Meridian Limited Partnership, L.P. ("ET Sub-Meridian"). The
1% general partner interest is owned by a limited liability company of which Mr.
Romanov is the sole member. ET Sub-Meridian was formed to acquire the leasehold
and purchase option rights to seven skilled nursing facilities located in
Maryland and New Jersey from a wholly owned subsidiary of Genesis for $35.5
million in cash and issuance of $8.5 million in term loans. See "Business -
Transactions with Genesis." The owners of the skilled nursing facilities
provided $17.7 million of financing to ET Sub-Meridian in connection with this
transaction. These promissory notes bear interest at 7.06% annually, with
principal and interest payable monthly through September 1, 2008.
The Company recorded a loss of $752,000 related to the portion of its
equity interest in ET Sub-Meridian's results of operations for the year ended
December 31, 1998. ET Sub-Meridian has real estate investments and long-term
debt of $110.0 million and $107.4 million, respectively, at December 31, 1998.
See Note 6 to the Company's consolidated financial statements included in this
Form 10-K. At December 31, 1998, ET Sub-Meridian had a $17.6 million
subordinated demand loan payable to the Company, bearing interest at 12% per
annum in connection with the above transaction.
12
<PAGE>
ET Sub-Heritage Andover, LLC
ET Sub-Vernon Court, LLC
ET Sub-Cabot Park, LLC
ET Sub-Cleveland Circle, LLC
During December 1998, the Company, through four newly-created limited
liability companies (ET Sub-Heritage Andover, LLC, ET Sub-Vernon Court, LLC, ET
Sub-Cabot Park, LLC, and ET Sub-Cleveland Circle, LLC), acquired member
interests in three assisted living facilities and one independent living
facility from National Development of New England, an unaffiliated third party
for $23.6 million in cash, assumption of $37.8 million in indebtedness and
issuance of $3.0 million in term loans, which mature June 30, 1999. A Genesis
Equity Investee leases each of the facilities.
As part of the purchase price paid by the limited liability companies
for the four facilities, the Company and Mr. Romanov made capital contributions
to the limited liability companies totaling $1.7 million and $8,600,
respectively. The Company also made $15.4 million of subordinated demand loans,
bearing interest at 12% per annum, to the limited liability companies. In
addition, the Company and Mr. Romanov contributed capital of $900,000 and
$47,000, respectively, and the Company made additional loans aggregating $3.8
million to ET Capital, bearing interest at 15%. ET Capital made loans
aggregating $4.7 million to three of the limited liability companies. The
Company also has an option to acquire Mr. Romanov's interest in ET Sub-Vernon
Court, LLC. The option exercise price is equal to Mr. Romanov's investment of
$3,200 and expires on November 30, 1999. As part of this transaction, the
Company assigned its right to acquire a fifth facility to the Genesis Equity
Investee and advanced to this entity $300,000 to pay a management termination
fee due to the prior manager of the facilities.
The Company is the sole member of ET Sub-Heritage Andover, LLC, which,
accordingly, is consolidated into the Company's consolidated financial
statements at December 31, 1998. In each of the remaining three limited
liability companies, the Company has a 99% member interest and a limited
liability company of which Mr. Romanov is the sole member has a 1% managing
member interest. As the Company has the ability to acquire Mr. Romanov's 1%
managing interest in ET Sub-Vernon Court, LLC, this company is consolidated into
the Company's consolidated financial statements at December 31, 1998.
The Company recorded aggregate losses of $52,000 related to the portion
of its equity interest in ET-Sub-Cabot Park, LLC and ET Sub-Cleveland Circle,
LLC's results of operations for the year ended December 31, 1998. These two
entities have real estate investments and aggregate long-term debt of $32.3
million and $31.2 million, respectively, at December 31, 1998. See Note 6 to the
Company's consolidated financial statements included in this Form 10-K.
13
<PAGE>
Right of First Refusal Agreement
The Company and Genesis have entered into a three year agreement which
expires January 30, 2001, subject to annual renewals thereafter. The agreement
provides Genesis with a right of first refusal to lease or manage any assisted
living, independent living or skilled nursing facility financed or acquired by
the Company within Genesis' markets unless the facility will be leased or
managed by the seller or an affiliate of the seller.
The agreement also provides the Company with the following:
o a right of first refusal to purchase and leaseback any assisted
living, independent living or skilled nursing facilities which
Genesis determines to sell and leaseback as part of a sale/leaseback
transaction or transactions, excluding sale/leaseback transactions
with commercial banking institutions;
o a right to offer financing to Genesis and other developers of
assisted and independent living facilities which, once developed,
will be operated by Genesis; and
o a right to offer financing to Genesis with respect to any new
off-balance sheet financing of skilled nursing facilities currently
owned by Genesis.
The Company believes that its agreement with Genesis will provide it
with opportunities to acquire and finance the development of additional assisted
living, independent living and skilled nursing facilities within the Genesis
ElderCareTM Networks. See Business - Transactions with Genesis" and "Business -
Risk Factors."
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
attempting to maximize total return to shareholders. The Company's business and
growth strategies to achieve this are:
o to invest in a portfolio of healthcare-related properties and
mortgages that are;
> operated or managed by established operators, and;
> located in close proximity to complementary healthcare services and
facilities;
o to pursue new investment opportunities through traditional and/or
innovative financing techniques; and
o to provide shareholders the opportunity for increased annual
distributions funded by income from new investments or annual
increases in rental and interest income from existing assets.
14
<PAGE>
The Company believes its strategy of investing in facilities that are
managed by established operators, such as Genesis, and that are located near
other complementary healthcare services and facilities will result in a
marketing advantage for operators of its facilities, which may result in higher
occupancy rates and revenues. Substantially all of the Company's senior living
centers 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 managed skilled nursing facility located near the assisted living
facility. In addition, complementary healthcare providers, such as Genesis, will
be available to provide ancillary services (such as pharmacy, physical therapy,
nursing and physician services) needed from time to time by residents of the
facilities leased to or managed by Genesis. The Company is in the process of
reviewing a strategy to diversify its investment portfolio by operator,
geography, type of healthcare facilities and form of financing to reduce its
exposure to Genesis. See "Business - Risk Factors."
The Company anticipates future internal and external growth will result
from the following:
Internal Growth from Operating Leases. Management anticipates future
internal growth from operating leases will result from:
o potentially higher occupancy and associated increased rental income
from facilities;
o future price increases to facility residents and resulting increases
in rental income payable under the Company's percentage and minimum
rent leases; and
o adjustments to rents under some of the Company's fixed rent leases.
Growth from Draws Under Construction Loans and Facility Purchase
Contracts and Options. The Company anticipates future growth from construction
loans and commitments and facility purchase contracts and options will result
from:
o increasing draws under construction loans; and
o the purchase and leaseback, pursuant to purchase contracts, of
certain senior housing center development projects upon the earlier
of the maturity of the related construction loan or at such time as
the facility reaches average monthly occupancy of at least 90% for
three consecutive months.
15
<PAGE>
External Growth. The Company's external growth strategy is to become a
significant source of healthcare industry capital. During 1998, the Company
focused on the acquisition of equity interests in and mortgages secured by
assisted living, independent living and skilled nursing facilities, and, to a
lesser extent, medical office and other buildings, located in the eastern United
States. The Company may also make investments in other types of healthcare
facilities and in other geographic regions in the future. 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. A portion of such investments may involve
Genesis as lessee or manager. See "Business - Risk Factors."
The Company's ability to grow through increases in rental income,
construction financings and acquisition of equity interests in and mortgages
secured by healthcare facilities, is subject to various factors including
occupancy and gross revenue trends of its lessees and borrowers and availability
of capital for expansion. The Company's lessees and borrowers may experience
decreases in their occupancy rates or gross revenues in connection with
healthcare reform and reductions in reimbursement for their products or
services. See "Business - Reimbursement" and "Business - Risk Factors."
The Company expects to fund its construction loan commitments during
1999 with cash flow from operations and funds available under the Credit
Facility. However, the Company may be limited in its ability to fund its
obligations under purchase contracts. If the Company is unable to raise
additional capital through equity financing, or is unable to increase its
borrowing capacity, the Company may be limited in its ability to fully
implement its growth strategy. Additionally, if the Company is unable to obtain
replacement financing by January 1, 2000, or is unable to negotiate a further
extension to its current credit facility at that time, Deutsche Bank could
exercise its right to foreclose on the collateral securing the Credit Facility,
which would have a significant adverse affect on the Company's ability to
continue its operations and meet its obligations, including payment of quarterly
shareholder distributions. See "Business - Risk Factors" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources."
The board of trustees may change the Company's business and growth
strategy at any time without a vote of shareholders. There can be no assurance
that the Company's growth objectives will be realized. See "Business - Risk
Factors."
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 of
the Company 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 sufficient cash flow to cover expected debt
service. See "Business - Risk Factors" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Liquidity and Capital
Resources."
16
<PAGE>
Transactions with Genesis
The Company and its Equity Investees had the following transactions
during 1998 with Genesis and its Equity Investees:
<TABLE>
<CAPTION>
Genesis (1) Genesis Equity Investees (2)
------------------------------- --------------------------------
Number of Investment Number of Investment
Properties(3) Amount(3) Properties(3) Amount(3)
-------------- ------------- -------------- --------------
(dollars in thousands)
<S> <C> <C> <C> <C>
ElderTrust 14 $ 89,552 10 $98,145
ElderTrust Equity Investees (4) 7 110,024 2 32,316
</TABLE>
(1) Represents Genesis and its consolidated subsidiaries.
(2) Represents entities in which Genesis accounts for its investment using the
equity method of accounting.
(3) Represents investments in or loans on real estate properties owned by the
Company or entities in which it accounts for its investment using the
equity method of accounting.
(4) Represents entities in which the Company accounts for its investment using
the equity method of accounting.
Below is a description of the transactions which comprised the
information in the above table.
Transactions between the Company and Genesis
Upon consummation of the Offering on January 30, 1998, the Company paid
approximately $80.7 million in cash and assumed $31.4 million of indebtedness
for thirteen properties or interests therein acquired directly from Genesis.
Additionally, during March 1998, the Company also acquired an additional
property from Genesis for approximately $3.0 million in cash and assumption of
$2.7 million in indebtedness. These properties were leased back to Genesis under
percentage and minimum rent leases, each for an initial ten-year period with two
five-year renewals.
During 1998, the Company received lease payments of $6.9 million from
Genesis. The Company also received $2.9 million for the first month's rent,
security deposits and closing costs in connection with these leased properties.
As a result of the assumption of indebtedness by the Company on two of the
properties acquired by it, Genesis was released from guarantees totaling
approximately $3.2 million.
17
<PAGE>
Upon consummation of the Offering, the Company also made payments to or
purchased from Genesis its ownership interests in two term loans, two
construction loans and a first mortgage loan aggregating $9.7 million, $3.5
million and $800,000, respectively. The term and construction loans have
maturities of between two and three years, subject to extension by the borrower
for up to three successive one-year terms, with a weighted average interest rate
of 9.4%. The first mortgage loan, which was not with Genesis, matured in
December 1998. In 1998 the Company recorded interest income on term and
construction loans of $935,000 from Genesis. The Company has agreed to purchase
three facilities underlying the related loans with Genesis upon the earlier of
the maturity of the loan or at such time as each applicable facility reaches
average monthly occupancy of at least 90% for three consecutive months. The
purchase price for these facilities is based upon each facility's net operating
income at the acquisition date and a formula agreed to on the original
transaction commencement date. The Company may be limited in its ability to fund
these purchases. See "Business - Risk Factors" and "Management's Discussion and
Analysis of Results of Operations and Financial Condition - Liquidity and
Capital Resources."
The Company entered into a right of first refusal agreement with
Genesis, whereby the Company was granted a right of first refusal to purchase
and leaseback to Genesis any assisted living, independent living or skilled
nursing facility which Genesis determines to sell and leaseback. See "Business -
Investments - Right of First Refusal Agreement."
The Company paid Genesis approximately $3.0 million in cash as
reimbursement for expenses incurred by Genesis on behalf of the Company in
connection with its formation. This amount included start-up and Offering
expenses. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Results of Operations."
Genesis has guaranteed the leases for 10 properties which are leased by
wholly-owned subsidiaries of Genesis. In the event Genesis assigns one or more
of the leases to a non-wholly owned subsidiary or a third party, Genesis will no
longer guarantee the applicable lease. Any such assignment would require the
consent of the Company which may not be unreasonably withheld. See "Business -
Risk Fators."
During 1998, the Company incurred approximately $730,000 of expenses in
connection with property due diligence for a proposed $250 million real estate
mortgage investment conduit transaction that was to be secured by skilled
nursing facilities owned by Genesis. The Company was not able to complete the
transaction because of adverse conditions in the capital markets. Genesis
reimbursed the Company for $165,000 of these expenses through December 31, 1998.
18
<PAGE>
Transactions between the Company and Genesis Equity Investees
Upon consummation of the Offering, the Company paid approximately $15.9
million in cash for two term loans and one construction loan to Genesis Equity
Investees. The Company recorded interest income on these loans of $2.2 million
in 1998. The Company has agreed to purchase the facilities underlying these
loans upon the earlier of the maturity of the loan or at such time as each
applicable facility reaches average monthly occupancy of at least 90% for three
consecutive months. The purchase price for these facilities is based upon each
facility's net operating income at the acquisition date and a formula agreed to
on the original transaction commencement date. The Company may be limited in its
ability to fund these purchases. See "Management's Discussion and Analysis of
Results of Operations and Financial Condition - Liquidity and Capital
Resources."
The Company received lease payments of $4.0 million in 1998 from
Genesis Equity Investees.
Transactions between the Company's Equity Investees and Genesis
The Company's Equity Investees had certain transactions with Genesis
during 1998. As the Company does not exercise voting control of its Equity
Investees, the Company records its investments in and results of operations from
these entities using the equity method of accounting. As a result, these
entities and their transactions with Genesis are not consolidated into the
Company's consolidated financial statements included in this Form 10-K. See
"Business - Investments - Transactions with the Company's Equity Investees."
During 1998, ET Capital, acquired from Genesis a $7.8 million second
mortgage note with an unaffiliated third party.
During September 1998, ET Sub-Meridian acquired the leasehold and
purchase option rights to seven skilled nursing facilities located in Maryland
and New Jersey from a wholly-owned subsidiary of Genesis. ET Sub-Meridian paid
the Genesis subsidiary $35.5 million in cash and $8.5 million in the form of a
five-year promissory note for these rights. The Company guaranteed the $8.5
million promissory note of ET-Sub Meridian payable to the Genesis subsidiary
that leases the facilities. The purchase options are exercisable by ET
Sub-Meridian in September 2008 for a cash exercise price of $66.5 million. ET
Sub-Meridian subleased the facilities to the Genesis subsidiary for an initial
ten-year period with a ten-year renewal exercisable by that entity. Genesis has
guaranteed the subleases.
19
<PAGE>
As part of the ET Sub-Meridian transaction, the Company agreed to
indemnify the property owners for any loss of deferral of tax benefits prior to
August 31, 2008 due to a default under a sublease or if a cure to a default by
the Genesis subsidiary leasing the facilities resulted in a taxable event to the
owners. The Company also agreed to indemnify Genesis against any amounts
expended by Genesis under a back-up indemnity provided by Genesis to the current
owners against any such loss of deferral to tax benefits or default resulting in
a taxable event to the owners.
Transactions between the Company, its Equity Investees and Genesis
Equity Investees
During December 1998, the Company, through four newly-created limited
liability companies, acquired direct and indirect interests in three assisted
living facilities and one independent living facility from an unaffiliated third
party. A Genesis Equity Investee leases each of the facilities. See "Business -
Investments - Transactions with the Company's Equity Investees." As part of this
transaction, the Company assigned its right to acquire a fifth facility to this
Genesis Equity Investee and advanced to Genesis $300,000 to pay a management
termination fee to the prior manager of the facilities.
Reimbursement
Health Care Reform
The healthcare industry is subject to extensive federal, state and
local regulation. The Company is affected by government regulation of the
healthcare industry in that the Company receives rent and debt payments from
lessees and borrowers and the Company's additional rents are generally based on
its lessees' gross revenue from operations. The underlying value of certain of
the Company's facilities depends on the revenue and profit that a facility is
able to generate. Aggressive efforts by health insurers and governmental
agencies to limit the cost of healthcare services and to reduce utilization of
hospital and other healthcare facilities may reduce future revenues or slow
revenue growth from these healthcare facilities and shift or reduce utilization.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Forward Outlook and Risks."
In recent years, a number of laws have been enacted that have effected
major changes in the healthcare system, both nationally and at the state level.
The Balanced Budget Act of 1997 (the "Balanced Budget Act"), signed into law on
August 5, 1997, seeks to achieve a balanced federal budget by, among other
things, reducing federal spending on the Medicare and Medicaid programs. The
Company anticipates that Congress and state legislatures will continue to review
and assess alternative healthcare delivery and payment systems and will continue
to propose and adopt legislation effecting fundamental changes in these systems.
Changes in the applicable laws or new interpretations of existing laws may have
a dramatic effect on the definition of permissible or impermissible activities,
the relative cost of doing business, and the methods and amounts of payments for
medical care by both governmental and other payors, any of which could
materially adversely impact the Company's lessees and borrowers.
20
<PAGE>
Medicare and Medicaid Reimbursement
Certain of the Company's lessees and borrowers, particularly those who
operate skilled nursing facilities, are reimbursed by the Medicare and Medicaid
programs for their products and services. Legislative and regulatory action has
resulted in continuing changes in the Medicare and Medicaid reimbursement
programs which may adversely impact certain of the Company's lessees and
borrowers. Therefore, the Company's revenues may be indirectly affected by
changes in these programs. The changes have limited, and are expected to
continue to limit, payment increases under these programs. Also, the Company's
lessees and borrowers may experience increases in time periods between
submission of Medicare and Medicaid program claims and receipt of payments due
to increased regulatory action and governmental budgetary constraints. Since
Medicaid programs are funded by both the states and the federal government, the
amount of payments can be affected by changes at either the state or federal
level. There is no assurance that payments under these programs will remain at
levels comparable to present levels or be sufficient to cover costs allocable to
these patients. Both Medicare and Medicaid payments are generally below retail
rates for Lessee-operated facilities. Increasingly, states have introduced
managed care contracting techniques in the administration of Medicaid programs.
Such mechanisms could have the impact of reducing utilization of and
reimbursement to the Company's lessees or borrowers. See "Business - Risk
Factors."
Impact of Balanced Budget Act
The Balanced Budget Act mandated establishment of a prospective payment
system ("PPS") for Medicare skilled nursing facilities under which such
facilities will be paid a federal per diem rate for most covered nursing
facility services. Pursuant to the Balanced Budget Act, PPS began to be phased
in for skilled nursing facilities commencing with cost reporting periods
beginning on or after July 1, 1998. Under PPS, reimbursement rates initially
will be based on a blend of a facility's historic reimbursement rate and a newly
prescribed federal per diem rate. In subsequent periods, and for facilities
first receiving payments for Medicare services on or after October 1, 1995, the
federal per diem rate will be used without regard to historic reimbursement
levels.
At the state level, the Balanced Budget Act also repealed rules which
required Medicaid payments to nursing facilities to be "reasonable and adequate"
to cover the costs of efficiently and economically operated facilities. Under
the Balanced Budget Act, states must now use a public notice and comment process
for determining Medicaid rates, rate methodology and justifications.
21
<PAGE>
It is unclear the impact the Balanced Budget Act will have on the
Company's lessees and borrowers abilities to make lease and debt payments to the
Company. The Company does not employ Medicaid and Medicare reimbursement
specialists and must rely on its lessees and borrowers to monitor and comply
with all reporting requirements and to insure appropriate payments are being
received. In February 1999, Genesis reported the estimated adverse impact of PPS
on its revenues in its Form 10-Q for the three months ended December 31, 1998.
However, in connection with the Company's review of the properties leased to
Genesis or Genesis Equity Investees, management notes:
o Of the 31 properties the Company owns or that are owned by its Equity
Investees, 15 are skilled nursing facilities impacted by PPS and
which are subject to fixed rent leases. No facilities impacted by PPS
are subject to percentage rent leases.
o An aggregate review of the skilled nursing facilities' operations did
not indicate a significant impact on the properties' lease coverage
ratios. Management of the Company will continue to monitor the
performance of these properties as PPS is fully implemented.
o The Company's lease base has approximately nine years before it comes
up for renewal. As a result, no leases subject to PPS are
contractually due for renegotiation in the near term.
o In addition to skilled nursing facilities, the Company also leases
assisted living facilities and medical office buildings. These
properties are not directly impacted by PPS or other items in the
Genesis announcement.
As a result, while it appears that PPS may have a negative impact on
the skilled nursing industry, including Genesis, management does not believe it
will have a material adverse impact on the Company's cash flows, results of
operations or financial condition. However, there can be no assurances that the
Company's lessees or borrowers will not be further negatively impacted by the
provisions or interpretations of the Balanced Budget Act, including PPS, or by
future changes in regulations or interpretations of such regulations. See
"Business - Government Regulation" and "Business - Risk Factors."
Government Regulation
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, 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
22
<PAGE>
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 laws also impose 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 or borrowers of the
Company's skilled nursing facilities or the provision of services and supplies
by such lessees will meet or continue to meet the requirements for participation
in the Medicaid or Medicare programs or state regulatory 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 programs 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. 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 began 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
that will provide reimbursement for capital-related costs through the facility's
per diem rates for resident care without regard to the facility's actual capital
costs. The Pennsylvania Medicaid program also limits capital cost reimbursement,
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. There can
be no assurance that reimbursement of the costs of the Company's skilled nursing
facilities under current or future reimbursement methodologies will be adequate
to cover the rental payments owed to the Company by the lessees of these
properties.
23
<PAGE>
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 or expanded or before it can reduce its resident capacity
or make other significant capital expenditures. Some of the Company's 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, 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 Federal Healthcare Programs
anti-kickback laws, 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 Federal Healthcare Program patients (including Medicare and Medicaid) 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
potential for issues to arise under this law may be increased under a provision
of the Balanced Budget Act which, as currently implemented, requires skilled
nursing facilities to purchase and bill for services of ancillary care providers
treating some of their Medicare residents.
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. 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 borrowers.
24
<PAGE>
Taxation
General
A corporation, trust or association meeting certain requirements may
elect to be treated as a REIT for federal income tax purposes. Commencing with
its taxable year ended December 31, 1998, and in all subsequent years, the
Company expects to qualify as a REIT under Sections 856 to 860, inclusive, of
the Tax Code. To qualify as a REIT, the Company must satisfy a variety of
complex organizational and operating requirements each year, including stock
ownership tests and percentage tests relating to the sources of its gross
income, the nature of its assets and the distribution of its income. The Company
intends to operate in such manner as to qualify as a REIT for federal income tax
purposes, but no assurance can be given that the Company will continue to
operate in such a manner so as to qualify or remain qualified as a REIT.
Generally, for each taxable year during which the Company qualifies as
a REIT, it will not be taxed on the portion of its taxable income (including
capital gains) that is distributed 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 discussed below.
To qualify as a REIT, the Company must distribute at least the sum of
(a) 95% of its REIT ordinary income for such year, (b) 95% of its REIT capital
gain net income for such year and (c) any undistributed taxable income from
prior periods. To the extent that the Company distributes at least 95%, but less
than 100% of its REIT taxable income, any undistributed income or gains will be
taxed to the Company at regular federal corporate tax rates. Any undistributed
net long-term capital gains that the Company elects to be taxed on will be
treated as having been distributed to the shareholders and will be included by
them in determining the amount of their capital gains. The tax paid by the
Company on those gains will be allocated among the shareholders and may be
claimed as a credit on their tax returns. The shareholders will receive an
increase in the basis of their shares in the Company equal to the difference the
capital gain income and the tax credit allocated to them. Under certain
circumstances, the Company may be subject to the "alternative minimum tax" on
its items of tax preference. The Company will be subject to tax at the highest
corporate rate on its net income from foreclosure property, regardless of the
amount of its distributions. The highest corporate tax rate is currently 35%.
25
<PAGE>
The Company may elect to treat any real property it acquires by
foreclosure as foreclosure property if certain conditions are satisfied. With a
valid election, the Company is permitted to directly own such property until the
end of the third taxable year after the year of acquisition so long as the
independent contractor (which would not include Genesis or its affiliates)
operates the property within 90 days after the property is acquired. Income from
foreclosure property is subject to tax at the maximum corporate rate, but the
income would qualify under the REIT gross income tests. Subject to certain
limitations, the Company will also be subject to an additional tax equal to 100%
of the net income, if any, derived from prohibited transactions. A prohibited
transaction is defined as a sale or disposition of inventory-type property or
property held by the Company primarily for sale to customers in the ordinary
course of its trade or business, which is not property acquired on foreclosure.
If the Company should fail to distribute during each calendar year at
least the sum of (a) 95% of its REIT ordinary income for such year, (b) 95% of
its REIT capital gain net income for such year and (c) 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.
If the Company should fail to satisfy a 75% gross income test or a 95% gross
income test, 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.
Failure To Qualify as a REIT
While the Company intends to operate so as to qualify as a real estate
investment trust under the Tax Code, if in any taxable year the Company fails to
qualify, and certain relief provisions do not apply, its taxable income would be
subject to tax (including alternative minimum tax) at corporate rates. If that
occurred, the Company might have to dispose of a significant amount of its
assets or incur a significant amount of debt in order to pay the resulting
federal income tax. Further distributions to its shareholders would not be
deductible by the Company nor would they be required to be made.
Distributions out of the Company's current or accumulated earnings and
profits would be taxable to the Company's shareholders as dividends and would be
eligible for the dividends received deduction for corporations. No portion of
any distributions would be eligible for designation as a capital gain dividend.
Further, the Company would be unable to pass through its undistributed capital
gains and the related tax paid by the Company.
26
<PAGE>
Unless entitled to relief under specific statutory provisions, the
Company also would be disqualified from taxation as a REIT for the four taxable
years following the year during which qualification was lost. The foregoing is
only a summary of some of the significant federal income tax considerations
affecting the Company and is qualified in its entirety by reference to the
applicable provisions of the Tax Code, the rules and regulations promulgated
thereunder, and the administrative and judicial interpretations thereof.
Stockholders of the Company are urged to consult their own tax advisors as to
the effects of these rules and regulations on them. In particular, foreign
shareholders should consult with their tax advisors concerning the tax
consequences of ownership of shares in the Company, including the possibility
that distributions with respect to the shares will be subject to federal income
tax withholding.
Competition
The Company competes 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 owns or that secure loans 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.
Employees
As of December 31, 1998, the Company employed seven full-time employees.
Risk Factors
Set forth below are the risks that we believe are material to investors
who purchase or own our common shares of beneficial interest or units of limited
partnership interest in the Operating Partnership, which are redeemable by the
holder on a one-for-one basis for common shares or their cash equivalent, at our
election. As used herein, all references to "we," "us" or "our" mean ElderTrust
and its consolidated subsidiaries unless the context otherwise requires.
27
<PAGE>
We must replace our existing credit facility
When we completed our initial public offering, we obtained a 364 day
secured credit facility of up to $140 million from Deutsche Bank, whereby
Deutsche Bank had an option to extend the credit facility for an additional 364
days. At December 31, 1998, we had $90.2 million of borrowings outstanding under
our credit facility, which is secured by substantially all of our assets not
otherwise pledged to other mortgagees. As a result of turmoil in the credit
markets in late summer and the fall of 1998, management of Deutsche Bank decided
to discontinue extending lines of credit to REITs and, therefore, declined to
exercise its option to extend the credit facility for an additional 364 day
period. The credit facility expired January 29, 1999. The original expiration
date of the credit facility was extended on January 29, 1999 to April 30, 1999,
and the availability under the credit facility was reduced to $100 million.
During this extension period, we notified Deutsche Bank that we were in
violation of certain restrictive covenants under the credit facility which
occurred principally as a result of our equity value (market value of
outstanding shares) being less than $70 million as of February 4, 1999. As a
result, additional borrowings were not permitted under the credit facility while
a technical default existed.
On March 31, 1999, the term of the credit facility was extended from
April 30, 1999 to January 1, 2000 through an amendment which also waived our
defaults under the credit facility and provided for available borrowings up to
an aggregate of $100.5 million. We had $95.8 million of indebtedness outstanding
under the credit facility at March 31, 1999, including the $1.0 million
extension fee in connection with this amendment. The interest rate on borrowings
outstanding under the credit facility will increase from 180 basis points over
the one-month LIBOR rate to 275 basis points effective June 1, 1999. The
weighted average interest rate on borrowings outstanding under the credit
facility at March 31, 1999 was 6.8%, including the 180 basis point adjustment.
We have entered into discussions with other potential sources to
replace the credit facility with new financing which would provide longer term
funding to support our objectives. If we are unable to raise additional capital
through equity financing, or unable to increase our borrowing capacity, we may
be limited in our ability to fully implement our growth strategy. Additionally,
if we are unable to obtain replacement financing by January 1, 2000, or unable
to negotiate a further extension to the current credit facility at that time,
Deutsche Bank could exercise its right to foreclose on the collateral securing
the credit facility, which would have a significant adverse affect on our
ability to continue our operations and meet our obligations, including payment
of quarterly shareholder distributions.
To qualify as a REIT, we must distribute at least 95% of our net
taxable income, excluding any net capital gain. If we are unable to make
required shareholder distributions, then we may be unable to qualify as a REIT
and would be subject to federal income taxes.
28
<PAGE>
Replacement financing may have significantly greater interest costs
We are currently negotiating with new lenders for financing to replace
our existing credit facility with Deutsche Bank. Based on preliminary
discussions with potential lenders, we expect to be able to replace the
borrowings under our credit facility. However, the interest rate on the new debt
may be significantly higher than the interest rate on our existing credit
facility with Deutsche Bank. Additionally, we may be required to pay significant
financing fees in the future in connection with replacement financing or
negotiating a further extension with Deutsche Bank. An increased interest rate
or significant financing fees would reduce our cash flow and affect our ability
to maintain distributions to our shareholders at previous levels. We can give no
assurance that we will be able to obtain replacement financing on acceptable
terms or at all, or that, if obtained, we will be able to maintain distributions
to our common shareholders at current levels, if at all.
Rising interest rates could adversely affect our cash flow because of
variable rate debt
At December 31, 1998, we had $90.2 million of variable rate
indebtedness outstanding under our existing credit facility, with an interest
rate of one-month LIBOR plus 180 basis points (7.36% at December 31, 1998). The
interest rate on borrowings outstanding under our credit facility is expected to
increase to 275 basis points over one-month LIBOR effective June 1, 1999. We
expect that some or all of any replacement financing of our existing credit
facility may have a variable interest rate, and we may borrow additional money
with variable interest rates in the future. The interest rate on replacement
financing may be significantly higher than the interest rates we are subject to
under the existing credit facility. We would expect significant increases in
interest rates to result in significant increases in interest expense, which
could adversely affect cash flow and our ability to meet our obligations and
make distributions to shareholders at current levels, if at all.
Our degree of leverage could limit our ability to obtain additional
financing and adversely affect our cash flow
As of December 31, 1998, our debt to book capitalization ratio, which
we calculate as total debt as a percentage of total debt plus the book equity
attributed to our outstanding common shares and outstanding partnership units,
was approximately 54.1%. We do not have a stated policy limiting the amount of
debt that we may incur. If we increase our leverage it could pose risks to our
shareholders, including that:
o our debt service may increase, which could adversely affect our cash
flow and, consequently, the amount available for distribution to our
shareholders;
o the risk that we will default on our indebtedness may increase;
o we may be unable to obtain additional financing in the future to fund
working capital, capital expenditures, acquisitions, development or
other general corporate purposes, or our ability to obtain such
financing on satisfactory terms may be impaired; and we may be more
vulnerable to a downturn in our business or the economy generally.
29
<PAGE>
Additionally, we may not have sufficient cash flow to repay
indebtedness outstanding if our creditors require immediate repayment of these
amounts or if the collateral underlying these amounts is insufficient to cover
the outstanding balances.
Our ability to grow may be significantly limited until the capital and
credit markets improve
During 1998, the stock prices of publicly traded equity real estate
investment trusts fell on average by 17.5%, according to industry data published
by the National Association of Real Estate Investment Trusts ("NAREIT"). The
stock prices of publicly traded healthcare equity real estate investment trusts
fell on average by 17.45% according to NAREIT and our stock price fell by 36.1%
during this period. This share price decline, combined with the reduction in
Medicare reimbursement levels during and after 1998, also has resulted in a
significant curtailment of banks' willingness to extend loans secured by
healthcare-related real estate, and has raised concerns about the ability of
some less well capitalized nursing home operators to continue their operations.
All of these factors have adversely affected our ability to access the capital
and credit markets. Because we rely on these markets to fund our growth, our
ability to grow may be significantly limited until such time as the capital and
credit markets improve.
We depend upon external sources of capital
To qualify as a REIT, we must distribute to our shareholders each year
at least 95% of our net taxable income, excluding any net capital gain. Because
of these distribution requirements, it is not likely that we will be able to
fund all future capital needs, including those for acquisitions, from income
from operations. We, therefore, rely on third-party sources of capital which may
or may not be available on favorable terms or at all. Our access to third-party
sources of capital depends on a number of things, including the market's
perception of our growth potential and our current and potential future
earnings. Moreover, additional equity offerings may result in substantial
dilution of security holders' interests, and additional debt financing may
substantially increase our leverage.
We rely to a substantial degree upon contractural obligations in the
form of leases and loans with subsidiaries of Genesis and other
entities in which Genesis has an equity ownership interest as our
majority source of revenues and for our ability to meet our corporate
obligations
Approximately 70% of our consolidated assets at December 31, 1998
consisted of real estate properties leased to and loans on real estate
properties made to Genesis or entities in which Genesis has an equity ownership
interest, under agreements as manager, tenant or borrower. We recorded revenues
in connection with these leases and borrowings aggregating $14.0 million in
1998. In addition, we have investments in unconsolidated entities which have
also leased properties or provided mortgages on properties to Genesis or
entities in which Genesis has an equity ownership interest. As a result of these
relationships, the Company's revenues and ability to meet its obligations
depends, in significant part, upon:
30
<PAGE>
o the ability of Genesis and other entities in which Genesis has an
equity ownership interest to meet their lease and loan obligations;
o the revenues derived from, and the successful operation of, the
facilities leased to or managed by Genesis or other entities in which
Genesis has an equity ownership interest; and
o the ability of these entities to complete successfully and on
schedule the development projects securing construction loans made by
the Company to them.
We have no control over Genesis or any of its subsidiaries or entities
in which Genesis has an equity ownership interest and can make no assurance that
any of these entities will have sufficient income or assets to enable them to
satisfy their obligations under the leases or loans we have made to them.
However, we have not experienced any operating issues to date with these
entities.
Genesis is not obligated to guarantee leases of its wholly-owned
subsidiaries if Genesis assigns one or more of these leases to a
non-wholly-owned subsidiary or to a third party
Genesis currently guarantees the lease obligations of its wholly-owned
subsidiaries. Under these leases, any assignment of these leases would require
our consent, which we may not unreasonably withhold. If Genesis assigns one or
more of the leases to a non-wholly owned subsidiary or a third party, Genesis
would no longer be obligated to guarantee the applicable leases. While we would
evaluate the creditworthiness of any assignee in determining whether to provide
our consent, any transferee could be less creditworthy than Genesis.
Genesis' right of first refusal to lease acquired facilities not
operated by the seller may discourage third parties from entering into
transactions with us and result in less favorable lease terms to us
At the time of our initial public offering, we entered into the right
of first refusal agreement with Genesis. Under the right of first refusal
agreement, for three years from January 30, 1998, subject to annual renewals
thereafter:
o Genesis has a right of first refusal to lease or manage any assisted
living, independent living or skilled nursing facility we finance or
acquire within Genesis' markets unless the facility will be leased or
managed by the seller or an affiliate of the seller.
31
<PAGE>
o We have:
o a right of first refusal to purchase and leaseback to Genesis any
assisted living, independent living or skilled nursing facilities
which Genesis determines to sell and leaseback, other than
sale/leaseback transactions with commercial banking institutions;
o a right to offer financing to Genesis and other developers of
assisted and independent living facilities which, once developed,
will be operated by Genesis; and
o a right to offer financing to Genesis with respect to any new
off-balance sheet financing of skilled nursing facilities owned by
Genesis as of January 30, 1998.
Genesis' right of first refusal to lease or manage facilities financed
or acquired by us in the future could discourage third parties who compete with
Genesis and did not wish to lease or manage the property following its sale to
us, from entering into transactions with us. Genesis' right of first refusal
also could result in lease terms with Genesis that are less favorable to us than
we could achieve with a third party had the right of first refusal agreement not
been entered into. Further, there can be no assurance that Genesis will decide
to sell and leaseback to us any additional facilities, engage in any new
off-balance sheet financing of skilled nursing facilities owned by it as of
January 30, 1998 or develop any additional facilities for which we would be able
to offer financing to Genesis under the right of first refusal agreement.
Additionally, under our lease agreements with subsidiaries of Genesis,
Genesis has a right of first refusal on offers we receive to purchase or lease
any facility subject to a percentage rent lease or a minimum rent lease with
subsidiaries of Genesis during the term of the lease, including extensions, and
for one year thereafter. The existence of this right of first refusal may
discourage third parties from offering to purchase or lease any of these
facilities.
We experience ongoing competition from and conflicts with Genesis
Our facilities, whether or not operated by Genesis, compete with
facilities owned and operated by Genesis in some markets. As a result, Genesis
has a conflict of interest due to its ownership of competing facilities and its
operation and management of a substantial portion of the facilities we own.
Because the percentage rent leases with Genesis provide for lower operating
margins for Genesis than minimum rent leases with Genesis, 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.
32
<PAGE>
Because Michael Walker serves as chairman and chief executive officer
of Genesis and chairman of ElderTrust, he has a conflict of interest in
matters involving Genesis and ElderTrust
Michael R. Walker, ElderTrust's chairman of the board, is chairman of
the board and chief executive officer of Genesis. At December 31, 1998, Mr.
Walker beneficially owned less than 1% of the outstanding common shares of
Genesis and approximately 6.9% of the outstanding common shares of ElderTrust.
Because he serves as chairman of both Genesis and ElderTrust, Mr. Walker has a
conflict of interest with respect to ElderTrust enforcing:
o the loan, purchase and right of first refusal agreements relating to
the properties and other assets acquired by us from subsidiaries of
Genesis or entities in which its has an interest or which may be
acquired from these entities in the future; and
o the leases we entered into with Genesis.
The failure by us to enforce material terms of these agreements could
result in a monetary loss to us, which could have a material adverse effect on
our financial condition, revenues and earnings. Our ongoing relationships with
Genesis as a lessee and manager of a substantial portion of our properties may
also deter us from vigorously enforcing the terms of these agreements. However,
although Mr. Walker may have a conflict of interest with respect to ElderTrust
actions, the board of trustees governs ElderTrust's actions, not Mr. Walker
alone. Mr. Walker is the only member of ElderTrust's board of trustee's who also
serves on the board of Genesis or on the boards' of entities in which Genesis
has an interest.
Holders of units of limited partnership interest in the Operating
Partnership have different interests than shareholders and may exercise
their voting rights in the Operating Partnership in a manner that
conflicts with the interests of shareholders
As the sole general partner of the Operating Partnership, we have
fiduciary obligations to the other limited partners in the Operating
Partnership, the discharge of which may conflict with the interests of our
shareholders. In addition, those persons holding beneficial interests in units
of limited partnership interest in the Operating Partnership, including Messrs.
Walker, Romanov and D. Lee McCreary, Jr., ElderTrust's chief financial officer,
will have the right, as limited partners, to vote on amendments to the
partnership agreement of the operating partnership, most of which require
approval by a majority in interest of the limited partners, including
ElderTrust, and such individuals may exercise their voting rights in a manner
that conflicts with the interests of our shareholders.
33
<PAGE>
Additionally, if we prepay or refinance debt securing some of our
properties or sell properties, Mr. Walker and other holders of units of limited
partnership interest in the operating partnership and Mr. Kent P. Dauten,
another trustee of ElderTrust, who previously owned properties now owned by us,
may incur adverse tax consequences which are different from the tax consequences
to us and our shareholders. Consequently, persons holding directly or indirectly
units of limited partnership interest, including Messrs. Walker and Dauten, may
have different objectives regarding the appropriate timing of such actions.
While we have the exclusive authority as general partner under the partnership
agreement to determine whether, when and on what terms to prepay or refinance
debt or to sell a property, any of these actions would require the approval of
our board of trustees. As trustees of ElderTrust, Messrs. Walker and Dauten have
substantial influence with respect to any of these actions, and could exercise
their influence in a manner inconsistent with the interests of some, or a
majority, of ElderTrust's shareholders.
Our executive officers and trustees have substantial influence
As of February 28, 1999, Messrs. Walker and Romanov beneficially owned
approximately 6.9% and 9.2%, respectively, of our outstanding common shares. All
trustees and executive officers as a group beneficially owned approximately
18.1% of our outstanding common shares. Accordingly, such persons have
substantial influence on ElderTrust and matters requiring a vote of our
shareholders.
We depend on our key personnel whose continued service is not
guaranteed
We depend on the efforts of our two executive officers, Messrs. Romanov
and McCreary. The loss of their services could have a significant adverse effect
on our operations. We only have an employment agreement with Mr. Romanov. While
we believe that this agreement provides us with some protection, it does not
guarantee Mr. Romanov's continued employment.
Our board of trustees may change investment policies without
shareholder approval
Our board of trustees may change our investment, financing and other
policies without shareholder approval. Any changes in these policies may have
adverse consequences on our business and operations.
Operators of our skilled nursing facilities rely on government and
other third party reimbursement to make lease and loan payments to us
A significant portion of the revenues derived from the eight skilled
nursing facilities owned by us is attributable to government reimbursement under
Medicare and Medicaid operators.
34
<PAGE>
The Medicare programs is a federally funded and administered health
insurance program that consists of Parts A and B. Participation in Part B is
voluntary and is funded in part through the payment of premiums. Subject to
certain limitations, benefits under Part A include inpatient hospital services,
skilled nursing in an eldercare center and medical services such as physical,
speech and occupational therapy, certain pharmaceuticals and medical supplies.
Part B provides coverage for physician services. Part B also reimburses for
medical services with the exception of pharmaceutical services. Medicare
benefits are not available for intermediate and custodial levels of care;
however, medical and physician services furnished to such patients may be
reimbursable under Part B.
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. Special rules apply under Medicare
and Medicaid for services purchased from an organization related by ownership or
control. 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.
During 1998, Medicare reimbursements payable to nursing home operators
were significantly reduced due to the implementation of a new reimbursement
methodology for nursing care, ancillary serves and capital costs which is being
phased-in over a four year period. Medicare now reimburses nursing home
operators at a flat per diem rate. In the past, a cost-based system of
reimbursement was used. This change in the Medicare reimbursement methodology
adversely affected the revenues of many nursing homes. Assisted living services
currently are not generally reimbursable under government reimbursement
programs, such as Medicare and Medicaid.
Although lease and loan payments to us 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 derived from the skilled nursing
facilities owned by us or that secure mortgages and loans to us these changes
could have a material adverse impact on the ability of the lessees or borrowers
of the skilled nursing facilities that we own or receive debt payments from to
make lease and loan payments to us. 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. We can make no assurance that future actions by governmental
or other third party payors 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. If reimbursement
levels do not cover lease or loan payments, the possibility exists that one or
more of our lessees or borrowers could default on their leases or loans to us.
35
<PAGE>
Healthcare industry regulation may adversely affect the operations of
our lessees and borrowers and their ability to make loan and lease
payments to us
Any failure by our lessees or borrowers to comply with applicable
government regulations could adversely affect their ability to make lease or
loan payments to us. The long-term care segment of the healthcare industry is
highly regulated. Operators of skilled nursing facilities are subject to
regulation under various federal, state and local laws, including those relating
to:
o delivery and adequacy of medical care;
o distribution of pharmaceuticals;
o equipment utilized in their facilities;
o personnel;
o operating policies;
o fire prevention;
o rate-setting;
o compliance with building and safety codes;
o compliance with environmental laws;
o periodic inspection by governmental and other authorities to ensure
compliance with various standards;
o licensing of facilities under state law;
o certification for participation under the federal healthcare program,
including Medicare and Medicaid; and
o ability to participate in other third party payment programs.
In addition, many states have adopted certificate of need or similar
laws which generally require that the appropriate state agency approve
acquisitions of skilled nursing facilities and determine that a need exists for
certain bed additions, new services, capital expenditures or other changes.
The failure to obtain or maintain any required regulatory approvals or
licenses could prevent an operator of one or more of our facilities from
offering services or adversely affect its ability to receive reimbursement for
services. It also could result in the denial of reimbursement, temporary
suspension of admission of new patients, suspension or decertification from the
federal healthcare program, restrictions on the ability to 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 our lessees or
borrowers will meet or continue to meet the requirements for participation in
the Medicaid or Medicare programs or of state licensing authorities. Nor can
there be any assurance that regulatory authorities will not adopt changes or new
interpretations of existing regulations that would adversely affect the ability
of our lessees or borrowers to make their rental or loan payments to us.
36
<PAGE>
Although not currently regulated at the federal level, except under
laws of generally applicable to businesses, 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:
o personnel education;
o training and records;
o facility services, including administration of medication, assistance
with self-administration of medication and the provision of limited
nursing services;
o monitoring of wellness;
o physical plant inspections;
o furnishing of resident units;
o food and housekeeping services;
o emergency evacuation plans; and
o 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 significant capital expenditures. Several of our
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 our 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 our lessees or borrowers to
comply with these requirements could have a material adverse effect on their
ability to make loan or lease payments to us.
37
<PAGE>
Operators of our facilities also must comply with federal and state
anti-remuneration laws
Healthcare operators also are subject to federal and state
anti-remuneration laws and regulations, such as the federal healthcare program
anti-kickback law. These laws govern financial arrangements among healthcare
providers and others who may be in a position to refer or recommend patients to
providers. These laws prohibit the offer, payment, solicitation or receipt of
any form of remuneration in return for the referral of Medicare and Medicaid
patients or for 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
have come under closer scrutiny by the government. Further, some states restrict
certain business corporations from providing, or holding themselves out as a
provider of, medical care. Sanctions for violation of any of these laws can
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 our
lessees.
We may encounter delays in substituting lessees or operators because
the facility licenses are held by our lessees and borrowers and not by
us
A loss of license or Medicare/Medicaid certification or default by one
or more of our lessees or borrowers could result in us having to obtain another
lessee or substitute operator for the affected facility or facilities. Because
the facility licenses for our properties are held by our lessees or borrowers
and not by us and because under the REIT tax rules we would have to find a new
"unrelated" lessee to operate the properties following a default, we may
encounter delays in exercising our remedies under the leases and loans made by
us 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 or a
default by the operator of one or more of our facilities. We can make no
assurance that we could contract with a new lessee or successor operator on a
timely basis or on acceptable terms and our failure do so could have a material
adverse effect on our financial condition, revenues, earnings and ability to
make distributions to our shareholders.
38
<PAGE>
Transfers of healthcare facilities require regulatory approvals and
alternative uses of healthcare facilities are limited
Because transfers of operations of healthcare facilities are subject to
regulatory approvals not required for transfers of other types of commercial
operations and other types of real estate, there may be delays in transferring
operations of our facilities to successor lessees or we may be prohibited from
transferring operations to a successor lessee. In addition, substantially all of
our properties are special purpose facilities that may not be easily adapted to
non-healthcare-related uses.
Proximity to hospitals and other healthcare facilities may affect our
ability to renew leases and attract new lessees in the event of
relocation or closure of a hospital or other healthcare facility
Many of our assisted living facilities, skilled nursing facilities and
medical office buildings are in close proximity to one or more hospitals. The
relocation or closure of a hospital could make our assisted living facilities,
skilled nursing facilities or medical office buildings in the affected area less
desirable and affect our ability to renew leases and attract new tenants.
Because we make construction loans, we are subject to development and
lease-up risks
We have made, and, depending on the availability of additional capital,
intend to continue to make, construction loans. Lending on development projects
is generally considered to involve greater risks than the purchase and leaseback
of operating properties. The risks associated with lending on development
projects include that:
o the development activities may be abandoned;
o the borrower may be unable to obtain, or experience delays in
obtaining, all necessary zoning, land-use, building, occupancy and
other required governmental permits and authorizations;
o construction costs of a facility may exceed the original estimates
possibly making the facility uneconomical;
o occupancy rates and rents at a completed facility may not be
sufficient to cover loan or lease payments;
o permanent financing may not be available on favorable terms;
o the term or construction loan may not be repaid; and
o construction and lease-up may not be completed on schedule resulting
in increased debt service expense and construction costs.
