-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CQWZgoXTLVzH8NfuIOFoogjyu6pslnn5sQPAt3ZWUjJ/gyIZlLmNS/Dnzx1Sj9V/ qXZB0U9CZQK/JTMSB+Qgtg== 0000950116-00-000820.txt : 20000413 0000950116-00-000820.hdr.sgml : 20000413 ACCESSION NUMBER: 0000950116-00-000820 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000412 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ELDERTRUST CENTRAL INDEX KEY: 0001043236 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500] IRS NUMBER: 232932973 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-13807 FILM NUMBER: 599135 BUSINESS ADDRESS: STREET 1: 101 E STATE ST STREET 2: STE 100 CITY: KENNETT SQUARE STATE: PA ZIP: 19348 BUSINESS PHONE: 6109254200 MAIL ADDRESS: STREET 1: 101 EAST STATE STREET STREET 2: STE 100 CITY: KENNETT SQUARE STATE: PA ZIP: 19348 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the year ended December 31, 1999 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from ___ to ___ Commission File No. 001-13807 ElderTrust (Exact name of registrant as specified in its charter) Maryland 23-2932973 (State or other jurisdiction of (I.R.S. Employer Identification incorporation or organization) Number) 101 East State Street, Suite 100, Kennett Square PA 19348 (Address of principal executive offices) (Zip Code) (610) 925-4200 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of Each Class on which registered - ------------------------------------ ----------------------- Common shares of beneficial interest New York Stock Exchange $.01 par value per share Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment of this Form 10-K. [ ] The aggregate market value of voting shares held by non-affiliates of the Registrant on February 29, 2000 was $31,468,918 based on the reported closing sales price of such shares on the New York Stock Exchange for that date. As of February 29, 2000, there were 7,119,000 total common shares outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's definitive proxy statement for the annual shareholders' meeting to be held on May 23, 2000 are incorporated by reference into Part III of this Form 10-K. ELDERTRUST 1999 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS Page ---- Cautionary Statements Regarding Forward-Looking Statements 1 PART I Item 1. Business 1 Item 2. Properties 51 Item 3. Legal Proceedings 54 Item 4. Submission of Matters to a Vote of Security Holders 54 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters 54 Item 6. Selected Financial Data 55 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 56 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 78 Item 8. Financial Statements and Supplementary Data 80 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 107 PART III Item 10. Directors and Executive Officers of the Registrant 107 Item 11. Executive Compensation 107 Item 12. Security Ownership of Certain Beneficial Owners and Management 107 Item 13. Certain Relationships and Related Transactions 107 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 107 i Cautionary Statements Regarding Forward-Looking Statements This Form 10-K contains certain "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934 with respect to results of operations and businesses of ElderTrust and its consolidated subsidiaries (collectively, "ElderTrust" or the "Company"). All statements, other than statements of historical facts, included in this Form 10-K, are forward-looking statements within the meaning of the Securities and Exchange Acts. In general, these statements are identified by the use of forward-looking words or phrases, including "intended," "will," "should," "could," "may," "continues," "continued," "estimate," "estimated," "expects," "expected," "believes," "anticipates" and "anticipated" or the negative or variations thereof or similar terminology. Because forward-looking statements involve risks and uncertainties, the Company's actual results could differ materially from those expressed or implied by these forward-looking statements. The statements set forth under the caption "Business - Risk Factors" and elsewhere in this Form 10-K, including statements contained in "Business" concerning the Company's credit facility, investments and business strategies, the Company's transactions with Genesis Health Ventures, Inc. and its subsidiaries, the ability of Genesis Health Ventures, Inc. and The Multicare Companies, Inc. to restructure their operations and continue to make lease and loan payments to the Company, government regulation and the impact of Medicare and Medicaid Prospective Payment programs on the Company's lessees and borrowers, certain statements contained in "Management's Discussion and Analysis of Financial Condition and Results of Operations" concerning the Company's ability to meet its liquidity needs and other statements contained herein regarding matters that are not historical facts identify important factors with respect to these forward-looking statements that could cause actual results to differ materially from those in these forward-looking statements. These forward-looking statements represent the Company's judgment as of the date of this Form 10-K. Although the Company believes that the expectations reflected in these forward-looking statements are reasonable, there can be no assurance that such expectations will prove to be correct. All subsequent written and oral forward-looking statements attributable to the Company are expressly qualified in their entirety by the cautionary statements. The Company disclaims, however, any intent or obligation to update its forward-looking statements. PART I 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 1 and other buildings. 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 of approximately $114.2 million from the Offering were contributed to a 94% owned subsidiary, ElderTrust Operating Limited Partnership (the "Operating Partnership"), which principally used the proceeds to fund the initial property acquisitions and other investments. ElderTrust is the sole general partner of the Operating Partnership and conducts all of its operations through 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. As of December 31, 1999, skilled nursing facilities and senior living centers comprised approximately 93% of the Company's consolidated investments in real estate properties and loans. At December 31, 1999, the Company's consolidated assets primarily consisted of: o a diversified portfolio of 22 healthcare properties aggregating $171.7 million in assets, consisting of seven assisted living facilities, eight skilled nursing facilities, one independent living facility and six medical office and other buildings, which are leased back to the prior owners or other third parties; o term loans totaling $27.4 million collateralized by five assisted living facilities on which construction had been recently completed but which were still in transition to stabilized occupancy levels; and o construction loans totaling $21.2 million collateralized by three assisted living facilities. Additionally, at December 31, 1999 the Company's investments in unconsolidated entities in which it accounts for its investments using the equity method of accounting (the Company's "Equity Investees") consisted of: o a 95% nonvoting equity interest in an entity which owns a $7.8 million second mortgage note; o a 99% limited partnership interest in an entity which holds leasehold and purchase option rights for seven skilled nursing facilities; and o a 99% limited member interest in two entities which each hold an assisted living facility. See "Business - Investments." 2 Genesis Health Ventures, Inc. was a co-registrant in the Company's Offering. Approximately 70% of the Company's consolidated assets at December 31, 1999 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"), under agreements as manager, tenant or borrower. Revenues recorded by the Company in connection with these leases and borrowings aggregated $18.4 million in 1999. 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: o the ability of Genesis and Genesis Equity Investees to meet their lease and loan obligations; o the revenues derived from, and the successful operation of, the facilities leased to or managed by Genesis or Genesis Equity Investees; and o the ability of these entities to successfully complete the development projects securing the construction loans made by the Company to these entities. Genesis and Multicare Announce Commencement of Debt Restructuring Discussions with their Senior Lenders On March 21, 2000, Genesis and The Multicare Companies, a 43.6% owned consolidated subsidiary of Genesis ("Multicare"), announced the beginning of debt restructuring discussions with their senior lenders with the intention of revising their respective capital structures. Genesis also announced that it did not make a $3.8 million interest payment to its senior debt lenders due March 20, 2000. Both Genesis and Multicare announced their intention not to make interest and principal payments on senior debt and have been prohibited by their senior lenders from making any scheduled interest payments on their publicly traded subordinated debt while discussions were ongoing. Each company cited their inability to sell assets due to the lack of long-term care market financing and the continuing effect of reduced Medicare payments as the causes of these actions. The senior lenders have given Genesis and Multicare a 60-day forbearance period to develop a restructuring plan. Shortly after the announcement, Moody's Investors Service issued a press release announcing that it had downgraded the debt ratings of Genesis and Multicare. In its press release, Moody's indicated that the ratings outlook for both companies was negative. Moody's stated that its rating action reflected the deterioration in the companies' operating results and financial condition which has stemmed from the impact of the prospective payment system ("PPS") for Medicare combined with high leverage. Moody's noted that despite cost cutting efforts, operating margins for both companies remain depressed, and planned asset divestitures have not materialized as anticipated. Moody's also stated that restructuring efforts could be adversely impacted by the currently difficult state of the long-term care sector, with several large providers already filing for bankruptcy in recent months. Standard & Poor's also downgraded the debt ratings of Genesis and Multicare. 3 Management of Genesis and Multicare have advised the Company that they expect Genesis and Multicare to continue to make all lease and loan payments to the Company. The Company has no control over Genesis or Multicare, however, and can make no assurance that either of these entities will have sufficient income or assets to enable them to satisfy their obligations under the leases or loans made by the Company to them. Any failure by Genesis or Multicare to continue making payments to the Company could have a significant adverse effect on the Company's financial condition, results of operations and cash available for distribution, could adversely affect the ability of the Company to maintain distributions at current levels or at all and could adversely affect the ability of the Company to meet its own debt obligations. If Genesis and Multicare were to cease making lease and loan payments to the Company, the Company may be required to restructure or terminate the underlying leases and may foreclose on the loans, in which event, the Company might be required to find new operators to operate the properties underlying the leases and loans. Under these circumstances, the Company's net income could decline as a result of such restructuring with Genesis or Multicare or could decline due to rents obtainable from any new operator. Depending on the magnitude of the reduction in the Company's net income, the Company would seek to offset the effect of such reduction in net income on the Company's ability to meet its debt service requirements by further reducing the cash distributions paid to the Company's shareholders and minority interests, through asset sales or through other available means. The Company believes that it has the ability to, and, if necessary, intends to, take these actions available to it and, as a result, believes it will be able to continue to satisfy its debt and operating obligations as they come due over the next twelve months. Based on the current quarterly cash distribution rate of $0.30 per common share announced in November 1999, annualized distributions to shareholders and minority interests would approximate $9.2 million during 2000, based on the number of common shares and units currently outstanding. During 1999, the Company's cash flow from operations exceeded its debt service requirements and distributions paid to shareholders and minority interests by $1.2 million. Giving effect to the current quarterly cash distribution rate and year 2000 debt service requirements as of December 31, 1999, the Company's cash flow from operations during 1999 would have exceeded its debt service requirements and distributions paid to shareholders and minority interests by $3.9 million. See "Business - Proposed Restructurings and Related Matters," "Business - Transactions with Genesis," "Business - Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations - Summary Condensed Consolidated Financial Data of Genesis." Credit Facility; Mortgage Refinancings On January 3, 2000, the term of the Company's bank credit facility (the "Credit Facility") with Deutsche Bank Securities ("Deutsche Bank") was extended from January 1, 2000 to June 30, 2001 through an amendment which also reduced borrowings available under the Credit Facility to $45.4 million. At December 31, 1999, the Company had $39.7 million outstanding under the Credit Facility. The Company used the Credit Facility principally for working capital and construction loan funding purposes during 1999. The Company paid financing fees and other related costs of approximately $2.0 million for various amendments to the Credit Facility, $1.5 million of which were amortized during 1999 and included as a component of 1999 interest expense. The Credit Facility contains various financial and other covenants, including, but not limited to, minimum net asset value, minimum tangible net worth, a total leverage ratio and minimum interest coverage ratio. The Company's owned properties and properties underlying loans receivable with an aggregate cost of $79.2 million are included in the Credit Facility borrowing base and pledged as collateral at December 31, 1999. The terms require the Company to make monthly payments of principal equal to .22% of the outstanding balance on the first day of the prior calendar month. In addition, the Company is required to pay a monthly facility fee in an amount equal to .0625% of the outstanding balance. Re-borrowings are not permitted after repayment, except for the $5.75 million revolving credit portion of the Credit Facility. As of the date of the agreement, the Company has available the entire $5.75 million, however, availability is restricted to certain specified purposes, including dividend distributions. Dividend distributions over the term of the loan are limited to $3.0 million plus 95% of the Company's funds from operations, as defined by the National Association of Real Estate Investment Trusts ("NAREIT") prior to January 1, 2000. Amounts outstanding under the Credit Facility bear interest at floating rates ranging from 2.75% to 3.25% over one-month LIBOR, as determined by the percentage of the Credit Facility outstanding as compared to the borrowing base. 4 The interest rate on borrowings outstanding under the Credit Facility at December 31, 1999 was 9.25%, 2.75% over one-month LIBOR. On September 9, 1999, the Company completed a $32.7 million financing of five properties arranged by J.P. Morgan Mortgage Capital Inc. ("J.P. Morgan"). One of the loans is collaterized by two of the properties. Approximately $19.2 million of the debt proceeds were used to pay-down the Company's outstanding Credit Facility. The remaining $13.5 million was used to pay-off an existing mortgage secured by two of the properties of $10.4 million, and a prepayment penalty of $1.2 million on the existing mortgage, with the balance of $1.9 million used to pay expenses, interest and required reserves. These mortgage loans have a ten-year term, a twenty-five year amortization period and a fixed weighted average interest rate of 8.37%. The Company incurred approximately $634,000 in financing costs on this transaction, which is being amortized over the mortgages' ten-year life. On October 5, 1999, the Company completed an $8.5 million financing of two medical office buildings arranged by J.P. Morgan. Approximately $7.9 million of the debt proceeds were used to pay-down the Company's Credit Facility. The remaining $592,000 of proceeds was used to pay expenses, interest and required reserves. These mortgage loans have a ten-year term, a twenty-five year amortization period and a fixed interest rate of 8.35%. The Company incurred approximately $242,000 in financing costs on this transaction, which is being amortized over the mortgages' ten-year life. On November 24, 1999, the Company completed a $30 million financing of four properties arranged by J.P. Morgan. One of the loans is collateralized by two of the properties. Approximately $28 million of the debt proceeds were used to pay-down the Company's outstanding Credit Facility. The remaining $2 million was used to pay transaction-related expenses and required reserves. These mortgages have a three-year term, are interest-only and have a variable interest rate of 3.00% over one-month LIBOR (9.5% at December 31, 1999). The variable interest rates are capped at 17.50%, 13.08%, and 11.98% on the individual mortgages of $4.6 million, $14.9 million and $10.5 million, respectively. The Company incurred approximately $552,000 in financing costs and $53,000 in interest rate cap fees on this transaction, which are being amortized over the mortgages' three-year life. The Company can at its option extend the term of the loans for one two-year period upon payment of a 50 basis point extension fee. The Company expects net cash provided by operations and funds available under the Credit Facility to be sufficient to enable it to meet its short-term cash flow requirements through December 31, 2000, including the funding of $352,000 of construction commitments. 5 The Credit Facility currently matures on June 30, 2001. If the Company is unable to pay-off or obtain replacement financing by June 30, 2001, or is unable to negotiate a further extension of the current credit facility at that time, or for any reason the Company were to be in default under the Credit Facility prior to its maturity, Deutsche Bank could exercise its right to foreclose on the collateral securing the Credit Facility, which would have a significant adverse affect on the Company's ability to continue its operations and meet its obligations, including payment of quarterly shareholder distributions. Moreover, if the Company is unable to raise additional capital through equity financing, or is unable to increase its borrowing capacity, the Company may be limited in its ability to fully fund its long-term capital needs. The interest rate, loan extension fee and loan principal amortization under the terms of the Credit Facility extension, as well as the higher interest expense under the new mortgage financing, will reduce the Company's cash flows and could affect its ability to maintain distributions to its shareholders at current levels. Future increases in interest rates, as well as any defaults by tenants or borrowers on their leases or loans, also could adversely affect the Company's cash flow and its ability to pay its obligations and make distributions at current levels. There can be no assurance that the Company will be able to continue making distributions to its common shareholders at current levels or at all. See "Business - Genesis and Multicare Announce Commencement of Debt Restructuring Discussions with their Senior Lenders," "Business - Transactions with Genesis," "Business - Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." To qualify as a REIT, the Company must distribute to its shareholders each year at least 95% (90% for taxable years beginning after December 31, 2000) of its net taxable income, excluding any net capital gain. If the Company is unable to make required shareholder distributions, then the Company may be unable to qualify as a REIT and be subject to federal income taxes. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" and "Business - Risk Factors." Investments Investment Policies In determining whether to invest in a facility or fund term or construction loans, the Company focuses on: o the experience of the operator; o the financial and operational feasibility of the property; o the net short and long-term supply/demand balance within the marketplace for the proposed investment; o the financial strength of the borrower or lessee; o the security available to support the financing; and o the amount of capital committed to the property by the borrower or lessee. The Company conducts market research and analysis for potential investments. In addition, the Company reviews the value of the properties, interest rates and debt service coverage requirements of debt to be assumed and the anticipated sources for repayment of such debt. The Company's investments primarily have taken the form of senior housing and other healthcare facilities leased to operators under long-term operating leases, term loans and construction financing. The 6 Company typically provides construction financing up to the lesser of 80% of the estimated value of the property or 90% of its cost. The Company's policy is to structure long-term financings to maximize returns. Subject to the availability of capital, the Company believes that appropriate new investments will be available in the future regardless of interest rate fluctuations. However, there can be no assurance that suitable investments will be identified or that such investments can be consummated on acceptable terms. See "Business - Business Strategy" and "Business - Risk Factors." Term loans and operating leases are normally secured by the underlying real estate, guarantees and/or cash deposits. As of December 31, 1999, cash deposits aggregating approximately $3.3 million were held by the Company as security for operating leases, term loans and construction loan obligations. 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 simultaneously. Economic terms of the Company's operating leases include fixed and minimum rent leases, which normally include annual rate increases, and percentage rent leases. Percentage rent leases require rents based upon a fixed percentage of facility revenues throughout the lease term. See "Business - Investments - Owned Properties - Operating Leases." The Company monitors its investments through a variety of methods. The monitoring process includes a review and analysis of the facility, borrower or lessee, and guarantor financial statements; periodic site visits; property reviews; and meetings with operators. Such reviews of operators and facilities generally encompass licensure and regulatory compliance materials and reports, contemplated building improvements and other material developments. The Company's lessees and borrowers are subject to various regulations. See "Business - Government Regulation" and "Business - Risk Factors." 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 Company may participate with other entities in property ownership through joint ventures or other types of co-ownership. Equity investments may be subject to existing mortgage financing and other indebtedness, or such financing or indebtedness may be incurred in connection with acquiring investments. Any such financing or indebtedness will have priority over the Company's equity interest in such property. The Company does not intend to invest in the securities of others for the purpose of exercising control. Where appropriate, and subject to REIT qualification rules, the Company may sell certain of its properties. Subject to the gross income and asset tests necessary for REIT qualification, the Company also may invest in securities of entities engaged in 7 real estate activities or securities of other issuers. The Company may acquire all or substantially all of the securities or assets of other REITs or similar entities where such investments would be consistent with the Company's investment policies. In any event, the Company does not intend that its investments in securities will require ElderTrust or its consolidated subsidiaries to register as investment companies under the Investment Company Act of 1940, as amended. To the extent that the Company's board of trustees determines it necessary to obtain additional capital, the Company may raise such capital through additional equity offerings, debt financing or retention of cash flow, subject to provisions of the Internal Revenue Code of 1986, as amended (the "Tax Code"), concerning the taxability of undistributed REIT income, or a combination of these methods. See "Business - Financing Policies" for further information concerning the Company's policies regarding debt financing. The Company may sell some or all of its investments in the future. Under lease agreements with Genesis or Genesis Equity Investees, these entities have the right of first refusal on offers the Company receives to purchase or lease any of its properties it desires to sell. See "Business - Risk Factors." The Company may consider offering purchase money financing in connection with the sale of properties where the provision of such financing will increase the value received by the Company for the property sold. The Company may, but does not presently intend to, make investments other than as described above. The Company will have the authority and may determine it necessary to offer its common shares or other equity or debt securities in exchange for property and to repurchase or otherwise reacquire its common shares or any other securities and may engage in such activities in the future. Similarly, the Company may offer additional units of the Operating Partnership or other equity interests in the Operating Partnership that are exchangeable into common or preferred shares of ElderTrust in exchange for property. The Company also may make loans to joint ventures in which it may participate in the future. The Company will not engage in trading, underwriting or the agency distribution or sale of securities of other issuers. At all times, the Company intends to make investments in such a manner as to be consistent with the requirements of the Tax Code to qualify as a REIT unless, because of circumstances or changes in the Tax Code (or the regulations promulgated thereunder), the board of trustees determines that it is no longer in the best interests of the Company to qualify as a REIT. 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." 8 Investment Portfolio The Company is a self-managed and self-administered real estate investment trust that invests principally in senior housing and other healthcare facilities. As such, the Company has one reportable business segment. All of the Company's facilities and business activities are contained within the United States. The Company has significant transactions with Genesis and Genesis Equity Investees. See "Business - Genesis and Multicare Announce Commencement of Debt Restructuring Discussions with their Senior Lenders" and "Business - Transactions with Genesis." The Company's consolidated investments in real estate properties and loans at December 31, 1999 are reflected in the following table:
- -------------------------------------------------------------------------------------------------------------------- Percentage Number Number Investment Number Number of of of per of of Type of Facility Investments(1) Portfolio Facilities Beds(2) Bed(3) Operators(4) States(5) - -------------------------------------------------------------------------------------------------------------------- (dollars in thousands) Owned Properties: Assisted Living Facilities $ 83,860 35.3% 7 671 $125 2 2 Independent Living Facilities 4,164 1.7 1 72 58 1 1 Skilled Nursing Facilities 84,379 35.5 8 1,187 71 3 2 Medical Office and Other Buildings 16,652 7.0 6 - - 3 4 -------------------------------------------- Total Owned Properties 189,055 79.5 22 1,930 -------------------------------------------- Term and Construction Loans: Assisted Living Facilities 48,646 20.5 8 567 86 3 3 -------------------------------------------- Total Term and Construction Loans 48,646 20.5 8 567 -------------------------------------------- Totals $237,701 100.0% 30 2,497 ============================================
- ----------- (1) Includes investments in real estate properties and loans on real estate properties aggregating $230.5 million, before reductions for accumulated depreciation, and credit enhancements on several owned properties, which aggregated $7.2 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 18 of the owned properties and seven of the properties underlying the term and construction loans, under management agreements with the tenants. See "Business - Transactions with Genesis" and "Item 2 - Properties." (5) The Company has investments in properties located in eight states, occupied by nine different tenants or borrowers. 9 Owned Properties Assisted Living Facilities Assisted living facilities provide services to aid in activities of daily living, such as bathing, meals, security, transportation, recreation, medication supervision and limited therapeutic programs. More intensive medical needs of the resident are often met within assisted living facilities by home health providers, close coordination with the resident's physician and skilled nursing facilities. Independent Living Facilities Independent living facilities offer specially designed residential units for active and ambulatory elderly residents and provide various ancillary services. These facilities offer residents an opportunity for an independent lifestyle with a range of social and health services. Skilled Nursing Facilities Skilled nursing facilities provide inpatient skilled nursing and custodial services as well as rehabilitative, restorative and transitional medical services. In some instances, nursing facilities supplement hospital care by providing specialized care for medically complex patients whose conditions require intense medical and therapeutic services, but who are medically stable enough to have these services provided in facilities that are less expensive than acute care hospitals. Medical Office and Other Buildings The medical office and other buildings provide office space primarily to practicing physicians and other healthcare professionals, principally in connection with services rendered by these physicians at an adjacent acute care or long-term facility. Operating Leases Each of the Company's skilled nursing and senior housing facilities, which includes the land (if owned), buildings, improvements and related rights, is leased pursuant to a long-term lease. These leases generally have a fixed term of 5 to 12 years and contain multiple five to ten-year renewal options. Some of these leases provide for rents based on a specified 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 base rents for the renewal periods are generally fixed rents 10 set at a spread above the Treasury yield for the corresponding period. The remaining leases ("fixed rent leases") are with tenants in the medical office and other buildings and 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 subject to fixed rent leases are required to repair, rebuild and maintain the leased properties. The net consolidated carrying value of the Company's leased properties aggregated $171.7 million at December 31, 1999, excluding credit enhancements aggregating $7.2 million on various properties. Credit enhancements consisted of $3.8 million in bond and operating reserve funds required in connection with outstanding debt issues on three facilities, security deposits of $1.8 million on various facilities, letters of credit aggregating $1 million on two facilities and mortgage escrow accounts of $0.6 million. See "Proposed Loan Restructurings and Related Matters" below for additional information. Term and Construction Loans Term Loans At December 31, 1999, the Company had investments in five term loans. All of the $27.4 million of term loans as of December 31, 1999 were first mortgage loans. The borrower under each of these loans is Genesis or Genesis Equity Investees. The interest rate on the Company's investments in term loans for operating facilities ranges from 9.5% to 10.5% per annum on the outstanding balances. The yield to the Company on term loans depends upon a number of factors, including the stated interest rate, average principal amount outstanding during the term of the loan, the amount of the commitment fee charged at the inception of the loan, and any interest rate adjustments. The term loans for operating facilities at December 31, 1999 generally had initial two-year terms and provided for one-year extension periods and a balloon payment of the outstanding principal balance at the end of the term. Three of the loans are subject to an extension fee of 50 basis points for each extension period. See "Proposed Loan Restructurings and Related Matters" below for additional information. Construction Loans At December 31, 1999, the Company had made construction loans totaling $21.2 million secured by three healthcare facilities under development. The borrower under two of the loans is Genesis. The Company has the option to purchase and leaseback the facility underlying the remaining loan from an unaffiliated company for $13.0 million upon 11 maturity of the loan. One construction loan was sold to a commercial bank during 1999. The interest rate on the Company's investments in construction loans ranges from 9% to 10.5% per annum on the outstanding balances. The rates on the outstanding balances of the Company's construction financings generally range from 350 to 400 basis points over the three-year Treasury rates in effect at the time the loan is executed. The construction financing period commences upon initial funding and terminates upon the earlier of the term of the construction loan, generally two to three years, or achievement of average monthly occupancy of at least 90% for three consecutive months. During the term of the construction financing, funds are advanced pursuant to draw requests made by the operator in accordance with the terms and conditions of the applicable financing agreement. These terms may require, among other things, a site visit by a Company representative or designee prior to the advancement of funds. Monthly interest payments are made on the total amount of the proceeds advanced during the development period. During the construction financing period, the Company generally requires additional security and collateral in the form of either payment and performance bonds and/or completion guarantees by either one or a combination of the operator's general contractor or parent entity, other affiliates of the operator, or one or more of the individual principals of the operator. See "Proposed Loan Restructurings and Related Matters" below for additional information. At December 31, 1999, the Company was committed to providing additional construction funding of approximately $352,000 on one ongoing project for which it had outstanding construction loans. Construction on facilities underlying all other construction loans was substantially completed during 1999. The following is a rollforward of the Company's construction loan commitments during 1999: Development Ongoing Projects Projects ----------- -------- (in thousands) Construction loan commitments, January 1, 1999 - $ 7,707 Commitments entered into during 1999 - - Commitments funded during 1999 - (6,708) Commitments which expired during 1999 - (647) ----- ------- Construction loan commitments, December 31, 1999 (a) - $ 352 ===== ======= - ---------- (a) This amount is expected to be funded during 2000 using available cash flow or by borrowing under the Credit Facility. Proposed Loan Restructurings and Related Matters The Company previously was obligated to purchase and leaseback, upon the maturity of the related loan or the facility reaching stabilized occupancy, five assisted living facilities (Mifflin, Coquina Place, Lehigh, Berkshire and Harbor Place) securing term loans and two assisted living facilities (Oaks and Sanatoga) securing construction loans made by the Company in January 1998. Of these seven loans, which had an aggregate principal balance at December 31, 1999 of $39.1 million, three loans, secured by the Mifflin, Coquina Place and Oaks facilities, were made to wholly-owned subsidiaries of Genesis, three loans, 12 secured by the Lehigh, Berkshire and Sanatoga facilities, were made to wholly-owned subsidiaries of Multicare and one loan, secured by the Harbor Place facility, was made to a Genesis Equity Investee. The Company believes it is no longer bound by the purchase and leaseback obligations contained in the loan documents because the borrowers have, from time to time, not complied with all loan provisions. The Company and the borrowers have extended the maturity date of the five term loans through April 28, 2000 to permit them to negotiate and document a proposed restructuring of the relationships among the parties. The terms of the transaction being contemplated do not indicate that the Company's mortgage loans are impaired at December 31, 1999. Under the proposed restructuring, the Company would acquire the Lehigh, Berkshire and Sanatoga facilities in exchange for the release of the Company's loans to the subsidiaries of Multicare. The Company would then net lease these properties to subsidiaries of Genesis for an initial lease term of 14 years, with three five-year renewal options. In addition, the maturity date on the loans for Mifflin, Coquina Place, Oaks and Harbor Place would be extended to April 1, 2001. As part of the proposed restructuring, the Company also would transfer to Genesis the Company's Phillipsburg skilled nursing facility and certain other assets in exchange for the improvements Genesis is making on the Company's Rittenhouse skilled nursing facility. The existing Rittenhouse lease would be amended to, among other things, increase the annual rent to an amount which equals the sum of the annual rents on the current separate leases for Phillipsburg and Rittenhouse. In addition, the Heritage Woods percentage rent lease would be converted into a minimum rent lease, and the Willowbrook lease would be set permanently as a minimum rent lease. Finally, if Genesis refinances the Oaks, Harbor Place, Coquina and Mifflin loans with a third party and does not receive sufficient loan proceeds to cover the existing loan balances, and once the Credit Facility is fully repaid, the parties would agree that any shortfall would be applied against amounts owed by an Equity Investee of the Company to Genesis under an $8.5 million note given to Genesis as part of the purchase price for interests in seven properties acquired from Genesis in 1998. The proposed restructuring is subject to approval by the Boards of the Company, Genesis and Multicare and by each company's principal lenders. No assurance can be given that the proposed restructurings will be completed. See "Business - Genesis and Multicare Announce Commencement of Debt Restructuring Discussions with their Senior Lenders" and "Business - Risk Factors." 13 Investments in the Company's Equity Investees The Company's Equity Investees represent entities in which the controlling interest is owned by Mr. D. Lee McCreary, the Company's President, Chief Executive Officer and Chief Financial Officer. As a result, the Company records its investments in, and results of operations from, these entities using the equity method of accounting in its consolidated financial statements included in this Form 10-K. ET Capital Corp. The Company has a nonvoting 95% equity interest in ET Capital Corp. ("ET Capital"). The remaining voting 5% equity interest in ET Capital is owned by Mr. McCreary. As of December 31, 1999, ET Capital owned a $7.8 million second trust mortgage note executed by AGE Institute of Florida, which it acquired from Genesis during 1998. This note is secured by a second lien on 11 Florida skilled nursing facilities owned by AGE Institute of Florida and a second lien on accounts receivable and other working capital assets. The facilities are managed by subsidiaries of Genesis. This note matures on September 30, 2008 with payments of interest only, at a fixed annual rate of 13% due quarterly until the note is paid in full. ET Capital recorded interest income on the note of $1.0 million during 1999. The borrower made all required interest payments during 1999 in accordance with the terms of the note. In September 1999, the senior lender on the $40.0 million first trust mortgage to the AGE Institute of Florida, which is guaranteed by Genesis, notified the borrower that it was in default of the loan due to the borrowers' failure to meet certain financial covenants. In November 1999, ET Capital notified the borrower that it was in default of the $7.8 million second trust mortgage loan held by ET Capital because of the default in the $40.0 million first trust mortgage loan. Subsequently, the senior lender extended the maturity date of the first mortgage trust loan from September 30, 1999 to March 28, 2000 to permit the AGE Institute of Florida time to obtain refinancing of the loan. A letter agreement dated December 22, 1999 made certain modifications and defined certain rights of the senior lender and ET Capital related to their respective loans to the AGE Institute of Florida. The AGE Institute of Florida has been working to obtain replacement financing of the $40.0 million first trust mortgage loan and is seeking a further extension of the loan maturity date from the senior lender. In January 2000, the AGE Institute of Florida received a tax determination letter confirming its tax-exempt status. The Company understands from the AGE Institute of Florida that it is continuing to pursue tax-exempt and other financing sources to refinance the first and second trust mortgages. If the AGE Institute of Florida is unable to refinance the $40.0 million first trust loan, or is otherwise unable to reach acceptable extension terms with the senior lender, the senior lender may take actions to recover its investment in such first trust loan. ET Capital has no control over the actions of the senior lender and such actions could be unfavorable to ET Capital. Based on the Company's assessment of the fair value of the facilities securing the underlying loans, the Company believes that ET Capital's $7.8 million second trust loan is not impaired at December 31, 1999. In addition to the AGE Institute of Florida second trust mortgage note, ET Capital has notes receivable aggregating $4.6 million at December 31, 1999 from two of the Company's Equity Investees and one of the Company's consolidated subsidiaries. These loans mature at various dates from April 2008 to December 2011 and bear interest at 14% per annum with interest and principal payable monthly. ET Capital's long-term debt includes two demand promissory notes payable to the Company aggregating $5.9 million at December 31, 1999 in connection with the above second mortgage note transaction. These notes bear interest at a weighted average rate of 12.1% per annum with interest only payable quarterly. In addition, ET Capital has loans payable to the Company aggregating $3.7 million, bearing interest at 15% and maturing at various dates from April 2008 to December 2011. 14 The Company recorded $1.3 million in interest income for the year ended December 31, 1999 on the notes payable from ET Capital. The Company also recorded income of $236,000 related to the portion of its equity interest in ET Capital's results of operations for the year ended December 31, 1999. See Note 6 of the Company's consolidated financial statements included in this Form 10-K. ET Sub-Meridian Limited Partnership, L.L.P. The Company has a 99% limited partnership interest in ET Sub-Meridian Limited Partnership, L.L.P. ("ET Sub-Meridian"). The 1% general partner interest is owned by a limited liability company of which Mr. McCreary is the sole member. ET Sub-Meridian owns the leasehold and purchase option rights to seven skilled nursing facilities located in Maryland and New Jersey, which it purchased from Genesis for $35.5 million in cash and issuance of $8.5 million in term loans during September 1998. The purchase options are exercisable by ET Sub-Meridian in September 2008 for a cash exercise price of $66.5 million. ET Sub-Meridian subleased the facilities to Genesis for an initial ten-year period with a ten-year renewal option. Genesis has guaranteed the subleases. As part of the transaction, the Company agreed to indemnify the property owners for any loss of deferral of tax benefits prior to August 31, 2008 due to a default under a sublease or if a cure of a default by the Genesis subsidiary leasing the facilities resulted in a taxable event to the owners. The Company also agreed to indemnify Genesis for any amounts expended by Genesis under the back-up indemnity provided by Genesis to the current owners for the same loss. The Company recorded a loss of $2.3 million related to the portion of its equity interest in ET Sub-Meridian's results of operations for the year ended December 31, 1999. ET Sub-Meridian has real estate investments and long-term debt of $106.5 million and $106.9 million, respectively, at December 31, 1999. See Note 6 of the Company's consolidated financial statements included in this Form 10-K. At December 31, 1999, ET Sub-Meridian had a $17.6 million subordinated demand loan bearing interest at 12% per annum payable to the Company in connection with the above transaction. The Company recorded $2.1 million in interest income on this loan for the year ended December 31, 1999. ET Sub-Heritage Andover, LLC ET Sub-Vernon Court, LLC ET Sub-Cabot Park, LLC ET Sub-Cleveland Circle, LLC The Company, through four limited liability companies (ET Sub-Heritage Andover, LLC, ET Sub-Vernon Court, LLC, ET Sub-Cabot Park, LLC, and ET Sub-Cleveland Circle, LLC), has member interests in three assisted living facilities and one independent living facility, which it acquired during December 1998 from an unrelated third party. A Genesis Equity Investee leases each of the facilities. 15 The Company is the sole member of ET Sub-Heritage Andover, LLC, which, accordingly, is consolidated into the Company's consolidated financial statements at December 31, 1999. In each of the remaining three limited liability companies, the Company has a 99% member interest. The 1% managing member interest in these three companies is owned by a limited liability company of which Mr. McCreary is the sole member. The Company currently has the option to acquire the 1% managing member interest in ET Sub-Vernon Court, LLC from Mr. McCreary. The option exercise price is $3,200. As the Company has the ability to acquire the 1% managing member interest in ET Sub-Vernon Court, LLC for a nominal amount, this company is consolidated into the Company's consolidated financial statements at December 31, 1999. Three of these limited liability companies have subordinated demand loans in the aggregate amount of $5.1 million with the Company at December 31, 1999, bearing interest at 12% per annum. The Company recorded $381,000 in interest income for the year ended December 31, 1999 in connection with the demand loans, aggregating $3.1 million at December 31, 1999, payable to the Company by the two unconsolidated limited liability companies. Additionally, three of the limited liability companies have loans payable to ET Capital aggregating $4.6 million at December 31, 1999, maturing at various dates from April 2008 to December 2011 and bearing interest at 14% per annum with interest and principal payable monthly. The Company recorded an aggregate loss of $401,000 related to the portion of its equity interest in ET-Sub-Cabot Park, LLC's and ET Sub-Cleveland Circle, LLC's results of operations for the year ended December 31, 1999. These two entities have real estate investments and aggregate long-term debt of $31.2 million and $30.7 million, respectively, at December 31, 1999. See Note 6 of the Company's consolidated financial statements included in this Form 10-K. Right of First Refusal Agreement The Company and Genesis have entered into a three-year agreement which expires January 30, 2001, subject to annual renewals thereafter. The agreement provides Genesis with a right of first refusal to lease or manage any assisted living, independent living or skilled nursing facility financed or acquired by the Company within Genesis' markets unless the facility will be leased or managed by the seller or an affiliate of the seller. The agreement also provides the Company with the following: o a right of first refusal to purchase and leaseback any assisted living, independent living or skilled nursing facilities which Genesis determines to sell and leaseback as part of a sale/leaseback transaction or transactions, excluding sale/leaseback transactions with commercial banking institutions; 16 o a right to offer financing to Genesis and other developers of assisted and independent living facilities which, once developed, will be operated by Genesis; and o a right to offer financing to Genesis with respect to any new off-balance sheet financing of skilled nursing facilities currently owned by Genesis. Due, among other things, to a lack of available capital, the Company does not anticipate purchasing any additional facilities under this agreement. Business Strategy The Company's principal business objective is to maximize growth in cash available for distribution and to enhance the value of its portfolio in attempting to maximize total return to shareholders. The Company's business strategies to achieve this are: o to invest in a portfolio of healthcare-related properties and mortgages that are; -- operated or managed by established operators; and -- located in close proximity to complementary healthcare services and facilities; o to pursue new investment opportunities through traditional and/or innovative financing techniques; and o to provide shareholders the opportunity for increased annual distributions funded by income from new investments or annual increases in rental and interest income from existing assets. The Company believes its strategy of investing in facilities that are managed by established operators, such as Genesis, and that are located near other complementary healthcare services and facilities will result in a marketing advantage for operators of its facilities, which may result in higher occupancy rates and revenues. Substantially all of the Company's senior living centers and development projects are located in close proximity to complementary healthcare services and facilities, such as skilled nursing facilities operated by Genesis and other healthcare providers. Genesis intends for residents of assisted living facilities owned by the Company to have access to long-term care at a Genesis managed skilled nursing facility located near the assisted living 17 facility. In addition, complementary healthcare providers, such as Genesis, will be available to provide ancillary services (such as pharmacy, physical therapy, nursing and physician services) needed from time to time by residents of the facilities leased to or managed by Genesis. The Company's ability to grow its business has been adversely impacted in recent periods by the unavailability of capital, which has also affected most, if not all, other publicly traded healthcare REITs. While the Company intends to seek to diversify its investment portfolio by operator, geography, type of healthcare facilities and form of financing, it is currently limited in its ability to do so by a lack of available capital to grow its business. See "Business - Risk Factors." The board of trustees may change the Company's business strategy at any time without a vote of shareholders. There can be no assurance that the Company's business objectives will be realized. See "Business - Risk Factors." Financing Policies The Company does not have a policy limiting the amount of indebtedness that the Company may incur. In addition, the declaration of trust and bylaws of the Company do not limit the amount or percentage of indebtedness that the Company may incur. The Company has not established any limit on the number or amount of mortgages that may be placed on any single property or on its portfolio as a whole. The board of trustees will consider a number of factors when evaluating the Company's level of indebtedness and when making decisions regarding the incurrence of indebtedness, including the purchase price of properties to be acquired with debt financing, the estimated market value of its properties upon refinancing and the ability of particular properties and the Company as a whole to generate sufficient cash flow to cover expected debt service. See "Business - Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." Transactions with Genesis At December 31, 1999, the Company and its Equity Investees had the following investments in real estate properties and loans leased to, managed by or made to Genesis or Genesis Equity Investees:
Genesis (1) Genesis Equity Investees (2) ------------------------------- -------------------------------- Number of Investment Number of Investment Properties(3) Amount(3) Properties(3) Amount(3) ------------- ---------- ------------- ---------- (dollars in thousands) ElderTrust 18 $120,432 7 $79,944 ElderTrust Equity Investees (4) 7 106,547 2 31,244
