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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
AMENDMENT NO. 1 TO
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): September 30, 1998
Capital Senior Living Corporation
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(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C> <C>
Delaware 1-17445 75-2678809
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(State or other jurisdiction of (Commission File (IRS Employer
incorporation) Number) Identification No.)
</TABLE>
14160 Dallas Parkway, Suite 300, Dallas, Texas 75240
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including are (972) 770-5600
(Not Applicable)
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(Former name or former address, if changed since last report)
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1
<PAGE>
Item 2. Acquisition or Disposition of Assets
- ---------------------------------------------
On September 30, 1998, Capital Senior Living Corporation (the
"Company"), through Capital Senior Living Properties 2 - NHPCT, Inc.
("Purchaser"), an indirect wholly-owned subsidiary, completed the acquisition of
four senior living communities from NHP Retirement Housing Partners I Limited
Partnership ("NHP") for cash consideration of $40,650,000. As previously
reported on the Company's Current Report on Form 8-K, dated September 30, 1998
(which is being amended by this Amendment No. 1), the Company completed the
acquisition, pursuant to the terms of the Asset Purchase Agreement, which was
previously filed as Exhibit 2.1 hereto, dated as of July 24, 1998, by and
between NHP and Capital Senior Living Properties, Inc. The funds for the
transaction were provided from working capital of the Company and from the
proceeds of a loan pursuant to the terms of the Loan Agreement, which was
previously filed as Exhibit 2.3 hereto, dated as of September 30, 1998, by and
between Purchaser and Lehman Brothers Holdings Inc. d/b/a Lehman Capital, a
division of Lehman Brothers Holdings Inc.
The senior living communities acquired by the Company are The Atrium of
Carmichael in Carmichael, California; Crosswoods Oaks in Citrus Heights,
California; The Heatherwood in Southfield, Michigan; and The Veranda Club in
Boca Raton, Florida. Capital Senior Living, Inc. ("CSL"), a subsidiary of the
Company, has operated these communities under a long-term management contract
since 1992. The purchase price for the properties was determined by independent
appraisal. Personnel working at the property sites and certain home office
personnel who perform services for NHP are employees of CSL. NHP (prior to the
acquisitions) reimbursed CSL for the salaries, related benefits, and overhead
reimbursements of such personnel. Capital Realty Group Brokerage, Inc., a
company wholly-owned by Messrs. Jeffrey L. Beck and James A. Stroud, the Chief
Executive and Chief Operating Officers of the Company, respectively, received a
brokerage fee of $1,219,500 related to this transaction, which was paid by NHP.
The Company has previously filed a Current Report on Form 8-K, dated
October 28, 1998, related to its acquisition of certain senior living
communities from Gramercy Hill Enterprises and Tesson Heights Enterprises (the
"Gramercy/Tesson Form 8-K"). The Gramercy/Tesson Form 8-K will be amended
pursuant to the Securities and Exchange Commission rules. The pro forma
financial statements to be included in the amendment to the Gramercy/Tesson Form
8-K will be substantially similar to the pro forma financial statements
contained herein.
Item 7. Financial Statements and Exhibits
- -------------------------------------------
(a) Financial Statements of business acquired.
Set forth below are the Independent Auditors' Reports,
Consolidated Balance Sheet at December 31, 1997 and 1996 and
the Consolidated Statements of Stockholders' Equity,
Consolidated Statements of Operations and Consolidated
Statements of Cash Flows for each of the three years ended
December 31, 1997 of NHP Retirement Housing I Limited
Partnership as described more fully in the notes thereto.
2
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Partners
NHP Retirement Housing Partners I Limited Partnership
We have audited the accompanying statements of financial position of NHP
Retirement Housing Partners I Limited Partnership as of December 31, 1997 and
1996, and the related statements of operations, partners' equity (deficit), and
cash flows for each of the three years in the period ended December 31, 1997.
