<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: March 31, 1997
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 jurisdiction of (I.R.S. Employer
incorporation or organization) Identification 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 13, 1997, 14,774,726 shares of the Registrant's
Common Stock $.001 par value, were outstanding.
<PAGE> 2
CAPSTONE CAPITAL CORPORATION
FORM 10-Q
March 31, 1997
TABLE OF CONTENTS
Part I - Financial Information
<TABLE>
<S> <C>
Item 1. Condensed Consolidated Financial Statements Page
Condensed Consolidated Balance Sheets 2
Condensed Consolidated Statements of Income 3
Condensed Consolidated Statements of Cash Flows 4
Notes to Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Part II - Other Information
Item 6. Exhibits 11
Signatures 12
</TABLE>
1
<PAGE> 3
Capstone Capital Corporation
Condensed Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
ASSETS Mar. 31, 1997 Dec. 31, 1996
------------- -------------
<S> <C> <C>
Real estate properties
Land $ 32,602,509 $ 30,952,673
Land improvements 2,350,308 2,350,309
Buildings and improvements 298,375,298 269,261,047
Construction in progress 21,768,400 12,650,780
------------ ------------
355,096,515 315,214,809
Less accumulated depreciation (12,910,329) (11,217,391)
------------ ------------
Real estate properties, net 342,186,186 303,997,418
Mortgage notes receivable 67,505,591 39,325,621
Cash 1,178,724 1,122,241
Accrued rental income 5,343,710 4,689,976
Other assets 11,305,286 7,559,860
------------ ------------
Total assets $427,519,497 $356,695,116
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Convertible subordinated debentures- 10.5% $17,000,000 $17,657,000
Convertible subordinated debentures- 6.55% 67,310,175 -
Bank credit facility 68,800,000 68,500,000
Mortgage note payable 23,184,447 23,228,417
Accrued expenses and other liabilities 9,647,077 5,754,180
------------ ------------
Total liabilities 185,941,699 115,139,597
------------ ------------
Stockholders' equity
Preferred stock, $0.001 par value,
10,000,000 shares authorized;
none issued 0 0
Common stock, $0.001 par value,
50,000,000 shares authorized;
14,289,769 shares and 14,247,947 shares
issued and outstanding, respectively 14,290 14,247
Additional paid-in-capital 241,253,769 240,832,943
Loans to officers to finance stock purchases (286,944) (286,944)
Cumulative net income 39,629,886 33,384,814
Cumulative dividends (39,033,203) (32,389,541)
------------ ------------
Total stockholders' equity 241,577,798 241,555,519
------------ ------------
Total liabilities and stockholders' equity $427,519,497 $356,695,116
============ ============
</TABLE>
The accompanying notes are an integral part of this financial statement.
2
<PAGE> 4
Capstone Capital Corporation
Condensed Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended
March 31,
-----------------------
1997 1996
----------- ----------
<S> <C> <C>
Revenues:
Rental income $ 9,679,607 $6,518,828
Mortgage interest income 1,363,648 867,910
Other income 240,815 55,432
----------- ----------
Total Income 11,284,070 7,442,170
----------- ----------
Expenses:
General and administrative 555,859 335,727
Depreciation 1,707,911 1,190,768
Amortization 78,227 161,340
Interest 2,551,352 1,614,687
Property operations 145,649 -
----------- ----------
Total expenses 5,038,998 3,302,522
----------- ----------
Net income $ 6,245,072 $ 4,139,648
=========== ===========
Net Income Per Share $ 0.43 $ 0.42
=========== ===========
Funds From Operations
(See Note 2) $ 7,377,476 $ 4,966,144
=========== ===========
Funds From Operations
Per Share:
Primary $ 0.51 $ 0.50
=========== ===========
Fully Diluted $ 0.51 $ 0.48
=========== ===========
Weighted Averages Shares
Outstanding
Primary 14,522,041 9,933,902
=========== ===========
Fully Diluted 16,252,924 12,838,980
=========== ===========
</TABLE>
The accompanying notes are an integral part of this financial statement
3
<PAGE> 5
Capstone Capital Corporation
Condensed Consolidated Statements of Cash Flow
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended
March 31,
------------------------------------
1997 1996
------------ -------------
<S> <C> <C>
Cash flows from operating activities:
Net income $6,245,072 $4,139,648
Depreciation 1,707,911 1,190,768
Amortization 228,527 161,340
Increase in accrued rental income (653,734) (525,612)
Increase in receivables and other assets (2,327,067) (306,081)
Increase in accrued expenses and
other liabilities 3,892,826 487,569
------------ ------------
Net cash provided by operating activities 9,093,535 5,147,632
------------ ------------
Cash flows from investing activities:
Acquisition of real estate properties (39,881,707) (21,514,278)
