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 September 30, 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 November 10, 2000
- ---------------------------------------- --------------------------------------
Common shares of beneficial interest, 7,119,000
$0.01 par value per share
Exhibit index is located on page 37
ELDERTRUST
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
TABLE OF CONTENTS
Page
----
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of September 30, 2000 and
December 31, 1999......................................................... 1
Condensed Consolidated Statements of Operations for the three
and nine months ended September 30, 2000 and 1999......................... 2
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 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..................................................... 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk.................. 34
PART II: OTHER INFORMATION
Item 3. Defaults Upon Senior Securities............................................. 35
Item 6. Exhibits and Reports on Form 8-K............................................ 35
SIGNATURES................................................................................... 36
EXHIBIT INDEX................................................................................ 37
i
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited)
ELDERTRUST
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except share and per share amounts)
September December
30, 2000 31, 1999
--------- ---------
ASSETS
Assets:
Real estate properties, at cost $165,719 $165,206
Less - accumulated depreciation (14,565) (10,180)
Land 16,693 16,655
-------- --------
Net real estate properties 167,847 171,681
Real estate loans receivable, net of allowance of $18,106 and $0, respectively 30,540 48,646
Cash and cash equivalents 2,925 3,605
Restricted cash 7,633 7,194
Accounts receivable, net 373 629
Accounts receivable from unconsolidated entities 2,073 1,068
Prepaid expenses 412 1,000
Investment in and advances to unconsolidated entities, net of allowance of
$1,187 and $0, respectively 19,714 31,129
Other assets, net of accumulated amortization and depreciation of $2,673 and
$2,148, respectively 1,471 1,530
-------- --------
Total assets $232,988 $266,482
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Bank credit facility $38,977 $39,670
Accounts payable and accrued expenses 1,380 1,535
Accounts payable to unconsolidated entities 872 13
Mortgages and bonds payable 108,141 109,005
Notes payable to unconsolidated entities 1,032 1,079
Other liabilities 3,482 3,751
-------- --------
Total liabilities 153,884 155,053
-------- --------
Minority interest 5,736 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 (45,809) (14,747)
Note receivable from former officer for common shares sold, net - (990)
-------- --------
Total shareholders' equity 73,368 103,440
-------- --------
Total liabilities and shareholders' equity $232,988 $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 Nine months ended
September 30, September 30,
--------------------------- ---------------------------
2000 1999 2000 1999
-------- --------- --------- --------
Revenues:
Rental revenues $4,692 $4,662 $14,058 $13,884
Interest, net of amortization of deferred loan
origination costs 491 1,350 2,801 4,368
Interest from unconsolidated equity investees 771 959 2,482 2,850
Other income 37 51 155 90
------ ------ -------- -------
Total revenues 5,991 7,022 19,496 21,192
------ ------ -------- -------
Expenses:
Property operating expenses 244 277 852 848
Interest expense, including amortization of
deferred finance costs 3,561 3,422 10,448 9,578
Depreciation 1,458 1,439 4,399 4,332
General and administrative 649 564 2,661 2,026
Bad debt expense 15 - 20,282 -
Separation agreement expenses - - - 2,800
------ ------ -------- -------
Total expenses 5,927 5,702 38,642 19,584
------ ------ -------- -------
Net income (loss) before equity in losses of
unconsolidated entities, minority interest and
extraordinary items 64 1,320 (19,146) 1,608
Equity in losses of unconsolidated entities, net (688) (657) (9,570) (1,877)
Minority interest 40 (46) 1,926 13
------ ------ -------- -------
Net income (loss) before extraordinary item (584) 617 (26,790) (256)
Extraordinary item:
Extinguishment of debt - (1,296) - (1,296)
Minority interest in extraordinary item - 86 - 86
------ ------ -------- -------
Net loss ($584) ($593) ($26,790) ($1,466)
====== ====== ======== =======
Basic and diluted weighted average number of common
shares outstanding 7,119 7,201 7,119 7,206
====== ====== ======== =======
Net income (loss) per share before extraordinary item
- basic and diluted ($0.08) $0.09 ($3.76) ($0.04)
====== ====== ======== =======
Net loss per share - basic and diluted ($0.08) ($0.08) ($3.76) ($0.20)
====== ====== ======== =======
See accompanying notes to unaudited condensed consolidated financial statements.
2
ELDERTRUST
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Nine months ended
September 30,
-----------------------
2000 1999
--------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($26,790) ($1,466)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization 4,999 5,707
Provision for bad debts 20,282 -
Extraordinary loss on extinguishment of debt - 1,296
Non-cash separation expense from debt forgiveness to officer - 2,600
Minority interest and equity in losses from unconsolidated entities 7,644 1,778
Net changes in assets and liabilities:
Accounts receivable and prepaid expenses (932) 2,735
Accounts payable and accrued expenses 704 421
Other 440 (105)
-------- -------
Net cash provided by operating activities 6,347 12,966
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in real estate loans receivable - (5,096)
Payments received on real estate loans receivable - 4,247
Capital expenditures (112) (1,656)
Proceeds from collection on advances to unconsolidated entities 659 720
Net increase in reserve funds and deposits - restricted cash (887) (2,610)
Other - 161
-------- -------
Net cash used in investing activities (340) (4,234)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of deferred financing fees (484) (2,004)
Borrowings under Credit Facility - 9,518
Payments under Credit Facility (693) (23,790)
Proceeds from mortgages payable - 32,695
Payments on mortgages and bonds payable (864) (11,218)
Payments on notes payable - (3,000)
Distributions to shareholders (4,272) (7,885)
Distributions to minority interests (327) (562)
Repurchases of common shares - (424)
Prepayment penalty on mortgage loan - (1,157)
Other (47) (95)
-------- -------
Net cash used in financing activities (6,687) (7,922)
-------- -------
Net increase (decrease) in cash and cash equivalents (680) 810
Cash and cash equivalents, beginning of period 3,605 2,272
-------- -------
Cash and cash equivalents, end of period $2,925 $3,082
======== =======
Supplemental cash flow information:
Cash paid for interest $9,957 $8,484
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 assuming the Company will continue as a going concern. As
discussed in Note 2, Genesis Health Ventures, Inc. ("Genesis"), the Company's
principal tenant, The Multicare Companies, Inc., a 43.6% owned consolidated
subsidiary of Genesis, ("Multicare") and several of their subsidiaries have
filed for reorganization under the provisions of Chapter 11 of the Bankruptcy
Reform Act of 1978 ("Bankruptcy Code"). In addition, the Company has a working
capital deficit of $59.1 million at September 30, 2000, resulting primarily from
the classification of its bank credit facility (the "Credit Facility") with an
outstanding balance of $39.0 million at September 30, 2000 as current based on
its maturity date of June 30, 2001, the classification of two bonds payable
totaling $20.0 million at September 30, 2000 as current based on the Company's
failure since June 30, 2000 to meet the minimum net worth and interest coverage
requirements under guarantee agreements relating to the underlying mortgages and
the classification of one mortgage payable with an outstanding balance of $2.8
million at September 30, 2000 as current based on the bankruptcy filing by
Genesis. The Company also continued not to meet the minimum tangible net worth,
the minimum net asset value and the interest coverage ratio requirements under
the Credit Facility at September 30, 2000.
