<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number: 001-13807
ElderTrust
(Exact name of registrant as specified in its charter)
Maryland 23-2932973
(State or other jurisdiction (I.R.S. Employer Identification Number)
of incorporation 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)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--------- ---------
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
Class Outstanding at April 30, 1999
- --------------------------------------- -------------------------------
Common stock, $0.01 par value per share 7,201,100
Exhibit index is located on page 28
<PAGE>
ELDERTRUST
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of March 31, 1999 and
December 31, 1998......................................................... 1
Condensed Consolidated Statements of Operations for the
three months ended March 31, 1999 and for the period
from January
30, 1998 to March 31, 1998................................................ 2
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 1999 and for the period
from January
30, 1998 to March 31, 1998................................................ 3
Notes to Unaudited Condensed Consolidated Financial Statements................... 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations....................................................... 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk......................... 25
PART II: OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.......................................... 26
Item 6. Exhibits and Reports on Form 8-K................................................... 26
SIGNATURES........................................................................................... 27
EXHIBIT INDEX........................................................................................ 28
</TABLE>
i
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited)
ELDERTRUST
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(dollar amounts in thousands, except share amounts)
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
-------------- -----------------
<S> <C> <C>
ASSETS
Assets:
Real estate properties, at cost $164,287 $163,783
Less - accumulated depreciation (5,881) (4,444)
Land 16,642 16,790
-------- --------
Net real estate properties 175,048 176,129
Real estate loans receivable 50,721 47,899
Cash and cash equivalents 2,060 2,272
Restricted cash 4,639 3,549
Accounts receivable 4,695 4,412
Accounts receivable from unconsolidated entities 1,044 987
Prepaid expenses 1,124 986
Investments in and advances to unconsolidated entities 33,800 34,426
Other assets, net 1,548 657
-------- --------
Total assets $274,679 $271,317
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Bank credit facility $ 95,822 $ 90,204
Accounts payable and accrued expenses 1,848 1,571
Accounts payable to unconsolidated entities 84 14
Mortgages and bonds payable 49,282 49,594
Notes payable 3,000 3,000
Notes payable to unconsolidated entities 1,121 1,134
Other liabilities 3,601 3,645
-------- --------
Total liabilities 154,758 149,162
Minority interest 8,718 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;
7,201,100 and 7,244,800 shares issued and outstanding,
respectively 72 72
Capital in excess of par value 116,004 116,428
Distributions in excess of earnings (4,873) (3,204)
-------- --------
Total shareholders' equity 111,203 113,296
-------- --------
Total liabilities and shareholders' equity $274,679 $271,317
======== ========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
1
<PAGE>
ELDERTRUST
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
For the three Period from
months ended January 30 to
March 31, March 31,
1999 1998
------------------- ------------------
<S> <C> <C>
Revenues:
Rental revenues $4,623 $ 2,420
Interest, net of amortization of deferred loan
origination costs 1,465 674
Interest from unconsolidated entities 941 113
Other income 19 23
------ -------
Total revenues 7,048 3,230
------ -------
Expenses:
Property operating expenses 298 150
Interest expense, including amortization of deferred
finance costs 2,935 779
Depreciation 1,440 743
General and administrative 753 379
Start-up expenses -- 2,617
------ -------
Total expenses 5,426 4,668
------ -------
Net income (loss) before equity in losses of unconsolidated
entities and minority interest 1,622 (1,438)
Equity in losses of unconsolidated entities, net (593) (4)
Minority interest (70) 88
------ -------
Net income (loss) $ 959 $(1,354)
====== =======
Basic and diluted weighted average number of
common shares outstanding 7,215 7,390
====== =======
Net income (loss) per share - basic and diluted $ 0.13 ($ 0.18)
====== ========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
2
<PAGE>
ELDERTRUST
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
For the three Period from
months ended January 30 to
March 31, March 31,
1999 1998
-------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 959 $ (1,354)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization 1,781 787
Non-cash compensation expense to officers -- 2,018
Non-cash expense in connection with stock issued to trustees -- 14
Minority interest and equity in losses from unconsolidated
entities 663 (84)
Net changes in assets and liabilities:
Accounts receivable and prepaid expenses (461) (1,507)
Accounts payable and accrued expenses 347 4,053
Other liabilities (39) 2,597
--------- ---------
Net cash provided by operating activities 3,250 6,524
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition and cost of real estate investments -- (103,882)
Investments in real estate mortgages and development funding (2,822) (37,900)
Investment in and advances to unconsolidated entities -- (7,406)
Capital expenditures (438) (103)
Proceeds from collection on advances to unconsolidated entities 34 --
Net increase in bond and operating reserve funds (restricted cash) (1,090) (2,657)
Other 155 (562)
--------- ---------
Net cash used in investing activities (4,161) (152,510)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from initial public offering, net of offering costs -- 114,217
Payment of deferred financing fees (1,330) (140)
Borrowings under Credit Facility 5,618 34,110
Principal payments on mortgages (312) (122)
Distributions to shareholders (2,628) --
Distributions to minority interests (188) --
Repurchase of common shares (424) --
Other (37) --
--------- ---------
Net cash provided by financing activities 699 148,065
--------- ---------
Net increase (decrease) in cash and cash equivalents (212) 2,079
Cash and cash equivalents, beginning of period 2,272 --
--------- ---------
Cash and cash equivalents, end of period $ 2,060 $ 2,079
========= =========
</TABLE>
3
See accompanying notes to unaudited condensed consolidated financial statements.
<PAGE>
ELDERTRUST
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
of ElderTrust and its consolidated subsidiaries (the "Company") have been
prepared in accordance with generally accepted accounting principles for interim
financial information and pursuant to the rules and regulations of the
Securities and Exchange Commission. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. Additionally, although the December 31, 1998
condensed consolidated balance sheet was derived from audited financial
statements, it does not include all disclosures required by generally accepted
accounting principles. In the opinion of management, all adjustments (consisting
only of normal recurring accruals) considered necessary for a fair presentation
of the financial statements for the interim periods presented have been
included. Operating results for the three months ended March 31, 1999 are not
necessarily indicative of the results that may be expected for the full fiscal
year ending December 31, 1999. Certain amounts included in the unaudited
condensed consolidated financial statements for the three months ended March 31,
1998 have been reclassified for comparative purposes.
Results of operations for the interim period ended March 31, 1998
includes the Company's operations from January 30, 1998, the date of
consummation of the Company's initial public offering, to March 31, 1998. The
accompanying unaudited condensed consolidated financial statements should be
read in conjunction with the consolidated financial statements and notes thereto
for the year ended December 31, 1998 included in the Company's Form 10-K filed
with the Securities and Exchange Commission.
2. Investments in Unconsolidated Entities
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. 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, LLP. 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 March 31, 1999. As a
result of the Company not having controlling or managing interest in the
remaining entities, the Company records its investments in and results of
operations from these entities using the equity method of accounting in its
consolidated financial statements. Summary combined financial information as of
and for the period ended March 31, 1999 for these unconsolidated entities is as
follows (dollars in thousands):
4
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ELDERTRUST
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (continued)
<TABLE>
<CAPTION>
ET ET Sub- ET
Sub-Meridian, ET Capital Cabot Sub-Cleveland
LLP Corp. Park, LLC Circle, LLC Total
---------------- ---------------- --------------- --------------- --------
<S> <C> <C> <C> <C> <C>
Current assets $ 1,562 $ 520 $ 255 $ 337 $ 2,674
Real estate properties (1) 109,156 -- 17,564 14,499 141,219
Notes receivable -- 12,492 -- -- 12,492
Other assets 452 125 500 474 1,551
Current liabilities 1,768 408 640 652 3,468
Long-term debt (2) 107,178 9,681 17,225 14,216 148,300
Total equity 139 3,048 178 211 3,576
Rental revenue 2,450 -- 413 364 3,227
Interest income 3 418 -- -- 421
Interest expense 2,138 320 347 268 3,073
Depreciation/amortization 878 3 140 116 1,137
Net income (loss) (563) 62 (74) (20) (595)
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 Genesis Health Ventures, Inc. ("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 Genesis 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 previous owners against any such
loss of deferral to tax benefits or default resulting in a taxable event to
them.
