<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, 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 November 13, 1997, 16,677,959 shares of the Registrant's Common Stock,
$.001 par value, were outstanding.
<PAGE> 2
CAPSTONE CAPITAL CORPORATION
FORM 10-Q
September 30, 1997
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Part I - Financial Information
Page
<S> <C>
Item 1. Condensed Consolidated Financial Statements
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 10
Part II - Other Information
Item 6. Exhibits 15
Signatures 16
</TABLE>
1
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Capstone Capital Corporation
Condensed Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
ASSETS Sept. 30, 1997 Dec. 31, 1996
-------------- -------------
<S> <C> <C>
Real estate properties
Land $42,636,744 $30,952,673
Land improvements 2,350,309 2,350,309
Buildings and improvements 388,495,852 269,261,047
Construction in progress 51,097,453 12,650,780
------------ ------------
484,580,358 315,214,809
Less accumulated depreciation (17,317,696) (11,217,391)
------------ -------------
Real estate properties, net 467,262,662 303,997,418
Mortgage notes receivable 108,006,212 39,325,621
Cash 814,363 1,122,241
Accrued rental income 6,923,150 4,689,976
Other assets 14,198,323 7,559,860
------------ ------------
Total assets $597,204,710 $356,695,116
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Convertible subordinated debentures- 10.5% $4,974,000 $17,657,000
Convertible subordinated debentures- 6.55% 68,296,832 -
Bank credit facility 92,400,000 68,500,000
Mortgage notes payable 57,129,060 23,228,417
Accrued expenses and other liabilities 16,407,454 5,754,180
------------ ------------
Total liabilities 239,207,346 115,139,597
------------ ------------
Stockholders' equity
Preferred stock, $0.001 par value,
10,000,000 shares authorized;
3,000,000 shares issued 3,000 0
Common stock, $0.001 par value,
50,000,000 shares authorized;
16,494,861 shares and 14,247,947 shares
issued and outstanding, respectively 16,495 14,247
Additional paid-in-capital 358,690,159 240,832,943
Loans to officers to finance stock purchases (286,944) (286,944)
Cumulative net income 53,382,276 33,384,814
Cumulative dividends (53,807,622) (32,389,541)
------------ ------------
Total stockholders' equity 357,997,364 241,555,519
------------ ------------
Total liabilities and stockholders' equity $597,204,710 $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>
Three Months Ended Nine Months Ended
Sept. 30, Sept. 30,
------------------------------ -----------------------------
1997 1996 1997 1996
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Rental income $ 12,534,479 $ 8,570,890 $ 32,740,312 $ 22,921,904
Mortgage interest income 2,667,686 891,775 6,263,967 2,378,974
Gain from sale of property - 3,519 - 197,191
Other income 160,815 213,017 613,405 501,450
------------ ------------ ------------ ------------
Total Income 15,362,980 9,679,201 39,617,684 25,999,519
------------ ------------ ------------ ------------
Expenses:
General and administrative 856,624 414,116 2,128,170 1,223,022
Depreciation 2,376,467 1,642,990 6,152,061 4,301,463
Amortization 215,916 90,245 492,212 316,706
Interest 4,422,920 2,715,328 10,386,861 6,601,717
Property operations 180,488 96,256 460,918 98,413
------------ ------------ ------------ ------------
Total expenses 8,052,415 4,958,935 19,620,222 12,541,321
------------ ------------ ------------ ------------
Net income $ 7,310,565 $ 4,720,266 $ 19,997,462 $ 13,458,198
============ ============ ============ ============
Net Income Per Share (Primary) $0.43 $0.44 $1.29 $1.28
============ ============ ============ ============
Net Income Per Share (Fully Diluted) $0.43 $0.42 $1.29 $1.27
============ ============ ============ ============
Weighted Averages Shares
Outstanding
Primary 16,691,441 10,851,964 15,432,086 10,529,286
============ ============ ============ ============
Fully Diluted 19,976,067 12,820,523 18,267,271 12,819,826
============ ============ ============ ============
</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>
Nine Months Ended
Sept. 30,
----------------------------------
1997 1996
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 19,997,462 $ 13,458,198
Gain from sale of property - (197,191)
Depreciation 6,152,061 4,301,463
Amortization of debenture original
issue discount 1,060,797 -
Other Amortization 492,212 316,706
Increase in accrued rental income (2,233,174) (1,764,860)
Construction funding deposit - (768,423)
Increase in receivables and other assets (5,909,794) (1,018,762)
