10-Q 1 thirdq.txt 10Q ELDERTRUST THIRD QUARTER OF 2001 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2001 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____ to _____ Commission File Number: 001-13807 ElderTrust (Exact name of registrant as specified in its charter) Maryland 23-2932973 (State or other jurisdiction of (I.R.S. Employer incorporation or organization Identification Number) 101 East State Street, Suite 100, Kennett Square, PA 19348 (Address of principal executive offices) (Zip Code) (610) 925-4200 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------ ------ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Class Outstanding at November 13, 2001 ------------------------------------- -------------------------------- Common shares of beneficial interest, 7,328,998 $0.01 par value per share ELDERTRUST FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2001 TABLE OF CONTENTS PART I: FINANCIAL INFORMATION Page ------ Item 1. Financial Statements (unaudited) Condensed Consolidated Balance Sheets as of September 30, 2001 and December 31, 2000 1 Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2001 and 2000 2 Condensed Consolidated Statement of Cash Flows for the nine months ended September 30, 2001 and 2000 3 Notes to Condensed Consolidated Financial Statements. 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 3. Quantitative and Qualitative Disclosures About Market Risk 21 PART II: OTHER INFORMATION Item 3. Defaults Upon Senior Securities 22 Item 6. Exhibits and Reports on Form 8-K 22 SIGNATURES 23 EXHIBIT INDEX 24 i PART I - FINANCIAL INFORMATION ITEM 1. Financial Statements ELDERTRUST CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share amounts) September 30, December 31, 2001 2000 (unaudited) ------------- ------------- ASSETS Assets: Real estate properties, at cost $160,225 $148,939 Less - accumulated depreciation (18,277) (14,085) Land 16,358 14,950 ------------- ------------- Net real estate properties 158,306 149,804 Properties held for sale, net of impairment allowance of $1,467 and $1,433, respectively 9,695 11,365 Real estate loans receivable, net of allowance of $39 and $7,087, respectively 21,659 41,559 Cash and cash equivalents 2,125 3,105 Restricted cash 9,269 8,409 Accounts receivable, net of allowance of $529 and $1,247, respectively 1,103 1,466 Accounts receivable from unconsolidated entities 1,857 1,905 Prepaid expenses 764 483 Investment in and advances to unconsolidated entities, net of allowance of $1,630 and $1,466, respectively 24,623 18,137 Other assets, net of accumulated amortization and depreciation of $3,237 and $2,840, respectively 718 1,454 ------------- ------------- $230,119 $237,687 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Bank credit facility $32,688 $38,720 Accounts payable and accrued expenses 1,149 1,613 Accounts payable to unconsolidated entities 11 12 Mortgages and bonds payable 107,000 107,932 Notes payable to unconsolidated entities 961 1,015 Other liabilities 3,507 3,639 ------------- ------------- Total liabilities 145,316 152,931 ============= ============= Minority interest 4,600 4,657 Shareholders' equity: Preferred shares, $.01 par value; 20,000,000 shares authorized; 0 outstanding - - Common shares, $.01 par value; 100,000,000 shares authorized; 7,245,664 and 7,119,000 shares issued and outstanding 72 71 Capital in excess of par value 120,673 120,377 Deficit (40,542) (40,349) ------------- ------------- Total shareholders' equity 80,203 80,099 ------------- ------------- Total liabilities and shareholders' equity $230,119 $237,687 ============= ============= See accompanying notes to unaudited condensed consolidated financial statements. 1 ELDERTRUST CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (in thousands, except per share amounts) For the three months For the nine months ended September 30, ended September 30, 2001 2000 2001 2000 ----------------------------------------- Revenues: Rental revenues $4,707 $4,692 $14,061 $14,058 Interest, net of amortization of deferred loan origination costs 592 491 2,124 2,801 Interest from unconsolidated equity investees 938 771 2,734 2,482 Other income 56 37 170 155 ----------------------------------------- Total revenues 6,293 5,991 19,089 19,496 ----------------------------------------- Expenses: Property operating expenses 333 244 923 852 Interest expense, including amortization of deferred finance costs 2,878 3,561 9,283 10,448 Depreciation 1,414 1,458 4,206 4,399 General and administrative 627 649 2,556 2,661 Loss on impairment of long- lived assets - - 450 - Bad debt expense 14 15 42 20,282 ----------------------------------------- Total expenses 5,266 5,927 17,460 38,642 ----------------------------------------- Net income (loss) before equity in losses of unconsolidated entities and minority interest 1,027 64 1,629 (19,146) Equity in losses of unconsolidated entities, net (583) (688) (1,823) (9,570) Minority interest (26) 40 - 1,926 ----------------------------------------- Net income (loss) $418 ($584) ($194) ($26,790) ========================================= Basic weighted average number of common shares outstanding 7,165 7,119 7,134 7,119 ========================================= Net income (loss) per share - basic $0.06 ($0.08) ($0.03) ($3.76) ========================================= Diluted weighted average number of common shares outstanding 7,529 7,119 7,134 7,119 ========================================= Net income (loss) per share - diluted $0.06 ($0.08) ($0.03) ($3.76) ========================================= See accompanying notes to unaudited condensed consolidated financial statements. 