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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-K
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<C> <S>
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
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COMMISSION FILE NUMBER: 001-11345
CAPSTONE CAPITAL CORPORATION
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C>
MARYLAND 63-1115479
(State or Other Jurisdiction of (I.R.S. Employer
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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<S> <C>
Common Stock, $.001 par value per share New York Stock Exchange, Inc.
8.875% Series A Cumulative Preferred
Stock, $.001 par value per share New York Stock Exchange, Inc.
10.50% Convertible Subordinated Debentures
due 2002 New York Stock Exchange, Inc.
6.55% Convertible Subordinated Debentures
due 2002 New York Stock Exchange, Inc.
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
Indicate by check mark whether the Registrant (1) has filed all reports to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that 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 or any amendment to this
Form 10-K. [ ]
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 16,
1998) of the Registrant held by non-affiliates on March 16, 1998 was
approximately $503,638,880.
As of March 16, 1998, 22,417,594 shares of the Registrant's Common Stock
were outstanding.
Part II incorporates by reference portions of the Capstone Capital
Corporation Annual Report to Stockholders for the fiscal year ended December 31,
1997. Part III incorporates by reference portions of the Capstone Capital
Corporation Annual Proxy Statement for the fiscal year ended December 31, 1997
(to be filed with the Commission on or about April 6, 1998).
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TABLE OF CONTENTS
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Item 1. Business.................................................... 1
General..................................................... 1
Investments................................................. 2
Nature of Investments....................................... 2
Selected Operators.......................................... 4
HEALTHSOUTH................................................. 5
Columbia.................................................... 5
MedPartners................................................. 5
Balanced Care............................................... 6
Investment Policy........................................... 6
Leases...................................................... 7
Mortgage Loans.............................................. 8
Development Arrangements.................................... 8
Taxation.................................................... 9
Competition................................................. 12
Governmental Regulation and Private Payor Cost
Containment................................................. 13
Interest Rate Sensitivity................................... 14
Environmental Matters....................................... 14
Insurance................................................... 15
Employees................................................... 16
Item 2. Properties.................................................. 16
Investments................................................. 16
Headquarters................................................ 16
Item 3. Legal Proceedings........................................... 16
Item 4. Submission of Matters to a Vote of Security Holders......... 16
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 17
Item 6. Selected Financial Data..................................... 17
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 18
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 18
Item 8. Financial Statements and Supplementary Data................. 18
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 18
Item 10. Directors and Executive Officers of the Registrant.......... 18
Directors................................................... 18
Executive Officers.......................................... 18
Item 11. Executive Compensation...................................... 18
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 19
Item 13. Certain Relationships and Related Transactions.............. 19
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 20
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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 health care properties (the
"Investments"). As of December 31, 1997, the Investments consisted of (i) 83
health care properties, excluding construction in progress, leased to 16 health
care operators (the "Leased Properties") and (ii) 69 mortgage loans on health
care properties, including loans related to construction in progress, made to 33
health care operators (the "Mortgage Loans"). For the year ended December 31,
1997, the Company realized approximately $46.2 million of rental income from the
Leased Properties and approximately $10.1 million of interest income from the
Mortgage Loans. The Investments are located in 28 states primarily in the
southeastern and western regions of the United States and represent a variety of
facility types in diverse health care industry segments. The Company's aggregate
Investments and commitments to invest not yet funded have grown from
approximately $115 million in Investments at inception on June 30, 1994 to
approximately $656 million in Investments, excluding approximately $59.9 million
in construction in progress, and approximately $124 million in commitments to
invest not yet funded on December 31, 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 at a fair market value. Mortgage Loans for completed projects 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 13.39% that increase annually at either a negotiated fixed rate or a rate
based on the consumer price index. Approximately 71.3% of the Company's
Investments as of December 31, 1997, are operated by public health care
companies or their subsidiaries, including HEALTHSOUTH Corporation ("HEALTH
SOUTH"), Columbia/HCA Healthcare Corporation ("Columbia"), MedPartners, Inc.
("MedPartners"), Balanced Care Corporation ("Balanced Care"), Integrated Health
Services, Inc. ("Integrated Health") and Tenet Healthcare Corporation ("Tenet").
For the year ended December 31, 1997, the Company derived approximately 27.1%,
15.4% and 9.5% of its revenues from HEALTHSOUTH, Columbia and MedPartners,
respectively.
The Company believes it is an important source of capital for the health
care industry and intends to continue investing in a high-quality portfolio of
properties managed by established operators of assisted living, ancillary
hospital, skilled nursing, inpatient rehabilitation and physician clinic
facilities. The Company diversifies its portfolio by operator, geography,
facility type and health care industry segment. The Company identifies potential
investment opportunities through (i) the relationship of certain members of its
Board of Directors with HEALTHSOUTH and MedPartners (Richard M. Scrushy, Michael
D. Martin and Larry R. House are also directors of HEALTHSOUTH, Richard M.
Scrushy, Michael D. Martin and Larry D. Striplin, Jr. are also directors of
MedPartners), (ii) relationships of its management and Board of Directors with
other health care operators and developers, (iii) brokers and other industry
contacts. Leases with HEALTHSOUTH and MedPartners are entered into on terms
which the Company believes to be no less favorable than its Leases with
unrelated lessees with similar credit characteristics.
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INVESTMENTS
The Company's Investments as of December 31, 1997, are summarized in the
following tables by Operator and by type of facility:
<TABLE>
<CAPTION>
NO. OF % OF
FACILITIES(#) INVESTMENTS($)(2) PORTFOLIO
------------- ----------------- ---------
<S> <C> <C> <C>
OPERATOR(1)
HEALTHSOUTH.................................... 20 $139,237,528 21.2%
MedPartners.................................... 16 87,218,819 13.3
Columbia....................................... 7 78,267,545 11.9
Balanced Care.................................. 20 60,081,925 9.2
Integrated Health.............................. 3 28,651,435 4.4
Tenet.......................................... 2 28,486,584 4.3
Senior Lifestyles.............................. 7 26,882,928 4.1
Quality Link................................... 6 23,453,341 3.6
Arcon.......................................... 4 17,865,403 2.7
MedCath........................................ 1 17,032,224 2.6
Quorum......................................... 4 16,658,671 2.5
Ramsey......................................... 2 12,500,000 1.9
New Vista...................................... 4 11,311,830 1.7
Other Operators................................ 56 108,524,264 16.6
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152 $656,172,497 100.0%
=== ============ =====
TYPE OF FACILITY
Assisted Living................................ 51 $118,936,933 18.1%
Ancillary Hospital............................. 19 157,749,652 24.0
Skilled Nursing................................ 38 104,176,991 15.9
Inpatient Rehabilitation....................... 5 69,725,291 10.6
Physician Clinic............................... 18 85,983,961 13.1
Ambulatory Surgery............................. 7 30,672,425 4.7
Integrated Delivery............................ 5 26,872,207 4.1
Sub-Acute Care................................. 2 18,787,809 2.9
Specialty Hospital............................. 1 17,032,224 2.6
Comp. Mental Health Hospital................... 2 12,500,000 1.9
Acute Care Hospital............................ 1 7,870,015 1.2
Outpatient Rehabilitation...................... 3 5,864,989 0.9
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152 $656,172,497 100.0%
=== ============ =====
</TABLE>
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(1) Operators are lessees under Leases ("Lessees"), borrowers under Mortgage
Loans ("Borrowers"), guarantors of certain Leases and Mortgage Loans
("Guarantors") or primary sublessees of the healthcare facilities
("Sublessees").
(2) Based on actual investment at December 31, 1997. Exclusive of construction
in progress of $59.9 million.
NATURE OF INVESTMENTS
Assisted Living Facilities. The assisted living facilities provide
services to aid residents in everyday living, such as bathing, meals, security,
transportation, recreation, medication supervision and limited therapeutic
programs. More intensive medical needs of the resident are often met within
assisted living facilities by home health providers, close coordination with the
resident's physician and skilled nursing facilities. Assisted living facilities
are increasingly successful as lower cost, less institutional alternatives for
the health problems of the elderly or medically frail.
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Ancillary Hospital Facilities. 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.
Skilled Nursing Facilities. Skilled nursing facilities provide inpatient
skilled nursing and custodial services as well as rehabilitative, restorative
and transitional medical services. In some instances, nursing facilities
supplement hospital care by providing specialized care for medically complex
patients whose conditions require intense medical and therapeutic services, but
who are medically stable enough to have these services provided in facilities
that are less expensive than acute care hospitals.
Inpatient Rehabilitation Facilities. 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. The inpatient rehabilitation facilities provide treatment
to restore physical, psycho-social, educational, vocational and economic
usefulness and independence to disabled persons. These facilities utilize a
coordinated multidisciplinary team approach to help patients attain measurable
goals.
Physician Clinics. Physician clinics provide a variety of outpatient
diagnostic and therapeutic healthcare services.
Ambulatory Surgery Facilities. Ambulatory surgery facilities provide
various surgical procedures, typically on an outpatient basis. Ambulatory
surgery facilities are designed to provide patients with quality surgical
services at convenient locations in the community. The patients experience
reduced costs compared to traditional acute-care hospitals.
Integrated Delivery Facilities. Integrated delivery facilities provide a
variety of medical services such as primary care, laboratory and diagnostic
services, outpatient surgery and emergency care.
Sub-Acute Care Facilities. Sub-acute care facilities provide monitoring,
specialized care and comprehensive rehabilitative therapy required by sub-acute
and medically complex patients and assist patients in reaching a level of
functioning that will enable them to return to home or transfer to a
rehabilitation center or a long-term care facility.
Specialty Hospitals. Specialty hospitals are designed to provide
specialized acute care procedures related to specific health problems. Three
basic categories of patients are treated in specialty hospitals: (i) chronic
patients: those with minimal possibilities for achieving functional
independence; (ii) long-term transitional patients: those with medically complex
problems and (iii) sub-acute patients: those who have been moved from an
acute-care hospital but still require nursing or rehabilitative services.
Comprehensive Mental Health Hospitals. Comprehensive mental health
hospitals provide a full range of treatment for psychiatric and chemical
dependency disorders. Patients are evaluated upon admission and an
individualized treatment plan is developed. Elements of the treatment plan
include individual, group and family therapy, activity therapy, educational
programs and career and vocational planning.
Acute Care Hospitals. Acute care hospitals provide services that include,
among others, general surgery, internal medicine, obstetrics, emergency room
care, radiology, diagnostic services, coronary care, pediatric services and
psychiatric services. On an outpatient basis, the services include, among
others, same day surgery, diagnostic radiology (e.g. magnetic resonance imaging,
CT scanning, X-ray), rehabilitative therapy, clinical laboratory services,
pharmaceutical services and psychiatric services.
Outpatient Rehabilitation Facilities. Outpatient rehabilitation facilities
offer a comprehensive range of rehabilitative health care 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.
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The following table sets forth as of December 31, 1997 the distribution of
the Company's Investments by state.
<TABLE>
<CAPTION>
NUMBER OF
STATE FACILITIES INVESTMENT(1) % OF PORTFOLIO
- ----- ---------- ------------- --------------
<S> <C> <C> <C>
Pennsylvania............................................. 21 $120,517,490 18.4%
Florida.................................................. 20 99,970,333 15.2
Texas.................................................... 15 85,176,442 13.0
California............................................... 10 48,791,797 7.4
Virginia................................................. 14 47,884,820 7.3
Alabama.................................................. 12 47,502,050 7.2
Nevada................................................... 2 34,987,108 5.3
Massachusetts............................................ 6 31,106,487 4.7
Missouri................................................. 9 28,907,022 4.4
Arizona.................................................. 2 25,582,224 3.9
Illinois................................................. 3 11,157,902 1.7
Michigan................................................. 3 11,146,874 1.7
Tennessee................................................ 5 10,870,066 1.7
North Carolina........................................... 4 9,597,667 1.5
Maryland................................................. 1 8,800,000 1.3
Oklahoma................................................. 6 6,500,000 1.0
Georgia.................................................. 6 5,984,919 0.9
Idaho.................................................... 1 4,962,497 0.8
South Carolina........................................... 2 3,420,452 0.5
Wyoming.................................................. 1 2,095,788 0.3
Arkansas................................................. 1 2,081,408 0.3
Washington............................................... 1 1,795,860 0.3
Iowa..................................................... 1 1,608,658 0.2
Montana.................................................. 1 1,524,261 0.2
Nebraska................................................. 1 1,521,911 0.2
Ohio..................................................... 2 1,098,909 0.2
Louisiana................................................ 1 993,460 0.2
Mississippi.............................................. 1 586,092 0.1
--- ------------ -----
Total.......................................... 152 $656,172,497 100.0%
=== ============ =====
</TABLE>
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(1) Based on actual investment at December 31, 1997. Exclusive of construction
in progress of $59.9 million.
SELECTED OPERATORS
Nine of the 44 Operators of the properties underlying the Company's
Investments at December 31, 1997, are subject to the reporting requirements of
the Securities and Exchange Commission (the "Commission") and are required to
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 four public Operators whose facilities comprise
approximately 55.6% of the Company's Investments at December 31, 1997. With
respect to such companies, the information provided is derived for the limited
purposes of this report from filings made with the Commission and other publicly
available information.
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
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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 health care services.
HEALTHSOUTH provides these services through its national network of outpatient
and inpatient rehabilitation facilities, outpatient surgery centers, medical
centers and other health care facilities. HEALTHSOUTH has over 1,700 patient
care locations in 50 states and the United Kingdom. HEALTHSOUTH's 1997 revenues
were approximately $3.0 billion.
The following is a summary of certain financial information for
HEALTHSOUTH:
HEALTHSOUTH SUMMARY CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1995 1996 1997
------------ ------------ -------------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and marketable securities....................... $ 156,321 $ 151,788 $ 193,047
Working capital...................................... 406,125 543,975 793,147
Total assets......................................... 2,931,495 3,371,952 4,249,771
Long-term debt....................................... 1,391,664 1,486,029 1,882,466
Stockholders' equity................................. 1,185,898 1,515,924 1,937,411
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED
----------------------- SEPTEMBER 30,
1995 1996 1997
---------- ---------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues.............................................. $2,003,146 $2,436,537 $2,163,018
Expenses.............................................. 1,867,478 2,166,282 1,881,719
Net income............................................ 92,521 220,818 231,818
</TABLE>
Columbia. Columbia, headquartered in Nashville, Tennessee, provides a full
range of inpatient and outpatient services and is one of the leading hospital
owners and management companies in the United States. Columbia had revenues of
$18.82 billion for 1997. Major services provided by Columbia 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 health
care/infusion services. Columbia owns and operates over 330 hospitals and other
health care facilities with approximately 60,000 licensed beds in 36 states,
England and Switzerland.
According to its public filings, Columbia recently has been the subject of
various significant government investigations regarding its compliance with
Medicare, Medicaid and similar programs. The following is derived from public
reports distributed by Columbia: "While it is too early to predict the outcome
of any of the on-going investigations or the initiation of any additional
investigations, were Columbia to be found in violation of federal or state laws
relating to Medicare, Medicaid or similar programs, Columbia could be subject to
substantial monetary fines, civil and criminal penalties, and exclusion from
participation in the Medicare and Medicaid programs." The Company does not
believe that these events will affect the ability of Columbia to make required
payments when due under the Company's leases with Columbia.
MedPartners. MedPartners, with 1997 revenue of approximately $6.3 billion,
is the largest physician practice management company in the United States.
MedPartners develops, consolidates and manages integrated health care 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 the nation's largest independent
prescription benefit management company which administers 53 million
prescriptions annually and provides disease management services and therapies
for patients with certain chronic conditions. MedPartners
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operates in 40 states through affiliations with approximately 13,531 physicians,
providing healthcare to over two million prepaid enrollees.
In January 1998, MedPartners and PhyCor, Inc. mutually agreed to terminate
the plan to merge the two companies previously approved by the boards of
directors of both companies in October 1997. In a press release dated March 18,
1998, MedPartners announced that it recorded pre-tax charges to earnings in the
fourth quarter of 1997 of approximately $646.7 million related primarily to the
restructuring and impairment of selected assets of certain of its clinic
operations within the physician practice management division. MedPartners
reported a loss in the fourth quarter of 1997 from continuing operations,
excluding the impact of restructuring and asset impairment charges, of $1.01 per
share. Also on March 18, 1998, MedPartners announced the appointment of Mac
Crawford as President, Chief Executive Officer and a director of MedPartners.
Mr. Crawford previously served as Chairman of the Board, President and Chief
Executive Officer of Magellan Health Services. Richard M. Scrushy will remain as
Chairman of the Board of MedPartners, a position he assumed in January of 1998
after Larry R. House resigned.
In recent months, a number of purported class action lawsuits have been
filed against MedPartners alleging violations of the Federal securities laws and
other claims. In addition, twenty-two health plans, including several divisions
of Blue Cross and Blue Shield, have filed a $3.3 billion lawsuit against
Caremark, a subsidiary of MedPartners, alleging fraudulent claims and physician
kickbacks.
The Company does not believe that these events will affect the ability of
MedPartners to make required payments when due under the Company's leases with
MedPartners.
Balanced Care. Balanced Care, headquartered in Mechanicsburg,
Pennsylvania, develops senior care continuums which meet the needs of upper
middle, middle and moderate income populations in non-urban, secondary markets.
As of February 2, 1998, Balanced Care operated a total of 34 assisted living
facilities, 13 skilled nursing facilities and four independent living facilities
in Pennsylvania, Missouri, Arkansas, North Carolina and Wisconsin, as well as a
home health care agency in Missouri and a rehabilitation therapy operation in
Pennsylvania. According to its public filings, assuming completion of the
planned divestiture of Balanced Care's assisted living facilities in Wisconsin,
Balanced Care will own nine and lease 35 senior living and health care
facilities in Pennsylvania, Missouri, Arkansas and North Carolina with a
capacity for 1,565 assisted living residents, 1,294 skilled nursing patients and
154 independent living residents.
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 health care industry. In addition, the Company believes
that the substantial health care 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 or to make a mortgage
loan, 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
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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 health care facility, comprised generally of the
land, buildings, other improvements and certain fixtures, for a use, in most
cases, restricted to the intended health care 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 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 or 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 certain cases.
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 three Integrated Health Leases,
which commenced in 1994 and 1995, contain an option, exercisable at the end of
the fifth year of the respective Lease, 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.
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Leases representing approximately 95% of the Company's total Leased
Properties as of December 31, 1997, expire at various times between 2004 and
2012. No assurance can be given that a lessee will exercise any option to renew
its lease upon the expiration of the initial term. In such an instance, the
Company may not be able to locate a qualified purchaser or a qualified
replacement tenant, as a result of which it would lose a source of revenue while
remaining responsible for the payment of its obligations.
MORTGAGE LOANS
The Company's permanent mortgage loans are comprised of secured loans which
are structured to provide the Company with interest income, additional interest
based on fixed rate increases or increases in the consumer price index,
principal amortization and commitment fees. While from time to time the Company
may invest in loan participations or secondary mortgages, substantially all of
the approximately $170.1 million of permanent mortgage loans as of December 31,
1997 are first mortgage loans.
The interest rates on the Company's investments in permanent mortgage loans
for operating facilities range from approximately 9.25% to 13.39% per annum on
the outstanding balances. The yield to the Company on permanent mortgage loans
depends upon a number of factors, including the stated interest rate, average
principal amount outstanding during the term of the loan, the amount of the
commitment fee charged at the inception of the loan and the interest rate
adjustments.
The permanent mortgage loans for operating facilities made through December
31, 1997 generally have initial maturities of between five and 15 years, require
monthly installments of principal and interest, and provide for a balloon
payment of the outstanding principal balance at maturity.
The Company generally requires a variety of additional forms of security
and collateral beyond that which is provided by the lien of the mortgage. For
example, the Company generally requires one or more of the following items: (a)
a guaranty of the complete payment and performance of all obligations associated
with each mortgage loan from the borrower's parent corporation, if any, other
affiliates of the borrower and/or one or more of the individual principals
controlling such borrower; (b) a collateral assignment from the borrower of the
leases and the rents relating to the mortgaged property; (c) a collateral
assignment from the borrower of all permits, licenses, approvals and contracts
relating to the operation of the mortgages property; (d) letter of credit or
cash collateral for a negotiated dollar amount typically equal to three months
to six months principal and interest on the loan; and (e) a security interest in
all of the borrower's personal property, including, in most instances, the
borrower's accounts receivable. In addition, the mortgage loans are generally
cross-defaulted and cross-collateralized with any other mortgage loans between
the borrower or any affiliate of the borrower and the Company.
