SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report pursuant to Section 13
or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 1998
[ ] Transition report under Section 13
or 15(d) of the Securities Exchange Act of 1934
Commission file number 1-13445.
CAPITAL SENIOR LIVING CORPORATION
---------------------------------
(Exact name of Registrant as specified in its charter)
DELAWARE 75-2678809
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
14160 Dallas Parkway, Suite 300, Dallas, Texas 75240
----------------------------------------------------
(Address of principal executive offices)
(972) 770-5600
--------------
(Issuer's telephone number, including area code)
Indicated by check whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the past 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
--- ---
As of November 13, 1998, the Registrant had outstanding 19,717,347
shares of its Common Stock, $.01 par value.
1
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CAPITAL SENIOR LIVING CORPORATION
INDEX
Page
Number
------
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets --
September 30, 1998 and December 31, 1997 3
Consolidated Statements of Income--
Three Months Ended September 30, 1998 and 1997 4
Consolidated Statements of Income--
Nine Months Ended September 30, 1998 and 1997 5
Consolidated Statements of Shareholders' Equity--
Nine Months Ended September 30, 1998 6
Consolidated Statements of Cash Flows--
Nine Months Ended September 30, 1998 and 1997 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signature
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2
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PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
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CAPITAL SENIOR LIVING CORPORATION
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1998 1997
------------------ ----------------
ASSETS (Unaudited) (Audited)
Current assets:
Cash and cash equivalents............................................... $ 34,378,076 $ 48,125,225
Accounts receivable, net................................................ 3,254,751 1,578,002
Accounts receivable from affiliates, net................................ 4,910,928 415,051
Deferred taxes.......................................................... 8,280 8,280
Prepaid expenses and other.............................................. 636,724 481,149
------------ ------------
Total current assets................................................. 43,188,759 50,607,707
Deferred taxes............................................................... 9,788,267 10,090,997
Property and equipment, net.................................................. 85,299,053 41,120,448
Investments in limited partnerships.......................................... 15,049,802 13,741,940
Note receivable from affiliate............................................... 7,354,617 --
Management contract rights, net.............................................. 207,613 243,559
Goodwill, net................................................................ 1,224,806 1,257,595
Deferred financing charges, net.............................................. 603,815 108,435
Deferred interest............................................................ 968,605 173,456
Other assets................................................................. 455,866 26,773
------------ ------------
Total assets......................................................... $164,141,203 $117,370,910
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................................ $ 2,793,414 $ 2,566,392
Accrued expenses........................................................ 1,845,039 1,259,410
Line of credit.......................................................... 6,808,239 1,830,130
Current portion of notes payable........................................ 591,114 932,664
Customer deposits....................................................... 620,880 277,413
Federal and state income taxes payable.................................. 1,114,975 831,682
Due to affiliates....................................................... -- 50,064
------------ ------------
Total current liabilities............................................ 13,773,661 7,747,755
Deferred income.............................................................. 696,763 231,256
Notes payable, net of current portion........................................ 37,966,859 5,744,767
Minority interest in consolidated partnerships............................... 11,201,561 11,087,512
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.01 par value:
Authorized shares -- 15,000,000; no shares issued or outstanding..... -- --
Common stock, $.01 par value:
Authorized shares -- 65,000,000
Issued and outstanding shares -- 19,717,347 at September 30,
1998 and December 31, 1997........................................ 197,173 197,173
Additional paid-in capital.............................................. 91,740,251 91,740,251
Retained earnings....................................................... 8,564,935 622,196
------------ ------------
Total shareholders' equity........................................... 100,502,359 92,559,620
------------ ------------
Total liabilities and shareholders' equity........................... $164,141,203 $117,370,910
============ ============
</TABLE>
See accompanying notes.
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CAPITAL SENIOR LIVING CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended September 30,
--------------------------------
1998 1997
------------ -------------
(Unaudited) (Unaudited)
Revenues:
Resident and health care revenue..................................... $ 5,193,660 $ 5,355,971
Rental and lease income.............................................. 1,073,421 1,056,067
Unaffiliated management services revenue............................. 604,333 472,351
Affiliated management services revenue............................... 374,698 322,194
Development fees..................................................... 3,059,791 185,205
260,468............................................................... 250,035 260,468
------------ -----------
Total revenues.................................................... 10,555,938 7,652,256
Expenses:
Operating expenses................................................... 3,837,149 4,203,402
General and administrative expenses.................................. 1,240,628 1,888,467
Depreciation and amortization........................................ 571,996 601,069
------------ -----------
Total expenses.................................................... 5,649,773 6,692,938
------------ -----------
Income from operations.................................................... 4,906,165 959,318
Other income (expense):
Interest income...................................................... 1,207,146 1,271,981
Interest expense..................................................... (187,836) (1,121,859)
Other ............................................................... -- 22,200
------------ -----------
Income before income taxes and minority interest in
consolidated partnerships........................................... 5,925,475 1,131,640
Provision for income taxes................................................ (2,289,103) --
------------ -----------
Income before minority interest in consolidated partnerships.............. 3,636,372 1,131,640
Minority interest in consolidated partnerships............................ (130,380) (334,877)
------------ -----------
Net income................................................................ $ 3,505,992 $ 796,763
============ ===========
Net income per share:
Basic and diluted.................................................... $ 0.18 $ 0.09
============ ===========
Weighted average shares outstanding.................................. 19,717,347 9,367,347
============ ===========
Pro forma net income:
Net income........................................................... $ 796,763
Pro forma income taxes............................................... (314,721)
===========
Pro forma net income...................................................... $ 482,042
===========
</TABLE>
See accompanying notes.