2 ELDERTRUST CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands) Nine months ended September 30, ------------------- 2001 2000 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss ($194) ($26,790) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 4,786 4,999 Bad debt expense 42 20,282 Loss on impairment of long-lived assets 450 - Minority interest and equity in losses from unconsolidated entities 1,823 7,644 Net changes in assets and liabilities: Accounts receivable and prepaid expenses 130 (932) Accounts payable and accrued expenses (465) 704 Other (93) 440 --------- --------- Net cash provided by operating activities 6,479 6,347 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (45) (112) Collection of advances to unconsolidated entities 149 659 Net increase in reserve funds and deposits - restricted cash (860) (887) Other (30) - --------- --------- Net cash used in investing activities (786) (340) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Payment of deferred financing fees - (484) Principal payments under bank credit facility (5,763) (693) Principal payments on mortgages and bonds payable (932) (864) Purchase of partnership units (19) - Stock options exercised 95 - Distributions to shareholders - (4,272) Distributions to minority interests - (327) Other (54) (47) --------- --------- Net cash used in financing activities (6,673) (6,687) --------- --------- Net decrease in cash and cash equivalents (980) (680) Cash and cash equivalents, beginning of period 3,105 3,605 --------- --------- Cash and cash equivalents, end of period $2,125 $2,925 ========= ========= Supplemental cash flow information: Cash paid for interest $9,053 $9,957 ========= ========= See accompanying notes to unaudited condensed consolidated financial statements. 3 ELDERTRUST NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. Basis of Presentation The accompanying unaudited condensed consolidated financial statements should be read together with the consolidated financial statements and notes thereto for the year ended December 31, 2000 included in the Company's annual report on Form 10-K filed with the Securities and Exchange Commission. 2. Certain Significant Risks and Uncertainties Genesis and Multicare Chapter 11 Bankruptcy Filings; and Emergence from Bankruptcy Approximately 72% of the Company's consolidated assets at September 30, 2001 consisted of real estate properties leased to or managed by and loans on real estate properties made to Genesis Health Ventures, Inc. ("Genesis") or its consolidated subsidiaries 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 $4.0 million in the third quarter of 2001 and $12.1 million for the nine months ended September 30, 2001. In addition, the Company's equity investees have also leased properties to Genesis or Genesis Equity Investees. Revenues recorded by the company for the nine months ended September 30, 2001 in connection with leases and loans to Genesis and the Multicare Companies, Inc., a 43.6% owned consolidated subsidiary of Genesis ("Multicare"), totaled $4.0 million, or 64% of the Company's total revenues, and $12.1 million, or 64% of the Company's total revenues for the nine months ended September 30, 2001. In addition, certain unconsolidated entities of the Company, accounted for under the equity method, also lease properties to Genesis and recognized revenues of $3.3 million for the three months ended September 30, 2001, and $9.7 million for the nine months ended September 30, 2001, from these properties. As a result of these relationships, the Company's revenues and ability to meet its obligations depends, in significant part, upon the ability of Genesis and Genesis Equity Investees to meet their lease and loan obligations, as well as revenues derived from, and the successful operation of, the facilities leased to or managed by Genesis or Genesis Equity Investees. On June 22, 2000, Genesis, the Company's principal tenant, and Multicare filed for protection under Chapter 11 of the United States Bankruptcy Code. On January 4, 2001, agreements negotiated in the prior year between the Company, Genesis and Multicare and Genesis and Multicare's major creditors were approved by the U.S. Bankruptcy Court and were consummated on January 31, 2001. 4 ELDERTRUST NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) On September 12, 2001, Genesis and Multicare announced that the federal bankruptcy court overseeing the companies' Chapter 11 cases had issued an opinion approving their joint plan of reorganization, subject to certain minor modifications. On September 20, 2001, Genesis and Multicare re-submitted the joint reorganization plan including the required modifications to the bankruptcy court. On October 2, 2001 Genesis and Multicare announced they have successfully completed their reorganization and have emerged from bankruptcy. In connection with the reorganization plan, Multicare became a wholly-owned subsidiary of Genesis. The independent auditors' report on Genesis' 2000 financial statements, included in Genesis' Form 10-K for the year ended September 30, 2000, indicated that there is substantial doubt regarding the ability of Genesis and Multicare to continue as going concerns. Each company's ability to continue as a going concern is dependent upon, among other things, future profitable operations, the ability to comply with the terms of their debtor-in-possession financing arrangements and the ability to generate sufficient cash from operations and financing agreements to meet their obligations. Although Genesis and Multicare have emerged from bankruptcy and continue to make lease and loan payments to the Company at this time, any failure by the combined entities to continue their operations and/or to continue to make lease and loan payments to the Company could have a significant adverse impact on our operations and cash flows due to the significant portion of our properties leased to and loans made to them. Liquidity The Company has a working capital deficit of $54.4 million at September 30, 2001, resulting primarily from $32.7 million of bank credit facility debt, which matures in August 2002, being classified as a current liability and the classification of approximately $25.4 million of long-term debt as current due to the Company's default on mortgages for failure to meet certain technical requirements, including property information requirements and the bankruptcy filing by Genesis. If the Company is unable to obtain waivers of the failed covenants, the lenders could exercise their rights to accelerate the related indebtedness or foreclose on the underlying collateral immediately. Based, in part, on the Company's favorable payment history, the Company believes that the lenders will take no action in regard to these technical defaults. 5 ELDERTRUST NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) 3. Real Estate Loans Receivable The following is a summary of real estate loans receivable (dollars in thousands): Stated Scheduled Balance at Balance at Type of Interest Maturity September 30, December 31, Property Loan Rate Date 2001 2000 ------------------------------ ---------------- -------- --------- ------------- ------------ Harbor Place Melbourne, FL Term 10.0% 5/2002 $ 4,828 $ 4,828 Mifflin Shillington, PA Term 9.5% 6/2002 2,474 5,164 (1) Coquina Place Ormond Beach, FL Term 9.5% 6/2002 1,400 4,577 (1) Lehigh Macungie, PA Term 10.5% 6/2000 - 6,665 (2) Berkshire Reading, PA Term 10.5% 6/2000 - 6,167 (2) Oaks Wyncote, PA Construction 9.0% 6/2002 3,500 5,033 (1) Montchanin Wilmington, DE Construction 10.5% 8/2000 9,496 9,496 Sanatoga Pottstown, PA Construction 10.5% 1/2001 - 6,716 (2) ------------- ------------ 21,698 48,646 Allowance for credit losses (39) (7,087) ------------- ------------ $ 21,659 $ 41,559 ============= ============