Increase in accrued expenses and
other liabilities 9,612,420 1,378,251
------------- -------------
Net cash provided by operating activities 29,171,984 15,705,382
------------- -------------
Cash flows from investing activities:
Acquisition of real estate properties (169,365,550) (87,095,957)
Proceeds from sale of property - 8,206,289
Investment in mortgage notes receivable (68,781,530) (4,598,696)
Collections on mortgage notes receivable 100,939 117,728
------------- -------------
Net cash used in investing activities (238,046,141) (83,370,636)
------------- -------------
Cash flows from financing activities:
Increase in bank credit facility 23,900,000 60,975,000
Proceeds from mortgage notes payable 34,100,000 19,907,321
Proceeds from issuance of convertible
subordinated debentures 67,235,025 -
Proceeds from issuance of common stock 33,488,754 -
Proceeds from issuance of preferred stock 72,637,500 -
Financing costs related to issuance of
convertible subordinated debentures (1,761,500) -
Financing costs related to stock offering (575,276) (51,713)
Payment of dividends (21,418,081) (13,951,771)
Capital contributions from minority interests 2,211,947 680,072
Distributions to minority interests (1,166,984) -
Proceeds from dividend reinvestment plan 114,251 40,006
Principal payments on mortgage note payable (199,357) (42,646)
------------- -------------
Net cash provided by financing activities 208,566,279 67,556,269
------------- -------------
Decrease in cash (307,878) (108,985)
Cash, beginning of period 1,122,241 675,568
------------- -------------
Cash, end of period $ 814,363 $ 566,583
============= =============
</TABLE>
The accompanying notes are an integral part of this financial statement
<PAGE> 6
CAPSTONE CAPITAL CORPORATION
Notes to Condensed Consolidated Financial Statements
September 30, 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, as amended. 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, as amended.
The Company is an indefinite life real estate investment trust
("REIT") which 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. REAL ESTATE PROPERTIES
As of September 30, 1997 the Company had investments in 74 leased
real estate properties totaling $433.5 million. These real estate properties
consist of and include eighteen ancillary hospital facilities, thirteen
physician clinics, eleven assisted living facilities, nine skilled nursing
facilities, six ambulatory surgery facilities, five inpatient rehabilitation
facilities, five integrated delivery facilities, three outpatient rehabilitation
facilities, two comprehensive mental health hospitals, and two sub-acute care
facilities. The properties are located in fifteen states and are leased to
sixteen healthcare-related entities or their subsidiaries pursuant to long-term
leases. In addition, the Company has invested approximately $51.1 million in
eighteen development projects at various stages of completion. The Company has
remaining commitments of approximately $56.5 million related to the
aforementioned development projects and expects all projects to be completed
during 1998.
The Company's properties are generally leased pursuant to fixed term
operating leases expiring principally from 2004 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
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refusal to purchase the leased property on the same terms and conditions as the
Company may propose to a third party.
The leases generally require the lessee to pay base rent, additional
rent commencing after the first year based either on a set percentage increase
or on a percentage increase in the consumer price index, all taxes (including
property taxes), maintenance, and other operating costs associated with the
leased property.
NOTE 3. MORTGAGE NOTES RECEIVABLE
As of September 30, 1997, the Company had provided $108.0 million in
mortgage financing for 45 properties located in eighteen states. The mortgage
notes receivable are secured by the real estate of 20 skilled nursing
facilities, 22 assisted living facilities, one acute-care hospital, one
specialty-care hospital and one ambulatory surgery facility. The facilities are
operated by 26 healthcare operators.
Nineteen of the facilities are under construction, and the Company has
committed a total of $96.8 million in construction and term loans for these
projects. As of September 30, 1997, the Company had advanced a total of $35.8
million toward these financing commitments. The Company expects to disburse the
remainder of the committed funds during 1998.
