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, 2000
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, 2000
- -------------------------------------- ---------------------------------
Common shares of beneficial interest, 7,119,000
$0.01 par value per share
Exhibit index is located on page 28
ELDERTRUST
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
TABLE OF CONTENTS
Page
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of March 31, 2000 and
December 31, 1999......................................................... 1
Condensed Consolidated Statements of Operations for the three
months ended March 31, 2000 and 1999...................................... 2
Condensed Consolidated Statements of Cash Flows for the three
months ended March 31, 2000 and 1999...................................... 3
Notes to Unaudited Condensed Consolidated Financial Statements................... 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations....................................................... 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk......................... 25
PART II: OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................................... 26
SIGNATURES........................................................................................... 27
EXHIBIT INDEX........................................................................................ 28
i
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited)
ELDERTRUST
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except share and per share amounts)
March 31, December 31,
2000 1999
--------- ---------
ASSETS
Assets:
Real estate properties, at cost $ 165,245 $ 165,206
Less - accumulated depreciation (11,629) (10,180)
Land 16,655 16,655
--------- ---------
Net real estate properties 170,271 171,681
Real estate loans receivable 48,646 48,646
Cash and cash equivalents 2,677 3,605
Restricted cash 7,100 7,194
Accounts receivable 496 629
Accounts receivable from unconsolidated entities 1,265 1,068
Prepaid expenses 1,130 1,000
Investment in and advances to unconsolidated entities 30,314 31,129
Other assets, net of accumulated amortization and depreciation of $2,333
and $2,148, respectively 1,530
1,835
--------- ---------
Total assets $ 263,734 $ 266,482
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Bank credit facility $ 39,495 $ 39,670
Accounts payable and accrued expenses 1,513 1,535
Accounts payable to unconsolidated entities 13 13
Mortgages and bonds payable 108,675 109,005
Notes payable to unconsolidated entities 1,064 1,079
Other liabilities 3,298 3,751
--------- ---------
Total liabilities 154,058 155,053
--------- ---------
Minority interest 7,856 7,989
Shareholders' Equity:
Preferred shares, $.01 par value; 20,000,000 shares authorized; none
outstanding -- --
Common shares, $.01 par value; 100,000,000 shares authorized; 7,119,000
shares issued and outstanding 71 71
Capital in excess of par value 119,106 119,106
Distributions in excess of earnings (16,367) (14,747)
Note receivable from former officer for common shares sold (990) (990)
--------- ---------
Total shareholders' equity 101,820 103,440
--------- ---------
Total liabilities and shareholders' equity $ 263,734 $ 266,482
========= =========
See accompanying notes to unaudited condensed
consolidated financial statements.
1
ELDERTRUST
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share amounts)
Three months ended March 31,
---------------------------------
2000 1999
-------------- ---------------
Revenues:
Rental revenues $4,680 $4,623
Interest, net of amortization of deferred loan
origination costs 1,319 1,465
Interest from unconsolidated equity investees 947 941
Other income 58 19
-------------- ---------------
Total revenues 7,004 7,048
-------------- ---------------
Expenses:
Property operating expenses 294 298
Interest expense, including amortization of deferred
finance costs 3,387 2,935
Depreciation 1,454 1,440
General and administrative 647 753
-------------- ---------------
Total expenses 5,782 5,426
-------------- ---------------
Net income before equity in losses of unconsolidated entities
and minority interest 1,222 1,622
Equity in losses of unconsolidated entities, net (666) (593)
Minority interest (40) (70)
-------------- ---------------
Net income $516 $959
============== ===============
Basic and diluted weighted average number of common shares
outstanding 7,119 7,215
============== ===============
Net income per share - basic and diluted $0.07 $0.13
============== ===============
See accompanying notes to unaudited condensed
consolidated financial statements.
2
ELDERTRUST
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Three months ended
March 31,
---------------------------
2000 1999
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $516 $959
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 1,646 1,781
Minority interest and equity in losses from unconsolidated entities 706 663
Net changes in assets and liabilities:
Accounts receivable and prepaid expenses (206) (461)
Accounts payable and accrued expenses (22) 347
Other (445) (39)
------------ ------------
Net cash provided by operating activities 2,195 3,250
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in real estate loans receivable - (2,822)
Capital expenditures (49) (438)
Proceeds from collection on advances to unconsolidated entities 149 34
Net decrease (increase) in reserve funds and deposits - restricted cash 94 (1,090)
Other - 155
------------ ------------
Net cash provided by (used in) investing activities 194 (4,161)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of deferred financing fees (488) (1,330)
Borrowings under Credit Facility - 5,618
Payments under Credit Facility (175) -
Payments on mortgages and bonds payable (330) (312)
Distributions to shareholders (2,136) (2,628)
Distributions to minority interests (173) (188)
Repurchases of common shares - (424)
Other (15) (37)
------------ ------------
Net cash provided by (used in) financing activities (3,317) 699
------------ ------------
Net decrease in cash and cash equivalents (928) (212)
Cash and cash equivalents, beginning of period 3,605 2,272
------------ ------------
Cash and cash equivalents, end of period $2,677 $2,060
============ ============
Supplemental cash flow information:
Cash paid for interest $3,266 $2,589
See accompanying notes to unaudited condensed
consolidated financial statements.
