FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
----------------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------------- ----------------
Commission file number
333-47411
--------------------
CNL Health Care Properties, Inc.
------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Maryland 59-3491443
---------------------------------- -------------------------------
(State of other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
400 E. South Street
Orlando, Florida 32801
---------------------------------- -------------------------------
(Address of principal executive
offices) (Zip Code)
Registrant's telephone number
(including area code) (407) 650-1000
-------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 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 ____ No X
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
20,000 shares of common stock, $.01 par value, outstanding as of November 2,
1998.
<PAGE>
CONTENTS
--------
Part I Page
- ------ ----
Item 1. Financial Statements:
Balance Sheets 1
Statements of Stockholders' Equity 2
Notes to Financial Statements 3-6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-10
Part II
Other Information 11
<PAGE>
CNL HEALTH CARE PROPERTIES, INC.
(A Development Stage Maryland Corporation)
BALANCE SHEETS
September 30, December 31,
1998 1997
----------- ------------
ASSETS
Cash $ 77 $200,000
Deferred offering costs 549,666 80,330
-------- --------
$549,743 $280,330
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Accrued offering costs:
Due to CNL Health Care Advisors,
Inc $346,243 $ 58,600
Due to others 3,500 21,730
-------- --------
349,743 80,330
-------- --------
Stockholder's equity:
Preferred stock, without par
value per share
Authorized and unissued
3,000,000 shares -- --
Excess shares, $.01 par value per
share
Authorized and unissued
103,000,000 shares -- --
Common stock, $.01 par value per
share
Authorized 100,000,000 and
100,000 shares, respectively,
and 20,000 shares
issued and outstanding 200 200
Capital in excess of par value 199,800 199,800
-------- --------
200,000 200,000
-------- --------
$549,743 $280,330
======== ========
See accompanying notes to financial statements.
<PAGE>
CNL HEALTH CARE PROPERTIES, INC.
(A Development Stage Maryland Corporation)
STATEMENTS OF STOCKHOLDERS' EQUITY
Nine Months Ended September 30, 1998 and December 22, 1997
(Date of Inception) through December 31, 1997
Common stock Capital
---------------- in
excess
Number of
of Par par
Shares value value Total
------ ------- ----- ------
Balance, December 22,
1997 (Date of Inception) -- $ -- $ -- $ --
Cash received from sale
of common stock to
CNL Health Care
Advisors, Inc. 20,000 200 199,800 200,000
------- ------ --------- --------
Balance at December 31,
1997 20,000 200 199,800 200,000
Cash received from sale
of common stock -- -- -- --
------- ------ --------- --------
Balance at September 30,
1998 20,000 $ 200 $199,800 $200,000
======= ====== ========= ========
See accompanying notes to financial statements.
<PAGE>
CNL HEALTH CARE PROPERTIES, INC.
(A Development Stage Maryland Corporation)
NOTES TO FINANCIAL STATEMENTS
Quarter and Nine Months Ended September 30, 1998 and
December 22, 1997 (Date of Inception)
through December 31, 1997
1. Significant Accounting Policies:
Organization and Nature of Business - CNL Health Care Properties, Inc.
(the "Company") was organized in Maryland on December 22, 1997. Beginning
on September 18, 1998, the Company offered for sale up to $155,000,000 of
shares of common stock (15,500,000 of shares at $10 per share) (the
"Offering"), 500,000 shares of which will be available only to
stockholders who elect to participate in the Company's reinvestment plan
(the "Reinvestment Plan") (see Note 2). In addition, the Company has
registered 600,000 shares issuable upon the exercise of warrants granted
to the managing dealer of the offering.
The Company intends to use the proceeds from its public offering, after
deducting offering expenses, primarily to acquire real estate properties
(the "Properties") related to health care and seniors' housing facilities
(the "Health Care Facilities") located across the United States. The
Health Care Facilities may include congregate living, assisted living and
skilled nursing facilities, continuing care retirement communities and
life care communities, and medical office buildings and walk-in clinics.