- ---------- (1) Represents Genesis and its consolidated subsidiaries. (2) Represents entities in which Genesis accounts for its investment using the equity method of accounting. 18 (3) Represents investments in or loans on real estate properties, before reductions for accumulated depreciation, owned by the Company or entities in which it accounts for its investment using the equity method of accounting. (4) Represents entities in which the Company accounts for its investment using the equity method of accounting. Below is a description of the loan and lease transactions which comprised the information in the above table. Transactions between the Company and Genesis At December 31, 1999, the Company leased eight properties to Genesis under percentage and minimum rent leases, each for an initial ten-year period with two five-year renewals. Genesis also leased space under fixed rent leases in three medical office and other buildings. The terms of these leases are for up to five years, subject to renewal. Additionally, Genesis managed one property leased by the Company to an unrelated third party. The Company received lease payments of $7.7 million in 1999 on properties leased to or managed by Genesis. Genesis has guaranteed the leases for eight properties that are leased by wholly-owned subsidiaries of Genesis. In the event Genesis assigns one or more of the leases to a non-wholly-owned subsidiary or a third party, Genesis will no longer guarantee the applicable lease. Any such assignment would require the consent of the Company which may not be unreasonably withheld. See "Business - - Risk Factors." At December 31, 1999, the Company had four term loans and two construction loans with Genesis. The term and construction loans had original maturities of between two and three years, subject to extension by the borrower for one to four one-year periods, with a weighted average interest rate of 10.0%. The Company recorded interest income on these loans of $3.3 million in 1999. See "Business - Investments - Proposed Loan Restructurings and Related Matters." The Company entered into a right of first refusal agreement with Genesis, whereby the Company was granted a right of first refusal to purchase and leaseback to Genesis any assisted living, independent living or skilled nursing facility which Genesis determines to sell and leaseback. See "Business - Investments - Right of First Refusal Agreement." 19 Transactions between the Company and Genesis Equity Investees At December 31, 1999, the Company leased six properties to Genesis Equity Investees under minimum rent leases, each for an initial term of ten to twelve years. The Company received lease payments of $7.0 million in 1999 from Genesis Equity Investees. At December 31, 1999, the Company had one term loan with a Genesis Equity Investee. The term loan had an original maturity of two years, subject to extension by the borrower for one one-year period, with an interest rate of 9.5%. The Company recorded interest income on this loan of $412,000 in 1999. See "Business - Investments - Proposed Loan Restructurings and Related Matters." Transactions between the Company's Equity Investees and Genesis At December 31, 1999, ET Sub-Meridian, an Equity Investee of the Company, subleased seven properties to Genesis under minimum rent leases, each for an initial ten-year period with a ten-year renewal option. ET Sub-Meridian received sublease payments of $9.8 million in 1999 from Genesis. See "Business - Investments - Investments in the Company's Equity Investees." 20 Transactions between the Company's Equity Investees and Genesis Equity Investees At December 31, 1999, ET Sub-Cabot Park, LLC and ET Sub-Cleveland Circle, LLC, Equity Investees of the Company, 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 $3.0 million in 1999 from Genesis Equity Investees. See "Business - Investments - Investments in the Company's Equity Investees." Reimbursement Health Care Reform The healthcare industry is subject to extensive federal, state and local regulation. The Company is affected by government regulation of the healthcare industry in that the Company receives rent and debt payments from lessees and borrowers and the Company's additional rents are generally based on its lessees' gross revenue from operations. The underlying value of certain of the Company's facilities depends on the revenue and profit that a facility is able to generate. Aggressive efforts by health insurers and governmental agencies to limit the cost of healthcare services and to reduce utilization of hospital and other healthcare facilities may further reduce revenues or slow revenue growth from these healthcare facilities and shift or reduce utilization. In recent years, a number of laws have been enacted that have effected major changes in the healthcare system, both nationally and at the state level. The Balanced Budget Act of 1997 (the "Balanced Budget Act"), signed into law on August 5, 1997, sought to achieve a balanced federal budget by, among other things, significantly reducing federal spending on the Medicare and Medicaid programs. The Medicare Balanced Budget Refinement Act ("Refinement Act"), signed into law in November 1999, made certain amendments to the Medicare reimbursement reductions resulting from the Balanced Budget Act. The Company anticipates that Congress and state legislatures will continue to review and assess alternative healthcare delivery and payment systems and will continue to propose and adopt legislation effecting fundamental changes in these systems. Changes in the applicable laws or new interpretations of existing laws may have a dramatic effect on the definition of permissible or impermissible activities, the relative cost of doing business, and the methods and amounts of payments for medical care by both governmental and other payers, any of which could materially adversely impact the Company's lessees and borrowers. 21 Medicare and Medicaid Reimbursement The Company's lessees and borrowers who operate skilled nursing facilities are reimbursed by the Medicare and Medicaid programs for their products and services. Legislative changes have reduced reimbursement payments under these programs, which has resulted in lower lease coverage ratios on the skilled nursing facilities leased by the Company to its tenants. Also, the Company's lessees and borrowers may experience increases in time periods between submission of Medicare and Medicaid program claims and receipt of payments due to increased regulatory action and governmental budgetary constraints. Since Medicaid programs are funded by both the states and the federal government, the amount of payments can be affected by changes at either the state or federal level. There is no assurance that payments under these programs will remain at levels comparable to present levels or be sufficient to cover costs allocable to these patients. Both Medicare and Medicaid payments are generally below retail rates for lessee-operated facilities. Increasingly, states have introduced managed care contracting techniques in the administration of Medicaid programs. Such mechanisms could have the impact of reducing utilization of and reimbursement to the Company's lessees or borrowers. See "Business - Risk Factors." Impact of Balanced Budget Act and Medicare Balanced Budget Refinement Act The Balanced Budget Act mandated establishment of PPS for Medicare skilled nursing facilities under which such facilities are paid a federal per diem rate for most covered nursing facility services. Pursuant to the Balanced Budget Act, PPS began to be phased in for skilled nursing facilities commencing with cost reporting periods beginning on or after July 1, 1998. Under PPS, reimbursement rates were initially based on a blend of a facility's historic reimbursement rate and a newly prescribed federal per diem rate, which resulted in significantly reduced reimbursement rates for many operators of skilled nursing facilities, including Genesis and Multicare. In subsequent periods, and for facilities first receiving payments for Medicare services on or after October 1, 1995, the federal per diem rate is used without regard to historic reimbursement levels. The Refinement Act addresses certain reductions in Medicare reimbursement resulting from the Balanced Budget Act. Under the Refinement Act, the federal per diem rate established under PPS will be increased by 20% for 15 categories of Medicare patients in skilled nursing facilities starting April 1, 2000 and continuing until the later of October 1, 2000 or changes to PPS are made to better account for patients in such categories. The federal rates for all categories will be increased by 4% in fiscal years 2001 and 2002. For cost reporting periods beginning on or after January 1, 2000, skilled nursing facilities may elect to receive Medicare payments based 100% on the federal per diem rate rather than partially on a federal per diem rate and partially on a pre-PPS facility specific rate. Certain services (such as prostheses and chemotherapy drugs) for skilled nursing facility patients will be paid by 22 Medicare in addition to the PPS per diem amounts starting April 1, 2000. The caps on rehabilitation therapy services required by the Balanced Budget Act will be suspended for 2000 and 2001. At the state level, the Balanced Budget Act also repealed rules which required Medicaid payments to nursing facilities to be "reasonable and adequate" to cover the costs of efficiently and economically operated facilities. Under the Balanced Budget Act, states must now use a public notice and comment process for determining Medicaid rates, rate methodology and justifications. The Company does not employ Medicaid and Medicare reimbursement specialists and must rely on its lessees and borrowers to monitor and comply with all reporting requirements and to ensure appropriate payments are being received. PPS has negatively impacted many operators in the skilled nursing industry, including Genesis and Multicare. There can be no assurances that the Company's lessees or borrowers will not be further negatively impacted by the provisions or interpretations of the Balanced Budget Act, including PPS, the Refinement Act or by future changes in regulations or interpretations of such regulations. See "Business - Genesis and Multicare Announce Commencement of Debt Restructuring Discussions with their Senior Lenders," "Business - Government Regulation" and "Business - Risk Factors." 23 Government Regulation The long-term care segment of the healthcare industry is highly regulated. Operators of skilled nursing facilities are subject to federal, state and local laws relating to the delivery and adequacy of medical care, distribution of pharmaceuticals, equipment, personnel, operating policies, fire prevention, rate-setting, compliance with building and safety codes and environmental laws. Operators of skilled nursing facilities also are subject to periodic inspection by governmental and other authorities to assure continued compliance with various standards, the continued licensing of the facility under state law, certification under the Medicare and Medicaid programs and the ability to participate in other third party payment programs. Many states have adopted Certificate of Need or similar laws which generally require that the appropriate state agency approve certain acquisitions of skilled nursing facilities and determine that a need exists for certain bed additions, new services and capital expenditures or other changes prior to beds and/or new services being added or capital expenditures being undertaken. The failure to obtain or maintain any required regulatory approvals or licenses could prevent an operator from offering services or adversely affect its ability to receive reimbursement for services and could result in the denial of reimbursement, temporary suspension of admission of new patients, suspension or decertification from the Medicaid or Medicare program, restrictions on the ability to acquire new facilities or expand existing facilities and, in extreme cases, revocation of the facility's license or closure of a facility. Federal laws also impose civil and criminal penalties for submission of false or fraudulent claims, including nursing home bills and cost reports, to Medicare or Medicaid. There can be no assurance that lessees or borrowers of the Company's skilled nursing facilities or the provision of services and supplies by such lessees will meet or continue to meet the requirements for participation in the Medicaid or Medicare programs or state regulatory authorities or that regulatory authorities will not adopt changes or new interpretations of existing regulations that would adversely affect the ability of lessees or borrowers to make rental or loan payments to the Company. Both Medicare and the Pennsylvania Medicaid programs impose limitations on the amount of reimbursement available for capital-related costs, such as depreciation, interest and rental expenses, following a change of ownership, including a sale and leaseback transaction. Under currently applicable Medicare reimbursement policies, the amount of Medicare reimbursement available to a skilled nursing facility for rental expenses following a sale and leaseback transaction may not exceed the amount that would have been reimbursed as capital costs had the provider retained legal title to the facility. Thus, if rental expenses are greater than the allowable capital cost reimbursement a skilled nursing facility would have received had the sale and leaseback transaction not occurred and the provider retained legal title, the amount of Medicare 24 reimbursement received by the provider will be limited. Medicare began a three-year phase out of separate capital cost reimbursement for skilled nursing facilities beginning July 1, 1998 under provisions of the Balanced Budget Act that will provide reimbursement for capital-related costs through the facility's per diem rates for resident care without regard to the facility's actual capital costs. The Pennsylvania Medicaid program also limits capital cost reimbursement, basing reimbursement for capital-related costs for new owners (including rent paid by lessees) on the appraised fair rental value of the facility to the prior owner as determined by the Pennsylvania Department of Public Welfare. There can be no assurance that reimbursement of the costs of the Company's skilled nursing facilities under current or future reimbursement methodologies will be adequate to cover the rental payments owed to the Company by the lessees of these properties. Although not currently regulated at the federal level (except under laws of general applicability to businesses, such as work place safety and income tax requirements), assisted living facilities are increasingly becoming subject to more stringent regulation and licensing by state and local health and social service agencies and other regulatory authorities. In general, these assisted living requirements address, among other things: personnel education, training and records; facility services, including administration of medication, assistance with self-administration of medication and limited nursing services; monitoring of wellness; physical plant inspections; furnishing of resident units; food and housekeeping services; emergency evacuation plans; and resident rights and responsibilities, including in certain states the right to receive certain healthcare services from providers of a resident's choice. In several states, assisted living facilities also require a certificate of need before the facility can be opened or expanded or before it can reduce its resident capacity or make other significant capital expenditures. Some of the Company's properties are licensed to provide independent living services, which generally involve lower levels of resident assistance. Like skilled nursing facilities and other healthcare facilities, assisted living facilities are subject to periodic inspection by government authorities. In most states, assisted living facilities, as well as skilled nursing and other healthcare facilities, are subject to state or local building code, fire code and food service licensure or certification requirements. Any failure by the Company's lessees or borrowers to meet applicable regulatory requirements may result in the imposition of fines, imposition of a provisional or conditional license or suspension or revocation of a license or other sanctions or adverse consequences, including delays in opening or expanding a facility. Any failure by the Company's lessees or borrowers to comply with such requirements could have a material adverse effect on the Company. Healthcare operators also are subject to federal and state anti-remuneration laws and regulations, such as the Federal Health Care Programs' anti-kickback law, which govern certain financial arrangements among healthcare providers and others who may be in a position to refer or recommend patients to such providers. These laws prohibit, among other things, the offer, payment, solicitation or receipt of any form of remuneration in return for the referral of Federal Health Care Program patients (including Medicare and Medicaid) or the purchasing, leasing, ordering (or arranging for or recommending the purchase, lease or order) of any goods, facilities, services or items for which payment can be made under a Federal Health Care Program. A violation of the Federal anti-kickback law or any other anti-remuneration law could result in 25 the loss of eligibility to participate in Medicare or Medicaid, or in civil or criminal penalties. The potential for issues to arise under this law may be increased under a provision of the Balanced Budget Act which, as currently implemented, requires skilled nursing facilities to purchase and bill for services of ancillary care providers treating some of their Medicare residents. The federal government, private insurers and various state enforcement agencies have increased their scrutiny of providers, business practices and claims in an effort to identify and prosecute fraudulent and abusive practices. In addition, the federal government has issued fraud alerts concerning nursing services, double billing, home health services and the provision of medical supplies to nursing facilities, and recently issued a model compliance plan referencing numerous areas of business operation that it recommends be made the subject of specific policies and procedures that nursing homes implement and enforce. Accordingly, these areas may come under closer scrutiny by the government. Possible sanctions for violation of any of these restrictions or prohibitions include loss of licensure or eligibility to participate in reimbursement programs and civil and criminal penalties. State laws vary from state to state, are often vague and have seldom been interpreted by the courts or regulatory agencies. There can be no assurance that these federal and state laws will ultimately be interpreted in a manner consistent with the practices of the Company's lessees or borrowers. The costs of complying with these laws, and/or defending against any allegations of non-compliance that might be brought, could be significant, and could negatively impact the ability of the Company's lessees or borrowers to meet their financial obligations to the Company. Taxation General A corporation, trust or association meeting certain requirements may elect to be treated as a REIT for federal income tax purposes. 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 to 860, inclusive, of the Tax Code. To qualify as a REIT, the Company must satisfy a variety of complex organizational and operating requirements each year, including share ownership tests and percentage tests relating to the sources of its gross income, the nature of its assets and the distribution of its income. The Company intends to operate in such manner as to continue qualifying as a REIT for federal income tax purposes for the year ended December 31, 1999 and in future periods, but no assurance can be given that the Company will continue to operate in such a manner so as to qualify or remain qualified as a REIT. Generally, for each taxable year during which the Company qualifies as a REIT, it will not be taxed on the portion of its taxable income (including capital gains) that is distributed to shareholders. This treatment substantially eliminates the "double taxation" (at the corporate and shareholder levels) that 26 generally results from investment in a regular corporation. However, the Company will be subject to federal income tax as discussed below. To qualify as a REIT, the Company is required to distribute dividends, other than capital gain dividends, to its shareholders in an amount at least equal to (1) the sum of (a) 95% (90% for taxable years beginning after December 31, 2000) of the Company's REIT taxable income, computed without regard to the dividends paid deduction and its net capital gain, and (b) 95% (90% for taxable years beginning after December 31, 2000) of the net income, after tax, from foreclosure property, minus (2) the sum of specific items of non-cash income. REIT taxable income is the taxable income of the REIT subject to adjustments, including a deduction for dividends paid. The Company will be taxed at regular ordinary and capital gain corporate rates on any undistributed REIT taxable income. The Company may elect to treat any undistributed net capital gains as having been distributed to the shareholders and will be included by them in income as long-term capital gain. The tax paid by the Company on those gains will be allocated among the shareholders and may be claimed as a credit on their tax returns. The shareholders will receive an increase in the basis of their shares in the Company equal to the difference the capital gain income and the tax credit allocated to them. Under certain circumstances, the Company may be subject to the "alternative minimum tax" on its items of tax preference. The Company will be subject to tax at the highest corporate rate on its net income from foreclosure property, regardless of the amount of its distributions. The highest corporate tax rate is currently 35%. Subject to certain limitations, the Company will also be subject to an additional tax equal to 100% of the net income, if any, derived from prohibited transactions. A prohibited transaction is defined as a sale or disposition of inventory-type property or property held by the Company primarily for sale to customers in the ordinary course of its trade or business, which is not property acquired on foreclosure. The Company may elect to treat any real property it acquires by foreclosure as foreclosure property if certain conditions are satisfied. Income from foreclosure property is subject to tax at the maximum corporate rate, but the income would qualify under the REIT gross income tests. With a valid election, the Company is permitted to directly own such property until the end of the third taxable year after the year of acquisition so long as the independent contractor (which would not include Genesis or its affiliates) operates the property within 90 days after the property is acquired. For taxable years beginning after December 31, 2000, a tenant of the Company may qualify as an independent contractor for the foreclosure property rules if the property that is leased to the independent contractor was under lease to the independent contractor or a third party at the time that the Company acquired the foreclosure property. If the property had been under lease to a third party, then the tenant could qualify as an independent contractor only if under the subsequent lease of the property, the Company receives a substantial or lesser benefit in comparison to the prior lease. If the Company should fail to distribute during each calendar year at least the sum of (a) 95% (90% for taxable years beginning after December 31, 27 2000) of its REIT ordinary income for such year, (b) 95% (90% for taxable years beginning after December 31, 2000) of its REIT capital gain net income for such year and (c) any undistributed taxable income from prior periods, the Company would be subject to a 4% excise tax on the excess of such required distribution over the amounts actually distributed. If the Company should fail to satisfy the 75% gross income test or the 95% gross income test, but has nonetheless maintained its qualification as a REIT because certain other requirements have been met, it will be subject to a 100% tax on an amount equal to (a) the gross income attributable to the greater of the amount by which the Company fails the 75% or 95% (or, for taxable years beginning after December 31, 2000, 90%) test multiplied by (b) a fraction intended to reflect the Company's profitability. Failure To Qualify as a REIT While the Company intends to operate so as to qualify as a real estate investment trust under the Tax Code, if in any taxable year the Company fails to qualify, and certain relief provisions do not apply, its taxable income would be subject to tax (including alternative minimum tax) at regular corporate rates. If that occurred, the Company might have to dispose of a significant amount of its assets or incur a significant amount of debt in order to pay the resulting federal income tax. Further distributions to its shareholders would not be deductible by the Company nor would they be required to be made. Distributions out of the Company's current or accumulated earnings and profits would be taxable to the Company's shareholders as dividends and would be eligible for the dividends received deduction for corporations. No portion of any distributions would be eligible for designation as a capital gain dividend. Further, the Company would be unable to pass through its undistributed capital gains and the related tax paid by the Company. Unless entitled to relief under specific statutory provisions, the Company also would be disqualified from taxation as a REIT for the four taxable years following the year during which qualification was lost. The foregoing is only a summary of some of the significant federal income tax considerations affecting the Company and is qualified in its entirety by reference to the applicable provisions of the Tax Code, the rules and regulations promulgated thereunder, and the administrative and judicial interpretations thereof. Shareholders of the Company are urged to consult their own tax advisors as to the effects of these rules and regulations on them. In particular, foreign shareholders should consult with their tax advisors concerning the tax consequences of ownership of shares in the Company, including the possibility that distributions with respect to the shares will be subject to federal income tax withholding. 28 Competition The Company competes with other healthcare REITs, real estate partnerships, healthcare providers and other investors, including but not limited to banks and insurance companies, in the acquisition, leasing and financing of healthcare facilities. Certain of these investors may have greater resources than the Company. Genesis and other lessees operating properties that the Company owns or that secure loans made by the Company compete on a local and regional basis with operators of other facilities that provide comparable services. Operators compete for residents based on quality of care, reputation, physical appearance of facilities, services offered, family preferences, physicians, staff and price. In general, regulatory and other barriers to competitive entry in the assisted living industry are not substantial. Moreover, if the development of new assisted living facilities outpaces demand for these facilities in certain markets, such markets may become saturated. Such an oversupply of facilities could cause operators of Company-owned facilities to experience decreased occupancy, depressed margins and lower operating results, which could have a material adverse effect on their ability to make lease or loan payments to the Company. Employees As of December 31, 1999, the Company employed six full-time employees. RISK FACTORS Set forth below are the risks that we believe are material to investors who purchase or own our common shares of beneficial interest or units of limited partnership interest in the Operating Partnership, which are redeemable by the holder on a one-for-one basis for common shares or their cash equivalent, at our election. As used herein, all references to "we," "us" or "our" mean ElderTrust and its consolidated subsidiaries unless the context otherwise requires. We rely to a substantial degree upon contractual obligations in the form of leases and loans with subsidiaries of Genesis and other entities in which Genesis has an equity ownership interest as our majority source of revenues and for our ability to meet our corporate obligations Approximately 70% of our consolidated assets at December 31, 1999 consisted of real estate properties leased to or managed by and loans on real estate properties made to Genesis or Genesis Equity Investees, under agreements as manager, tenant or borrower. We recorded revenues in connection with these leases and borrowings aggregating $18.4 million in 1999. In addition, our Equity Investees have also leased properties to Genesis or Genesis Equity Investees. As a result of these relationships, the Company's revenues and ability to meet its obligations depends, in significant part, upon: o the ability of Genesis and Genesis Equity Investees to meet their lease and loan obligations; o the revenues derived from, and the successful operation of, the facilities leased to or managed by Genesis or Genesis Equity Investees; and o the ability of these entities to successfully complete the development projects securing construction loans made by the Company to these entities. On March 21, 2000, Genesis and Multicare announced the beginning of debt restructuring discussions with their senior lenders with the intention of revising their respective capital structures. Genesis also announced that it did not make a $3.8 million interest payment to its senior debt lenders due March 20, 2000. Both Genesis and Multicare announced their intention not to make interest and principal payments on senior debt and have been prohibited by their senior lenders from making any scheduled interest payments on their publicly traded subordinated debt while discussions were ongoing. Each company cited their inability to sell assets due to the lack of long-term care market financing and the continuing effect of reduced Medicare payments as the causes of these actions. The senior lenders have given Genesis and Multicare a 60-day forbearance period to develop a restructuring plan. Shortly after the announcement, Moody's Investors Service issued a press release announcing that it had downgraded the debt ratings of Genesis and Multicare. In its press release, Moody's indicated that the ratings outlook for both companies was negative. Moody's stated that its rating action reflected the deterioration in the companies' operating results and financial condition which has stemmed from the impact of PPS for Medicare combined with high leverage. Moody's noted that despite cost cutting efforts, operating margins for both companies remain depressed, and planned asset divestitures have not materialized as anticipated. Moody's also stated that restructuring efforts could be adversely impacted by the currently difficult state of the long-term care sector, with several large providers already filing for bankruptcy in recent months. Standard & Poor's also downgraded the debt ratings of Genesis and Multicare. 29 We have no control over Genesis or Multicare and can make no assurance that either of these entities will have sufficient income or assets to enable them to satisfy their obligations under the leases or loans made by us to them. Any failure by Genesis or Multicare to continue making payments to us could have a significant adverse effect on our financial condition, results of operations and cash available for distribution, could adversely affect our ability to maintain distributions at current levels or at all and could adversely affect our ability to meet our own debt obligations. Any Failure by Genesis or Multicare to Continue to Make Lease and Loan Payments to Us Could Have a Significant Adverse Effect on Our Cash Flow and Could Adversely Affect Our Ability To Make Distributions to Shareholders At any time, a tenant of our properties or a borrower may seek the protection of bankruptcy laws, which could result in rejection and termination of the unexpired term of such tenant's lease or effectively limit our recovery of such borrower's debt to the value of the property securing the borrower's loan, and thereby cause a reduction in our cash flow available for distribution. In a bankruptcy, distributions on account of damages caused by lease rejections or of deficiencies after collateral liquidation are usually protracted and not likely to amount to payment in full. No assurance can be given that tenants or borrowers will not file for bankruptcy protection or, if any tenants file, that they will assume their leases and continue to make rental payments in a timely manner. If tenant leases are not assumed following bankruptcy, our income and cash available for distribution may be adversely affected. Any failure by Genesis or Multicare to continue to make lease and loan payments to us, whether as a result of a bankruptcy filing or otherwise, could have a significant adverse effect on our financial condition, results of operations and cash available for distribution, could adversely affect our ability to maintain distributions to shareholders at current levels or at all and could adversely affect our ability to meet our own debt obligations. We must pay-off our existing credit facility by June 30, 2001 or obtain replacement financing On January 3, 2000, the term of our Credit Facility was extended from January 1, 2000 to June 30, 2001 through an amendment which also reduced borrowings available under the Credit Facility to $45.4 million. At December 31, 1999, we had $39.7 million outstanding under the Credit Facility, which is secured by substantially all of our assets not otherwise pledged to other mortgagees. The Credit Facility currently matures on June 30, 2001. If we are unable to pay-off or obtain replacement financing by June 30, 2001, or are unable to negotiate a further extension of the current credit facility at that time, or for any reason the Company were to be in default under the Credit Facility prior to its maturity, Deutsche Bank could exercise its right to foreclose on the collateral securing the Credit Facility, which would have a significant adverse affect on our ability to continue our operations and meet our obligations, including payment of quarterly shareholder distributions. If we are unable to raise additional capital through equity financing, or are unable to increase our borrowing capacity, we may be limited in our ability to fully fund our long-term capital needs. To qualify as a REIT, we must distribute at least 95% (90% for taxable years beginning after December 31, 2000) of our net taxable income, excluding any net capital gain. If we are unable to make required shareholder distributions, then we may be unable to qualify as a REIT and would be subject to federal income taxes. Replacement financing may have significantly greater interest costs and could affect our ability to maintain distributions at current levels If we are unable to pay-off our existing credit facility by June 30, 2001, we will need to find replacement financing or negotiate a further extension of the current credit facility at that time. The interest rate on any new debt may be significantly higher than the interest rate on our existing credit facility with Deutsche Bank. Additionally, we may be required to pay significant financing fees in the future in connection with replacement financing or negotiating a further extension with Deutsche Bank. An increased interest rate or significant financing fees would reduce our cash flow and affect our ability to maintain distributions to our shareholders at current levels. We can give no assurance that we will be able to obtain replacement financing on acceptable terms or at all, or that, if obtained, we will be able to maintain distributions to our common shareholders at current levels, if at all. 30 Rising interest rates could adversely affect our cash flow because of variable rate debt and could affect our ability to maintain distributions at current levels At December 31, 1999, we had $39.7 million of variable rate indebtedness outstanding under our existing credit facility, with an interest rate of one-month LIBOR plus 275 basis points (9.25% at December 31, 1999). Amounts outstanding under the Credit Facility bear interest at floating rates ranging from 2.75% to 3.25% over one-month LIBOR, as determined by the percentage of the Credit Facility outstanding as compared to the borrowing base. In addition, we have variable rate mortgages of $30 million at December 31, 1999, with an interest rate of one-month LIBOR plus 300 basis points (9.50% at December 31, 1999). Also, we may borrow additional money with variable interest rates in the future. We would expect significant increases in interest rates to result in significant increases in interest expense, which could adversely affect cash flow and our ability to meet our obligations and make distributions to shareholders at current levels, if at all. Our degree of leverage could limit our ability to obtain additional financing and adversely affect our cash flow As of December 31, 1999, our debt to book capitalization ratio, which we calculate as total debt as a percentage of total debt plus the book equity attributed to our outstanding common shares and outstanding partnership units, was approximately 57.3%. We do not have a stated policy limiting the amount of debt that we may incur. If we increase our leverage it could pose risks to our shareholders, including that: o our debt service may increase, which could adversely affect our cash flow and, consequently, the amount available for distribution to our shareholders; o the risk that we will default on our indebtedness may increase; and o we may be unable to obtain additional financing in the future to fund working capital, capital expenditures, acquisitions, development or other general corporate purposes, or our ability to obtain such financing on satisfactory terms may be impaired; and we may be more vulnerable to a downturn in our business or the economy generally. Additionally, we may not have sufficient cash flow to repay indebtedness outstanding if our creditors require immediate repayment of these amounts or if the collateral underlying these amounts is insufficient to cover the outstanding balances. Our ability to grow may be significantly limited until the capital and credit markets improve During 1999, the stock prices of publicly traded equity real estate investment trusts fell on average by 4.6%, according to industry data published by NAREIT. The stock prices of publicly traded healthcare equity real estate investment trusts fell on average by 24.8% according to NAREIT and our stock price fell by 47.3% during this period. This share price decline, combined with the reduction in Medicare reimbursement levels during and after 1998, also has resulted in a significant curtailment of banks' willingness to extend loans secured by healthcare-related real estate, and has raised concerns about the ability of some less well capitalized nursing home operators to continue their 31 operations. During 1999, four publicly-traded nursing home companies filed for protection under the bankruptcy laws due, in part, to reductions in Medicare reimbursement rates. All of these factors have adversely affected our ability to access the capital and credit markets. Because we rely on these markets to fund our growth, our ability to grow will be significantly limited until such time as the capital and credit markets improve. We depend upon external sources of capital To qualify as a REIT, we must distribute to our shareholders each year at least 95% (90% for taxable years beginning after December 31, 2000) of our net taxable income, excluding any net capital gain. Because of these distribution requirements, it is not likely that we will be able to fund future capital needs, including those for acquisitions, from income from operations. We, therefore, rely on third-party sources of capital which may or may not be available on favorable terms or at all. Our access to third-party sources of capital depends on a number of things, including the market's perception of our growth potential and our current and potential future earnings. Moreover, additional equity offerings may result in substantial dilution of security holders' interests, and additional debt financing may substantially increase our leverage. 32 Operators of our skilled nursing facilities rely on government and other third party reimbursement to make lease and loan payments to us A significant portion of the revenues derived from the eight skilled nursing facilities owned by us is attributable to government reimbursement under Medicare and Medicaid operators. During 1998, Medicare reimbursements payable to nursing home operators were significantly reduced due to the implementation of a new reimbursement methodology for nursing care, ancillary services and capital costs which is being phased-in over a three year period. Medicare now reimburses nursing home operators at a flat per diem rate. In the past, a cost-based system of reimbursement was used. This change in the Medicare reimbursement methodology adversely affected the revenues of many nursing homes. 33 Assisted living services currently are not generally reimbursable under government reimbursement programs, such as Medicare and Medicaid. Although lease and loan payments to us are not directly linked to the level of government reimbursement, to the extent that changes in these programs have a material adverse effect on the revenues derived from the skilled nursing facilities owned by us or that secure mortgages and loans to us, these changes could have a material adverse impact on the ability of the lessees or borrowers of the skilled nursing facilities that we own or receive debt payments from to make lease and loan payments to us. Healthcare facilities also have experienced increasing pressures from private payers attempting to control healthcare costs that in some instances have reduced reimbursement to levels approaching that of government payers. We can make no assurance that future actions by governmental or other third party payers will not result in further reductions in reimbursement levels, or that future reimbursements from any payer will be sufficient to cover the costs of the facilities' operations. If reimbursement levels do not cover lease or loan payments, the possibility exists that one or more of our lessees or borrowers could default on their leases or loans to us. Genesis is not obligated to guarantee leases of its wholly-owned subsidiaries if Genesis assigns one or more of these leases to a non-wholly-owned subsidiary or to a third party Genesis currently guarantees the lease obligations of its wholly-owned subsidiaries. Under these leases, any assignment of these leases would require our consent, which we may not unreasonably withhold. If Genesis assigns one or more of the leases to a non-wholly-owned subsidiary or a third party, Genesis would no longer be obligated to guarantee the applicable leases. While we would evaluate the creditworthiness of any assignee in determining whether to provide our consent, any transferee could be less creditworthy than Genesis. Genesis' right of first refusal to lease acquired facilities not operated by the seller may discourage third parties from entering into transactions with us and result in less favorable lease terms to us At the time of our initial public offering, we entered into the right of first refusal agreement with Genesis. Under the right of first refusal agreement, for three years from January 30, 1998, subject to annual renewals thereafter: o Genesis has a right of first refusal to lease or manage any assisted living, independent living or skilled nursing facility we finance or acquire within Genesis' markets unless the facility will be leased or managed by the seller or an affiliate of the seller. 34 o We have: --a right of first refusal to purchase and leaseback to Genesis any assisted living, independent living or skilled nursing facilities which Genesis determines to sell and leaseback, other than sale/leaseback transactions with commercial banking institutions; --a right to offer financing to Genesis and other developers of assisted and independent living facilities which, once developed, will be operated by Genesis; and --a right to offer financing to Genesis with respect to any new off-balance sheet financing of skilled nursing facilities owned by Genesis as of January 30, 1998. Genesis' right of first refusal to lease or manage facilities financed or acquired by us in the future could discourage third parties who compete with Genesis and did not wish to lease or manage the property following its sale to us, from entering into transactions with us. Genesis' right of first refusal also could result in lease terms with Genesis that are less favorable to us than we could achieve with a third party had the right of first refusal agreement not been entered into. Further, there can be no assurance that Genesis will decide to sell and leaseback to us any additional facilities, engage in any new off-balance sheet financing of skilled nursing facilities owned by it as of January 30, 1998 or develop any additional facilities for which we would be able to offer financing to Genesis under the right of first refusal agreement. Additionally, under our lease agreements with subsidiaries of Genesis, Genesis has a right of first refusal on offers we receive to purchase or lease any facility subject to a percentage rent lease or a minimum rent lease with subsidiaries of Genesis during the term of the lease, including extensions, and for one year thereafter. The existence of this right of first refusal may discourage third parties from offering to purchase or lease any of these facilities. We experience ongoing competition from and conflicts with Genesis Our facilities, whether or not operated by Genesis, compete with facilities owned and operated by Genesis in some markets. As a result, Genesis has a conflict of interest due to its ownership of competing facilities and its operation and management of a substantial portion of the facilities we own. Because the percentage rent leases with Genesis provide for lower operating margins for Genesis than minimum rent leases with Genesis, Genesis may also have a conflict of interest to the extent that it is involved in the placement of private pay residents with acuity levels equally suited to an assisted living facility or a skilled nursing facility. 35 Because Michael Walker serves as chairman and chief executive officer of Genesis and chairman of ElderTrust, he has a conflict of interest in matters involving Genesis and ElderTrust Michael R. Walker, ElderTrust's chairman of the board, is chairman of the board and chief executive officer of Genesis. At December 31, 1999, Mr. Walker beneficially owned approximately 2.7% of the common shares of Genesis and approximately 7.4% of the common shares of ElderTrust. Because he serves as chairman of both Genesis and ElderTrust, Mr. Walker has a conflict of interest with respect to ElderTrust enforcing: o the loan, purchase and right of first refusal agreements relating to the properties and other assets acquired by us from subsidiaries of Genesis or entities in which its has an interest or which may be acquired from these entities in the future; and o the leases we entered into with Genesis. The failure by us to enforce material terms of these agreements could result in a monetary loss to us, which could have a material adverse effect on our financial condition, revenues and earnings. Our ongoing relationships with Genesis as a lessee and manager of a substantial portion of our properties may also deter us from vigorously enforcing the terms of these agreements. Holders of units of limited partnership interest in the Operating Partnership have different interests than shareholders and may exercise their voting rights in the Operating Partnership in a manner that conflicts with the interests of shareholders As the sole general partner of the Operating Partnership, we have fiduciary obligations to the other limited partners in the Operating Partnership, the discharge of which may conflict with the interests of our shareholders. In addition, those persons holding beneficial interests in units of limited partnership interest in the Operating Partnership, including Messrs. Walker and D. Lee McCreary, Jr., have the right, as limited partners, to vote on amendments to the partnership agreement of the operating partnership, most of which require approval by a majority in interest of the limited partners, including ElderTrust, and such individuals may exercise their voting rights in a manner that conflicts with the interests of our shareholders. Additionally, if we prepay or refinance debt securing some of our properties or sell properties, Mr. Walker and other holders of units of limited partnership interest in the operating partnership, may incur adverse tax consequences which are different from the tax consequences to us and our shareholders. Consequently, persons holding directly or indirectly units of limited partnership interest, including Mr. Walker, may have different objectives regarding the appropriate timing of such actions. While we have the exclusive authority as general partner under 36 the partnership agreement to determine whether, when and on what terms to prepay or refinance debt or to sell a property, any of these actions would require the approval of our board of trustees. As a trustee of ElderTrust, Mr. Walker has substantial influence with respect to any of these actions, and could exercise his influence in a manner inconsistent with the interests of some, or a majority, of ElderTrust's shareholders. We depend on our key personnel whose continued service is not guaranteed We depend on the efforts of our executive officer, Mr. McCreary. The loss of his services could have a significant adverse effect on our operations. While we believe that the employment agreement we have with Mr. McCreary provides us with some protection, it does not guarantee Mr. McCreary's continued employment. Our board of trustees may change investment policies without shareholder approval Our board of trustees may change our investment, financing and other policies without shareholder approval. Any changes in these policies may have adverse consequences on our business and operations. Healthcare industry regulation may adversely affect the operations of our lessees and borrowers and their ability to make loan and lease payments to us Any failure by our lessees or borrowers to comply with applicable government regulations could adversely affect their ability to make lease or loan payments to us. The long-term care segment of the healthcare industry is highly regulated. Operators of skilled nursing facilities are subject to regulation under various federal, state and local laws, including those relating to: o delivery and adequacy of medical care; o distribution of pharmaceuticals; o equipment utilized in their facilities; 37 o personnel; o operating policies; o fire prevention; o rate-setting; o compliance with building and safety codes; o compliance with environmental laws; o periodic inspection by governmental and other authorities to ensure compliance with various standards; o licensing of facilities under state law; o certification for participation under the Federal Health Care Program, including Medicare and Medicaid; and o ability to participate in other third party payment programs. In addition, many states have adopted certificate of need or similar laws which generally require that the appropriate state agency approve acquisitions of skilled nursing facilities and determine that a need exists for certain bed additions, new services, capital expenditures or other changes. The failure to obtain or maintain any required regulatory approvals or licenses could prevent an operator of one or more of our facilities from offering services or adversely affect its ability to receive reimbursement for services. It also could result in the denial of reimbursement, temporary suspension of admission of new patients, suspension or decertification from a Federal Health Care Program, restrictions on the ability to expand existing facilities and, in extreme cases, revocation of the facility's license or closure of a facility. Federal law also imposes civil and criminal penalties for submission of false or fraudulent claims, including nursing home bills and cost reports, to Medicare or Medicaid. There can be no assurance that our lessees or borrowers will meet or continue to meet the requirements for participation in the Medicaid or Medicare programs or of state licensing authorities. Nor can there be any assurance that regulatory authorities will not adopt changes or new interpretations of existing regulations that would adversely affect the ability of our lessees or borrowers to make their rental or loan payments to us. Although not currently regulated at the federal level, except under laws of generally applicable to businesses, assisted living facilities are increasingly becoming subject to more stringent regulation and licensing by state and local health and social service agencies and other regulatory authorities. In general, these assisted living requirements address: 38 o personnel education; o training and records; o facility services, including administration of medication, assistance with self-administration of medication and the provision of limited nursing services; o monitoring of wellness; o physical plant inspections; o furnishing of resident units; o food and housekeeping services; o emergency evacuation plans; and o resident rights and responsibilities, including in certain states the right to receive certain healthcare services from providers of a resident's choice. In several states, assisted living facilities also require a certificate of need before the facility can be opened, expand or reduce its resident capacity or make significant capital expenditures. Several of our properties are licensed to provide independent living services, which generally involve lower levels of resident assistance. Like skilled nursing facilities and other healthcare facilities, assisted living facilities are subject to periodic inspection by government authorities. In most states, assisted living facilities, as well as skilled nursing and other healthcare facilities, also are subject to state or local building code, fire code and food service licensure or certification requirements. Any failure by our lessees or borrowers to meet applicable regulatory requirements may result in the imposition of fines, imposition of a provisional or conditional license or suspension or revocation of a license or other sanctions or adverse consequences, including delays in opening or expanding a facility. Any failure by our lessees or borrowers to comply with these requirements could have a material adverse effect on their ability to make loan or lease payments to us. Operators of our facilities also must comply with federal and state anti-remuneration laws Healthcare operators also are subject to federal and state anti-remuneration laws and regulations, such as the Federal Health Care Program anti-kickback law. These laws govern financial arrangements among healthcare providers and others that may be in a position to refer or recommend patients to providers. These laws prohibit, among other things, the offer, payment, solicitation or receipt of any form of remuneration in return for the referral of Federal Health Care Program patients or for purchasing, leasing, ordering 39 (or arranging for or recommending the purchase, lease or order) of any goods, facilities, services or items for which payment can be made under a Federal Health Care Program. A violation of the federal anti-kickback law could result in the loss of eligibility to participate in Medicare or Medicaid or in civil or criminal penalties. The federal government, private insurers and various state enforcement agencies have increased their scrutiny of providers, business practices and claims in an effort to identify and prosecute fraudulent and abusive practices. In addition, the federal government has issued fraud alerts concerning nursing services, double billing, home health services and the provision of medical supplies to nursing facilities, and recently issued a model compliance plan referencing numerous areas of business operation that it recommends be made the subject of specific policies and procedures that nursing homes implement and enforce. Accordingly, these areas have come under closer scrutiny by the government. Further, some states restrict certain business corporations from providing, or holding themselves out as a provider of, medical care. Sanctions for violation of any of these laws can include loss of licensure or eligibility to participate in reimbursement programs and civil and criminal penalties. State laws vary from state to state, are often vague and have seldom been interpreted by the courts or regulatory agencies. There can be no assurance that these federal and state laws will ultimately be interpreted in a manner consistent with the practices of our lessees. The costs of complying with these laws, and/or defending against any allegations of non-compliance that might be brought, could be significant, and could negatively impact the ability of the Company's lessees or borrowers to meet their financial obligations to the Company. We may encounter delays in substituting lessees or operators because the facility licenses are held by our lessees and borrowers and not by us A loss of license or Medicare/Medicaid certification or default by one or more of our lessees or borrowers could result in us having to obtain another lessee or substitute operator for the affected facility or facilities. Because the facility licenses for our properties are held by our lessees or borrowers and not by us and because under the REIT tax rules we would have to find a new "unrelated" lessee to operate the properties following a default, we may encounter delays in exercising our remedies under the leases and loans made by us or substituting a new lessee or operator in the event of any loss of licensure or Medical/Medicaid certification by a prior lessee or operator or a default by the operator of one or more of our facilities. We can make no assurance that we could contract with a new lessee or successor operator on a timely basis or on acceptable terms and our failure do so could have a material adverse effect on our financial condition, revenues, earnings and ability to make distributions to our shareholders. Transfers of healthcare facilities require regulatory approvals and alternative uses of healthcare facilities are limited Because transfers of operations of healthcare facilities are subject to regulatory approvals not required for transfers of other types of commercial operations and other types of real estate, there may be delays in transferring operations of our facilities to 40 successor lessees or we may be prohibited from transferring operations to a successor lessee. In addition, substantially all of our properties are special purpose facilities that may not be easily adapted to non-healthcare-related uses. Proximity to hospitals and other healthcare facilities may affect our ability to renew leases and attract new lessees in the event of relocation or closure of a hospital or other healthcare facility Many of our assisted living facilities, skilled nursing facilities and medical office buildings are in close proximity to one or more hospitals. The relocation or closure of a hospital could make our assisted living facilities, skilled nursing facilities or medical office buildings in the affected area less desirable and affect our ability to renew leases and attract new tenants. Because we have made construction loans, we are subject to development and lease-up risks We have made construction loans. Lending on development projects is generally considered to involve greater risks than the purchase and leaseback of operating properties. The risks associated with lending on development projects include that: o the development activities may be abandoned; o the borrower may be unable to obtain, or experience delays in obtaining, all necessary zoning, land-use, building, occupancy and other required governmental permits and authorizations; o construction costs of a facility may exceed the original estimates possibly making the facility uneconomical; o occupancy rates and rents at a completed facility may not be sufficient to cover loan or lease payments; o permanent financing may not be available on favorable terms; o the term or construction loan may not be repaid; and o construction and lease-up may not be completed on schedule resulting in increased debt service expense and construction costs. In addition, construction-lending activities typically require substantial time and attention from our management. Because real estate investments are illiquid, we may not be able to sell properties when appropriate Real estate investments generally cannot be sold quickly. We may not be able to vary our portfolio promptly in response to economic or other conditions. This inability to 41 respond to changes in the performance of our investments could adversely affect our ability to service debt and make distributions to our shareholders. The revenues derived by us from percentage rent leases depend to a greater extent on the operator's ability to operate the properties subject to these leases successfully due the absence of minimum rent provisions We lease two assisted living facilities and one independent living facility under percentage rent leases, which do not require the payment of minimum rent. The revenues derived by us under these percentage rent leases, therefore, depends to a greater extent upon the ability of these operators to operate the properties subject to these leases successfully because of the absence of minimum rent requirements. Lack of industry diversification subjects us to the risks associated with investments in a single industry While we are authorized to invest in various types of income-producing real estate, our current strategy is to acquire and hold, as long-term investments, only healthcare-related properties. Consequently, we currently do not have any significant non-healthcare related real estate assets, and, therefore, are subject to the risks associated with investments in a single industry. Competition in the marketplace could adversely affect the ability of our lessees and borrowers to make lease and loan payments to us Lessees operating our owned properties or borrowers operating properties that secure loans we have made compete on a local and regional basis with operators of other facilities that provide comparable services. Operators compete for residents based on a number of factors, including: o quality of care; o reputation; o physical appearance of facilities; o range and type of services offered; o family preferences; o physicians affiliated with the facility; o staff of the facility; and o price. There can be no assurance that operators of our facilities will be able to compete effectively. If they are unable to do so, their ability to make lease and loan payments to us could be adversely affected. 