Investment in mortgage notes receivable (28,249,594) (1,104,293)
Collections on mortgage notes receivable 69,624 23,075
------------ ------------
Net cash used in investing activities (68,061,677) (22,595,496)
------------ ------------
Cash flows from financing activities:
Increase in bank credit facility 300,000 22,150,000
Proceeds from issuance of convertible
subordinated debentures 67,235,025 --
Financing costs related to issuance
of convertible subordinated debentures (1,836,650) --
Financing costs related to stock offering (10,829) --
Payment of dividends (6,643,663) (4,418,731)
Capital contributions from minority interests -- 29,099
Decrease in loans to finance stock purchases -- 10,000
Proceeds from dividend reinvestment plan 24,711 9,539
Principal payments on mortgage note payable (43,969) --
------------ ------------
Net cash from financing activities 59,024,625 17,779,907
------------ ------------
Increase in cash 56,483 332,043
Cash, beginning of period 1,122,241 675,568
------------ ------------
Cash, end of period $1,178,724 $1,007,611
============ ============
</TABLE>
The accompanying notes are an integral part of this financial statement
4
<PAGE> 6
CAPSTONE CAPITAL CORPORATION
Notes to Condensed Consolidated Financial Statements
March 31, 1997
(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, 1996. 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, 1996.
The Company is an indefinite life real estate investment trust ("REIT")
which commenced operations on June 30, 1994. 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. 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, 1997 Mar. 31, 1996
------------- -------------
<S> <C> <C>
Net income $6,245,072 $4,139,648
Add: Depreciation and amortization 1,786,138 1,352,108
Less: Straight-line rental income (653,734) (525,612)
----------- -----------
Funds from operations $7,377,476 $4,966,144
=========== ===========
</TABLE>
5
<PAGE> 7
NOTE 3. REAL ESTATE PROPERTIES
As of March 31, 1997 the Company had investments in 54 leased real estate
properties totaling $333.3 million. These real estate properties consist of and
include sixteen ancillary hospital facilities, ten physician clinics, six
ambulatory surgery facilities, five assisted living facilities, five skilled
nursing facilities, four inpatient rehabilitation facilities, three outpatient
rehabilitation facilities, two comprehensive mental health hospitals, two
sub-acute care facilities and one integrated delivery facility. The properties
are located in fourteen states and are leased to thirteen healthcare-related
entities or their subsidiaries pursuant to long-term leases. In addition, the
Company has invested approximately $21.8 million in fourteen development
projects at various stages of completion. The Company has remaining commitments
of approximately $74.1 million for development projects and expects all projects
to be completed by the first quarter of 1998.
The Company's properties are generally leased pursuant to fixed term
operating leases expiring from 2001 to 2012 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 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, 1997, the Company had provided $67.5 million in mortgage
financing for 22 properties located in nine states. The mortgage notes
receivable are secured by the real estate of 12 skilled nursing facilities, six
assisted living facilities, two acute-care hospitals, one integrated delivery
facility and one ancillary hospital facility which are operated by 15 healthcare
operators.
Eight of the facilities are under construction, and the Company has
committed a total of $51.5 million in construction and term loans for these
projects. As of March 31, 1997, the Company had advanced a total of $17.3
million toward these financing commitments. The Company expects to disburse the
remainder of the committed funds during 1997.
The mortgage notes receivable for completed projects ("Permanent Loans")
require monthly installments of principal and interest with final payment dates
in or before 2009 and bear rates ranging from 10.00 percent to 13.39 percent at
March 31, 1997. Each Permanent Loan provides for an initial interest rate to be
increased annually by either a set rate or upon an increase in the consumer
price index. For those projects under construction, the notes receivable
typically bear interest at a floating rate and
6
<PAGE> 8
require monthly payments of interest only. Upon completion of construction, the
outstanding principal balance is converted to a Permanent Loan.
The Company had no impaired mortgage notes receivable at or during the
quarter ended March 31, 1997.