The Company may provide mortgage financing (the "Mortgage Loans") to
operators of Health Care Facilities in the aggregate principal amount of
approximately 5% to 10% of the Company's total assets. The Company also
may offer furniture, fixture and equipment financing ("Secured Equipment
Leases") to operators of Health Care Facilities. Secured Equipment Leases
will be funded from the proceeds of a loan in an amount up to ten percent
of the Company's total assets which the Company intends to obtain.
The Company is in the development stage and has not begun operations.
Income Taxes - The Company intends to make an election to be taxed as a
real estate investment trust ("REIT") under Sections 856 through 860 of
the Internal Revenue Code commencing with its taxable year ending December
31, 1998. If the Company qualifies for taxation as a REIT, the Company
generally will not be subject to federal corporate income tax to the
extent it distributes its REIT taxable income to its stockholders, so long
as it distributes at least 95 percent of its REIT taxable income. REITs
are subject to a number of other organizational and operational
requirements. Even if the Company qualifies for taxation as a REIT, it may
be subject to certain state and local taxes on its income and property,
and federal income and excise taxes on its undistributed income.
<PAGE>
CNL HEALTH CARE PROPERTIES, INC.
(A Development Stage Maryland Corporation)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Quarter and Nine Months Ended September 30, 1998 and
December 22, 1997 (Date of Inception)
through December 31, 1997
1. Significant Accounting Policies - Continued:
Basis of Presentation - The accompanying unaudited financial statements
have been prepared in accordance with the instructions to Form 10-Q and do
not include all of the information and note disclosures required by
generally accepted accounting principles. The financial statements reflect
all adjustments, consisting of normal recurring adjustments, which are, in
the opinion of management, necessary to a fair statement of the results
for the interim period presented.
2. Reinvestment Plan:
The Company has established a Reinvestment Plan pursuant to which
stockholders may elect to have the full amount of their cash distributions
from the Company reinvested in additional shares of common stock of the
Company.
The Offering includes 500,000 shares of common stock for purchase through
the Reinvestment Plan.
3. Deferred Offering Costs:
The Company has and will continue to incur certain costs in connection
with the Offering, including filing fees, legal, accounting, marketing and
printing costs and escrow fees, which will be deducted from the gross
proceeds of the Offering. Certain preliminary costs incurred prior to
raising capital have been and will be advanced by an affiliate of the
Company.
4. Capitalization:
At December 31, 1997, the Company was authorized to issue 100,000 shares
of common stock, all of one class, with a par value of $.01 per share. On
September 15, 1998, the Company amended the Articles of Incorporation to
increase the number of authorized shares of capital stock from 100,000
shares to 206,000,000 shares (consisting of 100,000,000 common shares,
3,000,000 preferred shares and 103,000,000 excess shares).
<PAGE>
CNL HEALTH CARE PROPERTIES, INC.
(A Development Stage Maryland Corporation)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Quarter and Nine Months Ended September 30, 1998 and
December 22, 1997 (Date of Inception)
through December 31, 1997
5. Concentration of Credit Risk:
At December 31, 1997, the Company had cash on deposit in one financial
institution in excess of federally insured levels; however, the Company
has not experienced any losses in such account. The Company limits
investments of cash investments to financial institutions with high credit
standing; therefore, the Company believes it is not exposed to any
significant credit risk on cash.
6. Related Party Arrangements:
Certain affiliates of the Company will receive fees and compensation in
connection with the Offering, and the acquisition, management, and sale of
the assets of the Company.
In connection with the formation of the Company and the offering of the
shares, the managing dealer of the Offering, an affiliate of the Company,
will receive selling commissions of 7.5% and a marketing support and due
diligence expense reimbursement of 0.5% of the total amount raised from
the sale of shares, computed at $10.00 per share sold. Up to 7% of the
commissions on shares sold and all or a portion of the 0.5% marketing
support and due diligence expense reimbursement fee may be reallowed to
certain soliciting dealers who are not affiliates of the Company, with
prior written approval from, and in the sole discretion of, the managing
dealer.