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CAPITAL SENIOR LIVING CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Nine Months Ended September 30,
-----------------------------------
1998 1997
-------------- ----------------
(Unaudited) (Unaudited)
Revenues:
Resident and health care revenue..................... $ 15,237,396 $ 15,783,442
Rental and lease income.............................. 3,204,391 3,214,040
Unaffiliated management services revenue............. 1,812,136 1,421,358
Affiliated management services revenue............... 1,191,782 1,023,320
Development fees..................................... 5,993,044 555,615
Other................................................ 705,504 721,878
------------- -------------
Total revenues.................................... 28,144,253 22,719,653
Expenses:
Operating expenses................................... 11,635,108 12,283,464
General and administrative expenses.................. 4,180,463 5,821,475
Depreciation and amortization........................ 1,695,494 1,551,023
------------- -------------
Total expenses.................................... 17,511,065 19,655,962
------------- -------------
Income from operations.................................... 10,633,188 3,063,691
Other income (expense):
Interest income...................................... 3,403,035 2,066,420
Interest expense..................................... (547,724) (1,541,256)
Other -- 22,200
------------- -------------
Income before income taxes and minority interest in
consolidated partnerships........................... 13,488,499 3,611,055
Provision for income taxes................................ (5,185,848) --
------------- -------------
Income before minority interest in consolidated
partnerships....................................... 8,302,651 3,611,055
Minority interest in consolidated partnerships............ (359,912) (1,600,903)
------------- -------------
Net income................................................ $ 7,942,739 $ 2,010,152
============= =============
Net income per share:
Basic and diluted.................................... $ 0.40 $ 0.21
============= =============
Weighted average shares outstanding.................. 19,717,347 9,367,347
============= =============
Pro forma net income:
Net income........................................... $ 2,010,152
Pro forma income taxes............................... (794,010)
-------------
Pro forma net income...................................... $ 1,216,142
=============
</TABLE>
See accompanying notes.
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CAPITAL SENIOR LIVING CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Common Stock Additional
------------------------------- Paid-In Retained
Shares Amount Capital Earnings Total
-------------- ------------- ------------ ------------ --------------
Balance at December 31, 1997............ 19,717,347 $197,173 $91,740,251 $ 622,196 $ 92,559,620
Net income............................ -- - -- 1,926,166 1,926,166
-------------- ------------- ------------ ------------ --------------
Balance at March 31, 1998............... 19,717,347 $197,173 $91,740,251 $2,548,362 $ 94,485,786
Net income............................ -- -- -- 2,510,581 2,510,581
-------------- ------------- ------------ ------------ --------------
Balance at June 30, 1998................ 19,717,347 $197,173 $91,740,251 $5,058,943 $ 96,996,367
Net income -- -- -- 3,505,992 3,505,992
-------------- ------------- ------------ ------------ --------------
Balance at September 30, 1998 19,717,347 $197,173 $91,740,251 $8,564,935 $100,502,359
============== ============= ============ ============ ==============
</TABLE>
See accompanying notes.
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CAPITAL SENIOR LIVING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30,
---------------------------------
1998 1997
------------- -------------
(Unaudited) (Unaudited)
Operating Activities
Net income................................................................. $ 7,942,739 $ 2,010,152
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization......................................... 1,695,494 1,551,023
Amortization of deferred financing charges............................ 27,883 --
Minority interest in consolidated partnerships........................ 359,912 1,600,903
Deferred interest..................................................... (795,149) --
Deferred taxes........................................................ 302,730 --
Deferred income....................................................... 465,507 --
Deferred initial public offering costs................................ -- (549,746)
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable................................................ (1,676,749) (1,939,812)
Accounts receivable from affiliates................................ (4,495,877) 32,908
Federal and state income taxes payable............................. 283,293 --
Prepaid expenses and other......................................... (449,310) (60,907)
Accounts payable and accrued expenses.............................. 844,723 2,574,581
Customer deposits.................................................. 37,267 218,275
Due to affiliates.................................................. (50,064) (11,284)
------------ -------------
Net cash provided by operating activities.................................. 4,492,399 5,426,093
Investing Activities
Capital expenditures....................................................... (5,119,177) (1,250,469)
Cash paid for acquisition of NHP assets.................................... (8,246,007) --
Cash acquired upon acquisition of HCP...................................... -- 8,995,455
Investments in limited partnerships........................................ (1,408,934) (16,027,427)
Investment in restricted cash equivalents.................................. -- (63,592,176)
------------ -------------
Net cash used in investing activities...................................... (14,774,118) (71,874,617)
Financing Activities
Proceeds from notes payable and line of credit............................. 5,193,079 --
Repayments of notes payable................................................ (634,428) (6,384,961)
Advances to affiliates..................................................... (7,354,617) --
Proceeds from notes payable to affiliates.................................. -- 500,000
Proceeds from mortgage note payable........................................ -- 76,131,267
Repurchase of HCP limited partnership interests............................ (144,791) --
Repurchase of Beneficial Unit Certificates of CSLC, L.P.................... -- (960,752)
Deferred loan charges paid................................................. (524,673) (85,355)
Distributions to minority partners......................................... -- (224,795)
------------ -------------
Net cash (used in) provided by financing activities........................ (3,465,430) 68,975,404
------------ -------------
(Decrease) increase in cash and cash equivalents........................... (13,747,149) 2,526,880
Cash and cash equivalents at beginning of period........................... 48,125,225 10,818,512
------------ -------------
Cash and cash equivalents at end of period................................. $ 34,378,076 $ 13,345,392
============ =============
</TABLE>
See accompanying notes.
