FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (NO FEE REQUIRED) For the fiscal year ended December 31, 1996
OR
|_| 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 ___________
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)
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)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
Aggregate market value of voting stock held by non-affiliates of registrant as
of March 1, 1997: $35,550,000
Number of shares of Common Stock outstanding as of March 1, 1997: 7,750,000
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement pursuant to Regulation
14A, which statement will be filed not later than 120 days after the end of the
fiscal year covered by this Report, are incorporated by reference in Part III
hereof.
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KAPSON SENIOR QUARTERS CORP.
ANNUAL REPORT ON FORM 10-K
----------------------------------------------------
TABLE OF CONTENTS
Item No. Page
- - -------- ----
PART I
1. Business.................................................. 3
2. Properties................................................ 15
3. Legal Proceedings......................................... 16
4. Submission Of Matters To A Vote Of Security Holders....... 16
PART II
5. Market For Registrant's Common Equity And
Related Stockholder Matters............................... 17
6. Selected Financial Data................................... 17
7. Management's Discussion And Analysis Of
Financial Condition And Results Of Operations............. 19
8. Financial Statements And Supplementary Data............... 24
9. Changes In And Disagreements With Accountants
On Accounting And Financial Disclosure.................... 24
PART III .............................................................. 24
PART IV
10. Exhibits, Financial Statements, And Reports On
Form 8-K.................................................. 25
Signatures................................................................ 26
Exhibit Index............................................................. 27
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PART I
ITEM 1. BUSINESS.
General
Kapson Senior Quarters Corp. (the "Company") is a leading provider of
assisted living services in the northeastern region of the United States, and
has owned, managed and/or operated assisted living facilities since 1972.
Assisted living facilities provide a residential alternative for elderly senior
citizens who need or desire assistance with their activities of daily living and
certain home health care services in a non-institutional environment. A majority
of the Company's facilities are operated under the "Senior Quarters" trademark.
The Company's operating philosophy is to provide services and care which
meet the individual needs of its residents and to enhance their physical and
mental well-being, thereby allowing residents to live longer and to "age in
place." The Company's facilities are designed to provide premium accommodations
and a comprehensive, bundled package of standard services for a single monthly
fee. These facilities offer, on a 24-hour basis, personal, supportive and home
health care services appropriate for their residents in a home-like setting, all
of which allow residents to maintain their independence and quality of life.
Furthermore, many of the Company's facilities, through its Extended Care
Program, also offer additional specialized care and services to residents in the
beginning stages of Alzheimer's disease, dementia and other cognitive
impairments. At December 31, 1996, the average monthly fee for standard services
at the Company's facilities was approximately $2,750 per unit. The Company
believes that its facilities are generally larger than typical assisted living
facilities in terms of units and resident capacity. Its prototype development
facility consists of 125 units with capacity for up to 200 residents. Over 50
years of combined experience in the assisted living industry have led the three
senior executives of the Company, Glenn Kaplan, Wayne Kaplan and Evan Kaplan
(collectively, the "Kaplans"), to develop and implement this prototype, which
enhances operating margins by capitalizing on economies of scale.
At December 31, 1996, the Company owned, managed and/or operated 15
assisted living facilities with an aggregate of 1,623 units and a capacity for
2,392 residents, located in New York, New Jersey, Connecticut and Pennsylvania.
Of these facilities, the Company owned all or a portion of eleven facilities
(seven entirely and four partially, with partial ownership interests ranging
from 10.0% to 50.1%) with an aggregate of 1,145 units and a capacity for 1,749
residents. The Company also operates one facility under a long-term operating
lease. Revenue from the twelve facilities in which the Company had an ownership
or leasehold interest constituted 93.7% of the Company's 1996 revenues, with the
balance provided by management fees from facilities owned by unaffiliated third
parties. The average age of residents at the Company's facilities is
approximately 85, and the average length of stay is 24 months. At December 31,
1996, the Company's facilities that were stabilized (i.e., in operation for at
least twelve months) had a weighted average occupancy rate of 97.0%, with many
of them maintaining waiting lists. Furthermore, such facilities have operated at
a 98.0% occupancy rate for the past five calendar
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years. Management attributes its success in maintaining high monthly fees and
occupancy levels to a number of factors, such as the premium nature of its
facilities; the comprehensive bundling of standard services as part of a single
package and the quality of those services; referrals from former residents,
their families and health care professionals; and the long tenure and low
turnover of its staff, which produces strong relationships with the residents
and their families.
Under applicable New York law and regulations, a publicly-traded
corporation is not permitted to be the licensed operator of a licensed facility,
although privately-owned corporations are permitted to operate certain types of
licensed facilities. The Kaplans individually are the licensed operators of
substantially all of the Company's facilities in New York, and the Kaplans may
in the future form one or more corporations to operate these facilities. The
Kaplans have, in turn, engaged a wholly-owned subsidiary of the Company to
provide certain management services at each such facility.
The Kaplan family has an extensive background in real estate and assisted
living. In 1932, the grandfather of the Kaplans founded a family-owned
commercial real estate enterprise and made a number of subsequent investments in
hotel and hospitality properties. This enterprise opened its first assisted
living facility in 1972, and a second assisted living facility was opened two
years later. Thereafter, the assisted living facilities were expanded, a third
facility was opened and land for future projects was purchased. In 1985, The
Kapson Group (the "Predecessor"), a New York general partnership between the
Kaplans, acquired one of these assisted living facilities. Since that time, The
Kapson Group has focused strictly on its assisted living business and has built
an executive management team with experience and expertise in the financing,
acquisition, development, management and operation of assisted living
facilities.
The Company was formed in order to consolidate and expand the assisted
living facility business of The Kapson Group. In connection with the Company's
initial public offering (the "Initial Public Offering"), a series of
transactions designed to consolidate The Kapson Group's assisted living business
in the Company were consummated. The address of the Company's headquarters is
242 Crossways Park West, Woodbury, New York 11797. Its telephone number is (516)
921-8900 and its facsimile number is (516) 921-8998. Its website address is
www.seniorquarters.com. The Company is a Delaware corporation incorporated on
June 7, 1996.
The Assisted Living Industry
The long-term care industry encompasses a wide continuum of services and
residential arrangements for elderly senior citizens. Skilled nursing facilities
provide the highest level of care and are designed for elderly senior citizens
who need chronic nursing and medical attention and are not able to live on their
own. Further, skilled nursing facilities tend to be one of the most expensive
alternatives while providing elderly senior citizens with limited independence
and a diminished quality of life. On the other end of the continuum is
home-based care, which typically is provided in an individual's private
residence. While this alternative allows the elderly individual to "age in
place" at home and, in certain instances, can provide most of the services
available at
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a skilled nursing facility, it does not foster any sense of community or the
ability to participate in group activities.
Assisted living facilities generally are designed to fill the gap in the
middle of this continuum. Assisted living facilities have been described by the
Assisted Living Federation of America as providing a special combination of
housing and personal, supportive and home health care services designed to
respond to the individual needs of those who need or desire help with their
activities of daily living, including personal care and household management.
Services in an assisted living facility are generally available 24 hours a day
to meet the scheduled and unscheduled needs of residents, thereby promoting
maximum dignity and independence.
The assisted living industry is highly fragmented, with only approximately
5% of the industry's beds represented by the top 30 industry participants based
on 1995 studies. However, the Company believes that substantial industry
consolidation is underway. At present, the industry is characterized by many
participants who operate only a limited number of facilities and who frequently
can offer only basic assistance with a limited number of activities of daily
living. Conversely, the Company believes that it is characterized by the
following: (i) the ability to offer premium accommodations and a comprehensive
bundle of standard services for a single inclusive monthly fee; (ii)
sophisticated, professional management structures and highly trained employees;
(iii) a cost-efficient, user-specific prototype facility; (iv) experience in
providing home health care services, and (v) the proven ability to operate in a
highly regulated environment such as that in the State of New York.
The Company's Assisted Living Services
The Company's facilities provide services and care which are designed to
meet the individual needs of its residents, enhance their physical and mental
well-being and to promote a supportive, independent and home-like setting. Most
of the Company's facilities are primarily designed as premium facilities at
which residents receive a comprehensive, bundled package of standard services
for a single monthly fee.
Tailored Care Plan. A primary element of the Company's strategy is the
concept of "tailored" care to meet each resident's specific needs. The
customizing of services to meet a resident's needs commences with the admissions
process, during which the resident, his or her family and physician, and the
facility's medical director and management staff discuss the resident's needs
and develop a plan for his or her care. If recommended by the resident's
physician, additional home health care or medical services may be provided at
the facility by a home health care services agency. The care plan is reviewed
and modified on a regular basis.
Extended Care Program. The Company has implemented its Extended Care
Program at certain of its facilities. The program is designed to accept
residents with the beginning stages of Alzheimer's disease, dementia and other
cognitive impairments and to enhance their opportunity to "age in place." This
program, which is provided at additional cost, includes special services such
as: personal care aides specifically trained to help seniors with declining
cognitive
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functioning; separate activity areas; special activities for cognitive and
behavioral problems, including ones that encourage artistic outlets for creative
expression; additional assistance with bathing, personal hygiene and dressing; a
high staff-to-resident ratio; either a separate dining room or separate dining
times, and special living arrangements. The Company intends to expand its
Extended Care Program to many of its current facilities and to offer it at all
new facilities.
New York State Assisted Living Program. In June 1993, the Company was
awarded 400 of the 698 beds (approximately 57%) allocated to the Long Island
Region under the State of New York's Assisted Living Program. This program is
geared to residents who are eligible for Medicaid and who require a higher
acuity of care than is typically provided in assisted living facilities. As part
of this program, the Company has committed to accept 380 Medicaid residents at
two facilities. The remaining number of beds may be filled by private-pay
residents. The Assisted Living Program is closed to new applicants and the
Company is not aware of any proposals pending in the New York State Legislature
to enact similar programs or to award additional beds under the existing
program.
Service and Care Package. The Company's facilities typically charge a
single monthly fee which includes a large package of services and amenities. The
Company believes that this fee is larger than that of typical providers of
assisted living services and that such a fee is viable because: (i) the
Company's facilities are designed as premium facilities; (ii) the Company's
basic package includes services that typical assisted living providers charge
for on an "as-needed" basis; (iii) the overall quality of its services; and (iv)
the long tenure of its staff which, because of its low turnover, becomes well
known and trusted by the facility's residents and their families. At December
31, 1996, the average monthly fee for standard services at the Company's
facilities was approximately $2,750 per unit. Among other things, the Company
believes that this fee structure distinguishes the Company from other assisted
living providers and enhances the home-like environment of its facilities, makes
it easier for the Company to predict operating expenses at any given facility
and, therefore, increases profitability at its facilities.
Wellness Monitoring. The staff at the Company's facilities closely monitors
the physical and mental health of its residents in order to identify and respond
to changes and then, together with the resident and the resident's family and
physician, as appropriate, designs a solution to fit that resident's particular
needs. This monitoring activity takes place at meals and other scheduled
activities, and informally as the staff performs its services around the
facility. In addition, the staff works with home health care services agencies
to provide services that the facilities cannot provide, such as physical and
occupational therapy.
Social and Recreational Activities. The Company believes that an essential
part of enjoying an assisted living environment as well as maintaining a healthy
lifestyle is participation in social and recreational activities. Residents are
encouraged to participate in facility activities, and numerous activities rooms
(such as bingo rooms, card rooms and cocktail lounges) are included in the
design of each of its facilities. At a typical Company facility there will be
between eight and 14 scheduled activities per day, seven days a week. The
activities vary facility by facility in accordance with the particular interests
of the facility's residents.
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Resident Participation. Each facility has a Residents' Council and a Food
Service Committee comprised of several residents who are elected by their
co-residents. The Residents' Council meets with the administrator of the
facility on a regular basis to discuss concerns and suggestions of the
residents. The Food Service Committee meets with the administrator and the chef
on a frequent basis to discuss possible changes and variations to the menu. Both
of these groups help to involve residents in the community while providing
day-to-day quality control.
Operations of the Company's Facilities
Corporate. Over the past 25 years the Company has provided centralized
management services to each of its facilities, including the development of
operating procedures, recruiting and training, financial accounting services, a
licensing facilitator and legal support systems. As part of the Company's
training procedures, new staff train at existing facilities to observe methods
of administration, cash management, personal care assistance, housekeeping,
maintenance, security, medication management, food preparation, nutrition
planning, supervision of recreational activities and other operational elements.