In addition, the Company has agreed to issue and sell soliciting dealer
warrants ("Soliciting Dealer Warrants") to the managing dealer. The price
for each warrant will be $0.0008 and one warrant will be issued for every
25 shares sold by the managing dealer. All or a portion of the Soliciting
Dealer Warrants may be reallowed to soliciting dealers with prior written
approval from, and in the sole discretion of the managing dealer, expect
where prohibited by either federal or state securities laws. The holder of
a Soliciting Dealer Warrant will be entitled to purchase one share of
common stock from the Company at a price of $12.00 during the five year
period commencing with the date the offering begins. No Soliciting Dealer
Warrant, however, will be exercisable until one year from the date of
issuance.
On December 22, 1997 (date of inception), CNL Health Care Advisors, Inc.
contributed $200,000 in cash to the Company and became its sole
stockholder.
<PAGE>
CNL HEALTH CARE PROPERTIES, INC.
(A Development Stage Maryland Corporation)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Quarter and Nine Months Ended September 30, 1998 and
December 22, 1997 (Date of Inception)
through December 31, 1997
6. Related Party Arrangements - Continued:
Amounts due to CNL Health Care Advisors, Inc. consisted of the following
at:
September 30, December 31,
1998 1997
---------- ----------
Expenditures incurred on behalf
of the Company $234,267 $43,398
Accounting and administrative
services 111,976 15,202
--------- -------
$346,243 $58,600
========= =======
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CNL Health Care Properties, Inc. (the "Company") is a Maryland corporation
that was organized December 22, 1997, to acquire real estate properties (the
"Properties") related to health care and seniors' housing facilities (the
"Health Care Facilities") located across the United States. The Health Care
Facilities may include congregate living, assisted living and skilled nursing
facilities, continuing care retirement communities and life care communities,
and medical office buildings and walk-in clinics. The Properties will be leased
on a long-term, "triple-net" basis. The Company may also provide mortgage
financing (the "Mortgage Loans") to operators of Health Care Facilities in the
aggregate principle amount of approximately 5% to 10% of the Company's total
assets. The Company also may offer furniture, fixture and equipment financing
("Secured Equipment Leases") to operators of Health Care Facilities. The
aggregate principal amount of Secured Equipment Leases is not expected to exceed
10% of the Company's total assets.
The Company's primary investment objectives are to preserve, protect, and
enhance the Company's assets while (i) making distributions commencing in the
initial year of Company operations; (ii) obtaining fixed income through the
receipt of base rent, and increasing the Company's income (and distributions)
and providing protection against inflation through automatic fixed increases in
base rent or increases in the base rent based on increases in consumer price
indices, over the terms of the leases, and obtaining fixed income through the
receipt of payments from Mortgage Loans and Secured Equipment Leases; (iii)
qualifying and remaining qualified as a REIT for federal income tax purposes;
and (iv) providing stockholders of the Company with liquidity of their
investment within five to ten years after commencement of the offering, either
in whole or in part, through (a) listing of the shares on a national securities
exchange or over-the-counter market ("Listing"), or (b) the commencement of the
orderly sale of the Company's assets, and distribution of the proceeds thereof
(outside the ordinary course of business and consistent with its objective of
qualifying as a REIT).
Pursuant to a registration statement on Form S-11 under the Securities Act
of 1933 effective September 18, 1998, the Company registered for sale an
aggregate of $155,000,000 of shares of common stock (the "Shares") (15,500,000
shares at $10 per Share), with 500,000 of such shares available only to
stockholders who elect to participate in the Company's reinvestment plan. The
offering of Shares of the Company commenced on September 18, 1998. The offering
of Shares of the Company will terminate no later than September 18, 1999, unless
the Company elects to extend it to a date no later than September 18, 2000, in
states that permit such extension.
The managing dealer of the offering of shares of the Company is CNL
Securities Corp., an affiliate of the Company.
<PAGE>
This information contains 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. Although the Company believes that the expectations
reflected in such forward-looking statements are based upon reasonable
assumptions, the Company's actual results could differ materially from those set
forth in the forward-looking statements. Certain factors that might cause such a
difference include the following: changes in general economic conditions,
changes in local real estate conditions, availability of proceeds from the
Company's offering, the ability of the Company to obtain a line of credit or
permanent financing on satisfactory terms, the ability of the Company to locate
suitable tenants for its Properties and borrowers for its Mortgage Loans and
Secured Equipment Leases, and the ability of tenants and borrowers to make
payments under their respective leases, Mortgage Loans or Secured Equipment
Leases.
