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 March 31, 1999
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 X No
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 May 6, 1999.
<PAGE>
CONTENTS
Part I Page
Item 1. Financial Statements:
Balance Sheets 1
Statements of Stockholder's Equity 2
Notes to Financial Statements 3-5
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 6-10
Item 3. Quantitative and Qualitative Disclosures
about Market Risk 10
Part II
Other Information 11
<PAGE>
CNL HEALTH CARE PROPERTIES, INC.
(A Development Stage Maryland Corporation)
BALANCE SHEETS
March 31, December 31,
1999 1998
--------------- ----------------
ASSETS
Cash $ 92 $ 92
Deferred offering costs 1,103,922 975,339
Other 11,205 1,148
-------------- ------------
1,115,219 $976,579
============== ============
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Due to related parties $911,689 $685,372
Accounts payable and accrued expenses 3,530 91,207
-------------- ------------
Total liabilities 915,219 776,579
-------------- ------------
Stockholder's equity:
Preferred stock, without par value.
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 shares, issued and
outstanding 20,000 shares 200 200
Capital in excess of par value 199,800 199,800
-------------- ------------
200,000 200,000
-------------- ------------
$1,115,219 $976,579
============== ============
See accompanying notes to financial statements.
<PAGE>
CNL HEALTH CARE PROPERTIES, INC.
(A Development Stage Maryland Corporation)
STATEMENTS OF STOCKHOLDER'S EQUITY
Quarter Ended March 31, 1999 and
Year Ended December 31, 1998
<TABLE>
<CAPTION>
Common stock Capital in
-----------------------
Number Par excess of
of Shares value par value Total
---------- --------- ------------- ------------
<S> <C>
Balance at December 31, 1997 20,000 $200 $199,800 $200,000
Subscriptions received for common
stock through public offering 2,550 26 25,474 25,500
Subscriptions held in escrow (2,550 ) (26 ) (25,474 ) (25,500 )
---------- -------- ------------ ------------
Balance at December 31, 1998 20,000 200 199,800 200,000
Subscriptions received for common
stock through public offering 22,350 224 223,276 223,500
Subscriptions held in escrow (22,350 ) (224 ) (223,276 ) (223,500 )
---------- -------- ------------ ------------
Balance at March 31, 1999 20,000 $200 $199,800 $200,000
========== ======== ============ ============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
CNL HEALTH CARE PROPERTIES, INC.
(A Development Stage Maryland Corporation)
NOTES TO FINANCIAL STATEMENTS
Quarters Ended March 31, 1999 and 1998
1. Significant Accounting Policies:
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. Operating results for
the quarter ended March 31, 1999, may not be indicative of the results
that may be expected for the year ending December 31, 1999. Amounts as
of December 31, 1998, included in the financial statements, have been
derived from audited financial statements as of that date.
These unaudited financial statements should be read in conjunction with
the financial statements and notes thereto included in the Company's
Form 10-K for the year ended December 31, 1998.
The Company is in the development stage and has not begun operations.
New Accounting Standard - In April 1998, the American Institute of
Certified Public Accountants issued Statement of Position ("SOP") 98-5,
"Reporting on the Costs of Start-Up Activities," which became effective
for the Company January 1, 1999. This SOP requires start-up and
organization costs to be expensed as incurred and also requires
previously deferred start-up costs to be recognized as a cumulative
effect adjustment in the statement of earnings. The Company plans to
expense $20,000 of organization costs once it becomes operational.
Management of the Company does not believe the adoption of this SOP
will have a material effect on the Company's financial position.
2. 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 affiliates
of the Company.
3. 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.
<PAGE>
CNL HEALTH CARE PROPERTIES, INC.
(A Development Stage Maryland Corporation)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Quarters Ended March 31, 1999 and 1998
3. Related Party Arrangements - Continued:
CNL Securities Corp. is entitled to receive commissions amounting to
7.5% of the total amount raised from the sale of shares for services in
connection with the offering of the shares, a substantial portion of
which will be paid as commissions to other broker-dealers. During the
quarter ended March 31, 1999, the Company incurred $16,763 of such
fees, of which $14,945 will be paid by CNL Securities Corp. as
commissions to other broker-dealers. These fees will not be paid until
subscriptions for at least 250,000 shares ($2,500,000) have been
obtained from the offering.
In addition, CNL Securities Corp. is entitled to receive a marketing
support and due diligence expense reimbursement fee equal to 0.5% of
the total amount raised from the sale of shares, a portion of which may
be reallowed to other broker-dealers. During the quarter ended March
31, 1999, the Company incurred $1,118 of such fee, the majority of
which will be reallowed to other broker-dealers and from which all bona
fide due diligence expenses will be paid. These fees will not be paid
until subscriptions for at least 250,000 shares ($2,500,000) have been
obtained from the offering.