Facility. The operational staff at each of the Company's assisted living
facilities generally consists of an administrator, who has overall
responsibility for the operation of the facility (subject, however, to the
control of the licensed operator, where applicable), a medical director, a
recreation director, a case manager or social worker and an assistant
administrator. At least one personal care aide is on duty 24 hours per day to
respond to emergencies, and scheduled 24-hour assisted living services are
available to residents. Each facility has a kitchen staff, a housekeeping staff
and a small maintenance staff. The Company's assisted living facilities have on
average 70 to 80 full-time or part-time employees depending on the size of the
facility and the extent of assisted living services provided in that facility.
The Company's facilities place emphasis on diet and nutrition, as well as
preparing attractively presented healthy meals which can be enjoyed by the
residents. The Company's food service program is led by a nutritionist, who
prepares all menus and recipes for each facility. The menus and recipes are
reviewed and changed based on consultation with nutritional experts, input from
the residents and applicable law and regulations. Under certain circumstances,
the Company also provides special meals for residents who require special diets.
Employees. The Company emphasizes maximizing each employee's potential
through support and training. The Company experiences low turnover in the staff
at both its central office and its facilities and, consequently, it is able to
promote from within. Management personnel is trained in the areas of supervision
and management skills. At the facility level, key personnel such as
administrators will generally have received approximately eight months training
at the Company's central office and one of the Company's facilities prior to the
opening of the facility. Other key personnel, such as medical directors, case
managers or recreational directors will generally have received approximately
four months training at one the Company's facilities prior to assuming duties at
a new facility. In addition, the administrators of each facility conduct monthly
in-service training sessions relating to various practical areas of care-giving
at the facility.
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These monthly training sessions cover policies and procedures of all facets of
facility operations, including special areas such as state and social service
regulations, quality assurance, fire, safety disaster procedures and resident
care. In addition, hourly employees are trained in the Company's philosophy of
assisted living, motivational sessions and practical how-to areas of dealing
with residents. The Company believes that the long tenure of its operational
staff is due to the advancement opportunities that arise out of the Company's
rapid growth.
Transition Team. In order to manage its growth more effectively, the
Company dispatches a transition team to each new facility that offers its
permanent staff back-up assistance and technical and other advice with respect
to all aspects of the operation of the new facility, such as budgets, policies,
procedures and systems, activities for the elderly, administration and provision
of specific assisted living services, food service, wellness monitoring,
maintenance and other operational areas. Depending on the size and nature of the
new facility, a transition team generally consists of two to eight persons who
are department heads of other facilities. The team is typically on site prior to
and through the new facility's opening date, and remains there for a week at a
time during the new facility's first two months of operation.
Quality Control. The Company ensures the quality of its services through
frequent, thorough reviews. The administrator of each facility conducts a
"walk-through" inspection every day and the department heads hold frequent staff
meetings to discuss issues concerning the operation of the facility. A Vice
President of Operations conducts a regular site review on an unannounced basis.
The Company also uses outside inspectors to examine the facility from the
viewpoint of the family member of a prospective resident and to report their
impressions to Company management.
Growth Strategy
Overview. The Company's growth strategy for the next three to five years
will focus on the expansion of its existing portfolio through the development
and acquisition of additional assisted living facilities, the expansion of its
ancillary services, such as home health care services, in-house pharmacy
services and its Extended Care Program, and maintaining its focus on
cost-efficient facilities management. The Company also intends to continue to
capitalize on public recognition of the "Senior Quarters" trademark to
distinguish itself from competitors.
The Company's primary focus is the northeastern United States where it
intends to maintain its position as a leading assisted living provider. The
Company also will seek to develop or acquire facilities in other areas of the
United States in which it believes it will be able to create a sizable presence.
The Company believes that by concentrating or "clustering" its facilities in
target areas with desirable demographics, it can increase the efficiency of its
management resources and achieve broad economies of scale.
Since 1985, the Company has developed ten assisted living facilities and
acquired all or an interest in three others, formed home health care service
agencies in order to offer such services in the Company's facilities, and
developed its prototype facility for cost-effective management.
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Most of these facilities have been located in New York State, which has one of
the most extensive regulatory frameworks with respect to the provision of
assisted living services. Accordingly, the Company believes that it not only has
the requisite experience but also the systems, procedures and infrastructure to
support its growth strategy and to adapt to regulatory change. The Company
intends to continue to finance its development and acquisition of new facilities
through a variety of sources, including the proceeds of the Initial Public
Offering, bank and other financing, long-term operating leases with REITs,
future debt or equity offerings, joint ventures and other sources.
The Company will seek to realize future growth primarily through the
construction of new facilities and through the acquisition of existing
facilities. The Company intends to pursue the conversion of buildings employed
for other uses on a selective basis, thereby increasing its universe of
potential development activities. Additionally, the Company will selectively
enter into management contracts to manage facilities for institutions and
developers that do not have experience in operating an assisted living facility.
The Company's experience with real estate developers and lenders has led it
to believe that the "Senior Quarters" trademark and the Company's established
reputation in the assisted living industry increase its development and
acquisition opportunities and that its participation in a project generally
lends that project credibility with the potential financing sources, local
governing bodies and communities and potential residents. Further, through its
activities as a leading developer and operator of assisted living facilities in
the northeastern United States and management's activities in numerous industry
associations, the Company has generated numerous contacts through which it is
able to identify possible development and acquisition opportunities.
Development of New Facilities
Prototype Facility. Through its quarter of a century of industry
experience, the Company has developed a prototype facility floor plan with more
efficient and flexible multi-purpose common areas and residential unit layout.
The design of this prototype has enabled the Company to reduce the square
footage required by 25% without adversely impacting the quality of its services
and facilities. The prototype facility contains 125 units with a capacity for up
to 200 residents, includes studios, one-bedroom and two-bedroom units, and spans
82,000 square feet.
Development Process. The development of a facility begins with the zoning
process, which the Company has significant experience at managing. Local zoning
board members are strongly encouraged to visit the Company's existing facilities
on both an escorted and a "drop-in" basis and to discuss with the Company's
senior management any concerns that may arise so that they may be addressed well
in advance of zoning board meetings. While the Company has developed a prototype
for its facilities, this plan is extremely flexible with respect to the exterior
facade, which can be tailored to blend into the surrounding community. The
construction of the Company's new facilities is typically undertaken by a select
group of general contractors with whom the Company works or intends to work on a
continuing basis. All contractors are required to submit performance and payment
bonds in favor of the Company. Several bids are solicited for each
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project and the winning bidder is brought into the planning process in its
initial stages. The intensive involvement of the general contractor at such an
early stage has resulted in most of the Company's existing projects being
completed on time and within budget. There can be no assurance, however, that
future projects will be completed on time and within budget.
Development Status. The Company currently has four assisted living
facilities under construction and an additional five facilities with zoning
approval. The Company is currently involved in various stages of
pre-construction development with respect to twelve assisted living facilities.
The Company is also in the preliminary stage of discussions to develop or
acquire an additional 10 sites in six states. In considering a prospective site
for development, the Company generally considers such factors as a potential
market's demographics, the number of existing long-term care facilities
(including those owned or managed by the Company) in the area, and the income
level of the target population. Preliminary development activities include due
diligence activities (including the evaluation of environmental and
geo-technical matters), the preparation of architectural and engineering plans
and the negotiation of definitive agreements regarding the acquisition of the
site and the financing of the development. The Company currently has no binding
commitment or other agreement, arrangement or understanding to acquire or to
proceed with the development of any of these sites, and there can be no
assurance that the Company will ultimately be able to or elect to acquire and
develop any of these sites.
On March 18, 1997, the Company announced that it plans to develop six
assisted living facilities in North Carolina and South Carolina with a joint
venture partner.
Acquisition of Existing Facilities
Acquisition Criteria. Driven by the assisted living industry's current
fragmentation and ongoing consolidation, the Company believes that there are a
large number of acquisition opportunities available for well-financed,
experienced operators. Through its extensive experience in the assisted living
industry and its development and acquisition team, the Company continually seeks
to acquire facilities in its targeted markets. In evaluating potential
acquisitions, the Company reviews and considers: (i) the location; (ii) its
ability to cluster with existing facilities; (iii) demographics of the area;
(iv) the current and projected revenues and cash flow of the facility, and (v)
the Company's ability to increase bottom-line profitability through enhanced
services (including home health care), operational efficiencies and capital
improvements.
Acquisition Process. Through its experience in developing and operating
assisted living facilities and management's participation in industry
associations, the Company has generated numerous contacts through which it is
able to identify possible acquisitions. The Company is regularly contacted by
other operators, industry participants and groups, as well as lenders and banks
associated and unassociated with the Company. The Company believes that it is
chosen over others due to its recognition as an experienced operator and its
ability to operate effectively in highly regulated states. Management intends to
pursue single and portfolio acquisitions of assisted living facilities where the
Company believes it can add increased value to the existing operations.
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Further, the Company will seek to acquire independent living facilities where
there is an opportunity to reposition the existing operation into a Senior
Quarters assisted living facility.
Conversions of Existing Facilities Used for Other Purposes. The Company has
extensive experience with the conversion of existing buildings into assisted
living facilities, which it believes expands its universe of potential
development opportunities. In certain instances, the conversion of an existing
facility may have compelling economic advantages compared to the development of
a new facility, including: (i) lower total development costs; (ii) less time
required for preparation of the facility; and (iii) an expedited zoning permit
process. While the Company believes that the majority of the facilities it
develops in the future will be newly constructed, the Company also believes that
its extensive experience with conversions enlarges its universe of potential
development projects and will enable it to take advantage of economically
lucrative conversion opportunities that do arise.
Expansion of Company-Provided Ancillary Services.
The Kaplans own and operate a New York licensed home care services agency,
which offers home care services in some of the Company's New York facilities.
The Company intends to provide such services through the Kaplans' agency in all
of its New York facilities. The Company expects to apply in the next year for
registration as a pharmacy in New York in order to offer and provide in-house
pharmacy services in its New York facilities and, where permissible, at its
other facilities. In addition, the Company intends to offer its Extended Care
Program for residents suffering from cognitive impairments at many of its
existing facilities and all of its new facilities. The Company believes not only
that these ancillary services will enable the Company to attract additional
residents and enable residents to stay at the Company's assisted living
facilities longer, rather than having to transfer to more expensive skilled
nursing facilities, but also that its provision of such services will increase
as its growth strategy is implemented.
The Company also seeks to enhance and increase the amount and diversity of
assisted living services it provides through: (i) the continued education of the
senior community, particularly the residents and their families, concerning the
cost effectiveness of receiving additional services in an assisted living
facility; (ii) the continued development and refinement of assisted living
programs designed to meet the needs of its residents as they "age in place"; and
(iii) the consistent delivery of quality services for residents.
Competition
The long-term care industry is highly competitive and the Company expects
that the assisted living industry will become more competitive in the future.
The Company competes with numerous local, regional and national companies
providing long-term care alternatives such as home care services agencies, life
care communities, skilled nursing facilities, community-based service programs,
retirement communities and convalescent centers. The Company expects that as
assisted living receives increased attention, competition will grow, and that
new market entrants will include companies focusing primarily on assisted
living. Assisted living providers compete
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for residents primarily on the basis of quality of service, price, reputation,
physical appearance and location of the living environment, services offered,
family preferences and physician referrals. Moreover, the Company expects to
face competition for the development or acquisition of assisted living
facilities during the course of its implementation of its growth strategy.
Competition may be increased by changes in the regulatory environment,
especially in New York, where assisted living is highly regulated and a majority
of the Company's facilities is located. Some of the Company's present and
potential competitors are significantly larger and have, or may obtain, greater
financial resources than those of the Company.
Government Regulation
The Company's facilities are and will continue to be subject to certain
federal, state and local regulations and licensing requirements. In addition,
the facilities are also subject to various local building codes and ordinances.
These requirements vary from state to state and are monitored to varying degrees
by state agencies. Specific categories and names of licensed facilities also
vary from state to state. Most states in which the Company currently does
business require that assisted living facilities and home health care services
agencies be licensed. New York requires state registration in order to own and
operate a pharmacy; other states in which the Company intends to provide
pharmacy services also regulate such services.