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 considered necessary
for a fair presentation of the financial statements for the interim periods
presented have been included. Operating results for the three and nine months
ended September 30, 2000 are not necessarily indicative of the results that may
be expected for the full fiscal year ending December 31, 2000. Certain amounts
included in the unaudited condensed consolidated financial statements as of and
for the three and nine months ended September 30, 1999 have been reclassified
for comparative purposes.
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. Certain Significant Risks and Uncertainties
Genesis and Multicare Bankruptcy Filings
On June 22, 2000, Genesis and Multicare announced that they had filed
for Chapter 11 bankruptcy protection following debt restructuring discussions
with their senior lenders.
4
ELDERTRUST
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (continued)
Approximately 70% of the Company's consolidated assets at September 30,
2000 consisted of real estate properties leased to or managed by subsidiaries of
Genesis and loans on real estate properties made to consolidated and
unconsolidated subsidiaries of Genesis or Multicare. Revenues recorded by the
Company for the nine months ended September 30, 2000 in connection with these
leases and loans totaled $12.9 million, or 66% of the Company's total revenues.
In addition, certain unconsolidated entities of the Company, accounted for under
the equity method, also lease properties to these entities and recognized
revenues of $9.7 million for the same period. The Company's investments in and
advances to such unconsolidated entities totaled $16.2 million at September 30,
2000.
Included in the Company's consolidated assets at September 30, 2000 are
$19.5 million in loans to wholly-owned subsidiaries of Multicare. These loans
are secured by real estate and 20% of the principal balance is guaranteed by
Multicare. The loans have a weighted average annual interest rate of 10.5%.
ElderTrust also has $14.8 million in loans to wholly-owned subsidiaries of
Genesis. These loans are secured by real estate and a 100% guarantee by Genesis.
The loans have a weighted average annual interest rate of 9.3%.
As a result of the Genesis and Multicare bankruptcy filings, the
borrowers ceased making interest payments to the Company during June 2000. It is
not expected that the borrowers on these loans will be permitted to make further
interest payments to the Company unless such payments are approved by the
bankruptcy court. During the bankruptcy reorganization process, the Company will
retain its security position in the collateral underlying the loans. Ultimate
recovery under the loans is dependent upon the value of the assets securing the
loans, which may be determined by the bankruptcy court. To the extent the loan
balance exceeds such collateral, recovery of the difference will be dependent on
the general unsecured creditors' recovery on their prepetition claims. See Note
3 for discussion of the allowance for loan losses recorded by the Company in
relation to these loans.
In addition, a tenant in bankruptcy has the ability to reject executory
contracts, including leases, to which they are a party. In the period before a
lessee elects whether to assume or reject a lease, lessees in bankruptcy are
required to continue to make lease payments. If Genesis rejects one or more of
the leases, the Company would be required to re-lease, operate or sell the
property subject to the rejected leases. Any such alternative may significantly
decrease the Company's cash flow and could significantly and adversely affect
its financial condition and results of operations. If the Company were required
to operate one or more of the properties, it may have insufficient cash flow to
do so. Alternatively, a debtor may assume a lease, in which case it is required
to continue making lease payments.
5
ELDERTRUST
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (continued)
As Genesis and Multicare are not currently permitted to make interest
payments to ElderTrust under bankruptcy filing rules, the Company's cash flow
has been significantly reduced. As a result, the Company has suspended further
distributions to its shareholders. The Company believes the distributions made
to shareholders to-date during 2000 will be sufficient to satisfy its REIT
distribution requirements for 2000. The Company believes that it can continue to
meet its debt service requirements after giving effect to this reduction in cash
flow; however, any further reduction in cash flow would significantly and
adversely affect the Company's ability to continue to meet its debt service
requirements and could further significantly and adversely affect its financial
condition and results of operations.
Liquidity
The Company has a working capital deficit of $59.1 million at September
30, 2000, resulting primarily from the classification of the Credit Facility
with an outstanding balance of $39.0 million at September 30, 2000 as current
based on its maturity date of June 30, 2001, the classification of two bonds
payable totaling $20.0 million at September 30, 2000 as current based on the
Company's failure since June 30, 2000 to meet the minimum net worth and interest
coverage requirements under guarantee agreements relating to the underlying
mortgages and the classification of one mortgage payable with an outstanding
balance of $2.8 million at September 30, 2000 as current based on the bankruptcy
filing by Genesis. The Company also continued not to meet the minimum tangible
net worth, the minimum net asset value and the interest coverage ratio
requirements under the Credit Facility at September 30, 2000. If the Company is
unable to pay-off or obtain replacement financing of the Credit Facility by June
30, 2001, or is unable to negotiate a further extension of the current Credit
Facility at that time, or the Company is unable to obtain waivers of the failed
covenants or a forbearance agreement from the lender, the bank could exercise
its right to foreclose on the collateral securing the Credit Facility. If the
Company is unable to obtain waivers of the failed covenants under the bonds and
mortgage payable or a forbearance agreement from the lenders, the lenders could
exercise their rights to accelerate the related indebtedness or foreclose on the
underlying collateral immediately. Foreclosure by the lenders would have a
significant adverse affect on the Company's ability to continue its operations.
The unaudited financial statements do not include adjustments, if any,
to reflect the possible effects on the recoverability and classification of
recorded assets or the amounts and classification of liabilities that may result
from the outcome of the uncertainties related to the matters discussed above
under "Genesis and Multicare Bankruptcy Filings" and "Liquidity."
6
ELDERTRUST
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. Real Estate Loans Receivable
The following is a summary of real estate loans receivable (dollars in
thousands):
Stated Scheduled Balance at Balance at
Type of Interest Maturity September 30, December 31,
Property Loan Rate Date 2000 1999
- --------------------------------------- --------------- ------------ ------------- --------------- ---------------
Harbor Place Melbourne, FL Term 9.5% 6/2000 $ 4,828 $ 4,828(1)
Mifflin Shillington, PA Term 9.5% 6/2000 5,164 5,164(2)
Coquina Place Ormond Beach, FL Term 9.5% 6/2000 4,577 4,577(2)
Lehigh Macungie, PA Term 10.5% 6/2000 6,665 6,665(2)
Berkshire Reading, PA Term 10.5% 6/2000 6,167 6,167(2)
Oaks Wyncote, PA Construction 9.0% 1/2001 5,033 5,033(2)
Montchanin Wilmington, DE Construction 10.5% 8/2000 9,496 9,496(3)
Sanatoga Pottstown, PA Construction 10.5% 1/2001 6,716 6,716(2)
-------- --------
48,646 48,646
Allowance for credit losses (18,106) -
-------- --------
$ 30,540 $ 48,646
======== ========
- ---------------
(1) This loan went into default on June 22, 2000 when the loan was not repaid by
the borrower upon its maturity. Genesis is the manager of the facility.
(2) These loans went into default on June 22, 2000 when the borrowers ceased
making interest payments to the Company. See Note 2.