39
<PAGE>
In addition, construction lending activities typically require
substantial time and attention from our management. We have agreed to purchase
or have the option to purchase eight of the nine facilities that secure the term
loans and the construction loans made by us at the end of the loan terms or at
such time as each facility reaches average monthly occupancy of at least 90% for
three consecutive months. Because of the above described development risks, we
can make no assurance as to the timing of the purchase of any of these
facilities. Further, in light of our capital constraints, we can make no
assurance that we will have sufficient funds available to honor our purchase
obligations or exercise the purchase options held by us.
Because real estate investments are illiquid, we may not be able to
sell properties when appropriate
Real estate investments generally cannot be sold quickly. We may not be
able to vary our portfolio promptly in response to economic or other conditions.
This inability to respond to changes in the performance of our investments could
adversely affect our ability to service debt and make distributions to our
shareholders.
The revenues derived by us from percentage rent leases depend to a
greater extent on the operator's ability to operate the properties
subject to these leases successfully due the absence of minimum rent
provisions
We lease two assisted living facilities and one independent living
facility under percentage rent leases which do not require the payment of
minimum rent. The revenues derived by us under these percentage rent leases,
therefore, depends to a greater extent upon the ability of these operators to
operate the properties subject to these leases successfully because of the
absence of minimum rent requirements.
Lack of industry diversification subjects us to the risks associated
with investments in a single industry
While we are authorized to invest in various types of income-producing
real estate, our current strategy is to acquire and hold, as long-term
investments, only healthcare-related properties. Consequently, we currently do
not have any significant non-healthcare related real estate assets, and,
therefore, are subject to the risks associated with investments in a single
industry.
40
<PAGE>
Competition in the marketplace could adversely affect the ability of
our lessees and borrowers to make lease and loan payments to us
Lessees operating our owned properties or borrowers operating
properties that secure loans we have made compete on a local and regional basis
with operators of other facilities that provide comparable services. Operators
compete for residents based on a number of factors, including:
o quality of care;
o reputation;
o physical appearance of facilities;
o range and type of services offered;
o family preferences;
o physicians affiliated with the facility;
o staff of the facility; and
o price.
There can be no assurance that operators of our facilities will be able
to compete effectively. If they are unable to do so, their ability to make lease
and loan payments to us could be adversely affected.
Overbuilding in the assisted living industry could result in decreased
occupancy, depressed margins and lower operating results for operators
of our assisted living facilities
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, the market
may become saturated. Such an oversupply of facilities could cause our operators
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 us.
Assisted living revenues are derived from private pay sources
Assisted living services currently are not generally reimbursable under
government reimbursement programs, such as Medicare and Medicaid. Accordingly,
substantially all of the revenues derived by operators of the assisted living
facilities owned by us come from private pay sources consisting of income or
assets of residents or their family members. In general, because of the cost
associated with building new facilities and the staffing and other costs of
providing the assisted living services at those facilities, only seniors with
income or assets meeting or exceeding the comparable median in the region where
the facilities are located can afford to pay the daily resident fees.
41
<PAGE>
An unexpectedly high resident turnover rate could adversely affect the
revenues derived by operators of our assisted living facilities, which
could adversely affect their ability to make lease and loan payments to
us
State regulations governing assisted living facilities require written
resident agreements with each resident. These regulations also require that each
resident have the right to terminate the resident agreement for any reason on
reasonable notice. Consistent with these regulations, the resident agreements
entered into with operators of our assisted living facilities allow residents to
terminate the agreement on 30 days' notice. Thus, operators of our assisted
living facilities can not contract with residents to stay for longer periods of
time, unlike typical apartment leasing arrangements that involve lease
agreements with specified leasing periods of up to one year or longer. If a
large number of residents elected to terminate their resident agreements at or
around the same time, then the revenues derived by the operator of the facility
could be adversely affected, which, in turn, would adversely affect the ability
of the operator to make lease or loan payments to us. In addition, the advanced
age of assisted living residents means that resident turnover in assisted living
facilities may be less predictable.
New acquisitions may fail to perform as expected
Assuming we are able to obtain capital on commercially reasonable
terms, we intend to continue to acquire assisted and independent living
facilities, skilled nursing facilities and medical and other office buildings
and to provide construction loans. Newly acquired properties and loans we make
may fail to perform as expected, which could adversely affect our earnings and
distributions to our shareholders.
Competition for acquisitions could result in increased prices for
properties
We expect other major real estate investors and healthcare companies
with significant capital will compete with us for attractive investment
opportunities, including the acquisition, leasing and financing of healthcare
facilities. These competitors include other healthcare REITs, publicly traded
REITs, private REITs, real estate partnerships, healthcare providers, investment
banking firms, private institutional investment funds and other investors. We
may not have the resources to compete with some or all of these investors.
Although we believe that appropriate new investments will be available in the
future, we can provide no assurance that suitable investments will continue to
be identified or that such investments can be consummated on acceptable terms.
Some potential losses may not be covered by insurance
We require our lessees and borrowers to secure and maintain,
comprehensive liability and property insurance that covers the Company, as well
42
<PAGE>
as the lessees and borrowers on all of our properties. Some types of losses,
however, either may be uninsurable or too expensive to insure against. Should an
uninsured loss or a loss in excess of insured limits occur, we could lose all or
a portion of the capital we have invested in a property, as well as the
anticipated future revenue from the property. In such an event, we might
nevertheless remain obligated for any mortgage debt or other financial
obligations related to the property. We cannot assure shareholders that material
losses in excess of insurance proceeds will not occur in the future.
Our failure to comply with tax-exempt bond requirements for our
Highgate and Woodbridge facilities could result in termination of the
tax-exempt status or acceleration of the bonds
Our indebtedness includes approximately $20.6 million of tax-exempt
bonds used to finance our Highgate and Woodbridge assisted living facilities.
The bonds are subject to various requirements under the Internal Revenue Code.
In addition, the bonds impose requirements on the operation of the facilities,
including a requirement that at least 20% of the rental units in the facilities
are occupied by tenants whose adjusted gross family income does not exceed 50%
of the median gross income for the relevant geographic area. If our lessees do
not comply with these requirements, the tax-exempt status of the bonds could be
terminated or the bonds could be accelerated. In the event of a default under
the bonds used to finance the Highgate and Woodbridge facilities, our interest
in the relevant property would be subordinate to the interests of the
bondholder.
Provisions of our declaration of trust and bylaws could inhibit changes
in control
Various provisions of our declaration of trust and bylaws may delay or
prevent a change in control or other transactions that could provide our
shareholders with a premium over the then-prevailing market price of their
shares or which might otherwise be in the best interest of our shareholders.
These provisions include:
o a classified board of trustees with the trustees divided into three
classes with terms of three years each;
o that the number of trustees may not be less than three nor more than
nine, with the number of trustees fixed within this range by action
of the board of trustees;
o that trustees may be removed only for cause upon the affirmative vote
of shareholders holding at least a majority of the shares entitled to
be cast in an election of trustees;
o the authority of the board of trustees to issue preferred shares of
beneficial interest in one or more series without shareholder
approval;
43
<PAGE>
o the exclusive authority of the board of trustees to amend the bylaws;
o an advance notice bylaw requiring advance notice of shareholder
nominations for trustee or new business proposals;
o that special meetings of shareholders may be called only by the
chairman, the president or at least one-third of the board of
trustees;
o a requirement of a vote of shareholders of not less than two-thirds
of all the votes entitled to be cast on the matter to approve
amendments to provisions of the declaration of trust that have an
anti-takeover effect; and
o the ownership limit described below which is primarily intended to
satisfy requirements under the Internal Revenue Code for
qualification as a REIT.
We also are subject to Maryland Business Combination Statute
Provisions of Maryland law prohibit specified "business combinations"
between a Maryland real estate investment trust and any person or entity who
beneficially owns ten percent or more of the voting power of its outstanding
shares, or any affiliate of the ten percent owner, for five years. Thereafter,
the business combination must be approved by (a) 80% of the outstanding voting
shares and (b) two-thirds of the outstanding voting shares, other than shares
held by the ten percent owner, unless specified statutory conditions are met. A
business combination that is approved any time before the ten percent owner
acquires his or her shares is not subject to these special voting requirements.
We have not "opted out" of these provisions and, accordingly, we are subject to
them.
Our failure to qualify as a REIT would cause us to be taxed as a
corporation
We intend to qualify as a REIT under the Internal Revenue Code of 1986,
as amended, commencing with our taxable year ended December 31, 1998. We can
give no assurance that we qualify or will maintain our qualification as a REIT.
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 Internal Revenue Code provisions for which there are only limited
judicial and administrative interpretations, and involves the determination of
various factual matters and circumstances not entirely within our control. For
example, in order to qualify as a REIT, at least 95% of our gross income in any
year must be derived from qualifying sources, and we must pay distributions to
shareholders aggregating annually at least 95% of our REIT taxable income,
excluding capital gains and certain noncash income. The complexity of these
provisions and of the applicable U.S. Treasury regulations is greater in the
case of a REIT that holds its assets in partnership form. We can make no
assurances 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 qualification
as a REIT.
44
<PAGE>
If we fail to qualify as a REIT or to maintain our REIT status, we will
be subject to federal income taxes at regular corporate rates, including any
alternative minimum tax. Moreover, we may be disqualified from treatment as a
REIT for the next four taxable years. If we failed to qualify as a REIT, our net
income available for investment or distribution to our shareholders would be
significantly reduced because of the additional tax liability to us for the
years involved. In addition, distributions to our shareholders would no longer
be required to be made by us.
We have a share ownership limit primarily for REIT tax purposes
To qualify and maintain qualification as a REIT for federal income tax
purposes, not more than 50% in value of our outstanding common shares may be
owned, directly or indirectly, by five or fewer individuals. In addition,
neither Genesis nor any person who constructively owns 10% or more of the
outstanding shares of Genesis or any other tenant may own actually or
constructively 10% or more, in value or voting rights, of our outstanding shares
of beneficial interest. Primarily to facilitate compliance with these
requirements, our declaration of trust prohibits ownership, directly or by
virtue of the attribution provisions of the Internal Revenue Code of 1986, as
amended, by any single shareholder of more than 8.6% of the issued and
outstanding common shares and generally prohibits the ownership, directly or by
virtue of these attribution rules, by any single shareholder or more than 9.9%
of any class or series of preferred shares of beneficial interest. We refer to
this as the "ownership limit." Mr. Romanov may own up to 15% of our outstanding
common shares under an exception granted to him at the time of our formation.
The federal tax laws include complex stock ownership rules that apply in
determining whether a shareholder exceeds the ownership limit. These rules may
cause a shareholder to be treated as owning the shares of a number of related
shareholders. Absent any such exemption or waiver by the board of trustees,
shares acquired or held in violation of the ownership limit will be transferred
to a trust for the exclusive benefit of a designated charitable beneficiary, and
the shareholder's rights to distributions and to vote would terminate. Also, the
ownership limit could delay or prevent a change in control and, therefore, could
adversely affect our shareholders' ability to realize a premium over the
then-prevailing market price for their shares.
Special considerations apply to us because of the nature of our assets
The manner in which we derive income from the assisted and independent
living facilities and skilled nursing facilities we own is governed by special
considerations in satisfying the requirements for REIT qualification. Because we
would not qualify as a REIT if we directly operated an assisted or independent
living facility, or a skilled nursing facility, we lease such facilities to a
healthcare provider, such as subsidiaries of Genesis, that operate the
facilities. It is essential to our qualification as a REIT that these
45
<PAGE>
arrangements be respected as leases for federal income tax purposes and that the
lessees, including the subsidiaries of Genesis that lease properties from us,
not be regarded as "related parties" of us or our operating partnership, as
determined under the applicable provisions of the Internal Revenue Code. In the
event the leases expire and are not renewed, we 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, to maintain our REIT qualification, we would have to engage a new
healthcare provider, which could not include Genesis or its subsidiaries or
Senior Life Choice, another existing tenant, to operate the facility after we
take possession of the facility. This requirement could deter us from exercising
our remedies in the event of a default even though such exercise otherwise would
be in our best interests. Although we would be permitted to operate the facility
for 90 days after taking possession of the facility pursuant to applicable U.S.
Treasury regulations without jeopardizing our REIT status, the fact that the
facility licenses are held by lessees or borrowers may preclude us from doing so
under applicable healthcare regulatory requirements.
We pay some taxes
Even if we qualify as a REIT, we are required to pay certain federal,
state and local taxes on our income and property.
Various factors have affected and are likely to continue to affect our
common share price
Various factor have affected and are likely to continue to affect our
common share price, including:
o the extent to which a secondary market develops for our common
shares;
o the extent of institutional investor interest in us;
o the market prices of other healthcare REITs and the attractiveness of
their equity securities in comparison to other equity securities,
including securities issued by other real estate-based companies;
o our financial performance and our dependence on Genesis as the
primary operator of our facilities;
o the financial performance of Genesis and other lessees of our
facilities; and
o general stock and bond market conditions.
46
<PAGE>
Our common share price is affected by changes in our earnings and cash
distributions
We believe that the market value of a REIT's equity securities is based
primarily upon the market's perception of the REIT's growth potential and its
current and potential future cash distributions, and is secondarily based upon
the real estate market value of the underlying assets. For that reason, our
shares may trade at prices that are higher or lower than the net asset value per
share. To the extent we retain operating cash flow for investment purposes,
working capital reserves or other purposes, these retained funds, while
increasing the value of our underlying assets, may not correspondingly increase
the market price of our shares. Our failure to meet the market's expectations
with regard to future earnings and cash distributions would likely adversely
affect the market price of our publicly traded securities.
Market interest rates may have an effect on the value of our publicly
traded securities
One of the factors that investors consider important in deciding
whether to buy or sell shares of a REIT is the distribution rate on such shares,
considered as a percentage of the price of such shares, relative to market
interest rates. If market interest rates go up, prospective purchasers of REIT
shares may expect a higher distribution and this would likely increase our
borrowing costs and potentially decrease funds available for distribution. Thus,
higher market interest rates could cause the market price of our publicly traded
securities to go down.
Shares available for future sale could adversely affect the market
price of our publicly traded securities
We have 513,630 units of limited partnership interest in our operating
partnership which are owned by minority interests. These units are redeemable by
the holder for cash or, at our election, common shares. In addition, we have
reserved a total of 779,340 common shares for issuance pursuant to our 1998
share option and incentive plan, of which 263,800 are subject to exercisable
share options as of February 28, 1999. We cannot predict the effect that future
sales of any of these common shares, or the perception that such sales could
occur, will have on the market prices of our outstanding common shares.
Environmental problems are possible and can be costly
Federal, state and local laws and regulations relating to the
protection of the environment may require a current or previous owner or
operator of real estate to investigate and clean up hazardous or toxic
substances or petroleum product releases at the property. If unidentified
environmental problems arise, we may have to make substantial payments, which
could adversely affect our cash flow and our ability to make distributions to
our shareholders because:
47
<PAGE>
o we or the operator may have to pay a governmental entity or third
parties for property damage and for investigation and clean-up costs
incurred by them in connection with the contamination;
o environmental laws typically impose clean-up responsibility and
liability without regard to whether the owner or operator knew or
caused the presence of the contaminants;
o even if more that one person may have been responsible for the
contamination, each person covered by the environmental laws may be
held responsible for all of the clean-up costs incurred; and
o third parties may sue the owner or operator of a site for damages and
costs resulting from environmental contamination emanating from that
site.
Environmental laws also govern the presence, maintenance and removal of
asbestos. These laws require (1) that owners or operators of buildings
containing asbestos properly manage and maintain the asbestos, (2) that they
notify and train those who may come into contact with asbestos and (3) that they
undertake special precautions, including removal or other abatement, if asbestos
would be disturbed during renovation or demolition of a building. These laws may
impose fines and penalties on building owners or operators who fail 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 properties in which we have an
interest. These assessments included 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, these
consultants conducted additional testing, including sampling for: asbestos, lead
in drinking water, 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 at the properties that we believe would have a material adverse
effect on our business, financial condition, revenues or earnings. Asbestos is
suspected in approximately one-third of our properties based on a visual
inspection and isolated sampling. We believe most of these properties contain
only minor amounts of asbestos and this asbestos is in good condition and almost
none of it is easily crumbled. For some of our properties, the environmental
assessments note potential offsite sources of contamination such as underground
storage tanks. Additionally, for some of our properties, the environmental
assessments note previous uses, such as the former presence of underground
storage tanks, and in these cases, documented underground storage tanks subject
to regulatory requirements were either removed, replaced or otherwise brought
into compliance.
48
<PAGE>
Failure of operators to comply with environmental laws regarding the
use and disposal of hazardous substances and infectious medical wastes
could adversely affect their ability to make lease and loan payments to
us
The operation of healthcare facilities also involves the handling, use,
storage, transportation, disposal and/or discharge of hazardous, infectious,
toxic, radioactive, flammable and other hazardous materials, wastes, pollutants
or contaminants. These activities may result in:
o damage to individuals, property or the environment;
o interruption of operations and increases in costs;
o legal liability, damages, injunctions or fines;
o investigations, administrative proceedings, penalties or other
governmental agency actions; and
o costs that are not covered by insurance.
We can make no assurance that our lessees or borrowers will not incur
liability in connection with the use and disposal of hazardous substances and
infectious medical waste, which could have a material adverse effect on their
ability to make lease or loan payments to us.
ERISA plans may be prohibited from investing in our common shares
Depending upon the particular circumstances of an ERISA plan, an
investment by an ERISA plan in our common shares may be inappropriate under the
Employee Retirement Income Security Act of 1974. In deciding whether to purchase
our 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 internal revenue
code and the effect of regulations issued by the U.S.
Department of Labor defining what constitutes assets of an ERISA Plan.
Year 2000 risks
We recognize that the Year 2000 problem could affect our operations as
well as the proper functioning of the embedded systems included in the our
properties. In any particular property, the problem could effect the functioning
of elevators, heating and air conditioning systems, security systems and other
automated building systems. The nature of our business is such that most of our
assets are subject to triple net lease arrangements with healthcare facility
operators under which the operators are obligated to remedy, at their own
expense, any Year 2000 problems pertaining to the properties. We are currently
discussing with these operators their plans to identify and address any such
problems in a manner that does not impair the operators' ability to continuously
operate the property involved. In addition, as Genesis represents a significant
source of our rental and interest revenue, we are discussing with Genesis its
preparedness for the Year 2000 so as to assess their ability to meet their
obligations, both in terms of facility repairs and ability to generate payments,
in a timely manner.
49
<PAGE>
We have also begun to evaluate the Year 2000 readiness of those
properties not subject to triple net lease arrangements, which principally
includes our medical and other office buildings, through identifying and
contacting suppliers of building systems and other critical business partners to
determine if the building systems are affected and whether these entities have
an effective plan in place to address the Year 2000 issue. We have evaluated our
own internal systems to determine the impact of Year 2000. Due principally to
our small size and low transactional volume, the Year 2000 issue is not expected
to have a significant impact on corporate operations. We do not expect costs of
achieving Year 2000 compliance to exceed $200,000. We have not developed a
formal contingency plan for Year 2000 issues which may arise. However, a
contingency plan will be established prior to December 31, 1999 once we have
completed our Year 2000 evaluation of our properties and lessees.
With respect to the Year 2000 compliance of critical third parties, our
lessees and borrowers who operate skilled nursing facilities derive a
substantial portion of their revenues from the Medicare and Medicaid programs.
Congress' General Accounting Office ("GAO") concluded in September 1998 that it
would be highly unlikely that all Medicare systems will be compliant on time to
ensure the delivery of uninterrupted benefits and services into the Year 2000.
While these operators do not receive payments directly from Medicare, but from
intermediaries, the GAO statement is interpreted to apply as well to these
intermediaries. Recently, the Health Care Financing Administration ("HCFA")
Administrator asserted that all systems necessary to make payments to fiscal
intermediaries would be compliant. The HCFA Administrator provided further
assurance that intermediary systems would also be compliant well in advance of
the deadline. Any delays in these operators receiving payments in connection
with Year 2000 issues could impact their ability to make required rent and debt
payments to us. However, based upon discussions with some of these operators,
including Genesis, these companies intend to actively confirm the Year 2000
readiness status for each intermediary and to work cooperatively to ensure
appropriate continuing payments for services rendered to all government-insured
patients.
There can be no assurance we have adequately assessed or identified all
aspects of its business which may be impacted by Year 2000 issues which may
arise after December 31, 1999. Additionally, there can be no assurance that our
lessees or borrowers or other third parties, such as Medicare intermediaries,
will adequately address and correct any and all Year 2000 issues that may arise
after December 31, 1999. A failure by our lessees or borrowers to be Year 2000
compliant, or significant delays in them receiving payments for services from
other third parties could significantly impact our ability to collect its rent
and debt payments, which could have a material adverse impact on our financial
condition or results of operations. As a result of the foregoing, there can be
no assurance that Year 2000 computer problems which may impact us or our lessees
or borrowers will not have a material adverse effect on our financial condition
or results of operations.
50
<PAGE>
ITEM 2. PROPERTIES
The Company's headquarters are currently located at 101 East State
Street, Suite 100, Kennett Square, PA 19348. As of December 31, 1998, the
Company had no material lease commitments as lessee. As of December 31, 1998,
the Company leased its corporate office space from Genesis on a month-to-month
basis. The Company is in the process of executing a longer term agreement with
Genesis for this space.
The following table sets forth certain information comprising the
Company's investments in owned real estate property as of December 31, 1998.
<TABLE>
<CAPTION>
Number of Annualized
Property State Beds (3) Investment (4) Rental Income (5)
- - ------------------------------------- --------- -------------- ---------------- -------------------
<S> <C> <C> <C> C> <C>
Assisted Living Facilities: (dollar amounts in thousands)
Heritage Woods * (1) MA 122 $12,492 $1,048
Willowbrook * (1) PA 65 6,446 641
Riverview Ridge (1) PA 105 6,619 551
Highgate at Paoli Pointe (1) PA 82 13,079 1,200
The Woodbridge PA 90 14,137 1,262
Heritage at North Andover * (1) MA 97 11,945 1,132
Heritage at Vernon Court (1) MA 115 18,804 1,709
-------------- ---------------- -------------------
Total Assisted Living 676 83,522 7,543
-------------- ---------------- -------------------
Independent Living Facilities:
Pleasant View * (1) NH 72 4,074 466
-------------- ---------------- -------------------
Total Independent Living 72 4,074 466
-------------- ----------------- -------------------
Skilled Nursing Facilities:
Rittenhouse CC * (1) PA 120 9,850 805
Lopatcong CC * (1) NJ 153 14,896 1,252
Phillipsburg CC (1) NJ 94 6,789 569
Wayne NRC * (2) PA 118 6,707 581
Belvedere NRC (1) PA 147 11,866 1,075
Chapel NRC (1) PA 240 12,304 1,146
Harston Hall NCH * (1) PA 196 7,836 806
Pennsburg Manor NRC * (1) PA 120 10,912 1,105
-------------- ---------------- -------------------
Total Skilled Nursing 1,188 81,160 7,339
-------------- --------------- -------------------
Medical Office and Other Buildings:
Professional Office Building I * PA 4,439 903
DCMH Medical Office Building * PA 8,146 1,289
Salisbury Medical Office Bldg.* (1) MD 1,347 218
Windsor Office Building * (1) CT 328 116
Windsor Clinic/Trg. Facility * (1) CT 1,481 81
Lacey Branch Office Building NJ 625 69
---------------- ------------------
Total Medical Office and 16,366 2,676
Other
---------------- ------------------
Total of Owned Properties 1,936 $185,122 $18,024
=============== ================ ==================
</TABLE>
51
<PAGE>
* Represent properties included in the Company's borrowing base for the Credit
Facility and pledged as collateral.
(1) Represent properties which are leased to and managed by Genesis or Genesis
Equity Investees. See "Business - Transactions with Genesis."
(2) Represents property managed by Genesis but leased by an unrelated third
party.
(3) Based upon the number of private and semi-private beds in service at
December 31, 1998.
(4) Includes investments in real estate properties and loans on real estate
properties aggregating $180.6 million, before reductions for accumulated
depreciation, and includes credit enhancements on three owned properties
which aggregated $4.5 million. Credit enhancements include bond and
operating reserve funds aggregating $3.5 million and letters of credit
aggregating $1.0 million.
(5) Reflects contract rate of annual base rent under fixed and minimum rent
leases and estimated rent under percentage rent leases assuming rental
income for these properties consistent with 1998.
The Company holds a fee interest in each of its properties except for
the land underlying the Windsor Clinic and Training Facility, the Professional
Office Building I and the DCMH Medical Office Building (in which the Company
owns a condominium unit), which are leasehold interests subject to long-term
ground leases from Genesis and other unaffiliated companies.
Each of the Company's skilled nursing and senior housing facilities,
which includes the land (if owned), buildings, improvements and related rights,
are leased principally to healthcare providers pursuant to long-term triple net
leases. The leases generally have fixed terms of 5 to 12 years and contain
multiple five to ten-year renewal options. These properties are leased
principally under percentage and minimum rent leases. These lessees are required
to insure, repair, rebuild and maintain the leased properties. The leases with
tenants in the medical and other office buildings are generally fixed rent
leases which provide for specified annual rents, subject to annual increases in
some of the leases. Generally, these leases are for a five year period. Some of
the lessees are required to insure, repair, rebuild and maintain the leased
properties. See "Business - Investments - Owned Property - Operating Leases."
The Company believes that its leased properties are adequately insured under
insurance policies maintained by the lessees.
The above properties are encumbered by mortgage loans and bonds
aggregating $49.6 million at December 31, 1998, bearing interest at a weighted
average rate of 7.2%. These mortgage loans mature from September 2005 through
September 2025. See Note 8 to the Company's Consolidated Financial Statements
included in this Form 10-K. Additionally, fourteen of the Company's properties,
not already subject to mortgage loans, are included in the borrowing base for
the Credit Facility and are pledged as collateral for outstanding borrowings.
See Note 7 to the Company's consolidated financial statements included in this
Form 10-K.
52
<PAGE>
The following table sets forth certain information regarding the
Company's term and construction loans on real estate property investments as of
December 31, 1998.
<TABLE>
<CAPTION>
Number of Interest Rate
Term and Construction Loans State Beds (3) Investment (4) on Loans (4)
- - ------------------------------------- --------- -------------- ---------------- -------------------
(dollars in thousands)
Term Loans
- - -------------------------------------
<S> <C> <C> <C> <C> <C>
Assisted Living Facilities:
Harbor Place * (1) FL 102 $4,828 9.5%
Mifflin * (1) PA 67 5,164 9.5
Coquina Place * (1) FL 80 4,577 9.5
Lehigh * (1) PA 70 6,665 10.5
Berkshire * (1) PA 64 6,269 10.5
-------------- ---------------
Total Assisted Living 383 27,503
-------------- ---------------
Total Term Loans 383 27,503
-------------- ---------------
Construction Loans
- - -------------------------------------
Assisted Living Facilities:
Oaks * (1) PA 52 2,410 9.0
Montchanin * (2) DE 92 9,216 10.5
Sanatoga * (1) PA 70 6,716 10.5
-------------- ---------------
Total Assisted Living 214 18,342
-------------- ---------------
Independent Living Facilities:
Mallard Landing * MD 147 2,054 15.0
-------------- --------------
Total Independent Living 147 2,054
-------------- ---------------
Total Construction Loans 361 20,396
------------- ---------------
Total Term and Construction Loans 744 $ 47,899
============== ===============
</TABLE>
* Represent loans included in the Company's borrowing base for the
Credit Facility and pledged as collateral.
(1) Represent properties which are managed by Genesis or Genesis Equity
Investees. The Company is obligated to purchase and leaseback these
facilities to the borrower upon the earlier of termination of the
loan period or the facility reaching average monthly occupancy of
at least 90% for three consecutive months. See "Business -
Investments - Investment Portfolio - Term and Construction Loans"
and "Business - Transactions with Genesis." The Company may be
limited in its ability to fund these purchases. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."
(2) The Company has the option to purchase and leaseback this facility
to the borrower for $13.0 million upon the earlier of termination
of the loan period or the facility reaching average monthly
occupancy of at least 90% for three consecutive months. See
"Business - Investments - Investment Portfolio - Term and
Construction Loans." The Company may be limited in its ability to
fund any exercise of this option. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources."
(3) Based upon the number of private and semi-private beds in service
at December 31, 1998.
(4) Represents principal balance and related rate of interest at
December 31, 1998. See Note 3 to the Company's consolidated
financial statements included in this Form 10-K.
53
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
three months ended December 31, 1998, through the solicitation of proxies or
otherwise.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The following table sets forth, from January 27, 1998, the date the
Company's common shares began trading, through the periods indicated, the high
and low sales prices of the Company's common stock on the New York Stock
Exchange and the distributions paid per share. There were 58 shareholders of
record of the Company's common shares as of February 28, 1999. The number of
shareholders of record does not include an indeterminate number of shareholders
whose shares are held by brokers in "street name." Management believes there are
in excess of 2,200 beneficial shareholders of the Company's common shares.
Distributions
Quarter ended High Low Per Share
-------------------- ------------ ----------- ----------------
March 31, 1998 (1) $19.50 $17.38 -
June 30, 1998 18.00 14.88 $0.243
September 30, 1998 17.75 11.63 0.365
December 31, 1998 14.50 9.25 0.365
(1) Represents the period from January 27, 1998 through March 31, 1998.
In order to qualify as a REIT for Federal income tax purposes, the Tax
Code generally requires that a REIT distribute annually at least 95% of its net
taxable income to its shareholders. See "Business - Taxation." The Company
intends to qualify as a REIT for the period ended December 31, 1998 and in
future periods. Accordingly, the Company expects to continue to make required
distributions to its shareholders. The amount and timing of future distributions
will depend upon the Company's cash available for distribution and limitations
or restrictions under future credit facilities on payment of dividends. See
"Business - Risk Factors" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources."
Distributions by the Company are at the discretion of the board of trustees.
There can be no assurance that any distributions will continue to be made or
that the amount of distributions will be maintained in future periods at the
same level as 1998.
54
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data for the period from
January 30, 1998 through December 31, 1998, and as of December 31, 1997 and
1998, is derived from the consolidated financial statements of the Company. The
following data should be read in conjunction with the Company's consolidated
financial statements and related notes, and other financial information included
in this Form 10-K, including "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
<TABLE>
<CAPTION>
For the period ended
December 31, 1998
--------------------------
(in thousands, except per share data)
<S> <C>
Operating Data:
Revenues $21,233
Expenses:
Property expenses 975
Interest expense 6,256
Depreciation 4,471
General and administrative and start-up expenses 4,637
-------
Total expenses 16,339
-------
Equity in losses of unconsolidated entities, net (648)
Minority interest (273)
-------
Net income $ 3,973
=======
Per share information:
Basic and diluted net income per share $ 0.54
=======
Weighted average basic and diluted common shares outstanding 7,369
=======
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1998
------------------------ ----------------------
(in thousands) (in thousands)
<S> <C> <C>
Balance Sheet Data:
Real estate properties, net - $176,129
Real estate loans receivable - 47,899
Credit Facility - 90,204
Other long-term debt - 53,728
Total liabilities - 149,162
Total shareholders' equity - 113,296
For the period ended
December 31, 1998
--------------------------
(in thousands)
Other data:
Funds from Operations (1) $12,356
=======
</TABLE>
(1) 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
55
<PAGE>
income (loss), computed in accordance with generally accepted
accounting principles, excluding gains (or losses) from debt
restructuring and sales of properties, plus real estate related
depreciation and after comparable adjustments for the Company's
portion of these items related to 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 using standards established by
NAREIT which may not be comparable to Funds from Operations reported
by other REITs that do not define the term using 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 using generally
accepted accounting principles and should not be considered as an
alternative to net income as an indication of the Company's financial
performance, or to cash flow from operating activities 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.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
ElderTrust is a self-managed and self-administered real estate
investment trust that invests principally in senior housing and other healthcare
facilities, primarily skilled nursing facilities, senior living centers and
medical office buildings. ElderTrust was formed in the state of Maryland on
September 23, 1997, and intends to make an election and to qualify as a REIT
commencing with its taxable year ended December 31, 1998. ElderTrust completed
its initial public offering (the "Offering") on January 30, 1998 pursuant to
which it issued 6,957,500 common shares. Net proceeds to ElderTrust of $114.2
million from the Offering were contributed to a 94% owned subsidiary, ElderTrust
Operating Limited Partnership (the "Operating Partnership") which principally
used the proceeds to fund the initial formation transactions and other
acquisitions. ElderTrust is the sole general partner of the Operating
Partnership and conducts all of its operations through the Operating
Partnership. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Formation Transactions and Acquisitions."
ElderTrust had no real estate investments prior to January 30, 1998.
ElderTrust's consolidated assets consist primarily of the assets of the
Operating Partnership and its consolidated subsidiaries (collectively, the
"Company"). As of December 31, 1998, skilled nursing facilities and senior
living centers comprised approximately 93% of the Company's consolidated
investments in real estate properties and loans.
Genesis Health Ventures, Inc. ("Genesis") was co-registrant in the
Company's Offering. Approximately 70% of the Company's consolidated assets at
December 31, 1998 consisted of real estate properties leased to and loans on
real estate properties made to Genesis or entities in which Genesis accounts for
its investment using the equity method of accounting ("Genesis Equity
56
<PAGE>
Investees"). Revenues recorded by the Company in connection with these leases
and borrowings aggregated $14.0 million in 1998. In addition, the Company's
investments in unconsolidated entities for which it accounts for using the
equity method of accounting (the Company's "Equity Investees") also have leased
properties or provided mortgages on properties to Genesis or Genesis Equity
Investees. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Formation Transactions and Acquisitions." As a result of
these relationships, the Company's revenues and ability to meet its obligations
depends, in significant part, upon:
o the ability of Genesis and Genesis Equity Investees to meet their
lease and loan obligations;
o the revenues derived from, and the successful operation of, the
facilities leased to or managed by Genesis or Genesis Equity
Investees; and
o the ability of these entities to complete successfully and on
schedule the development projects securing construction loans made by
the Company to them.
The Company has no control over these entities and can make no
assurance that any of these entities will have sufficient income or assets to
enable them to satisfy their obligations under the leases or loans made to them.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Summary Condensed Consolidated Financial Data of Genesis."
Contemporaneously with the closing of the Offering, the Company entered
into a $140 million bank credit facility (the "Credit Facility") from Deutsche
Bank Securities ("Deutsche Bank") which expired January 29, 1999. The Company
used the Credit Facility principally to fund a portion of the initial formation
transactions, additional acquisitions during 1998 and for working capital
purposes. The original expiration date of the Credit Facility was extended on
January 29, 1999 to April 30, 1999, and the availability under the Credit
Facility was reduced to $100 million. During this extension period, the
Company notified Deutsche Bank that it was in violation of certain restrictive
covenants under the Credit Facility which occurred principally as a result of
the Company's equity value (market value of outstanding shares) being less than
$70 million as of February 4, 1999. As a result, additional borrowings were not
permitted under the Credit Facility while a technical default existed. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."
The Company has incurred indebtedness to acquire its assets and may
incur additional short and long-term indebtedness, and related interest expense,
from time to time. The Company does not have availability under the Credit
Facility to fund acquisitions. If the Company is unable to raise additional
capital through equity financing, or is unable to increase its borrowing
capacity, the Company may be limited in its ability to fully implement its
growth strategy. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources."
57
<PAGE>
The Company intends to declare and pay distributions to its
shareholders in amounts not less than the amounts required to maintain REIT
status. The amount and timing of distributions will depend upon the Company's
cash available for distribution and limitations or restrictions under future
credit facilities on payment of dividends. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources."
Substantially all of the Company's revenues are derived from:
o rents received under leases of healthcare-related real estate;
o interest earned from term and construction loans; and
o interest earned from the temporary investment of funds in short-term
instruments.
The Company has incurred operating and administrative expenses, which
principally included compensation expense for its executive officers and other
employees, office rental and related occupancy costs. The Company is
self-administered and managed by its executive officers and staff, and has not
engaged a separate advisor or paid an advisory fee for administrative or
investment services, although the Company has engaged legal, accounting, tax and
financial advisors as needed from time to time. The primary non-cash expenses of
the Company are the depreciation of its healthcare facilities and amortization
of its deferred loan acquisition costs.
Formation Transactions and Acquisitions
Upon completion of the Offering or shortly thereafter, the Company
acquired eighteen senior living and other healthcare properties with assets
aggregating $151.4 million. The Company paid $103.9 million in cash, assumed
term mortgage loans and other indebtedness aggregating $37.0 million and issued
partnership units in the Operating Partnership aggregating $10.5 million, for
these properties. Additionally, the Company funded five term loans aggregating
$27.5 million, three construction loans aggregating $6.5 million, an $800,000
first mortgage note and a 95% equity interest in a unconsolidated entity owned
by the Company, which acquired a $7.8 million second mortgage note. The net
proceeds from the Offering and the Credit Facility were used to fund these
acquisitions, term and construction loans and the mortgage note.
Thirteen of the initial properties were acquired from Genesis. The
Company paid approximately $80.7 million in cash and assumed $31.4 million of
indebtedness for the thirteen properties or interests therein acquired directly
from Genesis. These properties were leased to Genesis or Genesis Equity
Investees, pursuant to long-term, triple net leases. In addition, the initial
funding of term and construction loans included payments to Genesis or Genesis
Equity Investees for five term loans aggregating $27.5 million, three
construction loans aggregating $6.5 million and a first mortgage note of
$800,000.
58
<PAGE>
The Company also acquired an assisted living facility during March 1998
and a medical office building during February 1998. The Company paid $10.9
million in cash and assumed indebtedness aggregating $2.7 million in connection
with these transactions. This included approximately $3.0 million in cash paid
to Genesis and the assumption of $2.7 million in indebtedness from Genesis.
The Company is obligated to purchase and leaseback five facilities
under term loans and two facilities under construction loans to Genesis or
Genesis Equity Investees upon the earlier of the maturity of the related loan or
at such time as the facilities reach average monthly occupancy of at least 90%
for three consecutive months. The aggregate purchase price for these facilities
is based upon each facility's net operating income at the acquisition date and a
formula agreed to on the transaction's original commencement date. The Company
also has the option to purchase and leaseback one facility from an unaffiliated
company for $13.0 million upon the earlier of the maturity of the related
construction loan or at such time as the facility achieves average monthly
occupancy of at least 90% for three consecutive months. The Company may be
limited in its ability to fund these purchases or exercise its purchase option.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."
In addition to the initial formation transactions and other direct
acquisitions, the Company acquired additional direct and indirect investments in
eleven properties through transactions discussed below.
Investments in Equity Investees
The Company, has several investments in entities in which the
controlling interest is owned by Mr. Edward B. Romanov, Jr., the Company's
President and Chief Executive Officer. As a result, the Company records its
investments in and results of operations from these entities using the equity
method of accounting in its consolidated financial statements included in this
Form 10-K.
ET Capital Corp.
The Company has a nonvoting 95% equity interest in an unconsolidated
entity, ET Capital Corp. ("ET Capital"). The remaining voting 5% equity interest
in ET Capital is owned by Mr. Romanov. As of December 31, 1998, ET Capital owned
a $7.8 million second mortgage note with AGE Institute of Florida, which it
acquired from Genesis. This note is secured by a second lien on 11 Florida
skilled nursing facilities owned by AGE Institute of Florida and a second lien
on accounts receivable and other working capital assets. This note matures on
September 30, 2008 with payments of interest only, at a fixed annual rate of 13%
due quarterly until the note is paid in full.
59
<PAGE>
The Company recorded income of $156,000 related to the portion of its
equity interest in ET Capital's results of operations for the year ended
December 31, 1998. ET Capital has notes receivable of $12.5 million and
long-term debt of $9.7 million payable to the Company at December 31, 1998. See
Note 6 to the Company's consolidated financial statements included in this Form
10-K.
ET Capital has notes receivable aggregating $4.7 million at December
31, 1998 from two of the Company's Equity Investees and one of the Company's
consolidated subsidiaries. These loans mature in December 2001 and bear interest
at 12% per annum with interest and principal payable monthly. ET Capital's
long-term debt includes two demand promissory notes payable to the Company
aggregating $5.9 million at December 31, 1998 in connection with the above
second mortgage note transaction. These notes bear interest at a weighted
average rate of 12.1% per annum with interest only payable quarterly. In
addition, ET Capital has loans payable to the Company aggregating $3.8 million,
bearing interest at 15% and maturing at various dates from April 2008 to
December 2011.
ET Sub-Meridian Limited Partnership, L.P.
During September 1998, the Company acquired a 99% limited partnership
interest in ET Sub-Meridian Limited Partnership, L.P. ("ET Sub-Meridian"). The
1% general partner interest is owned by a limited liability company of which Mr.
Romanov is the sole member. ET Sub-Meridian was formed to acquire the leasehold
and purchase option rights to seven skilled nursing facilities located in
Maryland and New Jersey from a wholly owned subsidiary of Genesis. ET
Sub-Meridian paid the Genesis subsidiary $35.5 million in cash and $8.5 million
in the form of a five-year promissory note for these rights. The Company
guaranteed the $8.5 million promissory note of ET-Sub Meridian payable to the
Genesis subsidiary that leases the facilities. The purchase options are
exercisable by ET Sub-Meridian in September 2008 for a cash exercise price of
$66.5 million. ET Sub-Meridian subleased the facilities to the Genesis
subsidiary for an initial ten-year period with a ten-year renewal exercisable by
that entity. Genesis has guaranteed the subleases. The owners of the skilled
nursing facilities provided $17.7 million of additional financing to ET
Sub-Meridian, representing the balance of funds used by ET Sub-Meridian to
consummate the transaction. These promissory notes bear interest at 7.06%
annually, with principal and interest payable monthly through September 1, 2008.
As part of the transaction, the Company agreed to indemnify the
property owners for any loss of deferral of tax benefits prior to August 31,
2008 due to a default under a sublease or if a cure to a default by the Genesis
subsidiary leasing the facilities resulted in a taxable event to the owners. The
Company also agreed to indemnify Genesis against any amounts expended by Genesis
under a back-up indemnity provided by Genesis to the current owners against any
such loss of deferral to tax benefits or default resulting in a taxable event to
the owners.
60
<PAGE>
The Company recorded a loss of $752,000 related to the portion of its
equity interest in ET Sub-Meridian's results of operations for the year ended
December 31, 1998. ET Sub-Meridian has real estate investments and long-term
debt of $110.0 million and $107.4 million, respectively, at December 31, 1998.
See Note 6 to the Company's consolidated financial statements included in this
Form 10-K. At December 31, 1998, ET Sub-Meridian had a $17.6 million
subordinated demand loan bearing interest at 12% per annum payable to the
Company in connection with the above transaction.
ET Sub-Heritage Andover, LLC
ET Sub-Vernon Court, LLC
ET Sub-Cabot Park, LLC
ET Sub-Cleveland Circle, LLC
During December 1998, the Company, through four newly-created limited
liability companies (ET Sub-Heritage Andover, LLC, ET Sub-Vernon Court, LLC, ET
Sub-Cabot Park, LLC, and ET Sub-Cleveland Circle, LLC), acquired member
interests in three assisted living facilities and one independent living
facility from National Development of New England, an unaffiliated third party
for $23.6 million in cash, assumption of $37.8 million in indebtedness and
issuance of $3.0 million in term loans, which mature June 30, 1999. A Genesis
Equity Investee leases each of the facilities.
As part of the purchase price paid by the limited liability companies
for the four facilities, the Company and Mr. Romanov made capital contributions
to the limited liability companies totaling $1.7 million and $8,600,
respectively. The Company also made $15.4 million of subordinated demand loans,
bearing interest at 12% per annum, to the limited liability companies. In
addition, the Company and Mr. Romanov contributed capital of $900,000 and
$47,000, respectively, and the Company made additional loans aggregating $3.8
million to ET Capital, bearing interest at 15%. ET Capital made loans
aggregating $4.7 million to three of the limited liability companies. The
Company also has an option to acquire Mr. Romanov's interest in ET Sub-Vernon
Court, LLC. The option exercise price is equal to Mr. Romanov's investment of
$3,200 and expires on November 30, 1999. As part of this transaction, the
Company assigned its right to acquire a fifth facility to the Genesis Equity
Investee and advanced to this entity $300,000 to pay a management termination
fee due to the prior manager of the facilities.
The Company is the sole member of ET Sub-Heritage Andover, LLC, which,
accordingly, is consolidated into the Company's consolidated financial
statements at December 31, 1998. In each of the remaining three limited
liability companies, the Company has a 99% member interest and a limited
liability company of which Mr. Romanov is the sole member has a 1% managing
member interest. As the Company has the ability to acquire Mr. Romanov's 1%
managing interest in ET Sub-Vernon Court, LLC, this company is consolidated into
61
<PAGE>
the Company's consolidated financial statements at December 31, 1998. The
Company recorded aggregate losses of $52,000 related to the portion of its
equity interest in ET-Sub-Cabot Park, LLC and ET Sub-Cleveland Circle, LLC's
results of operations for the year ended December 31, 1998. These two entities
have real estate investments and aggregate long-term debt of $32.3 million and
$31.2 million, respectively, at December 31, 1998. See Note 6 to the Company's
consolidated financial statements included in this Form 10-K.
Right of First Refusal Agreement
The Company and Genesis have entered into a three year agreement which
expires January 30, 2001, subject to annual renewals thereafter. The agreement
provides Genesis with a right of first refusal to lease or manage any assisted
living, independent living or skilled nursing facility financed or acquired by
the Company within Genesis' markets unless the facility will be leased or
managed by the seller or an affiliate of the seller.
The agreement also provides the Company with the following:
o a right of first refusal to purchase and leaseback any assisted
living, independent living or skilled nursing facilities which
Genesis determines to sell and leaseback as part of a sale/leaseback
transaction or transactions, excluding sale/leaseback transactions
with commercial banking institutions;
o a right to offer financing to Genesis and other developers of
assisted and independent living facilities which, once developed,
will be operated by Genesis; and
o a right to offer financing to Genesis with respect to any new
off-balance sheet financing of skilled nursing facilities currently
owned by Genesis.
The Company believes that its agreement with Genesis will provide it
with opportunities to acquire and finance the development of additional assisted
living, independent living and skilled nursing facilities within the Genesis
ElderCareTM Networks.
Results of Operations
The Company had no real estate investment operations prior to
consummation of the Offering on January 30, 1998. The Company acquired its real
estate investments during 1998 through acquisitions of senior housing and other
healthcare-related properties and term and construction loans. The revenues and
expenses generated by these investments were included in the Company's results
of operations from the dates of acquisition, which occurred at various times
during 1998. Accordingly, the operating results for 1998 are not necessarily
indicative of a complete year of operations or of results for any future period.
62
<PAGE>
Period from January 30, 1998 to December 31, 1998
Revenues
Rental revenues of $12.3 million were generated during the period from
January 30, 1998 to December 31, 1998 from the immediate leaseback or assumption
of existing leases of 18 healthcare facilities purchased with proceeds of the
Offering on January 30, 1998. The acquisition of two additional facilities was
delayed pending receipt of necessary consents to transfer the properties to the
Company. The Delaware County Memorial Hospital Medical Office Building, which
was purchased during February 1998, generated $1.2 million in lease revenues.
The Riverview Ridge assisted living facility, which was acquired during March
1998, generated $504,000 in lease revenues. The Company also acquired two
assisted living facilities during December 1998, ET Sub-Heritage Andover, LLC
and ET Sub-Vernon Court, LLC, which generated $236,000 in lease revenues.
Interest income of $5.9 million, net of amortization of deferred loan
costs of $220,000, was earned during the period from January 30, 1998 to
December 31, 1998. Interest income was comprised of $3.9 million from term and
construction loans and a mortgage which matured December 1, 1998, with the
remainder resulting from interest on excess invested funds, bond reserve funds
and related party notes receivable.
Fee income of $1.0 million was earned for financial services rendered
in connection with certain financial service transactions during the period.