3. Credit Facility
At March 31, 1999, the Company had $95.8 million outstanding under its
bank credit facility (the "Credit Facility"). 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 from $140 million to $100.5
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 also borrowed additional funds for working
capital during February 1999, prior to the determination that the Company was in
5
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ELDERTRUST
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (continued)
violation of the minimum equity value covenant. Additional borrowings were not
permitted under the Credit Facility during this period while the Company was in
default.
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 Credit Facility contains
various financial and other covenants, including, but not limited to, minimum
net asset value, minimum tangible net worth, a total leverage ratio and minimum
interest coverage ratio. The covenant requiring maintenance of a minimum equity
value is no longer required under the Credit Facility, as amended. The Company's
owned properties and properties underlying loans receivable with an aggregate
cost of $152.0 million are included in the Credit Facility borrowing base and
pledged as collateral.
Amounts outstanding under the Credit Facility bear interest at floating
rates based on a margin over the London Interbank Offered 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.
The interest rate on borrowings outstanding under the Credit Facility will
increase from 1.80% over one-month LIBOR to 2.75% effective June 1, 1999. The
interest rate on borrowings outstanding under the Credit Facility at March 31,
1999 was 6.8%, including the 1.80% margin adjustment.
The Company paid financing fees aggregating $1.3 million in connection
with amendments to the Credit Facility during the three months ended March 31,
1999. Unamortized deferred financing costs in connection with the Credit
Facility aggregated approximately $1.4 million at March 31, 1999. These
financing costs will be fully amortized ratably during the remaining three
quarters of 1999 and included as a component of interest expense.
6
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ELDERTRUST
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. Earnings (Loss) Per Share
The following table sets forth the computation of basic and diluted
earnings (loss) per share for the periods indicated (in thousands, except per
share data):
<TABLE>
<CAPTION>
For the three months
ended March 31,
----------------------------
1999 1998 (1)
------------ ------------
<S> <C> <C>
Net income (loss) for basic and diluted earnings (loss) per share $ 959 $(1,354)
============ ============
Weighted average common shares outstanding for basic and diluted net
earnings (loss) per share 7,215 7,390
============ ============
Basic and diluted net earnings (loss) per share $ 0.13 $ (0.18)
============ ============
</TABLE>
(1) Represents the period from January 30, 1998 to March 31, 1998.
The effect of outstanding stock options is antidilutive and thus not
reflected in the determination of weighted average common shares outstanding.
The operating partnership units are not included in the determination of
weighted average common shares outstanding since they are not considered to be
common stock equivalents as they are redeemable for cash.
5. Supplemental Cash Flow Information:
Supplemental cash flow information for the periods indicated is as
follows
<TABLE>
<CAPTION>
For the three months ended
March 31,
-------------------------------
1999 1998 (1)
-------------- -------------
(amounts in thousands)
<S> <C> <C>
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 -- 36,996
Units issued in connection with acquisition of real estate
properties -- 10,511
</TABLE>
(1) Represents the period from January 30, 1998 through March 31, 1998.
7
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Forward-Looking Statements
Management's Discussion and Analysis of Financial Condition and Results
of Operations contains certain forward-looking statements with respect to
results of operations and financial condition of ElderTrust and its consolidated
subsidiaries (collectively, the "Company"). In addition, forward-looking
statements may be included in various other Company documents to be issued in
the future and in various oral statements by Company representatives to
securities analysts and potential investors from time to time. In general, these
statements are identified by the use of forward-looking words or phrases,
including "intended," "will," "should," "may," "continues," "estimates,"
"expects," and "anticipates" or the negative or variations thereof or similar
terminology. These statements are not guarantees of the Company's future
performance and are subject to risks and uncertainties, and other important
factors that could cause the Company's actual performance or achievements to be
materially different from those expressed or implied by these forward-looking
statements. These risks, uncertainties and factors include, but are not limited
to:
o general economic, business and regulatory conditions,
o the ability to refinance the Company's existing credit facility,
o availability, terms and use of capital,
o federal and state government regulation,
o changes in Medicare and Medicaid reimbursement programs,
o relationship with Genesis Health Ventures ("Genesis"),
o competition, and
o Year 2000 readiness.
Refer to the Company's annual report on Form 10-K for the year ended
December 31, 1998 for a discussion of these and other factors which management
believes may impact the Company. The forward-looking statements included herein
represent the Company's judgment as of the date of this Form 10-Q and should be
read in conjunction with the consolidated financial statements and notes thereto
appearing elsewhere in this report. 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.
8
<PAGE>
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, including skilled nursing facilities, assisted and
independent living facilities and medical office buildings. The Company conducts
all of its operations through ElderTrust Operating Limited Partnership (the
"Operating Partnership"), of which ElderTrust is the sole general partner. The
Company's consolidated assets consist primarily of the assets of the Operating
Partnership and its consolidated subsidiaries. As of March 31, 1999, skilled
nursing, assisted and independent living facilities comprised approximately 93%
of the Company's consolidated investments in real estate properties and loans.
Approximately 69% of the Company's consolidated assets at March 31,
1999 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").
Revenues recorded by the Company in connection with these leases and borrowings
aggregated $4.6 million for the three months ended March 31, 1999. In addition,
the Company's investments in unconsolidated entities 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. As a result of these relationships, the Company and its Equity
Investees' revenues and ability to meet their 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.
Neither the Company nor its Equity Investees has 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 "Summary Condensed Consolidated Financial Data of Genesis."
On March 31, 1999, the term of the bank credit facility (the "Credit
Facility") was extended from April 30, 1999 to January 1, 2000 through an
amendment which also waived certain defaults under the Credit Facility and
provided for available borrowings up to an aggregate of $100.5 million. At March
31, 1999 the Company had $95.8 million outstanding under the Credit Facility.
See "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,
9
<PAGE>
from time to time. The Company has unfunded construction loan commitments at
March 31, 1999 which it expects to fund with cash flow from operations and funds
available under the Credit Facility. The Company is also obligated, or has an
option, to purchase eight assisted living facilities underlying term or
construction loans, which will generally be leased back to the sellers pursuant
to long term leases. A portion or all of the purchase price for these
acquisitions will be satisfied by any remaining balance outstanding under the
related term or construction loans. The Company will need to fund the remainder
of the purchase prices through borrowings under the existing or any future
credit facilities or through other funding alternatives. Due to the limited
availability of funds under the existing credit facility, the Company may be
required to finance any required purchases or exercise of its purchase option by
using other borrowing sources, the sale of other assets or issuance of equity.
See "Liquidity and Capital Resources."
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 the
existing and any future credit facilities on payment of shareholder
distributions. See "Liquidity and Capital Resources."
Substantially all of the Company's revenues are derived from:
o rents received under long-term 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, amortization of its deferred loan origination costs
and deferred financing costs.
Investments in Equity Investees
The Company's Equity Investees represent 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
10
<PAGE>
investments in and results of operations from these entities using the equity
method of accounting in the unaudited condensed consolidated financial
statements included herein.
ET Capital Corp.
The Company has a nonvoting 95% equity interest in ET Capital Corp.
