UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1997
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (No Fee Required)
For the transition period from __________ to __________
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Commission File No. 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 Identification No.)
incorporation or organization)
242 Crossways Park West
Woodbury, New York 11797
----------------------- -------------------
(Address of principal executive offices) (Zip Code)
(516) 921-8900
----------------------------------------------------
(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 twelve (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 |_|
As of July 31, 1997, there were 7,750,000 shares of the Registrant's Common
Stock outstanding.
<PAGE>
KAPSON SENIOR QUARTERS CORP.
INDEX
Page
----
PART I FINANCIAL INFORMATION
Kapson Senior Quarters Corp. Consolidated Balance
Sheets 2
Consolidated Statements of Operations of Kapson 3
Senior Quarters Corp. for the Three and Six Months
Ended June 30, 1997 and the Combined Statements of
Operations of the Kapson Group for the Three and
Six Months Ended June 30, 1996
Consolidated Statement of Cash Flows of Kapson 4
Senior Quarters Corp. for the Six Months Ended
June 30, 1997 and the Combined Statement of Cash
Flows of the Kapson Group for the Six Months
Ended June 30, 1996
Notes to Consolidated Financial Statements 5-7
Management's Discussion and Analysis of Financial 8-14
Condition and Results
of Operations
PART II OTHER INFORMATION 15
Signatures 17
1
<PAGE>
KAPSON SENIOR QUARTERS CORP.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
June 30, 1997 December 31, 1996
-------------- -----------------
<S> <C> <C>
Current assets
Cash and cash equivalents $ 8,722,625 $ 16,053,307
Accounts receivable 146,961 80,329
Prepaid expenses and other current assets 919,683 574,733
Deferred income taxes 503,000 503,000
------------- ------------
Total current assets 10,292,269 17,211,369
Property and equipment, net 64,042,112 58,377,735
Facility development costs 5,919,872 1,190,727
Restricted cash 3,595,172 3,134,695
Deferred financing costs, net 2,679,330 2,595,407
Intangibles, net 4,683,978 4,821,842
Investment in joint ventures 396,191 551,829
Other assets 11,333,621 8,104,648
------------- ------------
Total assets $ 102,942,545 $ 95,988,252
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt $ 964,013 $ 943,658
Accounts payable and accrued expenses 3,278,860 3,294,040
Accrued interest 339,966 --
Deferred revenue 604,844 519,168
------------- ------------
Total current liabilities 5,187,683 4,756,866
Long-term debt 77,359,540 72,408,516
Loan payable 555,000 555,000
Resident security deposits 2,379,697 1,725,192
Deferred income taxes 1,317,534 2,542,000
Deferred interest payable 370,368 147,500
Construction retainage payable 349,151 613,057
------------- ------------
Total liabilities 87,518,973 82,748,131
------------- ------------
Minority interest 4,969,164 948,925
------------- ------------
Shareholders' equity
Common stock; $.01 par value, 30,000,000 shares
authorized, 7,750,000 issued and outstanding 77,500 77,500
Additional paid-in capital 16,603,405 16,603,348
Accumulated deficit (6,226,497) (4,389,652)
------------- ------------
Total shareholders' equity 10,454,408 12,291,196
------------- ------------
Total liabilities and shareholders' equity $ 102,942,545 $ 95,988,252
============= ============
</TABLE>
The accompanying notes are an integral part of these consolidated and
combined financial statements.
2
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS OF KAPSON SENIOR QUARTERS CORP.