(3) This loan went into default on August 1, 2000 when the loan was not repaid
upon its maturity.
The unfunded portion of the Company's construction loan commitments
amounted to $347,000 and $352,000 at September 30, 2000 and December 31, 1999,
respectively. Due to certain defaults by the borrowers under the loan
agreements, the Company believes it is no longer obligated to provide any
further funding.
The Company previously was obligated, or had an option, to purchase and
leaseback, upon the maturity of the related loan or the facility reaching
stabilized occupancy, the eight assisted living facilities underlying the term
and construction loans. The Company believes it is no longer bound by the
purchase and leaseback obligations contained in seven of the loan documents
because the borrowers have, from time to time, not complied with all loan
provisions. The Company did not exercise its option to purchase the remaining
facility, Montchanin, upon its August 1, 2000 maturity date. The Company has
declared this loan, with a principal balance of $9.5 million at September 30,
2000, in default and is pursuing its remedies to collect the amounts due.
The four term loans secured by the Mifflin, Coquina Place, Lehigh and
Berkshire facilities, with a principal balance of $8.9 million at September 30,
2000, net of allowance for credit losses, matured on June 28, 2000. In addition,
the loan secured by the Sanatoga facility went into default as a result of the
bankruptcy filing by Genesis. Due to the Chapter 11 bankruptcy filings by
Genesis and Multicare, the Company is prohibited from pursuing collection on
these loans.
7
ELDERTRUST
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (continued)
In addition, the Company had one loan in the amount of $4.8 million
with an annual interest rate of 9.50%, secured by the Harbor Place facility, to
an entity in which Genesis accounts for its investment using the equity method
of accounting, which was not included in the June 22, 2000 bankruptcy filing.
This loan matured on June 22, 2000. The Company has declared this loan in
default and this transaction's resolution is currently under negotiation with
the borrower and Genesis, the property manager. Due to certain defaults by the
borrower under the loan agreement, a default interest rate, which equals 2% plus
the stated interest rate, is being assessed on this loan.
As previously disclosed, the Company, Genesis and Multicare have been
discussing a proposed restructuring of the loans and other relationships among
the parties. These discussions are continuing. Any restructuring is subject to
approval by the Boards of the Company, Genesis and Multicare and the bankruptcy
court. No assurance can be given that the proposed restructuring will be
completed.
Based on the Company's assessment of the collateral value underlying
the loans as compared to the net book value of the loans, the Company recorded
an allowance for credit losses of $18.1 million during the nine months ended
September 30, 2000.
4. 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 for a nominal amount, this company is consolidated into the Company's
condensed consolidated financial statements at September 30, 2000.
8
ELDERTRUST
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (continued)
Summary combined financial information as of and for the nine months
ended September 30, 2000 for these unconsolidated entities is as follows
(dollars in thousands):
ET ET Sub- ET
Sub-Meridian, ET Capital Cabot Sub-Cleveland
LLP Corp. Park, LLC Circle, LLC Total
--------------------------------- --------------- -----------------------------
Current assets $310 $535 $126 $135 $1,106
Real estate properties (1) 103,912 - 16,695 13,782 134,389
Notes receivable - 4,409 - - 4,409
Other assets 1,301 - 541 513 2,355
Total assets 105,523 4,944 17,362 14,430 142,259
Current liabilities 2,174 640 679 739 4,232
Long-term debt (2) 105,757 9,291 16,769 13,584 145,401
Total deficit (4,116) (4,988) (355) (119) (9,578)
Rental revenue 7,350 - 1,232 1,088 9,670
Interest income, ElderTrust (3) - 477 - - 477
Interest income, other 19 256 30 28 333
Interest expense, ElderTrust (3) 1,605 591 412 238 2,846
Interest expense, other 4,950 - 621 555 6,126
Depreciation/amortization 2,634 118 420 346 3,518
Bad debt expense - 7,800 - - 7,800
Net loss (1,863) (7,860) (215) (47) (9,985)
Percent ownership 99% 95% 99% 99%
---------------
(1) Includes properties under capital lease.
(2) Includes capital lease obligations.
(3) Includes ElderTrust and its unconsolidated subsidiaries.
As of September 30, 2000, ET Capital Corp. ("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. The borrower ceased making
interest payments to ET Capital during the quarter ended June 30, 2000.
In June 2000, the senior lender on the $40.0 million first trust
mortgage to the AGE Institute of Florida notified ET Capital that the borrower
was in default of the first trust mortgage due to a default by Genesis, the
guarantor, under an amendment to the loan agreement and that no forbearance or
waiver of such default has been granted. Additionally, the senior lender is
9
ELDERTRUST
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (continued)
seeking recovery from ET Capital of an interest payment totaling approximately
$250,000 received by ET Capital from the AGE Institute of Florida in April 2000,
for the quarter ended March 31, 2000.
The AGE Institute of Florida has been working to obtain replacement
financing of the $40.0 million first trust mortgage loan. 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.
Management of ET Capital has determined, based on a decrease in the
underlying cash flows generated by the properties securing the note, the value
of the underlying collateral may not be sufficient to satisfy the borrowers'
obligation under the note. As a result, a bad debt allowance of $7.8 million was
recorded by ET Capital during the nine months ended September 30, 2000. The
Company recorded 95% of this loss based on its 95% equity interest in ET
Capital, which reduces its investment and advances to ET Capital.
ET Capital's long-term debt includes two demand promissory notes
payable to the Company aggregating $5.9 million at September 30, 2000 in
connection with the above second mortgage transaction. These notes bear interest
at a weighted average rate of 12.1% per annum with interest only payable
quarterly. ET Capital ceased making interest payments to the Company during the
quarter ended June 30, 2000. Management of the Company has determined that these
notes are fully impaired at September 30, 2000. The Company recorded an
impairment loss of $1.2 million against the remaining balance of these notes
during the nine months ended September 30, 2000.
As of September 30, 2000, 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. The $8.5 million promissory note bears interest at an
annual rate of 8.0% for the first year, 9.0% for the second year and 10.0% for
remainder of the term of the note, with interest payable monthly through
September 3, 2003. The note is guaranteed by the Company and may be in default
due to ET Sub-Meridian's failure to make a principal payment of $3.0 million due
on September 3, 1999. However, ET Sub-Meridian and the Company believe that
Genesis agreed to extend the principal payment due on September 3, 1999 until
the maturity date of September 3, 2003. The Company, ET Sub-Meridian and Genesis
are working to resolve the dispute. Any agreement reached by the parties will be
subject to bankruptcy court approval. The Company does not have sufficient cash
available to satisfy the guarantee if it were required to do so.
10
ELDERTRUST
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (continued)
ET Sub-Meridian, whose ownership of the facilities is in the form of a
capital lease, subleased the facilities to Genesis for an initial ten-year
period with a ten-year renewal option. The nominal property owner has encumbered
the properties with mortgage loan financing. These loans are in default as a
result of the Genesis bankruptcy filing. The Company is assisting the nominal
owner in obtaining waivers of these defaults.
5. Credit Facility
At September 30, 2000, the Company had $39.0 million outstanding under
the Credit Facility. The interest rate on borrowings outstanding under the
Credit Facility at September 30, 2000 was 9.44%, 2.75% over one-month LIBOR.
