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, 2003
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 of (I.R.S. Employer
incorporation or organization) Identification Number)
2711 Centerville Road, Suite 108, Wilmington, DE 19808
(Address of principal executive offices) (Zip Code)
(302) 993-1022
(Registrants 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 by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Exchange Act).
Yes ____ No X
Indicate the number of shares outstanding of each of the issuers
classes of common stock, as of the latest practicable date:
Class Outstanding at October 31, 2003
_________________________________ _______________________________
Common shares of beneficial 7,784,446
interest, $0.01 par value per
share
ELDERTRUST
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2003
TABLE OF CONTENTS
PART I: FINANCIAL INFORMATION Page
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of September
30, 2003 (unaudited) and December 31, 2002............... 1
Condensed Consolidated Statements of Operations for the
three and nine month periods ended September 30, 2003
and 2002 (unaudited)..................................... 2
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 2003 and 2002 (unaudited) 3
Notes to Unaudited Condensed Consolidated Financial
Statements............................................... 4
Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations............... 11
Item 3. Quantitative and Qualitative Disclosures About
Market Risk...................................... 34
Item 4. Controls and Procedures............................. 35
PART II: OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.................... 35
SIGNATURES...................................................... 37
EXHIBIT INDEX................................................... 38
i
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
ELDERTRUST
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
September 30,
2003 December 31,
(unaudited) 2002
-----------------------------
ASSETS
Assets:
Real estate properties, at cost $163,968 $306,553
Less accumulated depreciation and
amortization of capital leases (28,510) (44,921)
Land 16,570 20,425
-----------------------------
Net real estate properties 152,028 282,057
Properties held for sale 118,189 926
Cash and cash equivalents 4,180 7,398
Restricted cash 10,181 11,259
Accounts receivable, net of allowance
of $28 and $16, respectively 159 119
Accounts receivable from unconsolidated
entities - 65
Prepaid expenses 975 613
Investment in and advances to unconsolidated
entities, net of allowance of $1,292 at
December 31, 2002 - 3,187
Other assets, net of accumulated amortization
and depreciation of $1,331 and $1,128,
respectively 1,089 1,151
-----------------------------
$286,801 $306,775
=============================
LIABILITIES AND SHAREHOLDERS EQUITY
Liabilities:
Guidance line of credit $ 5,000 $ 3,067
Accounts payable and accrued expenses 1,037 1,441
Accounts payable to unconsolidated entities - 47
Mortgages, bonds, note payable and capital
lease obligations 104,414 204,889
Mortgages and capital lease obligation
related to properties held for sale 82,226 1,007
Notes payable to unconsolidated entities - 3,844
Other liabilities 7,712 6,267
-----------------------------
Total liabilities 200,389 220,562
-----------------------------
Minority interest 3,481 3,469
Shareholders equity:
Preferred shares, $.01 par value;
20,000,000 shares authorized;
none outstanding - -
Common shares, $.01 par value; 100,000,000
shares authorized; 7,784,446 and
7,540,142 shares issued and outstanding,
respectively 78 75
Capital in excess of par value 121,974 121,988
Deficit (39,121) (39,319)
-----------------------------
Total shareholders equity 82,931 82,744
-----------------------------
Total liabilities and shareholders equity $286,801 $306,775
=============================
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,
--------------------------------------
2003 2002 2003 2002
--------------------------------------
Revenues:
rental $4,755 $3,874 $14,177 $11,563
Interest 59 69 188 214
Interest from unconsolidated
equity investees - 217 - 647
Other income - 5 - 226
--------------------------------------
Total revenues 4,814 4,165 14,365 12,650
--------------------------------------
Expenses:
Property operating expenses 314 285 921 998
Interest expense, including
amortization of deferred
finance costs 2,070 1,835 6,191 5,571
Depreciation and amortization 1,459 1,195 4,375 3,586
General and administrative 573 551 2,042 1,705
Bad debt recovery - - (894) -
Gain on debt extinguishment (1,856) - (1,856) -
Severance expense 1,341 - 1,341 -
--------------------------------------
Total expenses 3,901 3,866 12,120 11,860
--------------------------------------
Net income before equity in
losses of unconsolidated
entities and minority interest 913 299 2,245 790
Equity in losses of unconsolidated
entities, net - (73) - (236)
Minority interest (36) (10) (81) (32)
--------------------------------------
Income from continuing operations 877 216 2,164 522
Income from discontinued
operations, net of minority
interest 1,433 469 501 1,115
--------------------------------------
Net income $2,310 $685 $2,665 $1,637
======================================
Income Per Share
- ----------------------------------
Basic weighted average number of
common shares outstanding 7,722 7,435 7,678 7,378
--------------------------------------
Basic income per share from
continuing operations $0.11 $0.03 $0.28 $0.07
Basic income per share from
discontinued operations $0.19 $0.06 $0.07 $0.15
Basic net income per share $0.30 $0.09 $0.35 $0.22
Diluted weighted average number of
common shares outstanding 7,770 7,741 7,709 7,701
--------------------------------------
Diluted income per share from
continuing operations $0.11 $0.03 $0.28 $0.07
Diluted income per share from
discontinued operations $0.19 $0.06 $0.07 $0.14
Diluted net income per share $0.30 $0.09 $0.35 $0.21
Dividends declared per share $0.16 - $0.32 -
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,
---------------------
2003 2002
---------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $2,665 $1,637
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 8,129 4,932
Bad debt expense (recovery) (896) 19
Stock compensation expense 30 -
(Gain) loss on sale of property,
plant and equipment (203) -
Gain on debt extinguishment (2,475) -
Loss on impairment of long-lived assets 2,021 250
Minority interest and equity in losses
from unconsolidated entities 100 1,674
Net changes in assets and liabilities:
Accounts receivable and prepaid expenses (179) (829)
Accounts payable and accrued expenses (391) 235
Deferred lease costs - (154)
Other 1,165 (848)
---------------------
Net cash provided by operating activities 9,966 6,916
---------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash acquired from acquisition of
unconsolidated subsidiaries - 495
Cash paid to acquire unconsolidated entities - (85)
Capital expenditures (362) (234)
Proceeds from affiliates - 650
Proceeds from sale of rental property 2,590 -
Net change in restricted cash 1,065 386
Deferred finance cost - (232)
Other 18 -
---------------------
Net cash provided by investing activities 3,312 980
---------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under guidance
line/bank credit facility (3,567) (7,370)
Borrowings under the guidance line 5,500 3,067
Principal payments on mortgages and
bonds payable (4,274) (1,007)
Payment of principal on Pennsburg &
Harston Hall mortgage (11,500) -
Distributions to shareholders (2,468) -
Deferred finance costs (51) -
Distributions to minority interests (94) (3)
Stock options exercised (41) 41
Other - (64)
---------------------
Net cash used in financing activities (16,495) (5,336)
---------------------
Net decrease in cash and cash equivalents (3,218) 2,560
Cash and cash equivalents, beginning of period 7,398 2,676
---------------------
Cash and cash equivalents, end of period $4,180 $5,236
=====================
Supplemental cash flow information:
Cash paid for interest $10,457 $5,970
See accompanying notes to unaudited condensed
consolidated financial statements.
3
ELDERTRUST
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial
statements of ElderTrust and its consolidated subsidiaries (ElderTrust
or the Company) should be read together with the consolidated financial
statements and notes the for the year ended December 31, 2002 included
in the Companys Annual Report on Form 10-K filed with the Securities
and Exchange Commission.
1. Certain Significant Risks and Uncertainties
Liquidity
The Company expects to meet its short-term liquidity requirements
generally through net cash provided by operations. The Company believes
that its net cash provided by operations will be sufficient to allow the
Company to make distributions necessary to enable the Company to qualify
as a real estate investment trust for federal income tax purposes.
On July 17, 2003, the Company borrowed $5.5 million under the Guidance
Line with Wachovia Bank. On August 13, 2003, those funds, along with $6
million of additional funds (consisting of $2.6 million in proceeds from
the Harston Hall sale, $2.5 million related to the lease restructuring
that closed in August 2003 and $0.9 million of operating cash), were used
to satisfy in full a $14 million, non-recourse loan secured by the Companys
Harston Hall and Pennsburg properties. Harston Hall and Pennsburg
properties were part of a series of transactions the Company entered into
with Genesis Health Ventures, Inc. (Genesis). See Note 3 Restructuring
Agreements for additional information on these agreements and transactions.
The Company has a working capital deficit of $4.7 million at September
30, 2003, primarily due to the outstanding balance on the Guidance Line of
$5.0 million. On October 30, 2003, the Company repaid the $5 million
outstanding balance on the Guidance Line. The Company has $7.5 million of
availability under the Guidance Line, subject to lender approval and
borrowing base limitations.
2. Discontinued Operations
Under Statement of Financial Accounting Standards No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, the
Company is required to reclassify from continuing operations to
discontinued operations the results of operations from any property
that is disposed of or is classified as held for sale and where the
Company will not have significant continuing involvement.
The Salisbury Medical Office Building (SMOB), located in Salisbury,
Maryland, was classified as held for sale in June 2002. On March 7, 2003,
the Company sold the SMOB for approximately $1.0 million. These proceeds
were used to payoff the $1.0 million of debt secured by the property.
