ITEM 1. BUSINESS
General
The Company is a self-managed and self-administered real estate investment trust ("REIT") that invests principally in senior housing and other healthcare facilities, primarily skilled nursing facilities, assisted and independent living facilities (or "senior living centers") and medical office and other buildings. The Company was formed in the
State of Maryland on September 23, 1997 and began operations upon the completion of its initial public offering on January 30, 1998 (the "Offering"), pursuant to which it issued 6,957,500 common shares. Net proceeds to ElderTrust of approximately $114.2 million from the Offering were contributed to a 94% owned subsidiary, ElderTrust Operating Limited Partnership (the "Operating Partnership"), the Company's operating partnership subsidiary. The Operating Partnership principally used the proceeds to fund the initial property acquisitions and other investments. The Company is the sole general partner of the Operating Partnership and conducts all of its operations through the Operating Partnership. At December 31, 2001, the Company owned a 94.9% interest in the Operating Partnership.
The Company had no real estate investments prior to January 30, 1998. The Company's consolidated assets consist primarily of the assets of the Operating Partnership and its consolidated subsidiaries. At December 31, 2001, the Company's consolidated assets primarily consisted of a diversified portfolio of 23 healthcare properties aggregating $166.7 million. The portfolio consists of ten assisted living facilities, eight skilled nursing facilities, one independent living facility and four medical office and other buildings, which are leased back to the prior owners or other third parties. Skilled nursing facilities and senior living centers comprised approximately 92% of the Company's consolidated assets at December 31, 2001.
Additionally, at December 31, 2001 the Company had investments in and advances to unconsolidated entities totaling $24.0 million, which it accounts for under the equity method of accounting (the Company's "Equity Investees"). These investments consisted of:
* a 95% nonvoting equity interest in an entity which owns a $7.8 million second mortgage note and other notes receivable aggregating $4.1 million due from the Company and it's Equity Investees;
* a 99% limited partnership interest in an entity which holds leasehold and purchase option rights for seven skilled nursing facilities; and
* a 99% non-managing member interest in two entities which each hold an assisted living facility.
Genesis Health Ventures, Inc. ("Genesis") was a co-registrant in the Company's Offering. Michael R. Walker, Chairman of the Board of the Company, is Chairman of the Board and Chief Executive Officer of Genesis. Approximately 71% of the Company's consolidated assets at December 31, 2001 consisted of real estate properties leased to or managed by Genesis or entities in which Genesis accounts for its investment using the equity method of accounting ("Genesis Equity Investees"). Revenues recorded by the Company in connection with these leases aggregated $14.8 million in 2001. In addition, the Company's Equity Investees have also leased properties to Genesis or Genesis Equity Investees. As a result of these relationships, the Company's revenues and ability to meet its obligations depends, in significant part, upon 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 Company's operations and cash flows due to the significant portion of our properties leased to such entities.
In addition to the facilities leased or managed by Genesis or Genesis Equity Investees, during 2001, the Company had loans outstanding to Genesis totaling approximately $12.2 million. These loans were repaid by Genesis in December 2001. The proceeds from these loan repayments were used to reduce the balance outstanding under the Company's Credit Facility with Deutsche Bank (the "Credit Facility"). See "Credit Facility; Mortgage Defaults". Interest income recorded by the Company during 2001 on all the loans repaid by Genesis in December 2001 totaled $1.3 million.
Genesis and Multicare Chapter 11 Bankruptcy Filings; Lease and Loan Restructurings; Genesis and Multicare Emergence from Bankruptcy
On June 22, 2000, Genesis and The Multicare Companies, Inc., formerly a 43.6% owned non-consolidated subsidiary of Genesis and a borrower of the Company, filed for protection under Chapter 11 of the United States Bankruptcy Code. During 2000, the Company, Genesis and Multicare and Genesis and Multicare's major creditors negotiated agreements to restructure their debt and lease obligations with the Company. The agreements were approved by the U.S. Bankruptcy Court on January 4, 2001 and were consummated on January 31, 2001.
Under the more significant terms of the agreement with Genesis:
(1) Twenty-one of the then existing twenty-three lease agreements between Genesis subsidiaries and ElderTrust continued in effect in accordance with their terms, except as provided below:
* Two leases were modified to reduce combined rents for the properties by $745,000 per year;
* One lease was modified to create an early termination right commencing on December 31, 2002; and
* One lease was modified to permit the Company to terminate the lease during 2001 without penalty if the current tenant is unable to achieve occupancy targets specified by loan documents secured by property. The lease remains in effect at December 31, 2001.
(2) Two leases (Windsor Office Building and Windsor Clinic/ Training facility) were terminated when the two properties subject to the leases were sold to Genesis for $1.25 million; such amount being paid through an increase in the notes receivable described in (4) below;
(3) An $8.5 million loan previously guaranteed by the Company and owed to Genesis by ET Sub-Meridian Limited Partnership, L.L.P. (ET Sub-Meridian), an unconsolidated subsidiary of the Company, was conveyed to the Company in a manner to effect an $8.5 million reduction in amounts owed to the Company by Genesis;
(4) The maturity date for three loans (Oaks, Coquina and Mifflin) made by the Company to Genesis and affiliated entities with unpaid principal balances totaling approximately $7.5 million at June 30, 2000 (after taking into account the aforementioned $1.25 million increase and $8.5 million reduction) were extended to June 30, 2002 at the rates in effect prior to the Genesis bankruptcy filing (These loans were repaid by Genesis in December 2001). In addition, the asset transfer agreements were terminated; and
(5) The maturity date and interest rate for one loan (Harbor Place) with a principal balance of approximately $4.8 million made by the Company to an entity in which Genesis owns a 100% limited partner interest was extended to May 31, 2002 at a 10% interest rate, an increase of 0.5% (This loan was repaid by Genesis in December 2001).
Under the terms of the agreement with Multicare, the Company acquired three properties secured by three loans (Lehigh, Berkshire and Sanatoga) with outstanding principal amounts totaling approximately $19.5 million, and having a net book value of $12.5 million, at December 31, 2000, in exchange for the outstanding indebtedness. These properties were then leased back to Multicare under long-term operating lease agreements. The Company had no other transactions with this entity.
On September 12, 2001, Genesis announced that the U.S. Bankruptcy Court had approved the Genesis and Multicare joint plan of reorganization, subject to certain minor modifications. On October 2, 2001, Genesis announced that it, along with Multicare, had successfully completed their reorganization and had emerged from bankruptcy. Genesis also announced that upon the acceptance of the reorganization plan Multicare became a wholly owned subsidiary of Genesis.
Credit Facility; Mortgage Defaults
Credit Facility
The Company has a line of credit agreement with Deutsche Bank. Effective January 31, 2001, the Credit Facility was extended to August 31, 2002 ("Fourth Amendment") and the covenants amended to, in part, cure the then existing covenant violations. 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 was in compliance with these requirements at December 31, 2001.
In connection with the Fourth Amendment, the Credit Facility (a) prohibited the Company from further borrowings under the facility, (b) required monthly principal payments equal to the cash flow generated by the Company for the month, not to be less than $450,000 a month and (c) prevented the Company from paying distributions in excess of 110% of the amount required to maintain REIT status.
In connection with the Fourth Amendment, the Company issued warrants to the lender to purchase 118,750 common shares at $1.70 per share. These warrants expire December 31, 2005.
The amounts outstanding under the Credit Facility bear interest at a floating rate equal to 3.25% over one-month LIBOR and a previously required monthly facility fee has been eliminated. The effective interest rate on borrowings outstanding under the Credit Facility at December 31, 2001 was 5.44%. At December 31, 2001, the Company had $7.2 million outstanding under the Credit Facility. At December 31, 2001, the Credit Facility was secured by properties with a cost of approximately $41.4 million. Substantially all of the Company's other assets at December 31, 2001 secure other outstanding indebtedness of the Company.
The Credit Facility matures on August 31, 2002. Based on the anticipated monthly payments the Company estimates that there will be a balance due at maturity of approximately $3.0 million. Based on the significant reduction in the Credit Facility outstanding balance during 2001 and the Company's payment history, the Company believes that it will be successful in negotiating a further extension of the Credit Facility that will enable it to pay-off all amounts outstanding under the Credit Facility within a reasonable period of time. However, if the Company is unable to pay-off or obtain replacement financing by August 31, 2002, or is unable to negotiate a further extension of the current Credit Facility at that time, or for any other reason the Company were to be in default under the Credit Facility prior to its maturity, Deutsche Bank could exercise its right to foreclose on the collateral securing the Credit Facility, which could have an adverse affect on the Company's financial condition and results of operations.
The terms of the Credit Facility extension reduced the Company's cash flows and imposed limits on its ability to make distributions to its shareholders. Future increases in interest rates, as well as any defaults by tenants on their leases, could adversely affect the Company's cash flow and its ability to pay its obligations.
Mortgage Defaults
At December 31, 2000, as a result of failing to meet certain financial covenants, the Company was in default on two bonds totaling approximately $20.0 million which are guaranteed by the Company and secured by mortgages on the Highgate and Woodbridge facilities. Under amendments to the guaranty and bond documents executed on January 31, 2001, the Company is no longer in default of these covenants. Certain other technical defaults, including informational and company certificates, have been resolved by an amendment to the bond documents executed as of February 1, 2002.
The Company continues to be in default on loans totaling $25.6 million, which are secured by mortgages on the Riverview Ridge, Lopatcong, Pleasant View and Heritage Andover facilities, as a result of its failure to meet certain property information reporting requirements and Genesis having filed for bankruptcy protection. There can be no assurance that the Company will be able to cure these defaults. Based, in part, on the Company's favorable payment history, the Company does not believe that the lender will take any action in connection with these defaults.
Suspension of Quarterly Cash Distributions to Shareholders
Effective for the quarter ended September 30, 2000, the Company suspended the payment of cash distributions to its shareholders. Effective January 31, 2001, the Company is precluded under its Credit Facility from paying distributions to its shareholders in excess of 110% of the amount required to be distributed to maintain its REIT status for federal income tax purposes. To qualify as a REIT, the Company must distribute with respect to each year at least 90% of its taxable income, excluding any net capital gain, to its shareholders. If the Company is unable to make any required shareholder distributions, then the Company may be unable to qualify as a REIT and be subject to federal income taxes.
During 2000, the Company recorded significant bad debt expenses due to the bankruptcy filing by Genesis, related to loans and properties under lease and, as a result, recognized a net loss for financial reporting purposes. For federal income tax purposes, these losses totaling approximately $13.5 million will be recorded in 2001 as required under applicable income tax rules. When recognized for federal income tax purposes, these losses will reduce the amount otherwise required by the Company to be distributed to meet REIT requirements. See "Item 8. Financial Statements and Supplementary Data - Note 12" for additional information.
Based on the amount of these losses, the Company does not believe it would have to make any distributions to its shareholders until at least December 2002 for REIT qualification purposes. Distributions by the Company are at the discretion of its board of trustees. The Company currently anticipates that it will address its distribution policy during the latter part of 2002. Such policy will depend upon various factors, including the minimum distribution required under federal tax law to maintain REIT status, the Company's cash available for distribution, limitations or restrictions under various debt covenants and other cash uses deemed appropriate by the Company.
New York Stock Exchange Listing
On August 8, 2000, the Company was notified by the New York Stock Exchange ("NYSE") that it had fallen below the continued listing criteria
relating to total market capitalization and minimum share value. Under the NYSE rules, the Company submitted a plan demonstrating that it could attain the continued listing criteria within 18 months. During the third quarter of 2001 the Company was notified by the New York Stock Exchange that, based on then recent trading prices of the Company's common shares, the Company had met the NYSE's continued listing standards and, therefore, the NYSE was removing the Company from its "Watch List." In accordance with the NYSE rules, the Company will be subject to a 12-month follow-up period during which the Company will be reviewed to ensure that it does not again fall below any of the NYSE's continued listing standards.
Investments
Investment Policies
At December 31, 2001, the Company's investments consisted primarily of senior housing and other healthcare facilities leased to operators under long-term operating leases. In prior periods, the Company's investments also included term and construction loans. As of December 31, 2001 all such loans have been repaid.
Operating leases are normally secured by the underlying real estate, guarantees and/or cash deposits. As of December 31, 2001, cash deposits aggregating approximately $3.3 million were held by the Company as security for operating leases. In addition, the leases are generally cross-defaulted with any other leases or other agreements between the operator or any affiliate of the operator and the Company, which were entered into at the time the leases were executed. The Company's operating leases include fixed and minimum rent leases, which normally include annual rate increases, and percentage rent leases. Percentage rent leases generally require rents based upon a fixed percentage of facility revenues throughout the lease term. See "Business - Investments - Properties - Operating Leases."
There are no limitations on the amount or percentage of the Company's total assets that may be invested in any one property. Additionally, no limits have been set on the concentration of investments in any one location, operator or facility type.
The board of trustees may change the investment policies and activities of the Company at any time without a vote of shareholders. There can be no assurance that the Company's investment objectives will be realized. See "Business - Risk Factors."
Investment Portfolio
The Company's consolidated investments in real estate properties at December 31, 2001 are reflected in the following table:
___________
1. Includes investments in real estate properties aggregating $186.4 million, before reductions for accumulated depreciation, and credit enhancements on several owned properties which aggregated $9.2 million.
2. Based upon the number of private and semi-private beds/units currently in service.
3. Investment per Bed was computed by using the respective facility investment amount divided by number of beds/units currently in service for each respective facility.
4. Genesis or Genesis Equity Investees managed 19 of the properties under management agreements with the tenants. See "Transactions with Genesis" and "Item 2
ITEM 2. PROPERTIES
The following table sets forth certain information comprising the Company's investments in owned real estate property as of December 31, 2001. At December 31, 2001, the Company's properties were encumbered by mortgage loans and bonds aggregating $106.8 million and bearing interest at a weighted average rate of 8.1%. These mortgage loans mature from December 2002 through September 2025. See Note 8 to the Company's Consolidated Financial Statements included in this Form 10-K for additional information.
_________________ * Represent properties included in the Company's borrowing base for the Credit Facility and pledged as collateral.
(1) Represent properties that are leased to and/or managed by Genesis or Genesis Equity Investees. See "Transactions with Genesis."
(2) Represents property managed by Genesis but leased by an unrelated third party. See "Transactions with Genesis."
(3) Based upon the number of private and semi-private beds in service at December 31, 2001.
(4) Includes investments in real estate properties aggregating $186.4 million, before reductions for accumulated depreciation and includes credit enhancements on several properties, which aggregated $9.2 million. Credit enhancements include bond and operating reserve funds aggregating $5.4 million, security deposits of $3.3 million and mortgage escrow accounts of $0.5 million.
(5) Reflects contract rate of annual base rent under fixed and minimum rent leases and estimated rent under percentage rent leases assuming rental income for these properties consistent with 2001.
The Company's interest in the Woodbridge facility was previously classified as "held for sale". As previously disclosed, the sale was expected to close during the later part of 2001. In November 2001, the Company's management made a decision to remove the Woodbridge facility from the held for sale category. The Company recorded $59,000 in depreciation expense for the period covering November and December 2001, based on the adjusted carrying value of $9.7 million at November 1, 2001. In February 2002, the Company announced that it had entered into a new lease and purchase option agreement, for the Woodbridge facility with a new tenant, who is an affiliate of Newton Senior Living LLC, for an initial lease term of 10 years commencing on February 1, 2002.
The Company holds a fee interest in each of its properties except for the Professional Office Building I and the DCMH Medical Office Building (in which the Company owns a condominium unit), which are leasehold interests subject to long-term ground leases from unaffiliated companies.