42 Overbuilding in the assisted living industry could result in decreased occupancy, depressed margins and lower operating results for operators of our assisted living facilities In general, regulatory and other barriers to competitive entry in the assisted living industry are not substantial. Moreover, if the development of new assisted living facilities outpaces demand for these facilities, the market may become saturated. Such an oversupply of facilities could cause our operators to experience decreased occupancy, depressed margins and lower operating results, which could have a material adverse effect on their ability to make lease or loan payments to us. Assisted living revenues are derived from private pay sources Assisted living services currently are not generally reimbursable under government reimbursement programs, such as Medicare and Medicaid. Accordingly, substantially all of the revenues derived by operators of the assisted living facilities owned by us come from private pay sources consisting of income or assets of residents or their family members. In general, because of the cost associated with building new facilities and the staffing and other costs of providing the assisted living services at those facilities, only seniors with income or assets meeting or exceeding the comparable median in the region where the facilities are located can afford to pay the daily resident fees. An unexpectedly high resident turnover rate could adversely affect the revenues derived by operators of our assisted living facilities, which could adversely affect their ability to make lease and loan payments to us State regulations governing assisted living facilities require written resident agreements with each resident. These regulations also require that each resident have the right to terminate the resident agreement for any reason on reasonable notice. Consistent with these regulations, the resident agreements entered into with operators of our assisted living facilities allow residents to terminate the agreement on 30 days' notice. Thus, operators of our assisted living facilities can not contract with residents to stay for longer periods of time, unlike typical apartment leasing arrangements that involve lease agreements with specified leasing periods of up to one year or longer. If a large number of residents elected to terminate their resident agreements at or around the same time, then the revenues derived by the operator of the facility could be adversely affected, which, in turn, would adversely affect the ability of the operator to make lease or loan payments to us. In addition, the advanced age of assisted living residents means that resident turnover in assisted living facilities may be less predictable. 43 New acquisitions may fail to perform as expected Assuming we are able to obtain capital on commercially reasonable terms, we intend to continue to acquire assisted and independent living facilities, skilled nursing facilities and medical office and other buildings and to provide construction loans. Newly acquired properties and loans we make may fail to perform as expected, which could adversely affect our earnings and distributions to our shareholders. Some potential losses may not be covered by insurance We require our lessees and borrowers to secure and maintain, comprehensive liability and property insurance that covers the Company, as well as the lessees and borrowers on all of our properties. Some types of losses, however, either may be uninsurable or too expensive to insure against. Should an uninsured loss or a loss in excess of insured limits occur, we could lose all or a portion of the capital we have invested in a property, as well as the anticipated future revenue from the property. In such an event, we might nevertheless remain obligated for any mortgage debt or other financial obligations related to the property. We cannot assure shareholders that material losses in excess of insurance proceeds will not occur in the future. Our failure to comply with tax-exempt bond requirements for our Highgate and Woodbridge facilities could result in termination of the tax-exempt status or acceleration of the bonds Our indebtedness at December 31, 1999 includes approximately $20.2 million of tax-exempt bonds used to finance our Highgate and Woodbridge assisted living facilities. The bonds are subject to various requirements under the Internal Revenue Code. In addition, the bonds impose requirements on the operation of the facilities, including a requirement that at least 20% of the rental units in the facilities are occupied by tenants whose adjusted gross family income does not exceed 50% of the median gross income for the relevant geographic area. If our lessees do not comply with these requirements, the tax-exempt status of the bonds could be terminated or the bonds could be accelerated. In the event of default under the bonds used to finance the Highgate and Woodbridge facilities, our interest in the relevant property would be subordinate to the interests of the bondholder. Provisions of our declaration of trust and bylaws could inhibit changes in control Various provisions of our declaration of trust and bylaws may delay or prevent a change in control or other transactions that could provide our shareholders with a premium over the then-prevailing market price of their shares or which might otherwise be in the best interest of our shareholders. These provisions include: 44 o a classified board of trustees with the trustees divided into three classes with terms of three years each; o that the number of trustees may not be less than three nor more than nine, with the number of trustees fixed within this range by action of the board of trustees; o that trustees may be removed only for cause upon the affirmative vote of shareholders holding at least a majority of the shares entitled to be cast in an election of trustees; o the authority of the board of trustees to issue preferred shares of beneficial interest in one or more series without shareholder approval; o the exclusive authority of the board of trustees to amend the bylaws; o an advance notice bylaw requiring advance notice of shareholder nominations for trustee or new business proposals; o that special meetings of shareholders may be called only by the chairman, the president or at least one-third of the board of trustees; o a requirement of a vote of shareholders of not less than two-thirds of all the votes entitled to be cast on the matter to approve amendments to provisions of the declaration of trust that have an anti-takeover effect; and o the ownership limit described below which is primarily intended to satisfy requirements under the Internal Revenue Code for qualification as a REIT. We also are subject to Maryland Business Combination Statute Provisions of Maryland law prohibit specified "business combinations" between a Maryland real estate investment trust and any person or entity who beneficially owns ten percent or more of the voting power of its outstanding shares, or any affiliate of the ten percent owner, for five years. Thereafter, the business combination must be approved by (a) 80% of the outstanding voting shares and (b) two-thirds of the outstanding voting shares, other than shares held by the ten percent owner, unless specified statutory conditions are met. A business combination that is approved any time before the ten-percent owner acquires his or her shares is not subject to these special voting requirements. We have not "opted out" of these provisions and, accordingly, we are subject to them. 45 Our failure to qualify as a REIT would cause us to be taxed as a corporation We believe that we were organized and operated in a manner so as to qualify as a REIT under the Internal Revenue Code of 1986, as amended, commencing with our taxable year ended December 31, 1998. We can give no assurance that we will maintain our qualification as a REIT. Qualification as a REIT involves the satisfaction of numerous requirements, some on an annual and some on a quarterly basis, established under highly technical and complex Internal Revenue Code provisions for which there are only limited judicial and administrative interpretations, and involves the determination of various factual matters and circumstances not entirely within our control. For example, in order to qualify as a REIT, at least 95% of our gross income in any year must be derived from qualifying sources, and we must pay distributions to shareholders aggregating annually at least 95% (90% for taxable years beginning after December 31, 2000) of our REIT taxable income, excluding capital gains and certain non-cash income. The complexity of these provisions and of the applicable U.S. Treasury regulations is greater in the case of a REIT that holds its assets in partnership form. We can make no assurances that legislation, new regulations, administrative interpretations or court decisions will not significantly change the tax laws with respect to qualification as a REIT or the federal income tax consequences of qualification as a REIT. If we fail to qualify as a REIT or to maintain our REIT status, we will be subject to federal income taxes at regular corporate rates, including any alternative minimum tax. Moreover, we may be disqualified from treatment as a REIT for the next four taxable years. If we failed to qualify as a REIT, our net income available for investment or distribution to our shareholders would be significantly reduced because of the additional tax liability to us for the years involved. In addition, distributions to our shareholders would no longer be required to be made by us. We have a share ownership limit primarily for REIT tax purposes To qualify and maintain qualification as a REIT for federal income tax purposes, not more than 50% in value of our outstanding common shares may be owned, directly or indirectly, by five or fewer individuals. In addition, neither Genesis nor any person who constructively owns 10% or more of the outstanding shares of Genesis or any other tenant may own actually or constructively 10% or more, in value or voting rights, of our outstanding shares of beneficial interest. Primarily to facilitate compliance with these requirements, our declaration of trust prohibits ownership, directly or by virtue of the attribution provisions of the Internal Revenue Code of 1986, as amended, by any single shareholder of more than 8.6% of the issued and outstanding common shares and generally prohibits the ownership, directly or by virtue of these attribution rules, by any single shareholder or more than 9.9% of any class or series of preferred shares of beneficial interest. We refer to this as the "ownership limit." The federal tax laws include complex share ownership rules that apply in determining whether a shareholder exceeds the ownership limit. These rules may cause a shareholder to be treated as owning the shares of a number of related shareholders. Absent any such exemption or 46 waiver by the board of trustees, shares acquired or held in violation of the ownership limit will be transferred to a trust for the exclusive benefit of a designated charitable beneficiary, and the shareholder's rights to distributions and to vote would terminate. Also, the ownership limit could delay or prevent a change in control and, therefore, could adversely affect our shareholders' ability to realize a premium over the then-prevailing market price for their shares. Special considerations apply to us because of the nature of our assets The manner in which we derive income from the assisted and independent living facilities and skilled nursing facilities we own is governed by special considerations in satisfying the requirements for REIT qualification. Because we would not qualify as a REIT if we directly operated an assisted or independent living facility, or a skilled nursing facility, we lease such facilities to a healthcare provider, such as subsidiaries of Genesis, which operate the facilities. It is essential to our qualification as a REIT that these arrangements be respected as leases for federal income tax purposes and that the lessees, including the subsidiaries of Genesis that lease properties from us, not be regarded as "related parties" of us or our operating partnership, as determined under the applicable provisions of the Internal Revenue Code. In the event the leases expire and are not renewed, we will have to find a new lessee that is not related to us to lease and operate the properties in order to continue to qualify as a REIT. For taxable years beginning after December 31, 2000, we would be able to elect to treat property acquired as a result of an expired lease as foreclosure property if certain conditions are satisfied. With a valid election, we would be permitted to directly own such property until the end of the second taxable year after the lease termination but only if an independent contractor operates the property within 90 days after the lease is terminated. The income from the foreclosure property would be subject to tax at the maximum corporate rate, but the income would qualify under the REIT gross income tests. In the event of a default on either a lease of, or a mortgage secured by, an assisted or independent living facility or skilled nursing facility, to maintain our REIT qualification, we would have to either immediately lease the property to a lessee that is not related to us, or make a foreclosure election and engage a new healthcare provider, which for our 2000 taxable year could not include Genesis or its subsidiaries or Senior Life Choice, another existing tenant, to operate the facility after we take possession of the facility. Although with a valid election, we would be permitted to operate the facility for 90 days after taking possession of the facility pursuant to applicable U.S. Treasury regulations without jeopardizing our REIT status, the fact that the facility licenses are held by lessees or borrowers may preclude us from doing so under applicable healthcare regulatory requirements. The REIT requirements and applicable healthcare regulatory requirements could deter us from exercising our remedies in the event of a default even though such exercise otherwise would be in our best interests. We pay some taxes Even if we qualify as a REIT, we are required to pay certain federal, state and local taxes on our income and property. 47 Various factors have affected and are likely to continue to affect our common share price Various factor have affected and are likely to continue to affect our common share price, including: o our financial performance and our dependence on Genesis as the primary operator of our facilities; o the financial performance of Genesis and other lessees of our facilities; o the extent to which a secondary market develops for our common shares; o the extent of institutional investor interest in us; o the market prices of other healthcare REITs and the attractiveness of their equity securities in comparison to other equity securities, including securities issued by other real estate-based companies; and o general stock and bond market conditions. Our common share price is affected by changes in our earnings and cash distributions We believe that the market value of a REIT's equity securities is based primarily upon the market's perception of the REIT's growth potential and its current and potential future cash distributions, and is secondarily based upon the real estate market value of the underlying assets. For that reason, our shares may trade at prices that are higher or lower than the net asset value per share. To the extent we retain operating cash flow for investment purposes, working capital reserves or other purposes, these retained funds, while increasing the value of our underlying assets, may not correspondingly increase the market price of our shares. Our failure to meet the market's expectations with regard to future earnings and cash distributions would likely adversely affect the market price of our publicly traded securities. Market interest rates may have an effect on the value of our publicly traded securities One of the factors that investors consider important in deciding whether to buy or sell shares of a REIT is the distribution rate on such shares, considered as a percentage of the price of such shares, relative to market interest rates. If market interest rates go up, prospective purchasers of REIT shares may expect a higher distribution and this would likely increase our borrowing costs and potentially decrease funds available for distribution. Thus, higher market interest rates could cause the market price of our publicly traded securities to go down. 48 Shares available for future sale could adversely affect the market price of our publicly traded securities We have 513,475 units of limited partnership interest in our operating partnership which are owned by minority interests. These units are redeemable by the holder for cash or, at our election, common shares. In addition, we have reserved a total of 779,340 common shares for issuance pursuant to our 1998 share option and incentive plan, of which 134,010 are subject to exercisable share options as of December 31, 1999. We cannot predict the effect that future sales of any of these common shares, or the perception that such sales could occur, will have on the market prices of our outstanding common shares. Environmental problems are possible and can be costly Federal, state and local laws and regulations relating to the protection of the environment may require a current or previous owner or operator of real estate to investigate and clean up hazardous or toxic substances or petroleum product releases at the property. If unidentified environmental problems arise, we may have to make substantial payments, which could adversely affect our cash flow and our ability to make distributions to our shareholders because: o we or the operator may have to pay a governmental entity or third parties for property damage and for investigation and clean-up costs incurred by them in connection with the contamination; o environmental laws typically impose clean-up responsibility and liability without regard to whether the owner or operator knew or caused the presence of the contaminants; o even if more that one person may have been responsible for the contamination, each person covered by the environmental laws may be held responsible for all of the clean-up costs incurred; and o third parties may sue the owner or operator of a site for damages and costs resulting from environmental contamination emanating from that site. Environmental laws also govern the presence, maintenance and removal of asbestos. These laws require (1) that owners or operators of buildings containing asbestos properly manage and maintain the asbestos, (2) that they notify and train those who may come into contact with asbestos and (3) that they undertake special precautions, including removal or other abatement, if asbestos would be disturbed during renovation or demolition of a building. These laws may impose fines and penalties on building owners or operators who fail to comply with these requirements and may allow third parties to seek recovery from owners or operators for personal injury associated with exposure to asbestos fibers. 49 Independent environmental consultants have conducted or updated environmental assessments at the properties in which we have an interest. These assessments included a visual inspection of the properties and the surrounding areas, an examination of current and historical uses of the properties and the surrounding areas and a review of relevant state, federal and historical documents. Where appropriate, on a property by property basis, these consultants conducted additional testing, including sampling for: asbestos, lead in drinking water, soil contamination where underground storage tanks are or were located or where other past site usage creates a potential for site impact and for contamination in groundwater. These environmental assessments have not revealed any environmental liabilities at the properties that we believe would have a material adverse effect on our business, financial condition, revenues or earnings. Asbestos is present at some of our buildings. The environmental consultants have not recommended removal or encapsulation of the asbestos, except in connection with the construction, remodeling, renovation or demolition of a building. For some of our properties, the environmental assessments also note potential offsite sources of contamination such as underground storage tanks. Additionally, for some of our properties, the environmental assessments note previous uses, such as the former presence of underground storage tanks, and in these cases, documented underground storage tanks subject to regulatory requirements were either removed, replaced or otherwise brought into compliance. Failure of operators to comply with environmental laws regarding the use and disposal of hazardous substances and infectious medical wastes could adversely affect their ability to make lease and loan payments to us The operation of healthcare facilities also involves the handling, use, storage, transportation, disposal and/or discharge of hazardous, infectious, toxic, radioactive, flammable and other hazardous materials, wastes, pollutants or contaminants. These activities may result in: o damage to individuals, property or the environment; o interruption of operations and increases in costs; o legal liability, damages, injunctions or fines; o investigations, administrative proceedings, penalties or other governmental agency actions; and o costs that are not covered by insurance. We can make no assurance that our lessees or borrowers will not incur liability in connection with the use and disposal of hazardous substances and infectious medical waste, which could have a material adverse effect on their ability to make lease or loan payments to us. ERISA plans may be prohibited from investing in our common shares Depending upon the particular circumstances of an ERISA plan, an investment by an ERISA plan in our common shares may be inappropriate under the Employee Retirement Income Security Act of 1974. In deciding whether to purchase our common shares on behalf of an ERISA plan, a fiduciary of an ERISA plan, in consultation with its advisors, should carefully consider its responsibilities under ERISA, the prohibited transaction rules of ERISA and the internal revenue code and the effect of regulations issued by the U.S. Department of Labor defining what constitutes assets of an ERISA Plan. 50 ITEM 2. PROPERTIES The Company's headquarters are currently located at 101 East State Street, Suite 100, Kennett Square, PA 19348. The Company leases its corporate office space from Genesis under an operating lease, which expires on April 30, 2001. 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. As of December 31, 1999, the Company had no other material lease commitments as lessee. The following table sets forth certain information comprising the Company's investments in owned real estate property as of December 31, 1999.
Number of Annualized Property State Beds (3) Investment (4) Rental Income (5) - ------------------------------------- --------- --------------- ---------------- ------------------- Assisted Living Facilities: (dollar amounts in thousands) Heritage Woods * (1) MA 126 $ 12,492 $ 1,053 Willowbrook * (1) PA 56 6,465 648 Riverview Ridge (1) PA 105 6,593 677 Highgate at Paoli Pointe (1) PA 82 13,245 1,210 The Woodbridge PA 90 14,116 1,280 Heritage at North Andover (1) MA 97 12,126 1,148 Heritage at Vernon Court (1) MA 115 18,823 1,702 ----- -------- ------- Total Assisted Living 671 83,860 7,718 ----- -------- ------- Independent Living Facilities: Pleasant View (1) NH 72 4,164 485 ----- -------- ------- Total Independent Living 72 4,164 485 ----- -------- ------- Skilled Nursing Facilities: Rittenhouse CC * (1) PA 119 9,806 802 Lopatcong CC (1) NJ 153 15,148 1,259 Phillipsburg CC (1) NJ 94 6,799 572 Wayne NRC (2) PA 118 8,459 806 Belvedere NRC (1) PA 147 12,193 1,107 Chapel NRC (1) PA 240 12,661 1,176 Harston Hall NCH (1) PA 196 8,080 832 Pennsburg Manor NRC (1) PA 120 11,233 1,118 ----- -------- ------- Total Skilled Nursing 1,187 84,379 7,672 ----- -------- ------- Medical Office and Other Buildings: Professional Office Building I PA 4,566 941 DCMH Medical Office Building PA 8,291 1,531 Salisbury Medical Office Bldg. (1) MD 1,361 164 Windsor Office Building * (1) CT 328 81 Windsor Clinic/Trg. Facility * (1) CT 1,481 117 Lacey Branch Office Building NJ 625 57 -------- ------- Total Medical Office and Other 16,652 2,891 -------- ------- Total of Owned Properties 1,930 $189,055 $18,766 ====== ========= =======
51 - ------------------ * 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 managed by Genesis or Genesis Equity Investees. See "Business - Transactions with Genesis." (2) Represents property managed by Genesis but leased by an unrelated third party. See "Business - Transactions with Genesis." (3) Based upon the number of private and semi-private beds in service at December 31, 1999. (4) Includes investments in real estate properties and loans on real estate properties aggregating $181.9 million, before reductions for accumulated depreciation, and includes credit enhancements on three owned properties, which aggregated $7.2 million. Credit enhancements include bond and operating reserve funds aggregating $3.8 million, security deposits of $1.8 million, letters of credit aggregating $1.0 million and mortgage escrow accounts of $0.6 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 1999. The Company holds a fee interest in each of its properties except for the land underlying the Windsor Clinic and Training Facility, 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 Genesis and other 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. See "Business - Investments - Owned Property - Operating Leases." The Company believes that its leased properties are adequately insured under insurance policies maintained by the lessees. The above properties are encumbered by mortgage loans and bonds aggregating $109.0 million at December 31, 1999, bearing interest at a weighted average rate of 8.4%. 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. Additionally, five of the Company's properties, not already subject to mortgage loans, are 52 included in the borrowing base for the Credit Facility and are pledged as collateral for outstanding borrowings. See Note 7 to the Company's consolidated financial statements included in this Form 10-K. The following table sets forth certain information regarding the Company's term and construction loans on real estate property investments as of December 31, 1999.
Number of Interest Rate Term and Construction Loans State Beds (3) Investment (4) on Loans (4) - ------------------------------------- --------- --------------- ---------------- ------------------- (dollars in thousands) Term Loans - ------------------------------------- Assisted Living Facilities: Harbor Place * (1) FL 92 $ 4,828 9.5% Mifflin * (1) PA 67 5,164 9.5 Coquina Place * (1) FL 60 4,577 9.5 Lehigh * (1) PA 70 6,665 10.5 Berkshire * (1) PA 64 6,167 10.5 ---- -------- Total Assisted Living 353 27,401 ---- -------- Total Term Loans 353 27,401 ---- -------- Construction Loans - ------------------------------------- Assisted Living Facilities: Oaks * (1) PA 52 5,033 9.0 Montchanin * (2) DE 92 9,496 10.5 Sanatoga * (1) PA 70 6,716 10.5 ---- -------- Total Assisted Living 214 21,245 ---- -------- Total Construction Loans 214 21,245 ---- -------- Total Term and Construction Loans 567 $48,646 ==== ========
- ---------------- * Represent loans included in the Company's borrowing base for the Credit Facility and pledged as collateral. (1) Represent properties that are managed by Genesis or Genesis Equity Investees. See "Business - Investments - Proposed Loan Restructurings and Related Matters." (2) The Company has the option to purchase and leaseback this facility to the borrower for $13.0 million upon maturity of the loan. See "Business - Investments - Investment Portfolio - Term and Construction Loans." The Company may be limited in its ability to fund any exercise of this option. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." (3) Based upon the number of private and semi-private beds in service at December 31, 1999. (4) Represents principal balance and related rate of interest at December 31, 1999. See Note 3 to the Company's consolidated financial statements included in this Form 10-K. 53 ITEM 3. LEGAL PROCEEDINGS None. 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, 1999, through the solicitation of proxies or otherwise. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The following table sets forth, from January 27, 1998, the date the Company's common shares began trading, through the periods indicated, the high and low sales prices of the Company's common stock on the New York Stock Exchange and the distributions paid per share. There were 91 shareholders of record of the Company's common shares as of February 29, 2000. The number of shareholders of record does not include an indeterminate number of shareholders whose shares are held by brokers in "street name." Management believes there are in excess of 4,000 beneficial shareholders of the Company's common shares. Distributions Per Quarter ended High Low Share ------------------ ------ ------ ----------------- March 31, 1998 (1) $19.50 $17.38 - June 30, 1998 18.00 14.88 $0.243 September 30, 1998 17.75 11.63 0.365 December 31, 1998 14.50 9.25 0.365 March 31, 1999 11.63 7.75 0.365 June 30, 1999 10.38 8.44 0.365 September 30, 1999 10.06 7.13 0.365 December 31, 1999 7.63 5.44 0.365(2) ---------- (1) Represents the period from January 27, 1998 through March 31, 1998. (2) Effective with the quarterly distribution paid in February 2000, the quarterly distribution was reduced from $0.365 per share to $0.30 per share. In order to qualify as a REIT for Federal income tax purposes, the Tax Code generally requires that a REIT distribute annually at least 95% (90% for taxable years beginning after December 31, 2000) of its net taxable income to its shareholders. for See "Business - Taxation." The Company believes that, 54 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 and intends to continue qualifying as a REIT for the year ended December 31, 1999 and in future periods. Accordingly, the Company expects to continue to make required distributions to its shareholders. The amount and timing of future distributions, however, will depend upon various factors, including the Company's cash available for distribution and limitations or restrictions under the Credit Facility on payment of dividends. See "Business - Genesis and Multicare Announce Commencement of Debt Restructuring Discussions with their Senior Leaders," "Business - Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." Distributions by the Company are at the discretion of the board of trustees. There can be no assurance that distributions will continue to be made at current levels. ITEM 6. SELECTED FINANCIAL DATA The following selected consolidated financial data for the year ended December 31, 1999 and for the period from January 30, 1998 through December 31, 1998, and as of December 31, 1999 and 1998, is derived from the consolidated financial statements of the Company. The following data should be read in conjunction 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."
1999 1998 -------- ------- (in thousands, except per share data) Operating Data: Revenues $ 28,141 $21,233 Expenses: Property expenses 1,124 975 Interest expense 13,136 6,256 Depreciation 5,788 4,460 General and administrative, separation agreement and start-up expenses 5,412 4,648 -------- -------- Total expenses 25,460 16,339 -------- -------- Equity in losses of unconsolidated entities, net (2,482) (648) Minority interest (19) (273) -------- -------- Net income before extraordinary item 180 3,973 Extraordinary item, net of minority interest (1,210) - -------- -------- Net income (loss) ($1,030) $ 3,973 ======== ======== Per share information: Basic and diluted net income per share before extraordinary item $0.03 $ 0.54 ======== ========= Basic and diluted net income (loss) per share ($0.14) $ 0.54 ======== ======== Weighted average basic and diluted common shares outstanding 7,198 7,369 ======== ======== Distributions per share $ 1.46 $ 0.97 ======== ========
55
December 31, 1999 December 31, 1998 ----------------- ----------------- (in thousands) Balance Sheet Data: Real estate properties, net $171,681 $176,129 Real estate loans receivable 48,646 47,899 Credit Facility 39,670 90,204 Mortgages, bonds and notes payable 110,084 53,728 Total liabilities 155,053 149,162 Total shareholders' equity $103,440 $113,296 1999 1998 ----------------- ----------------- (in thousands) Other data: Funds from Operations (1) $ 12,672 $12,356 ----------------- -----------------
- ---------- (1) The White Paper on Funds from Operations approved by the Board of Governors of NAREIT in March 1995 defines Funds from Operations as net income (loss), computed in accordance with generally accepted accounting principles, excluding gains (or losses) from debt restructuring and sales of properties, plus real estate related depreciation and after comparable adjustments for the Company's portion of these items related to unconsolidated partnerships and joint ventures. The Company believes that Funds from Operations is helpful to investors as a measure of the performance of an equity REIT because, along with cash flow from operating activities, financing activities and investing activities, it provides investors with an indication of the ability of the Company to incur and service debt, to make capital expenditures and to fund other cash needs. The Company computes Funds from Operations using standards established by NAREIT which may not be comparable to Funds from Operations reported by other REITs that do not define the term using the current NAREIT definition or that interpret the current NAREIT definition differently than the Company. Funds from Operations does not represent cash generated from operating activities using generally accepted accounting principles and should not be considered as an alternative to net income as an indication of the Company's financial performance, or to cash flow from operating activities as a measure of the Company's liquidity, nor is it indicative of funds available to fund the Company's cash needs, including its ability to make cash distributions. Effective January 1, 2000, Funds from Operations will include both recurring and non-recurring results of operations, except those results defined as "extraordinary items" under generally accepted accounting principles and gains and losses from sales of depreciable property. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General The Company is a self-managed and self-administered real estate investment trust that invests principally in senior housing and other healthcare facilities, including skilled nursing facilities, assisted and independent 56 living facilities and medical office and other buildings. The Company conducts primarily all of its operations through the Operating Partnership, of which ElderTrust is the sole general partner. The Company's consolidated assets consist primarily of the assets of the Operating Partnership and its consolidated subsidiaries. As of December 31, 1999, skilled nursing, assisted and independent living facilities comprised approximately 93% of the Company's consolidated investments in real estate properties and loans. Approximately 70% of the Company's consolidated assets at December 31, 1999 consisted of real estate properties leased to or managed by and loans on real estate properties made to Genesis or Genesis Equity Investees. Revenues recorded by the Company in connection with these leases and borrowings aggregated $18.4 million in 1999. 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: o the ability of Genesis and Genesis Equity Investees to meet their lease and loan obligations; o the revenues derived from, and the successful operation of, the facilities leased to or managed by Genesis or Genesis Equity Investees; and o the ability of these entities to successfully complete the development projects securing the construction loans made by the Company to these entities. On March 21, 2000, Genesis and Multicare announced the beginning of debt restructuring discussions with their senior lenders with the intention of revising their respective capital structures. Genesis also announced that it did not make a $3.8 million interest payment to its senior debt lenders due March 20, 2000. Both Genesis and Multicare announced their intention not to make interest and principal payments on senior debt and have been prohibited by their senior lenders from making any scheduled interest payments on their publicly traded subordinated debt while discussions were ongoing. Each company cited their inability to sell assets due to the lack of long-term care market financing and the continuing effect of reduced Medicare payments as the causes of these actions. The senior lenders have given Genesis and Multicare a 60-day forbearance period to develop a restructuring plan. Shortly after the announcement, Moody's Investors Service issued a press release announcing that it had downgraded the debt ratings of Genesis and Multicare. In its press release, Moody's indicated that the ratings outlook for both companies was negative. Moody's stated that its rating action reflected the deterioration in the companies' operating results and financial condition which has stemmed from the impact of PPS for Medicare combined with high leverage. Moody's noted that despite cost cutting efforts, operating margins for both companies remain depressed, and planned asset divestitures have not materialized as anticipated. Moody's also stated that restructuring efforts could be adversely impacted by the currently difficult state of the long-term care sector, with several large providers already filing for bankruptcy in recent months. Standard & Poor's also downgraded the debt ratings of Genesis and Multicare. Management of Genesis and Multicare have advised the Company that they expect Genesis and Multicare to continue to make all lease and loan payments to the Company. The Company has no control over Genesis or Multicare, however, and can make no assurance that either of these entities will have sufficient income or assets to enable them to satisfy their obligations under the leases or loans made by the Company to them. Any failure by Genesis or Multicare to continue making payments to the Company could have a significant adverse effect on the Company's financial condition, results of operations and cash available for distribution, could adversely affect the ability of the Company to maintain distributions at current levels or at all and could adversely affect the ability of the Company to meet its own debt obligations. If Genesis and Multicare were to cease making lease and loan payments to the Company, the Company may be required to restructure or terminate the underlying leases and may foreclose on the loans, in which event, the Company might be required to find new operators to operate the properties underlying the leases and loans. Under these circumstances, the Company's net income could decline as a result of such restructuring with Genesis or Multicare or could decline due to rents obtainable from any new operator. Depending on the magnitude of the reduction in the Company's net income, the Company would seek to offset the effect of such reduction in net income on the Company's ability to meet its debt service requirements by further reducing the cash distributions paid to the Company's shareholders and minority interests, through asset sales 57 or through other available means. The Company believes that it has the ability to, and, if necessary, intends to, take these actions available to it and, as a result, believes it will be able to continue to satisfy its debt and operating obligations as they come due over the next twelve months. Based on the current quarterly cash distribution rate of $0.30 per common share announced in November 1999, annualized distributions to shareholders and minority interests would approximate $9.2 million during 2000, based on the number of common shares and units currently outstanding. During 1999, the Company's cash flow from operations exceeded its debt service requirements and distributions paid to shareholders and minority interests by $1.2 million. Giving effect to the current quarterly cash distribution rate and year 2000 debt service requirements as of December 31, 1999, the Company's cash flow from operations during 1999 would have exceeded its debt service requirements and distributions paid to shareholders and minority interests by $3.9 million. See "Summary Condensed Consolidated Financial Data of Genesis." The Company has incurred indebtedness to acquire its assets and may incur additional short and long-term indebtedness, and related interest expense, from time to time. The Company has unfunded construction loan commitments at December 31, 1999 of approximately $352,000 which it expects to fund with cash flows from operations and funds available under the Credit Facility. The Company also was obligated, or has an option, to purchase eight assisted living facilities underlying term or construction loans, which will generally be leased back to the sellers pursuant to long-term leases. The Company is currently negotiating with Genesis to restructure seven of these relationships. See "Liquidity and Capital Resources." The Company intends to declare and pay distributions to its shareholders in amounts not less than the amounts required to maintain REIT status. The amount and timing of distributions will depend upon various factors, however, including the Company's cash available for distribution. See "Liquidity and Capital Resources." Substantially all of the Company's revenues are derived from: o rents received under long-term leases of healthcare-related real estate; o interest earned from term and construction loans; and o interest earned from the temporary investment of funds in short-term instruments. The Company has incurred operating and administrative expenses, which principally include compensation expense for its executive officers and other employees, office rental and related occupancy costs. The Company is self-administered and managed by its executive officers and staff, and has not engaged a separate advisor or paid an advisory fee for administrative or investment services, although the Company has engaged legal, accounting, tax and financial advisors as needed from time to time. 58 The primary non-cash expenses of the Company are the depreciation of its healthcare facilities, amortization of its deferred loan origination costs and deferred financing costs. Investments in Equity Investees The Company's Equity Investees represent entities in which the controlling interest is owned by Mr. D. Lee McCreary, the Company's President, Chief Executive Officer and Chief Financial Officer. As a result, the Company records its investments in, and results of operations from, these entities using the equity method of accounting in its consolidated financial statements included in this Form 10-K. ET Capital Corp. The Company has a nonvoting 95% equity interest in ET Capital. The remaining voting 5% equity interest in ET Capital is owned by Mr. McCreary. As of December 31, 1999, ET Capital owned a $7.8 million second trust mortgage note executed by AGE Institute of Florida, which it acquired from Genesis during 1998. This note is secured by a second lien on 11 Florida skilled nursing facilities owned by AGE Institute of Florida and a second lien on accounts receivable and other working capital assets. The facilities are managed by subsidiaries of Genesis. This note matures on September 30, 2008 with payments of interest only, at a fixed annual rate of 13% due quarterly until the note is paid in full. ET Capital recorded interest income on the note of $1.0 million and $882,000 during 1999 and 1998, respectively. The borrower made all required interest payments during 1999 in accordance with the terms of the note. In September 1999, the senior lender on the $40.0 million first trust mortgage to the AGE Institute of Florida, which is guaranteed by Genesis, notified the borrower that it was in default of the loan due to the borrowers' failure to meet certain financial covenants. In November 1999, ET Capital notified the borrower that it was in default of the $7.8 million second trust mortgage loan held by ET Capital because of the default in the $40.0 million first trust mortgage loan. Subsequently, the senior lender extended the maturity date of the first mortgage trust loan from September 30, 1999 to March 28, 2000 to permit the AGE Institute of Florida time to obtain refinancing of the loan. A letter agreement dated December 22, 1999 made certain modifications and defined certain rights of the senior lender and ET Capital related to their respective loans to the AGE Institute of Florida. The AGE Institute of Florida has been working to obtain replacement financing of the $40.0 million first trust mortgage loan and is seeking a further extension of the loan maturity date from the senior lender. In January 2000, the AGE Institute of Florida received a tax determination letter confirming its tax-exempt status. The Company understands from the AGE Institute of Florida that it is continuing to pursue tax-exempt and other financing sources to refinance the first and second trust mortgages. If the AGE Institute of Florida is unable to refinance the $40.0 million first trust loan, or is otherwise unable to reach acceptable extension terms with the senior lender, the senior lender may take actions to recover its investment in such first trust loan. ET Capital has no control over the actions of the senior lender and such actions could be unfavorable to ET Capital. Based on the Company's assessment of the fair value of the facilities securing the underlying loans, the Company believes that ET Capital's $7.8 million second trust loan is not impaired at December 31, 1999. In addition to the AGE Institute of Florida second trust mortgage note, ET Capital has notes receivable aggregating $4.6 million at December 31, 1999 from two of the Company's Equity Investees and one of the Company's consolidated subsidiaries. These loans mature at various dates from April 2008 to December 2011 and bear interest at 14% per annum with interest and principal payable monthly. ET Capital's long-term debt includes two demand promissory notes payable to the Company aggregating $5.9 million at December 31, 1999 in connection with the above second mortgage note transaction. These notes bear interest at a weighted average rate of 12.1% per annum with interest only payable quarterly. In addition, ET Capital has loans 59 payable to the Company aggregating $3.7 million, bearing interest at 15% and maturing at various dates from April 2008 to December 2011. The Company recorded $1.3 million and $687,000 in interest income for the year ended December 31, 1999 and the period from January 30, 1998 to December 31, 1998, respectively, on the notes payable from ET Capital. The Company also recorded income of $236,000 and $156,000 related to the portion of its equity interest in ET Capital's results of operations for the year ended December 31, 1999 and the period from January 30, 1998 to December 31, 1998, respectively. See Note 6 of the Company's consolidated financial statements included in this Form 10-K. ET Sub-Meridian Limited Partnership, L.L.P. The Company has a 99% limited partnership interest in ET Sub-Meridian. The 1% general partner interest is owned by a limited liability company of which Mr. McCreary is the sole member. ET Sub-Meridian owns the leasehold and purchase option rights to seven skilled nursing facilities located in Maryland and New Jersey, which it purchased from Genesis for $35.5 million in cash and issuance of $8.5 million in term loans during September 1998. The purchase options are exercisable by ET Sub-Meridian in September 2008 for a cash exercise price of $66.5 million. ET Sub-Meridian subleased the facilities to Genesis for an initial ten-year period with a ten-year renewal option. Genesis has guaranteed the subleases. As part of the transaction, the Company agreed to indemnify the property owners for any loss of deferral of tax benefits prior to August 31, 2008 due to a default under a sublease or if a cure of a default by the Genesis subsidiary leasing the facilities resulted in a taxable event to the owners. The Company also agreed to indemnify Genesis for any amounts expended by Genesis under the back-up indemnity provided by Genesis to the current owners for the same loss. The Company recorded losses of $2.3 million and $752,000 related to the portion of its equity interest in ET Sub-Meridian's results of operations for the year ended December 31, 1999 and the period from January 30, 1998 to December 31, 1998, respectively. ET Sub-Meridian has real estate investments and long-term debt of $106.5 million and $106.9 million, respectively, at December 31, 1999. See Note 6 of the Company's consolidated financial statements included in this Form 10-K. At December 31, 1999, ET Sub-Meridian had a $17.6 million subordinated demand loan bearing interest at 12% per annum payable to the Company in connection with the above transaction. The Company recorded $2.1 million and $710,000 in interest income on this loan for the year ended December 31, 1999 and the period January 30, 1998 to December 31, 1998, respectively. 