There were no borrowings under the $5.75 million revolving credit portion of the
Credit Facility at September 30, 2000. Any such borrowings are subject to prior
approval from the issuing bank.
The Company is currently seeking a waiver for its failure to meet the
minimum tangible net worth, minimum net asset value and minimum interest
coverage ratio requirements under the Credit Facility at September 30, 2000 and
June 30, 2000, principally resulting from the bad debt charges recorded on real
estate loans receivable (see Note 3), investments in and advances to
unconsolidated entities (see Note 4) and a note receivable from a former officer
of the Company and certain other assets (see Note 7) during the second quarter
of 2000.
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 $484,000 for the
nine months ended September 30, 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 $1.4 million at September 30, 2000. Deferred financing costs of
$464,000 were amortized during the nine months ended September 30, 2000 and
included as a component of interest expense.
11
ELDERTRUST
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. Loss Per Share
The following table sets forth the computation of basic and diluted
loss per share for the periods indicated (in thousands, except per share data):
For the three months ended For the nine months ended
September 30, September 30,
------------------------------- ------------------------------
2000 1999 2000 1999
------------- -------------- -------------- ------------
Net loss available for basic and diluted loss
per share ($584) ($593) ($26,790) ($1,466)
====== ====== ======== =======
Weighted average common shares outstanding for
basic and diluted net loss per share 7,119 7,201 7,119 7,206
====== ====== ======== =======
Basic and diluted net loss per share ($0.08) ($0.08) ($3.76) ($0.20)
====== ====== ======== =======
The effect of outstanding share options is antidilutive and thus not
reflected in the determination of weighted average common shares outstanding for
the diluted net loss 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.
7. Other Charges
During the second quarter of 2000, the Company recorded bad debt
charges of approximately $990,000 related to a note receivable from a former
officer of the Company.
In addition, the Company wrote-off $682,000 of costs incurred in
connection with property due diligence for investment transactions that were not
completed because of adverse conditions in the capital markets and the June 22,
2000 Chapter 11 filings of Genesis and Multicare. These write-offs are included
as a component of general and administrative expenses.
8. NYSE Listing Criteria
On September 22, 2000, ElderTrust announced that it had been notified by
the New York Stock Exchange ("NYSE") that is has fallen below the continued
listing criteria relating to total market capitalization and minimum share
value.
Under the market capitalization requirement, the Company's market
capitalization must meet or exceed $15 million. Under the NYSE rules, the NYSE
may grant a period of up to 18 months ending February 10, 2002 during which the
Company would need to meet the requirement. The Company has formally requested
12
ELDERTRUST
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (continued)
that this time period be granted and has submitted a business plan to the NYSE
to demonstrate its ability to achieve compliance with this standard. If the plan
is accepted, the Company will be subject to quarterly monitoring by the NYSE in
the interim period. The Company has not been notified by the NYSE if the plan
has been accepted.
Under the minimum share value requirement, the Company's shares must trade
at a value exceeding $1 for thirty consecutive trading days. As a result of the
notification, the Company must meet this requirement by the later of either its
next annual meeting, currently scheduled for May 2001, or March 20, 2001 to
retain its listing.
9. Derivative Instruments and Hedging Activities
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. SFAS 133
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure the instrument at
fair value. The accounting for changes in the fair value of a derivative depends
on the intended use of the derivative and the resulting designation. SFAS No.
133 and subsequent amendments, SFAS No. 137 and SFAS No. 138, are effective for
the Company on January 1, 2001. The Company does not expect the adoption of
Statement 133 to have a material adverse impact on the Company's financial
condition or results of operations because the Company does not use derivative
instruments other than interest rate cap agreements.
13
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, "ElderTrust" or the "Company"). 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 the ability of Genesis Health Ventures, Inc. ("Genesis"), the
Company's principal tenant, and The Multicare Companies, Inc., a
43.6% owned consolidated subsidiary of Genesis, ("Multicare") to
resume making loan payments and continue making lease payments to
the Company;
o the outcome of the Genesis and Multicare bankruptcy proceedings;
o the Company's ability to pay-off or refinance its bank credit
facility (the "Credit Facility) when it becomes due on June 30,
2001;
o the Company's ability to cure its failure to meet debt covenants or
obtain waivers from its lenders;
o the NYSE acceptance of the Company's business plan;
o interest rates;
o availability, terms and use of capital;
o general economic, business and regulatory conditions;
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
14
cautionary statements. The Company disclaims, however, any intent or obligation
to update its forward-looking statements.
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 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
September 30, 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 September 30, 2000 consisted of real estate properties leased to or
managed by subsidiaries of Genesis and loans on real estate properties made to
consolidated and unconsolidated subsidiaries of Genesis or Multicare.
On June 22, 2000, Genesis and Multicare announced that they had filed
for Chapter 11 bankruptcy protection following debt restructuring discussions
with their senior lenders.
The accompanying unaudited condensed consolidated financial statements
of ElderTrust and its consolidated subsidiaries have been prepared assuming the
Company will continue as a going concern. As previously discussed, Genesis, the
Company's principal tenant, and Multicare have filed for reorganization under
the provisions of Chapter 11 of the Bankruptcy Reform Act of 1978 ("Bankruptcy
Code"). In addition, the Company has a working capital deficit of $59.1 million
at September 30, 2000, resulting primarily from the classification of its bank
credit facility (the "Credit Facility") with an outstanding balance of $39.0
million at September 30, 2000 as current based on its maturity date of June 30,
2001, the classification of two bonds payable totaling $20.0 million at
September 30, 2000 as current based on the Company's failure since June 30, 2000
to meet the minimum net worth and interest coverage requirements under guarantee
agreements relating to the underlying mortgages and the classification of one
mortgage payable with an outstanding balance of $2.8 million at September 30,
2000 as current based on the bankruptcy filing by Genesis. The Company also
continued not to meet the minimum tangible net worth, the minimum net asset
value and the interest coverage ratio requirements under the Credit Facility at
September 30, 2000. The unaudited financial statements do not include
adjustments, if any, to reflect the possible effects on the recoverability and
classification of recorded assets or the amounts and classification of
liabilities that may result from the outcome of the uncertainties related to the
foregoing matters.
15
Revenues recorded by the Company for the nine months ended September
30, 2000 in connection with leases and loans to Genesis and Multicare totaled
$12.9 million, or 66% of the Company's total revenues. In addition, certain
unconsolidated entities of the Company, accounted for under the equity method,
also lease properties to these entities and recognized revenues of $9.7 million
for the same period. The Company's investments in and advances to such
unconsolidated entities totaled $16.2 million at September 30, 2000.
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 entities in which Genesis accounts for
its investment using the equity method of accounting ("Genesis
Equity Investees") to meet their lease and loan obligations;
o the outcome of the Genesis and Multicare bankruptcy proceedings; and
o the revenues derived from, and the successful operation of, the
facilities leased to or managed by Genesis or Genesis Equity
Investees.
