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 March 31, 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 May 14, 1998, the Registrant had outstanding 19,717,347 shares of its
Common Stock, $.01 par value.
1
<PAGE>
CAPITAL SENIOR LIVING CORPORATION
INDEX
Page
Number
------
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets --
March 31, 1998 and December 31, 1997 3
Consolidated Statements of Income--
Three Months Ended March 31, 1998 and 1997 4
Consolidated Statements of Equity--
Three Months Ended March 31, 1998 5
Consolidated Statements of Cash Flows--
Three Months Ended March 31, 1998 and 1997 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signature
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
CAPITAL SENIOR LIVING CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
<S> <C> <C>
March 31, December 31,
1998 1997
------------------ -----------
(Unaudited) (Audited)
Current assets:
Cash and cash equivalents............................................... $47,403,644 $48,125,225
Accounts receivable, net................................................ 1,971,552 1,578,002
Accounts receivable from affiliates..................................... 1,214,974 415,051
Deferred taxes.......................................................... 8,280 8,280
Prepaid expenses and other.............................................. 410,927 481,149
--------------- ---------------
Total current assets................................................. 51,009,377 50,607,707
Deferred taxes............................................................... 10,090,997 10,090,997
Property and equipment, net.................................................. 42,118,310 41,120,448
Investments in limited partnerships.......................................... 14,046,940 13,741,940
Note receivable from affiliate............................................... 1,791,707 --
Management contract rights, net.............................................. 231,577 243,559
Goodwill, net................................................................ 1,246,665 1,257,595
Deferred financing charges, net.............................................. 108,000 108,435
Other assets................................................................. 575,740 200,229
--------------- ---------------
Total assets......................................................... $121,219,313 $117,370,910
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................................ $2,630,978 $2,566,392
Accrued expenses........................................................ 1,452,746 1,259,410
Line of credit.......................................................... 3,273,423 1,830,130
Current portion of notes payable........................................ 580,061 932,664
Customer deposits....................................................... 291,823 277,413
Federal and state income taxes payable.................................. 1,332,099 831,682
Due to affiliates....................................................... -- 50,064
--------------- ---------------
Total current liabilities............................................ 9,561,130 7,747,755
Deferred income.............................................................. 197,250 231,256
Notes payable, net of current portion........................................ 5,959,737 5,744,767
Minority interest in consolidated partnerships............................... 11,015,410 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 March 31, 1998
and December 31, 1997............................................. 197,173 197,173
Additional paid-in capital.............................................. 91,740,251 91,740,251
Retained earnings....................................................... 2,548,362 622,196
--------------- ---------------
Total shareholders' equity........................................... 94,485,786 92,559,620
--------------- ---------------
Total liabilities and shareholders' equity........................... $121,219,313 $117,370,910
=============== ===============
</TABLE>
See accompanying notes.
3
<PAGE>
<TABLE>
<CAPTION>
CAPITAL SENIOR LIVING CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<S> <C> <C>
Three Months Ended March 31,
1998 1997
------------------ -----------
(Unaudited) (Unaudited)
Revenues:
Resident and health care revenue........................................ $4,934,895 $4,765,141
Rental and lease income................................................. 1,067,501 1,098,224
Unaffiliated management services revenue................................ 637,928 448,626
Affiliated management services revenue.................................. 379,449 353,199
Development fees........................................................ 1,110,430 185,205
Other................................................................... 223,912 240,195
------------- -------------
Total revenues....................................................... 8,354,115 7,090,590
Expenses:
Operating expenses...................................................... 4,013,966 3,970,227
General and administrative expenses..................................... 1,449,829 1,521,289
Depreciation and amortization........................................... 560,172 474,712
------------- -------------
Total expenses....................................................... 6,023,967 5,966,228
------------- -------------
Income from operations....................................................... 2,330,148 1,124,362
Other income (expense):
Interest income......................................................... 1,092,819 143,099
Interest expense........................................................ (177,977) (189,035)
Other .................................................................. -- 4,200
------------- -------------
Income before income taxes and minority interest in
consolidated partnerships.............................................. 3,244,990 1,082,626
Provision for income taxes................................................... (1,232,252) --
------------- -------------
Income before minority interest in consolidated partnerships................. 2,012,738 1,082,626
Minority interest in consolidated partnerships............................... (86,572) (499,691)
------------- -------------
Net income................................................................... $ 1,926,166 $ 582,935
============= =============
Net income per share:
Basic and diluted....................................................... $ 0.10 $ 0.06
============= =============
Weighted average shares outstanding..................................... 19,717,347 9,367,347
============= =============
Pro forma net income:
Net income.............................................................. $ 582,935
Pro forma income taxes.................................................. (227,345)
-------------
Pro forma net income......................................................... $ 355,590
=============
</TABLE>
See accompanying notes.