Expenses
Property operating expenses of $975,000 for the period from January 30,
1998 to December 31, 1998 represented 6.9% of rental revenues.
Interest expense of $6.3 million for the period from January 30, 1998
to December 31, 1998 was comprised principally of interest of $2.6 million on
mortgage indebtedness and $3.4 million on the Credit Facility, with the
remainder resulting from amortization of deferred financing costs and interest
on tenant security deposits.
Depreciation of $4.5 million for the period from January 30, 1998 to
December 31, 1998 was recorded in connection with depreciation of the Company's
properties placed in service during the period.
General and administrative expenses of $1.6 million for the period from
January 30, 1998 to December 31, 1998 represented 11.3% of rental revenues.
These expenses consisted principally of management salaries and benefits, legal
and other administrative costs since the Offering.
63
<PAGE>
Start-up expenses were $3.0 million for the period from January 30,
1998 to December 31, 1998. These expenses were comprised principally of
nonrecurring compensation expense of $2.0 million recorded in connection with
the issuance of units of beneficial interest of the Operating Partnership to
certain officers of the Company in connection with its formation and
approximately $700,000 of amounts reimbursed to Genesis for other formation
expenses.
The Company recorded a loss of $648,000 for the period from January 30,
1998 to December 31, 1998 in connection with its portion of the losses incurred
by the Company's Equity Investees.
The Company recorded a reduction in net income of $273,000 for the
portion of its consolidated operations which relate to minority interest owners
of the Operating Partnership and other consolidated entities.
Liquidity and Capital Resources
The Company generated cash flows from operating activities of $13.7
million for the period January 30, 1998 to December 31, 1998. The Company
generated cash flows from financing activities of $193.9 million for the period
January 30, 1998 to December 31, 1998. Cash flows from financing activities were
comprised principally of the net proceeds from the Offering of $114.2 million
and borrowings under the Credit Facility of $90.2 million, offset in part by
distributions to shareholders of $7.2 million and the repurchase of treasury
shares of $1.7 million.
The Company used its cash flows from operating and financing
activities, along with the assumption of debt of $50.3 million, units issued of
$10.5 million and notes issued of $4.1 million to fund: (i) $116.4 million for
the acquisition of real estate properties; (ii) $50.2 million to fund term and
construction loans; and (iii) $38.2 million to fund investments in the Company's
investees. At December 31, 1998, the Company's consolidated net real estate
investments in properties and loans aggregated $224.0 million. The Company
funded its investments through a combination of long-term and short-term
financing, utilizing both debt and equity.
Working capital was $3.0 million at December 31, 1998, which included
accounts receivable of $4.4 million offset, in part, by accounts payable and
accrued expenses of $1.6 million. Cash and cash equivalents at December 31, 1998
were $2.3 million. As of December 31, 1998, the Company had shareholders' equity
of $113.3 million and Credit Facility borrowings, mortgages, bonds and notes
payable aggregating $142.8 million, excluding notes payable to the Company's
Equity Investees, which represents a debt to equity ratio of 1.26 to 1.
64
<PAGE>
At December 31, 1998, the unfunded portion of construction loan
commitments made by the Company aggregated $7.7 million. The Company expects to
fund its construction loan commitments during 1999 with cash flow from
operations and funds available under the Credit Facility.
The Company also has obligations at December 31, 1998 to purchase and
leaseback seven facilities subject to term or construction loans to Genesis or
Genesis Equity Investees, upon the earlier of the maturity of the related loans
or the facilities reaching average monthly occupancy of at least 90% for three
consecutive months. The purchase price for these facilities is based upon each
facility's net operating income at the acquisition date and a formula agreed to
on the transaction's original commencement date. These amounts cannot be
estimated at this time due to the status of the operations of the facilities
underlying the related term and construction loans. The Company also has an
option at December 31, 1998 to purchase and leaseback one facility subject to a
construction loan to an unaffiliated company for $13.0 million upon the earlier
of the maturity of the related loan or the facility reaching average monthly
occupancy of at least 90% for three consecutive months. The Company does not
expect to be required to purchase any of these facilities before September 1999.
The Company may be limited in its ability to fund these purchases or exercise
its purchase option due to limited availability of funds under the Credit
Facility. A portion or all of the purchase price for these acquisitions will be
reduced by any remaining balance outstanding under the related term and
construction loans.
Contemporaneously with the closing of the Offering, the Company entered
into the $140 million Credit Facility with Deutsche Bank, which expired January
29, 1999. The Credit Facility enables the Company to borrow generally at
floating rates based on a margin over the one-month London Interbank Borrowing
Rate ("LIBOR"), as determined by the percentage of the Credit Facility
outstanding as compared to the borrowing base. At December 31, 1998, the margin
was 1.8% over LIBOR for an aggregate rate of 7.36%, based on a borrowing base of
$93.3 million. The balance outstanding under the Credit Facility at December 31,
1998 was $90.2 million. The Credit Facility contains various financial and other
covenants, including, but not limited to, minimum equity value, minimum tangible
net worth, a total leverage ratio and minimum interest coverage ratio. Because
the Credit Facility is floating rate debt, fluctuations in prevailing interest
rates will impact the Company's interest expense in connection with borrowings
under the Credit Facility. See "Item 7A - Quantitative and Qualitative
Disclosures About Market Risk."
The original expiration date of the Credit Facility was extended on
January 29, 1999 to April 30, 1999, and the availability under the Credit
Facility was reduced to $100 million. In addition, the $1.0 million in letters
of credit originally available under the Credit Facility were canceled. During
this extension period, the Company notified Deutsche Bank that it was in
violation of certain restrictive covenants under the Credit Facility which
occurred principally as a result of the Company's equity value (market value of
outstanding shares) being less than $70 million as of February 4, 1999. The
Company declared and made shareholder distributions and borrowed additional
funds for working capital during February 1999, prior to the determination that
the Company was in violation of the minimum equity value covenant. As a result,
additional borrowings were not permitted under the Credit Facility while a
technical default existed.
65
<PAGE>
On March 31, 1999, the term of the Credit Facility was extended from
April 30, 1999 to January 1, 2000 through an amendment which also waived the
Company's defaults under the Credit Facility and provided for available
borrowings up to an aggregate of $100.5 million. The Company had $95.8 million
of indebtedness outstanding under the Credit Facility at March 31, 1999, which
included the $1.0 million extension fee paid in connection with this amendment.
The interest rate on borrowings outstanding under the Credit Facility will
increase from a 180 basis point margin over one-month LIBOR to a 275 basis point
margin effective June 1, 1999. The weighted average interest rate on borrowings
outstanding under the Credit Facility at March 31, 1999 was 6.8%, including the
180 basis point margin.
The Company expects net cash provided by operations and funds available
under the Credit Facility to be sufficient to enable it to meet its short-term
cash flow requirements through December 31, 1999, including the funding of
construction commitments and shareholder distributions. The Company does not
have availability under the current credit facility to finance acquisitions
consistent with its long-term growth strategy.
The Company expects to meet its long-term cash flow requirements for
the funding of future construction commitments and real estate property
development and acquisitions by borrowing and by issuing equity or debt
securities in public or private transactions. The Company believes that it will
be able to obtain financing for its long-term capital needs. However, due to
recent illiquidity in the capital markets and uncertainty concerning the
economy, there can be no assurance that additional financing or capital will be
available on terms acceptable to the Company. Subject to the availability of
capital in the credit markets, the Company may, under certain circumstances,
borrow additional amounts in connection with the renovation or expansion of
facilities, the acquisition of additional properties, or as necessary, to meet
certain distribution requirements imposed on REITs under the Tax Code.
The Company has entered into discussions with potential sources to
replace the Credit Facility with new financing which would provide longer term
funding to support the Company's objectives. If the Company is unable to raise
additional capital through equity financing, or is unable to increase its
borrowing capacity, the Company may be limited in its ability to fully
implement its growth strategy. Additionally, if the Company is unable to obtain
replacement financing by January 1, 2000, or is unable to negotiate a further
extension to the current credit facility at that time, Deutsche Bank could
exercise its right to foreclose on the collateral securing the Credit Facility,
which would have a significant adverse affect on the Company's ability to
continue its operations and meet its obligations, including payment of quarterly
shareholder distributions.
66
<PAGE>
To qualify as a REIT, the Company must distribute to its shareholders
each year at least 95% of its net taxable income, excluding any net capital
gain. If the Company is unable to make required shareholder distributions, then
the Company may be unable to qualify as a REIT and be subject to federal income
taxes.
The interest rate on replacement financing may be significantly higher
than the interest rate on the existing credit facility. Additionally, the
Company may be required to pay significant financing fees in the future in
connection with replacement financing or negotiating a further extension with
Deutsche Bank. Increased interest rates or significant financing fees would
reduce the Company's cash flow and affect its ability to continue to maintain
distributions to its shareholders at current levels. There can be no assurance
that the Company will be able to obtain replacement financing on acceptable
terms or at all, or that, if obtained, it will be able to continue making
distributions to its common shareholders at previous levels.
Facilities owned by the Company and leased to third parties under
percentage and minimum rent triple net leases require the lessee to pay
substantially all expenses associated with the operation of such facilities.
Percentage and minimum rent leases represent 86% of the Company's leased
properties at December 31, 1998. As a result of these arrangements, the Company
does not believe it will be responsible for significant expenses in connection
with the facilities during the terms of the leases. The Company anticipates
entering into similar leases with respect to additional properties acquired.
However, there can be no assurance the Company will not be responsible for
significant expenses of its leased properties in the event one or more of its
lessees default on their leases with the Company.
In August 1998, the Company implemented a share repurchase program.
Under the share repurchase program, the Company from time to time may repurchase
shares in open market transactions up to an amount equal to the Company's excess
cash flow on a quarterly and cumulative basis. During the year ended December
31, 1998, the Company repurchased 147,800 common shares for an aggregate
purchase price of $1.7 million. The Company's ability to repurchase shares in
the future will be dependent upon the Company having sufficient excess funds to
repurchase shares.
Distributions to Shareholders Subsequent to Year End
The board of trustees declared a cash distribution on February 9, 1999.
The cash distribution of $0.365 per share was paid on or about February 26,
1999, to common shareholders of record on February 18, 1999. There can be no
assurance that distributions will continue to be made or that the level of
distributions will be maintained in future periods at the same level as 1998.
67
<PAGE>
Funds from Operations
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 generally accepted accounting principles, excluding
gains (or losses) from debt restructuring and sales of properties, plus real
estate related depreciation and after comparable adjustments for the Company's
portion of these items related to 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 using standards
established by NAREIT which may not be comparable to Funds from Operations
reported by other REITs that do not define the term using 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 using generally accepted accounting principles and should not be
considered as an alternative to net income as an indication of the Company's
financial performance, or to cash flow from operating activities 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.
The following table presents the Company's Funds from Operations for
the period from the Company's Offering on January 30, 1998 to December 31, 1998:
(in thousands)
Funds from Operations:
Net income $3,973
Minority interest 273
-------
Net income before minority interest 4,246
Adjustments to derive funds from operations:
Add:
Real estate depreciation and amortization,
including amounts related to
unconsolidated entities 5,907
Nonrecurring items - start-up expenses 3,027
-------
Funds from Operations before allocation
to minority interest 13,180
Less:
Funds from Operations allocable to minority
interest (824)
-------
Funds from Operations attributable to the
common shareholders $12,356
=======
68
<PAGE>
Impact of Inflation
Earnings of the Company are primarily long-term investments with fixed
interest rates. These investments are mainly financed with a combination of
equity, long-term mortgages and borrowings under the revolving lines of credit.
During inflationary periods, which generally are accompanied by rising interest
rates, the Company's ability to grow may be adversely affected because the yield
on new investments may increase at a slower rate than new borrowing costs.
New Accounting Pronouncements
See the Company's consolidated financial statements and related notes
for information relating to the impact on the Company of new accounting
pronouncements.
Year 2000 Considerations
The Company recognizes that the Year 2000 problem could affect its
operations as well as the proper functioning of the embedded systems included in
the Company's properties. In any particular property, the problem could affect
the functioning of elevators, heating and air conditioning systems, security
systems and other automated building systems. The nature of the Company's
business is such that most of its assets are subject to triple net lease
arrangements with healthcare facility operators under which the operators are
obligated to remedy, at their own expense, any Year 2000 problems pertaining to
the properties. The Company is currently discussing with these operators their
plans to identify and address any such problems in a manner that does not impair
the operators' ability to continuously operate the property involved. In
addition, as Genesis represents a significant source of the Company's rental and
interest revenue, the Company is discussing with Genesis its preparedness for
the Year 2000 so as to assess their ability to meet their obligations, both in
terms of facility repairs and ability to generate payments, in a timely manner.
The Company has also begun to evaluate the Year 2000 readiness of those
properties not subject to triple net lease arrangements, which principally
includes the Company's medical and other office buildings, through identifying
and contacting suppliers of building systems and other critical business
partners to determine if the building systems are affected and whether these
entities have an effective plan in place to address the Year 2000 issue. The
Company has evaluated its own internal systems to determine the impact of Year
2000. Due principally to the Company's small size and low transactional volume,
the Year 2000 issue is not expected to have a significant impact on corporate
operations. The Company does not expect its costs of achieving Year 2000
compliance to exceed $200,000. The Company has not developed a formal
contingency plan for Year 2000 issues which may arise. However, a contingency
plan will be established prior to December 31, 1999 once the Company has
completed its Year 2000 evaluation of its properties and lessees.
69
<PAGE>
With respect to the Year 2000 compliance of critical third parties, the
Company's lessees and borrowers who operate skilled nursing facilities derive a
substantial portion of their revenues from the Medicare and Medicaid programs.
Congress' General Accounting Office ("GAO") concluded in September 1998 that it
would be highly unlikely that all Medicare systems will be compliant on time to
ensure the delivery of uninterrupted benefits and services into the Year 2000.
While these operators do not receive payments directly from Medicare, but from
intermediaries, the GAO statement is interpreted to apply as well to these
intermediaries. Recently, the Health Care Financing Administration ("HCFA")
Administrator asserted that all systems necessary to make payments to fiscal
intermediaries would be compliant. The HCFA Administrator provided further
assurance that intermediary systems would also be compliant well in advance of
the deadline. Any delays in these operators receiving payments in connection
with Year 2000 issues could impact their ability to make required rent and debt
payments to the Company. However, based upon discussions with some of these
operators, including Genesis, these companies intend to actively confirm the
Year 2000 readiness status for each intermediary and to work cooperatively to
ensure appropriate continuing payments for services rendered to all
government-insured patients.
There can be no assurance the Company has adequately assessed or
identified all aspects of its business which may be impacted by Year 2000 issues
which may arise after December 31, 1999. Additionally, there can be no assurance
that the Company's lessees or borrowers or other third parties, such as Medicare
intermediaries, will adequately address and correct any and all Year 2000 issues
that may arise after December 31, 1999. A failure by the Company's lessees or
borrowers to be Year 2000 compliant, or significant delays in them receiving
payments for services from other third parties could significantly impact the
Company's ability to collect its rent and debt payments, which could have a
material adverse impact on the Company's financial condition or results of
operations. As a result of the foregoing, there can be no assurance that Year
2000 computer problems which may impact the Company or its lessees or borrowers
will not have a material adverse effect on the Company's financial condition or
results of operations.
Summary Condensed Consolidated Financial Data of Genesis
As leases with and loans to Genesis represent a significant portion of
the Company's consolidated assets and revenues, the Company has included certain
summary condensed consolidated financial data of Genesis for the periods
discussed below. The summary condensed consolidated financial data of Genesis
was extracted from Genesis' annual report on Form 10-K for the year ended
September 30, 1998 as filed with the Securities and Exchange Commission (the
"Commission") under the Securities Exchange Act of 1934, as amended, (the
"Exchange Act") and the Genesis quarterly report on Form 10-Q for the quarter
ended December 31, 1998 as filed with the Commission.
70
<PAGE>
The Genesis financial data presented includes only the most recent
interim and fiscal year end reporting periods. The Company can make no
representation as to the accuracy and completeness of Genesis' public filings.
It should be noted that Genesis has no duty, contractual or otherwise, to advise
the Company of any events subsequent to such dates which might affect the
significance or accuracy of such information.
Genesis is subject to the information filing requirements of the
Exchange Act, and in accordance therewith, is obligated to file periodic
reports, proxy statements and other information with the Commission relating to
its business, financial condition and other matters. Such reports, proxy
statements and other information may be inspected at the offices of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and should also be
available at the following Regional Offices of the Commission: 7 World Trade
Center, New York, N.Y. 10048, and 500 West Madison Street, Suite 1400, Chicago,
IL 60661. Such reports and other information concerning Genesis can also be
inspected at the offices of the New York Stock Exchange, Inc., 20 Broad Street,
Room 1102, New York, New York 10005.
The following table sets forth certain summary condensed consolidated
financial data for Genesis as of and for the periods indicated.
<TABLE>
<CAPTION>
For the For the three
year ended months ended
September 30, December 31,
--------------------------------- ------------------
1998 1997 1998
-------------- -------------- ------------------
(in thousands, except per share data)
Operations Data
- - -------------------------------------------
<S> <C> <C> <C>
Net revenues $1,405,305 $1,099,823 $479,204
Operating income before capital costs (1) 134,690 184,868 71,154
Depreciation and amortization 52,385 41,946 17,807
Lease expense 31,182 28,587 6,367
Interest expense, net 82,088 39,103 27,323
Earnings (loss) before income taxes,
equity in net income (loss) of
unconsolidated affiliates and
extraordinary items (30,965) 75,232 19,657
Income taxes (8,158) 27,088 7,378
Earnings (loss) before equity in net
income (loss) of unconsolidated
affiliates and extraordinary items (22,807) 48,144 12,279
Equity in net income (loss) of
unconsolidated affiliates 486 - (892)
Extraordinary items, net of tax (1,924) (553) (1,799)
Net income (loss) (24,245) 47,591 9,588
Net income (loss) available to common
shareholders (2) $ (25,900) $ 47,591 $ 5,171
</TABLE>
71
<PAGE>
<TABLE>
<CAPTION>
For the For the three
year ended months ended
September 30, December 31,
--------------------------------- ------------------
1998 1997 1998
-------------- -------------- ------------------
(in thousands, except per share data)
Operations Data
- - -------------------------------------------
<S> <C> <C> <C>
Per common share data:
Basic
Earnings (loss) before extraordinary
items ($0.68) $ 1.39 $ 0.20
Net income (loss) ($0.74) $ 1.38 $ 0.15
Weighted average shares of common
stock and equivalents 35,159 34,558 35,217
Diluted
Earnings (loss) before extraordinary
items ($0.68) $ 1.34 $ 0.20
Net income (loss) ($0.74) $ 1.33 $ 0.15
Weighted average shares of common
stock and equivalents 35,159 36,120 35,381
</TABLE>
(1) Capital costs include depreciation and amortization, lease expense and
interest expense.
(2) Net income (loss) reduced by preferred stock dividends.
September 30, December 31,
---------------------- -----------------
1998 1998
---------------------- -----------------
(dollars in thousands)
Balance Sheet Data
Working capital $ 305,718 $ 372,864
Total assets 2,627,368 2,670,678
Long-term debt 1,358,595 1,439,457
Shareholders' equity $ 875,072 $ 880,058
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's investments in real estate loans receivable bear interest
at fixed rates. Changes in interest rates generally affect the fair market value
of the underlying loan receivable, but not earnings or cash flows. Assuming the
repayment terms and additional commitments of the loans receivable existing at
December 31, 1998, a one percent change in the interest rates would change the
fair value of these loans receivable by approximately $950,000. The carrying
amount of the loans receivable approximates their fair value at December 31,
1998.
The Company's mortgages and bonds payable bear interest at fixed rates.
The Company is exposed to market risks related to fluctuations in interest rates
on its Credit Facility. The Company does not utilize interest rate swaps,
forward or option contracts on foreign currencies or commodities, or other types
of derivative financial instruments. The Company provides fixed rate mortgage
loans to operators of healthcare facilities as part of its normal operations.
72
<PAGE>
For fixed rate debt, changes in interest rates generally affect the
fair market value of the underlying indebtedness, but not earnings or cash
flows. The Company generally cannot prepay fixed rate debt prior to maturity.
Therefore, interest rate risk and changes in fair market value should not have a
significant impact on the fixed rate debt until the Company would be required to
refinance such debt. The maturity schedule for the Company's fixed rate
mortgages and bonds payable is as follows:
1999 $ 1,178
2000 1,329
2001 1,452
2002 1,561
2003 1,682
Thereafter 42,392
The carrying amount of the mortgages and bonds payable approximates their fair
value at December 31, 1998.
For variable rate debt, changes in interest rates generally do not
impact fair market value, but do affect future earnings and cash flows. Assuming
the Credit Facility balance outstanding at December 31, 1998 of $90.2 million
remains constant, each one percentage point increase in interest rates would
result in an increase in interest expense for the coming year of approximately
$902,000, based on the current interest rate terms. Effective June 1, 1999, the
interest rate under the Credit Facility will be increased to 275 basis points
over one-month LIBOR, which is 95 basis points higher than at December 31, 1998.
The Company expects that some or all of any replacement financing of
the existing credit facility may have a variable interest rate. Additionally,
the Company may borrow additional money with variable interest rates in the
future. Increases in interest rates, therefore, would result in increases in
interest expenses, which could adversely affect the Company's cash flow and its
ability to pay its obligations and make distributions to shareholders at similar
levels as in prior periods. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources."
73
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Independent Auditors' Report
The Board of Trustees and Shareholders
ElderTrust:
We have audited the accompanying consolidated balance sheet of ElderTrust and
subsidiaries as of December 31, 1998 and the consolidated statements of
operations, shareholders' equity and cash flows for the period from January 30,
1998 to December 31, 1998. We also have audited the related financial statement
schedules as listed in the accompanying index for Item 14(a)2 on page 96. These
consolidated financial statements and schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and schedules 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 financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of ElderTrust and
subsidiaries as of December 31, 1998, and the results of their operations and
their cash flows for the period from January 30, 1998 to December 31, 1998 in
conformity with generally accepted accounting principles. Also, in our opinion,
the related financial statement schedules when considered in relation to the
basic consolidated financial statements taken a whole, presents fairly, in all
material respects, the information set forth therein.
KPMG LLP
Arlington, Virginia
February 26, 1999, except as to note 7,
which is as of March 31, 1999
74
<PAGE>
ELDERTRUST
CONSOLIDATED BALANCE SHEETS
As of December 31, 1998 and 1997
(dollar amounts in thousands, except share amounts)
<TABLE>
<CAPTION>
1998 1997
-------- ---------
<S> <C> <C>
ASSETS
Assets:
Real estate properties, at cost $163,783 -
Less - accumulated depreciation (4,444) -
Land 16,790 -
-------- ---------
Net real estate properties 176,129 -
Real estate loans receivable 47,899 -
Cash and cash equivalents 2,272 -
Restricted cash 3,549 -
Accounts receivable 4,412 -
Accounts receivable from unconsolidated entities 987 -
Prepaid expenses 986 -
Investment in and advances to unconsolidated entities 34,426 -
Other assets, net of accumulated amortization and
depreciation of $358 657 -
-------- ---------
Total assets $271,317 -
======== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Bank credit facility borrowings $90,204 -
Accounts payable and accrued expenses 1,571 -
Accounts payable to unconsolidated entities 14 -
Mortgages and bonds payable 49,594 -
Notes payable 3,000 -
Notes payable to unconsolidated entities 1,134 -
Other liabilities 3,645 -
-------- ---------
Total liabilities 149,162 -
Minority interest 8,859 -
Shareholders' Equity:
Preferred shares, $.01 par value; 20,000,000 shares
authorized; none outstanding - -
Common shares, $.01 par value; 100,000,000 shares
authorized; 7,392,600 shares issued and 7,244,800
shares outstanding 74 -
Capital in excess of par value 118,170 -
Distributions in excess of earnings (3,204) -
Common shares held in treasury, at cost, 147,800 shares (1,744) -
-------- ---------
Total shareholders' equity 113,296 -
-------- ---------
Total liabilities and shareholders' equity $271,317 -
======== =========
</TABLE>
The accompanying notes to consolidated financial statements are
an integral part of these statements.
75
<PAGE>
ELDERTRUST
CONSOLIDATED STATEMENT OF OPERATIONS
For the Period from January 30 to
December 31, 1998 (dollars in
thousands, except per share amounts)
Revenues:
Rental revenues $14,198
Interest, net of amortization of deferred loan costs 5,904
Financial services fee income 1,018
Other income 113
-------
Total revenues 21,233
-------
Expenses:
Property operating expenses 975
Interest expense, including amortization of deferred
finance costs 6,256
Depreciation 4,471
General and administrative 1,610
Start-up expenses 3,027
-------
Total expenses 16,339
-------
Net income before equity in losses of unconsolidated
entities and minority interest 4,894
Equity in losses of unconsolidated entities, net (648)
Minority interest (273)
-------
Net income $ 3,973
=======
Basic and diluted weighted average number of common shares
outstanding 7,369
=======
Net income per share - basic and diluted $ 0.54
=======
The accompanying notes to consolidated financial statements are
an integral part of these statements.
76
<PAGE>
ELDERTRUST
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
For the Period from January 30 to December 31, 1998
(amounts in thousands)
<TABLE>
<CAPTION>
Common
Capital In Distributions Shares Total
Shares Common Excess of In Excess of held in Shareholders'
Outstanding Stock Par Value Earnings Treasury Equity
------------ ---------- ----------- ------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1997 - $- $ - $ - $ - $ -
Issuance of common shares, net 7,393 74 118,170 - - 118,244
Repurchase of common shares (148) - - - (1,744) (1,744)
Net income - - - 3,973 - 3,973
Distributions - - - (7,177) - (7,177)
=========== ========= =========== ============= ========== ============
Balances at December 31, 1998 7,245 $74 $ 118,170 $(3,204) $(1,744) $113,296
=========== ========= =========== ============= ========== ============
</TABLE>
The accompanying notes to consolidated financial statements are
an integral part of these statements.
77
<PAGE>
ELDERTRUST
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Period from January 30, to December 31, 1998
(dollars in thousands)
<TABLE>
<CAPTION>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $3,973
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 4,802
Non-cash compensation expense to officers 2,018
Non-cash expense in connection with issuance of stock to trustees 179
Minority interest and equity in losses from unconsolidated entities 921
Other 4
Net changes in assets and liabilities:
Accounts receivable and prepaid expenses (3,385)
Accounts payable and accrued expenses 1,585
Other liabilities 3,645
---------
Net cash provided by operating activities 13,742
---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition and cost of real estate investments (116,388)
Investment in real estate mortgages and development funding (50,213)
Investment in and advances to unconsolidated entities (38,226)
Purchase of equipment (243)
Proceeds from collection on advances to unconsolidated entities 1,462
Principal payments received on loans and mortgages 2,314
Net increase in bond and operating reserve funds (restricted cash) (3,549)
Other (559)
---------
Net cash used in investing activities (205,402)
---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from initial public offering, net of offering costs 114,213
Loan origination costs (364)
Borrowings under Credit Facility 90,204
Principal payments on mortgages (734)
Dividends to shareholders (7,177)
Distributions to minority interests (469)
Purchases of treasury shares (1,744)
Other 3
---------
Net cash provided by financing activities 193,932
---------
Net increase in cash and cash equivalents 2,272
Cash and cash equivalents, beginning of period -
=========
Cash and cash equivalents, end of period $2,272
=========
</TABLE>
The accompanying notes to consolidated financial statements are
an integral part of these statements.
78
<PAGE>
ELDERTRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
as of December 31, 1998
1. Organization and Operations
ElderTrust was formed in the State of Maryland on September 23, 1997
and issued a total of 100 common shares to the Company's chief financial officer
for a total consideration of $100. ElderTrust completed its initial public
offering on January 30, 1998 (the "Offering") pursuant to which it issued
6,957,500 common shares. Net proceeds to ElderTrust were approximately $114.2
million.
ElderTrust had no operations prior to January 30, 1998. At December 31,
1998, ElderTrust's total assets consisted primarily of a 93% owned subsidiary,
ElderTrust Operating Limited Partnership (the "Operating Partnership") and its
wholly-owned subsidiaries and controlled partnerships (collectively, the
"Company"). At December 31, 1998, the Company's assets primarily consisted of
(i) a diversified portfolio of 22 healthcare properties, consisting primarily of
assisted living and skilled nursing facilities which are leased back to the
prior owners or other third parties, (ii) construction loans totaling $20.4
million collateralized by healthcare properties under construction, (iii) term
loans totaling $27.5 million 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, (iv) a 95%
non-voting equity interest in an unconsolidated entity (ET Capital Corp.) which
owns a $7.8 million second mortgage note, (v) a 99% non-voting limited
partnership interest in an unconsolidated entity (ET Sub-Meridian Limited
Partnership, LLP) which holds leasehold and purchase option rights for seven
skilled nursing facilities, and (vi) a 99% non-voting limited member interest in
two unconsolidated entities (ET Sub-Cabot Park, LLC and ET Sub-Cleveland Circle,
LLC) which each own an assisted living facility.
Genesis Health Ventures, Inc. ("Genesis") was co-registrant in the
Company's Offering. Approximately 70% of the Company's consolidated assets at
December 31, 1998 consisted of real estate properties leased to and loans on
real estate properties made to Genesis or entities in which Genesis accounts for
its investment using the equity method of accounting ("Genesis Equity
Investees"). In addition, the Company has investments in unconsolidated entities
which have also leased properties or provided mortgages on properties to Genesis
or Genesis Equity Investees. As such, the Company's consolidated revenues and
ability to make expected distributions to shareholders depends, in significant
part, upon the revenues derived from Genesis. See Note 5. Additionally, Michael
R. Walker serves as Chairman of the Board of Genesis and of ElderTrust.
79
<PAGE>
ELDERTRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
2. Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements of ElderTrust include all the
accounts of ElderTrust, the Operating Partnership, and the Operating
Partnership's wholly-owned subsidiaries and controlled partnerships
(collectively, the "Company"). All significant intercompany balances and
transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could vary from those estimates.
Cash and Cash Equivalents
The Company considers all short-term, highly-liquid investments that
are readily convertible to cash and have an original maturity of three months or
less at the time of purchase to be cash equivalents.
Real Estate Properties
Real estate properties are recorded at cost. Acquisition costs and
transaction fees, including legal fees, title insurance, transfer taxes,
external due diligence costs and market interest rate adjustments on assumed
debt directly related to each property are capitalized as a cost of the
respective property. The cost of real estate properties acquired is allocated
between land and buildings and improvements based upon estimated market values
at the time of acquisition. Depreciation is provided for on a straight-line
basis over an estimated composite useful life of twenty-eight and one-half years
for building and improvements.
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of
The Company reviews its long-lived assets, which includes real estate
properties, and certain identifiable intangibles for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell.
80
<PAGE>
ELDERTRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Real Estate Loans Receivable
Real estate loans receivable are recorded at cost, less the related
allowance for impaired notes receivable. Management, considering current
information and events regarding the borrowers' ability to repay their
obligations, considers a note to be impaired when it is probable that the
Company will be unable to collect all amounts due according to the contractual
terms of the note agreement. When a loan is considered to be impaired, the
amount of the impairment is measured based on the present value of expected
future cash flows discounted at the note's effective interest rate. Impairment
losses are included in the allowance for doubtful accounts through a charge to
bad debt expense. Cash receipts on the impaired notes receivable are applied to
reduce the principal amount of such notes until the principal has been recovered
and are recognized as interest income, thereafter.
Real estate loans receivable consist of term loans on assisted living
facilities in the lease-up phase maturing in three years or less, and
construction loans on assisted living or independent living facilities maturing
in three years or less. Interest income on the loans is recognized as earned
based upon the principal amount outstanding. The loans are generally fully
collateralized by the real estate and may include guarantees.
Deferred Loan Costs
Deferred loan costs are incurred in the process of acquiring financing
for the properties. The Company amortizes these costs over the term of the loan
using a method which approximates the interest method.
Federal Income Taxes
The Company will elect to qualify as a real estate investment trust
("REIT") under Sections 856 through 860 of the Internal Revenue Code of 1986, as
amended , commencing with its taxable period ending December 31, 1998. As a
result, the Company will generally not be subject to income tax on its taxable
income at corporate rates to the extent it distributes annually at least 95% of
its taxable income to its shareholders and complies with certain other
requirements. The Company believes it will qualify as a REIT and, accordingly,
no provision has been made for income taxes in the accompanying consolidated
financial statements.
81
<PAGE>
ELDERTRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Leases and Rental Income
Real estate properties are leased to operators primarily on a long-term
triple net-lease basis. Some of these leases provide for rents based on a
specific percentage of facility operating revenues with no required minimum rent
("percentage rent leases"). Other leases provide for 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 ("minimum rent leases"). Both types of
leases are triple net leases that require the lessees to pay all operating
expenses, taxes, insurance, maintenance and other costs, including a portion of
capitalized expenditures. The remaining leases ("fixed rent leases") are with
tenants in the medical and other office buildings and provide for specific
annual rents, subject to annual increases in some of the leases. Some of the
lessees subject to fixed rent leases are required to repair, rebuild and
maintain the leased properties.
Lease payments are recognized as revenue as earned. Certain of the
leases provide for scheduled annual rent increases. The Company reports base
rental revenue on these leases using the straight-line method over the terms of
the respective leases. The Company records an unbilled rent receivable or
payable representing the amount that the straight-line rental revenue exceeds or
reduces the rent currently collectible under the lease agreements.
Stock Option Plan
The Company applies the intrinsic value-based method of accounting
prescribed by the Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations, in accounting for its
fixed plan stock options. As such, compensation expense would be recorded on the
date of grant only if the current market price of the underlying shares exceeded
the exercise price.
Investments in Unconsolidated Entities
The Company, has several investments in entities in which the
controlling voting interest is owned by Mr. Edward B. Romanov, Jr., the
Company's President and Chief Executive Officer. The Company accounts for these
investments using the equity method of accounting.
Net Income per Share
Basic income per share is calculated by dividing net income by the
weighted average number of common shares outstanding. Diluted income per share
is calculated by dividing net income by the addition of weighted average common
shares and common share equivalents outstanding.
82
<PAGE>
ELDERTRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Adoption of Recent Accounting Pronouncements
Segment Reporting
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 131 superseded SFAS
No. 14, "Financial Reporting of a Business Enterprise," and established new
standards for reporting information about operating segments in annual financial
statements and requires selected information about operating segments in interim
financial reports. SFAS No. 131 also established standards for related
disclosures about products and services, geographic areas and major customers.
The Company implemented the reporting requirements of SFAS No. 131 during the
fourth quarter of 1998. The Company is a real estate investment trust whose
primary objective is to invest in healthcare facilities. As such, the Company
has one reportable business segment.
Start-up Expenses
In April 1998, the Accounting Standards Executive Committee issued
Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-Up
Activities." SOP 98-5 requires costs of start-up activities, including
organizational costs, to be expensed as incurred. Start-up activities are
defined as those one-time activities related to opening a new facility,
introducing a new product or service, conducting businesses in a new territory,
conducting business with a new process in an existing facility, or commencing a
new operation. The Company adopted SOP 98-5 effective for 1998 and, accordingly,
reflected $3.0 million of start-up expenses in the accompanying consolidated
statement of operations.
Comprehensive Income
During 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and presentation of
comprehensive income and its components in a full set of financial statements.
The Company has no items of comprehensive income which would require additional
disclosure in the consolidated financial statements.
83
<PAGE>
ELDERTRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Other Recent Accounting Pronouncements
Derivative Instruments and Hedging Activities
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. SFAS No.
133 requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure the instrument at
fair value. The accounting for changes in the fair value of a derivative depends
on the intended use of the derivative and the resulting designation. SFAS No.
133 is effective for the Company on January 1, 2000. The Company intends to
adopt this accounting standard as required. The Company does not expect the
adoption of Statement 133 to have a material adverse impact on the Company's
financial condition or results of operations because the Company does not use
derivative instruments.
3. Real Estate Loans Receivable
The following is a summary of real estate loans receivable (dollars in
thousands):
<TABLE>
<CAPTION>
Scheduled Balance at
Type of Interest Maturity December 31,
Property Loan Rate Date 1998
- - ------------------------------------------ ----------------- -------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
Harbor Place Melbourne, FL Term 9.5% 1/2000 $ 4,828
Mifflin Shillington, PA Term 9.5% 1/2000 5,164
Coquina Place Ormand Beach, FL Term 9.5% 1/2000 4,577
Lehigh Macungie, PA Term 10.5% 1/2000 6,665
Berkshire Reading, PA Term 10.5% 1/2000 6,269
Oaks Wyncote, PA Construction 9.0% 1/2001 2,410
Montchanin Wilmington, DE Construction 10.5% 8/2000 9,216
Mallard Landing Salisbury, MD Construction 15.0% 1/2000 2,054
Sanatoga Pottstown, PA Construction 10.5% 1/2001 6,716
-----------------
$ 47,899
=================
</TABLE>
The unfunded portion of construction loan commitments amounted to $7.7
million at December 31, 1998.
The Company has the obligation to purchase from and leaseback seven of
the assisted living facilities currently securing the Company's loans to the
borrowers, Genesis or entities in which Genesis owns an equity interest. The
date upon which this occurs is the earlier of the maturity of the loan or at
such time as the assisted living facility reaches a average monthly occupancy of
at least 90% for three consecutive months. Genesis has the right to extend the
loans for one to four one-year periods, if the facility has not reached
stabilized occupancy by the maturity date, upon the payment of a 0.5% fee. The
purchase prices will be determined based upon each property's net operating
income at the acquisition date and a formula agreed to on the transaction's
original commencement date.
84
<PAGE>
ELDERTRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The Company also has the option to purchase and leaseback one of the
facilities securing a construction loan made to an unaffiliated company. This
option expires in September 2000; however, the borrower has the right to extend
the maturity for two one-year extensions, upon the payment by the company of a
0.5% fee, in the event the facility has not reached average monthly occupancy of
at least 90% for three consecutive months by the maturity date. The option
agreement provides for a $13.0 million cash purchase price.
4. Real Estate Investments
As of December 31, 1998, the Company had investments in 22 real estate
properties located in six states. The properties include seven assisted living
facilities and one independent living facility with a total of 748 beds, eight
skilled nursing facilities with a total of 1,188 beds and six medical and other
office buildings. The Company leases its properties to operators pursuant to
long-term triple net leases.
At December 31, 1998, future minimum lease payments receivable are as
follows (dollars in thousands):
1999 $18,314
2000 18,229
2001 18,125
2002 17,393
2003 16,581
Thereafter 74,956
The following represents a rollforward of the balance of real estate
properties and related accumulated depreciation at December 31, 1998:
<TABLE>
<CAPTION>
Accumulated
Cost Basis Depreciation
------------------- --------------------
(amounts in thousands)
<S> <C> <C>
Balance at January 1, 1998 - -
Additions during period
Acquisitions $ 180,426 $ 4,442
Improvements 147 2
-------------- ---------------
Balance at December 31, 1998 $ 180,573 $ 4,444
============== ===============
</TABLE>
85
<PAGE>
ELDERTRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
5. Concentration of Risk
Approximately 70% of the Company's consolidated assets at December 31,
1998 consisted of real estate properties leased to and loans on real estate
properties made to Genesis or Genesis Equity Investees. Consolidated revenues
recorded by the Company in connection with these leases and borrowings
aggregated $14.0 million in 1998. In addition, the Company has investments in
unconsolidated entities which have also leased properties or provided mortgages
on properties to Genesis or Genesis Equity Investees. As such, the Company's
consolidated revenues and ability to make expected distributions to shareholders
depends, in significant part, upon the revenues derived from Genesis.
The Company and Genesis have entered into a three year agreement which
expires January 30, 2001, subject to annual renewals thereafter. The agreement
provides Genesis with a right of first refusal to lease or manage any assisted
living, independent living or skilled nursing facility financed or acquired by
the Company within Genesis' markets unless the facility will be leased or
managed by the seller or an affiliate of the seller. The agreement also provides
the Company with (a) a right of first refusal to purchase and leaseback any
assisted living, independent living or skilled nursing facilities which Genesis
determines to sell and leaseback as part of a sale/leaseback transaction or
transactions, excluding sale/leaseback transactions with commercial banking
institutions; (b) a right to offer financing to Genesis and other developers of
assisted and independent living facilities which, once developed, will be
operated by Genesis; and (c) a right to offer financing to Genesis with respect
to any new off-balance sheet financing of skilled nursing facilities currently
owned by Genesis. The Company believes that its agreement with Genesis will
provide it with opportunities to acquire and finance the development of
additional assisted living, independent living and skilled nursing facilities
within the Genesis ElderCareTM Networks.
6. Investments in Unconsolidated Entities
Summary combined financial information as of and for the period ended
December 31, 1998 for unconsolidated companies accounted for by the equity
method is as follows (dollars in thousands):
<TABLE>
<CAPTION>
ET ET Sub- ET Sub-
Sub-Meridian, ET Capital Cabot Cleveland
LLP Corp. Park, LLC Circle, LLC Total
-------------- ------------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Current assets $ 1,019 $ 57 $ - $ 6 $ 1,082
Real estate properties (1) 110,024 - 17,670 14,646 142,340
Notes receivable - 12,537 - - 12,537
Other assets 602 127 504 474 1,707
Current liabilities 1,458 21 496 577 2,552
Long-term debt (2) 107,400 9,714 17,151 14,088 148,353
Total equity 702 2,986 252 231 4,171
Rental revenue 3,269 - 137 121 3,527
Interest income - 939 - - 939
Interest expense 2,859 687 127 98 3,771
Depreciation/amortization 1,170 11 46 39 1,266
Net income (760) 164 (36) (16) (648)
Percent ownership 99% 95% 99% 99%
</TABLE>
(1) Includes properties under capital lease.
(2) Includes capital lease obligations.
In connection with ET Sub-Meridian's acquisition of seven skilled
nursing facilities from a wholly-owned subsidiary of Genesis, the Company agreed
to indemnify the property owners for any loss of deferral of tax benefits prior
to August 31, 2008 due to a default under a sublease or if a cure to a default
by the Genesis subsidiary leasing the facilities resulted in a taxable event to
the owners. The Company also agreed to indemnify Genesis against any amounts
expended by Genesis under a back-up indemnity provided by Genesis to the current
owners against any such loss of deferral to tax benefits or default resulting in
a taxable event to the owners.
86
<PAGE>
ELDERTRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
7. Credit Facility
At December 31, 1998, the Company had $90.2 million outstanding on a
$140 million bank credit facility (the "Credit Facility") which expired on
January 29, 1999. The Credit Facility enabled the Company to borrow funds at
floating rates based on a margin over the London Interbank Borrowing Rate
("LIBOR"), as determined by the percentage of the Credit Facility outstanding as
compared to the borrowing base. The margin ranges from 1.50% to 1.80% over
one-month LIBOR. At December 31, 1998, the margin was 1.80%, for a total rate of
7.36%, based on a borrowing base of $93.3 million. The Credit Facility included
a letter of credit facility, with $1 million outstanding as of December 31,
1998. In general, the maximum letters of credit outstanding can be $4.5 million,
subject to certain other constraints and conditions. The Credit Facility
contains various financial and other covenants, including, but not limited to,
minimum equity value, minimum tangible net worth, a total leverage ratio and
minimum interest coverage ratio.
The original expiration date of the Credit Facility was extended on
January 29, 1999 to April 30, 1999, and the availability under the Credit
Facility was reduced to $100 million. In addition, the letters of credit
originally available under the Credit Facility were canceled. During the
extension period, the Company notified the bank that it was in violation of
certain restrictive covenants under the Credit Facility which occurred as a
result of the Company's equity value (market value of outstanding shares) being
less than $70 million as of February 4, 1999 and due to the Company declaring
and paying shareholder distributions during this violation period. The Company
declared and made shareholder distributions and borrowed additional funds for
working capital during February 1999, prior to the determination that the
Company was in violation of the minimum equity value covenant. As a result,
additional borrowings were not permitted under the Credit Facility while it a
technical default existed.
On March 31, 1999, the term of the Credit Facility was extended from
April 30, 1999 to January 1, 2000 through an amendment which also waived the
Company's defaults under the Credit Facility and provided for available
borrowings up to an aggregate of $100.5 million. The Company had $95.8 million
of indebtedness outstanding under the Credit Facility at March 31, 1999,
including the $1.0 million extension fee paid in connection with this amendment.
The interest rate on borrowings outstanding under the Credit Facility will
increase from 1.8% over one-month LIBOR to 2.75% effective June 1, 1999. The
weighted average interest rate on borrowings outstanding under the Credit
Facility at March 31, 1999 was 6.8%, including the 1.8% margin adjustment.
8. Mortgages and Bonds Payable
As part of the acquisition price paid for certain of the real estate
properties, the Company assumed mortgages to which the acquired properties were
subject. Due in large part to the significant decrease in long-term interest
87
<PAGE>
ELDERTRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
rates since these mortgages were first incurred by the original borrower, the
interest rates on these mortgages are above the amounts that would have been
incurred under market borrowing rates in effect on the purchase date.
Accordingly, the recorded purchase price and assumed debt have been adjusted to
reflect these obligations at a market rate at the date of acquisition. The face
amount and recorded amount of these obligations is as follows (dollars in
thousands):
<TABLE>
<CAPTION>
Fair
Stated Stated Market Adjusted Debt Balance at
Interest Maturity Debt Value Amount at December 31,
Property Rate Date Amount Adjustment Assumption Date 1998
- - ----------------------- ----------- ------------ ----------- ------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
The Woodbridge
Bonds due 2005 8.00% 9/2005 $885 $ 4 $889 $889
Bonds due 2025 8.50% 9/2025 9,060 659 9,719 9,724
Belvedere NRC/ Chapel
NRC 11.00% 7/2009 11,251 287 11,538 10,949
Highgate at Paoli
Pointe Series A
Bonds 8.05% 9/2025 9,680 273 9,953 9,963
Riverview Ridge 9.00% 1/2020 2,724 257 2,981 2,944
Vernon Court 6.35% 5/2025 13,964 771 14,735 14,618
Lacey Branch Office
Bldg. 8.25% 10/2022 494 19 513 507
----------- ------------- ---------------- ---------------
Total $48,058 $2,270 $50,328 $49,594
=========== ============= ================ ===============
</TABLE>
The Company's weighted average effective interest rate on mortgages and
bonds payable was 7.2% at December 31, 1998.
Scheduled principal payments and bond sinking fund requirements are as
follows:
1999 $ 1,178
2000 1,329
2001 1,452
2002 1,561
2003 1,682
Thereafter 42,392
9. Notes Payable
The Company has issued five $600,000 promissory notes to the sellers of
the Heritage at North Andover property which the Company acquired on December 1,
1998. These notes mature on June 30, 1999 and interest only is paid monthly at
an interest rate of 7%.
88
<PAGE>
ELDERTRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
10. Share Option and Incentive Plan and Other Retirement Arrangements
The Company has established the 1998 share option and incentive plan
(the "Plan") for the purpose of attracting and retaining key executive officers
and employees, as well as non-employee trustees. A total of 779,340 common
shares were reserved for issuance under the Plan at December 31, 1998. In
conjunction with the Offering, the Company granted options with respect to
504,000 common shares to officers, employees and trustees. The exercise price
for such options is the Offering price of $18.00. The term of such options is
ten years from the date of grant. Of these options, 150,000 vested immediately,
322,500 vest ratably over three years from the date of grant and 31,500 vest
ratably over five years from date of grant. Additional options with respect to
7,500 and 25,000 common shares were granted to a trustee and officer of the
Company, respectively, during 1998 at an exercise price of $17.75 and $15.125
per share, respectively. These options vest ratably over three and five years
respectively, and terminate ten years from the date of grant.