Certain of the Company's Mortgage Loans are comprised of loan
participations in which the Company subordinates its right to repayment to
another lender but retains the right to repay the outstanding indebtedness owed
to the senior lender at any time. The Company also provides mezzanine financing
secured by second mortgages on health care properties in which it has, in
certain events, the right to repay the outstanding indebtedness owed to the
first mortgage lender.
DEVELOPMENT ARRANGEMENTS
The Company has entered into certain development funding arrangements to
provide the funding to enable health care operators to build facilities on
property owned or leased by the Company or securing a mortgage loan. 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 health care facilities. Providing such capital will, management
believes, enhance the Company's position as a provider of funds for the health
care industry.
Investments in facilities under development subject the Company to risks
related to possible delays in construction, cost of materials, financing
availability, volatility in interest rates, labor availability, compliance with
development agreements and funding arrangements and ability of the completed
facility to generate the cash flow necessary to make payments to the Company
under the leases or Mortgage Loans, as applicable.
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Because development projects relate to properties under construction and which
have no operating history, these investments generally involve greater risks
than the sale and leaseback of operating properties.
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 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 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.
TAXATION
The following is only a summary of some of the significant federal income
tax considerations affecting the Company and is qualified in its entirety by
reference to the REIT Provisions of the Code, the rules and regulations
promulgated thereunder, and the administrative and judicial interpretations
thereof. The Company and its stockholders may be subject to state or local
taxation in various state or local jurisdictions, including those in which it or
they transact business or reside. The state and local tax treatment of the
Company and its stockholders may not conform to the federal tax consequences
described above. Moreover, there may be other federal, state, local or foreign,
or estate and gift tax considerations applicable to the circumstances of a
particular investor. Stockholders of the Company are urged to consult their own
tax advisors as to the effects of these rules and regulations on them. In
particular, foreign stockholders and tax-exempt domestic stockholders should
consult with their tax advisors concerning the tax consequences of ownership of
shares in the Company, including the possibility that distributions with respect
to the shares will be subject to federal income tax withholding.
General. The Company was organized and has elected, and believes that it
has been operated and intends to operate so as to, qualify as a REIT for federal
income tax purposes under Sections 856 through 860 of the Code (the "REIT
Provisions of the Code"). No assurance can be given, however, that the Company
will continue to be operated in a manner so as to remain qualified as a REIT. In
brief, if certain detailed conditions imposed by the REIT Provisions of the Code
are met, entities such as the Company which invest primarily in real estate and
that would otherwise be treated for federal income tax purposes as corporations
subject to regular corporate income tax are generally not taxed at the corporate
level on their "REIT taxable income" which is distributed to stockholders. This
treatment substantially eliminates the "double taxation" (at both the corporate
and stockholder levels) that generally results from the use of corporate
investment vehicles. The following is a general summary of the provisions that
govern the federal income tax treatment of a REIT and its stockholders. This
summary is qualified in its entirety by the applicable Code provisions, rules
and regulations promulgated thereunder, and administrative and judicial
interpretations thereof.
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Requirements for Qualifications. The Code defines a REIT as a corporation,
trust or association (1) which is managed by one or more trustees or directors,
(2) the beneficial ownership of which is evidenced by transferable shares, or by
transferable certificates of beneficial interest, (3) which would be taxable,
but for the REIT Provisions of the Code, as an association taxable as a domestic
corporation, (4) which is neither a financial institution nor an insurance
company subject to certain provisions of the Code, (5) the beneficial ownership
of which is held by 100 or more persons determined without reference to any
rules of attribution, (6) which is not closely held as determined under the
personal holding company stock ownership test of Section 542(a) (as applied with
certain modifications), and (7) which meets certain other tests, described below
regarding the nature of its income and assets. The Code provides that conditions
(1) through (4), inclusive, must be met during the entire taxable year and that
condition (5) must be met during at least 335 days of a taxable year of 12
months, or during a proportionate part of a taxable year of less than 12 months.
Moreover, in order to qualify as a REIT for a taxable year under the Code, the
Company must elect or previously have elected to be so treated and must meet the
requirements stated above and which are described more fully below.
Gross Income Tests. There are two separate percentage tests relating to
the sources of the Company's gross income which must be satisfied annually.
First, in general, at least 75% of the Company's gross income (excluding gross
income from certain sales of property to customers in the ordinary course of the
Company's trade or business ("dealer property")) from the taxable year must be
derived directly or indirectly from investments in real property which includes
"rents from real property" (other than gain from dealer property), mortgages on
real property, or certain qualified temporary investment income. Second, in
general, at least 95% of the Company's gross income (excluding gross income from
certain sales of dealer property) for each taxable year must be derived from
such real property investments described with respect to the 75% test,
dividends, interest or gross income from the sale or disposition of stock or
other securities (other than gross income from certain sales of dealer
property).
Asset Tests. At the close of each quarter of the Company's taxable year,
the Company must also satisfy three tests relating to the nature of its assets.
First, at least 75% of the value of the Company's total assets must consist of
real estate assets (including interests in real property and interests in
mortgages on real property as well as its allocable share of real estate assets
held by joint ventures or partnerships in which the Company participates, if
any), cash, cash items and government securities. Second, not more than 25% of
the Company's total assets may be represented by securities other than those
includable in the 75% asset class. Third, of the investments included in the 25%
asset class, the value of any one issuer's securities owned by the Company may
not exceed 5% of the value of the Company's total assets, and the Company may
not own more than 10% of any one issuer's outstanding voting securities. The
Company may own 100% of another corporation, provided such other corporation
constitutes a qualified REIT subsidiary under the REIT Provisions of the Code.
In such a case, the separate existence of the qualified REIT subsidiary is
ignored for federal income tax purposes and the assets, income, gain, loss and
other attributes of such entity are treated as being owned or generated directly
by the Company.
Annual Distribution Requirements. The Company, in order to continue to
qualify as a REIT, is required to distribute dividends (other than capital gain
dividends) to its stockholders in an amount equal to or greater than the excess
of (A) the sum of (i) 95% of the Company's "REIT taxable income" (computed
without regard to the dividends paid deduction and by excluding the Company's
net capital gain) and (ii) 95% of the net income, if any, (after tax), from
foreclosure property, over (B) the sum of certain non-cash income (from certain
inputed rental income and income from transactions inadvertently failing to
qualify as like-kind exchanges). To the extent that the Company does not
distribute all of its net long-term capital gain and all of its REIT taxable
income, it will be subject to tax thereon. In addition, the Company will be
subject to a 4% excise tax to the extent it fails within a calendar year to make
required distributions to its stockholders of 85% of its ordinary income and 95%
of its capital gain net income plus the excess, if any, of the grossed up
required distribution for the preceding calendar year over the amount treated as
distributed for such preceding calendar year. For this purpose, "grossed up
required distribution" for any calendar year is the sum of the taxable income of
the Company for the taxable year (without regard to the deduction for dividends
paid) and all amounts from earlier years that are not treated as having been
distributed under the provision. Dividends
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declared in the last quarter of the year (October, November or December) and
paid during the following January, will be treated as having been paid and
received on December 31.
It is possible that the Company, from time to time, may not have sufficient
cash or other liquid assets to meet the 95% distribution requirements due to
timing differences between actual receipt of income and actual payment of
deductible expenses or dividends on the one hand and the inclusion of such
income and deduction of such expenses or dividends in arriving at REIT taxable
income of the Company on the other hand. The problem of inadequate cash to make
required distributions could also occur as a result of the repayment in cash of
principal amounts due on the Company's outstanding debt, particularly in the
case of balloon repayments or as a result of capital losses on short-term
investments of working capital. Therefore, the Company might find it necessary
to arrange for short-term, or possibly long-term, borrowing or new equity
financing. If the Company were unable to arrange such borrowing or financing as
might be necessary to provide funds for required distributions, its REIT status
could be jeopardized. Under certain circumstances, the Company may be able to
rectify a failure to meet the annual REIT distribution requirements for a
taxable year by paying deficiency dividends to stockholders within a specified
period.
Taxation of Stockholders -- In General. As long as the Company qualifies
as a REIT, distributions other than capital gain dividends (including
reinvestments pursuant to the Company's dividend reinvestment plan, if any) made
to the Company's taxable domestic stockholders out of current and accumulated
earnings and profits will be taken into account by them as ordinary income, and
corporate stockholders will not be eligible for the dividends received
deduction. Distributions that are designated as capital gain dividends will be
taxed as long-term capital gains to the extent they do not exceed the Company's
actual net capital gain for the taxable year, although corporate stockholders
may be required to treat up to 20% of any such capital gain dividend as ordinary
income. Distributions in excess of the Company's current and accumulated
earnings and profits will not be taxable to a stockholder to the extent that
they do not exceed the adjusted basis of a stockholder's shares of stock. To the
extent that such distributions exceed the adjusted basis of a stockholder's
shares of stock, they will be included in income as long-term capital gain (or
short-term capital gain if the shares of stock have been held for not more than
one year) assuming the shares of stock are a capital asset in the hands of the
stockholder. Stockholders may not include, in their respective income tax
returns, any net operating losses or capital losses of the Company. Dividends
declared by the Company in the last quarter of the calendar year (October
through December) to stockholders of record on a date in such quarter shall be
treated as both paid by the Company and received by such stockholders on
December 31 of such year, provided that the Company actually pays such dividends
during January of the following calendar year.
In general, any gain or loss recognized by a stockholder on the sale or
other taxable disposition of shares of stock will be treated as capital gain or
loss, provided the shares are a capital asset in the hands of the seller. In
general, any loss upon a sale or exchange of shares of stock by a stockholder
who has held such shares for not more than six months (after applying certain
rules), will be treated as a long-term capital loss to the extent of
distributions from the Company required to be treated by such stockholder as
long-term gain. The Taxpayer Relief Act of 1997 (the "Act") alters the taxation
of capital gain income. Under the Act, individuals who hold certain investments
for more than 18 months may be taxed at a maximum long-term capital gain rate of
20% on the sale or exchange of those investments. Individuals who hold certain
assets for more than 12 months but less than 18 months may be taxed at a maximum
mid-term capital gain rate of 28% on the sale or exchange of those investments.
The Act also provides a maximum rate of 25% for "unrecaptured section 1250 gain"
for individuals, special rules for "qualified 5-year gain," as well as other
changes to prior law. The Act allows the IRS to prescribe regulations on how the
Act's new capital gain rates will apply to sales of capital assets by "pass-thru
entities," which include REITs such as the Company. To date, regulations have
not yet been prescribed, and it remains unclear how the Act's new rates will
apply to capital gain dividends or undistributed capital gains, including, for
example, the extent, if any, to which capital gain dividends or undistributed
capital gains from the Company will be taxed to individuals at the new rates for
mid-term capital gains and unrealized section 1250 recapture, rather than the
long-term capital gain rates. Investors are urged to consult their own tax
advisors with respect to the new rules contained in the Act.
Tax preference and other items which are treated differently for regular
and alternative minimum tax purposes are to be allocated between a REIT and its
stockholders under regulations which are to be
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prescribed. It is likely that these regulations would require tax preference
items to be allocated to the Company's stockholders with respect to any
accelerated depreciation claimed by the Company.
Failure to Qualify As A REIT. If the Company fails to qualify for taxation
as a REIT in any taxable year and the relief provisions do not apply, the
Company will be subject to tax (including any applicable alternative minimum
tax) on its taxable income at regular corporate rates. Distributions to
stockholders in any year in which the Company fails to qualify will not be
deductible by the Company, nor will they be required to be made. In such event,
to the extent of current or accumulated earnings and profits, all distributions
to stockholders will be taxable as ordinary income, and, subject to certain
limitations in the Code, corporate distributees may be eligible for the
dividends received deduction. Failure to qualify and to maintain qualification
as a REIT would force the Company to significantly reduce its distributions and
possibly incur substantial indebtedness or liquidate substantial investments in
order to pay the resulting corporate taxes. In addition, the Company, once
having obtained REIT status and having lost such status, would not be eligible
to elect REIT status for the four subsequent taxable years, unless its failure
to maintain its qualification was due to reasonable cause and not willful
neglect, and certain other requirements were satisfied. In order to elect again
to be taxed as a REIT, the Company would be required to distribute all of its
earnings and profits accumulated in any non-REIT taxable year.
Taxpayer Relief Act of 1997. On August 5, 1997, President Clinton signed
into law the Taxpayer Relief Act of 1997 (H.R. 2014), which will have the effect
of modifying certain REIT-related Code provisions for tax years of the Company
beginning on or after January 1, 1998. Some of the potentially significant REIT-
related changes contained in this legislation include: (i) the rule
disqualifying a REIT for any year in which it fails to comply with certain
regulations requiring the REIT to monitor its stock ownership is replaced with
an intermediate financial penalty; (ii) the rule disqualifying a REIT in any
year that it is "closely held" does not apply if during such year the REIT
complied with certain regulations which require the REIT to monitor its stock
ownership, and the REIT did not know or have reason to know that it was closely
held; (iii) a REIT is permitted to render a de minimis amount of impermissible
services to tenants in connection with the management of property and still
treat amounts received with respect to such property (other than certain amounts
relating to such services) as qualified rent; (iv) the rules regarding
attribution to partnerships for purposes of defining qualified rent and
independent contractors are modified so that attribution occurs only when a
partner owns a 25% or greater interest in the partnership; (v) the 30% gross
income test is repealed; (vi) any corporation wholly-owned by a REIT is
permitted to be treated as a qualified REIT subsidiary regardless of whether
such subsidiary has always been owned by the REIT; (vii) a REIT may elect to
retain, rather than distribute, its net long-term capital gains and pay the tax
on such gains, while its shareholders include their proportionate share of the
undistributed long-term capital gains in income and receive a credit for their
share of the tax paid by the REIT; (viii) the class of excess noncash items for
purposes of the REIT distribution requirements is expanded; and (ix) certain
other Code provisions relating to REITs are amended. Some or all of the
provisions could affect both the Company's operations and its ability to
maintain its REIT status for its taxable years beginning in 1998.
COMPETITION
The Company competes for investments with, among other investors,
health care providers, other health care-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 health care 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 health care 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.
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GOVERNMENTAL REGULATION AND PRIVATE PAYOR COST CONTAINMENT
Health Care Reform. The health care industry is facing various challenges,
including increased governmental and private payor pressure on health care
providers to control costs, the migration of patients from acute care facilities
into extended care and home care settings, and the vertical and horizontal
consolidation of health care providers. These changes, including reductions in
reimbursement levels under Medicare, Medicaid and private payor programs, could
adversely affect the Company's revenues.
Medicare is a federal health insurance program for individuals age 65 or
over and certain chronically disabled individuals. Medicaid is a joint federal
and state program designed to provide medical assistance to certain low income
individuals. A significant portion of the revenue of the Company's borrowers and
lessees is derived from governmentally funded reimbursement programs, such as
Medicare and Medicaid. Therefore, the Company's revenues may be indirectly
affected by changes in these programs. These programs are highly regulated and
subject to frequent and substantial changes resulting from legislation, adoption
of rules and regulations and administrative and judicial interpretations of
existing law. In recent years, there have been fundamental changes in the
Medicare program which have resulted in reduced levels of payment for a
substantial portion of health care services. In many instances, revenues from
Medicaid programs are already insufficient to cover the actual costs incurred in
providing care to those patients. Moreover, health care facilities and
physicians have experienced increasing pressures from private payors attempting
to control health care costs, and reimbursement from private payors has, in many
cases, effectively been reduced to levels approaching those of government
payors.
The Balanced Budget Act of 1997 includes $115 billion in Medicare savings
and $14.6 billion in Medicaid savings during the next five fiscal years. The
need to slow the growth rate in federal health care expenditures will be a
continuing priority as Congress attempts to assure the short term solvency of
the Medicare Trust Fund. It is anticipated that further debate on overall
structural reform of federal health care programs will affect additional
legislative action on cost containment. A number of states also have implemented
or proposed cost containment programs, including rate setting agencies which
control inpatient health care facility rates, including private pay rates.
The Company believes that government and private efforts to contain and
reduce health care costs will continue. These trends are likely to lead to
reduced or slower growth in reimbursement for certain services provided by the
Company's borrowers and lessees. In addition, Company anticipates continuing
governmental and private cost control initiatives which will reduce, freeze, or
restrict payments to physicians and many other medical professionals. Many
lessees, tenants, or sublessees are medical professionals whose financial
condition could suffer material, adverse effects from these initiatives.
There is no assurance that lessees, sublessees, and tenants or borrowers
will in the future be able to generate the cash flow necessary to make payments
required under the leases or other agreements. The Company believes that the
vast nature of the health care industry, the financial strength and operating
flexibility of its Operators, and the diversity of its portfolio will mitigate
against the impact of any such diminution in reimbursement. However, the Company
cannot predict what cost containment proposals, if any, will be adopted, and if
adopted, no assurance can be given that the implementation of such reforms will
not have a material, adverse effect on the Company's financial condition or
results of operations.
Potential Operator Loss of License or Certification and Restrictions on
Expansion. The financial condition of the Operators may be affected by changes
in the regulatory licensing and certification policies of federal, state, and
local governments for health care facilities. Health care facilities that
participate in Medicare and Medicaid must meet extensive program requirements,
including physical plant and operational requirements, which are revised from
time to time. Physicians also must meet various requirements to continue
participation in Medicare and Medicaid. The failure of an Operator to comply
with such regulations, licensing, or accreditation requirements could affect its
ability to obtain Medicare, Medicaid and private payor reimbursement, as well as
its ability to operate its facility or facilities and could adversely affect
such Operator's ability to make debt or lease payments to the Company. There can
be no assurance that the operators of all of the Leased Properties will remain
in compliance with applicable law.
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In addition, expansion (including the acquisition of new beds or services
or acquisition of medical equipment) and, occasionally, the discontinuation of
services of health care facilities is generally subjected, in many states, to
regulatory approvals through state Certificate of Need ("CON") programs. The
inability to obtain necessary approvals can inhibit a health care facility's
expansion and adversely affect its profitability. CON requirements are not
uniform throughout the United States and are subject to change. The Company
cannot predict the impact of regulatory changes with respect to CONs on the
operations of the Company's Operators.
In the past several years, due to rising health care costs, there has been
an increased emphasis on detecting and eliminating fraud and abuse in the
Medicare and Medicaid programs. Payment of any consideration in exchange for
referral of Medicare and Medicaid patients is generally prohibited by federal
statute, which subjects violators to severe penalties, including exclusion from
the Medicare and Medicaid programs, tremendous fines, and prison sentences. In
addition, legislation has been adopted in some states and at the federal levels
that severely restricts the ability of physicians to refer patients to entities
in which they have a financial interest.
In recent years, both federal and state governments have significantly
increased investigation and enforcement activity to detect and punish
wrongdoers. The Department of Health and Human Services Office of Inspector
General recouped $1.2 billion in fiscal 1997 from health care fraud
investigations -- five times more than recovered in fiscal 1996. Medicare barred
2,719 physicians, suppliers, and others from its program in 1997, nearly double
the number of exclusions from 1996. Private lawsuits filed by informants
alleging health care fraud and state enforcement initiatives have increased
significantly. It is anticipated that the trend toward increased investigation
and informant activity in the area of fraud and abuse, as well as unlawful
self-referral, will continue in future years. In the event that any Operator
were to be found in violation of laws regarding fraud, abuse, or self-referral,
that Operator's ability to operate a health care facility or medical practice
could be jeopardized, which could adversely affect its ability to make debt or
lease payments to the Company and, thereby, adversely affect the Company.
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 Company's $180
million unsecured line of credit (the "Bank Credit Facility") provided by a
consortium of banks led by NationsBank, National Association ("NationsBank")
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 December 31, 1997, the Company had variable interest rate
indebtedness aggregating approximately $173.0 million under the Bank Credit
Facility and $27.5 million under the Company's $40 million short-term credit
facility (the "Short-Term Credit Facility").
The Bank Credit Facility matures on June 24, 2000. The Short-Term Credit
Facility was repaid in full on February 6, 1998. The Company intends to renew
the Bank Credit Facility or repay the outstanding balance at that time with
proceeds from a refinancing or from a sale of debt or equity securities. There
can be no assurances that the lenders will agree to renew the Bank Credit
Facility on terms favorable to the Company or that the Company will be able to
obtain refinancing proceeds or proceeds from the sale of debt or equity
securities.
