UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (No Fee Required)
For the transition period from __________ to __________
----------
Commission File No. 0-28752
KAPSON SENIOR QUARTERS CORP.
(Exact name of Registrant as specified in its charter)
Delaware 11-3323503
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
125 Froehlich Farm Blvd.
Woodbury, New York 11797
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(516) 921-8900
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve (12) months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes |X| No |_|
As of October 31, 1997, there were 7,750,000 shares of the Registrants Common
Stock outstanding.
As of October 31, 1997, there were 2,400,000 shares of the Registrant's $2.00
Convertible Exchangeable Preferred Stock outstanding.
<PAGE>
KAPSON SENIOR QUARTERS CORP.
INDEX
Page
----
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Kapson Senior Quarters Corp. Consolidated Balance
Sheets as of September 30, 1997 and December 31, 1996 2
Consolidated Statements of Operations of Kapson 3
Senior Quarters Corp. for the Three and Nine
Months Ended September 30, 1997 and the Combined
Statements of Operations of the Kapson Group
for the Three and Nine Months Ended September 30, 1996
Consolidated Statement of Cash Flows of Kapson Senior 4
Quarters Corp. for the Nine Months Ended
September 30, 1997 and the Combined Statement of
Cash Flows of the Kapson Group for the Nine Months
Ended September 30, 1996
Notes to Consolidated Financial Statements 5-11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12-19
PART II OTHER INFORMATION 20
Signatures 23
1
<PAGE>
KAPSON SENIOR QUARTERS CORP.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
September 30, 1997 December 31, 1996
------------------ -----------------
<S> <C> <C>
Current assets
Cash and cash equivalents $ 28,571,990 $ 16,053,307
Accounts receivable 344,415 80,329
Prepaid expenses and other current assets 1,293,433 574,733
Deferred income taxes 503,000 503,000
------------- ------------
Total current assets 30,712,838 17,211,369
Property and equipment, net 92,247,311 58,377,735
Facility development costs 13,321,604 1,190,727
Restricted cash 2,125,840 3,134,695
Deferred financing costs, net 3,446,343 2,595,407
Intangibles, net 7,488,426 4,821,842
Investment in joint ventures 392,309 551,829
Other assets 15,068,957 8,104,648
------------- ------------
Total assets $ 164,803,628 $ 95,988,252
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt $ 667,314 $ 943,658
Accounts payable and accrued expenses 5,603,843 3,294,040
Deferred revenue 575,880 519,168
------------- ------------
Total current liabilities 6,847,037 4,756,866
Long-term debt 79,773,042 72,408,516
Loan payable 555,000 555,000
Resident security deposits 2,459,705 1,725,192
Deferred income taxes 946,308 2,542,000
Deferred interest payable 38,423 147,500
Construction retainage payable 1,074,588 613,057
------------- ------------
Total liabilities 91,694,103 82,748,131
------------- ------------
Minority interest 7,311,307 948,925
------------- ------------
Shareholders' equity
Preferred stock; $.01 par value, 2,600,000
shares authorized 2,400,000 issued and outstanding 24,000 --
Common stock; $.01 par value, 30,000,000 shares
authorized, 7,750,000 issued and outstanding 77,500 77,500
Additional paid-in capital 72,479,906 16,603,348
Accumulated deficit (6,783,188) (4,389,652)
------------- ------------
Total shareholders' equity 65,798,218 12,291,196
------------- ------------
Total liabilities and shareholders' equity $ 164,803,628 $ 95,988,252
============= ============
</TABLE>
The accompanying notes are an integral part of these unaudited
consolidated and combined financial statements.
2
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS OF KAPSON SENIOR QUARTERS CORP.
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997
AND THE COMBINED STATEMENTS OF OPERATIONS OF THE KAPSON GROUP
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1996
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Assisted living revenues $ 9,027,433 $ 5,763,819 $ 23,892,687 $ 15,292,744
Management fees 771,582 354,181 1,417,159 786,316
----------- ----------- ------------ ------------
Total revenues 9,799,015 6,118,000 25,309,846 16,079,060
----------- ----------- ------------ ------------
Operating expenses:
Assisted living operating expenses 6,071,331 3,913,036 16,481,609 10,164,775
Rent 470,437 -- 1,239,187 --
General and administrative 1,386,361 1,109,277 3,787,746 2,362,424
Depreciation and amortization 737,313 689,012 2,123,586 1,600,715
----------- ----------- ------------ ------------
Total operating expenses 8,665,442 5,711,325 23,632,128 14,127,914
----------- ----------- ------------ ------------
Operating income 1,133,573 406,675 1,677,718 1,951,146
Equity in income (loss) from joint ventures (3,882) 38,172 (159,520) 66,110
Interest income 870,401 24,025 1,276,878 128,086
Interest expense (1,650,062) (1,803,231) (5,382,622) (4,768,071)
Other income (expense), net (104,588) (4,744) (402,991) (12,566)
----------- ----------- ------------ ------------
Income (loss) before minority interest 245,442 (1,339,103) (2,990,537) (2,635,295)
Minority interest in net loss of partnerships 121,095 501,998 295,663 872,694
----------- ----------- ------------ ------------
Income (loss) before (provision) benefit for income taxes 366,537 (837,105) (2,694,874) (1,762,601)
(Provision) Benefit for income taxes (146,615) -- 1,077,950 --
----------- ----------- ------------ ------------
Income (loss) before extraordinary loss 219,922 (837,105) (1,616,924) (1,762,601)
Extraordinary loss, net of tax benefit of $517,741 (776,612) -- (776,612) --
----------- ----------- ------------ ------------
Net income (loss) ($ 556,690) ($ 837,105) ($ 2,393,536) ($ 1,762,601)
=========== ============
Preferred dividend $ 1,086,667 $ 1,086,667
----------- ------------
Net loss available to common shareholders ($ 1,643,357) ($ 3,480,203)
=========== ============
Loss per common share:
Loss before extraordinary item ($ 0.11) ($ 0.35)
Extraordinary loss ($ 0.10) ($ 0.10)
----------- ------------
Net loss ($ 0.21) ($ 0.45)
=========== ============
Weighted average number of shares outstanding 7,750,000 7,750,000
=========== ============
Unaudited pro forma data:
Loss before provision for income taxes ($ 837,105) ($ 1,762,601)
Benefit for income taxes 334,842 705,040
----------- ------------
Pro forma net loss ($ 502,263) ($ 1,057,561)
=========== ============
Pro forma loss per share ($ 0.11) ($ 0.22)
=========== ============
Pro forma weighted average number
of common shares outstanding 4,758,000 4,758,000
=========== ============
</TABLE>
The accompanying notes are an integral part of these unaudited
consolidated and combined financial statements.