Included in the Company's consolidated assets at September 30, 2000 are
$19.5 million in loans to wholly-owned subsidiaries of Multicare. These loans
are secured by real estate and 20% of the principal balance is guaranteed by
Multicare. The loans have a weighted average annual interest rate of 10.5%.
ElderTrust also has $14.8 million in loans to wholly-owned subsidiaries of
Genesis. These loans are secured by real estate and a 100% guarantee by Genesis.
The loans have a weighted average annual interest rate of 9.3%.
The four term loans secured by the Mifflin, Coquina Place, Lehigh and
Berkshire facilities, with a principal balance of $8.9 million at September 30,
2000, net of allowance for credit losses, matured on June 28, 2000. In addition,
the loan secured by the Sanatoga facility went into default as a result of the
bankruptcy filing by Multicare. Due to the June 22, 2000 Chapter 11 bankruptcy
filings by Genesis and Multicare, the Company is prohibited from pursuing
collection on these loans.
As previously disclosed, the Company, Genesis and Multicare have been
discussing a proposed restructuring of the loans and other relationships among
the parties. These discussions are continuing. Any restructuring is subject to
approval by the Boards of the Company, Genesis and Multicare and the bankruptcy
court. No assurance can be given that the proposed restructuring will be
completed.
As a result of the Genesis and Multicare bankruptcy filings, the
borrowers ceased making interest payments to the Company during June 2000. It is
not expected that the borrowers on these loans will be permitted to make further
interest payments to the Company unless such payments are approved by the
16
bankruptcy court. During the bankruptcy reorganization process, the Company will
retain its security position in the collateral underlying the loans. Ultimate
recovery under the loans is dependent upon the value of the assets securing the
loans, which may be determined by the bankruptcy court. To the extent the loan
balance exceeds such collateral, recovery of the difference will be dependent on
the general unsecured creditors' recovery on their prepetition claims. Based on
the Company's assessment of the collateral value underlying the loans as
compared to the net book value of the loans, the Company recorded an allowance
for credit losses of $18.1 million during nine months ended September 30, 2000.
In addition, a tenant in bankruptcy has the ability to reject executory
contracts, including leases, to which they are a party. In the period before a
lessee elects whether to assume or reject a lease, lessees in bankruptcy are
required to continue to make lease payments. If Genesis rejects one or more of
the leases, the Company would be required to re-lease, operate or sell the
property subject to the rejected leases. Any such alternative may significantly
decrease the Company's cash flow and could significantly and adversely affect
its financial condition and results of operations. If the Company were required
to operate one or more of the properties, it may have insufficient cash flow to
do so. Alternatively, a debtor may assume a lease, in which case it is required
to continue making lease payments.
As Genesis and Multicare are not currently permitted to make interest
payments to ElderTrust under bankruptcy filing rules, the Company's cash flow
has been significantly reduced. As a result, the Company has suspended further
distributions to its shareholders. The Company believes the distributions made
to shareholders to date during 2000 will be sufficient to satisfy its REIT
distribution requirements for 2000. The Company believes that it can continue to
meet its debt service requirements after giving effect to this reduction in cash
flow; however, any further reduction in cash flow would significantly and
adversely affect the Company's ability to continue to meet its debt service
requirements and could further significantly and adversely affect its financial
condition and results of operations.
The Company has a working capital deficit of $59.1 million at September
30, 2000, resulting primarily from the classification of the Credit Facility
with an outstanding balance of $39.0 million at September 30, 2000 as current
based on its maturity date of June 30, 2001, the classification of two bonds
payable totaling $20.0 million at September 30, 2000 as current based on the
Company's failure since June 30, 2000 to meet the minimum net worth and interest
coverage requirements under guarantee agreements relating to the underlying
mortgages and the classification of one mortgage payable with an outstanding
balance of $2.8 million at September 30, 2000 as current based on the bankruptcy
filing by Genesis. The Company also continued not to meet the minimum tangible
net worth, the minimum net asset value and the interest coverage ratio
requirements under the Credit Facility at September 30, 2000. If the Company is
unable to pay-off or obtain replacement financing of the Credit Facility by June
30, 2001, or is unable to negotiate a further extension of the current Credit
Facility at that time, or the Company is unable to obtain waivers of the failed
17
covenants or a forbearance agreement from the lender, the bank could exercise
its right to foreclose on the collateral securing the Credit Facility. If the
Company is unable to obtain waivers of the failed covenants under the bonds and
mortgage payable or a forbearance agreement from the lenders, the lenders could
exercise their rights to accelerate the related indebtedness or foreclose on the
underlying collateral immediately. Foreclosure by the lenders would have a
significant adverse affect on the Company's ability to continue its operations.
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
September 30, 2000 of approximately $347,000 which, if required, it expects to
fund with cash flows from operations and funds available under the Credit
Facility. Due to certain defaults by the borrowers under the loan agreements,
the Company believes it is no longer obligated to provide any further funding.
The Company also was obligated, or had 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. As previously
disclosed, the Company is currently negotiating with Genesis and Multicare to
restructure seven of these relationships. The Company did not exercise its
option to purchase the remaining facility upon its August 1, 2000 maturity date.
See "Liquidity and Capital Resources."
Substantially all of the Company's revenues are currently derived from
rents received under long-term leases of healthcare-related real estate.
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.
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.
18
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 September 30, 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
$769,000 during the nine months ended September 30, 2000 and 1999, respectively.
The borrower ceased making interest payments to ET Capital during the quarter
ended June 30, 2000.
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.
In June 2000, the senior lender on the $40.0 million first trust
mortgage to the AGE Institute of Florida notified ET Capital that the borrower
was in default of the first trust mortgage due to a default by Genesis, the
guarantor, under an amendment to the loan agreement and that no forbearance or
waiver of such default has been granted. Additionally, the senior lender is
seeking recovery from ET Capital of an interest payment totaling approximately
$250,000 received by ET Capital from the AGE Institute of Florida in April 2000,
for the quarter ended March 31, 2000.
The AGE Institute of Florida has been working to obtain replacement
financing of the $40.0 million first trust mortgage loan. 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.
Management of ET Capital has determined, based on a decrease in the
underlying cash flows generated by the properties securing the note, the value
of the underlying collateral may not be sufficient to satisfy the borrower's
19
obligation under the note. As a result, a bad debt allowance of $7.8 million was
recorded by ET Capital during the nine months ended September 30, 2000. The
Company recorded 95% of this loss based on its 95% equity interest in ET
Capital, which reduces its investment and advances to ET Capital.
ET Capital's long-term debt includes two demand promissory notes
payable to the Company aggregating $5.9 million at September 30, 2000 in
connection with the above second mortgage transaction. These notes bear interest
at a weighted average rate of 12.1% per annum with interest only payable
quarterly. ET Capital ceased making interest payments to the Company during the
quarter ended June 30, 2000. Management of the Company has determined that these
notes are fully impaired at September 30, 2000.
In addition to the AGE Institute of Florida second trust mortgage note
and related notes payable to the Company, ET Capital has notes receivable
aggregating $4.4 million at September 30, 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 has loans payable
to the Company aggregating $3.4 million, bearing interest at 15% and maturing at
various dates from April 2008 to December 2011.