60 ET Sub-Heritage Andover, LLC ET Sub-Vernon Court, LLC ET Sub-Cabot Park, LLC ET Sub-Cleveland Circle, LLC The Company, through four limited liability companies (ET Sub-Heritage Andover, LLC, ET Sub-Vernon Court, LLC, ET Sub-Cabot Park, LLC, and ET Sub-Cleveland Circle, LLC), has member interests in three assisted living facilities and one independent living facility, which it acquired during December 1998 from an unrelated third party. A Genesis Equity Investee leases each of the facilities. The Company is the sole member of ET Sub-Heritage Andover, LLC, which, accordingly, is consolidated into the Company's consolidated financial statements at December 31, 1999. In each of the remaining three limited liability companies, the Company has a 99% member interest. The 1% managing member interest in these three companies is owned by a limited liability company of which Mr. McCreary is the sole member. The Company currently has the option to acquire the 1% managing member interest in ET Sub-Vernon Court, LLC from Mr. McCreary. The option exercise price is $3,200. As the Company has the ability to acquire the 1% managing member interest in ET Sub-Vernon Court, LLC for a nominal amount, this company is consolidated into the Company's consolidated financial statements at December 31, 1999. Three of these limited liability companies have subordinated demand loans in the aggregate amount of $5.1 million with the Company at December 31, 1999, bearing interest at 12% per annum. The Company recorded $381,000 and $50,000 in interest income for the year ended December 31, 1999 and the period from January 30, 1998 to December 31, 1998, respectively, in connection with the demand loans, aggregating $3.1 million at December 31, 1999, payable to the Company by the two unconsolidated limited liability companies. Additionally, three of the limited liability companies have loans payable to ET Capital aggregating $4.6 million at December 31, 1999, maturing at various dates from April 2008 to December 2011 and bearing interest at 14% per annum with interest and principal payable monthly. The Company recorded aggregate losses of $401,000 and $52,000 related to the portion of its equity interest in ET-Sub-Cabot Park, LLC's and ET Sub-Cleveland Circle, LLC's results of operations for the year ended December 31, 1999 and the period from January 30, 1998 to December 31, 1998, respectively. These two entities have real estate investments and aggregate long-term debt of $31.2 million and $30.7 million, respectively, at December 31, 1999. See Note 6 of the Company's consolidated financial statements included in this Form 10-K. Results of Operations The Company had no real estate investment operations prior to consummation of its initial public offering on January 30, 1998. Thus, results 61 of operations for the period from January 30, 1998 to December 31, 1998 represent only eleven months of operations. Additionally, the Company acquired its real estate investments at various times during 1998 through acquisitions of senior housing and other healthcare-related properties and term and construction loans. The Company also made investments in its Equity Investees at various times during 1998. The revenues and expenses generated by the Company's investments were included in its results of operations from the dates of acquisition or investment. Accordingly, the operating results for the year ended December 31, 1999 are not comparable to those of the prior year. Year ended December 31, 1999 compared with the period from January 30, 1998 to December 31, 1998 Revenues Rental revenues of $18.6 million were generated for the year ended December 31, 1999. This represented a 30.7% increase from $14.2 million for the corresponding period in 1998. This increase was a result of 1998 including only eleven months of operations and due to acquisitions of senior housing and other healthcare-related properties at various times during 1998. Interest income of $5.7 million, net of amortization of deferred loan costs of $227,000, was earned for the year ended December 31, 1999. This represented a 26.8% increase from $4.5 million for the corresponding period in 1998. This increase was a result of 1998 including only eleven months of operations and due to additional funding of construction loans at various times during 1998 and 1999. The increase was comprised of an increase of $1.1 million in interest on term and construction loans and an increase of $206,000 in interest earned on excess invested funds and bond and operating reserve funds, offset, in part, by a decrease of $73,000 in connection with a mortgage loan receivable that was collected in December 1998. Interest from unconsolidated Equity Investees of $3.8 million was earned for the year ended December 31, 1999. This represented a 163.4% increase from $1.4 million for the corresponding period in 1998. This increase was a result of a large increase in the average loan balance with these unconsolidated Equity Investees from 1998 to 1999, primarily in connection with two transactions that occurred in September and December 1998. Expenses Property operating expenses principally relate to medical office buildings, which are not subject to leases that require the lessees to pay all operating expenses of the related property. Property operating expenses for these leased properties were $1.1 million for the year ended December 31, 1999. This represented a 15.3% increase from $975,000 for the corresponding period in 1998. This increase was a result of 1998 including less than eleven months of operations for the Company's medical office buildings due to one of these 62 buildings being acquired by the Company during the last half of February 1998. Property operating expenses as a percentage of medical office building rental revenues decreased to 42.9% for the year ended December 31, 1999 as compared to 44.7% for the corresponding period in 1998. Interest expense, which included amortization of deferred financing costs of $1.6 million, was $13.1 million for the year ended December 31, 1999. This represented a 110.0% increase in interest expense from $6.3 million for the corresponding period in 1998. This increase was primarily due to 1998 including only eleven months of operations, increased amortization of deferred financing costs of $1.5 million, increases in third-party debt at various times during 1998 and 1999 to fund operating, investing and financing activities, and a higher interest rate on the Credit Facility. Third-party debt, which includes the Credit Facility and mortgages and notes payable to third parties, increased from $142.8 million at December 31, 1998 to $148.7 million at December 31, 1999. The weighted average interest rate on outstanding third-party debt increased from 7.2% at December 31, 1998 to 8.4% at December 31, 1999. The Company's interest expense increased as a result of the increase in the interest rate on the Credit Facility in June 1999 from a margin of 1.80% over the one-month LIBOR to 2.75%. The Company's interest rate on the Credit Facility was 9.25% at December 31, 1999 versus 7.36% at December 31, 1998. Depreciation was $5.8 million for the year ended December 31, 1999. This represented a 29.8% increase from $4.5 million for the corresponding period in 1998. This increase was a result of 1998 including only eleven months of operations and increases in real estate properties and other depreciable assets that were placed in service at various times during 1998 and 1999. General and administrative expenses were $2.6 million for the year ended December 31, 1999. This represented a 61.1% increase from $1.6 million for the corresponding period in 1998. This increase was a result of 1998 including only eleven months of operations and additional expenses as the Company established its current internal infrastructure. General and administrative expenses increased as a percentage of total rental revenues to 9.3% for the year ended December 31, 1999 as compared to 7.6% for the corresponding period in 1998. This increase was due to the growth in the Company's infrastructure which began in late 1998. These expenses consisted principally of management salaries and benefits and legal and other administrative costs. Separation agreement expenses of $2.8 million were recorded for the year ended December 31, 1999 in connection with Mr. Romanov's resignation from the Company. These expenses are comprised of cancellation of indebtedness payable by Mr. Romanov to the Company of $2.6 million and $200,000 in costs payable to third parties in connection with a separation agreement with Mr. Romanov. Start-up expenses were $3.0 million for the period ended December 31, 1998. These expenses were principally comprised of nonrecurring compensation 63 expense of $2.0 million recorded in connection with the issuance of units of beneficial interest of the operating partnership to certain officers of the Company and approximately $700,000 of amounts reimbursed to Genesis for certain formation expenses. An extraordinary loss of $1.2 million, net of a minority interest benefit of $86,000, was recorded for the year ended December 31, 1999 in connection with the prepayment of an existing mortgage loan. Period from January 30, 1998 to December 31, 1998 Revenues Rental revenues of $12.3 million were generated during the period from January 30, 1998 to December 31, 1998 from the immediate leaseback or assumption of existing leases of 18 healthcare facilities purchased with proceeds of the Offering on January 30, 1998. The acquisition of two additional facilities was delayed pending receipt of necessary consents to transfer the properties to the Company. The Delaware County Memorial Hospital Medical Office Building, which was purchased during February 1998, generated $1.2 million in lease revenues. The Riverview Ridge assisted living facility, which was acquired during March 1998, generated $504,000 in lease revenues. The Company also acquired two assisted living facilities during December 1998, ET Sub-Heritage Andover, LLC and ET Sub-Vernon Court, LLC, which generated $236,000 in lease revenues. Interest income of $4.5 million, net of amortization of deferred loan costs of $220,000, was earned during the period from January 30, 1998 to December 31, 1998. Interest income was comprised of $3.9 million from term and construction loans and a mortgage which matured December 1, 1998, with the remainder resulting from interest on excess invested funds, bond reserve funds and related party notes receivable. Interest on advances to unconsolidated Equity Investees of $1.4 million was earned during the period from January 30, 1998 to December 31, 1998. Fee income of $1.0 million was earned for financial services rendered in connection with certain financial service transactions during the period from January 30, 1998 to December 31, 1998. 64 Expenses Property operating expenses of $975,000 for the period from January 30, 1998 to December 31, 1998 represented 6.9% of rental revenues. Interest expense of $6.3 million for the period from January 30, 1998 to December 31, 1998 was comprised principally of interest of $2.6 million on mortgage indebtedness and $3.4 million on the Credit Facility, with the remainder resulting from amortization of deferred financing costs and interest on tenant security deposits. Depreciation of $4.5 million for the period from January 30, 1998 to December 31, 1998 was recorded in connection with depreciation of the Company's properties placed in service during the period. General and administrative expenses of $1.6 million for the period from January 30, 1998 to December 31, 1998 represented 11.3% of rental revenues. These expenses consisted principally of management salaries and benefits, legal and other administrative costs since the Offering. Start-up expenses were $3.0 million for the period from January 30, 1998 to December 31, 1998. These expenses were comprised principally of nonrecurring compensation expense of $2.0 million recorded in connection with the issuance of units of beneficial interest of the Operating Partnership to certain officers of the Company in connection with its formation and approximately $700,000 of amounts reimbursed to Genesis for other formation expenses. The Company recorded a loss of $648,000 for the period from January 30, 1998 to December 31, 1998 in connection with its portion of the losses incurred by the Company's Equity Investees. The Company recorded a reduction in net income of $273,000 for the period from January 30, 1998 to December 31, 1998 for the portion of its consolidated operations which relate to minority interest owners of the Operating Partnership and other consolidated entities. Liquidity and Capital Resources Net cash provided by operating activities was $16.7 million for the year ended December 31, 1999 compared to $13.7 million for 1998. Net cash used in financing activities was $10.5 million for the year ended December 31, 1999 compared to net cash provided by financing activities of $193.9 million for 1998. Net cash used in financing activities for 1999 principally included borrowings under the Credit Facility of $9.5 million and new mortgages payable issued of $71.1 million reduced by (a) $60.1 million in payments on the Credit Facility, (b) $3.0 million in deferred financing fees and other related costs in connection with amendments to the Credit Facility and new mortgages payable during the period, (c) $10.5 million in distributions to shareholders, (d) $14.7 million in payments on mortgage loans and notes payable, (e) $923,000 in common share repurchases, and (f) a $1.2 million prepayment penalty on a mortgage loan. Net cash provided by financing activities for 1998 included $114.2 million of net proceeds from the Company's initial public offering and borrowings under the Credit Facility of $90.2 million, partially offset by distributions to shareholders of $7.2 million and common share repurchases of $1.7 million. Net cash used in investing activities was $4.9 million for the year ended December 31, 1999 compared to $205.4 million for 1998. The Company used its net cash provided by operating and financing activities for the year ended December 31, 1999 principally to fund its investing activities, including (a) $5.1 million in construction loans, (b) $3.6 million in bond and operating reserve funds and deposits and (c) $1.3 million in purchases of equipment and building renovations, partially offset by $4.3 million in payments received on term and construction loans receivable and $815,000 of proceeds received from unconsolidated entities. Net cash provided by operating and financing activities during the period ended December 31, 1998 was principally used to fund investing activities, including (a) $116.4 million for the acquisition of real estate properties, (b) $50.2 million of term and construction loans made and (c) $38.2 million of investments in the Company's Equity Investees. 65 At December 31, 1999, the Company's consolidated net real estate investments in properties and loans aggregated $220.3 million. Working capital, excluding the current portion of the balance outstanding under the Credit Facility of approximately $0.9 million and $90.2 million as of December 31, 1999 and 1998, respectively, was $3.5 million and $3.0 million at December 31, 1999 and December 31, 1998, respectively. Cash and cash equivalents were $3.6 million and $2.3 million, at December 31, 1999 and December 31, 1998, respectively. As of December 31, 1999, the Company had shareholders' equity of $103.4 million and Credit Facility borrowings and mortgages, bonds and notes payable to third parties aggregating $148.7 million, which represents a debt to equity ratio of 1.44 to 1. This was an increase from 1.26 to 1 at December 31, 1998. This increase was due primarily to a net increase of $5.9 million in such indebtedness and a net decrease in shareholders' equity of $9.9 million. The net increase in third-party indebtedness primarily resulted from new mortgages issued of $71.1 million offset, in part, by repayments of third-party indebtedness aggregating $14.7 million and repayments under the Credit Facility of $50.5 million. The net decrease in shareholders' equity primarily resulted from the declaration and payment of $10.5 million in dividends to shareholders, the repurchase of common shares for $923,000 and a net loss aggregating $1.0 million for the year ended December 31, 1999. The Company funded $5.1 million in construction loan commitments for the year ended December 31, 1999. One construction loan was sold to a commercial bank during 1999. The remaining unfunded portions of construction loan commitments made by the Company are approximately $352,000 at December 31, 1999. The Company expects to continue to fund its remaining construction loan commitments during 2000 with cash flows from operations and funds available under the Credit Facility. The Company previously was obligated to purchase and leaseback, upon the maturity of the related loan or the facility reaching stabilized occupancy, five assisted living facilities (Mifflin, Coquina Place, Lehigh, Berkshire and Harbor Place) securing term loans and two assisted living facilities (Oaks and Sanatoga) securing construction loans made by the Company in January 1998. Of these seven loans, which had an aggregate principal balance at December 31, 1999 of $39.1 million, three loans, secured by the Mifflin, Coquina Place and Oaks facilities, were made to wholly-owned subsidiaries of Genesis, three loans, secured by the Lehigh, Berkshire and Sanatoga facilities, were made to wholly-owned subsidiaries of Multicare and one loan, secured by the Harbor Place facility, was made to a Genesis Equity Investee. The Company believes it is no longer bound by the purchase and leaseback obligations contained in the loan documents because the borrowers have, from time to time, not complied with all loan provisions. The Company is in discussions with Genesis and Multicare about a possible restructuring of transactions between the companies. See "Proposed Loan Restructurings and Related Matters". 66 The Company also has the option to purchase and leaseback one facility from an unaffiliated company for $13.0 million upon maturity of the related construction loan. On January 3, 2000, the term of the Credit Facility was extended from January 1, 2000 to June 30, 2001 through an amendment which also reduced borrowings available under the Credit Facility to $45.4 million. At December 31, 1999, the Company had $39.7 million outstanding under the Credit Facility. The Company paid financing fees and other related costs of approximately $2.0 million for various amendments to the Credit Facility, $1.5 million of which were amortized during 1999 and included as a component of 1999 interest expense. The Credit Facility contains various financial and other covenants, including, but not limited to, minimum net asset value, minimum tangible net worth, a total leverage ratio and minimum interest coverage ratio. The Company's owned properties and properties underlying loans receivable with an aggregate cost of $79.2 million are included in the Credit Facility borrowing base and pledged as collateral at December 31, 1999. The terms require the Company to make monthly payments of principal equal to .22% of the outstanding balance on the first day of the prior calendar month. In addition, the Company is required to pay a monthly facility fee in an amount equal to .0625% of the outstanding balance. Re-borrowings are not permitted after repayment, except for the $5.75 million revolving credit portion of the Credit Facility. As of the date of the 67 agreement, the Company has available the entire $5.75 million, however, availability is restricted to certain specified purposes, including dividend distributions. Dividend distributions over the term of the loan are limited to $3.0 million plus 95% of the Company's funds from operations, as defined by NAREIT prior to January 1, 2000. Amounts outstanding under the Credit Facility bear interest at floating rates ranging from 2.75% to 3.25% over one-month LIBOR, as determined by the percentage of the Credit Facility outstanding as compared to the borrowing base. The interest rate on borrowings outstanding under the Credit Facility at December 31, 1999 was 9.25%, 2.75% over one-month LIBOR. The interest rate on borrowings outstanding under the Credit Facility at December 31, 1998 was 7.36%, 1.80% over one-month LIBOR. On September 9, 1999, the Company completed a $32.7 million financing of five properties arranged by J.P. Morgan. One of the loans is collaterized by two of the properties. Approximately $19.2 million of the debt proceeds were used to pay-down the Company's outstanding Credit Facility to a balance of $75.9 million. The remaining $13.5 million was used to pay-off an existing mortgage secured by two of the properties of $10.4 million, and a prepayment penalty of $1.2 million on the existing mortgage, with the balance of $1.9 million used to pay expenses, interest and required reserves. These mortgages have a ten-year term, a twenty-five year amortization period and a fixed weighted average interest rate of 8.37%. The Company incurred approximately $634,000 in financing costs on this transaction, which is being amortized over the mortgages' ten-year life. On October 5, 1999, the Company completed an $8.5 million financing of two medical office buildings arranged by J.P. Morgan. Approximately $7.9 million of the debt proceeds were used to pay-down the Company's Credit Facility. These remaining $592,000 of proceeds was used to pay expenses, interest and required reserves. These mortgage loans have a ten-year term, a twenty-five year amortization period and a fixed interest rate of 8.35%. The Company incurred approximately $242,000 in financing costs on this transaction, which is being amortized over the mortgages' ten-year life. On November 24, 1999, the Company completed a $30 million financing of four properties arranged by J.P. Morgan. One of the loans is collateralized by two of the properties. Approximately $28 million of the debt proceeds were used to pay-down the Company's outstanding Credit Facility. The remaining $2 million was used to pay transaction-related expenses and required reserves. These mortgages have a three-year term, are interest-only and have a variable interest rate of 3.00% over one-month LIBOR (9.5% at December 31, 1999). The variable interest rates are capped at 17.50%, 13.08%, and 11.98% on the individual 68 mortgages of $4.6 million, $14.9 million and $10.5 million, respectively. The Company incurred approximately $552,000 in financing costs and $53,000 in interest rate cap fees on this transaction, which are being amortized over the mortgages' three-year life. The Company can at its option extend the term of the loans for one two-year period upon payment of a 50 basis point extension fee. The Company expects net cash provided by operations and funds available under the Credit Facility to be sufficient to enable it to meet its short-term cash flow requirements through December 31, 2000, including the funding of $352,000 of construction commitments and shareholder distributions. Any failure by Genesis or Multicare to continue making lease or loan payments to the Company could have a significant adverse effect on the Company's financial condition, results of operations and cash available for distribution, could adversely affect the ability of the Company to maintain distributions at current levels or at all and could adversely affect the ability of the Company to meet its own debt obligations. See "Summary Condensed Consolidated Financial Data of Genesis." The Credit Facility currently matures on June 30, 2001. If the Company is unable to pay-off or obtain replacement financing by June 30, 2001, or is unable to negotiate a further extension of the current credit facility at that time, or for any reason the Company were to be in default under the Credit Facility prior to its maturity, Deutsche Bank could exercise its right to foreclose on the collateral securing the Credit Facility, which would have a significant adverse affect on the Company's ability to continue its operations and meet its obligations, including payment of quarterly shareholder distributions. Moreover, if the Company is unable to raise additional capital through equity financing, or is unable to increase its borrowing capacity, the Company may be limited in its ability to fully fund its long-term capital needs. The interest rate, loan extension fee and loan principal amortization under the terms of the Credit Facility extension, as well as the higher interest expense under the new mortgage financing, will reduce the Company's cash flows and could affect its ability to maintain distributions to its shareholders at current levels. Future increases in interest rates, as well as any defualts by tenants or borrowers on their leases or loans, also could adversely affect the Company's cash flow and its ability to pay its obligations and make distributions at current levels. See "Item 7. Quantitative and Qualitative Disclosures About Market Risk." There can be no assurance that the Company will be able to continue making distributions to its common shareholders at current levels or at all. To qualify as a REIT, the Company must distribute to its shareholders each year at least 95% (90% for taxable years beginning after December 31, 2000) of its net taxable income, excluding any net capital gain. If the Company is unable to make required shareholder distributions, then the Company may be unable to qualify as a REIT and be subject to federal income taxes. Facilities owned by the Company and leased to third parties under percentage and minimum rent triple net leases require the lessee to pay substantially all expenses associated with the operation of such facilities. Facilities owned by the Company and subject to percentage and minimum rent leases represent approximately 92% of the Company's investments in owned facilities at December 31, 1999. As a result of these arrangements, the Company does not believe it will be responsible for significant expenses in connection with the facilities during the terms of the leases. The Company anticipates entering into similar leases with respect to additional properties acquired. 69 However, there can be no assurance the Company will not be responsible for significant expenses of its leased properties in the event one or more of its lessees default on their leases with the Company. In August 1998, the Company implemented a share repurchase program. Under the share repurchase program, the Company was authorized from time to time to repurchase shares in open market transactions up to an amount equal to the Company's excess cash flow on a quarterly and cumulative basis. In March 1999, in light of the Company's cash position and Credit Facility negotiations, the Company suspended the share repurchase program. In November 1999, the Company reinstituted the share repurchase program on a limited basis. The Company completed this limited share repurchase program in December 1999 with the repurchase of 82,100 common shares at an average price of $6.08. The Company repurchased and effectively retired 125,800 and 147,800 common shares for an aggregate purchase price of $923,000 and $1.7 million for the years ended December 31, 1999 and 1998, respectively. These shares are reflected as a reduction of shares issued and outstanding in the accompanying financial statements. Distributions to Shareholders Subsequent to Year End The board of trustees declared a cash distribution on January 13, 2000. The cash distribution of $0.30 per share was paid on February 15, 2000 to common shareholders of record on January 28, 2000, and reflects a reduction from the quarterly distribution rate of $0.365 per share paid in prior periods. 70 Funds from Operations The White Paper on Funds from Operations approved by the Board of Governors of NAREIT in March 1995 defines Funds from Operations as net income (loss), computed in accordance with generally accepted accounting principles, excluding gains (or losses) from debt restructuring and sales of properties, plus real estate related depreciation and after comparable adjustments for the Company's portion of these items related to unconsolidated partnerships and joint ventures. The Company believes that Funds from Operations is helpful to investors as a measure of the performance of an equity REIT because, along with cash flow from operating activities, financing activities and investing activities, it provides investors with an indication of the ability of the Company to incur and service debt, to make capital expenditures and to fund other cash needs. The Company computes Funds from Operations using standards established by NAREIT which may not be comparable to Funds from Operations reported by other REITs that do not define the term using the current NAREIT definition or that interpret the current NAREIT definition differently than the Company. Funds from Operations does not represent cash generated from operating activities using generally accepted accounting principles and should not be considered as an alternative to net income as an indication of the Company's financial performance, or to cash flow from operating activities as a measure of the Company's liquidity, nor is it indicative of funds available to fund the Company's cash needs, including its ability to make cash distributions. Effective January 1, 2000, Funds from Operations will include both recurring and non-recurring results of operations, except those results defined as "extraordinary items" under generally accepted accounting principles and gains and losses from sales of depreciable property. 71 The following table presents the Company's Funds from Operations for the year ended December 31, 1999 and for the period from the Company's Offering on January 30, 1998 to December 31, 1998:
1999 1998 -------- ------- (in thousands) Funds from Operations: Net income (loss) ($1,030) $ 3,973 Minority interest (67) 273 -------- ------- Net income (loss) before minority interest (1,097) 4,246 Adjustments to derive funds from operations: Add: Real estate depreciation and amortization: Consolidated entities 5,963 4,664 Unconsolidated entities 4,492 1,243 Nonrecurring items - start-up expenses - 3,027 Nonrecurring items - separation agreement expenses 2,800 - Nonrecurring items - unamortized financing costs 129 - Extraordinary loss on debt extinguishment 1,296 - -------- ------- Funds from Operations before allocation to minority interest 13,583 13,180 Less: Funds from Operations allocable to minority interest (911) (824) -------- ------- Funds from Operations attributable to the common shareholders $ 12,672 $12,356 ======== =======
Impact of Inflation Earnings of the Company are primarily from long-term investments with fixed interest rates and fixed and percentage rental streams. These investments are mainly financed with a combination of equity, long-term mortgages and borrowings under the revolving lines of credit. During inflationary periods, 72 which generally are accompanied by rising interest rates, the Company's ability to grow may be adversely affected because the yield on new investments may increase at a slower rate than new borrowing costs. Recent Accounting Pronouncements See the Company's consolidated financial statements and related notes for information relating to the impact on the Company of new accounting pronouncements. Year 2000 Considerations The Company completed its assessment of Year 2000 issues related to both its corporate offices and properties. Total expenditures for Year 2000 issue costs did not exceed $5,000. To the date of this report, the Company has not encountered any business interruptions or adverse financial consequences related to the Year 2000 issue. However, there can be no assurance that Year 2000 computer problems which may impact the Company or its lessees or borrowers or other third parties will not have a material adverse effect on the Company's financial condition or results of operations subsequent to the date of this report. Summary Condensed Consolidated Financial Data of Genesis As leases with and loans to Genesis represent a significant portion of the Company's consolidated assets and revenues, the Company has included certain summary condensed consolidated financial data of Genesis for the periods discussed below. The summary condensed consolidated financial data of Genesis was extracted from Genesis' annual report on Form 10-K for the year ended September 30, 1999 as filed with the Securities and Exchange Commission (the "Commission") under the Securities Exchange Act of 1934, as amended, (the "Exchange Act") and the Genesis quarterly report on Form 10-Q for the quarter ended December 31, 1999 as filed with the Commission. The Genesis financial data presented includes only the most recent interim and fiscal year end reporting periods. The Company can make no representation as to the accuracy and completeness of Genesis' public filings. It should be noted that Genesis has no duty, contractual or otherwise, to advise the Company of any events subsequent to such dates which might affect the significance or accuracy of such information. Genesis is subject to the information filing requirements of the Exchange Act, and in accordance therewith, is obligated to file periodic reports, proxy statements and other information with the Commission relating to its business, financial condition and other matters. Such reports, proxy statements and other information may be inspected at the offices of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and should also be available at the following Regional Offices of the Commission: 7 World Trade Center, New York, N.Y. 10048, and 500 West Madison Street, Suite 1400, Chicago, IL 60661. Such reports and other information concerning Genesis can also be inspected at the offices of the New York Stock Exchange, Inc., 20 Broad Street, 73 Room 1102, New York, New York 10005. The SEC also maintains an Internet web site that contains reports, proxy statements and other information regarding issuers, like Genesis, that file electronically with the SEC. The address of that site is http://www.sec.gov. The following table sets forth certain summary condensed consolidated financial data for Genesis as of and for the periods indicated.
For the three months ended For the years ended December 31, September 30, -------------- ----------------------------- 1999 1999 1998 -------------- ---------- ---------- (in thousands, except per share data) Operations Data - ----------------------------------------------- Net revenues $ 586,884 $1,866,426 $1,405,305 Operating income before restructuring and capital costs (1) 65,750 85,879 134,690 Multicare joint venture restructuring charge 420,000 - - Depreciation and amortization 29,118 74,955 52,385 Lease expense 9,527 26,653 31,182 Interest expense, net 52,776 119,220 82,088 Loss before income taxes, equity in net income (loss) of unconsolidated affiliates, extraordinary items and cumulative effect of accounting change (445,671) (134,949) (30,965) Income taxes (7,280) (44,711) (8,158) Loss before equity in net income (loss) of unconsolidated affiliates and extraordinary items (438,391) (90,238) (22,807) Minority interest 6,927 - - Equity in net income (loss) of unconsolidated affiliates - (178,235) 486 Extraordinary items, net of tax - (2,100) (1,924) Cumulative effect of accounting change(3) (10,412) - - Net loss (441,876) (270,573) (24,245) Net loss available to common shareholders(2) ($450,182) ($290,050) ($25,900)
74
For the three months ended For the years ended December 31, September 30, ------------- ----------------------- 1999 1999 1998 ------------- ------ ------ (in thousands, except per share data) Per common share data: Basic Loss before extraordinary items and cumulative effect of accounting change ($10.37) ($8.11) ($0.68) Net loss ($10.62) ($8.17) ($0.74) Weighted average shares of common stock and equivalents 42,390 35,485 35,159 Diluted Loss before extraordinary items and cumulative effect of accounting change ($10.37) ($8.11) ($0.68) Net loss ($10.62) ($8.17) ($0.74) Weighted average shares of common stock and equivalents 42,390 35,485 35,159
- ---------- (1) Capital costs include depreciation and amortization, lease expense and interest expense. (2) Net income (loss) reduced by preferred stock dividends. (3) Cumulative effect of accounting change relates to October 1, 1999 adoption of American Institute of Certified Public Accountant's Statement of Position 98-5 "Reporting on the Costs of Start-Up Activities", which requires start-up costs to be expensed as incurred.
December 31, September 30, September 30, 1999 1999 1998 ------------- ------------- ------------- (dollars in thousands) Balance Sheet Data Working capital $ 301,345 $ 235,704 $ 243,461 Total assets 3,546,350 2,429,914 2,627,368 Long-term debt 2,242,754 1,484,510 1,358,595 Shareholders' equity $ 187,445 $ 587,890 $ 875,072
Multicare On October 8, 1999, Genesis entered into an agreement to restructure its 1997 investment in Multicare. Genesis initially acquired a 43.6% interest in Multicare and was to become sole owner of Multicare at a later date through a cash payment or the issuance of additional Genesis common shares at equivalent value. In the restructuring, Genesis completed the Multicare acquisition through the issuance of convertible preferred shares. The restructuring also included a $50 million cash investment in Genesis by the Multicare financial partners in exchange for Genesis common shares and warrants. This transaction was approved by Genesis' shareholders on November 11, 1999. Prior to the restructuring transaction, Genesis accounted for its investment in Multicare using the equity method of accounting. Under the terms of the restructuring agreement, Genesis has managerial, operational and financial control of Multicare. Accordingly, Multicare's assets, liabilities, revenues and expenses are now consolidated by Genesis. The non-Genesis shareholders' remaining 56.4% interest in Multicare is carried as minority interest. 75 Genesis and Multicate Debt Restructuring Discussions On March 21, 2000, Genesis and Multicare announced the beginning of debt restructuring discussions with their senior lenders with the intention of revising their respective capital structures. Genesis also announced that it did not make a $3.8 million interest payment to its senior debt lenders due March 20, 2000. Both Genesis and Multicare announced their intention not to make interest and principal payments on senior debt and have been prohibited by their senior lenders from making any scheduled interest payments on their publicly traded subordinated debt while discussions were ongoing. Each company cited their inability to sell assets due to the lack of long-term care market financing and the continuing effect of reduced Medicare payments as the causes of these actions. The senior lenders have given Genesis and Multicare a 60-day forbearance period to develop a restructuring plan. Shortly after the announcement, Moody's Investors Service issued a press release announcing that it had downgraded the debt ratings of Genesis and Multicare. In its press release, Moody's indicated that the ratings outlook for both companies was negative. Moody's stated that its rating action reflected the deterioration in the companies' operating results and financial condition which has stemmed from the impact of PPS for Medicare combined with high leverage. Moody's noted that despite cost cutting efforts, operating margins for both companies remain depressed, and planned asset divestitures have not materialized as anticipated. Moody's also stated that restructuring efforts could be adversely impacted by the currently difficult state of the long-term care sector, with several large providers already filing for bankruptcy in recent months. Standard & Poor's also downgraded the debt ratings of Genesis and Multicare. Management of Genesis and Multicare have advised the Company that they expect Genesis and Multicare to continue to make all lease and loan payments to the Company. The Company has no control over Genesis or Multicare, however, and can make no assurance that either of these entities will have sufficient income or assets to enable them to satisfy their obligations under the leases or loans made by the Company to them. Any failure by Genesis or Multicare to continue making payments to the Company could have a significant adverse effect on the Company's financial condition, results of operations and cash available for distribution, could adversely affect the ability of the Company to maintain distributions at current levels or at all and could adversely affect the ability of the Company to meet its own debt obligations. Proposed Loan Restructurings and Related Matters The Company previously was obligated to purchase and leaseback, upon the maturity of the related loan or the facility reaching stabilized occupancy, five assisted living facilities (Mifflin, Coquina Place, Lehigh, Berkshire and Harbor Place) securing term loans and two assisted living facilities (Oaks and Sanatoga) securing construction loans made by the Company in January 1998. Of these seven loans, which had an aggregate principal balance at December 31, 1999 of $39.1 million, three loans, secured by the Mifflin, Coquina Place and Oaks facilities, were made to wholly-owned subsidiaries of Genesis, three loans, secured by the Lehigh, Berkshire and Sanatoga facilities, were made to wholly-owned subsidiaries of Multicare and one loan, secured by the Harbor Place facility, was made to a Genesis Equity Investee. The Company believes it is no longer bound by the purchase and leaseback obligations contained in the loan documents because the borrowers have, from time to time, not complied with all loan provisions. The Company and the borrowers have extended the maturity date of the five term loans through April 28, 2000 to permit them to negotiate and document a proposed restructuring of the relationships among the parties. The terms of the transaction being contemplated do not indicate that the Company's mortgage loans are impaired at December 31, 1999. Under the proposed restructuring, the Company would acquire the Lehigh, Berkshire and Sanatoga facilities in exchange for the release of the Company's loans to the subsidiaries of Multicare. The Company would then net lease these properties to subsidiaries of Genesis for an initial lease term of 14 years, with three five-year renewal options. In addition, the maturity date on the loans for Mifflin, Coquina Place, Oaks and Harbor Place would be extended to April 1, 2001. 76 As part of the proposed restructuring, the Company also would transfer to Genesis the Company's Phillipsburg skilled nursing facility and certain other assets in exchange for the improvements Genesis is making on the Company's Rittenhouse skilled nursing facility. The existing Rittenhouse lease would be amended to, among other things, increase the annual rent to an amount which equals the sum of the annual rents on the current separate leases for Phillipsburg and Rittenhouse. In addition, the Heritage Woods percentage rent lease would be converted into a minimum rent lease, and the Willowbrook lease would be set permanently as a minimum rent lease. Finally, if Genesis refinances the Oaks, Harbor Place, Coquina and Mifflin loans with a third party and does not receive sufficient loan proceeds to cover the existing loan balances, and once the Credit Facility is fully repaid, the parties would agree that any shortfall would be applied against amounts owed by an Equity Investee of the Company to Genesis under an $8.5 million note given to Genesis as part of the purchase price for interests in seven properties acquired from Genesis in 1998. The proposed restructuring is subject to approval by the Boards of the Company, Genesis and Multicare and by each company's principal lenders. No assurance can be given that the proposed restructuring will be completed. 77 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's investments in real estate loans receivable bear interest at fixed rates. Changes in interest rates generally affect the fair market value of the underlying fixed interest rate loans receivable, but not earnings or cash flows. Based on the repayment terms and additional commitments of the loans receivable existing at December 31, 1999, a one-percent increase in the interest rates would change the fair value of these loans receivable by approximately $337,000. The fair value of the Company's real estate loans receivable at December 31, 1999 approximates its carrying value of $48.6 million. The Company's bonds 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 agreements to limit the impact that interest rate fluctuations have on its variable rate mortgages. Interest rate cap agreements are used for hedging purposes rather than for trading purposes. The Company does not utilize interest rate swaps, forward or option contracts on foreign currencies or commodities, or any other type of derivative financial instrument, other than interest rate cap agreements. For 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. 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): 2000 $ 986 2001 1,148 2002 1,243 2003 1,338 2004 1,437 Thereafter 72,853 ------- $79,005 ======= At December 31, 1999, the fair value of the Company's fixed rate mortgages and bonds payable approximates its carrying value of $79.0 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, 1999, the fair value of the Company's variable rate debt approximates its carrying value of $69.7 million. The weighted average interest rate on borrowings outstanding under the Credit Facility and variable rate mortgages was 9.36% at December 31, 1999. Assuming the Credit Facility and variable rate mortgage balances outstanding at December 31, 1999 of $69.7 million remains constant, each one percentage point increase in interest rates from 9.36% at December 31, 1999 would result in an increase in interest expense for the coming year of approximately $697,000, based on the current interest rate terms. Amounts outstanding under the Credit Facility bear interest at floating rates ranging from 2.75% to 3.25% over one-month LIBOR, as determined by the percentage of the Credit Facility outstanding as compared to the borrowing base. Variable-rate mortgages bear interest at 3.00% over one-month LIBOR. The fair value of the Company's interest rate cap agreements at December 31, 1999 approximates its carrying value of approximately $52,000. 78 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." 79 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, 1999 and 1998 and the consolidated statements of operations, shareholders' equity and cash flows for the year ended December 31, 1999 and the period from January 30, 1998 to December 31, 1998. We also have audited the related financial statement schedules III and IV as listed in the accompanying index for Item 14(a) 2 on page 108. These consolidated financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and schedules based upon our audits. We conducted our audits in accordance with generally accepted auditing standards. 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of ElderTrust and subsidiaries as of December 31, 1999 and 1998, and the results of their operations and their cash flows for the year ended December 31, 1999 and the period from January 30, 1998 to December 31, 1998 in conformity with generally accepted accounting principles. 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 14, 2000, except as to Note 5 which is as of March 21, 2000 80 ELDERTRUST CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share amounts)
December December 31, 31, 1999 1998 ------------ ----------- ASSETS Assets: Real estate properties, at cost $165,206 $163,918 Less - accumulated depreciation (10,180) (4,444) Land 16,655 16,655 ------------ ----------- Net real estate properties 171,681 176,129 Real estate loans receivable 48,646 47,899 Cash and cash equivalents 3,605 2,272 Restricted cash 7,194 3,549 Accounts receivable 629 4,412 Accounts receivable from unconsolidated entities 1,068 987 Prepaid expenses 1,000 1,002 Investment in and advances to unconsolidated entities 31,129 34,426 Other assets, net of accumulated amortization and depreciation of $2,148 and $358, respectively 1,530 641 ------------ ----------- Total assets $266,482 $271,317 ============ =========== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Bank credit facility $ 39,670 $ 90,204 Accounts payable and accrued expenses 1,535 1,571 Accounts payable to unconsolidated entities 13 14 Mortgages and bonds payable 109,005 49,594 Notes payable - 3,000 Notes payable to unconsolidated entities 1,079 1,134 Other liabilities 3,751 3,645 ------------ ----------- Total liabilities 155,053 149,162 ------------ ----------- Minority interest 7,989 8,859 Shareholders' Equity: Preferred shares, $.01 par value; 20,000,000 shares authorized; none outstanding - - Common shares, $.01 par value; 100,000,000 shares authorized; 7,119,000 and 7,244,800 shares issued and outstanding, respectively 71 72 Capital in excess of par value 119,106 120,028 Distributions in excess of earnings (14,747) (3,204) Note receivable from former officer for common shares sold (990) (3,600) ------------ ----------- Total shareholders' equity 103,440 113,296 ------------ ----------- Total liabilities and shareholders' equity $266,482 $271,317 ============ ===========
The accompanying notes to consolidated financial statements are an integral part of these statements. 81 ELDERTRUST CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts)
Period from January 30, Year ended 1998 to December 31, December 31, 1999 1998 ------------ ------------ Revenues: Rental revenues $18,552 $14,198 Interest, net of amortization of deferred loan origination costs 5,653 4,458 Interest from unconsolidated equity investees 3,809 1,446 Fee income - 1,018 Other income 127 113 ------- ------- Total revenues 28,141 21,233 ------- ------- Expenses: Property operating expenses 1,124 975 Interest expense, including amortization of deferred finance costs 13,136 6,256 Depreciation 5,788 4,460 General and administrative 2,612 1,621 Separation agreement expenses 2,800 - Start-up expenses - 3,027 ------- ------- Total expenses 25,460 16,339 ------- ------- Net income before equity in losses of unconsolidated entities, minority interest and extraordinary item 2,681 4,894 Equity in losses of unconsolidated entities, net (2,482) (648) Minority interest (19) (273) ------- ------- Net income before extraordinary item 180 3,973 Extraordinary item: Loss on extinguishment of debt (1,296) - Minority interest in extraordinary item 86 - ------- ------- Net income (loss) ($1,030) $ 3,973 ======= ======= Basic and diluted weighted average number of common shares outstanding 7,198 7,369 ======= ======= Net income per share before extraordinary item - basic and diluted $0.03 $0.54 ======= ======= Net income (loss) per share - basic and diluted ($0.14) $0.54 ======= =======
The accompanying notes to consolidated financial statements are an integral part of these statements. 82 ELDERTRUST CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Year Ended December 31, 1999 and Period from January 30 to December 31, 1998 (in thousands)
Note Capital In Distributions Receivable Total Shares Common Excess of In Excess of From Former Shareholders' Outstanding Shares Par Value Earnings Officer Equity ------------ ---------- ----------- ------------ ------------ ----------------- Balances at December 31, 1997 - $ - $ - $ - $ - $ - Issuance of common shares, net 7,393 74 121,770 - - 121,844 Repurchase of common shares (148) (2) (1,742) - - (1,744) Net income - - - 3,973 - 3,973 Distributions - - - (7,177) - (7,177) Loan to officer - - - - (3,600) (3,600) ----- ---- -------- -------- ------- -------- Balances at December 31, 1998 7,245 $ 72 $120,028 ($3,204) ($3,600) $113,296 Repurchase of common shares (126) (1) (922) - - (923) Net loss - - - (1,030) - (1,030) Distributions - - - (10,513) - (10,513) Forgiveness of loan to former officer - - - - 2,600 2,600 Loan repayment from former officer - - - - 10 10 ----- ---- -------- -------- ------- -------- Balances at December 31, 1999 7,119 $ 71 $119,106 ($14,747) ($990) $103,440 ===== ==== ======== ======== ======= ========
The accompanying notes to consolidated financial statements are an integral part of these statements. 83 ELDERTRUST CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Period from January 30, Year ended 1998 to December December 31, 31, 1999 1998 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) ($1,030) $3,973 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 7,526 4,802 Extraordinary loss on extinguishment of debt 1,296 - Non-cash separation expense from debt forgiveness to officer 2,600 - Non-cash compensation expense to officers - 2,018 Non-cash expense in connection with issuance of stock to trustees - 179 Non-cash expense in connection with write-off of unamortized deferred financing costs 129 - Minority interest and equity in losses from unconsolidated entities 2,415 921 Other - 4 Net changes in assets and liabilities: Accounts receivable and prepaid expenses 3,704 (3,385) Accounts payable and accrued expenses (37) 1,585 Other 124 3,645 ------------ ------------ Net cash provided by operating activities 16,727 13,742 ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition and cost of real estate investments - (116,388) Investment in real estate loans receivable (5,095) (50,213) Investment in and advances to unconsolidated entities - (38,226) Capital expenditures (1,330) (243) Proceeds from collection on advances to unconsolidated entities 815 1,462 Payments received on real estate loans receivable 4,348 2,314 Net increase in reserve funds and deposits - restricted cash (3,645) (3,549) Other 52 (559) ------------ ------------ Net cash used in investing activities (4,855) (205,402) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from initial public offering, net of offering costs - 114,213 Payment of deferred financing fees (2,965) (364) Borrowings under Credit Facility 9,518 90,204 Payments under Credit Facility (60,052) - Proceeds from mortgages payable 71,145 - Payments on mortgages payable (11,734) (734) Payments on notes payable (3,000) - Distributions to shareholders (10,513) (7,177) Distributions to minority interests (750) (469) Repurchases of common shares (923) (1,744) Prepayment penalty on mortgage loan (1,157) - Other (108) 3 ------------ ------------ Net cash provided by (used in) financing activities (10,539) 193,932 ------------ ------------ Net increase in cash and cash equivalents 1,333 2,272 Cash and cash equivalents, beginning of period 2,272 - ------------ ------------ Cash and cash equivalents, end of period $3,605 $2,272 ============ ============
The accompanying notes to consolidated financial statements are an integral part of these statements. 84 ELDERTRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999 and 1998 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. ElderTrust had no operations prior to January 30, 1998. At December 31, 1999 and 1998, ElderTrust's total assets consisted primarily of a 93% 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, 1999 and 1998, the Company's assets primarily consisted of (i) a diversified portfolio of 22 healthcare properties, consisting primarily of assisted living and skilled nursing facilities which are leased back to the prior owners or other third parties, (ii) construction loans totaling $21.2 million and $20.4 million, respectively, collateralized by healthcare properties under construction, (iii) term loans totaling $27.4 million and $27.5 million, respectively, collateralized by healthcare properties on which construction has been recently completed but which are still in transition to stabilized occupancy levels, (iv) a 95% non-voting equity interest in an unconsolidated entity (ET Capital Corp.) which owns a $7.8 million second mortgage note, (v) 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 (vi) 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 70% of the Company's consolidated assets at December 31, 1999 and 1998 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. Additionally, Michael R. Walker serves as Chairman of the Board and Chief Executive Officer of Genesis and of ElderTrust. 85 ELDERTRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 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 subsidiaries and controlled partnerships. All significant intercompany balances and transactions have been eliminated. Certain amounts included in the consolidated financial statements as of December 31, 1998 and for the period from January 30, 1998 to December 31, 1998 have been reclassified for comparative purposes to conform to the presentation for 1999. 2. Summary of Significant Accounting Policies Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles 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. 86 ELDERTRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of 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 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. Real Estate Loans Receivable Real estate loans receivable are recorded at cost, less the related allowance for impaired notes receivable, if any. Management, considering current information and events regarding the borrowers' ability to repay their obligations, considers a note to be impaired when it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the note agreement. When a loan is considered to be impaired, the amount of the impairment is measured based on the present value of expected future cash flows discounted at the note's effective interest rate. Impairment losses are included in the allowance for doubtful accounts through a charge to bad debt expense. Cash receipts on the impaired notes receivable are applied to reduce the principal amount of such notes until the principal has been recovered and are recognized as interest income, thereafter. No loans were considered impaired as of December 31, 1999 or 1998. Real estate loans receivable consist of term loans on assisted living facilities in the lease-up phase and construction loans on assisted living or independent living facilities. Interest income on the loans is recognized as earned based upon the principal amount outstanding. The loans are generally fully collateralized by the real estate and may include guarantees. Deferred Loan Costs Deferred loan costs are incurred in the process of acquiring financing for the properties. The Company amortizes these costs over the term of the loan using a method that approximates the interest method. 87 ELDERTRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Federal Income 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 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 annually at least 95% (90% for taxable years beginning after December 31, 2000) of its taxable income to its shareholders and complies with certain other requirements. The Company believes it will continue to qualify as a REIT and, accordingly, no provision has been made for income taxes in the accompanying consolidated 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. Some of the lessees subject to fixed rent leases are required to repair, rebuild and maintain the leased properties. Lease payments are recognized as revenue as earned. 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. 88 ELDERTRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 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. Hedging Transactions The Company utilizes interest rate cap agreements to limit the impact that interest rate fluctuations have on its variable rate mortgages. Cap fees are amortized over the term of the underlying debt instruments using a method that approximates the interest method. Net Income per Share Basic income per share is calculated by dividing net income by the weighted average number of common shares outstanding. Diluted income per share is calculated by dividing net income by the addition of weighted average common shares and common share equivalents outstanding. 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. Start-up Expenses Start-up activities, including organizational costs, are expensed as incurred. Start-up activities are defined as those one-time activities related to opening a new facility, introducing a new product or service, conducting businesses in a new territory, conducting business with a new process in an existing facility, or commencing a new operation. The Company expensed $3.0 million of start-up expenses in 1998. Recent Accounting Pronouncements Derivative Instruments and Hedging Activities In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. SFAS No. 133 requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure the instrument at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. SFAS No. 133 is effective for the Company on January 1, 2001. The Company does not expect the adoption of Statement 133 to have a material adverse impact on the Company's financial condition or results of operations because the Company does not use derivative instruments other than interest rate cap agreements. 89 ELDERTRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 3. Real Estate Loans Receivable The following is a summary of real estate loans receivable (dollars in thousands):
