UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the period ended: September 30, 1996
Commission File Number: 0-28752
KAPSON SENIOR QUARTERS CORP
( Exact name of registrant as specified in its charter)
Delaware 11-3323503
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
242 Crossways Park West, Woodbury, N.Y. 11797
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (516) 921-8900
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 and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registration
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES_______ NO____X____
Shares of Common Stock outstanding as of October 31, 1996: 7,750,000
<PAGE>
KAPSON SENIOR QUARTERS CORP.
INDEX
Page
----
PART I Financial Information
Condensed Combined Balance Sheets - 2
September 30, 1996 and
December 31, 1995
Condensed Combined Statements of Operations - 3
Three and Nine months ended
September 30, 1996 and 1995
Condensed Combined Statements of Cash Flows - 4
Nine months ended
September 30, 1996 and 1995
Notes to Condensed Combined Financial Statements 5-10
Management's Discussion and Analysis 11-15
of Financial Condition and
Results of Operations
Part II Other Information 16
Signatures 17
Exhibit 27 Financial Data Schedule 18
<PAGE>
KAPSON SENIOR QUARTERS CORP.
CONDENSED COMBINED BALANCE SHEETS
(unaudited)
ASSETS
<TABLE>
<CAPTION>
Pro Forma
September 30, 1996 September 30, 1996 December 31, 1995
------------------ ------------------ -----------------
<S> <C> <C> <C>
Current assets
Cash and cash equivalents $ 25,929,009 $ 584,509 $ 3,392,318
Accounts receivable 96,318 96,318 77,837
Prepaid expenses and other current
assets 440,964 440,964 270,317
------------ ------------ ------------
Total current assets 26,466,291 1,121,791 3,740,472
Property and equipment, net 58,689,581 58,689,581 29,445,121
Facility development costs 474,767 474,767 16,374,566
Restricted cash 2,755,933 2,755,933 2,592,185
Deferred financing costs, net 2,507,627 2,507,627 2,082,285
Intangibles 3,102,263 3,102,263 --
Investment in joint ventures 541,110 541,110 --
Other assets 1,670,920 1,670,920 172,163
------------ ------------ ------------
Total assets $ 96,208,492 $ 70,863,992 $ 54,406,792
============ ============ ============
LIABILITIES AND PARTNERS' AND SHAREHOLDERS' (DEFICIT)
Current liabilities
Current portion of long-term debt $ 245,867 $ 245,867 $ 245,867
Accounts payable and accrued
expenses 3,275,105 3,275,105 3,219,472
Accrued interest -- -- 363,198
Due to affiliates -- -- 3,300,450
Deferred revenue 364,420 364,420 207,564
------------ ------------ ------------
Total current liabilities 3,885,392 3,885,392 7,336,551
Long-term debt 72,563,377 72,563,377 53,807,880
Resident security deposits 1,623,098 1,623,098 1,278,147
Deferred interest payable 209,718 209,718 105,200
Construction retainage payable 613,057 613,057 227,200
------------ ------------ ------------
Total liabilities 78,894,642 78,894,642 62,754,978
------------ ------------ ------------
Minority Interest 1,790,577 1,790,577 1,463,271
------------ ------------ ------------
Partners' and shareholders' (deficit) 15,523,273 (9,821,227) (9,811,457)
------------ ------------ ------------
Total liabilites and partners' and
shareholders' (deficit) $ 96,208,492 $ 70,863,992 $ 54,406,792
============ ============ ============
</TABLE>
<PAGE>
KAPSON SENIOR QUARTERS CORP.
CONDENSED COMBINED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
1996 1995 1996 1995
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Assisted living revenues $5,763,819 $3,555,716 $15,292,744 $10,579,905
Management fees 354,181 126,196 786,316 335,257
Other - affiliates -- 11,266 -- 33,799
---------- ---------- ----------- -----------
Total revenues 6,118,000 3,693,178 16,079,060 10,948,961
---------- ---------- ----------- -----------
Operating expenses:
Assisted living operating expenses 3,913,036 2,363,084 10,164,775 6,294,412
General and administrative 1,109,277 426,085 2,362,424 1,156,093
Depreciation 689,012 308,519 1,600,715 884,208
---------- ---------- ----------- -----------
Total operating expenses 5,711,325 3,097,688 14,127,914 8,334,713
---------- ---------- ----------- -----------
Operating income 406,675 595,490 1,951,146 2,614,248
Equity in income from joint ventures 38,172 -- 66,110 --
Interest income 24,025 14,632 128,086 35,960
Interest expense (1,755,603) (1,011,495) (4,599,745) (2,666,778)
Interest expense - affiliates (47,628) (37,559) (168,326) (142,179)
Other income (expense), net (4,744) 123 (12,566) 1,194
---------- ---------- ----------- -----------
Loss before minority interest (1,339,103) (438,809) (2,635,295) (157,555)
Minority interest in net loss of
combined partnerships 501,998 -- 872,694 --
---------- ---------- ----------- -----------
Net loss ($837,105) ($438,809) ($1,762,601) ($157,555)
========== ========== =========== ===========
Pro forma data:
Net loss ($837,105) ($438,809) ($1,762,601) ($157,555)
Pro froma benefit for income taxes 334,842 175,524 705,040 63,022
---------- ---------- ----------- -----------
Pro forma net loss ($502,263) ($263,285) ($1,057,561) ($94,533)
========== ========== =========== ===========
Pro forma net loss per share ($0.11) ($0.06) ($0.22) ($0.02)
========== ========== =========== ===========
Pro forma weighted average number
of common shares outstanding 4,758,000 4,758,000 4,758,000 4,758,000
========== ========== =========== ===========
</TABLE>
<PAGE>
KAPSON SENIOR QUARTERS CORP.