The Company recorded $591,000 and $966,000 in interest income for the
nine months ended September 30, 2000 and 1999, respectively, on the notes
receivable from ET Capital. The Company also recorded a loss of $7.5 million and
income of $176,000 related to its equity interest in ET Capital's results of
operations for the nine months ended September 30, 2000 and 1999, respectively.
In addition, the Company recorded an impairment loss of $1.2 million on the
remaining balance of the notes receivable from ET Capital issued in connection
with the above second mortgage note transaction. See Note 4 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 $8.5 million promissory
note bears interest at an annual rate of 8.0% for the first year, 9.0% for the
second year and 10.0% for remainder of the term of the note, with interest
payable monthly through September 3, 2003. The note is guaranteed by the
Company. 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.
20
Genesis has declared ET Sub-Meridian in default of the $8.5 million
loan based on the fact that a principal payment of $3.0 million due on September
3, 1999 was not made. However, ET Sub-Meridian and the Company believe that
Genesis agreed to extend the principal payment due on September 3, 1999 until
the maturity date of September 3, 2003. The Company, ET Sub-Meridian and Genesis
are working to resolve the dispute. Any agreement reached by the parties will be
subject to bankruptcy court approval. The Company does not have sufficient cash
available to satisfy the guarantee if it were required to do so.
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 a loss of $1.8 million related to its equity
interest in ET Sub-Meridian's results of operations for each of the nine months
ended September 30, 2000 and 1999. ET Sub-Meridian has real estate investments
and long-term debt of $103.9 million and $105.8 million, respectively, at
September 30, 2000. See Note 4 of the Company's unaudited condensed consolidated
financial statements included herein. At September 30, 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 $1.6 million in interest income on this loan during each of the nine
months ended September 30, 2000 and 1999.
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 September 30, 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
21
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 September
30, 2000.
Three of these limited liability companies have subordinated demand
loans in the aggregate amount of $5.1 million with the Company at September 30,
2000, bearing interest at 12% per annum. The Company recorded $286,000 and
$285,000 in interest income for the nine months ended September 30, 2000 and
1999, respectively, in connection with the demand loans, aggregating $3.1
million at September 30, 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 $4.4 million at September
30, 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 $259,000 and $298,000 related
to its equity interest in ET-Sub-Cabot Park, LLC's and ET Sub-Cleveland Circle,
LLC's results of operations for the nine months ended September 30, 2000 and
1999, respectively. These two entities have real estate investments and
aggregate long-term debt of $30.5 million and $30.4 million, respectively, at
September 30, 2000. See Note 4 of the Company's unaudited condensed consolidated
financial statements included herein.
Results of Operations
Three months ended September 30, 2000 compared with the three months
ended September 30, 1999
Revenues
Rental revenues of $4.7 million were generated for each of the three
months ended September 30, 2000 and 1999.
Interest income of $491,000, net of amortization of deferred loan costs
of $10,000, was earned for the three months ended September 30, 2000. This
represented a 63.6% decrease from $1.4 million for the corresponding period in
1999. This decrease was primarily comprised of a $883,000 decrease in interest
earned on term and construction loans, resulting primarily from the non-receipt
of third quarter 2000 interest due from Genesis and Multicare subsidiaries that
were part of the June 22, 2000 Genesis and Multicare bankruptcy filings and a
$34,000 decrease in interest earned on a note receivable from a former officer
resulting from the non-receipt of third quarter 2000 interest due from the
former officer, partially offset by lower amortization of deferred loan costs of
$72,000.
22
Interest from unconsolidated equity investees of $771,000 was earned
during the three months ended September 30, 2000. This represented a 19.6%
decrease from $959,000 for the corresponding period in 1999. This decrease
resulted primarily from ET Capital not making its third quarter 2000 interest
payment to the Company on its note payables related to the AGE Institute of
Florida second mortgage held by ET Capital that is in default.
Expenses
Interest expense, which included amortization of deferred financing
costs of $155,000, was $3.6 million for the three months ended September 30,
2000. This represented a 4.1% increase in interest expense from $3.4 million for
the corresponding period in 1999. This increase was primarily due to higher
interest expense on third-party debt of $433,000 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 $294,000. 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 7.9% at September 30, 1999 to 8.8% at September 30, 2000. The
Company's interest expense increased as a result of an increase in the one-month
LIBOR from 5.38% at June 30, 1999 to 6.69% at September 30, 2000. The Company's
interest rate on the Credit Facility was 9.44% at September 30, 2000 compared to
8.13% at September 30, 1999. The Company's interest rate on its variable rate
mortgages was 9.69% at September 30, 2000.
General and administrative expenses were $649,000 for the three months
ended September 30, 2000. This represented a 15.1% increase from $564,000 for
the corresponding period in 1999. This increase was primarily a result of third
quarter legal fees incurred in connection with the June 22, 2000 Chapter 11
filings of Genesis and Multicare.
An extraordinary loss of $1.2 million, net of a minority interest
benefit of $86,000, was recorded during the three months ended September 30,
1999 in connection with the prepayment of an existing mortgage loan.
23
Nine months ended September 30, 2000 compared with the nine months
ended September 30, 1999
Revenues
Rental revenues of $14.1 million were generated for the nine months
ended September 30, 2000. This represented a 1% increase from $13.9 million for
the corresponding period in 1999.
Interest income of $2.8 million, net of amortization of deferred loan
costs of $137,000, was earned for the nine months ended September 30, 2000. This
represented a 35.9% decrease from $4.4 million for the corresponding period in
1999. This decrease was primarily comprised of a $1.3 million decrease in
interest earned on term and construction loans, resulting primarily from the
non-receipt of June through September 2000 interest due from the Genesis and
Multicare subsidiaries which were part of the June 22, 2000 bankruptcy filings
as well as the 1999 sale of a construction loan receivable to a commercial bank,
partially offset by additional funding of one construction loan during 1999, a
$138,000 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 $70,000 decrease in interest earned
on a third party receivable which was paid in 1999. During the nine months ended
September 30, 2000, the Company recorded interest income of $1.5 million on
loans to Genesis and Multicare subsidiaries that were part of the June 22, 2000
Genesis and Multicare bankruptcy filings. The recorded interest income on these
loans represented interest payments for the period from January 2000 through May
2000. Interest payments on these loans, with an aggregate principal balance of
$34.3 million prior to allowance for credit losses, ceased beginning with the
June 2000 payment.
Interest from unconsolidated equity investees of $2.5 million was
earned during the nine months ended September 30, 2000. This represented a 12.9%
decrease from $2.9 million for the corresponding period in 1999. This decrease
resulted primarily from ET Capital not making its second or third quarter 2000
interest payment to the Company on its note payables related to the AGE
Institute of Florida second mortgage transaction.
Expenses
Interest expense, which included amortization of deferred financing
costs of $464,000, was $10.4 million for the nine months ended September 30,
2000. This represented a 9.1% increase in interest expense from $9.6 million for
the corresponding period in 1999. This increase was primarily due to higher
interest expense on third-party debt of $1.6 million 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 $743,000.