Each of the Company's skilled nursing and senior housing facilities, which includes the land (if owned), buildings, improvements and related rights, are leased principally to healthcare providers pursuant to long- term triple net leases. The leases generally have fixed terms of 5 to 12 years and contain multiple five to ten-year renewal options. These properties are leased principally under percentage and minimum rent leases. These lessees are required to insure, repair, rebuild and maintain the leased properties. The leases with tenants in the medical office and other buildings are generally fixed rent leases, which provide for specified annual rents, subject to annual increases in some of the leases. Generally, these leases are for a five-year period. Some of the lessees are required to insure, repair, rebuild and maintain the leased properties. The Company believes that its leased properties are adequately insured under insurance policies maintained by the lessees. See "Business - Investments - Owned Property - Operating Leases."
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the three months ended December 31, 2001, through the solicitation of proxies or otherwise.
PART II
ITEM 5.
ITEM 5.	MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The following table sets forth the high and low sales prices of the Company's common stock on the New York Stock Exchange and the distributions paid per share for the periods indicated.
Cash Distributions Quarter Ended High Low Per Share - --------------------- -------- ------- ---------------- December 31, 2001 $8.85 $6.83 $ - September 30, 2001 7.50 5.00 - June 30, 2001 5.19 3.45 - March 31, 2001 3.75 2.38 -
December 31, 2000 2.81 0.94 - September 30, 2000 1.38 0.69 - (1) June 30, 2000 3.63 0.56 0.30 March 31, 2000 7.69 2.69 0.30
(1) Effective beginning with the quarter ended September 30, 2000, the Company suspended the payment of quarterly distributions to its shareholders.
Effective January 31, 2001, the Company is precluded under its Credit Facility from paying distributions to its shareholders in excess of 110% of the amount required to be distributed to maintain its REIT status for federal income tax purposes. To qualify as a REIT, the Company must distribute with respect to each year at least 90% of its taxable income, excluding any net capital gain, to its shareholders.
During 2000, the Company recorded significant bad debt expenses due to the Genesis bankruptcy filing related to loans and properties under lease and, as a result, recognized a net loss for financial reporting purposes. For federal income tax purposes, these losses totaling approximately $13.5 million will be recorded in 2001 as required under applicable income tax rules. When recognized for federal income tax purposes, these losses will reduce the amount otherwise required by the Company to be distributed to meet REIT requirements.
Based on the amount of these losses, the Company does not believe it would have to make any distributions to its shareholders until at least December 2002 for REIT qualification purposes. Distributions by the Company are at the discretion of its board of trustees. The Company currently anticipates that it will address its distribution policy during the latter part of 2002. Such policy will depend upon various factors, including the minimum distribution required under federal tax law to maintain REIT status, the Company's cash available for distribution, limitations or restrictions under various debt covenants and other cash uses deemed appropriate by the Company.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data for the years ended December 31, 2001, 2000, 1999 and the period from January 30, 1998 through December 31, 1998 and as of December 31, 2001, 2000, 1999 and 1998, is derived from the consolidated financial statements of the Company. The following data should be read together with the Company's consolidated financial statements and related notes, and other financial information included in this Form 10-K, including "Management's Discussion and Analysis of Financial Condition and Results of Operations."
__________
The following table presents the Company's Funds from Operations for the years ended December 31, 2001, 2000 1999 and 1998:
(1) For comparison, purposes the years ended December 31, 1999 and 1998 were restated to conform to the new FFO definition.
(2) The White Paper on Funds from Operations approved by the Board of Governors of NAREIT in October, 1999 defines Funds from Operations as net income (loss), computed in accordance with generally accepted accounting principles, excluding gains (or 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 will be calculated to reflect funds from operations on the same basis. 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. Effective January 1, 2000, Funds from Operations includes 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 operating property. For comparative purposes, Funds from Operations for periods prior to 2000 have been restated to conform to the new definition of Funds from Operations.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The Company is a self-managed and self-administered 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 sole general partner of the Operating Partnership and conducts primarily all of its operations through the Operating Partnership.
At December 31, 2001, the Company's consolidated assets primarily consisted of a portfolio of 23 healthcare properties aggregating $166.7 million in assets. The portfolio consists of ten assisted living facilities, eight skilled nursing facilities, one independent living facility and four medical office and other buildings, which are leased back to the prior owners or other third parties. These facilities comprised approximately 92% of the Company's consolidated assets at December 31, 2001.
Approximately 71% of the Company's consolidated assets at December 31, 2001 consisted of real estate properties leased to or managed by Genesis or Genesis Equity Investees. In addition, the Company's Equity Investees have also leased properties to Genesis or Genesis Equity Investees. Revenues recorded by the Company in connection with these leases aggregated $14.8 million in 2001. As a result of these relationships, the Company's revenues and ability to meet its obligations depends, 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 Company's operations and cash flows due to the significant portion of our properties leased to such entities.
In addition to the facilities leased or managed by Genesis or Genesis Equity Investees, during 2001, the Company had loans outstanding to Genesis totaling approximately $12.2 million. These loans were repaid by Genesis in December 2001. The proceeds from these loan repayments were used by the Company to reduce the balance outstanding under the Credit Facility. Interest income recorded by the Company during 2001 on the loans repaid by Genesis in December 2001 totaled $3.1 million.
Genesis and Multicare Chapter 11 Bankruptcy Filings; Lease and Loan Restructurings; Genesis and Multicare Emergence from Bankruptcy
On June 22, 2000, Genesis and The Multicare Companies, Inc., formerly a 43.6% owned non-consolidated subsidiary of Genesis and a borrower of the Company, filed for protection under Chapter 11 of the United States Bankruptcy Code. During 2000, the Company, Genesis and Multicare and Genesis and Multicare's major creditors negotiated agreements to restructure their debt and lease obligations with the Company. The agreements were approved by the U.S. Bankruptcy Court on January 4, 2001 and were consummated on January 31, 2001.
Under the more significant terms of the agreement with Genesis:
(1) Twenty-one of the then existing twenty-three lease agreements between Genesis subsidiaries and ElderTrust continued in effect in accordance with their terms, except as provided below:
* Two leases were modified to reduce combined rents for the properties by $745,000 per year;
* One lease was modified to create an early termination right commencing on December 31, 2002; and
* One lease was modified to permit the Company to terminate the lease during 2001 without penalty if the current tenant is unable to achieve occupancy targets specified by loan documents secured by property. The lease remains in effect at December 31, 2001.
(2) Two leases (Windsor Office Building and Windsor Clinic/Training facility) were terminated when the two properties subject to the leases were sold to Genesis for $1.25 million; such amount being paid through an increase in the notes receivable described in (4) below;
(3) An $8.5 million loan previously guaranteed by the Company and owed to Genesis by ET Sub-Meridian, an unconsolidated subsidiary of the Company, was conveyed to the Company in a manner to effect an $8.5 million reduction in amounts owed to the Company by Genesis;
(4) The maturity date for three loans (Oaks, Coquina and Mifflin) made by the Company to Genesis and affiliated entities with unpaid principal balances totaling approximately $7.5 million at June 30, 2000 (after taking into account the aforementioned $1.25 million increase and $8.5 million reduction) were extended to June 30, 2002 at the rates in effect prior to the Genesis bankruptcy filing (these loans were repaid by Genesis in December 2001). In addition, the asset transfer agreements were terminated; and
(5) The maturity date and interest rate for one loan (Harbor Place) with a principal balance of approximately $4.8 million made by the Company to an entity in which Genesis owns a 100% limited
partner interest was extended to May 31, 2002 at a 10% interest rate, an increase of 0.5% (this loan was repaid by Genesis in December 2001).
Under the terms of the agreement with Multicare, the Company acquired three properties which had secured three loans (Lehigh, Berkshire and Sanatoga) with outstanding principal amounts totaling approximately $19.5 million, and having a fair value of $12.5 million, at December 31, 2000, in exchange for the outstanding indebtedness. These properties were then leased back to Multicare affiliates under long-term operating lease agreements. The Company had no other transactions with this entity.
On September 12, 2001, Genesis announced that the U.S. Bankruptcy Court had approved the Genesis and Multicare joint plan of reorganization, subject to certain minor modifications. On October 2, 2001, Genesis announced that it, along with Multicare, had successfully completed their reorganization and had emerged from bankruptcy. Genesis also announced that upon the acceptance of the reorganization plan Multicare became a wholly owned subsidiary of Genesis.
Suspension of Quarterly Cash Distributions to Shareholders
Effective beginning with the quarter ended September 30, 2000, the Company suspended the payment of cash distributions to its shareholders. Effective January 31, 2001, the Company is precluded under its Credit Facility from paying distributions to its shareholders in excess of 110% of the amount required to be distributed to maintain its REIT status for federal income tax purposes. To qualify as a REIT, the Company must distribute with respect to each year at least 90% of its taxable income, excluding any net capital gain, to its shareholders.
During 2000, the Company recorded significant bad debt expenses due to the bankruptcy filing by Genesis related to loans and properties under lease and, as a result, recognized a net loss for financial reporting purposes. For federal income tax purposes, these losses totaling approximately $13.5 million will be recorded in 2001 as required under applicable income tax rules. When recognized for federal income tax purposes, these losses will reduce the amount otherwise required by the Company to be distributed to meet REIT requirements.
Based on the amount of these losses, the Company does not believe it would have to make any distributions to its shareholders until at least December 2002 for REIT qualification purposes. Distributions by the Company are at the discretion of its board of trustees. The Company currently anticipates that it will address its distribution policy during the latter part of 2002. Such policy will depend upon various factors, including the minimum distribution required under federal tax law to maintain REIT status, the Company's cash available for distribution, limitations or restrictions under various debt covenants and other cash uses deemed appropriate by the Company.
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 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 Company's 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 indicated that the carrying amount of an asset may not be recoverable. Recoverability of assets held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. Any impairment recognized is measured by the amount by which the carrying amount of the assets exceeds its estimated fair value.
Revenue Recognition
The Company's 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 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.
Investments in Unconsolidated Entities
The Company has several investments in entities in which the controlling voting interest is owned by Mr. D. Lee McCreary, Jr., the Company's President, Chief Executive Officer and Chief Financial Officer. As a result, the Company accounts for these investments using the equity method of accounting.
Investments in limited partnerships accounted for under the equity method of accounting recognize losses only to the extent of the limited partner's investment and advances made. The limited partner will recognize losses in excess of its investment, including advances, if it has guaranteed performance under any debt or other obligations of the limited partnership.
A summary of the Company's investments in its equity investees follows:
ET Capital Corp.
The Company has (a) nonvoting 95% equity interest in and (b) $3.1 million in loans to ET Capital Corp. ("ET Capital"), net of a bad debt allowance of $5.9 million. The voting 5% equity interest in ET Capital is owned by Mr. McCreary.
As of December 31, 2001, ET Capital owned a $7.8 million second trust mortgage note executed by The AGE Institute of Florida ("AGE"), which ET Capital acquired in two separate transactions from Genesis during 1998. 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. During 2000, the borrower ceased making interest payments to ET Capital and in November 2000, ET Capital notified the borrower that it was in default of the $7.8 million second trust mortgage loan held by ET Capital.
Management of ET Capital has determined, based on the decrease in the underlying cash flows generated by the properties securing the note, that the value of the underlying collateral may not be sufficient to satisfy the borrower's obligation under the note. As a result, a bad debt allowance of $7.8 million was recorded by ET Capital during the year ended December 31, 2000.
In addition, ET Capital has notes receivable aggregating $3.2 million and $0.9 million at December 31, 2001 from two of the Company's Equity Investees and one of the Company's consolidated subsidiaries, respectively. These loans mature at various dates from April 2008 to December 2011 and bear interest at 14%, with interest and principal payable monthly. ET Capital Corp. recorded $0.5 million and $0.1 million, respectively in interest income for the year ended December 31, 2001.
At December 31, 2001, ET Capital's long-term debt includes two demand promissory notes payable to the Operating Partnership aggregating $5.9 million, which were used to partially fund ET Capital's investment in the second trust mortgage note referred to above. These notes bear interest at a weighted average rate of 12.1% with interest only payable quarterly. During the year ended December 31, 2000, the Company recorded a bad debt allowance of $5.9 million relating to this loan. In addition, ET Capital has loans payable to the Company aggregating $3.1 million, bearing interest at 15% and maturing at various dates from April 2008 to December 2011. The proceeds from these loans were used to partially fund ET Capital's other investments.
The Company recorded $0.8 million and $0.7 million in interest income for the years ended December 31, 2001 and 2000, respectively, on the notes receivable from ET Capital. The Company also recorded losses of $0.3 million and $7.2 million related to the portion of its equity interest in ET Capital's results of operations for the years ended December 31, 2001 and 2000, respectively.
In May 2001, ET Capital was named as a third party defendant in a complaint filed against Genesis. The complaint was filed by several not- for-profit entities, including AGE, which own skilled nursing facilities that were formerly managed by Genesis. The third party complaints arise from a lawsuit filed by Genesis seeking payment from AGE of various management fees allegedly owed Genesis by AGE. In its third party complaint, AGE asserts, among other things, that by acquiring in 1998 the $7.8 million of loans from Genesis secured by second mortgage liens on properties owned by AGE, ET Capital joined with Genesis in an effort to defraud AGE. ET Capital believes that the complaint is without merit and intends to vigorously defend its position.
ET Sub-Meridian Limited Partnership, L.L.P.
The Company has a 99% limited partnership interest in ET Sub- Meridian. Mr. McCreary owns the 1% general partner interest through a limited liability company of which he 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 acquired from Genesis in 1998. The purchase options are exercisable by ET Sub-Meridian in September 2008 for a cash exercise price of $66.5 million. ET Sub- Meridian subleased the facilities to Genesis for an initial ten-year period with a ten-year renewal option. Genesis has guaranteed the subleases.
In connection with the ET Sub-Meridian transaction, the Company agreed to indemnify the property owners for any loss of deferral of tax benefits prior to August 31, 2008 due to a default under a sublease or if a cure 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.
ET Sub-Meridian has real estate investments and long-term debt of $99.5 million and $104.2 million and $103.0 million and $105.4 million, respectively, at December 31, 2001 and 2000. Included in long term debt, ET Sub-Meridian has a $17.6 million subordinated demand loan bearing interest at 12% payable to the Company in connection with the above transaction. The Company recorded $2.1 million in interest income on this loan for the years ended December 31, 2001 and 2000. As described above, as part of the restructuring of the lease and loan transactions between Genesis and the Company, on January 31, 2001, the Company acquired from Genesis a $8.5 million loan receivable of ET Sub-Meridian that had been guaranteed by the Company. The interest rate on this loan is 8%. The Company recorded interest income of $0.6 million on this loan for the eleven months ended December 31, 2001. The Company recorded losses of $2.0 million and $2.5 million related to the portion of its equity interest in ET Sub-Meridian's results of operations for the years ended December 31, 2001 and 2000, respectively. See Note 6 of the Company's consolidated financial statements for additional information.
ET Sub-Cabot Park, LLC ET Sub-Cleveland Circle, LLC
The Company has a 99% non-managing member interest in ET Sub-Cabot Park and LLC, and ET Sub-Cleveland Circle, LLC, each of which owns a single assisted living facility. The 1% managing member interest in these companies is owned by a limited liability company of which Mr. McCreary is the sole member.
Et Sub-Cabot Park and ET Sub-Cleveland Circle have subordinated demand loans in the aggregate amount of $3.1 million payable to the Company at December 31, 2001, bearing interest at 12%. The Company recorded $381,000 and $382,000 in interest income for the years ended December 31, 2001 and 2000, respectively, in connection with these demand loans.