Reimbursement. Government payments for assisted living facilities have been
limited and most assisted living residents or their families generally pay the
cost of their care from their own financial resources. In certain instances
private long-term care insurance may provide funds for assisted living services.
The purchase of private long-term care insurance appears to be increasing
dramatically as more types of insurance become available. However, the Company's
two ALP facilities are intended to serve primarily Medicaid residents. The
residential fee for Medicaid residents, whether eligible for SSI or not, is
based on the SSI residential rate applicable to ALP facilities. Home care
services provided to residents of the ALP facility who are Medicaid
beneficiaries are reimbursed by Medicaid on a per day basis, which is equal to
50% of the amount that would be paid for the anticipated services at each
resident's level of care (based on social and nursing assessments) to nursing
facilities in the same geographical area for a Medicaid resident's home care
services. Because the ALP facility only receives a fixed amount from Medicaid
for a range of home care services within the resident's level of care, the ALP
facility would be at financial risk should its Medicaid eligible residents
require a level of services within the range for the specified level of care
that exceeds the amount reimbursed by Medicaid, and there is no assurance that
the proposed federal and state legislation involving Medicaid, in whatever form
such legislation may take, will not reduce government support. The combined
payments for Medicaid-eligible residents are approximately the same as the
overall monthly fee for a private paying resident in a semi-private
accommodation.
Other. The significant aspects of both the licensing and regulatory
environments in states where the Company currently operates and under applicable
federal law include the following:
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New York. The State of New York has a variety of levels of senior housing
ranging from those for residents requiring limited or no services to those aimed
at residents whose health needs are substantial. Certain of the lower levels,
such as independent living facilities, are subject to little or no regulation as
residential facilities. The Company owns and/or manages two independent living
facilities. However, residential facilities in which personal care and other
services are provided are licensed and regulated by New York State's Department
of Social Services, and, with regard to ALP facilities, by the Department of
Health, as well. The Company's New York licensed facilities consist of Adult
Homes, Enriched Housing Programs and ALP facilities. Adult Homes and Enriched
Housing Programs are a class of residential facilities for adults needing levels
of care that are more moderate than the higher levels of care required for a
resident in order to qualify for an ALP facility. The license application
process for licensed facilities, which includes an assessment of public need, is
complex and may take one year or more.
Current New York law and regulations prohibit a publicly-traded corporation
from operating a licensed facility. Natural persons, individually or in
partnership, and privately-held corporations may operate Adult Homes, Enriched
Housing Programs and ALP facilities. The licensed operator(s) of an Adult Home
or an Enriched Housing Program may enter into management contracts which provide
that the licensed operator(s) shall maintain ultimate responsibility and
liability for the licensed entity and the power to discharge persons working at
the licensed facility. Licensed operators of ALP facilities may enter into
management contracts that provide additionally that the licensed operator shall
retain control and responsibility for the day-to-day operations by the licensed
operators, retain the authority and power to hire and discharge persons working
at the licensed entity, maintain and control the books and records of the
licensed entity, retain ultimate authority to dispose of assets used in the
operation of the licensed entity, to incur any liability on behalf of the
licensed entity and to adopt or enforce policies regarding the operation of the
licensed entity. Any change in the operator of any type of licensed facility
requires prior notification and approval of the state. New York's licensed
facilities are also subject to periodic inspection and license renewal every
four years.
The Kapson Licensed Home Care Services Agency, which is owned and operated
by the Kaplans, has applied to the New York State Department of Health to extend
its license to additional counties so as to provide such services to all of the
New York facilities serviced by the Company. A significant portion of the home
care services provided in the Company's ALP facilities are already being
provided by the Kapson Licensed Home Care Services Agency. If and when its
license is extended to other counties by the Department of Health, the Kapson
Licensed Home Care Services Agency intends to maintain on-site office space at
the Company's facilities.
The Company expects to apply within the next year to New York State
authorities for registration as a pharmacy in order to provide in-house pharmacy
services in all of its facilities. A New York pharmacy may be owned by a
corporation provided that the corporation obtains a registration and that the
actual practice of pharmacy is conducted by licensed pharmacists.
New Jersey, Connecticut and Pennsylvania. The State of New Jersey has four
levels of supportive senior housing, all of which are licensed, regulated and
subject to inspection. In the
13
<PAGE>
State of Connecticut, assisted living facilities are licensed and inspected by
the State Department of Health and Addiction Services and are a combination of a
"managed residential community" and an "Assisted Living Services Agency."
Assisted living facilities in the State of Pennsylvania are designated "personal
care homes" which must also receive a state license and are subject to
regulation and inspection. Publicly traded corporations may own and operate
assisted living facilities in New Jersey, Connecticut and Pennsylvania.
Federal and State Fraud and Abuse Laws and Regulations. The federal "Stark
Law" provides that where certain health care professionals have a "financial
relationship" with a provider of Medicaid-reimbursable "designated health
services" (including, among other things, home health care and pharmacy
services), the health care professional may be prohibited from making a referral
to the health care provider, and such health care professionals may be
prohibited from billing for the designated health service. Although the Company
believes that ownership in it is not subject to the Stark Law, a "financial
relationship" may be interpreted by the government to include ownership of stock
of the Company directly in the case of pharmacy services it may provide and
indirectly as a provider of management services to the home health care services
agency. Accordingly, referrals by certain health care professionals who are
stockholders of the Company to the Kapson Licensed Home Care Services Agency or
the Company's pharmacy for residents whose services are reimbursable by
Medicaid, and billing Medicaid by the ALP for such services, may be prohibited
under the Stark Law. Certain exceptions available under the Stark Law to certain
health care professionals who are investors would not be applicable as the
Company does not currently meet the qualifying test of stockholder equity of at
least $75.0 million. Submission of a claim for services for which payment is
prohibited under the Stark Law could result in substantial civil penalties. New
York State imposes similar prohibitions against health care professionals
referring any patients to a company that provides pharmacy services in which the
health care professional has an ownership or financial interest, such as stock
ownership. Laws imposing various restrictions applicable to such referrals exist
in many other states. The Company reviews and will continue to review all
aspects of its operations to assure compliance with federal and state health
care fraud and abuse laws, and will monitor developments under such laws. In
addition, in submitting claims to the Medicaid or Medicare programs, such as in
its ALP and possible future pharmacy and home care activities, the Company is
(and will be) subject to federal and state laws imposing significant civil and
criminal penalties for claims that the Company knew or should have known were
overstated or otherwise inappropriate.
Employees
As of December 31, 1996, the Company and its facilities employed
approximately 1,000 persons, including 32 in the Company's corporate
headquarters. The Company believes its employee relations are good.
Forward Looking Statements
Certain statements contained in this Annual Report on Form 10-K, including,
without limitation, statements appearing under Item 1, "Business," and Item 7,
"Management's Discussion
14
<PAGE>
and Analysis of Financial Condition and Results of Operations," are
forward-looking statements (within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934). The matters
referred to in the forward looking statements could be affected by the risks and
uncertainties involved in the Company's business. These risks and uncertainties
include, but are not limited to, the effect of economic and market conditions,
the availability of financing, general real estate and construction risks,
governmental regulation, competition, and other business risks common to
assisted living operations, as well as certain other risks described above in
this Annual Report.
ITEM 2. PROPERTIES.
The Company currently owns/leases/manages and/or operates 15 assisted
living facilities containing 1,623 units with a capacity for 2,392 residents.
The following chart sets forth information regarding the Company's existing
facilities.
<TABLE>
<CAPTION>
Year of
Number of Commence-
Units/ Owned, Year ment
Resident Leased or Constructed of Kapson
Facility City Capacity Managed or Converted Operations
- - -------- ---- -------- ------- ------------ ----------
<S> <C> <C> <C> <C> <C>
CONNECTICUT
Senior Quarters at Stamford (1)............... Stamford 94/188 100% 1988 1988
NEW JERSEY
Senior Quarters at Cranford (1)(5)............ Cranford 173/254 Leased 1993 1993
Change Bridge Inn (1)......................... Montville 103/112 23.75% 1988 1995
Senior Quarters at Jamesburg (1).............. Jamesburg 125/156 10% 1996 1996
NEW YORK
Senior Quarters at Centereach I (2)........... Centereach 101/200 100% 1979 1979
Senior Quarters at Huntington Station (2)..... Huntington 99/198 100% 1987 1987
Senior Quarters at Centereach II (1).......... Centereach 99/198 100% 1989 1989
The Regency at Glen Cove (3).................. Glen Cove 95/105 Managed 1993 1993
Senior Quarters at Chestnut Ridge (2)......... Chestnut Ridge 98/148 50.1% 1995 1995
Castle Gardens (4)............................ Vestal 84/84 Managed 1990/1993 1996
Senior Quarters at East Northport (2)......... East Northport 139/200 100% 1996 1996
Senior Quarters at Lynbrook (2)............... Lynbrook 126/200 Managed 1996 1996
Town Gate East (2)............................ Penfield 100/120 100% 1972 1996
Town Gate Manor (2)........................... Rochester 67/79 100% 1970 1996
PENNSYLVANIA
Senior Quarters at Glen Riddle (1)............ Glen Riddle 120/150 11% 1996 1996
-----------
TOTAL.................................................. 1,623/2,392
</TABLE>
- - -----------
(1) This facility is directly managed by a wholly-owned subsidiary of the
Company.
(2) In order to comply with applicable New York law and regulations, this
facility is operated by the Kaplans individually pursuant to an operating
agreement. The Kaplans have engaged a wholly-owned subsidiary of the
Company to provide certain management services pursuant to a management
agreement.
(3) This facility is operated by its owner, a New York not-for-profit
corporation that is unaffiliated with the Company. The owner has engaged a
wholly-owned subsidiary of the Company to provide management services
pursuant to a management agreement.
(4) The portion of this facility that is operated as an independent living
facility (84 beds) is managed by a wholly-owned subsidiary of the Company
pursuant to a management agreement. The portion that is operated as an
Enriched Housing Program facility (27 beds) is operated by a New York
not-for-profit corporation.
(5) This Facility is leased through a long-term operating lease with HealthCare
REIT.
15
<PAGE>
The Company's facilities are generally located near or in a major
population center and close to shopping malls and social and cultural activity
centers. Management believes that, among other factors, residents generally
choose a facility that is located close to their homes or the homes of their
families. Room configurations consist of studios and variously sized one-bedroom
or two-bedroom apartments. Communal areas usually include a variety of activity
rooms, a medical examination room, beauty salon/barber shop, library, chapel,
media rooms, billiard room, a crafts room and a 24-hour per day country kitchen.
The Company believes that its facilities are generally larger than typical
assisted living facilities in terms of units and resident capacity. Management
believes that economies of scale enhance operating margins at large facilities
and that "rent-up" risk is minimized through management's extensive experience
in marketing and developing, acquiring, managing and/or operating large
facilities, and the proximity of the Company's facilities to population centers
that can sustain such facilities. At December 31, 1996, the Company's facilities
that were stabilized (i.e., in operation for at least twelve months) had a
weighted average occupancy rate of 97.0%, with many of them maintaining waiting
lists.
The Company leases 5,715 square feet of corporate office space in Woodbury,
New York.
ITEM 3. LEGAL PROCEEDINGS.
The Company is involved in various lawsuits and other matters arising in
the normal course of business. In the opinion of management of the Company,
although the outcomes of these claims and suits are uncertain, in the aggregate
they should not have a material adverse effect on the Company's financial
position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of security holders during the fourth
quarter of 1996.
16
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Common Stock of the Company has traded on the National Association of
Securities Dealers Automated Quotation System ("NASDAQ") National Market System
since September 26, 1996 under the symbol KPSQ. On March 1, 1997 there were 43
holders of record of the Company's Common Stock.
The following table sets forth the high and low closing bid prices for the
Company's Common Stock as reported by NASDAQ:
Calendar Period High Low
- - --------------- ---- ---
1996:
Fourth Quarter...................................... 10 1/4 6 3/8
The Company has never declared or paid any cash dividends on its Common
Stock. The Company currently anticipates that it will retain all future earnings
for the expansion and operation of its business and does not anticipate paying
cash dividends in the foreseeable future.