4
ELDERTRUST
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (continued)
On August 13, 2003, the Harston Hall property, located in Flourtown,
Pennsylvania, was sold to Genesis Health Ventures, Inc. (Genesis) for
approximately $2.6 million. The $14.0 million non-recourse debt secured
by the Harston Hall and Pennsburg properties was satisfied in full for a
payment of $11.5 million prior to the sale. The extinguishment of the
Harston Hall portion of the debt resulted a gain of $0.6 million, which
is included in discontinued operations.
On September 11, 2003, the Company entered into a definitive Master
Agreement (the Genesis Agreement) with Genesis. Under the terms of the
Genesis Agreement, five properties, (Liberty Court also known as
Rittenhouse, Willowbrook, Phillipsburg, Riverview Ridge and Pleasant
View), would be sold to the company spun-off from Genesis Health Ventures,
which will be known as Genesis HealthCare Corporation (HealthCare).
Among other transactions, HealthCare would purchase the ownership interest
in the Companys subsidiary ET Sub-Meridian Limited Partnership, L.L.P.
(Meridian) that is the prime lessee on seven properties currently subleased
to Genesis and accounted for by the Company as capital leases (Meridian 7).
All 12 of these properties have been accounted for as discontinued
operations at September 30, 2003.
The following represents a summary of the results of operations for
the above properties, which were classified in discontinued operations
for the nine month periods ended September 30, 2003 and 2002:
For the nine months ended
September 30,
-------------------------
2003 2002
-------------------------
(unaudited, in thousands)
Rental revenue $ 9,960 $ 2,479
Other income 1 2,183
-------------------------
Total revenue 9,961 4,662
Interest expense 4,597 799
Depreciation and amortization 3,431 907
Property operating expense 24 42
General and administrative 190 152
Loss on impairment of assets 2,021 250
Gain on sale of fixed assets (203) -
Gain on debt restructuring (619) -
-------------------------
Total expenses 9,441 2,150
Income before minority interest 520 2,512
Equity in losses of unconsolidated
subsidiaries - (1,344)
Minority interest (19) (53)
-------------------------
Income from discontinued operations $501 $1,115
-------------------------
5
ELDERTRUST
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. Restructuring Agreements
The Company announced on July 14, 2003, that it had entered into a
non-binding letter of intent (the LOI) with Genesis Health Ventures, Inc.
(Genesis) to restructure their current business relationship. As was
previously announced, Genesis intends to spin-off its ElderCare division
(the Spin-Off) which will be known as Genesis HealthCare Corporation
(HealthCare). Operations of ElderTrust assets that are leased to
Genesis would be spun off to HealthCare as part of the transaction and,
as a result, ElderTrust has certain approval rights with respect to the
Spin-Off. The LOI sets forth the proposed terms of the restructuring of
the Companys current transactions with Genesis and approval of the Spin-
Off. The LOI also addresses assets currently leased by the Company to
Crozer/Genesis ElderCare Limited Partnership (Crozer) and Genesis
Eldercare Partnership of New England, L.P. (NDNE), a 90% owned subsidiary
of Genesis, and the proposed assignment of leasehold interests to
Benchmark Assisted Living, LLC (Benchmark).
On August 13, 2003, the Company announced the completion of its
restructured lease transactions with Crozer, including the satisfaction
of its $14 million, non-recourse loan secured by the Harston Hall and
Pennsburg properties for a cash payment of $11.5 million. Under the
terms of the agreements with Crozer:
* The Harston Hall property was sold to Genesis Health Ventures, Inc.
(Genesis) for $2.6 million;
* The annual rent on the Pennsburg property was reduced to $656,000
per year in exchange for a one-time payment by Genesis of $2.5
million;
* The leases for the Pennsburg, Chapel Manor and Belvedere properties
were extended for approximately twelve years, and certain other
changes were made to the leases, including, but not limited to,
elimination and return of the security deposits, the addition of a
lease coverage ratio test of at least 1.25:1, and the addition of
lease guarantees by Genesis. Following Genesis proposed Spin-Off,
the leases will be guaranteed by HealthCare.
ElderTrust recorded an impairment charge on the Harston Hall
property of $2.0 million in the quarter ended June 30, 2003. During
the quarter ended September 30, 2003, the Company recorded a gain of
approximately $0.2 million upon the sale of Harston Hall and a gain of
approximately $0.6 million corresponding to the amount of debt forgiven
by the lender to satisfy the related mortgage loan.
On September 11, 2003, the Company announced that it entered into
a definitive Master Agreement (the Genesis Agreement) with Genesis and
a purchase and sale agreement (the Benchmark Agreement) with NDNE.
6
ELDERTRUST
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (continued)
Under the terms of the Benchmark Agreement, the Company completed
the following transactions on October 24, 2003:
* NDNE assigned their leasehold interests in the Cabot Park,
Cleveland Circle, North Andover and Vernon Court properties
to Benchmark;
* Annual rent under the leases were reduced by $1,380,000 per year;
* The terms of the leases were extended ten years to 2013;
* Benchmark has the option to acquire the Cabot Park, Cleveland
Circle and North Andover properties, on the fifth and tenth lease
anniversary dates;
* Benchmark has an option to acquire the Vernon Court property at
any time during the lease term;
* The leases have limited guarantees equal to one years rent provided
by AEW Partners IV, a significant investor in Benchmark; and
* The Company received $5.0 million as consideration for the above
transactions.
Under the terms of the Genesis Agreement:
* On October 29, 2003, the Company sold the Liberty Court property
to Genesis for approximately $10.3 million;
* On October 29, 2003, rents on Heritage Woods and Sanatoga Court
properties were reduced by $0.7 million per year and their lease
terms were extended through 2012 in exchange for a cash payment
of approximately $2.6 million.
* On November 7, 2003, Genesis purchased the Companys ownership
interest in Meridian which is the prime lessee on seven
properties which were subleased to Genesis and accounted for by
the Company as capital leases (Meridian 7);
* Four other properties, (Willowbrook, Phillipsburg, Riverview Ridge
and Pleasant View), will be sold to Healthcare; and
* Genesis would pay a $5.0 million consent fee to the Company
immediately upon completion of the Spin-off. Following the Spin-
Off, the Company would change the guarantor from Genesis to
HealthCare on the six remaining leases with Genesis, including
Heritage Woods, and Sanatoga Court, and make certain other
modifications to those leases.
7
ELDERTRUST
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (continued)
Total consideration for the above transactions is expected to be
approximately $126.7 million, of which approximately $44.1 million is
expected to be received in cash and $82.6 million of existing debt and
capitalized lease obligations are expected to be assumed by the
purchaser. Of these amounts, $93.4 million, including $18 million in
cash and Genesiss assumption of $75.4 million of debt and lease
obligations relate to Meridian which was sold on November 7, 2003.
Also, $5.0 million would be allocable to the guarantor consent fee,
which payment is conditioned upon the occurrence of the spin-off.
Consummation of the remaining restructuring transactions are subject
to various closing conditions, including the receipt of any necessary
lender and other third party consents.
The parties have agreed to complete the remaining transactions
with Genesis as soon as possible but no later than March 31, 2004,
unless extended by the parties.
4. Share Option Plans
The Company applies the intrinsic value-based method of accounting
prescribed by the Accounting Principles Board Opinion No. 25 (APB No.
25), Accounting for Stock Issued to Employees, and related
interpretations, in accounting for its fixed plan share options. As
such, compensation expense would be recorded only if the current market
price of the underlying shares on the date of grant exceeded the
exercise price.
Additionally, during the second quarter of 2003, the Company
issued performance based stock options accounted for as variable plans
under APB No. 25. The Company recognized a minimal amount of
compensation expense related to the performance based stock options
during the period ended September 30, 2003.
The following table shows compensation expense that would have been
recorded during the periods presented, for the Plans based upon the fair
value of the option awards, under SFAS No. 123, Stock Based Compensation.
Pro forma net income and net income per share would have been as
follows:
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------------
2003 2002 2003 2002
--------------------------------------
Net income, as reported $2,310 $ 685 $2,665 $1,637
Add: stock-based employee
compensation under stock
option plans 23 - 30 -
Deduct: total stock-based employee
compensation expense determined
under fair value based method
for all awards, net of related
tax effects (66) (42) (242) (102)
Pro forma net income $2,267 $ 643 $2,453 $1,535
Basic net income per share, as
reported $ 0.30 $ 0.09 $ 0.35 $ 0.22
Basic pro forma net income per
share $ 0.29 $ 0.09 $ 0.32 $ 0.21
Diluted net income per share, as
reported $ 0.30 $ 0.09 $ 0.35 $ 0.21
Diluted pro forma net income per
share $ 0.29 $ 0.08 $ 0.32 $ 0.20
8
ELDERTRUST
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Distributions
On August 15, 2003, the Company paid a quarterly distribution of
$0.16 per common share to shareholders of record on August 1, 2003.
On October 20, 2003, the Companys Board of Trustees authorized the
payment of a quarterly distribution of $0.16 per common share to
shareholders of record on October 30, 2003. The distribution will be
paid on November 14, 2003.