3
ELDERTRUST
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
of ElderTrust and its consolidated subsidiaries ("ElderTrust" or the "Company")
have been prepared in accordance with generally accepted accounting principles
and pursuant to the rules and regulations of the Securities and Exchange
Commission. The interim condensed consolidated financial statements do not
include all of the footnotes for complete financial statements. The December 31,
1999 condensed consolidated balance sheet was derived from audited financial
statements. 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, 2000 are not necessarily
indicative of the results that may be expected for the full fiscal year ending
December 31, 2000.
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, 1999 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. D. Lee McCreary, Jr., the Company's
President, Chief Executive Officer and Chief Financial Officer. Mr. McCreary
owns all of the voting interest in ET Capital Corp., representing a 5% equity
interest. Mr. McCreary also owns a 1% general partner interest in ET
Sub-Meridian, LLP and 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 also has an
option to acquire Mr. McCreary's 1% managing interest in ET Sub-Vernon Court,
LLC, this company is consolidated into the Company's condensed consolidated
financial statements at March 31, 2000.
4
ELDERTRUST
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (continued)
Summary combined financial information as of and for the three months
ended March 31, 2000 for these unconsolidated entities is as follows (dollars in
thousands):
ET Sub- ET Sub- ET Sub-
Meridian, ET Capital Cabot Cleveland
LLP Corp. Park, LLC Circle, LLC Total
-------- ---------- --------- ----------- -----
Current assets $ 121 $368 $6 $5 $500
Real estate properties (1) 105,669 - 16,975 14,013 136,657
Notes receivable - 12,309 - - 12,309
Other assets 1,244 115 550 519 2,428
Total assets 107,034 12,791 17,531 14,538 151,894
Current liabilities 1,892 426 530 472 3,320
Long-term debt (2) 106,224 9,379 16,869 13,723 146,195
Total equity (2,791) 2,986 (138) 117 174
Rental revenue 2,450 - 410 361 3,221
Interest income, ElderTrust (3) - 160 - - 160
Interest income, other 5 256 6 6 273
Interest expense, ElderTrust (3) 533 316 138 80 1,067
Interest expense, other 1,660 - 207 185 2,052
Depreciation/amortization 878 3 140 115 1,136
Net income (loss) (631) 57 (76) (21) (671)
Percent ownership 99% 95% 99% 99%
(1) Includes properties under capital lease.
(2) Includes capital lease obligations.
(3) Includes ElderTrust and its unconsolidated subsidiaries.
3. Credit Facility
At March 31, 2000, the Company had $39.5 million outstanding under its
bank credit facility (the "Credit Facility"). The interest rate on borrowings
outstanding under the Credit Facility at March 31, 2000 was 8.69%, 2.75% over
one-month LIBOR. Any borrowings under the $5.75 million revolving credit portion
of the Credit Facility are subject to prior approval from the issuing bank.
On January 3, 2000, the term of the Credit Facility was extended from
January 1, 2000 to June 30, 2001 through an amendment which also reduced
borrowings available under the Credit Facility to $45.4 million. The Company
paid financing fees and other related costs of approximately $488,000 for the
three months ended March 31, 2000 primarily in connection with the January 3,
2000 amendment to the Credit Facility. Unamortized deferred financing costs in
connection with the Credit Facility and mortgages payable aggregated
approximately $1.8 million at March 31, 2000. Deferred financing costs of
$153,000 were amortized during the three months ended March 31, 2000 and
included as a component of interest expense.
5
ELDERTRUST
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share for the periods indicated (in thousands, except per share
data):
For the three months ended
March 31,
------------- -------------
2000 1999
------------- -------------
Net income available for basic and diluted
earnings per share $516 $959
============= =============
Weighted average common shares outstanding for
basic and diluted net income per share 7,119 7,215
============= =============
Basic and diluted net income per share $0.07 $0.13
============= =============
The effect of dilutive outstanding share options is reflected in the
determination of weighted average common shares outstanding for the diluted net
income per share calculation. The operating partnership units are not included
in the determination of weighted average common shares outstanding since they
are not considered to be common share equivalents as they are redeemable for
cash at the Company's discretion.
6
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. 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," "could," "may,"
"continues," "continued," "estimate," "estimated," "expects," "expected,"
"believes," "anticipates" and "anticipated" 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 Company's ability to pay-off or refinance the Credit Facility
when it becomes due on June 30, 2001;
o the financial condition of Genesis Health Ventures, Inc.
("Genesis"), the Company's principal tenant;
o the ability of Genesis and The Multicare Companies, Inc.
("Multicare") to restructure their operations and continue to make
lease and loan payments to the Company;
o interest rates;
o availability, terms and use of capital;
o federal and state government regulation;
o changes in Medicare and Medicaid reimbursement programs; and
o competition.
Refer to the Company's annual report on Form 10-K for the year ended
December 31, 1999 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 unaudited condensed 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.
7
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 and other buildings. The
Company conducts primarily all of its operations through 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, 2000, skilled nursing,
assisted and independent living facilities comprised approximately 93% of the
Company's consolidated investments in real estate properties and loans.
Approximately 70% of the Company's consolidated assets at March 31,
2000 consisted of real estate properties leased to or managed by 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 $4.7 million for the three months ended March 31,
2000. In addition, unconsolidated entities of the Company which are accounted
for by the Company using the equity method of accounting (the Company's "Equity
Investees") have also leased properties to Genesis or Genesis Equity Investees.
As a result of these relationships, the Company's revenues and ability to meet
its obligations depends, in significant part, upon:
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 successfully complete the
development projects securing the construction loans made by the
Company to these entities.
