<PAGE> 1 UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------------
FORM 10-Q
(Mark One)
__X__ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
_____ For the quarterly period ended: September 30, 1995
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 1-11345
--------------------------------
CAPSTONE CAPITAL CORPORATION
(Exact name of Registrant as specified in its charter)
Maryland 63-1115479
(State or other (I.R.S.
jurisdiction of Employer
incorporation or Identificat
organization) ion No.)
1000 Urban Center Drive
Suite 630
Birmingham, Alabama 35242
(Address of principal executive offices)
(205) 967-2092
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all
reports to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that 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 May 14, 1996, 10,556,855 shares of the Registrant's Common Stock
$.001 par value, were outstanding.
<PAGE>
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CAPSTONE CAPITAL CORPORATION
FORM 10-Q
March 31, 1996
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
Part I - Financial Information
<S> <C> <C>
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Income 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Part II - Other Information
Item 6. Exhibits 13
Signatures 14
</TABLE>
<PAGE>
<PAGE> 3
Capstone Capital Corporation
Condensed Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
ASSETS Mar. 31, 1996 Dec. 31, 1995
------------- -------------
<S> <C> <C>
Real estate properties
Land $25,512,901 $ 24,669,023
Land improvements 2,350,308 2,350,309
Buildings and improvements 209,304,593 185,771,380
Construction in progress 74,596 37,409
------------ ------------
237,242,398 212,828,121
Less accumulated depreciation (6,756,539) (5,570,953)
------------ ------------
Real estate properties, net 230,485,859 207,257,168
Mortgage notes receivable 26,069,971 24,988,753
Cash 1,007,611 675,568
Other assets 5,471,097 7,703,394
------------ ------------
Total assets $263,034,538 $240,624,883
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Convertible subordinated debentures $43,805,000 $43,947,000
Bank credit facility 52,375,000 30,225,000
Other liabilities 3,277,127 2,706,228
------------ ------------
Total liabilities 99,457,127 76,878,228
Stockholders' equity ------------ ------------
Preferred stock, $.001 par value,
10,000,000 shares authorized;
none issued 0 0
Common stock, $0.001 par value,
50,000,000 shares authorized;
9,939,000 shares and 9,929,732 shares
issued and outstanding, respectively 9,939 9,929
Additional paid-in-capital 162,835,540 162,735,711
Loans to officers to finance
stock purchases (276,944) (286,944)
Cumulative net income 18,610,773 14,471,125
Cumulative dividends (17,601,897) (13,183,166)
------------ ------------
Total stockholders' equity 163,577,411 163,746,655
------------ ------------
Total liabilities and stockholders' equity $263,034,538 $240,624,883
============ ============
</TABLE>
(The accompanying notes are an integral part of this financial statement)
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Capstone Capital Corporation
Condensed Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended
March 31,
---------------
1996 1995
------------ ------------
<S> <C> <C>
Revenues:
Rental income $ 6,518,828 $4,480,104
Mortgage interest income 867,910 370,079
Other income 55,432 12,796
------------ ------------
Total Income 7,442,170 4,862,979
------------ ------------
Expenses:
General and administrative 335,727 296,666
Depreciation 1,190,768 812,065
Amortization 161,340 62,651
Interest 1,614,687 1,289,122
------------ ------------
Total expenses 3,302,522 2,460,504
Net income $ 4,139,648 $2,402,475
============ ============
Net Income Per Share $0.42 $0.40
============ ============
Funds From Operations
(See Note 2) $ 4,966,144 $2,916,106
============ ============
Funds From Operations
Per Share:
Primary $0.50 $0.49
============ ============
Fully Diluted $0.48 --
============
Weighted Averages Shares
Outstanding
Primary 9,933,902 5,980,000
============ ============
Fully Diluted 12,838,980 --
============
</TABLE>
(The accompanying notes are an integral part of this financial statement).