The following is a summary of option transactions and exercise prices during
1998:
<TABLE>
<CAPTION>
Price per share
-----------------------------------------
Weighted
Options Average Range
-------------- -------------- ----------------------
<S> <C> <C> <C>
Options outstanding, January 30, 1998 - - -
Options granted 536,500 $17.86 $15.13 to $18.00
Options exercised - - -
Options terminated - - -
-------------- -------------- ----------------------
Options outstanding, December 31, 1998 536,500 $17.86 $15.13 to $18.00
============== ============== ======================
Options exercisable, December 31, 1998 150,000 $18.00 $18.00
============== ============== ======================
</TABLE>
No compensation expense has been recognized for options granted under
the Plan as the Company adopted the disclosure-only provisions of SFAS No. 123,
"Stock Based Compensation" during 1998. Under SFAS No. 123, compensation expense
of $443,000 would have been recorded in 1998 for the Company's Plan based upon
the fair value of the option awards. Earnings per share would have been $0.48 in
1998 under SFAS No. 123. The fair value determination was calculated using the
Black-Scholes option pricing model to value all stock options granted in 1998
using the following assumptions:
Weighted average risk free interest rate 5.9%
Expected volatility 17.7%
Expected dividend yield 8.1%
Weighted average expected life of options 3.65 years
Weighted average fair value at date of grant $1.69
The Company has established a SIMPLE IRA retirement plan covering all
eligible employees. Under this plan, eligible employees may make contributions
up to the Internal Revenue Service maximum, and the Company is required to make
certain minimum contributions. Company contributions to this Plan were $14,000
in 1998.
89
<PAGE>
ELDERTRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
11. Distributions
The Company must distribute at least 95% of its taxable income in order
to continue to qualify as a REIT. Distributions in a given year may exceed the
Company's earnings and profits due to non-cash expenses such as depreciation and
amortization. Per share distributions on the Company's common shares are broken
down according to the following categories for income tax purposes:
1998
------------
Ordinary income $0.973
Capital gains -
Return of capital -
------------
$0.973
============
On February 9, 1999, the Board of Trustees declared a distribution of
$0.365 per share for the period October 1, 1998 through December 31, 1998. The
distribution was paid on February 26, 1999 to shareholders of record on February
18, 1999.
12. Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share data):
1998
--------
Net income for basic and diluted earnings per share $3,973
=========
Shares for basic and diluted net earnings per share 7,369
=========
Basic and diluted net earnings per share $ 0.54
=========
The effect of the stock options and the Operating Partnership units are
antidilutive.
13. Repurchase of Common Stock
During August 1998, the Company announced that it had authorized a
Share Repurchase Program, pursuant to which the Company may from time to time
repurchase shares in open market transactions up to an amount equal to the
Company's excess cash flow. During 1998, the Company repurchased 147,800 of its
common shares for an aggregate price of approximately $1,744,000.
90
<PAGE>
ELDERTRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
14. Disclosure About Fair Value of Financial Instruments
The carrying amount of cash and cash equivalents, restricted cash and
accounts receivable approximates fair value based on the short term nature of
these investments. The carrying amount of the real estate loans receivable
approximates their fair value because they were all acquired in 1998 and
continue to be priced at market rates based on their relative credit risk at
that time.
The carrying amount of the Company's Credit Facility approximates fair
value because the borrowings are interest rate variable. The carrying amount of
the Company's mortgages and bonds payable approximates their fair value because
they were all restated to a market interest rate at the time of acquisition and
continue to be priced at market rates based on their relative credit risk at
that time. All mortgages and bonds payable were acquired during 1998. The notes
payable carrying amount approximates fair value because of their short term
nature. They were issued in December 1998 and mature in June 1999.
15. Quarterly Financial Information (Unaudited)
The following quarterly financial data summarize the unaudited
quarterly results for the year ended December 31, 1998 (in thousands, except per
share amounts):
<TABLE>
<CAPTION>
Quarter ended
-------------------------------------------------------------------------
March 31 June 30 September 30 December 31
-------------- ---------- ------------------- ------------------
<S> <C> <C> <C> <C>
1998
- - -------------------------------
Revenues $ 3,230 $ 5,366 $ 6,302 $ 6,336
Net income (1,354) 2,008 2,352 967
Net income per share:
Basic (0.18) 0.27 0.32 0.13
Diluted (0.18) 0.27 0.32 0.13
Dividends per share - 0.243 0.365 0.365
</TABLE>
16. Pro Forma Statement of Operations Information
The following unaudited pro forma statement of operations information
gives effect to all the Company's acquisitions which occurred at various times
during 1998 as though they had occurred on January 30, 1998, after giving effect
to certain adjustments, including additional rental revenues, additional
depreciation expense, and increased interest expense on the debt related to the
acquisitions. The Company's pro forma operating results include the results of
operations of the Delaware County Memorial Hospital Medical Office Building, the
Riverview Ridge assisted living facility, ET Sub-Heritage Andover, LLC and ET
Sub-Vernon Court, LLC. Additionally, the pro forma operating results includes
the Company's portion of its equity interests in ET Sub-Meridian, ET Sub-Cabot
Park, LLC and ET Sub-Cleveland Circle, LLC. The pro forma financial information
does not necessarily reflect the results of operations that would have occurred
had the acquisitions occurred at the beginning of the period.
91
<PAGE>
ELDERTRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
For the Period January 30, to December 31, 1998
-----------------------------------------------
(dollars in thousands, except per share amounts):
Total net revenue $25,791
Net income 2,739
Real estate depreciation and amortization 9,610
Basic and diluted net income per share $ 0.38
17. Related Party Transactions
In connection with the Offering, the Company issued and sold to Edward
B. Romanov, Jr., the Company's President and Chief Executive Officer, 200,000
common shares in a private placement at a per share price equal to the Offering
price of $18.00 per share. Mr. Romanov paid for these shares with a 10-year
recourse promissory note in favor of the Company, with interest only payable
until maturity at an annual rate of 7%.
In addition, Mr. Romanov, owns 118,750 units in the Operating
Partnership, which represent an interest of approximately 1.5%, and received
cash distributions of $115,500 during 1998.
The Company has entered into a three-year employment agreement with Mr.
Romanov, which will continue until January 30, 2001, and thereafter will be
automatically renewed for successive two-year terms, unless otherwise
terminated.
Mr. Romanov owns all of the voting interest in ET Capital Corp.,
representing a 5% equity interest. Mr. Romanov also owns a 1% general partner
interest in ET Sub-Meridian. He also owns a 1% managing member interest in ET
Sub-Vernon Court, LLC, ET Sub-Cabot Park, LLC and ET Sub-Cleveland Circle, LLC.
through a limited liability company of which he is the sole member. As the
Company has the ability to acquire Mr. Romanov's 1% managing interest in ET
Sub-Vernon Court, LLC, this company is consolidated into the Company's
consolidated financial statements at December 31, 1998. Through these ownership
interests, Mr. Romanov controls these entities.
92
<PAGE>
ELDERTRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
18. Minority Interest
Immediately after the Offering the Company owned approximately 93.9% of
the equity of the Operating Partnership. Subsequent to the Offering, an
additional 34,100 Operating Partnership units were issued during the year
resulting in the Company owning approximately 93.4% at December 31, 1998. The
remaining ownership interests include interests owned directly or indirectly by
directors and officers of the Company and Genesis. As of December 31, 1998,
there are 513,630 units owned by minority interests.
Subject to certain limitations in the Operating Partnership Agreement
the limited partners that hold units in the Operating Partnership have the right
to require the redemption of their units, which aggregate 513,630 at December
31, 1998, at any time after March 30, 1999 ("Unit Redemption Rights"). The
Operating Partnership's obligation with respect to the Unit Redemption Rights is
that the limited partner will receive cash from the Operating Partnership in an
amount equal to the market value of the units to be redeemed. However, in lieu
of the Operating Partnership acquiring the units for cash, the Company has the
right to elect to acquire the units directly from the limited partner, either
for cash or common shares of ElderTrust at the Company's discretion.
93
<PAGE>
19. Supplemental Cash Flow Information:
Supplemental cash flow information for the year ended December 31, 1998
is as follows (amounts in thousands):
<TABLE>
<CAPTION>
<S> <C>
Cash Paid For:
Interest $ 5,412
==========
Non-Cash Investing and Financing Transactions:
Note receivable relating to officer share purchase $ 3,600
==========
Assumption of debt in connection with acquisition of real estate properties $ 50,328
==========
Units issued in connection with acquisition of real estate properties $ 10,511
==========
Notes issued in connection with acquisition of real estate properties $ 4,134
==========
Non-cash transaction relating to the sale of partnership units:
Accounts receivable $ 3,000
==========
Reduction in advances to unconsolidated entities $ 1,690
==========
Issuance of partnership units $ 375
==========
Reduction in cost of real estate investments $ 935
==========
</TABLE>
94
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated herein by
reference to the information under the heading "Election of Trustees" in the
Company's proxy statement to be filed with respect to the 1999 annual meeting of
shareholders (the "Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by
reference to the information under the heading "Executive Compensation and Other
Information" in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated herein by
reference to the information under the heading "Securities Owned by Management
and Principal Shareholders" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by
reference to the information under the heading "Certain Relationships and
Related Transactions" in the Proxy Statement.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are included in Part II, Item 8 of this report:
(1) Financial Statements: Page Number
-----------
Independent Auditors' Report 74
Consolidated Balance Sheet as of December 31, 1998 75
Consolidated Statement of Operations for the period from
January 30 to December 31, 1998 76
Consolidated Statement of Stockholders' Equity for the period
from January 30 to December 31, 1998 77
Consolidated Statement of Cash Flows for the period
from January 30 to December 31, 1998 78
Notes to Consolidated Financial Statements 79
95
<PAGE>
(2) The following Financial Statement Schedules are included in Item 14 (d):
Schedule III - Real Estate and Accumulated Depreciation
Schedule IV - Mortgage Loans on Real Estate
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission
are not required under the related instructions or are inapplicable
and therefore have been omitted.
(3) Exhibits:
The exhibits filed with this report are listed in the exhibit index on
page 98.
(b) Current Reports on Form 8-K:
The Company filed a report on Form 8-K dated December 1, 1998 reporting
the Company's acquisition of direct or indirect interests in three
assisted living facilities and one independent living facility.
(c) Exhibits:
The exhibits listed in Item 14(a)(3) above are filed with this Form
10-K.
(d) Financial Statement Schedules:
Financial statement schedules are included on pages S-1 and S-2.
96
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, on March
31, 1999.
ElderTrust
----------------------------------------------
Registrant
By: /s/ Edward B. Romanov. Jr.
----------------------------------------------
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities indicated on March 31, 1999.
By: /s/ Edward B. Romanov, Jr.
----------------------------------------------
Edward B. Romanov, Jr.
Chief Executive Officer, President and Trustee
(Principal Executive Officer)
By: /s/ D. Lee McCreary, Jr.
----------------------------------------------
D. Lee McCreary, Jr.
Chief Financial Officer
(Principal Financial and Accounting Officer)
By: /s/ Michael R. Walker
----------------------------------------------
Michael R. Walker
Chairman of the Board
By: /s/ Kent P. Dauten
----------------------------------------------
Kent P. Dauten
Trustee
By: /s/ Rodman W. Moorhead, III
----------------------------------------------
Rodman W. Moorhead, III
Trustee
By:
----------------------------------------------
Timothy T. Weglicki
Trustee
By: /s/ Stuart D. Halpert
----------------------------------------------
Stuart D. Halpert
Trustee
97
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
- - ----------- -----------
<S> <C>
(a) 3.1 Amended and Restated Declaration of Trust of the Company
(a) 3.2 Amended and Restated Bylaws of the Company
(a) 10.1 Second Amended and Restated Agreement of Limited Partnership of the Operating Partnership
(a) 10.2 Registration Rights Agreement between the Company and the persons named therein
(a) 10.3 1998 Share Option and Incentive Plan *
(b) 10.4 Subscription Agreement between the Company and Edward B. Romanov, Jr. dated as of October 8, 1997
(a) 10.5 Employment Agreement between the Company and Edward B. Romanov, Jr.*
(a) 10.6 Non-Competition Agreement between the Company and Michael R. Walker*
(b) 10.7 Indemnification Agreement between the Company and each of its officers and trustees *
(b) 10.8 Form of Asset Transfer Agreement between the Operating Partnership and Genesis (Heritage Woods, Willowbrook,
Riverview Ridge, Pleasant View, Rittenhouse, Lopatcong, Phillipsburg, Wayne, POB 1, Lacey Bank Building,
Belvedere, Chapel Manor and Pennsburg Manor)
(b) 10.9 Plan of Asset Transfer and Contribution Agreement between the Operating Partnership and Senior LifeChoice
dated as of September 25, 1997
(b) 10.10 Form of Asset Transfer Agreement between the Operating Partnership and certain limited partners in Senior
LifeChoice of Paoli, L.P. and Senior LifeChoice of Kimberton, L.P. who are selling partnership interests
for cash
(b) 10.11 Plan of Asset Transfer and Contribution Agreement among the Operating Partnership, GHV Associates and the
partners in GHV Associates dated as of September 25, 1997
(b) 10.12 Plan of Asset Transfer and Contribution Agreement among the Operating Partnership and certain partners in
Salisbury Medical Office Building General Partnership dated as of September 25, 1997
(b) 10.13 Asset Transfer Agreement between the Operating Partnership and certain parties in Salisbury Medical Office
Building General Partnership who are selling partnership interests for cash
(b) 10.14 Form of Term Loan Agreement (Mifflin and Coquina Center (Genesis))
(b) 10.14.1 Form of Secured Note (Mifflin and Coquina Center (Genesis))
(b) 10.14.2 Form of Mortgage and Security Agreement (Mifflin and Coquina Center (Genesis))
(b) 10.14.3 Form of Assignment of Rents and Leases (Mifflin and Coquina Center (Genesis))
</TABLE>
98
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
(b) 10.14.4 Form of Collateral Assignment of Agreements Affecting Real Estate (Mifflin and Coquina Center (Genesis))
(b) 10.14.5 Form of Guaranty and Suretyship Agreement (Mifflin and Coquina Center (Genesis))
(b) 10.15 Form of Construction Loan Agreement (Oaks (Genesis))
(b) 10.15.1 Form of Secured Note (Oaks (Genesis))
(b) 10.15.2 Form of Mortgage and Security Agreement (Oaks (Genesis))
(b) 10.15.3 Form of Assignment of Rents and Leases (Oaks (Genesis))
(b) 10.15.4 Form of Collateral Assignment of Agreements Affecting Real Estate (Oaks (Genesis))
(b) 10.15.5 Form of Guaranty and Suretyship Agreement (Oaks (Genesis))
(b) 10.16 Form of Assignment and Assumption Agreement between the Operating Partnership and Genesis (Montchanin
Construction Loan)
(b) 10.17 Form of Construction Loan Commitment between the Operating Partnership and Genesis
(a) 10.18 Assignment and Assumption Agreement between ET Capital Corp. and Genesis
(a) 10.18.1 Amendment of Working Capital Loan and Security Agreement among ET Capital Corp., Genesis and AGE
Institute of Florida
(a) 10.18.2 Intercreditor Agreement among ET Capital Corp., Genesis and AGE Institute of Florida
(a) 10.19 Right of First Refusal Agreement between the Operating Partnership and Genesis
(a) 10.20 Option Agreement to purchase Holton Point facility between the Operating Partnership and Genesis
(b) 10.21 Form of Minimum Rent Lease between the Operating Partnership and Genesis (Heritage Woods, Highgate
at Paoli Pointe, Rittenhouse, Lopatcong, Phillipsburg and Wayne)
(b) 10.22 Form of Percentage Rent Lease between the Operating Partnership and Genesis (Willowbrook, Riverview
Ridge and Pleasant View)
(b) 10.23 Form of Fixed Rent Lease between the Operating Partnership and Genesis (Salisbury Medical Office Building,
Windsor Office Building and Windsor Clinic and Training Facility)
(a) 10.24 Credit Facility
10.25 First Amendment to Credit Facility
(a) 10.26 Cross Indemnification and Contribution Agreement between the Company and Genesis
(c) 10.27 Subordinated Promissory Note of ET Sub-Meridian payable to the Operating Partnership in the amount of
$18.5 million
(c) 10.28 Agreement of Limited Partnership of ET Sub-Meridian
(c) 10.29 Indemnification Agreement dated September 3, 1998 in favor of the persons and entities listed on
Exhibit B thereto
(c) 10.30 Indemnification Consent and Acknowledgment Agreement dated September 3, 1998 between the Operating
Partnership and Genesis
</TABLE>
99
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
(c) 10.31 Guarantee Agreement dated September 3, 1998 between Operating Partnership and ET Sub-Meridian
(c) 10.32 Subordinated Promissory Note of ET Sub-Meridian payable to Genesis in the amount of $8.5 million
(d) 10.33 Purchase and Sale Agreement dated as of June 12, 1998 by and among ElderTrust Operating Limited
Partnership, Genesis Health Ventures, Inc., collectively "the Purchasers" and Cabot Park Limited
Partnership, Cleveland Circle Assisted Living Limited Partnership, Heritage at the Falls Assisted
Living Limited Partnership, Vernon Court Associated Partnership, and North Andover Assisted Living
Limited Partnership, collectively "the Seller"
(d) 10.34 Amendment to the Purchase and Sale Agreement dated July 22, 1998 by and among ElderTrust Operating
Limited Partnership, Genesis Health Ventures, Inc. and Robert A. Fishman, counsel for the Seller
and the NDNE/ADS Entities
(d) 10.35 Second Amendment to the Purchase and Sale Agreement dated July 22, 1998 by and among ElderTrust
Operating Limited Partnership, Genesis Health Ventures, Inc. and Robert A. Fishman, counsel for the
Seller and the NDNE/ADS Entities
(d) 10.36 Amendment to the Purchase and Sale Agreement dated November 30, 1998 by and among ElderTrust
Operating Limited Partnership, Genesis Health Ventures, Inc. and Robert A. Fishman, counsel for the
Seller and the NDNE/ADS Entities
(d) 10.37 Assignment and Assumption of the Purchase and Sale Agreement by and between ElderTrust Operating
Limited Partnership and Genesis Health Ventures, Inc. dated November 23, 1998
10.38 Operating Agreement of ET-Sub Heritage Andover, L.L.C.
10.39 Operating Agreement of ET-Sub Vernon Court, L.L.C.
10.40 Operating Agreement of ET-Sub Cabot Park, L.L.C.
10.41 Operating Agreement of ET-Sub Cleveland Circle, L.L.C.
10.42 Option Agreement by and between Edward B. Romanov, Jr. and the Operating Partnership to purchase
Mr. Romanov's controlling ownership interest in ET-Sub Vernon Court, L.L.C.
11.1 Computation of basic and diluted earnings per share for the period from January 30, 1998 through
December 31, 1998
21.1 Subsidiaries of the Registrant
27.1 Financial Data Schedule
</TABLE>
- - ----------------
* Represents management contract or compensatory plan
(a) Incorporated by reference to the Company's Form 10-K for the year ended
December 31, 1997.
(b) Incorporated by reference to the Company's Form S-11 Registration Statement
(No. 333-37451).
(c) Incorporated by reference to the Company's Form 8-K filed on
September 18, 1998.
(d) Incorporated by reference to the Company's Form 8-K filed on December 16,
1998.
100
<PAGE>
ELDERTRUST
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
(dollars in thousands)
<TABLE>
<CAPTION>
Initial Cost to
Company Cost Gross Amount at Which Carried at Close of Period
----------------------- Capitalized -----------------------------------------------
Buildings Subsequent
and to Buildings and Accum.
Description Encumbrances Land Improvements Acquisition Land Improvements Total(1) Deprec.(2)
- - ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assisted Living Facilities:
Agawam, MA $ -(3) $1,249 $11,243 $ - $1,249 $11,243 $12,492 $362
Clark's Summit, PA -(3) 645 5,801 - 645 5,801 6,446 187
Wilkes-Barre, PA 2,724 662 5,957 - 662 5,957 6,619 157
Paoli, PA 9,680 1,128 10,148 - 1,128 10,148 11,276 326
Kimberton, PA 9,945 1,226 11,035 - 1,226 11,035 12,261 355
North Andover, MA -(3) 1,194 10,751 - 1,194 10,751 11,945 31
Newton, MA 13,964 1,793 16,141 - 1,793 16,141 17,934 47
------- ------- ------ ------ ------- ------- ------- -------
Subtotal 36,313 7,897 71,076 - 7,897 71,076 78,973 1,465
------- ------- ------ ------ ------- ------- ------- -------
Independent Living Facility:
Concord, NH -(3) 407 3,667 - 407 3,667 4,074 118
Skilled Nursing Facilities:
Philadelphia, PA -(3) 985 8,865 - 985 8,865 9,850 285
Lopatcong, NJ -(3) 1,490 13,406 - 1,490 13,406 14,896 431
Phillipsburg, NJ - 679 6,110 - 679 6,110 6,789 197
Wayne, PA -(3) 662 5,959 86 662 6,045 6,707 192
Chester, PA 11,251(4) 1,187 10,679 - 1,187 10,679 11,866 343
Philadelphia, PA -(4) 1,230 11,074 - 1,230 11,074 12,304 356
Flourtown, PA -(3) 784 7,052 - 784 7,052 7,836 227
Pennsburg, PA -(3) 1,091 9,821 - 1,091 9,821 10,912 316
------- ------- ------ ------ ------- ------- ------- -------
Subtotal 11,251 8,108 72,966 86 8,108 73,052 81,160 2,347
------- ------- ------ ------ ------- ------- ------- -------
Medical Office and Other Buildings:
Upland, PA -(3) - 4,383 56 - 4,439 4,439 143
Drexel Hill, PA -(3) - 8,141 5 - 8,146 8,146 262
Salisbury, MD -(3) 135 1,212 - 135 1,212 1,347 39
Windsor, CT -(3) 148 1,333 - 148 1,333 1,481 43
Windsor, CT -(3) 33 295 - 33 295 328 9
Forked River, NJ 494 62 563 - 62 563 625 18
------- ------- ------ ------ ------- ------- ------- -------
Subtotal 494 378 15,927 61 378 15,988 16,366 514
------- ------- ------ ------ ------- ------- ------- -------
Grand Total $48,058 $16,790 $163,636 $147 $16,790 $163,783 $180,573 $4,444
======= ======= ======== ======= ======= ======== ======== =======
(1) The aggregate cost for Federal income tax purposes is $171,715.
(2) Depreciation expense is calculated using a 28.5 year composite life for both
building and equipment.
(3) Encumbered by the Credit Facility in the aggregate amount of $100 million.
(4) This is a single note which covers both properties.
</TABLE>
S-1
<PAGE>
(Restubbed Table)
<TABLE>
<CAPTION>
Orig. Construct./ Date
Renovation Date Acquired
- - ---------------------------------------------------------------------
<S> <C> <C>
Assisted Living Facilities:
Agawam, MA 1997 Jan-98
Clark's Summit, PA 1996 Jan-98
Wilkes-Barre, PA 1993 Mar-98
Paoli, PA 1995 Jan-98
Kimberton, PA 1996 Jan-98
North Andover, MA 1995 Dec-98
Newton, MA 1905/1995 Dec-98
Concord, NH 1926 Jan-98
Skilled Nursing Facilities:
Philadelphia, PA 1930/1993 Jan-98
Lopatcong, NJ 1984/1992 Jan-98
Phillipsburg, NJ 1930/1993 Jan-98
Wayne, PA 1920/1989 Jan-98
Chester, PA 1960/1983 Jan-98
Philadelphia, PA 1973 Jan-98
Flourtown, PA 1977/1991 Jan-98
Pennsburg, PA 1982 Jan-98
Subtotal
Medical Office and Other Bui
Upland, PA 1977 Jan-98
Drexel Hill, PA 1984/1997 Feb-98
Salisbury, MD 1984 Jan-98
Windsor, CT 1996 Jan-98
Windsor, CT 1934/1965 Jan-98
Forked River, NJ 1996 Jan-98
Subtotal
Grand Total
</TABLE>
(1) The aggregate cost for Federal income tax purposes is $171,715.
(2) Depreciation expense is calculated using a 28.5 year composite life for both
building and equipment.
(3) Encumbered by the Credit Facility in the aggregate amount of $100 million.
(4) This is a single note which covers both properties.
<PAGE>
S-2
ELDERTRUST
SCHEDULE IV
MORTGAGE LOANS ON REAL ESTATE
December 31, 1998
(dollars in thousands)
<TABLE>
<CAPTION>
Final Periodic
Number of Interest Maturity Payment
Description Beds Rate Date Term Prior Liens
- - -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Term Loans - Assisted Living Facilities:
Melbourne, FL 102 9.50% 1/2000 (2) None
Shillington, PA 67 9.50% 1/2000 (2) None
Ormond Beach, FL 80 9.50% 1/2000 (2) None
Macungie, PA 70 10.50% 1/2000 (2) None
Reading, PA 64 10.50% 1/2000 (2) None
----------
Subtotal 383
----------
Construction Loans - Assisted or Independent
Living Projects:
Wyncote, PA 52 9.00% 1/2001 (2) None
Wilmington, DE 92 10.50% 8/2000 (2) None
Salisbury, MD 147 15.00% 1/2000 (3) $840
Pottstown, PA 70 10.50% 1/2001 (2) None
----------
Subtotal 361
----------
Penn Mortgage Loan - Personal Care Facility (unoccupied):
Philadelphia, PA 180 10.25% 12/1998 (2) None
----------
Grand Total 924
==========
(1) The aggregate cost for Federal income tax purposes is $47,899.
(2) Interest only payable to maturity date. The Company has either the
obligation or option to purchase the various facilities at maturity as
defined in the loan agreements.
(3) The borrower is required to repay the outstanding principal balance based
on sale proceeds, net of closing costs and $0.7 per apartment or cottage
to the junior lienholder.
Activity for the year ended December 31, 1998 is as follows:
Mortgage
Loans
------------
Balance at December 31, 1997 $ -
Additions during the period:
New mortgage loans 50,213
Other -
Deductions during the period:
Collections of principal (2,314)
------------
Balance at December 31, 1998 $47,899
============
</TABLE>
S-2
<PAGE>
<TABLE>
<CAPTION>
(Restubbed Table)
Loans Subject to
Carrying Amount Delinquent
Face Amount of Mortgages at Principal
Description of Mortgages December 31, 1998(1) or Interest
- - ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Term Loans - Assisted Living Facilities:
Melbourne, FL $4,828 $4,828 -
Shillington, PA 5,164 5,164 -
Ormond Beach, FL 4,577 4,577 -
Macungie, PA 6,665 6,665 -
Reading, PA 6,269 6,269 -
------------------------------------
Subtotal 27,503 27,503
------------------------------------
Construction Loans - Assisted or Independent
Living Projects:
Wyncote, PA 5,380 2,410 -
Wilmington, DE 9,500 9,216 -
Salisbury, MD 6,407 2,054 -
Pottstown, PA 6,511 6,716 -
------------------------------------
Subtotal 27,798 20,396
------------------------------------
Penn Mortgage Loan - Personal Care Facility (unoccupied)
Philadelphia, PA 800 - -
------------------------------------
Grand Total $56,101 $47,899
====================================
</TABLE>
<PAGE>
FIRST AMENDMENT TO CREDIT AGREEMENT
by and among
ELDERTRUST,
a Maryland real estate investment trust,
ELDERTRUST OPERATING LIMITED PARTNERSHIP,
a Delaware limited partnership,
VARIOUS BANKS,
DEUTSCHE BANK AG, NEW YORK BRANCH,
as Issuing Bank,
and
GERMAN AMERICAN CAPITAL CORPORATION,
as Administrative Agent
- - --------------------------------------------------------------------------------
Dated as of January 29, 1999
- - --------------------------------------------------------------------------------
<PAGE>
FIRST AMENDMENT TO CREDIT AGREEMENT
This FIRST AMENDMENT TO CREDIT AGREEMENT, dated as of January
29, 1999 (as amended, restated, replaced, supplemented or otherwise modified
from time to time, this "Agreement"), by and among ELDERTRUST (the "REIT"), a
Maryland real estate investment trust, ELDERTRUST OPERATING LIMITED PARTNERSHIP
(the "Borrower"), a Delaware limited partnership, the Banks from time to time
party to the Credit Agreement (defined below), DEUTSCHE BANK AG, NEW YORK BRANCH
(the "Issuing Bank"), and GERMAN AMERICAN CAPITAL CORPORATION (the
"Administrative Agent").
Unless the context otherwise requires, all capitalized terms
used in this Agreement shall have the respective meanings set forth herein or in
that certain Credit Agreement dated as of January 30, 1998 (as the same may be
amended, restated, replaced, supplemented or otherwise modified from time to
time, the "Credit Agreement") by and among the REIT, the Borrower, the various
Banks that from time to time become parties under the Credit Agreement, the
Issuing Bank and the Administrative Agent.
W I T N E S S E T H :
WHEREAS, pursuant to the Credit Agreement, the Banks have
agreed to make Loans from time to time to the Borrower and the Issuing Bank has
agreed to issue Letters of Credit for the account of the Borrower;
WHEREAS, certain Loans have been made to the Borrower
(collectively, the "Existing Loans") which are due and payable by the Borrower
on January 29, 1999 (the "Maturity Date"); and
WHEREAS, the Borrower has requested and the Banks have agreed
to modify and supplement the Credit Agreement so as to extend the Maturity Date
for the Existing Loans and any future Loans made pursuant to the Credit
Agreement as amended by this Agreement, as provided herein and on and subject to
the conditions set forth herein.
NOW, THEREFORE, in consideration of the foregoing, the
agreements contained herein and other good and valuable consideration, the
receipt and adequacy of which are hereby acknowledged, it is agreed:
1. Certain Defined Terms. For purposes of this Agreement, the following
terms shall have the meanings specified below, and in the event of any conflict
between the definitions of such terms set forth below and those, if any, set
forth in the Credit Agreement for such terms, those set forth below shall apply
with respect to the extension of the Maturity Date and the First Extended
Maturity Date:
"First Extended Maturity Date" has the meaning specified in
Section 1.1
"First Extension Fee" has the meaning specified in Section
2(A)(iii)
"Second Extended Maturity Date" has the meaning specified in
Section 1.2.
"Second Extension Fee" has the meaning specified in Section
2(B)(iii)
"Second Extension Request" has the meaning specified in
Section 1.2
1. Extension of Maturity Date. Subject to the terms of this Agreement,
the parties hereto agree to amend the provisions of Section 2.03(b) of the
Credit Agreement to extend the Maturity Date as hereinafter set forth.
1.1 First Extension: Effective on the Effective Date (as
defined below) of this Agreement, the Maturity Date shall be extended
to April 30, 1999 (the "First Extended Maturity Date").
<PAGE>
1.2 Second Extension:Not less than 10 Business Days prior to
the First Extended Maturity Date, the Borrower may make a written
request (the "Second Extension Request") to the Administrative Agent,
requesting that the First Extended Maturity Date be extended to July
30, 1999 (the "Second Extended Maturity Date") upon satisfaction of the
conditions precedent contained in Section 2(B) of this Agreement.
1.3 Agreement of Banks: The Administrative Agent, as of the
date hereof, is the only Bank (as defined in the Credit Agreement) and
accordingly, and notwithstanding the provisions of Section 2.03(b) of
the Credit Agreement, the only consent required to the extension of the
Maturity Date to the First Extended Maturity Date and the Second
Extended Maturity Date is that of the Administrative Agent. The consent
of the Administrative Agent shall be granted upon satisfaction of all
applicable conditions precedent set forth in Section 2 of this
Agreement.
2. Effective Date; Conditions Precedent. (A) This Agreement
shall be effective on the date (the "Effective Date") upon which all of the
following conditions have been satisfied
(i) The parties hereto shall have executed and
delivered this Agreement;
(ii) The Borrower shall have delivered to the
Administrative Agent a certificate of an Authorized Officer of the Borrower
stating that no Default or Event of Default under the Credit Agreement and the
other Credit Documents has occurred and is continuing as of the Effective Date.
In addition, the Administrative Agent shall be satisfied that the Borrower is in
compliance with all its obligations under the terms of the Credit Agreement and
the other Credit Documents;
(iii) The Borrower shall have paid a non-refundable
extension fee (the "First Extension Fee") to the Administrative Agent in the
amount of Three Hundred One Thousand Six Hundred Forty and 00/100 US Dollars (US
$301,640.00);
(iv) The Borrower shall have executed and/or
delivered or caused to be executed and delivered to the Administrative Agent
such documents and instruments with respect to this Agreement and the
transactions contemplated herein as the Administrative Agent may reasonably
request, including without limitation, a reconfirmation of the Subsidiaries
Guaranty and the Parent Guaranty;
(v) The REIT and the Borrower shall each ratify,
affirm, reaffirm and confirm to the Administrative Agent in writing that each of
the representations, warranties, covenants and agreements made by the REIT and
the Borrower in the Credit Agreement and other Credit Documents as supplemented
and modified hereby are true, correct and complete as of the Effective Date;
and,
(vi) The REIT and the Borrower shall deliver to the
Administrative Agent current certificates of good standing for each of the REIT
and the Borrower issued by the Secretary of State of the states in which each
entity is formed.
(B) The effectiveness of the Second Extended Maturity Date
shall be conditioned upon satisfaction of all of the following conditions:
<PAGE>
(i) The Borrower shall deliver to the Administrative
Agent a certificate of an Authorized Officer of the Borrower stating that no
Default or Event of Default under the Credit Agreement and the other Credit
Documents shall have occurred and be continuing as of the First Extended
Maturity Date. In addition, the Administrative Agent shall be satisfied that the
Borrower is in compliance with all its obligations under the terms of the Credit
Agreement and the other Credit Documents;
(ii) The Borrower shall have timely delivered to the
Administrative Agent the Second Extension Request;
(iii) The Borrower shall have paid a non-refundable
extension fee (the "Second Extension Fee") to the Administrative Agent in the
amount of Four Hundred Two Thousand One Hundred Eighty and 00/100 US Dollars (US
$402,180.00) ;
(iv) The Borrower shall have executed and/or
delivered or caused to be executed and delivered to the Administrative Agent
such documents and instruments with respect to this Agreement and the
transactions contemplated herein as the Administrative Agent may reasonably
request, including without limitation, a reconfirmation of the Subsidiaries
Guaranty and the Parent Guaranty;
(v) The REIT and the Borrower shall each ratify,
affirm, reaffirm and confirm to the Administrative Agent in writing that each of
the representations, warranties, covenants and agreements made by the REIT and
the Borrower in the Credit Agreement and other Credit Documents as supplemented
and modified hereby are true, correct and complete as of the First Extended
Maturity Date; and
(vi) The REIT and the Borrower shall have delivered
to the Administrative Agent a
binding commitment letter, in form and substance satisfactory to the
Administrative Agent, and issued by a financial institution acceptable to the
Administrative Agent, pursuant to which such financial institution commits to
refinance the Total Commitment and all other sums due to the Administrative
Agent and the Banks under the Credit Agreement and the other Credit Documents
not later than the Second Extended Maturity Date.
<PAGE>
3. Amendments to all Existing Loan Documents. From and after the
Effective Date, each reference in any of the Credit Documents relating to the
Credit Agreement shall be a reference to the Credit Agreement as supplemented
and modified hereby. In the event of any conflict between the terms of this
Agreement and the terms of the Credit Agreement, the terms of this Agreement
shall supersede and be controlling.
4. Enforceable Obligations. The REIT and the Borrower hereby ratify,
affirm, reaffirm, confirm, acknowledge and agree that (i) the Credit Agreement,
and the other Credit Documents, as supplemented and modified by this Agreement,
represent the valid, enforceable and collectible obligations of the REIT and the
Borrower, and (ii) the Liens, security interests, assignments and other rights
evidenced by the Credit Agreement and the other Credit Documents, as
supplemented and modified by this Agreement, continue uninterrupted from the
their original dates of execution and delivery.
5. Payment of Expenses. The Borrower agrees to pay all costs and
expenses incurred by the Administrative Agent in connection herewith including,
without limitation, all recordation and filing fees, taxes and reasonable
attorneys' fees and expenses.
6. Letters of Credit. It is specifically understood and agreed that all
outstanding Letters of Credit shall expire as set forth in each Letter of Credit
without extension or renewal.
7. Total Commitment; Borrowing Base. The REIT, the Borrower and the
Administrative Agent (in its capacity as Administrative Agent and the only Bank)
specifically agree and acknowledge that, from and after the Effective Date, (a)
the Total Commitment shall be permanently reduced to [$100,545,598.00] and (b)
no further additions to the Borrowing Base shall be made.
8. Borrowings. From and after the Effective Date (a) the "Minimum
Borrowing Amount" as defined in Section 10.01 of the Credit Agreement shall be
"$500,000.00", and (b) the last sentence of Section 1.03(a) of the Credit
Agreement shall be amended in full to read as follows: "Notwithstanding anything
to the contrary contained in this Agreement, no more than two Notices of
Borrowing may be given in any 30 consecutive day period."
<PAGE>
9. Limitation of Amendments. This Agreement is limited as specified and
other than the specific terms and provisions contained herein shall not
constitute an amendment, modification or waiver of, or otherwise affect, in any
way, any other provisions of the Credit Agreement, the Notes, the Mortgages or
any other Credit Documents.
10. Counterparts. This Agreement may be executed in any number of
counterparts and by the different parties hereto on separate counterparts, each
of which when so executed and delivered shall be an original, but all of which
shall together constitute one and the same instrument.
11. Captions, etc. The use of the singular shall include the plural
when the context requires and vice versa. The captions contained herein are for
purposes of convenience and are not part of this Agreement.
12. Further Assurances. The REIT and the Borrower agree to execute and
deliver, or cause to be executed and delivered, to the Administrative Agent all
other instruments, certificates, agreements, consents and opinions, and to take,
or cause to be taken, such other actions, including, without limitation the
recording of documents in each case as the Administrative Agent may reasonably
require in order to accomplish, evidence or confirm the terms of this Agreement.
In connection with the foregoing, the Borrower agrees to pay or provide for to
the satisfaction of the Administrative Agent and Issuing Bank the payment of all
costs and expenses in connection therewith, including, without limitation, all
attorney's fees and expenses.
13. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York, including, without
limitation, Section 5-1401 of the General Obligations Law, but otherwise without
regard to conflict of law principles.
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be duly executed and delivered by its duly authorized
representatives as of the day and year first above written.
ELDERTRUST
By: /s/ Edward B. Romanov, Jr.
-------------------------------------------------
Name:
Title:
ELDERTRUST OPERATING LIMITED PARTNERSHIP
By: ElderTrust, general partner
By: /s/ Edward B. Romanov, Jr.
-------------------------------------------------
Name:
Title:
GERMAN AMERICAN CAPITAL CORPORATION, as a Bank and as
Administrative Agent
By: /s/ Christopher Tognola
-------------------------------------------------
Name:
Title:
By: /s/ Joel C. Horne
-------------------------------------------------
Name:
Title:
DEUTSCHE BANK AG, NEW YORK BRANCH, as Issuing Bank
By: /s/ Steven A. Cohen
-------------------------------------------------
Name:
Title:
By: /s/ Rich Uhlig
-------------------------------------------------
Name:
Title:
<PAGE>
OPERATING AGREEMENT
OF
ET SUB-HERITAGE ANDOVER, L.L.C.
THIS OPERATING AGREEMENT dated as of October 23, 1998 (the
"Agreement") is entered into by and between ET SUB-HERITAGE ANDOVER, L.L.C., a
Delaware limited liability company (the "LLC"), and ELDERTRUST OPERATING LIMITED
PARTNERSHIP, a Delaware limited Partnership (the "Member").
Recitals
A. A Certificate of Formation dated July 16, 1998 (the "Certificate")
has been filed by the Member to form a limited liability company under the name
"ET Sub-Heritage Andover, L.L.C." pursuant to and in accordance with the
Delaware Limited Liability Company Act, as amended (6 Del. C. ss. 18-101, et
seq.) (the "Act").
B. By executing this Agreement, the Member hereby (i) ratifies the
formation of the LLC and the filing of the Certificate and (ii) continues the
existence of the LLC.
C. The Member and the LLC hereby adopt this Agreement to set forth the
terms governing the affairs of the LLC and the conduct of its business.
Terms of Agreement
1. Name. The name of the LLC is ET Sub-Heritage Andover, L.L.C. The
Member may change the name of the LLC from time to time.
2. Purpose and Powers. The LLC may carry on any lawful business purpose
or activity for which a limited liability company may be organized under the
Act. The LLC shall have all power necessary or convenient to the conduct,
promotion or attainment of its business, purposes and activities.
3. Registered Office and Agent. The address of the LLC's registered
office in the State of Delaware is 1209 Orange Street, Wilmington, County of New
Castle, Delaware 19801. The name of the LLC's registered agent at such address
is The Corporation Trust Company.
4. Member. ElderTrust Operating Limited Partnership is the sole member
of the LLC. The address of the Member is 101 East State Street, Suite 101,
Kennett Square, Pennsylvania 19348.
5. Management by Member. Responsibility for the management of the
business and affairs of the LLC shall be vested in the Member, which shall have
all right, power and authority to manage, operate and control the business and
affairs of the LLC and to do or cause to be done any and all acts, at the
expense of the LLC, deemed by it to be necessary or convenient to the
furtherance of the purpose of the LLC described in this Agreement, and all
powers, statutory or otherwise, possessed by members of a limited liability
company under the Act. Without limiting the generality of the foregoing, the
Member may appoint, remove and replace officers of the LLC at any time and from
time to time, and the Member, in its sole discretion, may retain such persons or
entities (including any person or entity in which the Member shall have an
interest or of which the Member is an affiliate) as it shall determine to
provide services to or on behalf of the LLC for such compensation as the Member
deems appropriate. The Member is hereby designated as an authorized person,
within the meaning of the Act, to execute, deliver and file the Certificate and
any amendments or restatements thereof required by law.
<PAGE>
6. Term. The life of the LLC shall be perpetual; provided, however,
that the LLC shall dissolve, and its affairs shall be wound up at the election
of the Member or upon the occurrence of an event of dissolution under the Act;
provided, further, however, that upon the occurrence of an event of dissolution
under the Act, the Member may elect to continue the LLC to the extent permitted
under the Act.
7. Capital Contributions. As of the date of this Agreement, the Member
has made an initial contribution to the capital of the LLC as set forth on
Exhibit A. Except to the extent required under the Act, the Member shall not be
required to make any additional contributions to the capital of the LLC.
8. Limitation on Liability; Indemnification.
a) Except as otherwise provided in the Act, the debts,
obligations and liabilities of the LLC, whether arising in contract,
tort or otherwise, shall be solely the debts, obligations and
liabilities of the LLC. None of the Member, its partners or any
officers, trustees, directors, employees or agents of any partner in
the Member, or any officers, employees or agents of the LLC, shall be
obligated personally for any debt, obligation or liability of the LLC
solely by reason of the fact that he, she or it (i) is or was such
Member, partner in the Member or officer, trustee, director, employee
or agent of any partner in the Member, or officer, employee or agent of
the LLC, or (ii) is or was serving at the request of the LLC as a
director, partner, venturer, trustee, employee, agent or similar
functionary of another foreign or domestic limited liability company,
corporation, partnership, sole proprietorship, trust, employee benefit
plan or other enterprise. The failure of the LLC to observe any
formalities or requirements relating to the exercise of its powers or
management of its business or affairs under the Act or this Agreement
shall not be grounds for imposing personal liability on the Member, its
partners or any officers, trustees, directors, employees or agents of
any partner in the Member, or any officers, employees or agents of the
LLC, for any liabilities of the LLC.
<PAGE>
b) The LLC shall indemnify and hold harmless the Member, its
partners or any officers, trustees, directors, employees or agents of
any partner in the Member, or any officers, employees or agents of the
LLC (individually, in each case, an "Indemnitee"), to the fullest
extent permitted by law from and against any and all losses, claims,
demands, costs, damages, liabilities (joint or several), expenses of
any nature (including attorneys' fees and disbursements), judgments,
fines, settlements and other amounts arising from any and all claims,
demands, actions, suits or proceedings, whether threatened, pending or
completed and whether civil, criminal, administrative, arbitrative or
investigative, including, without limitation, any appeal to any such
claim, demand, action, suit or proceeding and any inquiry or
investigation that could lead to such claim, demand, action, suit or
proceeding, arising out of or incidental to the business or activities
of or relating to the LLC and in which any such Indemnitee may be, or
may have been, involved, or threatened to be involved, as a party or
otherwise, by reason of the fact that he, she or it (i) is or was the
Member, a partner in the Member or an officer, trustee, director,
employee or agent of any partner in the Member, or an officer, employee
or agent of the LLC, or (ii) is or was serving at the request of the
LLC as a director, officer, partner, venturer, proprietor, trustee,
employee, agent or similar functionary of another foreign or domestic
limited liability company, corporation, partnership, joint venture,
sole proprietorship, trust, employee benefit plan or other enterprise,
to the fullest extent permitted under the Act, as the same exists or
may hereafter be amended, regardless of whether the Indemnitee
continues to be the Member, a partner in the Member or an officer,
trustee, director, employee or agent of any partner in the Member, or
an officer, employee or agent of the LLC, at the time any such
liability or expense is paid or incurred; provided, however, that this
provision shall not eliminate or limit the liability of an Indemnitee
(i) for any breach of the Indemnitee's duty of loyalty to the LLC or
its Member or (ii) for acts or omissions which involve intentional
misconduct, gross negligence or a knowing violation of law. Any right
of an Indemnitee under this Section 8 shall be a contract right and as
such shall run to the benefit of such Indemnitee. Any repeal or
amendment of this Section 8 shall be prospective only and shall not
limit the rights of any such Indemnitee or the obligations of the LLC
with respect to any claim arising from or related to the status or the
services of such Indemnitee in any of the foregoing capacities prior to
any such repeal or amendment to this Section 8. Such right shall
include the right to be paid by the LLC expenses incurred in
investigating or defending any such proceeding in advance of its final
disposition to the maximum extent permitted under the Act, as the same
exists or may hereafter be amended. If a claim for indemnification or
advancement of expenses hereunder is not paid in full by the LLC within
sixty (60) days after a written claim has been received by the LLC, the
claimant may at any time thereafter bring suit against the LLC to
recover the unpaid amount of the claim, and if successful in whole or
in part, the claimant shall also be entitled to be paid the expenses of
prosecuting such claim. It shall be a defense to any such action that
such indemnification or advancement of costs of defense are not
permitted under the Act, but the burden of proving such defense shall
be on the LLC. Neither the failure of the LLC to have made its
determination prior to the commencement of such action that
indemnification of, or advancement of costs of defense to, the
Indemnitee is permissible in the circumstances nor an actual
determination by the LLC that such indemnification or advancement is
not permissible shall be a defense to the action or create a
presumption that such indemnification or advancement is not
permissible. In the event of the death of any Indemnitee, such right
shall inure to the benefit of his or her heirs, executors,
administrators and personal representatives. The rights conferred above
shall not be exclusive of any other right which any Indemnitee may have
or hereafter acquire under any statute, resolution, agreement or
otherwise. If authorized by the Member, the LLC may purchase and
maintain insurance on behalf of any Indemnitee to the full extent
permitted by the Act.
<PAGE>
9. Distributions. The Member from time to time, in its sole discretion,
shall determine the amount of cash and other property of the LLC that is not
reasonably necessary for the operation of the LLC and is available for
distribution to the Member and shall cause the LLC to distribute such cash and
property to the Member, subject to the Act.
10. Assignment of Interest. The Member from time to time may assign or
transfer all or any part of its interest in the LLC, including granting security
interests in such interest.
11. Winding Up and Distribution Upon Dissolution. Upon dissolution of
the LLC, the Member shall wind up the business and affairs of the LLC and shall
cause all property and assets of the LLC to be distributed as follows:
a) first, all of the LLC's debts, liabilities and obligations,
including any loans or advances from the Member, shall be paid in full
or reserves therefor shall be set aside; and
b) any remaining assets shall be distributed to the Member.
12. Amendments. The Member and the LLC may at any time and from time to
time amend this Agreement by executing a written amendment signed by authorized
representatives of both parties.
13. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware (but not including the choice
of law rules thereof), including, without limitation, the Act.
<PAGE>
IN WITNESS WHEREOF, the LLC and the Member have executed this
Agreement as of the date first set forth above.
LLC:
ET SUB-HERITAGE ANDOVER, L.L.C.
By: ElderTrust Operating Limited Partnership, Sole Member
By: ElderTrust, General Partner
By: /s/ Edward B. Romanov, Jr.
---------------------------------------
Name:
Title:
MEMBER:
ELDERTRUST OPERATING LIMITED PARTNERSHIP
By: ElderTrust, General Partner
By: /s/ Edward B, Romanov, Jr.
---------------------------------------
Name:
Title:
<PAGE>
EXHIBIT A
MEMBER'S CAPITAL CONTRIBUTION
Cash in the Amount of:
Assignment of:
<PAGE>
OPERATING AGREEMENT
OF
ET SUB-VERNON COURT, L.L.C.