Scheduled Balance at Balance at Type of Interest Maturity December 31, December 31, Property Loan Rate Date 1999 1998 - --------------------------------------- --------------- ------------ ------------- --------------- --------------- Harbor Place Melbourne, FL Term 9.5% 4/2000 $ 4,828 $ 4,828 Mifflin Shillington, PA Term 9.5% 4/2000 5,164 5,164 Coquina Place Ormond Beach, FL Term 9.5% 4/2000 4,577 4,577 Lehigh Macungie, PA Term 10.5% 4/2000 6,665 6,665 Berkshire Reading, PA Term 10.5% 4/2000 6,167 6,269 Oaks Wyncote, PA Construction 9.0% 1/2001 5,033 2,410 Montchanin Wilmington, DE Construction 10.5% 8/2000 9,496 9,216 Mallard Landing Salisbury, MD Construction 15.0% - - 2,054 Sanatoga Pottstown, PA Construction 10.5% 1/2001 6,716 6,716 -------- -------- $ 48,646 $ 47,899 ======== ========
The unfunded portion of construction loan commitments amounted to $352,000 and $7.7 million at December 31, 1999 and 1998, respectively. The construction loan on the Mallard Landing assisted living facility was sold to a commercial bank during 1999. The Company previously was obligated to purchase and leaseback, upon the maturity of the related loan or the facility reaching stabilized occupancy, five assisted living facilities (Mifflin, Coquina Place, Lehigh, Berkshire and Harbor Place) securing term loans and two assisted living facilities (Oaks and Sanatoga) securing construction loans made by the Company in January 1998. Of these seven loans, which had an aggregate principal balance at December 31, 1999 of $39.1 million, three loans, secured by the Mifflin, Coquina Place and Oaks facilities, were made to wholly-owned subsidiaries of Genesis, three loans, secured by the Lehigh, Berkshire and Sanatoga facilities, were made to wholly-owned subsidiaries of The Multicare Companies, Inc., a 43.6% owned consolidated subsidiary of Genesis ("Multicare") and one loan, secured by the Harbor Place facility, was made to a Genesis Equity Investee. The Company believes it is no longer bound by the purchase and leaseback obligations contained in the loan documents because the borrowers have, from time to time, not complied with all loan provisions. 90 ELDERTRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) The Company and the borrowers have extended the maturity date of the five term loans through April 28, 2000 to permit them to negotiate and document a proposed restructuring of the relationships among the parties. The terms of the transaction being contemplated do not indicate that the Company's mortgage loans are impaired at December 31, 1999. Under the proposed restructuring, the Company would acquire the Lehigh, Berkshire and Sanatoga facilities in exchange for the release of the Company's loans to the subsidiaries of Multicare. The Company would then net lease these properties to subsidiaries of Genesis for an initial lease term of 14 years, with three five-year renewal options. In addition, the maturity date on the loans for Mifflin, Coquina Place, Oaks and Harbor Place would be extended to April 1, 2001. As part of the proposed restructuring, the Company also would transfer to Genesis the Company's Phillipsburg skilled nursing facility and certain other assets in exchange for the improvements Genesis is making on the Company's Rittenhouse skilled nursing facility. The existing Rittenhouse lease would be amended to, among other things, increase the annual rent to an amount which equals the sum of the annual rents on the current separate leases for Phillipsburg and Rittenhouse. In addition, the Heritage Woods percentage rent lease would be converted into a minimum rent lease, and the Willowbrook lease would be set permanently as a minimum rent lease. Finally, if Genesis refinances the Oaks, Harbor Place, Coquina and Mifflin loans with a third party and does not receive sufficient loan proceeds to cover the existing loan balances, and once the Credit Facility is fully repaid, the parties would agree that any shortfall would be applied against amounts owed by an equity investee of the Company to Genesis under an $8.5 million note given to Genesis as part of the purchase price for interests in seven properties acquired from Genesis in 1998. The proposed restructuring is subject to approval by the Boards of the Company, Genesis and Multicare and by each company's principal lenders. No assurance can be given that the proposed restructurings will be completed. The Company also has the option to purchase and leaseback to an unaffiliated borrower the facility securing the Montchanin construction loan. This option expires in September 2000. The borrower has the right to extend the maturity for two one-year periods, upon the payment by the borrower to the Company of a 0.5% fee. The option agreement provides for a $13.0 million cash purchase price. 4. Real Estate Investments As of December 31, 1999 and 1998, the Company had investments in 22 real estate properties located in six states. The properties include seven assisted living facilities and one independent living facility with a total of 743 beds, eight skilled nursing facilities with a total of 1,187 beds, and six medical office and other buildings. The Company leases its properties to operators pursuant to long-term triple net leases. 91 ELDERTRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) At December 31, 1999, future minimum lease payments receivable are as follows (dollars in thousands): 2000 $ 19,275 2001 18,962 2002 18,019 2003 17,019 2004 15,708 Thereafter 60,854 -------- $149,837 ======== 5. Concentration of Risk Revenues recorded by the Company under leases with and loans to Genesis or Genesis Equity Investees were approximately $18.4 million and $14.0 million in 1999 and 1998, 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 $2.7 million and $804,000 in 1999 and 1998, respectively. The Company's consolidated revenues and ability to make expected distributions to shareholders depends, in significant part, upon the revenues derived from Genesis. On March 21, 2000, Genesis and Multicare announced the beginning of debt restructuring discussions with their senior lenders with the intention of revising their respective capital structures. Genesis also announced that it did not make a $3.8 million interest payment to its senior debt lenders due March 20, 2000. Both Genesis and Multicare announced their intention not to make interest and principal payments on senior debt and have been prohibited by their senior lenders from making any scheduled interest payments on their publicly traded subordinated debt while discussions were ongoing. Each company cited their inability to sell assets due to the lack of long-term care market financing and the continuing effect of reduced Medicare payments as the causes of these actions. The senior lenders have given Genesis and Multicare a 60-day forbearance period to develop a restructuring plan. Shortly after the announcement, Moody's Investors Service issued a press release announcing that it had downgraded the debt ratings of Genesis and Multicare. In its press release, Moody's indicated that the ratings outlook for both companies was negative. Moody's stated that its rating action reflected the deterioration in the companies' operating results and financial condition which has stemmed from the impact of the prospective payment system ("PPS") for Medicare combined with high leverage. Moody's noted that despite cost cutting efforts, operating margins for both companies remain depressed, and planned asset divestitures have not materialized as anticipated. Moody's also stated that restructuring efforts could be adversely impacted by the currently difficult state of the long-term care sector, with several large providers already filing for bankruptcy in recent months. Standard & Poor's also downgraded the debt ratings of Genesis and Multicare. 92 ELDERTRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Management of Genesis and Multicare have advised the Company that they expect Genesis and Multicare to continue to make all lease and loan payments to the Company. The Company has no control over Genesis or Multicare, however, and can make no assurance that either of these entities will have sufficient income or assets to enable them to satisfy their obligations under the leases or loans made by the Company to them. Any failure by Genesis or Multicare to continue making payments to the Company could have a significant adverse effect on the Company's financial condition, results of operations and cash available for distribution, could adversely affect the ability of the Company to maintain distributions at current levels or at all and could adversely affect the ability of the Company to meet its own debt obligations. If Genesis and Multicare were to cease making lease and loan payments to the Company, the Company may be required to restructure or terminate the underlying leases and may foreclose on the loans, in which event, the Company might be required to find new operators to operate the properties underlying the leases and loans. Under these circumstances, the Company's net income could decline as a result of such restructuring with Genesis or Multicare or could decline due to rents obtainable from any new operator. Depending on the magnitude of the reduction in the Company's net income, the Company would seek to offset the effect of such reduction in net income on the Company's ability to meet its debt service requirements by further reducing the cash distributions paid to the Company's shareholders and minority interests, through asset sales or through other available means. The Company believes that it has the ability to, and, if necessary, intends to, take these actions available to it and, as a result, believes it will be able to continue to satisfy its debt and operating obligations as they come due over the next twelve months. Based on the current quarterly cash distribution rate of $0.30 per common share announced in November 1999, annualized distributions to shareholders and minority interests would approximate $9.2 million during 2000, based on the number of common shares and units currently outstanding. During 1999, the Company's cash flow from operations exceeded its debt service requirements and distributions paid to shareholders and minority interests by $1.2 million. Giving effect to the current quarterly cash distribution rate and year 2000 debt service requirements as of December 31, 1999, the Company's cash flow from operations during 1999 would have exceeded its debt service requirements and distributions paid to shareholders and minority interests by $3.9 million. 93 ELDERTRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) The Company and Genesis have entered into a three-year agreement that expires January 30, 2001, subject to annual renewals thereafter. The agreement provides Genesis with a right of first refusal to lease or manage any assisted living, independent living or skilled nursing facility financed or acquired by the Company within Genesis' markets unless the facility will be leased or managed by a seller or an affiliate of a seller. The agreement also provides the Company with (a) a right of first refusal to purchase and leaseback any assisted living, independent living or skilled nursing facilities which Genesis determines to sell and leaseback as part of a sale/leaseback transaction or transactions, excluding sale/leaseback transactions with commercial banking institutions; (b) a right to offer financing to Genesis and other developers of assisted and independent living facilities which, once developed, will be operated by Genesis; and (c) a right to offer financing to Genesis with respect to any new off-balance sheet financing of skilled nursing facilities currently owned by Genesis. Due, among other things, to a lack of available capital, the Company does not anticipate purchasing any additional facilities under this agreement. 6. Investments in Unconsolidated Entities 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, 1999
ET ET Sub- ET Sub-Meridian, ET Capital Cabot Sub-Cleveland LLP Corp. Park, LLC Circle, LLC Total -------------- ------------- ------------- -------------- ------------ Current assets $ 124 $ 352 $ 2 $ 2 $ 480 Real estate properties (1) 106,547 - 17,115 14,129 137,791 Notes receivable - 12,358 - - 12,358 Other assets 1,110 117 514 490 2,231 Current liabilities 1,260 414 504 463 2,641 Long-term debt (2) 106,919 9,424 16,920 13,791 147,054 Total equity (2,106) 2,991 (61) 140 964 Rental revenue 9,800 - 1,617 1,423 12,840 Interest income 16 1,687 26 27 1,756 Interest expense 8,633 1,289 1,387 1,070 12,379 Depreciation/amortization 3,514 14 560 462 4,550 Net income (loss) (2,341) 249 (313) (91) (2,496) Percent ownership 99% 95% 99% 99%
94 ELDERTRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) As of and for the period ended December 31, 1998
ET ET Sub- ET Sub-Meridian, ET Capital Cabot Sub-Cleveland LLP Corp. Park, LLC Circle, LLC Total -------------- ------------- -------------- -------------- ------------- Current assets $ - $ 57 $ - $ 6 $ 63 Real estate properties (1) 110,024 - 17,670 14,646 142,340 Notes receivable - 12,537 - - 12,537 Other assets 1,169 127 504 474 2,274 Current liabilities 1,458 21 496 577 2,552 Long-term debt (2) 107,400 9,714 17,151 14,088 148,353 Total equity 702 2,986 252 231 4,171 Rental revenue 3,266 - 137 121 3,524 Interest income 3 939 - - 942 Interest expense 2,859 687 127 98 3,771 Depreciation/amortization 1,170 11 46 39 1,266 Net income (loss) (760) 164 (36) (16) (648) Percent ownership 99% 95% 99% 99%
(1) Includes properties under capital lease. (2) Includes capital lease obligations. In connection with ET Sub-Meridian's acquisition of seven skilled nursing facilities from Genesis, 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, 1999, ET Capital Corp. ("ET Capital") owned a $7.8 million second trust mortgage note executed by AGE Institute of Florida, which it acquired from Genesis during 1998. This note is secured by a second lien on 11 Florida skilled nursing facilities owned by AGE Institute of Florida and a second lien on accounts receivable and other working capital assets. The facilities are managed by subsidiaries of Genesis. This note matures on September 30, 2008 with payments of interest only, at a fixed annual rate of 13% due quarterly until the note is paid in full. ET Capital recorded interest income on the note of $1.0 million and $882,000 during 1999 and 1998, respectively. The borrower made all required interest payments during 1999 in accordance with the terms of the note. 95 ELDERTRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) In September 1999, the senior lender on the $40.0 million first trust mortgage to the AGE Institute of Florida, which is guaranteed by Genesis, notified the borrower that it was in default of the loan due to the borrowers' failure to meet certain financial covenants. In November 1999, ET Capital notified the borrower that it was in default of the $7.8 million second trust mortgage loan held by ET Capital because of the default in the $40.0 million first trust mortgage loan. Subsequently, the senior lender extended the maturity date of the first mortgage trust loan from September 30, 1999 to March 28, 2000 to permit the AGE Institute of Florida time to obtain refinancing of the loan. A letter agreement dated December 22, 1999 made certain modifications and defined certain rights of the senior lender and ET Capital related to their respective loans to the AGE Institute of Florida. The AGE Institute of Florida has been working to obtain replacement financing of the $40.0 million first trust mortgage loan and is seeking a further extension of the loan maturity date from the senior lender. In January 2000, the AGE Institute of Florida received a tax determination letter confirming its tax-exempt status. The Company understands from the AGE Institute of Florida that it is continuing to pursue tax-exempt and other financing sources to refinance the first and second trust mortgages. If the AGE Institute of Florida is unable to refinance the $40.0 million first trust loan, or is otherwise unable to reach acceptable extension terms with the senior lender, the senior lender may take actions to recover its investment in such first trust loan. ET Capital has no control over the actions of the senior lender and such actions could be unfavorable to ET Capital. Based on the Company's assessment of the fair value of the facilities securing the underlying loans, the Company believes that ET Capital's $7.8 million second trust loan is not impaired at December 31, 1999. 7. Credit Facility On January 3, 2000, the term of the Company's bank credit facility (the "Credit Facility") was extended from January 1, 2000 to June 30, 2001 through an amendment which also reduced borrowings available under the Credit Facility to $45.4 million. At December 31, 1999 and 1998, the Company had $39.7 million and $90.2 million, respectively, outstanding under the Credit Facility. The Company paid financing fees and other related costs of approximately $2.0 million for various amendments to the Credit Facility, $1.5 million of which were amortized during 1999 and included as a component of 1999 interest expense. The Credit Facility contains various financial and other covenants, including, but not limited to, minimum net asset value, minimum tangible net worth, a total leverage ratio and minimum interest coverage ratio. The Company's owned properties and properties underlying loans receivable with an aggregate cost of $79.2 million are included in the Credit Facility borrowing base and pledged as collateral at December 31, 1999. The terms require the Company to make monthly payments of principal equal to .22% of the outstanding balance on the first day of the prior calendar month. In addition, the Company is required to pay a monthly facility fee in an amount equal to .0625% of the outstanding balance. Re-borrowings are not permitted after repayment, except for the $5.75 million revolving credit portion of the Credit Facility. As of the date of the agreement, the Company has available the entire $5.75 million, however, availability is restricted to certain specified purposes, including dividend distributions. Dividend distributions over the term of the loan are limited to $3.0 million plus 95% of the Company's funds from operations, as defined by the National Association of Real Estate Investment Trusts ("NAREIT") prior to January 1, 2000. Amounts outstanding under the Credit Facility bear interest at floating rates ranging from 2.75% to 3.25% over one-month LIBOR, as determined by the percentage of the Credit Facility outstanding as compared to the borrowing base. The interest rate on borrowings outstanding under the Credit Facility at December 31, 1999 was 9.25%, 2.75% over one-month LIBOR. The interest rate on borrowings outstanding under the Credit Facility at December 31, 1998 was 7.36%, 1.80% over one-month LIBOR. 96 ELDERTRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 8. Mortgages and Bonds Payable The following is a summary of mortgages and bonds payable at December 31, 1999 and 1998 (dollars in thousands):
Effective Balance at Balance at Interest Maturity December December Property Rate Date 31, 1999 31, 1998 --------------------------- ------------ ------------ ------------ ------------ Wayne NRC LIBOR +3.00% 12/2002 $4,600 $ - Pennsburg Manor NRC/ LIBOR Harston Hall NCH +3.00% 12/2002 14,900 - Lopatcong Care Center LIBOR +3.00% 12/2002 10,500 - DCMH Medical Office Building 8.35% 11/2009 5,855 - Professional Office Building I 8.35% 11/2009 2,581 - Pleasant View 8.26% 10/2009 3,890 - Salisbury Medical Office Building 8.16% 10/2009 1,047 - Heritage at North Andover 8.26% 10/2009 8,747 - The Woodbridge Bonds due 2005 7.81% * 9/2005 833 889 Bonds due 2025 7.81% * 9/2025 9,500 9,724 Belvedere NRC/ Chapel NRC 8.46% 10/2009 18,928 - Belvedere NRC/ Chapel NRC 7.81% * 7/2009 - 10,949 Highgate at Paoli Pointe Series A Bonds 7.81% * 9/2025 9,878 9,963 Riverview Ridge 7.81% * 1/2020 2,890 2,944 Vernon Court 5.80% * 5/2025 14,357 14,618 Lacey Branch Office Bldg. 7.81% * 10/2022 499 507 -------- ------- Total $109,005 $49,594 ======== =======
- ------------------- * 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. On September 9, 1999, the Company completed a $32.7 million financing of five properties, Pleasant View, Salisbury Medical Office Building, Heritage at North Andover, Belvedere NRC and Chapel NRC. One of the loans is collateralized by two of the properties. These mortgages have a ten-year term, a twenty-five year amortization period and a fixed weighted average interest rate of 8.37%. The Company incurred 97 ELDERTRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) approximately $634,000 in financing costs on this transaction, which is being amortized over the mortgages' ten-year life. On October 5, 1999, the Company completed an $8.5 million financing of two properties, DCMH Medical Office Building and Professional Office Building I. These mortgage loans have a ten-year term, a twenty-five year amortization period and a fixed interest rate of 8.35%. The Company incurred approximately $242,000 in financing costs on this transaction, which is being amortized over the mortgages' ten-year life. On November 24, 1999, the Company completed a $30 million financing of four properties, Wayne NRC, Pennsburg Manor NRC, Harston Hall NCH and Lopatcong Care Center. One of the loans is collateralized by two of the properties. These mortgages have a three-year term, are interest-only and have a variable interest rate of 3.00% over one-month LIBOR (9.5% at December 31, 1999.) The variable interest rates are capped at 17.50%, 13.08%, and 11.98% on the individual mortgages of $4.6 million, $14.9 million and $10.5 million, respectively. The Company incurred approximately $552,000 in financing costs and $53,000 in interest rate cap fees on this transaction, which are being amortized over the mortgages' three-year life. The Company can at its option extend the term of the loan for one two-year period upon payment of a 50 basis point extension fee. During 1999, the Company recorded an extraordinary loss of $1.2 million, net of a minority interest benefit of $86,000, in connection with the prepayment of the Belvedere NRC/Chapel Hill NRC mortgage loan acquired during 1998. The Company's weighted average effective interest rate on mortgages and bonds payable was 8.4% and 7.2% at December 31, 1999 and 1998, respectively. Scheduled principal payments and bond sinking fund requirements are as follows (dollars in thousands): 2000 $ 986 2001 1,148 2002 31,243 2003 1,338 2004 1,437 Thereafter 72,853 -------- $109,005 ======== 9. Notes Payable The Company has issued five $600,000 promissory notes to the sellers of the Heritage at North Andover property which the Company acquired on December 1, 1998. Interest only was paid monthly on these notes at an interest rate of 7%. The notes matured and were repaid on June 30, 1999. 98 ELDERTRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 10. Operating Lease The Company leases its corporate office space from Genesis under an operating lease, which expires on April 30, 2001. 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. The following is a schedule of future minimum rental payments under the operating lease (dollars in thousands): Year ending December 31: 2000 $ 44 2001 15 ---- Total minimum payments required $ 59 ==== 11. Share Option and Incentive Plan 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, 1999. In conjunction with 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. 99 ELDERTRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) The following summarizes the activity in the 1998 Plan for the years ended December 31, 1999 and 1998:
1999 1998 Weighted Weighted Average Average Exercise Exercise Shares Price Shares Price ------------------------------------------- Options outstanding, beginning of year 536,500 $ 17.86 - - Options granted 231,500 6.50 536,500 $ 17.86 Options exercised - - - - Options forfeited (307,500) 17.99 - - ------------------------------------------ Options outstanding, end of year 460,500 $ 12.06 536,500 $ 17.86 ========================================== Options exercisable, end of year 134,010 $ 16.73 252,300 $ 17.97 ========================================== Weighted average fair value of options granted during the year (calculated as of the grant date): $ 0.07 $ 1.69
Information regarding stock options outstanding and exercisable as of December 31, 1999 is as follows:
Exercise Price Range -------------------------------------- $5.31-$6.69 $15.13-$18.81 ----------------- ----------------- Options outstanding at December 31, 1999: Shares 231,500 229,000 Weighted average exercise price 6.50 17.69 Weighted average remaining contractual life 9.8 years 8.1 years Options exercisable at December 31, 1999: Shares 11,859 122,151 Weighted average exercise price 5.31 17.83
No compensation expense has been recognized for options granted under the 1998 Plan as the Company adopted the disclosure-only provisions of SFAS No. 123, "Stock Based Compensation" during 1998. Under SFAS No. 123, compensation expense of $106,000 and $443,000 would have been recorded in 1999 and 1998, respectively, for the 1998 Plan based upon the fair value of the option awards. Earnings per share would have been ($0.16) and $0.48 in 1999 and 1998, 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 1999 and 1998 using the following assumptions: 100 ELDERTRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1999 1998 ------------------------- Weighted average risk free interest rate 6.2% 5.9% Expected volatility 21.0% 17.7% Expected dividend yield 11.4% 8.1% Weighted average expected life of options 3.89 years 3.65 years
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 key persons of the Company to acquire a proprietary interest in the Company. As of December 31, 1999, a total of 350,000 common shares were reserved for issuance under the 1999 Plan. No shares were granted during 1999. 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 $16,000 and $14,000 in 1999 and 1998, respectively. 12. 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 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 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. 13. Distributions The Company must distribute at least 95% (90% for taxable years beginning after December 31, 2000) 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- 101 ELDERTRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) cash expenses such as depreciation and amortization. Per share distributions on the Company's common shares include the following categories for income tax purposes: 1999 1998 ------- ------ Ordinary income $0.1232 $0.973 Capital gains - - Return of capital 1.3368 - ------- ------ $1.4600 $0.973 ======= ====== On January 13, 2000, the Board of Trustees declared a distribution of $0.30 per share for the period October 1, 1999 through December 31, 1999. The distribution was paid on February 15, 2000 to shareholders of record on January 28, 2000. 14. Earnings Per Share The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share data): 1999 1998 ------- ------- Net income (loss) available for basic and diluted earnings per share ($1,030) $3,973 ======= ======= Shares for basic and diluted net earnings per share 7,198 7,369 ======= ======= Basic and diluted net income (loss) per share ($0.14) $0.54 ======= ======= The effect of outstanding share options is antidilutive and thus not reflected in the determination of weighted average common shares outstanding. The Operating Partnership units are not included in the determination of weighted average common shares outstanding since they are not considered to be common share equivalents as they are redeemable for cash at the Company's discretion. 15. Repurchase of Common Shares In August 1998, the Company implemented a share repurchase program. Under the share repurchase program, the Company was authorized from time to time to repurchase shares in open market transactions up to an amount equal to the Company's excess cash flow on a quarterly and cumulative basis. In March 1999, in light of the Company's cash position and Credit Facility negotiations, the Company suspended the share repurchase program. In November 1999, the Company reinstituted the share repurchase program on a limited basis. The Company completed this limited share 102 ELDERTRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) repurchase program in December 1999 with the repurchase of 82,100 common shares at an average price of $6.08. The Company repurchased and effectively retired 125,800 and 147,800 common shares for an aggregate purchase price of $923,000 and $1.7 million for the years ended December 31, 1999 and 1998, respectively. These shares are reflected as a reduction of shares issued and outstanding in these consolidated financial statements. 16. 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, 1999 approximates fair value because all of the loans mature within one year. The carrying amount of real estate loans receivable at December 31, 1998 approximated fair value as all the loans were acquired in 1998 and were priced at market rates based on their relative credit risk at that time. The carrying amounts of the Company's Credit Facility and variable rate mortgages payable at December 31, 1999 approximate fair value because the borrowings are interest rate variable. The fair value of the Company's fixed rate mortgages and bonds payable at December 31, 1999 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, 1999 is not significant. At December 31, 1998, the carrying amount of the Company's Credit Facility approximated fair value because the borrowings were interest rate variable. The carrying amount of the Company's fixed rate mortgages and bonds payable at December 31, 1998 approximated fair value because they were all acquired in 1998 and restated to a market interest rate at the time of acquisition based on their relative credit risk at that time. The notes payable carrying amount at December 31, 1998 approximated fair value because of their short term nature. The carrying amounts of the Company's interest rate cap agreements at December 31, 1999 approximate fair value based on quoted market prices. 103 ELDERTRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 17. Quarterly Financial Information (Unaudited) The following quarterly financial data summarize the unaudited quarterly results for the years ended December 31, 1999 and 1998 (in thousands, except per share amounts):
Quarter ended ----------------------------------------------------------- 1999 December 31 September 30 June 30 March 31 - -------------------------------------- ----------- ------------ ------------ ------------ Revenues $ 6,949 $ 7,022 $ 7,122 $ 7,048 Net income (loss) before (1,832) extraordinary item 436 617 959 Net income (loss) 436 (593) (1,832) 959 Net income (loss) per share before extraordinary item - basic and diluted 0.06 0.09 (0.25) 0.13 Net income (loss) per share - basic and diluted 0.06 (0.08) (0.25) 0.13 Distributions per share 0.365 0.365 0.365 0.365
Quarter ended ----------------------------------------------------------- 1998 December 31 September 30 June 30 March 31 - -------------------------------------- ----------- ------------ ------------ ------------ Revenues $ 6,336 $ 6,302 $ 5,366 $ 3,230 Net income (loss) 967 2,352 2,008 (1,354) Net income (loss) per share - basic and diluted 0.13 0.32 0.27 (0.18) Distributions per share 0.365 0.365 0.243 -
18. Related Party Transactions In connection with the Offering, the Company issued and sold to Edward B. Romanov, Jr., the Company's President, Chief Executive Officer, 200,000 common shares in a private placement at a per share price equal to the Offering price of $18.00 per share. Mr. Romanov paid for these shares with a 10-year recourse promissory note in favor of the Company, with interest only payable until maturity at an annual rate of 7%. In addition, Mr. Romanov, owned 118,750 units in the Operating Partnership at December 31, 1999 and 1998, which represented an interest of approximately 1.6% and 1.5%, respectively. Mr. Romanov received cash distributions from the Operating Partnership in the amount of $173,400 and $115,500 during 1999 and 1998, respectively. During the second quarter of 1999, Mr. Romanov resigned all positions with the Company and its subsidiaries, including President, Chief Executive Officer and a trustee of the Company, in order to pursue other business interests. In connection with Mr. Romanov's resignation, the Company, among other things, cancelled indebtedness in the amount of $2.6 million owed by Mr. Romanov to the Company. The Company recorded a nonrecurring charge of $2.8 million during 1999 in connection with the cancellation of 104 ELDERTRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) the $2.6 million of indebtedness and $200,000 in costs payable to third parties in connection with a separation agreement. Mr. Romanov's employment agreement was terminated concurrent with his resignation. Also, Mr. Romanov transferred his controlling interest in several entities to Mr. D. Lee McCreary as discussed below. Mr. McCreary acquired the controlling interest in ET Capital Corp. and ET Sub-Meridian, LLP from Mr. Romanov 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. Also, after obtaining final approval from the Massachusetts Housing Finance Agency and the U.S. Department of Housing and Urban Development in January 2000, Mr. McCreary owns a 1% managing member interest in ET Sub-Vernon Court, LLC, ET Sub-Cabot Park, LLC and ET Sub-Cleveland Circle, LLC. In addition, Mr. McCreary owns 12,000 units in the Operating Partnership at December 31, 1999 and 1998, which represented an interest of approximately 0.2%, and received cash distributions of $17,500 and $11,700 during 1999 and 1998, respectively. 19. Minority Interest Immediately after the Offering the Company owned approximately 93.9% of the equity of the Operating Partnership. Subsequent to the Offering, an additional 31,445 Operating Partnership units were issued resulting in the Company owning approximately 93.3% and 93.4% at December 31, 1999 and 1998, respectively. The remaining ownership interests include interests owned directly or indirectly by directors and officers of the Company and Genesis. As of December 31, 1999 and 1998, there are 513,475 units owned by minority interests. 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 after March 30, 1999 ("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. 105 ELDERTRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 20. Supplemental Cash Flow Information: Supplemental cash flow information for the year ended December 31, 1999 and period ended December 31, 1998 is as follows (amounts in thousands):
1999 1998 --------------------- Cash Paid For: Interest $ 11,814 $ 5,412 ===================== Non-Cash Investing and Financing Transactions: Note receivable relating to officer share purchase $ - $ 3,600 ===================== Assumption of debt in connection with acquisition of real estate properties $ - $ 50,328 ===================== Units issued in connection with acquisition of real estate properties $ - $ 10,511 ===================== Notes issued in connection with acquisition of real estate properties $ - $ 4,134 ===================== Non-cash transaction relating to the sale of partnership units: Accounts receivable $ - $ 3,000 ===================== Reduction in advances to unconsolidated entities $ - $ 1,690 ===================== Issuance of partnership units $ - $ 375 ===================== Reduction in cost of real estate investments $ - $ 935 =====================
106 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III 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 2000 annual meeting of shareholders (the "Proxy Statement"). 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. 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. 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. 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 80 Consolidated Balance Sheets as of December 31, 1999 and 1998 81 Consolidated Statements of Operations for the year ended December 31, 1999 and the period from January 30 to December 31, 1998 82 107 Consolidated Statements of Shareholders' Equity for the year ended December 31, 1999 and the period from January 30 to December 31, 1998 83 Consolidated Statements of Cash Flows for the year ended December 31, 1999 and the period from January 30 to December 31, 1998 84 Notes to Consolidated Financial Statements 85 (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 110. (b) Current Reports on Form 8-K: The Company filed a report on Form 8-K dated October 13, 1999 announcing the adoption of the Shareholder's Rights Plan. The Company filed a report on Form 8-K dated November 24, 1999 announcing the adoption of a new distribution policy. (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-1 through S-15. 108 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 April 10, 2000. 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 April 10, 2000. 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: ------------------------------------------ Rodman W. Moorhead, III Trustee 109 EXHIBIT INDEX Exhibit No. Description - ----------- ----------- (a) 3.1 Amended and Restated Declaration of Trust of the Company (a) 3.2 Amended and Restated Bylaws of the Company (h) 4.1 Rights Agreement between ElderTrust and First Union National Bank, as Rights Agent 4.2 Articles Supplementary for Classifying and Designating Series A Junior Participating Preferred Shares (a) 10.1 Second Amended and Restated Agreement of Limited Partnership of the Operating Partnership (a) 10.2 Registration Rights Agreement between the Company and the persons named therein (a) 10.3 1998 Share Option and Incentive Plan * 10.4 1999 Share Option and Incentive Plan * (a) 10.5 Non-Competition Agreement between the Company and Michael R. Walker* (b) 10.6 Indemnification Agreement between the Company and each of its officers and trustees * (b) 10.7 Form of Asset Transfer Agreement between the Operating Partnership and Genesis (Heritage Woods, Willowbrook, Riverview Ridge, Pleasant View, Rittenhouse, Lopatcong, Phillipsburg, Wayne, POB 1, Lacey Bank Building, Belvedere, Chapel Manor and Pennsburg Manor) (b) 10.8 Plan of Asset Transfer and Contribution Agreement between the Operating Partnership and Senior LifeChoice dated as of September 25, 1997 (b) 10.9 Form of Asset Transfer Agreement between the Operating Partnership and certain limited partners in Senior LifeChoice of Paoli, L.P. and Senior LifeChoice of Kimberton, L.P. who are selling partnership interests for cash (b) 10.10 Plan of Asset Transfer and Contribution Agreement among the Operating Partnership, GHV Associates and the partners in GHV Associates dated as of September 25, 1997 (b) 10.11 Plan of Asset Transfer and Contribution Agreement among the Operating Partnership and certain partners in Salisbury Medical Office Building General Partnership dated as of September 25, 1997 (b) 10.12 Asset Transfer Agreement between the Operating Partnership and certain parties in Salisbury Medical Office Building General Partnership who are selling partnership interests for cash (b) 10.13 Form of Term Loan Agreement (Mifflin and Coquina Center (Genesis)) (b) 10.13.1 Form of Secured Note (Mifflin and Coquina Center (Genesis)) (b) 10.13.2 Form of Mortgage and Security Agreement (Mifflin and Coquina Center (Genesis)) (b) 10.13.3 Form of Assignment of Rents and Leases (Mifflin and Coquina Center (Genesis)) (b) 10.13.4 Form of Collateral Assignment of Agreements Affecting Real Estate (Mifflin and Coquina Center (Genesis)) (b) 10.13.5 Form of Guaranty and Suretyship Agreement (Mifflin and Coquina Center (Genesis)) (b) 10.14 Form of Construction Loan Agreement (Oaks (Genesis)) (b) 10.14.1 Form of Secured Note (Oaks (Genesis)) (b) 10.14.2 Form of Mortgage and Security Agreement (Oaks (Genesis)) (b) 10.14.3 Form of Assignment of Rents and Leases (Oaks (Genesis)) (b) 10.14.4 Form of Collateral Assignment of Agreements Affecting Real Estate (Oaks (Genesis)) (b) 10.14.5 Form of Guaranty and Suretyship Agreement (Oaks (Genesis)) 110 (b) 10.15 Form of Assignment and Assumption Agreement between the Operating Partnership and Genesis (Montchanin Construction Loan) (a) 10.16 Assignment and Assumption Agreement between ET Capital Corp. and Genesis (a) 10.16.1 Amendment of Working Capital Loan and Security Agreement among ET Capital Corp., Genesis and AGE Institute of Florida (a) 10.16.2 Intercreditor Agreement among ET Capital Corp., Genesis and AGE Institute of Florida 10.16.3 Intercreditor Agreement among ET Capital Corp., AGE Institute of Florida and Bank of America, N.A. (a) 10.17 Right of First Refusal Agreement between the Operating Partnership and Genesis (a) 10.18 Option Agreement to purchase Holton Point facility between the Operating Partnership and Genesis (b) 10.19 Form of Minimum Rent Lease between the Operating Partnership and Genesis (Heritage Woods, Highgate at Paoli Pointe, Rittenhouse, Lopatcong, Phillipsburg and Wayne) (b) 10.20 Form of Percentage Rent Lease between the Operating Partnership and Genesis (Willowbrook, Riverview Ridge and Pleasant View) (b) 10.21 Form of Fixed Rent Lease between the Operating Partnership and Genesis (Salisbury Medical Office Building, Windsor Office Building and Windsor Clinic and Training Facility) (a) 10.22 Credit Facility (e) 10.23 First Amendment to Credit Facility (a) 10.24 Cross Indemnification and Contribution Agreement between the Company and Genesis (c) 10.25 Subordinated Promissory Note of ET Sub-Meridian payable to the Operating Partnership in the amount of $18.5 million (c) 10.26 Agreement of Limited Partnership of ET Sub-Meridian (c) 10.27 Indemnification Agreement dated September 3, 1998 in favor of the persons and entities listed on Exhibit B thereto (c) 10.28 Indemnification Consent and Acknowledgment Agreement dated September 3, 1998 between the Operating Partnership and Genesis (c) 10.29 Guarantee Agreement dated September 3, 1998 between Operating Partnership and ET Sub-Meridian (c) 10.30 Subordinated Promissory Note of ET Sub-Meridian payable to Genesis in the amount of $8.5 million (d) 10.31 Purchase and Sale Agreement dated as of June 12, 1998 by and among ElderTrust Operating Limited Partnership, Genesis Health Ventures, Inc., collectively "the Purchasers" and Cabot Park Limited Partnership, Cleveland Circle Assisted Living Limited Partnership, Heritage at the Falls Assisted Living Limited Partnership, Vernon Court Associated Partnership, and North Andover Assisted Living Limited Partnership, collectively "the Seller" (d) 10.32 Amendment to the Purchase and Sale Agreement dated July 22, 1998 by and among ElderTrust Operating Limited Partnership, Genesis Health Ventures, Inc. and Robert A. Fishman, counsel for the Seller and the NDNE/ADS Entities (d) 10.33 Second Amendment to the Purchase and Sale Agreement dated July 22, 1998 by and among ElderTrust Operating Limited Partnership, Genesis Health Ventures, Inc. and Robert A. Fishman, counsel for the Seller and the NDNE/ADS Entities (d) 10.34 Amendment to the Purchase and Sale Agreement dated November 30, 1998 by and among ElderTrust Operating Limited Partnership, Genesis Health Ventures, Inc. and Robert A. Fishman, counsel for the Seller and the NDNE/ADS Entities 111 (d) 10.35 Assignment and Assumption of the Purchase and Sale Agreement by and between ElderTrust Operating Limited Partnership and Genesis Health Ventures, Inc. dated November 23, 1998 (e) 10.36 Operating Agreement of ET-Sub Vernon Court, L.L.C. (e) 10.37 Operating Agreement of ET-Sub Cabot Park, L.L.C. (e) 10.38 Operating Agreement of ET-Sub Cleveland Circle, L.L.C. 10.39 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. (f) 10.40 Certificate of Designation for Class C (LIHTC) Units of ElderTrust Operating Limited Partnership (f) 10.41 Second Amendment to Credit Agreement (g) 10.42 Separation Agreement and Release dated July 29, 1999, by and among ElderTrust, ElderTrust Operating Limited Partnership and Edward B. Romanov, Jr.* 10.43 Third Amendment to Credit Agreement 10.44 Second Amendment to Second Amended and Restated Agreement of Limited Partnership of ElderTrust Operating Limited Partnership 10.45 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 for the year ended December 31, 1999 and the period from January 30, 1998 through December 31, 1998 21.1 Subsidiaries of the Registrant 23.1 Consent of KPMG LLP 27.1 Financial Data Schedule - ---------- * 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 S-11 Registration Statement (No. 333-37451). (c) Incorporated by reference to the Company's Form 8-K filed on September 18, 1998. (d) Incorporated by reference to the Company's Form 8-K filed on December 16, 1998. (e) Incorporated by reference to the Company's Form 10-K for the year ended December 31, 1998. (f) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999. (g) Incorporated by reference to the Company's Form 8-K filed on July 29, 1999. (h) Incorporated by reference to the Company's Form 8-K filed on October 13, 1999. 112 Independent Auditors' Report The Partners ET Sub-Meridian Limited Partnership, L.L.P.: We have audited the accompanying balance sheet of ET Sub-Meridian Limited Partnership, L.L.P. (the Partnership) as of December 31, 1999, and the related statements of operations, partners' capital and cash flows for the year ended December 31, 1999. We also have audited the related financial statement schedule III. These financial statements and schedule are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audit. We conducted our audit in accordance with generally accepted auditing standards. 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 audit provides 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, 1999, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule III 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 14, 2000, except as to Note 4 which is as of March 21, 2000 S-1 ET SUB-MERIDIAN LIMITED PARTNERSHIP, L.L.P. BALANCE SHEET (in thousands)
December 31, 1999 -------------- ASSETS Assets: Property under capital lease, less accumulated amortization $106,547 Cash and cash equivalents 124 Restricted cash 1,110 --------- Total assets $107,781 ========= LIABILITIES AND PARTNERS' CAPITAL (DEFICIT) Liabilities: Accounts payable and accrued expenses 126 Accounts payable to related parties 317 Rent received in advance 817 Capital lease obligations 64,373 Notes payable 24,970 Note payable to related party 17,576 Other liabilities 1,708 --------- Total liabilities 109,887 Partners' capital (deficit) (2,106) --------- Total liabilities and partners' capital (deficit) $107,781 =========
The accompanying notes to financial statements are an integral part of these statements. S-2 ET SUB-MERIDIAN LIMITED PARTNERSHIP, L.L.P. STATEMENT OF OPERATIONS (in thousands)
Year ended December 31, 1999 ----------------- Revenues: Rental revenues $9,800 Other income 16 --------- Total revenues 9,816 --------- Expenses: Interest expense 6,495 Interest expense - related party 2,138 Amortization expense 3,514 General and administrative 2 Management fee - related party 8 --------- Total expenses 12,157 --------- Net loss ($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. STATEMENT OF PARTNERS' CAPITAL (DEFICIT) Year Ended December 31, 1999 (in thousands)
General General Partner Partner ------------- ------------ Limited Toughkenamon, ET Meridian, Partner L.L.C L.L.C. Total --------- ------------- ------------ ------- Balances at January 1, 1999 $ 690 $ - $ 12 $ 702 Capital contributions - - - - Net loss (2,318) (12) (11) (2,341) Distributions (449) (18) - (467) Transfer of general partner interest - 1 (1) - -------- ------ ------ -------- Balances at December 31, 1999 ($ 2,077) ($ 29) $ - ($ 2,106) ======== ====== ====== ========
The accompanying notes to financial statements are an integral part of these statements. S-4 ET SUB-MERIDIAN LIMITED PARTNERSHIP, L.L.P. STATEMENT OF CASH FLOWS (in thousands)
Year ended December 31, 1999 ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net loss ($2,341) Adjustments to reconcile net loss to net cash provided by operating activities: Amortization 3,514 Net changes in assets and liabilities: Accounts payable and accrued expenses (198) Accrued interest on capital lease obligations (93) Other 75 ------- Net cash provided by operating activities 957 ------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition and cost of real estate investments (37) Net decrease in reserve funds and deposits -restricted cash 59 ------- Net cash provided by investing activities 22 ------- CASH FLOWS FROM FINANCING ACTIVITIES: Distributions to partners (467) Payments of principal on notes payable (388) ------- Net cash used in financing activities (855) ------- Net increase in cash and cash equivalents 124 Cash and cash equivalents, beginning of period - ------- Cash and cash equivalents, end of period $ 124 ======= Supplemental cash flow information: Cash paid for interest $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, 1999 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"). 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, 1999 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. Additionally, Michael R. Walker serves as Chairman of the Board of Genesis and of ElderTrust. 2. Summary of Significant Accounting Policies Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles 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 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 (continued) Restricted Cash Restricted cash represents future lease payments on the capital lease obligations and principal and interest payments on third party note payable to owners of the skilled nursing facilities required to be maintained in lockbox. Properties Under Capital Lease Properties under capital lease consist of real estate properties, which 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. 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 leased properties under capital lease, 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. Federal Income Taxes No provision for Federal income taxes is necessary in the financial statements of the Partnership because, as a partnership, it is not subject to Federal income tax 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 capitalized expenditures. Subleases provide for minimum rent, based on the lesser of stated amounts in the sublease agreement or minimum rent for the prior year multiplied by two times the cumulative Consumer Price Index ("minimum rent leases"). Sublease payments are recognized as revenue as earned. S-7 ET SUB-MERIDIAN LIMITED PARTNERSHIP, L.L.P. NOTES TO FINANCIAL STATEMENTS (continued) 3. Properties Under Capital Lease The Partnership conducts all of its operations from properties, which are classified as capital leases. As of December 31, 1999, 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, 1999 by major class (dollars in thousands): Real estate properties, at cost $ 100,108 Less-accumulated depreciation (4,684) Land 11,123 ---------- Net real estate properties $ 106,547 ==========