CONDENSED COMBINED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1996 1995
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss ($ 1,762,601) ($ 157,555)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation 1,600,715 884,208
Amortization of deferred financing costs and intangibles 274,002 159,736
Minority interest in net loss of combined partnerships (872,694) (1,563)
Equity in income from invesment in joint ventures (66,110) --
Changes in other assets and liabilities, excluding the effect
of acquired facilites:
Accounts receivable (18,481) (45,372)
Prepaid expenses and other current assets (75,146) (1,476,007)
Restricted cash - resident security deposits 475,030 48,806
Other assets (1,414,761) (143,976)
Accounts payable and accrued expenses 55,633 1,636,628
Accrued interest (258,680) 178,175
Resident security deposits 344,951 (4,293)
Deferred revenue 156,856 23,565
------------ ------------
Net cash (used in) provided by
operating activities (1,561,286) 1,102,352
------------ ------------
Cash flows from investing activities:
Acquisition of facilities, (net of cash assumed
of $518,000) (9,856,250) --
(Increase) in restricted mortgage escrow funds (638,778) (329,730)
Investment in joint venture (475,000) --
Purchases and development of property and equipment (8,137,516) (14,147,354)
Sale of minority interests in combined partnerships 1,200,000 --
------------ ------------
Net cash used in investing activities (17,907,544) (14,477,084)
------------ ------------
Cash flow from financing activities:
Proceeds from issuance of long-term debt 19,282,227 14,296,800
Principal payment of long-term debt (526,730) (46,407)
Deferred financing costs (471,857) (81,949)
Due to affiliates (3,375,450) (116,050)
Contributions to capital 3,271,067 --
Distributions to partners and shareholders (1,518,236) (711,693)
------------ ------------
Net cash provided by financing
activities 16,661,021 13,340,701
------------ ------------
Net decrease in cash and
cash equivalents (2,807,809) (34,031)
Cash and cash equivalents, beginning of period 3,392,318 1,886,634
------------ ------------
Cash and cash equivalents, end of period $ 584,509 $ 1,852,603
============ ============
Cash, paid for interest $ 4,510,549 $ 2,328,865
============ ============
</TABLE>
<PAGE>
KAPSON SENIOR QUARTERS CORP.
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
1. Operations and Summary of Significant Accounting Policies
The Company
Kapson Senior Quarters Corp. (The "Company") is an owner, operator, manager and
developer of assisted living facilities which was incorporated under the General
Corporation Law of Delaware on June 7, 1996 by three individual equal owners
(the "Kaplans"). The Company was formed in order to consolidate and expand the
assisted living facility business of the Kapson Group (the"Predecessor") of
which the Kaplans are owners. The Company had no operations prior to October 1,
1996.
On October 1, 1996, the Company sold 3,550,000 shares of common stock to the
public at a price of $10 per share in an initial public offering (the
"Offering"). The company realized net proceeds from the Offering of
approximately $31.3 million, after deducting offering costs of approximately
$4.2 million. Concurrently with the completion of the Offering, the Predecessor
contributed its interests in its wholly owned, majority and minority owned
facilities and management agreements with respect to facilities which were owned
by unrelated parties to the company in exchange for 4,150,000 shares of common
stock of the Company (see Predecessor, below).
The Predecessor
The financial statements included herein as of September 30, 1996 and December
31, 1995 and for the three and nine months ended September 30, 1996 and 1995
represent the combined results of operations and financial position of the
Predecessor. The Predecessor develops, owns, operates and manages assisted
living facilities for senior citizens. As mentioned above, the Predecessor
contributed its businesses to the Company at the consummation of the Offering on
October 1, 1996.
The Predecessor represents a combination of the businesses of Sub Chapter S
corporations, Partnerships or Limited Liability Companies which own, assisted
living facilities, facilities under development, an entity that provides
facility management services to unrelated entities, an entity that provides
administrative support to the Predecessor entities, and the Company.