Recent Sales of Unregistered Securities
On October 22, 1996, the Company issued 50,000 unregistered shares of Common
Stock to Hameem Associates, L.P., ("Hameem"), as partial consideration for the
purchase by the Company of Hameem's 50% limited partnership interest in the
entity that owns Senior Quarters at East Northport.
ITEM 6. SELECTED FINANCIAL DATA.
The financial data for the years ended December 31, 1996, 1995 and 1994 and
balance sheet data as of December 31, 1996 and 1995 have been derived from the
audited financial statements of the Company and the Predecessor and should be
read in conjunction with those financial statements and notes thereto included
elsewhere in this Annual Report. In addition, the selected financial data should
be read in conjunction with "Business" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
17
<PAGE>
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
The Predecessor (1) The Company (1)
------------------------------------------------------ ---------------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data
Revenues:
Assisted living revenues ............................ $11,553 $12,628 $13,349 $14,275 $22,534
Management fee ...................................... 24 248 348 443 1,080
Other - affiliates .................................. 242 112 57 45 --
--------- --------- --------- --------- ---------
Total revenues .................................. 11,819 12,988 13,754 14,763 23,614
--------- --------- --------- --------- ---------
Operating Expenses:
Assisted living operating expenses .................. 7,289 7,591 7,837 8,314 14,804
General and administrative .......................... 1,038 727 1,142 1,658 3,814
Depreciation ........................................ 1,264 1,188 1,180 1,234 2,091
--------- --------- --------- --------- ---------
Total operating expenses ........................ 9,591 9,506 10,159 11,206 20,709
--------- --------- --------- --------- ---------
Operating income ........................................ 2,228 3,482 3,595 3,557 2,905
Interest income ......................................... 22 12 8 44 463
Interest expense ........................................ (3,495) (3,553) (3,495) (3,936) (6,515)
Equity in income from joint ventures .................... -- -- -- -- 77
Other income (expense), net ............................. 280 (10) (1) (34) (205)
--------- --------- --------- --------- ---------
Income (loss) before minority interest and
extraordinary item .................................. (965) (69) 107 (369) (3,275)
Minority interest in net loss of combined
partnerships ........................................ -- -- -- 16 924
--------- --------- --------- --------- ---------
Income (loss) before provision for income taxes
and extraordinary item .............................. (965) (69) 107 (353) (2,351)
Provision for income taxes .............................. -- -- -- -- (2,039)
Extraordinary item ...................................... -- -- 4,399 -- --
--------- --------- --------- --------- ---------
Net Income (loss) ............................... $(965) $(69) $4,506 $(353) $(4,390)
========= ========= ========= ========= =========
Unaudited pro forma data:
Income (loss) before taxes and extraordinary
item ............................................ $(965) $(69) $107 $(353) $(2,351)
Pro forma benefit (provision) for income
taxes ........................................... 386 28 (43) 141 941
--------- --------- --------- --------- ---------
Income (loss) before extraordinary item ............. (579) (41) 64 (212) (1,410)
Extraordinary item - forgiveness of debt, net
of tax .......................................... -- -- 2,639 -- --
--------- --------- --------- --------- ---------
Pro forma net income (loss) ......................... $(579) $(41) $2,703 $(212) $(1,410)
========= ========= ========= ========= =========
Pro forma income (loss) per share:
Income (loss) before extraordinary item ............. ($.12) ($.01) $.01 ($.04) ($.26)
Extraordinary item .................................. -- -- .56 -- --
--------- --------- --------- --------- ---------
Income (loss) ....................................... ($.12) ($.01) $.57 ($.04) ($.26)
========= ========= ========= ========= =========
Pro forma weighted average number of
common shares outstanding ...................... 4,758 4,758 4,758 4,758 5,510
========= ========= ========= ========= =========
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
The Predecessor (1) The Company
------------------------------------------------------ ---------------
<S> <C> <C> <C> <C> <C>
Selected Operating Data:
Assisted living units owned, managed and/or
operated (end of period)......................... 393 661 661 862 1,623
Assisted living resident capacity (end of period).... 784 1,143 1,143 1,403 2,392
Weighted average occupancy of fully-stabilized
assisted living facilities....................... 99% 98% 98% 98% 97%
</TABLE>
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
The Predecessor (1) The Company
------------------------------------------------------ ---------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital (deficit) ............................... $(11,233) $(22,603) $(17,712) $(3,596) $12,455
Total assets ............................................ 31,825 31,381 34,294 54,407 95,988
Long-term debt, excluding current portion ............... 30,547 18,500 20,461 53,808 72,409
Shareholders' and Partners' equity (deficit) ............ (11,704) (12,325) (8,740) (9,811) 12,291
</TABLE>
- - -----------
(1) The Predecessor represents a combination of the businesses which owned all
or part of eleven assisted living facilities, facilities under development,
and an entity that provides facility management services. The Company was
formed in order to consolidate and expand the assisting living business of
the Predecessor. The financial data for the year ended December 31, 1996
represent nine months of the Predecessor and three months of the Company.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Results of Operations
Twelve Months Ended December 31, 1996 Compared to Twelve Months Ended
December 31, 1995
Revenues. Assisted living revenues increased to $22.5 million for the
twelve months ended December 31, 1996, compared to $14.3 million for the twelve
months ended December 31, 1995, an increase of 57.9%. 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 combined revenue of $4.4 million; (ii) the acquisition of Town Gate
East and Town Gate Manor on April 1, 1996 which contributed combined revenue of
$2.9 million, and (iii) the leasing of Senior Quarters at Cranford which
contributed $835,000. Excluding Senior Quarters at Chestnut Ridge, Senior
Quarters at East Northport, Town Gate East, Town Gate Manor and Senior Quarters
at Cranford, assisted living revenues were approximately equivalent for the
twelve months ended December 31, 1996 and 1995. Management fee revenue increased
to $1.1 million for the twelve months ended December 31, 1996, compared to
$443,000 for the
19
<PAGE>
twelve months ended December 31, 1995, an increase of 143.9%. The increase was
primarily attributable to revenues from Management Contracts at Change Bridge
Inn, Senior Quarters at Jamesburg, Castle Gardens, Senior Quarters at Lynbrook
and Senior Quarters at Glen Riddle for 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 $14.8
million for the twelve months ended December 31, 1996, compared to $8.3 million
for the twelve months ended December 31, 1995, an increase of 78.1%. As a
percentage of assisted living revenues, assisted living operating expenses were
65.7% and 58.2% for the twelve months ended December 31, 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 initial "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 60.5% and 57.1% for the twelve months ended December 31, 1996
and 1995, respectively. This increase is 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 $3.8 million for the twelve months ended December
31, 1996, compared to $1.7 million for the twelve months ended December 31,
1995. As a percentage of total revenues, general and administrative expense was
16.1% and 11.2% for the twelve months ended December 31, 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, Senior Quarters at East Northport, Senior Quarters at
Lynbrook, Senior Quarters at Jamesburg and Senior Quarters at Glen Riddle.
Interest Expense. Interest expense was $6.5 million for the twelve months
ended December 31, 1996, compared to $3.9 million for the twelve months ended
December 31, 1995, an increase of 65.5%. The increase is attributable to new
borrowings incurred in connection with the opening of Senior Quarters at
Chestnut Ridge and Senior Quarters at East Northport on September 1, 1995 and
March 15, 1996, respectively; and the acquisition of Town Gate East and Town
Gate Manor on April 1, 1996; partially offset by a decrease in interest expense
from refinancing an existing mortgage at a lower interest rate for Senior
Quarters at Centereach.
Net Loss. Net loss, including a one-time, non-cash charge for income taxes
of $2.4 million, was ($4.4 million) for the twelve months ended December 31,
1996, compared to ($353,000) for the twelve months ended December 31, 1995. The
increase in net loss is primarily
20
<PAGE>
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 the one-time,
non-cash charge for income taxes of $2.4 million, Senior Quarters at Chestnut
Ridge and Senior Quarters at East Northport, net income (loss) would have been
($330,000) and $439,000 for the twelve months ended December 31, 1996 and 1995,
respectively. The one-time non-cash charge for income taxes of $2.4 million
resulted from a change in tax status from non-taxable to taxable for facilities
contributed to the Company by the Predecessor concurrent with the Initial Public
Offering.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994.
Revenues. Assisted living revenues increased to $14.3 million for the year
ended December 31, 1995, compared to $13.3 million for the year ended December
31, 1994, an increase of 6.9%. The increase is attributable primarily to
increased rental rates and to the opening of Senior Quarters at Chestnut Ridge
on September 1, 1995, which contributed revenue of approximately $283,000.
Excluding Senior Quarters at Chestnut Ridge, assisted living revenues increased
4.8%. Management fee revenue increased to $443,000 for the year ended December
31, 1995, compared to $348,000 for the year ended December 31, 1994, an increase
of 27.3%. The increase was primarily attributable to Senior Quarters at
Cranford, a facility managed by the Company which opened in late 1993 and for
which revenue increased significantly in 1995 due to a full year of stabilized
occupancy.
Operating Expenses. Assisted living operating expenses increased to $8.3
million for the year ended December 31, 1995, compared to $7.8 million for the
year ended December 31, 1994, an increase of 6.1%. As a percentage of assisted
living revenues, assisted living operating expenses were 58.2% and 58.7% for the
years ended December 31, 1995 and 1994, respectively. Excluding: (i) pre-
opening expenses and negative margins during the "rent-up" period for Senior
Quarters at Chestnut Ridge; and (ii) a one-time tax refund related to a real
estate tax grievance, assisted living operating expenses would be 57.1% of
assisted living revenues for the year ended December 31, 1995. General and
administrative expense was $1.7 million for the year ended December 31, 1995,
compared to $1.1 million for the year ended December 31, 1994, an increase of
45.3%. As a percentage of total revenues, general and administrative expense was
11.2% and 8.3% for the years ended December 31, 1995 and 1994, respectively. The
increase is primarily the result of: (i) approximately $160,000 related to
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; and (ii) approximately $228,000
of general and administrative expenses related to the Company's expansion,
including Senior Quarters at Chestnut Ridge, Change Bridge Inn and Castle
Gardens.
Interest Expense. Interest expense was $3.9 million for the year ended
December 31, 1995, compared to $3.5 million for the year ended December 31,
1994, an increase of 12.6%. The increase is primarily attributable to the
opening of Senior Quarters at Chestnut Ridge at which point interest expense
with respect to this facility was no longer capitalized.
21
<PAGE>
Income (Loss) Before Extraordinary Item. Income (loss) before extraordinary
item was ($353,000) for the year ended December 31, 1995, compared to $107,000
for the year ended December 31, 1994. The decrease in net income is primarily
the result of the opening of Senior Quarters at Chestnut Ridge and higher
payroll costs in connection with the Company's expansion plans. The Company was
not required to pay and did not pay federal or state income taxes.
Extraordinary Item. For the year ended December 31, 1994, the Company
recorded an extraordinary gain of $4.4 million. This gain resulted from a
settlement with various lenders to satisfy certain outstanding mortgage notes
payable and accrued interest payable at a $4.4 million discount. The Predecessor
simultaneously refinanced this debt with other lenders at then prevailing market
rates.
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 underwriting fees and expenses of approximately
$5.9 million, totaled approximately $29.6 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 and a
distribution of approximately $6.0 million to cover capital gains taxes arising
out of the transaction.
Net cash provided by (used in) operating activities was ($0.9) million for
the twelve months ended December 31, 1996, compared to $3.1 million for the
twelve months ended December 31, 1995. The decrease is primarily attributable
to: (i) a net loss for the twelve months ended December 31, 1996, of $4.4
million compared to a net loss for the twelve months ended December 31, 1995, of
$353,000; (ii) a minority interest in the net loss of combined partnerships;
(iii) a decrease in accrued interest; and (iv) an increase in other assets.
Net cash (used in) investing activities was ($28.1) million for the twelve
months ended December 31, 1996, compared to ($17.6) million for the twelve
months ended December 31, 1995. Substantially all of the cash used in investing
activities for the twelve months ended December 31, 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 twelve months ended December 31, 1996. Net cash used in
investing activities was funded primarily through long-term debt.