This Operating Agreement of ET SUB-VERNON COURT, L.L.C. (this
"Agreement"), dated as of October 23, 1998, is entered into by and between
VERNON ALF, L.L.C., a Delaware limited liability company (the "Managing
Member"), and ELDERTRUST OPERATING LIMITED PARTNERSHIP, a Delaware limited
partnership, as the Class A Member (the "Class A Member") and ELDERTRUST
OPERATING LIMITED PARTNERSHIP, a Delaware limited partnership, as the Class B
Member (the "Class B Member").
R E C I T A L S:
WHEREAS, the Company was formed under the Delaware Limited Liability
Company Act, as amended (the "Act"), by the filing of a certificate of formation
with the Secretary of State of the State of Delaware on July 16, 1998; and
WHEREAS, the Members (as defined below) desire by this Agreement to set
forth the rights and obligations of, the relationships among, and certain other
provisions governing the conduct of the affairs of the Members and the Company;
and
WHEREAS, certain capitalized terms used herein shall have the meanings
ascribed thereto in Article XIV.
NOW, THEREFORE, in consideration of the foregoing, of the mutual
promises herein contained and of other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto,
intending legally to be bound, hereby covenant and agree as follows:
ARTICLE I
ORGANIZATIONAL AND OTHER MATTERS
SECTION 1.01. Formation; Admission. By its execution and delivery of
this Agreement, each of the Members hereby ratifies the formation of the Company
under the provisions of the Act pursuant to the filing of the Certificate of
Formation with the Secretary of State of the State of Delaware and confirms its
admission to the Company as one of the initial Members.
SECTION 1.02. Name. The name of the Company shall be ET SUB-VERNON
COURT, L.L.C. and the business of the Company shall be conducted under such
name.
SECTION 1.03. Principal Place of Business. The principal place of
business and the principal office of the Company shall be located at 101 East
State Street, Suite 101, Kennett Square, Pennsylvania 19348. The Company may
have such other or additional offices, either within or without the State of
Delaware, as the Managing Member shall deem advisable.
SECTION 1.04. Registered Agent. The name of the Company's initial
registered agent in the State of Delaware is Corporation Trust Center and the
address of such registered agent is 1209 Orange Street, Wilmington, County of
New Castle, Delaware. The Managing Member may change the registered agent of the
Company from time to time.
ARTICLE II
PURPOSE AND POWERS
SECTION 2.01. Purpose of the Company. The sole purpose of the Company
is to acquire, own, develop, mortgage, encumber, hypothecate, lease, sell,
maintain, improve, alter, remodel, expand, manage, and otherwise operate and
deal with all or part of (a) that certain assisted living facility known as
Heritage at Vernon Court and located at 430 Centre Street, Newton, Massachusetts
(the "Property"), including obtaining financing and refinancing for the above
purposes, selling, or otherwise disposing of all or any part of the Property,
and investing and reinvesting any funds held in reserve. Notwithstanding
anything contained herein to the contrary, the Company shall not engage in any
business, and it shall have no purpose unrelated to the Property and shall not
acquire any real property or own assets other than those related to the Property
or otherwise in furtherance of the purposes of the Company.
SECTION 2.02. Powers of the Company. In order to carry out its
purposes, the Company is empowered and authorized to engage in such acts and
activities as may be required, in the reasonable judgment of the Managing
Member, whose determination shall be conclusive, to carry out the foregoing
purposes, including the power to enter into and perform its obligations under
the Loan Documents (as defined below).
SECTION 2.03 Right to Rely on Managing Member. Any Person dealing with
the Company shall be entitled to rely (without further duty of inquiry) upon a
certificate signed by the Managing Member as to:
(a) the identity of any Member;
(b) the existence or nonexistence of any fact or facts that constitute
a condition precedent to acts on behalf of the Company by the Managing Member or
that are in any other manner germane to the affairs of the Company;
(c) the Persons who are authorized to execute and deliver any
instrument or document of the Company; or
(d) any other matter whatsoever involving the Company or any Member.
SECTION 2.04 Limitation on Authority. So long as any indebtedness
remains outstanding under the Loan Documents, the Company shall not, and the
Managing Member shall not permit the Company to, incur any Indebtedness except
as permitted under the Loan Documents.
ARTICLE III
CAPITAL
SECTION 3.01. Capital Contributions of Members. As of the date of this
Agreement, each Member shall make a Capital Contribution to the Company as set
forth opposite its name on Schedule A. The Members shall not be required to make
any Capital Contributions to the Company other than as set forth in this Section
3.01.
SECTION 3.02. Capital Accounts. A separate Capital Account shall be
established and maintained for each Member in all events in accordance with the
rules of Regulations Section 1.704-1(b)(2)(iv), as amended from time to time.
SECTION 3.03. No Interest on Capital Contributions or Amounts in
Capital Account. No Member shall be entitled to receive any interest on its
Capital Contributions or its outstanding Capital Account balance.
SECTION 3.04. Return of Capital. Except upon the dissolution of the
Company or as may be specifically provided in this Agreement, no Member shall
have the right to demand or to receive the return of all or any part of its
Capital Account or its Capital Contributions to the Company.
ARTICLE IV
ALLOCATION OF PROFITS AND LOSSES; DISTRIBUTIONS OF
CASH FLOW AND CERTAIN PROCEEDS
SECTION 4.01. Certain Definitions.
"Cash Flow" shall mean and refer to the sum of the following:
(i) the taxable income (or loss) of the Company for federal
income tax purposes as shown on the books of the Company for the period for
which such determination is being made, excluding taxable income, gain, or loss
from any Terminating Capital Transactions, increased by (A) the amount of cost
recovery, depreciation, or amortization deductions or similar deductions in lieu
thereof deductible by the Company in computing such taxable income, and any
other non-cash accruals deductible in determining federal taxable income or
loss, for such period, and (B) any non-taxable income or receipts of the Company
for such period (including, without limitation, any amounts received during such
period that were included in taxable income in a prior period and the proceeds
of any loans to the Company) except Capital Contributions to the Company
pursuant to Article III; and reduced by (AA) payments from the sum of the
foregoing upon the principal of any loan to the Company, (BB) expenditures from
the sum of the foregoing for the acquisition, improvement, development, or
replacement of property not financed through Capital Contributions to the
Company or any reserves previously set aside by the Company for such purposes,
and for the payment of items attributable to the acquisition, improvement,
development, or replacement of property which are not deductible in determining
federal taxable income when paid, and (CC) any amounts included in determining
gross income for such period that were not received by the Company during such
period. (ii) any other funds (including amounts previously set aside as reserves
by the Managing Member if and to the extent the Managing Member no longer
regards such reserves as reasonably necessary in the efficient conduct of the
business of the Company) deemed available for distribution and designated as
Cash Flow by the Managing Member.
"Net Proceeds of a Capital Transaction" means the proceeds received by
the Company in connection with a Capital Transaction, after (i) the payment of
all costs and terminating expenses of any kind or nature incurred by the Company
in connection with such Capital Transaction, (ii) the utilization of any such
proceeds in connection with the discharge of debts and other obligations of the
Company (including any loans to the Company made by Members and any accrued but
unpaid interest thereon) required or intended (as determined by the Managing
Member, in its sole and absolute discretion) to be discharged with the proceeds
of such Capital Transaction, and (iii) the retention of such proceeds or a
portion of such proceeds in connection with creation of or addition to a reserve
established pursuant to Section 4.06 (as determined by the Managing Member in
its sole and absolute discretion). "Net Proceeds of an Interim Capital
Transaction" and "Net Proceeds of a Terminating Capital Transaction" mean the
amount of Net Proceeds received by the Company with respect to an Interim
Capital Transaction or a Terminating Capital Transaction, as the case may be.
"Percentage Interests" Percentage Interests of the Members are as
follows:
Managing Member -- 1% percent
Class A Member - 90 %
Class B Member - 9 %
SECTION 4.02. Allocation of Net Income or Net Loss.
(a) Subject to Section 4.07, the Net Income of the Company, if
any, for each Fiscal Year (or portion thereof) shall be allocated to the Members
(after reducing their Capital Accounts for all Cash Flow distributed during such
Fiscal Year or to be distributed with respect to such Fiscal Year), pro rata, in
proportion to their Percentage Interests.
(b) Subject to Section 4.07, the Net Loss of the Company, if
any, for each Fiscal Year during the term of this Agreement shall be allocated
to the Members in proportion to their Percentage Interests.
SECTION 4.03. Allocation of Gains and Losses from Capital Transactions.
(a) Subject to Section 4.07, any Book Tax Gain of the Company
resulting from a Capital Transaction shall be allocated to the Members, pro
rata, in proportion to their Percentage Interests.
(b) Subject to Section 4.07, any Book Tax Loss of the Company
resulting from a Capital Transaction shall be allocated to the Members, pro
rata, in proportion to their Percentage Interests.
SECTION 4.04. Allocation of Income and Loss With Respect to Membership
Interests Transferred.
If any Membership Interest is transferred during any Fiscal
Year, the Net Income or Net Loss attributable to such Membership Interest for
such Fiscal Year shall be divided and allocated proportionately between the
transferor and the transferee based upon the number of days during such calendar
year for which each party was the owner of the interest transferred.
Notwithstanding any provision herein to the contrary, any Book Tax Gain or Book
Tax Loss of the Company realized in connection with a Capital Transaction shall
be allocated only to Persons who are holders of Membership Interests as of the
date such Capital Transaction occurs.
SECTION 4.05. Distributions of Cash Flow.
(a) Cash Flow of the Company shall be determined for each
Fiscal Year. Cash Flow as so determined shall be distributed in cash to the
Members in proportion to their Membership Interests.
Distributions of Cash Flow made within the first seventy-five
(75) days of a subsequent Fiscal Year and designated by the Managing Member as
made with respect to the immediately prior Fiscal Year shall be considered made
with respect to such prior Fiscal Year for purposes of this Section 4.05(a) and
Sections 4.02 and 4.03.
(b) Cash Flow, if any, shall be distributed at least quarterly
within thirty (30) days after the end of each calendar quarter, commencing with
the calendar quarter ending December 31, 1998. Cash Flow also may be
distributed, in the sole and absolute discretion of the Managing Member, at such
other time or times during any Fiscal Year in anticipation of the year-end
determination thereof, and such distributions shall be subject to year-end
adjustment. The Members agree that, within thirty (30) days after determination
by the Company that an overpayment was made to any Member for any Fiscal Year
pursuant to this Section 4.05, such Member shall repay, allow as a credit
against future distributions, or make such other adjustments as the Managing
Member determines to be appropriate to remedy such overpayment. Likewise,
appropriate adjustment shall be made to remedy any underpayment.
SECTION 4.06. Distribution of Proceeds from Capital Transactions;
Liquidation Distributions.
(a) The Net Proceeds of an Interim Capital Transaction shall
be distributed to the Members in accordance with the Members' Percentage
Interests.
(b) The Net Proceeds of a Terminating Capital Transaction and
any other remaining assets of the Company to be distributed to the Members in
connection with dissolution and liquidation of the Company pursuant to Article
VIII, after payment of all debts and liabilities of the Company (including,
without limitation, all amounts owing to a Member under this Agreement (other
than this Section 4.06) or under any agreement between the Company and a Member
entered into by the Member other than in its capacity as a Member in the
Company), the payment of expenses of liquidation of the Company, and the
establishment of a reasonable reserve (including, without limitation, an amount
estimated by the Managing Member to be sufficient to pay any amount reasonably
anticipated to be required to be paid pursuant to Section 5.03(a)), shall be
distributed to the Members, pro rata, in accordance with their respective
Percentage Interests. Distributions pursuant to this Section 4.06(b) shall be
made by the end of the Fiscal Year in which such Terminating Capital Transaction
occurs or, if later, within ninety (90) days of such Terminating Capital
Transaction.
(c) Notwithstanding any provision in this Section 4.06 to the
contrary, in the event that the Net Proceeds of the Terminating Capital
Transaction are to be paid to the Company in more than one installment, each
such installment (including any interest thereon) shall be allocated among the
Members in accordance with their respective "Installment Percentages". The
"Installment Percentage" of each Member shall be (i) the aggregate amount of
cash that would have been distributed to that Member under this Section 4.06 had
the Net Proceeds of the Terminating Capital Transaction been paid in one lump
sum divided by (ii) the total Net Proceeds that would have been distributed to
all of the Members under that Section.
SECTION 4.07. Special Allocation Rules.
The following allocation rules shall apply notwithstanding any other
provisions of Sections 4.02 and 4.03, and the other provisions of Sections 4.02
and 4.03 shall be applied only after giving effect to the following rules. In
the event there is a conflict between any of the following rules, the earlier
listed rule shall govern.
(a) If in any Fiscal Year there is a net increase during such
year in the amount of Minimum Gain attributable to Member Nonrecourse Debts, the
Member(s) that bear the economic risk of loss with respect thereto (within the
meaning of Regulations section 1.704-1T(b)(4)(iv)(k)(1)) shall be specially
allocated items of Company loss or deduction in an amount equal to the excess of
(i) the amount of such net increase, over (ii) the aggregate amount of any
distributions during such Fiscal Year to such Member(s) of the proceeds of such
debt that are allocable to such increase in Minimum Gain. Items to be so
allocated shall be determined in accordance with Regulations section
1.704-1T(b)(4)(iv)(h).
(b) If in any Fiscal Year there is a net decrease in the
Company's Minimum Gain attributable to Nonrecourse Liabilities during such
Fiscal Year, each Member shall be specially allocated items of Company income
and gain for such Fiscal Year (and, if necessary, for subsequent Fiscal Years)
in proportion to, and to the extent of, an amount equal to the greater of the
following:
(i) the portion of such Member's share of the net
decrease in such Minimum Gain during such Fiscal Year (as such share is
determined pursuant to Regulations section 1.704-1T(b)(4)(iv)(f)) that is
allocable to the disposition of Company property subject to one or more
Nonrecourse Liabilities (as such allocable portion is determined pursuant to
Regulations section 1.704-1T(b)(4)(iv)(e)(2)); or
(ii) such Member's Excess Negative Balance at the end
of such Fiscal Year (determined before any allocation for such Fiscal Year of
any items of income, gain, loss, or deduction described in section 705(a)(2)(B)
of the Code).
Items to be so allocated shall be determined and the
allocation made in accordance with Regulations section 1.704-1T(b)(4)(iv)(e).
(c) If in any Fiscal Year there is a net decrease in the
Company's Minimum Gain attributable to Member Nonrecourse Debts during such
Fiscal Year, the Member(s) that bear the economic risk of loss with respect to
such Member Nonrecourse Debts (within the meaning of Regulations section
1.704-1T(b)(4)(iv)(k)(1)) shall be specially allocated items of Company income
and gain for such Fiscal Year (and, if necessary, for subsequent Fiscal Years)
in an amount equal to the greater of the following:
(i) the net decrease in such Minimum Gain during such
Fiscal Year that is allocable to the disposition of Company property subject to
one or more Member Nonrecourse Debts (as such allocable portion is determined
pursuant to Regulations section 1.704-1T(b)(4)(iv)(h)(6)); or
(ii) such Member's (Members') Excess Negative Balance
at the end of such Fiscal Year (determined before any allocation for such Fiscal
Year of any items of income, gain, loss, or deduction described in section
705.1.(2)(B) of the Code).
Items to be so allocated shall be determined and the
allocation made in accordance with Regulations section 1.704-1T(b)(4)(iv)(h)(6).
(d) For purposes of allocating Company Nonrecourse Liabilities
among the Members pursuant to Regulations section 1.752-1T(a)(2)(i), the
respective interests of the Members in Company profits shall be equal to their
respective Percentage Interests.
(e) A Member shall not be allocated any amount of deduction or
loss (including Net Loss and Book Tax Loss) to the extent such allocation would
give rise to or increase an Excess Negative Balance in such Member's Capital
Account.
(f) In the event a Member receives with respect to a Fiscal
Year an adjustment, allocation, or distribution described in subparagraphs (4),
(5), and (6) of Regulations section 1.704-1(b)(2)(ii)(d) that results in such
Member having an Excess Negative Balance in its Capital Account, such Member
shall be allocated for such Fiscal Year (and, if necessary, for subsequent
Fiscal Years) items of income or gain in an amount and manner sufficient to
eliminate such Excess Negative Balance as promptly as possible, as provided in
Regulations section 1.704-1(b)(2)(ii)(d).
(g) In the event that any fees, interest, or other amounts
paid to a Member or affiliate of a Member pursuant to this Agreement or to any
agreement between the Company and the Member or affiliate providing for the
payment of such amounts, and deducted by the Company, whether in reliance on
sections 162, 163, 707(a), and/or 707(c) of the Code or otherwise, on its
federal income tax return are disallowed as deductions to the Company in or with
respect to the Fiscal Year for which such amounts are claimed and are treated as
Company distributions, then:
(i) the Net Income or Net Loss, as the case may be,
for the Fiscal Year in or with respect to which such fees, interest, or other
amounts were paid shall be increased or decreased, as the case may be, by the
amount of such deduction that is so disallowed and treated as a Company
distribution; and
(ii) there shall be allocated to the Member who
received (or whose affiliate received) such payments, prior to the allocations
pursuant to Sections 4.02 and 4.02(b), an amount of gross income of the Company
for the Fiscal Year in or with respect to which such claimed deduction was
disallowed, equal to the amount of such deduction that was so disallowed and
treated as a Company distribution.
(h) Except as otherwise specifically provided in this
Agreement and as provided in the next sentence below, the distributive share of
a Member of each specific deduction and item of income, gain, loss, and credit
of the Company for federal income tax purposes for any Fiscal Year shall be the
same as such Member's proportionate share (determined as set forth in Section
4.02 and 4.03) of Net Income, Net Loss, Book Tax Gain, or Book Tax Loss, as the
case may be, for such Fiscal Year. Notwithstanding the foregoing, any income
recognized pursuant to sections 1245 and 1250 of the Code and any investment
credit recapture recognized pursuant to section 47 of the Code shall be
allocated among the Members in the same proportions as the depreciation
deductions and investment credits giving rise to such income or recapture were
allocated among such Members and their respective predecessors in interest.
(i) It is the intent of the Members that each Member's
distributive share of income, gain, loss, and credit (or items thereof) shall be
determined and allocated in each Fiscal Year in accordance with this Section
4.07 to effect the distributions in the manner contemplated by Sections 4.05 and
4.06 to the extent permitted by Code section 704(b) and the applicable
Regulations. In order to achieve the contemplated distributions provided for in
Sections 4.05 and 4.06, the Managing Member is authorized and directed to
allocate income, gain, loss, and credit (or items thereof) with respect to any
Fiscal Year in a manner different from that otherwise provided for in this
Section 4.07 if, and to the extent that, allocating income, gain, loss, and
credit (or items thereof) in a manner provided for in this Section 4.07 either
would not achieve the intended economic result desired by the Members or would
not be respected under Code section 704(b) (referred to as a "new allocation").
The Managing Member is authorized to make a new allocation under this Section
4.07(i) only after having determined both (i) that the new allocation either
more accurately effects the distributions contemplated by the Members as set
forth in Section 4.05 and 4.06 or is not inconsistent with those distributions
and (ii) that the new allocation will not have a material adverse effect on the
economic interests of the Members (including, without limitation, causing them
to recognize income that they would not otherwise be required to recognize or to
lose the benefit of deductions that they otherwise would have been permitted to
recognize). New allocations by the Managing Member in accordance with this
Section 4.07(i) shall not require the consent of the other Members.
SECTION 4.08. Contributed Property; Reevaluations Pursuant to Section
704(b) Regulations.
In the event that any property contributed to the Company or revalued
pursuant to the provisions of Regulations section 1.704-1(b)(2)(iv)(f) has a
Carrying Value that differs from the Adjusted Basis of such property at the time
of its contribution or revaluation, any income, depreciation, gain, or loss with
respect to such property shall, solely for tax purposes, be allocated among the
Members in a manner that takes such difference into account and is consistent
with Code section 704(c), the Regulations thereunder, and Regulations section
1.704-1(b)(2)(iv)(f)(4), 1.704-1(b)(2)(iv)(g), and 1.704-1(b)(4)(i). The
allocations made pursuant to this Section 4.08 shall be made solely for tax
purposes and shall not affect or in any way be taken into account in computing
any Member's Capital Account or share of Net Income, Net Loss, Book Tax Gain,
Book Tax Loss, or other allocations or distributions under this Agreement.
SECTION 4.09. Withholding Taxes and Reporting Obligations.
(a) The Company is authorized and directed to withhold from or
pay on behalf of any Member the amount of federal, state, local, or foreign
taxes that the Managing Member reasonably determines that the Company is
required to withhold or pay with respect to any amount distributable or
allocable to such Member pursuant to this Agreement, including, without
limitation, any taxes required to be paid by the Company pursuant to section
1441, 1442, 1445, or 1446 of the Code. Any amount so withheld or paid on behalf
of a Member shall constitute an advance by the Company to such Member that shall
be secured by the Member's Membership Interest. An advance to a Member pursuant
to this Section 4.09(a) shall be repaid to the Company, in whole or in part, as
reasonably determined by the Managing Member in its sole discretion, either (i)
out of any distributions from the Company which the Member may be or become
entitled to receive, or (ii) by the Member in cash upon demand by the Company.
(b) The Members agree to cooperate fully with all efforts of
the Company to comply with its tax withholding and information reporting
obligations and to provide the Company with such information as the Managing
Member may reasonably request from time to time in connection with such
obligations. Any Member or permitted transferee of a Membership Interest that
fails to comply with this Section 4.09(b) shall be liable to the Company for the
amount of any taxes, penalties, and interest for which the Company becomes
liable as a result of any such failure.
ARTICLE V
MANAGEMENT
SECTION 5.01. Members.
(a) Membership Interests. The Membership Interests shall have
such relative rights, powers and duties as are set forth in this Agreement.
(b) Meetings and Actions.
(i) Meetings. The Members shall meet at least once
each Fiscal Year at the principal offices of the Company or at such other place
as may be fixed by the Managing Member (unless such meeting shall be waived by
all of the Members), upon ten (10) days' notice to all Members in writing or by
telephone or facsimile transmission. Members may participate in a meeting of the
Members by means of conference telephone or similar communications equipment by
means of which all persons participating in the meeting can hear each other, and
such participation in a meeting shall constitute presence in person at the
meeting.
(ii) Quorum. No action may be taken at a meeting of
the Members unless a quorum consisting of each of the Members are present in
person or by proxy.
(iii) Action by Written Consent. Any action to be
taken by the Members may be taken without a meeting if consents in writing
setting forth the action so taken are signed by each of the Members.
(iv) Voting. Each Member shall be entitled to vote
its Percentage Interest with respect to any decision made by the Members to the
extent provided for herein.
SECTION 5.02. Management of the Company by the Managing Member.
(a) Management by the Managing Member. The Members hereby
unanimously agree that the responsibility for management of the business and
affairs of the Company shall be delegated to a manager pursuant to Section
18-402 of the Act which shall at all times be a Member of the Company (the
"Managing Member").
(b) Managing Member.
(i) The Members hereby unanimously appoint Vernon
ALF, L.L.C. to serve as the Managing Member until its resignation or replacement
as set forth herein.
(c) Power and Authority of the Managing Member. Subject to
Section 5.04, the Managing Member (acting on behalf of the Company) shall have
the right, power, and authority, to manage, operate and control the business and
affairs of the Company and to do or cause to be done any and all acts, at the
expense of the Company, deemed by the Managing Member to be necessary or
appropriate to effectuate the purposes of the Company including, without
limitation, the right, power and authority on behalf of the Company to make,
execute, assign, acknowledge, and file on behalf of the Company any and all
documents or instruments of any kind which the Managing Member may deem
necessary or appropriate in carrying out the business and affairs of the
Company, including, without limitation, powers of attorney, agreements of
indemnification, documents, or instruments of any kind or character, and
amendments thereto (and no person, firm or corporation dealing with the Managing
Member shall be required to determine or inquire into the authority or power of
the Managing Member to bind the Company or to execute, acknowledge, or deliver
any and all documents in connection therewith).
(d) Third Party Reliance. Third parties dealing with the
Company shall be entitled to rely conclusively upon the power and authority of
the Managing Member of the Company as set forth herein.
(e) Fees to the Managing Member. Except as expressly provided
in this Agreement, the Managing Member, in its capacity as such, shall not be
entitled to any fees for services rendered for or on behalf of the Company.
(f) Fiduciary Relationship. The Managing Member shall not be
liable to the Company or its Members for monetary damages for breach of
fiduciary duty as the Managing Member or otherwise liable, responsible or
accountable to the Company or its Members for monetary damages or otherwise for
any acts performed, or for any failure to act; provided, however, that this
provision shall not eliminate or limit the liability of the Managing Member for
acts or omissions which involve intentional misconduct or a knowing violation of
law.
(g) Reimbursement. All expenses incurred with respect to the
organization, operation, and management of the Company shall be borne by the
Company. The Managing Member shall be entitled to reimbursement from the Company
for direct expenses allocable to the organization, operation, and management of
the Company.
SECTION 5.03. Indemnification of the Members, the Managing Member and
any Affiliate.
(a) In accordance with Section 18-108 of the Act, the Company
shall indemnify and hold harmless any Member, the Managing Member and Affiliates
thereof (individually, in each case, an "Indemnitee") to the fullest extent
permitted by law from and against any and all losses, claims, demands, costs,
damages, liabilities (joint or several), expenses of any nature (including
attorneys' fees and disbursements), judgments, fines, settlements, and other
amounts arising from any and all claims, demands, actions, suits, or
proceedings, whether civil, criminal, administrative or investigative, in which
the Indemnitee may be involved, or threatened to be involved, as a party or
otherwise, arising out of or incidental to the business or activities of or
relating to the Company, regardless of whether the Indemnitee continues to be a
Member, the Managing Member or an Affiliate thereof at the time any such
liability or expense is paid or incurred; provided, however, that this provision
shall not eliminate or limit the liability of an Indemnitee (i) for any breach
of the Indemnitee's duty of loyalty to the Company or its Members, (ii) for acts
or omissions which involve gross negligence, intentional misconduct or a knowing
violation of law, or (iii) for any transaction from which the Indemnitee
received any improper personal benefit.
(b) Expenses incurred by an Indemnitee in defending any claim,
demand, action, suit, or proceeding subject to this Section 5.03 shall, from
time to time, upon request by the Indemnitee be advanced by the Company prior to
the final disposition of such claim, demand, action, suit, or proceeding upon
receipt by the Company of an undertaking by or on behalf of the Indemnitee to
repay such amount, if it shall be determined in a judicial proceeding or a
binding arbitration that such Indemnitee is not entitled to be indemnified as
authorized in this Section 5.03.
(c) The indemnification provided by this Section 5.03 shall be
in addition to any other rights to which an Indemnitee may be entitled under any
agreement, vote of the Members, as a matter of law or equity or otherwise, both
as to an action in the Indemnitee's capacity as a Member, the Managing Member or
any Affiliate thereof, and as to an action in another capacity, and shall
continue as to an Indemnitee who has ceased to serve in such capacity and shall
inure to the benefit of the heirs, successors, assigns, and administrators of
the Indemnitee.
(d) The Company may purchase and maintain insurance on behalf
of the Managing Member and such other Persons as the Managing Member shall
determine against any liability that may be asserted against or expense that may
be incurred by such Persons in connection with the offering of interests in the
Company or the business or activities of the Company, regardless of whether the
Company would have the power to indemnify such Persons against such liability
under the provisions of this Agreement.
(e) An Indemnitee shall not be denied indemnification in whole
or in part under this Section 5.03 or otherwise by reason of the fact that the
Indemnitee had an interest in the transaction with respect to which the
indemnification applies if the transaction was otherwise permitted or not
expressly prohibited by the terms of this Agreement.
(f) The provisions of this Section 5.03 are for the benefit of
the Indemnitees, their heirs, successors, assigns and administrators and shall
not be deemed to create any rights for the benefit of any other Persons.
SECTION 5.04. Limitation on Authority of the Managing Member.
Notwithstanding anything in this Agreement to the
contrary, the Managing Member shall not without the prior written consent of the
Class A Member cause or permit the Company to:
(i) dissolve and wind-up the affairs of the Company,
except as provided in Article VIII;
(ii) merge or consolidate with any other limited
liability company or other entity;
(iii) sell, assign, lease or otherwise dispose of
twenty percent (20%) or more of the Company Assets; or
(iv) modify the terms of this Agreement.
SECTION 5.05. Other Activities of Members.
Any Member may have other business interests or may engage in other
business ventures of any nature or description whatsoever, whether currently
existing or hereafter created, and may compete, directly or indirectly, with the
business of the Company. No Member or Affiliate thereof shall incur any
liability to the Company as a result of such Member's or Affiliate's pursuit of
such other business interest, ventures and competitive activity, and neither the
Company nor the other Members shall have any right to participate in such other
business ventures or to receive or share in any income or profits derived
therefrom.
SECTION 5.06. Transactions with Managing Member or Affiliates.
The Company is expressly permitted in the normal course of its business
to enter into transactions with the Managing Member or with any Affiliate of the
Managing Member provided that the price and other terms of such transactions are
fair to the Company and that the price and other terms of such transactions are
not less favorable to the Company than those generally prevailing with respect
to comparable transactions between unrelated parties.
ARTICLE VI
BANK ACCOUNTS; BOOKS AND RECORDS;
STATEMENTS; TAXES; FISCAL YEAR
SECTION 6.01. Bank Accounts.
All funds of the Company shall be deposited in its name in such
checking and savings accounts, time deposits or certificates of deposit, or
other accounts at such banks, as shall be designated by the Managing Member from
time to time, and the Managing Member shall arrange for the appropriate conduct
of such account or accounts.
SECTION 6.02. Books and Records.
The Managing Member shall keep, or cause to be kept, accurate, full and
complete books and accounts showing assets, liabilities, income, operations,
transactions and the financial condition of the Company. Such books and accounts
shall be prepared on the accrual basis of accounting. Any Member, or its
respective designee, shall have access thereto at any reasonable time during
regular business hours and shall have the right to copy said records at their
expense.
SECTION 6.03. Financial Statements and Information.
(a) All financial statements prepared pursuant to this Section
6.03 shall be accurate and complete in all material respects, shall present
fairly the financial position and operating results of the Company, and shall be
prepared on the accrual basis as provided in Section 6.03 for each Fiscal Year
of the Company during the term of this Agreement.
(b) Within 45 days after the end of each quarterly period (the
"Fiscal Quarter") of each Fiscal Year, commencing with the first full Fiscal
Quarter after the date of this Agreement, the Managing Member shall prepare and
submit or cause to be prepared and submitted to the Members an unaudited
statement of profit and loss for the Company for such Fiscal Quarter and an
unaudited balance sheet of the Company dated as of the end of such Fiscal
Quarter, in each case prepared in accordance with generally accepted accounting
principles.
(c) Within 90 days after the end of each Fiscal Year during
the term of this Agreement, the Managing Member shall prepare and submit or
cause to be prepared and submitted to the Members (i) an audited balance sheet,
together with audited statements of profit and loss, Members' equity and changes
in financial position for the Company during such Fiscal Year; and (ii) a report
of the activities of the Company during the Fiscal Year.
(d) The Managing Member shall provide to the Members such
other reports and information concerning the business and affairs of the Company
as may be required by the Act or by any other law or regulation of any
regulatory body applicable to the Company.
SECTION 6.04. Accounting Decisions.
All decisions as to accounting matters, except as specifically provided
to the contrary herein, shall be made by the Managing Member.
SECTION 6.05. Where Maintained.
The books, accounts and records of the Company at all times shall be
maintained at the Company's principal office.
SECTION 6.06. Tax Returns.
The Managing Member shall, at the expense of the Company, cause to be
prepared and delivered to the Members, in a timely fashion after the end of each
Fiscal Year, copies of all federal and state income tax returns for the Company
for such Fiscal Year and one copy of each return shall be filed by the Managing
Member. Such returns shall be prepared on the accrual basis, and shall
accurately reflect the results of operations of the Company for such Fiscal
Year. The Managing Member is designated as the "tax matters partner" (as defined
in the Code) of the Company and is authorized and required to represent the
Company (at the expense of the Company) in connection with all examinations of
the affairs of the Company by any federal, state, or local tax authorities,
including any resulting administrative and judicial proceedings, and to expend
funds of the Company for professional services and costs associated therewith.
Each Member agrees to cooperate with the Managing Member and to do or refrain
from doing any or all things reasonably required by the Managing Member in
connection with the conduct of such proceedings.
SECTION 6.07. Fiscal Year.
The Fiscal Year of the Company for financial and Federal, state and
local income tax purposes shall initially be the calendar year. The Managing
Member shall have authority to change the beginning and ending dates of the
Fiscal Year if the Managing Member, in its sole and absolute discretion, deems
such change to be necessary or appropriate to the business of the Company, and
the Managing Member shall give written notice of any such change to the Members
within thirty (30) days after the occurrence thereof.
ARTICLE VII
LIMITATION ON LIABILITY
The debts, obligations, and liabilities of the Company, whether arising
in contract, tort, or otherwise, shall be solely the debts, obligations, and
liabilities of the Company. None of the Members, the Managing Manager, or any
stockholders, directors, partners, officers, agents or employees of any Member
or the Company, shall be obligated personally for any debt, obligation, or
liability of the Company solely by reason of his, her, or its status as such
Member, Managing Member, stockholder, director, partner, officer, agent or
employee. The failure of the Company to observe any formalities or requirements
relating to the exercise of its powers or management of its business or affairs
under the Act or this Agreement shall not be grounds for imposing personal
liability on the Members, the Managing Member, or any officer, agent or employee
of any Member or the Company for liabilities of the Company.
ARTICLE VIII
DISSOLUTION AND LIQUIDATION
SECTION 8.01. The Company shall dissolve, and its affairs shall be
wound up, solely upon the first to occur of the following, unless the Members
elect to continue the Company to the extent permitted under the Act:
(a) December 31, 2096;
(b) at the time specified in a written consent of the Members,
provided that, so long as any indebtedness remains outstanding under the Loan
Documents, the Company will be dissolved only to the extent permitted under the
Loan Documents;
(c) at any time there are no remaining Members, provided that,
the Company shall not be dissolved and is not required to be wound up if, within
90 days after the occurrence of the event that terminated the continued
membership of the last remaining Member, the personal representative of the last
remaining Member agrees in writing to continue the Company and to the admission
of the personal representative of such Member or its nominee or designee to the
Company as a Member, effective as of the occurrence of the event that terminated
the continuing membership of the last remaining Member; or
(d) at the time specified in a decree of judicial dissolution
under the Act.
The death, retirement, resignation, expulsion, bankruptcy or
dissolution of any Member or the occurrence of any other event that terminates
the continued membership of any Member shall not cause the Company to be
dissolved or its affairs to be wound up, and upon the occurrence of any such
event, the Company shall be continued without dissolution, unless, (i) within 90
days following the occurrence of such event, all Members agree in writing to
dissolve the Company; and (ii) for so long as any indebtedness remains
outstanding under the Loan Documents, the Members, by unanimous vote, approve
such dissolution; and (iii) for so long as any indebtedness remains outstanding
under the Loan Documents, such dissolution is permitted under the terms of the
Loan Documents.
The foregoing constitute the only events upon which the
Company shall be dissolved and its affairs wound up, notwithstanding any
provisions of the Act.
SECTION 8.02. Upon the dissolution of the Company, unless its business
is continued as provided in the Act, the Managing Member shall wind up the
affairs of the Company.
SECTION 8.03. Upon the winding up and termination of the Company in
accordance with the Act, the assets of the Company shall be distributed as
follows:
(a) to creditors of the Company (including the Members to the
extent they are creditors) to the extent permitted by law, in satisfaction of
all of the Company's debts, liabilities, and obligations, by payment thereof or
establishment of reasonable reserves therefor; and
(b) any remaining assets to the Members in proportion to their
Percentage Interests.
SECTION 8.04. When all debts, liabilities, and obligations of the
Company have been paid and discharged, or adequate provisions have been made
therefor and all remaining property and assets of the Company have been
distributed to the Members, a certificate of cancellation shall be prepared,
executed, and filed in accordance with the Act.
ARTICLE IX
TRANSFER OF INTERESTS
SECTION 9.01. Transfer.
(a) The term "transfer", when used in this Article IX with
respect to a Membership Interest, shall include any sale, assignment, gift,
pledge, hypothecation, mortgage, exchange, or other disposition, except that
such term shall not include any pledge, mortgage, or hypothecation of or
granting of a security interest in a Membership Interest in connection with any
financing obtained on behalf of the Company.
(b) No Membership Interest shall be transferred, in whole or
in part, except in accordance with the terms and conditions set forth in this
Article IX. Any transfer or purported transfer of any Membership Interest not
made in accordance with this Article IX shall be null and void.
SECTION 9.02. Transfer of Interest of Managing Member.
If the Managing Member desires to sell or transfer all or any portion
of such Managing Member's Membership Interest, such transfer shall be permitted
if (and only if):
(a) such transfer (i) would not violate the then applicable
Federal and state securities laws and rules and regulations of the Securities
and Exchange Commission, state securities commissions and any other governmental
authorities with jurisdiction over such disposition, (ii) would not result in
the Company being classified for federal income tax purposes as an "association
taxable as a corporation" rather than as a limited liability company, (iii)
would not prejudice or affect the continuity of the Company for the purposes of
section 708 of the Code and (iv) would not affect the Company's existence as a
limited liability company under the Act.
(b) a successor Managing Member is admitted to the Company in
accordance with Section 10.02; and
(c) such transfer and the admission of the transferee as a
Managing Member of the Company is approved by the Class A Member.
SECTION 9.03. Transfer of Interest of Non-Managing Member.
If a Non-Managing Member desires to transfer all or any portion of its
Membership Interest such transfer shall be permitted if (and only if):
(a) such transfer (i) would not violate the then applicable
federal and state securities laws and rules and regulations of the Securities
and Exchange Commission, state securities commissions and any other governmental
authorities with jurisdiction over such disposition, (ii) would not result in
the Company being classified for federal income tax purposes as an "association
taxable as a corporation" rather than as a limited liability company, (iii)
would not prejudice or affect the continuity of the Company for the purposes of
Section 708 of the Code; and (iv) would not affect the Company's existence as a
limited liability company under the Act.
(b) the transferee is admitted as a Member of the Company in
accordance with Section 10.01.
(c) if the transferor is the Class B Member, the Class B
Member shall have first offered the Class A Member the right of first refusal to
acquire the Membership Interest of the Class B Member on the same terms and
conditions as the Class B Member is prepared to transfer the Class B Member's
Membership Interest to a third party and the Class A Member shall have failed to
exercise the right of first refusal within thirty (30) days after receipt of a
copy of all of the terms and conditions of the proposed transfer.
SECTION 9.04. Right to Purchase Interest of Managing Member.
Upon the termination of the employment of Edward B. Romanov, Jr. as an
officer of ElderTrust, a Maryland real estate investment trust, for any reason
(including, but not limited to, death, disability or voluntary separation),
ElderTrust Operating Limited Partnership (or its successors, assigns or
designee(s)) will have the right to purchase the Managing Member's Membership
Interest for cash within the later of (x) sixty (60) days after the date of his
termination and (y) thirty (30) days after his successor is elected or
appointed. The purchase price of the Managing Member's Membership Interest will
be the fair market value of the Managing Member's Membership Interest, as agreed
to between ElderTrust Operating Limited Partnership and the Managing Member (or
if they cannot agree, as determined by a national accounting firm selected by
ElderTrust Operating Limited Partnership and the Managing Member).
ARTICLE X
ADMISSION OF ADDITIONAL MEMBERS; WITHDRAWAL OF MEMBERS;
REMOVAL OF MANAGING MEMBER
SECTION 10.01. [INTENTIONALLY DELETED].
SECTION 10.02. Admission of a Successor Managing Member.
A transferee of all or any portion of the Membership Interest of the
Managing Member pursuant to Article IX shall be admitted to the Company as a
Managing Member (in the place, in whole or in part, of the transferor or former
Managing Member), and upon the first date of receipt by the Company of all of
the following (which date, in the event the successor Managing Member is in the
place in whole of the transferor or former Managing Member, shall be
contemporaneous with the withdrawal of such transferor or former Managing
Member):
(a) the successor Managing Member's acceptance of, and
agreement to be bound by, all of the terms and provisions of this Agreement, in
form and substance satisfactory to the Company;
(b) evidence of the authority of such successor Managing
Member to become a Managing Member and to be bound by all of the terms and
conditions of this Agreement;
(c) the written agreement of the successor Managing Member to
continue the business of the Company in accordance with the terms and provisions
of this Agreement; and
(d) such other documents or instruments as may be required in
order to effect the admission of the successor Managing Member as a Managing
Member under this Agreement.
SECTION 10.03. Withdrawal of Managing Member.
The Managing Member may withdraw from the Company only upon a transfer
of all of such Managing Member's Membership Interest as a Managing Member in
accordance with Article IX. The Managing Member shall have no liability to the
Company or the Members on account of any withdrawal in accordance with the terms
of this Article X.
SECTION 10.04. Withdrawal of Non-Managing Member.
Either Non-Managing Member may withdraw from the Company at any time
upon a transfer of all of such Member's Membership Interest as a Member in
accordance with Article IX.
SECTION 10.05. Removal of Managing Member.
(a) The Managing Member may be removed as the Managing Member
of the Company for "cause" (as hereinafter defined), upon the affirmative vote
of the Class A Member. Any such action by the Class A Member must also provide
for the election of a successor Managing Member and shall become effective only
upon the admission of the successor Managing Member pursuant to Section 10.2. As
used herein, "cause" shall mean actual fraud, negligence, bad faith or willful
misconduct.
(b) Written notice of removal of the Managing Member pursuant
to this Section 10.05 shall be provided to the Managing Member at the address
set forth on Schedule A.
(c) Notwithstanding Section 10.05(a), the Managing Member may
not be removed pursuant to Section 10.05(a) until such time as the Company shall
have received an opinion of legal counsel that the removal (i) may be taken
without the concurrence of all Members, (ii) would not cause the loss of limited
liability of the Members under this Agreement, and (iii) would not cause the
Company to be treated as an association taxable as a corporation for federal
income tax purposes.
(d) In the event the Managing Member is removed pursuant to
this Article X, within 30 days after the Business Day on which such withdrawal
becomes effective:
(i) if the Managing Member had a positive balance in
its Capital Account as of the effective date of its withdrawal, it shall be
entitled to receive cash in an amount equal to such positive balance; or
(ii) if the Managing Member had a negative balance in
its Capital Account as of the effective date of its withdrawal, it shall be
required to pay to the Company an amount equal to such negative balance.
(e) Any successor Managing Member elected pursuant to Section
10.02(a) shall, at the effective date of its admission to the Company as the
Managing Member, make a Capital Contribution to the Company in an amount equal
to $3244.00.
ARTICLE XI
SEPARATENESS REQUIREMENTS
SECTION 11.01. So long as any indebtedness is outstanding under the
Loan Documents, the Company will --
(a) maintain records and books of account separate from those
of any other Person;
(b) maintain financial statements separate from those of any
other Person (except that the Company may be included in consolidated financial
statements of another Person where required by GAAP);
(c) except for certain overhead and transaction costs that are
allocated on a reasonable basis among the Company and certain of its Affiliates,
pay its own liabilities from its own funds and pay the salaries of its own
employees, if any; (d) participate in the fair and reasonable allocation of any
and all overhead expenses and other common expenses for facilities, goods, or
services provided to multiple entities;
(e) maintain an arm's length relationship with its affiliates
and any other parties furnishing services to it;
(f) except as otherwise contemplated by the Loan Documents,
deposit all of its funds in checking accounts, savings accounts, time deposits
or certificates of deposit in its own name or invest such funds in its own name;
(g) observe all limited liability company formalities
necessary to maintain its identity as an entity separate and distinct from the
Members and all of their other Affiliates;
(h) hold itself out as a separate and distinct entity from any
other Person;
(i) hold title to its assets in its own name; and
(j) conduct its own business in its own name or under such
trade name as will not be reasonably likely to cause confusion as to its
separate existence.
SECTION 11.02. So long as any indebtedness is outstanding under the
Loan Documents, the Company will not --
(a) fail to correct any known misunderstanding regarding its
separate identity;
(b) commingle its funds or other assets with those of any
other Person;
(c) guarantee or become obligated for the debts of any other
entity or hold its credit as being available to satisfy the obligations of any
other Person (provided that this provision shall not be deemed to prohibit
customary joint and several obligations and indemnification and contribution
agreements entered into under the Loan Documents or in the ordinary course of
business of the Company);
(d) pledge any of its assets for the benefit of any other
Person other than the lender under the Loan Documents (except as otherwise
permitted by the Loan Documents);
(e) acquire obligations or securities of its Members;
(f) make any loans to any other Person;
(g) identify its Members or any of its Affiliates as a
division or part of it or itself as a division or part of any of them (except
for inclusion of the Company in consolidated financial statements in accordance
with GAAP);
(h) engage (either as transferor or transferee) in any
material transaction with any Affiliate other than for fair value and on terms
similar to those obtainable in arms'-length transactions with unaffiliated
parties, or engage in any transaction with any Affiliate involving any intent to
hinder, delay or defraud any entity; or
(i) engage in any business activity other than as stated in
this Agreement.
SECTION 11.03. So long as any indebtedness is outstanding under the
Loan Documents, each of the Members will --
(a) observe all customary formalities necessary to maintain
its identity as an entity separate and distinct from the Company and all of its
other Affiliates; and
(b) hold itself out as a separate and distinct entity from the
Company and not identify the Company as a division of the Members.
ARTICLE XII
AMENDMENT
SECTION 12.01. This Agreement may be amended or modified by a written
instrument executed by the Member. Notwithstanding the foregoing, so long as any
indebtedness remains outstanding under the Loan Documents, the provisions of
Sections 2.01, 5.03, 5.04, 10.01, 10.02, 10.03, 11.01, 11.02, 11.03, this
Section 12.01 and Article XIII shall not be amended under conditions or in any
manner that would be prohibited by the Loan Documents.
ARTICLE XIII
MHFA REQUIREMENTS
SECTION 13.01.
(a) Notwithstanding any other provision of this Agreement, no
amendment to this Agreement shall be made which would affect the rights of the
MHFA under any agreement between MHFA and the Company without securing the prior
written consent of MHFA.
(b) The hiring of a management agent for the Property shall be
subject to MHFA approval. As used herein, the term "Management Fee" shall mean
the amount payable from time to time by the Company to such management agent on
an annual basis for management services in accordance with a management contract
approved by MHFA. No distribution, amount of Cash Flow or loans to the Company
may be guaranteed by any assignment of any Management Fees to be received by any
such management agent. The terms of any loans by the Members to the Company must
be approved by MHFA.
(c) Any new or substitute Member must agree to acknowledge the
Company's obligations to MHFA in connection with the mortgage debt owed to MHFA
and the operation of the property by any new or substitute Member is subject to
prior written approval of MHFA.
(d) The Managing Member shall be solely responsible for the
management of the Company business with all the rights and powers generally
conferred by law. Any party dealing with the Company may rely on a certificate
signed by the Managing Member that it has all necessary power and authority to
bind the Company by its acts.
(e) The provisions of this Section 13.01 are intended for the
benefit of MHFA only and shall be of no force and effect at any time that MHFA
is not the holder of a mortgage of the Property.
(f) Any transfer of any Membership Interests shall be subject
to the approval of MHFA.
SECTION 13.02 Limited Dividend. Notwithstanding anything to the
contrary contained in this Agreement, distributions to Members shall be limited
to those amounts permitted by MHFA, the Executive Office of Communities and
Development of the Commonwealth of Massachusetts, the Massachusetts Industrial
Finance Authority ("MIFA") or such other state or federal agency which provides
assistance for the construction or operation of the Property, if and to the
extent applicable.
ARTICLE XIV
DEFINITIONS
As used herein, the following capitalized terms have the meanings set
forth below:
"Act" means the Delaware Limited Liability Company Act, as it may be
amended from time to time.
"Agreement": This Operating Agreement as it may be from time to time
amended.
"Adjusted Basis": The basis for determining gain or loss for federal
income tax purposes from the sale or other disposition of property, as defined
in Section 1011 of the Code.