These financial statements are the responsibility of the partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of NHP Retirement Housing Partners
I Limited Partnership at December 31, 1997 and 1996 and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
Ernst & Young LLP
Dallas, Texas
February 13, 1998
3
<PAGE>
<TABLE>
<CAPTION>
NHP RETIREMENT HOUSING PARTNERS I LIMITED PARTNERSHIP
-----------------------------------------------------
A LIMITED PARTNERSHIP
---------------------
STATEMENTS OF FINANCIAL POSITION
--------------------------------
December 31,
------------
1997 1996
---- ----
ASSETS (Note 6)
------
<S> <C> <C>
Cash and cash equivalents (Note 2) $ 4,495,733 $ 4,017,181
Interest receivable 0 1,200
Other receivables 31,892 28,363
Pension notes issuance costs (Note 1) 1,009,842 1,264,634
Pension notes organization costs (Note 1) 215,326 265,102
Prepaid expenses 300,654 285,111
Rental property (Notes 1, 4 and 10):
Land 6,820,468 6,318,028
Buildings and improvements, net of
accumulated depreciation of $15,456,154
in 1997 and $13,752,920 in 1996 42,670,005 43,853,213
Other assets 41,920 39,052
----------------- ----------------
Total assets $ 55,585,840 $ 56,071,884
================= ================
LIABILITIES AND PARTNERS' DEFICIT
---------------------------------
Liabilities:
Accounts payable $ 320,796 $ 336,446
Interest payable (Note 6) 23,730,407 20,681,172
Pension Notes (Note 6) 42,672,000 42,672,000
Other liabilities (Note 2) 882,625 818,377
----------------- ----------------
67,605,828 64,507,995
----------------- ----------------
Partners' deficit (Notes 5 and 7):
General Partner (1,596,670) (1,465,252)
Assignee Limited Partner - 42,691
investment units outstanding (10,423,318) (6,970,859)
----------------- ----------------
Total partners' deficit (12,019,988) (8,436,111)
----------------- ----------------
Total liabilities and partners' deficit $ 55,585,840 $ 56,071,884
================= ================
See notes to financial statements.
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
NHP RETIREMENT HOUSING PARTNERS I LIMITED PARTNERSHIP
-----------------------------------------------------
A LIMITED PARTNERSHIP
---------------------
STATEMENTS OF OPERATIONS
------------------------
Year Ended December 31,
-----------------------
<S> <C> <C> <C>
1997 1996 1995
---- ---- ----
REVENUES:
Rental income $ 15,243,028 $ 14,241,055 $ 13,754,959
Interest income 89,872 79,811 83,348
Other income 215,238 167,233 182,319
-------------- -------------- ---------------
15,548,138 14,488,099 14,020,626
-------------- -------------- ---------------
COSTS AND EXPENSES:
Salaries, related benefits and overhead reimbursements (Note 3) 3,984,975 3,825,002 3,919,906
Management fees, dietary fees and other services (Note 3) 1,432,813 1,350,502 1,326,272
Administrative and marketing 778,400 754,504 700,594
Utilities 890,070 874,156 852,805
Maintenance 521,464 451,412 444,394
Resident services, other than salaries 296,468 297,794 292,097
Food services, other than salaries 1,591,266 1,511,771 1,513,898
Depreciation 1,703,233 1,615,089 1,525,513
Taxes and insurance 1,183,215 1,101,282 1,067,522
-------------- -------------- ---------------
12,381,904 11,781,512 11,643,001
-------------- -------------- ---------------
INCOME FROM RENTAL OPERATIONS 3,166,234 2,706,587 2,377,625
-------------- -------------- ---------------
COSTS AND EXPENSES:
Interest expense - pension notes (Note 6) 6,036,275 5,775,285 5,521,051
Amortization of pension notes issuance costs 254,792 254,792 254,792
Amortization of pension notes organization costs 49,776 49,776 49,776
Other expenses 348,308 201,402 242,555
-------------- -------------- ---------------
6,689,151 6,281,255 6,068,174
-------------- -------------- ---------------
NET LOSS $ (3,522,917) $ (3,574,668) $ (3,690,549)
============== ============== ===============
ALLOCATION OF NET LOSS:
General Partner $ (70,458) $ (71,493) $ (73,811)
Assignor Limited Partner (3,452,459) (3,503,175) (3,616,738)
-------------- -------------- ---------------
$ (3,522,917) $ (3,574,668) $ (3,690,549)
============== ============== ===============
NET LOSS PER ASSIGNEE INTEREST $ (81) $ (82) $ (85)
============== ============== ===============
See notes to financial statements.