In addition, the Company has agreed to issue and sell soliciting dealer
warrants ("Soliciting Dealer Warrants") to CNL Securities Corp. 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, except 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.
CNL Health Care Advisors, Inc. is entitled to receive acquisition fees
for services in finding, negotiating the leases of and acquiring
properties on behalf of the Company equal to 4.5% of gross proceeds,
loan proceeds from permanent financing and amounts outstanding on the
line of credit, if any, at the time of listing of the shares on a
national securities exchange or over-the-counter market, but excluding
that portion of the permanent financing used to finance secured
equipment leases. During the quarter ended March 31, 1999, the Company
incurred $10,058 of such fees. Such fees are included in other assets
at March 31, 1999. These fees will not be paid until subscriptions for
at least 250,000 shares ($2,500,000) have been obtained from the
offering.
<PAGE>
CNL HEALTH CARE PROPERTIES, INC.
(A Development Stage Maryland Corporation)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Quarters Ended March 31, 1999 and 1998
3. Related Party Arrangements - Continued:
CNL Health Care Advisors, Inc. and its affiliates provide various
administrative services to the Company, including services related to
accounting; financial, tax and regulatory compliance reporting;
stockholder distributions and reporting; due diligence and marketing;
and investor relations (including administrative services in connection
with the offering), on a day-to-day basis. For the quarters ended March
31, 1999 and 1998, $70,291 and $12,629, respectively, were classified
as deferred offering costs for these services.
Amounts due to related parties consisted of the following at:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
-------------- ---------------
<S> <C>
Due to CNL Health Care Advisors, Inc.:
Expenditures incurred on behalf of the
Company $599,587 $470,798
Accounting and administrative services 281,677 211,386
Acquisition fees 11,205 1,148
--------------- ----------------
892,469 683,332
--------------- ----------------
Due to CNL Securities Corp.:
Commissions 17,975 1,912
Marketing support and due diligence
expense reimbursement fee 1,245 128
--------------- ----------------
19,220 2,040
--------------- ----------------
$911,689 $685,372
=============== ================
</TABLE>
4. Subsequent Event:
During the period April 1, 1999 through April 23, 1999, the Company
received subscription proceeds of 65,699 shares ($656,990) of common
stock.
<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 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.
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 CNL Health Care Advisors, Inc.
(the "Advisor") is the Company's sole source of capital until the Company sells
the minimum number of 250,000 Shares ($2,500,000). As of April 23, 1999,
subscription funds totalling $905,990 have been deposited with the escrow agent
for the offering. Until subscription proceeds for the Company total at least
$2,500,000 (250,000 Shares), the proceeds will be held in escrow. In the event
subscriptions for at least 250,000 shares are not obtained by September 18,
1999, the subscriptions will be returned promptly with interest to investors.
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 may 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 March 31, 1999 and December 31, 1998, the Company's total assets
were $1,115,219 and $976,579, respectively. The increase in total assets
reflects deferred offering expenses incurred during the three months ended March
31, 1999.
During the quarters ended March 31, 1999 and 1998, affiliates of the
Company incurred $128,789 and $146,489, respectively, for certain organizational
and offering expenses. As of March 31, 1999 and 1998, the Company owed
affiliates $911,689 and $82,378, respectively, for such amounts, unpaid fees and
administrative expenses. In the event the minimum offering proceeds are not
received by the Company, the Company will have no obligation to repay such
amounts. Further, the Advisor of the Company has agreed to pay all
organizational and offering expenses (excluding selling commissions and
marketing support and due diligence expense reimbursement fees) 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 March 31 1999, 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 is not expected to exceed 10% of the Company's total assets.
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 March 31, 1999, 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.
Year 2000 Compliance
The Year 2000 problem concerns the inability of information and
non-information technology systems to properly recognize and process
date-sensitive information beyond January 1, 2000. The Company does not have any
information or non-information technology systems. The Advisor and affiliates of
the Advisor provide all services requiring the use of information and
non-information technology systems pursuant to an advisory agreement with the
Company. The information technology system of the affiliates of the Advisor
consists of a network of personal computers and servers built using hardware and
software from mainstream suppliers. The non-information technology systems of
the affiliates of the Advisor are primarily facility related and include
building security systems, elevators, fire suppressions, HVAC, electrical
systems and other utilities. The affiliates of the Advisor have no internally
generated programmed software coding to correct, as substantially all of the
software utilized by the Advisor and affiliates is purchased or licensed from
external providers.