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1997
AND THE COMBINED STATEMENTS OF OPERATIONS OF THE KAPSON GROUP
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1996
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
-------------------------- --------------------------
1997 1996 1997 1996
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Revenues:
Assisted living revenues $ 7,636,786 $ 5,656,277 $ 14,865,254 $ 9,528,925
Management fees 353,074 207,010 645,577 432,135
Other - affiliates -- 22,500 -- 22,500
----------- ----------- ------------ -----------
Total revenues 7,989,860 5,885,787 15,510,831 9,983,560
----------- ----------- ------------ -----------
Operating expenses:
Assisted living operating expenses 5,317,223 3,719,031 10,410,278 6,251,739
Rent 384,375 -- 768,750
General and administrative 1,417,272 701,206 2,401,385 1,221,137
Depreciation and amortization 712,109 591,607 1,386,273 966,213
----------- ----------- ------------ -----------
Total operating expenses 7,830,979 5,011,844 14,966,686 8,439,089
----------- ----------- ------------ -----------
Operating income 158,881 873,943 544,145 1,544,471
Equity in income (loss) from joint ventures (149,536) 27,938 (155,638) 27,938
Interest income 213,151 59,264 406,477 104,061
Interest expense (1,903,403) (1,811,499) (3,732,560) (2,964,841)
Other income (expense), net (274,552) (4,310) (298,403) (7,822)
----------- ----------- ------------ -----------
Loss before minority interest (1,955,459) (854,664) (3,235,979) (1,296,193)
Minority interest in net loss of partnerships 74,628 320,195 174,568 370,696
----------- ----------- ------------ -----------
Loss before provision for income taxes (1,880,831) (534,469) (3,061,411) (925,497)
Benefit for income taxes 752,332 -- 1,224,564 --
----------- ----------- ------------ -----------
Net loss ($1,128,499) ($ 534,469) ($ 1,836,847) ($ 925,497)
=========== =========== ============ ===========
Loss per share ($ 0.15) ($ 0.24)
=========== ============
Weighted average number
of common shares outstanding 7,750,000 7,750,000
=========== ============
Unaudited pro forma data:
Loss before provision for income taxes ($ 534,469) ($ 925,497)
Benefit for income taxes 213,788 370,199
----------- -----------
Pro forma net loss
($ 320,681) ($ 555,298)
=========== ===========
Pro forma loss per share
($ 0.07) ($ 0.12)
=========== ===========
Pro forma weighted average number
of common shares outstanding 4,775,000 4,775,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated and
combined financial statements.
3
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS OF KAPSON SENIOR QUARTERS CORP.
FOR THE SIX MONTHS ENDED JUNE 30, 1997
AND THE COMBINED STATEMENTS OF CASH FLOWS OF THE KAPSON GROUP
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(Unaudited)
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss ($ 1,836,847) ($ 925,496)
Adjustments to reconcile net loss to net
cash (used in) provided by:
Depreciation 1,195,034 911,703
Amortization 322,494 218,131
Deferred income taxes (1,224,466) --
Minority interest in net loss of combined
partnerships (174,568) (370,696)
Equity in income (loss) from investment
in joint ventures 155,638 (27,938)
Changes in other assets and liabilities,
excluding the effect of acquired facilities
Accounts receivable (66,632) (17,163)
Prepaid expenses and other current assets (337,371) 17,453
Restricted cash - resident security deposits (429,453) (20,161)
Other assets (1,299,653) (55,495)
Accounts payable and accrued expenses (15,117) (1,221,697)
Accrued interest 339,966 (62,356)
Resident security deposits payable 654,505 295,045
Deferred interest payable 222,868 70,300
Deferred revenue 85,676 110,971
------------ ------------
Net cash used in operating activities (2,407,926) (1,077,399)
------------ ------------
Cash flows from investing activities:
Acquisition of facilities, (net of cash assumed
of $0 and $518,000) (3,880,000) (9,856,250)
Increase (decrease) in restricted mortgage escrow
funds (31,024) 228,666
Investment in joint venture -- (475,000)
Purchases and development of property and equipment (8,061,938) (5,477,242)
Sale of minority interests in combined partnerships 1,200,000 1,200,000
Increase in contributed capital by minority partners 1,094,807 --
------------ ------------
Net cash used in investing activities (9,678,155) (14,379,826)
------------ ------------
Cash flow from financing activities:
Proceeds from issuance of long-term debt 5,387,220 15,120,073
Principal payment of long-term debt (415,841) (445,260)
Deferred financing costs (215,980) (120,849)
Due (from) to affiliates -- (404,336)
Distributions to shareholders and partners of the
Predecessor -- (370,549)
------------ ------------
Net cash provided by financing activities 4,755,399 13,779,079
------------ ------------
Net decrease in cash and cash equivalents (7,330,682) (1,678,146)
Cash and cash equivalents, beginning of period 16,053,307 3,392,318
------------ ------------
Cash and cash equivalents, end of period $ 8,722,625 $ 1,714,172
============ ============
Cash paid during the year for:
Interest $ 3,246,572 $ 2,647,067
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated and
combined financial statements.