During September 1997, the Company entered into an interest rate swap
agreement with NationsBank which, beginning March 1998, effectively fixed the
base rate at 5.959% on a $50 million notional amount of borrowings under the
Bank Credit Facility. Future indebtedness may also bear interest at a floating
rate. Increases in interest rates 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,
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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 health care 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
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
15
<PAGE> 18
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 health care
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, 1998, the Company employed 14 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
INVESTMENTS
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
8,301 square feet at a rental of $17.83 per square foot, aggregating $147,337.56
annually.
ITEM 3. LEGAL PROCEEDINGS
The Company is not aware of any material 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 1997.
16
<PAGE> 19
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". As of March 24, 1998, there were 598 holders of
record of the Common Stock. The following table sets forth, for the fiscal
periods indicated, 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>
DISTRIBUTIONS
HIGH LOW PER SHARE
---- --- -------------
<S> <C> <C> <C> <C> <C>
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 .460
Fourth Quarter....................................... 21 7/8 20 3/4 .465
------
Total...................................... $1.825
1997:
First Quarter........................................ $24 1/8 $22 3/8 $ .470
Second Quarter....................................... 24 3/8 21 3/8 .475
Third Quarter........................................ 24 1/2 22 7/8 .480
Fourth Quarter....................................... 25 9/16 23 3/8 .485
------
Total...................................... $1.910
1998:
First Quarter (through March 24, 1998)............... $25 15/16 $23 3/4 --
</TABLE>
The Company makes quarterly distributions to stockholders of approximately
85% to 95% of its cash available for distribution; however, the Company may
elect to pay more or less than such amount as determined by the Board of
Directors of the Company. In any event, the Company expects to make
distributions annually in excess of 95% of its REIT taxable income in order to
satisfy the annual distribution requirements of a REIT. Payment of
distributions, however, will be at the discretion of the Board of Directors at
all times and will depend upon various factors including the Company's financial
condition, earnings, anticipated investments and other relevant factors.
The Company has a dividend reinvestment plan under which stockholders of
record may invest all or a portion of their dividend distributions and up to an
additional $5,000 per quarter to purchase additional shares of Common Stock.
ITEM 6. SELECTED FINANCIAL DATA
The information set forth under the caption "Selected Financial Data," set
forth on Page 3 of the Company's 1997 Annual Report to Stockholders, is
incorporated herein by reference.
The ratio of earnings to combined fixed charges and preferred stock
dividends is set forth below for each period indicated:
<TABLE>
<CAPTION>
FROM JUNE 30, 1994
(INCEPTION) TO
YEAR ENDED DECEMBER 31, DECEMBER 31, 1994
------------------------ ------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Ratio of earnings to fixed charges and preferred stock
dividends................................................. 2.4x 3.0x 2.0x 4.0x
</TABLE>
For purposes of calculating the following ratios, (i) earnings represent
income from continuing operations before income taxes, plus fixed charges, (ii)
fixed charges represent interest expense on all indebtedness (including
amortization of deferred debt issuance costs) and the portion of operating lease
rental expense that is representative of the interest factor (deemed to be
one-third of operating lease rentals), and (iii) preferred
17
<PAGE> 20
stock dividends represent dividends actually paid during the respective fiscal
year on the outstanding shares of 8 7/8% Series A Cumulative Preferred Stock,
par value $.001 per share, of the Company.
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 1997 Annual Report to Stockholders under the caption
"Management's Discussion," is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
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 1997 Annual Report to Stockholders, 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" in the Company's Proxy Statement relating to the Annual
Meeting of Stockholders to be held on May 7, 1998, is incorporated herein by
reference.
EXECUTIVE OFFICERS
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
John W. McRoberts................... 45 President and Chief Executive Officer
Malcolm E. McVay.................... 36 Chief Financial Officer, Secretary and Treasurer
</TABLE>
Mr. McRoberts was a senior officer of AmSouth Bank (formerly AmSouth Bank
N.A.), headquartered in Birmingham, Alabama, prior to becoming a co-founder,
President and Chief Executive Officer of the Company in 1994. He was employed by
AmSouth Bank from 1977 to 1993 and most recently was head of Corporate Banking
for the Birmingham area. Mr. McRoberts' responsibilities at AmSouth Bank also
included oversight of the bank's entire healthcare lending portfolio and the
Birmingham based real estate lending portfolio.
Mr. McVay was a senior vice president of SouthTrust Bank, N.A.,
headquartered in Birmingham, Alabama, prior to becoming Chief Financial Officer,
Secretary and Treasurer of the Company. With ten years of commercial banking
experience, Mr. McVay served as the senior loan officer and chairman of the
senior loan committee for SouthTrust's west Alabama operations.
ITEM 11. EXECUTIVE COMPENSATION
The information under the caption "Executive Compensation," set forth in
the Company's Proxy Statement relating to the Annual Meeting of Stockholders to
be held on May 7, 1998, is incorporated herein
18
<PAGE> 21
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 in the Company's Proxy Statement relating to
the Annual Meeting of Stockholders to be held on May 7, 1998, is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information under the caption "Certain Relationships and Related
Transactions," set forth in the Company's Proxy Statement relating to the Annual
Meeting of Stockholders to be held on May 7, 1998, is incorporated herein by
reference.
19
<PAGE> 22
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
1997 Annual Report to Stockholders:
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 1997 and December 31,
1996.
Consolidated Statements of Income for the Years Ended December 31,
1997, December 31, 1996, and December 31, 1995.
Consolidated Statements of Cash Flow for the Fiscal Years Ended
December 31, 1997, December 31, 1996, and December 31, 1995.
Consolidated Statements of Stockholders' Equity for the Fiscal Years
Ended December 31, 1997, December 31, 1996, and December 31, 1995.
Notes to Consolidated Financial Statements.
(2) CONSOLIDATED FINANCIAL STATEMENT SCHEDULES:
Independent Auditors' Report on Consolidated Financial Statement Schedules
Schedule III -- Real Estate and Accumulated Depreciation as of December 31,
1997
Schedule IV -- Mortgage Loans on Real Estate as of December 31, 1997
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: MALCOLM E. MCVAY, SECRETARY, CAPSTONE
CAPITAL CORPORATION, 1000 URBAN CENTER DRIVE, SUITE 630, BIRMINGHAM, ALABAMA
35242.
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K with the Securities and
Exchange Commission on December 24, 1997 to report under Item 5 the execution of
an underwriting agreement between the Company and Legg Mason Wood Walker,
Incorporated. No other reports on Form 8-K were filed by the Company during the
last quarter of the fiscal year ended December 31, 1997.
20
<PAGE> 23
(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
Independent Auditors' Report
The Stockholders and Board of Directors
Capstone Capital Corporation:
Under date of January 20, 1998, we reported on the consolidated balance sheets
of Capstone Capital Corporation as of December 31, 1997 and 1996, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the years in the three-year period ended December 31, 1997, as
contained in the 1997 annual report to stockholders. These consolidated
financial statements and our report thereon are incorporated by reference in the
annual report on Form 10-K for the year 1997. In connection with our audits of
the aforementioned consolidated financial statements, we also audited the
related consolidated financial statement schedules as listed in Part IV, Item
14(a)(2). These consolidated financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statement schedules based on our audits.
In our opinion such financial statement schedules, when considered in relation
to the basic consolidated financial statements taken as a whole, present
fairly, in all material respects, the information set forth therein.
/s/ KPMG PEAT MARWICK LLP
Birmingham, Alabama
January 20, 1998
CAPSTONE CAPITAL CORPORATION
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1997
<TABLE>
<CAPTION>
Cost
Capitalized
Subsequent to
Description Initial Cost Acquisition
- ----------------------------------------------------------------------- --------------------------------- -------------
Type Building &
Property(1) (2) Location Land Improvements Improvements
- ------------------------------------- ---- ------------------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
One-7000 Medical Building AHF S. Miami, FL $ 737,168 $12,649,159 $ --
Birmingham Medical Building II AHF Birmingham, AL 1,866,774 7,835,011 4,600
Birmingham Medical Building I AHF Birmingham, AL 701,301 4,048,481 --
American Sports Medicine Institute AHF Birmingham, AL 822,390 2,411,404 --
Larkin Annex Medical Building AHF S. Miami, FL 1,514,728 757,947 --
Richmond Medical Building AHF Richmond, VA 1,084,545 1,036,696 --
Sunrise Mountainview AHF Las Vegas, NV -- 29,519,775 715,846
Sarasota Medical Centre AHF Sarasota, FL -- 14,901,245 460,568
Beaumont Regional Professional Towers AHF Beaumont, TX -- 8,892,446 325,135
Bellaire Plaza AHF Houston, TX 2,336,080 6,643,920 --
Midway Medical Plaza AHF Los Angeles, CA 4,093,477 16,522,062 1,030
Medical Building II AHF Gadsden, AL 41,372 5,821,627 --
Desert Springs AHF Las Vegas, NV 1,489,288 3,282,401 --
Hamiter Building AHF Gadsden, AL 82,743 4,339,510 --
Goodyear Clinic AHF Gadsden, AL 75,580 1,546,052 --
Daniel Medical Center AHF Winter Park, FL 1,620,000 4,580,000 --
Southwest General Medical Building AHF San Antonio, TX -- 2,361,042 7,050
Richmond Medical Building II AHF Richmond, VA 1,084,545 9,018,485 --
Melbourne Medical Building PC Melbourne, FL 3,275,000 6,112,537 --
McCullough Medical Plaza PC Birmingham, AL 1,200,000 4,831,549 --
South County Medical Center II PC St Louis, MO -- 2,890,954 --
Greenwood Medical Building PC Memphis, TN 352,588 1,448,909 --
Columbus OB/GYN PC Columbus, GA 311,000 1,303,603 --
Indialantic Medical Building PC Melbourne, FL 480,000 752,168 --
West Palm Beach Medical Building PC West Palm, FL 90,000 491,693 --
Par Place Medical PC Palm Bay, FL 750,000 5,819,038 18,542
Brookstone PC Tampa, FL 850,000 5,101,001 1,046
Melbourne Clinic PC Melbourne, FL 860,000 1,790,000 2,400
Clayton Big Bend PC St. Louis, MO 533,850 1,745,912 465,542
Bonita Bay Medical Centre ASF Bonita Springs, FL -- 8,073,115 --
South County Medical Plaza ASF St. Louis, MO 1,024,000 5,941,206 352,850
Cape Coral Medical Plaza ASF Cape Coral, FL -- 5,809,339 --
Northlake ASF Tucker, GA -- 1,007,017 43,828
North Shore ASF Evanston, IL 141,375 740,061 37,994
West County Surgery ASF Town & Country, MO 585,000 1,358,662 94,962
Mountain View LTC Greensburg, PA 207,888 9,625,535 30,223
Oakwood SAC Alexandria, VA 313,570 9,848,800 34,675
Gravois SAC St. Louis, MO 1,427,162 6,982,312 181,290
Southeast Texas Rehabilitation IRF Beaumont, TX 926,000 9,809,294 18,903
Altoona Rehabilitation IRF Altoona, PA 1,150,000 16,033,654 18,548
Mechanicsburg Rehabilitation IRF Mechanicsburg, PA 850,000 11,578,962 17,086
Great Lakes Rehabilitation Hospital IRF Erie, PA -- 14,523,233 --
Desert Vista CMHH Mesa, AZ 1,185,758 7,364,242 --
</TABLE>
<TABLE>
<CAPTION>
Gross Amount at which
Carried at December 31, 1997
-----------------------------
Buildings & Total Accumulated Date
Property(1) Land Improvements (3) Depreciation(4) Acquired
- ----------------------------------- ---------- ------------- ----------- --------------- --------
<S> <C> <C> <C> <C> <C>
One-7000 Medical Building $ 737,168 $12,649,159 $13,386,327 $1,112,325 6/30/94
Birmingham Medical Building II 1,888,774 7,839,611 9,706,385 696,864 6/30/94
Birmingham Medical Building I 701,301 4,048,481 4,749,782 362,795 6/30/94
American Sports Medicine Institute 822,390 2,411,404 3,233,794 220,491 6/30/94
Larkin Annex Medical Building 1,514,728 757,947 2,272,675 72,970 6/30/94
Richmond Medical Building 1,084,545 1,036,696 2,121,241 94,728 6/30/94
Sunrise Mountainview -- 30,235,421 30,235,421 1,280,425 3/31/96
Sarasota Medical Centre -- 14,901,245 14,901,245 873,374 7/1/95
Beaumont Regional Professional Towers -- 9,217,581 9,217,581 304,555 8/23/98
Bellaire Plaza 2,336,080 6,843,920 9,180,000 45,493 9/26/97
Midway Medical Plaza 4,093,477 18,523,092 20,615,569 1,450,119 6/30/94
Medical Building II 41,372 5,821,627 5,862,999 516,638 6/30/94
Desert Springs 1,469,286 3,282,401 4,751,687 298,255 6/30/94
Hamiter Building 82,743 4,339,510 4,422,253 384,594 6/30/94
Goodyear Clinic 75,680 1,548,062 1,621,732 137,171 6/2/97
Daniel Medical Center 1,620,000 4,580,000 6,200,000 67,196 10/21/94
Southwest General Medical Building -- 2,388,092 2,388,092 189,216 6/30/94
Richmond Medical Building II 1,084,545 9,018,485 10,103,030 805,143 8/17/95
Melbourne Medical Building 3,275,000 6,112,537 9,387,537 362,826 7/28/94
McCullough Medical Plaza 1,200,000 4,831,549 6,031,549 422,429 7/1/97
South County Medical Center II -- 2,890,954 2,890,954 34,218 1/31/96
Greenwood Medical Building 352,586 1,448,909 1,801,495 114,812 8/7/95
Columbus OB/GYN 311,000 1,303,603 1,614,603 76,618 8/17/95
Indialantic Medical Building 480,000 752,168 1,232,168 45,018 1/15/95
West Palm Beach Medical Building 90,000 491,893 581,693 38,424 6/28/96
Par Place Medical 750,000 5,836,580 8,585,580 220,766 9/30/96
Brookstone 850,000 5,102,047 5,952,047 159,842 11/26/96
Melbourne Clinic 660,000 1,792,400 2,452,400 49,323 5/31/96
Clayton Big Bend 533,650 2,212,454 2,748,104 81,093 4/1/95
Bonita Bay Medical Centre -- 8,073,115 8,073,115 495,246 6/30/94
South County Medical Plaza 1,024,000 6,294,056 7,318,056 589,115 4/1/95
Cape Coral Medical Plaza -- 5,609,339 5,609,339 386,787 6/30/94
Northlake -- 1,050,845 1,050,845 96,005 6/30/94
North Shore 141,375 778,045 919,420 71,683 12/31/96
West County Surgery 565,000 1,453,644 2,018,644 35,141 8/30/94
Mountain View 207,888 9,655,758 9,863,626 848,303 12/15/94
Oakwood 313,570 9,883,475 10,197,045 762,122 6/30/94
Gravois 1,427,162 7,163,602 8,590,764 643,864 7/1/96
Southeast Texas Rehabilitation 925,000 9,626,197 10,551,197 413,834 5/10/96
Altoona Rehabilitation 1,150,000 16,052,200 17,202,200 659,349 5/10/96
Mechanicsburg Rehabilitation 850,000 11,596,056 12,446,057 476,349 3/27/95
Great Lakes Rehabilitation Hospital - 14,523,233 14,523,233 1,008,854 4/17/95
Desert Vista 1,185,758 7,364,242 8,550,000 523,882 4/17/95
</TABLE>
21
<PAGE> 24
CAPSTONE CAPITAL CORPORATION
SCHEDULE III -- REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1997
<TABLE>
<CAPTION>
Cost Capitalized
Description Initial Cost Subsequent to Acquisition
- -------------------------------------------------------- ------------------------- -------------------------
Building &
Property(1) Type(2) Location Land Improvements Improvements
- ----------- ------- -------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Mission Vista CMHH San Antonio, TX $ 238,809 $ 3,711,192 $ --
Coral Gables ORF Coral Gables, FL 580,646 1,742,935 --
Little Rock ORF Little Rock, AR 333,240 1,748,168 --
Virginia Beach ORF Virginia Beach, VA -- 1,460,000 --
Arcon DeFuniak Springs Center IDF DeFuniak Springs, FL -- 4,822,158 --
Arcon Crystal Beach Center IDF Destin, FL 710,437 3,706,972 --
Arcon Soddy Daisy Center IDF Soddy Daisy, TN -- 3,717,652 --
Kingston Health Care SNF Kingston, PA 124,000 4,122,799 --
Blakely-Pine SNF Peckville, PA 23,000 2,465,000 --
Butler-Balanced Care ALF Butler, MO 11,250 1,322,500 --
Nevada I-Balanced Care ALF Nevada, MO 75,000 1,258,750 --
Nevada II-Balanced Care ALF Nevada, MO 48,750 1,287,000 --
Alleghany IRF Pittsburg, PA -- 15,002,604 --
Highlands Diagnostic PC Birmingham, AL 515,000 1,619,888 --
Surburban Heights IDF Chicago Heights, IL 160,000 8,846,804 --
Lamar-Balanced Care ALF Lamar, MO 46,750 1,294,500 --
Arcon Mesquite IDF Mesquite, TX -- 4,908,184 --
Kelsey-Seybold PC Houston, TX 4,155,768 9,554,175 --
Chicoppee Blue Cross/Blue Shield PC Chicoppee, MA 1,380,000 7,254,000 --
Farmington Blue Cross/Blue Shield PC Framington, MA 1,077,100 2,638,900 --
Baintree Blue Cross/Blue Shield PC Baintree, MA 1,077,500 6,080,500 --
Methuen Blue Cross/Blue Shield PC Methuen, MA 448,500 6,502,500 --
Agawan Blue Cross/Blue Shield PC Agawan, MA 36,000 2,368,000 --
South Boston-Quality Link SNF South Boston, VA 194,493 1,186,572 97,246
Goochland-Quality Link SNF Goochland, VA 68,072 3,355,164 194,493
Fork Union-Quality Link SNF Fluvanna, VA 77,796 2,956,454 194,493
Garner-Quality Link SNF Garner, NC 388,985 5,364,696 291,739