<PAGE>
Year 2000 Compliance - Continued
In early 1998, the Advisor and affiliates formed a Year 2000 committee
(the "Y2K Team") for the purpose of identifying, understanding and addressing
the various issues associated with Year 2000 compliance. The Y2K Team consists
of members from the Advisor and its affiliates, including representatives from
senior management, information systems, telecommunications, legal, office
management, accounting and property management. The Y2K Team's initial step in
assessing the Company's Year 2000 ("Y2K") readiness consists of identifying any
systems that are date sensitive and, accordingly, could have potential Y2K
problems. The Y2K Team is in the process of conducting inspections, interviews
and tests to identify which of the Company's systems could have a potential Y2K
problem.
The information system of the Advisor and its affiliates is comprised
of hardware and software applications from mainstream suppliers; accordingly,
the Y2K Team is in the process of contacting the respective vendors and
manufacturers to verify the Y2K compliance of their products. In addition, the
Y2K Team has also requested and is evaluating documentation from other companies
with which the Company has a material third party relationship, including the
Company's major vendors, financial institutions and transfer agent. The Company
depends on its financial institutions for availability of cash and financing and
its transfer agent to maintain and track investor information. The Y2K Team has
also requested and is evaluating documentation from the non-information
technology systems providers of the Advisor and affiliates. Although the Advisor
continues to receive positive responses from its third party relationships
regarding their Y2K compliance, the Advisor cannot be assured that the financial
institutions, transfer agent, other vendors and non-information technology
system providers have adequately considered the impact of the Year 2000. The
Advisor is not able to measure the effect on the operations of the Advisor and
its affiliates of any third party's failure to adequately address the impact of
the Year 2000.
The Advisor and its affiliates have identified and have implemented
upgrades for certain hardware equipment. In addition, the Advisor and its
affiliates have identified certain software applications which will require
upgrades to become Year 2000 compliant. The Advisor expects all of these
upgrades as well as any other necessary remedial measures on the information
technology systems used in the business activities and operations of the Company
to be completed by September 30, 1999, although, the Advisor cannot be assured
that the upgrade solutions provided by the vendors have addressed all possible
Year 2000 issues. The Advisor does not expect the aggregate cost of the Year
2000 remedial measures to be material to the results of operations of the
Company.
The Advisor and affiliates have received certification from the
Company's transfer agent of its Y2K compliance. Due to the material relationship
of the Company with its transfer agent, the Y2K Team is evaluating the Year 2000
compliance of the systems of the transfer agent and expects to have the
evaluation completed by September 30, 1999. Despite the positive response from
the transfer agent and the evaluation of the transfer agent's system by the Y2K
Team, the Advisor cannot be assured that the transfer agent has addressed all
possible Year 2000 issues. In the event that the systems of the transfer agent
are not Y2K compliant, the worst case scenario of the Advisor would be that the
Advisor would have to allocate resources to internally perform the functions of
the transfer agent. The Advisor does not anticipate that the additional cost of
these resources would have a material impact on the Company.
<PAGE>
Year 2000 Compliance - Continued
Based upon the progress the Advisor and affiliates have made in
addressing the Year 2000 issues and their plan and timeline to complete the
compliance program, the Advisor does not foresee significant risks associated
with its Year 2000 compliance at this time. The Advisor plans to address its
significant Y2K issues prior to being affected by them; therefore, it has not
developed a comprehensive contingency plan. However, if the Advisor identifies
significant risks related to its Year 2000 compliance or if its progress
deviates from the anticipated timeline, the Advisor will develop contingency
plans as deemed necessary at that time.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Not applicable.
<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 February 19, 1999, at a special meeting in lieu of an
annual meeting, the sole stockholder of the Registrant
re-elected James M. Seneff, Jr., Robert A. Bourne, David W.
Dunbar, Timothy S. Smick and Edward A. Moses to serve as
directors of the company.
Item 5. Other Information. Inapplicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
27. Financial Data Schedule (Filed herewith.)
(b) No reports on Form 8-K were filed during the quarter ended
March 31, 1999.
<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 11th day of May, 1999.
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
March 31, 1999 and is qualified in its entirety by reference
to the Form 10-Q of CNL Heatlh Care Properties, Inc. for the
three months ended March 31, 1999.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-Mos
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Jan-01-1999
<PERIOD-END> Mar-31-1999
<CASH> 92
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,115,219
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 0
0
0
<COMMON> 200
<OTHER-SE> 199,800
<TOTAL-LIABILITY-AND-EQUITY> 1,115,219
<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>