<PAGE>
The assisted living facilities owned and operated by the Predecessor are as
follows:
<TABLE>
<CAPTION>
FACILITY ENTITY FORM %
<S> <C> <C> <C>
Wholly and majority owned
Senior Quarters at Stamford Kapson Stamford Corp. Sub Chapter S 100
Senior Quarters at Huntington Commco Management Associates, Inc. Sub Chapter S 100
Station
Senior Quarters at Centereach I HK Associates General Partnership 100
Senior Quarters at Centereach II KapShore Development Corp. Sub Chapter S 100
*Town Gate East Kapson Rochester East, LLC Limited Liability
Company
*Town Gate Manor Kapson Rochester Manor, LLC Limited Liability 100
Company
*Senior Quarters at Chestnut Ridge Chestnut Ridge Development LLC Limited Liability 50
Company
+Senior Quarters at East Northport Larkfield Garden Associates L.P. Limited Partnership 50
Senior Quarters at Briarcliff Manor Kapson Briarcliff Manor, LLC Limited Liability 100
(under development) Company
Minority Owned Joint Ventures
(under development)
Senior Quarters at Jamesburg Kapson Jamesburg Development LLC Limited Liability 11
Company
Senior Quarters at Glen Riddle Kapson Glen Riddle Development LLC Limited Partnership 10
*Senior Quarters at Montville Kapson Montville Development LLC Limited Liability 23.75
Company
</TABLE>
* Ownership percentages were acquired or sold in April 1996 (See Note 2)
+ See Notes 2 and 5
Basis of Presentation
The accompanying condensed combined financial statements include the assets,
liabilities and operations associated with the wholly and majority owned
entities of the Predecessor listed above, as well as the Company. Since the
entities have common ownership and management interest, the assets and
liabilities are reflected at historical cost. Investments in minority owned
joint ventures are accounted for on the equity method. All significant
intercompany accounts and transactions have been eliminated in combination.
Minority interests represent the net equity attributable to non-affiliated
investors that are not owned by the Predecessor.
The condensed combined financial statements included herein are unaudited and
include all adjustments (consisting of normal recurring adjustments) which are,
in the opinion of management, necessary for a fair presentation of the financial
position and results of operations of the interim period pursuant to the rules
and regulations of the Securities and Exchange Commission. Certain information
and footnote disclosures
<PAGE>
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted. These condensed
combined financial statements should be read in conjunction with the 1995
audited financial statements of the Predecessor and the 1996 audited balance
sheet of the Company included in the Company's registration statement on Form
S-1 filed with respect to the Offering. Although the Predecessor's and Company's
operations are not highly seasonal, the results of operations for the three and
nine months ended September 30, 1996 and 1995 are not necessarily indicative of
the operating results of the full year.
Intangible Assets
Intangible assets consists of goodwill ($2,811,923 net at September 30, 1996)
which is the excess of the purchase price over the net assets of acquired
facilities which is being amortized on the straight-line method over 15 years,
and a covenant not to compete ($290,340, net at September 30, 1996) which is
being amortized on a straight-line basis over 7 years.
If there is an event or change in circumstances that indicates that the basis of
the long lived intangibles may not be recoverable, it is the Predecessor's
policy to assess any impairment in value by making a comparison of the current
and projected operating cash flows of the facility for which the intangible
relates over its remaining useful life, on an undiscounted basis, to the
carrying amount of the intangible. Such carrying amounts would be adjusted, if
necessary, to reflect an impairment in value of the intangible.
Pro Forma Presentation
The pro forma presentation in the accompanying balance sheet reflects the
issuance of the 3,550,000 shares of common stock and the net proceeds of
approximately $31.3 million, in connection with the Offering; the contribution
of the Predecessor businesses to the Company in exchange for 4,150,000 shares of
the Company's common stock and final distributions declared by certain entities
that comprise the Predecessor in the aggregate amount of $6,082,000 which were
paid from the proceeds of the Offering. Such distributions were primarily used
to satisfy the tax liabilities of the Kaplans incurred upon the transfer of the
Predecessor interests in the facilities to the Company and real state transfer
taxes arising out of the transaction.
The pro forma benefit for income taxes is based on the historical combined
financial data of the Predecessor as if the entities comprising the Predecessor
had operated as taxable corporations for the periods presented and is recorded
at the statutory rate in effect during the period (40%).
The pro forma net loss per share for all periods presented were determined based
on the number of shares of common stock issued by the Company in the Offering to
fund the $6,082,000 distribution based on the offering price of $10 per share
(608,200) plus, the issuance of the 4,150,000 shares of common stock to the
Kaplans for its contribution of the Predecessor businesses to the Company.
2. Acquisitions and Dispositions
Acquisitions
On April 1, 1996 the Predecessor purchased two assisted living facilities (Town
Gate Manor and Town Gate East) for approximately $10,375,000 which it fully
funded through mortgage notes under the Credit Facility (Note 3). The
Predecessor has accounted for this acquisition under the purchase method. Under
the purchase method the purchase price is allocated to the assets acquired and
liabilities assumed based upon their relative fair value with the excess of the
purchase price over the fair value of the net assets acquired recorded as good-
will. The preliminary allocation of the purchase price, which in management's
opinion is not expected to materially differ from the final fair value valuation
adjustments of the net assets acquired is:
<PAGE>
Cash ................................................. $ 518,000
Property and equipment ............................... 6,422,000
Goodwill ............................................. 2,903,000
Covenant not to compete .............................. 323,000
Other assets ......................................... 290,000
Other liabilities .................................... (81,000)
------------
Purchase price ....................................... $ 10,375,000
============
On April 1, 1996 the Predecessor also purchased for $475,000 in cash, a 23.75%
interest in a limited partnership (Senior Quarters at Montville). The
Predecessor is accounting for this investment under the equity method of
accounting. (See Note 5)
Dispositions
In April, 1996 the Predecessor sold a 49.9% interest in its Senior Quarters at
Chestnut Ridge facility to an unrelated party for $1,200,000. Since the
Predecessor has retained operational and 50.1% voting control of the facility,
the results of the operations of the facility are combined in the accompanying
financial statements with the 49.9% investment reflected as a component of
minority interest.