Lawrenceville-Quality Link SNF Lawrenceville, VA 106,971 4,094,235 194,493
Emporia-Quality Link SNF Emporia, VA 165,319 4,230,380 291,739
Old Forge Manor ALF Old Forge, PA 41,000 2,245,000 --
West View ALF Wyoming, PA 43,000 2,334,000 --
Bloomsburg Manor ALF Bloomsburg, PA 83,000 3,638,387 --
Kingston Manor ALF Kingston, PA 244,000 3,230,000 --
Mid-Valley Manor ALF Peckville, PA 56,400 3,235,600 --
Jenni-Lynn ALF West Columbia, SC 90,000 2,460,000 --
Jaylene ALF St. Petersburg, FL 235,000 1,239,893 --
Kingsley Place of Henderson ALF Henderson, TX -- 4,504,097 --
Kingsley Place of Oakwell ALF San Antonio, TX -- 6,184,144 --
Kingsley Place Medical Center ALF San Antonio, TX -- 5,809,601 --
Kingsley Place of McKinney ALF McKinney, TX -- 5,366,733 --
Remington Park ALF Remington Park, TX -- -- 6,974,753
Grand Court of San Angelo ALF San Angelo, TX -- -- 7,417,575
Acron Navarre IDF Navarre, FL -- -- 1,479,036
</TABLE>
<TABLE>
<CAPTION>
Gross Amount at which
Carried at December 31, 1997
----------------------------------
Buildings & Accumulated Date
Property(1) Land Improvements Total(3) Depreciation(4) Acquired
- ----------- ---------- ------------ -------- --------------- --------
<S> <C> <C> <C> <C> <C>
Mission Vista $ 238,809 $ 3,711,192 $ 3,950,001 $259,695 4/17/95
Coral Gables 580,646 1,742,935 2,323,581 157,447 6/30/94
Little Rock 333,240 1,748,168 2,081,408 163,856 6/30/94
Virginia Beach -- 1,460,000 1,460,000 131,743 6/30/94
Arcon DeFuniak Springs Center -- 4,822,158 4,822,158 60,720 6/1/97
Arcon Crystal Beach Center 710,437 3,706,972 4,417,409 84,148 2/1/97
Arcon Soddy Daisy Center -- 3,717,652 3,717,852 38,710 8/1/97
Kingston Health Care 124,000 4,122,799 4,246,799 94,470 1/31/97
Blakely-Pine 23,000 2,465,000 2,488,000 56,815 1/31/97
Butler-Balanced Care 11,250 1,322,500 1,333,750 22,295 5/15/97
Nevada I-Balanced Care 75,000 1,258,750 1,333,750 21,070 5/15/97
Nevada II-Balanced Care 46,750 1,267,000 1,333,750 21,580 5/15/97
Alleghany -- 15,002,604 15,002,604 189,029 6/30/97
Highlands Diagnostic 515,000 1,619,888 2,134,888 18,792 7/15/97
Surburban Heights 160,000 8,846,804 9,006,804 98,071 7/23/97
Lamar-Balanced Care 48,750 1,294,500 1,341,250 12,371 8/18/97
Arcon Mesquite -- 4,908,164 4,908,164 40,179 9/1/97
Kelsey-Seybold 4,155,788 9,554,175 13,709,943 60,822 9/30/97
Chicoppee Blue Cross/Blue Shield 1,380,000 7,254,000 5,634,000 15,407 12/19/97
Farmington Blue Cross/Blue Shield 1,077,100 2,638,900 3,716,000 5,811 12/19/97
Baintree Blue Cross/Blue Shield 1,077,500 6,080,500 7,158,000 12,896 12/19/97
Methuen Blue Cross/Blue Shield 448,500 6,502,500 6,951,000 13,795 12/19/97
Agawan Blue Cross/Blue Shield 36,000 2,368,000 2,404,000 5,022 12/19/97
South Boston-Quality Link 194,493 1,283,817 1,478,310 20,928 6/20/97
Goochland-Quality Link 88,072 3,549,858 3,617,728 55,040 6/20/97
Fork Union-Quality Link 77,796 3,150,947 3,228,743 49,714 6/20/97
Garner-Quality Link 388,985 5,656,435 6,045,420 87,123 6/20/97
Lawrenceville-Quality Link 106,971 4,288,728 4,395,699 54,924 6/20/97
Emporia-Quality Link 165,319 4,522,119 4,687,438 72,005 8/20/97
Old Forge Manor 41,000 2,245,000 2,286,000 51,590 1/31/97
West View 43,000 2,334,000 2,377,000 53,600 1/31/97
Bloomsburg Manor 83,000 3,636,387 3,719,387 82,951 1/31/97
Kingston Manor 244,000 3,230,000 3,474,000 74,035 1/31/97
Mid-Valley Manor 56,400 3,235,800 3,292,000 74,370 1/31/97
Jenni-Lynn 90,000 2,460,000 2,550,000 52,584 2/21/97
Jaylene 235,000 1,239,893 1,474,893 26,010 3/5/97
Kingsley Place of Henderson -- 4,504,097 4,504,097 9,393 12/1/97
Kingsley Place of Oakwell -- 6,184,144 6,184,144 12,927 12/1/97
Kingsley Place Medical Center -- 5,809,601 5,809,601 12,152 12/1/97
Kingsley Place of McKinney -- 5,366,733 5,366,733 11,222 12/1/97
Remington Park -- 6,974,753 6,974,753 -- (6)
Grand Court of San Angelo -- 7,417,575 7,417,575 -- (6)
Acron Navarre -- 1,479,036 1,479,036 -- (6)
</TABLE>
22
<PAGE> 25
CAPSTONE CAPITAL CORPORATION
SCHEDULE III -- REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1997
<TABLE>
<CAPTION> Cost Capitalized
Description Initial Cost Subsequent to Acquisition
- ---------------------------------------------------------- --------------------------- -------------------------
Type Building &
Property(1) (2) Location Land Improvements Improvements
- ----------- ---- -------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
El Paso -- Grand Court ALF El Paso, TX -- -- 6,706,406
Abilene -- Grand Court ALF Abilene, TX -- -- 5,297,157
Wichita -- Grand Court ALF Wichita Falls, TX -- -- 6,185,388
Greensboro -- Balanced Care ALF Greensboro, NC -- -- 1,521,844
Harrisburg -- Balanced Care ALF Harrisburg, PA -- -- 3,090,447
Ravenna -- Balanced Care ALF Ravenna, OH -- -- 2,411,451
ALCO IV Hampden -- Balanced Care ALF Hampden, PA -- -- 1,273,302
River Landings ALF Health Park, FL -- -- 1,517,807
Zephyrhills ALF Zephyrhills, FL -- -- 1,881,203
Burbank MOB Burbank, CA -- -- 1,260,070
Stafford ALF Stafford, NJ -- -- 1,514,230
Hillsborough ALF Hillsborough, NJ -- -- 1,493,725
Torrington ALF Torrington, CT -- -- 1,418,626
Hazelwood IDF Hazelwood, MO -- -- 3,029,525
Scottsdale IDF Scottsdale, AZ -- -- 1,686,669
Augusta Gardens ALF Augusta, GA -- -- 3,705,001
--------------------------- -----------
$46,655,844 $435,819,206 $63,958,343
Gross Amount at which
Carried at December 31, 1997
----------------------------
Buildings & Total Accumulated Date
Property(1) Land Improvements (3) Depreciation(4) Acquired
- ----------- ---- ------------ ----- --------------- --------
El Paso -- Grand Court -- 6,708,406 6,706,406 -- (6)
Abilene -- Grand Court -- 5,297,157 5,297,157 -- (6)
Wichita -- Grand Court -- 6,185,388 6,185,388 -- (6)
Greensboro -- Balanced Care -- 1,521,844 1,521,844 -- (6)
Harrisburg -- Balanced Care -- 3,090,447 3,090,447 -- (6)
Ravenna -- Balanced Care -- 2,411,451 2,411,461 -- (6)
ALCO IV Hampden -- Balanced Care -- 1,273,302 1,273,302 -- (6)
River Landings -- 1,317,807 1,517,607 -- (6)
Zephyrhills -- 1,881,203 1,881,203 -- (6)
Burbank -- 1,260,070 1,260,070 -- (6)
Stafford -- 1,614,230 1,541,230 -- (6)
Hillsborough -- 1,493,725 1,493,725 -- (6)
Torrington -- 1,418,626 1,418,626 -- (6)
Hazelwood -- 3,029,525 3,029,525 -- (6)
Scottsdale -- 1,686,669 1,686,669 -- (6)
Augusta Gardens -- 3,705,001 3,705,001 -- (6)
------------------------- --------------------------
$46,655,544 $499,314,979(5) 545,970,823 $19,924,089
</TABLE>
(1) Properties which are subject to encumbrances include: the Sunrise
Mountainview facility which had a balance as of 12/31/97 of $23,045,159;
Sarasota Medical Centre, Bonita Bay Medical Centre and Cape Coral Medical Plaza
which had a 12/31/97 balance of $23,046,159; and the South Boston, Goochland,
Fort Union, Gamar, Lawrenceville and Emporia facilities which had a 12/31/97
balance of $16,851,453.
(2) AHF means ancilliary hospital facility, PC means off-campus physician
clinic, ASF means ambulatory surgery facility, SAC means subacute care facility,
IRF means inpatient rehabilitation facility, CMHH means comprehensive mental
health hospital and ORF means outpatient rehabilitation facility, SNF means
skilled nursing facility, ALF means assisted living facility.
(3)
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996 December 31, 1995
Accumulated Accumulated Accumulated
Cost Depreciation Cost Depreciation Cost Depreciation
---- ------------ ---- ------------ ---- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at Beginning of Year $316,214,809 $11,217,391 $212,828,121 $ 5,570,953 $152,739,813 $1,411,722
Acquisitions 170,891,798 -- 97,436,498 -- 60,060,899 --
Cost of Real Estate Sold -- -- (10,563,181) (375,373) -- --
Properties Under Construction 59,884,216 -- 15,513,371 -- 37,409 --
Depreciation -- 8,706,698 -- 6,021,811 -- 4,159,181
------------ ----------- ------------ ----------- ------------ ----------
Balance at End of year $45,970,823 $19,924,089 $315,214,809 $11,217,391 $212,828,121 $5,870,903
============ =========== ============ =========== ============ ==========
</TABLE>
(4) Depreciation is calculated using a 40 year life for all completed
facilities.
(5) Aggregate cost for federal income tax purposes.
(6) Properties are under construction. Completion is expected during 1998.
23
<PAGE> 26
CAPSTONE CAPITAL CORPORATION
SCHEDULE IV--MORTGAGE LOANS ON REAL ESTATE
December 31, 1997
<TABLE>
<CAPTION>
Principal
Amt of Loans
Current Final Periodic Face Carrying Subject to
Facility Interest Maturity Payment Prior Amount Amount Delinquent
Property Location Type(1) Rate Date Terms Liens of Mtgs of Mtgs(5) Princ or Int
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FIRST MORTGAGES:
Chapman General Hospital Orange, CA ACH 11.52% 8/10/09 (3) -- 8,000,000 7,870,015 --
BCC at Darlington Darlington, PA ALF 10.50% 3/31/98 (3) -- 5,875,000 5,875,000 --
BCC at Northridge Saxonburg, PA ALF 10.50% 3/31/98 (3) -- 8,600,000 8,800,000 --
BCC at Sarver Sarver, PA ALF 10.50% 3/31/98 (3) -- 288,000 286,000 --
BCC at Saxonburg Saxonburg, PA ALF 10.50% 3/31/98 (3) -- 8,618,000 8,618,000 --
Capri Villa Harriman, TN ALF 10.84% 5/1/02 (3) -- 4,300,000 4,281,585 --
Carillon-Asheboro Ashboro, NC ALF 9.45% 3/1/03 (3) -- 1,250,000 1,250,000 --
Enumclaw Seattle, WA ALF 10.19% 9/3/02 (3) -- 1,795,861 1,795,861 --
Eyers Groove Millville, PA ALF 10.50% 3/31/98 (3) -- 1,031,675 1,031,675 --
Kenworth/Walden Hickory, NC ALF 10.00% 10/3/07 (3) -- 1,698,547 1,698,547 --
New Vista/Brawley Brawley, CA ALF 10.71% 6/1/07 (3) -- 3,400,000 2,986,827 --
New Vista/Claremont Claremont, CA ALF 10.66% 5/7/21 (3) -- 2,200,000 2,178,741 --
Park Place Carrollwood Tampa, FL ALF 9.40% 1/1/08 (3) -- 5,825,000 5,825,000 --
Prestige Caldwell Caldwell, ID ALF 9.74% 10/1/02 (3) -- 4,970,000 4,962,497 --
Bainbridge Bainbridge, MA SNF 11.00% 5/31/02 (3) -- 2,248,800 2,243,487 --
BCC at Butler Clearfield, PA SNF 10.50% 3/31/98 (3) -- 246,000 246,000 --
Bloomsburg II Bloomsburg, PA SNF 10.50% 3/31/98 (3) -- 4,568,325 4,568,325 --
Burleson/Silver Haven Burleson, TX SNF 13.79% 6/27/05 (3) -- 2,550,000 2,517,529 --
Canton Harbor Baltimore, MD SNF 10.58% 2/15/02 (3) -- 8,800,000 8,800,000 --
Carewell Colonial Grandfield, OK SNF 9.25% 12/24/02 (3) -- 541,721 541,721 --
Carewell Temple Temple, OK SNF 9.25% 12/24/02 (3) -- 664,333 664,333 --
Carewell Tuttle Tuttle, OK SNF 9.25% 12/24/02 (3) -- 497,964 497,964 --
Carewell Western Lauton, OK SNF 9.25% 12/24/02 (3) -- 2,236,097 2,236,097 --
Carewell Willow Park Lauton, OK SNF 9.25% 12/24/02 (3) -- 2,067,903 2,067,903 --
Carewell Woodland Lauton, OK SNF 9.25% 12/24/02 (3) -- 491,983 491,983 --
</TABLE>
24
<PAGE> 27
CAPSTONE CAPITAL CORPORATION
SCHEDULE IV--MORTGAGE LOANS ON REAL ESTATE
December 31, 1997
<TABLE>
<CAPTION>
Principal
Amt of Loans
Current Final Periodic Face Carrying Subject to
Facility Interest Maturity Payment Prior Amount Amount Delinquent
Property Location Type(1) Rate Date Terms Liens of Mtgs of Mtgs(5) Princ or Int
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Charter House--Farmington Farmington, MI SNF 10.50% 2/15/07 (3) -- 4,784,445 4,764,432 --
Charter House--Novi Novi, MI SNF 10.50% 2/15/07 (3) -- 4,784,445 4,764,432 --
Chisolm/Richardson Burleson, TX SNF 13.79% 10/15/05 (3) -- 300,000 263,750 --
Cogburn Health Center Mobile, AL SNF 11.00% 7/1/05 (3) -- 4,000,000 3,938,206 --
Granbury/Valley View Granbury, TX SNF 13.79% 10/18/05 (3) -- 975,000 962,585 --
Grasslake Grass Lake, MI SNF 10.82% 5/25/02 (3) -- 1,624,237 1,618,010 --
Ideal Nursing Center Mobile, AL SNF 11.00% 8/30/09 (3) -- 4,890,000 4,867,902 --
Johnson/Harriman Harriman, TN SNF 10.25% 5/25/07 (3) -- 2,410,137 2,138,741 --
Lynchburg Lynchburg, VA SNF 10.11% 6/25/02 (3) -- 2,254,482 2,240,290 --
New Vista WP II Los Angeles, CA SNF 10.00% 5/1/07 (3) -- 350,000 348,904 --
New Vista/D.L/W.Pav Los Angeles, CA SNF 10.00% 5/1/07 (3) -- 5,850,000 5,799,358 --
Roberts Health Care Huntsville, AL SNF 11.50% 8/31/01 (3) -- 762,560 782,580 --
Tri County/Adamsville Adamsville, TN SNF 10.92% 11/25/01 (3) -- 2,250,000 2,217,746 --
-----------
SUB TOTAL 116,820,003
SECOND MORTGAGES:
Matrix Eastside Snellville, GA ALF 12.00% 9/20/01 (3) 2,816,000 704,000 702,830 --
Matrix Tucker/Northlake Tucker, GA ALF 12.00% 9/20/01 (3) 3,456,000 822,345 820,977 --
Phillips Cardinal Cuyahoga, OH ALF 12.00% 9/2/02 (3) 5,675,000 799,206 799,206 --
HP Florida/Pinellas Park Pinellas Park, FL SNF 12.25% 2/4/02 (3) 2,291,000 609,000 609,000 --
Phillips Cuyahoga Cuyahoga, OH SNF 12.00% 9/1/02 (3) 4,475,000 299,702 299,702 --
Tri State Manor Harrogate, TN SNF 12.00% 1/31/02 (3) 4,000,000 1,000,000 994,432 --
-----------
SUB TOTAL 4,226,147
CONSTRUCTION MORTGAGES:
Cambridge Bay Area Medical Bradenton, FL AHF 9.50% (2) (4) -- 2,798,839 2,798,839 --
ALCO I Harrisonburg, VA ALF 9.00% (2) (4) -- 1,170,373 1,170,373 --
ALCO II Roanoke, VA ALF 9.00% (2) (4) -- 1,314,042 1,314,042 --
</TABLE>
25
<PAGE> 28
CAPSTONE CAPITAL CORPORATION
SCHEDULE IV--MORTGAGE LOANS ON REAL ESTATE
December 31, 1997
<TABLE>
<CAPTION>
Principal
Amt of Loans
Current Final Periodic Face Carrying Subject to
Facility Interest Maturity Payment Prior Amount Amount Delinquent
Property Location Type(1) Rate Date Terms Liens of Mtgs of Mtgs(5) Princ or Int
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ALCO III Danville, VA ALF 9.00% (2) (4) -- 1,148,824 1,146,824 --
ALCO VII Biloxi, MS ALF 9.00% (2) (4) -- 588,092 588,092 --
Carillon--Harrisburg Harrisburg, NC ALF 9.36% (2) (4) -- 603,700 603,700 --
Emeritus Auburn Auburn, CA ALF 9.00% (2) (4) -- 3,150,133 3,150,133 --
Emeritus Cheyenne Cheyenne, WY ALF 9.00% (2) (4) -- 2,095,788 2,095,788 --
Emeritus Urbana Urbana, IL ALF 9.00% (2) (4) -- 1,231,678 1,231,678 --
North Central Ft Dodge Ft Dodge, IA ALF 11.00% (2) (4) -- 1,608,658 1,608,658 --
North Central Grd Island Grand Island, NB ALF 11.00% (2) (4) -- 1,521,911 1,521,911 --
Parc Chateau Kenner, LA ALF 10.50% (2) (4) -- 993,460 993,460 --
Prestige--Chico Chico, CA ALF 10.19% (2) (4) -- 374,855 374,855 --
Prestige--Grand Park Billings, MO ALF 10.19% (2) (4) -- 1,524,261 1,524,261 --
Prestige--Oroville Oroville, CA ALF 10.19% (2) (4) -- 1,186,810 1,186,810 --
Wellington/Kennesaw Kennesaw, GA ALF 10.50% (2) (4) -- 755,688 755,688 --
Columbia Cottage Florence Florence, AL ALF 12.00% (2) (4) -- 170,000 170,000 --
Medistar/Pecan Valley San Antonio, TX ASF 9.50% (2) (4) -- 5,683,006 5,883,006 --
MedCath Tucson, AZ SH 9.50% (2) (4) -- 17,800,000 17,032,224 --
ACMC/Gainsville Gainsville, FL SNF 10.50% (2) (4) -- 1,065,327 1,065,327 --
Life Care Charleston
Medical Charleston, SC SNF 10.00% (2) (4) -- 870,452 870,452 --
Staunton Staunton, VA SNF 10.75% (2) (4) -- 724,054 724,054 --
------------
SUB TOTAL 47,808,176
CONSTRUCTION SECOND MORTGAGES:
Columbia Cottage
Collegeville Collegeville, PA ALF 12.00% (1) (4) 512,000 127,164 127,164 --
Columbia Cottage
Wyomissing Wyomissing, PA ALF 12.00% (1) (4) 1,952,000 244,420 244,420 --
Ivy Hall/Atlanta Atlanta, GA ALF 11.25% (1) (4) 5,626,000 1,039,976 1,039,976 --
------------
SUB TOTAL 1,411,560
------------
TOTAL $170,065,686
============
</TABLE>
26
<PAGE> 29
(1) ALF means assisted living facility; AHF means ancillary hospital facility;
SNF means skilled nursing facility; IRF means inpatient rehabilitation facility;
PC means physician clinic; ASF means ambulatory surgery facility; IDF means
integrated delivery facility; SAC means sub-acute care facility; SH means
specialty hospital; CMHH means comprehensive mental health hospital; ACH means
acute-care hospital; and ORF means outpatient rehabilitation facility.
(2) Based on completion of construction.
(3) Represents current stated interest rate. Generally, the loans are amortized
with principal and interest payable at varying amounts over the life to maturity
with annual interest rate adjustments. Generally, a balloon payment is due upon
maturity and there is a prepayment penalty (as defined by the loan agreement).
(4) Interest only payments are due during the construction phase.
(5)
<TABLE>
<CAPTION>
December 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Balance at Beginning of Period $ 39,325,621 $ 24,988,753 $13,244,230
New Mortgage Loans 136,763,128 24,250,938 3,825,000
Increase to Existing Mortgage 4,125,033 290,000 8,001,005
Collection of Principal (10,147,896) (10,214,070) (81,432)
------------------------------------------
Balance at end of period $ 170,065,886 $ 39,325,621 $24,988,753
==========================================
</TABLE>
27
<PAGE> 30
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 March 30, 1998.
CAPSTONE CAPITAL CORPORATION
By /s/ JOHN W. MCROBERTS
------------------------------------
John W. McRoberts
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S> <C>
/s/ JOHN W. MCROBERTS President and Chief Executive March 30, 1998
- ----------------------------------------------------- Officer (Principal Executive
John W. McRoberts Officer)
/s/ MALCOLM E. MCVAY Chief Financial Officer, March 30, 1998
- ----------------------------------------------------- Secretary and Treasurer
Malcolm E. McVay (Principal Financial Officer)
/s/ RICHARD M. SCRUSHY Chairman of the Board March 30, 1998
- -----------------------------------------------------
Richard M. Scrushy
/s/ MICHAEL D. MARTIN Director March 30, 1998
- -----------------------------------------------------
Michael D. Martin
/s/ GEORGE E. BOGLE Director March 30, 1998
- -----------------------------------------------------
George E. Bogle
/s/ ERIC R. HANSON Director March 30, 1998
- -----------------------------------------------------
Eric R. Hanson
/s/ BARRY MORTON Director March 30, 1998
- -----------------------------------------------------
Barry Morton
/s/ LARRY D. STRIPLIN, JR. Director March 30, 1998
- -----------------------------------------------------
Larry D. Striplin, Jr.
