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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
---------------------
FORM 10-K/A
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<S> <S>
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED,
EFFECTIVE OCTOBER 7, 1996).
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
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COMMISSION FILE NUMBER 001-11345
CAPSTONE CAPITAL CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
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<S> <C>
MARYLAND 63-1115479
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
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1000 URBAN CENTER DRIVE, SUITE 630
BIRMINGHAM, ALABAMA 35242
(Address of Principal Executive Offices, Including Zip Code)
(205) 967-2092
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
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<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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<C> <C>
Common Stock, $.001 par value per share New York Stock Exchange, Inc.
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Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant: (1) has filed all reports
required 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 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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K/A or any amendment to
this Form 10-K/A. [ ]
The aggregate market value of the shares of Common Stock (based upon the
closing price of these shares on the New York Stock Exchange, Inc. on March 14,
1997) of the Registrant held by non-affiliates on March 14, 1997, was
approximately $331,205,388.
As of March 14, 1997, 14,288,529 shares of the Registrant's Common Stock
were outstanding.
(2) Part III incorporates by reference portions of the Capstone Capital
Corporation Annual Proxy Statement for the fiscal year ended December 31, 1996
(to be filed with the Commission on or about March 27, 1997). Part IV
incorporates by reference portions of the Capstone Capital Corporation Annual
Report for the fiscal year ended December 31, 1996 (to be filed with the
Commission on or about March 27, 1997).
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TABLE OF CONTENTS
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PAGE
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Item 1. Business.................................................... 1
General..................................................... 1
Investments................................................. 2
Selected Operators.......................................... 5
HEALTHSOUTH................................................. 5
Columbia/HCA................................................ 6
MedPartners................................................. 6
Integrated Health........................................... 6
Tenet....................................................... 7
Investment Policy........................................... 7
Leases...................................................... 7
Development Arrangements.................................... 8
Competition................................................. 9
Government Regulation....................................... 9
Medicaid, Medicare, Blue Cross and Other Revenue Sources.... 11
Interest Rate Sensitivity................................... 12
Environmental Matters....................................... 13
Insurance................................................... 13
Employees................................................... 14
Item 2. Properties.................................................. 14
Headquarters................................................ 14
Item 3. Legal Proceedings........................................... 14
Item 4. Submission of Matters to a Vote of Security Holders......... 14
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 14
Item 6. Selected Financial Data..................................... 15
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 15
Item 8. Financial Statements and Supplementary Data................. 15
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 15
Item 10. Directors and Executive Officers of the Registrant.......... 15
Directors................................................... 15
Executive Officers.......................................... 15
Item 11. Executive Compensation...................................... 16
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 16
Item 13. Certain Relationships and Related Transactions.............. 16
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 16
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PART I
ITEM 1. BUSINESS
GENERAL
The Company is a real estate investment trust which owns, leases and
invests in a diversified portfolio of healthcare properties (the "Investments").
As of February 28, 1997, the Investments consisted of (i) 67 healthcare
properties leased to 18 healthcare operators (the "Leased Properties") and (ii)
22 mortgage loans on healthcare properties (the "Mortgage Loans"). For the year
ended December 31, 1996, the Company realized approximately $32.0 million of
rental income from the Leased Properties and approximately $3.2 million of
interest income from the Mortgage Loans. The Investments are located in 17
states primarily in the southeastern and western regions of the United States
and represent a variety of facility types in diverse healthcare industry
segments. The Investments, including commitments to invest certain of which have
been partially funded, have grown from approximately $115 million at inception
on June 30, 1994 to approximately $527 million on February 28, 1997.
Substantially all of the leases (the "Leases") for Leased Properties are
triple net leases which require the lessees to pay, in addition to base rent,
any additional rent and all additional charges, including any fines, penalties,
interest and costs which may be levied for nonpayment or late payment thereof,
all operating expenses, taxes, environmental clean up costs, association dues,
insurance premiums, assessments, levies, fees, water and sewer rents and charges
and all governmental charges with respect to the applicable Leased Property. The
Leases generally provide for increases in rent commencing after the first year,
have primary terms of 10 to 15 years with options to extend the term at least 10
years and grant the lessees a right of first refusal to acquire the Company's
interest. Mortgage Loans generally have initial maturities of between 5 and 15
years require monthly installments of principal and interest and bear interest
at initial rates ranging from 9.25% to 11.75% that increase annually at either a
negotiated fixed rate or a rate based on the consumer price index. Approximately
67% of the Company's Investments as of February 28, 1997, are operated by public
healthcare companies or their subsidiaries, including HEALTHSOUTH Corporation
("HEALTHSOUTH"), Columbia/HCA Healthcare Corporation ("Columbia/HCA"),
MedPartners, Inc. ("MedPartners"), Integrated Health Services, Inc. ("Integrated
Health"), and Tenet Healthcare Corporation ("Tenet"). For the year ended
December 31, 1996, the Company derived approximately 33.4% and 19.5% of its
revenues from HEALTHSOUTH and Columbia, respectively.
The Company believes it is an important source of capital for the
healthcare industry and intends to continue investing in a high-quality
portfolio of properties managed by established operators of rehabilitation,
alternate-site care, long-term care and acute-care facilities. The Company
diversifies its portfolio by operator, geography, facility type and healthcare
industry segment. The Company identifies potential investment opportunities
through (i) the relationship of certain members of its Board of Directors with
HEALTHSOUTH, MedPartners and Integrated Health (three of which are also
directors of HEALTHSOUTH, two of which are also directors of MedPartners and one
of which is also a director of Integrated Health), (ii) relationships of its
management and Board of Directors with other healthcare operators and
developers, (iii) brokers and other industry contacts. Leases with HEALTHSOUTH,
MedPartners and Integrated Health are entered into on terms no less favorable
than Leases with unrelated lessees with similar credit criteria.
The Company's primary objective is to provide current income for
distribution to stockholders. The Company commenced paying quarterly dividends
of $.425 per share for the quarter ended September 30, 1994, increased its
quarterly dividend to $.445 per share for the quarter ended June 30, 1995,
increased it to $.455 per share for the quarter ended June 30, 1996, increased
it to $.46 per share for the quarter ended September 30, 1996 and increased it
to $.465 per share for the quarter ended December 31, 1996.
1
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INVESTMENTS
The following table sets forth as of December 31, 1996, certain information
regarding the Company's Investments:
<TABLE>
<CAPTION>
OPERATOR AND TYPE OF TYPE OF AMOUNT OF % OF 1996
PROPERTY NAME(1) INVESTMENT PROPERTY(2) INVESTMENT(3) PORTFOLIO REVENUE(4)
---------------- ---------- ----------- ------------- --------- ------------
<S> <C> <C> <C> <C> <C>
HEALTHSOUTH
Altoona Rehabilitation Hospital Equity IRF $ 17,202,200 5.0% $ 1,208,269
Great Lakes Rehab. Hospital Equity IRF 14,523,233 4.2 1,920,286
One-7000 Building Equity AHF 13,386,327 3.9 1,718,577
Mechanicsburg Rehabilitation
Hospital Equity IRF 12,446,057 3.6 873,943
Richmond Medical Building II Equity AHF 10,103,030 3.0 1,302,115
Birmingham Medical Building II Equity AHF 9,706,385 2.8 1,247,763
South County Medical Center Equity ASF 7,400,000 2.2 865,665
Birmingham Medical Building I Equity AHF 4,749,782 1.4 612,368
American Sports Medicine Institute Equity AHF 3,233,794 0.9 409,162
Coral Gables Rehabilitation Center Equity ORF 2,323,581 0.7 298,257
Larkin Medical Building Equity AHF 2,272,675 0.7 291,792
Richmond Medical Building I Equity AHF 2,121,241 0.6 267,410
Little Rock Rehabilitation Center Equity ORF 2,081,408 0.6 267,151
West County Surgery Center Equity ASF 1,926,642 0.6 0
Virginia Beach Rehabilitation
Center Equity ORF 1,460,000 0.4 189,414
North Shore Surgical Center Equity ASF 919,420 0.3 113,550
------------ ----- ------------
$105,855,775 30.9% $ 11,585,722
COLUMBIA/HCA
Sunrise Mountainview Medical Center Equity AHF $ 29,519,775 8.6% $ 2,431,834
Sarasota Medical Center Equity AHF 14,440,677 4.2 1,696,848
Beaumont Regional Professional
Tower Equity AHF 8,892,446 2.6 963,535
Bonita Bay Medical Center Equity ASF 8,039,347 2.4 920,328
Cape Coral Medical Plaza Equity ASF 5,608,615 1.6 636,564
Northlake Surgical Center Equity ASF 1,050,845 0.4 124,365
------------ ----- ------------
$ 67,551,705 19.8% $ 6,773,474
MEDPARTNERS
Melbourne Medical Building Equity PC $ 9,387,537 2.7% $ 24,416
Par Place Medical Center Equity PC 6,585,580 1.9 424,658
Brookstone Office Building Equity PC 5,951,001 1.7 133,984
McCollough Clinic Equity PC 6,031,549 1.8 746,928
Melbourne Clinic Equity PC 2,450,000 0.7 1,198,803
Greenwood Medical Building Equity PC 1,801,495 0.5 237,938
Columbus OB/GYN Clinic Equity PC 1,509,000 0.4 215,990
Indialantic Medical Building Equity PC 1,232,168 0.4 195,153
West Palm Beach Medical Building Equity PC 581,693 0.2 79,771
------------ ----- ------------
$ 35,530,023 10.3% $ 3,257,641
INTEGRATED HEALTH
Oakwood Nursing & Rehabilitation Equity SAC $ 10,197,045 3.0% $ 1,158,971
Mountain View Nursing Center Equity SNF 9,863,626 2.9 1,109,352
Gravois Nursing Center Equity SAC 8,590,764 2.5 964,881
------------ ----- ------------
$ 28,651,435 8.4% $ 3,233,204
</TABLE>
2
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<TABLE>
<CAPTION>
OPERATOR AND TYPE OF TYPE OF AMOUNT OF % OF 1996
PROPERTY NAME(1) INVESTMENT PROPERTY(2) INVESTMENT(3) PORTFOLIO REVENUE(4)
---------------- ---------- ----------- ------------- --------- ------------
<S> <C> <C> <C> <C> <C>
TENET
Midway Medical Plaza Equity AHF $ 20,616,569 6.0% $ 2,236,498
Chapman General Hospital Mortgage ACH 7,913,076 2.3 881,134
------------ ----- ------------
$ 28,529,645 8.3% $ 3,117,632
KERLAN-JOBE
Kerlan-Jobe Orthopaedic Clinic Mortgage IDF $ 3,998,950 1.2% $ 22,998
------------ ----- ------------
$ 3,998,950 1.2% $ 22,998
MEDCATH, INC.
Tucson Heart Hospital Mortgage ACH $ 4,353,526 1.3% $ 88,142
------------ ----- ------------
$ 4,353,526 1.3% $ 88,142
QUORUM
Gadsden Medical Building II Equity AHF $ 5,862,999 1.7% $ 712,461
Desert Springs Medical Plaza Equity AHF 4,751,687 1.4 578,969
Hamiter Building Equity AHF 4,422,253 1.3 537,941
Goodyear Clinic Equity AHF 1,621,732 0.5 203,175
------------ ----- ------------
$ 16,658,671 4.9% $ 2,032,546
RAMSAY HEALTH CARE
Desert Vista Hospital Equity CMHH $ 8,550,000 2.5% $ 1,047,546
Mission Vista Hospital Equity CMHH 3,950,000 1.2 524,386
------------ ----- ------------
$ 12,500,00 3.7% $ 1,571,932
HORIZON/CMS
Southeast Texas Rehab. Hospital Equity IRF $ 10,551,197 3.1% $ 797,144
------------ ----- ------------
$ 10,551,197 3.1% $ 797,144
COGBURN
Ideal Nursing Center Mortgage SNF $ 4,887,005 1.4% $ 542,591
Cogburn Health Center Mortgage SNF 3,958,508 1.2 454,236
------------ ----- ------------
$ 8,845,513 2.6% $ 996,827
NEW VISTA HEALTH SERVICES, INC.
Diana Lynn Lodge Mortgage SNF $ 4,850,000 1.4% $ 0
West Los Angeles Pavilion Mortgage SNF 1,000,000 0.3 0
Oak Park Manor Mortgage ALF 2,196,835 0.6 53,032
------------ ----- ------------
$ 8,046,835 2.3% $ 53,032
VANGUARD CARE
Silver Haven Care Nursing Center Mortgage SNF $ 2,533,112 0.7% $ 332,773
Valley View Nursing Center Mortgage SNF 968,543 0.3 127,069
Richardson Manor Nursing Center Mortgage SNF 281,580 0.1 37,374
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$ 3,783,235 1.1% $ 497,216
NEW MEDICAL PROPERTY INVESTORS
Southwest General Hospital Equity AHF $ 2,368,092 0.7% $ 306,624
------------ ----- ------------
$ 2,368,092 0.7% $ 306,624
TRI-COUNTY CONVALESCENT HOME, INC.
Adamsville Mortgage SNF $ 2,237,138 0.7% $ 8,531
------------ ----- ------------
$ 2,237,138 0.7% $ 8,531
</TABLE>
3
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<TABLE>
<CAPTION>
OPERATOR AND TYPE OF TYPE OF AMOUNT OF % OF 1996
PROPERTY NAME(1) INVESTMENT PROPERTY(2) INVESTMENT(3) PORTFOLIO REVENUE(4)
---------------- ---------- ----------- ------------- --------- ------------
<S> <C> <C> <C> <C> <C>
SSM HEALTH SYSTEMS, INC.
Clayton Big Bend Medical Center Equity PC $ 2,280,562 0.7% $ 347,534
------------ ----- ------------
$ 2,280,562 0.7% $ 347,534
IVY HALL ASSOCIATES
Ivy Hall/Atlanta Mortgage ALF $ 147,347 0.0% $ 737
------------ ----- ------------
$ 147,347 0.0% $ 737
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Total $341,889,649 100.0% $ 34,690,936
============ ===== ============
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(1) Operators are Lessees, Borrowers, Guarantors or primary sublessees of the
healthcare facilities.
(2) AHF means ancillary hospital facility, ACH means acute-care hospital, ALF
means assisted living facility, ASF means ambulatory surgery facility, CMHH
means comprehensive mental health hospital, IDF means integrated delivery
facility, IRF means inpatient rehabilitation facility, ORF means outpatient
rehabilitation facility, PC means physician clinic, SAC means sub-acute care
facility, and SNF means skilled nursing facility.