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
NHP RETIREMENT HOUSING PARTNERS I LIMITED PARTNERSHIP
-----------------------------------------------------
A LIMITED PARTNERSHIP
---------------------
STATEMENTS OF PARTNERS' EQUITY (DEFICIT)
----------------------------------------
General Partner-
Capital Realty Assignee
Group Senior Limited
Housing, Inc. Partners Total
---------------- -------- -----
<S> <C> <C> <C>
Partners' equity (deficit) at January 1, 1995 $ (1,197,854) $ 149,054 $ (1,048,800)
Distributions (60,960) 0 (60,960)
Net Loss (73,811) (3,616,738) (3,690,549)
---------------- --------------- ---------------
Partners' deficit at December 31, 1995 (1,332,625) (3,467,684) (4,800,309)
Distributions (61,134) 0 (61,134)
Net Loss (71,493) (3,503,175) (3,574,668)
---------------- --------------- ---------------
Partners' deficit at December 31, 1996 (1,465,252) (6,970,859) (8,436,111)
Distributions (60,960) 0 (60,960)
Net Loss (70,458) (3,452,459) (3,522,917)
---------------- --------------- ---------------
Partners' deficit at December 31, 1997 $ (1,596,670) $ (10,423,318) $ (12,019,988)
================ =============== ===============
See notes to financial statements.
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
NHP RETIREMENT HOUSING PARTNERS I LIMITED PARTNERSHIP
-----------------------------------------------------
A LIMITED PARTNERSHIP
---------------------
STATEMENTS OF CASH FLOWS
------------------------
Year Ended December 31,
<S> <C> <C> <C>
1997 1996 1995
---- ---- ----
Cash flows from operating activities:
Rent collections $ 15,239,499 $ 14,244,537 $ 13,747,228
Interest received 91,072 79,876 83,325
Other income 215,238 167,233 182,319
Management fees, dietary fees and other services (1,429,906) (1,351,527) (1,326,188)
Salary, related benefits and overhead reimbursements (3,971,789) (3,816,530) (3,925,369)
Other operating expenses paid (5,595,097) (5,202,737) (5,114,939)
Interest paid (2,987,040) (2,995,574) (2,987,040)
--------------- -------------- --------------
Net cash provided by operating activities 1,561,977 1,125,278 659,336
Cash flows from investing activity:
Capital expenditures (1,022,465) (525,567) (712,919)
--------------- -------------- --------------
Net cash used in investing activity (1,022,465) (525,567) (712,919)
Cash flows from financing activity:
Distributions (60,960) (61,134) (60,960)
--------------- -------------- --------------
Net cash used in financing activity (60,960) (61,134) (60,960)
--------------- -------------- --------------
Net increase (decrease) in cash and cash equivalents 478,552 538,577 (114,543)
Cash and cash equivalents at beginning of year 4,017,181 3,478,604 3,593,147
--------------- -------------- --------------
Cash and cash equivalents at end of year $ 4,495,733 $ 4,017,181 $ 3,478,604
=============== ============== ==============
</TABLE>
7
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<TABLE>
<CAPTION>
NHP RETIREMENT HOUSING PARTNERS I LIMITED PARTNERSHIP
-----------------------------------------------------
A LIMITED PARTNERSHIP
---------------------
STATEMENTS OF CASH FLOWS
------------------------
(continued)
Year Ended December 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
RECONCILIATION OF NET LOSS TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Net loss $ (3,522,917) $ (3,574,668) $ (3,690,549)
--------------- -------------- --------------
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation 1,703,233 1,615,089 1,525,513
Amortization of pension notes organization costs 49,776 49,776 49,776
Amortization of pension notes issuance costs 254,792 254,792 254,792
Interest Payable 3,049,235 2,779,711 2,534,011
Changes in operating assets and liabilities:
Interest receivable 1,200 65 (23)
Other assets and receivables (6,397) 827,993 (7,461)
Prepaid expenses (15,543) (5,959) (5,759)
Accounts payable (15,650) (254,782) 88,374
Purchase installments 0 (552,000) 0
Other liabilities 64,248 (14,739) (89,338)
--------------- -------------- --------------
Net cash provided by operating activities $ 1,561,977 $ 1,125,278 $ 659,336
=============== ============== ==============
See notes to financial statements.