/s/ LARRY R. HOUSE Director March 30, 1998
- -----------------------------------------------------
Larry R. House
/s/ Robert N. Elkins Director March 30, 1998
- -----------------------------------------------------
Robert N. Elkins
</TABLE>
28
<PAGE> 31
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION OF EXHIBITS PAGE NUMBER
- ------- ----------------------- -----------
<C> <C> <S> <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.
3.3 -- Form of Articles Supplementary of the Company classifying
the 8.875% Series A Cumulative Preferred Stock, incorporated
by reference (pursuant to the provisions of Rule 12b-32) to
Exhibit 3.1 of the Company's Form S-3 Registration Statement
No. 333-31639, dated July 18, 1997.
4.1 -- Specimen of Common Stock Certificate incorporated by
reference (pursuant to the provisions of Rule 12b-32) to
Exhibit 4 to the Company's Form S-11 Registration Statement
No. 33-77788, 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,
incorporated by reference (pursuant to the provisions of
Rule 12b-32) to Exhibit 4.4 to the Annual Report on Form
10-K of the Company for the fiscal year ended December 31,
1996.
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,
incorporated by reference (pursuant to the provisions of
Rule 12b-32) to Exhibit 4.4 to the Annual Report on Form
10-K of the Company for the fiscal year ended December 31,
1996.
4.6 -- Form of 8.875% Series A Cumulative Preferred Stock
Certificate, incorporated by reference (pursuant to the
provisions of Rule 12b-32) to Exhibit 4.6 of the Company's
Form S-3 Registration Statement No. 333-31639, dated July
18, 1997.
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.
</TABLE>
29
<PAGE> 32
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION OF EXHIBITS PAGE NUMBER
- ------- ----------------------- -----------
<C> <C> <S> <C>
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.
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.
</TABLE>
30
<PAGE> 33
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION OF EXHIBITS PAGE NUMBER
- ------- ----------------------- -----------
<C> <C> <S> <C>
*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.
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 12b-32) 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.
</TABLE>
31
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<C> <C> <S> <C>
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 12b-32) 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.
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.
</TABLE>
32
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<TABLE>
<CAPTION>
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NUMBER DESCRIPTION OF EXHIBITS PAGE NUMBER
- ------- ----------------------- -----------
<C> <C> <S> <C>
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.
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.
</TABLE>
33
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<TABLE>
<CAPTION>
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NUMBER DESCRIPTION OF EXHIBITS PAGE NUMBER
- ------- ----------------------- -----------
<C> <C> <S> <C>
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.
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.
</TABLE>
34
<PAGE> 37
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION OF EXHIBITS PAGE NUMBER
- ------- ----------------------- -----------
<C> <C> <S> <C>
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.
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.
</TABLE>
35
<PAGE> 38
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION OF EXHIBITS PAGE NUMBER
- ------- ----------------------- -----------
<C> <C> <S> <C>
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.
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, incorporated by reference (pursuant to
the provisions of Rule 12b-32) to Exhibit 10.71 to the Form
10-K Annual Report of the Company dated March 31, 1997.
*10.72 -- Employment and Noncompetition Agreement by and between
Capstone Capital Corporation and John W. McRoberts dated
effective November 1, 1996, incorporated by reference
(pursuant to the provisions of Rule 12b-32) to Exhibit 10.72
to the Form 10-K Annual Report of the Company dated March
31, 1997.
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,
incorporated by reference (pursuant to the provisions of
Rule 12b-32) to Exhibit 10.73 to the Form 10-K Annual Report
of the Company dated March 31, 1997.
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 , incorporated by reference (pursuant to
the provisions of Rule 12b-32) to Exhibit 10.74 to the Form
10-K Annual Report of the Company dated March 31, 1997.
10.75 -- Amendment Agreement No. 2 to Amended and Restated Revolving
Credit and Reimbursement Agreement by and between the
Company and NationsBank, N.A. (South) as Agent, dated
September 18, 1997.
10.76 -- Amendment Agreement No. 3 to Amended and Restated Revolving
Credit and Reimbursement Agreement by and between the
Company and NationsBank, National Association (successor by
merger of NationsBank, N.A. South)) as Agent for the
lenders, dated October 31, 1997.
*10.77 -- Second Amendment to 1994 Stock Incentive Plan of the
Company.
*10.78 -- Severance Agreement and General Release effective October
13, 1997 between the Company and William C. Harlan.
12 -- Statement re computation of ratios.
</TABLE>
36
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<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION OF EXHIBITS PAGE NUMBER
- ------- ----------------------- -----------
<C> <C> <S> <C>
13.1 -- Selected Financial Data, as set forth in the Company's
Annual Report to Stockholders for the Fiscal Year Ended
December 31, 1997 on Page 3. Such Annual Report shall not be
deemed to be filed with the Securities and Exchange
Commission as a part of this Annual Report on Form 10-K 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 Annual Report on Form 10-K.)
13.2 -- Management's Discussion, as set forth in the Company's
Annual Report to Stockholders for the Fiscal Year Ended
December 31, 1997 on Pages 10 through 16. Such Annual Report
shall not be deemed to be filed with the Securities and
Exchange Commission as a part of this Annual Report on Form
10-K 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 Annual Report on Form 10-K.)
13.3 -- Consolidated Financial Statements and related notes thereto,
together with the report of KPMG Peat Marwick LLP thereon,
as set forth in the Company's Annual Report to Stockholders
for the Fiscal Year Ended December 31, 1997 on Pages 17
through 27. Such Annual Report shall not be deemed to be
filed with the Securities and Exchange Commission as a part
of this Annual Report on Form 10-K 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 Annual
Report on Form 10-K.)
21 -- List of Subsidiaries.
23 -- Consent of KPMG Peat Marwick LLP.
27.1 -- Financial Data Schedule for Fiscal Year Ended 1997 (for SEC
use only).
27.2 -- Restated Financial Data Schedule for Fiscal Year Ended 1996
(for SEC use only).
27.3 -- Restated Financial Data Schedule for Fiscal Year Ended 1995
(for SEC use only).
</TABLE>
- ---------------
* Management Contract or Compensatory Plan, Contract or Arrangement.
37
<PAGE> 1
EXHIBIT 10.75
AMENDMENT NO. 2 TO
AMENDED AND RESTATED
REVOLVING CREDIT AND REIMBURSEMENT AGREEMENT
THIS AMENDMENT AGREEMENT is made and entered into this 18th day of
September, 1997, by and among CAPSTONE CAPITAL CORPORATION, a Maryland
corporation (herein called the "Borrower"), NATIONSBANK, NATIONAL ASSOCIATION
(successor by merger of NationsBank, N.A. (South) (the "Agent"), as Agent for
the lenders (the "Lenders") party to the Amended and Restated Revolving Credit
and Reimbursement Agreement dated June 24, 1996 among such Lenders, Borrower and
the Agent, as amended (the "Agreement") and the Lenders (the "Increasing
Lenders") party to this Amendment Agreement.
W I T N E S S E T H:
WHEREAS, the Borrower, the Agent and the Lenders have entered into the
Agreement pursuant to which the Lenders have agreed to make revolving loans to
the Borrower in the principal amount of $170,000,000 as evidenced by the Notes
(as defined in the Agreement); and
WHEREAS, the Lender has agreed to provide to Borrower Loans of up to
$10,000,000 thereby increasing the Total Revolving Credit Commitment to
$180,000,000 and the parties hereto desire to amend the Agreement in the manner
herein set forth effective as of the date hereof;
NOW, THEREFORE, the Borrower, the Agent and the Lender do hereby agree
as follows:
1. Definitions. The term "Agreement" as used herein and in the Loan
Documents (as defined in the Agreement) shall mean the Agreement as hereby
amended and modified. Unless the context otherwise requires, all terms used
herein without definition shall have the definition provided therefor in the
Agreement.
2. Amendments. Subject to the conditions hereof, the Agreement is
hereby amended, effective as of the date hereof, by deleting Exhibit A and
inserting in lieu thereof Exhibit A attached hereto, and the Lender agrees by
the execution of this Amendment Agreement that it shall be a party to the
Agreement and shall provide the Borrower its Revolving Credit Commitment.
3. Representations and Warranties. The Borrower hereby certifies that:
(a) The representations and warranties made by Borrower in Article
VI thereof are true on and as of the date hereof except that the
financial statements referred to in Section 6.01(f) shall be those most
recently furnished to each Lender pursuant to Section 7.01(a) and (b);
<PAGE> 2
(b) There has been no material change in the condition, financial or
otherwise, of the Borrower and its Subsidiaries since the date of the
most recent financial reports of the Borrower received by each Lender
under Section 7.01 thereof, other than changes in the ordinary course
of business, none of which has been a material adverse change;
(c) The business and properties of the Borrower and its Subsidiaries
are not, and since the date of the most recent financial report of the
Borrower and its Subsidiaries received by each Lender under Section
7.01 thereof have not been, adversely affected in any substantial way
as the result of any fire, explosion, earthquake, accident, strike,
lockout, combination of workers, flood, embargo, riot, activities of
armed forces, war or acts of God or the public enemy, or cancellation
or loss of any major contracts; and
(d) No event has occurred and no condition exists which, upon the
consummation of the transaction contemplated hereby, constituted a
Default or an Event of Default on the part of the Borrower under the
Agreement or the Notes either immediately or with the lapse of time or
the giving of notice, or both.
4. Conditions. As a condition to the effectiveness of this Amendment
Agreement, the Borrower shall deliver, or cause to be delivered to the Agent,
the following:
(a) Five (5) executed counterparts of this Amendment Agreement; and
(b) Fully-executed Notes payable to the Lenders in the amount of
Lender's Revolving Credit Commitment.
5. Other Documents. All instruments and documents incident to the
consummation of the transactions contemplated hereby shall be satisfactory in
form and substance to the Agent and its counsel; the Agent shall have received
copies of all additional agreements, instruments and documents which it may
reasonably request in connection therewith, including evidence of the authority
of Borrower to enter into the transactions contemplated by this Amendment
Agreement, in each case such documents, when appropriate, to be certified by
appropriate corporate or governmental authorities; and all proceedings of the
Borrowers relating to the matters provided for herein shall be satisfactory to
the Agent and its counsel.
6. Entire Agreement. This Amendment Agreement sets forth the entire
understanding and agreement of the parties hereto in relation to the subject
matter hereof and supersedes any prior negotiations and agreements among the
parties relative to such subject matter. No promise, conditions, representation
or warranty, express or implied, not herein set forth shall bind any party
hereto, and no one of them has relied on any such promise, condition,
representation or warranty. Each of the parties hereto acknowledges that, except
as in this Amendment Agreement or otherwise expressly stated, no
representations, warranties or commitments, express or implied, have been made
by any other party to the other. None of the terms or conditions of this
Amendment Agreement may be changed, modified, waived or canceled orally or
otherwise, except by writing, signed by all the parties hereto, specifying such
change, modification, waiver or cancellation of such terms or conditions, or of
any proceeding or succeeding breach thereof.
<PAGE> 3
7. Full Force and Effect of Agreement. Except as hereby specifically
amended, modified or supplemented, the Agreement and all of the other Loan
Documents are hereby confirmed and ratified in all respects and shall remain in
full force and effect according to their respective terms.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment
agreement to be duly executed by their duly authorized officers, all as of the
day and year first above written.
CAPSTONE CAPITAL CORPORATION
WITNESS:
/s/ Krista M. Young By: /s/ Andrew L. Kizer
- ---------------------------------- --------------------------------
/s/ Suzanne H. Duffy Name: Andrew L. Kizer
- ---------------------------------- Title: Vice President
<PAGE> 4
NATIONSBANK, NATIONAL ASSOCIATION
as Agent
By: /s/ Scott S. Ward
--------------------------------
Name: Scott S. Ward
Title: Senior Vice President
<PAGE> 5
CREDITANSTALT CORPORATE FINANCE, INC.
By: /s/ Robert M. Biringer
--------------------------------
Name: Robert M. Biringer
Title: Executive Vice President
By: /s/ W. Craig Stamm
--------------------------------
Name: W. Craig Stamm
Title: Vice President
<PAGE> 6
THE SUMITOMO BANK, LIMITED
By: /s/ Lauren P. Carrigan
--------------------------------
Name: Lauren P. Carrigan
Title: Assistant Vice President
By: /s/ Diane M. Rhoades
--------------------------------
Name: Diane M. Rhoades
Title: Executive Officer
<PAGE> 7
EXHIBIT A
Applicable Commitment Percentages
<TABLE>
<CAPTION>
Applicable
----------
Revolving Credit Commitment
---------------- ----------
Lender Commitment Percentage
- ------ ---------------- -------------
<S> <C> <C>
NationsBank, National Association $ 45,000,000 25.000000000%
AmSouth Bank of Alabama $ 25,000,000 13.888888889%
Credit Lyonnais New York Branch $ 30,000,000 16.666666667%
National City Bank of Kentucky $ 15,000,000 8.333333333%
Creditanstalt Corporate Finance, Inc. $ 30,000,000 16.666666667%
The Bank of Nova Scotia $ 10,000,000 5.555555556%
First Commercial Bank $ 10,000,000 5.555555556%
The Sumitomo Bank, Limited $ 15,000,000 8.333333333%
------------ ------------
Total $180,000,000 100%
</TABLE>
<PAGE> 1
EXHIBIT 10.76
AMENDMENT NO. 3 TO
AMENDED AND RESTATED
REVOLVING CREDIT AND REIMBURSEMENT AGREEMENT
THIS AMENDMENT AGREEMENT is made and entered into this 31st day of
October, 1997, by and among CAPSTONE CAPITAL CORPORATION, a Maryland corporation
(herein called the "Borrower"), NATIONSBANK, NATIONAL ASSOCIATION (successor by
merger of NationsBank, N.A. (South)) (the "Agent"), as Agent for the lenders
(the "Lenders") party to the Amended and Restated Revolving Credit and
Reimbursement Agreement dated June 24, 1996, as amended, among such Lenders,
Borrower and the Agent (the "Agreement") and each of the Lenders party to the
Agreement.
W I T N E S S E T H:
WHEREAS, the Borrower, the Agent and the Lenders have entered into the
Agreement pursuant to which the Lenders have agreed to make revolving loans to
the Borrower in the principal amount of $180,000,000 as evidenced by the Notes
(as defined in the Agreement); and
WHEREAS, the parties hereto desire further to amend the Agreement in
the manner herein set forth effective as of the date hereof;
NOW, THEREFORE, the Borrower, the Agent and the Lenders do hereby agree
as follows:
1. Definitions. The term "Agreement" as used herein and in the Loan
Documents (as defined in the Agreement) shall mean the Agreement as hereby
amended and modified. Unless the context otherwise requires, all terms used
herein without definition shall have the definition provided therefor in the
Agreement.
2. Amendments. Subject to the conditions hereof, clause (iv) of Section
8.07 of the Agreement is hereby amended, effective as of the date hereof, by
deleting the figure "$75,000,000" and inserting in lieu thereof the figure
"$100,000,000".
3. Guaranty. Each Subsidiary of the Borrower has joined in the
execution of this Amendment Agreement for the purpose of (i) agreeing to the
amendment to the Agreement and (ii) confirming its guarantee of payment of all
the Obligations.
4. Representations and Warranties. The Borrower hereby certifies that:
(a) The representations and warranties made by Borrower in Article
VI thereof are true on and as of the date hereof except that the
financial statements referred to in Section 6.01(f) shall be those most
recently furnished to each Lender pursuant to Section 7.01(a) and (b);
<PAGE> 2
(b) There has been no material change in the condition, financial
or otherwise, of the Borrower and its Subsidiaries since the date of
the most recent financial reports of the Borrower received by each
Lender under Section 7.01 thereof, other than changes in the ordinary
course of business, none of which has been a material adverse change;
(c) The business and properties of the Borrower and its
Subsidiaries are not, and since the date of the most recent financial
report of the Borrower and its Subsidiaries received by each Lender
under Section 7.01 thereof have not been, adversely affected in any
substantial way as the result of any fire, explosion, earthquake,
accident, strike, lockout, combination of workers, flood, embargo,
riot, activities of armed forces, war or acts of God or the public
enemy, or cancellation or loss of any major contracts; and
(d) No event has occurred and no condition exists which, upon the
consummation of the transaction contemplated hereby, constituted a
Default or an Event of Default on the part of the Borrower under the
Agreement or the Notes either immediately or with the lapse of time or
the giving of notice, or both.
5. Conditions. As a condition to the effectiveness of this Amendment
Agreement, the Borrower shall deliver, or cause to be delivered to the Agent,
twelve (12) executed counterparts of this Amendment Agreement.
6. Other Documents. All instruments and documents incident to the
consummation of the transactions contemplated hereby shall be satisfactory in
form and substance to the Agent and its counsel; the Agent shall have received
copies of all additional agreements, instruments and documents which it may
reasonably request in connection therewith, including evidence of the authority
of Borrower to enter into the transactions contemplated by this Amendment
Agreement, in each case such documents, when appropriate, to be certified by
appropriate corporate or governmental authorities; and all proceedings of the
Borrowers relating to the matters provided for herein shall be satisfactory to
the Agent and its counsel.
7. Entire Agreement. This Amendment Agreement sets forth the entire
understanding and agreement of the parties hereto in relation to the subject
matter hereof and supersedes any prior negotiations and agreements among the
parties relative to such subject matter. No promise, conditions, representation
or warranty, express or implied, not herein set forth shall bind any party
hereto, and no one of them has relied on any such promise, condition,
representation or warranty. Each of the parties hereto acknowledges that, except
as in this Amendment Agreement or otherwise expressly stated, no
representations, warranties or commitments, express or implied, have been made
by any other party to the other. None of the terms of conditions of this
Amendment Agreement may be changed, modified, waived or canceled orally or
otherwise, except by writing, signed by all the parties hereto, specifying such
change, modification, waiver or cancellation of such terms or conditions, or of
any proceeding or succeeding breach thereof.
<PAGE> 3
8. Full Force and Effect of Agreement. Except as hereby specifically
amended, modified or supplemented, the Agreement and all of the other Loan
Documents are hereby confirmed and ratified in all respects and shall remain in
full force and effect according to their respective terms.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment
agreement to be duly executed by their duly authorized officers, all as of the
day and year first above written.
CAPSTONE CAPITAL CORPORATION
WITNESS:
/s/ Nancy R. Echols By: /s/ Andrew L. Kizer
- ---------------------------------- -------------------------------
Name: Andrew L. Kizer
/s/ Suzanne H. Duffy Title: Vice President
- ----------------------------------
<PAGE> 4
GUARANTORS:
CAPSTONE CAPITAL OF ALABAMA, INC.
CAPSTONE CAPITAL OF PENNSYLVANIA, INC.
CAPSTONE CAPITAL OF CALIFORNIA, INC.
CAPSTONE CAPITAL OF BONITA BAY, INC.
CAPSTONE CAPITAL OF CAPE CORAL, INC.
CAPSTONE CAPITAL OF SARASOTA, INC.
WITNESS: CAPSTONE CAPITAL OF TEXAS, INC.
CAPSTONE CAPITAL OF LAS VEGAS, INC.
CAPSTONE CAPITAL OF BAYTOWN, INC.
/s/ Nancy R. Echols
- ----------------------------
/s/ Suzanne H. Duffy By: /s/ Andrew L. Kizer
- ---------------------------- ----------------------------------
Name: Andrew L. Kizer
Title: Vice President
CAPSTONE OF BONITA BAY, LTD.
By its General Partner:
Capstone Capital of Bonita Bay, Inc.
By: /s/ Andrew L. Kizer
----------------------------------
Name: Andrew L. Kizer
Title: Vice President
CAPSTONE OF CAPE CORAL, LTD.
By its General Partner:
Capstone Capital of Cape Coral, Inc.
By: /s/ Andrew L. Kizer
----------------------------------
Name: Andrew L. Kizer
Title: Vice President
CAPSTONE OF SARASOTA, LTD.
By its General Partner:
Capstone Capital of Sarasota, Inc.
By: /s/ Andrew L. Kizer
----------------------------------
Name: Andrew L. Kizer
Title: Vice President
<PAGE> 5
CAPSTONE CAPITAL OF SAN ANTONIO, LTD.
By its General Partner:
Capstone Capital of Cape Coral, Inc.