Liquidity and Capital Resources
A capital contribution of $200,000 from an affiliate of the Company is the
Company's sole source of capital until the Company sells the minimum number of
250,000 Shares ($2,500,000). As of November 2, 1998, no subscription funds had
been deposited with the escrow agent for the Offering.
The Company expects to use net offering proceeds from the sale of Shares
to purchase Properties and to invest in Mortgage Loans. In addition, the Company
intends to borrow money to acquire Assets and to pay certain related fees. The
Company intends to encumber assets in connection with such borrowing. The
Company plans to obtain a revolving line of credit initially in an amount up to
$45,000,000 (the "Line of Credit"). The Company also plans to obtain permanent
financing ("Permanent Financing"). Although the Board of Directors anticipates
that the Line of Credit initially will be in the amount of $45,000,000 and the
aggregate amount of any Permanent Financing shall not exceed 30% of the
Company's total assets, the maximum amount the Company may borrow is 300% of the
Company's net assets. The Company has engaged in preliminary discussions with
potential lenders but has not yet received a commitment for the Line of Credit
or any Permanent Financing and there is no assurance that the Company will
obtain the Line of Credit or any Permanent Financing on satisfactory terms.
At September 30, 1998 and December 31, 1997, the Company's total assets
were $549,743 and $280,330, respectively. The increase in total assets reflects
organizational and offering expenses incurred and recorded as deferred offering
costs during the nine months ended September 30, 1998.
As of September 30, 1998, the Company owed an affiliate of the Company
$346,243 for certain organizational and offering expenses it has incurred on
behalf of the Company. In the event the minimum offering proceeds are not
received by the Company, the Company will have no obligation to repay such
amounts. Further, CNL Health Care Properties, Inc., the advisor of the Company
(the "Advisor"), has agreed to pay all organizational and offering expenses in
excess of three percent of the gross offering proceeds.
<PAGE>
Liquidity and Capital Resources - Continued
Due to anticipated low operating expenses, rental income expected to be
obtained from Properties after they are acquired, the fact that the Line of
Credit and Permanent Financing have not been obtained and that the Company has
not entered into Mortgage Loans or Secured Equipment Leases, management does not
believe that working capital reserves will be necessary at this time. Management
has the right to cause the Company to maintain reserves if, in their discretion,
they determine such reserves are required to meet the Company's working capital
needs.
As of September 30, 1998, the Company had not entered into any
arrangements creating a reasonable probability that a Property would be acquired
by the Company or that a particular Mortgage Loan or Secured Equipment Lease
would be funded. The number of Properties to be acquired and Mortgage Loans to
be invested in will depend upon the amount of net offering proceeds and loan
proceeds available to the Company. The amount invested in Secured Equipment
Leases will not exceed 10% of the gross offering proceeds.
Management expects that the cash to be generated from operations will be
adequate to pay operating expenses and to make distributions to stockholders.
Results of Operations
As of September 30, 1998, no significant operations had commenced because
the Company was in its development stage. No operations will commence until such
time as the Company has sold at least 250,000 Shares ($2,500,000). Management is
not aware of any known trends or uncertainties, other than national economic
conditions, which may reasonably be expected to have a material impact,
favorable or unfavorable, on revenues or income from the acquisition and
operation of the Properties.
The Year 2000 problem is the result of information technology systems and
embedded systems (products which are made with microprocessor (computer) chips
such as HVAC systems, physical security systems and elevators) using a two-digit
format, as opposed to four digits, to indicate the year. Such information
technology and embedded systems may be unable to properly recognize and process
date-sensitive information beginning January 1, 2000.
The Company does not have any information technology systems. Affiliates
of the Advisor provide all services requiring the use of information technology
systems pursuant to a management agreement with the Company. The Advisor and
affiliates have established a team dedicated to reviewing the internal
information technology systems used in the operation of the Company, and the
information technology and embedded systems and the Year 2000 compliance plans
of the Company's significant suppliers, financial institutions and transfer
agent.