("ET Capital"). The remaining voting 5% equity interest in ET Capital is owned
by Mr. Romanov. As of March 31, 1999, ET Capital owned a $7.8 million second
mortgage note with AGE Institute of Florida, which it acquired from Genesis
during 1998. 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 $59,000 and a loss of ($4,000) related
to the portion of its equity interest in ET Capital's results of operations for
the three months ended March 31, 1999 and the period from January 30, 1998 to
March 31, 1998, respectively. ET Capital has notes receivable of $12.5 million
and long-term debt of $9.7 million payable to the Company at March 31, 1999. See
Note 3 to the Company's unaudited condensed consolidated financial statements
included herein.
ET Capital has notes receivable aggregating $4.7 million at March 31,
1999 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 March 31, 1999 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. The Company
recorded $320,000 and $113,000 in interest income during the three months ended
March 31, 1999 and the period from January 30, 1998 to March 31, 1998,
respectively, on the notes payable to the Company by ET Capital.
ET Sub-Meridian Limited Partnership, L.L.P.
The Company has a 99% limited partnership interest in ET Sub-Meridian
Limited Partnership, L.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 owns the leasehold and purchase option rights to seven skilled
nursing facilities located in Maryland and New Jersey, which it purchased from
Genesis during September 1998. 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 Genesis for an initial ten-year period
with a ten-year renewal exercisable by that entity. Genesis has guaranteed the
subleases.
11
<PAGE>
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.
The Company recorded a loss of ($557,000) related to the portion of its
equity interest in ET Sub-Meridian's results of operations for the three months
ended March 31, 1999. ET Sub-Meridian has real estate investments and long-term
debt of $109.2 million and $107.2 million, respectively, at March 31, 1999. See
Note 3 to the Company's unaudited condensed consolidated financial statements
included herein. At March 31, 1999, 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. The Company recorded $527,000
in interest income during the three months ended March 31, 1999 on this loan.
ET Sub-Heritage Andover, LLC
ET Sub-Vernon Court, LLC
ET Sub-Cabot Park, LLC
ET Sub-Cleveland Circle, LLC
The Company, through four limited liability companies (ET Sub-Heritage
Andover, LLC, ET Sub-Vernon Court, LLC, ET Sub-Cabot Park, LLC, and ET
Sub-Cleveland Circle, LLC), has member interests in three assisted living
facilities and one independent living facility which it acquired during December
1998 from an unrelated third party. A Genesis Equity Investee leases each of the
facilities.
These limited liability companies have $15.4 million of subordinated
demand loans bearing interest at 12% per annum with the Company. The Company
recorded $94,000 in interest income during the three months ended March 31, 1999
in connection with the demand loans payable aggregating $3.1 million payable to
the Company by two of the unconsolidated limited liability companies.
Additionally, three of the limited liability companies have loans aggregating
$4.7 million payable to ET Capital, maturing December 2001 and bearing interest
at 12% per annum with interest and principal payable monthly. The Company 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.
The Company is the sole member of ET Sub-Heritage Andover, LLC, which,
accordingly, is consolidated into the Company's consolidated financial
statements at March 31, 1999. In each of the remaining three limited liability
companies, the Company has a 99% member interest and a limited liability company
12
<PAGE>
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 March 31, 1999.
The Company recorded aggregate losses of ($93,000) 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 three months ended March 31, 1999.
These two entities have real estate investments and aggregate long-term debt of
$32.1 million and $31.4 million, respectively, at March 31, 1999. See Note 3 to
the Company's unaudited condensed consolidated financial statements included
herein.
Results of Operations
The Company had no real estate investment operations prior to
consummation of its initial public offering on January 30, 1998. Thus, results
of operations for the quarter ended March 31, 1998 represent only two months of
operations. Additionally, the Company acquired its real estate investments at
various times during 1998 through acquisitions of senior housing and other
healthcare-related properties and term and construction loans. The Company also
made investments in its Equity Investees at various times during 1998. The
revenues and expenses generated by the Company's investments were included in
its results of operations from the dates of acquisition or investment.
Accordingly, the operating results for the three months ended March 31, 1998 are
not comparable to those of the quarter ended March 31, 1999.
Three months ended March 31, 1999 compared with the period from January
30, 1998 to March 31, 1998
Revenues
Rental revenues of $4.6 million were generated during the three months
ended March 31, 1999. This represented a 91% increase from $2.4 million for the
corresponding period in 1998. This increase was a result of 1998 including only
two months of operations and due to acquisitions of senior housing and other
healthcare-related properties at various times during 1998.
Interest income of $1.5 million, net of amortization of deferred loan
costs of $30,000, was earned during the three months ended March 31, 1999. This
represented an increase of $791,000, or 117%, from $674,000 for the
corresponding period in 1998. This increase was a result of 1998 including only
two months of operations and due to additional funding of construction loans at
various times during 1998 and 1999. The increase was comprised of an increase of
$706,000 in interest on term and construction loans and an increase of $98,000
in interest earned on excess invested funds and bond reserve funds, offset by a
decrease of $13,000 in connection with a mortgage loan receivable that was paid
off in December 1998.
13
<PAGE>
Interest from unconsolidated entities of $941,000 was earned during the
three months ended March 31, 1999. This represented an increase of $828,000, or
733%, from $113,000 for the corresponding period in 1998. This increase was
primarily a result of the loans with these unconsolidated equity investees
increasing from $5.6 million at March 31, 1998 to $30.4 million at March 31,
1999.
Expenses
Property operating expenses principally relate to medical office
buildings which are not subject to leases that require the lessees to pay all
operating expenses of the related property. Property operating expenses for
these leased properties were $298,000 for the three months ended March 31, 1999.
This represented a 99% increase from $150,000 for the corresponding period in
1998. This increase was a result of 1998 including less than two months of
operations for the Company's medical office buildings due to one of these
buildings being acquired during the last half of February 1998. Property
operating expenses as a percentage of total rental revenues remained relatively
consistent at 6.4% for the three months ended March 31, 1999 as compared to 6.2%
for the corresponding period in 1998.
Interest expense, which included amortization of deferred financing
costs of $311,000, was $2.9 million for the three months ended March 31, 1999.
This represented a 277% increase in interest expense from $779,000 for the
corresponding period in 1998. This increase was a result of 1998 including only
two months of operations, increased amortization of deferred financing costs of
$299,000 and increases in debt at various times during 1998 to fund operating,
investing and financing activities. Debt, which includes the Credit Facility and
mortgages and notes payable, increased from $71.0 million at March 31, 1998 to
$148.1 million at March 31, 1999. The weighted average interest rate on total
outstanding debt decreased from 7.6% at March 31, 1998 to 6.9% at March 31,
1999.
The Company expects interest expense to increase as a result of the
increase in the interest rate on the Credit Facility in June 1999 from 1.80%
over the one-month London Interbank Offered Rate ("LIBOR") to 2.75%.
Additionally, the Company expects interest expense to increase as a result of
the amortization of deferred financing costs of $1.4 million during the
remaining three quarters of 1999. The Company expects to incur additional
deferred financing costs in the future in connection with refinancing of the
Credit Facility.
Depreciation was $1.4 million for the three months ended March 31,
1999. This represented a 94% increase from $743,000 for the corresponding period
in 1998. This increase was a result of 1998 including only two months of
operations and increases in real estate properties and other depreciable assets
which were placed in service at various times during 1998.
14
<PAGE>
General and administrative expenses were $753,000 for the three months
ended March 31, 1999. This represented a 99% increase from $379,000 for the
corresponding period in 1998. This increase was a result of 1998 including only
two months of operations and additional expenses as the Company established its
current internal infrastructure. General and administrative expenses increased
slightly as a percentage of rental revenues to 16.3% for the three months ended
March 31, 1999 as compared to 15.7% for the corresponding period in 1998. This
increase was due to the growth in the Company's infrastructure to support its
growth during 1998. These expenses consisted principally of management salaries
and benefits and legal and other administrative costs.