The following is a schedule by years of future minimum lease payments under capital lease together with the present value of the minimum lease payments as of December 31, 1999 (dollars in thousands): 2000 $ 4,245 2001 4,245 2002 4,245 2003 4,245 2004 4,245 Thereafter 83,177 -------- Total minimum lease payments 104,402 Less: amount representing interest at 7.06% per annum 40,029 -------- Present value of minimum lease payments $64,373 ======== The Partnership subleases these properties to operators pursuant to long-term triple net leases. At December 31, 1999, future minimum sublease payments receivable are as follows (dollars in thousands): 2000 $ 9,800 2001 9,800 2002 9,800 2003 9,800 2004 9,800 Thereafter 35,933 ------- $84,933 ======= S-8 ET SUB-MERIDIAN LIMITED PARTNERSHIP, L.L.P. NOTES TO FINANCIAL STATEMENTS (continued) 4. Concentration of Risk Revenues recorded by the Partnership under leases with Genesis aggregated $9.8 million in 1999. The Partnership's revenues and ability to make distributions to partners' depends, in significant part, upon the revenues derived from Genesis. On March 21, 2000, Genesis announced the beginning of debt restructuring discussions with its senior lenders with the intention of revising its capital structure. Genesis also announced that it did not make a $3.8 million interest payment to its senior debt lenders due March 20, 2000. Genesis does not intend to make interest and principal payments on senior debt and has been prohibited by its senior lenders from making any scheduled interest payments on its publicly traded subordinated debt while discussions were ongoing. Genesis cited its inability to sell assets due to the lack of long-term care market financing and the continuing effect of reduced Medicare payments as the causes of these actions. The senior lenders have given Genesis a 60-day forbearance period to develop a restructuring plan. Shortly after the announcement, Moody's Investors Service issued a press release announcing that it had downgraded the debt ratings of Genesis. In its press release, Moody's indicated that the ratings outlook for Genesis was negative. Moody's stated that its rating action reflected the deterioration in the company's operating results and financial condition which has stemmed from the impact of the prospective payment system ("PPS") for Medicare combined with high leverage. Moody's noted that despite cost cutting efforts, operating margins for Genesis remain depressed, and planned asset divestitures have not materialized as anticipated. Moody's also stated that restructuring efforts could be adversely impacted by the currently difficult state of the long-term care sector, with several large providers already filing for bankruptcy in recent months. Standard & Poor's also downgraded the debt ratings of Genesis. Management of Genesis have advised the Partnership that they expect Genesis to continue to make all sublease payments to the Partnership. The Partnership has no control over Genesis, however, and can make no assurance that Genesis will have sufficient income or assets to enable it to satisfy its obligations under the subleases. Any failure by Genesis to continue making payments to the Partnership could have a significant adverse effect on the Partnership's financial condition, results of operations and cash available for distribution and could adversely affect the ability of the Partnership to meet its own debt obligations. If Genesis was to cease making sublease payments to the Partnership, the Partnership may be required to restructure or terminate the underlying subleases, in which event, the Partnership might be required to find new operators to operate the properties underlying the subleases. Under these circumstances, the Partnership's net income could decline as a result of such restructuring with Genesis or could decline due to rents obtainable from any new operator. Depending on the magnitude of the reduction in the Partnership's net income, the Partnership would seek to offset the effect of such reduction in net income on the Partnership's ability to meet its debt service requirements through asset sales or through other available means. The Partnership believes that it has the ability to, and, if necessary, intends to, take these actions available to it and, as a result, believes it will be able to continue to satisfy its debt and operating obligations as they come due over the next twelve months. S-9 ET SUB-MERIDIAN LIMITED PARTNERSHIP, L.L.P. NOTES TO FINANCIAL STATEMENTS (continued) 5. Notes Payable The Partnership partially financed the acquisition of properties under capital lease with notes payables 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 8.0% for the first year, 9.0% for the second year and 10.0% for remainder of the term of the note, with interest payable monthly through September 3, 2003. The note is guaranteed by the Limited Partner. 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% per annum and is due on demand. Under the terms of a modification to the $8.5 million promissory note agreement, the principal payment due on September 3, 1999 was extended until the maturity date of September 3, 2003 and the interest rate on the note was increased to 10% effective September 3, 1999. 6. Partners' Capital The Partnership percentage interests of the partners are as follows: General Partner 1% Limited Partner 99% ---- 100% ==== S-10 ET SUB-MERIDIAN LIMITED PARTNERSHIP, L.L.P. NOTES TO FINANCIAL STATEMENTS (continued) Distribution of Cash: Cash flow, as defined in the partnership agreement, shall be distributed to the partners in proportion to their percentage interests. At December 31, 1999, distributions due but not paid to the Limited Partner totaled $836,000. Distribution of Income or Loss: Net income or net loss of the partnership shall be distributed 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, 1999 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, 1999 is not significant. 8. Related Party Transactions During 1999, the Partnership paid management fees of $8,000 to the Limited Partner for administrative services provided to the Partnership. The Limited Partner is a 93% owned subsidiary of ElderTrust. At December 31, 1999, 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. Mr. McCreary acquired the controlling interest in the Partnership from Mr. Edward B. Romanov, Jr., the former President and Chief Executive Officer of ElderTrust, during 1999 for $20,000. S-11 ET SUB-MERIDIAN LIMITED PARTNERSHIP, L.L.P. SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1999 (dollars in thousands)
Initial Cost to Company Gross Amount at Which Carried at Close of Period ----------------------- Cost ------------------------------------------------ Capitalized Buildings and Subsequent to Buildings and Accum. Description Encumbrances Land Improvements Acquisition Land Improvements Total (1) Deprec. (2) - ----------------------------------------------------------------------------------------------------------------------------- Skilled Nursing Facilities: La Plata, MD $9,208 $1,306 $11,751 $4 $1,306 $11,755 $13,061 $550 Voorhees, NJ 12,173 1,745 15,699 6 1,745 15,705 17,450 735 Centerville, MD 10,033 1,424 12,809 5 1,424 12,814 14,238 600 Dundalk, MD 13,484 1,916 17,241 6 1,916 17,247 19,163 807 Towson, MD 3,883 546 4,912 2 546 4,914 5,460 230 Severna Park, MD 12,958 1,841 16,567 6 1,841 16,573 18,414 775 Westfield, NJ 16,484 2,345 21,092 8 2,345 21,100 23,445 987 -------------------------------------------------- ------------------------------------- ----------- Grand Total $78,223 $11,123 $100,071 $ 37 $11,123 $100,108 $111,231 $4,684 ============= ================================= ===================================== ===========
[RESTUBBED TABLE]
Orig. Construct./ Date Description Renovation Date Acquired - ------------------------------------------------------- Skilled Nursing Facilities: La Plata, MD 1983 Sep-98 Voorhees, NJ 1986/1988 Sep-98 Centerville, MD 1977/1983/1991 Sep-98 Dundalk, MD 1981 Sep-98 Towson, MD 1972-1973 Sep-98 Severna Park, MD 1982 Sep-98 Westfield, NJ 1970/1980/1994 Sep-98 Grand Total
(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 properties under capital lease and related amortization from January 1, 1999 to December 31, 1999:
Accumulated Cost Basis Amortization ----------------- -------------------- Balance at January 1, 1999 $ 111,194 $1,170 Additions during period Acquisitions 37 3,514 Improvements - - ---------- ------- Balance at December 31, 1999 $ 111,231 $4,684 ========== =======
S-12 ELDERTRUST SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1999 (dollars in thousands)
Initial Cost to Company Cost Gross Amount at Which Carried at Close of Period ----------------------- Capitalized ------------------------------------------------ Buildings and Subsequent to Buildings and Accum. Description Encumbrances Land Improvements Acquisition Land Improvements Total (1) Deprec. (2) - ---------------------------------------------------------------------------------------------------------------------------------- Assisted Living Facilities: Agawam, MA $ - (3) $1,249 $11,243 $ - $1,249 $11,243 $12,492 $756 Clark's Summit, PA - (3) 645 5,802 18 645 5,820 6,465 391 Wilkes-Barre, PA 2,724 662 5,932 - 662 5,932 6,594 365 Paoli, PA 9,680 1,128 10,079 - 1,128 10,079 11,207 678 Kimberton, PA 9,945 1,239 10,834 1 1,239 10,835 12,074 729 North Andover, MA 8,770 1,194 10,729 3 1,194 10,732 11,926 408 Newton, MA 13,964 1,793 16,091 5 1,793 16,096 17,889 612 ------------- ---------------------------------- ------------------------------------- ----------- Subtotal 45,083 7,910 70,710 27 7,910 70,737 78,647 3,939 ------------- ---------------------------------- ------------------------------------- ----------- Independent Living Facility: Concord, NH 3,900 407 3,667 - 407 3,667 4,074 247 Skilled Nursing Facilities: Philadelphia, PA - (3) 985 8,821 - 985 8,821 9,806 595 Lopatcong, NJ 10,500 1,490 13,406 - 1,490 13,406 14,896 902 Phillipsburg, NJ - 679 6,110 10 679 6,120 6,799 411 Wayne, PA 4,600 662 5,921 1,761 662 7,682 8,344 410 Chester, PA 18,975 (4) 1,187 10,670 - 1,187 10,670 11,857 717 Philadelphia, PA - (4) 1,230 11,074 - 1,230 11,074 12,304 745 Flourtown, PA 14,900 (5) 784 7,052 - 784 7,052 7,836 474 Pennsburg, PA - (5) 1,091 9,813 - 1,091 9,813 10,904 660 --------------------------------------------------- ------------------------------------- ----------- Subtotal 48,975 8,108 72,867 1,771 8,108 74,638 82,746 4,914 ------------- ---------------------------------- ------------------------------------- ----------- Medical Office and Other Buildings: Upland, PA 2,585 - 4,383 72 - 4,455 4,455 299 Drexel Hill, PA 5,865 - 8,132 26 - 8,158 8,158 548 Salisbury, MD 1,050 135 1,212 - 135 1,212 1,347 81 Windsor, CT - (3) - 1,481 - - 1,481 1,481 94 Windsor, CT - (3) 33 295 - 33 295 328 20 Forked River, NJ 494 62 563 - 62 563 625 38 ------------- ---------------------------------- ------------------------------------- ----------- Subtotal 9,994 230 16,066 98 230 16,164 16,394 1,080 ------------- ---------------------------------- ------------------------------------- ----------- ------------- ---------------------------------- ------------------------------------- ----------- Grand Total $107,952 $16,655 $163,310 $1,896 $16,655 $165,206 $181,861 $10,180 ============= ================================== ===================================== ===========
(1) The aggregate cost for Federal income tax purposes is $173,345. (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 $100.5 million. (4) This is a single note which covers both properties. (5) This is a single note which covers both properties. S-13 [RESTUBBED TABLE]
Orig. Construct./ Date Description Renovation Date Acquired - ------------------------------------------------------------------------------- Assisted Living Facilities: Agawam, MA 1997 Jan-98 Clark's Summit, PA 1996 Jan-98 Wilkes-Barre, PA 1993 Mar-98 Paoli, PA 1995 Jan-98 Kimberton, PA 1996 Jan-98 North Andover, MA 1995 Dec-98 Newton, MA 1905/1995 Dec-98 Subtotal Independent Living Facility: Concord, NH 1926 Jan-98 Skilled Nursing Facilities: Philadelphia, PA 1930/1993 Jan-98 Lopatcong, NJ 1984/1992 Jan-98 Phillipsburg, NJ 1930/1993 Jan-98 Wayne, PA 1920/1999 Jan-98 Chester, PA 1960/1983 Jan-98 Philadelphia, PA 1973 Jan-98 Flourtown, PA 1977/1991 Jan-98 Pennsburg, PA 1982 Jan-98 Subtotal Medical Office and Other Buildings: Upland, PA 1977 Jan-98 Drexel Hill, PA 1984/1997 Feb-98 Salisbury, MD 1984 Jan-98 Windsor, CT 1996 Jan-98 Windsor, CT 1934/1965 Jan-98 Forked River, NJ 1996 Jan-98 Subtotal Grand Total
ELDERTRUST SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1999 (continued) (dollars in thousands) The following represents a rollforward of the balance of real estate properties and related accumulated depreciation from January 1, 1998 to December 31, 1999:
Accumulated Cost Basis Depreciation ------------------- --------------------- Balance at January 1, 1998 - - Additions during period Acquisitions $ 180,426 $ 4,442 Improvements 147 2 ---------- -------- Balance at December 31, 1998 180,573 4,444 ---------- -------- Additions during period Acquisitions - 5,723 Improvements 1,288 13 ---------- -------- Balance at December 31, 1999 $ 181,861 $10,180 ========== ========
S-14 ELDERTRUST SCHEDULE IV MORTGAGE LOANS ON REAL ESTATE December 31, 1999 (dollars in thousands)
Final Periodic Number of Interest Maturity Payment Description Beds Rate Date Term Prior Liens - ------------------------------------------------------------------------------------------------------------- Term Loans - Assisted Living Facilities: Melbourne, FL 92 9.50% 4/2000 (2) None Shillington, PA 67 9.50% 4/2000 (2) None Ormond Beach, FL 60 9.50% 4/2000 (2) None Macungie, PA 70 10.50% 4/2000 (2) None Reading, PA 64 10.50% 4/2000 (2) None --- Subtotal 353 --- Construction Loans - Assisted Living Facilities: Wyncote, PA 52 9.00% 1/2001 (2) None Wilmington, DE 92 10.50% 8/2000 (3) None Pottstown, PA 70 10.50% 1/2001 (2) None --- Subtotal 214 --- Grand Total 567 ===
[RESTUBED FOR TABLE ABOVE]
Carrying Amount Loans Subject to Face Amount of Mortgages at DelinquentPrincipal Description of Mortgages December 31, 1999(1) or Interest - -------------------------------------------------------------------------------------------------------- Term Loans - Assisted Living Facilities: Melbourne, FL $ 4,828 $ 4,828 - Shillington, PA 5,164 5,164 - Ormond Beach, FL 4,577 4,577 - Macungie, PA 6,665 6,665 - Reading, PA 6,269 6,167 - ------------------------- Subtotal 27,503 27,401 ------------------------- Construction Loans - Assisted Living Facilities: Wyncote, PA 5,380 5,033 - Wilmington, DE 9,500 9,496 - Pottstown, PA 6,511 6,716 - ------------------------- Subtotal 21,391 21,245 ------------------------- Grand Total $48,894 $48,646 =========================
(1) The aggregate cost for Federal income tax purposes is $48,646. (2) Interest only payable to maturity date. The Company previously had the obligation to purchase the facility upon maturity or once stabilized occupancy was achieved, as described in the loan agreement. (3) Interest only payable to maturity date. The Company has the option to purchase the facility at maturity as described in the loan agreement. Mortgage loan activity for the years ended December 31, 1999 and 1998 is as follows: 1999 1998 ------- ------- Balance, beginning of year $47,899 $ - Additions during the period: New mortgage loans 5,095 50,213 Other - - Deductions during the period: Collections of principal (4,348) (2,314) ------- ------- Balance, end of year $48,646 $47,899 ======= ======= S-15 EX-4.2 2 EXHIBIT 4.2 ELDERTRUST Articles Supplementary of ElderTrust Classifying and Designating a Series of Preferred Shares as Series A Junior Participating Preferred Shares and Fixing Distribution and Other Preferences and Rights of Such Series ElderTrust, a Maryland real estate investment trust (the "Company"), hereby certifies to the State Department of Assessments and Taxation of Maryland pursuant to Section 8-203 of the Annotated Code of Maryland that: FIRST: Pursuant to authority granted by the Articles of Amendment and Restatement of Declaration of Trust of the Company, the Board of Trustees on October 13, 1999 adopted a resolution designating and classifying 16,000 unissued and unclassified preferred shares of beneficial interest, par value $.01 per share, of the Company as Series A Junior Participating Preferred Shares. SECOND: The following is a description of the Series A Junior Participating Preferred Shares, including the preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends and distributions, qualifications, terms and conditions of redemption thereof: Section 1. Number of Shares and Designation. This class of preferred shares of beneficial interest shall be designated as "Series A Junior Participating Preferred Shares," having a par value $.01 per share, and the number of shares which shall constitute such series shall be 16,000. Such number may be increased or decreased from time to time by resolution of the Board of Trustees and by the filing of articles supplementary in accordance with the Annotated Code of Maryland; provided, that no decrease shall reduce the number of Series A Junior Participating Preferred Shares to a number less than the number of such shares then outstanding plus the number of such shares reserved for issuance upon the exercise of outstanding options, rights or warrants or upon the conversion of any outstanding securities issued by the Company convertible into Series A Junior Participating Preferred Shares. Section 2. Definitions. For purposes of the Series A Junior Participating Preferred Shares, the following terms shall have the meanings indicated: "Adjustment Number" shall have the meaning set forth in Section 6(A). "Average Market Value" shall have the meaning set forth in Section 8. "Board of Trustees" shall mean the Board of Trustees of the Company or any committee authorized by such Board of Trustees to perform any of its responsibilities with respect to the Series A Preferred Shares. "Business Day" shall mean any day other than a Saturday, Sunday or a day on which state or federally chartered banking institutions in New York City, New York are not required to be open. "Common Adjustment" shall have the meaning set forth in Section 6(A). "Parity Shares" shall have the meaning set forth in Section 5(A). "Quarterly Distribution Payment Date" shall mean the 15th day (or, if such day is not a Business Day, the next Business Day thereafter) of February, May, August and November of each year, commencing November 15, 1999. "Rights Declaration Date" shall mean October 13, 1999. "Senior Preferred Shares" shall mean preferred shares of beneficial interest of the Company ranking prior and superior to the Series A Preferred Shares with respect to dividends and distributions of the Company. "Series A Junior Liquidation Preference" means an amount per Series A Preferred Share equal to $35,000. "Series A Preferred Shares" shall mean the Series A Junior Participating Preferred Shares. Section 3. Dividends and Distributions. (A) Subject to the prior and superior rights of the holders of any Senior Preferred Shares (or any similar shares of beneficial interest) of the Company, the holders of Series A Preferred Shares shall be entitled to receive, when, as and if declared by the Board of Trustees out of funds legally available for payment of dividends or distributions, quarterly dividends or distributions payable in cash on the Quarterly Distribution Payment Date, commencing on the first Quarterly Distribution Payment Date after first issuance of a Series A Preferred Share or fraction thereof, in an amount per share (rounded to the nearest cent) equal to the greater of (a) $10.00 or (b) subject to the provision for adjustment hereinafter set forth, one thousand (1,000) times the aggregate per share amount of all cash dividends and distributions, and one thousand (1,000) times the aggregate per share amount (payable in kind) of all non-cash dividends and 2 distributions (other than dividends and distributions payable in Common Shares of the Company, or a subdivision of the outstanding Common Shares (by reclassification or otherwise)) declared on the Common Shares, since the immediately preceding Quarterly Distribution Payment Date, or, with respect to the first Quarterly Distribution Payment Date, since the first issuance of a Series A Preferred Share or fraction thereof. In the event the Company shall at any time after October 13, 1999 (the "Rights Declaration Date") (i) declare or pay any dividend or distribution on Common Shares payable in Common Shares, (ii) subdivide the outstanding Common Shares, or (iii) combine the outstanding Common Shares into a smaller number of shares, then in each such case the amount to which holders of Series A Preferred Shares were entitled immediately prior to such event under clause (b) of the preceding sentence shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of Common Shares outstanding immediately after such event and the denominator of which is the number of Common Shares that were outstanding immediately prior to such event. (B) The Company shall declare a dividend or distribution on the Series A Preferred Shares as provided in paragraph (A) above immediately after it declares a dividend or distribution on any Common Shares (other than a dividend or distribution payable in Common Shares); provided, that, in the event no dividend or distribution shall have been declared on the Common Shares during the period between any Quarterly Distribution Payment Date and the next subsequent Quarterly Distribution Payment Date, a dividend of $10.00 per Series A Preferred Share shall nevertheless be payable on such subsequent Quarterly Distribution Payment Date. (C) Dividends and distributions shall begin to accrue and be cumulative on outstanding Series A Preferred Shares from the Quarterly Distribution Payment Date next preceding the date of issue of such Series A Preferred Shares, unless the date of issue of such shares is prior to the record date set for the first Quarterly Distribution Payment Date, in which case dividends and distributions on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Quarterly Distribution Payment Date or is a date after the record date for the determination of holders of Series A Preferred Shares entitled to receive a quarterly distribution and before such Quarterly Distribution Payment Date, in either of which events such dividends and distributions shall begin to accrue and be cumulative from such Quarterly Distribution Payment Date. Accrued but unpaid dividends and distributions shall not bear interest. Dividends and distributions paid on the Series A Preferred Shares in an amount less than the total amount of such dividends and distributions at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of Trustees may fix a record date for the determination of holders of Series A Preferred Shares entitled to receive payment of a dividend or distribution declared thereon, which record date shall be no more than 60 days prior to the date fixed for the payment thereof. Section 4. Voting Rights. The holders of Series A Preferred Shares shall have the following voting rights: 3 (A) Subject to the provision for adjustment hereinafter set forth, each Series A Preferred Share shall entitle the holder thereof to one thousand (1,000) votes on all matters submitted to a vote of the shareholders of the Company. In the event the Company shall at any time after the Rights Declaration Date (i) declare any dividend or distribution on Common Shares payable in Common Shares, (ii) subdivide the outstanding Common Shares, or (iii) combine the outstanding Common Shares into a smaller number of shares, then in each such case the number of votes per share to which holders of Series A Preferred Shares were entitled immediately prior to such event shall be adjusted by multiplying such number by a fraction, the numerator of which is the number of Common Shares outstanding immediately after such event and the denominator of which is the number of Common Shares that were outstanding immediately prior to such event. (B) Except as otherwise provided by law, the holders of Series A Preferred Shares and the holders of Common Shares and any other shares of beneficial interest of the Company having general voting rights shall vote together as one class on all matters submitted to a vote of shareholders of the Company. (C) Except as set forth herein, holders of Series A Preferred Shares shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Shares as set forth herein) for taking any corporate action. Section 5. Certain Restrictions. (A) Whenever dividends or distributions payable on the Series A Preferred Shares as provided in Section 3 are not paid, thereafter and until such dividends and distributions, whether or not declared, on Series A Preferred Shares outstanding shall have been paid in full, the Company shall not: (i) declare or pay dividends or distributions on, or redeem or purchase or otherwise acquire for consideration, any shares of beneficial interest ranking junior (either as to dividends or distributions, or upon liquidation, dissolution or winding up) to the Series A Preferred Shares; or (ii) declare or pay dividends or distributions on any shares of beneficial interest ranking on a parity (either as to dividends or distributions, or upon liquidation, dissolution or winding up) (the "Parity Shares") with the Series A Preferred Shares, except dividends or distributions paid ratably on the Series A Preferred Shares and all such Parity Shares on which dividends and distributions are payable in proportion to the total amounts to which the holders of all such shares are then entitled; or 4 (iii) redeem or purchase or otherwise acquire for consideration any Parity Shares, provided that the Company may at any time redeem, purchase or otherwise acquire any such Parity Shares in exchange for any Shares of the Company ranking junior (either as to dividends or distributions, or upon dissolution, liquidation or winding up) to the Series A Preferred Shares; or (iv) redeem or purchase or otherwise acquire for consideration any Series A Preferred Shares, or any Parity Shares, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Trustees) to all holders of such shares upon such terms as the Board of Trustees, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes. (B) The Company shall not permit any subsidiary of the Company to purchase or otherwise acquire for consideration any shares of beneficial interest of the Company unless the Company could, under paragraph (A) of this Section 5, purchase or otherwise acquire such shares at such time and in such manner. Section 6. Liquidation, Dissolution or Winding Up. (A) Upon any liquidation (voluntary or otherwise), dissolution or winding up of the Company, no dividend or distribution shall be made to the holders of shares of beneficial interest ranking junior (either as to dividends or distributions, or upon liquidation, dissolution or winding up) to the Series A Preferred Shares unless, prior thereto, the holders of Series A Preferred Shares shall have received (i) $35,000 per share, plus (ii) any unpaid dividends and distributions accrued and unpaid thereon, whether or not declared, to the date of such payment (the "Series A Junior Liquidation Preference"). Following the payment of the full amount of the Series A Junior Liquidation Preference, no additional dividends or distributions shall be made to the holders of Series A Preferred Shares unless, prior thereto, the holders of Common Shares shall have received an amount per share (the "Common Adjustment") equal to the quotient obtained by dividing (i) the Series A Junior Liquidation Preference by (ii) 1,000 (as appropriately adjusted as set forth in subparagraph (C) below to reflect such events as share splits, share dividends and share distributions, and recapitalizations with respect to the Common Shares) (such number in clause (ii) immediately above as so adjusted being referred to as the "Adjustment Number"). Following the payment of the full amount of the Series A Junior Liquidation Preference and the Common Adjustment in respect of all outstanding Series A Preferred Shares and Common Shares, respectively, holders of Series A Preferred Shares and holders of Common Shares shall receive their ratable and proportionate share of the remaining assets to be distributed in the ratio of the Adjustment Number to one (1) with respect to such Series A Preferred Shares and Common Shares, on a per share basis, respectively. 5 (B) In the event, however, that there are not sufficient assets available to permit payment in full of the Series A Junior Liquidation Preference and the liquidation preferences of all other series of Preferred Shares, if any, which rank on a parity with the Series A Preferred Shares, then such remaining assets shall be distributed ratably to the holders of such parity shares in proportion to their respective liquidation preferences. In the event, however, that there are sufficient assets available to permit payment in full of the Common Adjustment, then such remaining assets shall be distributed ratably to the holders of Common Shares. (C) In the event the Company shall at any time after the Rights Declaration Date (i) declare any dividend or distribution on Common Shares payable in Common Shares, (ii) subdivide the outstanding Common Shares, or (iii) combine the outstanding Common Shares into a smaller number of shares, then in each such case the Adjustment Number in effect immediately prior to such event shall be adjusted by multiplying such Adjustment Number by a fraction the numerator of which is the number of Common Shares outstanding immediately after such event and the denominator of which is the number of Common Shares that were outstanding immediately prior to such event. Section 7. Consolidation, Merger, Etc. In case the Company shall enter into any consolidation, merger, combination or other transaction in which the Common Shares are exchanged for or changed into other shares or securities, cash and/or any other property, then in any such case the Series A Preferred Shares shall at the same time be similarly exchanged or changed into such shares or securities, cash and/or any other property in an amount per share (subject to the provision for adjustment hereinafter set forth) equal to one thousand (1,000) times the aggregate amount of shares, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each Common Shares is changed or exchanged. In the event the Company shall at any time after the Rights Declaration Date (i) declare any dividend or distribution on Common Shares payable in Common Shares, (ii) subdivide the outstanding Common Shares, or (iii) combine the outstanding Common Shares into a smaller number of shares, then in each such case the amount set forth in the preceding sentence with respect to the exchange or change of Series A Preferred Shares (as previously adjusted, if any prior adjustment has occurred) shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of Common Shares outstanding immediately after such event and the denominator of which is the number of Common Shares that were outstanding immediately prior to such event. Section 8. Redemption at the Option of the Board of Trustees. The outstanding Series A Preferred Shares may be redeemed as a whole, but not in part, at any time, or from time to time, at the option of the Board of Trustees, at a cash price per share equal to 105 percent of (i) the product of the Adjustment Number times the Average Market Value (as such term is hereinafter defined) of the Common Shares, plus (ii) all dividends and distributions which on the redemption date are payable on the shares to be redeemed and have not been paid, earned or declared and a sum sufficient for the payment thereof set apart, without interest. The "Average Market Value" of the Series A Preferred Shares shall equal the average of the closing sale prices of the Common Shares during the 30-day period immediately preceding the date before the 6 redemption date on the Composite Tape for New York Stock Exchange Listed Stocks, or, if such shares are not quoted on the Composite Tape, on the New York Stock Exchange, or, if such shares are not listed on such Exchange, on the principal United States securities exchange registered under the Securities Exchange Act of 1934, as amended, on which such shares are listed, or, if such shares are not listed on any such exchange, the average of the closing sale prices with respect to a Common Shares during such 30-day period, as quoted on the National Association of Securities Dealers, Inc. Automated Quotations System or any system then in use, or if no such quotations are available, the fair market value of the Common Shares as determined by the Board in good faith. Section 9. Shares to be Retired. Any Series A Preferred Shares purchased or otherwise acquired by the Company in any manner whatsoever shall be retired and canceled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued preferred shares of beneficial interest of the Company and may be reissued as part of a new series of preferred shares to be created by resolution or resolutions of the Board of Trustees, subject to the conditions and restrictions on issuance set forth herein, or reclassified as Common Shares or other shares of the Company as provided in the Company's Declaration of Trust. Section 10. Ranking. Notwithstanding anything contained herein to the contrary, the Series A Preferred Shares shall rank junior to all other series of the Company's Preferred Shares as to voting rights, the payment of dividends and distributions, and the distribution of assets in liquidation, unless the terms of any such series shall provide otherwise. Section 11. Amendment. The Declaration of Trust of the Company shall not be further amended, nor shall Articles Supplementary be filed or amended, in any manner which would materially alter or change the powers, preferences or special rights of the Series A Preferred Shares so as to affect them adversely without the affirmative vote of the holders of at least a majority of the outstanding Series A Preferred Shares, voting separately as a class. Section 11. Fractional Shares. Series A Preferred Shares may be issued in fractions of a share which shall entitle the holders, in proportion to such holders' fractional shares, to exercise voting rights, receive dividends, participate in distributions and have the benefit of all other rights of holders of Series A Preferred Shares. [Page Break Intentionally Inserted] 7 IN WITNESS WHEREOF, the Company has caused these Articles Supplementary to be duly executed by its President and Chief Executive Officer and attested by its Assistant Secretary this 13th day of October, 1999. ELDERTRUST By: /s/ D. Lee McCreary, Jr. ------------------------------------ Name: D. Lee McCreary, Jr. Title: President and Chief Executive Officer I, Kelly McAteer, Assistant Secretary, hereby acknowledge on behalf of ElderTrust that the foregoing Articles Supplementary are the act of said trust under the penalties of perjury. Attest: /s/ Kelly McAteer - ---------------------- Kelly McAteer 8 EX-10.4 3 EXHIBIT 10.4 ELDERTRUST 1999 SHARE OPTION AND INCENTIVE PLAN
TABLE OF CONTENTS Page ---- SECTION 1. GENERAL PURPOSE OF THE PLAN; DEFINITIONS..............................................................1 SECTION 2. ADMINISTRATION OF PLAN; ADMINISTRATOR AUTHORITY TO SELECT PARTICIPANTS AND DETERMINE AWARDS...........2 SECTION 3. SHARES ISSUABLE UNDER THE PLAN; RECAPITALIZATIONS; MERGERS; SUBSTITUTE AWARDS.........................3 SECTION 4. ELIGIBILITY...........................................................................................4 SECTION 5. SHARE OPTIONS.........................................................................................4 SECTION 6. RESTRICTED SHARE AWARDS...............................................................................6 SECTION 7. DEFERRED SHARE AWARDS.................................................................................7 SECTION 8. UNRESTRICTED SHARE AWARDS.............................................................................8 SECTION 9. PERFORMANCE SHARE AWARDS..............................................................................8 SECTION 10. DISTRIBUTION EQUIVALENT RIGHTS.......................................................................8 SECTION 11. TAX WITHHOLDING......................................................................................9 SECTION 12. TRANSFER, LEAVE OF ABSENCE, ETC......................................................................9 SECTION 13. AMENDMENTS AND TERMINATION...........................................................................9 SECTION 14. STATUS OF PLAN.......................................................................................10 SECTION 15. CHANGE OF CONTROL PROVISIONS.........................................................................10 SECTION 16. GENERAL PROVISIONS...................................................................................11 SECTION 17. EFFECTIVE DATE OF PLAN...............................................................................11 SECTION 18. GOVERNING LAW........................................................................................11
i ELDERTRUST 1999 SHARE OPTION AND INCENTIVE PLAN SECTION 1. GENERAL PURPOSE OF THE PLAN; DEFINITIONS The name of the plan is the ElderTrust 1999 Share Option and Incentive Plan (the "Plan"). The purpose of the Plan is to encourage and enable the officers, employees, Non-Employee Trustees and other key persons of ElderTrust (the "Company"), and the employees and other key persons of ElderTrust Operating Limited Partnership (the "Operating Partnership") and the Company's other Subsidiaries, upon whose judgment, initiative and efforts the Company largely depends for the successful conduct of its business to acquire a proprietary interest in the Company. It is anticipated that providing such persons with a direct stake in the Company's welfare will assure a closer identification of their interests with those of the Company, thereby stimulating their efforts on the Company's behalf and strengthening their desire to remain with the Company. The following terms shall be defined as set forth below: "Act" means the Securities Exchange Act of 1934, as amended from time to time. "Administrator" means either the Board or the Committee, to the extent the Committee has been delegated authority pursuant to Section 2. "Award" or "Awards," except where referring to a particular category of grant under the Plan, shall include Incentive Share Options, Non-Qualified Share Options, Restricted Share Awards, Deferred Share Awards, Unrestricted Share Awards, Performance Share Awards and Distribution Equivalent Rights. "Board" means the Board of Trustees of the Company as constituted from time to time. "Change of Control" is defined in Section 15. "Code" means the Internal Revenue Code of 1986, as amended from time to time, and any successor Code, and related rules, regulations and interpretations. "Committee" means the Committee of the Board referred to in Section 2(b). "Company" means ElderTrust, a Maryland real estate investment trust, and any successor thereto. "Deferred Share Award" means Awards granted pursuant to Section 7. "Distribution Equivalent Right" means Awards granted pursuant to Section 10. "Effective Date" means the date on which the Plan is initially approved by Shareholders as set forth in Section 17. "Fair Market Value" on any given date means the last reported sale price at which Shares are traded on such date or, if no Shares are traded on such date, the next preceding date on which Shares were traded, as reflected on the principal stock exchange or, if applicable, any other national stock exchange on which the Shares are traded or admitted to trading. "Incentive Share Option" means any Share Option that qualifies as and is designated in writing in the related Option agreement as constituting an "incentive stock option" as defined in Section 422 of the Code. 1 "Non-Employee Trustee" means a member of the Board who is not also an employee of the Company or any Subsidiary. "Non-Qualified Share Option" means any Share Option that is not an Incentive Share Option. "Operating Partnership" means ElderTrust Operating Limited Partnership, a Delaware limited partnership, and any successor thereto. "Option" or "Share Option" means any option to purchase Shares granted pursuant to Section 5. "Performance Share Award" means Awards granted pursuant to Section 9. "Restricted Share Award" means Awards granted pursuant to Section 6. "Shares" means the common shares of beneficial interest, par value $.01 per share, of the Company, subject to adjustments pursuant to Section 3. "Subsidiary" means any corporation or other entity (other than the Company) in any unbroken chain of corporations or other entities beginning with the Company if each of the corporations or entities (other than the last corporation or entity in the unbroken chain) owns Shares or other interests possessing 50 percent or more of the economic interest or the total combined voting power of all classes of Shares or other interests in one of the other corporations or entities in the chain. "Unrestricted Share Award" means any Award granted pursuant to Section 8. SECTION 2. ADMINISTRATION OF PLAN; ADMINISTRATOR AUTHORITY TO SELECT PARTICIPANTS AND DETERMINE AWARDS (a) The Plan shall be administered by the Board, which shall have the full power and authority to take all actions and to make all determinations required or provided for under the Plan or any Award granted or agreement entered into hereunder and all such other actions and determinations not inconsistent with the specific terms and provisions of the Plan deemed by the Board to be necessary or appropriate to the administration of the Plan or any Award granted or agreement entered into hereunder. (b) The Board from time to time may appoint a Committee consisting of two or more members of the Board who, in the sole discretion of the Board, may be the same trustees who serve on the Compensation Committee, or may appoint the Compensation Committee to serve as the Committee. The Board, in its sole discretion, may provide that the role of the Committee shall be limited to making recommendations to the Board concerning any determinations to be made and actions to be taken by the Board pursuant to or with respect to the Plan, or the Board may delegate to the Committee such powers and authorities related to the administration of the Plan, as set forth in Section 2(a) above, as the Board shall determine, consistent with the By-Laws of the Company and applicable law. In the event that the Plan or any Award granted or agreement entered into hereunder provides for any action to be taken by or determination to be made by the Board, such action may be taken by or such determination may be made by the Committee if the power and authority to do so has been delegated to the Committee by the Board as provided for in this Section 2. (c) Powers of Administrator. The Administrator shall have the power and authority to grant Awards consistent with the terms of the Plan, including the power and authority: (i) to select the individuals to whom Awards may from time to time be granted; (ii) to determine the time or times of grant, and the extent, if any, of Incentive Share Options, Non-Qualified Share Options, Restricted Share Awards, Deferred Share Awards, 2 Unrestricted Share Awards, Performance Share Awards and Distribution Equivalent Rights, or any combination of the foregoing, granted to any one or more participants; (iii) to determine the number of Shares to be covered by any Award; (iv) to determine and modify from time to time the terms and conditions, including restrictions, not inconsistent with the terms of the Plan, of any Award, which terms and conditions may differ among individual Awards and participants, and to approve the form of written instruments evidencing the Awards; (v) to accelerate at any time the exercisability or vesting of all or any portion of any Award; (vi) subject to the provisions of Section 5(a)(ii), to extend at any time the post-termination period in which Share Options may be exercised; (vii) to determine at any time whether, to what extent, and under what circumstances Shares and other amounts payable with respect to an Award shall be deferred either automatically or at the election of the participant and whether and to what extent the Company shall pay or credit amounts constituting deemed interest (at rates determined by the Administrator) or distributions or deemed distributions on such deferrals; and (viii) at any time to adopt, alter and repeal such rules, guidelines and practices for administration of the Plan and for its own acts and proceedings as it shall deem advisable; to interpret the terms and provisions of the Plan and any Award (including related written instruments); to make all determinations it deems advisable for the administration of the Plan; to decide all disputes arising in connection with the Plan; and to otherwise supervise the administration of the Plan. All decisions and interpretations of the Administrator shall be made in the Administrator's sole and absolute discretion and shall be final and binding on all persons, including the Company and Plan participants. SECTION 3. SHARES ISSUABLE UNDER THE PLAN; RECAPITALIZATIONS; MERGERS; SUBSTITUTE AWARDS (a) Shares Issuable. The maximum number of Shares reserved and available for issuance under the Plan shall be 350,000 Shares. For purposes of this limitation, if any portion of an Award is forfeited, canceled, reacquired by the Company, satisfied without the issuance of Shares or otherwise terminated, the Shares underlying such portion of the Award shall be added back to the Shares available for issuance under the Plan. Subject to such overall limitation, Shares may be issued up to such maximum number pursuant to any type or types of Award; provided, however, that, Shares Options with respect to no more than 250,000 Shares may be granted to any one individual participant during any one calendar year period. The Shares available for issuance under the Plan may be authorized but unissued Shares or Shares reacquired by the Company. (b) Recapitalizations. If, through, or as a result of any merger, consolidation, sale of all or substantially all of the assets of the Company, reorganization, recapitalization, reclassification, share dividend, share split, reverse share split or other similar transaction, the outstanding Shares are increased or decreased or are exchanged for a different number or kind of shares or other securities of the Company, or additional shares or new or different shares or other securities of the Company or other non-cash assets are distributed with respect to such Shares or other securities, the Administrator may make an appropriate or proportionate adjustment in (i) the maximum number of Shares reserved for issuance under the Plan, (ii) the number of Share Options that can be granted to any one individual participant, (iii) the number and kind of shares or other securities subject to any then outstanding Awards under the Plan, and (iv) the price for each share subject to any then outstanding Share Options under the Plan, without changing the aggregate exercise price (i.e., the exercise price multiplied by the number of Share Options) as to which such Share Options remain exercisable. The adjustment by the Administrator shall be 3 final, binding and conclusive. No fractional Shares shall be issued under the Plan resulting from any such adjustment, but the Administrator in its discretion may make a cash payment in lieu of fractional shares. (c) Mergers. In contemplation of and subject to the consummation of a consolidation or merger or sale of all or substantially all of the assets of the Company in which outstanding Shares are exchanged for securities, cash or other property of an unrelated corporation or business entity or in the event of a liquidation of the Company (in each case, a "Transaction"), the Board, or the board of directors of any entity assuming the obligations of the Company, may, in its discretion, take any one or more of the following actions, as to outstanding Awards: (i) provide that such Awards shall be assumed or equivalent awards shall be substituted, by the acquiring or succeeding corporation (or an affiliate thereof), and/or (ii) upon written notice to the participants, provide that all Awards will terminate immediately prior to the consummation of the Transaction. In the event that, pursuant to clause (ii) above, Awards will terminate immediately prior to the consummation of the Transaction, all vested Awards, other than Share Options, shall be fully settled in cash or in kind at such appropriate consideration as determined by the Administrator in its sole discretion after taking into account the consideration payable per Share pursuant to the business combination (the "Merger Price") and all Share Options shall be fully settled, in cash or in kind, in an amount equal to the difference between (A) the Merger Price times the number of Shares subject to such outstanding Share Options (to the extent then exercisable at prices not in excess of the Merger Price) and (B) the aggregate exercise price of all such outstanding Share Options; provided, however, that each participant shall be permitted, within a specified period determined by the Administrator prior to the consummation of the Transaction, to exercise all outstanding Share Options, including those that are not then exercisable, subject to the consummation of the Transaction. (d) Substitute Awards. The Administrator may grant Awards under the Plan in substitution for Shares and Share based awards held by employees of another corporation who become employees of the Company or a Subsidiary as the result of a merger or consolidation of the employing corporation with the Company or a Subsidiary or the acquisition by the Company or a Subsidiary of property or Shares of the employing corporation. The Administrator may direct that the substitute awards be granted on such terms and conditions as the Administrator considers appropriate in the circumstances. SECTION 4. ELIGIBILITY Participants in the Plan will be such full or part-time officers and other employees, Non-Employee Trustees and key persons of the Company, the Operating Partnership and the Company's other Subsidiaries who are responsible for or contribute to the management, growth or profitability of the Company, the Operating Partnership and the Company's other Subsidiaries as are selected from time to time by the Administrator in its sole discretion. SECTION 5. SHARE OPTIONS Any Share Option granted under the Plan shall be in such form as the Administrator may from time to time approve. Share Options granted under the Plan may be either Incentive Share Options or Non-Qualified Share Options. Incentive Share Options may be granted only to employees of the Company or any Subsidiary that is a "subsidiary corporation" within the meaning of Section 424(f) of the Code. To the extent that any Option does not qualify as an Incentive Share Option, it shall be deemed a Non-Qualified Share Option. No Incentive Share Option shall be granted under the Plan after April 15, 2009. (a) Share Options Granted to Employees and Key Persons and Non-Employee Trustees. The Administrator in its discretion may grant Share Options to eligible employees and key persons of the Company or any Subsidiary and to Non-Employee Trustees. Share Options granted pursuant to this Section 5(a) shall be subject to the following terms and conditions and shall contain such additional terms and conditions, not inconsistent with the terms of the Plan, as the Administrator shall deem desirable. If the Administrator so determines, Share Options 4 may be granted in lieu of cash compensation at the participant's election, subject to such terms and conditions as the Administrator may establish, as well as in addition to other compensation. (i) Exercise Price. The exercise price per share for the Shares covered by a Share Option granted pursuant to this Section 5(a) shall be determined by the Administrator at the time of grant but shall not be less than 100 percent of the Fair Market Value on the date of grant in the case of Incentive Share Options, or par value in the case of Non-Qualified Share Options. If an employee owns or is deemed to own (by reason of the attribution rules of Section 424(d) of the Code) more than 10 percent of the combined voting power of all classes of Shares of the Company or any parent or subsidiary corporation and an Incentive Share Option is granted to such employee, the exercise price of such Incentive Share Option shall be not less than 110 percent of the Fair Market Value on the grant date. (ii) Option Term. The term of each Share Option shall be fixed by the Administrator, but no Incentive Share Option shall be exercisable more than ten years after the date the Share Option is granted. If an employee owns or is deemed to own (by reason of the attribution rules of Section 424(d) of the Code) more than 10 percent of the combined voting power of all classes of Shares of the Company or any parent or subsidiary corporation and an Incentive Share Option is granted to such employee, the term of such Share Option shall be no more than five years from the date of grant. (iii) Exercisability; Rights of a Shareholder. Share Options shall become exercisable at such time or times, whether or not in installments, as shall be determined by the Administrator at or after the grant date; provided, however, that Share Options granted in lieu of compensation shall be exercisable in full as of the grant date unless the Administrator otherwise provides in the Option Award agreement. The Administrator may at any time accelerate the exercisability of all or any portion of any Share Option. A participant shall have the rights of a Shareholder only as to Shares acquired upon the exercise of a Share Option and not as to unexercised Share Options. (iv) Method of Exercise. Share Options may be exercised in whole or in part, by giving written notice of exercise to the Company, specifying the number of shares to be purchased. Payment of the purchase price may be made by one or more of the following methods to the extent provided in the Option Award agreement: (A) In cash, by certified or bank check or other instrument acceptable to the Administrator; (B) In the form of Shares that are not then subject to restrictions under any Company plan and that have been beneficially owned by the participant for at least six months, if permitted by the Administrator in its discretion. Such surrendered Shares shall be valued at Fair Market Value on the exercise date; (C) By the participant delivering to the Company a properly executed exercise notice together with irrevocable instructions to a broker to promptly deliver to the Company cash or a check payable and acceptable to the Company to pay the purchase price; provided that in the event the participant chooses to pay the purchase price as so provided, the participant and the broker shall comply with such procedures and enter into such agreements of indemnity and other agreements as the Administrator shall prescribe as a condition of such payment procedure; or (D) By the participant delivering to the Company a promissory note if the Administrator has expressly authorized the loan of funds to the participant for the purpose of enabling or assisting the participant to effect the exercise of his Share Option; provided that at least so much of the exercise price as represents the par value of the Shares shall be paid other than with a promissory note. 5 Payment instruments will be received subject to collection. The delivery of certificates representing the Shares to be purchased pursuant to the exercise of a Share Option will be contingent upon receipt from the participant (or a purchaser acting in his stead in accordance with the provisions of the Share Option) by the Company of the full purchase price for such shares and the fulfillment of any other requirements contained in the Share Option or applicable provisions of laws. (v) Annual Limit on Incentive Share Options. To the extent required for "incentive stock option" treatment under Section 422 of the Code, the aggregate Fair Market Value (determined as of the time of grant) of the Shares with respect to which Incentive Share Options granted under this Plan and any other plan of the Company or its parent and subsidiary corporations become exercisable for the first time by a participant during any calendar year shall not exceed $100,000. To the extent that any Share Option exceeds this limit, it shall constitute a Non-Qualified Share Option. (b) Reload Options. At the discretion of the Administrator and subject to such restrictions, terms and conditions as the Administrator may establish, Options granted under the Plan may include a "reload" feature pursuant to which a participant exercising a Share Option by the delivery of a number of Shares in accordance with Section 5(a)(iv)(B) hereof would automatically be granted an additional Share Option (with an exercise price equal to the Fair Market Value of the Shares on the date the additional Share Option is granted and with such other terms as the Administrator may provide) to purchase that number of Shares equal to the number delivered to exercise the original Share Option with an Option term equal to the remainder of the original Option term unless the Administrator otherwise determines in the Option Award agreement for the original grant. (c) Non-transferability of Share Options. No Share Option shall be transferable by the participant otherwise than by will or by the laws of descent and distribution and all Share Options shall be exercisable, during the participant's lifetime, only by the participant. Notwithstanding the foregoing, the Administrator, in its sole discretion, may provide in the Award agreement regarding a given Share Option that the participant may transfer, without consideration for the transfer, his Non-Qualified Share Options to members of his family, to trusts for the benefit of such family members, or to partnerships in which such family members are the only partners, provided that the transferee agrees in writing with the Company to be bound by all of the terms and conditions of this Plan and the applicable Option Award agreement. (d) Termination. Except as may otherwise be provided by the Administrator either in the Award agreement, or, subject to Section 13 below, in writing after the Award agreement is issued, a participant's rights in all Share Options shall automatically terminate upon the participant's termination of employment (or cessation of business relationship) with the Company and its Subsidiaries for any reason. SECTION 6. RESTRICTED SHARE AWARDS (a) Nature of Restricted Share Awards. A Restricted Share Award is an Award entitling the recipient to acquire, at par value or such other higher purchase price determined by the Administrator, Shares subject to such restrictions and conditions as the Administrator may determine at the time of grant ("Restricted Shares"). Conditions may be based on continuing employment (or other business relationship) and/or achievement of pre-established performance goals and objectives. Such performance goals and objectives shall be established in writing by the Administrator prior to the ninetieth day of the year in which the grant is made and while the outcome is substantially uncertain. Performance goals and objectives shall be based on Share price, market share, sales, earnings per Share, return on equity, costs, or any combination of these factors. Performance goals and objectives may include positive results, maintaining the status quo or limiting economic losses. The grant of a Restricted Share Award is contingent on the participant executing the Restricted Share Award agreement. The terms and conditions of each such agreement shall be determined by the Administrator, and such terms and conditions may differ among individual Awards and participants. (b) Rights as a Shareholder. Upon execution of the Restricted Share Award agreement and paying any applicable purchase price, a participant shall have the rights of a Shareholder with respect to the voting of the 6 Restricted Share, subject to such terms and conditions as may be contained in the Restricted Share Award agreement. Unless the Administrator shall otherwise determine, certificates evidencing the Restricted Shares shall remain in the possession of the Company until such Restricted Shares are vested as provided in Section 6(d) below, and the participant shall be required, as a condition of the grant, to deliver to the Company a Share power endorsed in blank. (c) Restrictions. Restricted Shares may not be sold, assigned, transferred, pledged or otherwise encumbered or disposed of except as specifically provided herein or in the Restricted Share Award agreement. If a participant's employment (or other business relationship) with the Company and its Subsidiaries terminates for any reason, the Company shall have the right to repurchase Restricted Shares that have not vested at the time of termination at their original purchase price, from the participant or the participant's legal representative. (d) Vesting of Restricted Shares. The Administrator at the time of grant shall specify the date or dates and/or the attainment of pre-established performance goals, objectives and other conditions on which the non-transferability of the Restricted Shares and the Company's right of repurchase or forfeiture shall lapse. Subsequent to such date or dates and/or the attainment of such pre-established performance goals, objectives and other conditions, the shares on which all restrictions have lapsed shall no longer be Restricted Shares and shall be deemed "vested." Except as may otherwise be provided by the Administrator either in the Award agreement or, subject to Section 13 below, in writing after the Award agreement is issued, a participant's rights in any shares of Restricted Shares that have not vested shall automatically terminate upon the participant's termination of employment (or other business relationship) with the Company and its Subsidiaries and such shares shall be subject to the Company's right of repurchase as provided in Section 6(c) above. (e) Waiver, Deferral and Reinvestment of Distributions. The Restricted Share Award agreement may require or permit the immediate payment, waiver, deferral or reinvestment (in the form of additional Restricted Shares) of distributions paid on the Restricted Shares. SECTION 7. DEFERRED SHARE AWARDS (a) Nature of Deferred Share Awards. A Deferred Share Award is an Award of phantom Share units to a participant, subject to restrictions and conditions as the Administrator may determine at the time of grant. Conditions may be based on continuing employment (or other business relationship) and/or achievement of pre-established performance goals and objectives. The grant of a Deferred Share Award is contingent on the participant executing the Deferred Share Award agreement. The terms and conditions of each such agreement shall be determined by the Administrator, and such terms and conditions may differ among individual Awards and participants. At the end of the deferral period, the Deferred Share Award, to the extent vested, shall be paid to the participant in the form of Shares. (b) Election to Receive Deferred Share Awards in Lieu of Compensation. The Administrator may, in its sole discretion, permit a participant to elect to receive a portion of the cash compensation or Restricted Share Award otherwise due to such participant in the form of a Deferred Share Award. Any such election shall be made in writing and shall be delivered to the Company no later than the date specified by the Administrator and in accordance with rules and procedures established by the Administrator. The Administrator shall have the sole right to determine whether and under what circumstances to permit such elections and to impose such limitations and other terms and conditions thereon as the Administrator deems appropriate. (c) Rights as a Shareholder. During the deferral period, a participant shall have no rights as a Shareholder; provided, however, that the participant may be credited with Distribution Equivalent Rights with respect to the phantom Share units underlying his Deferred Share Award, subject to such terms and conditions as the Administrator may determine. (d) Restrictions. A Deferred Share Award may not be sold, assigned, transferred, pledged or otherwise encumbered or disposed of during the deferral period. 