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 September 30, 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 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 September 30, 1997.
NOTE 4. MORTGAGE NOTES PAYABLE
The Company has a non-recourse mortgage note payable to a life
insurance company for a principal amount of $23.1 million ("$23.1 Million
Mortgage Note"). The $23.1 Million Mortgage Note bears interest at 8.5% and is
payable in monthly payments of principal and interest based on a 30 year
amortization with the final payment due on May 26, 2026. The $23.1 Million
Mortgage Note is collateralized by an ancillary hospital facility purchased in
January 1996 for $30 million.
The Company has a non-recourse mortgage note payable to a bank for a
principal amount of $17.0 million ("$17.0 Million Mortgage Note"). The $17.0
Million Mortgage Note bears interest at 50 basis points in excess of the prime
rate, as such rate fluctuates from time to time and is payable in monthly
payments of principal and interest based on a
6
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25 year amortization with the unpaid balance due in a balloon payment on June
20, 2000. The interest rate as of September 30, 1997 was 9.0%. The $17.0 Million
Mortgage Note is collateralized by six skilled nursing facilities purchased in
June 1997 for $23.8 million.
The Company has three non-recourse mortgage notes payable to a company
for a combined principal amount of $17.1 million ("$17.1 Million Mortgage
Notes"). The $17.1 Million Mortgage Notes bear interest at 8.125% and are
payable in monthly payments of principal and interest based on a 25 year
amortization with the remaining unpaid balance due in a balloon payment on
September 1, 2004. The $17.1 Million Mortgage Notes are collateralized by two
ambulatory surgery facilities and one ancillary hospital facility.
NOTE 5. BANK CREDIT FACILITY
On September 18, 1997, the Company completed an amendment to its
unsecured line of credit ("Bank Credit Facility") which provides for an increase
to $180 million from its previous principal amount of $170 million. The Bank
Credit Facility is participated in by a consortium of eight banks and is
available until June 24, 2000. At September 30, 1997, the Company had drawn
$92.4 million against the Bank Credit Facility for the purchase of real estate
properties and the funding of mortgage loans.
Borrowings under the Bank Credit Facility bear an interest rate chosen
by the Company from either the prime rate or the Eurodollar rate ("Base Rate")
plus a percentage rate ranging from 1.00 percent to 1.625 percent, depending
upon the Company's senior debt to consolidated total capital ratio for the
preceding fiscal quarter. During September 1997, the Company entered into
interest rate swap transactions ("Swap") with NationsBank which, beginning March
1998, effectively fix the Base Rate at 5.959 percent on a $50 million notional
amount of borrowings under the Bank Credit Facility. The Swap will be effective
until March 2003 unless NationsBank elects to cancel at the three year
anniversary of the Swap during March 2001.
NOTE 6. CONVERTIBLE SUBORDINATED DEBENTURES
As of September 30, 1997 the Company had $4,974,000 aggregate
principal amount of 10.5% convertible subordinated debentures (the "10.5%
Debentures") outstanding. The 10.5% 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 September 30, 1997, a total of $2,124,000 of principal amount
of the 10.5% Debentures was converted into 131,721 shares of common stock of the
Company at the conversion price of $16.125 per share.
As of September 30, 1997, the Company had $74,750,000 aggregate
principal amount of 6.55% convertible subordinated debentures (the "6.55%
Debentures"). The 6.55% Debentures are due on March 14, 2002 and were issued at
a 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, and commenced on
7
<PAGE> 9
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. As of September 30, 1997, there had been no
conversions of the 6.55% Debentures.
NOTE 7. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental disclosure of cash flow information is as follows:
<TABLE>
<CAPTION>
For the 9 Mos. For the 9 Mos.