4
<PAGE>
<TABLE>
<CAPTION>
CAPITAL SENIOR LIVING CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<S> <C> <C> <C> <C> <C>
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
========== ======== =========== ========== ===========
</TABLE>
See accompanying notes.
5
<PAGE>
<TABLE>
<CAPTION>
CAPITAL SENIOR LIVING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<S> <C> <C>
Three Months Ended March 31,
-----------------------------------
1998 1997
------------------ ---------------
(Unaudited) (Unaudited)
Operating Activities
Net income................................................................... $1,926,166 $ 582,935
Adjustments to reconcile net income to net
cash (used in) provided by operating activities:
Depreciation and amortization........................................... 560,172 474,712
Minority interest in consolidated partnerships.......................... 86,572 499,691
Changes in operating assets and liabilities, net of acquisition:
Accounts receivable.................................................. (1,185,059) (199,302)
Accounts receivable from affiliates.................................. (8,414) (33,372)
Note receivable from affiliate...................................... (1,791,707) --
Federal and state income taxes payable............................... 500,417 --
Prepaid expenses and other........................................... 70,222 21,900
Accounts payable and accrued expenses................................ 257,922 461,107
Customer deposits.................................................... 14,410 7,405
Deferred income...................................................... (34,006) (29,156)
Other assets and due to affiliates................................... (417,469) (1,332)
------------- ----------------
Net cash (used in) provided by operating activities.......................... (20,774) 1,784,588
Investing Activities
Capital expenditures......................................................... (1,465,805) (333,439)
Cash acquired upon acquisition of HCP........................................ -- 8,995,455
Investments in limited partnerships.......................................... (406,072) (7,918,858)
------------- ----------------
Net cash (used in) provided by investing activities.......................... (1,871,877) 743,158
Financing Activities
Proceeds from notes payable and line of credit............................... 1,658,263 --
(129,521)s of notes payable.................................................. (352,603) (129,521)
Repurchase of HCP limited partnership interests.............................. (125,529) --
Repurchase of Beneficial Unit Certificates of CSLC, L.P...................... -- (329,620)
Deferred loan charges paid................................................... (9,061) --
------------- ----------------
Net cash provided by (used in) financing activities.......................... 1,171,070 (459,141)
------------- ----------------
(Decrease) increase in cash and cash equivalents............................. (721,581) 2,068,605
Cash and cash equivalents at beginning of period............................. 48,125,225 10,818,512
------------- ----------------
Cash and cash equivalents at end of period................................... $47,403,644 $12,887,117
============= ================
</TABLE>
See accompanying notes.
6
<PAGE>
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 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 March 31, 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 March 31,
1998 and 1997, its results of operations, changes in shareholders' equity and
cash flows for the three month periods ended March 31, 1998 and 1997. The
results of operations for the three-month period ended March 31, 1998 are not
necessarily indicative of the results for the year ending December 31, 1998.
2. NOTE RECEIVABLE FROM AFFILIATE
During the three months ended March 31, 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 March 31, 1998,
approximately $1,800,000 has been advanced to Triad under this loan facility.
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 effective of outstanding options
calculated using the treasury stock method.
The average daily price of the common stock during the first quarter of 1998 was
$12.13 per share, and therefore, the options are not considered dilutive for
purposes of calculating diluted net income per share.