(1) Under the terms of the restructuring agreement with Genesis, the principal amounts of these loans receivable were reduced. (2) Title of the related property passed to the Company at January 31, 2001 under the restructuring with Genesis. The Company has one term loan in the amount of $4.8 million, with an original annual interest rate of 9.5%, secured by the Harbor Place facility. On January 31, 2001, under the restructuring of the relationships between ElderTrust and Genesis, the Company extended the term of the loan until May 31, 2002, for a fee of $24,000 which was paid on January 31, 2001. The Company also increased the interest rate to 10.0%. Principal payments are made monthly to the extent of one half of excess cash flow of the property, if any, after payment of operating expenses, management fee, interest and an amount to be agreed upon by the parties for capital expenditures. During the month of October 2001, the Company had discussions with Genesis regarding the above mentioned loan during which Genesis indicated the possibility that they may refinance its mortgage loans with a third party and payoff the amounts owed to the Company before their June 2002 due date. This amount is approximately $12.2 million which is for Harbor Place, Mifflin, Coquina Place, and Oaks. These discussions have resulted from Genesis' recent emergence from bankruptcy and the current interest rate environment. Based on these conversations with Genesis, the Company believes the above loan may be repaid by November 30, 2001. On October 10, 2001, the Company received approximately $10.1 million for the payment of the outstanding Montchanin property mortgage loan and all related accrued interest receivable. All proceeds were applied to the balance of the Company's bank credit facility. 4. Properties Held for Sale The Woodbridge assisted living facility is classified as held for sale on September 30, 2001. After adjusting for impairment losses of $1.5 million, the property has a net carrying value of $9.7 million as of September 30, 2001. The Company continues to actively market the Woodbridge assisted living facility for sale. 6 ELDERTRUST NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) 5. Investments in Unconsolidated Entities The Company's equity investees represent entities in which the controlling interests are owned by Mr. D. Lee McCreary, Jr., 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. Summary unaudited combined financial information as of and for the nine months ended September 30, 2001 for these unconsolidated entities is as follows (dollars in thousands): ET Sub- ET Sub- ET Sub- Meridian, ET Capital Cabot Cleveland LLP Corp. Park, LLC Circle, LLC Total ----------- ---------- ---------- ----------- -------- Current assets $1,296 $178 $126 $188 $1,788 Real estate properties (1) 100,400 - 16,136 13,321 129,857 Notes receivable - 4,180 - - 4,180 Other assets 357 270 537 508 1,672 Total assets 102,053 4,628 16,799 14,017 137,497 Current liabilities 2,480 374 596 656 4,106 Long-term debt (2) 104,590 9,075 16,550 13,289 143,504 Total liabilities 109,156 9,449 17,416 14,171 150,192 Total deficit (7,103) (4,821) (617) (154) (12,695) Change in long-term debt (3) (250) (69) (56) (76) (451) Rental revenue 7,371 - 1,250 1,106 9,727 Interest income 63 1,431 18 17 1,529 Interest expense 6,231 390 1,014 773 8,408 Depreciation/amortization 2,634 - 420 346 3,400 Bad debt expense 47 1,139 - - 1,186 Net income (loss) (1,528) (106) (191) (21) (1,846) Percent ownership 99% 95% 99% 99%
(1) Includes properties under capital lease. (2) Includes capital lease obligations. (3) Change is from June 2001 to September 2001. 6. Bank Credit Facility Effective January 31, 2001, the Bank Credit Facility was extended to August 31, 2002 and the covenants amended to cure the then existing covenant violations. As a result of this extension the Company is (i) 7 ELDERTRUST NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) prohibited from further borrowings under the facility, (ii) required to make monthly principal payments equal to the cash flow generated by the Company for the month and (iii) is prevented from paying distributions to shareholders in excess of 110% of that amount required to maintain the Company's REIT status under the tax laws. The amounts outstanding under the Bank Credit Facility bear interest at a floating Rate of 3.25% over one-month LIBOR, or 6.88% at September 30, 2001. The Company's owned properties and properties underlying loans receivable with an aggregate cost basis of $63.1 million are included in the Bank Credit Facility borrowing base and pledged as collateral at September 30, 2001. 7. Income (Loss) Per Share The following table sets forth the computation of basic and diluted net income (loss) per share for the periods indicated (in thousands, except per share data): For the three months For the three months ended September 30, ended September 30, ------------------------------------------- 2001 2000 2001 2000 ------------------------------------------- Basic income (loss) per share: ------------------------------- Net income (loss) $418 ($584) ($194) ($26,790) Weighted average common shares outstanding 7,165 7,119 7,134 7,119 =========================================== Basic net income (loss) per share $0.06 ($0.08) ($0.03) ($3.76) =========================================== Diluted loss per share: ------------------------------- Net income (loss) $418 ($584) ($194) ($26,790) Weighted average common shares outstanding 7,165 7,119 7,134 7,119 Common stock equivalents - stock options & Warrants 365 - - - ------------------------------------------- Total weighted average number of diluted shares 7,529 7,119 7,134 7,119 =========================================== Diluted net income (loss) per share $0.06 ($0.08) ($0.03) ($3.76) =========================================== Units of ElderTrust Operating Limited Partnership are not included in the determination of weighted average common shares outstanding for purposes of computing diluted income per share since they are redeemable for cash at the Company's discretion. 