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 June 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 August 13, 1998, the Registrant had outstanding 19,717,347 shares
of its Common Stock, $.01 par value.
1
<PAGE>
CAPITAL SENIOR LIVING CORPORATION
INDEX
<TABLE>
<CAPTION>
<S> <C>
Page
Number
------
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets --
June 30, 1998 and December 31, 1997 3
Consolidated Statements of Income--
Three Months Ended June 30, 1998 and 1997 4
Consolidated Statements of Income--
Six Months Ended June 30, 1998 and 1997 5
Consolidated Statements of Shareholders' Equity--
Six Months Ended June 30, 1998 6
Consolidated Statements of Cash Flows--
Six Months Ended June 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 10
</TABLE>
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signature
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
CAPITAL SENIOR LIVING CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------------ -----------
ASSETS (Unaudited) (Audited)
<S> <C> <C>
Current assets:
Cash and cash equivalents............................................... $ 45,084,758 $ 48,125,225
Accounts receivable, net................................................ 2,331,999 1,578,002
Accounts receivable from affiliates..................................... 1,905,650 415,051
Deferred taxes.......................................................... 8,280 8,280
Prepaid expenses and other.............................................. 426,885 481,149
-------------- ---------------
Total current assets................................................. 49,757,572 50,607,707
Deferred taxes............................................................... 9,889,177 10,090,997
Property and equipment, net.................................................. 42,916,588 41,120,448
Investments in limited partnerships.......................................... 14,885,974 13,741,940
Note receivable from affiliate............................................... 4,976,205 --
Management contract rights, net.............................................. 219,595 243,559
Goodwill, net................................................................ 1,235,735 1,257,595
Deferred financing charges, net.............................................. 148,102 108,435
Deferred interest............................................................ 699,480 173,456
Other assets................................................................. 60,201 26,773
----------------- -----------------
Total assets......................................................... $124,788,629 $117,370,910
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................................ $ 2,278,641 $ 2,566,392
Accrued expenses........................................................ 1,669,208 1,259,410
Line of credit.......................................................... 5,254,144 1,830,130
Current portion of notes payable........................................ 582,029 932,664
Customer deposits....................................................... 314,465 277,413
Federal and state income taxes payable.................................. 433,379 831,682
Due to affiliates....................................................... -- 50,064
----------------- -----------------
Total current liabilities........................................... 10,531,866 7,747,755
Deferred income.............................................................. 371,245 231,256
Notes payable, net of current portion........................................ 5,817,970 5,744,767
Minority interest in consolidated partnerships............................... 11,071,181 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 June 30, 1998
and December 31, 1997............................................. 197,173 197,173
Additional paid-in capital.............................................. 91,740,251 91,740,251
Retained earnings....................................................... 5,058,943 622,196
--------------- ----------------
Total shareholders' equity........................................... 96,996,367 92,559,620
-------------- --------------
Total liabilities and shareholders' equity........................... $124,788,629 $117,370,910
============ ============
</TABLE>
See accompanying notes.
3
<PAGE>
CAPITAL SENIOR LIVING CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended June 30,
1998 1997
------------------ -----------------
(Unaudited) (Unaudited)
Revenues:
<S> <C> <C>
Resident and health care revenue........................................ $ 5,108,841 $ 5,662,330
Rental and lease income................................................. 1,063,469 1,059,749
Unaffiliated management services revenue................................ 569,875 500,381
Affiliated management services revenue.................................. 437,635 347,927
Development fees........................................................ 1,822,823 185,205
Other................................................................... 231,557 221,215
------------ -----------
Total revenues....................................................... 9,234,200 7,976,807
Expenses:
Operating expenses...................................................... 3,783,994 4,109,835
General and administrative expenses..................................... 1,490,004 2,411,719
Depreciation and amortization........................................... 563,326 475,242
----------- -----------
Total expenses....................................................... 5,837,324 6,996,796
---------- ----------
Income from operations....................................................... 3,396,876 980,011
Other income (expense):
Interest income......................................................... 1,103,070 651,340
Interest expense........................................................ (181,912) (230,362)
Other .................................................................. -- (4,200)
--------------- ------------
Income before income taxes and minority interest in
consolidated partnerships.............................................. 4,318,034 1,396,789
Provision for income taxes................................................... (1,664,493) --
----------- ----------------
Income before minority interest in consolidated partnerships................. 2,653,541 1,396,789
Minority interest in consolidated partnerships............................... (142,960) (766,335)
------------- -----------
Net income................................................................... $ 2,510,581 $ 630,454
=========== ==========
Net income per share:
Basic and diluted....................................................... $ 0.13 $ 0.07
=============== ==============
Weighted average shares outstanding..................................... 19,717,347 9,367,347
========== ==========
Pro forma net income:
Net income.............................................................. $ 630,454
Pro forma income taxes.................................................. (249,029)
----------
Pro forma net income......................................................... $ 381,425
=========
</TABLE>
See accompanying notes.