(3) Based on actual investment at December 31, 1996.
(4) Reflects actual income earned for the year ended December 31, 1996.
Ancillary hospital facilities, which are contiguous or adjacent to a
hospital, contain physician offices and provide a variety of medical services
such as diagnostic, outpatient surgery and rehabilitation services, selected
hospital support services and educational and research activities. Acute-care
hospitals provide a full range of inpatient, acute healthcare services. Assisted
living facilities generally provide extended care and a variety of healthcare
services to the elderly in a more residential setting. Ambulatory surgery
facilities provide various surgical procedures, typically on an outpatient
basis. Comprehensive mental health hospitals provide a full range of treatment
for psychiatric and chemical dependency disorders. Integrated delivery
facilities provide a variety of medical services such as primary care,
laboratory and diagnostic services, outpatient surgery and emergency care.
Inpatient rehabilitation facilities provide a full range of inpatient
rehabilitation services to patients experiencing significant physical
disabilities due to various conditions, such as head injury, spinal cord injury,
stroke, certain orthopedic problems and neuromuscular disease. Outpatient
rehabilitation facilities offer a comprehensive range of rehabilitative
healthcare services, including physical and occupational therapy, and focus
predominantly on orthopedic injuries, sports injuries, work injuries, hand and
upper extremity injuries, back injuries and various neurological/neuromuscular
conditions. Physician clinics provide a variety of outpatient diagnostic and
therapeutic healthcare services. Sub-acute care facilities provide monitoring,
specialized care and comprehensive rehabilitative therapy required by sub-acute
and medically complex patients. Skilled nursing facilities provide extended care
and a variety of acute-care healthcare services to the elderly.
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The following table sets forth as of December 31, 1996 the distribution of
the Company's Investments by state.
<TABLE>
<CAPTION>
NUMBER OF
STATE FACILITIES INVESTMENT(1) % OF PORTFOLIO
- ----- ---------- ------------- ---------------
<S> <C> <C> <C>
Florida.......................................... 12 $ 72,259,202 21.1%
Alabama.......................................... 9 44,474,007 13.0%
Texas............................................ 7 29,544,970 8.6%
California....................................... 6 40,575,430 11.9%
Missouri......................................... 4 20,197,968 5.9%
Pennsylvania..................................... 4 54,035,116 15.8%
Virginia......................................... 4 23,881,316 7.0%
Georgia.......................................... 3 2,707,192 0.8%
Arizona.......................................... 2 12,903,526 3.8%
Nevada........................................... 2 34,271,462 10.0%
Tennessee........................................ 2 4,038,633 1.2%
Arkansas......................................... 1 2,081,408 0.6%
Illinois......................................... 1 919,420 0.3%
-- ------------ ----
TOTAL.................................. 57 $341,889,650 100%
</TABLE>
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(1) Based on actual investment at December 31, 1996.
SELECTED OPERATORS
Nine of the 17 Operators of the properties underlying the Company's
Investments at December 31, 1996, are subject to the reporting requirements of
the Securities and Exchange Commission (the "Commission") and file with the
Commission annual reports containing audited financial information and quarterly
reports for the first three quarters of each fiscal year containing unaudited
financial information. Certain summary information is set forth below with
respect to five public Operators whose facilities comprise approximately 51.5%
of the Company's Investments at December 31, 1996. With respect to such
companies, the information provided is derived for the limited purposes of this
report from filings made with the Commission.
While the Company has not established any definitive credit criteria, the
Company evaluates the creditworthiness of the Operators based upon a review of
publicly available financial and other information, as well as a due diligence
review of the individual financial statements and other non-financial
information provided by the Operators, to the extent available, and other data
customarily reviewed when a company makes an acquisition or significant
investment. While the Company believes the information is provided in good faith
and has no reason to believe that any such information is inaccurate in any
material respect, the Company, in most instances, has not and cannot make an
independent investigation of such information.
HEALTHSOUTH. HEALTHSOUTH, headquartered in Birmingham, Alabama, is the
nation's largest provider of outpatient and rehabilitative healthcare services.
HEALTHSOUTH provides these services through its national network of outpatient
and inpatient rehabilitation facilities, outpatient surgery centers, medical
centers and other healthcare facilities. As of December 31, 1996, HEALTHSOUTH
had over 1,000 patient care locations in 50 states. HEALTHSOUTH's 1996 revenues
were approximately $2.4 billion.
On February 18, 1997, HEALTHSOUTH entered into a plan and agreement of
merger with Horizon/ CMS Healthcare Corporation. As a result of the merger,
HEALTHSOUTH will acquire 33 inpatient rehabilitation hospitals, 58 specialty
hospitals and subacute units, 282 outpatient rehabilitation facilities, 267
long-term care facilities that Horizon/CMS owns, leases or manages, a contract
therapy business holding 1,400 contracts, an institutional pharmacy business
serving 38,500 beds, and other healthcare services.
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The following is a summary of certain financial information for
HEALTHSOUTH:
HEALTHSOUTH SUMMARY CONSOLIDATED FINANCIAL INFORMATION
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<CAPTION>
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1994 1995 1996
------------ ------------ -------------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA
Cash and marketable securities................... $ 129,971 $ 156,321 $ 124,852
Working capital.................................. 282,667 406,125 469,609
Total assets..................................... 2,230,093 2,931,495 3,182,772
Long-term debt................................... 1,139,087 1,391,664 1,463,927
Stockholders' equity............................. 757,583 1,185,898 1,397,231
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED
------------------------- SEPTEMBER 30,
1994 1995 1996
----------- ----------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues.......................................... $1,649,199 $2,003,146 $1,793,766
Expenses.......................................... 1,464,526 1,791,257 1,499,773
Net Income........................................ 88,083 92,521 158,450
</TABLE>
COLUMBIA/HCA. Columbia/HCA, headquartered in Louisville, Kentucky,
provides a full range of inpatient and outpatient services and is one of the
leading hospital owners and management companies in the United States. Major
services provided by Columbia/HCA and its affiliated entities include acute
inpatient care, inpatient psychiatric care, outpatient diagnostic services,
outpatient surgery programs, outpatient psychiatric services, rehabilitation
services, skilled nursing care and home healthcare/infusion services. At
February 28, 1997, Columbia/HCA operated 347 hospitals, 147 surgery centers and
more than 550 home health agencies and extensive ancillary service providers in
37 states, England and Switzerland. Columbia/HCA is building comprehensive
networks of healthcare services, including home health, rehabilitation and
skilled nursing units in local markets around the country.
MEDPARTNERS. MedPartners, with annualized revenues of approximately $5.1
billion, is the largest physician practice management company in the United
States. MedPartners develops, consolidates and manages integrated healthcare
delivery systems. Through its network of affiliated group and independent
practice association ("IPA") physicians, MedPartners provides primary and
specialty health care services to prepaid managed care enrollees and
fee-for-service patients. MedPartners also operates one of the largest
independent prescription benefit management programs in the United States and
provides disease management services and therapies for patients with certain
chronic conditions. As of December 31, 1996, MedPartners operated in 25 states
through affiliations with approximately 8,875 physicians, including
approximately 2,603 in group practices, 5,314 through IPA relationships and 958
who were hospital-based, providing healthcare to approximately 1.6 million
prepaid enrollees.
INTEGRATED HEALTH. Integrated Health, formed in 1986, and headquartered in
Owings Mills, Maryland, is one of the nation's leading providers of sub-acute
healthcare services. Integrated Health's strategy is to use geriatric care
facilities as platforms to provide a wide variety of medical and rehabilitative
services more typically delivered in the acute-care hospital setting. Integrated
Health's focus on providing sub-acute care is designed to address the fact that
cost containment measures implemented by private insurers and limitations on
government reimbursement of hospital costs have resulted in the discharge from
hospitals of many patients who continue to require sub-acute care. These
patients often cannot be effectively cared for in the home because of the
complex monitoring and specialized medical treatment required. Because geriatric
care facilities have lower capital and operating costs than acute-care
hospitals, Integrated Health is able to offer these complex medical services at
a significantly lower cost than acute-care hospitals. As of December 31, 1996,
Integrated Health operated over 1,000 post-acute service locations in 40 states
throughout the United
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States. On October 21, 1996, Integrated Health announced that it had entered
into a definitive merger agreement pursuant to which it will acquire Coram
Healthcare Corp, which is the largest provider of home infusion services with
annualized 1996 revenues of $532 million and 112 locations in 43 states.
TENET. Tenet Healthcare Corporation, headquartered in Santa Barbara,
California, owns and operates 127 hospitals and numerous ancillary healthcare
operations serving communities in 22 states. On January 30, 1997, Tenet acquired
OrNda HealthCorp in a transaction accounted for as a pooling of interests. A
substantial number of OrNda's 50 general hospitals complement the 77 general
hospitals owned or leased by Tenet prior to the merger, particularly in south
Florida and southern California. As of January 30, 1997, the combined company
had approximately 97,000 employees and pro forma revenues of $8.8 billion for
the 12 months ended November 30, 1996.
INVESTMENT POLICY
The Company's investment objectives are to (i) generate current income for
stockholders; (ii) provide the opportunity for additional returns to
stockholders through the acquisition and development of additional properties
and the acquisition of additional mortgages, which may require the use of
additional debt or equity financing; (iii) provide stockholders with the
opportunity to realize capital growth resulting from appreciation, if any, in
the residual values of any properties acquired; and (iv) preserve and protect
stockholders' capital. There can be no assurance that any of these objectives
will be realized.
Management's investment criteria emphasize evaluation of the (i)
creditworthiness of a proposed lessee, borrower, guarantor, developer or, under
certain circumstances, sublessee of a healthcare facility, (ii) competitive
position of a proposed property, (iii) attractiveness of the industry segment
and (iv) strategic fit of a proposed property with the Company's existing
portfolio. The Company believes that there is significant demand for REIT
financing capital in the healthcare industry. In addition, the Company believes
that the substantial healthcare industry experience and industry relationships
of its management and directors will help the Company identify, evaluate and
complete additional investments.
The primary factor in determining whether to make an investment as a Lease
or Mortgage Loan is the financing structure proposed by the owner or developer.
In evaluating whether to purchase a property for lease, the Company considers
such factors as (i) the geographic area, type of property and demographic
profile; (ii) the location, construction quality, condition and design of the
property; (iii) the current and anticipated cash available for distribution and
its adequacy to meet operational needs and lease obligations and to provide a
competitive market return on equity to the Company's investors; (iv) the
potential for capital appreciation, if any; (v) the growth, tax and regulatory
environment of the communities in which the properties are located; (vi) the
occupancy and demand for similar health facilities in the same or nearby
communities; (vii) the mix of private and government sponsored patients; (viii)
any potential alternative uses of the facilities; (ix) prospects for liquidity
through financing or refinancing; (x) industry segment and operator
diversification; and (xi) the suitability of the potential investments in light
of maintaining REIT status.
In making future investments, the Company intends to focus on established,
creditworthy potential lessees, borrowers and developers which meet the
Company's standards for quality and experience of management. In order to
determine creditworthiness of potential lessees, borrowers and developers, the
Company reviews historical and prospective financial information of lessees,
borrowers and developers, together with appropriate financial information of any
guarantor. Factors considered in connection with such financial reviews include
the net worth, profitability and cash flow, debt position, and the ability to
provide additional credit enhancements.
LEASES
Each Lease relates to a healthcare facility, comprised generally of the
land, buildings, other improvements and certain fixtures, for a use, in most
cases, restricted to the intended healthcare related use and for such other uses
as may be necessary in connection with or incidental to such use (the "Primary
Intended Use"). Generally, personal property is not being purchased or leased,
although the Company has been granted an option to purchase any personal
property necessary or appropriate for the operation of the Leased
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Properties for an amount equal to the then-current book value (original cost
less accumulated depreciation on the books of the lessee). The Leases have
initial terms ranging from 10 to 15 years with the majority having one or more
renewal terms providing in total at least 10 additional years exercisable by the
lessee. The Leases are subject to earlier termination upon the occurrence of an
event of default under the Lease by the lessee. Base rent varies by Lease,
taking into consideration many factors, including the credit of the lessee,
purchase price of the property, operating performance of the facility, location,
type and physical condition of the facility. The Leases generally provide for
additional rent commencing after the first year based on either a set percentage
increase on a rate based on the consumer price index, with annual increases
generally limited to a maximum of 5%.
Substantially all of the Leases are triple net leases which require the
lessees to pay, in addition to base rent, any additional rent and all additional
charges, including any fines, penalties, interest and costs which may be levied
for nonpayment or late payment thereof, all operating expenses, taxes,
environmental clean up costs, association dues, insurance premiums, assessments,
levies, fees, water and sewer rents and charges, all governmental charges with
respect to the applicable Leased Property and ground rent in the case of the
Larkin Medical Building, Virginia Beach, North Lake, North Shore, Great Lakes,
Altoona, Mechanicsburg, Southwest General Medical Building, Cape Coral Medical
Plaza, Bonita Bay Medical Centre and Sarasota Medical Centre facilities.
Each lessee is required, at its expense, to maintain its leased property in
good order and repair. The Company is not required to repair, rebuild or
maintain the Leased Properties. Under certain Leases, the Company must purchase
from the lessees certain structural capital improvements and replacements made
by such lessees or otherwise compensate the lessees.
Generally, the Leases also contain provisions which generally permit the
lessees, under certain circumstances, to terminate the Leases and to repurchase
the applicable Leased Property for a price equal to the Minimum Repurchase Price
(as defined in the Leases) or to substitute another property or properties for
the applicable Leased Property. These circumstances include (i) the occurrence
of certain damage to or destruction of the Leased Properties, (ii) condemnation
and (iii) mutual agreement of the parties. The Integrated Health Leases contain
an option, commencing at the end of the fifth year, to repurchase the Leased
Property for a purchase price equal to the Minimum Repurchase Price (as defined
in the Leases). Each of the lessees has a right of first refusal to purchase the
Leased Property during the terms of the Leases and for a short period of time
following the expiration of the terms of the Leases on the same terms and
conditions as the Company may propose to sell such Leased Property to an
unrelated third party.
DEVELOPMENT ARRANGEMENTS
The Company has entered into certain development funding arrangements to
provide the funding to enable healthcare operators to build facilities on
property owned or leased by the Company. The Company views development funding
as an effective way to acquire prime investments and to meet the significant
demand on the part of qualified operators for funds for development of
healthcare facilities. Providing such capital will, management believes, enhance
the Company's position as a provider of funds for the healthcare industry.