8 ELDERTRUST NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) 8. New York Stock Exchange Listing During the third quarter of 2001 the Company was notified by the New York Stock Exchange that, as a result of the Company's consistent positive performance regarding the original business plan submitted and the timely achievement of total market capitalization, the Company had met the NYSE's continued listing standards and, therefore, the NYSE was removing the Company from its "Watch List." In accordance with the NYSE rules, the Company will be subject to a 12-month follow-up period during which the Company will be reviewed to ensure that it does not again fall below any of the NYSE's continued listing standards. 9 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements Management's Discussion and Analysis of Financial Condition and Results of Operations contains certain forward-looking statements with respect to results of operations and financial condition of ElderTrust and its consolidated subsidiaries (collectively, "ElderTrust" or the "Company"). In general, these statements are identified by the use of forward-looking words or phrases, including "intended," "will," "should," "could," "may," "continues," "continued," "estimate," "estimated," "expects," "expected," "believes," "anticipates" and "anticipated" or the negative or variations thereof or similar terminology. These statements are not guarantees of the Company's future performance and are subject to risks and uncertainties, and other important factors that could cause the Company's actual performance or achievements to be materially different from those expressed or implied by these forward-looking statements. These risks, uncertainties and factors include, but are not limited to: * the ability of Genesis Health Ventures, Inc. ("Genesis"), the Company's principal tenant, to continue making loan and lease payments to the Company; * the Company's ability to repay, further extend or refinance its Bank Credit Facility when it matures in August 2002; * fluctuation of interest rates; * availability, terms and use of capital; * general economic, business and regulatory conditions; * federal and state government regulation; * changes in Medicare and Medicaid reimbursement programs; and * competition. Refer to the Company's annual report on Form 10-K for the year ended December 31, 2000 for a discussion of these and other factors which management believes may impact the Company. The forward-looking statements included herein represent the Company's judgment as of the date of this Form 10-Q and should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto appearing elsewhere in this report. Although the Company believes that the expectations reflected in these forward-looking statements are reasonable, there can be no assurance that such expectations will prove to be correct. All subsequent written and oral forward-looking statements attributable to the Company are expressly qualified in their entirety by the cautionary statements. The Company disclaims, however, any intent or obligation to update its forward-looking statements. 10 General The Company is a self-managed and self-administered real estate investment trust ("REIT") that invests principally in senior housing and other healthcare facilities, including skilled nursing facilities, assisted and independent living facilities and medical office and other buildings. The Company conducts primarily all of its operations through ElderTrust Operating Limited Partnership (the "Operating Partnership"), of which ElderTrust is the sole general partner. The Company's consolidated assets consist primarily of the assets of the Operating Partnership and its consolidated subsidiaries. As of September 30, 2001, skilled nursing, assisted and independent living facilities comprised approximately 88% of the Company's consolidated investments in real estate properties and loans. Approximately 72% of the Company's consolidated assets at September 30, 2001 consisted of real estate properties leased to or managed by subsidiaries of Genesis and loans on real estate properties made to consolidated and unconsolidated subsidiaries of Genesis. A significant portion of the Company's revenues are currently derived from rents received under long-term leases of healthcare-related real estate. The Company has incurred operating and administrative expenses, which principally consist of compensation expense for its executive officers and other employees, office rental and related occupancy costs. The accompanying unaudited condensed consolidated financial statements of ElderTrust and its consolidated subsidiaries have been prepared assuming the Company will continue as a going concern. As previously discussed, Genesis, the Company's principal tenant, and Multicare filed for reorganization under the provisions of Chapter 11 of the United States Bankruptcy Code. Both companies were operating as debtors-in-possession subject to the jurisdiction of the U.S. Bankruptcy Court as of September 30, 2001. On October 2, 2001, Genesis announced that they successfully completed their reorganization and have emerged from bankruptcy. Genesis also announced that upon the acceptance of the reorganization plan Multicare is now a wholly-owned subsidiary of Genesis. Revenues recorded by the Company for the nine months ended September 30, 2001 in connection with leases and loans to Genesis and Multicare totaled $4.0 million, or 64% of the Company's total revenues, and $12.1 million, or 64% of the Company's total revenues for the nine months ended September 30, 2001. In addition, certain unconsolidated entities of the Company, accounted for under the equity method, also lease properties to Genesis and recognized revenues of $3.3 million for the three months ended September 30, 2001, and $9.7 million for the nine months ended September 30, 2001, from these properties. 