On October 27, 2003, the Company announced its intention to
increase the quarterly dividend from $0.16 to $0.18 per share beginning
with the quarterly dividend for the fourth quarter of 2003. The proposed
dividend increase is conditioned on the completion of the restructuring
transactions with Genesis and is subject to the authorization of the
Companys Board of Trustees.
6. Income Per Share
The following table sets forth the computation of basic and diluted
net income per share for the periods indicated (in thousands, except per
share data):
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------------
2003 2002 2003 2002
--------------------------------------
Basic net income per share:
- ----------------------------------
Weighted average common shares
outstanding 7,722 7,435 7,678 7,378
=====================================
Income from continuing
operations $877 $216 $2,164 $522
Basic income per share from
continuing operations per
share $0.11 $0.03 $0.28 $0.07
Income from discontinued
operations $1,433 $469 $501 $1,115
Basic income per share from
discontinued operations $0.19 $0.06 $0.07 $0.15
Net income $2,310 $685 $2,665 $1,637
Basic net income per share $0.30 $0.09 $0.35 $0.22
9
ELDERTRUST
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (continued)
Diluted net income per share:
- ----------------------------------
Weighted average common shares
outstanding 7,722 7,435 7,678 7,378
Common stock equivalents - stock
options and warrants 48 306 31 323
-------------------------------------
Total weighted average number
of diluted shares 7,770 7,741 7,709 7,701
=====================================
Income from continuing
operations $877 $216 $2,164 $522
Diluted income per share from
continuing operations $0.11 $0.03 $0.28 $0.07
Income from discontinued
operations $1,433 $469 $501 $1,115
Diluted income per share from
discontinued operations $0.19 $0.06 $0.07 $0.14
Net income $2,310 $685 $2,665 $1,637
Diluted net income per share $0.30 $0.09 $0.35 $0.21
Units of ElderTrust Operating Limited Partnership are not included
in the determination of weighted average common shares outstanding for
purposes of computing diluted income per share as they are anti-dilutive.
10
ITEM 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
Forward-Looking Statements
Managements 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 but not limited to 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 Companys future performance, and are subject to risks
and uncertainties and other important factors that could cause the
Companys 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:
* the extent to which the Company can consummate the proposed
restructuring transactions, described herein with Genesis Health
Ventures, Inc. (Genesis), the Companys principal tenant;
* the ability of Genesis (and after the proposed spin-off of its
healthcare assets, HealthCare) to continue making lease payments
to the Company;
* fluctuation of interest rates;
* the ability to achieve planned reductions in recurring overhead
expenses;
* availability, terms and use of capital;
* general economic, business and regulatory conditions;
* federal and state government regulation;
* changes in Medicare and Medicaid reimbursement programs; and
* competition.
Refer to the Companys Annual Report on Form 10-K for the year ended
December 31, 2002 for a discussion of these and other factors which
management believes may impact the Company. The forward-looking
statements included herein represent the Companys judgment as of the
date of this Form 10-Q and should be read in conjunction with the
unaudited condensed consolidated financial statements and notes thereto
appearing elsewhere in this report. Although the Company believes that
the expectations reflected in these forward-looking statements are
reasonable, there can be no assurance that such expectations will prove
to be correct. All subsequent written and oral forward-looking statements
attributable to the Company are expressly qualified in their entirety by
the cautionary statements. The Company disclaims, however, any intent or
obligation to update its forward-looking statements.
11
General
The Company is a self-managed and self-administered real estate
investment trust (REIT) that invests principally in senior housing and
other healthcare facilities, primarily skilled nursing facilities,
assisted and independent living facilities and medical office and other
buildings. The Company is the general partner of, and conducts all of
its operations through, ElderTrust Operating Limited Partnership (the
Operating Partnership). At September 30, 2003, the Company owned a 96.3%
interest in the Operating Partnership.
The Companys consolidated assets consist primarily of the assets of
the Operating Partnership and its consolidated subsidiaries. At September
30, 2003, the Companys consolidated assets primarily consisted of a
diversified portfolio of 30 healthcare properties with an aggregate
carrying value of $270.2 million. The portfolio consists of eleven
assisted living facilities, fourteen skilled nursing facilities, including
seven properties that are leased by the Company under capital leases, two
independent living facilities and three medical office and other buildings.
Skilled nursing facilities and assisted and independent living facilities
comprised approximately 96% of the Companys consolidated assets at September
30, 2003.
Approximately 93% of the Companys consolidated assets at September
30, 2003 consisted of properties leased to or managed by subsidiaries of
Genesis or entities in which it has an equity interest (Genesis Equity
Investees). Revenues recorded by the Company in connection with these
leases aggregated $5.0 million during the third quarter of 2003 and $3.7
million during the third quarter of 2002. Revenues for the nine months
ended September 30, 2003 and 2002 were $21.3 million and $11.2 million,
respectively. As a result of these relationships with Genesis, the
Companys revenues and ability to meet its obligations depend, in
significant part, upon the ability of Genesis and Genesis Equity
Investees to meet their lease obligations. Any failure of these
entities to continue their operations and/or to continue to make lease
payments to the Company could have a significant adverse impact on the
Companys operations and cash flows due to the significant portion of our
properties leased to such entities.
During the third quarter of 2003, the Company entered into
agreements restructuring certain of its transactions with Genesis,
Crozer/Genesis ElderCare Limited Partnership (Crozer) and Genesis
Eldercare Partnership of New England, L.P. (NDNE), which is a 90% owned
subsidiary of Genesis, and the proposed assignment of leasehold interests
to Benchmark Assisted Living, LLC (Benchmark). As a result of
transactions completed pursuant to the terms of those agreements, as of
November 10, 2003, the Companys portfolio consists of 22 healthcare
properties with an aggregate carrying value of $168.4 million. The
portfolio consists of 11 assisted living facilities, 6 skilled nursing
facilities, 2 independent living facilities and 3 medical office and other
buildings. Also, under those agreements, the Company would sell an
additional four skilled nursing facilities to Genesis.
Critical Accounting Policies
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that
12
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting
period. Actual results could vary from those estimates.
The Companys critical accounting policies are as follows:
Impairment of Long-Lived Assets
The Company reviews its long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable or when managements intended use of an
asset has changed. Once circumstances require a review the asset is
tested to determine if it is impaired. An asset is impaired if the
carrying amount of an asset is greater than the future net cash flows,
measured on an absolute basis, expected to be generated by the asset.
If the asset is impaired, the Company records an impairment charge equal
to the assets carrying amount over its estimated fair value.
Real Estate Properties
Real estate properties are recorded at cost less accumulated
depreciation, amortization and impairment charges. Acquisition costs
and transaction fees, including legal fees, title insurance, transfer
taxes, external due diligence costs and market interest rate adjustments
on assumed debt directly related to each property are capitalized as a
cost of the respective property. The cost of real estate properties
acquired is allocated between land, buildings, improvements and leases,
if applicable, based upon estimated market values at the time of
acquisition. Depreciation is provided for on a straight-line basis
over an estimated composite useful life of twenty-eight and one-half
years for buildings and improvements.
We classify the properties we are actively marketing as held for
sale once all of the following conditions are met:
* our board has approved the sale, and
* we have a fully executed agreement with a qualified buyer which
provides for no significant outstanding or continuing obligations
with the property after sale and does not contain any significant
contingencies related to the completion of the transaction.
We carry properties held for sale at the lower of their carrying
values or estimated fair values less costs to sell. We cease
depreciation at the time the asset is classified as held for sale. We
segregate the held for sale properties on our consolidated balance sheet.
Revenue Recognition
The Companys real estate assets are leased to operators primarily
through long-term triple-net leases. These leases generally take the
form of percentage, minimum or fixed rents. Lease payments are
recognized as revenue when earned, based on the provisions of the
13
underlying leases. The Company reports base rental revenue on these
leases using the straight-line method over the terms of the respective
leases. The Company records an unbilled rent receivable or payable
representing the amount that the straight-line rental revenue exceeds or
reduces the rent currently collectible under the lease agreements.
Resignation of President and Chief Executive Officer
On September 4, 2003, D. Lee McCreary, Jr. resigned all of his
positions with the Company, including as President and Chief Executive
Officer. The Companys board of directors appointed Michael R. Walker
as Acting President and Chief Executive Officer. The Company recognized
$1.3 million in severance and related costs relating to the severance
agreement with Mr. McCreary during the quarter ended September 30, 2003.
Financial Accounting Standards Board Statement No. 150
Under Financial Accounting Standards Board Statement No. 150,
Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity (FASB 150), companies are required to report
a cumulative effect of a change in accounting, for the difference between
the previously reported carrying amount of mandatory redeemable financial
instruments and the amount to be reported as a liability for those
instruments.
The Company adopted FASB 150 for the quarter ended September 30,
2003 and initially recorded a $49,000 expense for a cumulative effect
of accounting change. On October 29, 2003, the Financial Accounting
Standard Board announced that certain provisions of FASB 150, related
to the difference between the previously reported carrying amount of
mandatory redeemable financial instruments and the amount to be reported
as a liability for those instruments, will be indefinitely deferred.
Due to the revised accounting treatment, the Company has revised its
earnings for the three and nine month periods ended September 30, 2003 to
eliminate this $49,000 charge recorded as a result of the application of
FASB 150. Below is a reconciliation of the effect of the restatement.