Net cash provided by financing activities was $41.7 million for the twelve
months ended December 31, 1996, compared to $16.0 million for the twelve months
ended December 31, 1995. Net cash provided by financing activities primarily
consists of the proceeds of long-term debt offset by principal repayments of
long-term debt, distributions to partners and shareholders of the Predecessor,
and proceeds from the Initial Public Offering net of underwriting fees and
offering costs.
22
<PAGE>
Historically, and prior to the completion of its initial public offering,
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 for the
Company was $12.5 million at December 31, 1996 and a deficit of $3.6 million at
December 31, 1995. Excluding current liabilities owed to an affiliate of the
Company (which did not become an obligation of the Company), the working capital
position at December 31, 1995 would have been a deficit of $296,000.
In January 1995, the Company obtained a $40.0 million acquisition and
development credit facility with Health Care REIT, Inc. ("HCR"), providing
temporary construction and permanent financing. In September 1996, this facility
was increased to $140.0 million and subsequently reduced to $100.0 million by
mutual agreement of the parties, and includes temporary construction, permanent
financing and operating leases. The amounts drawn on the original $40.0 million
HCR credit facility were applied against the new $100.0 million facility.
Approximately $23.0 million of the HCR 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). As of
December 31, 1996, an additional $26.1 million has been committed for two
facilities (Senior Quarters at Cranford and the construction of Senior Quarters
at Albany) under operating leases. Under the facility, 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 HCR credit facility requires, as a
condition to future drawings, certain financial covenants on the date of each
closing, to include requirements of minimum net worth and cash balances, payment
coverage, current and debt to equity ratios and non-financial covenants to
include changes in ownership, additional debt on a facility and modification of
material contracts, all as further defined in the facility. At December 31,
1996, the Company was not in compliance with certain of these covenants,
primarily as a result of the one-time non-cash charge of $2.4 million for income
taxes taken in the fourth quarter of 1996. Waiver on default of certain
financial covenants was received from HCR and the facility was subsequently
amended to revise certain financial covenants to reflect the Company's current
and future business environment.
Indebtedness on two other properties (Senior Quarters at Huntington Station
and Senior Quarters at Stamford) having a combined outstanding balance of $15.3
million matures in February 1999, at which time all unpaid principal balances,
if any, become due and payable. The lending arrangements also 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 expects to refinance such debt with the existing lender or with another
financing source.
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
23
<PAGE>
long-term debt, including publicly issued debt. Because the Company intends to
use such financing for its properties, the amount of its indebtedness will
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. Further, increases in interest rates could increase the
Company's debt service obligations, and, alone or in combination with a
contraction in the overall availability of credit, could make it more difficult
for the Company to obtain future financing on commercially acceptable terms.
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Item 14 of Part IV of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
The information required by Part III (Items 10 through 13) is incorporated
by reference to the captions "Principal Stockholders," "Election of Directors,"
"Management" and "Certain Transactions" in the Company's definitive Proxy
Statement to be filed pursuant to Regulation 14A within 120 days after the end
of the Company's fiscal year covered by this Report.
24
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, AND REPORTS ON FORM 8-K.
(a) See Index to Financial Statements immediately following Exhibit Index.
(b) None.
(c) Exhibits
See Exhibit Index immediately following signature pages.
25
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned hereunto duly authorized.
KAPSON SENIOR QUARTERS CORP.
By: /s/ Glenn Kaplan
----------------------------------
Glenn Kaplan
Chairman of the Board of Directors
and Chief Executive Officer
Date: March 27, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
/s/ Glenn Kaplan Chairman of the Board of Directors March 27, 1997
- - ------------------------- and Chief Executive Officer
Glenn Kaplan (principal executive officer)
/s/ Wayne Kaplan Vice Chairman, Senior Executive March 27, 1997
- - ------------------------ Vice President, Secretary and Director
Wayne L. Kaplan
/s/ Evan A. Kaplan President, Chief Operating March 27, 1997
- - ------------------------- Officer and Director
Evan A. Kaplan
/s/ Raymond DioGuardi Chief Financial Officer March 27, 1997
- - ------------------------- (principal financial officer and
Raymond DioGuardi principal accounting officer)
/s/ Bernard J. Korman Director March 27, 1997
- - ------------------------
Bernard J. Korman
/s/ Gerald Schuster Director March 27, 1997
- - ------------------------
Gerald Schuster
/s/ Joseph G. Beck Director March 27, 1997
- - --------------------------
Joseph G. Beck
/s/ Risa Lavizzo-Mourey Director March 27, 1997
- - ------------------------
Risa Lavizzo-Mourey, M.D.
</TABLE>
26
<PAGE>
EXHIBIT INDEX
-------------
3.1 Certificate of Incorporation of the Company (incorporated by
reference to Exhibit 3.1 to the Company's Registration Statement on
Form S-1 dated September 26, 1996 (Registration No. 33-5945)).
3.2 By-laws of the Company (incorporated by reference to Exhibit 3.2 to
the Company's Registration Statement on Form S-1 dated September 26,
1996 (Registration No. 33- 5945)).
10.1 Form of Operating Agreement (incorporated by reference to Exhibit
10.1 to the Company's Registration Statement on Form S-1 dated
September 26, 1996 (Registration No. 33-5945)).
10.2 Form of Management Services Agreement (incorporated by reference to
Exhibit 10.2 to the Company's Registration Statement on Form S-1
dated September 26, 1996 (Registration No. 33-5945)).
10.3 Form of Kapson Senior Quarters Corp. 1996 Stock Incentive Plan
(incorporated by reference to Exhibit 10.3 to the Company's
Registration Statement on Form S-1 dated September 26, 1996
(Registration No. 33-5945)).
10.4 Form of Registration Rights Agreement among the Registrant, Glenn
Kaplan, Wayne L. Kaplan, Evan A. Kaplan and Herbert Kaplan
(incorporated by reference to Exhibit 10.4 to the Company's
Registration Statement on Form S-1 dated September 26, 1996
(Registration No. 33-5945)).
10.5 Form of Stockholder Agreement among the Registrant, Glenn Kaplan,
Wayne L. Kaplan and Evan A. Kaplan (incorporated by reference to
Exhibit 10.22 to the Company's Registration Statement on Form S-1
dated September 26, 1996 (Registration No. 33- 5945)).
10.6 Form of Employment Agreement between each of Glenn Kaplan, Wayne L.
Kaplan and Evan A. Kaplan and the Registrant (incorporated by
reference to Exhibit 10.23 to the Company's Registration Statement
on Form S-1 dated September 26, 1996 (Registration No. 33-5945)).
10.7 Form of Indemnification Agreement (incorporated by reference to
Exhibit 10.24 to the Company's Registration Statement on Form S-1
dated September 26, 1996 (Registration No. 33-5945)).
10.8 Mortgage, Security Agreement, Assignment of Leases and Rents and
Fixture Filing made March, 1996 by Kapson Rochester Manor, LLC in
favor of Health Care REIT, Inc.
27
<PAGE>
(incorporated by reference to Exhibit 10.25 to the Company's
Registration Statement on Form S-1 dated September 26, 1996
(Registration No. 33-5945)).
10.9 Mortgage Note in the sum of $3,890,625.00, dated March, 1996, made
by Kapson Rochester Manor, LLC to the order of Health Care REIT,
Inc. (incorporated by reference to Exhibit 10.26 to the Company's
Registration Statement on Form S-1 dated September 26, 1996
(Registration No. 33-5945)).
10.10 Loan Agreement dated March, 1996 between Kapson Rochester Manor, LLC
and Health Care REIT, Inc. (incorporated by reference to Exhibit
10.27 to the Company's Registration Statement on Form S-1 dated
September 26, 1996 (Registration No. 33-5945)).
10.11 Form of Health Care REIT, Inc., $140 million Credit Facility
Commitment Letter (incorporated by reference to Exhibit 10.28 to the
Company's Registration Statement on Form S-1 dated September 26,
1996 (Registration No. 33-5945)).
10.12* Amendment dated October 16, 1996, to Health Care REIT, Inc. Credit
Facility Commitment Letter.
10.13* Waiver of covenants by Health Care REIT, Inc. dated March 6,1997.
21.1 Subsidiaries of the Company. (incorporated by reference to Exhibit
21.1 to the Company's Registration Statement on Form S-1 dated
September 26, 1996 (Registration No. 333- 5945)).
27.1* Financial Data Schedule.
* Filed herewith.
28
<PAGE>
KAPSON SENIOR QUARTERS CORP.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Report of Independent Accountants F-2
Consolidated Balance Sheet of the Company as of December 31, 1996 and F-3
Combined Balance Sheet of the Predecessor as of December 31, 1995
Consolidated Statement of Operations of the Company for the year ended F-4
December 31,1996, and the Combined Statements of Operations of
the Predecessor for each of the two years in the period ended
December 31, 1995 and 1994
Consolidated Statement of Shareholders' Equity of the Company for the F-5
year ended December 31, 1996, and the Combined Statements of
Shareholders' and Partners' Deficit of the Predecessor for each of the two
years in the period ended December 31, 1995 and 1994
Consolidated Statement of Cash Flows of the Company for the year ended F-6
December 31, 1996 and the Combined Statements of Cash Flows of the
Predecessor for each of the two years in the period ended December 31, 1995
and 1994
Notes to Consolidated and Combined Financial Statements F-7 - F-19
</TABLE>
F-1
<PAGE>
Report of Independent Accountants
To the Shareholders of
Kapson Senior Quarters Corp.
We have audited the accompanying consolidated balance sheet of Kapson Senior
Quarters Corp. (the "Company" as defined in Note 1) as of December 31, 1996, and
the related consolidated statements of operations, shareholders' equity and cash
flows for the year then ended. We have also audited the combined balance sheet
of The Kapson Group (the "Predecessor" as defined in Note 1) as of December 31,
1995 and the related combined statements of operations, shareholders' and
partners' deficit and cash flows for each of the two years in the period ended
December 31, 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Kapson
Senior Quarters Corp. as of December 31, 1996 and the consolidated results of
its operations and its cash flows for the year then ended, in conformity with
generally accepted accounting principles. Further, in our opinion, the combined
financial statements referred to above present fairly, in all material respects,
the combined financial position of The Kapson Group as of December 31, 1995 and
the combined results of its operations and its cash flows for each of the two
years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles.
Coopers & Lybrand L.L.P.
New York, New York
March 6, 1997
F-2
<PAGE>
CONSOLIDATED BALANCE SHEET OF KAPSON SENIOR QUARTERS CORP.
AS OF DECEMBER 31, 1996
AND THE COMBINED BALANCE SHEET OF THE KAPSON GROUP
AS OF DECEMBER 31, 1995
ASSETS
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Current assets
Cash and cash equivalents $ 16,053,307 $ 3,392,318
Accounts receivable 80,329 77,837
Prepaid expenses and other current assets 574,733 270,317
Deferred income taxes 503,000 --
------------ ------------
Total current assets 17,211,369 3,740,472
Property and equipment, net 58,377,735 29,445,121
Facility development costs 1,190,727 16,374,566
Restricted cash 3,134,695 2,592,185
Deferred financing costs, net 2,595,407 2,082,285
Intangibles, net 4,821,842 --
Investment in joint ventures 551,829 --
Other assets 8,104,648 172,163
------------ ------------
Total assets $ 95,988,252 $ 54,406,792
============ ============
LIABILITIES AND SHAREHOLDERS' AND PARTNERS' EQUITY (DEFICIT)
Current liabilities
Current portion of long-term debt $ 943,658 $ 245,867
Accounts payable and accrued expenses 3,294,040 3,219,472
Accrued interest -- 363,198
Due to affiliates -- 3,300,450
Deferred revenue 519,168 207,564
------------ ------------
Total current liabilities 4,756,866 7,336,551
Long-term debt 72,408,516 53,807,880
Loan payable 555,000 --
Resident security deposits 1,725,192 1,278,147
Deferred income taxes 2,542,000 --
Deferred interest payable 147,500 105,200
Construction retainage payable 613,057 227,200
------------ ------------
Total liabilities 82,748,131 62,754,978
------------ ------------
Minority interest 948,925 1,463,271
------------ ------------
Shareholders' and partners' equity (deficit)
Common stock; $.01 par value, 30,000,000 shares authorized,
7,750,000 issued and outstanding 77,500 --
Additional paid-in capital 16,603,348 --
Accumulated deficit (4,389,652) --
Shareholders' and partners' deficit -- (9,811,457)
------------ ------------
Total shareholders' and partners' equity (deficit) 12,291,196 (9,811,457)
------------ ------------
Total liabilities and shareholders' and partners' equity (deficit) $ 95,988,252 $ 54,406,792
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated and combined
financial statements
F-3
<PAGE>
CONSOLIDATED STATEMENT OF OPERATIONS OF KAPSON SENIOR QUARTERS CORP.