</TABLE>
8
<PAGE>
NHP RETIREMENT HOUSING PARTNERS I LIMITED PARTNERSHIP
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A LIMITED PARTNERSHIP
---------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
December 31, 1997 and 1996
1. SUMMARY OF PARTNERSHIP ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
-----------------------------------------------------------------------
Organization
------------
NHP Retirement Housing Partners I Limited Partnership (the
Partnership) is a limited partnership organized under the laws of the State
of Delaware on March 10, 1986. The Partnership was formed for the purpose
of raising capital by issuing both Pension Notes (Notes) to tax-exempt
investors and selling additional partnership interests in the form of
Assignee Interests (Interests) to taxable individuals. Interests represent
assignments of the limited partnership interests of the Partnership issued
to the Assignor Limited Partner, NHP RHP-I Assignor Corporation. The
proceeds from the sale of the Notes and Interests have been invested in
residential rental properties for retirement age occupants.
A description of the Projects now owned directly or indirectly and
operated by the Partnership is as follows:
The Amberleigh. This project is a 271 unit retirement living center
located in Williamsville, New York. The facility was approximately 97
% and 98 % occupied at December 31, 1997 and 1996 , respectively.
The Atrium of Carmichael. This project is a 153 unit retirement living
center located in Sacramento, California. This facility was
approximately 99 % and 98 % occupied at December 31, 1997 and 1996 ,
respectively.
Crosswood Oaks. This project is an 122 unit retirement living center
located in Sacramento, California. This facility was approximately 91
% and 86 % occupied at December 31, 1997 and 1996 , respectively.
The Heatherwood. This project is an 160 unit retirement living center
located in Southfield, Michigan. This facility was approximately 98 %
and 81 % occupied at December 31, 1997 and 1996 , respectively.
Veranda Club. This project is an 189 unit retirement living center
located in Boca Raton, Florida. This facility was approximately 96 %
and 98 % occupied at December 31, 1997 and 1996 , respectively.
Significant Accounting Policies
-------------------------------
Offering costs, issuance costs and organization costs related to the
sale of Notes are being amortized using the straight line method over the
term of the Notes. Accumulated amortization at December 31, 1997 and 1996
was $2,547,920 and $2,293,128 , respectively. Selling commissions related
to the sale of Interests were recorded as a direct reduction to the capital
account of the holders of Interests. Accumulated amortization at December
31, 1997 and 1996 was 497,760 and $447,984 , respectively. Direct costs of
acquisition, including acquisition fees and expenses paid to the General
Partner, have been capitalized as a part of buildings and improvements.
9
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NHP RETIREMENT HOUSING PARTNERS I LIMITED PARTNERSHIP
-----------------------------------------------------
A LIMITED PARTNERSHIP
---------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
(Continued)
Other fees and expenses of the Partnership are recognized as expenses in
the period the related services are performed.
Interest expense on Notes is calculated using the effective interest
method (see Note 6). Operating deficit and cash flow guarantee payments
received from the sellers of The Heatherwood, The Atrium and Crosswood Oaks
are recognized as a reduction of the basis of the respective properties.
Buildings and improvements are recorded at the lower of cost or net
recoverable value (Note 10) and depreciated using the straight-line method,
assuming a 30-year life and a 30% salvage value. Furniture and equipment
are recorded at cost and depreciated using the straight line method over 5
years.