On March 21, 2000, Genesis and Multicare announced the beginning of
debt restructuring discussions with their senior lenders with the intention of
revising their respective capital structures. Genesis also announced that it did
not make a $3.8 million interest payment to its senior debt lenders due March
20, 2000. Both Genesis and Multicare announced their intention not to make
interest and principal payments on senior debt and have been prohibited by their
senior lenders from making any scheduled interest payments on their publicly
traded subordinated debt while discussions were ongoing. Each company cited
their inability to sell assets due to the lack of long-term care market
financing and the continuing effect of reduced Medicare payments as the causes
of these actions. The senior lenders have given Genesis and Multicare a 60-day
forbearance period to develop a restructuring plan.
8
Shortly after the announcement, Moody's Investors Service issued a
press release announcing that it had downgraded the debt ratings of Genesis and
Multicare. In its press release, Moody's indicated that the ratings outlook for
both companies was negative. Moody's stated that its rating action reflected the
deterioration in the companies' operating results and financial condition which
has stemmed from the impact of the prospective payment system ("PPS") for
Medicare combined with high leverage. Moody's noted that despite cost cutting
efforts, operating margins for both companies remain depressed, and planned
asset divestitures have not materialized as anticipated. Moody's also stated
that restructuring efforts could be adversely impacted by the currently
difficult state of the long-term care sector, with several large providers
already filing for bankruptcy in recent months. Standard & Poor's also
downgraded the debt ratings of Genesis and Multicare.
Management of Genesis and Multicare have advised the Company that they
expect Genesis and Multicare to continue to make all lease and loan payments to
the Company. The Company has no control over Genesis or Multicare, however, and
can make no assurance that either of these entities will have sufficient income
or assets to enable them to satisfy their obligations under the leases or loans
made by the Company to them. Any failure by Genesis or Multicare to continue
making payments to the Company could have a significant adverse effect on the
Company's financial condition, results of operations and cash available for
distribution, could adversely affect the ability of the Company to maintain
distributions at current levels or at all and could adversely affect the ability
of the Company to meet its own debt obligations.
If Genesis and Multicare were to cease making lease and loan payments
to the Company, the Company may be required to restructure or terminate the
underlying leases and may foreclose on the loans, in which event, the Company
might be required to find new operators to operate the properties underlying the
leases and loans. Under these circumstances, the Company's net income could
decline as a result of such restructuring with Genesis or Multicare or could
decline due to rents obtainable from any new operator. Depending on the
magnitude of the reduction in the Company's net income, the Company would seek
to offset the effect of such reduction in net income on the Company's ability to
meet its debt service requirements by reducing the cash distributions paid to
the Company's shareholders and minority interests, through asset sales or
through other available means. The Company believes that it has the ability to,
and, if necessary, intends to, take these actions available to it and, as a
result, believes it will be able to continue to satisfy its debt and operating
obligations as they come due during 2000. See "Summary Condensed Consolidated
Financial Data of Genesis."
The Company has incurred indebtedness to acquire its assets and may
incur additional short and long-term indebtedness, and related interest expense,
from time to time. The Company has unfunded construction loan commitments at
March 31, 2000 of approximately $347,000 which it expects to fund with cash
flows from operations and funds available under the Credit Facility. The Company
also was 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. The Company is currently
negotiating with Genesis to restructure seven of these relationships. 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 various factors,
however, including the Company's cash available for distribution. The interest
rate, loan extension fee and loan principal amortization under the terms of the
Credit Facility extension, as well as the higher interest expense under the
mortgage refinancings of eleven properties during the last half of 1999, have
reduced the Company's cash flows and could affect its ability to maintain
distributions to its shareholders at current levels. Future increases in
9
interest rates, as well as any defaults by tenants or borrowers on their leases
or loans, also could adversely affect the Company's cash flow and its ability to
pay its obligations and make distributions at current levels. See "Item 3.
Quantitative and Qualitative Disclosures About Market Risk." Due to the
uncertainty of the Genesis and Multicare situation, as well as the continued
uncertainty in the long-term care financing environment as a whole, the Company
can provide no assurances as to future dividend levels. There can be no
assurance that the Company will be able to continue making distributions to its
common shareholders at current levels or at all. 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 include 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.
10
Investments in Equity Investees
The Company's Equity Investees represent entities in which the
controlling interest is owned by Mr. D. Lee McCreary, the Company's President,
Chief Executive Officer and Chief Financial Officer. As a result, the Company
records its 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. The
remaining voting 5% equity interest in ET Capital is owned by Mr. McCreary. As
of March 31, 2000, ET Capital owned a $7.8 million second trust mortgage note
executed by 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. The facilities are managed by
subsidiaries of Genesis. 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. ET Capital recorded interest income on the note of $256,000 and
$254,000 during the three months ended March 31, 2000 and 1999, respectively.
The borrower made all required interest payments due through March 31, 2000 in
accordance with the terms of the note.
In September 1999, the senior lender on the $40.0 million first trust
mortgage to the AGE Institute of Florida, which is guaranteed by Genesis,
notified the borrower that it was in default of the loan due to the borrowers'
failure to meet certain financial covenants. In November 1999, ET Capital
notified the borrower that it was in default of the $7.8 million second trust
mortgage loan held by ET Capital because of the default in the $40.0 million
first trust mortgage loan. Subsequently, the senior lender extended the maturity
date of the first mortgage trust loan from September 30, 1999 to March 28, 2000
to permit the AGE Institute of Florida time to obtain refinancing of the loan. A
letter agreement dated December 22, 1999 made certain modifications and defined
certain rights of the senior lender and ET Capital related to their respective
loans to the AGE Institute of Florida. The AGE Institute of Florida has been
working to obtain replacement financing of the $40.0 million first trust
mortgage loan and is seeking a further extension of the loan maturity date from
the senior lender.