The Company contracts with a qualified third party developer to construct a
facility. Prior to making any funding advance for a development, the Company
will enter into a contract to acquire or ground lease the real estate, will
enter into a triple net lease with the third party developer and will have
approval authority with regard to plans, specifications, budgets and time
schedules for the completion of the development of the property. Under the terms
of the development funding agreements, the Company will receive funding fees
(the economic equivalent of construction period interest) on all funds advanced.
Timely completion of the development in compliance with the plans,
specifications, budgets and time schedules will be the contractual
responsibility of the third party developer. All construction and service
contracts relating to the development will be assigned to the Company. During
the term of the development of a facility, funds will be advanced pursuant to
requests made by the third party developer in accordance with the terms and
conditions of the applicable funding agreement based on costs incurred prior to
the date of such requests. As construction progresses, the Company will receive
monthly reports evidencing the third party developer's compliance with the
plans, specifications, budgets and time schedules, certified by appropriate
architects and engineers. Change
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<PAGE> 11
orders, if any, to the plans, specifications, budgets and time schedules will be
permitted only with the approval of the Company.
Failure by the third party developer to comply with the terms of the
funding agreements, including inability to meet budgets and time schedules, will
constitute a default on the part of the third party developer. Depending on the
nature of the default, the Company will have remedies available to it, including
the authority to remove the third party developer and undertake completion of
the development at the expense of the third party developer or the right to
require completion of the development property or repayment of the funds
invested by the Company pursuant to guarantees of the parent company of the
developer. The Company believes that it has the requisite development and
construction management oversight experience to complete, if necessary, a
development. Upon completion of the development, the applicable Operator will
have the obligation to undertake its responsibilities under the applicable
Lease.
COMPETITION
The Company competes for investments with, among other investors,
healthcare providers, other healthcare-related REITs, real estate partnerships
and financial institutions. Certain of these investors have greater capital
resources than the Company. All of the Investments operate in a competitive
environment, and patients and referral sources, including physicians, may change
their preferences for a healthcare facility from time to time. The Investments
compete with other similar facilities in their various locations for the support
of the medical community. Additionally, other healthcare facilities in which the
Company may invest will likely compete with similar facilities for the support
of the medical community and the general public. Some significant competitive
factors for the placing of physicians in ancillary hospital facilities and
patients in medical facilities include reputation, physical appearance of the
facilities, services offered, quality of care, family preferences, physician
services, location and price.
GOVERNMENT REGULATION
The financial condition of the lessees, borrowers, guarantors and
sublessees ("Operators") may be affected by changes in the reimbursement,
licensing and certification policies of federal, state and local governments for
healthcare-related facilities. Certain of the healthcare facilities underlying
the Investments may also be affected by changes in accreditation standards or
procedures of accrediting agencies that are recognized by governments in the
certification process. In addition, expansion (including the addition of new
beds or services or acquisition of medical equipment) and occasionally the
discontinuation of services of healthcare facilities is generally subjected, in
most states, to regulatory approval through state Certificate of Need ("CON")
programs.
Rental arrangements are subject to federal and state laws and regulations
governing illegal rebates, kickbacks and referrals where co-investors are
physicians or others in a position to refer patients to the facilities. The
effect of these laws and regulations is generally to prohibit, through the
imposition of criminal and civil penalties (including program exclusion),
payment arrangements that are construed to include compensation for patient
referrals. Although there can be no assurance that government enforcement
agencies' and courts' interpretations of these laws will be consistent with that
of the Company, the Company does not believe that it has, nor is it aware that
any of the Operators have, any rental arrangements that do not comply in all
material respects with these laws. Legislative and regulatory proposals may be
enacted or adopted in the future that adversely affect physicians and other
healthcare providers that invest in healthcare facilities, regardless of whether
there is compensation for referrals, by limiting reimbursement by the Medicare
and Medicaid programs of otherwise covered services, requiring disclosures of
such interests, or imposing civil monetary and criminal penalties for violations
of proscriptions against referrals to such facilities. Such legislation or
regulations could adversely affect the ability of Operators to generate the cash
flow necessary to make payments to the Company under the Leases or Mortgage
Loans, as applicable.
State CON statutes generally provide that, prior to the addition of new
beds, the construction of new facilities or the introduction of new services, a
state health planning designated agency ("SHPDA") must determine that a need
exists for those beds, facilities or services. The CON process is intended to
promote
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<PAGE> 12
comprehensive healthcare planning, assist in providing high quality healthcare
at the lowest possible cost and avoid unnecessary duplication by ensuring that
only those healthcare facilities that are needed will be built.
Typically, the provider of services submits an application to the
appropriate SHPDA with information concerning the area and population to be
served, the anticipated demand for the facility or service to be provided, the
amount of capital expenditure, the estimated annual operating costs, the
relationship of the proposed facility or service to the overall state health
plan and the cost per patient day for the type of care contemplated. Whether the
CON is granted is based upon a finding of need by the SHPDA in accordance with
criteria set forth in CON statutes and state and regional health facilities
plans. If the proposed facility or service is found to be necessary and the
applicant to be the appropriate provider, the SHPDA will issue a CON containing
a maximum amount of expenditure and a specific time period for the holder of the
CON to implement the approved project.
Licensure and certification are separate, but related, regulatory
activities. The former is usually a state or local requirement and the latter is
a federal requirement. In almost all instances, licensure and certification will
follow specific standards and requirements that are set forth in readily
available public documents. Compliance with the requirements is monitored by
annual on-site inspections by representatives of various government agencies. To
the best of the Company's knowledge, all of the hospitals affiliated with the
ancillary hospital facilities have obtained all necessary CONs. To the best of
the Company's knowledge, all of the Leased Properties have obtained CONs, where
applicable. Loss by a facility of its ability to participate in government
sponsored programs because of licensing, certification or accreditation
deficiencies or because of program exclusion resulting from violations of law
would have adverse effects on its revenues and, therefore, its ability to
generate the cash flow necessary to make payment to the Company under the Leases
or Mortgage Loans, as applicable.
The American Medical Association has promulgated ethical guidelines on
physician referrals to facilities in which they have an ownership interest.
Generally, physicians are prohibited from making referrals to facilities in
which they have an ownership interest unless they provide services at the
facility (such as surgeons at surgery centers and physicians with staff
privileges at hospitals). A narrow exception to this position is permitted when
a facility is clearly needed in a community and alternative financing is not
available if certain strict conditions are satisfied. While it is generally
believed that this position is not intended to affect physician ownership in
large, publicly-traded companies such as the Company, physicians considering an
investment in the Company should be aware of the existence of these ethical
considerations and consider the potential applicability to the proposed
investment, including whether the physician is required to disclose his
investment to patients referred to such facilities.
The healthcare industry is undergoing significant changes as government and
third party payors adopt techniques, including managed care, to control the
cost, utilization and delivery of healthcare services. In addition to extensive
existing governmental healthcare regulation, there are numerous initiatives at
the federal and state levels for comprehensive reforms affecting the payment for
and availability of healthcare services. Aspects of certain of these healthcare
proposals, such as further reductions in Medicare and Medicaid payments and
increased use of managed care, if adopted, could adversely affect the Company by
reducing the Operators' ability to generate the cash flow necessary to make
payments to the Company under the Leases and Mortgage Loans, as applicable.
Other cost-control initiatives regarding the cost and delivery of healthcare are
also currently being considered, and reductions in payments to physicians or
other changes in reimbursement for healthcare services by other third-party
payors could materially adversely affect the financial condition of the
sublessees. Substantially all of the tenants or sublessees under leases are in
the medical profession and the Company believes that such tenants are dependent
on payment for their services by third-party payors. No assurance can be given
whether or to what extent any of the healthcare proposals will be enacted into
law, or the effect any such proposals or subsequent legislation or other changes
regarding healthcare would have on the financial condition of the tenants or
owners of the healthcare facilities underlying the Investments and their ability
to generate the cash flow necessary to make payments to the Company under the
Leases or Mortgage Loans, as applicable, or to renew the Leases.
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<PAGE> 13
Healthcare operators are subject to federal and state laws and regulations
which govern financial and other arrangements between healthcare providers.
These laws prohibit certain direct and indirect payments or fee-splitting
arrangements between healthcare providers that are designed to induce or
encourage the referral of patients to, or the recommendation of, a particular
provider for medical products and services. They also require compliance with a
variety of safety, health and other requirements relating to the conditions of
the licensed facility and quality of care provided. Possible sanctions for
violation of these laws and regulations include loss of license or
certification, the imposition of civil monetary and criminal penalties and
potential exclusion from Medicare and Medicaid programs, any of which could
adversely affect the ability of an Operator to generate the cash flow necessary
to make payments under the Leases or Mortgage Loans, as applicable.
In certain circumstances, conviction of abusive or fraudulent behavior with
respect to one facility may subject other facilities under common control or
ownership to disqualification from participation in the Medicare and Medicaid
programs.
Because this area of the law currently is subject to intense scrutiny,
additional laws and regulations may be enacted which could require changes in
certain operations of Operators. For example, a tenant's loss of license or
Medicare/Medicaid certification could result in the Company or a lessee or
borrower having to obtain another tenant for the affected healthcare facilities
underlying the Investments. No assurances can be given that the Company or any
Operator could contract with such a tenant on a timely basis or on acceptable
terms and a failure to do so could have an adverse effect on the Company's
revenues.
In addition to current regulations, the Clinton administration and Congress
may propose legislation affecting the payment for and availability of health
care services. Aspects of certain health care proposals, such as reductions in
Medicare and Medicaid payments, if adopted, could adversely affect Operators
and, therefore, their ability to generate the cash flow necessary to make
payment to the Company under the Leases or Mortgage Loans, as applicable.
Alternatively, other aspects of reform proposals, such as universal health
insurance coverage and coverage of certain previously uncovered services, could
have a positive impact on certain Operators. It is not possible at this time to
predict what, if any, reforms may be adopted by Congress or state legislatures.
The Company believes that healthcare regulations will continue to change
and, therefore, regularly monitors developments in healthcare law. There can be
no assurance that the operators of all of the Leased Properties will remain in
compliance with applicable law.
MEDICAID, MEDICARE, BLUE CROSS AND OTHER REVENUE SOURCES
Payments for patient care earned by Operators are received from the federal
Medicare program, state Medicaid programs, private insurance carriers, employers
and Blue Cross plans, health maintenance organizations, preferred provider
arrangements and directly from patients. Medicare payments to acute-care
hospitals for inpatient services are made pursuant to the Prospective Payment
System ("PPS") under which a hospital is paid a prospectively established rate
based on diagnosis. In general, Medicare payments for psychiatric, cancer, long
term, children's and rehabilitation hospitals, as well as distinct
rehabilitation and psychiatric units in general hospitals, are exempt from PPS
and continue to be reimbursed on a reasonable cost basis system.
Under regulations effective October 1, 1991, the capital related costs of
PPS hospitals are to be reimbursed by the Medicare program on a prospective
basis, phased in over a 10-year transition period, eventually to be a set
federal rate. The effects of the new payment methodology on actual levels of
reimbursement cannot yet be predicted. Properties not subject to PPS will
continue to be reimbursed by Medicare for capital costs on a percentage of cost
basis, subject to certain case limitations. Payments from state Medicaid
programs for acute care, rehabilitative and psychiatric care are based on
reasonable costs or are at fixed or capitated rates. Medicare and Medicaid
payments are generally below a facility's actual charge schedule and in some
cases payments are limited, delayed or reduced because of federal and sometimes
state budget deficits.
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<PAGE> 14
In recent years, fundamental changes in the Medicare program (including the
implementation of a PPS for inpatient services at medical/surgical hospitals)
have resulted in reduced levels of payment for a substantial portion of
healthcare services. Moreover, healthcare facilities have experienced increasing
pressures from private payors attempting to control healthcare costs, that have
in many instances reduced reimbursement to levels approaching that of government
payors. Considerable uncertainties surround the future determination of payment
levels under the Medicare program for inpatient hospital services as well as
outpatient services. Certain types of healthcare services, such as ambulatory
surgical centers, are undergoing major changes in utilization, services covered
and reimbursement methodologies. The Company can not predict what impact these
types of changes might have on the Company or the Operators.
The federal Medicare program adopted a system of reimbursement of physician
services, known as resource-based relative value scale ("RBRVS"), which took
effect in 1992 and was phased in through 1996. The RBRVS fee schedule and other
future changes in Medicare physician reimbursement will result in a decrease
from the historical levels of compensation per Medicare patient for certain
physicians. In addition, a number of states have received approval from the
Department of Health and Human Services to contract with managed care companies,
which, in turn, enter into agreements with physicians and hospitals who
participate in the Medicaid program. In many instances, physicians and hospitals
receive a flat payment per enrollee in the managed care plan. Some hospitals and
physicians receiving these capitated payments have experienced reductions in
revenues historically received for the treatment of Medicaid patients.
In August 1993, the Omnibus Budget Reconciliation Act of 1993 ("OBRA 1993")
was enacted, which included amendments to Medicare and Medicaid laws. The
primary focus of these amendments were a reduction in payments to providers
furnishing services under Part A of the Medicare program, and to physicians,
durable medical equipment suppliers and other providers of services under Part B
of the Medicare program. These amendments have resulted in substantial
reductions in reimbursements to hospitals.
Considerable uncertainty surrounds the future determination of payment
levels for services currently being reimbursed on a cost basis. Also,
substantial areas of the Medicare program are subject to legislative and
regulatory change, administrative rulings, interpretations, administration
discretion, governmental funding restrictions and requirements for utilization
review (such as second opinions for surgery and preadmission criteria). These
matters, as well as more general governmental budgetary concerns, may
significantly reduce payments under such programs made to the Operators'
facilities, and there can be no assurance that future Medicare payment rates
will be sufficient to cover cost increases in providing services to Medicare
patients.
Blue Cross payments in different states and areas are based on costs,
negotiated rates or retail rates. Payments from health maintenance organizations
and preferred provider organizations generally are negotiated, usually at a
discount from published charge schedules, which may take the form of a flat
payment per enrollee in the plan offered by such organizations.
Third-party payors, including commercial insurance companies, health
maintenance organizations, and preferred provider organizations, increasingly
demand enhanced quality and lower or discounted prices from healthcare
providers. Moreover, many third-party payors are adopting capitated RBRVS-based
reimbursement methodologies, which are also likely to reduce potential physician
reimbursements and have already adversely affected the income of many
physicians. These demands may lead to reductions in present and future
reimbursements for services provided by Operators. Such diminution of income
could have an adverse affect on the Operators' ability to generate the cash flow
necessary to make payments to the Company under the Leases or Mortgage Loans as
applicable.