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------------
(in thousands, except per share amount)
Net income as reported in press
release $2,261 $2,616
Add: Cumulative effect of
accounting change 49 49
--------------------------------------
Net income $2,310 $2,665
======================================
Basic net income per share as
reported in press release $0.29 $0.34
Add: Cumulative effect of
accounting change $0.01 $0.01
Basic net income per share $0.30 $0.35
14
Diluted net income per share as
reported in press release $0.29 $0.34
Add: Cumulative effect of
accounting change $0.01 $0.01
Diluted net income per share $0.30 $0.35
Restructuring Agreements
During the third quarter of 2003, the Company entered into
agreements restructuring certain of its transactions with Genesis,
Crozer/Genesis ElderCare Limited Partnership (Crozer) and Genesis
Eldercare Partnership of New England, L.P. (NDNE), which is a 90%
owned subsidiary of Genesis Health Ventures (Geneisis), and Benchmark
Assisted Living, LLC (Benchmark).
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
The pro forma condensed consolidated balance sheet assumes all of
the following transactions occurred on September 30, 2003:
Completed transactions during the period from October 1, 2003 through
November 14, 2003
* The sale of the Liberty Court property to Genesis;
* The sale of the Meridian 7 ownership interest to Genesis;
* Reduction in rents on five properties in exchange for a one-time
cash payment.
In progress transactions as of November 14, 2003
* Sale of four properties to Genesis;
* Repayment of one mortgage loan and one bond obligation;
* Modification of certain leases;
* Consent to Genesis reorganization in exchange for a one-time
cash payment.
In the opinion of the Companys Management, all material adjustments
necessary to reflect the effects of the preceding transactions have been
made. The unaudited condensed consolidated pro forma balance sheet is
presented for illustrative purposes only and is not necessarily
indicative of what the actual financial position would have been had
the transactions described above occurred on September 30, 2003, nor
does it purport to represent the future financial position of the
Company. See Note 3- Restructuring Agreements for additional
information on these agreements and transactions.
15
Pro forma selected condensed consolidated balance sheet data as
of September 30, 2003:
(unaudited, in thousands)
Foot- In progress Foot- Pro
Historical Completed note Subtotal Transactions note forma
ASSETS
Assets:
Real estate properties,
at cost $163,968 - 163,968 - $163,968
Less accumulated
depreciation and
amortization of capital
leases (28,510) - (28,510) - (28,510)
Land 16,570 - 16,570 - 16,570
---------------------------------------------------------------------
Net real estate properties 152,028 - 152,028 - 152,028
Properties held for sale, net 118,189 (101,769) (a) 16,420 (16,420) (a) -
Cash and cash equivalents 4,180 29,247 (b) 33,427 (6,797) (b) 26,630
Restricted cash 10,181 (1,370) (c) 8,811 (2,753) (c) 6,058
Accounts receivable, net of
allowance of $28 and $16,
respectively 159 - 159 - 159
Prepaid expenses 975 - 975 (419) (d) 556
Other assets, net of
accumulated amortization
and depreciation of $1,331
and $1,128, respectively 1,089 - 1,089 (67) (e) 1,022
---------------------------------------------------------------------
Total Assets $286,801 ($73,892) $212,909 ($26,456) $186,453
=====================================================================
LIABILITIES AND SHAREHOLDERS EQUITY
Liabilities:
Guidance line $ 5,000 ($5,000) $ - $ - $ -
Accounts payable and
accrued expenses 1,037 (539) (f) 498 - 498
Mortgages, bonds, note
payable and capital lease
obligations 104,414 - 104,414 (19,715) (g) 84,699
Mortgages and capital lease
obligation related to
properties held for sale 82,226 (75,910) (h) 6,316 (6,316) (h) -
Other liabilities 7,712 4,988 (i) 12,700 774 (i) 13,474
---------------------------------------------------------------------
Total liabilities 200,389 (76,461) 123,928 (25,257) 98,671
Minority interest 3,481 149 3,630 (12) 3,618
Shareholders equity:
Preferred shares, $.01
par value; 20,000,000
shares authorized;
none outstanding - - - - -
Common shares, $.01 par
value; 100,000,000 shares
authorized; 7,784,446 and
7,540,142 shares issued
and outstanding,
respectively 78 - 78 - 78
Capital in excess of
par value 121,974 - 121,974 - 121,974
Deficit (39,121) 2,420 (j) (36,701) (1,187) (j) (37,888)
---------------------------------------------------------------------
Total shareholders equity 82,931 2,420 85,351 (1,187) 84,164
---------------------------------------------------------------------
Total liabilities and
shareholders equity $286,801 ($73,892) $212,909 ($26,456) $186,453
=====================================================================
</Table>
16
Footnotes:
(a) Sale of properties
Completed
Meridian 7 ($93,567)
Liberty Court (8,202)
-------------
($101,769)
=============
In progress
Willowbrook ($5,307)
Phillipsburg (2,326)
Riverview Ridge (5,441)
Pleasant View (3,346)
-------------
($16,420)
=============
(b) Cash and cash equivalents
Completed
Benchmark lease modification fee $ 5,000
Proceeds received from the sale of properties 26,684
Heritage Woods and Sanatoga Court rent
reduction payment 2,563
Reduction in amounts outstanding under the
Guidance Line (5,000)
-------------
$29,247
=============
In progress
Payment of amounts outstanding under the
Highgate bond ($7,908)
Repayment of the Lopatcong mortgage loan (10,500)
Consent fee from Genesis 5,000
Refund of security deposits (1,679)
Proceeds received from the sale of properties 8,290
-------------
($6,797)
=============
(c) Restricted cash
Completed
Release of Meridian 7 restricted cash ($1,370)
In progress
Bond reserves utilized as part of the Highgate
bond repayment ($2,221)
Refund of security deposits (532)
-------------
($2,753)
=============
(d) Application of previously funded transaction
costs ($419)
(e) Write-off remaining balance of deferred financing
costs related to mortgages to be repaid/assumed ($67)
(f) Payment of accrued interest and other liabilities
upon sale of properties ($539)
(g) Repayment of Lopatcong mortgage loan ($10,500)
Repayment of Highgate bond (9,215)
-------------
($19,715)
=============
17
(h) Mortgages, notes and capital lease obligations
assumed by purchaser
Completed
Meridian 7 note payable and capital lease
obligation ($75,910)
In progress
Pleasant View ($3,699)
Riverview Ridge (2,617)
------------
($6,316)
============
(i) Other liabilities represent deferral of lease
modification payments and the refund of
security and other deposits
Completed
Meridian 7 refund of sublease deposits ($2,575)
Benchmark lease modification payment 5,000
Heritage Woods and Sanatoga lease
modification payment 2,563
------------
$4,988
============
In progress
Return Highgate deposit ($48)
Return security deposits (1,678)
50% of guarantee fee (other 50% recorded
as income) 2,500
------------
$774
============
(j) Represents the impact on income of the various
transactions
Completed
Gain on sale of Meridian 7 partnership interest $ 528
Gain on sale of Liberty Court 1,892
------------
$ 2,420
============
In progress
Loss on sale of Willowbrook ($3,652)
Gain on sale of Phillipsburg 1,025
Loss on sale of Riverview Ridge (176)
Gain on sale of Pleasant View 1,134
Loss on extinguishment of Highgate bond (867)
Transaction costs (1,059)
Guarantor fee on properties sold 2,408
------------
($1,187)
============
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
The pro forma condensed consolidated statements of operations for
the nine months ended September 30, 2003 and the year ended December 31,
2002 assume all of the following transactions occurred on January 1,
2003 and January 1, 2002, respectively:
Completed transactions during the period from October 1, 2003
through November 14, 2003
* The sale of the Liberty Court property to Genesis;
* The sale of the Meridian 7 ownership interest to Genesis;
18
* Reduction in rents on five properties in exchange for a
one-time cash payment;
In progress transactions as of November 14, 2003
* Sale of four properties to Genesis;
* Repayment of one mortgage and one bond obligation;
* Modification of certain leases;
In the opinion of the Companys Management, all material adjustments
necessary to reflect the effects of the preceding transactions have been
made. The unaudited condensed consolidated pro forma statement of
operations is presented for illustrative purposes only and is not
necessarily indicative of what the actual results of operations would
have been had the transactions described above occurred on January 1,
2002, nor does it purport to represent the results of operations for
future periods. See Note 3- Restructuring Agreements for additional
information on these agreements and transactions.