7
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CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
(Unaudited)
1. BASIS OF PRESENTATION
Capital Senior Living Corporation, a Delaware corporation, was incorporated on
October 25, 1996. The accompanying consolidated financial statements include the
financial statements of Capital Senior Living Corporation (the "Company") and
its subsidiaries and limited partnerships owned and controlled by it or under
common ownership prior to the transfer of ownership in connection with the
November 5, 1997 public offering and formation transactions. All intercompany
balances and transactions have been eliminated in consolidation.
The accompanying consolidated balance sheet, as of December 31, 1997, has been
derived from audited consolidated financial statements of the Company for the
year ended December 31, 1997, and the accompanying unaudited consolidated
financial statements, as of September 30, 1998 and 1997, have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and note disclosures normally included in the annual
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to those rules and
regulations. For further information, refer to the financial statements and
notes thereto for the year ended December 31, 1997 included in the Company's
Annual Report on Form 10-K filed with the Securities and Exchange Commission on
March 31, 1998.
In the opinion of the Company, the accompanying consolidated financial
statements contain all adjustments (all of which were normal recurring accruals)
necessary to present fairly the Company's financial position as of September 30,
1998 and 1997, results of operations for the three and nine month periods ended
September 30, 1998 and 1997, respectively, changes in shareholders' equity for
the nine months ended September 30, 1998 and cash flows for the nine month
periods ended September 30, 1998 and 1997. The results of operations for the
three and nine month periods ended September 30, 1998 are not necessarily
indicative of the results for the year ending December 31, 1998.
2. TRANSACTIONS WITH AFFILIATE
During 1998, a wholly-owned subsidiary of the Company loaned money to Triad
Senior Living I, L.P. ("Triad") pursuant to an unsecured loan facility not to
exceed $10,000,000. The principal is due March 12, 2003. The first draw under
this loan facility was made on March 12, 1998. Interest is due quarterly at 8%
per annum. This loan may be prepaid without penalty. At September 30, 1998,
$6,744,594 has been advanced to Triad under this loan facility.
Effective April 1, 1998, a wholly-owned subsidiary of the Company obtained a 19%
limited partnership interest in Triad for $330,243 in cash. The Company is
accounting for this under the equity method of accounting based on the
provisions of the Triad partnership agreement. As a result, the Company has
deferred interest income on the note receivable from Triad and development fees
receivable from Triad of $34,921 and $395,800, respectively, as of September 30,
1998.
During the third quarter, a wholly-owned subsidiary of the Company loaned money
to Triad Senior Living II, L.P. ("Triad II") pursuant to an unsecured loan
facility not to exceed $7,000,000. The principal is due September 25, 2003. The
first draw under this loan facility was made on September 25, 1998. Interest is
8
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CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
(Unaudited)
due quarterly at 10.5% per annum. This loan may be prepaid without penalty. At
September 30, 1998, $610,023 has been advanced to Triad II under this loan
facility.
Effective September 23, 1998, a wholly-owned subsidiary of the Company obtained
a 19% limited partnership interest in Triad II for $74,100 in cash. The Company
is accounting for this under the equity method of accounting based on the
provisions of the Triad II partnership agreement. As a result, the Company has
deferred interest income on the note receivable from Triad II and development
fees receivable from Triad II of $154 and $68,638, respectively, as of September
30, 1998.
3. ACQUISITIONS
On September 30, 1998, a wholly-owned subsidiary of the Company acquired four
senior living communities from NHP Retirement Housing Partners I Limited
Partnership ("NHP") for $40,683,281 by entering into a $32,300,000 mortgage loan
agreement with Lehman Brothers Holdings, Inc., a cash payment of $8,246,007 and
assumption of net assets and liabilities of $137,274. The Company's subsidiary
mortgaged the four senior living communities as collateral. The acquisition was
accounted for as a purchase. The Company's purchase price allocation is based on
preliminary estimates.
Subsequent to September 30, 1998, a wholly-owned subsidiary of the Company
acquired a senior living community from Tesson Heights Enterprises, a Texas
limited partnership, for $23,051,786. The Company's subsidiary borrowed
$15,400,000 pursuant to an existing mortgage loan agreement with Lehman Brothers
Holdings, Inc. and mortgaged the senior living community as collateral. A
wholly-owned subsidiary of the Company also acquired a senior living community
from Gramercy Hill Enterprises, a Texas limited partnership, for $11,036,655.
The Company's subsidiary assumed a $6,334,660 note, along with borrowing
$1,980,000 from WMF Washington Mortgage Corp. on a second lien basis and
mortgaged the senior living community as collateral. The Company's subsidiaries
paid the remaining purchase prices with a cash payment of $7,376,632 and
$2,425,798, respectively, and assumption of liabilities of $275,154 and
$296,197, respectively.
The Company has not completed its analysis of the purchase accounting for any of
the transactions above. As a result, the pro forma financial information
reflecting the results of operations as if the purchase had occurred as of
January 1, 1997 and earnings per share for 1997 and the nine month period ended
September 30, 1998 is not yet complete. This information will be filed by the
Company in a Form 8-K with the Securities and Exchange Commission.
4. NET INCOME PER SHARE
Basic net income per share is calculated by dividing net income by the weighted
average number of common shares outstanding during the period. Diluted net
income per share considers the dilutive effect of outstanding options calculated
using the treasury stock method.
The average daily price of the common stock during the third quarter of 1998 and
nine months ended September 30, 1998 did not exceed the exercise price of the
options, and therefore, the options are not considered dilutive for purposes of
calculating diluted net income per share.