Start-up expenses were $2.6 million for the three months ended March
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 and approximately $500,000 of amounts reimbursed to Genesis for certain
formation expenses.
Liquidity and Capital Resources
Net cash flows provided by operating activities were $3.3 million for
the three months ended March 31, 1999 compared to $6.5 million for the same
period in 1998. Net cash flows provided by financing activities were $699,000
for the three months ended March 31, 1999 compared to $148.1 million for the
same period in 1998. Net cash flows provided by financing activities for 1999
principally included borrowings under the Credit Facility of $5.6 million,
offset in part by (a) $1.3 million in deferred financing fees in connection with
amendments to the Credit Facility during the quarter, (b) $2.6 million in
distributions to shareholders, and (c) $424,000 in common share repurchases.
Net cash flows provided by financing activities for 1998 included $114.2 million
of net proceeds from the Company's initial public offering and borrowings under
the Credit Facility of $34.1 million.
The Company used its net cash flows provided by operating and financing
activities during the three months ended March 31, 1999 principally to fund (a)
$2.8 million in construction loans, (b) $1.1 million in bond and operating
reserve funds, and (c) $438,000 in purchases of equipment and building
renovations. Net cash flows provided by operating and financing activities
during the quarter ended March 31, 1998 were principally used to fund (a) $103.9
million for the acquisition of real estate properties, (b) $37.9 million to fund
term and construction loans, and (c) $7.4 million to fund investments in the
Company's unconsolidated equity investees.
At March 31, 1999, the Company's consolidated net real estate
investments in properties and loans aggregated $225.8 million. The Company
funded its investments through a combination of long-term and short-term
financing, utilizing both debt and equity. Working capital was $7.0 and $7.1
million at March 31, 1999 and December 31, 1998, respectively. Cash and cash
equivalents were $2.1 million and $2.3 million, respectively. As of March 31,
1999, the Company had shareholders' equity of $111.2 million and Credit Facility
15
<PAGE>
borrowings, mortgages, bonds and notes payable aggregating $148.1 million,
excluding notes payable to the Company's unconsolidated equity investees, which
represents a debt to equity ratio of 1.33 to 1. This was a slight increase from
1.26 to 1 at December 31, 1998.
At March 31, 1999, the unfunded portion of construction loan
commitments made by the Company aggregated $4.5 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 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. 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 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
required to purchase certain of these facilities during the fourth quarter of
1999. A portion or all of the purchase price for these acquisitions will be
satisfied by any remaining balance outstanding under the related term or
construction loans. The Company will need to fund the remainder of the purchase
prices through borrowings under the existing or any future credit facilities or
through other funding alternatives. Due to the limited availability of funds
under the existing credit facility, the Company may be required to finance any
required purchases or exercise of its purchase option by using other borrowing
sources, the sale of other assets or issuance of equity.
At March 31, 1999, the Company had $95.8 million outstanding under the
Credit Facility. 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 from $140 million to $100.5 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 also 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. Additional borrowings were not permitted
under the Credit Facility during this period while the Company was in default.
16
<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 Credit Facility contains
various financial and other covenants, including, but not limited to, minimum
net asset value, minimum tangible net worth, a total leverage ratio and minimum
interest coverage ratio. The covenant requiring maintenance of a minimum equity
value is no longer required under the Credit Facility, as amended. The Company's
owned properties and properties underlying loans receivable with an aggregate
cost of $152.0 million are included in the Credit Facility borrowing base and
pledged as collateral.
Amounts outstanding under the Credit Facility bear interest at floating
rates based on a margin over one-month 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. The interest rate on borrowings
outstanding under the Credit Facility will increase from 1.80% over one-month
LIBOR to 2.75% effective June 1, 1999. The interest rate on borrowings
outstanding under the Credit Facility at March 31, 1999 was 6.8%, including the
1.80% margin adjustment.
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 expects to meet its long-term cash flow requirements for
the funding of future construction commitments, purchase commitments or options
regarding facilities underlying term or construction loans, real estate property
development and other acquisitions by borrowing, issuing equity or debt
securities in public or private transactions or through the sale of other
assets. 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 in the health care industry, 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 Internal Revenue 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 fund its
long-term capital needs. 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, the 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.
17
<PAGE>
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.
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.
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.
Facilities owned by the Company and subject to percentage and minimum rent
leases represent 91% of the Company's investments in owned facilities at March
31, 1999. 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. The Company repurchased 43,700
common shares for an aggregate purchase price of $424,000 during the three
months ended March 31, 1999. These shares are reflected as a reduction of shares
issued and outstanding in the accompanying 1999 balance sheet. In April 1999,
the Board of Trustees temporarily suspended the share repurchase program.
Distributions to Shareholders Subsequent to March 31, 1999
The board of trustees declared a cash distribution on April 15, 1999.
The cash distribution of $0.365 per share will be paid on May 14, 1999, to
common shareholders of record on April 30, 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.
18
<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.
19
<PAGE>
The following table presents the Company's Funds from Operations for
the periods presented below (in thousands):
<TABLE>
<CAPTION>
For the three months ended
March 31,
---------------------------------------------
1999 1998 (1)
------------------ --------------------
<S> <C> <C>
Funds from Operations:
Net income (loss) $ 959 $(1,354)
Minority interest (70) 88
------ -------
Net income (loss) before minority interest 1,029 (1,442)
Adjustments to derive Funds from Operations:
Add:
Real estate depreciation and amortization,
including amounts related to
unconsolidated entities 2,591 769
Nonrecurring start-up expenses -- 2,617
------ -------
Funds from Operations before allocation
to minority interest 3,620 1,944
Less:
Funds from Operations allocable to minority
interest (242) (119)
------ -------
Funds from Operations attributable to the common
shareholders $3,378 $ 1,825
====== =======
</TABLE>
(1) Represents the period from January 30, 1998 through March 31, 1998.
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.
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
20
<PAGE>
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.
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
21
<PAGE>
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' quarterly report on Form 10-Q for the quarter ended
December 31, 1998 as filed with the Securities and Exchange Commission (the
"SEC").
The Genesis financial data presented includes only the most recent
interim reporting period. 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
Securities Exchange Act of 1934, and in accordance therewith, is obligated to
file periodic reports, proxy statements and other information with the SEC
relating to its business, financial condition and other matters. Such reports,
proxy statements and other information may be inspected at the offices of the
SEC at 450 Fifth Street, N.W., Washington, D.C. 20549, and should also be
available at the following Regional Offices of the SEC: 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.
22
<PAGE>
The following table sets forth certain summary condensed consolidated
financial data for Genesis as of and for the periods indicated.
<TABLE>
<CAPTION>
For the three months ended December 31,
-------------------------------------------
1998 1997
-------------------- --------------------
(in thousands, except per share data)
Operations Data
- --------------------------------------------------------
<S> <C> <C>
Net revenues $479,204 $302,565
Operating income before capital costs (1) 71,154 57,186
Depreciation and amortization 17,807 11,686
Lease expense 6,367 6,643
Interest expense, net 27,323 19,643
Earnings before income taxes, equity in net income of
unconsolidated affiliates and extraordinary items
19,657 19,214
Income taxes 7,378 7,013
Earnings before equity in net income (loss) of
unconsolidated affiliates and extraordinary items 12,279 12,201
Equity in net income (loss) of unconsolidated affiliates (892) 621
Extraordinary items, net of tax (1,799) (1,924)
Net income 9,588 10,898
Net income available to common shareholders (2) $5,171 $10,898
Per common share data:
Basic
Earnings before extraordinary items $0.20 $0.37
Net income $0.15 $0.31
Weighted average shares 35,217 34,079
Diluted
Earnings before extraordinary items $0.20 $0.36
Net income $0.15 $0.31
Weighted average shares 35,381 35,594
</TABLE>
(1) Capital costs include depreciation and amortization, lease expense and
interest expense.