INTEREST RATE SENSITIVITY
The degree of risk associated with the Company's borrowings will increase
to the extent that the Company borrows on terms involving variable interest
rates and/or "balloon" payments at maturity. Borrowings under the Bank Credit
Facility bear interest at a rate chosen by the Company from either the base rate
of NationsBank or the Eurodollar rate plus a percentage that varies from 1% to
1.625%. At June 30, 1997, the Company had variable interest rate indebtedness
aggregating approximately $110.6 million under the Bank Credit Facility. Future
indebtedness may also bear interest at a floating rate. Increases in interest
rates
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<PAGE> 15
could increase the Company's interest expense, which could adversely affect the
Company's ability to pay dividends to stockholders.
ENVIRONMENTAL MATTERS
Under various federal, state and local environmental laws, ordinances and
regulations, an owner of real property may be liable for the costs of removal or
remediation of certain hazardous or toxic substances at, under or disposed of in
connection with such property, as well as certain other potential costs relating
to hazardous or toxic substances (including injuries to persons and adjacent
property as well as fines). Most, if not all, of these laws, ordinances and
regulations contain stringent enforcement provisions including, but not limited
to, the authority to impose substantial administrative, civil and criminal fines
and penalties upon violators. Such laws often impose liability without regard to
whether the owner knew of, or was responsible for, the presence or disposal of
such substances and may be imposed on the owner in connection with the
activities of an operator of the property. The cost of any required remediation,
removal, fines or personal or property damages and the owner's liability
therefor could exceed the value of the property and/or the aggregate assets of
the owner or affect an operator's ability to satisfy its financial obligations
to the Company under the Leased Properties or Mortgage Loans. In addition, the
presence of such substances, or the failure to properly dispose of or remediate
such substances, may adversely affect the owner's ability to sell or lease such
property or to borrow using such property as collateral. In addition, under the
laws of some states and under the Comprehensive Environmental Response,
Compensation and Liability Act, a lender may be held liable under certain
circumstances as an "owner" or "operator" for costs of addressing releases or
threatened releases of hazardous substances at a property in which the lender
holds a security interest.
Operations at the healthcare facilities underlying the Investments have
been and will continue to be subject to numerous federal, state and local
environmental laws, ordinances and regulations, including those relating to the
generation, segregation, handling, packaging and disposal of radioactive
materials and other medical wastes as well as facility siting, construction,
occupational training and safety, disposal of non-medical wastes, underground
storage tanks and ash emissions from incinerators. In addition, certain of the
Investments were built prior to the time prohibitions on the use of asbestos in
building construction were enacted and other such facilities may be acquired by
the Company in the future.
The Company had Phase I environmental audits conducted on all of the
healthcare facilities underlying the Investments. Phase I environmental audits
involve preliminary reviews of title and uses of real property with little or no
sampling and should not be relied upon as the final determination of the absence
of environmental concerns. Certain of the Investments have asbestos-containing
building materials. Any remedial action taken in the future with respect to
other properties owned by the Company containing asbestos are required to be
paid by the Lessees under the Leases. In addition, all of the Leases and
Mortgage Loan documents contain indemnification provisions relating to
environmental liabilities or conditions, although there can be no assurances
that the Operators will be able to fulfill their indemnification obligations.
Moreover, the scope of such indemnification obligations may be limited and there
can be no assurances that such indemnification obligations will apply to all
environmental costs or liabilities incurred by the Company. Neither the Leases
nor the Mortgage Loans give the Company control over the operations of the
Operators or their tenants, nor will the Company monitor the properties with
respect to environmental matters.
No assurance can be given that the provisions of the Leases and Mortgage
Loan documents will fully protect the Company or that any prior owner, lessee,
sublessee or future lessee of an Investment did not and will not create
environmental conditions not known to the Company. However, the Company is not
aware of any such condition or liability that would have a material adverse
effect on the Company's results of operations and financial position.
INSURANCE
The Company obtains title insurance with respect to each of the Investments
in amounts equal to their respective purchase prices or in the amount of the
Company's committed investment, insuring that the Company holds title to each of
the Investments free and clear of all liens and encumbrances, except those
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<PAGE> 16
approved by the Company. The Company believes that the Investments are
adequately covered by comprehensive liability, fire, flood (if available) and
extended coverage with respect to the Investments with policy specifications and
insured limits customarily carried for similar properties. However, there are
certain types of losses which may either be uninsurable or not economically
insurable. The Company generally does not require the Operators to carry
earthquake insurance with respect to its Investments. This decision was based
upon a number of factors, including the structural design of the buildings and
the general lack of seismic activity in the areas where the healthcare
facilities underlying the Investments are located. Should an uninsured loss
occur the Company could lose its investment in, and anticipated profits and cash
flow from, an Investment.
EMPLOYEES
As of March 24, 1997, the Company employed ten people. None of the
Company's employees is a member of a labor union and the Company considers its
relations with its employees to be excellent.
ITEM 2. PROPERTIES
Information with respect to the Company's Investments is set forth in Item
1 of this Report.
HEADQUARTERS
The Company's headquarters are located in offices at 1000 Urban Center
Drive, Suite 630, Birmingham, Alabama, which are leased from an unaffiliated
party pursuant to a written lease that expires July 31, 1999. The lease covers
6,204 square feet at a rental of $17.66 per square foot, aggregating $109,562
annually.
ITEM 3. LEGAL PROCEEDINGS
The Company is not aware of any legal action pending or threatened against
it.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of stockholders during the fourth quarter
of 1996.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is listed on the New York Stock Exchange, Inc.
("NYSE") under the symbol "CCT". The following table sets forth, for the fiscal
periods indicated, since the Common Stock began trading, the high and low
closing sales prices of the Common Stock on the NYSE, and the dividend
distributions per share declared by the Company with respect to each applicable
quarter:
<TABLE>
<CAPTION>
DISTRIBUTION
HIGH LOW PER SHARE
---- ---- ------------
<S> <C> <C> <C>
1995:
First Quarter............................................... 17 1/8 15 5/8 .425
Second Quarter.............................................. 18 15 3/8 .445
Third Quarter............................................... 19 1/4 17 3/8 .445
Fourth Quarter.............................................. 19 1/4 18 1/8 .445
1996:
First Quarter............................................... 21 1/2 18 7/8 .445
Second Quarter.............................................. 21 1/2 19 1/2 .455
Third Quarter............................................... 21 1/4 19 3/4 .46
Fourth Quarter.............................................. 21 7/8 20 3/4 .465
1997:
First Quarter (through March 24)............................ 24 1/8 22 3/8
</TABLE>
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<PAGE> 17
On March 24, 1997, the closing price of the Common Stock on the NYSE was
$22 1/2 per share. As of March 14, 1997, 14,288,529 shares of Common Stock were
issued and outstanding and held by approximately 500 record holders.
The Company intends to continue its policy of paying quarterly cash
dividends. Future dividends will be dependent, however, upon the Company's
earnings, financial requirements and other relevant factors.
ITEM 6. SELECTED FINANCIAL DATA
The information set forth under the caption "Selected Financial Data", set
forth on Page 5 of the Company's 1996 Annual Report to Shareholders, is
incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company's information relating to the management's discussion and
analysis of financial condition and results of operations, set forth on pages 10
through 16 of the Company's 1996 Annual Report to Shareholders under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's consolidated financial statements and the related notes
thereto, together with the report of KPMG Peat Marwick LLP thereon, set forth on
Pages 17 through 27 of the Company's 1996 Annual Report to Shareholders, are
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors
The information with respect to directors, set forth under the caption
"Election of Directors" on pages 2 through 4 of the Company's Proxy Statement
relating to the Annual Meeting of Shareholders to be held on May 1, 1997, is
incorporated herein by reference.
EXECUTIVE OFFICERS
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Richard M. Scrushy........................ 44 Chairman of the Board
John W. McRoberts......................... 44 President and Chief Executive Officer
William C. Harlan......................... 46 Senior Vice President and Head of
Acquisitions
Andrew L. Kizer........................... 40 Vice President, Chief Financial Officer,
Secretary and Treasurer
</TABLE>
Mr. Scrushy is Chairman and Chief Executive Officer of HEALTHSOUTH and is a
co-founder of the Company. Prior to founding HEALTHSOUTH in 1983, Mr. Scrushy
served as a Vice President of Lifemark Corporation, a NYSE-listed company. He
also serves on the Board of Directors of Integrated Health Services, Inc., and
MedPartners, Inc.
Mr. McRoberts was a senior officer of AmSouth Bank of Alabama (formerly
AmSouth Bank N.A.), headquartered in Birmingham, Alabama, prior to becoming a
co-founder, President and Chief Executive Officer of the Company. He was
employed by AmSouth Bank from 1977 to 1993 and most recently was head
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<PAGE> 18
of Corporate Banking for the Birmingham area. Mr. McRoberts' responsibilities at
AmSouth also included oversight of the bank's entire healthcare lending
portfolio and the Birmingham based real estate lending portfolio.
Mr. Harlan was a senior vice president of SouthTrust Bank, N.A.,
headquartered in Birmingham, Alabama, prior to becoming employed by the Company.
He was employed by SouthTrust Bank, N.A. from 1976 to 1993 and was most recently
head of the bank's healthcare lending area. Mr. Harlan serves on the advisory
board of Carraway Medical Center, Inc.
Mr. Kizer, a certified public accountant, was a senior manager with KPMG
Peat Marwick in its Birmingham office prior to becoming employed by the Company.
Mr. Kizer was employed at KPMG Peat Marwick from 1985 to 1993. Prior to that
time he was employed by Arthur Andersen in its Birmingham office.
ITEM 11. EXECUTIVE COMPENSATION
The information under the caption "Executive Compensation," set forth on
pages 7 through 12 in the Company's Proxy Statement relating to the Annual
Meeting of Shareholders to be held on May 1, 1997, is incorporated herein by
reference. The Comparative Performance Graph and the Compensation Committee
Report on Executive Compensation, also included in the Proxy Statement, are
expressly not incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information under the caption "Security Ownership of Certain Beneficial
Owners and Management," set forth on pages 6 through 7 in the Company's Proxy
Statement relating to the Annual Meeting of Shareholders to be held on May 1,
1997, is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information under the caption "Certain Relationships and Related
Transactions," set forth on page 13 in the Company's Proxy Statement relating to
the Annual Meeting of Shareholders to be held on May 1, 1997, is incorporated
herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Index to Consolidated Financial Statements, Consolidated Financial
Statement Schedules and Exhibits.
1. Consolidated Financial Statements: The following consolidated
financial statements of Capstone Capital Corporation are incorporated
herein by reference in Item 8 from the Company's 1996 Annual Report to
Shareholders:
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 1996 and December
31, 1995.
Consolidated Statements of Income for the Years Ended December 31,
1996 and December 31, 1995, and for the period from inception to
December 31, 1994.
Consolidated Statements of Cash Flow for the Fiscal Years Ended
December 31, 1996 and December 31, 1995, and for the period from
inception to December 31, 1994.
Consolidated Statements of Stockholders' Equity for the Fiscal
Years Ended December 31, 1996 and December 31, 1995, and for the period
from inception to December 31, 1994.
Notes to Consolidated Financial Statements.
16
<PAGE> 19
2. Consolidated Financial Statement Schedules:
Independent Auditors' Report on Consolidated Financial Statement
Schedules
Schedule III -- Real Estate and Accumulated Depreciation as of
December 31, 1996
Schedule IV -- Mortgage Loans on Real Estate as of December 31,
1996
All other schedules are omitted because they are not applicable or
not required or because the information is included in the Company's
consolidated financial statements or notes thereto.
3. Exhibits
The exhibits listed on the accompanying Index of Exhibits are filed
as a part of this report or are incorporated herein by reference.
The Company agrees to furnish to the Securities and Exchange
Commission, upon request, a copy of each instrument defining the rights
of holders of the Company's long-term debt.
CAPSTONE CAPITAL CORPORATION WILL FURNISH TO EACH STOCKHOLDER, UPON
WRITTEN REQUEST, COPIES OF THE EXHIBITS REFERRED TO ABOVE AT A COST OF
TEN CENTS PER PAGE. REQUESTS SHOULD BE ADDRESSED TO: ANDREW L. KIZER,
SECRETARY, CAPSTONE CAPITAL CORPORATION, 1000 URBAN CENTER DRIVE, SUITE
630, BIRMINGHAM, ALABAMA 35242.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the last quarter of
the fiscal year ended December 31, 1996.
(c) Exhibits
The response to this portion of Item 14 is submitted as a separate section
of this report. See Item 14(a)(3) and separate Exhibit Index attached hereto.
(d) Financial Statement Schedules
The response to this portion of Item 14 is submitted as a separate section
of this report. See Item 14(a)(2).
17
<PAGE> 20
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Birmingham, State of Alabama, on September 26, 1997.
CAPSTONE CAPITAL CORPORATION
By: /s/ JOHN W. MCROBERTS
------------------------------------
John W. McRoberts,
President and Chief Executive
Officer
18
<PAGE> 21
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S> <C> <C>
3.1 -- Articles of Incorporation of the Company incorporated by
reference (pursuant to the provisions of Rule 12b-32) to
Exhibit 3.1 to the Company's Form S-11 Registration
Statement No. 33-77788, dated April 15, 1994, together with
Amendment to Articles of Incorporation incorporated by
reference to Exhibit 3.3 to the Company's Form S-11
Registration Statement No. 33-77788, and Amendment to
Articles of Incorporation incorporated by reference to
Exhibit 3.4 to Amendment No. 2 to the Company's Form S-11
Registration Statement No. 33-77788.
3.2 -- Amended and Restated By-Laws of the Company incorporated by
reference (pursuant to the provisions of Rule 12b-32) to
Exhibit 3.2 to Amendment No. 1 to the Company's Form S-11
Registration Statement No. 33-89756, dated March 6, 1995.
4.1 -- Specimen of Common Stock Certificate incorporated by
reference (pursuant to the provisions of Rule 12b32) to
Exhibit 4 to the Company's Form S-11 Registration Statement
No. 33-77788, dated April 15, 1994.
4.2 -- Form of Indenture for the 10 1/2% Convertible Subordinated
Debentures due 2002 between the Company and AmSouth Bank of
Alabama (including the form of Debenture included therein),
incorporated by reference (pursuant to the provisions of
Rule 12b-32) to Exhibit 4 to the Company's Form S-11
Registration Statement No. 33-89756, dated March 6, 1995.