3
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS OF KAPSON SENIOR QUARTERS CORP.
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
AND THE COMBINED STATEMENTS OF CASH FLOWS OF THE KAPSON GROUP
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(Unaudited)
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss ($ 2,393,536) ($ 1,762,601)
Adjustments to reconcile net loss to net cash (used in) provided by operations:
Depreciation 1,803,696 1,600,715
Amortization 426,957 274,002
Deferred income taxes (1,595,692) --
Minority interest in net loss of combined partnerships (295,663) (872,694)
Equity in income (loss) from investment in joint ventures 159,520 (66,110)
Changes in other assets and liabilities, excluding the effect of acquire:d
acquired facilities
Accounts receivable (264,086) (18,481)
Prepaid expenses and other current assets (699,445) (75,146)
Restricted cash - resident security deposits (370,463) 475,030
Other assets (3,929,751) (1,414,761)
Accounts payable and accrued expenses 2,310,181 55,633
Accrued interest -- (258,680)
Resident security deposits payable 734,513 344,951
Deferred interest payable (109,077) --
Deferred revenue 56,712 156,856
Deferred financing costs (991,178) (471,857)
------------ ------------
Net cash used in operating activities (5,157,312) (2,033,143)
------------ ------------
Cash flows from investing activities:
Acquisition of facilities, (net of cash assumed of $0 and $518,000) (29,680,000) (9,856,250)
Increase (decrease) in restricted mortgage escrow funds 1,379,319 (638,778)
Investment in joint venture -- (475,000)
Purchases and development of property and equipment (20,652,092) (8,137,516)
Sale of minority interests in combined partnerships 1,200,000 1,200,000
Increase in contributed capital by minority partners 3,519,400 --
Loans to joint venture partners (1,079,372) --
------------ ------------
Net cash used in investing activities (45,312,745) (17,907,544)
------------ ------------
Cash flow from financing activities:
Proceeds from Preferred Stock Offering, net of offering costs 56,987,225 --
Proceeds from issuance of long-term debt 22,797,192 19,282,227
Principal payment of long-term debt (15,709,010) (526,730)
Due (from) to affiliates -- (3,375,450)
Contributions to capital -- 3,271,067
Distributions to shareholders and partners of the Predecessor -- (1,518,236)
Dividends paid (1,086,667) --
------------ ------------
Net cash provided by financing activities 62,988,740 17,132,878
------------ ------------
Net increase (decrease) in cash and cash equivalents 12,518,683 (2,807,809)
Cash and cash equivalents, beginning of period 16,053,307 3,392,318
------------ ------------
Cash and cash equivalents, end of period $ 28,571,990 $ 584,509
============ ============
Cash paid during the year for: $ 5,382,622 $ 4,510,549
Interest ============ ============
See notes 6 and 7 for noncash investing and financing activities
</TABLE>
The accompanying notes are an integral part of these unaudited
consolidated and combined financial statements.
4
<PAGE>
KAPSON SENIOR QUARTERS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. General
The accompanying unaudited interim financial statements of Kapson Senior
Quarters Corp. (the "Company") and the Kapson Group (the "Predecessor") have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission (the "SEC"). Certain information and note disclosures
normally included in annual financial statements have been condensed or omitted
pursuant to those rules and regulations. In the opinion of management, all
adjustments, consisting of normal, recurring adjustments considered necessary
for a fair presentation, have been included. Although management believes that
the disclosures made are adequate to ensure that the information presented is
not misleading, it is suggested that these financial statements be read in
conjunction with the financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1996. The results of the nine months ended September 30, 1997 and 1996 are not
necessarily indicative of the results of operations for the entire year.
2. Operations
The Company
The Company is an owner, operator, lessee, manager and developer of assisted
living facilities for senior citizens which was incorporated under the General
Corporation Law of Delaware on September 7, 1996 by three individual equal
owners (the "Kaplans"). The Company was formed in order to consolidate and
expand the assisted living facility business of the Predecessor of which the
Kaplans were owners. The Company had no operations prior to October 1, 1996.
On October 1, 1996, the Company sold 3,550,000 shares of common stock to the
public at a price of $10 per share in an initial public offering (the
"Offering"). The Company realized net proceeds from the Offering of
approximately $29.6 million, after deducting offering costs of approximately
$5.9 million. Concurrently with the completion of the Offering, the Predecessor
contributed at its historical costs, its interests in its wholly owned, majority
and minority owned facilities and management agreements with respect to
facilities which were owned by unrelated parties to the Company in exchange for
4,150,000 shares of common stock of the Company. In addition, simultaneously
with the Offering, the Company declared and distributed approximately $6.0
million in cash to the owners of the Predecessor to satisfy tax liabilities
incurred by the owners pertaining to the transfer of the Predecessor interests
in the facilities to the Company. This distribution was funded through the
Offering proceeds.