7
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CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 1998
(Unaudited)
4. CONTINGENCIES
Angeles Housing Concepts, Inc. ("AHC") has filed a lawsuit currently pending 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 by inducing such
party to terminate the agreements. The complaint seeks damages of at least $2
million. Trial in the action is currently expected to occur in June 1998 and
discovery in the action is ongoing. The Company is vigorously defending these
claims. While the Company believes that ultimately its insurance will cover this
claim if determined adversely to the Company, the Company's insurance carrier
formally denied coverage. The Company has filed suit against the carrier for
coverage and the insurance carrier has indicated it will reconsider its original
decision. No assurance can be made that the Company will have adequate insurance
coverage for any damage award against the Company in this lawsuit.
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 March 31, 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 March 31, 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%.
8
<PAGE>
CAPITAL SENIOR LIVING CORPORATION
March 31, 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 months ended March 31, 1998 and 1997 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 March 31, 1998, the Company's revenue was derived as follows: 59.1% from
the operation of five owned and one leased senior living community that are
operated by the Company; 12.8% from lease rentals from triple net leases of
three skilled nursing facilities and four physical rehabilitation centers; 12.1%
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 13.3% 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
2.6% in the first quarter of 1997 to 13.3% in the first 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 July 1998 and February 2004. In
addition, certain of the contracts provide for supplemental incentive fees that
vary by contract based upon the financial performance of the managed community.
9
<PAGE>
<TABLE>
<CAPTION>
CAPITAL SENIOR LIVING CORPORATION
March 31, 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.
<S> <C> <C> <C> <C>
Three Months Ended
March 31,
------------------------------------------------------------
1998 1997
------------------------------ ----------------------------
$ % $ %
Revenues: ------------ ----------- ------------ -----------
Resident and healthcare revenue $4,935 59.1% $4,765 67.2%
Rental and lease income 1,068 12.8 1,098 15.5
Unaffiliated management services revenue 638 7.6 449 6.3
Affiliated management services revenue 379 4.5 353 5.0
Development fees 1,110 13.3 185 2.6
Other 224 2.7 241 3.4
------- ------- ------- -------
Total revenue 8,354 100.0 7,091 100.0
------- ------- ------- -------
Expenses:
Operating expenses 4,014 48.0 3,970 56.0
General and administrative expenses 1,450 17.4 1,522 21.5
Depreciation and amortization 560 6.7 475 6.7
------- ------- ------- -------
Total expenses 6,024 72.1 5,967 84.2
------- ------- ------- -------
Income from operations 2,330 27.9 1,124 15.8
----
Other income (expense)
Interest income 1,093 13.0 143 2.0
Interest expense (178) (2.1) (189) (2.7)
Other -- 0.0 4 0.1
------- ------- ------- -------
Income before income taxes and minority interest
in consolidated partnerships 3,245 38.8 1,082 15.2
Provision for income taxes (1,232) (14.7) -- 0.0
------- ------- ------- -------
Income before minority interest in
consolidated partnerships 2,013 24.1 1,082 15.2
Minority interest in consolidated partnerships (87) (1.0) (499) (7.0)
------- ------- ------- -------
Net income $ 1,926 23.1% $ 583 8.2%
======= ======= ======= =======
</TABLE>
Three Months Ended March 31, 1998 Compared to the Three Months Ended March 31,
1997
Revenues. Total revenues were $8,354,000 in the three months ended March 31,
1998 compared to $7,091,000 for the three months ended March 31, 1997,
representing an increase of $1,263,000, or 17.8%. The primary components of this
increase were improvements in development fees of $925,000, management fees of
$215,000 and resident and healthcare revenue of $170,000. These increases were
due to the addition of six development contracts for managing the development
and construction of new senior living communities owned by third parties,
including Triad, improved incentive management fees on 13 properties due to
better operating efficiencies and the addition of one third-party management
contract in January 1998.
10
<PAGE>
CAPITAL SENIOR LIVING CORPORATION
March 31, 1998
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Expenses. Total expenses of $6,024,000 in the first quarter of 1998 were
relatively unchanged compared to $5,967,000 in the first quarter of 1997, due
mainly to corporate management and property management controlling expense
levels through greater efficiency.
Other income and expenses. Interest income increased $950,000, primarily as a
result of an increase in interest income from the temporary investment of
approximately $47,000,000 of the Company's cash balances.