Ended Ended
Sept. 30, 1997 Sept. 30, 1996
-------------- --------------
<S> <C> <C>
Cash payments for bank credit
facility interest expense $5,449,597 $ 3,585,074
Cash payments for mortgage notes 1,885,633 345,711
payable
Cash payments for convertible
subordinated debentures' interest expense 3,587,806 2,299,763
Non-cash distribution to minority interest 30,771 -
Convertible subordinated debentures
converted into shares of common stock:
Convertible subordinated debentures (12,683,000) (16,512,000)
Financing costs (488,864) (621,339)
Shares of common stock 786,539 992,021
Additional paid in capital 12,193,349 15,889,669
</TABLE>
NOTE 8. COMMITMENTS AND CONTINGENCIES
The Company has committed a total of $204.5 million towards the
acquisition and construction of real estate properties and providing mortgage
financing. As of September 30, 1997, the Company had funded approximately $86.9
million towards these commitments with the balance of $117.6 million expected to
be funded over the next nine months.
During May 1997, the Company provided a letter of credit in the amount
of $2,869,800 to a third party lender in connection with a project under
development. The lender may only draw on the letter of credit in the event that
the developer defaults on the
8
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loan. The letter of credit expires in the earlier of one year or with payoff of
the construction loan.
NOTE 9. SUBSEQUENT EVENTS
On October 17, 1997, the Company declared a dividend of $0.48 per share
to the holders of common stock on November 3, 1997. The dividend will be paid in
cash on November 17, 1997. The dividend related to the quarter ended September
30, 1997.
For the period from October 1 through November 7, 1997, a total of
$695,000 of principal amount of 10.5% 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 43,101 shares outstanding of common stock
of the Company.
9
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THIRD QUARTER 1997 COMPARED TO THIRD QUARTER 1996
For the quarter ended September 30, 1997 the Company reported net
income of $7.3 million, or $0.43 per common share, compared to $4.7 million, or
$0.44 per common share at September 30, 1996.
Revenues for the quarter ended September 30, 1997 totaled $15.4
million, an increase of $5.7 million over September 30, 1996 revenues of $9.7
million. The increase in revenues is primarily attributable to additional rental
and mortgage interest income from investments made since September 30, 1996.
Specifically, the Company's investments in real estate increased by
approximately $184.4 million to $484.6 million at September 30, 1997 from $300.2
million at September 30, 1996. The Company's investments in mortgage loans
increased $86.5 million to $108.0 million at September 30, 1997 from $21.5
million at September 30, 1996.
Interest expense for the quarter ended September 30, 1997 totaled $4.4
million, an increase of $1.7 million over September 30, 1996 interest expense of
$2.7 million. The increase is primarily due to a full quarter's additional
interest on the 6.55% Debentures issued in March 1997 which was slightly offset
by the decrease in interest accrued on the 10.5% Debentures due to conversions
into the Company's common stock. In addition, the Company recognized three
month's additional interest related to the $17.0 Million Mortgage Note entered
into in June of 1997 and one month's additional interest related to the $17.1
Million Mortgage Note entered into in September 1997.
Depreciation for the quarter ended September 30, 1997 totaled $2.4
million, an increase of $0.8 million over September 30, 1996 depreciation of
$1.6 million. This is primarily due to the acquisition of real estate
properties subsequent to September 30, 1996.
Funds from operations ("FFO") represents net income (computed in
accordance with generally accepted accounting principles), less gains from sales
of property and rental income recognized on a straight-line basis on those
leases with scheduled rent increases, plus depreciation, amortization and
stock-based compensation expense. Set forth below is a summary of the
calculation of FFO:
<TABLE>
<CAPTION>
For The For The
Reconciliation of net income to Quarter Ended Quarter Ended
funds from operations Sept. 30, 1997 Sept. 30, 1996
-------------- --------------
<S> <C> <C>
Net Income $7,310,565 $4,720,266
Add: Depreciation and amortization 2,592,383 1,733,235
Add: Stock-based compensation 46,550 -
Less: Gain on sale of asset - (3,519)
Less: Straight-line rental income (922,303) (637,548)
---------- ----------
Funds from operations $9,027,195 $5,812,434
========== ==========
</TABLE>
10
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FFO for the quarter ended September 30, 1997 totaled $9,027,195, an
increase of $3,214,761 over FFO for the same period in 1996 of $5,812,434. The
increase is attributable primarily to increases in net income and depreciation
and amortization expense.