In January 2000, the AGE Institute of Florida received a tax
determination letter confirming its tax-exempt status. The Company understands
from the AGE Institute of Florida that it is continuing to pursue tax-exempt and
other financing sources to refinance the first and second trust mortgages. If
the AGE Institute of Florida is unable to refinance the $40.0 million first
trust loan, or is otherwise unable to reach acceptable extension terms with the
senior lender, the senior lender may take actions to recover its investment in
such first trust loan. ET Capital has no control over the actions of the senior
lender and such actions could be unfavorable to ET Capital. Based on the
Company's assessment of the fair value of the facilities securing the underlying
loans, the Company believes that ET Capital's $7.8 million second trust loan is
not impaired at March 31, 2000.
11
In addition to the AGE Institute of Florida second trust mortgage note,
ET Capital has notes receivable aggregating $4.5 million at March 31, 2000 from
two of the Company's Equity Investees and one of the Company's consolidated
subsidiaries. These loans mature at various dates from April 2008 to December
2011 and bear interest at 14% 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, 2000 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 $3.6
million, bearing interest at 15% and maturing at various dates from April 2008
to December 2011.
The Company recorded $316,000 and $320,000 in interest income for the
three months ended March 31, 2000 and 1999, respectively, on the notes payable
from ET Capital. The Company also recorded income of $54,000 and $59,000 related
to the portion of its equity interest in ET Capital's results of operations for
three months ended March 31, 2000 and 1999, respectively. See Note 2 of the
Company's unaudited condensed consolidated financial statements included herein.
ET Sub-Meridian Limited Partnership, L.L.P.
The Company has a 99% limited partnership interest in ET Sub-Meridian.
The 1% general partner interest is owned by a limited liability company of which
Mr. McCreary 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 for $35.5 million in cash and issuance
of $8.5 million in term loans 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 option. Genesis has guaranteed
the subleases.
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 of a default by the Genesis
subsidiary leasing the facilities resulted in a taxable event to the owners. The
Company also agreed to indemnify Genesis for any amounts expended by Genesis
under the back-up indemnity provided by Genesis to the current owners for the
same loss.
The Company recorded losses of $625,000 and $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, 2000 and 1999, respectively. ET Sub-Meridian
has real estate investments and long-term debt of $105.7 million and $106.2
million, respectively, at March 31, 2000. See Note 2 of the Company's unaudited
condensed consolidated financial statements included herein. At March 31, 2000,
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 $533,000 and $527,000 in interest income on this loan for
the three months ended March 31, 2000 and 1999, respectively.
12
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.
The Company is the sole member of ET Sub-Heritage Andover, LLC, which,
accordingly, is consolidated into the Company's unaudited condensed consolidated
financial statements at March 31, 2000. In each of the remaining three limited
liability companies, the Company has a 99% member interest. The 1% managing
member interest in these three companies is owned by a limited liability company
of which Mr. McCreary is the sole member. The Company currently has the option
to acquire the 1% managing member interest in ET Sub-Vernon Court, LLC from Mr.
McCreary. The option exercise price is $3,200. As the Company has the ability to
acquire the 1% managing member interest in ET Sub-Vernon Court, LLC for a
nominal amount, this company is consolidated into the Company's unaudited
condensed consolidated financial statements at March 31, 2000.
Three of these limited liability companies have subordinated demand
loans in the aggregate amount of $5.1 million with the Company at March 31,
2000, bearing interest at 12% per annum. The Company recorded $95,000 and
$94,000 in interest income for the three months ended March 31, 2000 and 1999,
respectively, in connection with the demand loans, aggregating $3.1 million at
March 31, 2000, payable to the Company by the two unconsolidated limited
liability companies. Additionally, three of the limited liability companies have
loans payable to ET Capital aggregating $4.5 million at March 31, 2000, maturing
at various dates from April 2008 to December 2011 and bearing interest at 14%
per annum with interest and principal payable monthly.
The Company recorded aggregate losses of $95,000 and $93,000 related to
the portion of its equity interest in ET-Sub-Cabot Park, LLC's and ET
Sub-Cleveland Circle, LLC's results of operations for the three months ended
March 31, 2000 and 1999, respectively. These two entities have real estate
investments and aggregate long-term debt of $31.0 million and $30.6 million,
respectively, at March 31, 2000. See Note 2 of the Company's unaudited condensed
consolidated financial statements included herein.
13
Results of Operations
Three months ended March 31, 2000 compared with the three months ended
March 31, 1999
Revenues
Interest income of $1.3 million, net of amortization of deferred loan
costs of $39,000, was earned for the three months ended March 31, 2000. This
represented a 10.0% decrease from $1.5 million for the corresponding period in
1999. This decrease was primarily comprised of a $43,000 decrease in interest
earned on construction loans, resulted from the 1999 sale of a construction loan
receivable to a commercial bank, partially offset by additional funding of one
construction loan during 1999, a $42,000 decrease in interest earned on a note
receivable from a former officer resulting from the 1999 cancellation of
indebtedness payable by the former officer to the Company of $2.6 million and a
$52,000 decrease in interest earned on a third party receivable which was paid
in 1999.