Pro Forma Financial Information
The Predecessor acquired and disposed of interests in facilities during the nine
months ended September 30, 1996. The pro forma financial information set forth
below is based upon the Predecessor's historical Condensed Combined Statements
of Operations for the nine months ended September 30, 1996 and 1995, adjusted to
give effect to these transactions as of January 1, 1995.
The pro forma financial information is presented for informational purposes only
and may not be indicative of what actual results of operations would have been
had the acquisitions occurred on January 1, 1995, nor does it purport to
represent the results of operations for future periods.
Nine Months ended
September 30,
1996 1995
---- ----
Total Revenue .................................. 16,990 13,613
Net Loss ....................................... (1,815) (376)
Pending Acquisition
In August 1996, the Company entered into an agreement to purchase the remaining
50% interest in Senior Quarters at East Northport. The purchase price will be
satisfied through (i) 50,000 shares of common stock and (ii) the remainder of
the purchase price will be paid in cash ($2,100,000). (See Note 5)
<PAGE>
3. Long-Term Debt
The Company and the Predecessor have available a $40 million recourse line of
credit (the "Credit Facility") from Health Care REIT Inc. The Credit Facility
provides both construction and permanent financing.
Construction financings, which can also be used for acquisitions, generally
expire in twelve months or the date the certificate of occupancy is received at
which time, they convert to permanent financing. Interest on construction
financing is 3.5% above the base rate announced by National City Bank of
Cleveland. Monthly payments of interest only are required.
Permanent financings ("Mortgage Notes") are for initial terms of 10 years, with
a 10 year renewal option. Interest, which is fixed on the date of the permanent
financing, is charged at 4.25% above comparable U.S. Treasury Notes during the
initial financing term and 6.25% above comparable U.S. Treasury Notes during any
renewal term. Monthly payments of interest only are due during the first year,
after which monthly payments of principal and interest are due based on a 25
year amortization period.
The Credit Facility is collateralized by the Predecessor's real estate,
equipment and accounts receivable. At September 30, 1996 $22,226,000 has been
drawn with $17,774,000 available under the $40 million Credit Facility. Interest
averaged 10.7% under the Credit Facility during 1996.
On October 1, 1996, concurrent with the Offering, the Company obtained an
additional $100 million recourse line of credit from Health Care REIT, Inc.
Senior Quarters at East Northport has drawn an additional $4,995,816 in mortgage
proceeds during 1996.
4. Commitments and Contingencies
Legal Proceedings
The Predecessor is named as a defendant in various lawsuits which arise in the
normal course of business. Although the ultimate outcome of these proceedings
cannot be determined, management believes that in no instance will the outcome
have a material adverse effect on the company's financial position, results of
operations or cash flows.
Employment Agreements
Effective with the Offering, the Company entered into employment agreements with
Glenn Kaplan, Chairman of the Board and Chief Executive Officer, Wayne Kaplan,
Vice Chairman of the Board, Senior Executive Vice President and Secretary, and
Evan Kaplan, President, Chief Operating Officer, and director, each of whom will
receive annual cash compensation and a bonus pursuant to substantially identical
five year employment contracts with the Company. These agreements are renewable
from year to year after the initial five year period. Each contract provides for
a salary of $213,000, increased annually by a percentage equal to the Consumer
Price Index. Each contract also provides for a discretionary bonus to be set by
the Company's Compensation Committee, based on the earnings of the Company and
other criteria determined by the Compensation Committee. If the executive
covered by the contract is terminated by the Company without cause, the
executive shall be paid the salary provided for in the contract for the
remainder of the term of the contract but in no event less than one year's
salary. In addition, the contract provides for a payment equal to two year's
base salary upon the occurrence of certain events relating to a change of
control of the Company and subsequent termination. Each executive officer has
agreed to devote substantially all of his time to the Company and not to compete
with the Company while employed thereby and for a period of one year from the
date of termination unless such executive officer is terminated without cause.
<PAGE>
Operating Agreements
The Kaplans, due to New York State law, are required to individually be the
licensed operators of all the Company's assisted living facilities located in
New York. The Company has entered into operating agreements with the Kaplans,
relating to the facilities, for a term of 25 years at a net fee of 3.5% of the
respective facilities' revenues.
5. Subsequent Events
In October, 1996 the Company completed an agreement to purchase the remaining
50% interest in Senior Quarters at East Northport. The purchase was completed by
payment of $2.1 million in cash and 50,000 shares of common stock.
Also, in October, 1996 the Company entered into an agreement to develop a
property at Senior Quarters at Albany.
On October 29, 1996 the Company reached an understanding to acquire Senior
Quarters at Cranford and an additional 71.25% interest in the entity that owns
Senior Quarters at Montville. Terms of the transaction have not been completed.
<PAGE>
KAPSON SENIOR QUARTERS CORP.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Note on Forward-Looking Statements
Certain information contained in this Form 10-Q are forward-looking statements.
Events could affect Kapson Senior Quarters Corp.'s (the Company's) actual
results and could cause the Company's actual results to differ materially from
those expressed in any forward-looking statements made by, or on behalf of, the
Company in this Form 10-Q. Such events could include unexpected increases in
construction or operating expenses, adverse decisions from zoning boards or
similar boards or authorities, changes in applicable laws and regulations, or in
the interpretations thereof, delays of Supplemental Security Income and Medicaid
payments, increased competition in the Company's principal markets, the
Company's inability to obtain additional financing on acceptable terms and the
Company's inability to hire, train and assimilate management and other employees
and adapt its purchasing, management information and other systems to
accommodate its expanded operations.