NOTE 5. MORTGAGE NOTE PAYABLE
The Company has a mortgage note payable to a life insurance company for a
principal amount of $23.3 million ("Mortgage Note"). The Mortgage Note bears
interest at 8.5% and is payable in 360 monthly payments of principal and
interest. The Mortgage Note is collateralized by an ancillary hospital
facility purchased in January 1996 for $30 million.
NOTE 6. BANK CREDIT FACILITY
In February 1997 the Company completed an amendment of its unsecured line
of credit ("Bank Credit Facility") which provided for an increase to $170
million from its previous principal amount of $150 million. The Bank Credit
Facility is participated in by a consortium of eight banks. At March 31, 1997,
the Company had drawn $68.8 million against the Bank Credit Facility for the
purchase of real estate properties and the funding of mortgage loans. The Bank
Credit Facility is available until June 24, 1999.
NOTE 7. CONVERTIBLE SUBORDINATED DEBENTURES
During March 1997, the Company issued $74,750,000 principal amount of
convertible subordinated debentures (the "6.55% Debentures") due March 14, 2002.
The 6.55% Debentures were issued at an issue price of $903 per $1,000 principal
amount at maturity, which represents an original issue discount of 9.70% from
the principal amount thereof which is payable at maturity. Interest on the 6.55%
Debentures is payable March 14 and September 14 in each year, commencing
September 14, 1997. Such rate of interest and accrual of original issue discount
represent a yield to maturity of 9.00% per annum (computed on a semiannual bond
equivalent basis).
The 6.55% Debentures are convertible into common stock of the Company at
any time before maturity at an initial conversion ratio of 39.4754 shares of
common stock for each $1,000 principal amount of 6.55% Debentures, subject to
adjustment in certain events. The 6.55% Debentures are redeemable at the option
of the Company, in whole or in part, after March 16, 2000 at redemption prices
of $989.48 in the year 2000, or $994.14 in the year 2001.
The 6.55% Debentures are unsecured obligations of the Company and are
subordinated to all present and future senior debt of the Company and
structurally subordinated to all existing and future liabilities and obligations
of subsidiaries and partnerships of the Company.
7
<PAGE> 9
NOTE 8.SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental disclosure of cash flow information is as follows:
<TABLE>
<CAPTION>
For the Qtr. For the Qtr.
Ended Ended
March 31, 1997 March 31, 1996
-------------- --------------
<S> <C> <C>
Cash payments for bank credit facility
interest expense $1,225,041 $266,877
Cash payments for convertible subordinated
debenture interest expense 833,019 383,294
Convertible subordinated debentures
converted into shares of common stock:
Convertible subordinated debentures (657,000) (142,000)
Financing costs (249,941) --
Shares of common stock 40,741 8,806
Additional paid in capital 616,259 133,194
</TABLE>
NOTE 9. COMMITMENTS AND CONTINGENCIES
The Company has committed a total of $164.7 million towards the
acquisition and construction of real estate properties and providing mortgage
financing. As of March 31, 1997, the Company had funded approximately $39.1
million towards these commitments with the balance of $125.6 million expected to
be funded over the next 12 months.
NOTE 10. SUBSEQUENT EVENTS
On April 21, 1997, the Company declared a dividend of $0.47 per share to
the holders of common stock on May 1, 1997. The dividend will be paid in cash on
May 15, 1997. The dividend related to the quarter ended March 31, 1997.
For the period from April 1 through May 12, 1997, a total of $7,820,000 of
principal amount of 10.5% Debentures was 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 384,557 in the shares of common stock of the Company,
an increase of $7,820,000 in stockholders' equity and a decrease of $7,820,000
in the outstanding balance of the 10.5% Debentures.
8
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
FIRST QUARTER 1997 COMPARED TO FIRST QUARTER 1996
For the quarter ended March 31, 1997 the Company reported net income of
$6.3 million or $0.43 net income per share, compared to $4.1 million, or $0.42
primary net income per common share at March 31, 1996.
Revenues for the quarter ended March 31, 1997 totaled $11.3 million,
increasing $3.9 million over March 31, 1996 revenues of $7.4 million. The
increase in revenues is primarily attributable to additional rental and mortgage
interest income from investments made since March 31, 1996. Specifically, the
Company's investments in real estate increased approximately $96.1 million with
the addition of 17 properties from $237.2 million at March 31, 1996 to $333.3
million at March 31, 1997. The Company's investments in mortgage loans increased
$41.4 million from $26.1 million at March 31, 1996 to $67.5 million at March 31,
1997.