4
<PAGE>
CAPITAL SENIOR LIVING CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Six Months Ended June 30,
1998 1997
------------------- ----------------
(Unaudited) (Unaudited)
Revenues:
<S> <C> <C>
Resident and health care revenue..................... $10,043,736 $10,427,471
Rental and lease income.............................. 2,130,970 2,157,973
Unaffiliated management services revenue............. 1,207,803 949,007
Affiliated management services revenue............... 817,084 701,126
Development fees..................................... 2,933,253 370,410
Other................................................ 455,469 461,410
-------------- -------------
Total revenues.................................... 17,588,315 15,067,397
Expenses:
Operating expenses................................... 7,797,960 8,080,062
General and administrative expenses.................. 2,939,833 3,933,008
Depreciation and amortization........................ 1,123,498 949,954
-------------- -------------
Total expenses.................................... 11,861,291 12,963,024
-------------- -------------
Income from operations.................................... 5,727,024 2,104,373
Other income (expense):
Interest income...................................... 2,195,889 794,439
Interest expense..................................... (359,889) (419,397)
-------------- -------------
Income before income taxes and minority interest in
consolidated partnerships........................... 7,563,024 2,479,415
Provision for income taxes................................ (2,896,745) --
-------------- -------------
Income before minority interest in consolidated
partnerships....................................... 4,666,279 2,479,415
Minority interest in consolidated partnerships............ (229,532) (1,266,026)
-------------- -------------
Net income................................................ $ 4,436,747 $ 1,213,389
============== =============
Net income per share:
Basic and diluted.................................... $ 0.23 $ 0.13
============== =============
Weighted average shares outstanding.................. 19,717,347 9,367,347
============== =============
Pro forma net income:
Net income........................................... $ 1,213,389
Pro forma income taxes............................... (479,289)
------------
Pro forma net income...................................... $ 734,100
============
</TABLE>
See accompanying notes.
5
<PAGE>
CAPITAL SENIOR LIVING CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Additional
---------------------------- Paid-In Retained
Shares Amount Capital Earnings Total
----------- -------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
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
========== ======== =========== ========== ===========
</TABLE>
See accompanying notes.