9
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CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998
(Unaudited)
5. CONTINGENCIES
On August 11, 1998, the Company executed a settlement agreement with Angeles
Housing Concepts, Inc. ("AHC") and ILM I Lease Corporation and ILM II Lease
Corporation (collectively, "ILM") resolving all claims among the parties
relating to a lawsuit filed by AHC against the Company alleging interference
with AHC's management agreements with ILM (the "Settlement Agreement") and
calling for a dismissal with prejudice of this lawsuit. In September 1998, this
lawsuit was dismissed with prejudice. The Settlement Agreement will not involve
any payment of damages to AHC or any other party by the Company.
On October 28, 1998, the Company received notice that a complaint had been filed
by an Interest holder in NHP Retirement Housing Partners I Limited Partnership
("NHP") in Chancery Court in Delaware against the Company, the Company's
subsidiary, Capital Senior Living Properties 2 - NHPCT, Inc. (the "Subsidiary"),
NHP and NHP's general partner, Capital Realty Group Senior Housing, Inc. This
Interest holder purchased 90 Interests in NHP in 1993 for $180. The complaint,
which seeks class action status, alleges violation of the NHP partnership
agreement in connection with NHP selling four of its properties to the
Subsidiary. The complaint seeks rescission of the sale by NHP of the four
properties to the Subsidiary and various other relief. The Company and the other
defendants believe the complaint is without merit and intend to vigorously
contest the complaint. The complaint has been turned over to the applicable
insurance carriers for defense and coverage.
The Company has pending claims incurred in the normal course of business which,
in the opinion of management, based on the advice of legal counsel, will not
have a material effect on the financial statements of the Company.
6. PRO FORMA INCOME TAXES
The income taxes on earnings of the S corporations and partnerships contributed
to the Company for the period from January 1, 1997 through September 30, 1997,
were the responsibility of the stockholders and partners. The pro forma
adjustment reflected on the statements of income for the three and nine month
periods ended September 30, 1997 assumes these S corporations and partnerships
were subject to income taxes. Pro forma income tax expense has been calculated
using statutory federal and state tax rates, estimated at 39.5%.
10
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CAPITAL SENIOR LIVING CORPORATION
September 30, 1998
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The following discussion and analysis addresses (i) the Company's results of
operations for the three and nine months ended September 30, 1998 and 1997,
respectively, and (ii) liquidity and capital resources of the Company and should
be read in conjunction with the Company's consolidated financial statements
contained elsewhere in this report.
The Company generates revenue from a variety of sources. For the three months
ended September 30, 1998, the Company's revenue was derived as follows: 49.2%
from the operation of five owned senior living communities that are operated by
the Company; 10.2% from lease rentals from triple net leases of three skilled
nursing facilities and four physical rehabilitation centers; 9.3% from
management fees arising from management services provided for five affiliate
owned and operated senior living communities and fifteen third party owned and
operated senior living communities; and 29.0% derived from development fees
earned for managing the development and construction of new senior living
communities for third parties, including Triad and Triad II.
For the nine months ended September 30 1998, the Company's revenue was derived
as follows: 54.1% from the operation of five owned and one leased senior living
community that are operated by the Company; 11.4% from lease rentals from triple
net leases of three skilled nursing facilities and four physical rehabilitation
centers; 10.6% from management fees arising from management services provided
for five affiliate owned and operated senior living communities and fifteen
third party owned and operated senior living communities; and 21.3% derived from
development fees earned for managing the development and construction of new
senior living communities for third parties, including Triad and Triad II.
As the Company continues to implement its business plan, management believes
that the mix of the Company's revenues will change and that development
activities will take on increased importance. Development fees are generally
based upon a percentage of construction cost and are earned over the period
commencing with the initial development activities and ending with the opening
of the community. Development fees as a percent of total revenues increased from
2.4% in the third quarter of 1997 to 29.0% in the third quarter of 1998.
The Company believes that the factors affecting the financial performance of
communities managed under contracts with third parties do not vary substantially
from the factors affecting the performance of owned and leased communities,
although there are different business risks associated with these activities.
The Company's management fees are primarily based on a percentage of gross
revenues and expire on various dates between December 1999 and August 2005. In
addition, certain of the contracts provide for supplemental incentive fees that
vary by contract based upon the financial performance of the managed community.
11
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CAPITAL SENIOR LIVING CORPORATION
September 30, 1998
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Results of Operations
The following tables set forth for the periods indicated, selected Statements of
Income data in thousands of dollars and expressed as a percentage of total
revenues.