By: /s/ Andrew L. Kizer
----------------------------------
Name: Andrew L. Kizer
Title: Vice President
CAPSTONE OF LAS VEGAS, LTD.
By its General Partner:
Capstone Capital of Las Vegas, Inc.
By: /s/ Andrew L. Kizer
----------------------------------
Name: Andrew L. Kizer
Title: Vice President
CAPSTONE OF BAYTOWN, LTD.
By its General Partner:
Capstone Capital of Baytown, Inc.
By: /s/ Andrew L. Kizer
----------------------------------
Name: Andrew L. Kizer
Title: Vice President
NATIONSBANK, NATIONAL ASSOCIATION,
as Agent
By: /s/ Scott S. Ward
----------------------------------
Name: Scott S. Ward
Title: Senior Vice President
AMSOUTH BANK OF ALABAMA
By: /s/ J. Ken DiFatta
----------------------------------
Name: J. Ken DiFatta
Title: Commercial Banking Officer
CREDIT LYONNAIS NEW YORK BRANCH
By: /s/ F. Tavangar
----------------------------------
Name: Farboud Tavangar
Title: First Vice President
NATIONAL CITY BANK OF KENTUCKY
By: /s/ Roderic M. Brown
----------------------------------
Name: Roderic M. Brown
Title: Vice President
CREDITANSTALT CORPORATE FINANCE, INC.
By: /s/ Scott Kray
----------------------------------
Name: Scott Kray
Title: Vice President
By: /s/ Stephen W. Hipp
----------------------------------
Name: Stephen W. Hipp
Title: Associate
THE BANK OF NOVA SCOTIA
By: /s/ W. Brown
----------------------------------
Name: W.J. Brown
Title: Vice President
FIRST COMMERCIAL BANK
By: /s/ J. Michael Phebus, Jr.
----------------------------------
Name: J. Michael Phebus, Jr.
Title: Commercial Loan Officer
THE SUMITOMO BANK, LIMITED
By: /s/ Sybil H. Weldon
----------------------------------
Name: Sybil H. Weldon
Title: Vice President & Mgr.
By: /s/ Lauren P. Carrigan
----------------------------------
Name: Lauren P. Carrigan
Title: Asst. Vice President
<PAGE> 1
EXHIBIT 10.77
STATE OF ALABAMA )
JEFFERSON COUNTY )
AMENDMENT TO 1994 STOCK INCENTIVE PLAN
OF CAPSTONE CAPITAL CORPORATION
(FORMERLY CRESCENT CAPITAL TRUST, INC.)
The Capstone Capital Corporation 1994 Stock Incentive Plan, which plan
was adopted by the Board of Directors of Capstone Capital Corporation on
February 6, 1997, and approved by the Shareholders of Capstone Capital
Corporation on May 1, 1997 (the "Plan"), is hereby amended as follows:
1. Section 3(a) of the Plan shall be deleted in its entirety and there shall be
substituted in lieu thereof the following:
"(a) Subject to the provisions of Section 3(c) and Section 12
of the Plan, the aggregate number of shares of Common Stock that may be
issued or transferred or exercised pursuant to Incentive Stock Awards
under the Plan will not exceed the greater of: (i) seven percent (7%)
of the Company's outstanding Common Stock, or (ii) one million seven
hundred fifty thousand (1,750,000) shares of Common Stock."
2. Section 14(d) of the Plan shall be deleted in its entirety and there shall
be substituted in lieu thereof the following:
"(d) An Option held by a person who was an Eligible Person at
the time such Option was granted will expire immediately if and when
the Participant ceases to be an Eligible Person, except as follows:
"(i) If the employment of a Participant or the service of
an Outside Director is terminated for any reason whatsoever, either
voluntarily or involuntarily, with or without cause, other than death
or disability, then the Options of the Participant will expire ninety
(90) days thereafter unless by their terms they expire sooner. During
said period, the Options may be exercised in accordance with their
terms, but only to the extent exercisable on the date of termination of
employment.
<PAGE> 2
"(ii) If the Participant dies or becomes permanently and
totally disabled while employed by the Company, the Options of
the Participant will expire one year after the date of death
or permanent and total disability, unless by their terms they
expire sooner. During said period, the Options may be
exercised by the Participant or his or her legal
representative in the event of death, in accordance with their
terms, but only to the extent exercisable on the date of
termination of employment."
3. Except as set forth in Paragraphs 1 and 2 above, all other provisions of the
Plan shall remain unchanged.
4. The changes set forth in this Amendment shall be and hereby are incorporated
in the Capstone Capital Corporation 1994 Stock Incentive Plan.
Date amendment adopted by Board of Directors: February 6, 1997
Date amendment adopted by Shareholders: May 1, 1997
<PAGE> 1
EXHIBIT 10.78
SEVERANCE AGREEMENT AND GENERAL RELEASE
This Severance Agreement and General Release (the "Agreement") is made
between Capstone Capital Corporation (hereinafter referred to as the "Company")
and William C. Harlan (hereinafter "Employee"). Unless the Company and Employee
enter into this Agreement, Employee does not have a right to any of the
considerations described in this Agreement. However, in consideration for
Employee agreeing to these terms, and Employee's agreement to resign as an
employee of the Company as described below, the Company will provide severance
and other consideration as set forth herein.
1. Consideration and Release. In consideration of payment by the
Company to the Employee of (a) the sum of Eighty-Three Thousand Dollars
($83,000) payable to Employee in twelve (12) semi-monthly installments, payable
on the 1st and 15th of each month, of Six Thousand Nine Hundred Sixteen and
67/100 Dollars ($6,916.67), less legally required deductions and withholdings,
commencing on November 1, 1997, (b) the sum of Eighty-five Thousand Dollars
($85,000), less legally required deductions and withholdings, payable upon
execution of this Agreement, which represents Employee's bonus for 1996, (c) the
sum of Twenty-Four Dollars ($24.00) per share against redemption of shares of
Common Stock of the Company acquired by Employee upon the exercise of all but
not less than all of Employee's stock options, less (i) Ninety-Eight Thousand
Five Hundred Sixty-Four and 77/100 Dollars ($98,564.77), which represents the
outstanding principal balance of and interest on the Employee's loan to purchase
Common Stock at October 12, 1997, (ii) Eighty-Five Thousand Dollars ($85,000)
which represents the outstanding principal balance of Employee's advance against
bonus for 1996, and (iii) less legally required deductions and withholdings, (d)
the sum of $85,000, less legally required deductions and withholdings and (e)
other good and valuable consideration, Employee agrees to release the Company as
follows:
Employee agrees on behalf of himself and all of his heirs or personal
representatives and assigns, and his estate, to release, remise,
forgive and forever discharge the Company , and all of its directors,
officers, agents and employees of and from any and all claims, rights,
demands, actions, liability, causes of action, damages, costs, expenses
or compensation, whether or not known or unknown, which presently
exists or which may hereinafter arise, or which in any way arises out
of or relates to Employee's employment or termination of Employee's
employment with the Company, including, but not limited to, any and all
claims of breach of contract or failure to pay compensation of any
kind, against the Company concerning events occurring at any time up to
the date of this Agreement. This release and covenant not to sue shall
be absolute and shall operate as a discharge and a bar to any suit at
law, or in equity, whether such suit arises out of contract, fraud, or
any other cause of action whatsoever, whether under any applicable
federal laws, state or local laws or ordinances for any reason
whatsoever.
-1-
<PAGE> 2
By executing this Agreement, Employee agrees to surrender for
redemption to the Company all shares of Common Stock acquired through the
exercise of all outstanding options against the payment described in
subparagraph (c) above, and Employee agrees to execute and deliver to the
Company any and all assignments or other documents necessary to transfer such
shares to the Company.
2. No Admission of Liability. Employee acknowledges and
understands that this Agreement does not constitute an admission of any kind by
the Company, but is simply an accommodation which offers a certain benefit in
return for Employee's agreeing to and signing this Agreement.
3. Confidentiality. The Company and Employee mutually agree that
the terms and provisions of this Agreement are strictly confidential and each
agree that neither the Company nor Employee will disclose or otherwise
communicate to any third party (including, in the case of Employee, to an
employee of the Company) the existence or provisions of this Agreement. The
Company and Employee further agree not to publish or otherwise communicate any
derogatory remark, in the case of Employee, concerning the Company, its
directors, officers, employees or agents, and in the case of the Company,
concerning the Employee, or do anything which would directly or indirectly
damage the business, business prospects or reputation of the Company or its
directors, officers, employees or agents or the business, business prospects or
reputation of the Employee, as the case may be. The Company further agrees to
provide Employee with a copy of any press release to be issued by the Company in
connection with Employee's resignation as an executive officer of the Company
prior to the public dissemination of such press release. Nothing in this Section
3 shall prohibit the Company from making such disclosures regarding the
existence and terms of this Agreement as shall be required under the federal
securities laws or in dealing with analysts and investment bankers on behalf of
the Company.
4. Reservation of Claims. Employee further acknowledges and
understands that the Company reserves the right to pursue all liability, causes
of action, obligations, liabilities and claims of any kind whatsoever in law or
equity against Employee, whether or not known or unknown, which presently exist
or which may hereinafter arise, or which in any way arises out of or relates to
his employment by the Company.
5. Effective Date of Resignation. Employee's resignation from
employment with the Company shall be effective October 13, 1997.
6. Reemployment. Employee agrees that he will not apply for or
otherwise seek reemployment with the Company and the Company has no obligation,
contractual or otherwise, to rehire, reemploy, recall or hire Employee in the
future.
-2-
<PAGE> 3
7. Nondisclosure.
(a) It is the intent of the parties to this Agreement to
preserve to the Company exclusively the special knowledge, experience and Trade
Secrets, as hereinafter defined, gained by the Employee during the course of
Employee's association with the Company, recognizing that if such knowledge,
experience and Trade Secrets were made available to competitors of the Company,
it would irreparably damage the business of the Company. For all purposes of
this Agreement, Employee's association with the Company shall include Employee's
association as an employee, officer and/or shareholder of the Company.
(b) The Employee hereby acknowledges and agrees that
Employee's obligations hereunder are special, unique and extraordinary and that
Employee has had special access to economically valuable confidential,
nonpublicly available information used or intended for use in the Company's
trade or business, including, but not limited to, development plans, markets,
designs, compositions, scripts, outlines, customer lists, customer information,
rent rolls, tenant information, lessees, developers, mortgagors, financial
information, regarding the Company and its employees, trade secrets (including
trade secrets as defined in the Alabama Trade Secrets Act), and any other
material or information relating to the business activities of the Company which
Employee may have developed or had access to either solely or jointly, or
arising directly or indirectly, from Employee's association with the Company
(collectively, the "Trade Secrets").
(c) It is further agreed that disclosure of such Trade
Secrets in any way, whether directly or indirectly, including copying or
removing of any records of the Company, except with the express written consent
of the Chief Executive Officer of the Company, would be deemed material and
would result in immediate and irreparable injury to the Company not properly or
completely compensable by damages in an action at law; and that the provisions
of this Agreement are necessary for the protection of the Company and that any
breach of this Agreement by Employee shall entitle the Company, in addition to
any other legal remedies available to it, including those remedies available
pursuant to the Alabama Trade Secrets Act, to apply to a court of competent
jurisdiction to enjoin any violation of this Agreement and/or to recover damages
for any breach of this Agreement, and to recover all costs of such action,
including a reasonable attorneys' fee. All of the rights and remedies of the
Company hereunder shall be cumulative and not alternative.
(d) Employee recognizes and has been advised by the
Company that such experience, knowledge and Trade Secrets are intended for use
in the Company's business, are not publicly known or cannot be readily
ascertained or derived from publicly available information. The Company and
Employee further agree that the Company's protection of the experience,
knowledge and Trade Secrets gained by the Employee during Employee's association
with the Company through agreements and through daily business practices is
reasonable under the circumstances and that such special experience, knowledge
or Trade Secrets have significant economic value and if it were made available
to others it would irreparably damage the business of the Company. Except as
otherwise provided in Section 7(e) of this Agreement, Employee agrees that
Employee will not in any manner
-3-
<PAGE> 4
or at any time disclose or make available to any person, business concern or
other entity any such experience, knowledge or Trade Secrets relating to the
Company or the business of the Company, or the employees or customers of the
Company, which was disclosed to Employee or came within Employee's knowledge
during the course of Employee's employment by or association with the Company,
nor shall Employee make or cause to be made any use of such experience,
knowledge or Trade Secrets as an employee, consultant, officer, director,
shareholder, partner, member or any other owner of any person, firm, business
concern or other entity.
(e) Notwithstanding any other provision of this Agreement
to the contrary, it is the intent of the Company and the Employee that the
provisions of this Agreement shall specifically prohibit Employee, for a period
of two (2) years after the effective date of this Agreement, from soliciting
business or investments from any of the healthcare operators (i) from which the
Company has acquired healthcare properties, (ii) to which the Company leases
leased properties, (iii) to which the Company has made mortgage loans, or (iv)
as of the date of this Agreement, to which the Company is considering the lease
of healthcare properties, from which the Company is considering the purchase of
healthcare properties, or to which the Company is considering the making of a
mortgage loan on healthcare properties; provided, that the limitations imposed
by this Section 7(e) shall not apply to discussions by Employee with Quorum
Health Group, Inc.; provided, further, that the limitations imposed by this
Section 7 shall not prohibit Employee from serving as an employee, consultant,
officer, director, shareholder, partner, member or any other owner of another
healthcare real estate investment trust so long as Employee shall comply with
the provisions of this Section 7 regarding nondisclosure of the Trade Secrets of
the Company.
8. Nonsolicitation.
(a) The Employee has agreed and represented to the
Company that, except as otherwise agreed in writing by the Chief Executive
Officer of the Company, for a period of two (2) years after the effective date
of this Agreement the Employee will not call upon or communicate with in any
manner, either directly or indirectly, any employee of the Company, whether now
employed or employed in the future, to solicit any such employee for employment
with any other person, firm, business concern or entity.
(b) It is agreed by the parties hereto that any breach of
this provision shall entitle the Company, in addition to any other legal
remedies available to it, to apply to a court of competent jurisdiction to
enjoin any violation of this provision and/or to recover damages for any breach
of this provision, and to recover all costs of such action, including a
reasonable attorneys' fee.
(c) All of the terms and provisions of this Section shall
survive for and during the period during which solicitation is restricted
hereunder.
9. Return of Materials. Employee hereby certifies that all
materials related directly or indirectly to his employment with the Company have
been returned to the Company. He further certifies that no part of any material,
information, monies or property which is confidential, proprietary or protected
by the Company has been retained by him or given to any third person or
-4-
<PAGE> 5
entity in anticipation of Employee's resignation as an employee of the Company
or for any other reason, and he further certifies that none of the foregoing
will be removed by the Employee from the premises of the Company.
10. Cooperation. Employee hereby agrees to cooperate fully with
the Company for a period of thirty (30) days following execution of this
Agreement to transition all matters in which Employee has been engaged on behalf
of the Company to such person(s) as may be designated by the Company and to
review in detail with the Company the terms of any pending transactions or
matters in which Employee has been engaged on behalf of the Company. Employee
further agrees that, for a period of five months following the expiration of
such thirty day period, Employee shall cooperate with the Company and make
himself available to the Company at such times and locations as the Company may
reasonably request to discuss such matters related to Employee's activities on
behalf of the Company.
11. Remedies.
(a) If Employee commits a breach or threatens to commit a
breach of any of the provisions of this Agreement, the Company shall be entitled
to seek any and all available remedies, including but not limited to the
following rights and remedies:
(i) To recover liquidated damages in the amount
paid to Employee under Section 1(a) hereof
with interest thereon at the rate of twelve
percent (12%) per annum; and
(ii) To have the provisions of this Agreement
specifically enforced by any court having
equity jurisdiction, it being acknowledged
and agreed that any such breach or
threatened breach will cause irreparable
injury to the Company and that money damages
will not provide an adequate remedy to the
Company;
(iii) To terminate payment of and declare void any
benefits payable to Employee under the terms
of this Agreement; and
(iv) To recover money damages.
(b) Each of the rights and remedies enumerated above
shall be independent of the other and shall be severally enforceable, and all of
such rights and remedies shall be in addition to, and not in lieu of, any other
rights and remedies available to the Company at law or in equity.
(c) All costs incurred by the prevailing party in the
enforcement of this Agreement and/or securing payment of damages specified
herein, including a reasonable attorney's
-5-
<PAGE> 6
fee, whether or not suit be instituted shall be paid by the non-prevailing
party; and Employee hereby waives all right to claim exemptions of personal
property under the laws and Constitution of the State of Alabama or any other
state of the United States.
12. Enforceability.
(a) If any of the covenants contained in this Agreement
is hereafter construed to be invalid or unenforceable, the same shall not affect
the remainder of the covenant or covenants, which shall be given full effect,
without regard to the invalid portions.
(b) If any of the covenants contained in this Agreement
is held to be unenforceable because of the duration of such provision or the
area covered thereby, the parties agree that the court making such determination
shall have the power to reduce the duration and/or area of such provision and,
in its reduced form, said provision shall then be enforceable.
13. Entire Agreement. This Agreement contains the entire Agreement
of the parties and supersedes and cancels any other agreement, representation,
communication or understanding, whether oral or written, between the parties
hereto and relating to the transactions contemplated herein or the subject
matter hereof. This Agreement may not be changed or terminated orally, but may
only be changed by an Agreement in writing signed by the parties hereto.
14. Applicable Law. This Agreement is made and entered into in the
State of Alabama, and shall in all respects be interpreted, enforced and
governed under the laws of said State.
15. Interpretation of Agreement. All parties have participated
fully in the negotiation and drafting of this Agreement. The Agreement has been
prepared by all parties equally, and is to be interpreted according to its
terms. No inference shall be drawn that the Agreement was prepared by or is the
product of any particular party or parties.
16. Voluntary Agreement. Employee understands that he has been
advised by the Company to seek counseling with anyone of his choosing including
an outside attorney, if he so desires. Employee is entering into this Agreement
freely and voluntarily, and Employee is satisfied that he has been given
sufficient opportunity to consider it. Employee acknowledges acceptance of this
Agreement by his signature below.
17. Amendments. This Agreement shall not be modified or amended
except by a writing signed by all parties.
18. Successors and Assigns. This Agreement shall be binding upon
and inure to the benefit of any successor to the Company and any such successor
shall be deemed substituted for the Company under the terms of this Agreement.
As used in this Agreement, the term "successor" shall include any person, firm,
corporation or other business entity which at any time, whether by
-6-
<PAGE> 7
merger, purchase or otherwise, acquires all or substantially all the assets of
the business of the Company.
19. Jurisdiction. It is acknowledged by the Company and the
Employee that the place of this Agreement, its situs, and form, is at all times
in the County of Jefferson, State of Alabama, and any action at law, suit in
equity, or judicial proceeding relating to the validity, construction,
interpretation, and enforcement of this Agreement, or any provision hereof,
shall be instituted and determined exclusively in the courts of said County and
State.
20. Captions. The captions or headings in this Agreement are made
for convenience and general reference only and shall not be construed to
describe, define or limit the scope or intent of the provisions of this
Agreement.
21. Termination of Offer. The offer set forth in this Agreement
shall terminate and be null and void if this Agreement is not executed by
Employee and delivered to the Company by 5:00 p.m. C.S.T. on Monday, October 13,
1997.
-7-
<PAGE> 8
IN WITNESS WHEREOF, the Company, by and through its duly authorized
officer, and Employee have caused this Agreement to be executed under seal on
the _____ day of October, 1997.
/s/ William C. Harlan
----------------------------------------
William C. Harlan
/s/ John W. Gant, Jr.