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Capstone Capital Corporation
Condensed Consolidated Statements of Cash Flow
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended
March 31,
-------------------------------------
1996 1995
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $4,139,648 $2,402,475
Depreciation of real estate 1,184,494 806,194
Other depreciation 6,274 5,871
Amortization of convertible debenture
issuance costs 67,826 --
Other amortization 93,514 62,651
Increase in accrued rental income (525,612) (361,085)
Decrease(increase) in receivables and other assets (306,081) 16,685
Increase in accrued interest expense 1,220,049 272
Decrease in accrued expenses and other liabilities (732,480) (3,657)
------------ ------------
Net cash provided by operating activities 5,147,632 2,929,406
------------ ------------
Cash flows from investing activities:
Acquisition of real estate properties (21,514,278) (24,572,240)
Investment in mortgage notes receivable (1,104,293) (464,105)
Collections on mortgage notes receivable 23,075 13,604
------------ ------------
Net cash used in investing activities (22,595,496) (25,022,741)
------------ ------------
Cash flows from financing activities:
Increase (decrease) in long-term notes payable 22,150,000 (23,800,000)
Proceeds from issuance of convertible
subordinated debentures - 50,000,000
Financing costs related to issuance of
convertible subordinated debentures - (1,500,000)
Capital contributions from minority interests 29,099 -
Payment of dividends (4,418,731) (2,541,500)
Proceeds from dividend reinvestment plan 9,539 -
Decrease in loans to finance stock purchases 10,000 -
------------ ------------
Net cash from financing activities 17,779,907 22,158,500
------------ ------------
Increase in cash 332,043 65,165
Cash, beginning of period 675,568 330,654
------------ ------------
Cash, end of period $1,007,611 $395,819
============ ============
</TABLE>
(The accompanying notes are an integral part of this financial statement).
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Capstone Capital Corporation
Notes to Condensed Consolidated Financial Statements
March 31, 1996
(Unaudited)
Note 1. Basis of Presentation and Organization
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by generally accepted
accounting principles for complete financial statements which are included in
the Capstone Capital Corporation (the Company ) Annual Report on Form 10-K
for the period ended December 31, 1995. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary
for a fair presentation have been included. These financial statements
should be read in conjunction with the financial statements included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1995.
The Company is an indefinite life real estate investment trust ( REIT )
which was incorporated in Maryland on March 31, 1994. The Company commenced
operations on June 30, 1994 with the receipt of proceeds from the sale of
5,980,000 shares of common stock. The Company invests in income-producing,
healthcare-related properties through acquisition or development of
facilities for lease or by provision of mortgage financing to healthcare
operators.
Note 2. Summary of Significant Accounting Policies
Basis of Presentation - The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries and its majority-
owned partnerships. Intercompany accounts and transactions have been
eliminated.
Real Estate Properties - Real estate properties are recorded at cost.
Acquisition costs and transaction fees are added to the purchase price. No
allowance for investment losses is considered necessary. The cost of real
estate properties acquired is allocated among land, land improvements, and
buildings and improvements based upon estimated market values at the time of
acquisition. Depreciation is provided for on a straight-line basis over the
following estimated useful life:
<TABLE>
<S> <C>
Building and improvements 40.0 years
Land improvements 20.0 years
</TABLE>
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Federal Income Taxes - No provision has been made for federal income taxes.
The Company intends at all times to qualify as a real estate investment trust
under sections 856 through 860 of the Internal Revenue Code of 1986, as
amended. The Company must distribute at least 95% of its real estate
investment trust taxable income to its stockholders and meet other
requirements to continue to qualify as a real estate investment trust.
Rental Income - Rental income is recognized as earned over the life of the
lease agreements. Certain of the leases provide for scheduled annual rent
increases. These rent increases are recognized on a straight-line basis over
the term of the lease.
Mortgage Interest Income - Mortgage interest income is recognized based on
the interest rates and the outstanding principal amounts of the mortgage
notes receivable. Certain of the mortgage notes receivable provide for
scheduled annual interest rate increases.
Net Income Per Share - Net income per share is computed using the weighted
average number of shares outstanding during the period.
Funds From Operations - Funds from operations is computed as net income
(determined in accordance with generally accepted accounting principles),
excluding rent income recognized on a straight-line basis on those leases
with scheduled rent increases and gains (or losses) from debt restructuring
and sales of properties, plus depreciation and amortization.