24
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 7.9% at September 30, 1999 to 8.8% at September 30, 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 5.38% at September
30, 1999 to 6.69% at September 30, 2000. The Company's interest rate on the
Credit Facility was 9.44% at September 30, 2000 compared to 8.13% at September
30, 1999. The Company's interest rate on its variable rate mortgages was 9.69%
at September 30, 2000.
General and administrative expenses were $2.7 million for the nine
months ended September 30, 2000. This represented a 31.3% increase from $2.0
million for the corresponding period in 1999. This increase was primarily a
result of a second quarter 2000 write-off of $682,000 of costs incurred in
connection with property due diligence for investment transactions that were not
completed because of adverse conditions in the capital markets and the June 22,
2000 Chapter 11 filings of Genesis and Multicare, as well as an increase in
third quarter 2000 legal fees incurred in connection with the June 22, 2000
Chapter 11 filings of Genesis and Multicare.
Bad debt expenses of $20.3 million were recorded during the nine months
ended September 30, 2000 resulting from impairment charges recorded on real
estate loans receivable of $18.1 million, investments in and advances to
unconsolidated entities of $1.2 million and a note receivable from a former
officer of the Company of $990,000 during the nine months ended September 30,
2000.
Separation agreement expenses of $2.8 million were recorded during the
nine months ended September 30, 1999 in connection with the resignation of a
former officer of the Company. These expenses were comprised of cancellation of
indebtedness payable by the former officer to the Company of $2.6 million and
$200,000 in costs payable to third parties in connection with a separation
agreement with the former officer.
See "Three months ended September 30, 2000 compared with the three
months ended September 30, 1999" for discussion of amounts recorded in
connection with an extraordinary loss associated with debt extinguishment.
The Company recorded aggregate losses of $9.6 million and $1.9 million
for the nine months ended September 30, 2000 and 1999, respectively, in
connection with its portion of the losses incurred by the Company's Equity
Investees. This increase is primarily due to the $7.8 million credit loss
25
recorded by ET Capital on the AGE Institute of Florida second mortgage
transaction during the second quarter of 2000.
Liquidity and Capital Resources
Net cash provided by operating activities was $6.3 million for the nine
months ended September 30, 2000 compared to $13.0 million for the corresponding
period in 1999. The decrease in net cash provided by operating activities is
primarily the result of net changes in assets and liabilities, a decrease in
interest revenue and an increase in interest expense.
Net cash used in investing activities was $340,000 for the nine months
ended September 30, 2000 compared to $4.2 million for the corresponding period
in 1999. Net cash used in investing activities for the nine months ended
September 30, 2000 principally included additional funding of reserve funds and
deposits of $887,000 and capital expenditures of $112,000 partially offset by
repayments of advances to unconsolidated entities of $659,000. Net cash used in
investing activities for the nine months ended September 30, 1999 principally
included funding of (a) $5.1 million in construction loans, (b) $2.6 million in
reserve funds and deposits and (c) $1.7 million in capital expenditures,
partially offset by $4.2 million in payments received on term and construction
loans receivable and $720,000 of proceeds received from unconsolidated entities.
Net cash used in financing activities was $6.7 million for the nine
months ended September 30, 2000 compared to $7.9 million for the corresponding
period in 1999. The decrease in net cash used in financing activities was
primarily due to a 1999 prepayment penalty on a mortgage loan of $1.2 million
During 2000, the Company had no new borrowings and continued repayment of
existing borrowings in 2000, while in 1999, debt repayments were partially
offset by new borrowings. Distributions to shareholders and minority interests
also decreased from 1999 to 2000.
At September 30, 2000, the Company's consolidated net real estate
investments in properties and loans aggregated $198.3 million. The Company has a
working capital deficit of $59.1 million at September 30, 2000, resulting
primarily from the classification of the Credit Facility with an outstanding
balance of $39.0 million at September 30, 2000 as current based on its maturity
date of June 30, 2001, the classification of two bonds payable totaling $20.0
million at September 30, 2000 as current based on the Company's failure since
June 30, 2000 to meet the minimum net worth and interest coverage requirements
under guarantee agreements relating to the underlying mortgages and the
classification of one mortgage payable with an outstanding balance of $2.8
million at September 30, 2000 as current based on the bankruptcy filing by
Genesis. The Company also continued not to meet the minimum tangible net worth,
the minimum net asset value and the interest coverage ratio requirements under
the Credit Facility at September 30, 2000. Cash and cash equivalents were $2.9
million and $3.6 million, at September 30, 2000 and December 31, 1999,
respectively.
26
As of September 30, 2000, the Company had shareholders' equity of $73.4
million and Credit Facility borrowings and mortgages and bonds payable to third
parties aggregating $147.1 million, which represents a debt to equity ratio of
2.01 to 1. This was an increase from the debt to equity ratio of 1.44 to 1 at
December 31, 1999. This increase was due primarily to a net decrease in
shareholder's equity of $30.1 million, which resulted from a net loss of $25.8
million and distributions to shareholders of $4.3 million for the nine months
ended September 30, 2000.
At September 30, 2000, the Company's third party indebtedness of $147.1
million consisted of $69.0 million in variable rate debt and $78.1 million in
fixed rate debt. The weighted average annual interest rate on this debt was
8.72%. Based on interest rates at September 30, 2000, quarterly debt service
requirements related to this debt approximate $3.9 million. In addition, the
Company has guaranteed an additional $8.5 million of indebtedness of ET
Sub-Meridian.
The unfunded portion of construction loan commitments made by the
Company were approximately $347,000 at September 30, 2000. Due to certain
defaults by the borrowers under the loan agreements, the Company believes it is
no longer obligated to provide any further funding.
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 September 30,
2000 of $21.0 million, net of allowance for credit losses, 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.
The Company also had the option to purchase and leaseback one facility
from an unaffiliated company for $13.0 million upon maturity of the related
construction loan. The Company did not exercise its option to purchase this
facility upon the August 1, 2000 maturity date.
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 September
30, 2000, the Company had $39.0 million outstanding under the Credit Facility.
27
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 $58.5 million, net of allowance for credit losses, are included in the
Credit Facility borrowing base and pledged as collateral at September 30, 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. 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.
The Company is currently seeking a waiver for its failure to meet the
minimum tangible net worth, minimum net asset value and minimum interest
coverage ratio requirements under the Credit Facility at September 30, 2000 and
June 30, 2000, principally resulting from the bad debt charges recorded on real
estate loans receivable, investments in and advances to unconsolidated entities
and a note receivable from a former officer of the Company and certain other
assets during the second quarter of 2000.
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
September 30, 2000 was 9.44%, 2.75% over one-month LIBOR.
The Company paid financing fees and other related costs of
approximately $484,000 for the nine months ended September 30, 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 $1.4 million at September 30, 2000.