In addition, these companies have loans payable to ET Capital aggregating $3.2 million at December 31, 2001 and 2000. These loans mature at various dates from April 2008 to December 2011 and bear interest at 14% with interest and principal payable monthly.
The Company recorded aggregate losses of $272,000 and $342,000 related to its equity interest in ET-Sub-Cabot Park, LLC's and ET Sub- Cleveland Circle, LLC's results of operations for the years ended December 31, 2001 and 2000, respectively. These two entities have real estate investments and aggregate long-term debt of $29.2 million and $29.7 million, respectively, at December 31, 2001. For 2000, the real estate investments and aggregate long-term debt was $30.2 million. See Note 6 of the Company's consolidated financial statements included in this Form 10-K for additional information.
At December 31, 2001, ET Sub-Cabot Park, LLC and ET Sub-Cleveland Circle, LLC each leased one property to a Genesis Equity Investee under a minimum rent lease, with an initial term of ten years and a ten-year renewal option. ET Sub-Cabot Park, LLC and ET Sub-Cleveland Circle, LLC received aggregate lease payments of $3.1 million in 2001 from Genesis Equity Investees. See Note 6 of the Company's consolidated financial statements for additional information.
Results of Operations
Year ended December 31, 2001 compared to the year ended December 31,
Revenues
Rental revenues were $18.8 million for 2001 as compared to $18.6 million for 2000. Rental revenues attributable to Genesis and Genesis Equity Investees totaled $14.8 million, or 79% of total rental revenues, for 2001 compared to $14.8 million, or 80% of total revenues for 2000.
Interest income was $2.7 million for 2001 as compared to $4.5 million, net of amortization of deferred loan costs of $145,000 for 2000, a 40.2% decrease. This decrease was a result of debt restructuring involving Genesis and Multicare during 2000, which was completed during 2001. The decrease was also due to the pay-off of loans which were not part of the restructuring with Genesis. See "Genesis and Multicare Chapter 11 Bankruptcy Filings; Lease and Loan Restructurings; Genesis and Multicare Emergence from Bankruptcy." During 2001, the Company had loans outstanding to Genesis totaling approximately $12.2 million. These loans were repaid by Genesis in December 2001. The proceeds from these loan repayments were used to reduce the balance outstanding under the Credit Facility. Interest income recorded by the Company during 2001 on all the loans repaid by Genesis in December 2001 totaled $1.3 million. During 2001, another borrower repaid a $10.2 million loan receivable from the Company, the proceeds of which were also used to reduce the outstanding balance under the Credit Facility. Interest income, net of bad debt expense, recorded by the Company during 2001 on this loan totaled $0.8 million. At December 31, 2001, the Company did not have any remaining loan receivables. Accordingly, the Company does not anticipate recognizing interest income from loan receivables in subsequent periods.
Interest from unconsolidated Equity Investees was $3.9 million for 2001 as compared to $3.3 million for 2000. This represents a 20.5% increase over the prior year. This increase is primarily due to the interest payments received by the Company related to a $8.5 million note receivable from ET Sub-Meridian, an unconsolidated subsidiary of the Company. This loan, which was previously guaranteed by the Company and owed to Genesis by ET Sub-Meridian, an unconsolidated subsidiary of the Company, and was conveyed to the Company in January 2001 in a manner to effect an $8.5 million reduction in amounts owed to the Company by Genesis under the terms of the restructuring with Genesis. See "Genesis and Multicare Chapter 11 Bankruptcy Filings; Lease and Loan Restructurings; Genesis and Multicare Emergence from Bankruptcy."
Expenses
Property operating expenses principally relate to medical office buildings, which are subject to leases that do not require the lessees to pay all property operating expenses. Property operating expenses for these properties were $1.3 million for 2001 compared to $1.1 million for 2000. Property operating expenses as a percentage of medical office building rental revenues increased to 43.5% for 2001 from 38.2% for 2000.
Interest expense, which includes amortization of deferred loan costs of $0.7 million, was $11.7 million for 2001 as compared to $14.0 million, net of amortization of deferred loan costs of $0.6 million for 2000. The decrease of $2.3 million is due to lower LIBOR rates and lower third party debt balances outstanding. The Credit Facility and mortgages and notes payable to third parties decreased from $146.7 million at December
31, 2000 to $113.9 million at December 31, 2001, respectively, including a $31.5 million reduction in the outstanding balance under the Credit Facility. The weighted average interest rate on outstanding third party debt decreased from 8.5% at December 31, 2000 to 7.1% at December 31, 2001. The Company's interest rate on the Credit Facility was 5.44% at December 31, 2001 compared to 9.63% at December 31, 2000. Amounts outstanding under the Credit Facility bear interest at a floating rate equal to 3.25% over one-month LIBOR.
Depreciation on real estate properties was approximately $5.7 million for 2001 compared to $5.9 million for 2000. This decrease is primarily due to the Woodbridge property being held for sale for the ten months ended October 31, 2001. During the held for sale period the property was not depreciated, as required under SFAS No. 121,"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of".
General and administrative expense was approximately $3.3 million for 2001 compared to $3.6 million for 2000. This decrease is primarily due to decreased compensation for officers of approximately $0.2 million, a decrease of $0.7 million in connection with property due diligence for investment transactions that were not completed in 2000 offset, in part, by an increase in legal expenses of approximately $0.6 million relating to the Genesis and Multicare lease and loan restructuring transactions and the resolution of the Woodbridge property new lease agreement.
Bad debt expense was $0.1 million for 2001 and $9.5 million for 2000. The bad debt expense recorded in 2000 resulted from impairment charges recorded on real estate loans receivable of $7.1 million, investments in and advances to unconsolidated entities of $1.4 million and a note receivable from a former officer of the Company of $990,000.
Loss on impairment of long-lived assets was $0.5 million for 2001 and $5.3 million for 2000. The loss on impairment of long-lived assets recorded in 2000 resulted primarily from fair market value adjustments on real estate properties held for sale at December 31, 2000.
The net losses recorded by the Company for its investment in ET Sub- Meridian, ET Capital, ET Sub-Cleveland Circle and ET Sub-Cabot Park were $2.6 million for 2001 and $10.0 million for 2000. The net decrease in net equity in losses of unconsolidated subsidiaries is primarily due to the bad debt expense of $7.8 million recorded by ET Capital during 2000. See "Investments in Unconsolidated Entities".
Year ended December 31, 2000 compared to the year ended December 31,
Revenues
Rental revenues for 2000 and 1999 were stable at $18.6 million. Rental Revenues attributable to Genesis and Genesis Equity Investees totaled $14.8 million, or 80% of total rental revenues, for 2000 compared to $14.7 million, or 80% of total revenues, for 1999.
Interest income was $4.5 million, net of amortization of deferred loan costs of $145,000, for 2000 as compared to $5.7 million, net of amortization of deferred loan costs of $227,000 for 1999, a 19.6% decrease. This decrease was a result of debt restructuring involving Genesis and Multicare during 2000. See "Genesis and Multicare Chapter 11 Bankruptcy Filings; Lease and Loan Restructurings; Genesis Emergence from Bankruptcy".
Interest from unconsolidated Equity Investees was $3.3 million for 2000 as compared to $3.8 million for 1999. This represents a 14.6% decrease over the prior year. This decrease was primarily due to ET Capital not making its second, third or fourth quarter 2000 interest payments to the Company on its notes payable related to the AGE second mortgage transactions. See "Investments in Unconsolidated Entities".
Expenses
Property operating expenses principally relate to medical office buildings, which are subject to leases that do not require the lessees to pay all property operating expenses. Property operating expenses for these leased properties were stable at $1.1 million for 2000 and 1999. Property operating expenses as a percentage of medical office building rental revenues decreased to 38.2% for 2000 as compared to 42.9% for 1999.
Interest expense, which includes amortization of deferred loan costs of $0.6 million for 1999, was $14.0 million for 2000 as compared to $13.1 million for 1999. The increase of $0.9 million is due to fluctuations in the LIBOR rate to the Credit Facility terms that required the Company to pay a monthly facility fee in an amount equal to 0.0625% (0.75%) of the outstanding balance. This increase in interest expense of $1.8 million was partially offset by a reduction in amortization of deferred loan costs of $0.9 million. Third party debt, which includes the Credit Facility and mortgages and notes payable, decreased from $148.7 million at December 31, 1999 to $146.7 million at December 31, 2000. The weighted average interest rate on outstanding third party debt increased from 8.4% at December 31, 1999 to 8.5% at December 31, 2000. The Company's interest rate on the Credit Facility was 9.63% at December 31, 2000 and 9.25% at December 31, 1999. After January 31, 2001, amounts outstanding under the Credit Facility bear interest at a floating rate equal to 3.25% over one-month LIBOR under the Fourth Amendment to the Credit Agreement.
Depreciation on real estate properties was approximately $5.8 million for both 2000 and 1999.
General and administrative expenses were $3.6 million for 2000 as compared to $2.6 million for 1999, an increase of 38.5%. The increase was primarily due to increased compensation for officers and the expenses of $0.7 million in connection with property due diligence for investment transactions that were not completed.
Bad debt expense of $9.5 million for 2000 resulted from impairment charges recorded on real estate loans receivable of $7.1 million, investments in and advances to unconsolidated entities of $1.4 million and a note receivable from a former officer of the Company of $990,000.
An extraordinary loss of $1.2 million, net of a minority interest benefit of $86,000, was recorded for 1999 in connection with the prepayment of an existing mortgage loan.
Losss on impairment of long-lived assets was $5.3 million for 2000. The loss on impairment of long-lived assets recorded in 2000 resulted primarily from fair market value adjustments on real estate properties held for sale at December 31, 2000.
The net losses recorded by the Company for its investment in ET Sub-Meridian, ET Capital, ET Sub-Cleveland Circle and ET Sub-Cabot Park were $10.0 million for 2000 and $2.5 million for 1999. The net increase in net equity in losses of unconsolidated entities is primarily due to the bad debt expense of $7.8 million recorded by ET Capital during 2000. See "Investments in Unconsolidated Entities".
Liquidity and Capital Resources
Net cash provided by operating activities was $11.1 million for 2001 as compared to $7.5 million for 2000. This increase in cash of $3.6 million is comprised of the following (a) an increase in net income of $21.8 million offset, in part, by (b), the net decrease in bad debt of $9.4 million, (c) the net decrease in loss on impairment of long-lived assets of $4.9 million, (d) the net decrease in minority interest and equity in losses from unconsolidated entities of $5.8 million, (e) the net decrease in depreciation and amortization of $0.2 million and (f) increased by the net change in operating assets and liabilities of $2.1 million.
Net cash provided by investing activities was $20.9 million for 2001 compared to net cash used in investing activities of $0.3 million for 2000. Net cash provided by investing activities for the year ended December 31, 2001 included (a) $21.7 million received in principal payments on loans receivable, (b) $0.2 million in proceeds from affiliates offset by (c) $0.8 million net increase in deposits and restricted cash.
Net cash used in financing activities was $32.4 million for 2001 compared to $7.7 million for 2000. The net cash used in financing activities for 2001 principally included $31.4 million in payments on the Credit Facility and $1.2 million in payments on mortgages. Net cash used in financing activities for 2000 included (a) $0.8 million in payments of deferred financing fees, (b) $1.0 million in payments on the Credit Facility, (c) $1.1 million in payments on mortgages payable, (d) $4.6 million in distributions to shareholders and minority interests and (e) $0.2 million related to the purchase of partnership units.
At December 31, 2001, the Company's consolidated net real estate investments in properties and loans aggregated $166.7 million as compared to $202.7 million as of December 31, 2000. This decrease of $36.0 million primarily resulted from (a) Genesis paying approximately $12.2 million to the Company in full payment of their term and construction loan receivables in December 2001, (b) an unrelated third party paid to the Company approximately $10.2 million including principal and interest in full payment of their construction loan receivable during October, 2001 and (c) approximately $12.5 million in loan receivables were exchanged for three assisted living facilities which secured by these loans. The proceeds of $22.4 million were used to reduce the balance outstanding under the Company's Credit Facility. Working capital (deficit) was ($49.6) million and ($21.5) million at December 31, 2001 and 2000, respectively. The increase in the working capital (deficit) at December 31, 2001 compared to 2000 was primarily due to the inclusion in current liabilities of three mortgages secured by four properties with unpaid principal balances totaling $30.0 million that will mature in December 2002. The Company has the right to extend the maturity of each of these mortgages for two additional years upon the payment of an aggregate extension fee of $150,000, subject to the requirement that the mortgages are not then in default and that the lender has determined that there has been no material adverse change in the condition, financial, physical or otherwise, of the property, or the borrower or any guarantor or indemnitor since November 1999 and that the performance of the property is consistent with its performance as of November 1999. The repayment of principal and interest on these mortgage loans is non-recourse to the Company. However, if the maturity date of these mortgages is not extended by the lender and the lender foreclosed on the properties securing the mortgages, the Company would lose the properties and the revenues it derives from the properties. At December 31, 2001, the properties had a book value of $36.9 million. During 2001, the Company derived $4.0 million of revenues from the properties.
The working capital deficit also includes the $7.2 million balance owed under the Credit Facility, which matures on August 31, 2002. Based on the anticipated monthly payments to August 31, 2002, the Company estimates that there will be a balance due at maturity of approximately $3.0 million. Based on the significant reduction during 2001 in the amount outstanding under the Credit Facility and the Company's payment history, the Company believes that it will be successful in negotiating a further extension of the Credit Facility that will enable it to pay- off all amounts outstanding under the Credit Facility within a reasonable period of time. If the Company is unable to negotiate a further extension of the Credit Facility or obtain replacement financing by August 31, 2002, or for any other reason the Operating Partnership were to be in default under the Credit Facility prior to its maturity, Deutsche Bank could exercise its right to foreclose on the collateral securing the Credit Facility, which could have an adverse affect on the Company's financial condition and results of operations.
Cash and cash equivalents were $2.7 million and $3.1 million at December 31, 2001 and December 31, 2000, respectively. The Company's management believes that available cash and cash equivalents should be sufficient to satisfy the Company's short-term working capital needs (other than the repayment of amounts outstanding under the Credit Facility). The current economic recession, combined with the net reduction in Medicare
reimbursement levels during and after 1998, which resulted in a significant curtailment of the willingness of banks to extend loans secured by healthcare-related real estate, has adversely impacted the debt and equity markets for healthcare-related companies. The Company depends on these markets to fund its long-term liquidity needs. The Company's ability to access the capital and credit markets will likely be significantly limited until such time as these markets improve. The Company does not have sufficient cash flow to repay indebtedness if its creditors require immediate repayment of these amounts or if the collateral underlying these amounts is insufficient to cover the outstanding balances.
As of December 31, 2001, the Company had shareholders' equity of $81.0 million and Credit Facility borrowings and mortgages, bonds and notes payable, including notes payable to third parties, aggregating $114.9 million, which represents a debt to equity ratio of 1.42 to 1. This was a decrease from 1.83 to 1 at December 31, 2000. This decrease was due primarily to a net decrease of $32.8 million in such indebtedness and a net increase in shareholders' equity of $0.9 million. The net decrease in third party indebtedness resulted primarily from repayments of third party indebtedness aggregating $1.2 million and repayments under the Credit Facility of $31.5 million. The net increase in shareholders' equity primarily resulted from stock options exercised during the year of $0.2 million, and net income aggregating $0.5 million for 2001.
Credit Facility
The Company has a line of credit agreement with Deutsche Bank. The Credit Facility is secured by properties with an aggregate book value of $41.4 million. Effective January 31, 2001, the Credit Facility was extended to August 31, 2002 (the "Fourth Amendment") and the covenants amended to, in part, cure the then existing covenant violations.