- ------------------------------------
Witness
CAPSTONE CAPITAL CORPORATION
/s/ Malcolm E. McVay
----------------------------------------
By: Malcolm E. McVay
Its: Chief Financial Officer
/s/ W. Todd Carlisle
- ------------------------------------
Attest
-8-
<PAGE> 1
Exhibit 12
Capstone Capital Corporation
Computation of Ratios of Earnings to Combined Fixed Charges and Preferred Stock
Dividends
<TABLE>
<CAPTION>
From
June 30, 1994
Year Year Year (Inception) to
Ended December 31, Ended December 31, Ended December 31, December 31,
1997 1996 1995 1994
----------------- ------------------ ------------------ --------------
<S> <C> <C> <C> <C>
Earnings:
Net Income 28,881,153 18,913,689 9,708,391 4,762,734
Plus Fixed Charges 18,573,918 9,389,931 9,459,360 1,544,579
Less Interest Capitalized Included Above (2,612,777) (552,686) (466,668) (94,858)
---------- ---------- ---------- ---------
Earnings before fixed charges 44,842,294 27,750,934 18,701,083 6,212,455
========== ========== ========== =========
Fixed Charges:
Interest Expense 14,767,309 8,812,170 8,786,913 1,438,860
Preferred Stock Dividend 1,109,375
Amortization of Def Debenture costs 46,664 - 183,052 -
Interest Capitalized 2,612,777 552,686 466,668 94,858
Estimated interest factor of rental expense 37,793 25,075 22,727 10,861
---------- ---------- ---------- ---------
(33% of $114,524, $75,984, $68,871, respectively)
Total Fixed Charges 18,573,918 9,389,931 9,459,360 1,544,579
========== ========== ========== =========
Ratio of earnings to fixed charges 2.4 x 3.0 x 2.0 x 4.0 x
========== ========== ========== =========
</TABLE>
<PAGE> 1
EXHIBIT 13.1
CAPSTONE CAPITAL CORPORATIONS
Selected Financials
As of December 31, 1997
Selected Consolidated Financial Information
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, 1997 December 31, 1996 December 31, 1995
<S> <C> <C> <C>
STATEMENT OF INCOME DATA
Revenues $ 57,178,471 $ 35,952,336 $ 24,707,272
Net income 28,881,153 18,913,689 9,708,391
Net income per share 1.76 1.71 1.55
Weighted average shares outstanding-Basic 15,760,437 11,086,096 6,271,242
Diluted 16,346,322 13,159,213 8,596,663
OTHER DATA
Funds from operations(1) 33,634,522 22,632,815 12,523,303
Dividends distributed 30,465,678 19,206,375 10,641,666
Dividends distributed per share 1.89 1.81 1.74
Net cash provided by operating activities 41,584,027 22,166,593 14,041,287
Net cash used in investing activities 361,491,935 114,140,448 74,752,832
Net cash provided by financing activities 320,755,748 92,420,528 61,056,459
BALANCE SHEET DATA
Real estate properties, net 526,046,734 303,997,418 207,257,168
Mortgage notes receivable 170,065,886 39,325,621 24,988,753
Total assets 723,290,927 356,695,116 240,624,883
Convertible subordinated debentures 72,684,370 17,657,000 43,947,000
Bank credit facility 172,950,000 68,500,000 30,225,000
Mortgage notes payable 56,944,397 23,228,417 --
Total stockholders' equity 372,233,067 241,555,519 163,746,655
</TABLE>
(1) Funds from operations("FFO") represents net income (computed in accordance
with generally accepted accounting principles), less undeclared preferred stock
dividends, gains from sale of property and rental income recognized on a
straight-line basis on those leases with scheduled rent increases, plus
depreciation and amortization. FFO should not be considered as an alternative to
net income or any other generally accepted accounting principle measurement of
performance as an indicator of operating performance or as an alternative to
cash flows from operations, investing and financing activities as a measure of
liquidity. The Company believes that FFO is an important supplemental measure of
the operating performance of a REIT's portfolio considering the fact that
historical cost accounting implicitly assumes that the value of real estate
assets diminishes predictably over time. FFO provides an alternative measurement
criteria, exclusive of certain non-cash items included in GAAP income, by which
to evaluate the performance of such investments. Additionally, FFO is consistent
with measures used by analysts to evaluate the company and other REITs. The
Company therefore discloses FFO, although it is a measurement that is not
defined by generally accepted accounting principles. The Company's measure may
not be comparable to similarly titled measures used by other REITs.
Consequently, the Company's FFO may not provide a meaningful measure of the
Company's performance as compared that of other REITs. FFO is computed as
shown:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
Dec. 31, 1997 Dec. 31, 1996 Dec. 31, 1995
<S> <C> <C> <C>
Net income available to common shareholders $ 27,771,778 $ 18,913,689 $ 9,708,391
Add: depreciation and amortization 9,484,540 6,315,077 4,696,838
Add: stock-based compensation 116,375 -- --
Less: gains on sale of assets 0 (197,191) --
Less: straight-line rental income (3,183,509) (2,398,760) (1,881,926)
Less: undeclared preferred stock dividends (554,662) -- --
----------- ----------- -----------
Funds from operations $33,634,522 $22,632,815 $12,523,303
</TABLE>
<PAGE> 1
EXHIBIT 13.2
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 1997 compared to the Year Ended 1996
In 1997, the Company reported net income of $28.9 million, or $1.76
basic earnings per common share and $ 1.75 diluted earnings per common share,
compared to $18.9 million, or $1.71 basic earnings per common share and $ 1.68
diluted earnings per common share in 1996. The increase in net income is
attributable to increases in rental and mortgage income from property
acquisitions and additional mortgage fundings. However, a portion of the revenue
from significant acquisitions in 1997 was offset by a $6 million increase in
interest expense.
<PAGE> 2
Total income increased $21.2 million, or 58.9%, to $57.2 million in
1997 over the previous year's total income of $36.0 million. The increase is due
primarily to rental income increasing $14.2 million in 1997 to $46.2 million
from 1996's total of $32.0 million. The Company acquired 39 additional
properties during the year and also recognized a full year's rental income on
eight properties acquired in 1996. Additionally, mortgage interest income
increased $7.0 million, or 221.2%, to $10.1 million in 1997 from $3.2 million in
1996 due to net mortgage fundings of $130.7 million during 1997.
Total expenses in 1997 were $28.3 million compared to $17.0 million in
1996, an increase of $11.3 million or 66.0%. This is primarily attributable to
an increase in interest expense of $6.0 million resulting from the issuance of
$74.8 million principal amount in 6.55% debentures and $104.4 million of draws
against the Bank Credit Facility. Depreciation expense increased $2.8 million in
1997 resulting from the Company's acquisition of 39 properties during the year
and the recognition of a full year's depreciation expense on the eight
properties that were acquired in 1996. General and administrative expenses also
increased $1.2 million due to the growth in the number of employees and
associated benefits.
Year Ended 1996 compared to the Year Ended 1995
In 1996, the Company reported net income of $18.9 million, or $1.71
basic earnings per common share and $1.68 diluted earnings per common share,
compared to $9.7 million, or $1.55 basic earnings per common share and $1.55
diluted earnings 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 debentures
to common stock and a decrease in the weighted average interest rate of the 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.
<PAGE> 3
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.
<PAGE> 4
LIQUIDITY AND CAPITAL RESOURCES
The Company requires capital in order to fund investments in healthcare
properties through sale/leaseback transactions or mortgage financings. 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, convertible
debentures, and conventional fixed-rate debt. 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 and Short-Term 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, 1997, the Company invested
approximately $230.8 million to acquire or construct real estate assets and
invested approximately $140.9 million in mortgage loans to healthcare providers.
As of December 31, 1997, the Company's investments totaled $716.1 million,
consisting of real estate properties of $486.1 million, real estate development
projects of $59.9 million and mortgage notes receivable of $170.1 million. These
real estate properties consist of seventeen ancillary hospital facilities,
eighteen physician clinics, six ambulatory surgery facilities, six inpatient
rehabilitation facilities, three outpatient rehabilitation facilities, two
comprehensive mental health hospitals, two sub-acute care facilities, five
integrated delivery facilities, nine skilled nursing facilities and fifteen
assisted living facilities. The properties are located in nineteen states and
are leased to seventeen healthcare-related entities or their subsidiaries
pursuant to long-term leases. There are nineteen real estate development
projects with nine healthcare operators consisting of fifteen assisted living
facilities, three integrated delivery facilities, and one physician clinic. The
mortgage notes receivable are secured by the real estate of thirty skilled
nursing facilities, thirty-five assisted living facilities, one acute-care
hospital, one ambulatory surgery facility, one ancillary hospital facility, and
one specialty hospital, which are operated by thirty-four healthcare operators.
During March 1995, the Company sold $52 million aggregate principal
amount of 10.50% Convertible Subordinated Debentures (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.
<PAGE> 5
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 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
unsecured line of credit (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.
On September 18, 1997, the Company completed an amendment to its
unsecured line of credit ("Bank Credit Facility") which provides for an increase
to $180 million from its previous principal amount of $150 million at December
31, 1996. The Bank Credit Facility is participated in by a consortium of eight
banks and is available until June 24, 2000. At December 31, 1997, the Company
had drawn $172,950,000 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. During September of 1997, the Company
entered into an interest rate swap ("Swap") agreement with NationsBank which,
beginning March 1998, effectively fixed the base rate at 5.959 percent on a $50
million notional amount of borrowings under the Bank Credit Facility. The Swap
will be effective until March 2003 unless NationsBank elects to cancel at the
three year anniversary of the Swap during March 2001.
The Bank Credit Facility contains certain representations, warranties,
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.
<PAGE> 6
On December 4, 1997, the Company obtained a $40 million Short-Term
Credit Facility from NationsBank primarily for purposes of funding investments.
Borrowings under the Short-Term Credit Facility bear interest at the Eurodollar
rate plus a percentage that varies from 1.00% to 1.625% and are payable on or
before April 3, 1998. At December 31, 1997 the outstanding balance under the
Short-Term Credit Facility was approximately $27,500,000.
There can be no assurances that the lenders will renew the Bank Credit
Facility or the Short-Term Credit Facility on terms favorable to the Company or
that the Company will be able to refinance at that time.
As of December 31, 1997, a total of $13.6 million in the principal
amount of the 10.50 % Debentures had been converted into 845,391 common shares
resulting in a decrease of $13.6 million in the debentures and an increase of
$13.6 million in stockholders' equity.
During March 1997, the Company issued $74,750,000 aggregate principal
amount of 6.55% Convertible Subordinated Debentures (the " 6.55 % Debentures").
The 6.55% Debentures are due on March 14, 2002 and were issued at a price of
$903 per $1,000 principal amount at maturity, which represents an original issue
discount of 9.70% from the principal amount thereof which is payable at
maturity. Interest on the 6.55% Debentures is payable March 14 and September 14
in each year, and commenced on September 14, 1997. Such rate of interest and
accrual of original issue discount represents a yield to maturity of 9.00% per
annum (computed on a semiannual bond equivalent basis). The 6.55% Debentures are
convertible into common stock of the Company at any time before maturity at an
initial conversion ratio of 39.4754 shares of common stock for each $1,000
principal amount of 6.55% Debentures, subject to adjustment in certain events.
As of December 31, 1997 there had been no conversions of the 6.55 % Debentures.
During June 1997, the Company raised net proceeds of $29.9 million with
the sale of 1.3 million shares of common stock at $24.25. During July 1997, the
Underwriter exercised its option to purchase an additional 155,400 share for net
proceeds of $3.6 million, which was used to reduce the Bank Credit Facility.
Also during July 1997, 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 $500,000,000 in debt securities, preferred stock,
common stock, and warrants to purchase any of the foregoing securities at prices
and terms to be determined at the time of sale.
During September 1997, the Company raised net proceeds of $72.2 million
with the sale of 3.0 million shares of 8.875% Series A cumulative preferred
stock ("Preferred Stock") at $25.00 per share. The dividends are cumulative from
the date of original issue and are payable quarterly, commencing on December 15,
1997. Except in certain circumstances relating to the Company's qualifications
as a REIT, the Preferred Stock is not redeemable prior to September 30, 2002. On
or after September 30, 2002, the
<PAGE> 7
Preferred Stock may be redeemed for cash at the option of the Company, in whole
or in part, at a redemption price of $25 per share, plus accrued and unpaid
dividends, if any, thereon to the redemption date. The redemption price (other
than the portion thereof consisting of accrued and unpaid dividends) shall be
payable solely out of the sale proceeds of other stock of the Company, which may
include other series of the Company's preferred stock, par value $.001 per
share, and from no other source. The Preferred Stock has no stated maturity and
will not be subject to any sinking fund or mandatory redemption and will not be
convertible into any other securities of the Company except in certain
circumstances relating to the Company's qualification as a REIT.
In December 1997, the Company sold 615,385 shares of common stock at a
per share price of $24.375 The net offering proceeds of $14.3 million were also
used to reduce the outstanding balance of the Company's Bank Credit Facility.
The Company has a dividend reinvestment and stock purchase plan
("Plan") under which participants can automatically reinvest all or a portion of
the cash dividends in shares of the Company's common stock and can make
voluntary cash payments for additional shares. Under the Plan, the Company had
received $ 155,413 for the twelve months ended December 31, 1997 in exchange for
6,747 shares of common stock.
COMMITMENTS
The Company has committed a total of $228.3 million towards the
acquisition and construction of real estate properties and providing mortgage
financing. As of December 31, 1997, the Company had funded approximately $104.0
million towards these commitments, with the balance of $124.3 million expected
to be funded throughout 1998. Financing for these commitments may be provided by
funds from operations, borrowings under the Bank Credit Facility or the
Short-Term Credit Facility, 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 express 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> 1
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, 1997 and 1996, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the years in the three-year period ended December 31, 1997. 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 audits.
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 consolidated financial statements referred to above,
present fairly, in all material respects, the financial position of Capstone
Capital Corporation as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1997 in conformity with generally accepted accounting
principles.
/s/ KPMG PEAT MARWICK LLP
Birmingham, Alabama
January 20, 1998
<PAGE> 2
CAPSTONE CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS Dec. 31, 1997 Dec. 31, 1996
------------- -------------
<S> <C> <C>
Real estate properties
Land $ 46,655,843 $ 30,952,673
Land improvements 2,350,309 2,350,309
Buildings and improvements 435,836,254 269,261,047
Personal property 1,264,201 -
Construction in progress 59,864,216 12,650,780
------------- -------------
545,970,823 315,214,809
Less accumulated depreciation (19,924,089) (11,217,391)
------------- -------------
Real estate properties, net 526,046,734 303,997,418
Mortgage notes receivable 170,065,886 39,325,621
Cash 1,970,081 1,122,241
Accrued rental income 7,873,485 4,689,976
Other assets 17,334,741 7,559,860
------------- -------------
Total assets $ 723,290,927 $ 356,695,116
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Convertible subordinated debentures $ 72,684,370 $ 17,657,000
Bank credit facility 172,950,000 68,500,000
Mortgage notes payable 56,944,397 23,228,417
Short term credit facility 27,500,000 -
Accrued expenses and other liabilities 20,979,093 5,754,180
------------- -------------
351,057,860 115,139,597
------------- -------------
Total liabilities
Stockholders' equity
Preferred stock, $.001 par value,
10,000,000 shares authorized;
3,000,000 issued 3,000 -
Common stock, $.001 par value,
50,000,000 shares authorized;
17,337,608 and 14,247,947 shares
issued 17,337 14,247
Additional paid-in-capital 376,891,745 240,832,943
Loans to officers to finance stock purchases (190,763) (286,944)
Unearned restricted stock compensation (539,000) -
Retained earnings (deficit) (589,252) 995,273
------------- -------------
375,593,067 241,555,519
Less common stock in treasury; 140,000 shares 3,360,000 -
------------- -------------
Total stockholders' equity 372,233,067 241,555,519
------------- -------------
Total liabilities and stockholders' equity $ 723,290,927 $ 356,695,116
============= =============
</TABLE>
The accompanying notes are an integral part of this financial statement
2
<PAGE> 3
CAPSTONE CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year ended Year ended Year ended
December 31, 1997 December 31, 1996 December 31, 1995
----------------- ----------------- -----------------
<S> <C> <C> <C>
Revenues:
Rental income $46,160,068 $31,959,674 $22,774,371
Mortgage interest income 10,147,896 3,159,228 1,819,725
Gain from sale of property - 197,191 -
Other income 870,507 636,243 113,176
----------- ----------- -----------
Total income 57,178,471 35,952,336 24,707,272
----------- ----------- -----------
Expenses:
General and administrative 2,902,375 1,669,678 1,515,130
Depreciation 8,781,460 6,021,811 4,180,868
Amortization 703,080 293,267 515,970
Interest (net of $2,612,777 capitalized in 1997,
$552,686 in 1996, and $466,668 in 1995) 14,767,309 8,812,170 8,786,913
Property operations 1,143,094 241,721 -
----------- ----------- -----------
Total expenses 28,297,318 17,038,647 14,998,881
----------- ----------- -----------
Net income $28,881,153 $18,913,689 $ 9,708,391
=========== =========== ===========
Earnings Per Share- Basic $ 1.76 $ 1.71 $ 1.55
=========== =========== ===========
Earnings Per Share- Diluted $ 1.75 $ 1.68 $ 1.55
=========== =========== ===========
Weighted Averages Shares
Outstanding- Basic 15,760,437 11,086,096 6,271,242
=========== =========== ===========
Weighted Averages Shares
Outstanding-Diluted 16,346,322 13,159,213 8,597,663
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of this financial statement
3
<PAGE> 4
CAPSTONE CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
Year ended Year ended Year ended
December 31, 1997 December 31, 1996 December 31, 1995
----------------- ----------------- -----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 28,881,153 18,913,689 $ 9,708,391
Gain from sale of property - (197,191) -
Depreciation 8,781,460 6,021,811 4,180,868
Amortization 703,080 293,267 515,970
Amortization of debenture original issue discount 1,160,120 - -
Earned compensation for restricted stock 116,375 - -
Increase in accrued rental income (3,183,509) (2,398,760) (1,881,926)
Construction funding deposit - (768,423) -
Increase in receivables and other assets (9,016,913) (1,826,826) (282,847)
Increase in accrued expenses and other liabilities 14,142,261 2,129,026 1,800,831
------------- ------------- ------------
Net cash provided by operating activities 41,584,027 22,166,593 14,041,287
------------- ------------- ------------
Cash flows from investing activities:
Acquisition of real estate properties (230,751,670) (102,025,229) (60,088,309)
Proceeds from sale of properties - 8,206,289 -
Investment in mortgage notes receivable (140,888,161) (22,496,689) (11,764,523)
Collections on mortgage notes receivable 10,147,896 2,175,181 -
Payment of earnest money deposit - - (2,900,000)
------------- ------------- ------------
Net cash used in investing activities (361,491,935) (114,140,448) (74,752,832)
------------- ------------- ------------
Cash flows from financing activities:
Increase(decrease) in bank credit facility 104,450,000 38,275,000 (37,275,000)
Proceeds from mortgage note payable 34,099,999 19,907,321 -
Principal payments on mortgage note payable (384,019) (71,583) -
Proceeds from short-term credit facility 27,500,000 - -
Proceeds from issuance of common stock 52,718,141 56,028,500 62,531,250
Costs related to common stock offering (2,758,473) (3,263,971) (3,882,543)
Proceeds from issuance of preferred stock 75,000,000 - -
Costs related to preferred stock offering (2,812,500) - -
Proceeds from issuance of convertible
subordinated debentures 67,499,250 - 52,000,000
Financing costs related to issuance of
convertible subordinated debentures (2,065,225) - (2,017,934)
Capital contributions from minority interests 2,211,947 687,611 430,711
Distributions to minority interest (1,129,295) - -
Payment of dividends (30,465,678) (19,206,375) (10,641,666)
Proceeds from dividend reinvestment plan 155,413 64,025 6,108
Purchase of treasury stock (3,360,000) - -
Decrease (increase) in loans to finance
stock purchases 96,181 - (94,467)
------------- ------------- ------------
Net cash provided by financing activities 320,755,748 92,420,528 61,056,459
------------- ------------- ------------
Increase in cash 847,840 446,673 344,914
Cash, beginning of period 1,122,241 675,568 330,654
------------- ------------- ------------
Cash, end of period $ 1,970,081 $ 1,122,241 $ 675,568
============= ============= ============
</TABLE>
The accompanying notes are an integral part of this financial statement
4
<PAGE> 5
CAPSTONE CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Loans to
officers to
Additional finance Retained Unearned
Common Preferred paid-in stock earnings restricted Treasury
stock stock capital purchases deficit stock stock Total
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1994 $5,988 -- 96,354,248 (192,477) 2,221,234 -- -- 98,388,985
Conversion of debentures to
common stock less related
cost of $323,296 499 -- 7,730,088 -- -- -- -- 7,730,587
Sale of 3,450,000 shares
less related expenses
of $3,882,543 3,450 -- 58,645,267 -- -- -- -- 58,648,717
Shares issued under the
dividend reinvestment plan -- -- 6,108 -- -- -- -- 6,108
Loans to officers -- -- -- (94,467) -- -- -- (94,467)
Net income -- -- -- -- 9,708,391 -- -- 9,708,391
Dividends paid
($1.74 per share) -- -- -- -- (10,641,666) -- -- (10,641,666)
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 9,929 -- 162,735,711 (286,944) 1,287,959 -- -- 163,746,655
Conversion of debentures to
common stock less related
cost of $1,017,004 1,630 -- 25,271,366 -- -- -- -- 25,272,996
Sale of 2,684,700 shares
less related expenses
of $3,263,971 2,685 -- 52,761,844 -- -- -- -- 52,764,529
Shares issued under the
dividend reinvestment plan 3 -- 64,022 -- -- -- -- 64,025
Net income -- -- -- -- 18,913,689 -- -- 18,913,689
Dividends paid
($1.81 per share -- -- -- -- (19,206,375) -- -- (19,206,375)
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 14,247 -- 240,832,943 (286,944) 995,273 -- -- 241,555,519
Conversion of debentures to
common stock less related
cost of $525,071 845 -- 13,106,084 -- -- -- -- 13,106,929
Sale of 2,070,785 shares
less related expenses
of $278,084 2,071 -- 47,544,346 -- -- -- -- 47,546,417
Shares issued under the
dividend reinvestment plan 7 -- 155,413 -- -- -- -- 155,420
Issuance of 3,000,000 shares
of preferred stock less
expenses of $2,812,500 -- 3,000 72,184,500 -- -- -- -- 72,187,500
Loan repayments -- -- -- 96,181 -- -- -- 96,181
Issuance of 140,000 shares
under stock option plan 140 -- 2,413,111 -- -- -- -- 2,413,251
Acquisition of 140,000
treasury shares -- -- -- -- -- -- (3,360,000) (3,360,000)
Issuance of restricted
stock 27 -- 655,348 -- -- (655,375) -- --
Amortization of deferred
compensation under
restricted stock plan -- -- -- -- -- 116,375 -- 116,375
Net income -- -- -- -- 28,881,153 -- -- 28,881,153
Dividends paid
($1.89 per share) -- -- -- -- (30,465,678) -- -- (30,465,678)
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 $17,337 3,000 376,891,745 (190,763) (589,252) (539,000) (3,360,000) 372,233,067
=================================================================================================================================
</TABLE>
The accompanying notes are an integral part of this financial statement
5
<PAGE> 6
CAPSTONE CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
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.