<PAGE>
Results of Operations - Continued
The information technology infrastructure of the affiliates of the Advisor
consists of a network of personal computers and servers that were obtained from
major suppliers. The affiliates utilize various administrative and financial
software applications on that infrastructure to perform the business functions
of the Company. The inability of the Advisor and affiliates to identify and
timely correct material Year 2000 deficiencies in the software and/or
infrastructure could result in an interruption in, or failure of, certain of the
Company's business activities or operations. Accordingly, the Advisor and
affiliates have requested and are evaluating documentation from the suppliers of
the affiliates regarding the Year 2000 compliance of their products that are
used in the business activities or operations of the Company. The costs expected
to be incurred by the Advisor and affiliates to become Year 2000 compliant will
be incurred by the Advisor and affiliates; therefore, these costs will have no
impact on the Company's financial position or results of operations.
The Company has material third party relationships with its financial
institutions and transfer agent. The Company depends on its financial
institutions for availability of cash and its transfer agent to maintain and
track investor information. If either of these third parties are unable to meet
their obligations to the Company because of the Year 2000 deficiencies, such a
failure may have a material impact on the Company. Accordingly, the Advisor has
requested and is evaluating documentation from the Company's financial
institutions and transfer agent relating to their Year 2000 compliance plans. At
this time, the Advisor has not yet received sufficient certifications to be
assured that the financial institutions and transfer agent have fully considered
and mitigated any potential material impact of the Year 2000 deficiencies.
Therefore, the Advisor does not, at this time, know of the potential costs to
the Company of any adverse impact or effect of any Year 2000 deficiencies by
these third parties.
The Advisor currently expects that all year 2000 compliance testing and
any necessary remedial measures on the information technology systems used in
the business activities and operations of the Company will be completed prior to
June 30, 1999. Based on the progress the Advisor and affiliates have made in
identifying and addressing the Company's Year 2000 issues and the plan and
timeline to complete the compliance program, the Advisor does not foresee
significant risks associated with the Company's Year 2000 compliance at this
time. Because the Advisor and affiliates are still evaluating the status of the
systems used in business activities and operations of the Company and the
systems of the third parties with which the Company conducts its business, the
Advisor has not yet developed a comprehensive contingency plan and is unable to
identify "the most reasonably likely worst case scenario" at this time. As the
Advisor identifies significant risks related to the Company's Year 2000
compliance or if the Company's Year 2000 compliance program's progress deviates
substantially from the anticipated timeline, the Advisor will develop
appropriate contingency plans.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. Inapplicable.
Item 2. Changes in Securities and Use of Proceeds.
(d) The information required by this item is set forth in Part I.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations and is hereby incorporated
by reference.
Item 3. Defaults upon Senior Securities. Inapplicable.
Item 4. Submission of Matters to a Vote of Security Holders.
On September 15, 1998, the sole stockholder of the Registrant
consented to the amendment and restatement of the Articles of
Incorporation of the Registrant (which amendment and
restatement did not differ from the form included in the
Registrant's Registration Statement on Form S-11, No.
333-47411).
Item 5. Other Information. Inapplicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits - None.
(b) No reports on Form 8-K were filed during the quarter ended
September 30, 1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
DATED this day of November, 1998.
CNL HEALTH CARE PROPERTIES, INC.
By: /s/ James M. Seneff, Jr.
--------------------------------
JAMES M. SENEFF, JR.
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
By: /s/ Robert A. Bourne
---------------------------------
ROBERT A. BOURNE
Director and President
(Principal Financial and
Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
balance sheet of CNL Health Care Properties, Inc. at September 30, 1998
and is qualified in its entirety by reference to the Form 10-Q of CNL
Health Care Properties, Inc. for the nine months ended September 30, 1998.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 77
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 549,743
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 0
0
0
<COMMON> 200
<OTHER-SE> 199,800
<TOTAL-LIABILITY-AND-EQUITY> 549,743
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>Due to the nature of the industry, CNL Health Care Properties,
Inc. has an unclassified balance sheet; therefore, no values are shown
above for current assets and current liabilities.
</FN>
</TABLE>