7 (e) Termination. Except as may otherwise be provided by the Administrator either in the Award agreement or, subject to Section 13 below, in writing after the Award agreement is issued, a participant's right in all Deferred Share Awards that have not vested shall automatically terminate upon the participant's termination of employment (or cessation of business relationship) with the Company and its Subsidiaries for any reason. SECTION 8. UNRESTRICTED SHARE AWARDS Grant or Sale of Unrestricted Shares. The Administrator may, in its sole discretion, grant (or sell at par value or such other higher purchase price determined by the Administrator) an Unrestricted Share Award to any participant pursuant to which such participant may receive Shares free of any restrictions ("Unrestricted Shares") under the Plan. Unrestricted Share Awards may be granted or sold as described in the preceding sentence in respect of past services or other valid consideration, or in lieu of any cash compensation due to such participant. SECTION 9. PERFORMANCE SHARE AWARDS (a) Nature of Performance Share Awards. A Performance Share Award is an Award entitling the recipient to acquire Shares upon the attainment of specified performance goals. The Administrator may make Performance Share Awards independent of or in connection with the granting of any other Award under the Plan. The Administrator in its sole discretion shall determine whether and to whom Performance Share Awards shall be made, the performance goals applicable under each such Award, the periods during which performance is to be measured, and all other limitations and conditions applicable to the awarded Performance Shares; provided, however, that the Administrator may rely on the performance goals and other standards applicable to other performance unit plans of the Company in setting the standards for Performance Share Awards under the Plan. (b) Rights as a Shareholder. A participant receiving a Performance Share Award shall have the rights of a Shareholder only as to shares actually received by the participant under the Plan and not with respect to shares subject to the Award but not actually received by the participant. A participant shall be entitled to receive a Share certificate evidencing the acquisition of Shares under a Performance Share Award only upon satisfaction of all conditions specified in the written instrument evidencing the Performance Share Award (or in a performance plan adopted by the Administrator). (c) Termination. Except as may otherwise be provided by the Administrator either in the Award agreement or, subject to Section 13 below, in writing after the Award agreement is issued, a participant's rights in all Performance Share Awards shall automatically terminate upon the participant's termination of employment (or cessation of business relationship) with the Company and its Subsidiaries for any reason. (d) Acceleration, Waiver, Etc. At any time prior to the participant's termination of employment (or other business relationship) by the Company and its Subsidiaries, the Administrator may in its sole discretion accelerate, waive or, subject to Section 13, amend any or all of the goals, restrictions or conditions imposed under any Performance Share Award. SECTION 10. DISTRIBUTION EQUIVALENT RIGHTS (a) Distribution Equivalent Rights. A Distribution Equivalent Right is an Award entitling the recipient to receive credits based on cash distributions that would have been paid on the Shares specified in the Distribution Equivalent Right (or other award to which it relates) if such shares had been issued to and held by the recipient. A Distribution Equivalent Right may be granted hereunder to any participant as a component of another Award or as a freestanding award. The terms and conditions of Distribution Equivalent Rights shall be specified in the grant. Distribution equivalents credited to the holder of a Distribution Equivalent Right may be paid currently or may be deemed to be reinvested in additional Shares, which may thereafter accrue additional equivalents. Any such reinvestment shall be at Fair Market Value on the date of reinvestment. Distribution Equivalent Rights may be settled in cash or Shares or a combination thereof, in a single installment or installments, all determined in the sole 8 discretion of the Administrator. A Distribution Equivalent Right granted as a component of another Award may provide that such Distribution Equivalent Right shall be settled upon exercise, settlement, or payment of, or lapse of restrictions on, such other award, and that such Distribution Equivalent Right shall expire or be forfeited or annulled under the same conditions as such other award. A Distribution Equivalent Right granted as a component of another Award may also contain terms and conditions different from such other award. (b) Interest Equivalents. Any Award under this Plan that is settled in whole or in part in cash on a deferred basis may provide in the grant for interest equivalents to be credited with respect to such cash payment. Interest equivalents may be compounded and shall be paid upon such terms and conditions as may be specified by the grant. (c) Termination. Except as may otherwise be provided by the Administrator either in the Award agreement or, subject to Section 13 below, in writing after the Award agreement is issued, a participant's rights in all Distribution Equivalent Rights or interest equivalents shall automatically terminate upon the participant's termination of employment (or cessation of business relationship) with the Company and its Subsidiaries for any reason. SECTION 11. TAX WITHHOLDING (a) Payment by Participant. Each participant shall, no later than the date as of which the value of an Award or of any Shares or other amounts received thereunder first becomes includable in the gross income of the participant for Federal income tax purposes, pay to the Company, or make arrangements satisfactory to the Administrator regarding payment of, any Federal, state, or local taxes of any kind required by law to be withheld with respect to such income. The Company and its Subsidiaries shall, to the extent permitted by law, have the right to deduct any such taxes from any payment of any kind otherwise due to the participant. The Company's obligation to deliver Share certificates to any participant is subject to and conditioned on tax obligations being satisfied by the participant. (b) Payment in Shares. Subject to approval by the Administrator, a participant may elect to have such tax withholding obligation satisfied, in whole or in part, by (i) authorizing the Company to withhold from Shares to be issued pursuant to any Award a number of shares with an aggregate Fair Market Value (as of the date the withholding is effected) that would satisfy the withholding amount due, or (ii) transferring to the Company Shares owned by the participant with an aggregate Fair Market Value (as of the date the withholding is effected) that would satisfy the withholding amount due. SECTION 12. TRANSFER, LEAVE OF ABSENCE, ETC. For purposes of the Plan, the following events shall not be deemed a termination of employment: (a) a transfer to the employment of the Company from a Subsidiary or from the Company to a Subsidiary, or from one Subsidiary to another; or (b) an approved leave of absence for military service or sickness, or for any other purpose approved by the Company, if the employee's right to reemployment is guaranteed either by a statute or by contract or under the written policy pursuant to which the leave of absence was granted or if the Administrator otherwise so provides in writing. SECTION 13. AMENDMENTS AND TERMINATION The Board may, at any time, amend or discontinue the Plan and the Administrator may, at any time, amend or cancel any outstanding Award for the purpose of satisfying changes in law or for any other lawful purpose, but no such action shall adversely affect rights under any outstanding Award without the holder's written consent. The 9 Administrator may provide substitute Awards at the same or reduced exercise or purchase price or with no exercise or purchase price in a manner not inconsistent with the terms of the Plan, but such price, if any, must satisfy the requirements which would apply to the substitute or amended Award if it were then initially granted under this Plan, but no such action shall adversely affect rights under any outstanding Award without the holder's written consent. Nothing in this Section 13 shall limit the Board's authority to take any action permitted pursuant to Section 3(c). SECTION 14. STATUS OF PLAN Unless the Administrator shall otherwise expressly determine in writing, with respect to the portion of any Award which has not been exercised and any payments in cash, Shares or other consideration not received by a participant, a participant shall have no rights greater than those of a general creditor of the Company. In its sole discretion, the Administrator may authorize the creation of trusts or other arrangements to meet the Company's obligations to deliver Shares or make payments with respect to Awards hereunder, provided that the existence of such trusts or other arrangements is consistent with the foregoing sentence. SECTION 15. CHANGE OF CONTROL PROVISIONS (a) Upon the occurrence of a Change of Control as defined in this Section 15 or as otherwise defined in the Award agreement, each Award shall be subject to such terms, if any, with respect to a Change of Control as have been provided by the Administrator either in the Award agreement or, subject to Section 13 above, in writing after the Award agreement is issued. (b) "Change of Control" shall mean the occurrence of any one of the following events: (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Act), becomes the "beneficial owner" (as defined in Rule 13d-3 under the Act), directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the combined voting power of the Company's then outstanding securities; (ii) during any two (2) year period, individuals who at the beginning of such period constitute the Board of Trustees, including for this purpose any new trustee whose election resulted from a vacancy on the Board of Trustees caused by the mandatory retirement, death, or disability of a trustee and was approved by a vote of at least two-thirds (2/3rds) of the trustees then still in office who were trustees at the beginning of the period, cease for any reason to constitute a majority thereof; (iii) notwithstanding clauses (i) or (v) of this Section 15(b), the Company consummates a merger or consolidation of the Company with or into another corporation or trust, the result of which is that the shareholders of the Company at the time of the execution of the agreement to merge or consolidate own less than eighty percent (80%) of the total equity of the entity surviving or resulting from the merger or consolidation or of a entity owning, directly or indirectly, one hundred percent (100%) of the total equity of such surviving or resulting entity; (iv) the sale in one or a series of transactions of all or substantially all of the assets of the Company; (v) any person, has commenced a tender or exchange offer, or entered into an agreement or received an option to acquire beneficial ownership of fifty percent (50%) or more of the total number of voting shares of the Company unless the Board of Trustees has made a determination that such action does not constitute and will not constitute a change in the persons in control of the Company; or (vi) there is a change of control in the Company of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Act other than in circumstances specifically covered by clauses (i) - (v) above. 10 SECTION 16. GENERAL PROVISIONS (a) No Distribution; Compliance with Legal Requirements. The Administrator may require each person acquiring Shares pursuant to an Award to represent to and agree with the Company in writing that such person is acquiring the shares without a view to distribution thereof. No Shares shall be issued pursuant to an Award until all applicable securities law and other legal and stock exchange or similar requirements have been satisfied. The Administrator may require the placing of such stop-orders and restrictive legends on certificates for Shares and Awards as it deems appropriate. (b) Delivery of Share Certificates. Share certificates to be delivered to participants under this Plan shall be deemed delivered for all purposes when the Company or a Share transfer agent of the Company shall have mailed such certificates in the United States mail, addressed to the participant, at the participant's last known address on file with the Company. (c) Other Compensation Arrangements; No Employment Rights. Nothing contained in this Plan shall prevent the Board from adopting other or additional compensation arrangements, including trusts, and such arrangements may be either generally applicable or applicable only in specific cases. The adoption of this Plan and the grant of Awards shall not confer upon any employee any right to continued employment with the Company or any Subsidiary and shall not interfere in any way with the right of the Company or any Subsidiary to terminate the employment of any of its employees at any time. (d) Trading Policy Restrictions. Option exercises and other Awards under the Plan shall be subject to such Company insider-trading-policy-related restrictions, terms and conditions as may be established by the Administrator, or in accordance with policies set by the Administrator, from time to time. SECTION 17. EFFECTIVE DATE OF PLAN This Plan shall become effective upon approval by the holders of a majority of the votes cast at a meeting of Shareholders at which a quorum is present. Subject to such approval by the Shareholders and to the requirement that no Share may be issued hereunder prior to such approval, Share Options and other Awards may be granted hereunder on and after adoption of this Plan by the Board. SECTION 18. GOVERNING LAW This Plan and all Awards and actions taken thereunder shall be governed by, and construed in accordance with, the laws of the State of Maryland, applied without regard to conflict of law principles. 11 EX-10.16.3 4 EXHIBIT 10.16.3 December 22, 1999 ET Capital Corp 101 East State Street, Suite 100 Kennett Square, Pennsylvania 19348 Attn: D. Lee McCreary, Jr., President Re: Intercreditor Agreement between ET Capital Corp, ("Creditor"), AGE Institute of Florida, Inc. ("Borrower") and Bank of America, N.A. ("formerly NationsBank, N.A., the "Lender") dated as of September 30, 1998 (the "Agreement") (All capitalized terms used herein but not defined herein shall have the meanings attributed to such in the Agreement) Dear Mr. McCreary: On September 23, 1999, the Lender delivered a Default Notice to you identifying the events of defaults of Borrower under the NationsBank Loan Agreements. Pursuant to Sections 3.1 and 5.3(b) of the Agreement, the delivery of the Default Notice to you terminated the subordination of the Lender's Lien in the Accounts and initiated the period for creation of "Post-Default Accounts." The Lender has agreed at the Borrower's request to waive the events of default and to extend the maturity date of the NationsBank Loan Obligations until March 28, 2000 (the "Extension Period") upon the satisfaction of certain conditions precedent, including, but not limited to your agreement to the recitations set forth below. By executing this letter, you acknowledge and agree that (1) from and after September 23, 1999, all Accounts generated by Borrower constitute "Post-Default Accounts," (b) the Lender's security interest in the Post-Default Accounts is senior to the interest of the Creditor's security interest in such Accounts and (c) the waiver by the Lender of the events of default under the NationsBank Loan Agreements, the extension of the due date of the NationsBank Loan Obligations and various other modifications as set forth in the Limited Waiver and First Amendment Agreement entered into between Lender and Borrower of even date herewith (the "First Amendment") do not constitute a revocation, nullification or waiver of the Default Notice by Lender, (d) Creditor shall have no right to accelerate the obligations of Borrower to Creditor during the Extension Period nor to receive payments of principal during the Extension Period (provided, Creditor may receive payments of interest during the Extension Period pursuant to Section 3.1 of the Agreement as if no Event of Default had occurred), and (e) all other terms and conditions of the Agreement remain in effect. Creditor hereby unconditionally waives and releases any claim or defense that it may have that the Lender's security interest in the Post-Default Accounts is subordinate to the Creditor's security interest by virtue of the waiver of the events of default and the execution of the First Amendment or the terms and conditions contained therein. Please execute a copy of this letter in the space provided below and return the original to us. Very truly yours, Bank of America, N.A. By: /s/ F. A. Zagar --------------------- Title: Managing Director Read and agreed: AGE Institute of Florida, Inc. By: /s/ Carol A. Tschop ------------------------- Building Title: President ET Capital Corp: By: /s/ D. Lee McCreary, Jr. ------------------------ Title: President 2 EX-10.39 5 EXHIBIT 10.39 OPTION AGREEMENT THIS OPTION AGREEMENT (the "Agreement") is made as of the 24th day of January 2000, by and between D. Lee McCreary, Jr., an individual residing in Landenberg, Pennsylvania ("Optionor"), and ElderTrust Operating Limited Partnership, a Delaware limited partnership ("Optionee"). 1. Grant of Option. Optionor, in consideration of the sum of Ten Dollars ($10) Dollars (the "Option Price"), receipt and sufficiency of which are hereby acknowledged, hereby grants to Optionee the exclusive right and option (the "Option") to purchase all of Optionor's right, title and interest in an to Vernon ALF, L.L.C. ("Vernon ALF Ownership Interest"). Good and clear title to the Vernon ALF Ownership Interest, free and clear of all liens and encumbrances except as may be acceptable to Optionee, is to be conveyed upon exercise of the Option. 2. Exercise of the Option. The Option may be exercised by Optionee at any time by providing written notice of such election to Optionor. Nothing herein shall be construed to obligate Optionor to exercise the Option and Optionor hereby acknowledge and agree that the Option may be exercised by Optionee at Optionee's sole and absolute discretion. 3. Purchase Price. If Optionor exercises the Option as herein provided, Optionee shall pay to Optionor a purchase price for the Optionor's Vernon ALF Ownership Interest in the amount of Three Thousand Two Hundred Forty-Four ($3,244.00) Dollars (the "Purchase Price"). 4. Representations and Warranties. Optionor hereby represents and warrants to Optionee that Optionor is the sole owner of the Vernon ALF Ownership Interest and has the full and complete authority to enter into this Agreement and convey the Vernon ALF Ownership Interest free and clear of any lien, claim or encumbrance. Optionee and Optionor agree to execute such other documentation and take such other action as may be commercially reasonable to effectuate this Agreement. 5. Assignment. Optionee shall have the right to assign this Option, or any of Optionee's Rights hereunder, or to name nominees to take title to the Vernon ALF Ownership Interest. 6. Successors and Assigns. This Agreement shall be binding upon the parties hereto and their respective heirs, executors, administrators, successors and assigns. 7. Notices. Wherever in this Agreement it shall be required or permitted that notice or demand be given or served by either party to or on the other, such notice or demand shall be deemed duly given or served if, and shall not be deemed duly given or served unless, in writing and mailed by certified mail, return receipt requested, or sent by Federal Express or comparable private delivery service which provides proof of delivery, addressed as follows: If given to Optionor: D. Lee McCreary, Jr. 1512 Broadrun Road Landenberg, PA 19350 If given to Optionee: c/o ElderTrust 101 East State Street Kennett Square, Pennsylvania 19348 Attn: Chief Operating Officer The time at which any notice or demand shall be deemed given or served shall be the time at which such notice or demand is mailed or delivered, whether or not such delivery is refused. Any notice may also be delivered personally but only if delivered personally to the individuals to whom notice is required to be given as set forth above. IN WITNESS WHEREOF, Optionor and Optionee have executed this Agreement as of the date first above written. OPTIONOR: OPTIONEE: /s/ D. Lee McCreary, Jr. - ----------------------------- D. Lee McCreary, Jr. ELDERTRUST OPERATING LIMITED Date: March 22, 2000 PARTNERSHIP a Delaware limited partnership By: ElderTrust, its general partner By: /s/ John H. Haas ------------------------------- Name: John Haas Title: Chief Operating Officer Date: March 22, 2000 2 EX-10.43 6 EXHIBIT 10.43 Exhibit 10.43 THIRD AMENDMENT TO CREDIT AGREEMENT by and among ELDERTRUST, a Maryland real estate investment trust, ELDERTRUST OPERATING LIMITED PARTNERSHIP, a Delaware limited partnership, VARIOUS BANKS, and GERMAN AMERICAN CAPITAL CORPORATION, as Administrative Agent - -------------------------------------------------------------------------------- Dated as of January 3, 2000 - -------------------------------------------------------------------------------- THIRD AMENDMENT TO CREDIT AGREEMENT This THIRD AMENDMENT TO CREDIT AGREEMENT, dated as of January 3, 2000 (this "Agreement"), by and among ELDERTRUST (the "REIT"), a Maryland real estate investment trust, ELDERTRUST OPERATING LIMITED PARTNERSHIP (the "Borrower"), a Delaware limited partnership, the Banks from time to time party to the Credit Agreement (defined below), and GERMAN AMERICAN CAPITAL CORPORATION (the "Administrative Agent"). Unless the context otherwise requires, all capitalized terms used in this Agreement shall have the respective meanings set forth herein or in that certain Credit Agreement dated as of January 30, 1998 (as amended by a First Amendment to Credit Agreement dated as of January 29, 1999 (the "First Amendment") and a Second Amendment to Credit Agreement dated as of March 31, 1999 (the "Second Amendment") and as it may be further amended, restated, replaced, supplemented or otherwise modified from time to time, the "Credit Agreement"), by and among the REIT, the Borrower, the various Banks that from time to time become parties under the Credit Agreement, Deutsche Bank AG, New York Branch (as Issuing Bank) and the Administrative Agent. W I T N E S S E T H : --------------------- WHEREAS, the Borrower and the REIT have requested, and the Banks have agreed, to (i) extend the Maturity Date of the Loans which have heretofore been made to the Borrower, and (ii) otherwise modify the Credit Agreement in certain respects, in each case, on and subject to the terms and conditions set forth herein. WHEREAS, because the current Maturity Date of January 1, 2000 is not a Business Day, the current Maturity Date is deemed extended to the first Business Day following such date. NOW, THEREFORE, in consideration of the foregoing, the agreements contained herein and other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, it is agreed: 1. Extension of Maturity Date. Effective on the Effective Date (as defined below), the Maturity Date of the Loans shall be extended from January 1, 2000 to June 30, 2001. 2. Future Borrowings. Effective on the Effective Date, future Borrowings of Loans shall be permitted, provided, however, that the aggregate maximum principal amount of Loans that may be outstanding during the period from the Effective Date to the Maturity Date shall not exceed the lesser of (i) $45,419,720 and (ii) as of any Borrowing date, the Borrowing Base then in effect. From and after the Effective Date, re-Borrowings of Loans shall not be permitted after repayment, except for a portion of the Total Commitment equal to $5,750,000 (the "Revolving Loan Portion"), which portion of the Total Commitment may be repaid and re-Borrowed in accordance with the provisions of the Credit Agreement. Future payments made by the Borrower in reduction of principal of Loans shall be applied first to the repayment of the outstanding principal of the Revolving Loan Portion. Effective on the Effective Date, the Total Commitment shall be reduced to $45,419,720, and the Total Commitment shall be further reduced from time to time in connection with (and in an amount equal to the amount of) any repayment of Loans made by the Borrower which is applied to the reduction of principal of Loans not constituting part of the Revolving Loan Portion. The parties hereto acknowledge and reconfirm that, pursuant to the First Amendment, (i) Letters of Credit are no longer available under the Credit Documents, and (ii) additions to the Borrowing Base are no longer permitted. 3. Interest Rate. Effective on the Effective Date, the definition of "Applicable Margin" set forth in the Credit Agreement shall be restated in its entirety as follows: " "Applicable Margin" shall mean: (a) with respect to a Eurodollar Loan, 2.75%, and (b) with respect to a Base Rate Loan, 1.5%; provided, however, that during any period in which (A) the aggregate outstanding principal amount of Loans exceeds 80% of the Borrowing Base then in effect, or (B) the Borrowing Base is comprised exclusively of Borrowing Base Pledged Mortgage Loans, "Applicable Margin" shall mean: (x) with respect is a Eurodollar Loan, 3.25%, and (y) with respect to a Base Rate Loan, 2.0%." 4. Amortization. Effective on the Effective Date, Section 3.02 of the Credit Agreement is hereby amended by changing the designation of Subsection "(h)" thereof to Subsection "(i)", and by adding the following new Subsection (h) thereto: "(h) Commencing on February 1, 2000 and on the first Business Day of each calendar month thereafter until the Maturity Date, the Borrower shall repay Loans in an amount equal to 0.22% of the aggregate principal amount of Loans outstanding on the first Business Day of the immediately preceding calendar month." 2 5. Interest Coverage Ratio. Effective on the Effective Date, Section 8.10 of the Credit Agreement shall be restated in its entirety to read as follows: "8.10 Minimum Interest Coverage Ratio. The REIT will not permit the ratio of Consolidated EBITDA to Consolidated Interest Expense for the Test Period then ended to be less than 1.75:1.00 at any time." 6. Montchanin Pledged Mortgage Loan. Effective on the Effective Date, the Administrative Agent consents to a waiver by the Borrower of its option to acquire the real property securing the Montchanin Pledged Mortgage Loan. The Borrower shall repay principal of Loans in an amount equal to the greater of (i) the Borrowing Base Amount for the Montchanin Pledged Mortgage Loan and (ii) 100% of the proceeds received by the Borrower in connection with the repayment of the Montchanin Pledged Mortgage Loan, in either case, within one (1) Business Day of its receipt of such amounts. 7. Certain Matters in Connection with Payment of Dividends. Effective on the Effective Date, provided that no Event of Default has then occurred and is continuing, the REIT will be permitted to declare and pay regular dividends through June 30, 2001 in accordance with Section 8.03 of the Credit Agreement. The proviso at the end of Section 8.03 of the Credit Agreement is hereby restated in its entirety as follows: "; provided, that the aggregate amount of cash Dividends paid by the REIT pursuant to this clause (iii) in any fiscal quarter of the REIT shall not exceed 95% of the REIT's estimated funds from operations (as determined pursuant to the definition of "funds from operations" of the National Association of Real Estate Investment Trusts as in effect on January 30, 1998) for such fiscal quarter, except for additional cash Dividends of up to $3,000,000 in the aggregate that may be paid by the REIT from time to time during the period from the Effective Date to the Maturity Date; and provided further that, except with respect to Dividends paid on or about January 15, 2000 and on or about January 15, 2001, no Dividends shall be paid by the REIT pursuant to this clause (iii) in any fiscal quarter of the REIT prior to the release by the REIT of its quarterly earnings report.". 8. Facility Fee. Effective on the Effective Date, the Borrower shall pay a monthly facility fee to the Administrative Agent on the first Business Day of each calendar month, commencing on February 1, 2000, in an amount equal to 0.0625% of the Total Commitment then in effect net of any prepayments made on such day (other than prepayments applied to the Revolving Loan Portion). 3 9. Reserve Account. Effective on the Effective Date, Paragraph 4 of the Second Amendment is hereby modified by inserting after Subparagraph 4(c)(ii) thereof the following new Subparagraph: "(iii) Third, the Administrative Agent shall, on the due dates therefor, apply the Account Collateral to the principal payments due in respect of the Loans pursuant to Section 3.02(h) of the Credit Agreement". Subparagraphs 4(c)(iii) and 4(c)(iv) of the Second Amendment shall be redesignated as Subparagraphs 4(c)(iv) Fourth and 4(c)(v) Fifth, respectively. 10. Agreement of Banks. The Administrative Agent, as of the date hereof, is the only Bank (as defined in the Credit Agreement) and accordingly, and notwithstanding the provisions of Section 2.03(b) of the Credit Agreement, the only consent required for the effectiveness of this Agreement is that of the Administrative Agent. The consent of the Administrative Agent shall be granted upon satisfaction of all applicable conditions precedent set forth in Paragraph 11 of this Agreement. 11. Effective Date; Conditions Precedent. This Agreement shall be effective on the date (the "Effective Date") upon which all of the following conditions have been satisfied: (a) The parties hereto shall have executed and delivered this Agreement; (b) The Borrower shall have delivered to the Administrative Agent a certificate of an Authorized Officer of the Borrower stating that no Default or Event of Default under the Credit Agreement and the other Credit Documents has occurred and is continuing as of the Effective Date. In addition, the Administrative Agent shall be satisfied that the Borrower, the REIT and its Subsidiaries are in compliance with all of their respective obligations under the terms of the Credit Agreement and the other Credit Documents; (c) The Borrower shall have paid a non-refundable loan maturity extension fee (the "Extension Fee") to the Administrative Agent in an amount equal to the sum of (i) $57,500 and (ii) 1.0% of the aggregate principal amount of Loans outstanding on the Effective Date; provided, however, in the event the Borrower is unable to transmit the Extension Fee to the Administrative Agent on the Effective Date because of so called "Y2K" problems, this condition shall be deemed waived and the Borrower agrees to pay the Extension Fee to the Administrative Agent as soon as practicable thereafter and, in any event, it shall be an Event of Default in the event the Borrower fails to pay the Extension Fee within ten (10) days of the Effective Date. 4 (d) The Borrower shall have executed and/or delivered or caused to be executed and/or delivered to the Administrative Agent such documents and instruments with respect to this Agreement and the transactions contemplated herein as the Administrative Agent may reasonably request, including without limitation, the following: (i) reconfirmations of the Subsidiaries Guaranty and the Parent Guaranty; (ii) mortgage modification agreements in recordable form, to be filed in the records where each Mortgage is filed, evidencing the maturity date extension, the interest rate modification and the other aspects of this Agreement, in form and content satisfactory to the Administrative Agent; (iii) endorsements to the mortgagee title insurance policies insuring the liens of the Mortgages, down-dating coverage and insuring the Mortgages as modified by the mortgage modifications referred to in clause (ii) above; and (iv) one or more opinions of counsel to the REIT and its Subsidiaries, in form and content satisfactory to the Administrative Agent, addressing such matters as the Administrative Agent may reasonably request, including, without limitation, the enforceability of this Agreement; (e) The REIT and the Borrower shall each ratify, affirm, reaffirm and confirm to the Administrative Agent in writing that each of the representations, warranties, covenants and agreements made by the REIT and the Borrower in the Credit Agreement and the other Credit Documents as supplemented and modified hereby are true, correct and complete as of the Effective Date; and (f) The REIT and the Borrower shall deliver to the Administrative Agent current certificates of good standing for each of the REIT and the Borrower issued by the Secretary of State of the states in which each entity is formed. 12. Amendments to all Existing Loan Documents. From and after the Effective Date, each reference in any of the Credit Documents relating to the Credit Agreement shall be a reference to the Credit Agreement as supplemented and modified hereby. In the event of any conflict between the terms of this Agreement and the terms of the Credit Agreement, the terms of this Agreement shall supersede and be controlling. 13. Enforceable Obligations. The REIT and the Borrower hereby ratify, affirm, reaffirm, confirm, acknowledge and agree that (i) the Credit Agreement, and the other Credit Documents, as supplemented and modified by this Agreement, represent the valid, enforceable and collectible obligations of the REIT and the Borrower, and (ii) the Liens, security interests, assignments and other rights evidenced by the Credit Agreement and the other Credit Documents, as supplemented and modified by this Agreement, continue uninterrupted from the their original dates of execution and delivery. 5 14. Payment of Expenses. The Borrower agrees to pay all costs and expenses incurred by the Administrative Agent in connection herewith including, without limitation, all recordation and filing fees, servicing fees, taxes and reasonable attorneys' fees and expenses. 15. Limitation of Amendments. This Agreement is limited as specified and other than the specific terms and provisions contained herein shall not constitute an amendment, modification or waiver of, or otherwise affect, in any way, any other provisions of the Credit Agreement, the Notes, the Mortgages or any other Credit Documents. 16. Counterparts. This Agreement may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which when so executed and delivered shall be an original, but all of which shall together constitute one and the same instrument. 17. Captions, etc. The use of the singular shall include the plural when the context requires and vice versa. The captions contained herein are for purposes of convenience and are not part of this Agreement. 18. Further Assurances. The REIT and the Borrower agree to execute and deliver, or cause to be executed and delivered, to the Administrative Agent all other instruments, certificates, agreements, consents and opinions, and to take, or cause to be taken, such other actions as the Administrative Agent may reasonably require in order to accomplish, evidence or confirm the terms of this Agreement. In connection with the foregoing, the Borrower agrees to pay or provide for to the satisfaction of the Administrative Agent and Issuing Bank the payment of all costs and expenses in connection therewith, including, without limitation, all attorney's fees and expenses. 19. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York, including, without limitation, Section 5-1401 of the General Obligations Law, but otherwise without regard to conflict of law principles. 6 IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be duly executed and delivered by its duly authorized representatives as of the day and year first above written. ELDERTRUST By: /s/ D. Lee McCreary Jr. ----------------------------------- Name: D. Lee McCreary, Jr. Title: President and Chief Executive Officer ELDERTRUST OPERATING LIMITED PARTNERSHIP By: ElderTrust, general partner By: /s/ D. Lee McCreary, Jr. ----------------------------------- Name: D. Lee McCreary, Jr. Title: President and Chief Executive Officer GERMAN AMERICAN CAPITAL CORPORATION, as a Bank and as Administrative Agent By: /s/ Christopher Tognola ----------------------------------- Name: Christoper Tognola Title: Vice President By: /s/ John Griffin ----------------------------------- Name: John Griffin Title: Vice President 7 EX-10.44 7 EXHIBIT 10.44 SECOND AMENDMENT TO SECOND AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF ELDERTRUST OPERATING LIMITED PARTNERSHIP THIS SECOND AMENDMENT TO SECOND AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF ELDERTRUST OPERATING LIMITED PARTNERSHIP (this "Second Amendment"), dated as of October 13, 1999, is entered into by ElderTrust, a Maryland real estate investment trust, as general partner (the "General Partner") of ElderTrust Operating Limited Partnership (the "Partnership"), for itself and on behalf of the limited partners of the Partnership; WHEREAS, the General Partner has entered into a Rights Agreement, dated as of October 13, 1999, between the General Partner and First Union National Bank, as rights agent ("the "Rights Agreement"), pursuant to which the General Partner has agreed to issue to the holders of its common shares of beneficial interest rights to purchase shares of a newly created series of preferred shares of beneficial interest, designated Series A Junior Participating Preferred Shares (the "Series A Preferred Shares"), upon and subject to the terms and conditions set forth in the Rights Agreement; WHEREAS, pursuant to Section 4.2.A of the Second Amended and Restated Agreement of Limited Partnership of the Partnership (as heretofore amended, the "Partnership Agreement"), the Partnership will issue to the General Partner rights to purchase a new class of Partnership Units, to be entitled "Series A Junior Participating Preferred Units," from time to time concurrently with the issuance by the General Partner from time to time of a like number of Series A Preferred Share purchase rights pursuant to the Rights Agreement; and WHEREAS, pursuant to the authority granted to the General Partner pursuant to Section 14.1.B of the Partnership Agreement, the General Partner desires to amend the Partnership Agreement (i) to establish a new class of Units, to be entitled "Series A Junior Participating Preferred Units" (the "Series A Preferred Units"), and to set forth the designations, preferences and relative, participating, optional or other special rights, powers and duties of such Series A Preferred Units, which are substantially the same as those of the Series A Preferred Shares, pursuant to Section 4.2.A of the Partnership Agreement and (ii) to protect the economic interests of limited partners in the Partnership to the extent provided herein upon exercise by holders of certain rights to purchase Series A Preferred Shares granted under the Rights Agreement and Articles Supplementary relating to the Series A Preferred Shares. NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, the receipt and sufficiency of which hereby are acknowledged, the General Partner hereby amends the Partnership Agreement, as follows: 1. Article 1 of the Partnership Agreement hereby is amended to add the following definitions: "Common Unit" means a Partnership Unit that is not a Preferred Unit. The Class A Units, Class B Units and Class C (LIHTC) Units are Common Units. "Exercise Percentage" has the meaning set forth in Section 4.3. "Liquidation Preference Amount" means, with respect to any Preferred Unit as of any date of determination, the amount (including accrued and unpaid distributions to the date of determination) payable with respect to such Preferred Unit (as established by the instrument designating such Preferred Unit) upon the voluntary or involuntary dissolution or winding up of the Partnership as a preference over distributions to Units ranking junior to such Preferred Unit. "Preferred Unit" means any Partnership Unit issued from time to time pursuant to Section 4.2 that is specifically designated by the General Partner at the time of its issuance as a Preferred Unit. Each class or series of Preferred Units shall have such designations, preferences, and relative, participating, optional, or other special rights, powers, and duties, including rights, powers, and duties senior to the Common Units, all as determined by the General Partner, subject to compliance with the requirements of Section 4.2. In addition, the definitions of "Partnership Unit," "Percentage Interest," and "Shares Amount" appearing in Article 1 of the Partnership Agreement hereby are deleted in their entirety and the following definitions are inserted in their place: "Partnership Unit" means a fractional, undivided share of the Partnership Interests of all Partners issued pursuant to Sections 4.1 and 4.2, and includes Class A Units, Class B Units, Class C (LIHTC) Units, Series A Preferred Units and any other classes or series of Partnership Units established after the date hereof. The number of Partnership Units outstanding and the Percentage Interests in the Partnership represented by such Partnership Units are set forth in Exhibit A, as such Exhibit may be amended from time to time. The ownership of Partnership Units shall be evidenced by a certificate in a form approved by the General Partner. Without limitation on the authority of the General Partner as set forth in Section 4.2 (but subject to the limitations thereof), the General Partner may designate any Partnership Units, when issued, as Common Units or as Preferred Units, may establish any other class of Partnership Units, and may designate one or more series of any class of Partnership Units. "Percentage Interest" means, as to a Partner holding a class or series of Partnership Interests, its interest in such class or series, determined by dividing the number of Partnership Units in such class or series owned by such Partner by the total number of Partnership Units in such class or series then outstanding as specified in Exhibit A, as such exhibit may be amended from time to time, multiplied by the aggregate Percentage Interest allocable to such class of Partnership Interests. If the Partnership shall at any time have 2 outstanding more than one class of Partnership Interests, the Percentage Interest attributable to each class of Partnership Interests shall be determined as set forth in Section 4.2.B; provided, however, that, for purposes of determining the rights and relationships among the various classes and series of Partnership Units, Preferred Units shall not be considered to have any share of the aggregate Percentage Interest in the Partnership unless, and only to the extent, provided otherwise in the instrument creating such class or series of Preferred Units. "Shares Amount" means a number of Shares equal to the number of Common Units offered for redemption by a Redeeming Partner, multiplied by the Conversion Factor; provided that, if the General Partner Entity issues to all holders of Shares rights, options, warrants or convertible or exchangeable securities entitling such holders to subscribe for or purchase Shares or any other securities or property (collectively, the "rights") and if the Partnership does not issue to all of the holders of Common Units at such time (other than the General Partner) corresponding rights to subscribe for or purchase Common Units or other securities or property corresponding to the securities or property covered by the rights granted by the General Partner, then the Shares Amount shall also include such rights that a holder of that number of Shares would be entitled to receive had it owned such Shares at the time such rights were issued; provided further that, if the rights issued by the General Partner are issued pursuant to a shareholder rights plan (or other arrangement having the same objective and substantially the same effect), then the Shares Amount shall include such rights only to the extent that (a) the Common Units offered for redemption were issued other than pursuant to Section 4.3 of this Agreement, and (b) such rights have not been exercised by the holders thereof (and have not otherwise terminated or been redeemed or eliminated). 2. Section 4.2 of the Partnership Agreement hereby is amended to add after Section 4.2.D the following section: E. Series A Preferred Units. Under the authority granted to it by Section 4.2.A, the General Partner hereby establishes an additional class of Partnership Units entitled "Series A Junior Participating Preferred Units" (the "Series A Preferred Units"). Series A Preferred Units shall have the designations, preferences and relative, participating, optional or other special rights, powers and duties as set forth in Exhibit I hereto. 3. Section 4.3 of the Partnership Agreement is hereby amended and restated in its entirety as follows: If the General Partner acquires any Class A Units using the proceeds from any exercise of any rights (as defined in the definition of Shares Amount) issued under a shareholder rights plan (or other arrangement having the same objective and substantially the same effect), then (a) the holders of Common Units at such time (other than the General Partner) as a group shall have the right to acquire, at the same price per Class A Unit paid by the General Partner, a total number of additional Class A Units equal to the product of (i) the total number of Common Units held by such holders, multiplied by (ii) a fraction, 3 the numerator of which is the number of Class A Units issued to the General Partner as a result of the exercise of such rights and the denominator of which is the total number of Class A Units held by the General Partner immediately prior to such issuance (which fraction is referred to as the "Exercise Percentage"), and (b) each holder of a Class A Unit, Class B Unit or Class C (LIHTC) Unit at such time shall have the right to acquire, at the same price per Class A Unit paid by the General Partner, a number of Class A Units equal to the product of (iii) the aggregate number of Common Units that such holder holds at such time, multiplied by (iv) the Exercise Percentage. (Thus, for example, if the General Partner were to acquire 2,000,000 Class A Units at $5 per Unit from the proceeds of the exercise of outstanding rights issued under a shareholder rights plan at a time when the General Partner already owned 8,000,000 Class A Units out of a total of 12,000,000 outstanding Common Units (which would represent a 25% increase in the number of Class A Units held by the General Partner), then the other holders of Common Units as a group would have the right to purchase a total of 1,000,000 Class A Units at $5 per Class A Unit, and each holder of a Class A Unit, Class B Unit or Class C (LIHTC) Unit would be entitled to purchase his proportionate share of such Class A Units, or .25 Class A Units for each Class A Unit, Class B Unit or Class C (LIHTC) Unit then held by such holder.) In the event Partnership Units or Partnership Interests other than Class A Units (including, without limitation, Series A Preferred Units) are issued to the General Partner using proceeds of any exercise of rights issued under a shareholder rights plan (or other arrangement having the same objective and substantially the same effect), the holders of Common Units shall be granted the right to acquire such other Partnership Units or Partnership Interests at the same price as paid by the General Partner and in such amounts as would be comparable to their rights had Class A Units been issued instead. The General Partner shall provide prompt written notice to the holders of Common Units of its acquisition of Class A Units (or other Partnership Units or Partnership Interests) using such proceeds and shall establish in good faith such procedures as it deems appropriate (including, without limitation, procedures to eliminate the issuance of fractional Partnership Units if the General Partner deems appropriate) to effectuate the rights of the holders of Common Units under the preceding provisions of this Section 4.3. Except to the extent expressly granted by the Partnership pursuant to this Section 4.3 or another agreement, no person shall have any preemptive, preferential or other similar right with respect to (i) additional Capital Contributions or loans to the Partnership; or (ii) issuance or sale of any Partnership Units or other Partnership Interests. 4. Section 8.6.C of the Partnership Agreement is hereby amended and restated in its entirety as follows: C. Exceptions to Exercise of Redemption Right. (i) Notwithstanding the provisions of Sections 8.6.A and 8.6.B, a Partner shall not be entitled to exercise the Redemption Right pursuant to Section 8.6.A if (but only as long as) the delivery of Shares to such Partner on the Specified Redemption Date (i) would be prohibited under the Declaration of Trust or (ii) would be prohibited 4 under applicable federal or state securities laws or regulations (in each case regardless of whether the General Partner would in fact assume and satisfy the Redemption Right). (ii) Notwithstanding the provisions of Sections 8.6.A and 8.6.B, a Partner shall not be entitled to exercise the Redemption Right pursuant to Section 8.6.A with respect to any Preferred Unit unless (i) such Preferred Unit has been issued to and is held by a Partner other than the General Partner, and (ii) the General Partner has expressly granted to such Partner the right to redeem such Preferred Units pursuant to Section 8.6.A. (iii) Preferred Units shall be redeemed, if at all, only in accordance with such redemption rights or options as are set forth with respect to such Preferred Units (or class or series thereof) in the instruments designating such Preferred Units (or class or series thereof). 5. Exhibits to Partnership Agreement. A. The General Partner shall maintain the information set forth in Exhibit A to the Partnership Agreement, as such information shall change from time to time, in such form as the General Partner deems appropriate for the conduct of the Partnership's affairs, and Exhibit A shall be deemed amended from time to time to reflect the information so maintained by the General Partner, whether or not a formal amendment to the Partnership Agreement has been executed amending such Exhibit A. In addition to the designation of Series A Preferred Units pursuant to this First Amendment, such information shall reflect (and Exhibit A shall be deemed amended from time to time to reflect) the issuance of any additional Partnership Units to the General Partner or any other Person, the transfer of Partnership Units and the redemption of any Partnership Units, all as contemplated herein. B. The Partnership Agreement is hereby amended by attaching thereto as Exhibit I the Exhibit I attached hereto. 