Interest expense for the quarter ended March 31, 1997 totaled $2.6
million, increasing $1.0 million over March 31, 1996 interest expense of $1.6
million. The increase is due to additional amounts outstanding under the Bank
Credit Facility at a slightly higher weighted average interest rate and to
additional interest related to the 8.5% $23.3 million Mortgage Note entered into
in June 1996. The Company also recognized additional interest on the 6.55%
Debentures issued in March 1997 which was offset by the decrease in interest on
the 10.5% Debentures due to conversions into the Company's common stock.
Depreciation for the quarter ended March 31, 1997 totaled $1.7 million
increasing $0.5 million over March 31, 1996 depreciation of $1.2 million. This
is primarily due to the acquisition of the 17 real estate properties subsequent
to March 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
As more fully discussed in Note 6, in February 1997 the Company completed
an amendment of its Bank Credit Facility which provided for an increase to $170
million from its previous principal amount of $150 million. At March 31, 1997,
the outstanding balance of the Bank Credit Facility was $68.8 million, 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, 1997, the balance of the Bank
Credit Facility as of May 13, 1997 was $88,100,000.
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.
9
<PAGE> 11
As more fully discussed in Note 7, during March 1997 the Company issued
$74.75 million principal amount of 6.55% convertible subordinated debentures
due March 2002. The net offering proceeds of $65,473,525 were used to reduce
Ithe Company's outstanding balance under the Bank Credit Facility. Interest on
the Debentures is payable semiannually commencing September 14, 1997.
Additionally, as discussed in Note 7, as of March 31, 1997 the Company had
$17,000,000 principal amount of 10.50% convertible subordinated debentures
outstanding. These Debentures are due April 2002 and interest is payable
semiannually.
On April 21, 1997, the Company declared a dividend of $0.47 per share to
the holders of common stock on May 1, 1997. The dividend will be paid in cash on
May 15, 1997. The dividend related to the quarter ended March 31, 1997.
COMMITMENTS
The Company has committed a total of approximately $164.7 million towards
the acquisition and construction of real estate properties and providing
mortgage financing. As of March 31, 1997, the Company had funded approximately
$39.1 million towards these commitments, with the balance of $125.6 million
expected to be funded during the next 12 months. Financing for these commitments
may be provided by funds from operations, borrowings under the Bank Credit
Facility or private or public offerings of debt or equity.
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Any statement contained in this report which is not a historical fact, or
which might otherwise be considered an opinion or projection concerning the
Company or its business, whether expressed or implied, is meant as, and should
be considered, a forward- looking statement as that term is defined in the
Private Securities Litigation Reform Act of 1996. Forward-looking statements are
based on assumptions and opinions concerning a variety of known and unknown
risks, including but not necessarily limited to changes in market conditions,
natural disasters, and other catastrophic events, increased competition, changes
in availability and cost of reinsurance, changes in governmental regulations,
and general economic conditions, as well as other risks more completely
described in the Company's filings with the Securities and Exchange Commission.
If any of these assumptions or opinions may also prove materially incorrect, any
forward-looking statements made on the basis of such assumptions or opinions may
also prove materially incorrect in one or more respects.
10
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PART II - OTHER INFORMATION
Item 6. Exhibits and Report on Form 8-K
(a) Exhibits
27 - Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K
A report on Form 8-K was filed by the Company on March 4, 1997
reporting the Company's 1996 financial statements.
11
<PAGE> 13
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, 1997
12
<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, 1997,
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 1,178,724
<SECURITIES> 0
<RECEIVABLES> 847,105
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 13,120,886
<PP&E> 333,745,909
<DEPRECIATION> 12,984,723
<TOTAL-ASSETS> 427,519,497
<CURRENT-LIABILITIES> 7,469,960
<BONDS> 84,310,175
0
0
<COMMON> 14,290
<OTHER-SE> 241,563,508
<TOTAL-LIABILITY-AND-EQUITY> 427,519,497
<SALES> 0
<TOTAL-REVENUES> 11,284,070
<CGS> 0
<TOTAL-COSTS> 5,038,998
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,551,352
<INCOME-PRETAX> 6,245,072
<INCOME-TAX> 0
<INCOME-CONTINUING> 6,245,072
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,245,072
<EPS-PRIMARY> .043
<EPS-DILUTED> .044
</TABLE>