Provision for income taxes. Provision for income taxes in the first quarter of
1998 was $1,232,000 compared to no provision in the first quarter of 1997. This
increase was due to the Company and its consolidated subsidiaries and
partnerships not being subject to income taxes in the first 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 $412,000
primarily as a result of the elimination of Capital Senior Living Communities,
L.P. ("CSLC, L.P.") minority interest as a result of the 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
$1,343,000 to $1,926,000 for the three months ended March 31, 1998, as compared
to $583,000 for the three months ended March 31, 1997.
Liquidity and Capital Resources
In addition to approximately $47,000,000 of cash balances of hand as of March
31, 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 lessee to make timely lease
payments. At March 31, 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. Following termination of these leases, the Company
intends to convert and operate the facilities as assisted living and Alzheimer's
11
<PAGE>
CAPITAL SENIOR LIVING CORPORATION
March 31, 1998
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
care facilities. 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. HCP's other facility leases are all current in
their lease obligations to HCP. The lessee for the remaining property continues
to fund the deficit between the required lease payment and operating cash flow.
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
will 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 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 March 31, 1998, approximately $1,800,000 has been advanced
to Triad under this loan facility.
12
<PAGE>
CAPITAL SENIOR LIVING CORPORATION
March 31, 1998
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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.
13
<PAGE>
CAPITAL SENIOR LIVING CORPORATION
March 31, 1998
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
On July 29, 1996, ILM I Lease Corporation and ILM II Lease Corporation
(collectively, "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
currently pending 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 seeks damages of at
least $2 million. Trial in the action is currently expected to occur in June
1998 and discovery in the action is ongoing. The Company is vigorously defending
these claims. The Company believes that it has meritorious defenses to AHC's
claims and is evaluating with counsel the various legal options it has against
AHC and others. While the Company believes that ultimately its insurance will
cover this claim if determined adversely to the Company, the Company's insurance
carrier formally denied coverage. The Company has filed suit against the carrier
for coverage and the insurance carrier has indicated it will reconsider its
original decision. No assurance can be made that the Company will have adequate
insurance coverage for any damage award against the Company in the AHC lawsuit.
In an action pending 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.
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.
14
<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:
10.39 Draw Promissory Note, dated April 1, 1998,
of Triad Senior Living I, L.P. in favor of
Capital Senior Living Properties, Inc.
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 March 31, 1998.
15
<PAGE>
CAPITAL SENIOR LIVING CORPORATION
March 31, 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: May 14, 1998
16
Exhibit 10.39
DRAW PROMISSORY NOTE
Amount: $10,000,000.00 Date: April 1, 1998
FOR VALUE RECEIVED, the undersigned, promises to pay to Capital Senior
Living Properties, Inc., a Texas corporation, the sum draw down up to Ten
Million and No/100 Dollars ($10,000,000.00), the principal due five (5) years
from the date of the first draw down and interest due quarterly at the rate of
eight percent (8%) 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 makes, endorsers, sureties and guarantors hereby waive presentment
or 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 I, L.P.,
a Texas limited partnership
By: Triad Senior Living, Inc.,
Its General Partner
By: /s/ Blake N. Fail
------------------
Title: President
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Article 5 - Financial Data Schedule for Capital Senior Living Corporation
</LEGEND>
<CIK> 0001043000
<NAME> Capital Senior Living Corporation
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 47,403,644
<SECURITIES> 14,046,940
<RECEIVABLES> 3,689,426
<ALLOWANCES> (502,900)
<INVENTORY> 0
<CURRENT-ASSETS> 51,009,377
<PP&E> 56,313,998
<DEPRECIATION> (14,195,688)
<TOTAL-ASSETS> 121,219,313
<CURRENT-LIABILITIES> 9,561,130
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 94,485,786
<TOTAL-LIABILITY-AND-EQUITY> 121,219,313
<SALES> 0
<TOTAL-REVENUES> 9,446,933
<CGS> 0
<TOTAL-COSTS> 6,023,967
<OTHER-EXPENSES> 86,572
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 177,977
<INCOME-PRETAX> 3,158,418
<INCOME-TAX> 1,232,252
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,926,166
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