Expenses
Interest expense, which included amortization of deferred financing
costs of $153,000, was $3.4 million for the three months ended March 31, 2000.
This represented a 15.4% increase in interest expense from $2.9 million for the
corresponding period in 1999. This increase was primarily due to higher interest
expense on third-party debt of $610,000 resulting from the refinancing of eleven
properties during the last half of 1999 at higher interest rates and a higher
interest rate on the variable-rate Credit Facility partially offset by a
decrease in amortization of deferred financing costs of $158,000. During the
last half of 1999, the Company completed refinancings of $41.2 million on seven
properties with a fixed weighted average interest rate of 8.37% and $30.0
million on four properties with a variable interest rate of 3.00% over one-month
LIBOR. Approximately $55.1 million of the debt proceeds were used to pay down
the Company's outstanding Credit Facility, with a variable interest rate of
1.80% to 2.75% over one-month LIBOR during 1999, and approximately $10.4 million
was used to pay-off an existing mortgage with an effective interest rate of
7.81%. The weighted average interest rate on outstanding third-party debt
increased from 6.9% at March 31, 1999 to 8.4% at March 31, 2000. The Company's
interest expense increased as a result of the increase in the interest rate on
the Credit Facility in June 1999 from a margin of 1.80% to 2.75% over one-month
LIBOR and an increase in the one-month LIBOR from 5.00% at March 31, 1999 to
5.94% at March 31, 2000. The Company's interest rate on the Credit Facility was
8.69% at March 31, 2000 versus 6.80% at March 31, 1999. The Company's interest
rate on its variable rate mortgages was 8.94% at March 31, 2000.
General and administrative expenses were $647,000 for the three months
ended March 31, 2000. This represented a 14.1% decrease from $753,000 for the
corresponding period in 1999. This decrease was primarily a result of a 1999
partial write-off of $160,000 of the expenses incurred during 1998 in connection
with property due diligence for an investment transaction that was not completed
because of adverse conditions in the capital markets.
14
The Company recorded aggregate losses of $666,000 and $593,000 for the
three months ended March 31, 2000 and 1999, respectively, in connection with its
portion of the losses incurred by the Company's Equity Investees.
Liquidity and Capital Resources
Net cash provided by operating activities was $2.2 million for the
three months ended March 31, 2000 compared to $3.3 million for the corresponding
period in 1999. The decrease in net cash provided by operating activities is
primarily the result of additional interest expense during the three month
period ended March 31, 2000 as compared to the three month period ended March
31, 1999. Net cash provided by investing activities was $194,000 for the three
months ended March 31, 2000 compared to net cash used in invested activities of
$4.2 million for the corresponding period in 1999. Net cash provided by
investing activities for the three months ended March 31, 2000 principally
included repayments of advances to unconsolidated entities of $149,000 and
reductions in reserve funds and deposits of $94,000 partially offset by capital
expenditures of $49,000. Net cash used in investing activities for the three
months ended March 31, 1999 principally included funding of (a) $2.8 million in
construction loans, (b) $1.1 million in bond and operating reserve funds and (c)
$438,000 in capital expenditures.
Net cash used in financing activities was $3.3 million for the three
months ended March 31, 2000 compared to net cash provided by financing
activities of $699,000 for the corresponding period in 1999. The decrease in
proceeds from financing activities is due to no new borrowings and continued
repayment of existing borrowings in 2000, while in 1999, new borrowings offset
debt repayments.
At March 31, 2000, the Company's consolidated net real estate
investments in properties and loans aggregated $218.9 million. Working capital,
excluding the current portion of the balance outstanding under the Credit
Facility of approximately $1.0 million and $0.9 million as of March 31, 2000 and
December 31, 1999, respectively, was $3.2 million and $3.5 million at March 31,
2000 and December 31, 1999, respectively. Cash and cash equivalents were $2.7
million and $3.6 million, at March 31, 2000 and December 31, 1999, respectively.
As of March 31, 2000, the Company had shareholders' equity of $101.8
million and Credit Facility borrowings and mortgages and bonds payable to third
parties aggregating $148.2 million, which represents a debt to equity ratio of
1.46 to 1. This was a slight increase from the debt to equity ratio of 1.44 to 1
at December 31, 1999.
The unfunded portion of construction loan commitments made by the
Company were approximately $347,000 at March 31, 2000. The Company expects to
continue to fund its construction loan commitments during 2000 with cash flows
from operations and funds available under the Credit Facility.
15
The Company previously was obligated to purchase and leaseback, upon
the maturity of the related loan or the facility reaching stabilized occupancy,
five assisted living facilities (Mifflin, Coquina Place, Lehigh, Berkshire and
Harbor Place) securing term loans and two assisted living facilities (Oaks and
Sanatoga) securing construction loans made by the Company in January 1998. Of
these seven loans, which had an aggregate principal balance at March 31, 2000 of
$39.1 million, three loans, secured by the Mifflin, Coquina Place and Oaks
facilities, were made to wholly-owned subsidiaries of Genesis, three loans,
secured by the Lehigh, Berkshire and Sanatoga facilities, were made to
wholly-owned subsidiaries of Multicare and one loan, secured by the Harbor Place
facility, was made to a Genesis Equity Investee. The Company believes it is no
longer bound by the purchase and leaseback obligations contained in the loan
documents because the borrowers have, from time to time, not complied with all
loan provisions. The Company is in discussions with Genesis and Multicare about
a possible restructuring of transactions between the companies. See "Proposed
Loan Restructurings and Related Matters."