Overview
Prior to the Offering, the Company's facilities were owned, managed and/or
operated by one or more S corporations, limited partnerships or limited
liability companies of the Company's predecessor, The Kapson Group (the
"Predecessor"). The Kapson Group is a general partnership of which Glenn Kaplan,
Wayne Kaplan, and Evan Kaplan (collectively, the "Kaplans") are the sole equal
partners. As the Company is newly formed, all references to the Company in
connection with historical financial data or otherwise include the Predecessor.
The historical financial statements of the Predecessor represent the combined
historical results of operations and financial condition of: (i) four
facilities that were wholly owned by the Predecessor (Senior Quarters at
Stamford, Senior Quarters at Huntington Station, Senior Quarters at Centereach
I, and Senior Quarters at Centereach II); (ii) two wholly owned facilities of
the Predecessor that were acquired on April 1, 1996 (Town Gate Manor and Town
Gate East); (iii) one facility that was wholly owned by the Predecessor but in
which a 49.9% interest was sold to an unrelated third party in April 1996
(Senior Quarters at Chestnut Ridge); (iv) an entity through which the
Predecessor controlled a 50% interest (and in August, 1996 agreed to acquire the
remaining 50% interest) in a newly-developed facility in East Northport, New
York (Senior Quarters at East Northport) which began operations on March 15,
1996; (v) an entity through which the Company owned a 23.75% minority interest
in Change Bridge Inn; (vi) two entities through which the Predecessor owned a
minority interest in facilities that were under construction (an 11% interest in
Senior Quarters at Glen Riddle and a 10% interest in Senior Quarters at
Jamesburg); (vii) a management company which received management fees from five
related and four unrelated entities, and (viii) an entity that provided
administrative support to the Predecessor and other affiliated entities.
The Company is an owner, operator, manager, and developer for assisted living
facilities. The Company was formed in order to consolidate and expand the
assisted living business of the Predecessor. The Company had no operations prior
to October 1, 1996.
Results of Operations
Three Months Ended September 30, 1996 Compared to Three Months Ended September
30, 1995
Revenues. Assisted living revenues increased to $5.8 million for the three
months ended September 30, 1996, compared to $3.6 million for the three months
ended September 30, 1995, an increase of 61.1%. The increase is attributable to:
(i) the opening of Senior Quarters at Chestnut Ridge on September 1, 1995 and
Senior Quarters at East Northport on March 15, 1996 which contributed revenue of
$566,000 and $640,000, respectively; and (ii) the acquisition of Town Gate East
and Town Gate Manor on April 1, 1996 which contributed combined revenue of
$952,000. Excluding Senior Quarters at Chestnut Ridge, Senior Quarters at East
Northport, Town Gate East and Town Gate Manor, assisted living revenues were
approximately equivalent for the three months ended September 30, 1996 and 1995.
Management fee revenue increased to $354,000 for the three months ended
September 30, 1996, compared to $126,000 for the three months ended September
30, 1995, an increase of 180.9%. The increase was primarily attributable to
Change Bridge Inn, Senior Quarters at Jamesburg, Castle Gardens, Senior Quarters
at Lynbrook and Senior Quarters at Glen Riddle which the Company assumed
management responsibility for on August 8, 1995, February 1, 1996, January 1,
1996, June 1, 1996, and June 19, 1996, respectively.
Operating Expenses. Assisted living operating expenses increased to $3.9 million
for the three months ended September 30, 1996, compared to $2.4 million for the
three months ended September 30, 1995, an increase of 62.5%. As a percentage of
assisted living revenues, assisted living operating expenses were 67.2% and
66.7% for the three months ended September 30, 1996 and 1995, respectively. The
increase in assisted living operating expenses as a percentage of assisted
living revenues is primarily attributable to the opening of Senior Quarters at
Chestnut Ridge and Senior Quarters at East Northport on September 1, 1995 and
March 15, 1996, respectively. As is consistent with the Company's experience
during the "rent-up" of a new facility, assisted living operating expenses as a
percentage of assisted living revenues are higher than they are for a facility
which is operating at or near full occupancy. The increase in assisted living
operating expenses as a percentage of assisted living revenues during the three
months ended September 30, 1996 is also attributable to increased payroll and
employee benefits related to start-up costs for one of the Company's ALP
facilities and the introduction of the Company's Extended Care Program at
another facility. General and administrative expense was $1.1 million for the
three months ended September 30, 1996, compared to $426,000 for the three months
ended September 30, 1995. As a percentage of total revenues, general and
administrative expense was 18.0% and 11.5% for the three months ended September
30, 1996 and 1995, respectively. The increase is primarily the result of: (i)
higher payroll and employee benefit costs in connection with a strategic
decision by the Company to invest in its management and facility development
capabilities in order to support future growth through development, acquisition
and management of additional facilities; and (ii) costs related to the opening
of Senior Quarters at Chestnut Ridge and Senior Quarters at East Northport and
preparations for the opening of the Senior Quarters at Lynbrook, Senior Quarters
at Patterson, Senior Quarters at Jamesburg and Senior Quarters at Glen Riddle.