In connection with the extension of the term of the Credit Facility to August 31, 2002, the Fourth Amendment to the Credit Facility (a) prohibited the Company from further borrowings under the facility, (b) required the Company to make monthly principal payments equal to the cash flow generated by the Company for the month, not to be less than $450,000 a month and (c) prevented the Company from paying distributions in excess of 110% of that amount required to maintain REIT status.
With respect to the Fourth Amendment, the Company issued warrants to the lender to purchase 118,750 common shares at $1.70 per share. These warrants expire December 31, 2005.
The amounts outstanding under the Credit Facility bear interest at a floating rate equal to 3.25% over one-month LIBOR and the previously required monthly facility fee has been eliminated. The effective interest rate on borrowings outstanding under the Credit Facility at December 31, 2001 was 5.44%. At December 31, 2001, the Company had $7.2 million
outstanding under the Credit Facility. The Company is currently making monthly principal and interest payments to Deutsche Bank, equal to its monthly cash flow, not to be less than $450,000 a month . At December 31, 2001, the Credit Facility was secured by properties with a book value of approximately $41.4 million. Substantially all of the Company's other assets at December 31, 2001 secure other outstanding indebtedness of the Company.
The terms of the Credit Facility extension reduced the Company's cash flows and impose limits on its ability to make distributions to its shareholders. Future increases in interest rates, as well as any defaults by tenants on their leases could adversely affect the Company's cash flow and its ability to pay its obligations.
To qualify as a REIT, the Company must distribute to its shareholders each year at least 90% of its net taxable income, excluding any net capital gain. If the Company is unable to make any required shareholder distributions, then the Company may be unable to qualify as a REIT and be subject to federal income taxes.
Mortgage Defaults
At December 31, 2000, as a result of failing to meet certain financial covenants, the Company was in default on two mortgage bonds totaling approximately $20.0 million which are guaranteed by the Company and secured by mortgages on the Highgate and Woodbridge facilities. Under amendments to the guaranty and bond documents executed on January 31, 2001, the Company is no longer in default of these covenants. Certain other defaults have been resolved by an amendment to the bond documents executed as of February 1, 2002.
The Company continues to be in default on loans totaling $25.6 million, which are secured by mortgages on the Riverview Ridge, Lopatcong, Pleasant View and Heritage Andover facilities, as a result of its failure to meet certain property information reporting requirements and Genesis having filed for bankruptcy protection. There can be no assurance that the Company will be able to cure these defaults. Based, in part, on the Company's favorable payment history, the Company does not believe that the lender will take any action in connection with these defaults.
Contractual Obligations and Commercial Commitments
The following table represents the Company's contractual obligations as of December 31, 2001 (amounts in thousands):
See Item 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's bonds payable and most of the Company's mortgages payable bear interest at fixed rates. 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 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.
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 maturity schedule for the Company's fixed rate mortgages and bonds payable is as follows (in thousands):
2002 $ 16,078 2003 1,076 2004 1,158 2005 1,249 2006 1,350 Thereafter 55,862 --------- $ 76,773 =========
At December 31, 2001, the fair value of the Company's fixed rate mortgages and bonds payable approximates its carrying value of $76.8 million.
For variable rate debt, changes in interest rates generally do not impact fair market value, but do affect future earnings and cash flows. At December 31, 2001, the fair value of the Company's variable rate debt approximates its carrying value of $37.2 million. The weighted average interest rate on borrowings outstanding under the Credit Facility and variable rate mortgages was 5.24% at December 31, 2001. Assuming the Credit Facility and variable rate mortgage balances outstanding at December 31, 2001 of $37.2 million remains constant, each one percentage point increase in interest rates from 5.24% at December 31, 2001 would result in an increase in interest expense for the coming year of approximately $372,000. Amounts outstanding under the Credit Facility bear interest at a rate of 3.25% over the one-month LIBOR. 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 expenses, which could adversely affect the Company's cash flow and its ability to pay its obligations and make distributions to shareholders at current levels. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources."
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Independent Auditors' Report
The Board of Trustees and Shareholders ElderTrust:
We have audited the accompanying consolidated balance sheets of ElderTrust and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 2001. In connection with our audits of the consolidated financial statements, we have also audited the related financial statement Schedules III and IV as listed in the accompanying index for Item 14(a) 2 on page 101. These consolidated financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of ElderTrust and subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
/s/ KPMG LLP
McLean, VA. January 16, 2002
ELDERTRUST CONSOLIDATED BALANCE SHEETS December 31, 2001 and 2000 (in thousands, except share and per share amounts)
2001 2000 ----------------------- ASSETS Assets: Real estate properties, at cost $169,078 $148,939 Less - accumulated depreciation (19,745) (14,085) Land 17,327 14,950 ----------------------- Net real estate properties 166,660 149,804 Properties held for sale, net of impairment allowance of $1,433 - 11,365 Real estate loans receivable, net of allowance of $7,087 - 41,559 Cash and cash equivalents 2,676 3,105 Restricted cash 9,245 8,409 Accounts receivable, net of allowance of $340 and $1,247, respectively 386 1,466 Accounts receivable from unconsolidated entities 1,552 1,905 Prepaid expenses 403 483 Investment in and advances to unconsolidated entities, net of allowance of $1,405 and $1,446, respectively 24,033 18,137 Other assets, net of accumulated amortization and depreciation of $2,817 and $2,840, respectively 600 1,454 ----------------------- Total assets $205,555 $237,687 =======================
LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Bank credit facility $7,174 $38,720 Accounts payable and accrued expenses 1,024 1,613 Accounts payable to unconsolidated entities 11 12 Mortgages and bonds payable 106,773 107,932 Notes payable to unconsolidated entities 942 1,015 Other liabilities 3,992 3,639 ----------------------- Total liabilities 119,916 152,931 -----------------------
Minority interest 4,641 4,657
Shareholders' equity: Preferred shares, $.01 par value; 20,000,000 shares authorized; none outstanding - - Common shares, $.01 par value; 100,000,000 shares authorized; 7,336,331 and 7,119,000 issued and outstanding, respectively 73 71 Capital in excess of par value 120,750 120,377 Deficit (39,825) (40,349) ----------------------- Total shareholders' equity 80,998 80,099 ----------------------- Total liabilities and shareholders' equity $205,555 $237,687 =======================
The accompanying notes to consolidated financial statements are an integral part of these statements.
ELDERTRUST CONSOLIDATED STATEMENTS OF OPERATIONS Years ended December 31, 2001, 2000 and 1999 (in thousands, except per share amounts)
2001 2000 1999 --------------------------- Revenues: Rental revenues $18,761 $18,601 $18,552 Interest, net of amortization of deferred loan origination costs 2,715 4,542 5,653 Interest from unconsolidated equity investees 3,920 3,252 3,809 Other income 234 189 127 --------------------------- Total revenues 25,630 26,584 28,141 ---------------------------
Expenses: Property operating expenses 1,250 1,128 1,124 Interest expense, including amortization of deferred finance costs 11,728 14,007 13,136 Depreciation 5,678 5,850 5,788 General and administrative 3,253 3,622 2,612 Bad debt expense 116 9,522 - Loss on impairment of long-lived assets 450 5,306 - Separation agreement expenses - - 2,800 --------------------------- Total expenses 22,475 39,435 25,460 ---------------------------
Net income (loss) before equity in losses of unconsolidated entities, minority interest and extraordinary item 3,155 (12,851) 2,681
Equity in losses of unconsolidated entities, net (2,590) (10,010) (2,482) Minority interest (41) 1,531 (19) --------------------------- Net income (loss) before extraordinary item 524 (21,330) 180
Extraordinary item: Loss on extinguishment of debt - - (1,296) Minority interest in extraordinary item - - 86 --------------------------- Net income (loss) $524 ($21,330) ($1,030) ===========================
Basic weighted average number of common shares outstanding 7,184 7,119 7,198 ===========================
Net income (loss) per share before extraordinary item - basic $0.07 ($3.00) $0.03 =========================== Net income (loss) per share - basic $0.07 ($3.00) ($0.14) ===========================
Diluted weighted average number of common shares outstanding 7,442 7,119 7,198 ===========================
Net income (loss) per share before extraordinary item - diluted $0.07 ($3.00) $0.03 =========================== Net income (loss) per share - diluted $0.07 ($3.00) ($0.14) ===========================
The accompanying notes to consolidated financial statements are an integral part of these statements.
ELDERTRUST CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Years ended December 31, 2001, 2000, and 1999 (in thousands)
The accompanying notes to consolidated financial statements are an integral part of these statements.
ELDERTRUST CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, 2001, 2000 and 1999 (in thousands)
2001 2000 1999 ----------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $524 ($21,330) ($1,030) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 6,405 6,613 7,526 Bad debt expense 116 9,522 - Loss on impairment of long-lived assets 450 5,306 - Extraordinary loss on extinguishment of debt - - 1,296 Non-cash separation expense from debt forgiveness to officer - - 2,600 Non-cash expense in connection with write-off of unamortized deferred loan costs - - 129 Minority interest and equity in losses from unconsolidated entities 2,640 8,479 2,415 Net changes in assets and liabilities: Accounts receivable and prepaid expenses 1,206 (1,246) 3,704 Accounts payable and accrued expenses (589) 77 (37) Other 394 78 124 ----------------------------- Net cash provided by operating activities 11,146 7,499 16,727 -----------------------------
CASH FLOWS FROM INVESTING ACTIVITIES: Investment in real estate loans receivable - - (5,095) Capital expenditures (171) (186) (1,330) Proceeds from collection on advances to unconsolidated entities 195 1,536 815 Payments received on real estate loans receivable 21,697 - 4,348 Net increase in reserve funds and deposits - restricted cash (836) (1,663) (3,645) Other (30) - 52 ----------------------------- Net cash provided by (used in) investing activities 20,855 (313) (4,855) -----------------------------
CASH FLOWS FROM FINANCING ACTIVITIES: Payment of deferred financing fees - (797) (2,965) Borrowings under credit facility - - 9,518 Payments under credit facility (31,352) (950) (60,052) Proceeds from mortgages payable - - 71,145 Payments on mortgages payable (1,159) (1,073) (11,734) Payments on notes payable - - (3,000) Purchase of partnership units (18) (203) - Distributions to shareholders - (4,272) (10,513) Distributions to minority interests - (327) (750) Stock options exercised 172 - - Repurchases of common shares - - (923) Prepayment penalty on mortgage loan - - (1,157) Other (73) (64) (108) ----------------------------- Net cash used in financing activities (32,430) (7,686) (10,539) -----------------------------
Net increase (decrease) in cash and cash equivalents (429) (500) 1,333 Cash and cash equivalents, beginning of period 3,105 3,605 2,272 ----------------------------- Cash and cash equivalents, end of period $ 2,676 $ 3,105 $ 3,605 =============================
The accompanying notes to consolidated financial statements are an integral part of these statements.
ELDERTRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001 and 2000
1. Organization and Operations
ElderTrust was formed in the State of Maryland on September 23, 1997 and began operations upon the completion of its initial public offering on January 30, 1998 (the "Offering") pursuant to which it issued 6,957,500 common shares. Net proceeds to ElderTrust were approximately $114.2 million.
At December 31, 2001 and 2000, ElderTrust's total assets consisted primarily of a 94.9% and 94.8%, respectively, owned subsidiary, ElderTrust Operating Limited Partnership (the "Operating Partnership") and its wholly- owned subsidiaries and controlled partnerships (collectively, "ElderTrust" or the "Company"). At December 31, 2001 and 2000 the Company's assets primarily consisted of (a) a diversified portfolio of 23 and 22 healthcare properties, respectively, consisting primarily of assisted living and skilled nursing facilities which are leased back to the prior owners or other third parties, (b) construction loans totaling $18.1 million for 2000, (c) term loans totaling $23.4 million for 2000, (d) a 95% non- voting equity interest in an unconsolidated entity (ET Capital Corp.) which owns a $7.8 million second mortgage note and other notes receivable aggregating $4.1 million due from the Company and two of the Company's equity investees, (e) a 99% non-voting limited partnership interest in an unconsolidated entity (ET Sub-Meridian Limited Partnership, LLP) which holds leasehold and purchase option rights for seven skilled nursing facilities, and (f) a 99% non-voting limited member interest in two unconsolidated entities (ET Sub-Cabot Park, LLC and ET Sub-Cleveland Circle, LLC) which each own an assisted living facility.
Genesis Health Ventures, Inc. was co-registrant in the Company's Offering. Approximately 71% and 72% of the Company's consolidated assets at December 31, 2001 and 2000, respectively, consisted of real estate properties leased to or managed by and loans on real estate properties made to Genesis Health Ventures, Inc. or its consolidated subsidiaries (unless the context otherwise requires, collectively, "Genesis") or entities in which Genesis accounts for its investment using the equity method of accounting ("Genesis Equity Investees"). In addition, the Company has investments in unconsolidated entities that have also leased properties to Genesis or Genesis Equity Investees. As such, the Company's consolidated revenues and ability to make expected distributions to shareholders depends, in significant part, upon the revenues derived from Genesis. See Note 5 of the Company's consolidated financial statements included in this Form 10-K for additional information. Additionally, Michael R. Walker serves as Chairman of the Board and Chief Executive Officer of Genesis and Chairman of the Board of ElderTrust.
Basis of Presentation
The consolidated financial statements of ElderTrust include all the accounts of ElderTrust, the Operating Partnership, and the Operating Partnership's wholly owned and controlled subsidiaries. All significant
ELDERTRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001 and 2000 (continued)
intercompany balances and transactions have been eliminated. Certain amounts included in the consolidated financial statements for prior periods have been reclassified for comparative purposes to conform to the presentation for 2001.
2. Summary of Significant Accounting Policies
Use of Estimates
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 affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could vary from those estimates.
Cash and Cash Equivalents
The Company considers all short-term, highly liquid investments that are readily convertible to cash and have an original maturity of three months or less at the time of purchase to be cash equivalents.
Restricted Cash
Restricted cash represents bond and operating reserve funds required in connection with outstanding debt issues, security deposits, letters of credit and mortgage escrow accounts.
Real Estate Properties
Real estate properties are recorded at cost. Acquisition costs and transaction fees, including legal fees, title insurance, transfer taxes, external due diligence costs and market interest rate adjustments on assumed debt directly related to each property are capitalized as a cost of the respective property. The cost of real estate properties acquired is allocated between land and buildings and improvements based upon estimated market values at the time of acquisition. Depreciation is provided for on a straight-line basis over an estimated composite useful life of twenty-eight and one-half years for buildings and improvements.
Impairment of Long-Lived Assets
The Company reviews its long-lived assets, which includes real estate properties, and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets held and used is
ELDERTRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001 and 2000 (continued)
measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the estimated fair value of the assets.
Real Estate Loans Receivable
Real estate loans receivable are recorded at cost, less the related allowance for impairment, if any. It is the Company's policy that impairment losses are included in the allowance for credit losses through a charge to bad debt expense. It is also the Company's policy to account for cash receipts for interest on impaired notes as interest revenue and to perform impairment reviews as needed.
Deferred Financing Costs
Deferred financing costs are incurred in the process of acquiring financing for the Company. The Company amortizes these costs over the term of the respective loan using a method that approximates the interest method.
Income Taxes
The Company has been organized and operated in a manner so as to qualify for taxation as a real estate investment trust ("REIT") under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended. As a result, the Company generally will not be subject to income tax on its taxable income at corporate rates to the extent it distributes with respect to each year 100% of its taxable income to its shareholders and complies with certain other requirements. The Company intends to continue to qualify as a REIT, and, accordingly, no provision has been made for federal income taxes for the Company in accompanying financial statements.