4.3 -- Form of Indenture for the Senior Debt Securities,
incorporated by reference (pursuant to the provisions of
Rule 12b-32) to Exhibit 4.3 to Amendment No. 2 to the
Company's Form S-3 Registration Statement No. 33-97926,
dated November 22, 1995.
*4.4 -- Indenture for the Subordinated Debt Securities dated March
14, 1997, between the Company and AmSouth Bank of Alabama.
*4.5 -- First Supplemental Indenture for the 6.55% Convertible
Subordinated Debentures due 2002, dated March 14, 1997,
between the Company and AmSouth Bank of Alabama.
10.1 -- Agreement of Sale and Purchase with respect to American
Sports Medicine Institute, Birmingham Medical Building I and
Birmingham Medical Building II, incorporated by reference
(pursuant to the provisions of Rule 12b-32) to Exhibit 10.1
to the Company's Form S-11 Registration Statement No.
33-77788, dated April 15, 1994.
10.2 -- Agreement of Sale and Purchase with respect to One-7000
Building, incorporated by reference (pursuant to the
provisions of Rule 12b-32) to Exhibit 10.2 to the Company's
Form S-11 Registration Statement No. 33-77788, dated April
15, 1994.
10.3 -- Agreement of Sale and Purchase with respect to Coral Gables
MRI, incorporated by reference (pursuant to the provisions
of Rule 12b-32) to Exhibit 10.3 to the Company's Form S-11
Registration Statement No. 33-77788, dated April 15, 1994.
10.4 -- Agreement of Sale and Purchase with respect to Little Rock,
incorporated by reference (pursuant to the provisions of
Rule 12b-32) to Exhibit 10.4 to the Company's Form S-11
Registration Statement No. 33-77788, dated April 15, 1994.
</TABLE>
<PAGE> 22
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S> <C> <C>
10.5 -- Agreement of Sale and Purchase with respect to Larkin
Medical Building, incorporated by reference (pursuant to the
provisions of Rule 12b-32) to Exhibit 10.5 to the Company's
Form S-11 Registration Statement No. 33-77788, dated April
15, 1994.
10.6 -- Agreement of Sale and Purchase with respect to Richmond
Medical Building I and Richmond Medical Building II,
incorporated by reference (pursuant to the provisions of
Rule 12b-32) to Exhibit 10.6 to the Company's Form S-11
Registration Statement No. 33-77788, dated April 15, 1994.
10.7 -- Agreement of Sale and Purchase with respect to Virginia
Beach, incorporated by reference (pursuant to the provisions
of Rule 12b-32) to Exhibit 10.7 to the Company's Form S-11
Registration Statement No. 33-77788, dated April 15, 1994.
10.8 -- Agreement of Sale and Purchase with respect to Midway
Medical Plaza, incorporated by reference (pursuant to the
provisions of Rule 12b-32) to Exhibit 10.8 to the Company's
Form S-11 Registration Statement No. 33-77788, dated April
15, 1994.
10.9 -- Agreement of Sale and Purchase with respect to Mountain
View, incorporated by reference (pursuant to the provisions
of Rule 12b-32) to Exhibit 10.9 to the Company's Form S-11
Registration Statement No. 33-77788, dated April 15, 1994.
10.10 -- Agreement of Sale and Purchase with respect to Gravois,
incorporated by reference (pursuant to the provisions of
Rule 12b-32) to Exhibit 10.10 to the Company's Form S-11
Registration Statement No. 33-77788, dated April 15, 1994.
10.11 -- Agreement of Sale and Purchase with respect to Goodyear,
Hamiter Building and Medical Building II, incorporated by
reference (pursuant to the provisions of Rule 12b-32) to
Exhibit 10.11 to the Company's Form S-11 Registration
Statement No. 33-77788, dated April 15, 1994.
10.12 -- Agreement of Sale and Purchase with respect to Desert
Springs, incorporated by reference (pursuant to the
provisions of Rule 12b-32) to Exhibit 10.12 to the Company's
Form S-11 Registration Statement No. 33-77788, dated April
15, 1994.
10.13 -- Agreement of Sale and Purchase with respect to South Lake
Medical Center, incorporated by reference (pursuant to the
provisions of Rule 12b-32) to Exhibit 10.13 to the Company's
Form S-11 Registration Statement No. 33-77788, dated April
15, 1994.
10.14 -- Agreement of Sale and Purchase with respect to Northlake,
incorporated by reference (pursuant to the provisions of
Rule 12b-32) to Exhibit 10.14 to the Company's Form S-11
Registration Statement No. 33-77788, dated April 15, 1994.
10.15 -- Agreement of Sale and Purchase with respect to North Shore,
incorporated by reference (pursuant to the provisions of
Rule 12b-32) to Exhibit 10.15 to the Company's Form S-11
Registration Statement No. 33-77788, dated April 15, 1994.
10.16 -- 1994 Stock Incentive Plan of Crescent Capital Trust, Inc.,
incorporated by reference (pursuant to the provisions of
Rule 12b-32) to Exhibit 10.16 to the Company's Form S-11
Registration Statement No. 33-77788, dated April 15, 1994.
10.17 -- Lease Agreement between the Company and Birmingham Realty
Company, dated May 25, 1993, incorporated by reference
(pursuant to the provisions of Rule 12b-32) to Exhibit 10.17
to the Company's Form S-11 Registration Statement No.
33-77788, dated April 15, 1994.
</TABLE>
2
<PAGE> 23
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S> <C> <C>
10.18 -- Agreement and Certificate of Limited Partnership of Capstone
Capital of San Antonio, Ltd., an Alabama limited
partnership, incorporated by reference (pursuant to the
provisions of Rule 12b-32) to Exhibit 10.1 to the Company's
Form 8-K Current Report filed with the Commission on
November 2, 1994.
10.19 -- Agreement of Sale and Purchase By and Between MDM
Associates-San Antonio, Ltd. and Capstone Capital of San
Antonio, Ltd. d/b/a Cahaba of San Antonio, Ltd., dated
October 21, 1994, incorporated by reference (pursuant to the
provisions of Rule 12b-32) to Exhibit 10.2 to the Company's
Form 8-K Current Report filed with the Commission on
November 2, 1994.
10.20 -- Lease Agreement -- Capstone Capital of San Antonio, Ltd.
d/b/a Cahaba of San Antonio, Ltd., Lessor, and New Medical
Property Investors Company d/b/a NMP Investors Company,
Lessee, dated October 21, 1994, incorporated by reference
(pursuant to the provisions of Rule 12b-32) to Exhibit 10.3
to the Company's Form 8-K Current Report filed with the
Commission on November 2, 1994.
10.21 -- Agreement of Sale and Purchase By and Between MDM
Associates-Philadelphia, Ltd. and Capstone Capital of
Pennsylvania, Inc., dated October 20, 1994, incorporated by
reference (pursuant to the provisions of Rule 12b-32) to
Exhibit 10.4 to the Company's Form 8-K Current Report filed
with the Commission on November 2, 1994.
10.22 -- Lease Agreement -- Capstone Capital of Pennsylvania, Inc.,
Lessor, and New Medical Property Investors Company, Lessee,
dated October 21, 1994, incorporated by reference (pursuant
to the provisions of Rule 12b-32) to Exhibit 10.5 to the
Company's Form 8-K Current Report filed with the Commission
on November 2, 1994.
10.23 -- Agreement and Certificate of Limited Partnership of Capstone
of Cape Coral, Ltd., an Alabama limited partnership,
incorporated by reference (pursuant to the provisions of
Rule 12b-32) to Exhibit 10.6 to the Company's Form 8-K
Current Report filed with the Commission on November 2,
1994.
10.24 -- Agreement to Assign Ground Lease By and Between Cape Coral
Medical Plaza, L.C., and Capstone of Cape Coral, Ltd., dated
October 18, 1994, incorporated by reference (pursuant to the
provisions of Rule 12b32) to Exhibit 10.7 to the Company's
Form 8-K Current Report filed with the Commission on
November 2, 1994.
10.25 -- Development Agreement between Capstone of Cape Coral, Ltd.
and Cape Coral Medical Plaza, L.C., dated October 18, 1994,
incorporated by reference (pursuant to the provisions of
Rule 12b-32) to Exhibit 10.8 to the Company's Form 8-K
Current Report filed with the Commission on November 2,
1994.
10.26 -- Guaranty of Obligations Pursuant to Lease Agreement executed
by Jaramar, Ltd., a Texas limited liability company, dated
October 18, 1994, to induce Capstone of Cape Coral, Ltd. to
enter into a Lease Agreement with Cape Coral Medical Plaza,
L.C., incorporated by reference (pursuant to the provisions
of Rule 12b32) to Exhibit 10.9 to the Company's Form 8-K
Current Report filed with the Commission on November 2,
1994.
10.27 -- Lease Agreement -- Capstone of Cape Coral, Ltd., Lessor, and
Cape Coral Medical Plaza, L.C., Lessee, dated October 18,
1994, incorporated by reference (pursuant to the provisions
of Rule 12b-32) to Exhibit 10.10 to the Company's Form 8-K
Current Report filed with the Commission on November 2,
1994.
</TABLE>
3
<PAGE> 24
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S> <C> <C>
10.28 -- Agreement and Certificate of Limited Partnership of Capstone
of Bonita Bay, Ltd., an Alabama limited partnership,
incorporated by reference (pursuant to the provisions of
Rule 12b-32) to Exhibit 10.11 to the Company's Form 8-K
Current Report filed with the Commission on November 2,
1994.
10.29 -- Agreement to Assign Ground Lease By and Between Bonita Bay
Medical Centre, L.C., and Capstone of Bonita Bay, Ltd.,
dated October 18, 1994, incorporated by reference (pursuant
to the provisions of Rule 12b-32) to Exhibit 10.12 to the
Company's Form 8-K Current Report filed with the Commission
on November 2, 1994.
10.30 -- Development Agreement between Capstone of Bonita Bay, Ltd.
and Bonita Bay Medical Centre, L.C., dated October 18, 1994,
incorporated by reference (pursuant to the provisions of
Rule 12b-32) to Exhibit 10.13 to the Company's Form 8-K
Current Report filed with the Commission on November 2,
1994.
10.31 -- Guaranty of Obligations Pursuant to Lease Agreement executed
by Jaramar, Ltd., a Texas limited liability company, dated
October 18, 1994, to induce Capstone of Bonita Bay, Ltd. to
enter into a Lease Agreement with Bonita Bay Medical Centre,
L.C., incorporated by reference (pursuant to the provisions
of Rule 12b-32) to Exhibit 10.14 to the Company's Form 8-K
Current Report filed with the Commission on November 2,
1994.
10.32 -- Lease Agreement -- Capstone of Bonita Bay, Ltd., Lessor, and
Bonita Bay Medical Centre, L.C., Lessee, dated October 18,
1994, incorporated by reference (pursuant to the provisions
of Rule 12b-32) to Exhibit 10.15 to the Company's Form 8-K
Current Report filed with the Commission on November 2,
1994.
10.33 -- Agreement and Certificate of Limited Partnership of Capstone
of Sarasota, Ltd., an Alabama limited partnership,
incorporated by reference (pursuant to the provisions of
Rule 12b-32) to Exhibit 10.16 to the Company's Form 8-K
Current Report filed with the Commission on November 2,
1994.
10.34 -- Agreement to Assign Ground Lease By and Between Sarasota
Medical Centre, L.C., and Capstone of Sarasota, Ltd., dated
October 18, 1994, incorporated by reference (pursuant to the
provisions of Rule 12b-32) to Exhibit 10.17 to the Company's
Form 8-K Current Report filed with the Commission on
November 2, 1994.
10.35 -- Development Agreement between Capstone of Sarasota, Ltd. and
Sarasota Medical Centre, L.C., dated October 18, 1994,
incorporated by reference (pursuant to the provisions of
Rule 12b-32) to Exhibit 10.18 to the Company's Form 8-K
Current Report filed with the Commission on November 2,
1994.
10.36 -- Guaranty of Obligations Pursuant to Lease Agreement executed
by Jaramar, Ltd., a Texas limited liability company, dated
October 18, 1994, to induce Capstone of Sarasota, Ltd. to
enter into a Lease Agreement with Sarasota Medical Centre,
L.C., incorporated by reference (pursuant to the provisions
of Rule 12b-32) to Exhibit 10.19 to the Company's Form 8-K
Current Report filed with the Commission on November 2,
1994.
10.37 -- Lease Agreement -- Capstone of Sarasota, Ltd., Lessor, and
Sarasota Medical Centre, L.C., Lessee, dated October 18,
1994, incorporated by reference (pursuant to the provisions
of Rule 12b-32) to Exhibit 10.20 to the Company's Form 8-K
Current Report filed with the Commission on November 2,
1994.
</TABLE>
4
<PAGE> 25
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S> <C> <C>
10.38 -- Lease Agreement -- Crescent Capital of Alabama, Inc. and
HEALTHSOUTH Medical Center, Inc., dated June 8, 1994,
incorporated by reference (pursuant to the provisions of
Rule 12b-32) to Exhibit 10.1 to the Company's Form S-11
Registration Statement No. 33-89756, dated February 24,
1995.
10.39 -- Lease Agreement -- Midway Acquisition Company, Inc. and
Midway Hospital Medical Center, Inc. dated April 19, 1994,
incorporated by reference (pursuant to the provisions of
Rule 12b-32) to Exhibit 10.2 to the Company's Form S-11
Registration Statement No. 33-89756, dated February 24,
1995.
10.40 -- The Urban Center at Liberty Park Office Building One
Thousand Office Lease Agreement between Torchmark
Development Corporation and Crescent Capital of Alabama,
Inc., dated June 28, 1994, incorporated by reference
(pursuant to the provisions of Rule 12b-32) to Exhibit 10.3
to the Company's Form S-11 Registration Statement No.
33-89756, dated February 24, 1995.
10.41 -- Adoption Agreement for AmSouth Bank of Alabama Standardized
401(k) Profit Sharing Plan and Trust, dated February 10,
1995, incorporated by reference (pursuant to the provisions
of Rule 12b-32) to Exhibit 10.4 to the Company's Form S-11
Registration Statement No. 33-89756, dated February 24,
1995.
10.42 -- Confirmation of Rate Cap Transaction between the Company and
NationsBank of North Carolina, N.A., dated December 7, 1994,
incorporated by reference (pursuant to the provisions of
Rule 12b-32) to Exhibit 10.5 to the Company's Form S-11
Registration Statement No. 33-89756, dated February 24,
1995.