The Company also has the option to purchase and leaseback one facility
from an unaffiliated company for $13.0 million upon maturity of the related
construction loan.
On January 3, 2000, the term of the Credit Facility was extended from
January 1, 2000 to June 30, 2001 through an amendment which also reduced
borrowings available under the Credit Facility to $45.4 million. At March 31,
2000, the Company had $39.5 million outstanding under the Credit Facility.
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 Company's
owned properties and properties underlying loans receivable with an aggregate
cost of $79.2 million are included in the Credit Facility borrowing base and
pledged as collateral at March 31, 2000. The terms require the Company to make
monthly payments of principal equal to .22% of the outstanding balance on the
first day of the prior calendar month. In addition, the Company is required to
pay a monthly facility fee in an amount equal to .0625% of the outstanding
balance. Re-borrowings are not permitted after repayment, except for the $5.75
million revolving credit portion of the Credit Facility. As of the date of the
agreement, the Company has available the entire $5.75 million. Any borrowings
under the revolving credit portion of the Credit Facility are subject to prior
approval from the issuer and are restricted to certain specified purposes,
including dividend distributions. Dividend distributions over the term of the
loan are limited to $3.0 million plus 95% of the Company's funds from
operations, as defined by the National Association of Real Estate Investment
Trusts ("NAREIT") prior to January 1, 2000.
16
Amounts outstanding under the Credit Facility bear interest at floating
rates ranging from 2.75% to 3.25% over one-month LIBOR, as determined by the
percentage of the Credit Facility outstanding as compared to the borrowing base.
The interest rate on borrowings outstanding under the Credit Facility at March
31, 2000 was 8.69%, 2.75% over one-month LIBOR.
The Company paid financing fees and other related costs of
approximately $488,000 for the three months ended March 31, 2000 primarily in
connection with the January 3, 2000 amendment to the Credit Facility.
Unamortized deferred financing costs in connection with the Credit Facility and
mortgages payable aggregated approximately $1.8 million at March 31, 2000.
Deferred financing costs of $153,000 were amortized during the three months
ended March 31, 2000 and included as a component of interest expense.
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, 2000, including the funding of
$347,000 of construction commitments and shareholder distributions. Any failure
by Genesis or Multicare to continue making lease or loan payments to the Company
could have a significant adverse effect on the Company's financial condition,
results of operations and cash available for distribution, could adversely
affect the ability of the Company to maintain distributions at current levels or
at all and could adversely affect the ability of the Company to meet its own
debt obligations. See "Summary Condensed Consolidated Financial Data of
Genesis."
The Credit Facility currently matures on June 30, 2001. If the Company
is unable to pay-off or obtain replacement financing by June 30, 2001, or is
unable to negotiate a further extension of the current credit facility at that
time, or for any reason the Company were to be in default under the Credit
Facility prior to its maturity, 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. Moreover,
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.
The interest rate, loan extension fee and loan principal amortization
under the terms of the Credit Facility extension, as well as the higher interest
expense under the mortgage refinancings of eleven properties during the last
half of 1999, have reduced the Company's cash flows and could affect its ability
to maintain distributions to its shareholders at current levels. Future
increases in interest rates, as well as any defaults by tenants or borrowers on
their leases or loans, also could adversely affect the Company's cash flow and
its ability to pay its obligations and make distributions at current levels. See
"Item 3. Quantitative and Qualitative Disclosures About Market Risk." Due to the
uncertainty of the Genesis and Multicare situation, as well as the continued
uncertainty in the long-term care financing environment as a whole, the Company
can provide no assurances as to future dividend levels. There can be no
assurance that the Company will be able to continue making distributions to its
common shareholders at current levels or at all.
17
To qualify as a REIT, the Company must distribute to its shareholders
each year at least 95% (90% for taxable years beginning after December 31, 2000)
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 approximately 91% of the Company's investments in owned
facilities at March 31, 2000. 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. 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.
Distributions to Shareholders Subsequent to Year End
The board of trustees declared a cash distribution on April 14, 2000.
The cash distribution of $0.30 per share will be paid on or about May 16, 2000
to common shareholders of record on April 28, 2000.
Funds from Operations
The White Paper on Funds from Operations approved by the Board of
Governors of NAREIT defines Funds from Operations (FFO) as net income (loss),
computed in accordance with generally accepted accounting principles, excluding
gains (or losses) from sales of properties, plus real estate related
depreciation and amortization and after comparable adjustments for the Company's
portion of these items related to unconsolidated partnerships and joint
ventures. In October 1999, NAREIT clarified the definition of FFO to include
both recurring and non-recurring results of operations, except those results
defined as "extraordinary items" under generally accepted accounting principles
and gains and losses from sales of depreciable property. This clarified
definition is effective for periods beginning January 1, 2000 and all prior
periods presented.
18
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
The following table presents the Company's Funds from Operations for
the periods presented below:
For the three months ended
March 31,
------------------------------------------
2000 1999
------------------- -------------------
(in thousands)
Funds from Operations:
Net income $ 516 $959
Minority interest 40 70
------------------- -------------------
Net income before minority interest 556 1,029
Adjustments:
Real estate depreciation and amortization:
Consolidated entities 1,488 1,467
Unconsolidated entities 1,122 1,124
------------------- -------------------
Funds from Operations before allocation to
minority interest 3,166 3,620
Less:
Funds from Operations allocable to minority
interest (215) (242)
------------------- -------------------
Funds from Operations attributable to the common
shareholders $ 2,951 $3,378
=================== ===================
Impact of Inflation
Earnings of the Company are primarily from long-term investments with
fixed interest rates and fixed and percentage rental streams. These investments
are mainly financed with a combination of equity, long-term mortgages and
borrowings under the revolving line 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.