(2) Net income (loss) reduced by preferred stock dividends.
<TABLE>
<CAPTION>
September 30, December 31,
-------------------- ------------------
1998 1998
-------------------- ------------------
(dollars in thousands)
Balance Sheet Data
- --------------------------------------------------------
<S> <C> <C>
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
</TABLE>
Impact of Prospective Payment System
The Balanced Budget Act of 1997 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
23
<PAGE>
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.
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 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
is subject to 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.
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 - Reimbursement," "Business - Government Regulation" and "Business -
Risk Factors" in the Company's Form 10-K for the year ended December 31, 1998.
24
<PAGE>
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
The Company provides fixed rate mortgage loans to operators of
healthcare facilities as part of its normal operations. The Company also has
mortgages and bonds payable which bear interest at fixed rates. Changes in
interest rates generally affect the fair market value of the underlying fixed
interest rate loans receivable or payable, but not earnings or cash flows. Refer
to the Company's annual report on Form 10-K for the year ended December 31, 1998
for discussion of the market risk associated with these financial instruments.
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 is exposed to market risks related to fluctuations in
interest rates on its Credit Facility as it represents variable rate debt. 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 March 31, 1999 of $95.8 million remains
constant, each one percentage point increase in interest rates from 6.8% at
March 31, 1999 would result in an increase in interest expense for the coming
year of approximately $958,000. Effective June 1, 1999, the interest rate under
the Credit Facility will be increased to a margin adjustment of 2.75% over
one-month LIBOR, which is 0.95% higher than at March 31, 1999. The Company had
unamortized deferred financing costs in connection with the Credit Facility
aggregating approximately $1.4 million at March 31, 1999 that are required to be
fully amortized by December 31, 1999. Amortization of these financing costs,
which is included as a component of interest expense, is expected to result in
increased quarterly interest expense for the remainder of 1999 of approximately
$156,000 as compared to the first quarter of 1999.
The Company expects to incur additional deferred financing costs in the
future in connection with refinancing of the Credit Facility. 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."
25
<PAGE>
PART II - OTHER INFORMATION
ITEM 2. Changes in Securities and Use of Proceeds
(a) Not applicable.
(b) Pursuant to a Member Interest Purchase and Contributions Agreement
dated April 29, 1999, effective as of December 1, 1998, ElderTrust
Operating Limited Partnership issued and sold 31,445 Class C (LIHTC)
units of limited partnership to an unaffiliated entity in exchange for
a capital contribution of $3.1 million in cash. The units are
exchangeable by the holder thereof on a one-for-one basis for common
shares of the Company or, at the option of the Company, cash equal to
the fair market value of such shares. The issuance of the Class C
(LIHTC) units in the operating partnership was effected in reliance on
an exemption from Section 4(2) of the Securities Act of 1933.
(c) Not applicable.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The exhibits filed with this report are listed in the exhibit index on
page 28.
(b) Reports on Form 8-K
The registrant filed a report on Form 8-K to announce the date of its
annual meeting was May 20, 1999.
26
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized on May 12, 1999.
ElderTrust
/s/ D. Lee McCreary, Jr.
---------------------------------------------
D. Lee McCreary, Jr.
Chief Financial Officer
(Principal Financial and Accounting Officer)
27
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
10.1 Certificate of Designation for Class C (LIHTC) Units of ElderTrust
Operating Limited Partnership
10.2 Second Amendment to Credit Agreement
11.1 Computation of basic and diluted earnings (loss) per share for
the three months ended March 31, 1999 and 1998
27.1 Financial Data Schedule for the three months ended March 31, 1999
28
<PAGE>
Exhibit 10.1
ELDERTRUST OPERATING LIMITED PARTNERSHIP
CERTIFICATE OF DESIGNATION
CLASS C (LIHTC) UNITS
Pursuant to Section 4.2 of the Second Amended and Restated Agreement of
Limited Partnership of ElderTrust Operating Limited Partnership (the
"Agreement"), this Certificate of Designation, adopted March 10, 1999, hereby
establishes, effective December 1, 1998, a separate class of Partnership Units,
which class of Partnership Units is designated as the "Class C (LIHTC) Units,"
shall have the rights and privileges set forth herein and shall be subject to
all of the provisions of the Agreement as modified herein.
1. Definitions. Capitalized terms used herein and not otherwise defined
herein shall have the meaning ascribed to such terms in the Agreement.
2. Same Rights as Class A Units. Except as expressly set forth in this
Certificate of Designation, each Class C (LIHTC) Unit shall have the same
rights, privileges, and obligations as are set forth with respect to the Class A
Units in the Agreement.
3. Special Allocation of Depreciation Deductions, Gain and Low Income
Housing Tax Credit Arising With Respect to NDNE Properties. Notwithstanding any
provisions of Section 6.1 or Exhibit C of the Agreement,
<PAGE>
(i) all deductions for Depreciation arising with respect to
the Heritage at Cleveland Circle, Heritage at Vernon Court and Cabot
Park Village ("NDNE Properties") (and all corresponding depreciation
deductions as computed for federal income tax purposes) shall be
allocated to the holder of the Class C (LIHTC) Units (if there is more
than one holder of Class C (LIHTC) Units, such deductions for
Depreciation shall be specially allocated among such holders based upon
their respective Percentage Interests attributable to their Class C
(LIHTC) Units); provided that any such deductions for Depreciation
which are Nonrecourse Deductions shall not be so specially allocated
but shall instead be allocated in accordance with the applicable
provisions of the Agreement (including Paragraph 1.E. of Exhibit C),
and provided further that the aggregate amount of Depreciation
deductions that shall be allocated to the holders of the Class C
(LIHTC) Units pursuant hereto shall not exceed $9,967,665;
(ii) for any taxable year in which deductions for Depreciation
are specially allocated to Class C (LIHTC) Units under subsection (i)
above, any low-income housing tax credit ("LIHTC") allowable for such
taxable year under Section 42 of the Code arising with respect to the
NDNE Property units that qualify as "low income housing units" under
Section 42 of the Code ("NDNE Low Income Housing Units") (and any
2
<PAGE>
subsequent recapture of any such LIHTC pursuant to Section 42(j) of the
Code) shall be specially allocated to the holder of the Class C (LIHTC)
Units (if there is more than one holder of Class C (LIHTC) Units, such
LIHTCs shall be allocated among such holders based upon their
respective Percentage Interests attributable to their Class C (LIHTC)
Units); provided that the aggregate amount of LIHTCs that shall be
allocated to the holders of the Class C (LIHTC) Units pursuant hereto
shall not exceed $1,919,941; any other LIHTCs allowable under Section
42 of the Code shall not be so specially allocated but instead shall be
allocated in accordance with the applicable provisions in the
Agreement; and
(iii) in the event that the Partnership recognizes any gain
(as computed for purposes of maintaining Capital Accounts) with respect
to the NDNE Properties in connection with a disposition all or any
portion of its interest in one or more of such properties, an amount of
such gain (and all corresponding gain as computed for federal income
tax purposes) equal to the aggregate Depreciation deductions with
respect to the NDNE Properties pursuant to subsection (i) above first
shall be specially allocated to the holder of the Class C (LIHTC) Units
3
<PAGE>
before any such gain is allocated to any of the other holders of
interests in the Partnership (if there is more than one holder of Class
C (LIHTC) Units, such gain shall be specially allocated among such
holders based upon their respective Percentage Interests attributable
to their Class C (LIHTC) Units); any gain recognized by the Partnership
in connection with the disposition of the NDNE Properties not required
to be specially allocated to the holder of the Class C (LIHTC) Units
shall be allocated in accordance with the applicable provisions of the
Agreement (including Paragraph 1 of Exhibit C).