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Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------------------------- ------------------------------------------
1998 1997 1998 1997
----------------------- ---------------------- --------------------- -------------------
$ % $ % $ % $ %
Revenues:
Resident and healthcare revenue $ 5,194 49.2% $ 5,356 70.0% $ 15,237 54.1% $15,783 69.5%
Rental and lease income 1,073 10.2% 1,056 13.8% 3,204 11.4% 3,214 14.1%
Unaffiliated management services
revenue 604 5.7% 472 6.2% 1,812 6.4% 1,421 6.3%
Affiliated management services revenue 375 3.6% 322 4.2% 1,192 4.2% 1,023 4.5%
Development fees 3,060 29.0% 185 2.4% 5,993 21.3% 557 2.5%
Other 250 2.3% 261 3.4% 706 2.6% 722 3.1%
-------- ------ ------- ------ -------- ------ ------- ------
Total revenue 10,556 100.0% 7,652 100.0% 28,144 100.0% 22,720 100.0%
-------- ------ ------- ------ -------- ------ ------- ------
Expenses:
Operating expenses: 3,837 36.3% 4,203 54.9% 11,635 41.3% 12,283 54.1%
General and administrative expenses 1,241 11.8% 1,889 24.7% 4,180 14.9% 5,822 25.6%
Depreciation and amortization 572 5.4% 601 7.9% 1,696 6.0% 1,551 6.8%
-------- ------ ------- ------ -------- ------ ------- ------
Total expenses 5,650 53.5% 6,693 87.5% 17,511 62.2% 19,656 86.5%
-------- ------ ------- ------ -------- ------ ------- ------
Income from operations 4,906 46.5% 959 12.5% 10,633 37.8% 3,064 13.5%
Other income (expense)
Interest income 1,207 11.4% 1,272 16.6% 3,403 12.1% 2,066 9.1%
Interest expense (188) (1.8%) (1,122) (14.7%) (547) (1.9%) (1,541) (6.8%)
Other - 0.0% 22 0.4% - - 22 -
--------- ------ ------- ------ -------- ------ ------- ------
Income before income taxes and minority
interest in consolidated partnerships 5,925 56.1% 1,131 14.8% 13,489 48.0% 3,611 15.8%
Provision for income taxes (2,289) (21.7%) - 0.0% (5,186) (18.4%) - 0.0%
--------- ------ ------- ------ -------- ------ ------- ------
Income before minority interest in
consolidated partnerships 3,636 34.4% 1,131 14.8% 8,303 29.6% 3,611 15.8%
Minority interest in consolidated
partnerships (130) (1.2%) (335) (4.4%) (360) (1.3%) (1,601) (7.0%)
--------- ------ ------- ------- -------- ------ ------- ------
Net income $ 3,506 33.2% $ 796 10.4% $ 7,943 28.3% $ 2,010 8.8%
========= ====== ======= ====== ======== ====== ======= ======
</TABLE>
Three Months Ended September 30, 1998 Compared to the Three Months Ended
September 30, 1997
Revenues. Total revenues were $10,556,000 in the three months ended September
30, 1998 compared to $7,652,000 for the three months ended September 30, 1997,
representing an increase of $2,904,000, or 37.9%. The primary components of this
increase were increases in development fees of $2,875,000. These increases were
due to the addition of 28 development contracts for managing the development and
construction of new senior living communities owned by third parties, including
Triad and Triad II.
Expenses. Total expenses were $5,650,000 in the third quarter of 1998 compared
to $6,693,000 in the third quarter of 1997, representing a decrease of
$1,043,000 due to a reduction in officers' salaries, the termination of the
Maryland Gardens lease, and corporate management and property management
controlling expense levels through greater efficiency.
Other income and expenses. Interest income decreased $65,000, primarily as a
result of the decrease of approximately $64,000,000 of U.S. Treasury securities
held during the third quarter of 1997 offset by the temporary investment of
$34,000,000 of the Company's cash balances.
12
<PAGE>
CAPITAL SENIOR LIVING CORPORATION
September 30, 1998
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Provision for income taxes. Provision for income taxes in the third quarter of
1998 was $2,289,000 compared to no provision in the third quarter of 1997. This
increase was due to the Company and its consolidated subsidiaries and
partnerships not being subject to income taxes in the third quarter of 1997, as
all of its taxable income was taxable to its stockholders and partners prior to
the initial public offering of the Common Stock of the Company.
Minority interest. Minority interest in limited partnerships decreased $205,000
primarily as a result of the elimination of Capital Senior Living Communities,
L.P. ("CSLC, L.P.") minority interest as a result of the formation transactions
that occurred concurrent with the initial public offering of the Common Stock of
the Company and the additional acquisitions of limited partnership interests in
HealthCare Properties, L.P. ("HCP") by the Company.
Net income. As a result of the foregoing factors, net income increased
$2,710,000 to $3,506,000 for the three months ended September 30, 1998, as
compared to $796,000 for the three months ended September 30, 1997.
Nine Months Ended September 30, 1998 Compared to the Nine Months Ended September
30, 1997
Revenues. Total revenues were $28,144,000 in the nine months ended September 30,
1998 compared to $22,720,000 for the nine months ended September 30, 1997,
representing an increase of $5,424,000, or 23.9%. The primary components of this
increase were increases in development fees of $5,436,000. These increases were
due to the addition of 28 development contracts for managing the development and
construction of new senior living communities owned by third parties, including
Triad and Triad II.
Expenses. Total expenses were $17,511,000 in the nine months ended September 30,
1998 compared to $19,656,000 in the nine months ended September 30, 1997,
representing a decrease of $2,145,000 due to a reduction in officers salaries
and corporate management and property management controlling expense levels
through greater efficiency.
Other income and expenses. Interest income increased $1,337,000, primarily as a
result of the temporary investment of approximately $34,000,000 of the Company's
cash balances that were from the Company's initial public offering in November
1997.
Provision for income taxes. Provision for income taxes in the nine months ended
September 30, 1998 was $5,186,000 compared to no provision in the nine months
ended September 30, 1997. This increase was due to the Company and its
consolidated subsidiaries and partnerships not being subject to income taxes in
the nine months ended September 30, 1997, as all of its taxable income was
taxable to its stockholders and partners prior to the initial public offering of
the Common Stock of the Company.
Minority interest. Minority interest in limited partnerships decreased
$1,241,000 primarily as a result of the elimination of CSLC, L.P. minority
interest as a result of the formation transactions that occurred concurrent with
the initial public offering of the Common Stock of the Company and the
additional acquisitions of limited partnership interests in HCP by the Company.