<PAGE>
KAPSON SENIOR QUARTERS CORP.
Management's Discussion and Analysis of
Financial Condition and Results of Operations, Continued
Interest Expense. Interest expense was $1.8 million for the three months ended
September 30, 1996, compared to $1.0 million for the three months ended
September 30, 1995, an increase of 80.0%. The increase is attributable to: (i)
the opening of Senior Quarters at Chestnut Ridge and Senior Quarters at East
Northport facilities on September 1, 1995 and March 15, 1996, respectively; and
(ii) the acquisition of Town Gate East and Town Gate Manor on April 1, 1996.
Interest expense with respect to Senior Quarters at Chestnut Ridge and Senior
Quarters at East Northport was capitalized prior to their opening.
Net Loss. Net loss was ($837,000) for the three months ended September 30, 1996,
compared to ($439,000) for the three months ended September 30, 1995. The
increase in net loss is primarily the result of the opening of Senior Quarters
at Chestnut Ridge and Senior Quarters at East Northport and, to a lesser extent,
higher payroll and benefit costs in connection with the Company's expansion
plans. Excluding Senior Quarters at Chestnut Ridge and Senior Quarters at East
Northport, net loss would have been ($196,000) and ($151,000) for the three
months ended September 30, 1996 and 1995, respectively. The Company was not
required to and did not pay federal or state income taxes. The minority interest
for the three months ended September 30, 1996 is related to the partial
ownership of Senior Quarters at East Northport and Senior Quarters at Chestnut
Ridge by unrelated third parties.
Results of Operations
Nine Months Ended September 30, 1996 Compared to Nine Months Ended September 30,
1995
Revenues. Assisted living revenues increased to $15.3 million for the nine
months ended September 30, 1996, compared to $10.6 million for the nine months
ended September 30, 1995, an increase of 44.3%. The increase is attributable to:
(i) the opening of Senior Quarters at Chestnut Ridge on September 1, 1995 and
Senior Quarters at East Northport on March 15, 1996 which contributed revenue of
$1.3 million and $1.4 million, respectively; and (ii) the acquisition of Town
Gate East and Town Gate Manor on April 1, 1996 which contributed combined
revenue of $1.9 million. Excluding Senior Quarters at Chestnut Ridge, Senior
Quarters at East Northport, Town Gate East and Town Gate Manor, assisted living
revenues were approximately equivalent for the nine months ended September 30,
1996 and 1995. Management believes that assisted living revenues for the nine
months ended September 30, 1996 were negatively impacted by inclement weather
experienced during the first quarter of 1996 which resulted in decreased
occupancy at certain of the Company's facilities, which was substantially offset
by fee increases. Management fee revenue increased to $786,000 for the nine
months ended September 30, 1996, compared to $335,000 for the nine months ended
September 30, 1995, an increase of 134.6%. The increase was primarily
attributable to Change Bridge Inn, Senior Quarters at Jamesburg, Castle Gardens,
Senior Quarters at Lynbrook and Senior Quarters at Glen Riddle which the Company
assumed management responsibility for on August 8, 1995, February 1, 1996,
January 1, 1996, June 1, 1996, and June 19, 1996, respectively.
Operating Expenses. Assisted living operating expenses increased to $10.2
million for the nine months ended September 30, 1996, compared to $6.3 million
for the nine months ended September 30, 1995, an increase of 61.9%. As a
percentage of assisted living revenues, assisted living operating expenses were
66.7% and 59.4% for the nine months ended September 30, 1996 and 1995,
respectively. The increase in assisted living operating expenses as a percentage
of assisted living revenues is primarily attributable to the opening of Senior
Quarters at Chestnut Ridge and Senior Quarters at East Northport on
<PAGE>
KAPSON SENIOR QUARTERS CORP.
Management's Discussion and Analysis of
Financial Condition and Results of Operations, continued
September 1, 1995 and March 15, 1996, respectively. As is consistent with the
Company's experience during the "rent-up" of a new facility, assisted living
operating expenses as a percentage of assisted living revenues are higher than
they are for a facility which is operating at or near full occupancy. Excluding
Senior Quarters at Chestnut Ridge and Senior Quarters at East Northport,
assisted living operating expenses as a percentage of assisted living revenues
would have been 60.8% and 57.1% for the nine months ended September 30, 1996 and
1995, respectively. The increase in assisted living operating expenses as a
percentage of assisted living revenues during the nine months ended September
30, 1996 is also attributable to: (i) inclement winter weather during the first
quarter of 1996 which adversely affected revenues and increased operating
expenses; and (ii) increased payroll and employee benefits related to start-up
costs for one of the Company's ALP facilities and the introduction of the
Company's Extended Care Program at another facility. General and administrative
expense was $2.4 million for the nine months ended September 30, 1996, compared
to $1.2 million for the nine months ended September 30, 1995. As a percentage of
total revenues, general and administrative expense was 14.9% and 11.0% for the
nine months ended September 30, 1996 and 1995, respectively. The increase is
primarily the result of: (i) higher payroll and employee benefit costs in
connection with a strategic decision by the Company to invest in its management
and facility development capabilities in order to support future growth through
development, acquisition and management of additional facilities; and (ii) costs
related to the opening of Senior Quarters at Chestnut Ridge and Senior Quarters
at East Northport and preparations for the opening of the Senior Quarters at
Lynbrook, Senior Quarters at Patterson, Senior Quarters at Jamesburg and Senior
Quarters at Glen Riddle.