In computing Net Income or Net Loss for purposes of the Agreement, such
amounts shall be recomputed by excluding therefrom all deductions for
Depreciation required to be specially allocated to the holders of Class C
(LIHTC) Units pursuant to clause (i) above and all gain required to be specially
allocated to the holders of Class C (LIHTC) Units pursuant to clause (iii)
above.
4. Deficit Restoration Obligation. Notwithstanding the last sentence of
Section 4.1 of the Agreement, each holder of Class C (LIHTC) Units agrees that
in the event that the Partnership is liquidated within the meaning of Regulation
Section 1.704-1(b)(2)(ii)(g) and such holder's Capital Account with respect to
its Class C (LIHTC) Units (computed separately without regard to any Capital
Account such holder has with respect to any other Partnership Interest) has a
4
<PAGE>
deficit balance (determined after giving effect to all contributions made by
such holder with respect to such Class C (LIHTC) Units, all distributions for
all Partnership Years, including the Partnership Year during which such
liquidation occurs, made to such holder with respect to such Class C (LIHTC)
Units, and all allocations of Partnership income, gain and loss, including
allocations with respect to the Partnership Year during which such liquidation
occurs, made to such holder with respect to such Class C (LIHTC) Units), such
holder of Class C (LIHTC Units) shall contribute to the capital of the
Partnership an amount equal to the lesser of such deficit balance or the
cumulative deductions for Depreciation specially allocated to the holder of
Class C (LIHTC) Units pursuant to clause (i) of Section 3 above (which amount so
contributed shall be treated as an asset of the Partnership and shall be applied
as set forth in Section 13.2 of the Agreement).
5
<PAGE>
Exhibit 10.2
SECOND AMENDMENT TO CREDIT AGREEMENT
by and among
ELDERTRUST,
a Maryland real estate investment trust,
ELDERTRUST OPERATING LIMITED PARTNERSHIP,
a Delaware limited partnership,
VARIOUS BANKS,
and
GERMAN AMERICAN CAPITAL CORPORATION,
as Administrative Agent
- ------------------------------------------------------------------------------
Dated as of March 31, 1999
- ------------------------------------------------------------------------------
<PAGE>
SECOND AMENDMENT TO CREDIT AGREEMENT
This SECOND AMENDMENT TO CREDIT AGREEMENT, dated as of March
31, 1999 (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), 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 amended by a
First Amendment to Credit Agreement dated as of January 29, 1999 (the "First
Amendment") and as it may be further 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, Deutsche Bank AG, New York Branch (as Issuing Bank)
and the Administrative Agent.
W I T N E S S E T H :
WHEREAS, certain Defaults have occurred under the Credit
Agreement and the other Credit Documents, as more particularly described in the
letter dated March 1, 1999 from the REIT to the Administrative Agent, a copy of
which is annexed hereto as Exhibit A (the "Default Letter"); and
WHEREAS, the Borrower and the REIT have requested, and the
Banks have agreed, to (i) waive the Defaults specified in the Default Letter,
(ii) extend the Maturity Date of the Loans which have heretofore been made to
the Borrower, and (iii) otherwise modify the Credit Agreement in certain
respects, in each case, on and subject to the terms and 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. Extension of Maturity Date. Effective on the Effective Date
(as defined below), the Maturity Date of the Loans shall be extended from April
30, 1999 to January 1, 2000.
2. Limited Future Borrowings. Effective on the Effective Date,
no future Borrowings of Loans shall be permitted except for Borrowings of Loans
to be used (i) to pay Dividends to shareholders in the REIT in accordance with
Section 8.03 of the Credit Agreement, (ii) to fund draw requests under Mortgage
<PAGE>
Loans that are construction loans, (iii) to pay costs and expenses associated
with this Agreement as approved by the Administrative Agent, (iv) to meet
scheduled payment obligations in respect of Indebtedness of the REIT and its
Subsidiaries permitted pursuant to the Credit Documents, or (v) to pay costs and
expenses incurred in the ordinary course of business to the extent such costs
have been reasonably approved by the Administrative Agent; provided, however,
that the aggregate maximum principal amount of Loans that may be incurred shall
not exceed $100,545,598. The parties hereto acknowledge and reconfirm that,
pursuant to the First Amendment, (i) Letters of Credit are no longer available
under the Credit Documents, and (ii) additions to the Borrowing Base are no
longer permitted.
3. Interest Rate. Effective on the Effective Date, from and
after June 1, 1999, the definition of "Applicable Margin" set forth in the
Credit Agreement shall be restated in its entirety as follows:
" "Applicable Margin" shall mean: (a) with respect to a
Eurodollar Loan, 2.75%, and (b) with respect to a Base Rate
Loan, 1.5%."
4. Reserve Account. The following Reserve Account provisions
shall be effective from and after the Effective Date:
(a) Establishment of Account. The Borrower shall, prior to the
Effective Date, establish with First Union National Bank or such other
institution as may be reasonably acceptable to the Administrative Agent (the
"Bank"), in the name of the Administrative Agent, a trust account, Account
Number 2000003210866 (the "Reserve Account"), for the purposes specified herein.
Only the Income (as hereinafter defined) of the REIT and its Subsidiaries and
other amounts permitted or required to be deposited therein pursuant hereto
shall be deposited in the Reserve Account, in accordance with the terms hereof.
The Reserve Account shall be under the sole dominion and control of the
Administrative Agent, and the Administrative Agent shall have the sole right to
make withdrawals from the Reserve Account and to exercise all rights with
respect to the Account Collateral (as hereinafter defined) on deposit therein
from time to time; provided, however, that so long as no Default or Event of
Default shall exist under the Credit Documents, the Administrative Agent shall
make disbursements of the Account Collateral, from time to time in accordance
herewith. All Account Collateral on deposit from time to time in the Reserve
Account shall be held in the Reserve Account in accordance with the provisions
hereof. The Administrative Agent may, in its discretion, employ a servicer to
service and manage the Reserve Account on its behalf.
(b) Deposit of Funds. The REIT and its Subsidiaries shall
cause all of their Income to be deposited into the Reserve Account immediately
upon receipt thereof by the REIT, any of its Subsidiaries or any of their
2
<PAGE>
respective employees, agents or contractors, including, without limitation,
Property Managers. For purposes hereof, the term "Income" shall mean all income,
rents and revenues of the REIT and its Subsidiaries of every type and nature
whatsoever, including, without limitation, rents, issues and profits from the
Properties, debt service on Mortgage Loans, proceeds of asset refinancings,
sales and other dispositions, proceeds of insurance and condemnation awards, but
excluding all amounts required to be paid by the REIT, the Borrower or any of
their Subsidiaries into any form of lockbox, cash collateral, escrow, reserve or
other security account, including without limitation, the "Distribution Account"
under the indebtedness encumbering the Properties known as the NDNE Properties,
pursuant to the terms of any Indebtedness incurred prior to the Effective Date
and permitted pursuant to the terms of the Credit Documents.