4
<PAGE>
KAPSON SENIOR QUARTERS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. General
The accompanying unaudited interim financial statements of Kapson Senior
Quarters Corp. (the "Company") and the Kapson Group (the "Predecessor") have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission (the "SEC"). Certain information and note disclosures
normally included in annual financial statements have been condensed or omitted
pursuant to those rules and regulations. In the opinion of management, all
adjustments, consisting of normal, recurring adjustments considered necessary
for a fair presentation, have been included. Although management believes that
the disclosures made are adequate to ensure that the information presented is
not misleading, it is suggested that these financial statements be read in
conjunction with the financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1996. The results of the six months ended June 30, 1997 and 1996 are not
necessarily indicative of the results of operations for the entire year.
2. Operations
The Company
The Company is an owner, operator, lessee, manager and developer of assisted
living facilities for senior citizens 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 Predecessor of which the Kaplans were
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 $29.6 million, after deducting offering costs of approximately
$5.9 million. Concurrently with the completion of the Offering, the Predecessor
contributed at its historical costs, 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. In addition, simultaneously
with the Offering, the Company declared and distributed approximately $6.0
million in cash to the owners of the Predecessor to satisfy tax liabilities
incurred by the owners pertaining to the transfer of the Predecessor interests
in the facilities to the Company. This distribution was funded through the
Offering proceeds.
5
<PAGE>
KAPSON SENIOR QUARTERS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Cont'd)
The Predecessor
The Predecessor represents a combination of the businesses of Sub Chapter S
Corporations, Partnerships or Limited Liability Companies which owned all or
part of eleven assisted living facilities, additional facilities under
development (including joint venture interests), an entity that provides
facility management services to unrelated entities and an entity that provided
administrative support to the Predecessor entities and the Company.
Impact of Recently Issued Accounting Pronouncements
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS No. 128"),
which establishes standards for computing and presenting earnings per share.
SFAS No. 128 will be effective for financial statements issued for periods
ending after December 15, 1997. Earlier application is not permitted. Management
believes that this change will not have any impact on the Company's financial
statements for the year ended December 31, 1997.
3. Acquisitions and Dispositions
In March 1997 the Company sold a 49.9% interest in its wholly-owned subsidiary
Kapson Briarcliff Manor, LLC for $1.2 million.
In April 1997, the Company formed a joint venture in which it has a 51% equity
interest and purchased a 90 unit facility in Albany, New York for $3.8 million
in cash. The allocation of the purchase price of the net assets acquired is:
Property and equipment $ 3,790,526
Goodwill 50,000
Other assets 42,174
Other liabilities (2,700)
-----------
Purchase Price $ 3,880,000
===========
Proforma financial information is not presented due to immateriality.
Since April 1997, the Company has entered into a lease arrangement for
approximately $1.1 million annually and a construction loan of $19.8 million for
the development of a second facility.
4. Credit Facility
In June 1997, the Company entered into a $50 million Non-Revolving Credit
Facility (the "Facility") with GMAC Commercial Mortgage Corporation to provide
construction and acquisition financing
6
<PAGE>
collateralized by assisted living or independent living facilities. Amounts
borrowed under the Facility will vary depending on the appraised value and
purchase price for acquisition loans or the appraised value or construction
costs for a construction loan. Interest rates will be based on the 30- day LIBOR
Rate plus 2.45% to 3% depending on the type of loan and loan to value or cost
percentages. Acquisition and construction loans are payable in full after three
and five years, respectively.
5. Joint Venture Agreement
In March 1997, the Company announced the formation of a joint venture through
which it intends to develop six assisted living facilities in North and South
Carolina.