FFO should not be considered as an alternative to net income or any
other generally accepted accounting principle measurement of performance as an
indicator of operating performance or as an alternative to cash flows from
operations, investing and financing activities as a measure of liquidity. The
Company believes that FFO is an important supplemental measure of the operating
performance of a REIT's portfolio considering the fact that historical cost
accounting implicitly assumes that the value of real estate assets diminishes
predictably over time. FFO provides an alternative measurement criteria,
exclusive of certain non-cash items included in GAAP income, by which to
evaluate the performance of such investments. Additionally, FFO is consistent
with measures used by analysts to evaluate the Company and other REITs. The
Company therefore discloses FFO, although it is a measurment that is not defined
by GAAP. The Company's measure may not be comparable to similarly titled
measures used by other REITs. Consequently, the Company's FFO may not provide a
meaningful measure of the Company's performance as compared to that of other
REITs.
Set forth below are amounts for operating, investing, and financing
cash flows:
<TABLE>
<CAPTION>
For the For the
Quarter Ended Quarter Ended
Sept. 30, 1997 Sept. 30, 1996
-------------- --------------
<S> <C> <C>
Net cash provided by operating activities $ 12,712,895 $ 6,836,605
Net cash used by investing activities (81,037,401) (13,431,982)
Net cash provided by financing activities 68,404,133 5,654,369
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1996
For the nine months ended September 30, 1997 the Company reported net
income of $20.0 million, or $1.29 per common share, compared to $13.5 million,
or $1.28 per common share at September 30, 1996.
Revenues for the nine months ended September 30, 1997 totaled $39.6
million, increasing $13.6 million over September 30, 1996 revenues of $26.0
million. The increase in revenues is primarily attributable to additional rental
and mortgage interest income from investments made subsequent to September 30,
1996.
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Interest expense for the nine months ended September 30, 1997 totaled
$10.4 million, an increase of $3.8 million over September 30, 1996 interest
expense of $6.6 million. The increase was due to five months' additional
interest related to the $23.3 Million Mortgage Note entered into in June 1996
and three month's additional interest related to the $17.0 Million Mortgage Note
entered into in June of 1997. The Company also incurred an additional six
months' interest on the 6.55% Debentures issued in March 1997 which was slightly
offset by the decrease in interest accrued on the 10.5% Debentures due to
conversions into the Company's common stock. Interest expense for the nine
months ended September 30, 1997 was also greater than interest expense for the
same period in 1996 due to additional amounts outstanding under the Bank Credit
Facility.
Depreciation for the nine months ended September 30, 1997 totaled $6.2
million, an increase of $1.9 million over September 30, 1996 depreciation of
$4.3 million. This is primarily due to the acquisition of real estate
properties subsequent to September 30, 1996.
FFO represents net income (computed in accordance with generally
accepted accounting principles), less gains from sales of property and rental
income recognized on a straight-line basis on those leases with scheduled rent
increases, plus depreciation, amortization and stock-based compensation
expense. Set forth below is a summary of the calculation of FFO:
<TABLE>
<CAPTION>
For The For The
Nine Months Nine Months
Reconciliation of net income to Ended Ended
funds from operations Sept. 30, 1997 Sept. 30, 1996
-------------- --------------
<S> <C> <C>
Net Income $19,997,462 $13,458,198
Add: Depreciation and amortization 6,644,273 4,618,169
Add: Stock-based compensation 46,550 -
Less: Gain on sale of asset - (197,191)
Less: Straight-line rental income (2,233,174) (1,764,860)
----------- -----------
Funds from operations $24,455,111 $16,114,316
=========== ===========
</TABLE>
FFO for the nine months ended September 30, 1997 totaled $24,455,111,
an increase of $8,340,795 over FFO for the same period in 1996 of $16,114,316.
The increase is attributable primarily to increases in net income and
depreciation and amortization expense.