<TABLE>
<CAPTION>
For The For The
Reconciliation of net income to Quarter Ended Quarter Ended
funds from operations Mar. 31, 1996 Mar. 31, 1995
------------ ------------
<S> <C> <C>
Net income $4,139,648 $2,402,475
Add: Depreciation and amortization 1,352,108 874,716
Less: Straight-line rental income (525,612) (361,085)
------------ ------------
Funds from operations $4,966,144 $2,916,106
============ ============
</TABLE>
Note 3. Real Estate Properties
Real estate properties as of March 31, 1996 total $237,242,398 and
include sixteen ancillary hospital facilities, seven physician clinics, five
ambulatory surgery facilities, three outpatient rehabilitation facilities,
two comprehensive mental health hospitals, two inpatient rehabilitation
facilities, two sub-acute care facilities, and one long-term care facility.
The properties are located in thirteen states and are leased to ten
healthcare-related entities or their subsidiaries pursuant to long-term
leases.
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The Company's properties are generally leased pursuant to fixed term
operating leases expiring from 2004 to 2010 and provide for options to extend
the lease terms for at least ten years. The leases generally provide the
lessees, during the terms of the leases and for a short period of time
following expiration, with the right of first refusal to purchase the leased
property on the same terms and conditions as the Company may propose to a
third party.
Each lease generally requires the lessee to pay base rent, additional
rent commencing after the first year based either on either a set percentage
increase or on a percentage increase in the consumer price index, and all
taxes (including property taxes), maintenance and other operating costs
associated with the leased property.
Note 4. Mortgage Notes Receivable
As of March 31, 1996, the Company had provided $26,069,971 in mortgage
financing for seven properties located in three states. The mortgage notes
receivable are secured by the real estate of five long-term care facilities,
one acute-care hospital facility and one ancillary hospital facility which
are operated by four healthcare operators.
The mortgage notes receivable require monthly installments of principal
and interest with final payment dates in or before 2009 and bear rates
ranging from 11.07 percent to 13.0 percent at March 31, 1996. Each mortgage
note receivable provides for an initial interest rate to be increased
annually by either a set rate or upon an increase in the consumer price
index.
The Company had no impaired mortgage notes receivable at or during the
quarter ended March 31, 1996.
Note 5. Bank Credit Facility
The Company has a $100,000,000 unsecured line of credit ( Bank Credit
Facility ) from a consortium of seven banks led by NationsBank of Georgia,
N.A. (the Bank). At March 31, 1996, the Company had drawn $52,375,000 against
the Bank Credit Facility for the purchase of real estate properties and the
funding of mortgage loans.
Borrowing under the Bank Credit Facility bears interest at a rate chosen
by the Company from either the Bank s base rate or LIBOR plus a percentage
rate ranging from 1.25 percent to 2.00 percent depending upon the Company's
senior debt to consolidated tangible net worth ratio for the preceding fiscal
quarter. In addition, the Company pays a commitment fee of either 0.25
percent to 0.38 percent per annum on the unused portion of funds available
for borrowing under the Bank Credit Facility. The commitment fee percentage
is based on the Company s senior debt to tangible net worth ratio.
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<PAGE> 9
The Bank Credit Facility contains certain representations, warranties
and financial and other covenants customary in such loan agreements. The
Bank Credit Facility is available until June 22, 1997.
Note 6. Convertible Subordinated Debentures
As of March 31, 1996 the Company had $43,805,000 aggregate principal
amount of 10.50% convertible subordinated debentures (the "Debentures")
outstanding. The Debentures are due on April 1, 2002 and interest is payable
semiannually on April 1 and October 1 of each year. During the quarter ended
March 31, 1996, a total of $142,000 of principal amount of Debentures was
converted into shares of common stock of the Company at the conversion price
of $16.125 per share. These conversions resulted in an increase of 8,806 in
the outstanding shares of the common stock of the Company, an increase of
$141,997 in stockholders' equity and a decrease of $142,000 in the
outstanding balance of the Debentures.