"Affiliate" means, with respect to any Person, (i) any Person directly
or indirectly controlling, controlled by or under common control with such
Person, (ii) any Person owning or controlling ten percent (10%) or more of the
outstanding voting interests of such Person, (iii) any Person of which such
Person owns or controls ten percent (10%) or more of the voting interests or
(iv) any officer, director, general partner or trustee of such Person or any
Person referred to in clauses (i), (ii), and (iii) above. For purposes of this
definition, "control," when used with respect to any Person, means the power to
direct the management and policies of such Person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise,
and the terms "controlling" and "controlled" have meanings correlative to the
foregoing.
"Agreed Value": (i) In the case of any property contributed to the
Company by a Member, the 704(c) Value of such property as of the time of its
contribution to the Company, reduced by any liabilities either assumed by the
Company upon such contribution or to which such property is subject when
contributed and (ii) in the case of any property distributed to a Member by the
Company, the Company's Carrying Value of such property at the time such property
is distributed, reduced by any indebtedness either assumed by such Member upon
such distribution or to which such property is subject at the time of
distribution as determined under Section 752 of the Code and the Regulations
thereunder. The aggregate Agreed Value of all property contributed to the
Company by a Member shall be set forth next to such Member's name on Schedule A.
"Book Tax Gain" and "Book Tax Loss": The amount of taxable gain or loss
that would result from a Capital Transaction if the Adjusted Basis at the time
of the Capital Transaction of the Company Assets with respect to which such
Capital Transaction occurs were equal to the Carrying Value of such Company
Assets at such time.
"Business Day": Monday through Friday of each week, except that a legal
holiday recognized as such by the Government of the United States or the State
of Maryland or the Commonwealth of Massachusetts shall not be regarded as a
Business Day.
"Capital Account": The capital account established and maintained for
each Member pursuant to Section 3.02.
"Capital Contribution": Any property (including cash) contributed to
the Company by or on behalf of a Member.
"Capital Transaction": (i) A transaction pursuant to which the Company
borrows funds, receives Capital Contributions from a new Member upon its
admission to the Company, or receives a distribution from any partnership or
joint venture in which the Company is a participant as a result of a capital
transaction with respect to that partnership or joint venture; (ii) a sale,
condemnation, exchange, abandonment, casualty not followed by reconstruction, or
other disposition, whether by foreclosure or otherwise, of Company Assets (other
than a disposition of personal property that is, or is to be, replaced), or
(iii) an insurance recovery with respect to Company Assets, or other transaction
that, in accordance with generally accepted tax accounting principles, is
considered capital in nature.
"Carrying Value": (i) With respect to any asset contributed or deemed
to be contributed to the Company or revalued on the Company's books, the fair
market value of such asset at the time of contribution or revaluation (as
determined by the Members) reduced, but not below zero, by all deductions for
depreciation, amortization, cost recovery and expense in lieu of depreciation
debited to the Capital Accounts of the Members in accordance with Regulations
Section 1.704-1(b)(2)(iv)(g) with respect to such asset since the time of
contribution or last revaluation up to the time the Carrying Value is to be
determined; and (ii) with respect to any other asset of the Company, the
Adjusted Basis of such asset as of the time the Carrying Value is to be
determined.
"Cash Flow": As defined in Section 4.01.
"Class A Member" means ElderTrust Operating Limited Partnership in its
capacity as the Class A Member hereunder.
"Class B Member" means ElderTrust Operating Limited Partnership in its
capacity as the Class B Member hereunder.
"Code": The Internal Revenue Code of 1986, as in effect and hereafter
amended, and, unless the context otherwise requires, applicable regulations
thereunder. Any reference herein to a specific section or sections of the Code
shall be deemed to include a reference to any corresponding provision of future
law.
"Company Assets": All assets and property, whether tangible or
intangible and whether real, personal or mixed, at any time owned by or held for
the benefit of the Company.
"Excess Negative Balance": The negative balance, if any, in a Member's
Capital Account as of the end of a Fiscal Year after crediting the Member's
Capital Account for the amount of any negative balance in such Capital Account
that the Partner is obligated to restore or is treated as obligated to restore
pursuant to Regulations sections 1.704-1(b)(2)(ii) (b)(3) and
1.704-1(b)(2)(ii)(c) and the amount of such Member's share of the Company's
Minimum Gain, determined pursuant to Regulations sections 1.704-1T(b)(4)(iv)(f)
and 1.704-1T(b)(4)(iv)(h)(5); and debiting the Member's Capital Account for any
adjustment, allocation, or distribution described in paragraph (4), (5), or (6)
of Regulations section 1.704-1(b)(2)(ii)(d).
"Fiscal Quarter" has the meaning ascribed thereto in Section 6.03(b).
"Fiscal Year": The fiscal year of the Company for financial accounting
purposes, and for federal, state and local income tax purposes, which shall be
the calendar year unless changed by the Managing Member in accordance with
Section 6.08
"GAAP" means generally accepted accounting principles.
"Indebtedness" means all amounts outstanding under the Loan Documents.
"Indemnitee" has the meaning ascribed thereto in Section 7.02.
"Interim Capital Transaction" means any Capital Transaction that is not
a Terminating Capital Transaction.
"Loan Documents" mean any and all documents executed and delivered or
assumed by the Company in connection with a loan from MHFA to be assumed by the
Company, as such documents may be amended from time to time.
"Managing Member" means Vernon ALF, L.L.C. in its capacity as Managing
Member.
"Member" means the Managing Member or either of the Non-Managing
Members.
"Member Nonrecourse Debt": Any Nonrecourse Debt (or portion thereof)
for which a Member bears (or is deemed to bear) the economic risk of loss within
the meaning of Regulations section 1.704-1T(b)(4)(iv)(k)(1).
"Membership Interest": As to any Member, all of the interest of that
Member in the Company, including, without limitation, such Member's (i) right to
a distributive share of the income, gain, losses and deductions of the Company
in accordance herewith, (ii) right to a distributive share of Company Assets,
and (iii) rights, if a Managing Member, with respect to the management of the
business and affairs of the Company and (iv) rights, if a Non-Managing Member,
to consent to approve of certain actions as provided in Section 5.04.
"MHFA means The Massachusetts Housing Finance Agency.
"Minimum Gain": The amount determined by computing, with respect to
each Nonrecourse Debt of the Company, the amount of Book Tax Gain (of whatever
character), if any, that the Company would realize if it disposed of (in a
taxable transaction) the Company Assets subject to such Nonrecourse Debt in full
satisfaction thereof and for no other consideration, and by then aggregating the
amounts so computed. For purposes of computing the amount of Minimum Gain, (i)
the Carrying Value of a Company Asset subject to two or more Nonrecourse Debts
of equal priority shall be allocated among such Nonrecourse Debts in proportion
to the outstanding principal balances of such Nonrecourse Debts; (ii) the
Carrying Value of a Company Asset subject to two or more Nonrecourse Debts of
unequal priority shall be allocated to the Nonrecourse Debts of an inferior
priority (in accordance with (i) above) only to the extent of the excess, if
any, of the Carrying Value of the Company Asset over the aggregate outstanding
balance of the Nonrecourse Debts of superior priority; and (iii) only the
portion of a Company Asset's Carrying Value allocated to Nonrecourse Debts of
the Company shall be used in computing the Minimum Gain.
"Net Income and Net Loss": For any taxable period, (i) the gross income
of the Company from all sources, other than any income or loss recognized with
respect to a Terminating Capital Transaction during such period, as calculated
for federal income tax purposes by the Company, plus (ii) any income of the
Company that is exempt from federal income tax and not otherwise taken into
account in computing gross income for federal income tax purposes, reduced by
(iii) Depreciation (as defined below), further reduced by (iv) all other items
of expense or deduction that are allowable as deductions to the Company under
the Code for such period but excluding any item of expense or deduction
attributable either to Depreciation (as defined below) or to a Terminating
Capital Transaction, as calculated for federal income tax purposes by the
Company, and further reduced by (v) any expenditures of the Company described in
section 705(a)(2)(b) of the Code or treated as expenditures described in section
705(a)(2)(b) of the Code pursuant to Regulations section 1.704-1(b)(2)(iv)(i),
and not otherwise taken into account in computing taxable income. "Depreciation"
means, for each taxable period, an amount equal to the depreciation,
amortization, or other cost recovery deductions allowable with respect to
Company Assets for such period for federal income tax purposes computed (using
the same method used by the Company in computing depreciation, amortization, or
other cost recovery deductions in preparing its federal income tax returns) as
if the Adjusted Basis of such Company Assets were equal to their Carrying
Values. All items of income, gain, loss, deduction, and credit recognized by the
Company for federal income tax purposes and allocated to the Members in
accordance with the provisions of Article IV shall be determined without regard
to any election that may be made by the Company under Code section 754 except as
expressly contemplated under Regulations section 1.704-1(b)(2)(iv)(m)(4);
provided, however, that such allocations, once made, shall be adjusted as
necessary to take into account those adjustments authorized under sections 734
and 743 of the Code.
"Net Proceeds of a Capital Transaction": As defined in Section 4.01.
"Non-Managing Members" means the Class A Member and the Class B Member.
"Nonrecourse Debt": Any liability that is considered nonrecourse for
purposes of Regulations section 1.1001-2 (without regard to whether such
liability is a recourse liability under Regulations section 1.752-1T(d)(2)) and
any other liability for which the creditor's right to repayment is limited to
one or more of the assets of the Company (within the meaning of Regulations
section 1.752-1T(d)(3)(ii)(b)(4)(ii).
"Nonrecourse Liability": Any Nonrecourse Debt (or portion thereof) for
which no Member bears (or is deemed to bear) the economic risk of loss within
the meaning of Regulations section 1.704-1T(b)(4)(iv)(k)(3).
"Percentage Interest": As defined in Section 4.01.
"Person" means a natural person, partnership (whether general or
limited), trust, estate, association, corporation, limited liability company,
unincorporated organization, custodian, nominee or any other individual or
entity in its own or any representative capacity.
"Property" has the meaning ascribed thereto in Section 2.01.
"Regulations": The regulations issued by the United States Department
of the Treasury under the Code, as now in effect and as they may be amended from
time to time, and any successor regulations.
"704(c) Value": With respect to any property contributed to the Company
by a Member, the fair market value of such property at the time of contribution
as determined by the Managing Member using such reasonable method of valuation
as it may adopt; provided, however, that the Managing Member shall, in its sole
and absolute discretion, use such method as it deems reasonable and appropriate
to allocate the aggregate of the 704(c) Values of properties contributed to the
Company in a single or integrated transaction among each separate property on a
basis proportional to its fair market value.
"Terminating Capital Transaction": Any Capital Transaction involving
all or substantially all of the then remaining Company Assets and/or any other
transaction which will result in a dissolution of the Company.
"Termination Date": December 31, 2096.
"Unrealized Gain": As to any Company Asset, the Book Tax Gain, if any,
that would be realized if such Company Asset were sold for its fair market value
on the date of determination.
"Unrealized Loss": As to any Company Asset, the Book Tax Loss, if any,
that would be realized if such Company Asset were sold for its fair market value
on the date of determination.
ARTICLE XV
MISCELLANEOUS
SECTION 15.01. Severability. Each provision hereof is intended to be
severable and the invalidity or illegality of any portion of this Agreement
shall not affect the validity or legality of the remainder hereof.
SECTION 15.02 Effect of Provisions Inconsistent with Act. It is the
intention of the parties that any provision hereof that is inconsistent with the
provisions of the Act be given effect to the maximum extent permitted under the
Act.
SECTION 15.03. Binding Effect. The terms and provisions of this
Agreement shall be binding upon, and inure to the benefit of, the successors and
assigns of each of the Members.
SECTION 15.04. Governing Law. The terms and provisions of this
Agreement shall be construed under the laws of the State of Delaware and the Act
as now adopted or as it may be hereafter amended shall govern the interpretation
of this Agreement.
[SIGNATURE PAGE TO FOLLOW]
<PAGE>
IN WITNESS WHEREOF, the undersigned have caused this Operating
Agreement to be duly executed on their behalf as of the date first written
above.
MANAGING MEMBER:
VERNON ALF, L.L.C.
By:/s/ Edward B. Romanov, Jr.
Edward B. Romanov, Jr.
Member
CLASS A MEMBER:
ELDERTRUST OPERATING LIMITED PARTNERSHIP
By: ELDERTRUST
General Partner
By:/s/ Edward B. Romanov, Jr.
Edward B. Romanov, Jr.
President
CLASS B MEMBER:
ELDERTRUST OPERATING LIMITED PARTNERSHIP
By: ELDERTRUST
General Partner
By:/s/ Edward B. Romanov, Jr.
Edward B. Romanov, Jr.
President
<PAGE>
SCHEDULE A
To Operating Agreement of ET Sub-Vernon
Court, L.L.C.
NAMES, ADDRESSES AND CAPITAL CONTRIBUTIONS OF MEMBERS
AGREED VALUE OF
CAPITAL CONTRIBUTIONS
MANAGING MEMBER:
VERNON ALF, L.L.C. $3,244.00
101 East State Street
Suite 101
Kennett Square, Pennsylvania 19348
CLASS A MEMBER
ELDERTRUST OPERATING LIMITED PARTNERSHIP $291,972.00
101 East State Street
Suite 101
Kennett Square, Pennsylvania 19348
CLASS B MEMBER:
ELDERTRUST OPERATING LIMITED PARTNERSHIP $29,197.00
101 East State Street
Suite 101
Kennett Square, Pennsylvania 19348
TOTAL: $324,413.00
<PAGE>
OPERATING AGREEMENT
OF
ET SUB-CABOT PARK, L.L.C.
This Operating Agreement of ET SUB-CABOT PARK, L.L.C. (this
"Agreement"), dated as of October 23, 1998, is entered into by and between CABOT
ALF, L.L.C., a Delaware limited liability company (the "Managing Member"), and
ELDERTRUST OPERATING LIMITED PARTNERSHIP, a Delaware limited partnership, as the
Class A Member (the "Class A Member") and ELDERTRUST OPERATING LIMITED
PARTNERSHIP, a Delaware limited partnership, as the Class B Member (the "Class B
Member").
R E C I T A L S:
WHEREAS, the Company was formed under the Delaware Limited Liability
Company Act, as amended (the "Act"), by the filing of a certificate of formation
with the Secretary of State of the State of Delaware on July 16, 1998; and
WHEREAS, the Members (as defined below) desire by this Agreement to set
forth the rights and obligations of, the relationships among, and certain other
provisions governing the conduct of the affairs of the Members and the Company;
and
WHEREAS, certain capitalized terms used herein shall have the meanings
ascribed thereto in Article XIV.
NOW, THEREFORE, in consideration of the foregoing, of the mutual
promises herein contained and of other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto,
intending legally to be bound, hereby covenant and agree as follows:
ARTICLE I
ORGANIZATIONAL AND OTHER MATTERS
SECTION 1.01. Formation; Admission. By its execution and delivery of
this Agreement, each of the Members hereby ratifies the formation of the Company
under the provisions of the Act pursuant to the filing of the Certificate of
Formation with the Secretary of State of the State of Delaware and confirms its
admission to the Company as one of the initial Members.
SECTION 1.02. Name. The name of the Company shall be ET SUB-CABOT PARK,
L.L.C. and the business of the Company shall be conducted under such name.
SECTION 1.03. Principal Place of Business. The principal place of
business and the principal office of the Company shall be located at 101 East
State Street, Suite 101, Kennett Square, Pennsylvania 19348. The Company may
have such other or additional offices, either within or without the State of
Delaware, as the Managing Member shall deem advisable.
SECTION 1.04. Registered Agent. The name of the Company's initial
registered agent in the State of Delaware is Corporation Trust Center and the
address of such registered agent is 1209 Orange Street, Wilmington, County of
New Castle, Delaware. The Managing Member may change the registered agent of the
Company from time to time.
<PAGE>
ARTICLE II
PURPOSE AND POWERS
SECTION 2.01. Purpose of the Company. The sole purpose of the Company
is to acquire, own, develop, mortgage, encumber, hypothecate, lease, sell,
maintain, improve, alter, remodel, expand, manage, and otherwise operate and
deal with all or part of (a) that certain assisted living facility known as The
Village at Cabot Park and located at 276-278 Newtonville Avenue, Newtonville,
Massachusetts (the "Property"), including obtaining financing and refinancing
for the above purposes, selling, or otherwise disposing of all or any part of
the Property, and investing and reinvesting any funds held in reserve.
Notwithstanding anything contained herein to the contrary, the Company shall not
engage in any business, and it shall have no purpose unrelated to the Property
and shall not acquire any real property or own assets other than those related
to the Property or otherwise in furtherance of the purposes of the Company.
SECTION 2.02. Powers of the Company. In order to carry out its
purposes, the Company is empowered and authorized to engage in such acts and
activities as may be required, in the reasonable judgment of the Managing
Member, whose determination shall be conclusive, to carry out the foregoing
purposes, including the power to enter into and perform its obligations under
the Loan Documents (as defined below).
SECTION 2.03 Right to Rely on Managing Member. Any Person dealing with
the Company shall be entitled to rely (without further duty of inquiry) upon a
certificate signed by the Managing Member as to:
(a) the identity of any Member;
(b) the existence or nonexistence of any fact or facts that constitute
a condition precedent to acts on behalf of the Company by the Managing Member or
that are in any other manner germane to the affairs of the Company;
(c) the Persons who are authorized to execute and deliver any
instrument or document of the Company; or
(d) any other matter whatsoever involving the Company or any Member.
SECTION 2.04 Limitation on Authority. So long as any indebtedness
remains outstanding under the Loan Documents, the Company shall not, and the
Managing Member shall not permit the Company to, incur any Indebtedness except
as permitted under the Loan Documents.
<PAGE>
ARTICLE III
CAPITAL
SECTION 3.01. Capital Contributions of Members. As of the date of this
Agreement, each Member shall make a Capital Contribution to the Company as set
forth opposite its name on Schedule A. The Members shall not be required to make
any Capital Contributions to the Company other than as set forth in this Section
3.01.
SECTION 3.02. Capital Accounts. A separate Capital Account shall be
established and maintained for each Member in all events in accordance with the
rules of Regulations Section 1.704-1(b)(2)(iv), as amended from time to time.
SECTION 3.03. No Interest on Capital Contributions or Amounts in
Capital Account. No Member shall be entitled to receive any interest on its
Capital Contributions or its outstanding Capital Account balance.
SECTION 3.04. Return of Capital. Except upon the dissolution of the
Company or as may be specifically provided in this Agreement, no Member shall
have the right to demand or to receive the return of all or any part of its
Capital Account or its Capital Contributions to the Company.
<PAGE>
ARTICLE IV
ALLOCATION OF PROFITS AND LOSSES; DISTRIBUTIONS OF
CASH FLOW AND CERTAIN PROCEEDS
SECTION 4.01. Certain Definitions.
"Cash Flow" shall mean and refer to the sum of the following:
(i) the taxable income (or loss) of the Company for
federal income tax purposes as shown on the books of the Company for the period
for which such determination is being made, excluding taxable income, gain, or
loss from any Terminating Capital Transactions, increased by (A) the amount of
cost recovery, depreciation, or amortization deductions or similar deductions in
lieu thereof deductible by the Company in computing such taxable income, and any
other non-cash accruals deductible in determining federal taxable income or
loss, for such period, and (B) any non-taxable income or receipts of the Company
for such period (including, without limitation, any amounts received during such
period that were included in taxable income in a prior period and the proceeds
of any loans to the Company) except Capital Contributions to the Company
pursuant to Article III; and reduced by (AA) payments from the sum of the
foregoing upon the principal of any loan to the Company, (BB) expenditures from
the sum of the foregoing for the acquisition, improvement, development, or
replacement of property not financed through Capital Contributions to the
Company or any reserves previously set aside by the Company for such purposes,
and for the payment of items attributable to the acquisition, improvement,
development, or replacement of property which are not deductible in determining
federal taxable income when paid, and (CC) any amounts included in determining
gross income for such period that were not received by the Company during such
period.
(ii) any other funds (including amounts previously
set aside as reserves by the Managing Member if and to the extent the Managing
Member no longer regards such reserves as reasonably necessary in the efficient
conduct of the business of the Company) deemed available for distribution and
designated as Cash Flow by the Managing Member.
"Net Proceeds of a Capital Transaction" means the proceeds received by
the Company in connection with a Capital Transaction, after (i) the payment of
all costs and terminating expenses of any kind or nature incurred by the Company
in connection with such Capital Transaction, (ii) the utilization of any such
proceeds in connection with the discharge of debts and other obligations of the
Company (including any loans to the Company made by Members and any accrued but
unpaid interest thereon) required or intended (as determined by the Managing
Member, in its sole and absolute discretion) to be discharged with the proceeds
of such Capital Transaction, and (iii) the retention of such proceeds or a
portion of such proceeds in connection with creation of or addition to a reserve
established pursuant to Section 4.06 (as determined by the Managing Member in
its sole and absolute discretion). "Net Proceeds of an Interim Capital
Transaction" and "Net Proceeds of a Terminating Capital Transaction" mean the
amount of Net Proceeds received by the Company with respect to an Interim
Capital Transaction or a Terminating Capital Transaction, as the case may be.
<PAGE>
"Percentage Interests" Percentage Interests of the Members are as
follows:
Managing Member -- 1% percent
Class A Member -- 90%
Class B Member -- 9%
SECTION 4.02. Allocation of Net Income or Net Loss.
(a) Subject to Section 4.07, the Net Income of the Company, if
any, for each Fiscal Year (or portion thereof) shall be allocated to the Members
(after reducing their Capital Accounts for all Cash Flow distributed during such
Fiscal Year or to be distributed with respect to such Fiscal Year), pro rata, in
proportion to their Percentage Interests.
(b) Subject to Section 4.07, the Net Loss of the Company, if
any, for each Fiscal Year during the term of this Agreement shall be allocated
to the Members in proportion to their Percentage Interests.
SECTION 4.03. Allocation of Gains and Losses from Capital
Transactions.
(a) Subject to Section 4.07, any Book Tax Gain of the Company
resulting from a Capital Transaction shall be allocated to the Members, pro
rata, in proportion to their Percentage Interests.
(b) Subject to Section 4.07, any Book Tax Loss of the Company
resulting from a Capital Transaction shall be allocated to the Members, pro
rata, in proportion to their Percentage Interests.
<PAGE>
SECTION 4.04. Allocation of Income and Loss With Respect to Membership
Interests Transferred.
If any Membership Interest is transferred during any Fiscal
Year, the Net Income or Net Loss attributable to such Membership Interest for
such Fiscal Year shall be divided and allocated proportionately between the
transferor and the transferee based upon the number of days during such calendar
year for which each party was the owner of the interest transferred.
Notwithstanding any provision herein to the contrary, any Book Tax Gain or Book
Tax Loss of the Company realized in connection with a Capital Transaction shall
be allocated only to Persons who are holders of Membership Interests as of the
date such Capital Transaction occurs.
SECTION 4.05. Distributions of Cash Flow.
(a) Cash Flow of the Company shall be determined for each
Fiscal Year. Cash Flow as so determined shall be distributed in cash to the
Members in proportion to their Membership Interests.
Distributions of Cash Flow made within the first seventy-five
(75) days of a subsequent Fiscal Year and designated by the Managing Member as
made with respect to the immediately prior Fiscal Year shall be considered made
with respect to such prior Fiscal Year for purposes of this Section 4.05(a) and
Sections 4.02 and 4.03.
(b) Cash Flow, if any, shall be distributed at least quarterly
within thirty (30) days after the end of each calendar quarter, commencing with
the calendar quarter ending December 31, 1998. Cash Flow also may be
distributed, in the sole and absolute discretion of the Managing Member, at such
other time or times during any Fiscal Year in anticipation of the year-end
determination thereof, and such distributions shall be subject to year-end
adjustment. The Members agree that, within thirty (30) days after determination
by the Company that an overpayment was made to any Member for any Fiscal Year
pursuant to this Section 4.05, such Member shall repay, allow as a credit
against future distributions, or make such other adjustments as the Managing
Member determines to be appropriate to remedy such overpayment. Likewise,
appropriate adjustment shall be made to remedy any underpayment.
<PAGE>
SECTION 4.06. Distribution of Proceeds from Capital Transactions;
Liquidation Distributions.
(a) The Net Proceeds of an Interim Capital Transaction shall
be distributed to the Members in accordance with the Members' Percentage
Interests.
(b) The Net Proceeds of a Terminating Capital Transaction and
any other remaining assets of the Company to be distributed to the Members in
connection with dissolution and liquidation of the Company pursuant to Article
VIII, after payment of all debts and liabilities of the Company (including,
without limitation, all amounts owing to a Member under this Agreement (other
than this Section 4.06) or under any agreement between the Company and a Member
entered into by the Member other than in its capacity as a Member in the
Company), the payment of expenses of liquidation of the Company, and the
establishment of a reasonable reserve (including, without limitation, an amount
estimated by the Managing Member to be sufficient to pay any amount reasonably
anticipated to be required to be paid pursuant to Section 5.03(a)), shall be
distributed to the Members, pro rata, in accordance with their respective
Percentage Interests. Distributions pursuant to this Section 4.06(b) shall be
made by the end of the Fiscal Year in which such Terminating Capital Transaction
occurs or, if later, within ninety (90) days of such Terminating Capital
Transaction.
(c) Notwithstanding any provision in this Section 4.06 to the
contrary, in the event that the Net Proceeds of the Terminating Capital
Transaction are to be paid to the Company in more than one installment, each
such installment (including any interest thereon) shall be allocated among the
Members in accordance with their respective "Installment Percentages". The
"Installment Percentage" of each Member shall be (i) the aggregate amount of
cash that would have been distributed to that Member under this Section 4.06 had
the Net Proceeds of the Terminating Capital Transaction been paid in one lump
sum divided by (ii) the total Net Proceeds that would have been distributed to
all of the Members under that Section.
<PAGE>
SECTION 4.07. Special Allocation Rules.
The following allocation rules shall apply notwithstanding any other
provisions of Sections 4.02 and 4.03, and the other provisions of Sections 4.02
and 4.03 shall be applied only after giving effect to the following rules. In
the event there is a conflict between any of the following rules, the earlier
listed rule shall govern.
(a) If in any Fiscal Year there is a net increase during such
year in the amount of Minimum Gain attributable to Member Nonrecourse Debts, the
Member(s) that bear the economic risk of loss with respect thereto (within the
meaning of Regulations section 1.704-1T(b)(4)(iv)(k)(1)) shall be specially
allocated items of Company loss or deduction in an amount equal to the excess of
(i) the amount of such net increase, over (ii) the aggregate amount of any
distributions during such Fiscal Year to such Member(s) of the proceeds of such
debt that are allocable to such increase in Minimum Gain. Items to be so
allocated shall be determined in accordance with Regulations section
1.704-1T(b)(4)(iv)(h).
(b) If in any Fiscal Year there is a net decrease in the
Company's Minimum Gain attributable to Nonrecourse Liabilities during such
Fiscal Year, each Member shall be specially allocated items of Company income
and gain for such Fiscal Year (and, if necessary, for subsequent Fiscal Years)
in proportion to, and to the extent of, an amount equal to the greater of the
following:
(i) the portion of such Member's share of the net
decrease in such Minimum Gain during such Fiscal Year (as such share is
determined pursuant to Regulations section 1.704-1T(b)(4)(iv)(f)) that is
allocable to the disposition of Company property subject to one or more
Nonrecourse Liabilities (as such allocable portion is determined pursuant to
Regulations section 1.704-1T(b)(4)(iv)(e)(2)); or
(ii) such Member's Excess Negative Balance at the end
of such Fiscal Year (determined before any allocation for such Fiscal Year of
any items of income, gain, loss, or deduction described in section 705(a)(2)(B)
of the Code).
<PAGE>
Items to be so allocated shall be determined and the
allocation made in accordance with Regulations section 1.704-1T(b)(4)(iv)(e).
(c) If in any Fiscal Year there is a net decrease in the
Company's Minimum Gain attributable to Member Nonrecourse Debts during such
Fiscal Year, the Member(s) that bear the economic risk of loss with respect to
such Member Nonrecourse Debts (within the meaning of Regulations section
1.704-1T(b)(4)(iv)(k)(1)) shall be specially allocated items of Company income
and gain for such Fiscal Year (and, if necessary, for subsequent Fiscal Years)
in an amount equal to the greater of the following:
(i) the net decrease in such Minimum Gain during such
Fiscal Year that is allocable to the disposition of Company property subject to
one or more Member Nonrecourse Debts (as such allocable portion is determined
pursuant to Regulations section 1.704-1T(b)(4)(iv)(h)(6)); or
(ii) such Member's (Members') Excess Negative Balance
at the end of such Fiscal Year (determined before any allocation for such Fiscal
Year of any items of income, gain, loss, or deduction described in section
705.1.(2)(B) of the Code).
Items to be so allocated shall be determined and the
allocation made in accordance with Regulations section 1.704-1T(b)(4)(iv)(h)(6).
(d) For purposes of allocating Company Nonrecourse Liabilities
among the Members pursuant to Regulations section 1.752-1T(a)(2)(i), the
respective interests of the Members in Company profits shall be equal to their
respective Percentage Interests.
(e) A Member shall not be allocated any amount of deduction or
loss (including Net Loss and Book Tax Loss) to the extent such allocation would
give rise to or increase an Excess Negative Balance in such Member's Capital
Account.
(f) In the event a Member receives with respect to a Fiscal
Year an adjustment, allocation, or distribution described in subparagraphs (4),
(5), and (6) of Regulations section 1.704-1(b)(2)(ii)(d) that results in such
Member having an Excess Negative Balance in its Capital Account, such Member
shall be allocated for such Fiscal Year (and, if necessary, for subsequent
Fiscal Years) items of income or gain in an amount and manner sufficient to
eliminate such Excess Negative Balance as promptly as possible, as provided in
Regulations section 1.704-1(b)(2)(ii)(d).
<PAGE>
(g) In the event that any fees, interest, or other amounts
paid to a Member or affiliate of a Member pursuant to this Agreement or to any
agreement between the Company and the Member or affiliate providing for the
payment of such amounts, and deducted by the Company, whether in reliance on
sections 162, 163, 707(a), and/or 707(c) of the Code or otherwise, on its
federal income tax return are disallowed as deductions to the Company in or with
respect to the Fiscal Year for which such amounts are claimed and are treated as
Company distributions, then:
(i) the Net Income or Net Loss, as the case may be,
for the Fiscal Year in or with respect to which such fees, interest, or other
amounts were paid shall be increased or decreased, as the case may be, by the
amount of such deduction that is so disallowed and treated as a Company
distribution; and
(ii) there shall be allocated to the Member who
received (or whose affiliate received) such payments, prior to the allocations
pursuant to Sections 4.02 and 4.02(b), an amount of gross income of the Company
for the Fiscal Year in or with respect to which such claimed deduction was
disallowed, equal to the amount of such deduction that was so disallowed and
treated as a Company distribution.
(h) Except as otherwise specifically provided in this
Agreement and as provided in the next sentence below, the distributive share of
a Member of each specific deduction and item of income, gain, loss, and credit
of the Company for federal income tax purposes for any Fiscal Year shall be the
same as such Member's proportionate share (determined as set forth in Section
4.02 and 4.03) of Net Income, Net Loss, Book Tax Gain, or Book Tax Loss, as the
case may be, for such Fiscal Year. Notwithstanding the foregoing, any income
recognized pursuant to sections 1245 and 1250 of the Code and any investment
credit recapture recognized pursuant to section 47 of the Code shall be
allocated among the Members in the same proportions as the depreciation
deductions and investment credits giving rise to such income or recapture were
allocated among such Members and their respective predecessors in interest.
<PAGE>
(i) It is the intent of the Members that each Member's
distributive share of income, gain, loss, and credit (or items thereof) shall be
determined and allocated in each Fiscal Year in accordance with this Section
4.07 to effect the distributions in the manner contemplated by Sections 4.05 and
4.06 to the extent permitted by Code section 704(b) and the applicable
Regulations. In order to achieve the contemplated distributions provided for in
Sections 4.05 and 4.06, the Managing Member is authorized and directed to
allocate income, gain, loss, and credit (or items thereof) with respect to any
Fiscal Year in a manner different from that otherwise provided for in this
Section 4.07 if, and to the extent that, allocating income, gain, loss, and
credit (or items thereof) in a manner provided for in this Section 4.07 either
would not achieve the intended economic result desired by the Members or would
not be respected under Code section 704(b) (referred to as a "new allocation").
The Managing Member is authorized to make a new allocation under this Section
4.07(i) only after having determined both (i) that the new allocation either
more accurately effects the distributions contemplated by the Members as set
forth in Section 4.05 and 4.06 or is not inconsistent with those distributions
and (ii) that the new allocation will not have a material adverse effect on the
economic interests of the Members (including, without limitation, causing them
to recognize income that they would not otherwise be required to recognize or to
lose the benefit of deductions that they otherwise would have been permitted to
recognize). New allocations by the Managing Member in accordance with this
Section 4.07(i) shall not require the consent of the other Members.
SECTION 4.08. Contributed Property; Reevaluations Pursuant to Section
704(b) Regulations.
In the event that any property contributed to the Company or revalued
pursuant to the provisions of Regulations section 1.704-1(b)(2)(iv)(f) has a
Carrying Value that differs from the Adjusted Basis of such property at the time
of its contribution or revaluation, any income, depreciation, gain, or loss with
respect to such property shall, solely for tax purposes, be allocated among the
Members in a manner that takes such difference into account and is consistent
with Code section 704(c), the Regulations thereunder, and Regulations section
1.704-1(b)(2)(iv)(f)(4), 1.704-1(b)(2)(iv)(g), and 1.704-1(b)(4)(i). The
allocations made pursuant to this Section 4.08 shall be made solely for tax
purposes and shall not affect or in any way be taken into account in computing
any Member's Capital Account or share of Net Income, Net Loss, Book Tax Gain,
Book Tax Loss, or other allocations or distributions under this Agreement.
<PAGE>
SECTION 4.09. Withholding Taxes and Reporting Obligations.
(a) The Company is authorized and directed to withhold from or
pay on behalf of any Member the amount of federal, state, local, or foreign
taxes that the Managing Member reasonably determines that the Company is
required to withhold or pay with respect to any amount distributable or
allocable to such Member pursuant to this Agreement, including, without
limitation, any taxes required to be paid by the Company pursuant to section
1441, 1442, 1445, or 1446 of the Code. Any amount so withheld or paid on behalf
of a Member shall constitute an advance by the Company to such Member that shall
be secured by the Member's Membership Interest. An advance to a Member pursuant
to this Section 4.09(a) shall be repaid to the Company, in whole or in part, as
reasonably determined by the Managing Member in its sole discretion, either (i)
out of any distributions from the Company which the Member may be or become
entitled to receive, or (ii) by the Member in cash upon demand by the Company.
(b) The Members agree to cooperate fully with all efforts of
the Company to comply with its tax withholding and information reporting
obligations and to provide the Company with such information as the Managing
Member may reasonably request from time to time in connection with such
obligations. Any Member or permitted transferee of a Membership Interest that
fails to comply with this Section 4.09(b) shall be liable to the Company for the
amount of any taxes, penalties, and interest for which the Company becomes
liable as a result of any such failure.
ARTICLE V
MANAGEMENT
SECTION 5.01. Members.
(a) Membership Interests. The Membership Interests shall have
such relative rights, powers and duties as are set forth in this Agreement.
(b) Meetings and Actions.
(i) Meetings. The Members shall meet at least once
each Fiscal Year at the principal offices of the Company or at such other place
as may be fixed by the Managing Member (unless such meeting shall be waived by
all of the Members), upon ten (10) days' notice to all Members in writing or by
telephone or facsimile transmission. Members may participate in a meeting of the
Members by means of conference telephone or similar communications equipment by
means of which all persons participating in the meeting can hear each other, and
such participation in a meeting shall constitute presence in person at the
meeting.
(ii) Quorum. No action may be taken at a meeting of
the Members unless a quorum consisting of each of the Members are present in
person or by proxy.
(iii) Action by Written Consent. Any action to be
taken by the Members may be taken without a meeting if consents in writing
setting forth the action so taken are signed by each of the Members.
(iv) Voting. Each Member shall be entitled to vote
its Percentage Interest with respect to any decision made by the Members to the
extent provided for herein.
SECTION 5.02. Management of the Company by the Managing Member.
(a) Management by the Managing Member. The Members hereby
unanimously agree that the responsibility for management of the business and
affairs of the Company shall be delegated to a manager pursuant to Section
18-402 of the Act which shall at all times be a Member of the Company (the
"Managing Member").
<PAGE>
(b) Managing Member.
(i) The Members hereby unanimously appoint Cabot ALF,
L.L.C. to serve as the Managing Member until its resignation or replacement as
set forth herein.
(c) Power and Authority of the Managing Member. Subject to
Section 5.04, the Managing Member (acting on behalf of the Company) shall have
the right, power, and authority, to manage, operate and control the business and
affairs of the Company and to do or cause to be done any and all acts, at the
expense of the Company, deemed by the Managing Member to be necessary or
appropriate to effectuate the purposes of the Company including, without
limitation, the right, power and authority on behalf of the Company to make,
execute, assign, acknowledge, and file on behalf of the Company any and all
documents or instruments of any kind which the Managing Member may deem
necessary or appropriate in carrying out the business and affairs of the
Company, including, without limitation, powers of attorney, agreements of
indemnification, documents, or instruments of any kind or character, and
amendments thereto (and no person, firm or corporation dealing with the Managing
Member shall be required to determine or inquire into the authority or power of
the Managing Member to bind the Company or to execute, acknowledge, or deliver
any and all documents in connection therewith).
(d) Third Party Reliance. Third parties dealing with the
Company shall be entitled to rely conclusively upon the power and authority of
the Managing Member of the Company as set forth herein.
(e) Fees to the Managing Member. Except as expressly provided
in this Agreement, the Managing Member, in its capacity as such, shall not be
entitled to any fees for services rendered for or on behalf of the Company.
(f) Fiduciary Relationship. The Managing Member shall not be
liable to the Company or its Members for monetary damages for breach of
fiduciary duty as the Managing Member or otherwise liable, responsible or
accountable to the Company or its Members for monetary damages or otherwise for
any acts performed, or for any failure to act; provided, however, that this
provision shall not eliminate or limit the liability of the Managing Member for
acts or omissions which involve intentional misconduct or a knowing violation of
law.
<PAGE>
(g) Reimbursement. All expenses incurred with respect to the
organization, operation, and management of the Company shall be borne by the
Company. The Managing Member shall be entitled to reimbursement from the Company
for direct expenses allocable to the organization, operation, and management of
the Company.
SECTION 5.03. Indemnification of the Members, the Managing Member and
any Affiliate.
(a) In accordance with Section 18-108 of the Act, the Company
shall indemnify and hold harmless any Member, the Managing Member and Affiliates
thereof (individually, in each case, an "Indemnitee") to the fullest extent
permitted by law from and against any and all losses, claims, demands, costs,
damages, liabilities (joint or several), expenses of any nature (including
attorneys' fees and disbursements), judgments, fines, settlements, and other
amounts arising from any and all claims, demands, actions, suits, or
proceedings, whether civil, criminal, administrative or investigative, in which
the Indemnitee may be involved, or threatened to be involved, as a party or
otherwise, arising out of or incidental to the business or activities of or
relating to the Company, regardless of whether the Indemnitee continues to be a
Member, the Managing Member or an Affiliate thereof at the time any such
liability or expense is paid or incurred; provided, however, that this provision
shall not eliminate or limit the liability of an Indemnitee (i) for any breach
of the Indemnitee's duty of loyalty to the Company or its Members, (ii) for acts
or omissions which involve gross negligence, intentional misconduct or a knowing
violation of law, or (iii) for any transaction from which the Indemnitee
received any improper personal benefit.
(b) Expenses incurred by an Indemnitee in defending any claim,
demand, action, suit, or proceeding subject to this Section 5.03 shall, from
time to time, upon request by the Indemnitee be advanced by the Company prior to
the final disposition of such claim, demand, action, suit, or proceeding upon
receipt by the Company of an undertaking by or on behalf of the Indemnitee to
repay such amount, if it shall be determined in a judicial proceeding or a
binding arbitration that such Indemnitee is not entitled to be indemnified as
authorized in this Section 5.03.
<PAGE>
(c) The indemnification provided by this Section 5.03 shall be
in addition to any other rights to which an Indemnitee may be entitled under any
agreement, vote of the Members, as a matter of law or equity or otherwise, both
as to an action in the Indemnitee's capacity as a Member, the Managing Member or
any Affiliate thereof, and as to an action in another capacity, and shall
continue as to an Indemnitee who has ceased to serve in such capacity and shall
inure to the benefit of the heirs, successors, assigns, and administrators of
the Indemnitee.
(d) The Company may purchase and maintain insurance on behalf
of the Managing Member and such other Persons as the Managing Member shall
determine against any liability that may be asserted against or expense that may
be incurred by such Persons in connection with the offering of interests in the
Company or the business or activities of the Company, regardless of whether the
Company would have the power to indemnify such Persons against such liability
under the provisions of this Agreement.
(e) An Indemnitee shall not be denied indemnification in whole
or in part under this Section 5.03 or otherwise by reason of the fact that the
Indemnitee had an interest in the transaction with respect to which the
indemnification applies if the transaction was otherwise permitted or not
expressly prohibited by the terms of this Agreement.
(f) The provisions of this Section 5.03 are for the benefit of
the Indemnitees, their heirs, successors, assigns and administrators and shall
not be deemed to create any rights for the benefit of any other Persons.
SECTION 5.04. Limitation on Authority of the Managing Member.
Notwithstanding anything in this Agreement to the
contrary, the Managing Member shall not without the prior written consent of the
Class A Member cause or permit the Company to:
(i) dissolve and wind-up the affairs of the Company,
except as provided in Article VIII;
(ii) merge or consolidate with any other limited
liability company or other entity;
<PAGE>
(iii) sell, assign, lease or otherwise dispose of
twenty percent (20%) or more of the Company Assets; or
(iv) modify the terms of this Agreement.
SECTION 5.05. Other Activities of Members.
Any Member may have other business interests or may engage in other
business ventures of any nature or description whatsoever, whether currently
existing or hereafter created, and may compete, directly or indirectly, with the
business of the Company. No Member or Affiliate thereof shall incur any
liability to the Company as a result of such Member's or Affiliate's pursuit of
such other business interest, ventures and competitive activity, and neither the
Company nor the other Members shall have any right to participate in such other
business ventures or to receive or share in any income or profits derived
therefrom.
SECTION 5.06. Transactions with Managing Member or Affiliates.
The Company is expressly permitted in the normal course of its business
to enter into transactions with the Managing Member or with any Affiliate of the
Managing Member provided that the price and other terms of such transactions are
fair to the Company and that the price and other terms of such transactions are
not less favorable to the Company than those generally prevailing with respect
to comparable transactions between unrelated parties.
<PAGE>
ARTICLE VI
BANK ACCOUNTS; BOOKS AND RECORDS;
STATEMENTS; TAXES; FISCAL YEAR
SECTION 6.01. Bank Accounts.
All funds of the Company shall be deposited in its name in such
checking and savings accounts, time deposits or certificates of deposit, or
other accounts at such banks, as shall be designated by the Managing Member from
time to time, and the Managing Member shall arrange for the appropriate conduct
of such account or accounts.
SECTION 6.02. Books and Records.
The Managing Member shall keep, or cause to be kept, accurate, full and
complete books and accounts showing assets, liabilities, income, operations,
transactions and the financial condition of the Company. Such books and accounts
shall be prepared on the accrual basis of accounting. Any Member, or its
respective designee, shall have access thereto at any reasonable time during
regular business hours and shall have the right to copy said records at their
expense.
SECTION 6.03. Financial Statements and Information.
(a) All financial statements prepared pursuant to this Section
6.03 shall be accurate and complete in all material respects, shall present
fairly the financial position and operating results of the Company, and shall be
prepared on the accrual basis as provided in Section 6.03 for each Fiscal Year
of the Company during the term of this Agreement.
(b) Within 45 days after the end of each quarterly period (the
"Fiscal Quarter") of each Fiscal Year, commencing with the first full Fiscal
Quarter after the date of this Agreement, the Managing Member shall prepare and
submit or cause to be prepared and submitted to the Members an unaudited
statement of profit and loss for the Company for such Fiscal Quarter and an
unaudited balance sheet of the Company dated as of the end of such Fiscal
Quarter, in each case prepared in accordance with generally accepted accounting
principles.
<PAGE>
(c) Within 90 days after the end of each Fiscal Year during
the term of this Agreement, the Managing Member shall prepare and submit or
cause to be prepared and submitted to the Members (i) an audited balance sheet,
together with audited statements of profit and loss, Members' equity and changes
in financial position for the Company during such Fiscal Year; and (ii) a report
of the activities of the Company during the Fiscal Year.
(d) The Managing Member shall provide to the Members such
other reports and information concerning the business and affairs of the Company
as may be required by the Act or by any other law or regulation of any
regulatory body applicable to the Company.
SECTION 6.04. Accounting Decisions.
All decisions as to accounting matters, except as specifically provided
to the contrary herein, shall be made by the Managing Member.
SECTION 6.05. Where Maintained.
The books, accounts and records of the Company at all times shall be
maintained at the Company's principal office.
SECTION 6.06. Tax Returns.
The Managing Member shall, at the expense of the Company, cause to be
prepared and delivered to the Members, in a timely fashion after the end of each
Fiscal Year, copies of all federal and state income tax returns for the Company
for such Fiscal Year and one copy of each return shall be filed by the Managing
Member. Such returns shall be prepared on the accrual basis, and shall
accurately reflect the results of operations of the Company for such Fiscal
Year. The Managing Member is designated as the "tax matters partner" (as defined
in the Code) of the Company and is authorized and required to represent the
Company (at the expense of the Company) in connection with all examinations of
the affairs of the Company by any federal, state, or local tax authorities,
including any resulting administrative and judicial proceedings, and to expend
funds of the Company for professional services and costs associated therewith.
Each Member agrees to cooperate with the Managing Member and to do or refrain
from doing any or all things reasonably required by the Managing Member in
connection with the conduct of such proceedings.
<PAGE>
SECTION 6.07. Fiscal Year.
The Fiscal Year of the Company for financial and Federal, state and
local income tax purposes shall initially be the calendar year. The Managing
Member shall have authority to change the beginning and ending dates of the
Fiscal Year if the Managing Member, in its sole and absolute discretion, deems
such change to be necessary or appropriate to the business of the Company, and
the Managing Member shall give written notice of any such change to the Members
within thirty (30) days after the occurrence thereof.
ARTICLE VII
LIMITATION ON LIABILITY
The debts, obligations, and liabilities of the Company, whether arising
in contract, tort, or otherwise, shall be solely the debts, obligations, and
liabilities of the Company. None of the Members, the Managing Manager, or any
stockholders, directors, partners, officers, agents or employees of any Member
or the Company, shall be obligated personally for any debt, obligation, or
liability of the Company solely by reason of his, her, or its status as such
Member, Managing Member, stockholder, director, partner, officer, agent or
employee. The failure of the Company to observe any formalities or requirements
relating to the exercise of its powers or management of its business or affairs
under the Act or this Agreement shall not be grounds for imposing personal
liability on the Members, the Managing Member, or any officer, agent or employee
of any Member or the Company for liabilities of the Company.
ARTICLE VIII
DISSOLUTION AND LIQUIDATION
SECTION 8.01. The Company shall dissolve, and its affairs shall be
wound up, solely upon the first to occur of the following, unless the Members
elect to continue the Company to the extent permitted under the Act:
<PAGE>
(a) December 31, 2096;
(b) at the time specified in a written consent of the Members,
provided that, so long as any indebtedness remains outstanding under the Loan
Documents, the Company will be dissolved only to the extent permitted under the
Loan Documents;
(c) at any time there are no remaining Members, provided that,
the Company shall not be dissolved and is not required to be wound up if, within
90 days after the occurrence of the event that terminated the continued
membership of the last remaining Member, the personal representative of the last
remaining Member agrees in writing to continue the Company and to the admission
of the personal representative of such Member or its nominee or designee to the
Company as a Member, effective as of the occurrence of the event that terminated
the continuing membership of the last remaining Member; or
(d) at the time specified in a decree of judicial dissolution
under the Act.