11 As a result of these relationships, the Company's revenues and it's ability to meet it's obligations depends, in significant part, upon the: * ability of Genesis and Genesis Equity Investees to meet their lease and loan obligations; and * revenues derived from, and the successful operation of, the facilities leased to or managed by Genesis or Genesis Equity Investees. Included in the Company's consolidated assets at September 30, 2001 are $12.2 million in loans to wholly-owned subsidiaries of Genesis. These loans are secured by real estate and are 100% guaranteed by Genesis. The loans have a weighted average interest rate of 9.6%. During the month of October 2001, the Company had discussions with Genesis regarding the above mentioned loans during which Genesis indicated the possibility that they may refinance its mortgage loans with a third party and payoff the amounts owed to the Company before their June 2002 due date. These discussions have resulted from Genesis' recent emergence from bankruptcy and the current interest rate environment. Based on these conversations with Genesis, the Company believes the loans may be repaid by November 30, 2001. The Company intends that, when those loans are repaid that, the entire proceeds amount of $12.2 million will be applied to further reduce borrowings under the Company's Bank Credit Facility. The independent auditors' report on Genesis' 2000 financial statements, included in Genesis' Form 10-K as of September 30, 2000, indicated that there is substantial doubt regarding the ability of Genesis and Multicare to continue as going concerns. Each company's ability to continue as a going concern is dependent upon, among other things, future profitable operations and the ability to generate sufficient cash from operations and financing agreements to meet their obligations. Any failure of Genesis to continue their operations and/or to continue to make lease and loan payments to us could have a significant adverse impact on our operations and cash flows due to the significant portion of our properties leased to and loans made to Genesis. Equity Investees Financial information regarding unconsolidated entities accounted for by the equity method is as follows: ET Capital Corp. ET Capital has notes receivable aggregating $4.2 million at September 30, 2001 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. 12 ET Capital's long-term debt includes demand promissory notes from ElderTrust Operating Partnership aggregating $3.1 million, bearing interest at 15% and maturing at various dates from April 2008 to December 2011. Payments on these notes were current at September 30, 2001. The Company recorded interest income of $130,000 and $136,000 for the three months ended September 30, 2001 and 2000, respectively, related to the note receivable from ET Capital. The Company also recorded income of $14,000 and $15,000 related to the portion of its equity interest in ET Capital's results of operations for the three months ended September 30, 2001 and 2000, respectively. The Company recorded interest income of $390,000 and $591,000 related to the note receivable from ET Capital for the nine months ended September 30, 2001 and 2000, respectively. The Company recorded losses of $101,000 and $7.5 million related to the portion of its equity interest in ET Capital's results of operations for the nine months ended September 30, 2001 and 2000, respectively. In May 2001, ET Capital Corp. was named as a third party defendant in a complaint filed against Genesis. The complaint was filed by several not-for-profit entities, including the AGE Institute of Florida ("AGE"), who own skilled nursing facilities that were formerly managed by Genesis. The third party complaints arise from a lawsuit filed by Genesis seeking payment from AGE of various management fees allegedly owed Genesis by AGE. In its third party complaint, AGE asserts, among other things, that by acquiring loans from Genesis secured by second mortgage liens on properties owned by the AGE Institute of Florida, ET Capital joined with Genesis in an effort to defraud AGE. These loans total $7.8 million and were acquired by ET Capital in 1998. ET Capital believes that the complaint is without merit and intends to vigorously defend its position. ET Sub-Meridian Limited Partnership, L.L.P. The Company recorded losses of $523,000 and $616,000 related to its equity interest in ET Sub-Meridian's results of operations for the quarter ended September 30, 2001 and 2000, respectively. ET Sub-Meridian has real estate investments and long-term debt of $100.4 million and $104.6 million, respectively, at September 30, 2001. At September 30, 2001, ET Sub- Meridian had a $17.6 million subordinated demand loan bearing interest at 12% per annum payable to the Company. The Company recorded $539,000 in interest income on this loan receivable during the quarters ended September 30, 2001 and 2000, respectively. The Company also acquired from Genesis a $8.5 million loan receivable from ET Sub-Meridian on January 31, 2001 and recorded interest income of $174,000 related to this note for the quarter ended September 30, 2001. The Company recorded losses of $1.5 million and $1.8 million related to its equity interest in ET Sub-Meridian's results of operations for the nine months ended September 30, 2001 and 2000, respectively. The Company also recorded $1.5 million and $2.0 million in interest income on its loans receivable from ET-Sub Meridian for the nine months ended September 30, 2001 and 2000, respectively. 13 ET Sub-Cabot Park, LLC ET Sub-Cleveland Circle, LLC ET Sub-Cabot Park, LLC and ET Sub-Cleveland Circle, LLC have subordinated demand loans in the aggregate amount of $6.2 million payable to the Company at September 30, 2001, bearing interest at 12% per annum. The Company recorded $96,000 in interest income for each of the quarters ended September 30, 2001 and 2000, in connection with the demand loans. The Company recorded $285,000 and $286,000 in interest income for the nine months ended September 30, 2001 and 2000, in connection with the above demand loans. The Company recorded an aggregate loss of $73,000 and $68,000 related to its equity interest in ET-Sub-Cabot Park, LLC's and ET Sub-Cleveland Circle, LLC's results of operations for the quarters ended September 30, 2001 and 2000, respectively. These two entities each have real estate investments and aggregate long-term debt of $29.5 million and $29.8 million at September 30, 2001. The real estate investments and aggregate long-term debt at September 30, 2000 were both equal to $30.5 million. The Company recorded an aggregate loss of $209,000 and $259,000 related to its equity interest in ET-Sub-Cabot Park, LLC's and ET Sub- Cleveland Circle, LLC's results of operations for the nine months ended September 30, 2001 and 2000, respectively. Results of Operations Three months ended September 30, 2001 compared with the three months ended September 30, 2000 Revenues Rental revenues were $4.7 million for each of the quarters ended September 30, 2001 and 2000. Interest income was $1.5 million and $1.3 million for the quarters ended September 30, 2001 and 2000, respectively. Expenses Interest expense, which included amortization of deferred financing costs of $147,000 and $164,000, was $2.9 million for the quarter ended September 30, 2001 and $3.6 million for the quarter ended September 30, 2000. The Company's interest expense decreased primarily due to the decrease in the one-month LIBOR from 6.69% at September 30, 2000 to 3.63% at September 30, 2001. The Company's interest rate on its Bank Credit Facility was 6.88% at September 30, 2001 compared to 9.44% at September 30, 2000. The Company's interest rate on its variable rate mortgages was 6.63% at September 30, 2001 compared to 9.69% at September 30, 2000. 