Note 7. Commitments and Contingencies
During 1995, the Company committed to fund a $8.51 million construction
and term loan for an ancillary hospital facility. As of March 31, 1996, the
Company had advanced a total of $5.64 million with the remaining balance
expected to be funded during 1996.
The Company is developing a $2.68 million expansion to an existing
ambulatory surgery facility owned by the Company. As of March 31, 1996, the
Company had funded $74,596 toward the construction of the expansion. The
remaining balance is expected to be funded during 1996.
In October 1995, the Company entered into a definitive purchase
agreement with an unrelated healthcare development entity to acquire an
ancillary hospital facility. During January 1996, the facility was purchased
for $30 million by a joint venture between the Company and an affiliate of
the unrelated healthcare development entity. As of March 31, 1996, the
Company had invested approximately $22.88 million in the joint venture, the
proceeds of which were used to fund a portion of the purchase price. The
Company has committed to invest up to an additional $4.12 million in the
joint venture to fund a portion of the remaining balance of the purchase
price. The Company expects to disburse the remainder of these funds prior to
June 30, 1996. Additionally, the joint venture expects to receive prior to
June 30, 1996 up to $23.3 million in mortgage financing proceeds of which up
to $22.97 million will be refunded to the Company.
The Company believes it has sufficient liquidity and financing
capabilities to finance the committments.
- 9 - <PAGE>
<PAGE> 10
Note 8. Subsequent Events
On April 18, 1996, the Company committed, subject to due diligence, to
fund approximately $19 million toward a construction and term loan for an
acute care hospital. The loan is to be secured by a mortgage on the
facility.
On April 23, 1996, the Company declared a dividend of $0.445 per share
to the holders of common stock on May 1, 1996. The dividend will be paid in
cash on May 15, 1996. The dividend related to the quarter ended March 31,
1996.
On May 10, 1996, the Company acquired two inpatient rehabilitation
hospitals located in Pennslyvania. The properties' acquisition price totaled
approximately $29.5 million. The properties are leased to a healthcare-
related entity pursuant to long term operating leases.
For the period from April 1 through May 13, 1996, a total of $9,963,000
of principal amount of Debentures has been converted into shares of common
stock of the Company at the conversion price of $16.125 per share. The
conversions resulted in an increase of 617,857 in the shares of common stock
of the Company, an increase of $9,962,944 in stockholders' equity and a
decrease of $9,963,000 in the outstanding balance of the Debentures.
- 10 - <PAGE>
<PAGE> 11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations
Revenues for the quarter ended March 31, 1996 totaled $7.4 million,
increasing $2.5 million over March 31, 1995 revenues of $4.9 million. The
increase in revenues is primarily attributable to additional rental and
mortgage interest income from investments made since March 31, 1995.
Specifically, investments in properties increased from $177 million at March
31, 1995 to $237 million at March 31, 1996 and mortgage loans increased from
$13.7 million at March 31, 1995 to $26.1 million at March 31, 1996.
Interest expense for the quarter ended March 31, 1996 totaled $1.6
million, increasing $325,565 over March 31, 1995 interest expense of $1.3
million. The increase is due primarily to an increase in the blended
interest rate on debt outstanding during the quarter ended March 31, 1996, as
compared to the quarter ended March 31, 1995. The increase in the blended
interest rate was attributable to the 10.50% interest rate on the convertible
debentures which were issued in March 1995 and outstanding the entire quarter
ended March 31, 1996.
Depreciation and amortization for the the quarter ended March 31, 1996
totaled $1,352,108 increasing $477,392 over March 31, 1995 depreciation and
amortization of $874,716. $404,409 of the increase is attributable to
depreciation of real estate properties acquired subsequent to March 31, 1995.
Additionally, $67,826 of the increase is due to a full quarter of
amortization of deferred financing costs related to the issuance of $52
million of convertible debentures in March 1995.
General and administrative expenses for the quarter ended March 31, 1996
totaled $335,727, increasing $39,061 over March 31, 1995 general and
administrative expenses of $296,666. The increase is due primarily to
additional administrative and professional services related to the additional
investments made since March 31, 1995.