Leases and Rental Income
Real estate properties are leased to operators primarily on a long- term triple net-lease basis. Some of these leases provide for rents based on a specific percentage of facility operating revenues with no required minimum rent ("percentage rent leases"). Other leases provide for base rent, increasing each year by the lesser of 5% of the increase in facility revenues for the immediately preceding year or one-half of the percentage increase in the Consumer Price Index for the immediately preceding year ("minimum rent leases"). Both types of leases are triple net-leases that require the lessees to pay all operating expenses, taxes, insurance, maintenance and other costs, including a portion of capitalized expenditures. The remaining leases ("fixed rent leases") are with tenants in the medical office and other buildings and provide for specific annual rents, subject to annual increases in some of the leases.
ELDERTRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001 and 2000 (continued)
Generally, lease payments are recognized as revenue in accordance with lease terms. Certain of the leases provide for scheduled annual rent increases. The Company reports base rental revenue on these leases using the straight-line method over the terms of the respective leases. The Company records an unbilled rent receivable or payable representing the amount that the straight-line rental revenue exceeds or reduces the rent currently collectible under the lease agreements.
Share Option Plans
The Company applies the intrinsic value-based method of accounting prescribed by the Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations, in accounting for its fixed plan 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.
Investments in Unconsolidated Entities
The Company has several investments in entities in which the controlling voting interest is owned by Mr. D. Lee McCreary, Jr., the Company's President, Chief Executive Officer and Chief Financial Officer. As a result, the Company accounts for these investments using the equity method of accounting.
Net Income/(Loss) per Share
Basic net income/(loss) per share is calculated by dividing net income by the weighted average number of common shares outstanding. Diluted net income/(loss) per share is calculated by dividing net income/(loss) by the addition of weighted average common shares outstanding and common share equivalents, if dilutive.
Segment Reporting
The Company is a real estate investment trust whose primary objective is to invest in healthcare facilities. The Company has one reportable segment, investments in healthcare facilities.
Recent Accounting Pronouncements
Accounting for the Impairment or Disposal of Long-Lived Assets
In August 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long- Lived Assets." SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and it addresses certain issues and points related to the treatment
ELDERTRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001 and 2000 (continued)
of assets that are held for sale. SFAS No. 144 is effective for all financial statements with fiscal years which begin after December 15, 2001. SFAS No. 144 will be effective for the Company for the fiscal year beginning January 1, 2002. The Company does not expect the adoption of SFAS No. 144 to have a material adverse impact on the Company's financial condition or results of operations.
3. Real Estate Loans Receivable
The following is a summary of real estate loans receivable at December 31, 2001 and 2000 (dollars in thousands):
On January 31, 2001, and under the restructuring of the agreements with Genesis and Multicare, the Company acquired the Lehigh, Berkshire and Sanatoga facilities in exchange for the release of the Company's loans to the subsidiaries of Multicare. The Company has leased these properties to subsidiaries of Genesis for an initial lease term of 10 years, with two five-year renewal options.
The following is a summary of real estate loans receivable at December 31, 2001 and 2000 including allowances for credit losses, the average recorded investment and total interest received for the period noted (dollars in thousands):
ELDERTRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001 and 2000 (continued)
Activity in the allowance for credit losses for the year ended December 31, 2001 and 2000 is as follows:
2001 2000 ------------ ------------ Balance at beginning of year ($ 7,087) $ - Charges to bad debt expense - (18,106) Recoveries of bad debt expense - 11,019 Effect of Genesis/Multicare restructuring 7,087 - ------------ ------------ Balance, end of year $ - ($ 7,087) ------------ ------------
4. Real Estate Investments
As of December 31, 2001, the Company had investments in 23 real estate properties located in five states. The properties include ten assisted living facilities and one independent living facility with a total of 966 beds, eight skilled nursing facilities with a total of 1,259 beds, and four medical office and other buildings. The Company leases its assisted living, independent living and skilled nursing properties to operators pursuant to long-term triple net leases.
At December 31, 2001, future minimum lease payments receivable are as follows (dollars in thousands):
2002 $ 18,666 2003 17,714 2004 17,271 2005 16,813 2006 16,429 Thereafter 46,429 ---------- $133,322 ==========
The Company's investment in the Woodbridge facility was previously classified as "held for sale". As previously disclosed, the sale was expected to close during the later part of 2001. In November 2001, the Company's management made a decision to remove the Woodbridge facility
ELDERTRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001 and 2000 (continued)
from the held for sale category. The Company recorded $59,000 in depreciation expense for the period covering November and December 2001, based on the adjusted carrying value of $9.7 million at November 1, 2001. In February 2002, the Company announced that it had entered into a new lease and purchase option agreement, for the Woodbridge facility with a new tenant, who is an affiliate of Newton Senior Living LLC, for an initial lease term of 10 years commencing on February 1, 2002.
5. Concentration of Risk
Revenues recorded by the Company under leases with and loans to Genesis or Genesis Equity Investees were approximately $16.1 million, $17.9 million and $18.6 million in 2001, 2000 and 1999, respectively. The Company's equity in net losses of unconsolidated entities (see Note 6) derived from arrangements with Genesis or Genesis Equity Investees totaled approximately $2.3 million, $2.8 million and $2.7 million in 2001, 2000 and 1999, respectively. The Company's consolidated revenues depends, in significant part, upon the revenues derived from Genesis.
On June 22, 2000, Genesis and The Multicare Companies, Inc., formerly a 43.6% owned non-consolidated subsidiary of Genesis and a borrower of the Company, filed for protection under Chapter 11 of the United States Bankruptcy Code. During 2000, the Company, Genesis and Multicare and Genesis and Multicare's major creditors negotiated agreements to restructure their debt and lease obligations with the Company. The agreements were approved by the U.S. Bankruptcy Court on January 4, 2001 and were consummated on January 31, 2001.
Under the more significant terms of the agreement with Genesis:
(1) Twenty-one of the then existing twenty-three lease agreements between Genesis subsidiaries and ElderTrust continued in effect in accordance with their terms, except as provided below:
* Two leases were modified to reduce combined rents for the properties by $745,000 per year;
* One lease was modified to create an early termination right commencing on December 31, 2002; and
* One lease was modified to permit the Company to terminate the lease during 2001 without penalty if the current tenant is unable to achieve occupancy targets specified by loan documents secured by property. The lease remains in effect at December 31, 2001.
(2) Two leases (Windsor Office Building and Windsor Clinic/Training facility) were terminated when the two properties subject to the
ELDERTRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001 and 2000 (continued)
leases were sold to Genesis for $1.25 million; such amount being paid through an increase in the notes receivable described in (4) below;
(3) An $8.5 million loan previously guaranteed by the Company and owed to Genesis by ET Sub-Meridian, an unconsolidated subsidiary of the Company, was conveyed to the Company in a manner to effect an $8.5 million reduction in amounts owed to the Company by Genesis;
(4) The maturity date for three loans (Oaks, Coquina and Mifflin) made by the Company to Genesis and affiliated entities with unpaid principal balances totaling approximately $7.5 million at June 30, 2000 (after taking into account the aforementioned $1.25 million increase and $8.5 million reduction) were extended to June 30, 2002 at the rates in effect prior to the Genesis bankruptcy filing; and
(5) The maturity date and interest rate for one loan (Harbor Place) with a principal balance of approximately $4.8 million made by the Company to an entity in which Genesis owns a 100% limited partner interest was extended to May 31, 2002 at a 10% interest rate, an increase of 0.5%.
Under the terms of the agreement with Multicare, the Company acquired three properties secured by three loans (Lehigh, Berkshire and Sanatoga) with outstanding principal amounts totaling approximately $19.5 million, and having a fair value of $12.5 million, at December 31, 2000, in exchange for the outstanding indebtedness. These properties were then leased back to Multicare under long-term operating lease agreements. The Company had no other transactions with this entity.
On September 12, 2001 Genesis announced that the U.S. Bankruptcy Court had approved the Genesis and Multicare joint plan of reorganization, subject to certain minor modifications. On October 2, 2001 Genesis announced they along with the Multicare companies had successfully completed their reorganization and had emerged from bankruptcy. Genesis also announced that upon the acceptance of the reorganization plan Multicare is now a wholly-owned subsidiary of Genesis.
In December 2001, Genesis paid approximately $12.2 million to the Company in full payment of their term and construction loan receivables. All of these proceeds were used to pay down the Credit Facility to approximately $7.2 million at December 31, 2001. Although Genesis has repaid their term and construction loan receivables, any failure of Genesis or Genesis Equity Investees to continue its operations and/or to continue to make lease payments to the Company could have a significant adverse impact on our operations and cash flows due to the significant portion of our properties leased to Genesis or Genesis Equity Investees.
ELDERTRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001 and 2000 (continued)
6. Investments in Unconsolidated Entities
The following is a summary of the Company's investment in and advances to unconsolidated entities accounted for by the equity method of accounting. For the years ended December 31, (dollars in thousands):
2001 2000 ------------ ------------ ET Capital Corp. $ 3,162 $ 3,501 ET Sub-Meridian, LLP 18,564 12,057 ET Sub-Cabot Park, LLC 1,305 1,328 ET Sub-Cleveland Circle, LLC 1,002 1,251 ------------ ------------ Total $ 24,033 $ 18,137 ------------ ------------
Summary combined financial information for unconsolidated entities accounted for by the equity method is as follows (dollars in thousands):
As of and for the year ended December 31, 2001
ELDERTRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001 and 2000 (continued)
As of and for the year ended December 31, 2000
As of and for the year ended December 31, 1999
(1) Includes properties under capital lease. (2) Includes capital lease obligations.
ELDERTRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001 and 2000 (continued)
In connection with ET Sub-Meridian's acquisition of seven skilled nursing facilities from Genesis, the Company agreed to indemnify the property owners for any loss of deferral of tax benefits prior to August 31, 2008 due to a default under a sublease or if a cure 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.
As of December 31, 2001, ET Capital owned a $7.8 million second trust mortgage note executed by The AGE Institute of Florida ("AGE") which it acquired from Genesis in two separate transactions during 1998. This note is secured by a second lien on 11 Florida skilled nursing facilities owned by AGE and a second lien on accounts receivable and other working capital assets. The facilities are managed by a third party. 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. During 2000, the borrower ceased making interest payments to ET Capital and in November 2000, ET Capital notified the borrower that it was in default of the $7.8 million second trust mortgage loan held by ET Capital.
Management of ET Capital has determined, based on the decrease in the underlying cash flows generated by the properties securing the note, that the value of the underlying collateral may not be sufficient to satisfy the borrower's obligation under the note. As a result, a bad debt allowance of $7.8 million was recorded by ET Capital during 2000.
In addition, ET Capital has notes receivable aggregating $3.2 million and $0.9 million at December 31, 2001 from two of the Company's Equity Investees and one of the Company's consolidated subsidiaries, respectively. These loans mature at various dates from April 2008 to December 2011 and bear interest at 14% with interest and principal payable monthly. ET Capital recorded $0.5 million and $0.1 million, respectively, in interest income for the year ended December 31, 2001.
At December 31, 2001, ET Capital's long-term debt includes two demand promissory notes payable to the Company aggregating $5.9 million, which were used to partially fund ET Capital's investment in the second trust mortgage note referred to above. These notes bear interest at a weighted average rate of 12.1% with interest only payable quarterly. During the year ended December 31, 2000, the Company recorded a bad debt allowance of $5.9 million relating to this loan. In addition, ET Capital has loans payable to the Company aggregating $3.1 million, bearing interest at 15% and maturing at various dates from April 2008 to December 2011. ET Capital ceased making interest payments, on these notes to the Company during the quarter ended June 30, 2000. Management of the Company has determined that these notes are fully impaired at December 31, 2000. During the fourth quarter of 2001, the Company received approximately $250,000 from ET Capital for accrued interest on the above mentioned loan.
ELDERTRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001 and 2000 (continued)
In May 2001, ET Capital was named as a third party defendant in a complaint filed against Genesis. The complaint was filed by several not- for-profit entities, including AGE, who own skilled nursing facilities that were formerly managed by Genesis. The third party complaints arise from a lawsuit filed by Genesis seeking payment from AGE of various management fees allegedly owed Genesis by AGE. In its third party complaint, AGE asserts, among other things, that by acquiring in 1998 the $7.8 million of loan from Genesis secured by second mortgage liens on properties owned by AGE, ET Capital joined with Genesis in an effort to defraud AGE. ET Capital believes that the complaint is without merit and intends to vigorously defend its position.
7. Credit Facility
Effective January 31, 2001, the term of the Credit Facility was extended to August 31, 2002 and the financial covenants were amended to, in part, cure the then existing covenant violations.
In connection with the extension of the term of the Credit Facility to August 31, 2002, (a) the Company was prohibited from further borrowings under the Credit Facility, (b) the Company was required to make monthly principal payments equal to its monthly cash flow, not to be less than $450,000 a month and (c) the Company was precluded from paying distributions to its shareholders in excess of 110% of the amount required to maintain its REIT status for federal income tax purposes. The previous requirement that the Operating Partnership pay the lender a monthly facility fee equal to 0.75% of the outstanding balance also was eliminated.
In connection with the extension of the term of the Credit Facility, the Company issued warrants to the lender to purchase 118,750 common shares at $1.70 per share. These warrants expire December 31, 2005.
The amounts outstanding under the Credit Facility bear interest at a floating rate equal to 3.25% over one-month LIBOR . The effective interest rate on borrowings outstanding under the Credit Facility at December 31, 2001 was 5.44%. At December 31, 2001, the Company had $7.2 million outstanding under the Credit Facility. The Company is required to make monthly principal payments equal to the cash flow generated by the Company for the month, not to be less than $450,000 a month. At December 31, 2001, the Credit Facility was secured by properties with a carrying value of approximately $41.4 million. Substantially all of the Company's other assets at December 31, 2001 secure other outstanding indebtedness of the Company.
The Credit Facility matures on August 31, 2002. Based on the anticipated monthly payments to August 31, 2002, the Company estimates that there will be a balance due at maturity of approximately $3.0 million. Based on the significant reduction during 2001 in the amount outstanding under the Credit Facility and the Company's payment history, the Company
ELDERTRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001 and 2000 (continued)
believes that it will be successful in negotiating a further extension of the Credit Facility which will enable it to pay-off all amounts outstanding under the Credit Facility within a reasonable period of time. If the Company is unable to negotiate a further extension of the Credit Facility or obtain replacement financing by August 31, 2002, or for any other reason the Company were to be in default under the Credit Facility prior to its maturity, Deutsche Bank could exercise its right to foreclose on the collateral securing the Credit Facility, which could have an adverse affect on the Company's financial condition and results of operations.
The terms of the Credit Facility extension reduced the Company's cash flows and imposed limits on its ability to make distributions to its shareholders. Future increases in interest rates, as well as any defaults by tenants on their leases, could adversely affect the Company's cash flow and its ability to pay its obligations.