Deferred financing costs of $464,000 were amortized during the nine months ended
September 30, 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. Any further reduction in the
Company's cash flows relating to the bankruptcy filings of Genesis and Multicare
or otherwise, however, would adversely affect the Company's ability to meet its
debt service requirements and could further significantly and adversely affect
its financial condition and results of operations. The Credit Facility currently
28
matures on June 30, 2001. If the Company is unable to pay-off or obtain
replacement financing of the Credit Facility by June 30, 2001, or is unable to
negotiate a further extension of the current Credit Facility at that time, or
the Company is unable to obtain waivers of the failed covenants or a forbearance
agreement from the lender, the bank could exercise its right to foreclose on the
collateral securing the Credit Facility. The Company also failed to meet the
minimum net worth and interest coverage requirements under guarantee agreements
relating to two bonds payable totaling $20.0 million at September 30, 2000. If
the Company is unable to obtain waivers of the failed covenants under the bonds
payable or a forbearance agreement from the bondholders, the bondholders could
exercise their rights to accelerate the related indebtedness or foreclose on the
underlying collateral immediately. Foreclosure by the lenders would also have a
significant adverse affect on the Company's ability to continue its operations.
Future increases in interest rates, as well as any defaults by tenants on their
leases with the Company, also could adversely affect the Company's cash flow and
its ability to pay its obligations. See "Item 3. Quantitative and Qualitative
Disclosures About Market Risk."
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. As Genesis
and Multicare are not permitted to make interest payments to ElderTrust during
the pendency of their bankruptcy filings, these filings have significantly
reduced the Company's cash flow. As a result, the Company has suspended further
quarterly distributions to its shareholders. The Company believes the
distributions made to shareholders to date during 2000 will be sufficient to
satisfy its REIT distribution requirements for 2000.
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 September 30, 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.
29
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.
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.
30
The following table presents the Company's Funds from Operations for
the periods presented below:
For the three months For the nine months ended
Ended September 30, September 30,
-------------------------------- --------------------------------
2000 1999 2000 1999
------------- -------------- ------------ -------------
(in thousands)
Funds from Operations:
Net loss ($584) ($593) ($26,790) ($1,466)
Minority interest (40) (40) (1,926) (99)
------ ------ -------- -------
Net loss before minority interest (624) (633) (28,716) (1,565)
Adjustments:
Real estate depreciation and amortization:
Consolidated entities 1,463 1,517 4,522 4,477
Unconsolidated entities 1,122 1,122 3,366 3,367
Extraordinary loss on debt extinguishment - 1,296 - 1,296
------ ------ -------- -------
Funds from Operations before allocation to
minority interest 1,961 3,302 (20,828) 7,575
Less:
Funds from Operations allocable to minority
interest (133) (221) 1,396 (507)
------ ------ -------- -------
Funds from Operations attributable to the
common shareholders $1,828 $3,081 ($19,432) $7,068
====== ====== ======== =======
31
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
June 30, 2000 as filed with the Securities and Exchange Commission (the "SEC").
On June 22, 2000, Genesis and Multicare announced that they had filed
for Chapter 11 bankruptcy protection following debt restructuring discussions
with their senior lenders.
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 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. 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.
32
The following table sets forth certain summary condensed consolidated
financial data for Genesis as of and for the periods indicated. Genesis
consolidates the results of Multicare, in which Genesis has a 43.6% interest.
The non-Genesis shareholders' remaining 56.4% in Multicare is recorded as
minority interest.
For the three months For the nine months
ended June 30, ended June 30,
---------------------------------- ---------------------------------
2000 1999 2000 1999
--------------- --------------- -------------- --------------
(in thousands, except per share data)
Operations Data
- ------------------------------------------------------
Net revenues $615,851 $465,088 $1,807,578 $1,408,911
Operating income before restructuring and capital
costs (1) 20,242 60,430 123,129 183,794
Multicare joint venture restructuring charge - - 420,000 -
Depreciation and amortization 29,423 18,887 87,578 55,453
Lease expense 9,661 6,655 28,674 19,641
Interest expense, net 61,180 29,515 170,682 85,295
Income (loss) before income taxes, minority
interest, equity in net loss of unconsolidated
affiliates, extraordinary item and cumulative
effect of accounting change (80,022) 5,373 (583,805) 23,405
Income tax expense (benefit) (20,233) 2,901 (35,968) 10,851
Income (loss) before minority interest, equity in
net loss of unconsolidated affiliates,
extraordinary item and cumulative effect of
accounting change (59,789) 2,472 (547,837) 12,554
Minority interest 10,268 - 23,295 -
Equity in net loss of unconsolidated affiliates - (3,475) - (8,626)
Income (loss) before extraordinary item and
cumulative effect of accounting change (49,521) (1,003) (524,542) 3,928
Extraordinary item, net of tax - - - (2,100)
Cumulative effect of accounting change (3) - - (10,412) -
Net income (loss) (49,521) (1,003) (534,954) 1,828
Net loss available to common shareholders (2) ($60,937) ($5,858) ($566,051) ($12,740)
Per common share data:
Basic and diluted
Loss before extraordinary items and cumulative
effect of accounting change ($1.25) ($0.17) ($11.94) ($0.30)
Net loss ($1.25) ($0.17) ($12.16) ($0.36)
Weighted average shares common stock and
equivalents 48,641,154 35,371,499 46,542,614 35,268,910
- ---------------
(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.
33
June 30, September 30,
-------------------- ------------------
2000 1999
-------------------- ------------------
(dollars in thousands)
Balance Sheet Data
- --------------------------------------------------------
Working capital $555,793 $ 235,704
Total assets 3,447,554 2,429,914
Long-term debt 101,440 1,484,510
Liabilities subject to compromise 2,481,890 -
Shareholders' equity $ 71,258 $ 587,890
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 9.55% at September 30, 2000. Assuming
the Credit Facility and variable rate mortgage balances outstanding at September
30, 2000 of $69.0 million remains constant, each one percentage point increase
in interest rates from 9.55% at September 30, 2000 would result in an increase
in interest expense for the next twelve months of approximately $690,000, 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. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources."
34
PART II - OTHER INFORMATION
ITEM 3. Defaults Upon Senior Securities
Events of default have been declared under two bonds payable totaling
$20.0 million at September 30, 2000, which are guaranteed by the Company, based
on the Company's failure since June 30, 2000 to meet the minimum net worth and
interest coverage requirements under guarantee agreements relating to the
underlying mortgages. In addition, an event of default has occurred under one
mortgage payable with an outstanding balance of $2.8 million at September 30,
2000 based on the bankruptcy filing by Genesis. The Company also continued not
to meet the minimum tangible net worth, the minimum net asset value and the
interest coverage ratio requirements under the Credit Facility at September 30,
2000.
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 37.
(b) Reports on Form 8-K
On July 7, 2000, ElderTrust filed a Form 8-K addressing the June 22,
2000 Chapter 11 bankruptcy filings by Genesis and Multicare. The Form
8-K also described impairment charges on loans and other investments
anticipated to be recorded by ElderTrust during the quarter ended June
30, 2000 and announced the suspension of quarterly distributions to
shareholders and that certain events of default had been declared under
its Credit Facility and certain other outstanding indebtedness.
35
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 November 13, 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)
36
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
11.1 Computation of basic and diluted loss per share for the three and
nine months ended September 30, 2000 and 1999.
27.1 Financial Data Schedule for the nine months ended September 30,
2000.
37