The death, retirement, resignation, expulsion, bankruptcy or
dissolution of any Member or the occurrence of any other event that terminates
the continued membership of any Member shall not cause the Company to be
dissolved or its affairs to be wound up, and upon the occurrence of any such
event, the Company shall be continued without dissolution, unless, (i) within 90
days following the occurrence of such event, all Members agree in writing to
dissolve the Company; and (ii) for so long as any indebtedness remains
outstanding under the Loan Documents, the Members, by unanimous vote, approve
such dissolution; and (iii) for so long as any indebtedness remains outstanding
under the Loan Documents, such dissolution is permitted under the terms of the
Loan Documents.
The foregoing constitute the only events upon which the
Company shall be dissolved and its affairs wound up, notwithstanding any
provisions of the Act.
SECTION 8.02. Upon the dissolution of the Company, unless its business
is continued as provided in the Act, the Managing Member shall wind up the
affairs of the Company.
<PAGE>
SECTION 8.03. Upon the winding up and termination of the Company in
accordance with the Act, the assets of the Company shall be distributed as
follows:
(a) to creditors of the Company (including the Members to the
extent they are creditors) to the extent permitted by law, in satisfaction of
all of the Company's debts, liabilities, and obligations, by payment thereof or
establishment of reasonable reserves therefor; and
(b) any remaining assets to the Members in proportion to their
Percentage Interests.
SECTION 8.04. When all debts, liabilities, and obligations of the
Company have been paid and discharged, or adequate provisions have been made
therefor and all remaining property and assets of the Company have been
distributed to the Members, a certificate of cancellation shall be prepared,
executed, and filed in accordance with the Act.
ARTICLE IX
TRANSFER OF INTERESTS
SECTION 9.01. Transfer.
(a) The term "transfer", when used in this Article IX with
respect to a Membership Interest, shall include any sale, assignment, gift,
pledge, hypothecation, mortgage, exchange, or other disposition, except that
such term shall not include any pledge, mortgage, or hypothecation of or
granting of a security interest in a Membership Interest in connection with any
financing obtained on behalf of the Company.
(b) No Membership Interest shall be transferred, in whole or
in part, except in accordance with the terms and conditions set forth in this
Article IX. Any transfer or purported transfer of any Membership Interest not
made in accordance with this Article IX shall be null and void.
<PAGE>
SECTION 9.02. Transfer of Interest of Managing Member.
If the Managing Member desires to sell or transfer all or any portion
of such Managing Member's Membership Interest, such transfer shall be permitted
if (and only if):
(a) such transfer (i) would not violate the then applicable
Federal and state securities laws and rules and regulations of the Securities
and Exchange Commission, state securities commissions and any other governmental
authorities with jurisdiction over such disposition, (ii) would not result in
the Company being classified for federal income tax purposes as an "association
taxable as a corporation" rather than as a limited liability company, (iii)
would not prejudice or affect the continuity of the Company for the purposes of
section 708 of the Code and (iv) would not affect the Company's existence as a
limited liability company under the Act.
(b) a successor Managing Member is admitted to the Company in
accordance with Section 10.02; and
(c) such transfer and the admission of the transferee as a
Managing Member of the Company is approved by the Class A Member.
SECTION 9.03. Transfer of Interest of Non-Managing Member.
If a Non-Managing Member desires to transfer all or any portion of its
Membership Interest such transfer shall be permitted if (and only if):
(a) such transfer (i) would not violate the then applicable
federal and state securities laws and rules and regulations of the Securities
and Exchange Commission, state securities commissions and any other governmental
authorities with jurisdiction over such disposition, (ii) would not result in
the Company being classified for federal income tax purposes as an "association
taxable as a corporation" rather than as a limited liability company, (iii)
would not prejudice or affect the continuity of the Company for the purposes of
Section 708 of the Code; and (iv) would not affect the Company's existence as a
limited liability company under the Act.
<PAGE>
(b) the transferee is admitted as a Member of the Company in
accordance with Section 10.01.
(c) if the transferor is the Class B Member, the Class B
Member shall have first offered the Class A Member the right of first refusal to
acquire the Membership Interest of the Class B Member on the same terms and
conditions as the Class B Member is prepared to transfer the Class B Member's
Membership Interest to a third party and the Class A Member shall have failed to
exercise the right of first refusal within thirty (30) days after receipt of a
copy of all of the terms and conditions of the proposed transfer.
SECTION 9.04. Right to Purchase Interest of Managing Member.
Upon the termination of the employment of Edward B. Romanov, Jr. as an
officer of ElderTrust, a Maryland real estate investment trust, for any reason
(including, but not limited to, death, disability or voluntary separation),
ElderTrust Operating Limited Partnership (or its successors, assigns or
designee(s)) will have the right to purchase the Managing Member's Membership
Interest for cash within the later of (x) sixty (60) days after the date of his
termination and (y) thirty (30) days after his successor is elected or
appointed. The purchase price of the Managing Member's Membership Interest will
be the fair market value of the Managing Member's Membership Interest, as agreed
to between ElderTrust Operating Limited Partnership and the Managing Member (or
if they cannot agree, as determined by a national accounting firm selected by
ElderTrust Operating Limited Partnership and the Managing Member).
<PAGE>
ARTICLE X
ADMISSION OF ADDITIONAL MEMBERS; WITHDRAWAL OF MEMBERS;
REMOVAL OF MANAGING MEMBER
SECTION 10.01. [INTENTIONALLY DELETED].
SECTION 10.02. Admission of a Successor Managing Member.
A transferee of all or any portion of the Membership Interest of the
Managing Member pursuant to Article IX shall be admitted to the Company as a
Managing Member (in the place, in whole or in part, of the transferor or former
Managing Member), and upon the first date of receipt by the Company of all of
the following (which date, in the event the successor Managing Member is in the
place in whole of the transferor or former Managing Member, shall be
contemporaneous with the withdrawal of such transferor or former Managing
Member):
(a) the successor Managing Member's acceptance of, and
agreement to be bound by, all of the terms and provisions of this Agreement, in
form and substance satisfactory to the Company;
(b) evidence of the authority of such successor Managing
Member to become a Managing Member and to be bound by all of the terms and
conditions of this Agreement;
(c) the written agreement of the successor Managing Member to
continue the business of the Company in accordance with the terms and provisions
of this Agreement; and
(d) such other documents or instruments as may be required in
order to effect the admission of the successor Managing Member as a Managing
Member under this Agreement.
SECTION 10.03. Withdrawal of Managing Member.
The Managing Member may withdraw from the Company only upon a transfer
of all of such Managing Member's Membership Interest as a Managing Member in
accordance with Article IX. The Managing Member shall have no liability to the
Company or the Members on account of any withdrawal in accordance with the terms
of this Article X.
SECTION 10.04. Withdrawal of Non-Managing Member.
Either Non-Managing Member may withdraw from the Company at any time
upon a transfer of all of such Member's Membership Interest as a Member in
accordance with Article IX.
<PAGE>
SECTION 10.05. Removal of Managing Member.
(a) The Managing Member may be removed as the Managing Member
of the Company for "cause" (as hereinafter defined), upon the affirmative vote
of the Class A Member. Any such action by the Class A Member must also provide
for the election of a successor Managing Member and shall become effective only
upon the admission of the successor Managing Member pursuant to Section 10.2. As
used herein, "cause" shall mean actual fraud, negligence, bad faith or willful
misconduct.
(b) Written notice of removal of the Managing Member pursuant
to this Section 10.05 shall be provided to the Managing Member at the address
set forth on Schedule A.
(c) Notwithstanding Section 10.05(a), the Managing Member may
not be removed pursuant to Section 10.05(a) until such time as the Company shall
have received an opinion of legal counsel that the removal (i) may be taken
without the concurrence of all Members, (ii) would not cause the loss of limited
liability of the Members under this Agreement, and (iii) would not cause the
Company to be treated as an association taxable as a corporation for federal
income tax purposes.
(d) In the event the Managing Member is removed pursuant to
this Article X, within 30 days after the Business Day on which such withdrawal
becomes effective:
(i) if the Managing Member had a positive balance in
its Capital Account as of the effective date of its withdrawal, it shall be
entitled to receive cash in an amount equal to such positive balance; or
(ii) if the Managing Member had a negative balance in
its Capital Account as of the effective date of its withdrawal, it shall be
required to pay to the Company an amount equal to such negative balance.
(e) Any successor Managing Member elected pursuant to Section
10.02(a) shall, at the effective date of its admission to the Company as the
Managing Member, make a Capital Contribution to the Company in an amount equal
to $2884.00.
<PAGE>
ARTICLE XI
SEPARATENESS REQUIREMENTS
SECTION 11.01. So long as any indebtedness is outstanding under the
Loan Documents, the Company will --
(a) maintain records and books of account separate from those of any
other Person;
(b) maintain financial statements separate from those of any other
Person (except that the Company may be included in consolidated financial
statements of another Person where required by GAAP);
(c) except for certain overhead and transaction costs that are
allocated on a reasonable basis among the Company and certain of its Affiliates,
pay its own liabilities from its own funds and pay the salaries of its own
employees, if any;
(d) participate in the fair and reasonable allocation of any and all
overhead expenses and other common expenses for facilities, goods, or services
provided to multiple entities;
(e) maintain an arm's length relationship with its affiliates and any
other parties furnishing services to it;
(f) except as otherwise contemplated by the Loan Documents, deposit all
of its funds in checking accounts, savings accounts, time deposits or
certificates of deposit in its own name or invest such funds in its own name;
(g) observe all limited liability company formalities necessary to
maintain its identity as an entity separate and distinct from the Members and
all of their other Affiliates;
(h) hold itself out as a separate and distinct entity from any other
Person;
(i) hold title to its assets in its own name; and
(j) conduct its own business in its own name or under such trade name
as will not be reasonably likely to cause confusion as to its separate
existence.
<PAGE>
SECTION 11.02. So long as any indebtedness is outstanding under the
Loan Documents, the Company will not --
(a) fail to correct any known misunderstanding regarding its separate
identity;
(b) commingle its funds or other assets with those of any other Person;
(c) guarantee or become obligated for the debts of any other entity or
hold its credit as being available to satisfy the obligations of any other
Person (provided that this provision shall not be deemed to prohibit customary
joint and several obligations and indemnification and contribution agreements
entered into under the Loan Documents or in the ordinary course of business of
the Company);
(d) pledge any of its assets for the benefit of any other Person other
than the lender under the Loan Documents (except as otherwise permitted by the
Loan Documents);
(e) acquire obligations or securities of its Members;
(f) make any loans to any other Person;
(g) identify its Members or any of its Affiliates as a division or part
of it or itself as a division or part of any of them (except for inclusion of
the Company in consolidated financial statements in accordance with GAAP);
(h) engage (either as transferor or transferee) in any material
transaction with any Affiliate other than for fair value and on terms similar to
those obtainable in arms'-length transactions with unaffiliated parties, or
engage in any transaction with any Affiliate involving any intent to hinder,
delay or defraud any entity; or
(i) engage in any business activity other than as stated in this
Agreement.
SECTION 11.03. So long as any indebtedness is outstanding under the
Loan Documents, each of the Members will --
(a) observe all customary formalities necessary to maintain its
identity as an entity separate and distinct from the Company and all of its
other Affiliates; and
<PAGE>
(b) hold itself out as a separate and distinct entity from the Company
and not identify the Company as a division of the Members.
ARTICLE XII
AMENDMENT
SECTION 12.01. This Agreement may be amended or modified by a written
instrument executed by the Member. Notwithstanding the foregoing, so long as any
indebtedness remains outstanding under the Loan Documents, the provisions of
Sections 2.01, 5.03, 5.04, 10.01, 10.02, 10.03, 11.01, 11.02, 11.03, this
Section 12.01 and Article XIII shall not be amended under conditions or in any
manner that would be prohibited by the Loan Documents.
ARTICLE XIII
MHFA REQUIREMENTS
SECTION 13.01.
(a) Notwithstanding any other provision of this Agreement, no
amendment to this Agreement shall be made which would affect the rights of the
MHFA under any agreement between MHFA and the Company without securing the prior
written consent of MHFA.
(b) The hiring of a management agent for the Property shall be
subject to MHFA approval. As used herein, the term "Management Fee" shall mean
the amount payable from time to time by the Company to such management agent on
an annual basis for management services in accordance with a management contract
approved by MHFA. No distribution, amount of Cash Flow or loans to the Company
may be guaranteed by any assignment of any Management Fees to be received by any
such management agent. The terms of any loans by the Members to the Company must
be approved by MHFA.
<PAGE>
(c) Any new or substitute Member must agree to acknowledge the
Company's obligations to MHFA in connection with the mortgage debt owed to MHFA
and the operation of the property by any new or substitute Member is subject to
prior written approval of MHFA.
(d) The Managing Member shall be solely responsible for the
management of the Company business with all the rights and powers generally
conferred by law. Any party dealing with the Company may rely on a certificate
signed by the Managing Member that it has all necessary power and authority to
bind the Company by its acts.
(e) The provisions of this Section 13.01 are intended for the
benefit of MHFA only and shall be of no force and effect at any time that MHFA
is not the holder of a mortgage of the Property.
(f) Any transfer of any Membership Interests shall be subject
to the approval of MHFA.
SECTION 13.02 Limited Dividend. Notwithstanding anything to the
contrary contained in this Agreement, distributions to Members shall be limited
to those amounts permitted by MHFA, the Executive Office of Communities and
Development of the Commonwealth of Massachusetts, the Massachusetts Industrial
Finance Authority ("MIFA") or such other state or federal agency which provides
assistance for the construction or operation of the Property, if and to the
extent applicable.
ARTICLE XIV
DEFINITIONS
As used herein, the following capitalized terms have the meanings set
forth below:
"Act" means the Delaware Limited Liability Company Act, as it may be
amended from time to time.
"Agreement": This Operating Agreement as it may be from time to time
amended.
<PAGE>
"Adjusted Basis": The basis for determining gain or loss for federal
income tax purposes from the sale or other disposition of property, as defined
in Section 1011 of the Code.
"Affiliate" means, with respect to any Person, (i) any Person directly
or indirectly controlling, controlled by or under common control with such
Person, (ii) any Person owning or controlling ten percent (10%) or more of the
outstanding voting interests of such Person, (iii) any Person of which such
Person owns or controls ten percent (10%) or more of the voting interests or
(iv) any officer, director, general partner or trustee of such Person or any
Person referred to in clauses (i), (ii), and (iii) above. For purposes of this
definition, "control," when used with respect to any Person, means the power to
direct the management and policies of such Person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise,
and the terms "controlling" and "controlled" have meanings correlative to the
foregoing.
"Agreed Value": (i) In the case of any property contributed to the
Company by a Member, the 704(c) Value of such property as of the time of its
contribution to the Company, reduced by any liabilities either assumed by the
Company upon such contribution or to which such property is subject when
contributed and (ii) in the case of any property distributed to a Member by the
Company, the Company's Carrying Value of such property at the time such property
is distributed, reduced by any indebtedness either assumed by such Member upon
such distribution or to which such property is subject at the time of
distribution as determined under Section 752 of the Code and the Regulations
thereunder. The aggregate Agreed Value of all property contributed to the
Company by a Member shall be set forth next to such Member's name on Schedule A.
"Book Tax Gain" and "Book Tax Loss": The amount of taxable gain or loss
that would result from a Capital Transaction if the Adjusted Basis at the time
of the Capital Transaction of the Company Assets with respect to which such
Capital Transaction occurs were equal to the Carrying Value of such Company
Assets at such time.
"Business Day": Monday through Friday of each week, except that a legal
holiday recognized as such by the Government of the United States or the State
of Maryland or the Commonwealth of Massachusetts shall not be regarded as a
Business Day.
<PAGE>
"Capital Account": The capital account established and maintained for
each Member pursuant to Section 3.02.
"Capital Contribution": Any property (including cash) contributed to
the Company by or on behalf of a Member.
"Capital Transaction": (i) A transaction pursuant to which the Company
borrows funds, receives Capital Contributions from a new Member upon its
admission to the Company, or receives a distribution from any partnership or
joint venture in which the Company is a participant as a result of a capital
transaction with respect to that partnership or joint venture; (ii) a sale,
condemnation, exchange, abandonment, casualty not followed by reconstruction, or
other disposition, whether by foreclosure or otherwise, of Company Assets (other
than a disposition of personal property that is, or is to be, replaced), or
(iii) an insurance recovery with respect to Company Assets, or other transaction
that, in accordance with generally accepted tax accounting principles, is
considered capital in nature.
"Carrying Value": (i) With respect to any asset contributed or deemed
to be contributed to the Company or revalued on the Company's books, the fair
market value of such asset at the time of contribution or revaluation (as
determined by the Members) reduced, but not below zero, by all deductions for
depreciation, amortization, cost recovery and expense in lieu of depreciation
debited to the Capital Accounts of the Members in accordance with Regulations
Section 1.704-1(b)(2)(iv)(g) with respect to such asset since the time of
contribution or last revaluation up to the time the Carrying Value is to be
determined; and (ii) with respect to any other asset of the Company, the
Adjusted Basis of such asset as of the time the Carrying Value is to be
determined.
"Cash Flow": As defined in Section 4.01.
"Class A Member" means ElderTrust Operating Limited Partnership in its
capacity as the Class A Member hereunder.
"Class B Member" means ElderTrust Operating Limited Partnership in its
capacity as the Class B Member hereunder.
"Code": The Internal Revenue Code of 1986, as in effect and hereafter
amended, and, unless the context otherwise requires, applicable regulations
thereunder. Any reference herein to a specific section or sections of the Code
shall be deemed to include a reference to any corresponding provision of future
law.
"Company Assets": All assets and property, whether tangible or
intangible and whether real, personal or mixed, at any time owned by or held for
the benefit of the Company.
"Excess Negative Balance": The negative balance, if any, in a Member's
Capital Account as of the end of a Fiscal Year after crediting the Member's
Capital Account for the amount of any negative balance in such Capital Account
that the Partner is obligated to restore or is treated as obligated to restore
pursuant to Regulations sections 1.704-1(b)(2)(ii) (b)(3) and
1.704-1(b)(2)(ii)(c) and the amount of such Member's share of the Company's
Minimum Gain, determined pursuant to Regulations sections 1.704-1T(b)(4)(iv)(f)
and 1.704-1T(b)(4)(iv)(h)(5); and debiting the Member's Capital Account for any
adjustment, allocation, or distribution described in paragraph (4), (5), or (6)
of Regulations section 1.704-1(b)(2)(ii)(d).
"Fiscal Quarter" has the meaning ascribed thereto in Section 6.03(b).
"Fiscal Year": The fiscal year of the Company for financial accounting
purposes, and for federal, state and local income tax purposes, which shall be
the calendar year unless changed by the Managing Member in accordance with
Section 6.08
"GAAP" means generally accepted accounting principles.
"Indebtedness" means all amounts outstanding under the Loan Documents.
"Indemnitee" has the meaning ascribed thereto in Section 7.02.
<PAGE>
"Interim Capital Transaction" means any Capital Transaction that is not
a Terminating Capital Transaction.
"Loan Documents" mean any and all documents executed and delivered or
assumed by the Company in connection with a loan from MHFA to be assumed by the
Company, as such documents may be amended from time to time.
"Managing Member" means Cabot ALF, L.L.C. in its capacity as Managing
Member.
"Member" means the Managing Member or either of the Non-Managing
Members.
"Member Nonrecourse Debt": Any Nonrecourse Debt (or portion thereof)
for which a Member bears (or is deemed to bear) the economic risk of loss within
the meaning of Regulations section 1.704-1T(b)(4)(iv)(k)(1).
"Membership Interest": As to any Member, all of the interest of that
Member in the Company, including, without limitation, such Member's (i) right to
a distributive share of the income, gain, losses and deductions of the Company
in accordance herewith, (ii) right to a distributive share of Company Assets,
and (iii) rights, if a Managing Member, with respect to the management of the
business and affairs of the Company and (iv) rights, if a Non-Managing Member,
to consent to approve of certain actions as provided in Section 5.04.
"MHFA means The Massachusetts Housing Finance Agency.
"Minimum Gain": The amount determined by computing, with respect to
each Nonrecourse Debt of the Company, the amount of Book Tax Gain (of whatever
character), if any, that the Company would realize if it disposed of (in a
taxable transaction) the Company Assets subject to such Nonrecourse Debt in full
satisfaction thereof and for no other consideration, and by then aggregating the
amounts so computed. For purposes of computing the amount of Minimum Gain, (i)
the Carrying Value of a Company Asset subject to two or more Nonrecourse Debts
of equal priority shall be allocated among such Nonrecourse Debts in proportion
to the outstanding principal balances of such Nonrecourse Debts; (ii) the
Carrying Value of a Company Asset subject to two or more Nonrecourse Debts of
unequal priority shall be allocated to the Nonrecourse Debts of an inferior
priority (in accordance with (i) above) only to the extent of the excess, if
any, of the Carrying Value of the Company Asset over the aggregate outstanding
balance of the Nonrecourse Debts of superior priority; and (iii) only the
portion of a Company Asset's Carrying Value allocated to Nonrecourse Debts of
the Company shall be used in computing the Minimum Gain.
<PAGE>
"Net Income and Net Loss": For any taxable period, (i) the gross income
of the Company from all sources, other than any income or loss recognized with
respect to a Terminating Capital Transaction during such period, as calculated
for federal income tax purposes by the Company, plus (ii) any income of the
Company that is exempt from federal income tax and not otherwise taken into
account in computing gross income for federal income tax purposes, reduced by
(iii) Depreciation (as defined below), further reduced by (iv) all other items
of expense or deduction that are allowable as deductions to the Company under
the Code for such period but excluding any item of expense or deduction
attributable either to Depreciation (as defined below) or to a Terminating
Capital Transaction, as calculated for federal income tax purposes by the
Company, and further reduced by (v) any expenditures of the Company described in
section 705(a)(2)(b) of the Code or treated as expenditures described in section
705(a)(2)(b) of the Code pursuant to Regulations section 1.704-1(b)(2)(iv)(i),
and not otherwise taken into account in computing taxable income. "Depreciation"
means, for each taxable period, an amount equal to the depreciation,
amortization, or other cost recovery deductions allowable with respect to
Company Assets for such period for federal income tax purposes computed (using
the same method used by the Company in computing depreciation, amortization, or
other cost recovery deductions in preparing its federal income tax returns) as
if the Adjusted Basis of such Company Assets were equal to their Carrying
Values. All items of income, gain, loss, deduction, and credit recognized by the
Company for federal income tax purposes and allocated to the Members in
accordance with the provisions of Article IV shall be determined without regard
to any election that may be made by the Company under Code section 754 except as
expressly contemplated under Regulations section 1.704-1(b)(2)(iv)(m)(4);
provided, however, that such allocations, once made, shall be adjusted as
necessary to take into account those adjustments authorized under sections 734
and 743 of the Code.
"Net Proceeds of a Capital Transaction": As defined in Section 4.01.
"Non-Managing Members" means the Class A Member and the Class B Member.
"Nonrecourse Debt": Any liability that is considered nonrecourse for
purposes of Regulations section 1.1001-2 (without regard to whether such
liability is a recourse liability under Regulations section 1.752-1T(d)(2)) and
any other liability for which the creditor's right to repayment is limited to
one or more of the assets of the Company (within the meaning of Regulations
section 1.752-1T(d)(3)(ii)(b)(4)(ii).
"Nonrecourse Liability": Any Nonrecourse Debt (or portion thereof) for
which no Member bears (or is deemed to bear) the economic risk of loss within
the meaning of Regulations section 1.704-1T(b)(4)(iv)(k)(3).
"Percentage Interest": As defined in Section 4.01.
<PAGE>
"Person" means a natural person, partnership (whether general or
limited), trust, estate, association, corporation, limited liability company,
unincorporated organization, custodian, nominee or any other individual or
entity in its own or any representative capacity.
"Property" has the meaning ascribed thereto in Section 2.01.
"Regulations": The regulations issued by the United States Department
of the Treasury under the Code, as now in effect and as they may be amended from
time to time, and any successor regulations.
"704(c) Value": With respect to any property contributed to the Company
by a Member, the fair market value of such property at the time of contribution
as determined by the Managing Member using such reasonable method of valuation
as it may adopt; provided, however, that the Managing Member shall, in its sole
and absolute discretion, use such method as it deems reasonable and appropriate
to allocate the aggregate of the 704(c) Values of properties contributed to the
Company in a single or integrated transaction among each separate property on a
basis proportional to its fair market value.
"Terminating Capital Transaction": Any Capital Transaction involving
all or substantially all of the then remaining Company Assets and/or any other
transaction which will result in a dissolution of the Company.
"Termination Date": December 31, 2096.
"Unrealized Gain": As to any Company Asset, the Book Tax Gain, if any,
that would be realized if such Company Asset were sold for its fair market value
on the date of determination.
"Unrealized Loss": As to any Company Asset, the Book Tax Loss, if any,
that would be realized if such Company Asset were sold for its fair market value
on the date of determination.
ARTICLE XV
MISCELLANEOUS
SECTION 15.01. Severability. Each provision hereof is intended to be
severable and the invalidity or illegality of any portion of this Agreement
shall not affect the validity or legality of the remainder hereof.
SECTION 15.02 Effect of Provisions Inconsistent with Act. It is the
intention of the parties that any provision hereof that is inconsistent with the
provisions of the Act be given effect to the maximum extent permitted under the
Act.
SECTION 15.03. Binding Effect. The terms and provisions of this
Agreement shall be binding upon, and inure to the benefit of, the successors and
assigns of each of the Members.
SECTION 15.04. Governing Law. The terms and provisions of this
Agreement shall be construed under the laws of the State of Delaware and the Act
as now adopted or as it may be hereafter amended shall govern the interpretation
of this Agreement.
[SIGNATURE PAGE TO FOLLOW]
<PAGE>
IN WITNESS WHEREOF, the undersigned have caused this Operating
Agreement to be duly executed on their behalf as of the date first written
above.
MANAGING MEMBER:
CABOT ALF, L.L.C.
By:/s/ Edward B. Romanov, Jr.
---------------------------------
Edward B. Romanov, Jr.
Member
CLASS A MEMBER:
ELDERTRUST OPERATING LIMITED PARTNERSHIP
By: ELDERTRUST
General Partner
By:/s/ Edward B. Romanov, Jr.
---------------------------------
Edward B. Romanov, Jr.
President
CLASS B MEMBER:
ELDERTRUST OPERATING LIMITED PARTNERSHIP
By: ELDERTRUST
General Partner
By:/s/ Edward B. Romanov, Jr.
---------------------------------
Edward B. Romanov, Jr.
President
<PAGE>
SCHEDULE A
To Operating Agreement of ET Sub-Cabot
Park, L.L.C.
NAMES, ADDRESSES AND CAPITAL CONTRIBUTIONS OF MEMBERS
AGREED VALUE OF
CAPITAL CONTRIBUTIONS
MANAGING MEMBER:
CABOT ALF, L.L.C. $2,884.00
101 East State Street
Suite 101
Kennett Square, Pennsylvania 19348
CLASS A MEMBER
ELDERTRUST OPERATING LIMITED PARTNERSHIP $259,554.00
101 East State Street
Suite 101
Kennett Square, Pennsylvania 19348
CLASS B MEMBER:
ELDERTRUST OPERATING LIMITED PARTNERSHIP $25,955.00
101 East State Street
Suite 101
Kennett Square, Pennsylvania 19348
TOTAL: $288,393.00
<PAGE>
OPERATING AGREEMENT
OF
ET SUB-CLEVELAND CIRCLE, L.L.C.
This Operating Agreement of ET SUB-CLEVELAND CIRCLE, L.L.C. (this
"Agreement"), dated as of October 23, 1998, is entered into by and between
CLEVELAND ALF, L.L.C., a Delaware limited liability company (the "Managing
Member"), and ELDERTRUST OPERATING LIMITED PARTNERSHIP, a Delaware limited
partnership, as the Class A Member (the "Class A Member") and ELDERTRUST
OPERATING LIMITED PARTNERSHIP, a Delaware limited partnership, as the Class B
Member (the "Class B Member").
R E C I T A L S:
WHEREAS, the Company was formed under the Delaware Limited Liability
Company Act, as amended (the "Act"), by the filing of a certificate of formation
with the Secretary of State of the State of Delaware on July 16, 1998; and
WHEREAS, the Members (as defined below) desire by this Agreement to set
forth the rights and obligations of, the relationships among, and certain other
provisions governing the conduct of the affairs of the Members and the Company;
and
WHEREAS, certain capitalized terms used herein shall have the meanings
ascribed thereto in Article XIV.
NOW, THEREFORE, in consideration of the foregoing, of the mutual
promises herein contained and of other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto,
intending legally to be bound, hereby covenant and agree as follows:
ARTICLE I
ORGANIZATIONAL AND OTHER MATTERS
SECTION 1.01. Formation; Admission. By its execution and delivery of
this Agreement, each of the Members hereby ratifies the formation of the Company
under the provisions of the Act pursuant to the filing of the Certificate of
Formation with the Secretary of State of the State of Delaware and confirms its
admission to the Company as one of the initial Members.
SECTION 1.02. Name. The name of the Company shall be ET SUB-CLEVELAND
CIRCLE, L.L.C. and the business of the Company shall be conducted under such
name.
<PAGE>
SECTION 1.03. Principal Place of Business. The principal place of
business and the principal office of the Company shall be located at 101 East
State Street, Suite 101, Kennett Square, Pennsylvania 19348. The Company may
have such other or additional offices, either within or without the State of
Delaware, as the Managing Member shall deem advisable.
SECTION 1.04. Registered Agent. The name of the Company's initial
registered agent in the State of Delaware is Corporation Trust Center and the
address of such registered agent is 1209 Orange Street, Wilmington, County of
New Castle, Delaware. The Managing Member may change the registered agent of the
Company from time to time.
ARTICLE II
PURPOSE AND POWERS
SECTION 2.01. Purpose of the Company. The sole purpose of the Company
is to acquire, own, develop, mortgage, encumber, hypothecate, lease, sell,
maintain, improve, alter, remodel, expand, manage, and otherwise operate and
deal with all or part of (a) that certain assisted living facility known as
Heritage at Cleveland Circle and located at 50 Sutherland Road, Boston,
Massachusetts (the "Property"), including obtaining financing and refinancing
for the above purposes, selling, or otherwise disposing of all or any part of
the Property, and investing and reinvesting any funds held in reserve.
Notwithstanding anything contained herein to the contrary, the Company shall not
engage in any business, and it shall have no purpose unrelated to the Property
and shall not acquire any real property or own assets other than those related
to the Property or otherwise in furtherance of the purposes of the Company.
SECTION 2.02. Powers of the Company. In order to carry out its
purposes, the Company is empowered and authorized to engage in such acts and
activities as may be required, in the reasonable judgment of the Managing
Member, whose determination shall be conclusive, to carry out the foregoing
purposes, including the power to enter into and perform its obligations under
the Loan Documents (as defined below).
SECTION 2.03 Right to Rely on Managing Member. Any Person dealing with
the Company shall be entitled to rely (without further duty of inquiry) upon a
certificate signed by the Managing Member as to:
(a) the identity of any Member;
(b) the existence or nonexistence of any fact or facts that constitute
a condition precedent to acts on behalf of the Company by the Managing Member or
that are in any other manner germane to the affairs of the Company;
(c) the Persons who are authorized to execute and deliver any
instrument or document of the Company; or
(d) any other matter whatsoever involving the Company or any Member.
SECTION 2.04 Limitation on Authority. So long as any indebtedness
remains outstanding under the Loan Documents, the Company shall not, and the
Managing Member shall not permit the Company to, incur any Indebtedness except
as permitted under the Loan Documents.
<PAGE>
ARTICLE III
CAPITAL
SECTION 3.01. Capital Contributions of Members. As of the date of this
Agreement, each Member shall make a Capital Contribution to the Company as set
forth opposite its name on Schedule A. The Members shall not be required to make
any Capital Contributions to the Company other than as set forth in this Section
3.01.
SECTION 3.02. Capital Accounts. A separate Capital Account shall be
established and maintained for each Member in all events in accordance with the
rules of Regulations Section 1.704-1(b)(2)(iv), as amended from time to time.
SECTION 3.03. No Interest on Capital Contributions or Amounts in
Capital Account. No Member shall be entitled to receive any interest on its
Capital Contributions or its outstanding Capital Account balance.
SECTION 3.04. Return of Capital. Except upon the dissolution of the
Company or as may be specifically provided in this Agreement, no Member shall
have the right to demand or to receive the return of all or any part of its
Capital Account or its Capital Contributions to the Company.
ARTICLE IV
ALLOCATION OF PROFITS AND LOSSES; DISTRIBUTIONS OF
CASH FLOW AND CERTAIN PROCEEDS
SECTION 4.01. Certain Definitions.
"Cash Flow" shall mean and refer to the sum of the following:
(i) the taxable income (or loss) of the Company for
federal income tax purposes as shown on the books of the Company for the period
for which such determination is being made, excluding taxable income, gain, or
loss from any Terminating Capital Transactions, increased by (A) the amount of
cost recovery, depreciation, or amortization deductions or similar deductions in
lieu thereof deductible by the Company in computing such taxable income, and any
other non-cash accruals deductible in determining federal taxable income or
loss, for such period, and (B) any non-taxable income or receipts of the Company
for such period (including, without limitation, any amounts received during such
period that were included in taxable income in a prior period and the proceeds
of any loans to the Company) except Capital Contributions to the Company
pursuant to Article III; and reduced by (AA) payments from the sum of the
foregoing upon the principal of any loan to the Company, (BB) expenditures from
the sum of the foregoing for the acquisition, improvement, development, or
replacement of property not financed through Capital Contributions to the
Company or any reserves previously set aside by the Company for such purposes,
and for the payment of items attributable to the acquisition, improvement,
development, or replacement of property which are not deductible in determining
federal taxable income when paid, and (CC) any amounts included in determining
gross income for such period that were not received by the Company during such
period.
(ii) any other funds (including amounts previously
set aside as reserves by the Managing Member if and to the extent the Managing
Member no longer regards such reserves as reasonably necessary in the efficient
conduct of the business of the Company) deemed available for distribution and
designated as Cash Flow by the Managing Member.
"Net Proceeds of a Capital Transaction" means the proceeds received by
the Company in connection with a Capital Transaction, after (i) the payment of
all costs and terminating expenses of any kind or nature incurred by the Company
in connection with such Capital Transaction, (ii) the utilization of any such
proceeds in connection with the discharge of debts and other obligations of the
Company (including any loans to the Company made by Members and any accrued but
unpaid interest thereon) required or intended (as determined by the Managing
Member, in its sole and absolute discretion) to be discharged with the proceeds
of such Capital Transaction, and (iii) the retention of such proceeds or a
portion of such proceeds in connection with creation of or addition to a reserve
established pursuant to Section 4.06 (as determined by the Managing Member in
its sole and absolute discretion). "Net Proceeds of an Interim Capital
Transaction" and "Net Proceeds of a Terminating Capital Transaction" mean the
amount of Net Proceeds received by the Company with respect to an Interim
Capital Transaction or a Terminating Capital Transaction, as the case may be.
<PAGE>
"Percentage Interests" Percentage Interests of the Members are as
follows:
Managing Member -- 1% percent
Class A Member - 90 %
Class B Member - 9 %
SECTION 4.02. Allocation of Net Income or Net Loss.
(a) Subject to Section 4.07, the Net Income of the Company, if
any, for each Fiscal Year (or portion thereof) shall be allocated to the Members
(after reducing their Capital Accounts for all Cash Flow distributed during such
Fiscal Year or to be distributed with respect to such Fiscal Year), pro rata, in
proportion to their Percentage Interests.
(b) Subject to Section 4.07, the Net Loss of the Company, if
any, for each Fiscal Year during the term of this Agreement shall be allocated
to the Members in proportion to their Percentage Interests.
SECTION 4.03. Allocation of Gains and Losses from Capital Transactions.
(a) Subject to Section 4.07, any Book Tax Gain of the Company
resulting from a Capital Transaction shall be allocated to the Members, pro
rata, in proportion to their Percentage Interests.
(b) Subject to Section 4.07, any Book Tax Loss of the Company
resulting from a Capital Transaction shall be allocated to the Members, pro
rata, in proportion to their Percentage Interests.
SECTION 4.04. Allocation of Income and Loss With Respect to Membership
Interests Transferred.
If any Membership Interest is transferred during any Fiscal
Year, the Net Income or Net Loss attributable to such Membership Interest for
such Fiscal Year shall be divided and allocated proportionately between the
transferor and the transferee based upon the number of days during such calendar
year for which each party was the owner of the interest transferred.
Notwithstanding any provision herein to the contrary, any Book Tax Gain or Book
Tax Loss of the Company realized in connection with a Capital Transaction shall
be allocated only to Persons who are holders of Membership Interests as of the
date such Capital Transaction occurs.
SECTION 4.05. Distributions of Cash Flow.
(a) Cash Flow of the Company shall be determined for each
Fiscal Year. Cash Flow as so determined shall be distributed in cash to the
Members in proportion to their Membership Interests.
Distributions of Cash Flow made within the first seventy-five
(75) days of a subsequent Fiscal Year and designated by the Managing Member as
made with respect to the immediately prior Fiscal Year shall be considered made
with respect to such prior Fiscal Year for purposes of this Section 4.05(a) and
Sections 4.02 and 4.03.
<PAGE>
(b) Cash Flow, if any, shall be distributed at least quarterly
within thirty (30) days after the end of each calendar quarter, commencing with
the calendar quarter ending December 31, 1998. Cash Flow also may be
distributed, in the sole and absolute discretion of the Managing Member, at such
other time or times during any Fiscal Year in anticipation of the year-end
determination thereof, and such distributions shall be subject to year-end
adjustment. The Members agree that, within thirty (30) days after determination
by the Company that an overpayment was made to any Member for any Fiscal Year
pursuant to this Section 4.05, such Member shall repay, allow as a credit
against future distributions, or make such other adjustments as the Managing
Member determines to be appropriate to remedy such overpayment. Likewise,
appropriate adjustment shall be made to remedy any underpayment.
SECTION 4.06. Distribution of Proceeds from Capital Transactions;
Liquidation Distributions.
(a) The Net Proceeds of an Interim Capital Transaction shall
be distributed to the Members in accordance with the Members' Percentage
Interests.
(b) The Net Proceeds of a Terminating Capital Transaction and
any other remaining assets of the Company to be distributed to the Members in
connection with dissolution and liquidation of the Company pursuant to Article
VIII, after payment of all debts and liabilities of the Company (including,
without limitation, all amounts owing to a Member under this Agreement (other
than this Section 4.06) or under any agreement between the Company and a Member
entered into by the Member other than in its capacity as a Member in the
Company), the payment of expenses of liquidation of the Company, and the
establishment of a reasonable reserve (including, without limitation, an amount
estimated by the Managing Member to be sufficient to pay any amount reasonably
anticipated to be required to be paid pursuant to Section 5.03(a)), shall be
distributed to the Members, pro rata, in accordance with their respective
Percentage Interests. Distributions pursuant to this Section 4.06(b) shall be
made by the end of the Fiscal Year in which such Terminating Capital Transaction
occurs or, if later, within ninety (90) days of such Terminating Capital
Transaction.
<PAGE>
(c) Notwithstanding any provision in this Section 4.06 to the
contrary, in the event that the Net Proceeds of the Terminating Capital
Transaction are to be paid to the Company in more than one installment, each
such installment (including any interest thereon) shall be allocated among the
Members in accordance with their respective "Installment Percentages". The
"Installment Percentage" of each Member shall be (i) the aggregate amount of
cash that would have been distributed to that Member under this Section 4.06 had
the Net Proceeds of the Terminating Capital Transaction been paid in one lump
sum divided by (ii) the total Net Proceeds that would have been distributed to
all of the Members under that Section.
SECTION 4.07. Special Allocation Rules.
The following allocation rules shall apply notwithstanding any other
provisions of Sections 4.02 and 4.03, and the other provisions of Sections 4.02
and 4.03 shall be applied only after giving effect to the following rules. In
the event there is a conflict between any of the following rules, the earlier
listed rule shall govern.
(a) If in any Fiscal Year there is a net increase during such
year in the amount of Minimum Gain attributable to Member Nonrecourse Debts, the
Member(s) that bear the economic risk of loss with respect thereto (within the
meaning of Regulations section 1.704-1T(b)(4)(iv)(k)(1)) shall be specially
allocated items of Company loss or deduction in an amount equal to the excess of
(i) the amount of such net increase, over (ii) the aggregate amount of any
distributions during such Fiscal Year to such Member(s) of the proceeds of such
debt that are allocable to such increase in Minimum Gain. Items to be so
allocated shall be determined in accordance with Regulations section
1.704-1T(b)(4)(iv)(h).
(b) If in any Fiscal Year there is a net decrease in the
Company's Minimum Gain attributable to Nonrecourse Liabilities during such
Fiscal Year, each Member shall be specially allocated items of Company income
and gain for such Fiscal Year (and, if necessary, for subsequent Fiscal Years)
in proportion to, and to the extent of, an amount equal to the greater of the
following:
(i) the portion of such Member's share of the net
decrease in such Minimum Gain during such Fiscal Year (as such share is
determined pursuant to Regulations section 1.704-1T(b)(4)(iv)(f)) that is
allocable to the disposition of Company property subject to one or more
Nonrecourse Liabilities (as such allocable portion is determined pursuant to
Regulations section 1.704-1T(b)(4)(iv)(e)(2)); or
(ii) such Member's Excess Negative Balance at the end
of such Fiscal Year
(determined before any allocation for such Fiscal Year of any items of income,
gain, loss, or deduction described in section 705(a)(2)(B) of the Code).
Items to be so allocated shall be determined and the
allocation made in accordance with Regulations section 1.704-1T(b)(4)(iv)(e).
(c) If in any Fiscal Year there is a net decrease in the
Company's Minimum Gain attributable to Member Nonrecourse Debts during such
Fiscal Year, the Member(s) that bear the economic risk of loss with respect to
such Member Nonrecourse Debts (within the meaning of Regulations section
1.704-1T(b)(4)(iv)(k)(1)) shall be specially allocated items of Company income
and gain for such Fiscal Year (and, if necessary, for subsequent Fiscal Years)
in an amount equal to the greater of the following:
(i) the net decrease in such Minimum Gain during such
Fiscal Year that is allocable to the disposition of Company property subject to
one or more Member Nonrecourse Debts (as such allocable portion is determined
pursuant to Regulations section 1.704-1T(b)(4)(iv)(h)(6)); or
(ii) such Member's (Members') Excess Negative Balance
at the end of such Fiscal
Year (determined before any allocation for such Fiscal Year of any items of
income, gain, loss, or deduction described in section 705.1.(2)(B) of the Code).
Items to be so allocated shall be determined and the
allocation made in accordance with Regulations section 1.704-1T(b)(4)(iv)(h)(6).
<PAGE>
(d) For purposes of allocating Company Nonrecourse Liabilities
among the Members pursuant to Regulations section 1.752-1T(a)(2)(i), the
respective interests of the Members in Company profits shall be equal to their
respective Percentage Interests.
(e) A Member shall not be allocated any amount of deduction or
loss (including Net Loss and Book Tax Loss) to the extent such allocation would
give rise to or increase an Excess Negative Balance in such Member's Capital
Account.
(f) In the event a Member receives with respect to a Fiscal
Year an adjustment, allocation, or distribution described in subparagraphs (4),
(5), and (6) of Regulations section 1.704-1(b)(2)(ii)(d) that results in such
Member having an Excess Negative Balance in its Capital Account, such Member
shall be allocated for such Fiscal Year (and, if necessary, for subsequent
Fiscal Years) items of income or gain in an amount and manner sufficient to
eliminate such Excess Negative Balance as promptly as possible, as provided in
Regulations section 1.704-1(b)(2)(ii)(d).
(g) In the event that any fees, interest, or other amounts
paid to a Member or affiliate of a Member pursuant to this Agreement or to any
agreement between the Company and the Member or affiliate providing for the
payment of such amounts, and deducted by the Company, whether in reliance on
sections 162, 163, 707(a), and/or 707(c) of the Code or otherwise, on its
federal income tax return are disallowed as deductions to the Company in or with
respect to the Fiscal Year for which such amounts are claimed and are treated as
Company distributions, then:
(i) the Net Income or Net Loss, as the case may be,
for the Fiscal Year in or with respect to which such fees, interest, or other
amounts were paid shall be increased or decreased, as the case may be, by the
amount of such deduction that is so disallowed and treated as a Company
distribution; and
(ii) there shall be allocated to the Member who
received (or whose affiliate received) such payments, prior to the allocations
pursuant to Sections 4.02 and 4.02(b), an amount of gross income of the Company
for the Fiscal Year in or with respect to which such claimed deduction was
disallowed, equal to the amount of such deduction that was so disallowed and
treated as a Company distribution.
(h) Except as otherwise specifically provided in this
Agreement and as provided in the next sentence below, the distributive share of
a Member of each specific deduction and item of income, gain, loss, and credit
of the Company for federal income tax purposes for any Fiscal Year shall be the
same as such Member's proportionate share (determined as set forth in Section
4.02 and 4.03) of Net Income, Net Loss, Book Tax Gain, or Book Tax Loss, as the
case may be, for such Fiscal Year. Notwithstanding the foregoing, any income
recognized pursuant to sections 1245 and 1250 of the Code and any investment
credit recapture recognized pursuant to section 47 of the Code shall be
allocated among the Members in the same proportions as the depreciation
deductions and investment credits giving rise to such income or recapture were
allocated among such Members and their respective predecessors in interest.
(i) It is the intent of the Members that each Member's
distributive share of income, gain, loss, and credit (or items thereof) shall be
determined and allocated in each Fiscal Year in accordance with this Section
4.07 to effect the distributions in the manner contemplated by Sections 4.05 and
4.06 to the extent permitted by Code section 704(b) and the applicable
Regulations. In order to achieve the contemplated distributions provided for in
Sections 4.05 and 4.06, the Managing Member is authorized and directed to
allocate income, gain, loss, and credit (or items thereof) with respect to any
Fiscal Year in a manner different from that otherwise provided for in this
Section 4.07 if, and to the extent that, allocating income, gain, loss, and
credit (or items thereof) in a manner provided for in this Section 4.07 either
would not achieve the intended economic result desired by the Members or would
not be respected under Code section 704(b) (referred to as a "new allocation").
The Managing Member is authorized to make a new allocation under this Section
4.07(i) only after having determined both (i) that the new allocation either
more accurately effects the distributions contemplated by the Members as set
forth in Section 4.05 and 4.06 or is not inconsistent with those distributions
and (ii) that the new allocation will not have a material adverse effect on the
economic interests of the Members (including, without limitation, causing them
to recognize income that they would not otherwise be required to recognize or to
lose the benefit of deductions that they otherwise would have been permitted to
recognize). New allocations by the Managing Member in accordance with this
Section 4.07(i) shall not require the consent of the other Members.
<PAGE>
SECTION 4.08. Contributed Property; Reevaluations Pursuant to Section
704(b) Regulations.
In the event that any property contributed to the Company or revalued
pursuant to the provisions of Regulations section 1.704-1(b)(2)(iv)(f) has a
Carrying Value that differs from the Adjusted Basis of such property at the time
of its contribution or revaluation, any income, depreciation, gain, or loss with
respect to such property shall, solely for tax purposes, be allocated among the
Members in a manner that takes such difference into account and is consistent
with Code section 704(c), the Regulations thereunder, and Regulations section
1.704-1(b)(2)(iv)(f)(4), 1.704-1(b)(2)(iv)(g), and 1.704-1(b)(4)(i). The
allocations made pursuant to this Section 4.08 shall be made solely for tax
purposes and shall not affect or in any way be taken into account in computing
any Member's Capital Account or share of Net Income, Net Loss, Book Tax Gain,
Book Tax Loss, or other allocations or distributions under this Agreement.
SECTION 4.09. Withholding Taxes and Reporting Obligations.
(a) The Company is authorized and directed to withhold from or
pay on behalf of any Member the amount of federal, state, local, or foreign
taxes that the Managing Member reasonably determines that the Company is
required to withhold or pay with respect to any amount distributable or
allocable to such Member pursuant to this Agreement, including, without
limitation, any taxes required to be paid by the Company pursuant to section
1441, 1442, 1445, or 1446 of the Code. Any amount so withheld or paid on behalf
of a Member shall constitute an advance by the Company to such Member that shall
be secured by the Member's Membership Interest. An advance to a Member pursuant
to this Section 4.09(a) shall be repaid to the Company, in whole or in part, as
reasonably determined by the Managing Member in its sole discretion, either (i)
out of any distributions from the Company which the Member may be or become
entitled to receive, or (ii) by the Member in cash upon demand by the Company.