(unaudited, dollars in thousands, except per share amounts)
Nine months ended September 30, 2003
Foot- In progress Foot- Pro
Historical Completed note Subtotal Transactions note forma
Revenues:
Rental $14,177 ($1,211) (a) $12,966 $843 (a) $13,809
Interest 188 - 188 - 188
----------------------------------------------------------------------
Total revenues 14,365 (1,211) 13,154 843 13,997
Expenses:
Property operating expenses 921 - 921 - 921
Interest expense, including
amortization of deferred
finance costs 6,191 (278) (b) 5,913 (911) (b) 5,002
Depreciation and amortization 4,375 - 4,375 - 4,375
General and administrative 2,042 - 2,042 - 2,042
Bad debt expense (recovery) (894) - (894) - (894)
Gain on debt restructuring (1,856) - (1,856) - (1,856)
Severance expense 1,341 - 1,341 - 1,341
----------------------------------------------------------------------
Total expenses 12,120 (278) 11,842 (911) 10,931
----------------------------------------------------------------------
Net income before equity in
losses of unconsolidated
entities and minority
interest 2,245 (933) 1,312 1,754 3,066
Minority interest (81) 41 (c) (40) (65) (c) (105)
----------------------------------------------------------------------
Income from continuing
operations $2,164 ($892) $1,272 $1,689 $2,961
=======================================================================
19
Income Per Share
Basic weighted average number
of common shares outstanding 7,678 7,678 7,678 7,678 7,678
Basic income per share $0.28 ($0.12) $0.16 $0.22 $0.38
Diluted weighted average number
of common shares outstanding 7,709 7,709 7,709 7,709 7,709
Diluted income per share $0.28 ($0.12) $0.16 $0.22 $0.38
</Table>
(unaudited, dollars in thousands, except per share amounts)
Year ended December 31, 2002
Foot- In progress Foot- Pro
Historical Completed note Subtotal Transactions note forma
Revenues:
Rental $16,217 ($1,567) (a) $14,650 $1,124 (a) $15,774
Interest 285 - 285 - 285
Interest from
unconsolidated equity
investees 763 - 763 - 763
Other income 245 - 245 - 245
----------------------------------------------------------------------
Total revenues 17,510 (1,567) 15,943 1,124 17,067
Expenses:
Property operating expenses 1,289 - 1,289 - 1,289
Interest expense, including
amortization of deferred
finance costs 7,843 (412) (b) 7,431 (1,316) (b) 6,115
Depreciation and amortization 5,051 - 5,051 - 5,051
General and administrative 2,273 - 2,273 - 2,273
----------------------------------------------------------------------
Total expenses 16,456 (412) 16,044 (1,316) 14,728
----------------------------------------------------------------------
Net income before equity in
losses of unconsolidated
entities and minority interest 1,054 (1,155) (101) 2,440 2,339
Equity in losses of
unconsolidated entities, net (21) - (21) - (21)
Minority interest (54) 61 (c) 7 (99) (c) (92)
----------------------------------------------------------------------
Income from continuing
operations $979 ($1,094) ($115) $2,341 $2,226
======================================================================
Income Per Share
Basic weighted average
number of common shares
outstanding 7,401 7,401 7,401 7,401 7,401
Basic income per share $0.13 ($0.15) ($0.02) $0.32 $0.30
Diluted weighted average
number of common shares
outstanding 7,708 7,708 7,708 7,708 7,708
Diluted net income per share $0.13 ($0.14) ($0.01) $0.30 $0.29
20
Footnotes:
(a) Represents the reduction in rental revenue for the following properties:
Completed
Nine months ended Year ended
September 30, December 31,
2003 2002
----------------------------------
Pennsburg Manor ($237) ($267)
Vernon Court (310) (414)
Cleveland Circle (178) (237)
Cabot Park (175) (233)
Heritage Woods (279) (373)
Sanatoga Court (32) (43)
----------------------------------
($1,211) ($1,567)
----------------------------------
In progress
Nine months ended Year ended
September 30, December 31,
2003 2002
----------------------------------
Straight-line rent adjustments
and amortization of lease
modification fees $843 $1,124
(b) Represents reduced interest expense due to payoff of debt or
assumption of debt by purchaser:
Completed
Nine months ended Year ended
September 30, December 31,
2003 2002
----------------------------------
Pennsburg Manor $278 $412
In Progress
Nine months ended Year ended
September 30, December 31,
2003 2002
----------------------------------
Repayment of Highgate bond ($543) ($739)
Lopatcong mortgage loan (368) (577)
----------------------------------
($911) ($1,316)
==================================
(c) Represents the allocatin of the impact on income from continuing
operations to minority interest based upon the Companys ownership
of 96.3% and 96.2% of the outstanding units of ElderTrust Operating
Limited Partnership during the nine-months ended September 30, 2003
and the year ended December 31, 2002, respectively:
21
Completed
Nine months ended Year ended
September 30, December 31,
2003 2002
----------------------------------
$41 $61
In progress
Nine months ended Year ended
September 30, December 31,
2003 2002
----------------------------------
($65) ($99)
Pro forma selected Funds From Operations data (see Funds From
Operations below for additional information) for the nine months ended
September 30, 2003 and for the twelve months ended December 31, 2002:
(dollars in thousands, except per share amounts)
Nine months ended September 30, 2003
Nine months ended Year ended
September 30, 2003 December 31, 2002
Funds from Operations:
Net income $ 2,961 $2,226
Minority interest 105 92
----------------------------------
Net income before minority
interest 3,066 2,318
Adjustments to derive funds
from operations:
Add:
Real estate depreciation
and amortization:
Consolidated entities 4,347 5,020
Unconsolidated entities - 758
----------------------------------
Funds from operations before
allocation to minority interest 7,413 8,096
Funds from operations allocable
to minority interest (272) (361)
----------------------------------
Funds from operations
attributable to the common
shareholders $7,141 $7,735
==================================
In the opinion of the Companys Management, all material
adjustments necessary to reflect the effects of the preceding
transactions have been made. The unaudited pro forma selected Funds
From Operations data is presented for illustrative purposes only and
is not necessarily indicative of what the actual financial position
would have been had the transactions described above occurred on January
1, 2003 and January 1, 2002, respectively, nor does it purport to
represent the future financial position of the Company. See Note 3-
Restructuring Agreements for additional information on these agreements
and transactions.
22
Results of Operations
Three months ended September 30, 2003 compared with the three months
ended September 30, 2002
Revenues
Rental revenues were $4.8 million and $3.9 million for the three
months ended September 30, 2003 and 2002, respectively. Rental revenues
attributable to Genesis and Genesis Equity Investees totaled $3.7 million
and $2.9 million, or 77 % and 75% of total rental revenues for the three
months ended September 30, 2003 and 2002, respectively. The amounts and
percentages for the three months ended September 30, 2003 are higher than
the corresponding period in 2002 primarily due to the consolidation, as
of September 30, 2002, of three entities in which the Company obtained a
controlling interest where previously the Company held a 99% non-
controlling interest. These entities generated $3.4 million of rental
revenue, including $2.6 million from Meridian which is included in
discontinued operations for the quarter ended September 30, 2003.
Interest income from unconsolidated equity investees was $0.2 million
for the quarter ended September 30, 2002. These amounts are no longer
applicable following the consolidation of Meridian, Cabot and Cleveland
during the third quarter of 2002, as the loans are eliminated during the
consolidation process.
Expenses
Interest expense, which includes amortization of deferred financing
costs of $102,000 and $89,000, was $2.1 million and $1.8 million for the
three months ended September 30, 2003 and 2002, respectively. The increase
is primarily due to the consolidation of previously unconsolidated entities.
Of the increase, approximately $1.7 million represents interest expense
incurred by those entities. This increase in interest expense was offset
by lower LIBOR rates and lower balances on other debt during 2003 as
compared to the comparable period in 2002.
Depreciation expense was $1.5 million and $1.2 million for the three
months ended September 30, 2003 and 2002, respectively. This increase is
due to the consolidation of previously unconsolidated entities during the
third quarter of 2002.
General and administrative expenses were $0.6 million in each of the
three months ended September 30, 2003 and 2002.
During the quarter the Company recognized a gain of $1.9 million from
the extinguishment of the debt related to the Pennsburg property.
Severance expense of $1.3 million was recorded for the quarter ended
September 30, 2003 in connection with the resignation, on September 4,
2003, of D. Lee McCreary, Jr. from all his positions with the Company,
including President and CEO.
23
Discontinued operations for the three month period ended September
30, 2003 represents the operating results of the following properties:
Meridian 7, Harston Hall, Liberty Court, Phillipsburg, Pleasant View,
Riverview Ridge and Willowbrook. These properties represent assets sold
during the three month period ended September 30, 2003 or assets to be
sold subject to the Genesis Master Agreement. Discontinued operations
for the three month period ended September 30, 2002 represents the
operating results of the properties listed above and the operating
results of the Salisbury Medical Office Building. The Salisbury Medical
Office Building was sold during March 2003. See Note 3- Restructuring
Agreements for additional information on these agreements and transactions.
Nine months ended September 30, 2003 compared with the nine months
ended September 30, 2002
Revenues
Rental revenues were $14.2 million and $11.6 million for the nine
months ended September 30, 2003 and 2002, respectively. Rental revenues
attributable to Genesis and Genesis Equity Investees totaled $11.3 million
and $8.7 million, or 80% and 75% of total revenues, respectively, for the
nine months ended September 30, 2003 and 2002. The amounts and percentages
for the nine months ended September 30, 2003 are higher than the
corresponding period in 2002 primarily due to the consolidation during
the third quarter of 2002 of three entities in which the Company
obtained a controlling interest where it previously held a 99% non
controlling interest. These entities generated $10.0 million of rental
revenue during the nine months ended September 30, 2003, including $7.7
million from Meridian which is included in discontinued operations for
the nine-month period ended September 30, 2003.