10.43 -- Lease Agreement between Crescent Capital of Alabama, Inc.
and HEALTHSOUTH Medical Center, Inc., dated June 8, 1994
(Birmingham), incorporated by reference (pursuant to the
provisions of Rule 12b-32) to Exhibit 10.1 to the Company's
Form 10-Q, dated August 15, 1994.
10.44 -- Lease Agreement between Crescent Capital of Alabama, Inc.
and HEALTHSOUTH Rehabilitation Corporation, dated June 8,
1994 (Larkin), incorporated by reference (pursuant to the
provisions of Rule 12b-32) to Exhibit 10.2 to the Company's
Form 10-Q, dated August 15, 1994.
10.45 -- Lease Agreement between Capstone Capital Trust, Inc. and
HEALTHSOUTH Rehabilitation Corporation, dated June 8, 1994
(Coral Gables), incorporated by reference (pursuant to the
provisions of Rule 12b-32) to Exhibit 10.3 to the Company's
Form 10-Q, dated August 15, 1994.
10.46 -- Lease Agreement between Capstone Capital Trust, Inc. and
HEALTHSOUTH Rehabilitation Corporation, dated June 8, 1994
(Little Rock), incorporated by reference (pursuant to the
provisions of Rule 12b-32) to Exhibit 10.4 to the Company's
Form 10-Q, dated August 15, 1994.
10.47 -- Lease Agreement between Capstone Capital Trust, Inc. and
HEALTHSOUTH Rehabilitation Corporation, dated June 8, 1994
(Larkin annex), incorporated by reference (pursuant to the
provisions of Rule 12b-32) to Exhibit 10.5 to the Company's
Form 10-Q, dated August 15, 1994.
10.48 -- Lease Agreement between Capstone Capital Trust, Inc. and
HEALTHSOUTH of Virginia, Inc., dated June 8, 1994
(Richmond), incorporated by reference (pursuant to the
provisions of Rule 12b-32) to Exhibit 10.6 to the Company's
Form 10-Q, dated August 15, 1994.
</TABLE>
5
<PAGE> 26
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S> <C> <C>
10.49 -- Lease Agreement between Capstone Capital Trust, Inc. and
HEALTHSOUTH Rehabilitation Corporation, dated June 8, 1994
(Virginia Beach), incorporated by reference (pursuant to the
provisions of Rule 12b-32) to Exhibit 10.7 to the Company's
Form 10-Q, dated August 15, 1994.
10.50 -- Lease Agreement between Midway Acquisition Company, Inc. and
Midway Hospital Medical Center, Inc., dated April 19, 1994
(Midway), incorporated by reference (pursuant to the
provisions of Rule 12b-32) to Exhibit 10.8 to the Company's
Form 10-Q, dated August 15, 1994.
10.51 -- Lease Agreement between Crescent Capital of Pennsylvania,
Inc. and Mountain View Nursing Center, Inc., dated June 15,
1994 (Mountain View), incorporated by reference (pursuant to
the provisions of Rule 12b-32) to Exhibit 10.9 to the
Company's Form 10-Q, dated August 15, 1994.
10.52 -- Lease Agreement between Capstone Capital Trust, Inc. and
Gravois Health Care, Inc., dated June 15, 1994 (Gravois),
incorporated by reference (pursuant to the provisions of
Rule 12b-32) to Exhibit 10.10 to the Company's Form 10-Q,
dated August 15, 1994.
10.53 -- Lease Agreement between Crescent Capital of Alabama, Inc.
and QHG of Gadsden, Inc., dated June 9, 1994 (Gadsden),
incorporated by reference (pursuant to the provisions of
Rule 12b-32) to Exhibit 10.11 to the Company's Form 10-Q,
dated August 15, 1994.
10.54 -- Lease Agreement between Capstone Capital Trust, Inc. and
NC-DSH, Inc., dated June 9, 1994 (Desert Springs),
incorporated by reference (pursuant to the provisions of
Rule 12b-32) to Exhibit 10.12 to the Company's Form 10-Q,
dated August 15, 1994.
10.55 -- Lease Agreement between Capstone Capital Trust, Inc. and
Surgical Health Corporation, dated June 16, 1994 (South
County), incorporated by reference (pursuant to the
provisions of Rule 12b-32) to Exhibit 10.13 to the Company's
Form 10-Q, dated August 15, 1994.
10.56 -- Lease Agreement between Capstone Capital Trust, Inc. and
Surgical Health Corporation, dated June 16 1994 (Northlake),
incorporated by reference (pursuant to the provisions of
Rule 12b-32) to Exhibit 10.14 to the Company's Form 10-Q,
dated August 15, 1994.
10.57 -- Lease Agreement between Capstone Capital Trust, Inc. and
Surgical Health Corporation d/b/a Evanston Properties, Inc.,
dated June 16, 1994 (North Shore), incorporated by reference
(pursuant to the provisions of Rule 12b-32) to Exhibit 10.15
to the Company's Form 10-Q, dated August 15, 1994.
10.58 -- Guaranty of Obligations pursuant to Lease Agreement between
Crescent Capital of Alabama, Inc. and HEALTHSOUTH
Rehabilitation Corporation, dated June 8, 1994, incorporated
by reference (pursuant to the provisions of Rule 12b-32) to
Exhibit 10.16 to the Company's Form 10-Q, dated August 15,
1994.
10.59 -- Guaranty of Obligations pursuant to Lease Agreement between
Capstone Capital Trust, Inc. and HEALTHSOUTH Rehabilitation
Corporation, dated June 8, 1994, incorporated by reference
(pursuant to the provisions of Rule 12b-32) to Exhibit 10.17
to the Company's Form 10-Q, dated August 15, 1994.
10.60 -- Guaranty of Obligations pursuant to Lease Agreement between
OrNda Healthcorp and Midway Acquisition Company, Inc., dated
April 19, 1994, incorporated by reference (pursuant to the
provisions of Rule 12b-32) to Exhibit 10.18 to the Company's
Form 10-Q, dated August 15, 1994.
</TABLE>
6
<PAGE> 27
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S> <C> <C>
10.61 -- Guaranty of Obligations pursuant to Lease Agreement between
Crescent Capital of Pennsylvania, Inc. and Integrated Health
Services, Inc., dated June 15, 1995, incorporated by
reference (pursuant to the provisions of Rule 12b-32) to
Exhibit 10.19 to the Company's Form 10-Q, dated August 15,
1994.
10.62 -- Guaranty of Obligations pursuant to Lease Agreement between
Capstone Capital Trust, Inc. and Integrated Health Services,
Inc., incorporated by reference (pursuant to the provisions
of Rule 12b-32) to Exhibit 10.20 to the Company's Form 10-Q,
dated August 15, 1994.
10.63 -- Guaranty of Obligations pursuant to Lease Agreement between
Crescent Capital of Alabama, Inc. and Quorum Health Group,
Inc., dated June 9, 1994, incorporated by reference
(pursuant to the provisions of Rule 12b-32) to Exhibit 10.21
to the Company's Form 10-Q, dated August 15, 1994.
10.64 -- Guaranty of Obligations pursuant to Lease Agreement between
Capstone Capital Trust, Inc. and Quorum Health Group, Inc.,
dated June 9, 1994, incorporated by reference (pursuant to
the provisions of Rule 12b-32) to Exhibit 10.22 to the
Company's Form 10-Q, dated August 15, 1994.
10.65 -- Guaranty of Obligations pursuant to Lease Agreement between
Capstone Capital of Alabama, Inc. and MedPartners, Inc.,
dated July 28, 1994, incorporated by reference (pursuant to
the provisions of Rule 12b-32) to Exhibit 10.23 to the
Company's Form 10-Q, dated August 15, 1994.
10.66 -- Revolving Credit and Reimbursement Agreement by and among
Capstone Capital Corporation, NationsBank of Georgia,
National Association, as Lender, and NationsBank of Georgia,
National Association, as Agent, dated June 22, 1994,
incorporated by reference (pursuant to the provisions of
Rule 12b-32) to Exhibit 10.6 to Amendment No. 2 to the
Company's Form S-11 Registration Statement No. 33-89756,
filed with the Commission on March 20, 1995.
10.67 -- Amendment Agreement No. 1 to Revolving Credit and
Reimbursement Agreement and Certain Other Loan Documents by
and among Capstone Capital Corporation, NationsBank of
Georgia, National Association, as Lender, and NationsBank of
Georgia, National Association, as Agent, dated October 26,
1994, incorporated by reference (pursuant to the provisions
of Rule 12b-32) to Exhibit 10.7 to Amendment No. 2 to the
Company's Form S-11 Registration Statement No. 33-89756,
filed with the Commission on March 20, 1995.
10.68 -- Amendment Agreement No. 2 to Revolving Credit and
Reimbursement Agreement and Certain Other Loan Documents by
and among Capstone Capital Corporation, NationsBank of
Georgia, National Association, as Lender, and NationsBank of
Georgia, National Association, as Agent, dated March 17,
1995, incorporated by reference (pursuant to the provisions
of Rule 12b-32) to Exhibit 10.8 to Amendment No. 2 to the
Company's Form S-11 Registration Statement No. 33-89756,
filed with the Commission on March 20, 1995.
10.69 -- Agreement of Sale and Purchase by and Between HEALTHSOUTH
Corporation, HEALTHSOUTH of Great Lakes, Inc. (Seller) and
Capstone Capital of Pennsylvania, Inc. (Purchaser), dated
March 17, 1995, incorporated by reference (pursuant to the
provisions of Rule 12b-32) to Exhibit 10(qqq) to the Form
10-K Annual Report of the Company dated March 29, 1995.
</TABLE>
7
<PAGE> 28
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S> <C> <C>
</TABLE>
10.70 -- Lease Agreement between Capstone Capital of Pennsylvania,
Inc. and HEALTHSOUTH Corporation, dated March 24, 1995
(Great Lakes), incorporated by reference (pursuant to the
provisions of Rule 12b-32) to Exhibit 10(rrr) to the Form
10-K Annual Report of the Company dated March 29, 1995.
*10.71 -- First Amendment to 1994 Stock Incentive Plan of Capstone
Capital Corporation.
*10.72 -- Employment and Noncompetition Agreement by and between
Capstone Capital Corporation and John W. McRoberts dated
effective November 1, 1996.
*10.73 -- Amended and Restated Revolving Credit and Reimbursement
Agreement by and among Capstone Capital Corporation;
NationsBank, National Association (South), AmSouth Bank of
Alabama, Credit Lyonnais New York Branch, National City
Bank, Kentucky, Creditanstalt Corporate Finance, Inc., The
Bank of Nova Scotia, First Commercial Bank, The Sumitomo
Bank, Limited, as Lenders; and NationsBank, National
Association (South), as Agent, dated June 24, 1996.
*10.74 -- Amendment No. 1 to Amended and Restated Revolving Credit and
Reimbursement Agreement by and among Capstone Capital
Corporation and NationsBank, N.A. (South) as Agent, dated
February 28, 1997.
*11 -- Statement re computation of per share earnings.
*12 -- Statement re computation of ratios.
13 -- Capstone Capital Corporation Annual Report to Shareholders
for the Fiscal Year Ended December 31, 1996. Such Annual
Report shall not be deemed to be filed with the Securities
and Exchange Commission as a part of this Form 10-K Annual
Report or otherwise subject to the liabilities of Section 18
of the Securities Exchange Act of 1934, as amended (except
for the specific portions thereof which are incorporated by
reference in this Form 10-K Annual Report).
*18 -- Letter re change in accounting principles.
*21 -- Subsidiaries.
23.1 -- Consent of KPMG Peat Marwick LLP.
*27 -- Financial Data Schedule (for SEC use only).
- ---------------
* Previously filed.
8
<PAGE> 1
[PAGES 10 THROUGH 16 OF THE COMPANY'S 1996 ANNUAL REPORT TO SHAREHOLDERS]
EXHIBIT 13.1
MANAGEMENT'S DISCUSSION
OVERVIEW
The Company is an indefinite life 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 a diversified portfolio of income-producing, healthcare-
related real estate, which it leases, and provides mortgage financing to
healthcare operators. The Company believes that it is an important source of
capital for the healthcare industry and intends to continue investing in a high
quality portfolio of properties managed by established operators of
rehabilitation, alternate-site care, long-term care, and acute-care facilities.
The Company diversifies its portfolio by operator, geography, facility type and
healthcare industry segment. The Company's primary objective is to provide
current income for distribution to stockholders.
The Company incurs operating and administrative expenses, principally
compensation expense for its officers and other employees, office rent and
occupancy costs, and various expenses incurred in connection with acquiring
additional facilities or providing additional mortgage financing. The Company is
self-administered and managed by its executives and staff, and does not engage a
separate advisor for administrative or investment services, although the Company
does engage legal, accounting, tax, and financial advisors from time to time.
All taxes, maintenance, and other operating costs associated with leased
properties are generally paid by the lessees. The Company intends to continue to
declare and pay quarterly dividends to its stockholders in amounts not less than
the amounts required to maintain REIT status under the Internal Revenue Code.
The Company's ability to pay dividends will depend upon its cash available for
distribution.
RESULTS OF OPERATIONS
Year Ended 1996 compared to the Year Ended 1995
In 1996, the Company reported net income of $18.9 million, or $1.71 primary
net income per common share, compared to $9.7 million, or $1.55 primary net
income per common share in 1995. The increase in net income is attributable to
increases in rental and mortgage income from property acquisitions and
additional mortgage fundings, while total interest expense experienced only a
minor increase due to conversions of the Company's Convertible Subordinated
Debentures (Debentures) to common stock and a decrease in the weighted average
interest rate of the unsecured line of credit (Bank Credit Facility) during
1996.
Total income increased $11.3 million, or 45.5%, to $36.0 million in 1996
over the previous year's total income of $24.7 million. The increase is due
primarily to rental income increasing $9.2 million in 1996 to $32.0 million from
1995's total of $22.8 million. The Company acquired eight additional properties
during the year and also recognized a full year's rental income on the twelve
properties acquired in 1995. Additionally, mortgage interest income increased
$1.4 million, or 73.6%, to $3.2 million in 1996 from $1.8 million in 1995, due
to additional mortgage fundings of $14.5 million during 1996.
Total expenses in 1996 were $17.0 million compared to $15.0 million in
1995, an increase of $2.0 million or 13.6%. This is primarily attributable to an
increase in depreciation expense of $1.8 million in 1996 resulting from the
Company's acquisition of eight properties during the year and the recognition of
a full year's depreciation expense on the twelve properties that were acquired
in 1995. Interest expense experienced only a slight increase for 1996 due to
$26.3 million in conversions of the Company's Debentures to common stock and to
a decrease in the weighted average interest rate of the Bank Credit Facility.