14 General and administrative expenses were $0.6 million for each of the quarters ended September 30, 2001 and 2000. Nine months ended September 30, 2001 compared with the nine months ended September 30, 2000 Revenues Rental revenues were $14.1 million for each of the nine month periods ended September 30, 2001 and 2000. Interest income, net of amortization of deferred loan costs of $0 and $137,000, was $4.9 million and $5.3 million for the nine months ended September 30, 2001 and 2000, respectively. This decrease is primarily due to the decrease in interest earned on the term and construction loans resulting from the Genesis and Multicare lease and loan restructuring agreements. The principal amounts of two term loans and one construction loan (Mifflin, Coquina Place and Oaks), were reduced by $7.4 million effective January 31, 2001, as part of the Genesis and Multicare lease and loan restructuring agreements, reducing interest income for the nine months ended September 30, 2001 by approximately $0.4 million. Expenses Interest expense, which included amortization of deferred financing costs of $579,000 and $601,000, was $9.3 million for the nine months ended September 30, 2001 as compared to $10.4 million for the nine months ended September 30, 2000. The Company's interest expense decreased primarily due to the decrease in the one-month LIBOR from 6.69% at September 30, 2000 to 3.63% at September 30, 2001. The Company's interest rate on the Bank Credit Facility was 6.88% at September 30, 2001 compared to 9.44% at September 30, 2000. The Company's interest rate on its variable rate mortgages was 6.63% at September 30, 2001 compared to 9.69% at September 30, 2000. General and administrative expenses of $2.6 million for the nine months ended September 30, 2001 were consistent with $2.7 million for the corresponding period in 2000. Bad debt expense was $42,000 and $20.3 million for the nine months ended September 30, 2001 and 2000, respectively. This decrease was a result of impairment charges recorded on real estate loans receivable of $18.1 million, investments in and advances to unconsolidated entities of $1.2 million and a note receivable from a former officer of the Company of $990,00 which were recorded in the nine months ended September 30, 2000. 15 Liquidity and Capital Resources Net cash provided by operating activities was $6.5 million for the nine months ended September 30, 2001 compared to $6.4 million for the corresponding period in 2000. Net cash used in investing activities was $786,000 for the nine months ended September 30, 2001 compared to $340,000 for the corresponding period in 2000. This increase in net cash used was principally a result of reduced collections on advances to unconsolidated entities of $510,000 slightly off set by the decrease in capital expenditures of $67,000. Net cash used in financing activities was $6.7 million for each of the nine months ended September 30, 2001 and 2000. The net cash used in financing activities was primarily the result of the repayment of $5.8 million on the Company's Bank Credit Facility during the nine months ended September 30, 2001 as compared to $0.7 million for the corresponding period in 2000. The main contributors to the net cash used in financing activities for the nine months ended September 30, 2000 were $4.6 million in distributions to shareholders and minority interests and the payment of $0.5 million in deferred financing fees. No distributions have been made in 2001. As of September 30, 2001, the Company had shareholders' equity of $80.2 million and Bank Credit Facility borrowings and mortgages and bonds payable to third parties aggregating $139.7 million, net of discount on the Bank Credit Facility of $269,000, which represents a debt to equity ratio of 1.74 to 1. The debt to equity ratio was 1.83 to 1 at December 31, 2000. At September 30, 2001, the Company's third party indebtedness of $139.7 million consisted of $62.7 million in variable rate debt and $77.0 million in fixed rate debt. The weighted average annual interest rate on this debt was 7.49% at September 30, 2001. Based on interest rates at September 30, 2001, quarterly debt service requirements related to this debt approximates $4.0 million. The Bank Credit Facility currently matures on August 31, 2002. If the Company is unable to pay-off or obtain replacement financing by August 31, 2002, or is unable to negotiate a further extension of the current Bank Credit Facility at that time, or for any other reason the Company were to be in default under the Bank Credit Facility prior to its maturity, Deutsche Bank could exercise its rights under the Bank Credit Facility, including the right to foreclose on the collateral securing the Bank Credit Facility. These remedies would have a significant adverse affect on the Company's ability to continue its operations and meet its obligations. 16 Future increases in interest rates, as well as any defaults by tenants or borrowers on their leases or loans, also could adversely effect the Company's cash flow and its ability to pay its obligations. To qualify as a REIT, the Company must distribute to its shareholders each year at least 90% of its net taxable income, excluding any net capital gain. If the Company is unable to make required shareholder distributions, then the Company may be unable to qualify as a REIT and be subject to federal income taxes. The Company does not expect to have net taxable income for the year ended December 31, 2001, and therefore, the Company's suspension of quarterly distributions to its shareholders is not expected to affect its REIT status. 