Interest income from unconsolidated entities was $0.6 million for
the nine months ended September 30, 2002. These amounts are no longer
applicable following the consolidation of Meridian, Cabot and Cleveland
during the third quarter of 2002, as the related loans are eliminated
during the consolidation process.
Other income was $0.2 million for the nine months ended September
30, 2002. For the nine months ended September 30, 2002, the company
recognized a gain of $180,000 on the sale of shares acquired as
satisfaction of a former tenants security deposit obligation under its
lease of the Woodbridge facility to a privately held company, of which
Mr. Walker is a principal stockholder.
Expenses
Property operating expenses were $0.9 million and $1.0 million for
the nine months ended September 30, 2003 and 2002, respectively. This
decrease is due to approximately $135,000 in expenses related to the
Woodbridge lease termination, being recorded during the nine months
ended September 30, 2002.
24
Interest expense, which includes amortization of deferred financing
costs of $317,000 and $243,000, was $6.2 million and $5.6 million for the
nine months ended September 30, 2003 and 2002, respectively. The increase
of $0.6 million is due to higher third party debt balances outstanding
during the third quarter of 2003 as compared to the corresponding period
in 2002 due to the consolidation of previously unconsolidated entities
during the third quarter of 2002. The Bank Credit Facility, mortgages,
notes payable and capital lease obligations decreased from $209.7 million
at September 30, 2002 to $191.6 million at September 30, 2003. The weighted
average interest rate on this outstanding third party debt increased slightly
to 6.88% for the quarter ended September 30, 2003 from 6.8% for the quarter
ended September 30, 2002. The Companys interest rate on the Guidance Line
was 4.35% at September 30, 2003. The balance outstanding under the Guidance
Line at September 30, 2003 was $5.0 million. The Companys interest rate on
its variable rate mortgages was 4.125% (3.00% over the one-month LIBOR) at
September 30, 2003 compared to 4.88% at September 30, 2002.
Depreciation expense was $4.4 million and $3.6 million for the nine
months ended September 30, 2003 and 2002, respectively. This increase is
due to the consolidation of previously unconsolidated entities during the
third quarter of 2002.
General and administrative expenses were $2.0 million and $1.7 million
for the nine months ended September 30, 2003 and 2002, respectively. This
increase of $0.2 million results primarily from higher accounting, legal and
other expense accruals associated with the implementation of certain
governance initiatives of the Sarbanes-Oxley Act of 2002.
Bad debt recovery for the nine months ended September 30, 2003
represents amounts previously deemed uncollectible of $0.9 million.
During the nine months ended September 30, 2003 the Company recognized
a gain of $1.9 million from the extinguishment of the debt on the Pennsburg
property.
Severance expense of $1.3 million was recorded for the quarter ended
September 30, 2003 in connection with the resignation, on September 4, 2003,
of D. Lee McCreary, Jr. from all his positions with the Company, including
President and CEO.
Income from discontinued operations was $0.5 million and $1.1 million
for the nine months ended September 30, 2003 and 2002, respectively. During
the third quarter of 2003, the Company entered into a definitive Master
Agreement (the Agreement) with Genesis Health Ventures, Inc. (NASDAQ:GHVI;
Genesis; after the spin-off, HealthCare) in connection with the Genesis
spin-off of its ElderCare business. The Company noted that, if completed,
the Agreement represents a significant restructuring of its transactions
with Genesis. As a result of this definitive agreement, twelve properties
have been classified as held for sale properties at September 30, 2003 and
their respective financial results have been classified as part of
discontinued operations for all time periods presented. Discontinued
operations also include the operating results of the Salisbury Medical
Office Building and Harston Hall, each of which was sold during the nine
month periods ended September 30, 2003.
25
Liquidity and Capital Resources
Net cash provided by operating activities was $10.0 million and
$6.9 million for the nine months ended September 30, 2003 and 2002,
respectively. This increase is primarily due to the receipt of $2.5
million related to the restructuring of certain lease agreements during
August 2003, offset in part, by a $0.9 million recovery of amounts
previously deemed uncollectible.
Net cash provided by investing activities was $3.3 million and $1.0
million for the nine months ended September 30, 2003 and 2002. The
increase was primarily due to the sale of the Harston Hall property which
generated approximately $2.6 million in cash.
Net cash used in financing activities was $16.5 million for the nine
months ended September 30, 2003 compared to $5.3 million for the
corresponding period in 2002. This increase is the primarily result of
a $11.5 million principal payment on the mortgage of the Pennsburg and
Harston Hall properties and distributions to shareholders of $2.5 million
offset, in part by, a reduction in principal payments on the guidance
line/bank credit facility of $3.8 million.
On August 30, 2002, the Operating Partnership entered into the
Guidance Line Agreement. ElderTrust guaranteed the Guidance Line.
Initial borrowings under the Guidance Line of approximately $3.1 million
were used to pay off the Companys prior credit facility and to pay certain
transaction and other costs. On October 30, 2003, the Company paid off
the Guidance Line, which had an outstanding balance of $5.0 million as of
September 30, 2003. The Company has $7.5 million of availability under
the Guidance Line subject to lender approval and borrowing base limitations.
In May, the Companys Board of Trustees authorized the sale of the
Harston Hall property and reconfirmed the approval in July of 2003. On
July 17, 2003 the Company borrowed $5.5 million on the Guidance Line in
anticipation of selling the Harston Hall property and the subsequent pay
- -off of the mortgage loan on the Harston Hall and Pennsburg properties.
On August 13, 2003 the Company restructured its lease transactions with
Crozer/Genesis ElderCare Limited Partnership (Crozer) and satisfied its
$14.0 million loan obligation secured by the Harston Hall and Pennsburg
properties. Under the terms of the agreements:
* The Harston Hall property was sold to Genesis Health Ventures,
Inc. for $2.6 million;
* The annual rent on the Pennsburg Manor property was reduced to
$656,000 per year in exchange for a one-time payment by Genesis
of $2.5 million; and
* The leases for the Pennsburg, Chapel Manor and Belvedere properties
were extended for approximately twelve years, and certain other
changes were made to the leases, including but not limited to
elimination and return of the security deposits, the addition of
a lease coverage ratio test of at least 1.25:1 and the addition of
lease guarantees by Genesis. Following Genesis proposed spin-off
to its shareholders of its Eldercare business (HealthCare), the
leases will be guaranteed by HealthCare.
26
The $14.0 million non-recourse loan securing the Harston Hall and
Pennsburg properties was also settled as a result of the above transaction.
This loan was satisfied in full for a cash payment of $11.5 million,
consisting of the $5.1 million received by the Company from Genesis,
(consisting of the $2.6 million in proceeds from the Harston Hall sale
and the $2.5 million related to the lease restructuring that closed in
August 2003), $5.5 million obtained by the Company under its credit
facility with Wachovia Bank and $0.9 million from cash held on its
balance sheet. The Company recorded a gain of approximately $2.5 million
corresponding to the amount of debt forgiven by the lender in the above
transaction.
The Company has a working capital deficit of $4.7 million at September
30, 2003.
As of September 30, 2003, the Company had shareholders equity of $82.9
million and debt aggregating $191.6 million, which represents a debt to
equity ratio of 2.31 to 1. The debt to equity ratio was 2.57 to 1 at
December 31, 2002. The decrease in the debt to equity ratio was primarily
due to a $21.2 million reduction in debt from December 31, 2002 to September
30, 2003.
At September 30, 2003, the Companys third party indebtedness of $191.6
million consisted of $19.0 million in variable rate debt, $107.0 million in
fixed rate debt and a capital lease obligation of $65.6 million. The
weighted average annual interest rate on this debt was 6.9% at September
30, 2003. Based on interest rates at September 30, 2003, future quarterly
debt service requirements approximate $4.3 million.
Future increases in interest rates, as well as any defaults by tenants
on their leases, could adversely effect the Companys cash flow and its
ability to pay its obligations.
Facilities owned by the Company and leased to tenants 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 96% of the Companys rental revenues at September
30, 2003. 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.
27
Contractual Obligations and Commercial Commitments
The following table represents the Companys contractual obligations
as of September 30, 2003 (amounts in thousands):
Payments due by period:
Less than 1 to 2 3 to 4 5 years
Total 1 year years years and after
--------------------------------------------
Long-term debt $191,640 $8,621 $22,174 $6,784 $ 154,061
Operating lease 653 166 173 178 136
--------------------------------------------
Total contractual obligations $192,293 $8,787 $22,347 $6,962 $154,197
============================================
As of September 30, 2003, the Companys commercial commitments
consisted of the following:
* The Company provided two letters of credit aggregating $1.0 million
in connection with the Woodbridge and Highgate debt documents.