13
<PAGE>
CAPITAL SENIOR LIVING CORPORATION
September 30, 1998
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Net income. As a result of the foregoing factors, net income increased
$5,933,000 to $7,943,000 for the nine months ended September 30, 1998, as
compared to $2,010,000 for the nine months ended September 30, 1997.
Liquidity and Capital Resources
In addition to approximately $34,000,000 of cash balances on hand as of
September 30, 1998, the Company's principal sources of liquidity are expected to
be cash flows from operations and amounts available for borrowing under its
$20,000,000 revolving line of credit. There can be no assurance, however, that
the Company will continue to generate cash flows at or above current levels or
that the Company will be able to meet its anticipated needs for working capital.
The Company derives the benefits and bears the risks attendant to the
communities it owns. The cash flows and profitability of owned communities
depends on the operating results of such communities and are subject to certain
risks of ownership, including the need for capital expenditures, financing and
other risks, such as those relating to environmental matters.
The cash flows and profitability of the Company's owned communities that are
leased to third parties depend on the ability of the lessees to make timely
lease payments. At September 30, 1998, HCP was operating one of its properties
and had leased seven of its owned properties under triple net leases to third
parties until 2000 or 2001. Four of these properties are leased until year 2001
to HealthSouth Rehabilitation Corp. ("HealthSouth"), which provides acute spinal
injury intermediate care at these properties. HealthSouth closed one of these
facilities in 1994 and closed another facility in February 1997 due to low
occupancy. HealthSouth has continued to make lease payments on a timely basis
for all four properties. HCP's other three facility leases are all current in
their lease payments to HCP. The lessee for one of these three facilities
continues to fund the deficit between the required lease payment and operating
cash flow. Should the operators of the leased properties default on payment of
their lease obligations prior to termination of the lease agreements, six of the
seven lease contracts contain a continuing guarantee of payment and performance
by the parent company of the operators, which the Company intends to pursue in
the event of default. Following termination of these leases and if the lessees
do not exercise options to purchase the properties, the Company intends to
convert and operate the facilities as assisted living and Alzheimer's care
facilities.
The cash flows and profitability of the Company's third party management fees
are dependent upon the revenues and profitability of the communities managed.
While the management contracts are generally terminable only for cause, in
certain cases the contracts can be terminated upon the sale of a community,
subject to the Company's rights to offer to purchase such community.
On September 16, 1997, the Company and Tri Point Communities, L.P. ("Tri
Point"), a limited partnership owned by the Company's founders (Messrs. Jeffrey
L. Beck and James A. Stroud) and their affiliates, entered into a Development
and Turnkey Services Agreement in connection with the development and management
of the Company's planned new communities (Waterford Communities) where Tri Point
would own and finance the construction of planned new Waterford Communities.
Effective April 1, 1998, Tri Point was reorganized and the interests of Messrs.
Beck and Stroud were sold at their cost to Triad Senior Living, Inc. and its
affiliates, which are unrelated third-parties. Triad Senior Living, Inc. and its
affiliates have previously owned, developed, operated and sold senior living
communities for their own account. Tri Point was renamed Triad Senior Living I,
14
<PAGE>
CAPITAL SENIOR LIVING CORPORATION
September 30, 1998
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
L.P. ("Triad"). The new general partner of Triad, owning 1%, is Triad Senior
Living, Inc. The limited partners are Blake N. Fail (principal owner of Triad
Senior Living, Inc.), owning 80%, and a wholly-owned subsidiary of the Company,
owning 19%. Triad will continue to be bound by the existing Development and
Turnkey Services Agreement and all existing development agreements, except the
development fee will be reduced from 7% to 4%, but will include reimbursements
for expenses. Triad will also continue to be bound by all existing property
management agreements. The Company's subsidiary will have an option to purchase
the partnership interests of Triad Senior Living, Inc. and Blake N. Fail for an
amount equal to the amount such party paid for its interest, plus non-compounded
interest of 12% per annum. The property management agreements also provide the
Company with an option to purchase the communities developed by Triad upon their
completion for an amount equal to the fair market value (based on a third-party
appraisal but not less than hard and soft costs and lease-up costs). The Company
has made no determination as to whether it will exercise its purchase options.
The Company will evaluate the possible exercise of each purchase based upon the
business and financial factors, which may exist at the time those options may be
exercised.
Triad has received and accepted commitments for loan facilities aggregating up
to $100,000,000 to fund its development activities.
During 1998, a wholly-owned subsidiary of the Company agreed to loan Triad up to
$10,000,000. The principal is due March 12, 2003. The first draw under this loan
facility was made on March 12, 1998. Interest is due quarterly at 8% per annum.
This loan may be prepaid without penalty. At September 30, 1998, approximately
$6,745,000 has been advanced to Triad under this loan facility.
On September 24, 1998, the Company and Triad II, a limited partnership, entered
into a Development and Turnkey Services Agreement in connection with the
development and management of the Company's planned new Waterford Communities
where Triad II would own and finance the construction of the new communities.
Triad II was organized on September 24, 1998. The general partner of Triad II,
owning 1% is Triad Partners II, Inc. The limited partners are Triad Senior
Living II, L.P., owning 80%, and a wholly-owned subsidiary of the Company,
owning 19%.
The Company's subsidiary will have an option to purchase the partnership
interests of Triad Partners II, Inc. in Triad II for an amount equal to the
amount such party paid for its interest, plus non-compounded interest of 12% per
annum. The property management agreements also provide the Company's subsidiary
with an option to purchase the communities developed by Triad II upon their
completion for an amount equal to the fair market value (based on a third-party
appraisal but not less than hard and soft costs and lease-up costs). The Company
has made no determination as to whether it will exercise its purchase options.