FOR THE YEAR ENDED DECEMBER 31, 1996
AND THE COMBINED STATEMENTS OF OPERATIONS OF THE KAPSON GROUP
FOR EACH OF THE TWO YEARS IN THE PERIOD ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Assisted living revenues $22,533,855 $14,275,484 $13,349,033
Management fees 1,080,223 442,825 347,839
Other - affiliates -- 45,065 57,530
------------ ------------ ------------
Total revenues 23,614,078 14,763,374 13,754,402
------------ ------------ ------------
Operating expenses:
Assisted living operating expenses 14,804,083 8,314,372 7,836,765
General and administrative 3,814,093 1,658,658 1,141,735
Depreciation 2,090,996 1,233,843 1,180,418
------------ ------------ ------------
Total operating expenses 20,709,172 11,206,873 10,158,918
------------ ------------ ------------
Operating income 2,904,906 3,556,501 3,595,484
Equity in income from joint ventures 76,829 -- --
Interest income 462,812 44,234 8,693
Interest expense (6,514,389) (3,935,796) (3,496,063)
Other income (expense), net (205,074) (34,065) (1,070)
------------ ------------ ------------
(Loss) income before minority interest (3,274,916) (369,126) 107,044
Minority interest in net loss of partnerships 924,264 15,845 --
------------ ------------ ------------
(Loss) income before provision for income taxes and extraordinary item (2,350,652) (353,281) 107,044
Provision for income taxes (2,039,000) -- --
------------ ------------ ------------
(Loss) income before extraordinary item (4,389,652) (353,281) 107,044
Extraordinary item - forgiveness of debt -- -- 4,398,672
------------ ------------ ------------
Net (loss) income ($4,389,652) ($353,281) $4,505,716
============ ============ ============
Unaudited pro forma data:
(Loss) income before provision for income taxes and extraordinary item ($2,350,652) ($353,281) $107,044
Benefit (provision) for income taxes 940,261 141,312 (42,818)
------------ ------------ ------------
(Loss) income before extraordinary item (1,410,391) (211,969) 64,226
Extraordinary item - forgiveness of debt, net of tax -- -- 2,639,204
------------ ------------ ------------
Pro forma net (loss) income ($1,410,391) ($211,969) $2,703,430
============ ============ ============
Pro forma (loss) income per share:
(Loss) income before extraordinary item ($0.26) ($0.04) $0.01
Extraordinary item, net of tax -- -- 0.56
------------ ------------ ------------
(Loss) income per share ($0.26) ($0.04) $0.57
============ ============ ============
Pro forma weighted average number
of common shares outstanding 5,510,000 4,758,000 4,758,000
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated and combined
financial statements
F-4
<PAGE>
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY OF KAPSON SENIOR QUARTERS CORP.
FOR THE YEAR ENDED DECEMBER 31, 1996
AND THE COMBINED STATEMENTS OF SHAREHOLDERS' AND
PARTNERS' DEFICIT OF THE KAPSON GROUP
FOR EACH OF THE TWO YEARS IN THE PERIOD ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
Common Stock Additional Shareholders'
--------------------------- Paid In Accumulated and Partners'
Shares Amount Capital Deficit Deficit Total
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1993 -- -- -- -- ($12,324,957) ($12,324,957)
Distributions -- -- -- -- (920,399) (920,399)
Net income -- -- -- -- 4,505,716 4,505,716
------------ ------------ ------------ ------------ ------------ ------------
December 31, 1994 -- -- -- -- (8,739,640) (8,739,640)
Distributions -- -- -- -- (718,536) (718,536)
Net loss -- -- -- -- (353,281) (353,281)
------------ ------------ ------------ ------------ ------------ ------------
December 31, 1995 -- -- -- -- (9,811,457) (9,811,457)
Distributions to owners
of Predecessor -- -- ($6,000,000) -- (918,236) (6,918,236)
Contributions by owners
of Predecessor -- -- -- -- 3,271,067 3,271,067
Issuance of common stock for
net assets of the Predecessor 4,150,000 $41,500 (7,500,126) -- 7,458,626 --
Issuance of common stock in
initial public offering 3,550,000 35,500 29,603,974 -- -- 29,639,474
Issuance of common stock for
purchase of minority interest 50,000 500 499,500 -- -- 500,000
Net loss -- -- -- ($4,389,652) -- (4,389,652)
------------ ------------ ------------ ------------ ------------ ------------
December 31, 1996 7,750,000 $77,500 $16,603,348 ($4,389,652) -- $12,291,196
============ ============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated and combined
financial statements.
F-5
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS OF KAPSON SENIOR QUARTERS CORP.
FOR THE YEAR ENDED DECEMBER 31, 1996
AND THE COMBINED STATEMENTS OF CASH FLOWS OF THE KAPSON GROUP
FOR EACH OF THE TWO YEARS IN THE PERIOD ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income ($4,389,652) ($353,281) $4,505,716
Adjustments to reconcile net (loss) income to net cash (used in)
provided by operating activities:
Depreciation 2,090,996 1,233,843 1,180,418
Amortization 437,378 226,456 216,867
Deferred income taxes 2,039,000 -- --
Extraordinary item -- -- (4,398,672)
Minority interest in net loss of combined partnerships (924,264) (15,845) --
Equity in income from invesment in joint ventures (76,829) -- --
Changes in other assets and liabilities, excluding the effect of acquired
facilites:
Accounts receivable (2,492) (49,396) (10,729)
Prepaid expenses and other current assets (208,915) (50,422) (29,297)
Restricted cash - resident security deposits (16,855) (19,336) (249,637)
Other assets (407,884) (128,144) (23,620)
Accounts payable and accrued expenses 74,568 1,961,924 230,555
Accrued interest (363,198) 101,325 155,937
Resident security deposits 447,045 79,115 122,845
Deferred interest payable 42,300 57,700 47,500
Deferred revenue 311,604 29,851 (50,364)
------------ ------------ ------------
Net cash (used in) provided by operating activities (947,198) 3,073,790 1,697,519
------------ ------------ ------------
Cash flows from investing activities:
Acquisition of facilities, (net of cash assumed
of $518,000) (9,856,250) -- --
Increase in restricted mortgage escrow funds (525,655) (1,069,015) (1,221,928)
Investment in joint venture (475,000) -- --
Purchases and development of property and equipment (9,031,911) (16,530,708) (724,971)
Purchase of minority interests in partnership interests (2,100,000) -- --
Sale of minority interests in combined partnerships 1,200,000 -- 1,479,116
Increase in other assets (7,341,007) -- --
------------ ------------ ------------
Net cash used in investing activities (28,129,823) (17,599,723) (467,783)
------------ ------------ ------------
Cash flow from financing activities:
Proceeds from initial public offering, net of offering costs 29,639,474 -- --
Proceeds from issuance of long-term debt 20,019,470 17,565,212 1,907,136
Principal payment of long-term debt (721,043) (78,039) (370,939)
Proceeds from loan 555,000 -- --
Deferred financing costs (732,272) (887,668) (1,481,980)
Due (from) to affiliates (3,375,450) 150,648 204,920
Contributions to capital by shareholders and partners of the Predecessor 3,271,067 -- --
Distributions to shareholders and partners of the Predecessor (6,918,236) (718,536) (920,399)
------------ ------------ ------------
Net cash provided by (used in) financing activities 41,738,010 16,031,617 (661,262)
------------ ------------ ------------
Net increase in cash and cash equivalents 12,660,989 1,505,684 568,474
Cash and cash equivalents, beginning of period 3,392,318 1,886,634 1,318,160
------------ ------------ ------------
Cash and cash equivalents, end of period $16,053,307 $3,392,318 $1,886,634
============ ============ ============
Cash paid during the year for:
Interest $6,877,587 $3,400,592 $3,036,255
============ ============ ============
Income taxes $24,860 -- --
============ ============ ============
Supplemental disclosure:
Issuance of common stock for purchase of remaining minority interest
in a facility $500,000 -- --
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated and combined
financial statements.
F-6
<PAGE>
KAPSON SENIOR QUARTERS CORP.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
1. Operations:
The Company
Kapson Senior Quarters Corp. (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
Kapson Group (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 cost, 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.
During the fourth quarter of 1996, the Company began operating Senior Quarters
at Cranford and the construction of Senior Quarters at Albany under long-term
operating leases.
The Predecessor
The Predecessor represents a combination of the businesses of Sub Chapter S
Corporations, Partnerships or Limited Liability Companies which owned six
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.
The assisted living facilities owned and operated by the Predecessor were as
follows:
<TABLE>
<CAPTION>
FACILITY FORM %
-------- ---- -
<S> <C> <C>
Wholly and Majority Owned
Senior Quarters at Stamford Sub Chapter S 100
Senior Quarters at Huntington Station Sub Chapter S 100
Senior Quarters at Centereach I General Partnership 100
Senior Quarters at Centereach II Sub Chapter S 100
*Town Gate East Limited Liability Company 100
*Town Gate Manor Limited Liability Company 100
Senior Quarters at Chestnut Ridge Limited Liability Company 50
Senior Quarters at East Northport Limited Partnership 50
</TABLE>
F-7
<PAGE>
<TABLE>
<S> <C> <C>
Minority Interests
Senior Quarters at Jamesburg Limited Liability Company 11
Senior Quarters at Glen Riddle Limited Partnership 10
*Senior Quarters at Montville Limited Partnership 23.7
</TABLE>
*Ownership percentages were acquired or sold in April 1996 (Notes 4 and 5)
Basis of Presentation
The accompanying consolidated financial statements include the accounts of the
Company's wholly owned subsidiaries and majority owned partnership investments.
The Company accounts for its minority owned partnership investments on the
equity method. All significant intercompany transactions and accounts have been
eliminated in consolidation. The 1996 consolidated financial statements reflect
the operations of the Company for the three months ended December 31, 1996 and
the Predecessor for the nine months ended September 30, 1996.
The combined financial statements as of December 31, 1995 and for each of the
two years in the period ended December 31, 1995 include the assets, liabilities
and operations associated with the wholly and majority owned entities of the
Predecessor listed above. Since the entities have common ownership and
management interest, the assets and liabilities are reflected at historical
cost. Investments in minority owned partnership investments are accounted for on
the equity method. All significant intercompany transactions and accounts have
been eliminated in combination.
Minority interests represent the net equity attributable to non-affiliated
investors of the Company or the Predecessor.
Disclosures made herein with respect to the years ended December 31, 1995 and
1994 and during the nine months ended September 30, 1996 are to be read as
disclosures of the Predecessor. All other disclosures unless specifically
identified are disclosures of the Company.
2. Summary of Significant Accounting Policies:
Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Revenues
Assisted living revenues are recorded when services are rendered and consist of
resident fees for basic housing, support services and fees associated with
additional services such as personalized health and support services. Management
fees, for minority-owned assisted living facilities, are recorded when the
respective services are rendered.
Property and Equipment
Property and equipment are stated at cost with depreciation calculated over the
assets' estimated useful lives using the straight-line method as follows:
Buildings and improvements 35 years
Furniture and equipment 7-10 years
Interest incurred during construction periods is capitalized as part of the
building costs. Maintenance and repairs are expensed as incurred; renewals and
improvements are capitalized.
F-8
<PAGE>
Intangible Assets
Intangible assets consist of the excess of cost over the fair value of net
assets of acquired facilities ($4,547,632, net of accumulated amortization of
$165,686) which is amortized on the straight-line method over 15 years, and a
covenant not to compete ($274,210, net of accumulated amortization of $48,390)
which is amortized on a straight-line basis over 5 years. Amortization expense
was $214,076 for the year ended December 31, 1996.
Long-Lived Assets
If there is an event or a change in circumstances adversely impacting the
recoverability of long-lived assets, the Company's policy is to assess any
impairment in value by making a comparison of the current and projected
operating cash flows of the asset over its remaining useful life, on an
undiscounted basis, to the carrying amount of the asset. Such carrying amounts
would be adjusted, if necessary, to reflect an impairment in the value of the
assets.