The Predecessor
The Predecessor represents a combination of the businesses of Sub Chapter S
Corporations, Partnerships or Limited Liability Companies which owned all or
part of eleven assisted living facilities, additional facilities under
development (including joint venture interests), an entity that
5
<PAGE>
provides facility management services to unrelated entities and an entity that
provided administrative support to the Predecessor entities and the Company.
Impact of Recently Issued Accounting Pronouncements
In February 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 a significant impact on the Company's
financial statements for the year ended December 31, 1997.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 129, "Disclosure of Information about Capital
Structure" (SFAS No. 129"), which requires that descriptive information about
securities be shown in the financial statements. SFAS No. 129 became effective
for fiscal year 1997. Management believes that this change will not have any
impact on the Company's disclosures in its financial statements for the year
ending December 31, 1997.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
No. 130"), which requires that changes in comprehensive income be shown in a
financial statement that is displayed with the same prominence as other
financial statements. SFAS No. 130 becomes effective in fiscal year 1998.
Management is currently considering the impact on the Company's financial
statements for the year ending December 31, 1997.
In June 1997, the Financial Accounting Standards Board issued Financial
Accounting Standards No. 131. "Disclosures About Segments of an Enterprise and
Related Information" ("SFAS No. 131"), which changes the way public companies
report information about segments. SFAS 131, which is based on the management
approach to segment reporting, includes requirements to report selected segment
information quarterly and entity-wide disclosures about products and services,
major customers, and the material countries in which the entity holds and
reports revenues. SFAS 131 becomes effective in fiscal year 1998. Management
believes that this change will not have any impact on the Company's Financial
Statements for the year ending December 31, 1997.
3. Preferred Stock
In July 1997, the Company sold 2,000,000 shares of its $2.00 Convertible
Exchangeable Preferred Stock at a price of $25.00 per share in a Rule 144A
Offering under the U.S. Securities Act of 1933, as amended (the "Preferred
Offering"). The Company realized net proceeds from the Preferred Offering of
approximately $47.4 million. Each share of Preferred Stock has a liquidation
preference of $25, plus accrued and unpaid dividends. Dividends will be
cumulative from the date of original issuance, and will be payable quarterly, in
arrears commencing September 30, 1997, at an annual rate of $2.00 per share in
cash. As of September 30, 1997, the company paid approximately $1.1 million in
dividends.
6
<PAGE>
KAPSON SENIOR QUARTERS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Cont'd)
The Preferred Stock is convertible at any time prior to redemption, at the
option of the holder, into shares of the Company's Common Stock at a conversion
rate equal to the liquidation preference divided by $12.98. The Preferred Stock
is not redeemable prior to July 1, 2000. The Preferred Stock is exchangeable, in
whole or in part, at the option of the Company on any dividend payment date
beginning September 30, 1997 for the Company's 8% Convertible Subordinated Notes
(the "Notes") at the rate of $1,000 principle amount of Notes for each 40 shares
of Preferred Stock. As of September 30, 1997 none of the Company's Preferred
Stock had been exchanged.
Neither the Preferred Stock, the Notes nor the Common Stock of the Company
issuable upon conversion, has been registered under the Securities Act of 1993,
as amended, or any state securities laws. The Company expects to file a Shelf
Registration Statement relating to the Preferred Stock, the Notes issuable upon
exchange of the Preferred Stock and the Common Stock issuable upon conversion of
the Preferred Stock or the Notes as applicable by December 15, 1997.
In August 1997, the Company sold an additional 400,000 shares of Preferred
Stock, representing the over allotment, and realized net proceeds of
approximately $9.6 million.
4. Shareholders' Equity
A summary of the changes in shareholders' equity for the nine months ended
September 30, 1997 is as follows:
<TABLE>
<CAPTION>
Preferred Stock Common Stock
-------------------- ------------------- Paid In Accumulated
Shares Amount Shares Amount Capital Deficit Total
------ ------ ------ ------ ------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
December 31, 1996 7,750,000 $77,500 $16,603,348 ($4,389,652) $12,291,196
Issuance of Preferred Stock 2,400,000 $24,000 56,963,225 56,987,225
Dividends Paid (1,086,667) (1,086,667)
Net Loss (2,393,536) (2,393,536)
----------- -----------
September 30, 1997 2,400,000 $24,000 7,750,000 $77,500 $72,479,906 ($6,783,188) $65,798,218
========= ======= ========= ======= =========== =========== ===========
</TABLE>
5. Loss Per Common Share
The computation of fully diluted loss per share for each of the periods was
antidilutive; as such, no presentation of fully diluted loss per share has been
included in the consolidated statements of operations. Loss attributable to
common stock includes a deduction of preferred stock dividends declared and
paid, which totaled approximately $1.1 million for the three and nine month
periods ended September 30, 1997.
7
<PAGE>
KAPSON SENIOR QUARTERS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Cont'd)
6. Acquisitions and Dispositions
In March 1997 the Company sold a 49.9% interest in its wholly-owned subsidiary
Kapson Briarcliff Manor, LLC for $1.2 million.
In July 1997, the Company leased a 107 unit assisted living facility located in
Chestnut Hill, Pennsylvania through a lease financing transaction recorded as
an operating lease. The initial term of the lease is for fifteen years with
annual lease payments of approximately $1.1 million. The Company has an option
to purchase the facility at fair market value at the end of the lease.
In April 1997, the Company formed a joint venture in which it has a 51% equity
interest and purchased a 90 unit facility in Albany, New York for $3.8 million
in cash.
In September 1997, the Company completed the acquisition of a 126 unit facility
located in Lynbrook, New York for $25.8 million which was funded by a mortgage
note of $10.4 million and $15.4 million in cash.