6. Subsequent Events
In July 1997, the Company sold 2,000,000 shares of its $2.00 Convertible
Exchangeable Preferred Stock at a price of $25.00 per share in a Rule 144A
Offering under the U.S. Securities Act of 1933, as amended (the "Preferred
Offering"). The Company realized net proceeds from the Preferred Offering of
approximately $47.4 million. Each share of Preferred Stock has a liquidation
preference of $25, plus accrued and unpaid dividends. Dividends will be
cumulative from the date of original issuance, and will be payable quarterly, in
arrears commencing September 30, 1997, at an annual rate of $2.00 per share in
cash.
The Preferred Stock is convertible at any time prior to redemption, at the
option of the holder, into shares of the Company's Common Stock at a conversion
rate equal to the liquidating preference divided by $12.98. The Preferred Stock
is not redeemable prior to July 1, 2000. The Preferred Stock is exchangeable, in
whole or in part, at the option of the Company on any dividend payment date
beginning September 30, 1997 for the Company's 8% Convertible Subordinated Notes
(the "Notes") at the rate of $1,000 principle amount of Notes for each 40 shares
of Preferred Stock.
Neither the Convertible Exchangeable Preferred Stock, the Notes nor the Common
Stock of the Company, issuable upon conversion, has been registered under the
Securities Act of 1993, as amended, or any state securities laws. However, the
Company has agreed, under certain circumstances, to file a Shelf Registration
Statement relating to the Preferred Stock, the Notes issuable upon exchange of
the Preferred Stock and the Common Stock issuable upon conversion of the
Preferred Stock or the Notes as applicable within 90 days after the conclusion
of the Preferred Offering, pursuant to a Registration Rights Agreement.
On August 12, 1997, the Company sold an additional 400,000 shares of Preferred
Stock, representing the over allotment, at a purchase price of $9.6 million
after deducting estimated expenses of $400,000.
7
<PAGE>
KAPSON SENIOR QUARTERS CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF 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 was a general partnership of which Glenn
Kaplan, Wayne Kaplan, and Evan Kaplan (collectively, the "Kaplans") were 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 October, 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 of 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.
New York State Assisted Living Program
In June 1993, the Company was awarded approximately 57% of the beds allocated to
Long Island under the State of New York Assisted Living Program ("ALP"). This
program is designed for residents who are eligible for Medicaid and who require
a higher acuity of care than is typically provided in assisted living
facilities. In support of the program, the Company dedicated a newly developed
facility in East Northport, New York, which opened in March 1996, and an
existing fully
8
<PAGE>
occupied facility in Centereach, New York (Senior Quarters at Centereach I).
In April 1997, due to excessive delays and higher than expected costs associated
with the ALP, the Company was unable to implement the program at these two
facilities and accordingly the Company has taken action to reduce the
incremental operating costs associated with the program at both facilities and
is returning their operations back to adult homes. Both facilities were
originally conceived and constructed as adult homes and hold licenses as adult
care facilities in New York. The Company has begun to accept private pay
residents to fill rooms held vacant in anticipation of the ALP at its East
Northport facility and has substantially concluded the transition at its
Centereach facility, back to an adult home facility.
During the first and second quarters, losses incurred at the East Northport
facility and other incremental operating expenses associated with the program
resulted in higher than historical assisted living operating expenses as a
percentage of assisted living revenues and increased the Company's net loss.
Results of Operations
Three Months Ended June 30, 1997 Compared to Three Months Ended June 30, 1996.
Revenues
Assisted living revenues increased by $1.9 million, or 33% to $7.6 million for
the three months ended June 30, 1997, compared to $5.7 million for the three
months ended June 30, 1996. The increase is attributable to: (i) the rent-up of
Senior Quarters at Chestnut Ridge which contributed revenue of $330,000 and (ii)
leasing of Senior Quarters at Cranford which contributed $1.2 million. Excluding
these facilities, assisted living revenues were $5.6 and $5.2 million for the
three months ended June 30, 1997 and 1996, respectively. Management fee revenue
increased by $146,000 or 70.5% to $353,000 for the three months ended June 30,
1997, compared to $207,000 for the three months ended June 30, 1996. The
increase was primarily attributable to new management responsibility for five
facilities, on varying dates, since June 1996.