(c) Disbursement of Account Collateral. Provided that no
Default or Event of Default has occurred and is continuing, the Administrative
Agent shall disburse on a daily basis the Account Collateral on deposit from
time to time in the Reserve Account to an account of the Borrower established at
the Bank. Notwithstanding the foregoing, at any time following the occurrence of
any Default or Event of Default that has been cured or waived, the
Administrative Agent may, in its sole discretion, elect by written notice to the
Borrower to activate the following provisions and disburse and apply the Account
Collateral on deposit from time to time in the Reserve Account in the following
manner:
(i) First, the Administrative Agent shall disburse to the
Borrower within 3 Business Days of its receipt of a certificate of an
authorized officer of the Borrower certifying the amounts and due dates
therefor, the amounts required for the payment of real estate taxes and
insurance premiums in respect of the Properties due in the instant
calendar month, or, at the election of the Administrative Agent, the
Administrative Agent may make any or all of such payments directly to
the Persons entitled thereto on behalf of the REIT and its
Subsidiaries;
(ii) Second, the Administrative Agent shall, on the due dates
therefor, apply the Account Collateral to the interest payments due in
respect of the Loans;
(iii) Third, the Administrative Agent shall disburse to the
Borrower, not more frequently than monthly, the amounts required to pay
operating expenses in respect of the Properties and/or in respect of
the businesses and operations of the REIT and its Subsidiaries, as
applicable, including, without limitation, debt service and other
amounts owing to the holders of Indebtedness and management fees due to
Property Managers, to the extent such operating expenses (x) are
payable in the instant calendar month, (y) are included in a current
budget for the related Property or for the businesses and operations of
the REIT or the related Subsidiary, as applicable, that has been
3
<PAGE>
approved by the Administrative Agent and (z) have been duly
requisitioned by the Borrower at least 3 Business Days in advance
pursuant to a certificate of an authorized officer of the Borrower
certifying the amounts and due dates therefor, and that such amounts
are covered by the approved budgets referred to in clause (y) above;
and
(iv) Fourth, after disbursement and application of the Account
Collateral in each calendar month in the manner provided above, the
balance of the Account Collateral on deposit from time to time in the
Reserve Account shall be retained in the Reserve Account as additional
security for the Obligations.
Notwithstanding the foregoing provisions of this Paragraph 4,
for so long as any Default or Event of Default has occurred and is continuing,
the Administrative Agent (i) shall have no obligation to make disbursements of
Account Collateral, (ii) shall be entitled to retain all Account Collateral in
the Reserve Account as additional security for the Obligations and (iii) shall
have the rights and remedies in respect of the Account Collateral and the
Reserve Account set forth in Paragraph 4(g) hereof.
(d) Pledge and Grant of Security Interest. As collateral
security for the Obligations, each of the REIT and the Borrower and, by virtue
of its execution and delivery of a ratification of the Subsidiaries Guaranty,
each Subsidiary of the REIT and the Borrower, hereby (i) grants to the
Administrative Agent the right to receive all Income of the REIT and its
Subsidiaries and (ii) pledges and assigns to the Administrative Agent a
continuing possessory lien upon and security interest in, (A) all of the Income
of the REIT and its Subsidiaries, (B) all of the right, title and interest in
and to the Reserve Account, and (C) all of the right, title and interest of the
REIT and its Subsidiaries in and to all deposits of Income and other deposits
made from time to time in the Reserve Account in accordance with this Paragraph
4, together with all cash and non-cash proceeds thereof, inclusive of interest
thereon (collectively, the "Account Collateral"), from the date of the
establishment of the Reserve Account until the termination thereof pursuant to
the terms hereof.
(e) Cash Equivalents. The Administrative Agent shall direct
the Bank to invest and reinvest any balances in the Reserve Account in Cash
Equivalents, provided that (i) the maturities of the Cash Equivalents on deposit
in the Reserve Account shall be selected and coordinated to become due not later
than on the day before any disbursements from the Reserve Account must be made,
(ii) all such Cash Equivalents shall be held in the name of the Administrative
Agent or of the Bank, as applicable, and shall be under the sole dominion and
control of the Administrative Agent, and (iii) no Cash Equivalent shall be
acquired unless the Administrative Agent shall retain a perfected first priority
Lien in such Cash Equivalent securing the Obligations and all filings and other
actions necessary to ensure the validity, perfection, and priority of such Lien
shall have been taken. All funds in the Reserve Account which are invested in
4
<PAGE>
Cash Equivalents shall be deemed to be held in the Reserve Account for all
purposes of the Credit Agreement and the other Credit Documents. The
Administrative Agent shall have no liability for any loss in investments of
funds in the Reserve Account that are invested in Cash Equivalents, and no such
loss shall affect Borrower's obligations to fund, or liabilities for funding,
the Reserve Account. The REIT and the Borrower agree to include all earnings on
the Reserve Account as income of the REIT and the Borrower for federal and
applicable state tax purposes. The REIT and the Borrower shall have no right
whatsoever to direct the Bank as to the investment of the Account Collateral on
deposit from time to time in the Reserve Account.
(f) Interest on Account Collateral; Monthly Statements. The
Reserve Account shall be maintained as an interest bearing account. All risk of
loss in respect of the Account Collateral on deposit in the Reserve Account
shall be borne by the REIT and the Borrower. The Administrative Agent shall
direct the Bank to provide to the Administrative Agent and the Borrower a
monthly statement of account showing deposits into and disbursements from the
Reserve Account.
(g) Remedies Upon Default. Notwithstanding the foregoing
provisions of this Paragraph 4, upon the occurrence and during the continuance
of a Default or an Event of Default, the Administrative Agent shall have no
obligation to make any disbursement of funds from the Reserve Account, and the
Administrative Agent shall have the immediate and continuing right to exercise
all rights and remedies afforded to the Administrative Agent under the Credit
Agreement and the other Credit Documents, or otherwise at law or in equity in
respect of the security for the Loans, in respect of the Reserve Account and the
Account Collateral on deposit therein, including, without limitation, the right
to withdraw and apply all Account Collateral on deposit in the Reserve Account
to the Obligations and/or to any costs or expenses relating to the Properties or
the Mortgage Loans; provided, however, that no such application shall be deemed
to have been made by the Administrative Agent, by operation of law or otherwise,
unless and until actually made by the Administrative Agent.
5. Financial Covenant Modifications. (a) Effective on the
Effective Date, Section 8.08 of the Credit Agreement shall be restated in its
entirety to read as follows:
"8.08 Minimum Tangible Net Worth; Minimum Net Asset Value. The
REIT will not permit the Tangible Net Worth of the REIT and
its Subsidiaries to be less than $100,000,000 at any time, and
the REIT will not permit the Net Asset Value of the REIT and
its Subsidiaries to be less than $100,000,000 at any time."
(b) Effective on the Effective Date, the reference to "70.0%"
in Section 8.09 of the Credit Agreement shall be changed to "60.0%". Effective
5
<PAGE>
on the Effective Date, for purposes of calculating the leverage ratio set forth
in Section 8.09 of the Credit Agreement, Book Value shall be calculated without
deduction for depreciation and amortization.
(c) Effective on the Effective Date, the definition of "Equity
Value" shall be deleted from the Credit Agreement.
(d) Effective on the Effective Date, the following definitions
shall be added to Section 10 of the Credit Agreement in the appropriate
alphabetical order:
"Net Asset Value" shall mean, as of any calculation date for
the immediately preceding three-month period, an amount computed by subtracting
Funded Debt on the Borrower's balance sheet as prepared at the end of each
quarter in accordance with generally accepted accounting principals from the sum
of;
a) 10 times
i) the Borrower's quarterly rental revenue, interest and
financial services fee income, less
ii) property operating expenses during that quarter
incurred in connection with such income, and
b) 8.33 times the Borrower's equity in earnings,
computed before depreciation, for the quarter from
entities accounted for under the equity method of
accounting.
The quarterly calculation shall then be annualized.
"Funded Debt" shall mean collectively, for purposes of
calculating Net Asset Value, Mortgages and bonds payable and the Loans as
reflected on the Borrower's consolidated balance sheet at the end of each
quarter.
6. Release Price. Effective on the Effective Date, clause (i)
of the definition of the term "Release Price" set forth in the Credit Agreement
shall be restated as follows:
"(i) an amount equal to 100% of the proceeds of such
refinancing, sale or other disposition, net of reasonable and
customary closing costs payable to third parties; and"
7. Budgets. The Borrower shall, within 30 days following the
Effective Date, deliver to the Administrative Agent current budgets for the
REIT, the Borrower and their Subsidiaries, prepared in reasonable detail, for
review and approval by the Administrative Agent, such approval not to be
unreasonably withheld.