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 87% of the Company's investments in owned facilities at September 30, 2001. As a result of these arrangements, the Company does not believe it will be responsible for significant expenses in connection with the facilities during the terms of the leases. However, there can be no assurance the Company will not be responsible for significant expenses of its leased properties in the event one or more of its lessees default on their leases with the Company. Funds from Operations The White Paper on Funds from Operations approved by the Board of Governors of NAREIT defines Funds from Operations ("FFO") as net income (loss), computed in accordance with accounting principles generally accepted in the United States of America, excluding gains (losses) from sales of property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures are calculated to reflect FFO on the same basis. The Company believes that FFO is helpful to investors as a measure of the performance of an equity REIT 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 FFO using standards established by NAREIT which may not be comparable to FFO reported by other REITs that do not define the term using the current NAREIT definition or that interpret the current NAREIT definition differently than the Company. FFO does not represent cash generated from operating activities using accounting principles generally accepted in the United States of America and should not be considered as an alternative to net income as an indication of the 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. FFO includes both recurring and non-recurring items, except those results defined as "extraordinary items" under accounting principles generally accepted in the United States of America and gains and losses from sales of depreciable operating property. 17 The following table presents the Company's Funds from Operations for the periods presented below: For the three months For the nine months Ended September 30, Ended September 30, ----------------------------------------- 2001 2000 2001 2000 ----------------------------------------- (in thousands) Funds from Operations: Net income (loss) $418 ($584) ($194) ($26,790) Minority interest 26 (40) - (1,926) ----------------------------------------- Net income (loss) before minority interest 444 (624) (194) (28,716) Adjustments: Real estate depreciation and amortization: Consolidated entities 1,410 1,463 4,193 4,522 Unconsolidated entities 1,122 1,122 3,366 3,366 Other items: Impairment charges on real estate properties - - 450 - ----------------------------------------- Funds from Operations before allocation to minority interest 2,976 1,961 7,815 (20,828) Less: Funds from Operations allocable to minority interest (155) (133) (410) 1,396 ----------------------------------------- Funds from Operations attributable to the common shareholders $2,821 $1,828 $7,405 ($19,432) ========================================= The following is a summary of capital expenditures for the three and nine Month periods ended September 30, 2001 and 2000: For the three months For the nine months Ended September 30, Ended September 30, ----------------------------------------- 2001 2000 2001 2000 ----------------------------------------- (in thousands) Recurring capital expenditures: Corporate / Administrative $ - $ - $ - $ 9 Equipment Replacement 3 - 3 7 Capital improvements 5 - 27 55 ----------------------------------------- 8 - 30 71 ----------------------------------------- Major renovations - 20 15 41 ----------------------------------------- Total capital expenditures $8 $20 $45 $112 ========================================= 18 Recurring capital expenditures include those expenditure made in the normal course of operations for corporate/administrative items and for routine improvements to the Company's existing properties. Major renovations include those expenditures which are larger in scope than recurring capital expenditures both in dollar value and time to complete and generally enhance the marketability and revenue producing capacity of the property. 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 presented below. The summary condensed consolidated financial data of Genesis were obtained from Genesis' quarterly report on Form 10-Q for the quarter ended June 30, 2001 as filed with the Securities and Exchange Commission (the "SEC"). The Genesis financial data presented includes only the most recent interim reporting period. The Company can make no representation as to the accuracy and completeness of Genesis' public filings. It should be noted that Genesis has no duty, contractual or otherwise, to advise the Company of any events subsequent to such dates which might affect the significance or accuracy of such information. Genesis is subject to the information filing requirements of the Securities and Exchange Act of 1934, as amended, and in accordance therewith, is obligated to file periodic reports, proxy statements and other information with the SEC relating to its business, financial condition and other matters. Such reports, proxy statements and other information may be inspected at the offices of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. 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 unaudited condensed consolidated financial data for Genesis as of and for the periods indicated. For the periods presented, Genesis consolidated the results of Multicare, which was 43.6% owned by Genesis. The non-Genesis shareholders' were recorded as minority interest. In connection with its reorganization plan approved by the U.S. Bankruptcy Court in September 2001, Multicare has become a wholly-owned subsidiary of Genesis. 