The proforma financial information set forth below is based upon the
Consolidated Statements of Operations of the Company for the nine months ended
September 30, 1997, adjusted to give effect to this transaction as of January 1,
1997.
The pro forma financial information for Lynbrook, New York is presented for
informational purposes only and may not be indicative of what actual results of
operations would have been had the acquisitions occurred on January 1, 1997, nor
does it purport to represent the results for future periods. This facility
commenced operations on January 1, 1997 and, therefore, no pro forma information
is presented for fiscal year ended December 31, 1996.
Nine months ended
September 30, 1997
(unaudited)
------------------
Total Revenue $27,828,612
Loss before extraordinary loss (1,579,740)
Net Loss $(2,356,352)
Loss before extraordinary loss per sh $ (0.20)
Net loss per share $ (0.30)
8
<PAGE>
These acquisitions have been accounted for as a purchase and accordingly, the
assets and liabilities of the acquired facilities have been recorded at their
estimated fair values at the dates of acquisition.
7. Joint Venture Agreements
Joint venture arrangements where the Company has an equity ownership greater
than 50% have been consolidated because minority shareholders do not have
participatory rights but protective rights.
In March 1997, the Company announced the formation of a joint venture through
which it intends to develop six assisted living facilities in North and South
Carolina. In October 1997, the Company and its joint venture partner obtained
$7.0 million in financing with a bank and commenced construction on a 100 unit
facility located in Lake Wylie, South Carolina. The Company has a 51% equity
interest in this project. No amounts have been drawn to date.
In June and August 1997, the Company formed two joint ventures with a partner in
which it has a 51% equity interest for purposes of constructing and operating a
142 unit facility in Kew Gardens, New York and a 205 unit facility in Riverdale,
New York. During the third quarter of 1997, the Company and its partner obtained
financing and commenced construction on these facilities. (See Note 6)
In September 1997, the Company entered into a joint venture agreement in which
it owns a 50.1% equity interest in a parcel of land for purposes of constructing
and operating a 100 unit assisted living facility in Stratford, Connecticut.
Construction and financing of this project is expected in the fourth quarter of
1997.
In September 1997, the Company entered into a joint venture agreement in which
it owns a 51% interest in a forty-five year operating lease to renovate an
existing building for purposes of operating a 216 unit assisted living facility
in New York City, New York. Annual lease payments are approximately $720,000.
Construction and financing of this project is expected in the fourth quarter of
1997. The Company does not have a purchase option.
In October 1997, the Company and its 50% joint venture partner obtained
construction financing up to $11.7 million with a bank and commenced
construction on a 125 unit facility in Bethlehem, Pennsylvania.
8. Long-Term Debt
In June 1997, the Company entered into a $50 million Non-Revolving Credit
Facility (the "Credit Facility") with GMAC Commercial Mortgage Corporation to
provide construction and acquisition financing collateralized by assisted living
or independent living facilities. Amounts borrowed under the Facility will vary
depending on the appraised value and purchase price for acquisition loans or the
appraised value or construction costs for a construction loan. Interest rates
will be based on the
9
<PAGE>
KAPSON SENIOR QUARTERS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Cont'd)
30-day LIBOR Rate plus 2.45% to 3% depending on the type of loan and loan to
value or cost percentages. Acquisition and construction loans are payable in
full after three and five years, respectively. Amounts available under the
Credit Facility are $39.2 million.
The Company obtained the following financing from a new lending institution for
development projects during the nine months ended September 30, 1997:
<TABLE>
<CAPTION>
# of Amount of Loan Balance
Acquisition Date Units Financing at 9/30/97 Terms
----------- ---- ----- --------- ------------ -----
<S> <C> <C> <C> <C> <C>
Kew Gardens 6/97 142 $19,800,000 $2,741,866 Interest rate is LIBOR plus 2.3% with
interest only due for the initial 30 month
period and interest and principal due for
the 30 month extension.
Riverdale 8/97 205 10,960,000 3,070,771 Interest rate is LIBOR plus 2.3% with
----------- ---------- interest only due for the initial 24 month
period and interest and principal due for
the 36 month extension.
Total $30,760,000 $5,812,637
=========== ==========
</TABLE>
In addition, in September 1997 the Company acquired a 126 unit facility located
in Lynbrook, New York and obtained a mortgage loan collateralized by the
facility in the amount of $10.4 million with interest rate based on the 30 day
LIBOR rate plus 2.3% due in monthly interest and principal installments until
September 2002, the maturity date.
Amounts borrowed for construction under the Company's existing credit facility
with Health Care REIT for its Briarcliff, New York and Albany, New York
developments for the nine months ending September 30, 1997 was $6.2 million.
The Company borrowed an additional $323,000 for Senior Quarters at East
Northport.
In September 1997, the Company prepaid approximately $15 million in debt and
$1.6 million in equity participation fees relating to mortgages loans on two
facilities. The Company recorded an extraordinary loss on the early retirement
of this debt of approximately $1.3 million before income taxes ($777,000 net of
income tax benefit).
9. Subsequent Events
In October 1997, the Company announced it has entered into a definitive
agreement with Prometheus Senior Quarters LLC ("Prometheus"), an affiliate of
Lazard Freres Real Estate Investors LLC whereby Prometheus will acquire
substantially all of the outstanding shares of the Company in a transaction
valued at approximately $250 million, including the assumption of debt.