FFO should not be considered as an alternative to net income or any
other generally accepted accounting principle measurement of performance as an
indicator of operating performance or as an alternative to cash flows from
operations, investing and financing activities as a measure of liquidity. The
Company believes that FFO is an important supplemental measure of the operating
performance of a REIT's portfolio considering the fact that historical cost
accounting implicitly assumes that the value of real estate assets diminishes
predictably over time. FFO provides an alternative
12
<PAGE> 14
measurement criteria, exclusive of certain non-cash items included in GAAP
income, by which to evaluate the performance of such investments. Additionally,
FFO is consistent with measures used by analysts to evaluate the Company and
other REITs. The Company therefore discloses FFO, although it is a measurement
that is not defined by GAAP. The Company's measure may not be comparable to
similarly titled measures used by other REITs. Consequently, the Company's FFO
may not provide a meaningful measure of the Company's performance as compared to
that of other REITs.
Set forth below are amounts for operating, investing, and financing
cash flows:
<TABLE>
<CAPTION>
For the For the
Nine Months Nine Months
Ended Ended
Sept. 30, 1997 Sept. 30, 1996
-------------- --------------
<S> <C> <C>
Net cash provided by operating activities $ 29,171,984 $ 15,705,382
Net cash used by investing activities (238,046,141) (83,370,636)
Net cash provided by financing activities 208,566,279 67,556,269
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
During September 1997, the Company raised net proceeds of $72.2
million with the sale of 3.0 million shares of 8.875% Series A cumulative
preferred stock ("Preferred Stock") at $25.00 per share. The dividends are
cumulative from the date of original issue and are payable quarterly, commencing
on December 15, 1997. Except in certain circumstances relating to the Company's
qualifications as a REIT, the Preferred Stock is not redeemable prior to
September 30, 2002. On or after September 30, 2002, the Preferred Stock may be
redeemed for cash at the option of the Company, in whole or in part, at a
redemption price of $25 per share, plus accrued and unpaid dividends, if any,
thereon to the redemption date. The redemption price (other than the portion
thereof consisting of accrued and unpaid dividends) shall be payable solely out
of the sale proceeds of other stock of the Company, which may include other
series of the Company's preferred stock, par value $.001 per share, and from no
other source. The Preferred Stock has no stated maturity and will not be subject
to any sinking fund or mandatory redemption and will not be convertible into any
other securities of the Company except in certain circumstances relating to the
Company's qualification as a REIT.
As discussed more fully in Note 4 to the financial statements, during
August 1997, the Company received proceeds from the issuance of the $17.1
Million Mortgage Notes collateralized by two ambulatory surgery facilities and
one ancillary hospital facility located in Florida.
At September 30, 1997, the outstanding balance of the Bank Credit
Facility was $92.4 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 September 30, 1997, the balance of the Bank Credit Facility as of November 7,
1997 was $128.6 million.
13
<PAGE> 15
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.
On October 17, 1997, the Company declared a dividend of $0.48 per share
to the holders of common stock on November 3, 1997. The dividend will be paid in
cash on November 17, 1997. The dividend related to the quarter ended September
30, 1997.
The Company has a dividend reinvestment and stock purchase plan
("Plan") under which participants can automatically reinvest all or a portion of
cash dividends in shares of the Company's common stock and can make voluntary
cash payments for additional shares. Under the Plan, the Company had received
$114,251 for the nine months ended September 30, 1997 in exchange for 4,983
shares of common stock.
COMMITMENTS
The Company has committed a total of approximately $204.5 million
towards the acquisition and construction of real estate properties and providing
mortgage financing. As of September 30, 1997, the Company had funded
approximately $86.9 million towards these commitments, with the balance of
$117.6 million expected to be funded during the next twelve 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.
During May 1997, the Company provided a letter of credit in the amount
of $2,869,800 to a third party lender in connection with a project under
development. The lender may only draw on the letter of credit in the event that
the developer defaults on the loan. The letter of credit expires in the earlier
of one year or with payoff of the construction loan.
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 1995. 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.
14
<PAGE> 16
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 - Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the three
months ended September 30, 1997.
15
<PAGE> 17
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
Date: November 13, 1997 By /s/ MALCOLM E. McVAY
----------------------
Malcolm E. McVay
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE FINANCIAL
STATEMENTS OF CAPSTONE CAPITAL CORPORATION FOR THE PERIOD ENDED SEPTEMBER 30,
1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
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<PERIOD-END> SEP-30-1997
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<BONDS> 73,270,832
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