The Company will evaluate the possible exercise of each purchase based upon the
business and financial factors, which may exist at the time those options may be
exercised.
Triad II is negotiating commitments for loan facilities aggregating up to
$26,000,000 to fund its development activities.
During the third quarter, a wholly-owned subsidiary the Company agreed to loan
Triad II up to $7,000,000. The principal is due September 25, 2003. The first
draw under this loan facility was made on September 25, 1998. Interest is due
15
<PAGE>
CAPITAL SENIOR LIVING CORPORATION
September 30, 1998
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
quarterly at 10.5% per annum. This loan may be prepaid without penalty. At
September 30, 1998, approximately $610,000 has been advanced to Triad II under
this loan facility.
On September 30, 1998, a wholly-owned subsidiary of the Company acquired four
senior living communities from NHP for $40,683,281 by entering into a
$32,300,000 mortgage loan agreement with Lehman Brothers Holdings, Inc., a cash
payment of $8,246,007 and assumption of net assets and liabilities of $137,274.
The Company's subsidiary mortgaged the four senior living communities as
collateral. The acquisition was accounted for as a purchase. The Company's
purchase price allocation is based on preliminary estimates.
Subsequent to September 30, 1998, a wholly-owned subsidiary of the Company
acquired a senior living community from Tesson Heights Enterprises, a Texas
limited partnership, for $23,051,786. The Company's subsidiary borrowed
$15,400,000 pursuant to the existing mortgage loan agreement with Lehman
Brothers Holdings, Inc. and mortgaged the senior living community as collateral.
A wholly-owned subsidiary of the Company also acquired a senior living community
from Gramercy Hill Enterprises, a Texas limited partnership, for $11,036,655.
The Company's subsidiary assumed a $6,334,660 note, and borrowed an additional
$1,980,000 from WMF Washington Mortgage Corp. on a second lien basis and
mortgaged the senior living community as collateral for both loans. The
Company's subsidiaries paid the remaining purchase prices with a cash payment of
$7,376,632 and $2,425,798, respectively, and assumption of liabilities of
$275,154 and $296,197, respectively.
Year 2000 Issue
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs or hardware that have date-sensitive software or embedded
chips may recognize the year 2000 as a date other than the year 2000. This could
result in a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities.
Based on ongoing assessments, the Company has developed a program to modify or
replace significant portions of its software and certain hardware, which are
generally PC-based systems, so that those systems will properly utilize dates
beyond December 31, 1999. The Company expects to substantially complete software
reprogramming and software and hardware replacement no later than December 31,
1998, with 100% completion targeted for September 30, 1999. The Company
presently believes that these modifications and replacements of existing
software and certain hardware will mitigate the Year 2000 Issue. However, if
such modifications and replacements are not completed timely, the Year 2000
Issue could have a material impact on the operations of the Company.
The Company has assessed its exposure to operating equipment, and such exposure
is not significant due to the nature of the Company's business.
The Company is not aware of any external agent with a Year 2000 Issue that would
materially impact the Company's results of operations, liquidity, or capital
resources. However, the Company has no means of determining whether or ensuring
that external agents will be Year 2000 ready. The inability of external agents
to complete their Year 2000 resolution process in a timely fashion could
materially impact the Company.
16
<PAGE>
CAPITAL SENIOR LIVING CORPORATION
September 30, 1998
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Management of the Company believes it has an effective program in place to
resolve the Year 2000 Issue in a timely manner. As noted above, the Company has
completed most but not all necessary phases of its Year 2000 program. In the
event that the Company does not complete the current program or any additional
phases, the Company could incur disruptions to its operations. In addition,
disruptions in the economy generally resulting from Year 2000 Issues could also
materially adversely affect the Company. The Company could be subject to
litigation for computer systems failure. The amount of potential liability and
lost revenue cannot be reasonably estimated at this time.
The Company currently has no contingency plans in place in the event it does not
complete all phases of its Year 2000 program. The Company plans to evaluate the
status of completion in early 1999 and determine whether such a plan is
necessary.
Forward Looking Statements
Certain information contained in this report constitutes "Forward-Looking
Statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended,
which can be identified by the use of forward-looking terminology such as "may,"
"will," "expect," "anticipate," "estimate" or "continue" or the negative thereof
or other variations thereon or comparable terminology. The Company cautions
readers that forward looking statements, including, without limitation, those
relating to the Company's future business prospects, revenues, working capital,
liquidity, capital needs, interest costs, and income, are subject to certain
risks and uncertainties that could cause actual results to differ materially
from those indicated in the forward looking statements, due to several important
factors herein identified, among others, and their risks and factors identified
from time to time in the Company's reports filed with the Securities and
Exchange Commission.
17
<PAGE>
CAPITAL SENIOR LIVING CORPORATION
September 30, 1998
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
On August 11, 1998, the Company executed a settlement agreement with Angeles
Housing Concepts, Inc. ("AHC") and ILM I Lease Corporation and ILM II Lease
Corporation (collectively, "ILM") resolving all claims among the parties
relating to a lawsuit filed by AHC against the Company alleging interference
with AHC's management agreements with ILM (the "Settlement Agreement") and
calling for a dismissal with prejudice of this lawsuit. In September 1998, this
lawsuit was dismissed with prejudice. The Settlement Agreement will not involve
any payment of damages to AHC or any other party by the Company.