* The Company entered into an agreement in 1998 with respect to the
NDNE properties (collectively, ET Sub-Vernon, Cabot and Cleveland) that
allows all deductions for depreciation and low income housing tax credits
(LIHTC) on the NDNE properties to be allocated to the holders of the Class
C (LIHTC) Units of limited partnership interest of the Operating Partnership
through 2012. The agreement further states that, in the event that prior
to December 31, 2012, the Operating Partnership either disposes of all or
any portion of their interests in the NDNE properties or takes any other
action with respect to the NDNE properties that causes the qualified basis
to be less than the amount thereof on the date of purchase and solely by
reason of such disposition or other action all or any part of the LIHTCs
actually allowed to the holders of the Class C (LIHTC) Units are subject
to recapture pursuant to Section 42(j) of the Internal Revenue Code, the
Company shall pay to such holders of the Class C (LIHTC) Units cash in an
amount equal to the credit recapture amount, if any, payable by the holders
of the Class C (LIHTC) Units solely as the result of such disposition or
other action. The Company also covenanted that, in the event that prior
to December 31, 2013, the Operating Partnership either disposes of all or
any portion of the Companys interest in the NDNE properties or takes any
other action with respect to the NDNE properties that causes the holders
of the Class C (LIHTC) Units to have to recognize a recapture of all or
any portion of the depreciation deductions that have been specially
allocated to them, the Company shall pay to the holders of the Class C
(LIHTC) Units cash in an amount equal to the excess of (a) 38% of such
depreciation deductions that are required to be recaptured solely as the
result of such disposition or other action over (b) the discounted present
value of such amount, discounted from December 31, 2013 to the last day
of the calendar year in which depreciation deductions are recaptured.
The transactions completed on October 24, 2003 under the Benchmark
Agreement did not trigger any obligations under this agreement.
Financial Covenants
This section presents the material financial covenants to which the
Company is subject to under our debt agreements and the degree to which
the Company is in compliance with these covenants as of September 30,
2003. Management is not presenting these covenants and the related
calculations for any other purpose or for any other period, and is not
intending for these measures to otherwise provide information about the
Companys financial condition or results of operations. If we fail to
comply with any of these requirements, then the related debt could become
due and payable before its stated due date. These measures should only
be used for the purposes of testing our compliance with our indebtedness
requirements.
28
(in thousands)
September 30, 2003
------------------
Total assets (per consolidated balance sheet) $ 286,801
------------------
Total liabilities (per consolidated balance sheet) $ 200,389
------------------
EBITDA, as defined in applicable debt agreements:
Net income (loss) for the 12 months ended September
30, 2003 $ 1,535
Add: Nonrecurring items
Loss on impairment of long-lived assets for the
12 months ended September 30, 2003 4,243
Bad debt expense (recovery) for the 12 months
ended September 30, 2003 (894)
Gain on sale of fixed assets for the 12 months
ended September 30, 2003 (241)
Gain on debt restructuring for the 12 months
ended September 30, 2003 (2,475)
Severance expense for the 12 months ended
September 30, 2003 1,341
Add: Income taxes for the 12 months ended September
30, 2003 23
Add: Interest expense for the 12 months ended
September 30, 2003 14,677
Add: Depreciation and amortization for the 12
months ended September 30, 2003 10,460
------------------
EBITDA, as defined in applicable debt agreements $28,669
------------------
Consolidated indebtedness (per consolidated
balance sheet) $191,640
------------------
Book value, as defined in applicable debt agreements:
Total assets (per consolidated balance sheet) $286,801
Add: Accumulated depreciation and amortization
(per consolidated balance sheet) 51,398
------------------
Book value, as defined in applicable debt agreements $338,199
------------------
Interest expense excluding amortization of deferred
financing costs for the 12 months ended September
30, 2003 $14,266
------------------
29
Fixed Charges, as defined in applicable debt agreements:
Interest expense excluding amortization of deferred
financing costs for the 12 months ended September
30, 2003 $14,266
Lease expense for the 12 months ended September
30, 2003 166
Current maturities of funded debt 3,056
------------------
Fixed charges, as defined in applicable debt
agreements $17,488
------------------
The following table sets forth the material financial covenants to
which we are subject under our indebtedness, and the degree to which we
complied with those covenants as of September 30, 2003:
Actual Ratio/Test
Required as of
Financial Covenant Ratio/Test September 30, 2003
- -------------------------------------------------------------------------
Minimum tangible net worth
(total assets total liabilities) $75.0 million $86.4 million
Total leverage ratio
(consolidated indebtedness/book value) Less than 65% 56.7%
Minimum interest coverage ratio
(EBITDA/interest expense excluding
amortization of deferred financing
costs) Greater than 1.75 2.01
Minimum fixed charge ratio
(EBITDA/fixed charges) Greater than 1.50 1.64
EBITDA to interest expense
(EBITDA/interest expense)(1) Greater than 1.80 1.95
(1) This interest coverage ratio requirement increases to 1.90:1 after
June 30, 2004.
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 accounting principles generally
accepted in the United States of America, excluding gains (losses) from
sales of property, plus depreciation and amortization, and after
adjustments for unconsolidated partnerships and joint ventures.
Adjustments for unconsolidated partnerships and joint ventures are
calculated to reflect FFO on the same basis. The Company believes that
FFO is helpful to investors as a measure of the performance of an equity
REIT. The Company computes FFO using standards established by NAREIT
which may not be comparable to FFO 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. FFO does
not represent cash generated from operating activities using accounting
principles generally accepted in the United States of America and should
not be considered as an alternative to net income as an indication of the
Companys financial performance, or to cash flow from operating activities
as a measure of the Companys liquidity, nor is it indicative of funds
available to fund the Companys cash needs, including its ability to make
cash distributions. FFO includes both recurring and non-recurring items,
except those results defined as extraordinary items under accounting
principles generally accepted in the United States of America and gains
and losses from sales of depreciable operating property.
30
The following table presents the Companys Funds from Operations
for the periods presented below:
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------------
2003 2002 2003 2002
--------------------------------------
($000s)
Funds from Operations:
Net income $2,310 $ 685 $2,665 $1,637
Minority interest 91 29 100 85
--------------------------------------
Net income before minority
interest 2,401 714 2,765 1,722
Adjustments to derive funds
from operations:
Add:
Real estate depreciation
and amortization:
Consolidated entities 2,575 1,492 7,790 4,490
Unconsolidated entities - 1,122 - 3,367
Loss on sale of real estate
property (241) - (203) -
--------------------------------------
Funds from operations before
allocation to minority interest 4,735 3,328 10,352 9,579
Funds from operations allocable
to minority interest (177) (129) (380) (440)
--------------------------------------
Funds from operations $4,558 $3,199 $9,972 $9,139
======================================
Per diluted share:
Net income $0.30 $0.09 $0.35 $0.21
Minority interest 0.01 - 0.01 0.01
--------------------------------------
Net income before minority
interest 0.31 0.09 0.36 0.22
Adjustments to derive funds
from operations:
Add:
Real estate depreciation
and amortization:
Consolidated entities 0.33 0.19 1.01 0.58
Unconsolidated entities - 0.15 - 0.44
Loss on sale of real estate
property (0.03) - (0.03) -
--------------------------------------
Funds from operations before
allocation to minority interest 0.61 0.43 1.34 1.24
Funds from operations allocable
to minority interest (0.02) (0.02) (0.05) (0.06)
--------------------------------------
Funds from operations attributable
to the common shareholders $0.59 $0.41 $1.29 $1.18
======================================
The following table presents information from the Companys
statements of cash flows for the periods presented:
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------------
2003 2002 2003 2002
--------------------------------------
($000s)
Other Data:
Cash flow provided by
operating activities $3,141 $2,235 $9,966 $6,916
Cash flow provided by
investing activities 3,726 543 3,312 980
Cash flow used in financing
activities (9,034) (617) (16,495) (5,336)
31
The following is a summary of capital expenditures for the
periods presented:
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------------
2003 2002 2003 2002
--------------------------------------
(in thousands)
Recurring capital expenditures:
Furniture, fixtures and equipment $ 5 $ - $ 83 $ 17
Capital improvements 53 26 252 28
--------------------------------------
58 26 335 45
--------------------------------------
Major renovations - 24 27 189
--------------------------------------
Total capital expenditures $58 $50 $362 $234
======================================
Recurring capital expenditures include those expenditures made in
the normal course of operations for corporate/administrative items and
for routine improvements to the Companys existing properties.
Major renovations include those expenditures which are larger in
scope than recurring capital expenditures both in dollar value and time
to complete and generally enhance the marketability and revenue producing
capacity or useful life of the property.
Summary Condensed Consolidated Financial Data of Genesis
As leases with Genesis represent a significant portion of the
Companys 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 taken from Genesis quarterly report on
Form 10-Q for the quarter ended June 30 2003 as filed with the
Securities and Exchange Commission (the Commission) under the Securities
Exchange Act of 1934, as amended (the Exchange Act).
Genesis is subject to the information filing requirements of the
Exchange Act, and in accordance therewith, is obligated to file periodic
reports, proxy statements and other information with the Commission
relating to its business, financial condition and other matters. Such
reports, proxy statements and other information may be inspected at the
offices of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549. 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.
The following table sets forth certain summary condensed
consolidated financial data for Genesis as of and for the quarters
ended June 30, 2003 and 2002.