Year ended December 31, 1995, compared to the period from June 30, 1994,
(inception) through December 31, 1994.
Revenues for the year ended December 31, 1995 totaled $24.7 million,
increasing $16.5 million, over 1994 revenues of $8.2 million. The increase in
revenues is primarily attributable to the recognition of a full year of revenues
from investments made during the partial year of 1994 and the revenues from
additional
<PAGE> 2
investments made during 1995. Specifically, a full year of revenues from 1994
investments added $11.1 million to revenues, and revenues from investments made
in 1995 added an additional $5.4 million.
Interest expense for the year ended December 31, 1995, totaled $8.8
million, increasing $7.4 million, over 1994 interest expense of $1.4 million.
The increase in interest expense is attributable to an increase of $3.5 million
in interest expense related to a full year of interest expense on amounts
borrowed under the Bank Credit Facility during 1994 and the interest expense on
amounts borrowed under the Bank Credit Facility during 1995. Additionally, $3.9
million of the increase in interest expense is due to interest expense related
to the issuance of $52 million of convertible debentures issued in March 1995.
Depreciation and amortization for the year ended December 31, 1995, totaled
$4.7 million, increasing $3.2 million over 1994 depreciation and amortization of
$1.5 million. $3.1 million of the increase in depreciation and amortization is
due primarily to a full year of depreciation on and amortization of investments
made in 1994 and the depreciation on and amortization of additional investments
made during 1995. Additionally, $0.2 million of the increase is due to
amortization of deferred financing costs related to the issuance of $52 million
of convertible debentures issued in March 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company requires capital in order to fund investments in healthcare
properties through sale/leaseback transactions or mortgage financing. To fund
these investments, the Company utilizes its cash flow from operations and a
combination of long-term and short-term capital including both equity and debt.
The Company's long-term capital includes equity securities and convertible
debentures. The Company's short-term capital is obtained through the use of its
Bank Credit Facility. The Company initially funds investments and working
capital needs through borrowings under the Bank Credit Facility, existing cash
and cash equivalents, and cash flow from operations. Thereafter, the Company
raises capital through issuance of additional long-term and short-term
indebtedness or the issuance of its securities in private or public
transactions. There can be no assurance that acceptable financing for future
investments can be obtained.
During the year ended December 31, 1996, the Company invested approximately
$102.4 million to acquire or construct real estate assets and invested
approximately $14.3 million in mortgage loans to healthcare providers. As of
December 31, 1996, the Company s investments totaled $354.6 million, consisting
of real estate properties of $302.6 million, real estate development projects of
$12.7 million, and mortgage notes receivable of $39.3 million. The 57 real
estate properties consist of sixteen ancillary hospital facilities, ten
physician clinics, nine skilled nursing facilities, six ambulatory surgery
facilities, four inpatient rehabilitation facilities, three outpatient
rehabilitation facilities, two comprehensive mental health hospitals, two sub-
acute care facilities, two assisted living facilities, two acute care hospitals,
and one integrated delivery facility. The real estate properties are located in
thirteen states and are leased or financed with seventeen healthcare-related
entities or their subsidiaries pursuant to long-term leases. There are eleven
real estate development projects with six healthcare operators consisting of
seven assisted living facilities, three integrated delivery facilities, and one
physician clinic. The mortgage notes receivable consist of thirteen mortgages
made to eight healthcare operators and secured by the real estate of five
long-term care facilities, three skilled nursing facilities, two acute-care
hospital facilities, two assisted living facilities, and one integrated delivery
facility.
During March 1995, the Company sold $52 million aggregate principal amount
of 10.50% Debentures due 2002. The net offering proceeds were used to reduce the
outstanding balance of the Company's Bank Credit Facility. As of December 31,
1996, a total of $34.3 million in the principal amount of the debentures had
been converted into 2.1 million common shares resulting in a decrease of $34.3
million in the debentures and an increase of $34.3 million in stockholders
equity. The Company intends to repay any 10.50% Debentures that remain
outstanding when such securities mature in 2002 from borrowings under the Bank
Credit Facility or from the sale of debt or equity securities.
During October 1995, the Company filed a registration statement
("Shelf-Registration") with the Securities and Exchange commission to enable the
Company to offer up to an aggregate of $250,000,000 in debt securities,
preferred stock, and common stock at prices and terms to be determined at the
time of sale. In December 1995, the Company sold 3.45 million shares of common
stock at a per share price of $18.125. The net offering proceeds of $58.6
million were used to reduce the outstanding balance of the Company's Bank Credit
Facility. Additionally, in November 1996, the Company sold 2.68 million shares
of common stock at a
<PAGE> 3
per share price of $20.875. The net offering proceeds of $52.8 million were also
used to reduce the outstanding balance of the Company's Bank Credit Facility.
In June 1996, the Company completed an amendment and restatement of its
Bank Credit Facility, increasing the principal amount to $150 million from its
previous principal amount of $100 million, extending the term to June 24, 1999,
from its previous term of June 22, 1997, and adjusting the determination of the
interest rate. At December 31, 1996, the outstanding balance of the Bank Credit
Facility was $68.5 million with a weighted average interest rate of 6.82%. The
maximum availability at year end was $81.5 million.
The Bank Credit Facility bears interest at a rate chosen by the Company
from either the Bank's base rate or the Euro-dollar 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. In
addition, the Company pays from 0.20 percent to 0.25 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 total
capital ratio.
The Bank Credit Facility contains certain representations, warranties and
financial, and other covenants customary in such loan agreements.
The Bank Credit Facility is unsecured; however, upon the occurrence of an
event of default under the Bank Credit Facility, at the option of the lenders,
the Bank Credit Facility may become secured by a significant portion of the
assets of the Company, including certain of the leased properties and mortgage
notes receivable.
The Bank Credit Facility, which is participated in by a consortium of eight
banks, will be available until June 24, 1999, and the principal balance
outstanding thereunder will mature on that date. The Company intends to renew
the Bank Credit Facility or to repay the outstanding balance thereunder at
maturity from the proceeds of a refinancing or from the sale of debt or equity
securities. There can be no assurances that the lenders will renew the Bank
Credit Facility on terms favorable to the Company or that the Company will be
able to refinance at that time.
On June 26, 1996, the Company entered into a mortgage note with 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.
The Company has committed a total of $102.8 million towards the acquisition
and construction of real estate properties and providing mortgage financing. As
of December 31, 1996, the Company had funded approximately $21.2 million towards
these commitments, with the balance of $81.6 million expected to be funded
throughout 1997. Financing for these commitments may be provided by funds from
operations, borrowings under the Bank Credit Facility, which the Company expects
to increase in 1997, or private placements or public offerings of debt or
equity.
Special 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.
<PAGE> 4
[PAGE 5 OF THE COMPANY'S ANNUAL REPORT TO STOCKHOLDERS]
EXHIBIT 13.2
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
FOR PERIOD FROM
YEAR ENDED YEAR ENDED INCEPTION TO
DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994
----------------- ----------------- -----------------
<S> <C> <C> <C>
STATEMENT OF INCOME DATA
Revenues...................................... $ 35,952,336 $ 24,707,272 $ 8,240,162
Net income.................................... 18,913,689 9,708,391 4,762,734
Net income per share.......................... 1.71 1.55 0.80
Weighted average shares outstanding-
Primary..................................... 11,086,086 6,271,242 5,980,000
Fully Diluted............................... 13,159,213 8,596,663 --
OTHER DATA
Funds from operations (I)-
Primary..................................... 22,632,815 12,523,303 5,628,243
Fully diluted............................... 25,852,242 16,390,667 --
Funds from operations per share-
Primary..................................... 2.04 2.00 0.94
Fully Diluted............................... 1.97 1.91 --
Dividends distributed......................... 19,206,375 10,641,666 2,541,500
Dividends distributed per share............... 1.81 1.74 0.425
BALANCE SHEET DATA
Real estate properties, net................... 303,997,418 207,257,168 151,328,041
Mortgage notes receivable..................... 39,325,621 24,988,753 13,224,230
Total assets.................................. 356,695,116 240,624,883 166,363,670
Convertible subordinated debentures........... 17,657,000 43,947,000 --
Bank credit facility.......................... 68,500,000 30,225,000 67,500,000
Mortgage Note Payable......................... 23,228,417 -- --
------------ ------------ ------------
Total stockholders' equity.......... $241,555,519 $163,746,655 $ 98,388,985
============ ============ ============
</TABLE>
(1) Funds from operations is computed as net income (computed in accordance with
generally accepted accounting principles), excluding rental income
recognized on a straight-line basis on those leases with scheduled rent
increases, and less book gains on the sale of assets, plus depreciation and
amortization. Management considers funds from operations to be an
informative measure of the performance of an equity REIT and consistent with
measures used by analysts to evaluate equity REITs. Funds from operations
does not represent cash generated from operating activities in accordance
with generally accepted accounting principles, is not necessarily indicative
of cash available to fund cash needs and should not be considered as an
alternative to net income as an indicator of the company's operating
performance or as an alternative to cash flow as a measure of liquidity.
<PAGE> 5
[PAGES 17 TO 27 OF THE COMPANY'S 1996 ANNUAL REPORT TO SHAREHOLDERS]
EXHIBIT 13.3
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
Capstone Capital Corporation:
We have audited the accompanying consolidated balance sheets of Capstone
Capital Corporation as of December 31, 1996 and 1995, and the related
consolidated statements of income, stockholders equity, and cash flows for the
years ended December 31, 1996 and 1995 and for the period from June 30, 1994
(inception) to December 31, 1994. These financial statements are the
responsibility of the Company s management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above, present fairly,
in all material respects, the financial position of Capstone Capital Corporation
as of December 31, 1996 and 1995, and the results of its operations and its cash
flows for the year ended December 31, 1996 and 1995 and for the period from June
30, 1994 (inception) to December 31, 1994, in conformity with generally accepted
accounting principles.
KPMG PEAT MARWICK LLP
Birmingham, Alabama
January 20, 1997
<PAGE> 6
CAPSTONE CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
Real estate properties
Land...................................................... $ 30,952,673 $ 24,669,023
Land improvements......................................... 2,350,309 2,350,309
Buildings and improvements................................ 269,261,047 185,771,380
Construction in progress.................................. 12,650,780 37,409
------------ ------------
315,214,809 212,828,121
Less accumulated depreciation............................. (11,217,391) (5,570,953)
------------ ------------
Real estate properties, net............................ 303,997,418 207,257,168
Mortgage notes receivable................................... 39,325,621 24,988,753
Cash........................................................ 1,122,241 675,568
Accrued rental income....................................... 4,689,976 2,518,323
Other assets................................................ 7,559,860 5,185,071
------------ ------------
Total assets...................................... $356,695,116 $240,624,883
============ ============
LIABILITIES AND STOCKHOLDERS EQUITY
Liabilities
Convertible subordinated debentures....................... $ 17,657,000 $ 43,947,000
Bank credit facility...................................... 68,500,000 30,225,000
Mortgage note payable..................................... 23,228,417 --
Accrued expenses and other liabilities.................... 5,754,180 2,706,228
------------ ------------
Total liabilities................................. 115,139,597 76,878,228
============ ============
Stockholders' equity
Preferred stock, $.001 par value, 10,000,000 shares
authorized; none issued................................ -- --
Common stock, $.001 par value, 50,000,000 shares
authorized; 14,247,947 shares and 9,929,732 shares
issued and outstanding, respectively................... 14,247 9,929
Additional paid-in-capital................................ 240,832,943 162,735,711
Loans to officers to finance stock purchases.............. (286,944) (286,944)
Retained Earnings......................................... 995,273 1,287,959
------------ ------------
Total stockholders' equity........................ 241,555,519 163,746,655
------------ ------------
Total liabilities and stockholders' equity........ $356,695,116 $240,624,883
============ ============
</TABLE>
The accompanying notes are an integral part of this financial statement
<PAGE> 7
CAPSTONE CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
YEAR ENDED YEAR ENDED INCEPTION TO
DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994
----------------- ----------------- -----------------
<S> <C> <C> <C>
Revenues
Rental income............................... $31,959,674 $22,774,371 $7,674,494
Mortgage interest income.................... 3,159,228 1,819,725 455,844
Gain from sale of property.................. 197,191 -- --
Other income................................ 636,243 113,176 109,824
----------- ----------- ----------
Total income........................ 35,952,336 24,707,272 8,240,162
----------- ----------- ----------
Expenses
General and administrative.................. 1,669,678 1,515,130 536,662
Depreciation................................ 6,021,811 4,180,868 1,416,574
Amortization................................ 293,267 515,970 85,332
Interest (net of $552,686 capitalized in
1996, $466,668 in 1995, and $94,858 in
1994).................................... 8,812,170 8,786,913 1,438,860
Property operations......................... 241,721 -- --
----------- ----------- ----------
Total expenses...................... 17,038,647 14,998,881 3,477,428
----------- ----------- ----------
Net income.................................... $18,913,689 $ 9,708,391 $4,762,734
=========== =========== ==========
Net Income Per Common Share................... $ 1.71 $ 1.55 $ 0.80
=========== =========== ==========
Weighted Averages Shares Outstanding.......... 11,086,086 6,271,242 5,980,000
=========== =========== ==========
</TABLE>
The accompanying notes are an integral part of this financial statement
<PAGE> 8
CAPSTONE CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED INCEPTION TO
DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994
----------------- ----------------- -----------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.................................. $ 18,913,689 $ 9,708,391 $ 4,762,734
Gain from sale of property.................. (197,191) -- --
Depreciation................................ 6,021,811 4,180,868 1,416,574
Amortization................................ 293,267 515,970 85,332
Increase in accrued rental income........... (2,398,760) (1,881,926) (636,397)
Construction funding deposit................ (768,423) -- --
Increase in receivables and other assets.... (1,568,075) (282,847) (934,482)
Increase in accrued expenses and other
liabilities.............................. 2,129,026..... 1,800,831 474,685
------------ ------------ ------------
Net cash provided by operating
activities........................ 22,425,344 14,041,287 5,168,446
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of real estate properties......... (102,025,229) (60,088,309) (152,739,813)
Proceeds from sale of properties.............. 8,206,289 -- --
Investment in mortgage notes receivable....... (22,769,689) (11,764,523) (13,224,230)
Collections on mortgage notes receivable...... 2,189,430 -- --
Payment of earnest money deposit.............. -- (2,900,000) --
------------ ------------ ------------
Net cash used in investing
activities........................ (114,399,199) (74,752,832) (165,964,043)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in bank credit facility... 38,275,000 (37,275,000) 67,500,000
Proceeds from mortgage note payable........... 19,907,321 -- --
Principal payments on mortgage note payable... (71,583) -- --
Proceeds from issuance of common stock........ 56,028,500 62,531,250 97,788,000
Costs related to issuance of common stock..... (3,263,971) (3,882,543) (1,427,772)
Proceeds from issuance of convertible
subordinated debentures..................... -- 52,000,000 --
Financing costs related to issuance of
convertible subordinated debentures......... -- (2,017,934) --
Capital contributions from minority
interests................................... 687,611 430,711 --
Payment of dividends.......................... (19,206,375) (10,641,666) (2,541,500)
Proceeds from dividend reinvestment plan...... 64,025 6,108 --
Increase in loans to finance stock
purchases................................... -- (94,467) (192,477)
------------ ------------ ------------
Net cash provided by financing
activities........................ 92,420,528 61,056,459 161,126,251
------------ ------------ ------------
Increase in cash.............................. 446,673 344,914 330,654
Cash, beginning of period..................... 675,568 330,654 --
------------ ------------ ------------
Cash, end of period $ 1,122,241 $ 675,568 $ 330,654
============ ============ ============
</TABLE>
The accompanying notes are an integral part of this financial statement
<PAGE> 9
CAPSTONE CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
<TABLE>
<CAPTION>
LOANS TO
COMMON STOCK ADDITIONAL OFFICERS TO TOTAL
-------------------- PAID-IN FINANCE STOCK RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL PURCHASES EARNINGS EQUITY
---------- ------- ------------ ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Proceeds from initial public
offering 5,980,000 $ 5,980 $ 96,354,248 -- -- $ 96,360,228
Loans to finance stock
purchases.................... -- -- -- (192,477) -- (192,477)
Net Income..................... 4,762,734 4,762,734
Dividends paid during 1994
($0.425 per share)........... -- -- -- -- (2,541,500) (2,541,500)
---------- ------- ------------ --------- ----------- ------------
BALANCE DECEMBER 31, 1994...... 5,980,000 5,980 96,354,248 $(192,477) 2,221,234 98,388,985
Shares issued in conversion of
convertible debentures to
common stock................. 499,404 499 8,052,384 -- -- 8,052,883
Convertible debenture issuance
costs related to conversion
of debentures to common
stock........................ -- -- (322,296) -- -- (322,296)
Proceeds from sale of 3,450,000
shares less related expenses
of $3,882,543................ 3,450,000 3,450 58,645,267 -- -- 58,648,717
Proceeds from issuance of
shares under the dividend
reinvestment plan............ 328 -- 6,108 -- -- 6,108
Loans to finance stock
purchases.................... -- -- -- (94,467) -- (94,467)
Net income..................... -- -- -- -- 9,708,391 9,708,391
Dividends paid during 1995
($1.74 per share)............ -- -- -- -- (10,641,666) (10,641,666)
---------- ------- ------------ --------- ----------- ------------
BALANCE DECEMBER 31, 1995...... 9,929,732 9,929 162,735,711 (286,944) 1,287,959 163,746,655
Shares issued in conversion of
convertible debentures to
common stock................. 1,630,310 1,630 26,288,370 -- -- 26,290,000
Convertible debenture issuance
costs related to conversion
of debentures to common
stock........................ (1,017,004) -- -- (1,017,004)
Proceeds from sale of 2,684,700
shares less related expenses
of $338,827.................. 2,684,700 2,685 52,761,844 -- -- 52,764,529
Proceeds from issuance of
shares under the dividend
reinvestment plan............ 3,205 3 64,022 -- -- 64,025
Net income..................... -- -- -- -- 18,913,689 18,913,689
Dividends paid during 1996
($1.81 per share)............ -- -- -- -- (19,206,375) (19,206,375)
---------- ------- ------------ --------- ----------- ------------
BALANCE DECEMBER 31, 1996...... 14,247,947 $14,247 $240,832,943 $(286,944) $ 995,273 $241,555,519
========== ======= ============ ========= =========== ============
</TABLE>
The accompanying notes are an integral part of this financial statement
<PAGE> 10
CAPSTONE CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION
Capstone Capital Corporation (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 its initial public offering of 5,980,000 shares of common stock.