6. Exhibit C to the Partnership Agreement hereby is amended to add new Section 1.G as follows and existing Section 1.G shall be redesignated as Section 1.H: G. Priority Allocation With Respect to Preferred Units. Any remaining items of Partnership gross income or gain for the Partnership Year, if any, shall be specially allocated to the General Partner or any other Partner that holds Preferred Units in an amount equal to the excess, if any, of the cumulative distributions received by such Partner for the current Partnership Year and all prior Partnership Years (other than distributions that are treated as being in satisfaction of the Liquidation Preference Amount for any Preferred Units held by such Partner or amounts paid in redemption of any Preferred Units, except to the extent that the Liquidation Preference Amount or amount paid in redemption includes accrued and unpaid distributions) over the cumulative allocations of Partnership gross income and gain to such Partner under this Section 1.F for all prior Partnership Years. 5 7. Certain Capitalized Terms. All capitalized terms used in this First Amendment and not otherwise defined shall have the meanings assigned in the Partnership Agreement or in the Articles Supplementary of the General Partner. Except as modified herein, all terms and conditions of the Partnership Agreement shall remain in full force and effect, which terms and conditions the General Partner hereby ratifies and affirms. [Page Break Intentionally Inserted] 6 IN WITNESS WHEREOF, the undersigned has executed this Second Amendment as of the date first set forth above. ELDERTRUST, as General Partner of ElderTrust Operating Limited Partnership By: /s/ D. Lee McCreary, Jr. -------------------------------- Name: D. Lee McCreary, Jr. Title: President and Chief Executive Officer 7 EXHIBIT I DESIGNATIONS, PREFERENCES AND OTHER RELATIVE, PARTICIPATING, OPTIONAL OR OTHER SPECIAL RIGHTS, POWERS AND DUTIES OF SERIES A PREFERRED UNITS The Series A Preferred Units shall have the following designations, preferences, rights, powers and duties: (1) Certain Defined Terms. The following capitalized terms used in this Exhibit I shall have the respective meanings set forth below: "Parity Units" has the meaning ascribed thereto in Section (3)(A) below. "Quarterly Distribution Payment Date" means the 15th day (or, if such day is not a Business Day, the next Business Day thereafter) of February, May, August and November of each year, commencing November 15, 1999. (2) Distributions. (A) Each holder of the then outstanding Series A Preferred Units shall be entitled to receive out of funds legally available therefor, when, as and if declared by the Partnership, quarterly distributions payable in cash on the Quarterly Distribution Payment Date at the rate per Series A Preferred Unit equal to the greater of (a) $10.00 or (b) subject to the provision for adjustment hereinafter set forth, one thousand (1,000) times the aggregate per unit amount of all cash distributions, and one thousand (1,000) times the aggregate per unit amount (payable in kind) of all non-cash or other distributions (other than a distribution payable in Class A Units, Class B Units or Class C (LIHTC) Units of the Partnership, or a subdivision of the outstanding Class A Units, Class B Units or Class C (LIHTC) Units (by reclassification or otherwise)), declared on such Class A Units, Class B Units or Class C (LIHTC) Units, since the immediately preceding Quarterly Distribution Payment Date, or, with respect to the first Quarterly Distribution Payment Date, since the first issuance of any Series A Preferred Units or a fraction thereof. In the event the Partnership shall at any time after October 13, 1999 (the "Rights Declaration Date") (i) declare or pay any distribution on Class A Units, Class B Units or Class C (LIHTC) Units payable in Class A Units, Class B Units or Class C (LIHTC) Units, (ii) subdivide the outstanding Class A Units, Class B Units or Class C (LIHTC) Units, or (iii) combine the outstanding Class A Units, Class B Units or Class C (LIHTC) Units into a smaller number of units, then in each such case the amount to which holders of Series A Preferred Units were entitled immediately prior to such event under clause (b) of the preceding sentence shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of Common Units outstanding immediately after such event and the denominator of which is the number of Common Units that were outstanding immediately prior to such event. A-1 (B) The Partnership shall declare a distribution on the Series A Preferred Units as provided in paragraph (A) above immediately after it declares a distribution on any Common Units (other than a distribution payable in Common Units); provided that, in the event no distribution shall have been declared on the Common Units during the period between any Quarterly Distribution Payment Date and the next subsequent Quarterly Distribution Payment Date, a distribution of $10.00 per unit on the Series A Preferred Units shall nevertheless be payable on such subsequent Quarterly Distribution Payment Date. (C) Distributions shall begin to accrue and be cumulative on outstanding Series A Preferred Units from the Quarterly Distribution Payment Date next preceding the date of issue of such Series A Preferred Units, unless the date of issue of such units is prior to the record date set for the first Quarterly Distribution Payment Date, in which case distributions on such units shall begin to accrue from the date of issue of such units, or unless the date of issue is a Quarterly Distribution Payment Date or is a date after the record date for the determination of holders of Series A Preferred Units entitled to receive a quarterly distribution and before such Quarterly Distribution Payment Date, in either of which events such distributions shall begin to accrue and be cumulative from such Quarterly Distribution Payment Date. Accrued but unpaid distributions shall not bear interest. Distributions paid on the Series A Preferred Units in an amount less than the total amount of such distributions at the time accrued and payable on such units shall be allocated pro rata on a unit-by-unit basis among all such units at the time outstanding. The Board of Trustees of the General Partner may fix a record date for the determination of holders of Series A Preferred Units entitled to receive payment of a distribution declared thereon, which record date shall be no more than 60 days prior to the date fixed for the payment thereof. (3) Certain Restrictions. (A) Whenever distributions payable on the Series A Preferred Units as provided in Section (2) are not paid, thereafter and until such distributions, whether or not declared, on Series A Preferred Units outstanding shall have been paid in full, the Partnership shall not: (i) declare or pay distributions on, or, except otherwise provided for in Section 8.6 of the Partnership Agreement, redeem or purchase or otherwise acquire for consideration, any units ranking junior (either as to distributions or upon liquidation, dissolution or winding up) to the Series A Preferred Units; or (ii) declare or pay distributions on any units ranking on a parity (either as to distributions or upon liquidation, dissolution or winding up) (the "Parity Units") with the Series A Preferred Units, except distributions A-2 paid ratably on the Series A Preferred Units and all such Parity Units on which distributions are payable in proportion to the total amounts to which the holders of all such units are then entitled; or (iii) redeem or purchase or otherwise acquire for consideration any Parity Units, provided that the Partnership may at any time redeem, purchase or otherwise acquire any such Parity Units in exchange for any units ranking junior (either as to distributions or upon dissolution, liquidation or winding up) to the Series A Preferred Units; or (iv) redeem or purchase or otherwise acquire for consideration any Series A Preferred Units, or any Parity Units, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Trustees of the General Partner) to all holders of such units upon such terms as the Board of Trustees of the General Partner, after consideration of the respective annual distribution rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes. (B) The General Partner shall not permit any subsidiary of the Partnership to purchase or otherwise acquire for consideration any Partnership Units unless the Partnership could, under paragraph (A) of this Section (3), purchase or otherwise acquire such units at such time and in such manner. (C) Notwithstanding anything contained in this Section (3) to the contrary, nothing herein shall limit or restrict the right of a holder of a Partnership Unit to require the Partnership to redeem such Partnership Unit in accordance with the provisions of Section 8.6 of the Partnership Agreement. (4) Liquidation, Dissolution or Winding Up. (A) Upon any liquidation (voluntary or otherwise), dissolution or winding up of the Partnership, no distribution shall be made to the holders of Partnership Units ranking junior (either as to distributions or upon liquidation, dissolution or winding up) to the Series A Preferred Units unless, prior thereto, the holders of Series A Preferred Units shall have received (i) $35,500 per Unit, plus (ii) any unpaid distributions accrued and unpaid thereon, whether or not declared, to the date of such payment (the "Series A Junior Liquidation Preference"). Following the payment of the full amount of the Series A Junior Liquidation Preference, no additional distributions shall be made to the holders of Series A Preferred Units unless, prior thereto, the holders of Common Units shall have received an amount per unit (the "Common Adjustment") equal to the quotient obtained by dividing (i) the Series A Junior Liquidation Preference by (ii) 1,000 (as appropriately adjusted as set forth in subparagraph (C) below to reflect such events as unit splits, unit distributions and recapitalizations with respect to the Common Units) (such A-3 number in clause (ii) immediately above as so adjusted being referred to as the "Adjustment Number"). Following the payment of the full amount of the Series A Junior Liquidation Preference and the Common Adjustment in respect of all outstanding Series A Preferred Units and Common Units, respectively, holders of Series A Preferred Units and holders of Common Units shall receive their ratable and proportionate share of the remaining assets to be distributed in the ratio of the Adjustment Number to one (1) with respect to such Series A Preferred Units and Common Units, on a per unit basis, respectively. (B) In the event, however, that there are not sufficient assets available to permit payment in full of the Series A Junior Liquidation Preference and the liquidation preferences of all other series of Preferred Units, if any, which rank on a parity with the Series A Preferred Units, then such remaining assets shall be distributed ratably to the holders of such Parity Units in proportion to their respective liquidation preferences. In the event, however, that there are sufficient assets available to permit payment in full of the Common Adjustment, then such remaining assets shall be distributed ratably to the holders of Common Units. (C) In the event the Partnership shall at any time after the Rights Declaration Date (i) declare any distribution on Class A Units, Class B Units or Class C (LIHTC) Units payable in Class A Units, Class B Units or Class C (LIHTC) Units, (ii) subdivide the outstanding Class A Units, Class B Units or Class C (LIHTC) Units, or (iii) combine the outstanding Class A Units, Class B Units or Class C (LIHTC) Units into a smaller number of units, then in each such case the Adjustment Number in effect immediately prior to such event shall be adjusted by multiplying such Adjustment Number by a fraction, the numerator of which is the number of Common Units outstanding immediately after such event and the denominator of which is the number of Common Units that were outstanding immediately prior to such event. 5. Consolidation, Merger, Etc. In case the Partnership shall enter into any consolidation, merger, combination or other transaction in which Class A Units, Class B Units or Class C (LIHTC) Units are exchanged for or changed into other units or securities, cash and/or any other property, then in any such case the Series A Preferred Units shall at the same time be similarly exchanged or changed into such units or securities, cash and/or any other property in an amount per unit (subject to the provision for adjustment hereinafter set forth) equal to one thousand (1,000) times the aggregate amount of units, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each Class A Unit, Class B Unit or Class C (LIHTC) Units is changed or exchanged. In the event the Partnership shall at any time after the Rights Declaration Date (i) declare any distribution on Class A Units, Class B Units or Class C (LIHTC) Units payable in Class A Units, Class B Units or Class C (LIHTC) Units, (ii) subdivide the outstanding Class A Units, Class B Units or Class C (LIHTC) Units, or (iii) combine the outstanding Class A Units, Class B Units or Class C (LIHTC) Units into a smaller number of units, then in each such case the amount set forth in the preceding sentence with respect to the exchange or change of Series A Preferred Units (as previously adjusted, if any prior adjustment has occurred) A-4 shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of Class A Units, Class B Units or Class C (LIHTC) Units outstanding immediately after such event and the denominator of which is the number of Class A Units, Class B Units or Class C (LIHTC) Units that were outstanding immediately prior to such event. 6. Redemption Right. The outstanding Series A Preferred Units may be redeemed as a whole, but not in part, at any time, or from time to time, at the option of the Board of Trustees of the General Partner, at a cash price per unit equal to 105 percent of (i) the product of the Adjustment Number times the Average Market Value (as such term is hereinafter defined) of a Class A Unit, plus (ii) all distributions which on the redemption date are payable on the Series A Preferred Units to be redeemed and have not been paid, earned or declared and a sum sufficient for the payment thereof set apart, without interest. The "Average Market Value" of a Class A Unit shall equal the average of the per share closing sale prices of the Shares of the General Partner during the 30-day period immediately preceding the date before the redemption date on the Composite Tape for New York Stock Exchange Listed Stocks, or, if such Shares are not quoted on the Composite Tape, on the New York Stock Exchange, or, if such Shares are not listed on such Exchange, on the principal United States securities exchange registered under the Securities Exchange Act of 1934, as amended, on which such Shares are listed, or, if such Shares are not listed on any such exchange, the average of the per share closing sale prices of the Shares during such 30-day period, as quoted on the National Association of Securities Dealers, Inc. Automated Quotations System or any system then in use, or if no such quotations are available, the fair market value of a Share as determined by the Board of Trustees of the General Partner in good faith. 7. Ranking. Notwithstanding anything contained herein to the contrary, the Series A Preferred Units shall rank junior to all other series of Preferred Units as to voting rights, the payment of distributions and the distribution of assets in liquidation, unless the terms of any such series shall provide otherwise. 8. Voting Rights. The holders of Series A Preferred Units shall have the following voting rights: (A) Subject to the provision for adjustment hereinafter set forth, each Series A Preferred Unit shall entitle the holder thereof to one thousand (1,000) votes on all matters submitted to a vote of the Partners. In the event the General Partner shall at any time after the Rights Declaration Date (i) declare any distribution on Class A Units, Class B Units or Class C (LIHTC) Units payable in Class A Units, Class B Units or Class C (LIHTC) Units, (ii) subdivide the outstanding Class A Units, Class B Units or Class C (LIHTC) Units, or (iii) combine the outstanding Class A Units, Class B Units or Class C (LIHTC) Units into a smaller number of units, then in each such case the number of votes per unit to which holders of Series A Preferred Units were entitled immediately prior to such event shall be adjusted by multiplying such number by a fraction, the numerator of which is the number of Common Units outstanding immediately after such event and the denominator of which is the number of Common Units that were outstanding immediately prior to such event. A-5 (B) Except as otherwise provided by law, the holders of Series A Preferred Units and the holders of Common Units and any other Partnership Units having general voting rights shall vote together as one class on all matters submitted to a vote of the Partners. (C) Except as set forth herein, holders of Series A Preferred Units shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Units as set forth herein) for taking any Partnership action. 9. General. The rights of the General Partner, in its capacity as a holder of the Series A Preferred Units, are in addition to and not in limitation on any other rights or authority of the General Partner, in any other capacity, under the Partnership Agreement. In addition, nothing contained in this Exhibit I shall be deemed to limit or otherwise restrict any rights or authority of the General Partner under the Partnership Agreement, other than in its capacity as a holder of the Series A Preferred Units. The foregoing is not intended to indicate that the General Partner is, or will be, the only holder of Series A Preferred Units. * * * * A-6 EX-10.45 8 EXHIBIT 10.45 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (the "Agreement") is made as of October 13, 1999 by and between Eldertrust, a real estate investment trust, with its principal place of business at 101 East State Street, Kennett Square, PA 19348 (the "Company"), and D. Lee McCreary, Jr. (the "Executive"). WITNESSETH: The Company desires to continue to employ the Executive as an employee of the Company, and the Executive desires to continue to provide services to the Company, all upon the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the premises and mutual agreements hereinafter set forth, and intending to be legally bound hereby, the parties hereto agree as follows: 1. Offer and Acceptance of Employment. The Company hereby agrees to employ the Executive as the President and Chief Executive Officer of the Company. The Executive accepts such employment and agrees to perform the customary responsibilities of such position during the term of this Agreement. The Executive will perform such other duties as may from time to time be reasonably assigned to him by the Board of Trustees of the Company, provided such duties are consistent with and do not interfere with the performance of the duties described herein and are of a type customarily performed by persons of similar titles with similar corporations. Nothing in this Agreement shall preclude Executive from serving as a director, trustee, officer of, or partner in, any other firm, trust, corporation or partnership or from pursuing personal investments, as long as such activities do not interfere with Executive's performance of his duties hereunder. 2. Period of Employment. (a) Period of Employment. The period of the Executive's employment under this Agreement shall commence on the date hereof and shall, unless sooner terminated pursuant to Section 4, continue for a three year period ending on October 13, 2002 (such period, as extended from time to time, herein referred to as the "Term"). Subject to Section 2(b), and if the Term has not been terminated pursuant to Section 4, on October 13, 2001 and on each October 13 thereafter the Term shall be extended for an additional period of one year. (b) Termination of Automatic Extension by Notice. The Company (with the affirmative vote of two-thirds of the entire membership of the Board of Trustees at a meeting of the Board of Trustees called and held for such purpose) or the Executive may elect to terminate the automatic extension of the Term set forth in Section 2(a) ("Automatic Extension") by giving written notice of such election. Any notice given hereunder must be given not less than one year prior to the end of the then current Term. 3. Compensation and Benefits. (a) Base Salary. As long as Executive remains an employee of Company, Executive will be paid a base salary which shall continue at the rate currently in effect, subject to adjustment as hereinafter provided. The Compensation and Share Option Committee of the Board of Trustees shall review Executive's base salary on an annual basis and make recommendations with respect to increases in base salary to the Board of Trustees. Any increase in base salary shall not reduce or limit any other obligation of the Company hereunder. Executive's annual base salary payable hereunder, as it may be increased from time to time and without reduction for any amounts deferred as described below, is referred to herein as "Base Salary." Effective July 29, 1999 the Executive's Base Salary shall be $200,000. Executive's Base Salary, as in effect from time to time, may not be reduced by the Company without Executive's consent, provided that the Base Salary payable under this paragraph shall be reduced to the extent Executive elects to defer or reduce such salary under the terms of any deferred compensation or savings plan or other employee benefit arrangement maintained or established by the Company. The Company shall pay Executive the portion of his Base Salary not deferred in accordance with its customary periodic payroll practices. (b) Incentive Compensation. Executive shall be eligible to receive incentive compensation in the form of share options in amounts determined from time to time by the Compensation and Share Option Committee of the Board of Trustees. (c) Benefits, Perquisites and Expenses. (i) Benefits. During the Term, Executive shall be eligible to participate in (1) each welfare benefit plan sponsored or maintained by the Company, including, without limitation, each life, hospitalization, medical, dental, health, accident or disability insurance or similar plan or program of the Company, and (2) each pension, profit sharing, retirement, deferred compensation or savings plan sponsored or maintained by the Company, in each case, whether now existing or established hereafter, to the extent that Executive is eligible to participate in any such plan under the generally applicable provisions thereof. With respect to the pension or retirement benefits payable to Executive, Executive's service credited for purposes of determining Executive's benefits and vesting shall be determined in accordance with the terms of the applicable plan or program. Nothing in this 2 Section 3(c), in and of itself, shall be construed to limit the ability of the Company to amend or terminate any particular plan, program or arrangement. (ii) Vacation. During the Term, the Executive shall be entitled to the number of paid vacation days in each calendar year determined by the Company from time to time for its senior executive officers, but not less than four weeks in any calendar year. The Executive shall also be entitled to all paid holidays given by the Company to its senior officers. Vacation days which are not used during any calendar year may not be accrued, nor shall Executive be entitled to compensation for unused vacation days. (iii) Perquisites. During the Term, Executive shall be entitled to receive such perquisites (e.g., fringe benefits) as are generally provided to other senior officers of the Company in accordance with the then current policies and practices of the Company. (iv) Business Expenses. During the Term, the Company shall pay or reimburse Executive for all reasonable expenses incurred or paid by Executive in the performance of Executive's duties hereunder, upon presentation of expense statements or vouchers and such other information as the Company may reasonably require and in accordance with the generally applicable policies and practices of the Company. 4. Employment Termination. The Term of employment under this Agreement may be earlier terminated only as follows: (a) Cause. For purposes hereof, a termination by the Corporation for "Cause" shall mean termination by action of at least two-thirds of the members of the Board of Trustees of the Company at a meeting duly called and held upon at least 15 days' prior written notice to Executive specifying the particulars of the action or inaction alleged to constitute "Cause" (and at which meeting Executive and his counsel were entitled to be present and given reasonable opportunity to be heard) because of (i) Executive's conviction of any felony (whether or not involving the Company or any of its subsidiaries) involving moral turpitude which subjects, or if generally known, would subject, the Company or any of its subsidiaries to public ridicule or embarrassment, (ii) fraud or other willful misconduct by Executive in respect of his obligations under this Agreement, or (iii) willful refusal or continuing failure to attempt, without proper cause and, other than by reason of illness, to follow the lawful directions of the Board of Trustees following thirty days' prior written notice to Executive of his refusal to perform, or failure to attempt to perform such duties and which during such thirty day period such refusal or failure to attempt is not cured by the Executive. "Cause" shall not include a bona fide disagreement over a corporate policy, so long as Executive does not willfully violate on a continuing basis specific written directions from the Board of Trustees, which directions are consistent with the provisions of this Agreement. Action or inaction 3 by Executive shall not be considered "willful" unless done or omitted by him intentionally and without his reasonable belief that his action or inaction was in the best interests of the Company, and shall not include failure to act by reason of total or partial incapacity due to physical or mental illness. (b) Without Cause. Notwithstanding anything to the contrary contained in this Agreement, the Company (with the affirmative vote of two-thirds of the entire membership of the Board of Trustees at a meeting of the Board of Trustees called and held for the purpose) may, at any time after at least 90 days' prior written notice in accordance with Section 4(e) hereof to the Executive, terminate the Executive's employment hereunder without Cause. (c) Death or Disability. If Executive dies, his employment shall terminate as of the date of death. If Executive develops a disability, the Company may terminate Executive's employment hereunder. As used in this Agreement, the term "disability" shall mean incapacity due to physical or mental illness which has caused the Executive to be unable to substantially perform his duties with the Company on a full time basis for (i) a period of twelve consecutive months, or (ii) for shorter periods aggregating more than twelve months in any twenty-four month period. During any period of Disability, the Executive agrees to submit to reasonable medical examinations upon the reasonable request, and at the expense, of the Company. (d) Good Reason. The Executive may terminate the Executive's employment for Good Reason at any time during the term of this Agreement. For purposes of this Agreement, "Good Reason" shall mean any of the following: (i) the assignment to the Executive by the Company of any duties inconsistent with the Executive's status with the Company or a substantial alteration in the nature or status of the Executive's responsibilities from those in effect immediately prior to the date hereof, or a reduction in the Executive's titles or offices as in effect immediately prior to the date hereof, or any removal of the Executive from, or any failure to reelect the Executive to, any of such positions, except in connection with the termination of his employment for disability or cause or as a result of the Executive's death or by the Executive other than for Good Reason, or the termination by the Company's Board of Trustees of the Automatic Extension; (ii) a reduction by the Company in the Executive's Base Salary as in effect on the date hereof or as the same may be increased from time to time during the term of this Agreement; (iii) a relocation of the Executive's principal place of employment or the relocation of the Company's principal office or corporate 4 headquarters to a location 35 miles or more from the Executive's current principal place of employment. (iv) any "Change of Control" as set forth in Section 6 hereof; (v) any material failure by the Company to comply with any of the provisions of this Agreement; (vi) any termination of the Executive's employment for reasons other than death, disability or Cause or the termination by the Board of Trustees of the Automatic Extension pursuant to Section 2(b) of this Agreement; (vii) the commencement of a proceeding or case, with or without the application or consent of the Company or any of its subsidiaries, in any court of competent jurisdiction, seeking (A) the liquidation, reorganization, dissolution or winding-up of the Company or its subsidiaries, or the composition or readjustment of the debts of the Company or its subsidiaries, (B) the appointment of a trustee, receiver, custodian, liquidator or the like for the Company or its subsidiaries or of all or any substantial part of their respective assets, or (C) any similar relief in respect of the Company or its subsidiaries under any law relating to bankruptcy, insolvency, reorganization, winding-up, or composition or adjustment of debts. (e) Notice of Termination. Any termination, except for death, pursuant to this Section 4 shall be communicated by a Notice of Termination. For purposes of this Agreement, a "Notice of Termination" shall mean a written notice which shall indicate those specific termination provisions in this Agreement relied upon and which sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. (f) Date of Termination. "Date of Termination" shall mean (i) if this Agreement is terminated by the Company for disability, 30 days after Notice of Termination is given to the Executive (provided that the Executive shall not have returned to the performance of the Executive's duties on a full-time basis during such 30-day period), (ii) if Executive's employment is terminated due to Executive's death, on the date of death; (iii) if the Executive's employment is terminated for Good Reason as a result of a Change of Control, as set forth in Section 6 hereof; or (iv) if the Executive's employment is terminated for any other reason, the date specified in the Notice of Termination (which shall not be less than 90 nor more than 180 days from the date such Notice of Termination is given). (g) Transfer of Minority Interests. The Executive shall transfer all of his direct or indirect interests in entities in which the Company has an 5 interest (which shall not for the purposes of this Section 4(g) be deemed to include ET Capital Corp.) immediately upon termination of the Executive's employment with the Company for any reason. Such transfer shall be in a manner reasonably determined by the Board of Trustees and at fair market value, as determined by the Board. 5. Payments upon Termination. (a) Termination Due to Death or Disability. Upon the death or Disability of the Executive (i) the Company shall pay to the Executive or his estate (1) his full Base Salary and other accrued benefits earned up to the last day of the month of the Executive's death or Disability, (2) all deferred compensation of any kind, including, without limitation, any amounts earned under any bonus plan, and (3) if any bonus, under any bonus plan, shall be payable in respect of the year in which the Executive's death or Disability occurs, such bonus(es) prorated up to the last day of the month of the Executive's death or Disability and (ii) all restricted shares, dividend equivalent rights, share option and performance share awards made to the Executive shall automatically become fully vested as of the date of death or Disability. (b) Termination for Cause. If the Executive's employment shall be terminated for Cause, the Company shall pay the Executive: (i) his full Base Salary through the Date of Termination (as defined in Section 4(f)) at the rate in effect at the time Notice of Termination (as defined in Section 4(e)) is given, and (ii) all deferred compensation of any kind. In addition, Executive shall have the option to have assigned to him at no cost and with no apportionment of prepaid premiums any assignable insurance policy owned by the Company and relating specifically to Executive. The Company shall have no further obligations to the Executive under this Agreement. (c) Termination by Executive for Good Reason or by the Company for Reasons other than for Cause, Death or Disability. (i) In the event (1) the Company terminates the Term without Cause, or (2) the Executive terminates the Term for Good Reason, then the Company shall make a lump-sum payment to the Executive equal to (x) three (3) times the Executive's average annual Base Salary for the last three years, or, if less, over the expired term this Agreement, plus (y) the average annual value as of the date of grant of the Executive's share options vesting in a fiscal year (using a Black-Scholes valuation as reasonably determined by the Company), plus (z) the value of the Executive's dividend equivalent rights credited to the Executive's memo account in the fiscal year immediately preceding such termination, provided that the value attributed to such share options and dividend equivalent rights shall not exceed 50 percent (50%) of Executive's average annual Base Salary for the three-year period preceding the termination of the Term; and all share options, share awards and 6 similar equity rights, if any, shall vest and become exercisable immediately prior to the termination of the Term and remain exercisable through their original terms with all rights. (ii) Following termination of the Term for any reason, other than for Cause or upon the death of the Executive, the Company shall also maintain in full force and effect, for the continued benefit of the Executive for a period equal to the greater of (x) the period of the Term otherwise remaining or (y) two (2) years without giving effect to such termination, all employee benefit plans and programs to which the Executive was entitled prior to the date of termination (including, without limitation, the benefit plans and programs provided for herein) if the Executive's continued participation is possible under the general terms and provisions of such plans and programs. In the event that the Executive's participation in any such plan or program is barred by the terms thereof, the Company shall pay to the Executive an amount equal to the annual contribution, payments, credits or allocations made by the Company to him, to his account or on his behalf under such plans and programs from which his continued participation is barred except that if the Executive's participation in any health, medical, life insurance or disability plan or program is barred, the Company shall obtain and pay for, on the Executive's behalf, to the extent possible individual insurance plans, policies or programs which provide to the Executive health, medical, life and disability insurance coverage which is equivalent to the insurance coverage to which the Executive was entitled prior to the date of termination. 6. Change of Control. (a) Upon a Change of Control (as defined below), the Executive may terminate the Term upon notice to the Company, effective as set forth in such notice (i) for any reason or for no reason during the initial ninety (90) day period following the date of such Change of Control, or (ii) at any time, within twenty-four (24) months following the date of a Change of Control, if any other event constituting Good Reason hereunder continues for more than ten (10) days after the Executive delivers notice thereof to the Company. The failure of Executive to exercise his rights hereunder following an event constituting a Change of Control shall not preclude Executive from exercising such rights following the occurrence of a subsequent Change of Control event, even if related to a prior Change of Control Event. (b) For purposes of this Agreement, the term "Change of Control" shall mean the happening of any of the following: (i) if any person ("Person") (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing fifty 7 percent (50%) or more of the combined voting power of the Company's then outstanding securities; (ii) notwithstanding clauses (i) or (iv) of this Section 6, the Company consummates a merger or consolidation of the Company with or into another corporation or trust, the result of which is that the shareholders of the Company at the time of the execution of the agreement to merge or consolidate own less than eighty percent (80%) of the total equity of the entity surviving or resulting from the merger or consolidation or of a entity owning, directly or indirectly, one hundred percent (100%) of the total equity of such surviving or resulting entity; (iii) the sale in one or a series of transactions of all or substantially all of the assets of the Company; (iv) any Person has commenced a tender or exchange offer, or entered into an agreement or received an option to acquire beneficial ownership of fifty percent (50%) or more of the total number of voting shares of the Company unless the Board of Trustees has made a determination that such action does not constitute and will not constitute a change in the Persons in control of the Company; or (v) there is a change of control in the Company of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Exchange Act other than in circumstances specifically covered by clauses (i) - (iv) above. 7. Certain Tax Matters. Notwithstanding any other provision of this Agreement or of any other agreement, contract, or understanding heretofore or hereafter entered into by the Executive with Employer, except an agreement, contract, or understanding hereafter entered into that expressly modifies or excludes application of this paragraph (an "Other Agreement"), and notwithstanding any formal or informal employment agreement or other arrangement for the direct or indirect provision of compensation to the Executive (including groups or classes of participants or beneficiaries of which the Executive is a member), whether or not such compensation is deferred, is in cash, or is in the form of a benefit to or for the Executive (a "Benefit Arrangement"), if the Executive is a "disqualified individual," as defined in Section 280G(c) of the Internal Revenue Code (the "Code"), any right to receive any payment or other benefit under this Agreement shall not become exercisable or vested (i) to the extent that such right to exercise, vesting, payment, or benefit, taking into account all other rights, payments, or benefits to or for the Executive under this Agreement, all Other Agreements, and all Benefit Arrangements, would cause any payment or benefit to the Executive under this Agreement to be considered a "parachute payment" within the meaning of Section 280G(b)(2) of the Code as then in effect (a "Parachute Payment") and (ii) if, as a result of receiving a Parachute Payment, the aggregate 8 after-tax amounts received by the Executive from the Employer under this Agreement, all Other Agreements, and all Benefit Arrangements would be less than the maximum after-tax amount that could be received by the Executive without causing any such payment or benefit to be considered a Parachute Payment. In the event that the receipt of any such right to exercise, vesting, payment, or benefit under this Agreement, in conjunction with all other rights, payments, or benefits to or for the Executive under any Other Agreement or any Benefit Arrangement would cause the Executive to be considered to have received a Parachute Payment under this Agreement that would have the effect of decreasing the after-tax amount received by Executive as described in clause (ii) of the preceding sentence, then the Executive shall have the right, in Executive's sole discretion, to designate those rights, payments, or benefits under this Agreement, any Other Agreements, and any Benefit Arrangements that should be reduced or eliminated so as to avoid having the payment or benefit to Executive under this Agreement be deemed to be a Parachute Payment. The Employer will take the position for tax purposes that no payments made under this Agreement are "parachute payments" within the meaning of Section 280G(b)(2) of the Code. 8. Executive's Covenants. (a) Nondisclosure. At all times during and after the Term, Executive shall keep confidential and shall not, except with the Company's express prior written consent, or except in the proper course of his employment with the Company, directly or indirectly, communicate, disclose, divulge, publish, or otherwise express, to any Person, or use for his own benefit or the benefit of any Person, any trade secrets, confidential or proprietary knowledge or information, no matter when or how acquired concerning the conduct and details of the Company's and its subsidiaries' business, including without limitation, names of customers and suppliers, marketing methods, trade secrets, policies, prospects and financial condition. For purposes of this Section 8, confidential information shall not include any information which is now known by or readily available to the general public or which becomes known by or readily available to the general public other than as a result of any improper act or omission of Executive. (b) Non-Competition. During the Term hereof and for a period of three (3) years thereafter, Executive shall not, except with the Company's express prior written consent, directly or indirectly, in any capacity, for the benefit of any Person: (i) Solicit any Person who is or during such period becomes a customer, supplier, employee, salesman, agent or representative of the Company or any subsidiary, in any manner which interferes or might interfere with such Person's relationship with the Company or any subsidiary, or in an effort to obtain such Person as a customer, supplier, employee, salesman, agent, or representative 9 of any business in competition with the Company or any subsidiary within 15 miles of any office or facility owned, leased or operated by the Company or any subsidiary. (ii) Establish, engage, own, manage, operate, join or control, or participate in the establishment, ownership (other than as the owner of less than one percent of the stock of a corporation whose shares are publicly traded), management, operation or control of, or be a director, officer, employee, salesman, agent or representative of, or be a consultant to, any Person in any business in competition with the Company or any subsidiary, at any location within 15 miles of any office or facility owned, leased or operated by the Company or any subsidiary, or act or conduct himself in any manner which he would have reason to believe inimical or contrary to the best interests of the Company or any subsidiary. (c) Enforcement. Executive acknowledges that any breach by him of any of the covenants and agreements of this Section 8 ("Covenants") will result in irreparable injury to the Company for which money damages could not adequately compensate the Company, and therefore, in the event of any such breach, the Company shall be entitled, in addition to all other rights and remedies which the Company may have at law or in equity, to have an injunction issued by any competent court enjoining and restraining Executive and/or all other Persons involved therein from continuing such breach. The existence of any claim or cause of action which Executive or any such other Person may have against the Company shall not constitute a defense or bar to the enforcement of any of the Covenants. If the Company is obliged to resort to litigation to enforce any of the Covenants which has a fixed term, then such term shall be extended for a period of time equal to the period during which a material breach of such Covenant was occurring, beginning on the date of a final court order (without further right of appeal)holding that such a material breach occurred, or, if later, the last day of the original fixed term of such Covenant. (d) Consideration. Executive expressly acknowledges that the Covenants are a material part of the consideration bargained for by the Company and, without the agreement of Executive to be bound by the Covenants, the Company would not have agreed to enter into this Agreement. 10 (e) Scope. If any portion of any Covenant or its application is construed to be invalid, illegal or unenforceable, then the other portions and their application shall not be affected thereby and shall be enforceable without regard thereto. If any of the Covenants is determined to be unenforceable because of its scope, duration, geographical area or similar factor, then the court making such determination shall have the power to reduce or limit such scope, duration, area or other factor, and such Covenant shall then be enforceable in its reduced or limited form. 9. No Obligation to Mitigate Damages; No Effect on Other Contractual Rights. (a) The Executive shall not be required to mitigate damages or the amount of any payment provided for under this Agreement by seeking other employment or otherwise, nor shall the amount of payment provided for under this Agreement be reduced by any compensation earned by the Executive as the result of employment by another employer after the Date of Termination, or otherwise. The amounts payable to Executive under Section 5 hereof shall not be treated as damages but as severance compensation to which, Executive is entitled by reason of termination of his employment in the circumstances contemplated by this Agreement. (b) The provisions of this Agreement, and any payment provided for hereunder, shall not reduce any amounts otherwise payable, or in any way diminish the Executive's existing rights, or rights which would accrue solely as a result of the passage of time, under any benefit plan, employment agreement or other contract, plan or arrangement. 10. Miscellaneous. (a) Notices. All notices, requests, demands, consents or other communications required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been duly given if and when (i) delivered personally, (ii) mailed by first class certified mail, return receipt requested, postage prepaid, or (iii) sent by a nationally recognized express courier service, postage or delivery changes prepaid, with receipt, or (iv) delivered by telecopy (with receipt, and with original delivered in accordance with any of (i), (ii) or (iii) above) to the parties at their respective addresses stated below or to such other addresses of which the parties may give notice in accordance with this Section. If to the Company, to: ElderTrust 101 East State Street, Suite 100 Kennett Square, PA 19348 Attention: Chairman 11 If to Executive, to: D. Lee McCreary, Jr. 1512 Broadrun Road Landenberg, PA 19350 (b) Entire Understanding. This Agreement sets forth the entire understanding between the parties with respect to the subject matter hereof and supersedes all prior and contemporaneous, written, oral, expressed or implied, communications, agreements and understandings with respect to the subject matter hereof. (c) Modification. This Agreement shall not be amended, modified, supplemented or terminated except in writing signed by both parties. No action taken by the Company hereunder, including without limitation any waiver, consent or approval, shall be effective unless approved by a majority of the Board of Trustees. (d) Termination of Prior Employment Agreements. All prior employment agreements between Executive and the Company and/or any of its affiliates (and any of their predecessors) are hereby terminated as of the date hereof as fully performed on both sides. (e) Assignability and Binding Effect. This Agreement shall inure to the benefit of and shall be binding upon the Company and its successors and assigns and upon Executive and his heirs, executors, and legal representatives. This Agreement is a personal employment contract of the Company, being for the personal services of Executive, and shall not be assignable by the Executive. (f) Severability. If any provision of this Agreement is construed to be invalid, illegal or unenforceable, then the remaining provisions hereof shall not be affected thereby and shall be enforceable without regard thereto. (g) Counterparts. This Agreement may be executed in any number of counterparts, each of which when so executed and delivered shall be an original hereof, and it shall not be necessary in making proof of this Agreement to produce or account for more than one counterpart hereof. (h) Section Headings. Section and subsection headings in this Agreement are inserted for convenience of reference only, and shall neither constitute a part of this Agreement nor affect its construction, interpretation, meaning or effect. 12 (i) References. All words used in this Agreement shall be construed to be of such number and gender as the context requires or permits. (j) Controlling Law. This Agreement is made under, and shall be governed by, construed and enforced in accordance with, the substantive laws of the State of Maryland applicable to agreements made and to be performed entirely therein. (k) Settlement of Disputes. The Company and Executive agree that any claim, dispute or controversy arising under or in connection with this Agreement, or otherwise in connection with Executive's employment by the Company (including, without limitation, any such claim, dispute or controversy arising under any federal, state or local statute, regulation or ordinance or any of the Company's employee benefit plans, policies or programs) shall be resolved solely and exclusively by binding arbitration. The arbitration shall be held in the city of Philadelphia, Pennsylvania (or at such other location as shall be mutually agreed by the parties). The arbitration shall be conducted in accordance with the Expedited Employment Arbitration Rules (the "Rules") of the American Arbitration Association (the "AAA") in effect at the time of the arbitration, except that the arbitrator shall be selected by alternatively striking from a list of five arbitrators supplied by the AAA. All fees and expenses of the arbitration, including a transcript if either requests, shall be borne equally by the parties. If Executive prevails as to any material issue presented to the arbitrator, the entire cost of such proceedings (including, without limitation, Executive's reasonable attorneys fees) shall be borne by the Company. If Executive does not prevail as to any material issue, each party will pay for the fees and expenses of its own attorneys, experts, witnesses, and preparation and presentation of proofs and post-hearing briefs (unless the party prevails on a claim for which attorney's fees are recoverable under the Rules). Any action to enforce or vacate the arbitrator's award shall be governed by the Federal Arbitration Act, if applicable, and otherwise by applicable state law. If either the Company or Executive pursues any claim, dispute or controversy against the other in a proceeding other than the arbitration provided for herein, the responding party shall be entitled to dismissal or injunctive relief regarding such action and recovery of all costs, losses and attorney's fees related to such action. (l) Approval and Authorizations. The execution and the implementation of the terms and conditions of this Agreement have been fully authorized by the Board of Trustees. (m) Indulgences, Etc. Neither the failure nor delay on the part of either party to exercise any right, remedy, power or privilege under this Agreement shall operate as a waiver thereof, nor shall the single or partial exercise of any right, remedy, power or privilege preclude any other or further exercise of the same or any other right, remedy, power or privilege, nor shall any waiver of any right, 13 remedy, power or privilege with respect to any occurrence be construed as a waiver of such right, remedy, power or privilege with respect to any other occurrence. No waiver shall be effective unless it is in writing and is signed by the party asserted to have granted such waiver. (n) Legal Expenses. In the event that the Executive institutes any legal action to enforce his rights under, or to recover damages for breach of this Agreement, the Executive, if he is the prevailing party, shall be entitled to recover from the Company any actual expenses for attorney's fees and disbursements incurred by him. IN WITNESS WHEREOF, the parties hereto have executed this Agreement the day and year first above mentioned, under seal, intending to be legally bound hereby. COMPANY: Attest: /s/ Kelly A. McAteer By: /s/ Michael Walker - ------------------------------ ----------------------------- Assistant Secretary Its: Chairman ------------- Date of Execution: 3/31/00 Date of Execution: 3/31/00 ------------- ------------ EXECUTIVE: /s/ D. Lee McCreary, Jr. --------------------------------- D. Lee McCreary, Jr. Date of Execution: 3/31/00 ------------- 14 EX-11.1 9 EXHIBIT 11.1 EXHIBIT 11.1 COMPUTATION OF BASIC AND DILUTED EARNINGS PER SHARE FOR THE YEAR ENDED DECEMBER 31, 1999 AND THE PERIOD FROM JANUARY 30, 1998 THROUGH DECEMBER 31, 1998 The following calculation is submitted in accordance with requirements of the Securities Exchange Act of 1934:
For the year ended December 31 1999 1998(1) ------------ ------------- (amounts in thousands) Net income (loss) available for common shareholders ($1,030) $ 3,973 ======= ======= Weighted average common shares outstanding used in calculating basic and diluted earnings per share 7,198 7,369 ======= ======= Basic and diluted net income (loss) per share ($0.14) $0.54 ======= =======
- ------------------- (1) Represents the period from January 30, 1998 to December 31, 1998. EX-21 10 EXHIBIT 21 EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT
Subsidiary Jurisdiction of Organization Type of Entity ---------- ---------------------------- -------------- 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
EX-23.1 11 EXHIBIT 23.1 [Letterhead of KPMG LLP] Consent of Independent Auditors The Board of Trustees and Shareholders ElderTrust: We consent to incorporation by reference in the registration statement (No. 333-80719) on Form S-8 (for the 1998 Share Option Incentive Plan), and the registration statement (No. 333-80717) on Form S-8 (for 1999 Share Option and Incentive Plan) of our report dated January 14, 2000, except as to note 5 which is as of March 21, 2000, related to the consolidated balance sheets of ElderTrust and subsidiaries as of December 31, 1999 and 1998 and the related consolidated statements of operations, shareholders' equity and cash flows for the year ended December 31, 1999 and the period from January 30, 1998 to December 31, 1998 and related financial statement schedules, included herein. /s/ KPMG LLP McLean, Virginia May 8, 2000 EX-27 12 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE SHEET AT DECEMBER 31, 1999 AND THE RELATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0001043236 ELDER TRUST 1000 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 3,605 0 50,343 0 0 6,302 181,861 10,180 266,482 3,743 20,211 0 0 71 103,369 266,482 28,141 28,141 0 6,912 5,301 0 13,136 180 0 180 0 1,210 0 (1,030) (0.14) (0.14) Includes $2.8 million recorded in connection with a separation agreement with an officer of the Company. Loss on extinguishment of debt.
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