Operating Expenses
Assisted living operating expenses increased by $1.6 million, or 43.2% to $5.3
million for the three months ended June 30, 1997, compared to $3.7 million for
the three months ended June 30, 1996. As a percentage of assisted living
revenues, assisted living operating expenses were 69.7% and 64.9% for the three
months ended June 30, 1997 and 1996, 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 East Northport and
higher than expected costs associated with ALP. Excluding expenses attributable
to Senior Quarters at East Northport and the ALP, assisted living operating
expenses as a percentage of assisted living revenues would have been 62.9% and
62.0% for the three months ended June 30, 1997 and 1996, respectively.
9
<PAGE>
General and Administrative Expense
General and administrative expense was $1.4 million for the three months ended
June 30, 1997, compared to $701,000 for the three months ended June 30, 1996. As
a percentage of total revenues, general and administrative expense was 17.5% and
11.9% for the three months ended June 30, 1997 and 1996, respectively. The
increase is primarily the result of 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.
Interest Income
Interest income increased by $154,000, or 261% to $213,000 for the three months
ended June 30, 1997, compared to $59,000 for the three months ended June 30,
1996. The increase is attributable to interest earned on the investment of the
proceeds from the Company's initial public offering.
Interest Expense
Interest expense increased by $100,000, or 5.6% to $1.9 million for the three
months ended June 30, 1997, compared to $1.8 million for the three months ended
June 30, 1996, primarily due to increased fees from equity participation
features on existing debt.
Net Loss
Net loss was $1.1 million for the three months ended June 30, 1997, compared to
a proforma net loss of $321,000 for the three months ended June 30, 1996. The
increase in net loss is primarily the result of operating losses at the East
Northport ALP facility, and, to a lesser extent, higher payroll and benefit
costs in connection with the Company's expansion plans. Excluding Senior
Quarters at East Northport, net loss would have been $552,000 and $189,000, on a
proforma basis for the three months ended June 30, 1997 and 1996, respectively.
10
<PAGE>
Results of Operations
Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996.
Revenues
Assisted living revenues increased by $5.4 million, or 56.8% to $14.9 million
for the six months ended June 30, 1997, compared to $9.5 million for the six
months ended June 30, 1996. The increase is attributable to: (i) the rent-up of
two new facilities, which opened on September 1, 1995 and March 15, 1996 and
contributed combined revenues of $2.9 million; (ii) the acquisition of two
facilities on April 1, 1996 which contributed combined revenues of $1.9 million
and another facility in April 1997 which contributed $256,000; and (iii) leasing
of a facility in October 1996 which contributed $2.5 million. Excluding the
impact of these new facilities, assisted living revenues were $7.3 million and
$6.9 million for the six months ended June 30, 1997 and 1996, respectively.
Management fee revenue increased by $214,000 or 49.5% to $646,000 for the six
months ended June 30, 1997 compared to $432,000 for the six months ended June
30, 1996. The increase was primarily attributable to six new facilities under
management by the Company.
Operating Expenses
Assisted living operating expenses increased by $4.1 million, or 65.1% to $10.4
million for the six months ended June 30, 1997, compared to $6.3 million for the
six months ended June 30, 1996. As a percentage of assisted living revenues,
assisted living operating expenses were 69.8% and 66.3% for the six months ended
June 30, 1997 and 1996, 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 East Northport and higher than expected
costs associated with ALP. Excluding expenses attributable to Senior Quarters at
East Northport and the ALP, assisted living operating expenses as a percentage
of assisted living revenues would have been 64.7% and 63.6% for the six months
ended June 30, 1997 and 1996, respectively.
General and Administrative Expense
General and administrative expense increased by $1.2 million, or 100% to $2.4
million for the six months ended June 30, 1997 compared to $1.2 million for the
six months ended June 30, 1996. As a percentage of total revenues, general and
administrative expense was 15.4% and 12.0% for the six months ended June 30,
1997 and 1996, 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.