10
<PAGE>
Under the terms of the Agreement, each share of the Company's common stock will
be converted into the right to receive $16.00 in cash and each share of the
Preferred Stock will be converted into the right to receive $30.82 in cash;
provided, that each person who is a record holder of shares on the date of the
Special Meeting of Stockholders may elect to retain up to 9.74026% of his
Shares, which, with respect to each share of Common Stock so retained, will
continue to represent one share of Common Stock of the Company and, with respect
to each share of Preferred Stock so retained, will represent 1.92604 shares of
Common Stock of the Company; provided, however, that the aggregate number of
shares retained by holders of Common Stock may not be less than 693,750
("Required Minimum"). If the holders of Common Stock elect in the aggregate to
retain fewer than the Required Minimum, the number of shares of Common Stock
required to be retained will be prorated among such holders. Three senior
officers of the Company, have agreed collectively to retain 375,000 shares of
the Required Minimum.
The acquisition is expected to be treated as a recapitalization for accounting
purposes. The transaction is contingent upon certain regulatory approvals and a
favorable vote by the Company's stockholders.
11
<PAGE>
KAPSON SENIOR QUARTERS CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Prior to the Offering, the Company's facilities were owned, managed and/or
operated by one or more S corporations, limited partnerships or limited
liability companies of the Company's predecessor, The Kapson Group (the
"Predecessor"). The Kapson Group was a general partnership of which Glenn
Kaplan, Wayne Kaplan, and Evan Kaplan (collectively, the "Kaplans") were the
sole equal partners. As the Company is newly formed, all references to the
Company in connection with historical financial data or otherwise include the
Predecessor.
The historical financial statements of the Predecessor represent the combined
historical results of operations and financial condition of: (i) four facilities
that were wholly owned by the Predecessor (Senior Quarters at Stamford, Senior
Quarters at Huntington Station, Senior Quarters at Centereach I, and Senior
Quarters at Centereach II); (ii) two wholly owned facilities of the Predecessor
that were acquired on April 1, 1996 (Town Gate Manor and Town Gate East); (iii)
one facility that was wholly owned by the Predecessor but in which a 49.9%
interest was sold to an unrelated third party in April 1996 (Senior Quarters at
Chestnut Ridge); (iv) an entity through which the Predecessor controlled a 50%
interest (and in October, 1996 agreed to acquire the remaining 50% interest) in
a newly-developed facility in East Northport, New York (Senior Quarters at East
Northport) which began operations on March 15, 1996; (v) an entity through which
the Company owned a 23.75% minority interest in Change Bridge Inn; (vi) two
entities through which the Predecessor owned a minority interest in facilities
that were under construction (an 11% interest in Senior Quarters at Glen Riddle
and a 10% interest in Senior Quarters at Jamesburg); (vii) a management company
which received management fees from five related and four unrelated entities,
and (viii) an entity that provided administrative support to the Predecessor and
other affiliated entities.
The Company is an owner, operator, manager, and developer of assisted living
facilities. The Company was formed in order to consolidate and expand the
assisted living business of the Predecessor. The Company had no operations prior
to October 1, 1996.
New York State Assisted Living Program
In June 1993, the Company was awarded approximately 57% of the beds allocated to
Long Island under the State of New York Assisted Living Program ("ALP"). This
program is designed for residents who are eligible for Medicaid and who require
a higher acuity of care than is typically provided in assisted living
facilities. In support of the program, the Company dedicated a newly developed
facility in East Northport, New York, which opened in March 1996, and an
existing fully occupied facility in Centereach, New York (Senior Quarters at
Centereach I).
12
<PAGE>
In April 1997, due to excessive delays and higher than expected costs associated
with the ALP, the Company was unable to implement the program at these two
facilities and accordingly the Company has taken action to reduce the
incremental operating costs associated with the program at both facilities and
is returning their operations back to adult homes. Both facilities were
originally conceived and constructed as adult homes and hold licenses as adult
care facilities in New York. The Company has begun to accept private pay
residents to fill rooms held vacant in anticipation of the ALP at its East
Northport facility and has substantially concluded the transition at its
Centereach facility, back to an adult home facility.
During the first and second quarters, losses incurred at the East Northport
facility and other incremental operating expenses associated with the program
resulted in higher than historical assisted living operating expenses as a
percentage of assisted living revenues and increased the Company's net loss.
Results of Operations
Three Months Ended September 30, 1997 Compared to Three Months Ended September
30, 1996.
Revenues
Assisted living revenues increased by $3.3 million, or 56.6% to $9.0 million for
the three months ended September 30, 1997, compared to $5.8 million for the
three months ended September 30, 1996. The increase is attributable to: (i) the
leasing of two facilities in October 1996 and July 1997 which contributed
combined revenues of $2 million; (ii) the rent up of two new facilities, which
opened in September 1995 and March 1996 and contributed combined revenues of
$490,000; and (iii) the acquisition of a facility in April 1997 which
contributed $346,000. Excluding these facilities, assisted living revenues were
$5.1 and $4.6 million for the three months ended September 30, 1997 and 1996,
respectively. Management fee revenue increased by $417,000 or 117.9% to $772,000
for the three months ended September 30, 1997, compared to $354,000 for the
three months ended September 30, 1996. The increase was primarily attributable
to new management and consulting revenues.
Operating Expenses
Assisted living operating expenses increased by $2.2 million, or 55.1% to $6.1
million for the three months ended September 30, 1997, compared to $3.9 million
for the three months ended September 30, 1996. As a percentage of assisted
living revenues, assisted living operating expenses were 67.3% and 69.9% for the
three months ended September 30, 1997 and 1996, respectively. The decrease in
assisted living operating expenses as a percentage of assisted living revenues
is primarily attributable to increased revenues at certain existing facilities
and improved occupancy levels at the Company's East Northport facility.
13
<PAGE>
Rent Expense
Rent expense was $470,000 for the three months ended September 30, 1997 as a
result of the leasing of two new facilities.