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, 1999 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.
20
Genesis is subject to the information filing requirements of the
Securities and Exchange Act of 1934, as amended, 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 Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and should
also be available at the following Regional Offices of the Commission: 7 World
Trade Center, New York, N.Y. 10048, and 500 West Madison Street, Suite 1400,
Chicago, IL 60661. Such reports and other information concerning Genesis can
also be inspected at the offices of the New York Stock Exchange, Inc., 20 Broad
Street, Room 1102, New York, New York 10005. The SEC also maintains an Internet
web site that contains reports, proxy statements and other information regarding
issuers, like Genesis, that file electronically with the SEC. The address of
that site is http://www.sec.gov.
21
The following table sets forth certain summary condensed consolidated
financial data for Genesis as of and for the periods indicated.
For the three months ended December 31,
-------------------------------------
1999 1998
---- ----
(in thousands, except per share data)
Operations Data
- --------------------------------------------------------
Net revenues $586,884 $479,204
Operating income before restructuring and capital
costs (1) 65,750 71,154
Multicare joint venture restructuring charge 420,000 -
Depreciation and amortization 29,118 17,807
Lease expense 9,527 6,367
Interest expense, net 52,776 27,323
Earnings (loss) before income taxes, equity in net
loss of unconsolidated affiliates, extraordinary
items and cumulative effect of accounting change (445,671) 19,657
Income taxes (7,280) 7,378
Earnings (loss) before equity in net loss of
unconsolidated affiliates and extraordinary items (438,391) 12,279
Minority interest 6,927 -
Equity in net loss of unconsolidated affiliates - (892)
Extraordinary items, net of tax - (1,799)
Cumulative effect of accounting change (3) (10,412) -
Net income (loss) (441,876) 9,588
Net income (loss) available to common shareholders (2)
($450,182) $4,677
Per common share data:
Basic
Earnings (loss) before extraordinary items and
cumulative effect of accounting change ($10.37) $0.18
Net income (loss) ($10.62) $0.13
Weighted average shares common stock and
equivalents 42,390 35,217
Diluted
Earnings (loss) before extraordinary items and
cumulative effect of accounting change ($10.37) $0.18
Net income (loss) ($10.62) $0.13
Weighted average shares common stock and
equivalents 42,390 35,381
(1) Capital costs include depreciation and amortization, lease expense and
interest expense.
(2) Net income (loss) reduced by preferred stock dividends.
(3) Cumulative effect of accounting change relates to October 1, 1999
adoption of American Institute of Certified Public Accountant's
Statement of Position 98-5 "Reporting on the Costs of Start-Up
Activities," which requires start-up costs to be expensed as incurred.
December 31, September 30,
-------------------- ------------------
1999 1999
-------------------- ------------------
(dollars in thousands)
Balance Sheet Data
- --------------------------------------------------------
Working capital $ 301,345 $ 235,704
Total assets 3,546,350 2,429,914
Long-term debt 2,242,754 1,484,510
Shareholders' equity $ 187,445 $ 587,890
22
Multicare
On October 8, 1999, Genesis entered into an agreement to restructure
its 1997 investment in Multicare. Genesis initially acquired a 43.6% interest in
Multicare and was to become sole owner of Multicare at a later date through a
cash payment or the issuance of additional Genesis common shares at equivalent
value. In the restructuring, Genesis completed the Multicare acquisition through
the issuance of convertible preferred shares. The restructuring also included a
$50 million cash investment in Genesis by the Multicare financial partners in
exchange for Genesis common shares and warrants. This transaction was approved
by Genesis' shareholders on November 11, 1999. Prior to the restructuring
transaction, Genesis accounted for its investment in Multicare using the equity
method of accounting. Under the terms of the restructuring agreement, Genesis
has managerial, operational and financial control of Multicare. Accordingly,
Multicare's assets, liabilities, revenues and expenses are now consolidated by
Genesis. The non-Genesis shareholders' remaining 56.4% interest in Multicare is
carried as minority interest.
Genesis and Multicare Debt Restructuring Discussions
On March 21, 2000, Genesis and Multicare announced the beginning of
debt restructuring discussions with their senior lenders with the intention of
revising their respective capital structures. Genesis also announced that it did
not make a $3.8 million interest payment to its senior debt lenders due March
20, 2000. Both Genesis and Multicare announced their intention not to make
interest and principal payments on senior debt and have been prohibited by their
senior lenders from making any scheduled interest payments on their publicly
traded subordinated debt while discussions were ongoing. Each company cited
their inability to sell assets due to the lack of long-term care market
financing and the continuing effect of reduced Medicare payments as the causes
of these actions. The senior lenders have given Genesis and Multicare a 60-day
forbearance period to develop a restructuring plan.
Shortly after the announcement, Moody's Investors Service issued a
press release announcing that it had downgraded the debt ratings of Genesis and
Multicare. In its press release, Moody's indicated that the ratings outlook for
both companies was negative. Moody's stated that its rating action reflected the
deterioration in the companies' operating results and financial condition which
has stemmed from the impact of PPS for Medicare combined with high leverage.