(b) The Members agree to cooperate fully with all efforts of
the Company to comply with its tax withholding and information reporting
obligations and to provide the Company with such information as the Managing
Member may reasonably request from time to time in connection with such
obligations. Any Member or permitted transferee of a Membership Interest that
fails to comply with this Section 4.09(b) shall be liable to the Company for the
amount of any taxes, penalties, and interest for which the Company becomes
liable as a result of any such failure.
ARTICLE V
MANAGEMENT
SECTION 5.01. Members.
(a) Membership Interests. The Membership Interests shall have
such relative rights, powers and duties as are set forth in this Agreement.
(b) Meetings and Actions.
(i) Meetings. The Members shall meet at least once
each Fiscal Year at the principal offices of the Company or at such other place
as may be fixed by the Managing Member (unless such meeting shall be waived by
all of the Members), upon ten (10) days' notice to all Members in writing or by
telephone or facsimile transmission. Members may participate in a meeting of the
Members by means of conference telephone or similar communications equipment by
means of which all persons participating in the meeting can hear each other, and
such participation in a meeting shall constitute presence in person at the
meeting.
<PAGE>
(ii) Quorum. No action may be taken at a meeting of
the Members unless a quorum
consisting of each of the Members are present in person or by proxy.
(iii) Action by Written Consent. Any action to be
taken by the Members may be taken
without a meeting if consents in writing setting forth the action so taken are
signed by each of the Members.
(iv) Voting. Each Member shall be entitled to vote
its Percentage Interest with
respect to any decision made by the Members to the extent provided for herein.
SECTION 5.02. Management of the Company by the Managing Member.
(a) Management by the Managing Member. The Members hereby
unanimously agree that the responsibility for management of the business and
affairs of the Company shall be delegated to a manager pursuant to Section
18-402 of the Act which shall at all times be a Member of the Company (the
"Managing Member").
(b) Managing Member.
(i) The Members hereby unanimously appoint Cleveland
ALF, L.L.C. to serve as the Managing Member until its resignation or replacement
as set forth herein.
(c) Power and Authority of the Managing Member. Subject to
Section 5.04, the Managing Member (acting on behalf of the Company) shall have
the right, power, and authority, to manage, operate and control the business and
affairs of the Company and to do or cause to be done any and all acts, at the
expense of the Company, deemed by the Managing Member to be necessary or
appropriate to effectuate the purposes of the Company including, without
limitation, the right, power and authority on behalf of the Company to make,
execute, assign, acknowledge, and file on behalf of the Company any and all
documents or instruments of any kind which the Managing Member may deem
necessary or appropriate in carrying out the business and affairs of the
Company, including, without limitation, powers of attorney, agreements of
indemnification, documents, or instruments of any kind or character, and
amendments thereto (and no person, firm or corporation dealing with the Managing
Member shall be required to determine or inquire into the authority or power of
the Managing Member to bind the Company or to execute, acknowledge, or deliver
any and all documents in connection therewith).
<PAGE>
(d) Third Party Reliance. Third parties dealing with the
Company shall be entitled to rely conclusively upon the power and authority of
the Managing Member of the Company as set forth herein.
(e) Fees to the Managing Member. Except as expressly provided
in this Agreement, the Managing Member, in its capacity as such, shall not be
entitled to any fees for services rendered for or on behalf of the Company.
(f) Fiduciary Relationship. The Managing Member shall not be
liable to the Company or its Members for monetary damages for breach of
fiduciary duty as the Managing Member or otherwise liable, responsible or
accountable to the Company or its Members for monetary damages or otherwise for
any acts performed, or for any failure to act; provided, however, that this
provision shall not eliminate or limit the liability of the Managing Member for
acts or omissions which involve intentional misconduct or a knowing violation of
law.
(g) Reimbursement. All expenses incurred with respect to the
organization, operation, and management of the Company shall be borne by the
Company. The Managing Member shall be entitled to reimbursement from the Company
for direct expenses allocable to the organization, operation, and management of
the Company.
SECTION 5.03. Indemnification of the Members, the Managing Member and
any Affiliate.
(a) In accordance with Section 18-108 of the Act, the Company
shall indemnify and hold harmless any Member, the Managing Member and Affiliates
thereof (individually, in each case, an "Indemnitee") to the fullest extent
permitted by law from and against any and all losses, claims, demands, costs,
damages, liabilities (joint or several), expenses of any nature (including
attorneys' fees and disbursements), judgments, fines, settlements, and other
amounts arising from any and all claims, demands, actions, suits, or
proceedings, whether civil, criminal, administrative or investigative, in which
the Indemnitee may be involved, or threatened to be involved, as a party or
otherwise, arising out of or incidental to the business or activities of or
relating to the Company, regardless of whether the Indemnitee continues to be a
Member, the Managing Member or an Affiliate thereof at the time any such
liability or expense is paid or incurred; provided, however, that this provision
shall not eliminate or limit the liability of an Indemnitee (i) for any breach
of the Indemnitee's duty of loyalty to the Company or its Members, (ii) for acts
or omissions which involve gross negligence, intentional misconduct or a knowing
violation of law, or (iii) for any transaction from which the Indemnitee
received any improper personal benefit.
<PAGE>
(b) Expenses incurred by an Indemnitee in defending any claim,
demand, action, suit, or proceeding subject to this Section 5.03 shall, from
time to time, upon request by the Indemnitee be advanced by the Company prior to
the final disposition of such claim, demand, action, suit, or proceeding upon
receipt by the Company of an undertaking by or on behalf of the Indemnitee to
repay such amount, if it shall be determined in a judicial proceeding or a
binding arbitration that such Indemnitee is not entitled to be indemnified as
authorized in this Section 5.03.
(c) The indemnification provided by this Section 5.03 shall be
in addition to any other rights to which an Indemnitee may be entitled under any
agreement, vote of the Members, as a matter of law or equity or otherwise, both
as to an action in the Indemnitee's capacity as a Member, the Managing Member or
any Affiliate thereof, and as to an action in another capacity, and shall
continue as to an Indemnitee who has ceased to serve in such capacity and shall
inure to the benefit of the heirs, successors, assigns, and administrators of
the Indemnitee.
(d) The Company may purchase and maintain insurance on behalf
of the Managing Member and such other Persons as the Managing Member shall
determine against any liability that may be asserted against or expense that may
be incurred by such Persons in connection with the offering of interests in the
Company or the business or activities of the Company, regardless of whether the
Company would have the power to indemnify such Persons against such liability
under the provisions of this Agreement.
(e) An Indemnitee shall not be denied indemnification in whole
or in part under this Section 5.03 or otherwise by reason of the fact that the
Indemnitee had an interest in the transaction with respect to which the
indemnification applies if the transaction was otherwise permitted or not
expressly prohibited by the terms of this Agreement.
(f) The provisions of this Section 5.03 are for the benefit of
the Indemnitees, their heirs, successors, assigns and administrators and shall
not be deemed to create any rights for the benefit of any other Persons.
<PAGE>
SECTION 5.04. Limitation on Authority of the Managing Member.
Notwithstanding anything in this Agreement to the contrary,
the Managing Member shall not without the prior written consent of the Class A
Member cause or permit the Company to:
(i) dissolve and wind-up the affairs of the Company,
except as provided in Article VIII;
(ii) merge or consolidate with any other limited
liability company or other entity;
(iii) sell, assign, lease or otherwise dispose of
twenty percent (20%) or more of the Company Assets; or
(iv) modify the terms of this Agreement.
SECTION 5.05. Other Activities of Members.
Any Member may have other business interests or may engage in other
business ventures of any nature or description whatsoever, whether currently
existing or hereafter created, and may compete, directly or indirectly, with the
business of the Company. No Member or Affiliate thereof shall incur any
liability to the Company as a result of such Member's or Affiliate's pursuit of
such other business interest, ventures and competitive activity, and neither the
Company nor the other Members shall have any right to participate in such other
business ventures or to receive or share in any income or profits derived
therefrom.
SECTION 5.06. Transactions with Managing Member or Affiliates.
The Company is expressly permitted in the normal course of its business
to enter into transactions with the Managing Member or with any Affiliate of the
Managing Member provided that the price and other terms of such transactions are
fair to the Company and that the price and other terms of such transactions are
not less favorable to the Company than those generally prevailing with respect
to comparable transactions between unrelated parties.
<PAGE>
ARTICLE VI
BANK ACCOUNTS; BOOKS AND RECORDS;
STATEMENTS; TAXES; FISCAL YEAR
SECTION 6.01. Bank Accounts.
All funds of the Company shall be deposited in its name in such
checking and savings accounts, time deposits or certificates of deposit, or
other accounts at such banks, as shall be designated by the Managing Member from
time to time, and the Managing Member shall arrange for the appropriate conduct
of such account or accounts.
SECTION 6.02. Books and Records.
The Managing Member shall keep, or cause to be kept, accurate, full and
complete books and accounts showing assets, liabilities, income, operations,
transactions and the financial condition of the Company. Such books and accounts
shall be prepared on the accrual basis of accounting. Any Member, or its
respective designee, shall have access thereto at any reasonable time during
regular business hours and shall have the right to copy said records at their
expense.
SECTION 6.03. Financial Statements and Information.
(a) All financial statements prepared pursuant to this Section
6.03 shall be accurate and complete in all material respects, shall present
fairly the financial position and operating results of the Company, and shall be
prepared on the accrual basis as provided in Section 6.03 for each Fiscal Year
of the Company during the term of this Agreement.
(b) Within 45 days after the end of each quarterly period (the
"Fiscal Quarter") of each Fiscal Year, commencing with the first full Fiscal
Quarter after the date of this Agreement, the Managing Member shall prepare and
submit or cause to be prepared and submitted to the Members an unaudited
statement of profit and loss for the Company for such Fiscal Quarter and an
unaudited balance sheet of the Company dated as of the end of such Fiscal
Quarter, in each case prepared in accordance with generally accepted accounting
principles.
<PAGE>
(c) Within 90 days after the end of each Fiscal Year during
the term of this Agreement, the Managing Member shall prepare and submit or
cause to be prepared and submitted to the Members (i) an audited balance sheet,
together with audited statements of profit and loss, Members' equity and changes
in financial position for the Company during such Fiscal Year; and (ii) a report
of the activities of the Company during the Fiscal Year.
(d) The Managing Member shall provide to the Members such
other reports and information concerning the business and affairs of the Company
as may be required by the Act or by any other law or regulation of any
regulatory body applicable to the Company.
SECTION 6.04. Accounting Decisions.
All decisions as to accounting matters, except as specifically provided
to the contrary herein, shall be made by the Managing Member.
SECTION 6.05. Where Maintained.
The books, accounts and records of the Company at all times shall be
maintained at the Company's principal office.
SECTION 6.06. Tax Returns.
The Managing Member shall, at the expense of the Company, cause to be
prepared and delivered to the Members, in a timely fashion after the end of each
Fiscal Year, copies of all federal and state income tax returns for the Company
for such Fiscal Year and one copy of each return shall be filed by the Managing
Member. Such returns shall be prepared on the accrual basis, and shall
accurately reflect the results of operations of the Company for such Fiscal
Year. The Managing Member is designated as the "tax matters partner" (as defined
in the Code) of the Company and is authorized and required to represent the
Company (at the expense of the Company) in connection with all examinations of
the affairs of the Company by any federal, state, or local tax authorities,
including any resulting administrative and judicial proceedings, and to expend
funds of the Company for professional services and costs associated therewith.
Each Member agrees to cooperate with the Managing Member and to do or refrain
from doing any or all things reasonably required by the Managing Member in
connection with the conduct of such proceedings.
SECTION 6.07. Fiscal Year.
The Fiscal Year of the Company for financial and Federal, state and
local income tax purposes shall initially be the calendar year. The Managing
Member shall have authority to change the beginning and ending dates of the
Fiscal Year if the Managing Member, in its sole and absolute discretion, deems
such change to be necessary or appropriate to the business of the Company, and
the Managing Member shall give written notice of any such change to the Members
within thirty (30) days after the occurrence thereof.
ARTICLE VII
LIMITATION ON LIABILITY
The debts, obligations, and liabilities of the Company, whether arising
in contract, tort, or otherwise, shall be solely the debts, obligations, and
liabilities of the Company. None of the Members, the Managing Manager, or any
stockholders, directors, partners, officers, agents or employees of any Member
or the Company, shall be obligated personally for any debt, obligation, or
liability of the Company solely by reason of his, her, or its status as such
Member, Managing Member, stockholder, director, partner, officer, agent or
employee. The failure of the Company to observe any formalities or requirements
relating to the exercise of its powers or management of its business or affairs
under the Act or this Agreement shall not be grounds for imposing personal
liability on the Members, the Managing Member, or any officer, agent or employee
of any Member or the Company for liabilities of the Company.
<PAGE>
ARTICLE VIII
DISSOLUTION AND LIQUIDATION
SECTION 8.01. The Company shall dissolve, and its affairs shall be
wound up, solely upon the first to occur of the following, unless the Members
elect to continue the Company to the extent permitted under the Act:
(a) December 31, 2096;
(b) at the time specified in a written consent of the Members,
provided that, so long as any indebtedness remains outstanding under the Loan
Documents, the Company will be dissolved only to the extent permitted under the
Loan Documents;
(c) at any time there are no remaining Members, provided that,
the Company shall not be dissolved and is not required to be wound up if, within
90 days after the occurrence of the event that terminated the continued
membership of the last remaining Member, the personal representative of the last
remaining Member agrees in writing to continue the Company and to the admission
of the personal representative of such Member or its nominee or designee to the
Company as a Member, effective as of the occurrence of the event that terminated
the continuing membership of the last remaining Member; or
(d) at the time specified in a decree of judicial dissolution
under the Act.
The death, retirement, resignation, expulsion, bankruptcy or
dissolution of any Member or the occurrence of any other event that terminates
the continued membership of any Member shall not cause the Company to be
dissolved or its affairs to be wound up, and upon the occurrence of any such
event, the Company shall be continued without dissolution, unless, (i) within 90
days following the occurrence of such event, all Members agree in writing to
dissolve the Company; and (ii) for so long as any indebtedness remains
outstanding under the Loan Documents, the Members, by unanimous vote, approve
such dissolution; and (iii) for so long as any indebtedness remains outstanding
under the Loan Documents, such dissolution is permitted under the terms of the
Loan Documents.
The foregoing constitute the only events upon which the
Company shall be dissolved and its affairs wound up, notwithstanding any
provisions of the Act.
<PAGE>
SECTION 8.02. Upon the dissolution of the Company, unless its business
is continued as provided in the Act, the Managing Member shall wind up the
affairs of the Company.
SECTION 8.03. Upon the winding up and termination of the Company in
accordance with the Act, the assets of the Company shall be distributed as
follows:
(a) to creditors of the Company (including the Members to the
extent they are creditors) to the extent permitted by law, in satisfaction of
all of the Company's debts, liabilities, and obligations, by payment thereof or
establishment of reasonable reserves therefor; and
(b) any remaining assets to the Members in proportion to their
Percentage Interests.
SECTION 8.04. When all debts, liabilities, and obligations of the
Company have been paid and discharged, or adequate provisions have been made
therefor and all remaining property and assets of the Company have been
distributed to the Members, a certificate of cancellation shall be prepared,
executed, and filed in accordance with the Act.
ARTICLE IX
TRANSFER OF INTERESTS
SECTION 9.01. Transfer.
(a) The term "transfer", when used in this Article IX with
respect to a Membership Interest, shall include any sale, assignment, gift,
pledge, hypothecation, mortgage, exchange, or other disposition, except that
such term shall not include any pledge, mortgage, or hypothecation of or
granting of a security interest in a Membership Interest in connection with any
financing obtained on behalf of the Company.
<PAGE>
(b) No Membership Interest shall be transferred, in whole or
in part, except in accordance with the terms and conditions set forth in this
Article IX. Any transfer or purported transfer of any Membership Interest not
made in accordance with this Article IX shall be null and void.
SECTION 9.02. Transfer of Interest of Managing Member.
If the Managing Member desires to sell or transfer all or any portion
of such Managing Member's Membership Interest, such transfer shall be permitted
if (and only if):
(a) such transfer (i) would not violate the then applicable
Federal and state securities laws and rules and regulations of the Securities
and Exchange Commission, state securities commissions and any other governmental
authorities with jurisdiction over such disposition, (ii) would not result in
the Company being classified for federal income tax purposes as an "association
taxable as a corporation" rather than as a limited liability company, (iii)
would not prejudice or affect the continuity of the Company for the purposes of
section 708 of the Code and (iv) would not affect the Company's existence as a
limited liability company under the Act.
(b) a successor Managing Member is admitted to the Company in
accordance with Section 10.02; and
(c) such transfer and the admission of the transferee as a
Managing Member of the Company is approved by the Class A Member.
SECTION 9.03. Transfer of Interest of Non-Managing Member.
If a Non-Managing Member desires to transfer all or any portion of its
Membership Interest such transfer shall be permitted if (and only if):
(a) such transfer (i) would not violate the then applicable
federal and state securities laws and rules and regulations of the Securities
and Exchange Commission, state securities commissions and any other governmental
authorities with jurisdiction over such disposition, (ii) would not result in
the Company being classified for federal income tax purposes as an "association
taxable as a corporation" rather than as a limited liability company, (iii)
would not prejudice or affect the continuity of the Company for the purposes of
Section 708 of the Code; and (iv) would not affect the Company's existence as a
limited liability company under the Act.
(b) the transferee is admitted as a Member of the Company in
accordance with Section 10.01.
(c) if the transferor is the Class B Member, the Class B
Member shall have first offered the Class A Member the right of first refusal to
acquire the Membership Interest of the Class B Member on the same terms and
conditions as the Class B Member is prepared to transfer the Class B Member's
Membership Interest to a third party and the Class A Member shall have failed to
exercise the right of first refusal within thirty (30) days after receipt of a
copy of all of the terms and conditions of the proposed transfer.
<PAGE>
SECTION 9.04. Right to Purchase Interest of Managing Member.
Upon the termination of the employment of Edward B. Romanov, Jr. as an
officer of ElderTrust, a Maryland real estate investment trust, for any reason
(including, but not limited to, death, disability or voluntary separation),
ElderTrust Operating Limited Partnership (or its successors, assigns or
designee(s)) will have the right to purchase the Managing Member's Membership
Interest for cash within the later of (x) sixty (60) days after the date of his
termination and (y) thirty (30) days after his successor is elected or
appointed. The purchase price of the Managing Member's Membership Interest will
be the fair market value of the Managing Member's Membership Interest, as agreed
to between ElderTrust Operating Limited Partnership and the Managing Member (or
if they cannot agree, as determined by a national accounting firm selected by
ElderTrust Operating Limited Partnership and the Managing Member).
ARTICLE X
ADMISSION OF ADDITIONAL MEMBERS; WITHDRAWAL OF MEMBERS;
REMOVAL OF MANAGING MEMBER
SECTION 10.01. [INTENTIONALLY DELETED].
SECTION 10.02. Admission of a Successor Managing Member.
A transferee of all or any portion of the Membership Interest of the
Managing Member pursuant to Article IX shall be admitted to the Company as a
Managing Member (in the place, in whole or in part, of the transferor or former
Managing Member), and upon the first date of receipt by the Company of all of
the following (which date, in the event the successor Managing Member is in the
place in whole of the transferor or former Managing Member, shall be
contemporaneous with the withdrawal of such transferor or former Managing
Member):
(a) the successor Managing Member's acceptance of, and
agreement to be bound by, all of the terms and provisions of this Agreement, in
form and substance satisfactory to the Company;
(b) evidence of the authority of such successor Managing
Member to become a Managing Member and to be bound by all of the terms and
conditions of this Agreement;
(c) the written agreement of the successor Managing Member to
continue the business of the Company in accordance with the terms and provisions
of this Agreement; and
(d) such other documents or instruments as may be required in
order to effect the admission of the successor Managing Member as a Managing
Member under this Agreement.
SECTION 10.03. Withdrawal of Managing Member.
The Managing Member may withdraw from the Company only upon a transfer
of all of such Managing Member's Membership Interest as a Managing Member in
accordance with Article IX. The Managing Member shall have no liability to the
Company or the Members on account of any withdrawal in accordance with the terms
of this Article X.
SECTION 10.04. Withdrawal of Non-Managing Member.
Either Non-Managing Member may withdraw from the Company at any time
upon a transfer of all of such Member's Membership Interest as a Member in
accordance with Article IX.
<PAGE>
SECTION 10.05. Removal of Managing Member.
(a) The Managing Member may be removed as the Managing Member
of the Company for "cause" (as hereinafter defined), upon the affirmative vote
of the Class A Member. Any such action by the Class A Member must also provide
for the election of a successor Managing Member and shall become effective only
upon the admission of the successor Managing Member pursuant to Section 10.2. As
used herein, "cause" shall mean actual fraud, negligence, bad faith or willful
misconduct.
(b) Written notice of removal of the Managing Member pursuant
to this Section 10.05 shall be provided to the Managing Member at the address
set forth on Schedule A.
(c) Notwithstanding Section 10.05(a), the Managing Member may
not be removed pursuant to Section 10.05(a) until such time as the Company shall
have received an opinion of legal counsel that the removal (i) may be taken
without the concurrence of all Members, (ii) would not cause the loss of limited
liability of the Members under this Agreement, and (iii) would not cause the
Company to be treated as an association taxable as a corporation for federal
income tax purposes.
(d) In the event the Managing Member is removed pursuant to
this Article X, within 30 days after the Business Day on which such withdrawal
becomes effective:
(i) if the Managing Member had a positive balance in
its Capital Account as of the effective date of its withdrawal, it shall be
entitled to receive cash in an amount equal to such positive balance; or
(ii) if the Managing Member had a negative balance in
its Capital Account as of the effective date of its withdrawal, it shall be
required to pay to the Company an amount equal to such negative balance.
(e) Any successor Managing Member elected pursuant to Section
10.02(a) shall, at the effective date of its admission to the Company as the
Managing Member, make a Capital Contribution to the Company in an amount equal
to $2472.00.
<PAGE>
ARTICLE XI
SEPARATENESS REQUIREMENTS
SECTION 11.01. So long as any indebtedness is outstanding under the
Loan Documents, the Company will --
(a) maintain records and books of account separate from those
of any other Person;
(b) maintain financial statements separate from those of any
other Person (except that the Company may be included in consolidated financial
statements of another Person where required by GAAP);
(c) except for certain overhead and transaction costs that are
allocated on a reasonable basis among the Company and certain of its Affiliates,
pay its own liabilities from its own funds and pay the salaries of its own
employees, if any; (d) participate in the fair and reasonable allocation of any
and all overhead expenses and other common expenses for facilities, goods, or
services provided to multiple entities;
(e) maintain an arm's length relationship with its affiliates
and any other parties furnishing services to it;
(f) except as otherwise contemplated by the Loan Documents,
deposit all of its funds in checking accounts, savings accounts, time deposits
or certificates of deposit in its own name or invest such funds in its own name;
(g) observe all limited liability company formalities
necessary to maintain its identity as an entity separate and distinct from the
Members and all of their other Affiliates;
(h) hold itself out as a separate and distinct entity from any
other Person;
(i) hold title to its assets in its own name; and
(j) conduct its own business in its own name or under such
trade name as will not be reasonably likely to cause confusion as to its
separate existence.
SECTION 11.02. So long as any indebtedness is outstanding under the
Loan Documents, the Company will not --
(a) fail to correct any known misunderstanding regarding its
separate identity;
(b) commingle its funds or other assets with those of any
other Person;
(c) guarantee or become obligated for the debts of any other
entity or hold its credit as being available to satisfy the obligations of any
other Person (provided that this provision shall not be deemed to prohibit
customary joint and several obligations and indemnification and contribution
agreements entered into under the Loan Documents or in the ordinary course of
business of the Company);
(d) pledge any of its assets for the benefit of any other
Person other than the lender under the Loan Documents (except as otherwise
permitted by the Loan Documents);
(e) acquire obligations or securities of its Members;
(f) make any loans to any other Person;
(g) identify its Members or any of its Affiliates as a
division or part of it or itself as a division or part of any of them (except
for inclusion of the Company in consolidated financial statements in accordance
with GAAP);
<PAGE>
(h) engage (either as transferor or transferee) in any
material transaction with any Affiliate other than for fair value and on terms
similar to those obtainable in arms'-length transactions with unaffiliated
parties, or engage in any transaction with any Affiliate involving any intent to
hinder, delay or defraud any entity; or
(i) engage in any business activity other than as stated in
this Agreement.
SECTION 11.03. So long as any indebtedness is outstanding under the
Loan Documents, each of the Members will --
(a) observe all customary formalities necessary to maintain
its identity as an entity separate and distinct from the Company and all of its
other Affiliates; and
(b) hold itself out as a separate and distinct entity from the
Company and not identify the Company as a division of the Members.
ARTICLE XII
AMENDMENT
SECTION 12.01. This Agreement may be amended or modified by a written
instrument executed by the Member. Notwithstanding the foregoing, so long as any
indebtedness remains outstanding under the Loan Documents, the provisions of
Sections 2.01, 5.03, 5.04, 10.01, 10.02, 10.03, 11.01, 11.02, 11.03, this
Section 12.01 and Article XIII shall not be amended under conditions or in any
manner that would be prohibited by the Loan Documents.
ARTICLE XIII
MHFA REQUIREMENTS
SECTION 13.01.
(a) Notwithstanding any other provision of this Agreement, no
amendment to this Agreement shall be made which would affect the rights of the
MHFA under any agreement between MHFA and the Company without securing the prior
written consent of MHFA.
<PAGE>
(b) The hiring of a management agent for the Property shall be
subject to MHFA approval. As used herein, the term "Management Fee" shall mean
the amount payable from time to time by the Company to such management agent on
an annual basis for management services in accordance with a management contract
approved by MHFA. No distribution, amount of Cash Flow or loans to the Company
may be guaranteed by any assignment of any Management Fees to be received by any
such management agent. The terms of any loans by the Members to the Company must
be approved by MHFA.
(c) Any new or substitute Member must agree to acknowledge the
Company's obligations to MHFA in connection with the mortgage debt owed to MHFA
and the operation of the property by any new or substitute Member is subject to
prior written approval of MHFA.
(d) The Managing Member shall be solely responsible for the
management of the Company business with all the rights and powers generally
conferred by law. Any party dealing with the Company may rely on a certificate
signed by the Managing Member that it has all necessary power and authority to
bind the Company by its acts.
(e) The provisions of this Section 13.01 are intended for the
benefit of MHFA only and shall be of no force and effect at any time that MHFA
is not the holder of a mortgage of the Property.
(f) Any transfer of any Membership Interests shall be subject
to the approval of MHFA.
SECTION 13.02 Limited Dividend. Notwithstanding anything to the
contrary contained in this Agreement, distributions to Members shall be limited
to those amounts permitted by MHFA, the Executive Office of Communities and
Development of the Commonwealth of Massachusetts, the Massachusetts Industrial
Finance Authority ("MIFA") or such other state or federal agency which provides
assistance for the construction or operation of the Property, if and to the
extent applicable.
ARTICLE XIV
DEFINITIONS
As used herein, the following capitalized terms have the meanings set
forth below:
"Act" means the Delaware Limited Liability Company Act, as it may be
amended from time to time.
"Agreement": This Operating Agreement as it may be from time to time
amended.
"Adjusted Basis": The basis for determining gain or loss for federal
income tax purposes from the sale or other disposition of property, as defined
in Section 1011 of the Code.
"Affiliate" means, with respect to any Person, (i) any Person directly
or indirectly controlling, controlled by or under common control with such
Person, (ii) any Person owning or controlling ten percent (10%) or more of the
outstanding voting interests of such Person, (iii) any Person of which such
Person owns or controls ten percent (10%) or more of the voting interests or
(iv) any officer, director, general partner or trustee of such Person or any
Person referred to in clauses (i), (ii), and (iii) above. For purposes of this
definition, "control," when used with respect to any Person, means the power to
direct the management and policies of such Person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise,
and the terms "controlling" and "controlled" have meanings correlative to the
foregoing.
<PAGE>
"Agreed Value": (i) In the case of any property contributed to the
Company by a Member, the 704(c) Value of such property as of the time of its
contribution to the Company, reduced by any liabilities either assumed by the
Company upon such contribution or to which such property is subject when
contributed and (ii) in the case of any property distributed to a Member by the
Company, the Company's Carrying Value of such property at the time such property
is distributed, reduced by any indebtedness either assumed by such Member upon
such distribution or to which such property is subject at the time of
distribution as determined under Section 752 of the Code and the Regulations
thereunder. The aggregate Agreed Value of all property contributed to the
Company by a Member shall be set forth next to such Member's name on Schedule A.
"Book Tax Gain" and "Book Tax Loss": The amount of taxable gain or loss
that would result from a Capital Transaction if the Adjusted Basis at the time
of the Capital Transaction of the Company Assets with respect to which such
Capital Transaction occurs were equal to the Carrying Value of such Company
Assets at such time.
"Business Day": Monday through Friday of each week, except that a legal
holiday recognized as such by the Government of the United States or the State
of Maryland or the Commonwealth of Massachusetts shall not be regarded as a
Business Day.
"Capital Account": The capital account established and maintained for
each Member pursuant to Section 3.02.
"Capital Contribution": Any property (including cash) contributed to
the Company by or on behalf of a Member.
"Capital Transaction": (i) A transaction pursuant to which the Company
borrows funds, receives Capital Contributions from a new Member upon its
admission to the Company, or receives a distribution from any partnership or
joint venture in which the Company is a participant as a result of a capital
transaction with respect to that partnership or joint venture; (ii) a sale,
condemnation, exchange, abandonment, casualty not followed by reconstruction, or
other disposition, whether by foreclosure or otherwise, of Company Assets (other
than a disposition of personal property that is, or is to be, replaced), or
(iii) an insurance recovery with respect to Company Assets, or other transaction
that, in accordance with generally accepted tax accounting principles, is
considered capital in nature.
<PAGE>
"Carrying Value": (i) With respect to any asset contributed or deemed
to be contributed to the Company or revalued on the Company's books, the fair
market value of such asset at the time of contribution or revaluation (as
determined by the Members) reduced, but not below zero, by all deductions for
depreciation, amortization, cost recovery and expense in lieu of depreciation
debited to the Capital Accounts of the Members in accordance with Regulations
Section 1.704-1(b)(2)(iv)(g) with respect to such asset since the time of
contribution or last revaluation up to the time the Carrying Value is to be
determined; and (ii) with respect to any other asset of the Company, the
Adjusted Basis of such asset as of the time the Carrying Value is to be
determined.
"Cash Flow": As defined in Section 4.01.
"Class A Member" means ElderTrust Operating Limited Partnership in its
capacity as the Class A Member hereunder.
"Class B Member" means ElderTrust Operating Limited Partnership in its
capacity as the Class B Member hereunder.
"Code": The Internal Revenue Code of 1986, as in effect and hereafter
amended, and, unless the context otherwise requires, applicable regulations
thereunder. Any reference herein to a specific section or sections of the Code
shall be deemed to include a reference to any corresponding provision of future
law.
"Company Assets": All assets and property, whether tangible or
intangible and whether real, personal or mixed, at any time owned by or held for
the benefit of the Company.
"Excess Negative Balance": The negative balance, if any, in a Member's
Capital Account as of the end of a Fiscal Year after crediting the Member's
Capital Account for the amount of any negative balance in such Capital Account
that the Partner is obligated to restore or is treated as obligated to restore
pursuant to Regulations sections 1.704-1(b)(2)(ii) (b)(3) and
1.704-1(b)(2)(ii)(c) and the amount of such Member's share of the Company's
Minimum Gain, determined pursuant to Regulations sections 1.704-1T(b)(4)(iv)(f)
and 1.704-1T(b)(4)(iv)(h)(5); and debiting the Member's Capital Account for any
adjustment, allocation, or distribution described in paragraph (4), (5), or (6)
of Regulations section 1.704-1(b)(2)(ii)(d).
"Fiscal Quarter" has the meaning ascribed thereto in Section 6.03(b).
"Fiscal Year": The fiscal year of the Company for financial accounting
purposes, and for federal, state and local income tax purposes, which shall be
the calendar year unless changed by the Managing Member in accordance with
Section 6.08
<PAGE>
"GAAP" means generally accepted accounting principles.
"Indebtedness" means all amounts outstanding under the Loan Documents.
"Indemnitee" has the meaning ascribed thereto in Section 7.02.
"Interim Capital Transaction" means any Capital Transaction that is not
a Terminating Capital Transaction.
"Loan Documents" mean any and all documents executed and delivered or
assumed by the Company in connection with a loan from MHFA to be assumed by the
Company, as such documents may be amended from time to time.
"Managing Member" means Cleveland ALF, L.L.C. in its capacity as
Managing Member.
"Member" means the Managing Member or either of the Non-Managing
Members.
"Member Nonrecourse Debt": Any Nonrecourse Debt (or portion thereof)
for which a Member bears (or is deemed to bear) the economic risk of loss within
the meaning of Regulations section 1.704-1T(b)(4)(iv)(k)(1).
"Membership Interest": As to any Member, all of the interest of that
Member in the Company, including, without limitation, such Member's (i) right to
a distributive share of the income, gain, losses and deductions of the Company
in accordance herewith, (ii) right to a distributive share of Company Assets,
and (iii) rights, if a Managing Member, with respect to the management of the
business and affairs of the Company and (iv) rights, if a Non-Managing Member,
to consent to approve of certain actions as provided in Section 5.04.
"MHFA means The Massachusetts Housing Finance Agency.
"Minimum Gain": The amount determined by computing, with respect to
each Nonrecourse Debt of the Company, the amount of Book Tax Gain (of whatever
character), if any, that the Company would realize if it disposed of (in a
taxable transaction) the Company Assets subject to such Nonrecourse Debt in full
satisfaction thereof and for no other consideration, and by then aggregating the
amounts so computed. For purposes of computing the amount of Minimum Gain, (i)
the Carrying Value of a Company Asset subject to two or more Nonrecourse Debts
of equal priority shall be allocated among such Nonrecourse Debts in proportion
to the outstanding principal balances of such Nonrecourse Debts; (ii) the
Carrying Value of a Company Asset subject to two or more Nonrecourse Debts of
unequal priority shall be allocated to the Nonrecourse Debts of an inferior
priority (in accordance with (i) above) only to the extent of the excess, if
any, of the Carrying Value of the Company Asset over the aggregate outstanding
balance of the Nonrecourse Debts of superior priority; and (iii) only the
portion of a Company Asset's Carrying Value allocated to Nonrecourse Debts of
the Company shall be used in computing the Minimum Gain.
<PAGE>
"Net Income and Net Loss": For any taxable period, (i) the gross income
of the Company from all sources, other than any income or loss recognized with
respect to a Terminating Capital Transaction during such period, as calculated
for federal income tax purposes by the Company, plus (ii) any income of the
Company that is exempt from federal income tax and not otherwise taken into
account in computing gross income for federal income tax purposes, reduced by
(iii) Depreciation (as defined below), further reduced by (iv) all other items
of expense or deduction that are allowable as deductions to the Company under
the Code for such period but excluding any item of expense or deduction
attributable either to Depreciation (as defined below) or to a Terminating
Capital Transaction, as calculated for federal income tax purposes by the
Company, and further reduced by (v) any expenditures of the Company described in
section 705(a)(2)(b) of the Code or treated as expenditures described in section
705(a)(2)(b) of the Code pursuant to Regulations section 1.704-1(b)(2)(iv)(i),
and not otherwise taken into account in computing taxable income. "Depreciation"
means, for each taxable period, an amount equal to the depreciation,
amortization, or other cost recovery deductions allowable with respect to
Company Assets for such period for federal income tax purposes computed (using
the same method used by the Company in computing depreciation, amortization, or
other cost recovery deductions in preparing its federal income tax returns) as
if the Adjusted Basis of such Company Assets were equal to their Carrying
Values. All items of income, gain, loss, deduction, and credit recognized by the
Company for federal income tax purposes and allocated to the Members in
accordance with the provisions of Article IV shall be determined without regard
to any election that may be made by the Company under Code section 754 except as
expressly contemplated under Regulations section 1.704-1(b)(2)(iv)(m)(4);
provided, however, that such allocations, once made, shall be adjusted as
necessary to take into account those adjustments authorized under sections 734
and 743 of the Code.
"Net Proceeds of a Capital Transaction": As defined in Section 4.01.
"Non-Managing Members" means the Class A Member and the Class B Member.
"Nonrecourse Debt": Any liability that is considered nonrecourse for
purposes of Regulations section 1.1001-2 (without regard to whether such
liability is a recourse liability under Regulations section 1.752-1T(d)(2)) and
any other liability for which the creditor's right to repayment is limited to
one or more of the assets of the Company (within the meaning of Regulations
section 1.752-1T(d)(3)(ii)(b)(4)(ii).
"Nonrecourse Liability": Any Nonrecourse Debt (or portion thereof) for
which no Member bears (or is deemed to bear) the economic risk of loss within
the meaning of Regulations section 1.704-1T(b)(4)(iv)(k)(3).
"Percentage Interest": As defined in Section 4.01.
"Person" means a natural person, partnership (whether general or
limited), trust, estate, association, corporation, limited liability company,
unincorporated organization, custodian, nominee or any other individual or
entity in its own or any representative capacity.
<PAGE>
"Property" has the meaning ascribed thereto in Section 2.01.
"Regulations": The regulations issued by the United States Department
of the Treasury under the Code, as now in effect and as they may be amended from
time to time, and any successor regulations.
"704(c) Value": With respect to any property contributed to the Company
by a Member, the fair market value of such property at the time of contribution
as determined by the Managing Member using such reasonable method of valuation
as it may adopt; provided, however, that the Managing Member shall, in its sole
and absolute discretion, use such method as it deems reasonable and appropriate
to allocate the aggregate of the 704(c) Values of properties contributed to the
Company in a single or integrated transaction among each separate property on a
basis proportional to its fair market value.
"Terminating Capital Transaction": Any Capital Transaction involving
all or substantially all of the then remaining Company Assets and/or any other
transaction which will result in a dissolution of the Company.
"Termination Date": December 31, 2096.
"Unrealized Gain": As to any Company Asset, the Book Tax Gain, if any,
that would be realized if such Company Asset were sold for its fair market value
on the date of determination.
"Unrealized Loss": As to any Company Asset, the Book Tax Loss, if any,
that would be realized if such Company Asset were sold for its fair market value
on the date of determination.
ARTICLE XV
MISCELLANEOUS
SECTION 15.01. Severability. Each provision hereof is intended to be
severable and the invalidity or illegality of any portion of this Agreement
shall not affect the validity or legality of the remainder hereof.
SECTION 15.02 Effect of Provisions Inconsistent with Act. It is the
intention of the parties that any provision hereof that is inconsistent with the
provisions of the Act be given effect to the maximum extent permitted under the
Act.
SECTION 15.03. Binding Effect. The terms and provisions of this
Agreement shall be binding upon, and inure to the benefit of, the successors and
assigns of each of the Members.
SECTION 15.04. Governing Law. The terms and provisions of this
Agreement shall be construed under the laws of the State of Delaware and the Act
as now adopted or as it may be hereafter amended shall govern the interpretation
of this Agreement.
[SIGNATURE PAGE TO FOLLOW]
<PAGE>
IN WITNESS WHEREOF, the undersigned have caused this Operating
Agreement to be duly executed on their behalf as of the date first written
above.
MANAGING MEMBER:
CLEVELAND ALF, L.L.C.
By:/s/ Edward B. Romanov, Jr.
-------------------------------
Edward B. Romanov, Jr.
Member
CLASS A MEMBER:
ELDERTRUST OPERATING LIMITED PARTNERSHIP
By: ELDERTRUST
General Partner
By:/s/ Edward B. Romanov, Jr.
-------------------------------
Edward B. Romanov, Jr.
President
CLASS B MEMBER:
ELDERTRUST OPERATING LIMITED PARTNERSHIP
By: ELDERTRUST
General Partner
By:/s/ Edward B. Romanov, Jr.
-------------------------------
Edward B. Romanov, Jr.
President
<PAGE>
- 29 -
SCHEDULE A
To Operating Agreement of ET Sub-Cleveland Circle, L.L.C.
NAMES, ADDRESSES AND CAPITAL CONTRIBUTIONS OF MEMBERS
AGREED VALUE OF
CAPITAL CONTRIBUTIONS
MANAGING MEMBER:
CLEVELAND ALF, L.L.C. $2,472.00
101 East State Street
Suite 101
Kennett Square, Pennsylvania 19348
CLASS A MEMBER
ELDERTRUST OPERATING LIMITED PARTNERSHIP $222,453.00
101 East State Street
Suite 101
Kennett Square, Pennsylvania 19348
CLASS B MEMBER:
ELDERTRUST OPERATING LIMITED PARTNERSHIP $22,245.00
101 East State Street
Suite 101
Kennett Square, Pennsylvania 19348
TOTAL: $247,170.00
<PAGE>
OPTION AGREEMENT
THIS OPTION AGREEMENT (this "Agreement") is made this 30th day of
November, 1998, by and between Edward B. Romanov, Jr., an individual residing in
Point Pleasant, Pennsylvania ("Optionor"), and ElderTrust Operating Limited
Partnership, a Delaware limited partnership ("Optionee").
1. Grant of Option. Optionor, in consideration of the sum of Ten
Dollars ($10) Dollars (the "Option Price"), receipt and sufficiency of which are
hereby acknowledged, hereby grants to Optionee the exclusive right and option
(the "Option") to purchase all of Optionor's right, title and interest in and to
Vernon ALF, L.L.C. ("Vernon ALF Ownership Interest"). Good and clear title to
the Vernon ALF Ownership Interest, free and clear of all liens and encumbrances
except as may be acceptable to Optionee, is to be conveyed upon exercise of the
Option.
2. Exercise of the Option. The Option may be exercised by Optionee at
any time on or before November 30, 1999 (the "Option Period") by providing
written notice of such election to Optionor prior to the expiration of the
Option Period. Nothing herein shall be construed to obligate Optionor to
exercise the Option and Optionor hereby acknowledge and agree that the Option
may be exercised by Optionee at Optionee's sole and absolute discretion.
3. Purchase Price. If Optionor exercises the Option as herein provided,
Optionee shall pay to Optionor a purchase price for the Premises in the amount
of Thirty-Two Hundred Forty-Four ($3,244.00) Dollars (the "Purchase Price").
4. Representations and Warranties. Optionor hereby represents and
warrants to Optionee that Optionor is thc sole owner of the Vernon ALF Ownership
Interest and has the full and complete authority to enter into this Agreement
and convey the Vernon ALF Ownership Interest free and clear of any lien, claim
or encumbrance. Optionee and Optionor agree to execute such other documentation
and take such other action as may be commercially reasonable to effectuate this
Agreement.
5. Assignment. Optionee shall have the right to assign this Option, or
any of Optionee's Rights hereunder, or to name nominees to take title to the
Vernon ALF Ownership Interest.
6. Successors and Assigns. This Agreement shall be binding upon the
parties hereto and their respective heirs, executors, administrators, successors
and assigns.
7. Time of the Essence. Whether or not elsewhere herein expressly
provided, all times and dates for performance set forth in this Agreement are
agreed to be of the essence of this Agreement.
<PAGE>
8. Notices. Wherever in this Agreement it shall be required or
permitted that notice or demand be given or served by either party to or on the
other, such notice or demand shall be deemed duly given or served if, and shall
not be deemed duly given or served unless, in writing and mailed by certified
mail, return receipt requested, or sent by Federal Express or comparable private
delivery service which provides proof of delivery, addressed as follows:
If given to Optionor:
c/o ElderTrust
101 East State Street
Kennett Square, Pennsylvania 19348
Attn: Edward B. Romanov, Jr.
If given to Optionee:
c/o ElderTrust
101 East State Street
Kennett Square, Pennsylvania 19348
Attn: Chief Financial Officer
The time at which any notice or demand shall be deemed given or served
shall be the time at which such notice or demand is mailed or delivered, whether
or not such delivery is refused. Any notice may also bc delivered personally but
only if delivered personally to the individuals to whom notice is required to be
given as set forth above.
IN WITNESS WHEREOF, Optionor and Optionee have executed this Agreement
as of the date first above written.
OPTIONOR: OPTIONEE:
/s/ Edward B. Romanov, Jr.
- - ----------------------------- ELDERTRUST OPERATING LIMITED
Edward B. Romanov, Jr. PARTNERSHIP,
a Delaware limited partnership
By: ElderTrust, its general partner
By: /s/ D. Lee McCreary, Jr.
----------------------------
Name: D. Lee McCreary, Jr.
Title: Senior Vice-President
<PAGE>
EXHIBIT 11.1
COMPUTATION OF BASIC AND DILUTED EARNINGS PER SHARE
FOR THE PERIOD FROM JANUARY 30, 1998 THROUGH DECEMBER 31, 1998
The following calculation is submitted in accordance with requirements
of the Securities Exchange Act of 1934:
(amounts in thousands)
Net income available for common shareholders
$ 3,973
===========
Weighted average common shares outstanding used in
calculating basic and diluted earnings per share
7,369
===========
Basic and diluted net income per share $0.54
===========
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
Subsidiary Jurisdiction of Organization Type of Entity
---------- ---------------------------- --------------
<S> <C> <C>
ElderTrust Operating Limited Partnership Delaware Limited partnership
ET Sub-Phillipsburg, L.L.C. Delaware Limited liability company
ET Sub-Windsor I, L.L.C. Delaware Limited liability company
ET Sub-Windsor II, L.L.C. Delaware Limited liability company
ET Sub-SMOB, L.L.C. Delaware Limited liability company
ET Sub-GENPAR, L.L.C. Delaware Limited liability company
ET Sub-Lopatcong, L.L.C. Delaware Limited liability company
ET Sub-Heritage Woods, L.L.C. Delaware Limited liability company
ET Sub-Pleasant View, L.L.C. Delaware Limited liability company
ET Sub-Lacey I, L.L.C. Delaware Limited liability company
ET Sub-Willowbrook Limited Partnership, L.L.P. Virginia Limited liability partnership
ET Sub-Riverview Ridge Limited Partnership, L.L.P. Virginia Limited liability partnership
ET Sub-Highgate, L.P. Pennsylvania Limited partnership
ET Sub-Woodbridge, L.P. Pennsylvania Limited partnership
ET Sub-Rittenhouse Limited Partnership, L.L.P. Virginia Limited liability partnership
ET Sub-Wayne I Limited Partnership, L.L.P. Virginia Limited liability partnership
ET Sub-Belvedere Limited Partnership, L.L.P. Virginia Limited liability partnership
ET Sub-Chapel Manor Limited Partnership, L.L.P. Virginia Limited liability partnership
ET Sub-Harston Hall Limited Partnership, L.L.P. Virginia Limited liability partnership
ET Sub-Pennsburg Manor Limited Partnership, L.L.P. Virginia Limited liability partnership
ET Sub-Silverlake Limited Partnership, L.L.P. Virginia Limited liability partnership
ET Sub-POB I Limited Partnership, L.L.P. Virginia Limited liability partnership
ET Sub-DCMH Limited Partnership, L.L.P. Virginia Limited liability partnership
ET Sub-Vernon Court, L.L.C. Delaware Limited liability company
ET Sub-Heritage Andover, L.L.C. Delaware Limited liability company
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AT DECEMBER 31, 1998 AND THE RELATED STATEMENT OF OPERATIONS FOR THE
ELEVEN MONTHS ENDED DECEMBER 31, 1998.
</LEGEND>
<CIK> 0001043236
<NAME> ELDER TRUST
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 2,272
<SECURITIES> 0
<RECEIVABLES> 53,298
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 12,206
<PP&E> 180,573
<DEPRECIATION> 4,444
<TOTAL-ASSETS> 271,317
<CURRENT-LIABILITIES> 95,804
<BONDS> 20,576
0
0
<COMMON> 74
<OTHER-SE> 113,222
<TOTAL-LIABILITY-AND-EQUITY> 271,317
<SALES> 21,233
<TOTAL-REVENUES> 21,233
<CGS> 0
<TOTAL-COSTS> 10,083
<OTHER-EXPENSES> 921
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,256
<INCOME-PRETAX> 3,973
<INCOME-TAX> 0
<INCOME-CONTINUING> 3,973
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,973
<EPS-PRIMARY> 0.54
<EPS-DILUTED> 0.54
</TABLE>