General and Administrative Expense
General and administrative expense was $1.4 million for the three months ended
September 30, 1997, compared to $1.1 million for the three months ended
September 30, 1996. As a percentage of total revenues, general and
administrative expense was 14.1% and 18.1% for the three months ended September
30, 1997 and 1996, respectively. The decrease is primarily attributable to the
acquisition of new facilities and management contracts without incremental
increases in corporate overhead.
Interest Income
Interest income increased by $846,000 to $870,000 for the three months ended
September 30, 1997, compared to $24,000 for the three months ended September 30,
1996. The increase is attributable to interest earned on the investment of the
proceeds from the Company's initial public offering and the convertible
preferred stock offering.
Interest Expense
Interest expense decreased by $153,000, or 8.5% to $1.7 million for the three
months ended September 30, 1997, compared to $1.8 million for the three months
ended September 30, 1996, primarily due to the payoff of two mortgages formerly
held by General Electric Capital Corp.
("GECC").
Extraordinary Loss
Extraordinary loss for the three months ended September 30, 1997, was $1.3
million before income taxes ($777,000 net of income tax benefit), resulting from
the payment of one time equity participation fees to GECC in connection with the
prepayment of mortgage indebtedness.
Net Loss
Net loss was $557,000 for the three months ended September 30, 1997, compared to
a proforma net loss of $502,000 for the three months ended September 30, 1996.
The increase in net loss is primarily the result of the one time equity
participation fee paid to GECC. Excluding the equity participation fee, the net
income (loss) was $220,000 and $(502,000), on a proforma basis for the three
months ended September 30, 1997 and 1996, respectively.
14
<PAGE>
Results of Operations
Nine Months Ended September 30, 1997 Compared to Nine Months Ended September 30,
1996.
Revenues
Assisted living revenues increased by $8.6 million, or 56.2% to $23.9 million
for the nine months ended September 30, 1997, compared to $15.3 million for the
nine months ended September 30, 1996. The increase is attributable to: (i) the
leasing of two facilities October 1996 and July 1997, which contributed combined
revenues of $4.5 million; (ii) the rent up of two new facilities which opened
September 1995 and March 1996 and contributed combined revenues of $1.8 million;
(iii) the acquisition of a facility April 1997 which contributed $602,000; and
(iv) additional revenues of $223,000 generated from the home care program.
Excluding the impact of these new facilities and program, assisted living
revenues were $14.6 million and $12.5 million for the nine months ended
September 30, 1997 and 1996, respectively. Management fee revenue increased by
$631,000 or 80.2% to $1.4 million for the nine months ended September 30, 1997
compared to $786,000 for the nine months ended September 30, 1996. The increase
was primarily attributable to new management and consulting revenue.
Operating Expenses
Assisted living operating expenses increased by $6.3 million, or 62.1% to $16.5
million for the nine months ended September 30, 1997, compared to $10.2 million
for the nine months ended September 30, 1996. As a percentage of assisted living
revenues, assisted living operating expenses were 68.9% and 66.5% for the nine
months ended September 30, 1997 and 1996, respectively. The increase in assisted
living operating expenses as a percentage of assisted living revenues is
primarily attributable to the opening of Senior Quarters at East Northport and
higher than expected costs associated with ALP for the first two quarters of
1997. Excluding expenses attributable to Senior Quarters at East Northport and
the ALP, assisted living operating expenses as a percentage of assisted living
revenues would have been 65.3% and 63% for the nine months ended September 30,
1997 and 1996, respectively.
Rent Expense
Rent expense was $1.2 million for the nine months ended September 30, 1997 as a
result of the leasing of two new facilities.
General and Administrative Expense
General and administrative expense increased by $1.4 million, or 60% to $3.8
million for the nine months ended September 30, 1997 compared to $2.4 million
for the nine months ended September 30, 1996. As a percentage of total revenues,
general and administrative expense was 15.1% and 14.7% for the nine months ended
September 30, 1997 and 1996, respectively. The increase is primarily the result
of: (i) higher payroll and employee benefit costs in connection with a strategic
15
<PAGE>
decision by the Company to invest in its management and facility development
capabilities in order to support future growth through development, acquisition
and management of additional facilities.
Interest Income
Interest income increased by $1.1 million to $1.3 million for the nine months
ended September 30, 1997 compared to $128,000 for the nine months ended
September 30, 1996. The increase is attributable to interest earned on the
investment of the proceeds from the Company's initial public offering and the
proceeds from the convertible preferred stock offering.
Interest Expense
Interest expense increased by $615,000, or 12.9% to $5.4 million for the nine
months ended September 30, 1997 compared to $4.8 million for the nine months
ended September 30, 1996. The increase is attributable to the opening of three
new facilities during 1996 resulting in nine months of interest expense in 1997.
Extraordinary Loss
Extraordinary loss for the nine months ended September 30, 1997, was $1.3
million before income taxes ($777,000 net of income tax benefit), resulting from
the payment of one time equity participation fees to GECC in connection with the
prepayment of mortgage indebtedness.
Net Loss
Net loss was $2.4 million for the nine months ended September 30, 1997, compared
to the proforma net loss of $1.1 million for the nine months ended September 30,
1996. The increase net loss is primarily the result of the equity participation
fee paid to GECC of $1.3 million, operating losses at the East Northport ALP
facility and incremental costs incurred during the first two quarters of 1997
for the implementation of ALP and, to a lesser extent, higher payroll and
benefit costs connection with the Company's expansion plans. Excluding the
equity participation, Senior Quarters at East Northport and the incremental
costs associated with the ALP during the first two quarters of 1997, net loss
would have been $575,000 and $676,000, on a proforma basis for the nine months
ended September 30, 1997 and 1996, respectively.