For the foregoing reasons, net income for the quarter ended March 31,
1996 increased to $4.97 million compared to $2.92 million for the quarter
ended March 31, 1995. Net income per share was $0.42 at March 31, 1996 as
compared to $0.40 at March 31, 1995.
Liquidity and Capital Resources
As of March 31, 1996, the Company had a $100,000,000 unsecured line of
credit (Bank Credit Facility) from a consortium of seven banks led by
NationsBank of Georgia, N.A. (Bank). At March 31, 1996, the outstanding
balance of the Bank Credit Facility was $52,375,000, the entire balance of
which was used for the acquisition of real estate and the funding of mortgage
loans. Due to acquisitions of real estate and the funding of development
projects subsequent to March 31, 1996, as discussed in the notes to the
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<PAGE> 12
financial statements, the balance of the Bank Credit Facility as of May 13,
1996 was $90,175,000.
Interest on the borrowings by the Company under the Bank Credit Facility
is payable at the Company's election at either (a) the base rate, which is a
floating rate equal to the higher of (i) the Federal Funds effective rate
plus 0.50 percent or (ii) the Bank's prime lending rate, or (b) LIBOR plus a
percentage ranging from 1.25 percent to 2.00 percent, varying in inverse
relation to the Company's ratio of consolidated senior debt to consolidated
tangible net worth for the preceding fiscal quarter. In addition, the
Company pays from 0.25 percent to 0.375 percent per annum (depending on the
senior debt to consolidated tangible net worth ratio) on the unused portion
of funds available for borrowing. The Bank Credit Facility, which is
available until June 22, 1997, contains certain representations, warranties
and financial and other covenants customary in such loan agreements.
The Company's current intention is to utilize the Bank Credit Facility
on a short-term basis to finance future investments in property acquisitions
and mortgage financing. The Company is currently evaluating various
alternatives for additional equity and debt financing with which to finance
those investments on a long-term basis.
As more fully discussed in Note 7, prior to June 30, 1996, the Company
expects to receive up to $22.97 million in proceeds from the financing of an
ancillary hospital facility. The Company expects to apply these proceeds as
a repayment of the amount borrowed under the Bank Credit Facility.
During the first quarter of 1996, the Company received approximately
$9,539 from the sale of its shares under the dividend reinvestment plan.
On April 23, 1996, the Company declared a dividend of $0.445 per share
to the holders of common stock on May 1, 1996. The dividend will be paid in
cash on May 15, 1996. The dividend related to the quarter ended March 31,
1996.
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<PAGE> 13
PART II - OTHER INFORMATION
Item 6. Exhibits and Report on Form 8-K
(a) Exhibits
Not applicable
(b) Reports on Form 8-K
A report on Form 8-K was filed by the Company on January 16, 1996
reporting the acquisition of Sunrise Mountainview Medical Center, L.C.,
including information related to Items 2 and 7.
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<PAGE> 14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CAPSTONE CAPITAL CORPORATION
By /s/ Andrew L. Kizer___________
Andrew L. Kizer
Vice President - Finance and
Chief Financial Officer
Date: May 13, 1996
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<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE FINANCIAL
STATEMENTS OF CAPSTONE CAPITAL CORPORATION FOR THE QUARTER ENDED MARCH 31, 1996,
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 1007611
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 237242398
<DEPRECIATION> 6756539
<TOTAL-ASSETS> 263034538
<CURRENT-LIABILITIES> 0
<BONDS> 43805000
0
0
<COMMON> 9939
<OTHER-SE> 181169369
<TOTAL-LIABILITY-AND-EQUITY> 263034538
<SALES> 0
<TOTAL-REVENUES> 7442170
<CGS> 0
<TOTAL-COSTS> 1352108
<OTHER-EXPENSES> 335727
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1614687
<INCOME-PRETAX> 4139648
<INCOME-TAX> 0
<INCOME-CONTINUING> 4139648
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4139648
<EPS-PRIMARY> 0.42
<EPS-DILUTED> 0.41
</TABLE>