6
<PAGE>
CAPITAL SENIOR LIVING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended June 30,
------------------------------------
1998 1997
------------------ ----------------
(Unaudited) (Unaudited)
Operating Activities
<S> <C> <C>
Net income................................................................... $ 4,436,747 $ 1,213,389
Adjustments to reconcile net income to net
cash (used in) provided by operating activities:
Depreciation and amortization........................................... 1,123,498 949,954
Minority interest in consolidated partnerships.......................... 229,532 1,266,026
Deferred interest.................................................... (699,480) --
Deferred taxes....................................................... 201,820 --
Deferred income...................................................... 139,989 --
Changes in operating assets and liabilities, net of acquisition:
Cash restricted...................................................... -- 37,330
Accounts receivable.................................................. (365,642) (671,284)
Accounts receivable from affiliates.................................. (1,878,954) 83,337
Federal and state income taxes payable............................... (398,303) --
Prepaid expenses and other........................................... 54,264 11,766
Accounts payable and accrued expenses................................ 122,047 459,157
Customer deposits.................................................... 37,052 9,490
Other assets and due to affiliates................................... 106,854 (34,673)
------------ ------------
Net cash provided by operating activities.................................... 3,109,424 3,324,492
Investing Activities
Capital expenditures......................................................... (2,871,310) (562,255)
Cash acquired upon acquisition of HCP........................................ -- 8,995,455
Investments in limited partnerships.......................................... (1,245,106) (14,155,888)
------------ ------------
Net cash used in investing activities........................................ (4,116,416) (5,722,688)
Financing Activities
Proceeds from notes payable and line of credit............................... 3,497,217 --
Repayments of notes payable.................................................. (350,635) (260,991)
Note receivable from affiliate............................................... (4,976,205) --
Proceeds from notes payable to affiliates.................................... -- 500,000
Proceeds from mortgage note payable.......................................... -- 5,500,000
Repurchase of HCP limited partnership interests.............................. (144,791) --
Repurchase of Beneficial Unit Certificates of CSLC, L.P...................... -- (960,752)
Deferred loan charges paid................................................... (59,061) --
------------ ------------
Net cash (used in) provided by financing activities.......................... (2,033,475) 4,778,257
------------ ------------
(Decrease) increase in cash and cash equivalents............................. (3,040,467) 2,380,061
Cash and cash equivalents at beginning of period............................. 48,125,225 10,818,512
------------ ------------
Cash and cash equivalents at end of period................................... $45,084,758 $13,198,573
============ ============
</TABLE>
See accompanying notes.
7
<PAGE>
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 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 June 30, 1998, 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 June 30, 1998
and 1997, results of operations for the three and six month periods ended June
30, 1998 and 1997, respectively, changes in shareholders' equity for the six
months ended June 30, 1998 and cash flows for the six month periods ended June
30, 1998 and 1997. The results of operations for the three and six month periods
ended June 30, 1998 are not necessarily indicative of the results for the year
ending December 31, 1998.
2. TRANSACTIONS WITH AFFILIATE
During 1998, 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 June 30, 1998, $4,976,205 has been advanced to Triad under
this loan facility.
Effective April 1, 1998, 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 partnership
agreement. As a result, the Company has deferred interest income on the note
receivable and development fees of $12,115 and $161,881, respectively, as of
June 30, 1998.
3. 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.
8
<PAGE>
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1998
(Unaudited)
The average daily price of the common stock during the second quarter of 1998
was $13.29 per share, and therefore, the options are not considered dilutive for
purposes of calculating diluted net income per share.
4. CONTINGENCIES
Angeles Housing Concepts, Inc. ("AHC") had filed a lawsuit in the U.S. District
Court of California against the Company and certain of its subsidiaries and
officers alleging that the defendants intentionally interfered with AHC's
property management agreements with a third party, ILM I Lease Corporation and
ILM II Lease Corporation (collectively, "ILM"), by inducing such party to
terminate the agreements. The complaint sought damages of at least $2 million.
The Company vigorously defended these claims and denied all allegations by AHC.
On August 11, 1998, the Company executed a settlement agreement with AHC and ILM
resolving all claims among the parties (the "Settlement Agreement") and calling
for a dismissal with prejudice of this lawsuit. The Settlement Agreement will
not involve any payment of damages to AHC or any other party by the Company.
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.
5. PRO FORMA INCOME TAXES
The income taxes on earnings of the S corporations and partnerships for the
period from January 1, 1997 through June 30, 1997, were the responsibility of
the stockholders and partners. The pro forma adjustment reflected on the
statement of income for the three month period ended June 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%.
9
<PAGE>
CAPITAL SENIOR LIVING CORPORATION
June 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 six months ended June 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 June 30, 1998, the Company's revenue was derived as follows: 55.3% from
the operation of five owned senior living communities that are operated by the
Company; 11.5% from lease rentals from triple net leases of three skilled
nursing facilities and four physical rehabilitation centers; 10.9% 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 19.7% derived from development fees
earned for managing the development and construction of new senior living
communities for third parties, including Triad.
For the six months ended June 30 1998, the Company's revenue was derived as
follows: 57.1% from the operation of five owned and one leased senior living
community that are operated by the Company; 12.1% from lease rentals from triple
net leases of three skilled nursing facilities and four physical rehabilitation
centers; 11.5% 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 16.7% derived from
development fees earned for managing the development and construction of new
senior living communities for third parties, including Triad.