16
<PAGE>
Liquidity and Capital Resources
Net cash used in operating activities was $5.1 million for the nine months ended
September 30, 1997, compared to $2.0 million for the nine months ended September
30, 1996. The increase is primarily attributable to increases in other assets,
deferred income taxes and an increase in net loss for the nine months ended
September 30, 1997 over the prior period, offset by increases in accounts
payable and accrued expenses.
Net cash used in investing activities was $45.3 million for the nine months
ended September 30, 1997, compared to $18 million for the nine months ended
September 30, 1996. Substantially all of the cash used in investing activities
for the nine months ended September 30, 1997 was for the acquisition and
development of new facilities, offset by the proceeds from the sale of minority
interests and an increase in contributed capital by minority partners. Net cash
used in investing activities was funded primarily through long-term debt and net
proceeds from the Company's Preferred Stock offering.
Net cash provided by financing activities was $63.0 million for the nine months
ended September 30, 1997, compared to $17.1 million for the nine months ended
September 30, 1996. Net cash provided by financing activities primarily consists
of the net proceeds of the Company's Preferred Stock Offering, and the proceeds
of long term debt offset by principal repayments of long-term debt.
In July 1997, the Company sold 2,000,000 shares of its $2.00 Convertible
Exchangeable Preferred Stock at a price of $25.00 per share and realized net
proceeds of approximately $47.4 million. In August 1997, the Company sold an
additional 400,000 shares of Convertible Exchangeable Preferred Stock and
realized net proceeds of $9.6 million. The Company intends to use such proceeds
towards continued development and acquisitions of assisted living facilities. In
addition, the Company has used a portion of the proceeds to repay $15.2 million
of mortgage indebtedness, with a weighted average interest rate of 10.25%
maturing on February 28, 1999, and $1.6 million in equity participation amounts
on the repaid indebtedness. The Company has recorded in the third quarter of
1997 an extraordinary loss on the early retirement of this debt of approximately
$1.3 million before income taxes ($777,000 net of income tax benefit).
In September 1997, the Company entered into a $50 million Non-Revolving Credit
Facility with GMAC Commercial Mortgage Corporation to provide construction and
acquisition financing collateralized by assisted living or independent living
facilities. Amounts borrowed will vary depending on the value of the facility
and will bear interest rates based on the 30-day LIBOR Rate plus 2.45% to 3%.
The Credit Facility has a two year term with acquisition and construction loans
payable full after three and five years, respectively. The amount currently
available under this facility is $39.2 million.
The Company leases two facilities under operating leases for periods ranging
from 10 to 15 years with aggregate annual lease payments of approximately $2.7
million.
17
<PAGE>
The Company currently has a $100 million acquisition, leasing and development
credit facility (the "Facility") with a lending institution, providing temporary
construction and permanent financing. The Company currently has drawn and
committed $55.2 million, with an additional $44.8 million remaining for future
financing under the Facility.
In October 1997, the Company announced it has entered into a definitive
agreement with Prometheus Senior Quarters LLC ("Prometheus"), an affiliate of
Lazard Freres Real Estate Investors LLC whereby Prometheus will acquire
substantially all of the outstanding shares of the Company in a transaction
valued at approximately $250 million, including the assumption of debt.
Under the terms of the Agreement, each share of the Company's common stock will
be converted into the right to receive $16.00 in cash and each share of the
Preferred Stock will be converted into the right to receive $30.82 in cash;
provided, that each person who is a record holder of shares on the date of the
Special Meeting of Stockholders may elect to retain up to 9.74026% of his
Shares, which, with respect to each share of Common Stock so retained, will
continue to represent one share of Common Stock of the Company and, with respect
to each share of Preferred Stock so retained, will represent 1.92604 shares of
Common Stock of the Company; provided, however, that the aggregate number of
shares retained by holders of Common Stock may not be less than 693,750
("Required Minimum"). If the holders of Common Stock elect in the aggregate to
retain fewer than the Required Minimum, the number of shares of Common Stock
required to be retained will be prorated among such holders. Three senior
officers and directors of the Company, have agreed collectively to retain
375,000 shares of the Required Minimum. The Merger will be financed by an equity
investment from Lazard Freres Real Estate Investors LLC of $89 million and the
issuance of $109 million in debt at an expected interest rate of 10%.
After the Merger, the Company intends to finance its growth strategy through a
variety of sources, including the remaining proceeds of the Preferred Offering,
bank and other financing, long-term operating leases with Health Care REIT,
future debt or equity offerings, joint ventures and other sources. To a limited
extent, the Company may also use other forms of financing such as taxable or
tax-exempt long-term debt, including publicly issued debt. The Company is
currently negotiating with lending institutions for expanded or new credit
facilities to fund acquisition and development activities.
Impact of Recently Issued Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS No. 128"),
which establishes standards for computing and presenting earnings per share.
SFAS No. 128 will be effective for financial statements issued for periods
ending after December 15, 1997. Earlier application is not permitted. Management
believes that this change will not have any impact on the Company's financial
statements for the year ended December 31, 1997.
18
<PAGE>
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 129, "Disclosure of Information about Capital
Structure" (SFAS No. 129"), which requires that descriptive information about
securities be shown in the financial statements. SFAS No. 129 became effective
for fiscal year 1997. Management believes that this change will not have a
significant impact on the Company's financial statements for the year ending
December 31, 1997.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
No. 130"), which requires that changes in comprehensive income be shown in a
financial statement that is displayed with the same prominence as other
financial statements. SFAS No. 130 becomes effective in fiscal year 1998.
Management is currently considering the impact on the Company's disclosures in
its financial statements for the year ending December 31, 1997.