6
<PAGE>
8. Waiver of Defaults. Effective on the Effective Date, the
Administrative Agent (in its capacity as the Administrative Agent and the sole
Bank) hereby waives the occurrence of the Defaults described in the Default
Letter. The waiver contained in this Paragraph 8 is intended only to apply to
the specific Defaults described in the Default Letter and shall be narrowly
construed.
9. 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 for the effectiveness of this Agreement 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
Paragraph 10 of this Agreement.
10. Effective Date; Conditions Precedent. This Agreement shall
be effective on the date (the "Effective Date") upon which all of the following
conditions have been satisfied:
(a) The parties hereto shall have executed and delivered this
Agreement;
(b) The Borrower shall have delivered to the Administrative
Agent a certificate of an Authorized Officer of the Borrower stating that, after
giving effect to the provisions of paragraph 8 hereof, 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, the REIT and its Subsidiaries are in
compliance with all of their respective obligations under the terms of the
Credit Agreement and the other Credit Documents;
(c) The Borrower shall have paid a non-refundable loan
maturity extension fee (the "Extension Fee") to the Administrative Agent in the
amount of $1,005,000. The Borrower shall receive a refund of 25% of the
Extension Fee if the Obligations are indefeasibly repaid in full before 11:00
a.m. on May 14, 1999;
(d) The Borrower shall have executed and/or delivered or
caused to be executed and/or 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, the following: (i) reconfirmations of the
Subsidiaries Guaranty and the Parent Guaranty (which documents shall provide for
the REIT's Subsidiaries to join in the pledge and grant of the security interest
in and to the Reserve Account and the Account Collateral on deposit therein from
time to time); (ii) mortgage modification agreements in recordable form, to be
filed in the records where each Mortgage is filed, evidencing the maturity date
extension, the interest rate modification and the other aspects of this
Agreement, in form and content satisfactory to the Administrative Agent; (iii)
7
<PAGE>
endorsements to the mortgagee title insurance policies insuring the liens of the
Mortgages, down-dating coverage and insuring the Mortgages as modified by the
mortgage modifications referred to in clause (ii) above; and (iv) one or more
opinions of counsel to the REIT and its Subsidiaries, in form and content
satisfactory to the Administrative Agent, addressing such matters as the
Administrative Agent may reasonably request, including, without limitation, the
enforceability of this Agreement;
(e) 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;
(f) 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; and
(g) The REIT and the Borrower shall certify in writing to the
Administrative Agent and provide copies of term sheets and/or commitment letters
or drafts thereof, confirming that the REIT and the Borrower are engaged in
negotiations with one or more financial institutions reasonably acceptable to
the Administrative Agent regarding the terms and conditions upon which said
financial institutions shall 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 January 1, 2000 and the REIT and the
Borrower are diligently pursuing the closing of a new financing facility by one
or more such financial institution(s) within such time frame.
11. 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.
12. 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.
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<PAGE>
13. 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, servicing fees,
taxes and reasonable attorneys' fees and expenses.
14. 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.
15. 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.
16. 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.
17. 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 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.
18. 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.
9
<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: Edward B. Romanov, Jr.
Title: President & CEO
ELDERTRUST OPERATING
LIMITED PARTNERSHIP
By: ElderTrust, general partner
By: /s/ Edward B. Romanov, Jr.
------------------------------
Name: Edward B. Romanov, Jr.
Title: President & CEO
GERMAN AMERICAN CAPITAL
CORPORATION, as a Bank and as
Administrative Agent
By: /s/ Christopher Tognola
------------------------------
Name: Christopher Tognola
Title: Authorized Signatory
By: /s/ Jon A. Vaccaro
------------------------------
Name: Jon A. Vaccaro
Title: Vice President
10
<PAGE>
Exhibit A to Second Amendment To Credit Agreement
March 1, 1999
BY TELECOPIER
German American Capital Corporation,
as Administrative Agent
31 West 52nd Street
23rd Floor
New York, NY 10019
Gentlemen:
Re: Notice Required under Section 7.01(f)
-------------------------------------
Pursuant to Section 7.01(f) of the ElderTrust Credit Agreement, ElderTrust is
required to provide prompt notice to German American Capital Corporation, as
Administrative Agent, when officers obtain knowledge of the occurrence of
certain events that constitute a Default or Event of Default. Pursuant to that
requirement we advise you as follows:
First, under Section 8.08 the REIT must not allow its equity value to fall below
$70 million. For this purpose equity value is defined as the current share price
multiplied by the shares outstanding. Currently ElderTrust has approximately 7.2
million shares outstanding and trades at a $7 11/16 share price. This equates to
a $55.3 million equity value. The Company's share price fell below $9.19, which
equates to the $70 million equity value, on February 4, 1999. The officers
identified in Section 7.01(f) became aware that this issue constituted a Default
on February 24, 1999.
Second, under Section 8.03 the REIT is not permitted to declare and/or pay a
dividend if it is in default under any other section. On February 9, 1999, the
REIT declared a dividend while the first default noted above was still
continuing. This dividend was paid on February 26, 1999.
Third, on February 22, 1999 the REIT submitted a Notice of Borrowing which
resulted in an additional loan of $2.6 million. In that notice the Company
represented that no Default or Event of Default "has occurred and is continuing,
or would result from such Proposed Borrowing or from the application of the
proceeds thereof." At that time the defaults noted above were existent.
<PAGE>
We hereby request waivers of the foregoing defaults in accordance with Section
12.12 of the Credit Agreement
Sincerely,
/s/ D. Lee McCreary, Jr.
- -----------------------------
D. Lee McCreary, Jr.
Senior Vice President and Chief Financial Officer
WAIVER APPROVED:
Deutsche Bank AG
New York Branch,
as issuing bank
- -----------------------------
By:
<PAGE>
EXHIBIT 11.1
COMPUTATION OF BASIC AND DILUTED EARNINGS (LOSS) PER SHARE
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
The following calculation is submitted in accordance with requirements
of the Securities Exchange Act of 1934:
<TABLE>
<CAPTION>
For the three months ended March 31,
--------------------------------------
1999 1998 (1)
----------------- ----------------
(amounts in thousands)
<S> <C> <C>
Net income (loss) available for common shareholders $959 $ (1,354)
================= ================
Weighted average common shares outstanding used in
calculating basic and diluted earnings (loss) per share
7,215 7,390
================= ================
Basic and diluted net income (loss) per share $0.13 ($0.18)
================= ================
</TABLE>
(1) Represents the period from January 30, 1998 to March 31, 1998.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AT MARCH 31, 1999 AND THE RELATED STATEMENT OF OPERATIONS FOR THE THREE
MONTHS ENDED MARCH 31, 1999.
</LEGEND>
<CIK> 0001043236
<NAME> ELDER TRUST
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 2,060
<SECURITIES> 0
<RECEIVABLES> 56,460
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 8,923
<PP&E> 180,929
<DEPRECIATION> 5,881
<TOTAL-ASSETS> 274,679
<CURRENT-LIABILITIES> 101,808
<BONDS> 20,507
0
0
<COMMON> 72
<OTHER-SE> 111,131
<TOTAL-LIABILITY-AND-EQUITY> 274,679
<SALES> 7,048
<TOTAL-REVENUES> 7,048
<CGS> 0
<TOTAL-COSTS> 2,491
<OTHER-EXPENSES> 663
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,935
<INCOME-PRETAX> 959
<INCOME-TAX> 0
<INCOME-CONTINUING> 959
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 959
<EPS-PRIMARY> 0.13
<EPS-DILUTED> 0.13
</TABLE>