The Company owns healthcare related properties which it leases, and it also
provides 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. Inter-company accounts and transactions have been eliminated.
Use of Estimates in the Preparation of Financial Statements -- The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Impairment of Assets -- In 1996 the Company adopted Statement of Financial
Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of". The Statement establishes
accounting standards for the impairment of long-lived assets, certain identified
intangibles and goodwill related to those assets. There was no effect on the
financial statements from the adoption since the Company does not consider any
of its assets to be impaired. Under provisions of the Statement, impairment
losses are recognized when expected future cash flows are less than the asset's
carrying value. Accordingly, when indicators of impairment are present, the
Company evaluates the carrying value of its properties and intangibles in
relation to the operating performance and future undiscounted cash flows of the
underlying property. The Company adjusts the net book value of the underlying
assets if the sum of the expected future cash flow is less than book value.
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 between 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 an estimated useful
life of 40 years for building and improvements and 20 years for land
improvements.
Federal Income Taxes -- No provision has been made for federal taxes. The
Company intends at all times to qualify as a REIT under sections 856 through 860
of the Internal Revenue Code of 1986, as amended. The Company must distribute at
least 95% of REIT taxable income to its stockholders and meet other requirements
to continue to qualify as a REIT.
Rental Income -- Rental income is recognized as earned over the life of the
lease agreements. Certain of the lease agreements 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 principal amounts outstanding 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.
<PAGE> 11
CAPSTONE CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Prior Year Reclassifications -- Certain classifications have been made to
the 1995 and 1994 financial statements to conform to the current year
presentation.
NOTE 3. REAL ESTATE PROPERTIES
As of December 31, 1996, the Company had investments in 44 leased real
estate properties totaling $302.6 million. These real estate properties consist
of sixteen ancillary hospital facilities, ten physician clinics, six ambulatory
surgery facilities, four inpatient rehabilitation facilities, three outpatient
rehabilitation facilities, two comprehensive mental health hospitals, two
sub-acute care facilities, and one skilled nursing facility. The properties are
located in thirteen states and are leased to ten healthcare-related entities or
their subsidiaries pursuant to long-term leases. In addition, the Company has
invested approximately $12.7 million in eleven development projects at various
stages of completion. The Company has remaining commitments of approximately
$67.2 million for development projects completion and expects all projects to be
completed by the end of 1997.
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 a set percentage increase or an
increase in the consumer price index, and all taxes (including property taxes),
maintenance, and other operating costs associated with the leased property.
Lessees that accounted for more than 10 percent of the Company's rental
income for the year ended December 31, 1996, were: HEALTHSOUTH Corporation,
$11.6 million and Columbia/HCA, $6.8 million.
Future minimum lease payments for the next five years under the
non-cancelable operating leases as of December 31, 1996 are as follows:
1997 -- $32,879,486; 1998 -- $33,295,707; 1999 -- $33,773,104;
2000 -- $34,370,668; 2001 -- $34,022,518. These amounts include only those
increases in lease payments related to leases that provide for set
percentage increases or set minimum increases in the consumer price index.
They do not include those increases in lease payments which may occur based
on the increase in the consumer price index but without set minimums.
NOTE 4. MORTGAGE NOTES RECEIVABLE
As of December 31, 1996, the Company had provided $39.3 million in mortgage
financing for thirteen properties located in six states. The mortgage notes
receivable are secured by the real estate of eight skilled nursing facilities,
two assisted living facilities, two acute-care hospitals, and one integrated
delivery facility, which are operated by eight healthcare operators.
Two of the facilities (one acute care hospital and one assisted living
facility) are under construction, and the Company has committed a total of $18.9
million in construction and term loans for these projects. As of December 31,
1996, the Company had advanced a total of $4.5 million toward these financing
commitments. The Company expects to disburse the remainder of the committed
funds in 1997.
The Company's mortgage notes receivable require monthly installments of
principal and interest, with final payment dates ranging from 2001 to 2012, and
bear rates ranging from 9.25 percent to 11.75 percent at December 31, 1996. Each
mortgage note receivable provides for the initial interest rates to be increased
annually by either a set rate or upon an increase in the consumer price index.
<PAGE> 12
CAPSTONE CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5. MORTGAGE NOTE PAYABLE
On June 26, 1996, the Company entered into a mortgage note with 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
On June 24, 1996, the Company completed an amendment and restatement of its
unsecured line of credit ("Bank Credit Facility") which provides for an increase
to $150 million from its previous principal amount of $100 million, an extension
of the term to June 24, 1999 from June 22, 1997, and an adjustment in the
determination of the interest rate. The Bank Credit Facility is participated in
by a consortium of eight banks. At December 31, 1996, the Company had drawn
$68,500,000 against the Bank Credit Facility for the purchase of real estate
properties and the funding of mortgage loans.
Borrowings under the amended and restated Bank Credit Facility bear an
interest rate chosen by the Company from either the Bank's base rate or the
Eurodollar 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. In addition, the Company pays a
commitment fee of 0.20 percent to 0.25 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 total capital ratio.
The Bank Credit Facility contains certain representations, warranties and
financial and other covenants customary in such loan agreements.
NOTE 7. CONVERTIBLE SUBORDINATED DEBENTURES
As of December 31, 1996, the Company had $17,657,000 aggregate principal
amount of 10.50% Convertible Subordinated Debentures ("Debentures") outstanding.
The Debentures mature on April 1, 2002, unless redeemed earlier by the
Company or converted by the holders. Payments of interest to the holders of the
Debentures are required each April 1 and October 1, commencing October 1, 1995.
The Debentures are convertible into shares of common stock of the Company at the
option of the holder at any time prior to redemption or stated maturity, at a
conversion price of $16.125 per share. The Debentures are subordinated to all
existing and future senior indebtedness of the Company and subordinated to all
existing and future liabilities and obligations of subsidiaries and partnerships
of the Company. The Debentures are redeemable, at the Company's option, in
whole, or from time to time, in part, at any time from April 5, 2000, through
March 31, 2002, at redemption prices ranging from 101.5% to 103.0%, plus accrued
and unpaid interest to and including the redemption date.
NOTE 8. STOCK OPTIONS
During 1995, the Financial Accounting Standards Board issued Financial
Accounting Statement No. 123, "Accounting for Stock-Based Compensation", ("FAS
123"). The Statement defines a fair value based method of accounting for an
employee stock option. It also allows an entity to continue using the intrinsic
value based accounting method prescribed by APB Opinion No. 25, "Accounting for
Stock Issued to Employees". The Company has continued to use this method to
account for its stock options. However, FAS 123 requires entities electing to
remain with the intrinsic method of accounting to provide pro forma disclosures
of net income and earnings per share as if the fair value based method of
accounting had been applied. Information about the Company's stock option plan
and the related required disclosures follow.
<PAGE> 13
CAPSTONE CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Pursuant to the Company's 1994 stock incentive plan, 1,063,600 shares of
common stock have been reserved for issuance. Options to acquire 602,500 and
413,000 shares at an exercise price of $18.375 and $16.50, respectively, were
granted in 1995 and 1994, respectively. There is no vesting period for these
options and they may be exercised within 10 years from the grant dates. No
options had been exercised as of December 31, 1996.
The pro forma information regarding net income and net income per common
share as required by FAS 123 is provided below. The fair value for these options
was estimated at the date of grant using the Roll-Geske option pricing model
with the following assumptions:
Risk free interest rate -- 6.33%, Volatility factor -- 16.96% and
Weighted average expected life of the options -- 8 years.
<TABLE>
<CAPTION>
1995
----------
<S> <C>
Net Income:
As reported............................................... $9,709,391
Pro forma................................................. $6,432,598
Net Income per common share:
As reported............................................... $ 1.55
Pro forma................................................. $ 1.03
</TABLE>
NOTE 9. RELATED PARTY TRANSACTIONS
During 1994 and 1995, the Company funded loans to certain officers for the
purpose of acquiring the Company's common stock. The loans, which are due on
demand and collateralized by the stock, totaled $286,944 at December 31, 1996,
and bear interest at the prime rate, which was 8.25% at December 31, 1996. In
addition, the Company has other loans to employees totaling $273,000 which bear
interest at the prime rate.
Certain of the Company's directors are directors and/or executive officers
of HEALTHSOUTH Corporation, MedPartners Inc., and Integrated Health Services,
Inc. During 1996, the Company received rental income of $11.6 million, $6.8
million and $3.2 million from HEALTHSOUTH Corporation, MedPartners Inc. and
Integrated Health Services, Inc., respectively.
NOTE 10. DIVIDENDS
In order to qualify as a REIT, the Company must, among other requirements,
distribute at least 95% of its REIT taxable income to its stockholders. Per
share dividend payments by the Company were characterized in the following
manner for income tax purposes:
<TABLE>
<CAPTION>
1996 1995 1994
----- ----- ------
<S> <C> <C> <C>
Ordinary Income.................................... $1.56 $1.54 $0.425
Return of Capital.................................. 0.25 0.20 --
----- ----- ------
Total dividends paid..................... $1.81 $1.74 $0.425
</TABLE>
In 1995, the Company adopted a dividend reinvestment and stock purchase
plan ("Plan") and reserved 1,000,000 shares of common stock for issuance under
the Plan. 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. The price of the shares purchased with
reinvested dividends will be at 95% of the shares market value on the dividend
payment date. Under the Plan, the Company received $64,025 during 1996 in
exchange for 3,205 shares of stock and $6,108 in exchange for 328 shares of
stock during 1995.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF KPMG PEAT MARWICK LLP
The Board of Directors
Capstone Capital Corporation:
We consent to incorporation by reference in registration statements No.
33-77788 and No. 33-97926 on Form S-3 and No. 333-21581 on Form S-8 of our
reports dated January 20, 1997, relating to the consolidated balance sheets of
Capstone Capital Corporation as of December 31, 1996 and 1995, and the related
consolidated statements of income, stockholders' equity, and cash flows for the
years ended December 31, 1996 and 1995, and for the period from June 30, 1994
(inception) to December 31, 1994, and all related schedules, which reports
appear in or incorporated by reference in the December 31, 1996 annual report
on Form 10-K of Capstone Capital Corporation.
Birmingham, Alabama
September 26, 1997
KPMG Peat Marwick LLP