In June 1997, the Financial Accounting Standards Board issued Financial
Accounting Standards No. 131. "Disclosures About Segments of an Enterprise and
Related Information" ("SFAS No. 131"), which changes the way public companies
report information about segments. SFAS 131, which is based on the management
approach to segment reporting, includes requirements to report selected segment
information quarterly and entity-wide disclosures about products and services,
major customers, and the material countries in which the entity holds and
reports revenues. SFAS 131 becomes effective in fiscal year 1998. Management
believes that this change will not have any impact on the Company's Financial
Statements for the year ending December 31, 1997.
Note on Forward-Looking Statements
Certain information contained this Form 10-Q are forward-looking statements.
Events could affect the Company's actual results and could cause such results to
differ materially from those expressed any forward-looking statements made by,
or on behalf of, the Company this Form 10-Q. Such events could include effect of
economic and market conditions, the availability of financing, general real
estate and construction risks, government regulation, competition and other
business risks common to assisted living operations.
19
<PAGE>
KAPSON SENIOR QUARTERS CORP.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Litigation:
There have been no material developments with respect to litigation
that occurred during this reporting period.
Item 2. Changes in Securities
(a)-(c)
On July 3, 1997, the Company issued 2,000,000 shares of its $2.00
Convertible Exchangeable Preferred Stock (the "Preferred Stock") at
a purchase price of $25 per share of Preferred Stock, for an
aggregate purchase price to investors of $50.0 million. The
Preferred Stock was sold to Raymond James & Associates, Inc., Forum
Capital Markets, L.P. and Wheat First Butcher Singer, as Initial
Purchasers pursuant to the exemption from the registration
requirements provided by Section 4(2) of the Securities Act of 1933,
as amended, and was subsequently offered for sale by the Initial
Purchasers to Qualified Institutional Buyers reliance on the
exemption from registration provided by Rule 144A, and to a limited
number of Institutional Accredited Investors that executed and
delivered a letter containing certain representations and
agreements.
On August 12, 1997, the Initial Purchasers exercised an
overallotment option to purchase an additional 400,000 shares of
Preferred Stock from the Company at an aggregate purchase price to
investors of $10.0 million.
Aggregate net proceeds to the Company from the sale of Preferred
Stock were $57.0 million, after deducting aggregate discounts to
Initial Purchasers of $2.4 million and offering expenses payable by
the Company of $0.6 million.
Dividends on the Preferred Stock are cumulative from the date of
original issuance and are payable quarterly arrears at an annual
rate of $2.00 per share cash. The Preferred Stock is convertible, at
the option of the holder, into Common Stock of the Company at an
initial conversion price of $12.98 per share of Common Stock, which
under certain circumstances is subject to adjustment upon a Change
Control (as defined) of the Company. The Preferred Stock is
exchangeable, at the option of the Company, on or after September
30, 1997, for 8% Convertible Subordinated Notes
20
<PAGE>
of the Company, which contain conversion and optional redemption
terms that are substantially identical to those of the Preferred
Stock. The Company may redeem the Preferred Stock, whole or part, at
any time on or after July 1, 2000 at redemption prices commencing at
$26.00 per share and declining thereafter.
In connection with the issuance and sale of Preferred Stock, the
Company filed with the Secretary of State of the State of Delaware a
Certificate of Designations of $2.00 Convertible Exchangeable
Preferred Stock (the "Certificate of Designations") which
established the designations, powers, preferences and rights of the
shares of such preferred stock, and the qualifications, limitations
or restrictions thereof ( addition to the designations, powers,
preferences and rights, and the qualifications, limitations or
restrictions thereof, set forth the Certificate of Incorporation
which may be applicable to the Company's preferred stock). The
Certificate of Designation provides that, with respect to payment of
dividends, redemption payments and rights upon liquidation,
dissolution or winding up of the affairs of the Company, the
Preferred Stock shall rank senior and prior to the Common Stock, par
value $.01 per share, of the Company (the "Common Stock"). The
liquidation value of shares of the Preferred Stock, case of the
voluntary or involuntary liquidation, dissolution or winding up of
the Company, shall be $25.00 per share, plus an amount equal to the
dividends accrued and unpaid thereon, whether or not declared, to
the payment date. If the assets of the Company are not sufficient to
pay full the liquidation value payable to the holders of shares of
the Preferred Stock, then the entire assets and funds of the Company
legally available for distribution shall be distributed among the
holders of the Preferred Stock.
Item 3. Defaults upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
On September 29, 1997, the Company's wholly owned subsidiary, Kapson
Lynbrook Corp., acquired the assisted living facility (the
"Facility") known as Senior Quarters at Lynbrook, located at 100
Peninsula Boulevard, Lynbrook, New York, from Pensun Associates. The
Company's subsidiary Senior Quarters Management Corp. had been the
manager of the facility pursuant to a management agreement with
Pensun Associates. The purchase price was $25.8 million, comprised
of $15.4 million in
21
<PAGE>
cash and assumption of a $10.4 million mortgage note on the Facility
held by Fleet Bank, N.A. The mortgage note, payment of which has
been guaranteed by the Company, bears interest at a variable rate,
and matures on October 1, 2002. The Facility, which contains 126
units and has a capacity for 200 residents, opened in January 1997
and had an occupancy level of 87% occupancy on the date of
acquisition.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
Form 8-K, Item 2, filed July 3, 1997.
22
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KAPSON SENIOR QUARTERS CORP.
November 14, 1997 /s/ Glenn Kaplan
------------------------------
Glenn Kaplan
Chairman of the Board and
Chief Executive Officer
November 14, 1997 /s/ Raymond DioGuardi
------------------------------
Raymond DioGuardi
Chief Financial Officer
23
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM COMBINED
BALANCE SHEETS AND COMBINED STATEMENTS OF OPERATIONS CONTAINED IN THE COMPANY'S
REGISTRATION STATEMENT ON FORM S-1. (REGISTRATION No. 333-5945) AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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24
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