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
2.3% in the second quarter of 1997 to 19.7% in the second 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.
10
<PAGE>
CAPITAL SENIOR LIVING CORPORATION
June 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.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------------------------- --------------------------------------------
1998 1997 1998 1997
----------------------- ----------------------- --------------------- ---------------------
$ % $ % $ % $ %
----------- --------- -------- ------- --------- ------- -------- -------
Revenues:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Resident and healthcare revenue $5,109 55.3% $ 5,662 71.0% $10,044 57.1% $10,428 69.2%
Rental and lease income 1,063 11.5 1,060 13.3 2,131 12.1 2,158 14.3
Unaffiliated management services
revenue 570 6.2 500 6.3 1,208 6.9 949 6.3
Affiliated management services revenue 438 4.7 348 4.4 817 4.6 701 4.7
Development fees 1,823 19.7 185 2.3 2,933 16.7 370 2.5
Other 231 2.6 222 2.7 455 2.6 461 3.0
----------- --------- -------- ------- --------- ------- -------- -------
Total revenue 9,234 100.0 7,977 100.0 17,588 100.0 15,067 100.0
----------- --------- -------- ------- --------- ------- -------- -------
Expenses:
Operating expenses: 3,784 41.0 4,110 51.5 7,798 44.3 8,080 53.6
General and administrative expenses 1,490 16.1 2,412 30.2 2,940 16.7 3,933 26.1
Depreciation and amortization 563 6.1 475 6.0 1,123 6.4 950 6.3
----------- --------- -------- ------- --------- ------- -------- -------
Total expenses 5,837 63.2 6,997 87.7 11,861 67.4 12,963 86.0
----------- --------- -------- ------- --------- ------- -------- -------
Income from operations 3,397 36.8 980 12.3 5,727 32.6 2,104 14.0
Other income (expense)
Interest income 1,103 11.9 651 8.2 2,196 12.5 794 5.3
Interest expense (182) (2.0) (230) (2.9) (360) (2.0) (419) (2.8)
Other -- 0.0 (4) (0.1) -- -- -- --
----------- --------- -------- ------- --------- ------- -------- -------
Income before income taxes and minority
interest in consolidated partnerships 4,318 46.7 1,397 17.5 7,563 43.1 2,479 16.5
Provision for income taxes (1,664) (18.0) -- 0.0 (2,897) (16.5) -- 0.0
----------- --------- -------- ------- --------- ------- -------- -------
Income before minority interest in
consolidated partnerships 2,654 28.7 1,397 17.5 4,666 26.6 2,479 16.5
Minority interest in consolidated
partnerships (143) (1.5) (767) (9.6) (229) (1.3) (1,266) (8.4)
----------- --------- -------- ------- --------- ------- -------- -------
Net income $ 2,511 27.2% $ 630 7.9% $4,437 25.3% $ 1,213 8.1%
=========== ========= ======== ======= ========= ======= ======== =======
</TABLE>
Three Months Ended June 30, 1998 Compared to the Three Months Ended June 30,
1997
Revenues. Total revenues were $9,234,000 in the three months ended June 30, 1998
compared to $7,977,000 for the three months ended June 30, 1997, representing an
increase of $1,257,000, or 15.8%. The primary components of this increase were
increases in development fees of $1,638,000 and management fees of $160,000 with
a decrease in resident and healthcare revenue of $553,000 due to the termination
of the Maryland Gardens lease. These increases were due to the addition of 17
development contracts for managing the development and construction of new
senior living communities owned by third parties, including Triad, improved
management fees on 18 properties due to better operating performances and the
addition of one third-party management contract in January 1998.
Expenses. Total expenses of $5,837,000 in the second quarter of 1998 compared to
$6,997,000 in the second quarter of 1997, representing a decrease of $1,160,000
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.