8. Mortgages and Bonds Payable
The following is a summary of mortgages and bonds payable at December 31, 2001 and 2000 (dollars in thousands):
Effective Balance at Balance at Interest Maturity December 31, December 31, Property Rate Date 2001 2000 - --------------------------------- --------- -------- ------------ ------------ LIBOR Wayne NRC(a) +3.00% 12/2002 ** $4,600 $4,600 Pennsburg Manor NRC/ LIBOR Harston Hall NCH(a) +3.00% 12/2002 ** 14,900 14,900 LIBOR Lopatcong Care Center(a) +3.00% 12/2002 ** 10,500 10,500 DCMH Medical Office Building(a) 8.35% 11/2009 5,717 5,790 Professional Office Building I(a) 8.35% 11/2009 2,520 2,551 Pleasant View(a) 8.26% 10/2009 3,796 3,846 Salisbury Medical Office Building(a) 8.16% 10/2009 1,022 1,034 Heritage at North Andover(a) 8.26% 10/2009 8,537 8,648 The Woodbridge Bonds due 2005 7.81%* 9/2005 610 735 Bonds due 2025 7.81%* 9/2025 9,440 9,470 Belvedere NRC/ Chapel NRC(a) 8.46% 10/2009 18,490 18,720 Highgate at Paoli Pointe Series A Bonds 7.81%* 1/2024 9,589 9,739 Riverview Ridge(a) 7.81%* 1/2020 2,742 2,807 Vernon Court(a) 5.80%* 5/2025 13,828 14,100 Lacey Branch Office Bldg. 7.81%* 10/2022 482 492 ----------- ------------ Total $106,773 $107,932 =========== ============
(a) The repayment of principal and interest on these loans is non- recourse to ElderTrust.
* The stated interest rates on these mortgages are higher than the effective interest rates because they were adjusted to market rates when the loans were acquired by the Company.
ELDERTRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001 and 2000 (continued)
** The Company has the right to extend the maturity of each of these mortgages for two additional years upon the payment of an aggregate extension fee of $150,000, subject to the requirement that the mortgages are not then in default and that the lender has determined that there has been no material adverse change in the condition, financial, physical or otherwise, of the property or the borrower since November 1999 and that the performance of the property is consistent with its performance as of November 1999. The repayment of principal and interest on these mortgage loans is non-recourse to ElderTrust. However, if the maturity date of these mortgages is not extended by the lender and the lender foreclosed on the properties securing the mortgages, the Company would lose the properties and the revenues it derives from the properties. At December 31, 2001, the properties had a book value of $36.9 million. During 2001, the Company derived $4.0 million of revenues from the properties.
The Company's weighted average effective interest rate on mortgages and bonds payable was 8.1% and 8.5% at December 31, 2001 and 2000, respectively.
Scheduled principal payments and bond sinking fund requirements are as follows: (dollars in thousands)
2002 $ 46,078 2003 1,076 2004 1,158 2005 1,249 2006 1,350 Thereafter 55,862 --------- $106,773 =========
The Company continues to be in default on loans totaling $25.6 million, which are secured by mortgages on the Riverview Ridge, Lopatcong, Pleasant View and Heritage Andover facilities, as a result of its failure to meet certain property information reporting requirements and Genesis having filed for bankruptcy protection. There can be no assurance that the Company will be able to cure these defaults. Based, in part, on the Company's favorable payment history, the Company believes that the lenders will take no action in regard to these defaults.
The 2002 maturities also include the scheduled principal payments under three mortgages with unpaid principal balances totaling $30.0 million that will mature in December 2002. The Lopatcong mortgage is included in the $25.6 million mentioned above. The Company has the right to extend the maturity of each of these mortgages for two additional years upon the payment of an aggregate extension fee of $150,000, subject to the requirement that the mortgages are not then in default and that the lender has determined that there has been no material adverse change in
ELDERTRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001 and 2000 (continued)
the condition, financial, physical or otherwise, of the property or the borrower since November 1999 and that the performance of the property is consistent with its performance as of November 1999. The repayment of principal and interest on these mortgage loans is non-recourse to ElderTrust. However, if the maturity date of these mortgages is not extended by the lender and the lender foreclosed on the properties securing the mortgages, the Company would lose the properties and the revenues it derives from the properties. At December 31, 2001, the properties had a book value of $36.9 million. During 2001, the Company derived $4.0 million of revenues from the properties.
9. Operating Lease
The Company leases its corporate office space from Genesis under an operating lease, which expires on May 31, 2003. Under the lease agreement, the Company pays base rent plus its portion of real estate taxes, common area maintenance and operation for the building based upon the ratio of square footage of the leased premises to the square footage of the building. Future minimum rental payments are $60,000 for 2002 and $26,000 for 2003.
10. Share Option and Incentive Plans and Other Retirement Arrangements
The Company established the 1998 share option and incentive plan (the "1998 Plan") for the purpose of attracting and retaining key executive officers and employees, as well as non-employee trustees. A total of 779,340 common shares were reserved for issuance under the 1998 Plan at December 31, 2001. At the time of the Offering, the Company granted options with respect to 504,000 common shares to officers, employees and trustees. The exercise price for such options is the Offering price of $18.00. The term of such options is ten years from the date of grant. Of these options, 150,000 vested immediately, 322,500 vest ratably over three years from the date of grant and 31,500 vest ratably over five years from date of grant. Additional options with respect to 7,500 and 25,000 common shares were granted to a trustee and officer of the Company, respectively, during 1998 at an exercise price of $17.75 and $15.125 per share, respectively. These options vest ratably over three and five years respectively, and terminate ten years from the date of grant. Additional options of 231,500 were granted during 1999 to a key executive officer and employees of the Company at exercise prices ranging from $5.31 to $6.69 per share. These options vest over three to four years and terminate ten years from the date of grant or three month's after termination of employment. During 1999, options of 307,500 were cancelled upon the resignations of a former executive officer and a trustee. Additional options of 323,840 were granted under the 1998 plan during 2000 to a key executive officer and employees of the Company at exercise prices ranging from $0.75 to $2.75 per share. Of these options, 108,612 vested immediately, 215,228 vest over two years from the date of grant and terminate ten years from the date of grant or three month's after termination of employment. Additionally, during 2000, options of 15,000 were cancelled upon the resignations of two former trustees.
During 1999, the Company established the 1999 share option and incentive plan (the "1999 Plan") for the purpose of encouraging and enabling the officers, employees, non-employee trustees and other
ELDERTRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001 and 2000 (continued)
key persons of the Company to acquire a proprietary interest in the Company. As of December 31, 2001, a total of 350,000 common shares were reserved for issuance under the 1999 Plan. Options of 43,000 were granted during 2001 from the 1999 Plan to the executive officers and the board members of the Company at exercise prices ranging from $3.50 to $4.18 per share. Of these options 8,000 vested immediately and the remaining 35,000 vest ratably on each of the annual anniversaries for the next three years and terminate ten years from the date of grant or three month's after termination of employment.
The following summarizes the activity in the 1998 and 1999 Plans for the years ended December 31, 2001, 2000 and 1999:
2001 2000 1999 -------------------------------------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise 1998 Plan and 1999 Plan Shares Price Shares Price Shares Price - ----------------------------------------------------------------------------- Options outstanding, beginning of year 871,500 $ 6.47 460,500 $12.06 536,500 $17.16 Options granted 43,000 4.08 426,000 0.82 231,500 6.50 Options exercised (217,331) 0.79 - - - - Options forfeited - - (15,000) 18.00 (307,500) 18.00 -------------------------------------------------- Options outstanding, end of year 697,169 $ 7.85 871,500 $ 6.47 460,500 $12.06 ================================================== Options exercisable, end of year 424,934 $10.64 355,833 $ 8.24 81,400 $15.86 ==================================================
Weighted average fair value of options granted during the year (calculated as of the grant date): $ 2.17 $ 0.28 $ 0.07
Information regarding stock options outstanding and exercisable under the 1998 and 1999 Plans as of December 31, 2001 is as follows:
Exercise Price Range -------------------------------------- $0.75-$2.75 $3.50-$6.69 $15.13-$18.00 -------------------------------------- Options outstanding at December 31, 2001: Shares 210,669 272,500 214,000 Weighted average exercise price $ 0.88 $ 5.52 $17.66 Weighted average remaining contractual life 8.7 years 5.8 years 6.1 years
Options exercisable at December 31, 2001: Shares 69,000 164,534 191,400 Weighted average exercise price $ 1.01 $ 6.23 $17.78
No compensation expense has been recognized for options granted under the 1998 and 1999 Plans as the Company adopted the disclosure-only provisions of SFAS No. 123, "Stock Based Compensation". Under SFAS No. 123, compensation expense of $88,000, $114,000 and $106,000 would have been recorded in 2001, 2000 and 1999, respectively, for the 1998 and 1999 Plan
ELDERTRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001 and 2000 (continued)
based upon the fair value of the option awards. Earnings (loss) per share would have been $0.06, ($3.01) and ($0.16) in 2001, 2000 and 1999, respectively, had the Company adopted the fair value provisions of SFAS No. 123. The fair value determination was calculated using the Black- Scholes option-pricing model to value all stock options granted in 2001, 2000 and 1999 using the following assumptions:
2001 2000 1999 ----------------------------------- Weighted average risk free interest rate 5.4% 6.1% 6.2% Expected volatility 85.7% 75.7% 21.0% Expected dividend yield 7.34% 7.71% 11.2% Weighted average expected life of options 3.50 years 3.55 years 3.89 years
The Company has established a defined contribution retirement plan covering all eligible employees. Under this plan, eligible employees may make contributions up to the Internal Revenue Service maximum, and the Company is required to make certain minimum contributions. Company contributions to this Plan were $24,000 in 2001, $16,000 in 2000 and $16,000 in 1999.
11. Shareholder's Rights Plan
On October 13, 1999, the Company adopted a Shareholder Rights Plan (the "Rights Plan"). The Rights Plan is designed to deter coercive and unfair hostile takeover tactics. Under the Rights Plan, the Company authorized and declared a distribution of one right for each of its outstanding common shares held on the record date of October 29, 1999. Each right upon the occurrence of certain events (a "triggering event") entitles the holder to purchase from the Company one one-thousandth of a Series A Junior Participating Preferred Share, $.01 par value per share, of the Company (which is intended to be the economic equivalent of one common share) at an initial purchase price of $35.
The rights are neither exercisable nor traded separately from the common shares unless a triggering event occurs and will expire on October 13, 2009, unless exchanged or redeemed earlier. The rights will be exercisable only if a person or group in the future becomes the beneficial owner of 15% or more of the common shares of the Company, or announces a tender or exchange offer which, if consummated, would result in that person or group owning at least 15% of the common shares, subject to certain exceptions. The Company generally may redeem the rights for $.0005 per right at any time until ten days following the public disclosure that the 15% position has been met. A total of 16,000 preferred shares are reserved for issuance under the rights.
12. Taxes
The Company believes that, commencing with its taxable period ended December 31, 1998, it has been organized and operated in a manner so as to qualify for taxation as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended. As a result, the Company generally will not be subject to income tax on its taxable income at corporate rates to the extent it distributes annually at least 100% of its taxable income to
ELDERTRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001 and 2000 (continued)
its shareholders and complies with certain other requirements. The Company intends to continue to qualify as a REIT and, accordingly, no provision has been made for income taxes in the accompanying consolidated financial statements.
The following table reconciles under Generally Accepted Accounting Principals ("GAAP"), net income to taxable income for the year ended December 31, (dollars in thousands):
Estimated 2001 2000 1999 ------------------------------- GAAP net income (loss) $ 524 ($21,330) ($ 1,030) Less: GAAP net income of taxable REIT subsidiaries included above 309 6,838 (224) ------------------------------- GAAP net income for REIT operations (1) 833 (14,492) (1,254) Add: book depreciation and amortization 5,400 5,550 5,491 Less: tax depreciation and amortization (5,900) (7,222) (8,140) Bad debt expense - tax (13,500) 9,972 - Impairment losses - tax - 4,639 - Other book/tax differences, net 2,367 4,608 3,121 ------------------------------- Adjusted taxable income subject to 90% Dividend requirement ($10,800) $ 3,055 ($ 782) ------------------------------- (1) All adjustments to GAAP net income from REIT operations are net of amounts attributable to minority interest and taxable REIT subsidiaries.
During 2000, the Company recorded significant bad debt expenses due to the Genesis bankruptcy filing related to loans and properties under lease and, as a result, recognized a net loss for financial reporting purposes. For federal income tax purposes, these losses will be recorded in 2001 as required under applicable income tax rules. When recognized for federal income tax purposes, these losses will reduce the amount otherwise required by the Company to be distributed to meet REIT requirements. Should these losses when recognized exceed REIT taxable income computed without regard to these losses, any excess loss ("NOL") amount may be carried forward for deduction in the succeeding year. The estimated NOL carry forward at December 31, 2001 is approximately $12.6 million.
The following is a reconciliation of the Company's dividends paid deduction for the years ended December 31 (dollars in thousands):
2001 2000 1999 ------------------------------- Cash dividends paid $ - $ 4,272 $ 10,513 Less: portion designated capital gains - - - ------------------------------- Dividends paid deduction $ - $ 4,272 $ 10,513 ===============================
ELDERTRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001 and 2000 (continued)
13. Distributions
The Company must distribute at least 90% of its taxable income in order to continue to qualify as a REIT. Distributions in a given year may exceed the Company's earnings and profits due to non-cash expenses such as depreciation and amortization. Per share distributions on the Company's common shares include the following categories for income tax purposes: 2001 2000 1999 ------------------------------- Ordinary income $ - $0.5508 $ 0.1232 Capital gains - - - Return of capital - 0.0492 1.3368 ------------------------------- $ - $ 0.6000 $ 1.4600 ===============================
No distributions were made for the year ended December 31, 2001.
14. Earnings (Loss) Per Share
The following table sets forth the computation of basic and diluted earnings (loss) per share (in thousands, except per share data):
Income (loss) per share - basic: 2001 2000 1999 - ------------------------------------------------------------------------ Net income (loss) $ 524 ($21,330) ($1,030)
Weighted average common shares outstanding 7,184 7,119 7,198 ===============================
Basic net income (loss) per share $0.07 ($3.00) ($0.14) ===============================
Income (loss) per share - diluted: - ----------------------------------------- Net income (loss) $ 524 ($21,330) ($1,030)
Weighted average common shares outstanding 7,184 7,119 7,198
Dilutive common stock equivalents - stock options and warrants 258 - - ------------------------------- Total weighted average number of diluted shares 7,442 7,119 7,198 =============================== Diluted net income (loss) per share $0.07 ($3.00) ($0.14) ===============================
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 since they are redeemable for cash at the Company's discretion.
ELDERTRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001 and 2000 (continued)
15. Disclosure About Fair Value of Financial Instruments
The carrying amount of cash and cash equivalents, restricted cash and accounts receivable approximates fair value based on the short-term nature of these investments. The carrying amount of real estate loans receivable at December 31, 2001 approximates the fair market value of the underlying properties.
The carrying amounts of the Company's Credit Facility and variable rate mortgages payable at December 31, 2001 and 2000 approximate fair value because the borrowings are at variable interest rates. The fair value of the Company's fixed rate mortgages and bonds payable at December 31, 2001 and 2000 is estimated using discounted cash flow analysis and the Company's current incremental borrowing rates for similar types of borrowing arrangements. The difference between the carrying amount and the fair value of the Company's fixed rate mortgages and bonds payable at December 31, 2001 and 2000 is not significant.