The cost of rental property and their useful lives are summarized as
follows:
<TABLE>
<CAPTION>
Useful Life 1997 1996
----------- ---- ----
<S> <C> <C> <C>
Land $ 6,820,468 $ 6,318,028
============= ==============
Land improvements 30 years 91,318 75,809
Building and building improvement 30 years 55,239,208 55,179,219
Furniture and equipment 5 years 2,795,633 2,351,105
------------- --------------
58,126,159 57,606,133
Less-accumulated depreciation (15,456,154) (13,752,920)
------------- --------------
$ 42,670,005 $ 43,853,213
============= ==============
</TABLE>
Rental income is recognized when earned based on residents' signed
rental agreements. Rental payments received in advance are deferred and
recognized when earned.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
New Accounting Pronouncements
-----------------------------
The Financial Accounting Standards Board issued Statement No. 130,
Reporting Comprehensive Income effective for fiscal 1998. Statement No. 130
requires reporting and display of comprehensive income and its components
in the financial statements. This new Statement will only expand the
Partnership's disclosures with respect to this item.
2. CASH AND CASH EQUIVALENTS
-------------------------
As of December 31, 1997 and 1996 , cash and cash equivalents consisted
of demand deposits and repurchase agreements. All repurchase agreements
have an original maturity of three months or less and, therefore, are
considered to be cash equivalents.
Cash and cash equivalents also includes $531,056 and $504,879 of
tenant security deposits at December 31, 1997 and 1996 , respectively,
which are designated for the purpose of providing refunds to tenants upon
move-out.
10
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NHP RETIREMENT HOUSING PARTNERS I LIMITED PARTNERSHIP
-----------------------------------------------------
A LIMITED PARTNERSHIP
---------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
(Continued)
3. TRANSACTIONS WITH THE GENERAL PARTNER AND ITS AFFILIATES
--------------------------------------------------------
Through January 22, 1995, the sole general partner of the Partnership
was NHP/RHGP-I Limited Partnership (NHP/RHGP-I). The sole limited partner
of the Partnership is NHP RHP-I Assignor Corporation, a Delaware
corporation which is an affiliate of NHP/RHGP-I.
On December 19, 1991, the General Partner executed an amended and
restated purchase agreement with Capital Realty Group Properties, Inc.
(CRG) for the transfer of the General Partner's interest in the
Partnership, subject to the approval of Assignee Holders. CRG's rights and
obligations under the purchase agreement were subsequently assigned to an
affiliate, Capital Realty Group Senior Housing, Inc. (CRGSH). CRGSH is the
management agent under a five year contract with an optio to renew for an
additional five years under certain conditions. Pursuant to a Consent
Solicitation dated October 25, 1994, Assignee Holders holding more than 64%
of the equity interests in the Partnership approved the election of CRGSH,
as the replacement general partner of the Partnership. Effective January
23, 1995, CRGSH became the sole general partner of the Partnership.
Effective February 1, 1995, CRGSH assigned its contract rights to manage
the Partnership's properties to Capital Senior Living, Inc. ("CSL"), a
subsidiary of Capital Senior Living Corporation. CRGSH and CSL received
$1,429,906, $1,351,527, and $1,326,188 in 1997, 1996 and 1995,
respectively, for management fees, dietary services fees and other
operating expense reimbursements related to services provided to the
Properties and the Partnership.
Personnel working at the Property sites and certain home office
personnel who perform services for the Partnership are employees as of
February 1, 1995 of CSL, an affiliate of CRGSH, and prior to February 1,
1995 were employees of CRGSH. The Partnership reimburses CRGSH or CSL for
the salaries and related benefits of such personnel as reflected in the
accompanying financial statements. During 1997 , 1996 and 1995 , such
reimbursements for salaries, related benefits and overhead reimbursements
amounted to $3,971,789, $3,816,530, and $3,925,369 , respectively.
During 1997 and 1996 , an affiliate of the General Partner, Capital
Senior Living Communities, L.P., purchased approximately 11,318 and 422 ,
respectively, of Pension Notes, or approximately 30.74 % of the
Partnership's outstanding Pension Notes at an average price of $822 per
Note. On November 3, 1997, Capital Senior Living Communities, L.P. sold its
Pension Notes to Capital Senior Living Properties, Inc., an affiliate of
the General Partner and a subsidiary of Capital Senior Living Corporation,
at a price of $1,422 per Note. At December 31, 1997, Capital Senior Living
Properties, Inc. holds 13,128 Pension Notes. Capital Senior Living
Corporation is subject to the periodic reporting obligations of the
Securities and Exchange Commission.