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.
6
<PAGE> 7
Mortgage Notes Receivable - Notes receivable are recorded at cost, less the
related allowance for impaired notes receivable. Management, considering current
information and events regarding the borrowers' ability to repay their
obligations, considers a not to be impaired when it is probable that the Company
will be unable to collect all amounts due according to the contractual terms of
the note agreement. When a loan is considered to be impaired, the amount of the
impairment is measured based on the present value of expected future cash flows
discounted at the note's effective interest rate. Impairment losses are included
in the allowance for doubtful accounts through a charge to bad debt expense.
Cash receipts on impaired notes receivable are applied to reduce the principal
amount of such notes until the principal has been recovered and are recognized
as interest income, thereafter.
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.
Earnings Per Common Share - In March 1997, the FASB issued SFAS No. 128,
"Earnings per share." The new standard simplifies the computation of earnings
per share and requires the presentation of two new amounts, basic and diluted
earnings per share. The Company is required to implement the Standard for the
quarter and year ended December 31, 1997. Restatement of all earnings per share
amounts is required for all prior periods presented. In addition, SFAS-128 also
requires a reconciliation of the numerator and denominator used to compute basic
and diluted earnings per share. The following schedule provides the required
reconciliation:
<TABLE>
<CAPTION>
(In thousands,
except per share data) 1997 1996 1995
- ---------------------- ---- ---- ----
<S> <C> <C> <C>
NUMERATOR:
Net income $ 28,881 $ 18,914 $ 9,708
Less: Preferred dividends (1,109) - -
Income available-Basic 27,772 18,914 9,708
Impact of potential dilutive
securities 785 3,219 4,051
Income available-Diluted 28,557 22,133 13,759
DENOMINATOR:
Weighted avg. outstanding
shares-Basic 15,760 11,086 6,271
Impact of potential dilutive
securities 546 2,073 2,326
Weighted avg. outstanding
shares-Diluted 16,346 13,159 8,597
EPS -Basic 1.76 1.71 1.55
EPS- Diluted(1) 1.75 1.68 1.55
</TABLE>
(1) Excludes the impact of the 10.50% Debentures, due to the antidilutive
effect of the "if converted method."
7
<PAGE> 8
Prior Year Reclassifications - Certain classifications have been made to the
1996 and 1995 financial statements to conform to the current year presentation.
NOTE 3. REAL ESTATE PROPERTIES
As of December 31, 1997, the Company had investments in 83 leased real
estate properties totaling $486.1 million. These real estate properties consist
of 17 ancillary hospital facilities, 18 physician clinics, 6 ambulatory surgery
facilities, 6 inpatient rehabilitation facilities, 3 outpatient rehabilitation
facilities, 2 comprehensive mental health hospitals, 2 sub-acute care
facilities, 5 integrated delivery facilities, 9 skilled nursing facilities and
15 assisted living facilities. The properties are located in 19 states and are
leased to 17 healthcare-related entities or their subsidiaries pursuant to
long-term leases. In addition, the Company has invested approximately $59.9
million in 19 development projects at various stages of completion. The Company
has remaining commitments of approximately $71.2 million for development
projects' completion and expects all projects to be completed by the end of
1998.
The Company's properties are generally leased pursuant to fixed term
operating leases expiring from 2001 to 2012 and provide for options to extend
the lease terms for at least ten years. The leases generally provide the
lessees, during the terms of the leases and for a short period of time following
expiration, with the right of first refusal to purchase the leased property on
the same terms and conditions as the Company may propose to a third party.
Each lease generally requires the lessee to pay base rent, additional
rent commencing after the first year based on 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, 1997, were: HEALTHSOUTH Corporation,
$15.5 million, Columbia/HCA, $8.8 million, and MedPartners, Inc. $5.4 million.
Future minimum lease payments for the next five years under the
non-cancelable operating leases as of December 31, 1997 are as follows: 1998 -
$51,939,220; 1999 - $52,777,976; 2000 - $53,632,279; 2001 - $53,575,853; 2002 -
$54,543,777. 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.
8
<PAGE> 9
NOTE 4. MORTGAGE NOTES RECEIVABLE
As of December 31, 1997, the Company had provided $170.1 million in
mortgage financing for 69 properties located in 24 states. The mortgage notes
receivable are secured by the real estate of 30 skilled nursing facilities, 35
assisted living facilities, 1 acute-care hospital, 1 ambulatory surgery
facility, 1 ancillary hospital facility, and 1 specialty hospital, which are
operated by 34 healthcare operators.
Twenty one of the facilities (3 skilled nursing facilities, 15 assisted
living facilities, 1 specialty hospital, 1 ambulatory surgery facility, and 1
ancillary hospital facility) are under construction, and the Company has
committed a total of $97.3 million in construction and term loans for these
projects. As of December 31, 1997, the Company had advanced a total of $44.1
million toward these financing commitments. The Company expects to disburse the
remainder of the committed funds in 1998.
The Company's mortgage notes receivable require monthly installments of
principal and interest, with final payment dates ranging from 2000 to 2021, and
bear rates ranging from 10.0% percent to 13.39% percent at December 31, 1997.
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.
NOTE 5. MORTGAGE NOTES PAYABLE
The Company has a non-recourse mortgage note to a life insurance
company for a principal amount of $23.0 million ("$23.0 Million Mortgage Note").
The $23.0 Million Mortgage Note bears interest at 8.5% and is payable in monthly
installments of principal and interest based on a 30 year amortization with the
final payment due on May 26, 2026. The $23.0 Million Mortgage Note is
collateralized by an ancillary hospital facility purchased in January 1996 for
$30 million.
The Company has a non-recourse mortgage note payable to a bank for a
principal amount of $16.9 million ("$16.9 Million Mortgage Note"). The $16.9
Million Mortgage Note bears interest at 50 basis points in excess of the prime
rate, as such rate fluctuates from time to time and is payable in monthly
installments of principal and interest based on a 25 year amortization with the
unpaid balance due in a balloon payment on June 20, 2000. The interest rate as
of December 31, 1997 was 9.0%. The $16.9 Million Mortgage Note is collateralized
by six skilled nursing facilities purchased in June 1997 for $23.8 million.
9
<PAGE> 10
The Company has three non-recourse mortgage notes payable to a company
for a combined principal sum of $17.0 million ("$17 Million Mortgage Note"). The
$17 Million Mortgage Notes bear interest at 8.125% and are payable in monthly
installments of principal and interest based on a 25 year amortization with the
remaining unpaid balance due in a balloon payment on September 1, 2004. The $17
Million Mortgage Notes are collateralized by two ambulatory surgery facilities
and one ancillary hospital facility.
NOTE 6. BANK CREDIT FACILITY
On September 18, 1997, the Company completed an amendment to its
unsecured line of credit ("Bank Credit Facility") which provides for an increase
to $180 million from its previous principal amount of $150 million at December
31, 1996. The Bank Credit Facility is participated in by a consortium of eight
banks and is available until June 24, 2000. At December 31, 1997, the Company
had drawn $172,950,000 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. During September of 1997, the Company
entered into an interest rate swap ("Swap") agreement with NationsBank which,
beginning March 1998, effectively fixes the base rate at 5.959 percent on a $50
million notional amount of borrowings under the Bank Credit Facility. The Swap
will be effective until March 2003 unless NationsBank elects to cancel at the
three year anniversary of the Swap during March 2001.
The Bank Credit Facility contains certain representations, warranties
and financial and other covenants customary in such loan agreements.
On December 4, 1997, the Company obtained a $40 million Short-Term
Credit Facility from NationsBank primarily for purposes of funding investments.
Borrowings under the Short-Term Credit Facility bear interest at the Eurodollar
rate plus a percentage that varies from 1.00% to 1.625% and are payable on or
before April 3, 1998. At December 31, 1997 the outstanding balance under the
Short-Term Credit Facility was approximately $27,500,000 and the weighted
average interest rate was 8.18%.
NOTE 7. CONVERTIBLE SUBORDINATED DEBENTURES
As of December 31, 1997, the Company had $4,025,000 aggregate principal
amount of 10.50% Convertible Subordinated Debentures (the "10.50% Debentures")
outstanding.
10
<PAGE> 11
The 10.50% 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 10.50% 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 10.50% 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.
As of December 31, 1997, the Company had $74,750,000 aggregate
principal amount of 6.55% Convertible Subordinated Debentures (the "6.55%
Debentures") outstanding.
The 6.55% Debentures are due on March 14, 2002 and were issued at a
price of $903 per $1,000 principal amount at maturity, which represents an
original issue discount of 9.70% from the principal amount thereof which is
payable at maturity. Interest on the 6.55% Debentures is payable March 14 and
September 14 in each year, and commenced on September 14, 1997. Such rate of
interest and accrual of original issue discount represents a yield to maturity
of 9.00% per annum (computed on a semiannual bond equivalent basis). The 6.55%
Debentures are convertible into common stock of the Company at any time before
maturity at an initial conversion ratio of 39.4754 shares of common stock for
each $1,000 principal amount of 6.55% Debentures, subject to adjustment in
certain events. As of December 31, 1997 there had been no conversions of the
6.55% Debentures.
NOTE 8. STOCK OPTIONS AND RESTRICTED STOCK AWARDS
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.
11
<PAGE> 12
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. In
October 1997, 85,000 options were exercised at $16.50 per share and 55,000
options were exercised at $18.375. The Company reacquired the shares issued
subsequent to the exercise of the options at $24.00 per share. The reacquired
shares were held in treasury at December 31, 1997.
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:
Assumptions for 1995-
Risk free interest rate - 6.33%, Volatility factor - 16.96%
and Weighted average expected life of the options - 8 years
<TABLE>
Net Income: 1995
----
<S> <C>
As reported $9,709,391
Pro forma $6,432,598
Net Income per common share:
As reported $1.55
Pro forma $1.03
</TABLE>
During 1997, the Company granted 53,500 shares at $18.125 and 31,250
shares at $20.875 of performance based restricted stock. Of the total 84,750
shares of restricted stock, 26,750 shares were issued and placed in escrow for
the employees. The remaining shares were deferred until January 2, 1998 in
accordance with the Restricted Stock Award Program and will vest at 120% of
original shares over three years. Shares issued under the plan are initially
recorded at their fair market value on the date of grant with the corresponding
charge to unearned restricted stock compensation representing the unearned
portion of the award. Compensation under the plan is charged to earnings over
the restriction period and amounted to $116,375 for 1997.
12
<PAGE> 13
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 $105,763 at December 31, 1997
and bear interest at the prime rate, which was 8.5% at December 31, 1997. In
addition, the Company has other loans to employees totaling $85,000 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 1997, the Company received rental income of $15.3 million,
$5.4 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>
1997 1996 1995
------------------------
<S> <C> <C> <C>
Ordinary Income $1.58 $1.56 $1.54
Return of Capital .31 .25 .20
------------------------
Total dividends paid $1.89 $1.81 $1.74
</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 98% of the shares' market value on the dividend
payment date. Under the Plan, the Company received $155,420 in exchange for
6,747 shares of stock and $64,025 in exchange for 3,205 shares of stock during
1997 and 1996, respectively.
13
<PAGE> 14
NOTE 11. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental disclosure of cash flow information is as follows:
<TABLE>
<CAPTION>
For the Year For the Year For the Year
Ended Ended Ended
Dec. 31, 1997 Dec. 31,1996 Dec. 31,1995
------------- ------------ ------------
<S> <C> <C> <C>
Cash payments for bank credit
facility interest expense $ 5,437,685 $ 4,472,210 $ 5,337,009
Cash payments for convertible
subordinated debenture interest
expense 5,977,262 3,496,540 2,713,755
Convertible subordinated debentures
converted into shares of common
stock:
Convertible subordinated debentures (13,632,000) (26,290,000) (8,053,000)
Financing costs (525,071) (1,017,004) (322,296)
Shares of common stock 845,391 1,630,310 499,404
Additional paid in capital 13,631,155 25,271,364 7,730,088
</TABLE>
NOTE 12. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values of the Company's financial instruments approximate
their carrying values due to the pricing and terms of these instruments and/or
their short term nature, except for the convertible subordinated debentures for
which fair value is $73,625,000 and $25,870,000 at December 31, 1997 and 1996,
respectively.
NOTE 13. COMMITMENTS AND CONTINGENCIES
The Company has committed a total of $228.3 million towards the
acquisition and construction of real estate properties and providing mortgage
financing. As of December 31, 1997, the Company had funded approximately $104
million towards these commitments, with the balance of $124.3 million expected
to be funded throughout 1998.
NOTE 14. SUBSEQUENT EVENTS
On January 21, 1998, the Company declared a dividend of $.485 per share
to the holders of common stock on February 2,1998. The dividend was paid in cash
on February 17, 1998. The dividend related to the quarter ended December 31,
1997.
In addition, on February 9, 1998, the Company issued 5,000,000 shares
of common stock at $24.44. Net proceeds from the sale of $115,787,500 were used
to reduce the Bank Credit Facility and retire the Short-term Credit Facility.
14
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES
OF
CAPSTONE CAPITAL CORPORATION
<TABLE>
<CAPTION>
Name of Subsidiary State of Organization
------------------ ---------------------
<S> <C>
Capstone Capital of Alabama, Inc. Alabama
Capstone Capital of Baytown, Inc. Alabama
Capstone Capital of Bonita Bay, Inc. Alabama
Capstone Capital of California, Inc. Alabama
Capstone Capital of Cape Coral, Inc. Alabama
Capstone Capital of Kentucky, Inc. Alabama
Capstone Capital of Las Vegas, Inc. Alabama
Capstone Capital of Massachusetts, Inc. Alabama
Capstone Capital of Pennsylvania, Inc. Pennsylvania
Capstone Capital of Sarasota, Inc. Alabama
Capstone Capital of Texas, Inc. Alabama
Capstone Capital of Virginia, Inc. Alabama
Capstone Capital Properties, Inc. Alabama
Capstone Capital Senior Housing, Inc. Alabama
Capstone of Baytown, Ltd. Alabama
Capstone of Bonita Bay, Ltd. Alabama
Capstone of Los Angeles, Ltd. Alabama
Capstone of Cape Coral, Ltd. Alabama
Capstone of Las Vegas, Ltd. Alabama
Capstone of Sarasota, Ltd. Alabama
Capstone Capital of San Antonio, Ltd. Alabama
Capstone of Virginia Limited Partnership Alabama
</TABLE>
<PAGE> 1
EXHIBIT 23
Consent of KPMG Peat Marwick LLP
The Board of Directors
Capstone Capital Corporation:
We consent to incorporation by reference in registration statements No.
333-31639 on Form S-3 and No. 333-21581 on Form S-8 of our reports dated
January 20, 1998, relating to the consolidated balance sheets of Capstone
Capital Corporation as of December 31, 1997 and 1996, and the related
consolidated statements of income, stockholders' equity, and cash flows for
each of the years in the three-year period ended December 31, 1997, and all
related schedules, which reports appear in or incorporated by reference in the
December 31, 1997, annual report on Form 10-K of Capstone Capital Corporation.
Birmingham, Alabama
March 26, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
EXHIBIT 27.1
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF CAPSTONE CAPITAL CORPORATION FOR THE YEAR ENDED DECEMBER
31, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,970,081
<SECURITIES> 0
<RECEIVABLES> 4,034,393
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 19,702,155
<PP&E> 487,045,128
<DEPRECIATION> 20,061,572
<TOTAL-ASSETS> 723,290,927
<CURRENT-LIABILITIES> 43,827,010
<BONDS> 72,684,370
0
3,000
<COMMON> 17,337
<OTHER-SE> 372,212,730
<TOTAL-LIABILITY-AND-EQUITY> 723,290,927
<SALES> 0
<TOTAL-REVENUES> 57,178,471
<CGS> 0
<TOTAL-COSTS> 28,297,318
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,767,309
<INCOME-PRETAX> 28,881,153
<INCOME-TAX> 0
<INCOME-CONTINUING> 28,881,153
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 28,881,153
<EPS-PRIMARY> 1.76
<EPS-DILUTED> 1.75
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
EXHIBIT 27.2
THIS RESTATED FINANCIAL DATA SCHEDULE CONTAINS RESTATED SUMMARY INFORMATION
EXTRACTED FROM THE FINANCIAL STATEMENTS OF CAPSTONE CAPITAL CORPORATION FOR THE
YEAR ENDED DECEMBER 31, 1996, AND RESTATED FINANCIAL DATA IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,122,241
<SECURITIES> 0
<RECEIVABLES> 335,304
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 10,757,880
<PP&E> 302,874,866
<DEPRECIATION> 11,275,768
<TOTAL-ASSETS> 356,695,116
<CURRENT-LIABILITIES> 3,899,467
<BONDS> 17,657,000
0
0
<COMMON> 14,247
<OTHER-SE> 240,832,943
<TOTAL-LIABILITY-AND-EQUITY> 356,695,116
<SALES> 0
<TOTAL-REVENUES> 35,952,336
<CGS> 0
<TOTAL-COSTS> 17,038,647
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,812,170
<INCOME-PRETAX> 18,913,689
<INCOME-TAX> 0
<INCOME-CONTINUING> 18,913,689
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,913,689
<EPS-PRIMARY> 1.71
<EPS-DILUTED> 1.68
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
EXHIBIT 27.3
THIS RESTATED FINANCIAL DATA SCHEDULE CONTAINS RESTATED SUMMARY INFORMATION
EXTRACTED FROM THE FINANCIAL STATEMENTS OF CAPSTONE CAPITAL CORPORATION FOR THE
YEAR ENDED DECEMBER 31, 1995, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 675,568
<SECURITIES> 0
<RECEIVABLES> 138,048
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,565,499
<PP&E> 201,782,118
<DEPRECIATION> 4,180,868
<TOTAL-ASSETS> 240,624,883
<CURRENT-LIABILITIES> 2,178,147
<BONDS> 43,947,000
0
0
<COMMON> 9,930
<OTHER-SE> 162,735,711
<TOTAL-LIABILITY-AND-EQUITY> 240,624,883
<SALES> 0
<TOTAL-REVENUES> 24,707,272
<CGS> 0
<TOTAL-COSTS> 14,998,991
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,786,913
<INCOME-PRETAX> 9,708,391
<INCOME-TAX> 0
<INCOME-CONTINUING> 9,708,391
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,708,391
<EPS-PRIMARY> 1.55
<EPS-DILUTED> 1.55
</TABLE>