16. Quarterly Financial Information (Unaudited)
The following quarterly financial data summarize the unaudited quarterly results for the years ended December 31, 2001 and 2000 (in thousands, except per share amounts):
Quarter ended ---------------------------------------------- December 31 September 30 June 30 March 31 ---------------------------------------------- - --------------------------- Revenues $ 6,394 $ 6,378 $ 6,417 $ 6,441 Net income (loss) 718 418 319 (931) Net income (loss) per share - basic 0.10 0.06 0.04 (0.13) Net income (loss) per share - diluted 0.09 0.06 0.04 (0.13)
Quarter ended ---------------------------------------------- December 31 September 30 June 30 March 31 ---------------------------------------------- - --------------------------- Revenues $ 7,088 $ 5,991 $ 6,501 $ 7,004 Net income (loss) 5,460 (584) (26,722) 516 Net income (loss) per share - basic 0.77 (0.08) (3.75) 0.07 Net income (loss) per share - diluted 0.75 (0.08) (3.75) 0.07 Distributions per share - - 0.30 0.30
ELDERTRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001 and 2000 (continued)
17. Related Party Transactions
Mr. McCreary acquired the controlling interest in ET Capital Corp. and ET Sub-Meridian, LLP from a former executive official of the Company during 1999. As a result, Mr. D. Lee McCreary owns all of the voting interest in ET Capital Corp., representing a 5% equity interest. Additionally, Mr. McCreary also owns a 1% general partner interest in ET Sub-Meridian, through a limited liability company which he is the sole member. Mr. McCreary acquired the controlling interest in ET Sub- Cabot, LLC and ET Sub-Cleveland, LLC from a former executive official of the Company during 1999, and was effective in 2000. Mr. McCreary owns the 1% managing member interest in ET Sub-Vernon Court, LLC, ET Sub-Cabot Park, LLC and ET Sub-Cleveland Circle, LLC. See Note 6 for additional information.
Michael R. Walker serves as Chairman of the Board and Chief Executive Officer of Genesis and Chairman of the Board of ElderTrust. At December 31, 2001, Mr. Walker beneficially owned no common shares of Genesis and approximately 8.6% of the common shares of ElderTrust. For information regarding transactions between the Company and Genesis, see Notes 1 and 5.
18. Minority Interest
The Company owned approximately 94.9% and 94.8% of the Operating Partnership, at December 31, 2001 and 2000, respectively. The ownership interest is represented by 7,242,265 and 7,237,750 units owned as of December 31, 2001 and 2000, respectively. The remaining ownership interests include interests owned directly or indirectly by directors and officers of the Company and Genesis totaling 390,210 units.
Subject to certain limitations in the Operating Partnership Agreement the limited partners that hold units in the Operating Partnership have the right to require the redemption of their units at any time ("Unit Redemption Rights"). The Operating Partnership's obligation with respect to the Unit Redemption Rights is that the limited partner will receive cash from the Operating Partnership in an amount equal to the market value of the units to be redeemed. However, in lieu of the Operating Partnership acquiring the units for cash, the Company has the right to elect to acquire the units directly from the limited partner, either for cash or common shares of ElderTrust at the Company's discretion.
19. Supplemental Cash Flow Information:
Supplemental cash flow information for the years ended December 31, 2001, 2000 and 1999 is as follows (amounts in thousands):
ELDERTRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001 and 2000 (continued)
Cash Paid For: 2001 2000 1999 ------------------------------- Interest $ 11,353 $ 13,324 $ 11,814 ===============================
Non-Cash Investing and Financing Transactions: Acquisition of real estate properties at fair value in exchange for notes receivable $ 12,650 $ - $ - ===============================
ITEM 9.
ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
	None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated herein by reference to the information under the heading "Election of Trustees" in the Company's proxy statement to be filed with respect to the 2001 annual meeting of shareholders (the "Proxy Statement").
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference to the information under the heading "Executive Compensation and Other Information" in the Proxy Statement.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated herein by reference to the information under the heading "Securities Owned by Management and Principal Shareholders" in the Proxy Statement.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by reference to the information under the heading "Certain Relationships and Related Transactions" in the Proxy Statement.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are included in Part II, Item 8 of this report:
(1) Financial Statements: Page Number -------------
Independent Auditors' Report 73 Consolidated Balance Sheets as of December 31, 2001 and 2000 74 Consolidated Statements of Operations for the years ended December 31, 2001, 2000 and 1999 75
Consolidated Statements of Shareholders' Equity for the years ended December 31, 2001, 2000 and 1999 76 Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999 77 Notes to Consolidated Financial Statements 78
(2) The following Financial Statement Schedules are included in Item 14 (d):
Separate Financial Statements and Schedule for ET Sub-Meridian Limited Partnership, L.L.P. Schedule III - Real Estate and Accumulated Depreciation Schedule IV - Mortgage Loans on Real Estate
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted.
(3) Exhibits:
The exhibits filed with this report are listed in the exhibit index on page 103.
(b) Current Reports on Form 8-K:
The Company did not file any reports on Form 8-K during the quarter ended December 31, 2001.
(c) Exhibits:
The exhibits listed in Item 14(a)(3) above are filed with this Form 10-K.
(d) Financial Statement Schedules:
Financial statement schedules are included on pages S-11 through S-14.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 20, 2002.
ElderTrust ----------------------------------- Registrant
By: /s/ D. Lee McCreary, Jr. ----------------------------------- President, Chief Executive Officer and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 20, 2002.
By: /s/ D. Lee McCreary, Jr. ----------------------------------- D. Lee McCreary, Jr. President, Chief Executive Officer, Chief Financial Officer and Trustee (Principal Executive, Financial and Accounting Officer)
By: /s/ Michael R. Walker ----------------------------------- Michael R. Walker Chairman of the Board
By: /s/ Rodman W. Moorhead, III ----------------------------------- Rodman W. Moorhead, III Trustee
By: /s/ John G. Foos ----------------------------------- John G. Foos Trustee
By: /s/ Harold L. Zuber, Jr. ----------------------------------- Harold L. Zuber, Jr. Trustee
EXHIBIT INDEX
Exhibit No. Description
(a) 3.1 	Amended and Restated Declaration of Trust of the Company 3.2	Articles Supplementary of the Company (a) 3.3	Amended and Restated Bylaws of the Company (b) 4.1 Rights Agreement between ElderTrust and First Union National Bank, as Rights Agent (c) 4.2 Articles Supplementary for Classifying and Designating Series A Junior Participating Preferred Shares (a) 10.1.1	Second Amended and Restated Agreement of Limited Partnership of ElderTrust Operating Limited Partnership (d) 10.1.2	Certificate of Designation for Class C (LIHTC) Units of ElderTrust Operating Limited Partnership (c) 10.1.3	Second Amendment to Second Amended and Restated Agreement of Limited Partnership of ElderTrust Operating Limited Partnership (a) 10.2 Registration Rights Agreement between the Company and the persons named therein (a) 10.3 1998 Share Option and Incentive Plan * (c) 10.4 1999 Share Option and Incentive Plan * (a) 10.5 Non-Competition Agreement between the Company and Michael R. Walker* (a) 10.6.1	Assignment and Assumption Agreement between ET Capital Corp. and Genesis (a) 10.6.2	Amendment of Working Capital Loan and Security Agreement among ET Capital Corp., Genesis and AGE Institute of Florida (a) 10.6.3	Intercreditor Agreement among ET Capital Corp., Genesis and AGE Institute of Florida (c) 10.6.4 Intercreditor Agreement among ET Capital Corp., AGE Institute of Florida and Bank of America, N.A. (e) 10.7 Form of Minimum Rent Lease between the Operating Partnership and Genesis (Heritage Woods, Highgate at Paoli Pointe, Rittenhouse, Lopatcong, Phillipsburg, Willowbrook, Sanatoga, Lehigh, Berkshire and Wayne) (e) 10.8 Form of Percentage Rent Lease between the Operating Partnership and Genesis (Riverview Ridge and Pleasant View) (e) 10.9 Form of Fixed Rent Lease between the Operating Partnership and Genesis (Salisbury Medical Office Building) (f) 10.10 Master Agreement with Genesis (f) 10.11 Master Agreement with The Multicare Companies, Inc. (a) 10.12.1 Credit Facility (g) 10.12.2 First Amendment to Credit Facility (d) 10.12.3 Second Amendment to Credit Facility (c) 10.12.4 Third Amendment to Credit Facility (h) 10.12.5 Master Agreement with Deutsche Bank (i) 10.12.6 Fourth Amendment to Credit Facility (i) 10.12.7 Supplement to Fourth Amendment to Credit Facility (j) 10.13.1 Subordinated Promissory Note of ET Sub-Meridian payable to the Operating Partnership in the amount of $18.5 million (j) 10.13.2 Agreement of Limited Partnership of ET Sub-Meridian
(j) 10.13.3 Indemnification Agreement dated September 3, 1998 in favor of the persons and entities listed on Exhibit B thereto (j) 10.13.4 Indemnification Consent and Acknowledgment Agreement dated September 3, 1998 between the Operating Partnership and Genesis (j) 10.13.5 Guarantee Agreement dated September 3, 1998 between Operating Partnership and ET Sub-Meridian (j) 10.13.6 Subordinated Promissory Note of ET Sub-Meridian payable to the Operating Partnership in the amount of $8.5 million (g) 10.14 Operating Agreement of ET-Sub Vernon Court, L.L.C. (g) 10.15 Operating Agreement of ET-Sub Cabot Park, L.L.C. (g) 10.16 Operating Agreement of ET-Sub Cleveland Circle, L.L.C. (c) 10.16 Option Agreement by and between D. Lee McCreary, Jr. and the Operating Partnership to purchase Mr. McCreary's controlling ownership interest in ET-Sub Vernon Court, L.L.C. (c) 10.17 Employment Agreement between the Company and D. Lee McCreary, Jr. dated as of October 13, 1999 * 11.1 Computation of basic and diluted earnings per share 21.1	 Subsidiaries of the Registrant 23.1	 Consent of Independent Auditors
(*) Represents management contract or compensatory plan
(a) Incorporated by reference to the Company's Form 10-K for the year ended December 31, 1997. (b) Incorporated by reference to the Company's Form 8-K filed on October 20, 1999. (c) Incorporated by reference to the Company's Form 10-K for the year ended December 31, 1999. (d) Incorporated by reference to the Company's Form 10-Q for the quarter ended March 31, 1999. (e) Incorporated by reference to the Company's Form S-11 Registration Statement (No. 333-37451). (f) Incorporated by reference to the Company's Form 8-K filed on December 11, 2000. (g) Incorporated by reference to the Company's Form 10-K for the year ended December 31, 1998. (h) Incorporated by reference to the Company's Form 10-K for the year ended December 31, 2000. (i) Incorporated by reference to the Company's Form 10-Q for the quarter ended March 31, 2001. (j) Incorporated by reference to the Company's Form 8-K filed on September 18, 1998.
Independent Auditors' Report
The Partners ET Sub-Meridian Limited Partnership, L.L.P.:
We have audited the accompanying balance sheets of ET Sub-Meridian Limited Partnership, L.L.P. (the Partnership) as of December 31, 2001 and 2000, and the related statements of operations, partners' capital (deficit), and cash flows for each of the years in the three year-period ended December 31, 2001. In connection with our audits of the financial statements, we also have audited the related Real Estate and Accumulated Depreciation financial statement schedule. These financial statements and the financial statement schedule are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of ET Sub-Meridian Limited Partnership, L.L.P. as of December 31, 2001 and 2000, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related Real Estate and Accumulated Depreciation financial statement schedule when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
/s/KPMG LLP
McLean, VA. January 16, 2002
ET SUB-MERIDIAN LIMITED PARTNERSHIP, L.L.P. BALANCE SHEETS December 31, 2001 and 2000 (in thousands)
2001 2000 ----------------------- ASSETS Assets: Properties under capital leases, less accumulated depreciation of $11,709 and $8,197, respectively $99,522 $103,034 Cash and cash equivalents 97 539 Restricted cash 884 1,057 Prepaid expenses 3 2 ----------------------- Total assets $100,506 $104,632 =======================
LIABILITIES AND PARTNERS' DEFICIT Liabilities: Accounts payable and accrued expenses 554 1,153 Accounts payable to related parties 789 1,148 Rent received in advance 837 817 Capital lease obligations 64,973 64,662 Notes payable 13,137 23,143 Note payable to related party 26,076 17,576 Other liabilities 1,728 1,708 ------------------------ Total liabilities 108,094 110,207
Partners' deficit (7,588) (5,575) ------------------------ Total liabilities and partners' deficit $100,506 $104,632 ========================
The accompanying notes to financial statements are an integral part of these statements.
S-2
ET SUB-MERIDIAN LIMITED PARTNERSHIP, L.L.P. STATEMENTS OF OPERATIONS Years ended December 31, 2001, 2000 and 1999 (in thousands)
2001 2000 1999 -------------------------------- Revenues: Rental revenues $9,883 $9,800 $9,800 Other income 67 28 16 -------------------------------- Total revenues 9,950 9,828 9,816
Expenses: Interest expense 6,193 6,592 6,495 Interest expense - related party 2,138 2,144 2,138 Depreciation expense 3,512 3,513 3,514 General and administrative 96 40 2 Management fee - related party 24 24 8 -------------------------------- Total expenses 11,963 12,313 12,157
-------------------------------- Net loss ($2,013) ($2,485) ($2,341) ================================
The accompanying notes to financial statements are an integral part of these statements.
S-3
ET SUB-MERIDIAN LIMITED PARTNERSHIP, L.L.P. STATEMENTS OF PARTNERS' DEFICIT Years ended December 31, 2001, 2000 and 1999 (in thousands)
General General Partner Partner ------------- ----------- Limited Toughkenamon, ET Meridian, Total Partner L.L.C. L.L.C. ---------- ------- ------------- ----------- Balances at January 1, 1999 $ 702 $ 690 $ - $ 12 Net loss (2,341) (2,318) (12) (11) Distributions (467) (449) (18) - Transfer of general partnership interest - - 1 (1) ---------- ------- ------------- ----------- Balances at December 31, 1999 (2,106) (2,077) (29) - Net loss (2,485) (2,460) (25) - Distributions (984) (982) (2) - ---------- ------- ------------- ----------- Balances at December 31, 2000 (5,575) (5,519) (56) - Net loss (2,013) (1,993) (20) - ---------- ------- ------------- ----------- Balances at December 31, 2001 ($7,588)($7,512) ($ 76) $ - ========== ======= ============= ===========
The accompanying notes to financial statements are an integral part of these statements.
S-4
ET SUB-MERIDIAN LIMITED PARTNERSHIP, L.L.P. STATEMENTS OF CASH FLOWS Years ended December 31, 2001, 2000 and 1999 (in thousands)
2001 2000 1999 --------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss ($2,013) ($2,485) ($2,341) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation 3,512 3,513 3,514 Net changes in assets and liabilities: Accounts payable and accrued expenses (938) 1,858 (198) Accrued interest on capital lease obligations 311 289 (93) Other 19 (2) 75 --------------------------------- Net cash provided by operating activities 891 3,173 957 ---------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition cost of additions to real estate investments - - (37) Net decrease in restricted cash 173 53 59 --------------------------------- Net cash provided by investing activities 173 53 22 ---------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES: Distributions to partners - (984) (467) Payments of principal on notes payable (1,506) (1,827) (388) --------------------------------- Net cash used in financing activities (1,506) (2,811) (855) ---------------------------------
Net increase (decrease) in cash and cash equivalents (442) 415 124 Cash and cash equivalents, beginning of year 539 124 - --------------------------------- Cash and cash equivalents, end of year $ 97 $ 539 $ 124 =================================
Supplemental cash flow information: Cash paid for interest $8,880 $8,299 $8,898 =================================
The accompanying notes to financial statements are an integral part of these statements.
S-5
ET SUB-MERIDIAN LIMITED PARTNERSHIP, L.L.P. Notes to Financial Statements December 31, 2001 and 2000
1. Organization and Operations
ET Sub-Meridian Limited Partnership, L.L.P. (the "Partnership") was formed pursuant to the Virginia Revised Uniform Limited Partnership Act, as amended, on August 7, 1998 by and among ET Meridian, L.L.C., a Delaware limited liability company as the general partner, and ElderTrust Operating Limited Partnership as the limited partner (the "Limited Partner"). The limited partner is a 99% owned subsidiary of ElderTrust. During 1999, ET Meridian, L.L.C. sold its general partner interest in the Partnership to Toughkenamon, L.L.C. (the "General Partner").