Interest Income
Interest income increased by $302,000, or 290% to $406,000 for the six months
ended June 30, 1997
11
<PAGE>
compared to $104,000 for the six months ended June 30, 1996. The increase is
attributable to interest earned on the investment of the proceeds from the
Company's initial public offering.
Interest Expense
Interest expense increased by $700,000, or 23.3% to $3.7 million for the six
months ended June 30, 1997 compared to $3.0 million for the six months ended
June 30, 1996. The increase is attributable to interest on borrowings for the
East Northport facility which opened on March 15, 1996 and debt incurred to
finance the acquisition of Town Gate East and Town Gate Manor.
Net Loss
Net loss was $1.8 million for the six months ended June 30, 1997, compared to
the proforma net loss of $555,000 for the six months ended June 30, 1996. The
increase in net loss is primarily the result of operating losses at the East
Northport ALP facility, incremental costs incurred during the implementation of
ALP and, to a lesser extent, higher payroll and benefit costs in connection with
the Company's expansion plans. Excluding Senior Quarters at East Northport and
the incremental costs associated with the ALP, net loss would have been $795,000
and $394,000, on a proforma basis for the six months ended June 30, 1997 and
1996, respectively.
12
<PAGE>
Liquidity and Capital Resources
Net cash used in operating activities was $2.4 million for the six months ended
June 30, 1997, compared to $1.1 million for the six months ended June 30, 1996.
The increase is primarily attributable to increases in, other assets, deferred
income taxes and an increase in net loss for the six months ended June 30, 1997
over the prior period, offset by increases in resident security deposits,
accrued interest and depreciation.
Net cash used in investing activities was $9.7 million for the six months ended
June 30, 1997, compared to $14.4 million for the six months ended June 30, 1996.
Substantially all of the cash used in investing activities for the six months
ended June 30, 1997 was for the development of new facilities offset by the
proceeds from the sale of minority interests and an increase in contributed
capital by minority partners. Net cash used in investing activities was funded
primarily through long-term debt.
Net cash provided by financing activities was $4.8 million for the six months
ended June 30, 1997, compared to $13.8 million for the six months ended June 30,
1996. Net cash provided by financing activities primarily consists of the
proceeds of long-term debt offset by principal repayments of long-term debt.
In July 1997, the Company sold 2,000,000 shares of its $2.00 Convertible
Exchangeable Preferred Stock at a price of $25.00 per share. The Company
realized net proceeds from the Preferred Offering of approximately $47.4 million
and intends to use such proceeds towards continued development and acquisitions
of assisted living facilities. In addition, the Company also intends to use a
portion of the proceeds to repay $15.2 million of mortgage indebtedness, with a
weighted average interest rate of 10.25% maturing on February 28, 1999, and $1.6
million in equity participation amounts on the repaid indebtedness. The Company
expects to record in the third quarter of 1997 an extraordinary loss on the
early retirement of this debt approximating the unamortized portion of the
equity participation amount. On August 12, 1997, the Company sold an additional
400,000 shares of Convertible Exchangeable Preferred Stock and realized net
proceeds of $9.6 million.
In June 1997, the Company entered into a $50 million Non-Revolving Credit
Facility with GMAC Commercial Mortgage Corporation to provide construction and
acquisition financing collateralized by assisted living or independent living
facilities. Amounts borrowed will vary depending on the value of the facility
and will bear interest rates based on the 30-day LIBOR Rate plus 2.45% to 3%.
The Credit Facility has a two year term with acquisition and construction loans
payable in full after three and five years, respectively.
The Company currently has a $100 million acquisition, leasing and development
credit facility (the "Facility") with a lending institution, providing temporary
construction and permanent financing. The Company currently has drawn and
committed $52.3 million, with an additional $47.7 million remaining for future
financings under the Facility.
13
<PAGE>
The Company intends to finance its growth strategy for the next three to five
years through a variety of sources, including the remaining proceeds of the
Offering and the Preferred 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.
Note on Forward-Looking Statements
Certain information contained in this Form 10-Q are forward-looking statements.
Events could affect the Company's actual results and could cause such 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
effect of economic and market conditions, the availability of financing, general
real estate and construction risks, government regulation, competition and other
business risks common to assisted living operations.