On October 28, 1998, the Corporation received notice that a complaint had been
filed by an Interest holder in NHP Retirement Housing Partners I Limited
Partnership ("NHP") in Chancery Court in Delaware against the Company, the
Company's subsidiary, Capital Senior Living Properties 2 - NHPCT, Inc. (the
"Subsidiary"), NHP and NHP's general partner, Capital Realty Group Senior
Housing, Inc. This Interest holder purchased 90 Interests in NHP in 1993 for
$180. The complaint, which seeks class action status, alleges violation of the
NHP partnership agreement in connection with NHP selling four of its properties
to the Subsidiary. The complaint seeks rescission of the sale by NHP of the four
properties to the Subsidiary and various other relief. The Company and the other
defendants believe the complaint is without merit and intend to vigorously
contest the complaint. The complaint has been turned over to the applicable
insurance carriers for defense and coverage.
The Company has pending claims incurred in the normal course of business which,
in the opinion of management, based on the advice of legal counsel, will not
have a material effect on the financial statements of the Company.
Item 2. CHANGES IN SECURITIES (Use of proceeds from public offering)
The Company's initial Registration Statement on Form S-1, File No. 333-33379,
was declared effective by the Securities and Exchange Commission on October 30,
1997 (the "Offering"). The Offering was managed by Lehman Brothers Inc., J.C.
Bradford & Co., Donaldson, Lufkin & Jenrette Securities Corporation and Smith
Barney Inc. A total of 10,350,000 shares of Common Stock, including 1,350,000
shares subject to an over-allotment option, were registered. The net proceeds to
the Company from the sale of such shares were approximately $128,407,000, after
deducting underwriting discounts and commissions of approximately $9,742,000 and
Offering expenses of approximately $1,576,000 paid by the Company. From the
effective date of the Registration Statement through the end date of the period
covered by this report, the Company has used approximately $1,600,000 of the net
proceeds of the Offering for expenses associated with the Offering. In addition,
the Company used a portion of such net proceeds as follows: (i) approximately
$70,800,000 of such net proceeds to repay the indebtedness incurred by the
Company to acquire assets (including construction in progress) in the
transactions undertaken at the closing of the Offering (the "Formation
Transactions"); (ii) approximately $18,100,000 to repay certain notes issued in
conjunction with the Formation Transactions (the "Formation Note"); (iii)
approximately $5,800,000 to pay the balance of the purchase price to an
affiliate related to the purchase of assets on the Formation Transactions; (iv)
approximately $1,200,000 of such net proceeds to repay indebtedness to
affiliates; (v) approximately $8,246,000 of such net proceeds to acquire the
four senior living communities from NHP; (vi) approximately $505,000 of such net
proceeds to purchase land in Carmichael, CA; and (vii) approximately $6,745,000
and $610,000 advanced to Triad and Triad II, respectively. There has not been a
material change in the use of proceeds described in the Company's prospectus.
18
<PAGE>
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
Item 5. OTHER INFORMATION
Not Applicable
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibit:
10.1 Draw Promissory Note, dated September 24,
1998, of Triad Senior Living II, L.P., in
favor of Capital Senior Living Properties,
Inc.
27.1 Financial Data Schedule
(B) Reports on Form 8-K
(i) The Registrant filed a report on Form 8-K,
dated September 30, 1998, to report the
acquisition of four senior living
communities from NHP Retirement Housing
Partners I Limited Partnership.
(ii) The Registrant filed a report on form 8-K,
dated October 29, 1998, to report the
acquisition of two senior living communities
from Tesson Heights Enterprises and Gramercy
Hill Enterprises.
19
<PAGE>
CAPITAL SENIOR LIVING CORPORATION
September 30, 1998
Signature
Pursuant to the requirements 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.
Capital Senior Living Corporation
(Registrant)
By: /s/ Lawrence A. Cohen
---------------------------------------------------------
Lawrence A. Cohen
Chief Financial Officer
(Principal Financial Officer and Duly Authorized Officer)
Date: November 13, 1998
20
Exhibit 10.1
DRAW PROMISSORY NOTE
Amount: $7,000,000.00 Date: September 24, 1998
FOR VALUE RECEIVED, the undersigned, promises to pay to Capital Senior
Living Properties, Inc., a Texas corporation, the sum draw down up to Seven
Million and No/100 Dollars ($7,000,000.00), the principal due five (5) years
from the date of the first draw down and interest due quarterly at the rate of
ten and one-half percent (10.5%) per annum, both principal and interest payable
at office at 14160 Dallas Parkway, Suite 300, Dallas, Texas 75240.
The accrued interest on this note is payable quarterly after the first
draw down.
All past due principal and interest shall bear interest from maturity
at the rate of twelve percent (12%) per annum.
This note may be prepaid without penalty.
Failure to pay any installment of principal and interest, or any other
part thereof, when due shall, at the election of the holder and without notice,
mature the whole note and it shall at once become due and payable.
It is hereby specifically agreed that if this note is placed in the
hands of an attorney for collection, or if collected by suit or through the
Probate Court or any other legal proceedings, the undersigned agrees to pay
reasonable attorneys' fees.
All makers, endorsers, sureties and guarantors hereby waive presentment
for payment of this note, notice of nonpayment, protest, notice of protest,
diligence, or any notice of, or defense on account of, any extension,
extensions, renewal, renewals, or change in any manner of or in this note, or in
any of its terms, provisions or covenants, or of any delay, indulgence or other
act of any holder of the aforesaid note.
TRIAD SENIOR LIVING II, L.P.,
a Texas limited partnership
By: Triad Partners II, Inc.,
Its General Partner
By: /s/ Blake N. Fail
--------------------------------
Title: President
21
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Financial Data Schedule - Capital Senior Living Corporation
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