Interest Expense. Interest expense was $4.6 million for the nine months ended
September 30, 1996, compared to $2.7 million for the nine months ended September
30, 1995, an increase of 70.4%. The increase is attributable to: (i) the opening
of Senior Quarters at Chestnut Ridge and Senior Quarters at East Northport
facilities on September 1, 1995 and March 15, 1996, respectively; and (ii) the
acquisition of Town Gate East and Town Gate Manor on April 1, 1996; and (iii)
offset by a decrease in interest expense due to the refinancing of mortgage at a
lesser rate for Senior Quarters at Centereach. Interest expense with respect to
Senior Quarters at Chestnut Ridge and Senior Quarters at East Northport was
capitalized prior to their opening.
Net Loss. Net loss was ($1.7 million) for the nine months ended September 30,
1996, compared to ($158,000) for the nine months ended September 30, 1995. The
increase in net loss is primarily the result of the opening of Senior Quarters
at Chestnut Ridge and Senior Quarters at East Northport and, to a lesser extent,
higher payroll and benefit costs in connection with the Company's expansion
plans. Excluding Senior Quarters at Chestnut Ridge and Senior Quarters at East
Northport, net income (loss) would have been ($500,000) and $271,000 for the
nine months ended September 30, 1996 and 1995, respectively. The Company was not
required to and did not pay federal or state income taxes. The minority interest
for the nine months ended September 30, 1996 is related to the partial ownership
of Senior Quarters at East Northport and Senior Quarters at Chestnut Ridge by
unrelated third parties.
<PAGE>
KAPSON SENIOR QUARTERS CORP.
Management's Discussion and Analysis of
Financial Condition and Results of Operations, continued
Liquidity and Capital Resources
On October 1, 1996, the Company completed an initial Public Stock Offering of
3,550,000 shares of Common Stock at $10.00 per share. The proceeds from this
sale of Common Stock, net of related costs of approximately $4.2 million,
totaled approximately $31.3 million. Concurrently with the completion of the
offering, the predecessor contributed its interests in its wholly owned,
majority and minority owned facilities and management agreements with respect to
facilities which were owned by unrelated parties to the Company in exchange for
4,150,000 shares of common stock of the Company.
Net cash provided by (used in) operating activities was ($1.6) million for the
nine months ended September 30, 1996, compared to $1.1 million for the nine
months ended September 30, 1995. The decrease is primarily attributable to: (i)
a net loss for the nine months ended September 30, 1996, compared to net income
for the nine months ended September 30, 1995; (ii) a minority interest in the
net loss of a partnership owning Senior Quarters at East Northport; and (iii) a
decrease in accounts payable and accrued expenses.
Net cash used in investing activities was $17.9 million for the nine months
ended September 30, 1996, compared to $14.5 million for the nine months ended
September 30, 1995. Substantially all of the cash used in investing activities
for the nine months ended September 30, 1996 and 1995 was for the development
and/or acquisition of new facilities (which was partially offset by the sale of
a minority interest in Senior Quarters at Chestnut Ridge for $1.2 million)
during the nine months ended September 30, 1996. Net cash used in investing
activities was funded primarily through long-term debt.
Net cash provided by financing activities was $16.7 million for the nine months
ended September 30, 1996, compared to $13.3 million for the nine months ended
September 30, 1995. Net cash provided by financing activities primarily consists
of the proceeds of long-term debt offset by principal repayments of long-term
debt and distributions to partners and shareholders. The increase for the nine
months ended September 30, 1996 is primarily the result of long-term debt
associated with the completion and opening of Senior Quarters at East Northport
and the acquisition of Town Gate Manor and Town Gate East.
Historically, the Company has operated with significant working capital deficits
primarily as a consequence of current liabilities owed to an uncombined
affiliate of the Predecessor as well as certain financing activities. The
working capital deficit for the Company was $2.8 million at September 30, 1996
and $3.6 million at December 31, 1995. Excluding current liabilities owed to an
affiliate of the Company (which will not be an obligation of the Company), the
Company's working capital position would have been a deficit of $296,000 at
December 31, 1995. On a pro forma basis, following the Offering and the
application of the estimated net proceeds therefrom, the Company will have pro
forma working capital of $22.6 million.