14
<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
(a)-(c)
On July 3, 1997, the Company issued 2,000,000 shares of its $2.00
Convertible Exchangeable Preferred Stock (the "Preferred Stock") at
a purchase price of $25 per share of Preferred Stock, for an
aggregate purchase price to investors of $50.0 million. The
Preferred Stock was sold to Raymond James & Associates, Inc., Forum
Capital Markets, L.P. and Wheat First Butcher Singer, as Initial
Purchasers pursuant to the exemption from the registration
requirements provided by Section 4(2) of the Securities Act of 1933,
as amended, and was subsequently offered for sale by the Initial
Purchasers to Qualified Institutional Buyers in reliance on the
exemption from registration provided by Rule 144A, and to a limited
number of Institutional Accredited Investors that executed and
delivered a letter containing certain representations and
agreements.
On August 12, 1997, the Initial Purchasers exercised an
overallotment option to purchase an additional 400,000 shares of
Preferred Stock from the Company at an aggregate purchase price to
investors of $10.0 million.
Aggregate net proceeds to the Company from the sale of Preferred
Stock were $57.0 million, after deducting aggregate discounts to
Initial Purchasers of $2.4 million and offering expenses payable by
the Company of $0.6 million.
Dividends on the Preferred Stock are cumulative from the date of
original issuance and are payable quarterly in arrears at an annual
rate of $2.00 per share in cash. The Preferred Stock is convertible,
at the option of the holder, into Common Stock of the Company as an
initial conversion price of $12.98 per share of Common Stock, which
under certain circumstances is subject to adjustment upon a Change
in Control (as defined) of the Company. The Preferred Stock is
exchangeable, at the option of the
15
<PAGE>
Company, on or after September 30, 1997, for 8% Convertible
Subordinated Notes of the Company, which contain conversion and
optional redemption terms that are substantially identical to those
of the Preferred Stock. The Company may redeem the Preferred Stock,
in whole or in part, at any time on or after July 1, 2000 at
redemption prices commencing at $26.00 per share and declining
thereafter.
In connection with the issuance and sale of Preferred Stock, the
Company filed with the Secretary of State of the State of Delaware a
Certificate of Designations of $2.00 Convertible Exchangeable
Preferred Stock (the "Certificate of Designations") which
established the designations, powers, preferences and rights of the
shares of such preferred stock, and the qualifications, limitations
or restrictions thereof (in addition to the designations, powers,
preferences and rights, and the qualifications, limitations or
restrictions thereof, set forth in the Certificate of Incorporation
which may be applicable to the Company's preferred stock). The
Certificate of Designation provides that, with respect to payment of
dividends, redemption payments and rights upon liquidation,
dissolution or winding up of the affairs of the Company, the
Preferred Stock shall rank senior and prior to the Common Stock, par
value $.01 per share, of the Company (the "Common Stock"). The
liquidation value of shares of the Preferred Stock, in case of the
voluntary or involuntary liquidation, dissolution or winding up of
the Company, shall be $25.00 per share, plus an amount equal to the
dividends accrued and unpaid thereon, whether or not declared, to
the payment date. If the assets of the Company are not sufficient to
pay in full the liquidation value payable to the holders of shares
of the Preferred Stock, then the entire assets and funds of the
Company legally available for distribution shall be distributed
among the holders of the Preferred Stock.
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. Exhibits and Reports on Form 8-K
(a) Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
There was no Form 8-K filed during the second quarter
period ending June 30, 1997.
16
<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.
August 13, 1997 /s/ Glenn Kaplan
-----------------------------------
Glenn Kaplan
Chairman of the Board and
Chief Executive Officer
August 13, 1997 /s/ Raymond DioGuardi
-----------------------------------
Raymond DioGuardi
Chief Financial Officer
17
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<LEGEND>
THIS SCHEDULE CONTAINS A SUMMARY OF FINANCIAL INFORMATION EXTRACTED FROM
COMBINED BALANCE SHEETS AND COMBINED STATEMENTS OF OPERATIONS CONTAINED IN THE
COMPANY'S QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED JUNE 30, 1997 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
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