Moody's noted that despite cost cutting efforts, operating margins for both
companies remain depressed, and planned asset divestitures have not materialized
as anticipated. Moody's also stated that restructuring efforts could be
adversely impacted by the currently difficult state of the long-term care
sector, with several large providers already filing for bankruptcy in recent
months. Standard & Poor's also downgraded the debt ratings of Genesis and
Multicare.
Management of Genesis and Multicare have advised the Company that they
expect Genesis and Multicare to continue to make all lease and loan payments to
the Company. The Company has no control over Genesis or Multicare, however, and
can make no assurance that either of these entities will have sufficient income
23
or assets to enable them to satisfy their obligations under the leases or loans
made by the Company to them. Any failure by Genesis or Multicare to continue
making payments to the Company could have a significant adverse effect on the
Company's financial condition, results of operations and cash available for
distribution, could adversely affect the ability of the Company to maintain
distributions at current levels or at all and could adversely affect the ability
of the Company to meet its own debt obligations.
Proposed Loan Restructurings and Related Matters
The Company previously was obligated to purchase and leaseback, upon
the maturity of the related loan or the facility reaching stabilized occupancy,
five assisted living facilities (Mifflin, Coquina Place, Lehigh, Berkshire and
Harbor Place) securing term loans and two assisted living facilities (Oaks and
Sanatoga) securing construction loans made by the Company in January 1998. Of
these seven loans, which had an aggregate principal balance at March 31, 2000 of
$39.1 million, three loans, secured by the Mifflin, Coquina Place and Oaks
facilities, were made to wholly-owned subsidiaries of Genesis, three loans,
secured by the Lehigh, Berkshire and Sanatoga facilities, were made to
wholly-owned subsidiaries of Multicare and one loan, secured by the Harbor Place
facility, was made to a Genesis Equity Investee. The Company believes it is no
longer bound by the purchase and leaseback obligations contained in the loan
documents because the borrowers have, from time to time, not complied with all
loan provisions.
The Company and the borrowers have extended the maturity date of the
five term loans through June 23, 2000 to permit them to negotiate and document a
proposed restructuring of the relationships among the parties. In the Company's
annual report on Form 10-K for the year ended December 31, 1999, the Company
noted that Genesis and Multicare announced on March 21, 2000 that they are in
negotiations with their senior lenders with the intention of revising their
respective capital structures. Also as indicated in the Form 10-K, the Company
stated that it was negotiating to restructure its financial relationship with
Genesis and Multicare and outlined the terms of a plan then under discussion.
The Company is continuing its negotiations with Genesis and Multicare towards a
proposed restructuring with the intent being that such restructuring may become
part of the larger restructuring efforts of those companies. Elements of the
previously described restructuring may be present in an agreement among the
Company, Genesis, and Multicare. No assurance, however, can be given that any
particular element will be included. The results of the negotiations among
Genesis, Multicare, and their lenders and other constituencies may affect the
Company's ability to complete a proposed restructuring of its relationship with
Genesis and Multicare.
Any proposed restructuring is subject to approval by the Boards of the
Company, Genesis, and Multicare, and by each company's principal lenders. No
assurance can be given regarding the terms of any proposed restructuring, nor
can any assurance be given that a proposed restructuring will be completed.
24
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, 1999
for discussion of the market risk associated with these financial instruments.
The Company is exposed to market risks related to fluctuations in
interest rates on its Credit Facility and variable rate mortgages. The Company
utilizes interest rate cap agreements to limit the impact that interest rate
fluctuations have on its variable rate mortgages. Interest rate cap agreements
are used for hedging purposes rather than for trading purposes. The Company does
not utilize interest rate swaps, forward or option contracts on foreign
currencies or commodities, or any other type of derivative financial instrument,
other than interest rate cap agreements.
For variable rate debt, changes in interest rates generally do not
impact fair market value, but do affect future earnings and cash flows. The
weighted average interest rate on borrowings outstanding under the Credit
Facility and variable rate mortgages was 8.80% at March 31, 2000. Assuming the
Credit Facility and variable rate mortgage balances outstanding at March 31,
2000 of $69.5 million remains constant, each one percentage point increase in
interest rates from 8.80% at March 31, 2000 would result in an increase in
interest expense for the next twelve months of approximately $695,000, based on
the current interest rate terms. Amounts outstanding under the Credit Facility
bear interest at floating rates ranging from 2.75% to 3.25% over one-month
LIBOR, as determined by the percentage of the Credit Facility outstanding as
compared to the borrowing base. Variable rate mortgages bear interest at 3.00%
over one-month LIBOR.
The Company may borrow additional money with variable interest rates in
the future. Increases in interest rates, therefore, would result in increases in
interest expense, which could adversely affect the Company's cash flow and its
ability to pay its obligations and make distributions to shareholders at current
levels. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources.
25
PART II - OTHER INFORMATION
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 dated February 7, 2000
announcing that its annual meeting will be held on May 23, 2000.
26
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, 2000.
ElderTrust
/s/ D. Lee McCreary, Jr.
-------------------------------------------------
D. Lee McCreary, Jr.
President, Chief Executive Officer,
Chief Financial Officer, Treasurer and Secretary
(Principal Financial and Accounting Officer)
27
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
11.1 Computation of basic and diluted income per share for the three
months ended March 31, 2000 and 1999.
27.1 Financial Data Schedule for the three months ended March 31, 2000.
28