Three Months Ended Nine Months Ended
June 30, June 30,
----------------------------------------
2003 2002 2003 2002
----------------------------------------
(unaudited, in thousands,
except share and per share data)
Operations Data
- --------------------------------
Net revenues $668,659 $628,058 $1,957,222 $1,857,923
Operating income before
restructuring and capital costs 49,264 48,576 152,731 167,607
Net gain from break-up fee and
other settlements - (229) (11,337) (21,907)
Debt restructuring and
reorganization costs - 2,570 - 4,270
Depreciation and amortization 16,622 15,077 48,817 44,387
Lease expense 6,879 6,971 20,782 20,055
Interest expense, net 9,848 9,459 30,657 31,386
------------------------------------------
32
Income before income taxes,
minority interest and equity
in net income of unconsolidated
affiliates 15,915 14,728 63,812 89,416
Income tax (benefit) 2,154 (4,567) 20,834 24,562
------------------------------------------
Income before minority interest
and equity in net loss of
unconsolidated affiliates 13,761 19,295 42,978 64,854
Equity in net income (loss) of
unconsolidated affiliates 569 99 1,161 490
Minority interest (1,272) (592) (3,567) (1,344)
------------------------------------------
Net income from continuing
operations before preferred
stock dividends 13,058 18,802 40,572 64,000
Preferred stock dividends 660 656 2,009 1,916
------------------------------------------
Net income (loss) from
continuing operations 12,398 18,146 38,563 62,084
Loss from discontinued operations 5,926 693 15,490 4,089
------------------------------------------
Net income available to common
shareholders $6,472 $17,453 $23,073 $57,995
==========================================
Per common share data:
Basic:
Income from continuing
operations $0.31 $0.44 $0.94 $1.51
Loss from discontinued
operations ($0.15) ($0.02) ($0.38) ($0.10)
Net income $0.16 $0.42 $0.56 $1.41
Weighted average shares 40,097,289 41,341,830 41,135,170 41,211,603
Diluted:
Income from continuing
operations $0.31 $0.43 $0.94 $1.48
Loss from discontinued
operations ($0.15) ($0.02) ($0.38) ($0.10)
Net income $0.16 $0.42 $0.56 $1.38
Weighted average shares
income from continuing
operations 42,370,934 43,470,082 43,378,463 43,339,666
Weighted average shares
net income 40,097,289 43,470,082 41,135,170 43,339,666
_______________
June 30, September 30,
------------------------------------
2003 2002
------------------------------------
(unaudited, dollars in thousands)
Balance Sheet Data
- --------------------------------------
Working capital $ 418,627 $ 449,006
Total assets 1,907,635 1,989,495
Long-term debt 575,702 648,939
Shareholders equity 906,902 914,123
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
The Companys bonds payable and most of the Companys mortgages bear
interest at fixed rates. The Company is exposed to market risks related
to fluctuations in interest rates on its variable rate mortgages. The
Company utilizes interest rate cap provisions within its debt agreements
to limit the impact that interest rate fluctuations have on its variable
rate mortgages. The Company does not utilize interest rate swaps, forward
or option contracts on foreign currencies or commodities, or any other
type of derivative financial instruments. Refer to the Companys Annual
Report on Form 10-K for the year ended December 31, 2002 for discussion
of the market risk associated with these financial instruments.
33
For fixed rate debt, changes in interest rates generally affect the
fair market value of the underlying indebtedness, but not earnings or
cash flows. The Company generally cannot prepay fixed rate debt prior
to maturity without premium. Therefore, interest rate risk and changes
in fair market value should not have a significant impact on the fixed
rate debt until the Company would be required to refinance such debt.
The carrying value of the Companys fixed rate mortgages, bonds and note
payable at September 30, 2003 is $107.0 million. The fair value of
fixed rate debt is approximately $115.6 million at September 30, 2003.
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 variable rate mortgages including
the Guidance Line at September 30, 2003 was 4.18%. Assuming the variable
rate mortgage balances outstanding at September 30, 2003 of $19.0 million
remain constant each one percentage point increase in interest rates would
result in a increase in interest expense for the next twelve months of
approximately $190,000.
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 Companys
cash flow and its ability to pay its obligations.
ITEM 4. Controls and Procedures
Our acting principal executive officer and principal financial
officer, Michael R. Walker, evaluated as of September 30, 2003 the
effectiveness of the design and operations of our controls and other
procedures that are designed to ensure that information required to be
disclosed by us in the reports that we file or submit under the
Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in the SECs rules and forms.
As a result of this evaluation, Mr. Walker concluded that, as of such
date, the design and operation of our disclosure controls and procedures
were effective.
There were no changes in our internal controls over financial
reporting identified in connection with the evaluation referred to
above that have materially affected, or are reasonably likely to
materially affect, our internal controls over financial reporting.
PART II - OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The exhibits filed with this report are listed in the exhibit
index on page 31.
34
(b) Reports on Form 8-K
The following report on Form 8-K was filed during the quarter
ended September 30, 2003:
Date of Filing Items Reported/Financial Statements Filed
-------------- -----------------------------------------
July 11, 2003 Item 5. Other Event, non-binding letter
of intent entered into with Genesis
regarding restructuring
July 29, 3003 Item 9. Regulation FD Disclosure
September 23, 2003 Item 5. Other Event, Michael R. Walker
appointed acting Chief Executive Officer
and President of ElderTrust, and D. Lee
McCreary, Jr. separation agreement.
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 14,
2003.
ELDERTRUST
/s/ Michael R. Walker
------------------------------------
Michael R. Walker
Acting President, Chief Executive
Officer, Chief Financial Officer,
Treasurer and Secretary (Acting
Principal Financial and Accounting
Officer)
36
EXHIBIT INDEX
Exhibit No. Description
- ----------- -------------------------------------------------------
10.29+ D. Lee McCreary, Jr. severance agreement
10.30+ Michael R. Walker compensation agreement
10.31 Genesis Master Agreement including exhibits
11.1 Computation of basic and diluted earnings per share
31.1 Rule 13a-14(a)/15d-14(a) certifications
32.1 Written Statement of Chief Executive Officer and Chief
Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
+ Represents a management contract or compensatory plan, contract or
arrangement.
37
EXHIBIT 11.1
COMPUTATION OF BASIC AND DILUTED
NET INCOME PER SHARE FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
The following calculation is submitted in accordance with
requirements of the Securities Exchange Act of 1934:
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------------
2003 2002 2003 2002
--------------------------------------
Basic net income per share:
- ----------------------------------
Weighted average common shares
outstanding 7,722 7,435 7,678 7,378
=====================================
Income from continuing
operations $877 $216 $2,164 $522
Basic income per share from
continuing operations per
share $0.11 $0.03 $0.28 $0.07
Income from discontinued
operations $1,433 $469 $501 $1,115
Basic income per share from
discontinued operations $0.19 $0.06 $0.07 $0.15
Net income $2,310 $685 $2,665 $1,637
Basic net income per share $0.30 $0.09 $0.35 $0.22
Diluted net income per share:
- ----------------------------------
Weighted average common shares
outstanding 7,722 7,435 7,678 7,378
Common stock equivalents - stock
options and warrants 48 306 31 323
-------------------------------------
Total weighted average number
of diluted shares 7,770 7,741 7,709 7,701
=====================================
Income from continuing
operations $877 $216 $2,164 $522
Diluted income per share from
continuing operations $0.11 $0.03 $0.28 $0.07
Income from discontinued
operations $1,433 $469 $501 $1,115
Diluted income per share from
discontinued operations $0.19 $0.06 $0.07 $0.14
Net income $2,310 $685 $2,665 $1,637
Diluted net income per share $0.30 $0.09 $0.35 $0.21
EXHIBIT 31.1
CERTIFICATIONS
I, Michael R. Walker, certify that:
1. I have reviewed this quarterly report on Form 10-Q of ElderTrust;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in
this report;
4. I am responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15
(e)) for the registrant and have:
(a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under my
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known
to me by others within those entities, particularly during the
period in which this report is being prepared;
(b) evaluated the effectiveness of the registrants disclosure controls
and procedures and presented in this report my conclusions about
the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such
evaluation; and
(c) disclosed in this report any change in the registrants internal
control over financial reporting that occurred during the
registrants most recent fiscal quarter (the registrants fourth
fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially
affect, the registrants internal control over financial
reporting; and
5. I have disclosed, based on my most recent evaluation of internal
control over financial reporting, to the registrants auditors and
the audit committee of the registrants board of directors (or
persons performing the equivalent functions):
(a) all significant deficiencies and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect
the registrants ability to record, process, summarize and
report financial information; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrants
internal control over financial reporting.
Date: November 14, 2003 /s/ Michael R. Walker
----------------- -----------------------------
Michael R. Walker
Acting President, Chief
Executive Officer, Chief
Financial Officer, Treasurer
and Secretary
EXHIBIT 32.1
Written Statement of Chief Executive Officer and Chief Financial Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
The undersigned acting Chief Executive Officer and Chief Financial
Officer of ElderTrust (the Company), certifies that, to his knowledge,
on the date hereof:
(a) the Form 10-Q of the Company for the quarter ended September 30,
2003 filed on November 14, 2003 with the Securities and Exchange
Commission (the Report) fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
(b) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
November 14, 2003 /s/ Michael Walker
_____________________ ____________________________
Date Michael Walker
Acting President, Chief
Executive Officer, Chief
Financial Officer, Treasurer
and Secretary