Facility Development Costs
Facility development costs include direct costs related to development and
construction of facilities. When a project is completed, related costs are
transferred to property and equipment. If a project is abandoned, all costs
previously capitalized are expensed.
Deferred Financing Costs
Deferred financing costs are amortized over the term of the related debt using
the interest method. Accumulated amortization was $523,877 and $304,729 at
December 31, 1996 and 1995, respectively.
Income Taxes
Effective October 1, 1996, the Company recognizes deferred tax liabilities and
assets for the expected future tax consequences of events that have been
included in the financial statements or tax returns. Deferred tax liabilities
and assets are determined based on the differences between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse. The
Company recorded a deferred tax liability of $2,400,000 for the year ended
December 31, 1996 resulting from the change in tax status from a non-taxable to
a taxable entity in connection with the Company's Offering.
The businesses comprising the Predecessor elected to be taxed as either S
Corporations, Partnerships or Limited Liability Companies pursuant to the
provisions of the Internal Revenue Code and, as such, were not subject to
federal or state income taxes because their taxable income or loss accrues to
individual shareholders, partners or members, respectively.
Restricted Cash
Included in restricted cash are resident security deposits and escrowed funds
that cannot be used in operating activities.
Cash Equivalents
The Company considers all investments with maturities, from the date of
purchase, of three months or less to be cash equivalents.
Pre-opening Costs
Costs incurred in connection with preparing facility units for initial rental
are expensed as incurred.
Stock Options
In October 1995, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standard No. 123, "Accounting for Stock-Based Compensation"
("SFAS No. 123"), which prescribes a new method of accounting for stock-based
compensation that determines compensation expense based on fair value measured
at the grant date. SFAS No. 123 provides companies that grant stock options or
other equity instruments to employees, the option of either
F-9
<PAGE>
adopting the new rules or continuing current accounting with disclosure of the
pro forma amounts as if the new rules had been adopted. SFAS No. 123 is
effective for transactions entered into after December 15, 1995. The Company has
elected the alternative disclosure provisions of SFAS No. 123 (see Note 9).
Investments in Joint Ventures
The Company accounts for its interest in minority owned non-controlled joint
ventures under the equity method.
Pro Forma Presentation (unaudited)
The pro forma net income (loss) per share for each of the two years in the
period ended December 31, 1995 was determined based upon the number of shares of
common stock assumed to be issued by the Company in the Offering to fund the
approximately $6,000,000 distribution based on the Offering price of $10 per
share (608,000) plus, the issuance of the 4,150,000 shares of common stock to
the Kaplans in the exchange. The $6,000,000 distribution was made to satisfy the
tax liabilities of the Kaplans expected to be incurred pertaining to the
transfer of the Predecessor interests in the facilities to the Company. The
weighted average shares used to determine pro forma net loss for the year ended
December 31, 1996 is based upon the shares issued to the Kaplans in the exchange
(4,150,000), the shares issued in the Offering (3,550,000) and the shares issued
to acquire the remaining minority interest in Senior Quarters at East Northport
(50,000).
The pro forma benefit (provision) for income taxes for the Company and the
Predecessor is based on the historical financial data of the Company and the
Predecessor as if the Company and the entities comprising the Predecessor had
operated as taxable corporations for all periods presented and is recorded at
the statutory rate in effect during the period (40%).
Earnings per share are not presented on an historical basis since the
Predecessor operated as a group of non-taxable entities. In addition, no shares
of common stock were issued until the Offering, therefore, disclosure of
historical earnings per share would not be meaningful.
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, 1996.
Reclassification
Certain items have been reclassified to conform with the current year
presentation.
3. Property and Equipment:
Property and equipment are stated at cost and consist of the following:
December 31,
--------------------------
1996 1995
----------- -----------
Land $4,800,644 $1,959,514
Buildings and improvements 57,334,170 29,728,334
Furniture and equipment 6,972,718 6,396,074
----------- -----------
69,107,532 38,083,922
Less, accumulated depreciation 10,729,797 8,638,801
----------- -----------
Property and equipment, net $58,377,735 $29,445,121
=========== ===========
F-10
<PAGE>
Capitalized interest costs during development approximated $459,000 and
$1,105,000, for the years ended December 31, 1996 and 1995, respectively.
Included in other assets is a deposit for approximately $7,341,000 for leasehold
improvements in a leased facility.
4. Investments in Joint Ventures:
The Company has an 11% general partnership interest in a limited partnership
(Senior Quarters at Glen Riddle), a 10% interest in a limited liability company
(Senior Quarters at Jamesburg) and a 23.75% interest in a limited partnership
(Senior Quarters at Montville). The equity interest in Senior Quarters at
Montville was purchased for $475,000 on April 1, 1996. The Company does not have
operational control of any of these entities. The joint venture agreements
provide the Company's joint venture partners with preference distributions on
their initial capital contributions and provisions for a return of capital
before any distribution can be made to the Company. Senior Quarters at Glen
Riddle and Senior Quarters at Jamesburg commenced operations during 1996.
Summarized financial information for these joint ventures is as follows:
December 31,
------------------------------
Balance Sheet 1996 1995
------------ ------------
Assets:
Property and equipment, net $ 26,757,516 $ 1,511,423
Construction in progress 86,938 6,340,604
Restricted investments 8,820,661 20,884,931
Other assets 4,182,373 1,344,308
------------ ------------
$ 39,847,488 $ 30,081,266
============ ============
Liabilities and partners' capital:
Notes payable $ 32,063,029 $ 25,585,142
Other liabilities 3,294,744 1,267,067
Partners'/members' capital 4,489,715 3,229,057
------------ ------------
$ 39,847,488 $ 30,081,266
============ ------------
Income Statement:
Revenues $ 4,279,141 $ --
Operating expenses (3,970,018) (20,363)
Other expense, net (1,013,609) --
------------ ------------
Net loss $ (704,486) $ (20,363)
============ ============
5. 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 was financed
entirely by mortgage notes under the Credit Facility (Notes 6 and 7). The
acquisition has been accounted for under the purchase method and the purchase
price was allocated to the assets acquired and liabilities assumed based upon
their relative fair value as follows:
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)
------------
$ 10,375,000
============
F-11
<PAGE>
In October 1996, the Company purchased for $2,600,000 the remaining 50% interest
of Senior Quarters at East Northport. The $2,600,000 purchase price was paid
through the issuance of 50,000 shares of common stock ($500,000) and $2,100,000
in cash. The entire purchase price in excess of the basis of minority interest
was allocated to goodwill.
Disposition
During 1996, the Predecessor sold a 49.9% interest in Senior Quarters at
Chestnut Ridge to an unrelated party for $1,200,000. Since the Company retained
operational and 50.1% voting control of the facility, its results of operations
are consolidated in the accompanying financial statements with the 49.9%
investment reflected as a component of minority interest.
Unaudited Pro Forma Financial Information
The unaudited pro forma financial information set forth below is based upon the
Company's and the Predecessor's historical statements of operations for the
years ended December 31, 1996 and 1995, adjusted to give effect to these
transactions as if they occurred on January 1, 1995.
The unaudited 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 and disposition occurred on January 1,
1995, nor does it purport to represent the results of operations for future
periods.
Unaudited pro forma data
For the year ended December 31,
-------------------------------
1996 1995
----- ----
Total revenue $ 24,569 $ 18,308
Net (loss) income (1,842) 227
Net (loss) income per share (.33) .05
F-12
<PAGE>
6. Long-Term Debt:
<TABLE>
<CAPTION>
December 31,
----------------------------------------
1996 1995
----- ----
<S> <C> <C>
Mortgage note payable to a financial institution bearing interest at
7.605% per annum due in monthly principal and interest installments of
$119,333 through December 1, 2005 when unpaid balance of
$12,954,978 is due. (B) $ 15,757,790 $ 16,000,000
Mortgage note payable to a financial institution bearing interest at 4%
above the financial institution's base lending rate (9.51% at December
31, 1996) and matures on February 28, 1999. (A) (B) (C) (E) 6,763,544 6,931,282
Mortgage note payable to a financial institution bearing interest at 4%
above the financial institution's base lending rate (9.51% at December
31, 1996) matures on February 28, 1999. (A) (B) (C) (E) 8,547,322 8,759,298
Mortgage note payable to an institution with interest only payments
through December 1996 at 4.25% above U.S. Treasury Notes (10.67%
at December 31, 1996); beginning January 1997 monthly payments of
principal and interest are due and matures December 2006. (B) (D) (I)
(Note 7) 8,000,000 8,000,000
Construction note payable to a financial institution, maturing June 1,
2036, bearing interest at 9.325% per annum and monthly payments of
principal and interest of $164,072. (F) 19,320,238 14,363,167
Mortgage note payable to a financial institution with interest only
payments through March 1997 at 4.25% above U.S. Treasury Notes
(10.67% at December 31, 1996). Beginning April 1997 monthly
payments of principal and interest are due and matures April 2006. (B)
(F) (G) (I) (Note 7) 6,484,375 --
Mortgage note payable to a financial institution with interest only
payments through March 1997 at 4.25% above U.S. Treasury Notes
(10.67% at December 31, 1996). Beginning April 1997 monthly
payments of principal and interest are due and matures April 2006. (B)
(F) (G) (I) (Note 7) 3,890,625 --
Mortgage note payable to a financial institution, maturing July 15, 2017
and providing up to $12,810,000 in funding, bearing interest at the prime
rate plus 3.5% (11.75% at December 31, 1996) during the construction
phase, during which only payments of interest are due (H)
(I) (Note 7) 4,588,280 --
--------------- ---------------
73,352,174 54,053,747
Less, current portion 943,658 245,867
--------------- ---------------
Long-term portion $ 72,408,516 $ 53,807,880
=============== ===============
</TABLE>
F-13
<PAGE>
(A) Effective February 1996, the Company makes monthly payments equal to the
outstanding mortgage principal balance multiplied by 12.0%. The difference
between this payment and the interest expense is applied as a reduction of
principal.
(B) The mortgage notes are collateralized by the facilities' property and
equipment.
(C) The mortgage notes include an equity participation provision for the
lender. The Company is obligated to pay the lender at either (i) the
maturity of the loan; (ii) refinancing of the loan; or (iii) sale of the
facility, the greater of $480,000 or 25% of the appraised market value of
the facility in excess of $17,500,000. The $480,000 is deferred interest
payable and is reflected in the accompanying financial statements under the
effective interest method. The difference between the effective interest
rate and the pay rate is reflected as deferred interest payable. The
effective interest rate on this note was 10.1% and 10.4% at December 31,
1996 and 1995, respectively.
(D) Monthly principal and interest payments are based upon a 25-year
amortization period. At maturity, the Company has an option to renew the
note for ten years at a rate of 6.75% above U.S. Treasury Notes increased
annually by 30 basis points. Monthly principal and interest payments will
be based upon a 16-year amortization period. As of December 31, 1995 the
note included an equity participation for the lender however, during 1996
the agreement was revised and the equity participation was eliminated. The
effect on the consolidated financial statements was immaterial. Prior to
the revision the Company was obligated to pay the lender at the expiration
of the initial term, prepayment or upon default, the greater of $800,000 or
50% of the difference between the fair market value of the facility and
$8,000,000. The difference between the effective interest rate and the pay
rate is reflected as deferred interest payable. The effective interest rate
on this note was 11.6% at December 31, 1995.
(E) These notes are partially or totally guaranteed by the respective partners
and shareholders of the Predecessor.
(F) Various prepayment penalties exist.
(G) Monthly principal and interest payments are based upon a 25-year
amortization period. At maturity, the Company has an option to renew the
note for ten years at a rate of 6.25% above U.S. Treasury Notes increased
annually by 30 basis points. Monthly principal and interest payments will
be based upon a 16-year amortization period.
(H) Monthly principal and interest payments are based upon a 25-year
amortization period. At maturity, the Company has an option to renew the
note for ten years at a rate of 6.25% above U.S. Treasury Notes increased
annually by 30 basis points.
(I) Various restrictive covenants exist.