19 For the three months For the nine months ended June 30, ended June 30, ---------------------------------------------- 2001 2000 2001 2000 ---------------------------------------------- (in thousands, except per share data) Operations Data ---------------------------------------- Net revenues $650,741 $615,851 $1,909,842 $1,807,578 Debt restructuring, reorganization and other costs 20,014 36,202 48,220 80,315 Gain on sale of assets - - (1,770) - Loss on sale of assets - 7,922 2,310 7,922 Multicare joint venture restructuring charge - - - 420,000 Depreciation and amortization 26,688 29,423 80,076 87,578 Lease expense 9,024 9,661 27,525 28,674 Interest expense, net 27,067 61,180 92,834 170,682 Loss before income taxes, minority interest, equity in net loss of unconsolidated affiliates, and cumulative effect of accounting change (18,820) (80,022) (70,774) (583,805) Income tax benefit - 20,233 - 35,968 Loss before minority interest, equity in net loss of unconsolidated affiliates and cumulative effect of accounting change (18,820) (59,789) (70,774) (547,837) Minority interest 2,077 10,928 8,292 25,223 Loss before cumulative effect of accounting change (16,916) (49,521) (63,701) (524,542) Cumulative effect of accounting change(1) - - - (10,412) Net Loss (16,916) (49,521) (63,701) (534,954) Net loss available to common shareholders (2) ($28,291) ($60,937) ($97,825) ($566,051) Per common share data: Basic and diluted Loss before income tax benefit, minority interest, equity in net loss of unconsolidated affiliates and cumulative effect of accounting change ($0.58) ($1.25) ($2.01) ($11.94) Net loss ($0.58) ($1.25) ($2.01) ($12.16) Weighted average shares common stock and equivalents 48,641,456 48,641,154 48,641,456 46,542,614
_______________ (1) 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. (2) Net loss reduced by preferred stock dividends. June 30, September 31, --------------------------- 2001 2000 --------------------------- (dollars in thousands) Balance Sheet Data ---------------------------------------------- Working capital $ 282,787 $ 304,241 Total assets 3,082,447 3,127,899 Long-term debt 14,920 10,441 Liabilities subject to compromise 3,058,532 2,446,673 Shareholders' deficit ($ 343,456) ($ 246,926) 20 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk The Company provides fixed rate mortgage loans to operators of healthcare facilities as part of its normal operations. The Company also has mortgages and bonds payable which bear interest at fixed rates. Changes in interest rates generally affect the fair market value of the underlying fixed interest rate loans receivable or payable, but not earnings or cash flows. Refer to the Company's annual report on Form 10-K for the year ended December 31, 2000 for discussion of the market risk associated with these financial instruments. For variable rate debt, changes in interest rates generally do not impact fair market value, but do affect future earnings and cash flows. The weighted average interest rate on borrowings outstanding under the Bank Credit Facility and variable rate mortgages was 6.76% at September 30, 2001. In October 2001, upon the repayment of the Montchanin loan, the Bank Credit Facility was further reduced by $10.1 million. Assuming the Bank Credit Facility and variable rate mortgage balances outstanding at October 31, 2001 of $52.6 million, net of $269,000 discount, remain constant, each one percentage point increase (decrease) in interest rates from 6.76% at September 30, 2001 would result in a increase (decrease) in interest expense for the next twelve months of approximately $526,000. Amounts outstanding under the Bank Credit Facility bear interest at 3.25% over one-month LIBOR. Variable rate mortgages bear interest at 3.00% over one-month LIBOR. The Company is exposed to market risks related to fluctuations in interest rates on its Bank Credit Facility and variable rate mortgages. The Company utilized interest rate cap provisions within some of its binding agreements to limit the impact that interest rate fluctuations have on its variable rate mortgages. The interest rate cap provisions embedded in the basic lending agreement do not meet the criteria for separate fair value accounting under SFAS No. 133. 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. The Company may borrow additional money with variable interest rates in the future. Increases in interest rates, therefore, would result in increases in interest expense, which could adversely affect the Company's cash flow and its ability to pay its obligations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." 21 PART II - OTHER INFORMATION ITEM 3. Defaults Upon Senior Securities The Company is in default on four mortgages totaling approximately $25.4 million for failure to meet certain technical requirements, including property information requirements and the bankruptcy filing by Genesis. If the Company is unable to obtain waivers of the failed covenants, the lenders could exercise their rights to accelerate the related indebtedness or foreclose on the underlying collateral immediately. Based, in part, on the Company's favorable payment history, the Company believes that the lenders will take no action in regard to these technical defaults. ITEM 6. Exhibits and Reports on Form 8-K (a) Exhibits The exhibits filed with this report are listed in the exhibit index on page 24. (b) Reports on Form 8-K None 22 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on November 13, 2001. ELDERTRUST /s/ D. Lee McCreary, Jr. ------------------------------------------------- D. Lee McCreary, Jr. President, Chief Executive Officer, Chief Financial Officer, Treasurer and Secretary (Principal Financial and Accounting Officer) 23 EXHIBIT INDEX Exhibit No. Description ----------- ----------- 11.1 Computation of basic and diluted income (loss) per share for the three and nine month periods ended September 30, 2001 and 2000. 24 EXHIBIT 11.1 COMPUTATION OF BASIC AND DILUTED NET INCOME (LOSS) PER SHARE FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 The following calculation is submitted in accordance with requirements of the Securities Exchange Act of 1934: For the three months For the three months ended September 30, ended September 30, ------------------------------------------- 2001 2000 2001 2000 ------------------------------------------- Basic income (loss) per share: ------------------------------- Net income (loss) $418 ($584) ($194) ($26,790) Weighted average common shares outstanding 7,165 7,119 7,134 7,119 =========================================== Basic net income (loss) per share $0.06 ($0.08) ($0.03) ($3.76) =========================================== Diluted loss per share: ------------------------------- Net income (loss) $418 ($584) ($194) ($26,790) Weighted average common shares outstanding 7,165 7,119 7,134 7,119 Common stock equivalents - stock options & Warrants 365 - - - ------------------------------------------- Total weighted average number of diluted shares 7,529 7,119 7,134 7,119 =========================================== Diluted net income (loss) per share $0.06 ($0.08) ($0.03) ($3.76) =========================================== 25