In January 1995, the Predecessor obtained a $40.0 million acquisition and
development credit facility with Health Care REIT, Inc. ("HCR"), pursuant to
which temporary construction financing bears interest at 3.5% above the base
rate announced by The National City Bank of Cleveland but not less than 11.25%,
and permanent financing bears interest at the rate of a ten-year U.S. Treasury
Note plus 4.25% per annum. The permanent financing rate increases by 30 basis
points per year. Approximately $22.2 million of the HCR credit facility has been
drawn for specific projects and is secured by four facilities (Senior Quarters
at Chestnut Ridge, Town Gate Manor, Town Gate East and the project at Briarcliff
Manor, NY). Effective as of the date of the Offering, the Company will have a
$140.0 million acquisition and development credit facility with HCR, pursuant to
which temporary construction financing bears interest at 3.5% above the base
rate announced by The National City Bank of Cleveland and permanent financing
bears interest at the rate of a ten-year U.S. Treasury Note plus either 4.0% per
annum for mortgage indebtedness or 3.75% per annum for permanent operating
leases. The permanent financing rate increases by 25 basis points per annum. The
amounts drawn on the original $40.0 million HCR credit facility will be applied
against the new $140.0 million facility. The HCR credit facility requires, as a
condition to future drawings, that the Company meet certain financial tests on
the date of each closing, including that the Company have a minimum net worth of
$14.0 million ($20.0 million once aggregate drawings exceed $100.0 million);
that the subject facility's payment coverage of net operating income to debt
service be not less than 1.25 to 1.0 (including management fees equal to 5% of
gross revenue and a replacement reserve equal to $400 per unit per year) after
the first 12 months of operation; that the Company maintain a current ratio of
1.25 to 1.0 and a minimum cash balance of $2.5 million at all times; and that
the Company's debt to equity ratio not exceed certain designated levels. The HCR
credit line also imposes certain negative covenants that prohibit, without the
prior written consent of the lender: (i)transfers of interests in the subject
facility; (ii) changes in ownership or management of the Company or the subject
facility; (iii) the creation of certain other types of indebtedness of the
subject facility; (iv) the modification of any material contracts; (v) mergers,
consolidations, sale of substantially all of the assets or other structural
changes with respect to the subsidiary which owns the facility; and (vi)
mergers, consolidations, or transfers of any assets by the Company which would
cause the net worth of the Company to fall below the amounts specified above.
Notwithstanding the foregoing, consent is not required in connection with the
public trading of the shares offered hereby, or for certain transfers of shares
by the Kaplans. Indebtedness on two other properties (Senior Quarters at
Huntington Station and Senior Quarters at Stamford) having a combined
outstanding balance of $15.4 million matures in February 1999, at which time all
unpaid principal balances, if any, become due and payable. While the Company
expects to refinance such debt with the existing lender or with another
financing source, there can be no assurance that the Company will be able to
obtain such refinancing on terms acceptable to the Company, which could result
in an adverse effect on the Company's operating results and financial condition.
With respect to current indebtedness on Senior Quarters at Huntington Station
and Senior Quarters at Stamford, which matures in February 1999, the lending
arrangements contain an equity participation feature payable at maturity in an
amount which is the greater of (a) $480,000 or (b) 25% of appraised market value
over $17.5 million. The Company is negotiating to remove the equity
participation features of these loans, but there can be no assurance that such
negotiations will be successful.
<PAGE>
The Company intends to finance its growth strategy for the next three to five
years through a variety of sources, including the proceeds of the Offering, bank
and other financing, long-term operating leases with REITs, future debt or
equity offerings, joint ventures and other sources. To a limited extent, the
Company may also use other forms of financing such as taxable or tax-exempt
long-term debt, including publicly issued debt. Because the Company intends to
use such financing for its properties, the amount of its indebtedness may
increase as the Company pursues its growth strategy. As a result of existing and
future indebtedness, a substantial portion of the Company's cash flow will be
devoted to debt service. There can be no assurance that the Company will
generate sufficient cash flow from operations to cover required interest and
principal payments. If the Company were unable to meet interest and principal
payments, it could be required to seek renegotiation of such payments with its
lenders or obtain additional equity or debt financing. There can be no
assurance, however, that such efforts will be successful or timely or that the
terms of any such financing or refinancing would be acceptable to the Company.
Further, in the event of future financings and refinancings, increases in
prevailing interest rates could increase the Company's debt service obligations.
Impact of Inflation and Changing Prices
Assisted living revenue and management fees from assisted living facilities are
the primary sources of revenue earned by the Company. These properties are
affected by rental rates which are highly dependent upon market conditions and
the competitive environments where the facilities are located. Employee
compensation is the principal cost element of property operations. Although
there can be no assurance it will continue to do so, the Company has been able
historically to offset the effects of inflation on salaries and other operating
expenses by increasing rental rates.
<PAGE>
KAPSON SENIOR QUARTERS CORP.
PART II OTHER INFORMATION
Item l. Legal Proceedings
LITIGATION:
There have been no material developments with respect to
litigation that occurred during this reporting period.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults upon Senior Securities Not applicable
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6(a) Exhibit 27 Financial data Schedule - Article 5 for third quarter
form 10Q
Item 6(b) Exhibits and Reports on Form 8-K
There was no form 8-K filed during the third quarter of the
year ending September 30, 1996.
<PAGE>
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.
KAPSON SENIOR QUARTERS CORP.
Nov. 14, 1996 /s/ Glenn Kaplan
(Date) --------------------------------
Glenn Kaplan
Chairman of the Board and
Chief Executive Officer
Nov. 14, 1996 /s/ John M. Sharpe Jr.
(Date) ----------------------------------
John M. Sharpe Jr.
Vice President, Chief Financial
Officer and Treasurer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
COMBINED BALANCE SHEETS AND COMBINED STATEMENTS OF OPERATIONS CONTAINED
IN THE COMPANY'S REGISTRATION STATEMENT ON FORM S-1. (REGISTRATION No. 333-
5945) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
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<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996
<PERIOD-END> DEC-31-1995 SEP-30-1996
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