11
<PAGE>
CAPITAL SENIOR LIVING CORPORATION
June 30, 1998
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Other income and expenses. Interest income increased $452,000, primarily as a
result of the temporary investment of approximately $45,000,000 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 second quarter of
1998 was $1,664,000 compared to no provision in the second quarter of 1997. This
increase was due to the Company and its consolidated subsidiaries and
partnerships not being subject to income taxes in the second 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 $624,000
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
$1,881,000 to $2,511,000 for the three months ended June 30, 1998, as compared
to $630,000 for the three months ended June 30, 1997.
Six Months Ended June 30, 1998 Compared to the Six Months Ended June 30, 1997
Revenues. Total revenues were $17,588,000 in the six months ended June 30, 1998
compared to $15,067,000 for the six months ended June 30, 1997, representing an
increase of $2,521,000, or 16.7%. The primary components of this increase were
improvements in development fees of $2,563,000. These increases were due to the
addition of 17 development contracts for managing the development and
construction of new senior living communities owned by third parties, including
Triad.
Expenses. Total expenses of $11,861,000 in the six months ended June 30, 1998
compared to $12,963,000 in the six months ended June 30, 1997, representing a
decrease of $1,102,000 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 $1,402,000, primarily as a
result of the temporary investment of approximately $45,000,000 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 six months ended
June 30, 1998 was $2,897,000 compared to no provision in the six months ended
June 30, 1997. This increase was due to the Company and its consolidated
subsidiaries and partnerships not being subject to income taxes in the six
months ended June 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
$1,037,000 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.
12
<PAGE>
CAPITAL SENIOR LIVING CORPORATION
June 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
$3,224,000 to $4,437,000 for the six months ended June 30, 1998, as compared to
$1,213,000 for the six months ended June 30, 1997.
Liquidity and Capital Resources
In addition to approximately $45,000,000 of cash balances on hand as of June 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 June 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 obligations to HCP, although, the lessee for one of these properties
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 assuming the
lessees do not exercise their purchase options, 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,
L.P. ("Triad"). The new general partner
13
<PAGE>
CAPITAL SENIOR LIVING CORPORATION
June 30, 1998
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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, 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 June 30, 1998, approximately $4,976,000 has been advanced to
Triad under this loan facility.
Year 2000 Issue
The Company has developed a plan to modify its information technology to be
ready for the Year 2000. The Company relies upon PC-based systems and does not
expect to incur material costs to transition to Year 2000 compliant systems in
its internal operations. The Company does not expect this project to have a
significant effect on operations. The Company will continue to implement systems
and all new investments are expected to be with Year 2000 compliant software.
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.
14
<PAGE>
CAPITAL SENIOR LIVING CORPORATION
June 30, 1998
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
On July 29, 1996, ILM terminated management agreements with Angeles Housing
Concepts, Inc. ("AHC") covering the management of its senior living communities
and entered into Management Agreements with the Company. AHC filed a lawsuit in
the U.S. District Court of California against the Company and certain of its
subsidiaries and officers alleging that the defendants intentionally interfered
with AHC's property management agreements with ILM by inducing ILM to terminate
the Agreements. The complaint sought damages of at least $2 million. The Company
vigorously defended these claims and denied all allegations by AHC. In an action
in the U.S. District Court for the Eastern District of Virginia in which the
Company is not a party, ILM initiated a lawsuit against AHC for breach of
contract and other claims and AHC filed a counterclaim against ILM. AHC has
obtained a judgment against ILM in this action in the amount of $1 million,
which judgment ILM has appealed.
On August 11, 1998, the Company, AHC and ILM executed a settlement agreement
resolving all claims among the parties (the "Settlement Agreement") and calling
for a dismissal with prejudice of this lawsuit. The Settlement Agreement will
not involve any payment of damages to AHC or any other party by the Company.
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; and
(iv) approximately $1,200,000 of such net proceeds to repay indebtedness to
affiliates. There has not been a material change in the use of proceeds
described in the Company's prospectus.
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
15
<PAGE>
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:
27.1 Financial Data Schedule
(B) Reports on Form 8-K
The Company did not file any reports on Form 8-K
during the quarterly period ended June 30, 1998.
16
<PAGE>
CAPITAL SENIOR LIVING CORPORATION
June 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: August 14, 1998
17
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(Financial Data Schedule for Capital Senior Living Corporation)
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<NAME> Capital Senior Living Corporation
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<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
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