The Partnership owns the leasehold and purchase option rights to seven skilled nursing facilities located in Maryland and New Jersey, which it purchased from a wholly-owned subsidiary of Genesis Health Ventures, Inc. ("Genesis") in September 1998 for $35.5 million in cash and issuance of $8.5 million in term loans. The owners of the skilled nursing facilities provided $17.7 million of financing to the Partnership in connection with this transaction. The purchase options are exercisable by the Partnership in September 2008 for a cash exercise price of $66.5 million. The Partnership subleased the facilities to Genesis for an initial ten-year period with a ten-year renewal option. Genesis has guaranteed the subleases.
All of the Partnership's assets at December 31, 2001 and 2000 consisted of real estate properties under capital lease, which were subleased to Genesis. As such, the Partnership's revenues and ability to make distributions to partners' depend, in significant part, upon the revenues derived from Genesis (See Note 4).
2. Summary of Significant Accounting Policies
Use of Estimates
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 affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the amounts of revenues and expenses during the reporting period. Actual results could vary from those estimates.
Cash and Cash Equivalents
The Partnership considers all short-term, highly liquid investments that are readily convertible to cash and have an original maturity of three months or less at the time of purchase to be cash equivalents.
S-6
ET SUB-MERIDIAN LIMITED PARTNERSHIP, L.L.P. Notes to Financial Statements December 31, 2001 and 2000 (continued)
Restricted Cash
Restricted cash represents future lease payments on the capital lease obligations and principal and interest payments on the note payable to owners of the skilled nursing facilities required to be deposited to a lockbox.
Properties Under Capital Leases
Properties under capital leases consist of real estate properties, which are recorded at cost. Acquisition costs and transaction fees, including legal fees and external due diligence costs, are capitalized as a cost of the respective property. The cost of real estate properties under capital lease is allocated between land and buildings and improvements based upon estimated fair values at the time of acquisition. Amortization of properties under capital lease is provided for on a straight-line basis over an estimated composite useful life of 28.5 years for buildings and improvements.
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of
The Partnership reviews its long-lived assets, which includes properties under capital leases, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less cost to sell.
Income Taxes
No provision for income taxes is necessary in the financial statements of the Partnership because, as a partnership, it is not subject to income taxes and the tax effect of its activities accrues to the partners.
Subleases and Rental Income
Real estate properties under capital lease are subleased to operators on a long-term triple net-lease basis. Triple net-leases require lessees to pay all operating expenses, taxes, insurance, maintenance and other costs, including a portion of capital expenditures. Subleases provide for minimum rent, based on the lesser of stated amounts
S-7
ET SUB-MERIDIAN LIMITED PARTNERSHIP, L.L.P. Notes to Financial Statements December 31, 2001 and 2000 (continued)
in the sublease agreement or minimum rent for the prior year multiplied by two times the change in the Consumer Price Index ("minimum rent leases"). Sublease payments are recognized as revenue as earned in accordance with the sub lease agreements.
3. Properties Under Capital Leases
The Partnership conducts all of its operations from properties which are classified as capital leases. As of December 31, 2001 and 2000, properties under capital lease consisted of seven skilled nursing facilities with a total of 1,176 beds located in two states. All of the leases are for 10 years and expire in 2008.
The following is an analysis of properties under capital lease at December 31, 2001 and 2000 by major class (dollars in thousands):
2001 2000 ---------------------- Real estate properties, at cost $100,108 $100,108 Less- accumulated depreciation (11,709) (8,197) Land 11,123 11,123 ---------------------- Net real estate properties $ 99,522 $103,034 ======================
Included in the future minimum lease payments is a $65,000 property maintenance fee the Company is required to pay to the lessor each year for the term of the lease. The following is a schedule by years of future minimum lease payments under capital leases together with the present value of the minimum lease payments as of December 31, 2001 (dollars in thousands):
2002 $ 4,245 2003 4,245 2004 4,245 2005 4,245 2006 4,245 Thereafter 74,692 ---------- Total minimum lease payments 95,917 Less: amount representing interest at 7.06% per annum 30,944 ---------- Present value of future minimum lease payments $ 64,973 ==========
The Partnership subleases these properties to operators pursuant to long-term triple net leases. Effective September 1, 2001, the annual minimum sublease payments have been increased to $10,050,000 per year. At December 31, 2001 future minimum sublease payments receivable are as follows (dollars in thousands):
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ET SUB-MERIDIAN LIMITED PARTNERSHIP, L.L.P. Notes to Financial Statements December 31, 2001 and 2000 (continued)
2002 $10,050 2003 10,050 2004 10,050 2005 10,050 2006 10,050 Thereafter 25,125 --------- Total minimum sublease payments $75,375 =========
4. Concentration of Risk
Revenues recorded by the Partnership under leases with Genesis aggregated $9.9 million and $9.8 million in 2001 and 2000. The Partnership's revenues and ability to make distributions to partners' depends, in significant part, upon the revenues derived from Genesis.
On June 22, 2000, Genesis filed for protection under Chapter 11 of the United States Bankruptcy Code. On October 2, 2001, Genesis announced that it along with The Multicare Companies, Inc., had successfully completed their reorganization and had emerged from bankruptcy.
5. Notes Payable
The Partnership partially financed the acquisition of properties under capital leases with notes payable of $8.5 million to Genesis, $17.7 million to the owners of the skilled nursing facilities and $17.6 million to the Limited Partner. The $8.5 million promissory note bears interest at an annual rate of 8% for the first year, 9% for the second year and 10% for remainder of the term of the note, with interest payable monthly through September 3, 2003. The $17.7 million promissory note bears interest at 7.06% annually, with principal and interest payable monthly through September 1, 2008. The $17.6 million subordinated demand loan payable to the Limited Partner bears interest at 12% and is due on demand. Under the terms of the agreements approved by the U. S. Bankruptcy Court, Meridian Healthcare, Inc. (a Genesis affiliate) assigned to ElderTrust Operating Limited Partnership, the Limited Partner, the $8.5 million promissory note, in consideration for reductions in the loan balances on the loans Genesis owed to ElderTrust Operating Limited Partnership. A modification to the note was executed to extend the term until September 2008 and change the interest rate to 8%.
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ET SUB-MERIDIAN LIMITED PARTNERSHIP, L.L.P. Notes to Financial Statements December 31, 2001 and 2000 (continued)
6. Partners' Capital
The Partnership percentage interests of the partners are as follows:
General Partners 1% Limited Partner 99% ---------- 100% ==========
Distribution of Cash
Cash flow, as defined in the partnership agreement, shall be distributed to the partners in proportion to their percentage interests.
Distribution of Income or Loss
Net income or loss of the partnership shall be allocated to the partners in proportion to their percentage interests.
7. Disclosure About Fair Value of Financial Instruments
The carrying amount of cash and cash equivalents and restricted cash approximates fair value based on the short-term nature of these investments.
The fair value of the Partnership's notes payable at December 31, 2001 and 2000 is estimated using discounted cash flow analysis and currently prevailing rates. The difference between the carrying amount and the fair value of the Partnership's notes payable at December 31, 2001 and 2000 is not significant.
8. Related Party Transactions
The Partnership paid management fees of $24,000, $24,000 and $8,000 for 2001, 2000 and 1999, respectively, to the Limited Partner for administrative services provided to the Partnership.
At December 31, 2001 and 2000, Mr. D. Lee McCreary, the President, Chief Executive Officer and Chief Financial Officer of ElderTrust, was the sole member of the limited liability company which owned the 1% general partner interest in the Partnership.
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ET SUB-MERIDIAN LIMITED PARTNERSHIP, L.L.P. SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 2001 (dollars in thousands)
(1) The aggregate cost for Federal income tax purposes is $3,177. (2) Depreciation expense is calculated using a 28.5 year composite life for buildings.
The following represents a rollforward of the balance of leased properties under capital leases and related depreciation from January 1, 1999 to December 31, 2001:
Accumulated Cost Basis Amortization ---------------- ------------------ Balance at January 1, 1999 $ 111,194 $ 1,170
Acquisitions during the year 37 1
Real estate properties depreciation for the period - 3,513 ---------------- ------------------ Balance at December 31, 1999 $ 111,231 $ 4,684
Real estate properties depreciation for the period - 3,513 ---------------- ------------------ Balance at December 31, 2000 $ 111,231 $ 8,197
Real estate properties depreciation for the period - 3,512 ---------------- ------------------ Balance at December 31, 2001 $ 111,231 $ 11,709 ================ ==================
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ELDERTRUST SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 2001 (dollars in thousands)
(1) The aggregate cost for Federal income tax purposes is $185,019. (2) Depreciation expense is calculated using a 28.5 year composite life for both building and equipment. (3) Encumbered by the Credit Facility in the aggregate amount of $7.2 million. (4)&(5) This is a single note which covers both properties. (6) This property was classified as held for sale prior to November 1, 2001. The asset value and accumulated depreciation have been adjusted according to SFAS 144. See "Item 2 - Properties"
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ELDERTRUST SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 2001 (continued) (dollars in thousands)
The following represents a rollforward of the balance of real estate properties and related accumulated depreciation from January 1, 1999 to December 31, 2001:
Accumulated Cost Basis Depreciation ---------------- ------------------ Balance at January 1, 1999 $ 180,573 $ 4,444
Improvements during the period 1,288 13
Real estate properties depreciation for the period - 5,723 ---------------- ------------------ Balance at December 31, 1999 $ 181,861 $ 10,180
Additions/(reductions) during period:
Assets held for sale written down to fair value (5,932) (626) Assets held for sale reclassed on balance sheet (12,666) (1,301) Improvements 626 66
Real estate properties depreciation for the period - 5,766 ---------------- ------------------ Balance at December 31, 2000 (1) $ 163,889 $ 14,085
Additions during period: Acquisitions (2) 12,650 362 Asset previously held for sale (3) 9,695 59 Improvements 171 75
Real estate properties depreciation for the period - 5,164 ---------------- ------------------ Balance at December 31, 2001 $ 186,405 $ 19,745 ================ ==================
(1) Balance does not reflect assets held for sale. Assets held for sale are disclosed separately on the Balance Sheet. (2) Represents three assisted living properties and land on one additional property acquired through the debt restructuring with Genesis on January 31, 2001. (3) Represents the Woodbridge property located in Kimberton, PA . This asset was reclassified from held for sale on November 1, 2001.
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ELDERTRUST SCHEDULE IV MORTGAGE LOANS ON REAL ESTATE December 31, 2001 (dollars in thousands)
(1) The aggregate cost for Federal income tax purposes is $0. (2) Interest only was payable until the maturity date. Principal payments were required to be made monthly to the extent of one half of excess cash, if any, after payment of operating expenses, management fee, interest and an amount to be agreed upon by the parties for capital expenditures. Principal payment requirements became effective upon closing of bankruptcy proceedings, which were consummated on January 31, 2001. (3) Interest only was payable until the maturity date.
Mortgage loan activity for the years ended December 31, 2001, 2000 and 1999 is as follows:
2001 2000 1999 -------------------------------- Balance, beginning of year $ 41,559 $ 48,646 $ 47,899 Additions during the period: New mortgage loans - - 5,095
Deductions during the period: Collections of principal (4) (21,698) - (4,348) Assisted living properties (5) (12,500) - - Other (refinancing agreement) (6) (7,361) (7,087) - -------------------------------- Balance, end of year $ - $ 41,559 $ 48,646 --------------------------------
(4) For 2001, includes principal payments on three term and two construction loan receivables. (5) These three assisted living properties were transferred to the Company upon the debt restructuring by Genesis in full payment of the mortgage notes receivable. The mortgage loan relief was subsequent to the write down of the mortgage loans receivable to fair value. See note 6, below. (6) Write down of the mortgage loan receivables to fair value due to negotiation and loan restructuring with Genesis, resulting from Genesis bankruptcy proceedings.
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EXHIBIT 11.1
COMPUTATION OF BASIC AND DILUTED EARNINGS PER SHARE FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
The following calculation is submitted in accordance with requirements of the Securities Exchange Act of 1934:
For the year ended December 31 ------------------------------ 2001 2000 1999 ------------------------------ (amounts in thousands) Basic income (loss) per share: - ------------------------------------------ Net income (loss) $524 ($21,330) ($1,030) ==============================
Weighted average common shares outstanding 7,184 7,119 7,198 ==============================
Basic net income (loss) per share $0.07 ($3.00) ($0.14) ==============================
Diluted loss per share: - ------------------------------------------ Net income (loss) $524 ($21,330) ($1,030) ==============================
Weighted average common shares outstanding 7,184 7,119 7,198 ============================== Common share equivalents - stock options and warrants 258 - -
Total weighted average number of diluted shares 7,442 - - ==============================
Diluted net income (loss) per share $0.07 ($3.00) ($0.14) ==============================
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
				 Jurisdiction Subsidiary of Organization Type of Entity ---------- ------------------- ------------------------ ElderTrust Maryland Trust ElderTrust Operating Limited Partnership Delaware Limited partnership ET Sub-Phillipsburg, L.L.C. Delaware Limited liability company ET Sub-Windsor I, L.L.C. Delaware Limited liability company ET Sub-Windsor II, L.L.C. Delaware Limited liability company ET Sub-SMOB, L.L.C. Delaware Limited liability company ET Sub-GENPAR, L.L.C. Delaware Limited liability company ET Sub-Lopatcong, L.L.C. Delaware Limited liability company ET Sub-Heritage Woods, L.L.C. Delaware Limited liability company ET Sub-Pleasant View, L.L.C. Delaware Limited liability company ET Sub-Lacey I, L.L.C. Delaware Limited liability company ET Sub-Willowbrook Limited Partnership, L.L.P. Virginia Limited liability partnership ET Sub-Riverview Ridge Limited Partnership, L.L.P. Virginia Limited liability partnership ET Sub-Highgate, L.P. Pennsylvania Limited partnership ET Sub-Woodbridge, L.P. Pennsylvania Limited partnership ET Sub-Rittenhouse Limited Partnership, L.L.P. Virginia Limited liability partnership ET Sub-Wayne I Limited Partnership, L.L.P. Virginia Limited liability partnership ET Sub-Belvedere Limited Partnership, L.L.P. Virginia Limited liability partnership ET Sub-Chapel Manor Limited Partnership, L.L.P. Virginia Limited liability partnership ET Sub-Harston Hall Limited Partnership, L.L.P. Virginia Limited liability partnership ET Sub-Pennsburg Manor Limited Partnership, L.L.P. Virginia Limited liability partnership ET Sub-Silverlake Limited Partnership, L.L.P. Virginia Limited liability partnership ET Sub-POB I Limited Partnership, L.L.P. Virginia Limited liability partnership ET Sub-DCMH Limited Partnership, L.L.P. Virginia Limited liability partnership ET Sub-Vernon Court, L.L.C. Delaware Limited liability company ET Sub-Heritage Andover, L.L.C. Delaware Limited liability company ET Belvedere Finance, L.L.C Delaware Limited liability company ET DCMH Finance, L.L.C. Delaware Limited liability company ET Pennsburg Finance, L.L.C. Delaware Limited liability company ET POB I Finance, L.L.C. Delaware Limited liability company ET Wayne I Finance, L.L.C. Delaware Limited liability company ET Sub-Berkshire Limited Partnership, L.L.P. Delaware Limited liability partnership ET Berkshire, L.L.C. Delaware Limited liability company ET Sub-Lehigh Limited Partnership, L.L.P. Delaware Limited liability partnership ET Lehigh, L.L.C. Delaware Limited liability company ET Sub-Sanatoga, Limited Partnership, L.L.P. Delaware Limited liability partnership ET Sanatoga, L.L.C. Delaware Limited liability company