F-14
<PAGE>
Principal payments on long-term debt as of December 31, 1996 are as follows:
Years ended
December 31,
------------
1997 $ 943,658
1998 996,589
1999 15,239,242
2000 751,842
2001 815,341
Thereafter 54,605,502
7. Credit Facility:
The Company has available a $100 million recourse line of credit (the "Credit
Facility") from Health Care REIT Inc. The Credit Facility provides both
construction and permanent financing as well as operating leases.
Construction financings, which can also be used for acquisitions, generally
expire on the earlier of fifteen months after the closing or date of licensure.
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.
At the expiration date the construction financing is automatically converted to
a permanent financing.
Permanent financings ("Mortgage Notes") are for initial terms of 10 years, with
a 10-year renewal at the Company's option. Interest, which is fixed on the date
of the permanent financing, is charged at 4.0% above comparable U.S. Treasury
Notes during the initial financing term and will be increased annually by 25
basis points during each subsequent year of the initial and renewal terms.
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 also provides for financings structured as operating leases.
Operating leases are for initial terms of 10 years, with three (3) five year
renewals. Interest is charged at 3.75% above comparable U.S. Treasury Notes
during the initial term and will be increased by 25 basis points during the
second and each subsequent year of the initial and renewal terms. The amount of
financings committed for these long-term operating leases was $26,100,000 at
December 31, 1996. Commitments for operating leases reduce the amount available
under the facility.
The Credit Facility is collateralized by the Company's real estate, equipment
and accounts receivable. At December 31, 1996, the Company has available under
the Credit Facility $50,935,942.
The credit facility requires, as a condition to future drawings, certain
financial covenants on the date of each closing, to include requirements of
minimum net worth and cash balances, payment coverage, current and debt to
equity ratios and non-financial covenants to include changes in ownership,
additional debt on a facility and modification of material contracts, all as
further defined in the facility.
At December 31, 1996, the Company was not in compliance with certain of these
covenants. Waiver on default of certain financial covenants was received from
Health Care REIT Inc. and the facility was subsequently amended to revise
certain financial covenants to reflect the Company's current and future business
environment.
F-15
<PAGE>
8. Income Taxes:
Prior to October 1, 1996, the Predecessor was not subject to federal and state
income taxes and the Company had no operations until the Offering. The deferred
tax provision was $2,039,000 for the three months ended December 31, 1996.
The Company recorded a one time, non cash charge to earnings of $2,400,000 to
reflect the impact of deferred tax liabilities incurred relating to the change
in tax status of the Company to a taxable corporation. The deferred tax
liabilities arose due to the difference in the tax basis of the Company's
property and equipment and the basis recorded for financial reporting purposes.
The change in tax status was required as part of the Offering.
The deferred tax effects of temporary differences as of December 31, 1996 are as
follows:
Deferred tax assets:
Net operating losses $ 236,000
Deferred revenue 208,000
Deferred interest 59,000
----------
Deferred tax assets 503,000
Deferred tax liabilities:
Depreciation of property and equipment 2,542,000
----------
Net deferred tax liabilities $2,039,000
==========
The difference between the actual income tax provision and the income tax
provision computed by applying the statutory federal income tax rate to income
before provision for income taxes is attributable to the following:
Benefit at statutory rate $ (799,000)
Benefit attributable to Predecessor 599,000
Provision recorded attributable to change in
tax status, including state income tax impact 2,400,000
State NOL, net of federal (89,000)
Other (72,000)
----------
$2,039,000
==========
The Company's net operating loss carryforwards for income tax purposes expire in
2011.
9. Commitments and Contingencies:
Management Agreements
The Company has agreements with unaffiliated parties to manage their assisted
living facilities. These agreements, which range from three to ten years with
five year renewal options, expire at various dates from 1997 through 2006. The
fees received under these agreements are generally 5% of gross rental revenue of
the facility and incentive fees related to facility operating results.
Legal Proceedings
The Company 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 any outcome will not have a
material adverse effect on the Company's financial position or results of
operations.
F-16
<PAGE>
Operating Leases
The Company is obligated under certain long term non-cancelable operating leases
for its corporate office and office equipment expiring at various dates through
2007. In addition, during the year, the Company entered into long-term operating
leases with Health Care REIT for an existing assisted living facility and the
financing of a facility under development (see Note 7). Future minimum lease
payments required under all operating leases as of December 31, 1996 are as
follows:
Years ended
December 31,
------------
1997 $ 1,899,564
1998 2,981,060
1999 3,039,090
2000 3,112,108
2001 3,174,401
Rent expense was approximately $385,000, $90,000 and $75,000 for the years ended
December 31, 1996, 1995 and 1994, respectively.
Stock Options
The Company adopted the 1996 Stock Incentive Plan (the "Plan") under which
options may be awarded to key employees. Pursuant to the Plan, a maximum of
600,000 shares of common stock may be issued. The Plan provides for the grant of
any or all of the following types of awards to eligible employees: (i) stock
options, including incentive stock options and non-qualified stock options; (ii)
stock appreciation rights, in tandem with stock options or freestanding; (iii)
restricted stock; and (iv) performance shares. In addition, the Plan provides
for the non-discretionary award of stock options to non-employee directors of
the Company as a portion of their annual retainer fee. Awards may be granted
singly, in combination, or in tandem, as determined by the Stock Option
Committee. The maximum number of shares of common stock subject to stock
options, performance shares, restricted stock or stock appreciation rights that
may be granted to any individual under the Plan is 50,000 for each fiscal year
of the Company during the term of the Plan. The exercise price may not be less
than the fair market value of the common stock at the time of grant. The options
expire ten years from date of grant and vest ratably over four years. In
September 1996, the Company granted 117,500 stock options under the Plan to
various key employees and non-employee directors at the then fair market value
of the Company's common stock, or $10.00 per share. There were no other options
granted under the Plan, nor were any options exercised or expired. During the
year, 12,500 options were canceled.
The Company has adopted the disclosure-only provision of FASB 123, "Accounting
for Stock-Based Compensation." Accordingly, no compensation cost has been
recognized for the stock incentive plan. Had the Company determined the
compensation cost of the Plan based upon the fair value at grant date, the
Company's pro forma net loss and pro forma loss per share would have been the
following as adjusted amounts indicated below (in thousands, except per share
amounts):
Pro forma net loss - as reported ($ 1,410)
Pro forma net loss - as adjusted ($ 1,444)
Pro forma loss per share - as reported ($.26)
Pro forma loss per share - as adjusted ($.26)
The fair value of stock options used to compute pro forma net income and
earnings per share in accordance with SFAS No. 123 is the estimated present
value at grant using the Black-Scholes option-pricing model with the following
weighted average assumptions for 1996: dividend yield of 0%; expected volatility
of 41.09%; a risk free interest rate of 5.59% and an expected holding period of
5 years.
F-17
<PAGE>
Employment Agreements
The Company has entered into employment agreements with the Kaplans, each of
whom will receive annual cash compensation and a bonus pursuant to substantially
identical five year employment contracts. 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.
Operating Agreements
The Kaplans, due to New York State law, are required to individually be the
licensed operators of all of 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' first $23.0 million in revenues and .2% thereafter. Total
payments to the Kaplans approximated $219,000 in 1996 and is included in other
income (expense), in the accompanying consolidated statement of operations.
10. Extraordinary Item:
During 1994, the Predecessor negotiated a settlement with various lenders to
satisfy outstanding mortgage notes payable and accrued interest payable at a
$4,398,672 discount. The Predecessor simultaneously refinanced this debt with
other lenders at the then prevailing market rates. This amount has been
reflected in the 1994 combined statement of operations as an extraordinary item.
11. Related Party Transactions:
Due to Affiliates
These amounts represent advances to/from affiliated entities that are not
included or combined as a component of the Predecessor. These advances, which
are due on demand and bear interest at rates ranging from 6.53% to 6.92%, were
made to assist in the funding of the affiliated entities start-up operations.
The Kaplans assumed these obligations in connection with the Offering.
Other - Affiliates
The Predecessor had arrangements with affiliated entities to provide real estate
advisory services. The fees received by the Predecessor were based on a
percentage of the affiliate's annual rental revenue. These arrangements were not
assumed by the Company.
12. Employee Benefit Plan:
During 1995, the Company established a 401(k) plan for all employees that meet
minimum employment criteria. The plan provides that the Company may, at its
option, contribute to the plan up to 6% of employees' salary. Employees are
always 100% vested in their own contributions and vested in Company
contributions over seven years. No contributions have been made for the years
ended December 31, 1996 and 1995.
F-18
<PAGE>
13. Concentration of Risk:
Business and Credit Concentration
Concentration of credit risk with respect to resident receivables is limited due
to the large number of residents comprising the resident roster and the policy
of the Company to obtain security deposits and personal guarantees from third
parties in many instances.
Financial Risk
The Company maintains its cash primarily at two financial institutions which
management believes are of high credit quality.
Geographic Concentration
The Company's facilities are located primarily in the Northeast region of the
United States. This concentration imposes on the Company certain risks, which
include local economic conditions, that are not within management's control.
14. Fair Value of Financial Instruments:
Cash and cash equivalents, and variable rate and fixed rate mortgage notes
payable are reflected in the accompanying balance sheet at amounts considered by
management to reasonably approximate fair value. Management estimates the fair
value of its long-term fixed rate notes payable using discounted cash flow
analysis based upon the Company's current borrowing rate for debt with similar
maturities.
15. Shareholders' Equity:
The Company's Certificate of Incorporation authorizes the Company to issue
10,000,000 shares of Preferred Stock, $.01 par value and 30,000,000 shares of
Common Stock, $.01 par value.
As of December 31, 1996, there are no issued shares of Preferred Stock.
16. Subsequent Events
In March 1997, the Company announced the formation of a joint venture and plans
to develop six assisted living facilities in North and South Carolina.
F-19
Exhibit 10.12
[Health Care REIT Letterhead]
October 16, 1996
Mr. Glenn Kaplan
Kapson Senior Quarters Corp.
242 Crossways Park West
Woodbury NY 11797
RE: Credit Facility for Kapson Senior Quarters Corp.
Dear Glenn:
This letter will confirm our agreements regarding the line of credit amount and
minimum net worth covenant based upon the recent IPO. The line of credit amount
will be $100,000,000 with a minimum net worth requirement of $13,000,000. Health
Care REIT, Inc. (HCN) will have the right to increase the line of credit amount
to the original proposed amount of $140,000,000 if HCN determines to waive the
original net worth covenant of $20,000,000, or Kapson and HCN mutually agree
upon a new minimum net worth covenant.
Please acknowledge your agreement to the foregoing by executing a copy of this
letter.
Very truly yours,
HEALTH CARE REIT, INC.
Raymond W. Braun
Vice President
Kapson Senior Quarters Corp.
By: /s/ Glenn Kaplan
--------------------------
Title: C.E.O.
--------------------------
March 6, 1997
Kapson Senior Quarters Corp.
242 Crossways Park West
Woodbury, New York 11797
Via Fax 1-516-921-8998
Attention: Raymond T. DioGaurdi
Chief Financial Officer
Dear Mr. DioGuardi:
Each Guaranty made by Kapson Senior Quarters Corp. (the "Company") in favor
of Health Care REIT, Inc. ("HCN") includes a mininium net worth requirement of
$13,000,000. You have advised us that, as of December 31, 1996, the Company had
a net worth of $12,291,196 and you have requested a waiver of this default.
Additionally, you have advised us that the net worth of the Company will remain
below $13,000,000 during 1997.
HCN waives the existing default and the continuing default throughout 1997
of the Company under the specified net worth requirement; provided, however, the
net worth of the Company must be at least $11,000,000 throughout 1997. The
original net worth requirement of $13,000,000 must be complied with as of
January 1, 1998 and thereafter.
This waiver is given on an independent one-time basis. This waiver does not
establish a course of dealing upon which the Company may rely in the future.
Except for the default and
<PAGE>
continuing default throughout 1997 specifically waived herein, this waiver does
not affect HCN's right to excercise its rights and remedies upon any default by
the Company or any affiliate of the Company.
Sincerely yours,
Health Care REIT, Inc.
By: /s/ Edward F. Lange, Jr.
---------------------------
Edward F. Lange, Jr.
Chief Financial Officer
EFL/scp
cc: George L. Chapman
Erin C. Ibele
Diane V. Davis
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 16,053
<SECURITIES> 0
<RECEIVABLES> 80
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 17,211
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0
0
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</TABLE>