A 50% partner in Retirement Living Communities, L.P. ("RLC") is
chairman of the board of a bank where the Partnership holds the majority of
its operating cash accounts
4. ACQUISITION OF PROPERTY
-----------------------
On November 5, 1997, the Partnership purchased approximately 3.10
acres of land adjacent to the Amberleigh property for $500,000 plus closing
costs. The land will be used in development of a 60 unit assisted living
retirement facility.
11
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NHP RETIREMENT HOUSING PARTNERS I LIMITED PARTNERSHIP
-----------------------------------------------------
A LIMITED PARTNERSHIP
---------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
(Continued)
In connection with the purchase of the Heatherwood in 1988, the
Partnership has recorded receivables of $826,877 from the seller and
purchase installments and other liabilities due to the seller totaling
$816,583. Amounts due to the Seller at December 31, 1995 include $264,583
in property management fees and the remaining $525,000 plus accrued
interest of $27,000 purchase installment payment due to the seller. During
1996, the General Partner attempted to contact the Seller, but was unable
to do so. The General Partner wrote off the amounts due to and from the
Seller and recorded a $10,294 adjustment to income during 1996.
5. CASH DISTRIBUTION POLICIES
--------------------------
The Partnership Agreement allows for quarterly payments of
substantially all Cash Available For Distribution Before Interest Payments
(as defined in the Partnership Agreement), subject to the following: (i)
distributions to Assignee Holders may be restricted or suspended for
limited periods when the General Partner determines in its absolute
discretion that it is in the best interests of the Partnership; and (ii)
all Assignee Holder distributions are subject to the payment of Partnership
expenses and maintenance of working capital reserves.
Cash Available For Distribution Before Interest Payments generally
consists of cash received from the ordinary operations of the Partnership
less operating expenses, without reduction for interest payments to Pension
Note Holders, and working capital reserves. Distributions of Cash Available
For Distribution Before Interest Payments are made in the following order
of priority, to the extent available:
First, to the General Partner in an amount equal to 2 percent of Cash
Available For Distribution Before Interest Payments for each quarterly
cash distribution period (payable only if the Note Holders receive the
distribution as described below).
Second, to the Pension Note Holders in an amount equal to an annual
return of 7 percent on the adjusted principal amount of their Pension
Notes for each quarterly cash distribution period.
Third, to the Assignee Holders in an amount equal to an annual return
of 7 percent on their adjusted capital contributions for each
quarterly cash distribution period.
Fourth, to the Pension Note Holders and Assignee Holders pro rata
based on the relationship between the adjusted principal amount of the
Pension Notes to the adjusted capital contributions of the Assignee
Holders until the Note Holders have received an amount equal to an
aggregate annual return of 10 percent on the adjusted principal amount
of their Pension Notes for each quarterly cash distribution period and
the Assignee Holders have received an amount equal to an aggregate
annual return of 10 percent on their adjusted capital contributions
for each quarterly cash distribution period.
Fifth, to the General Partner as a Partnership Incentive Fee in an
amount equal to 8 percent of Cash Available For Distribution Before
Interest Payments for the fiscal year. If the amount of Cash Available
for Distribution Before Interest Payments for any fiscal year is
insufficient to pay the General Partner its Partnership Incentive Fee,
the fee shall not accrue and shall not be paid from Cash Available For
Distribution Before Interest Payments payable in subsequent fiscal
years.
12
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NHP RETIREMENT HOUSING PARTNERS I LIMITED PARTNERSHIP
-----------------------------------------------------
A LIMITED PARTNERSHIP
---------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
(Continued)
Sixth, the balance to the Note Holders and Assignee Holders pro rata
based on the relationship between the adjusted principal amount of the
Pension Notes to the adjusted capital contributions of the Assignee
Holders. However, the amount of interest payable to the Note Holders
shall not exceed a cumulative noncompounded return of 13 percent per
annum on the adjusted principal amount of their Pension Notes. No
payments of Cash Available For Distribution Before Interest Payments
shall reduce the principal balance of the Pension Notes.
No distributions were paid to the Assignee Interest Holders during
1997 , 1996 or 1995 . The General Partner anticipates that distributions to
Assignee Interest Holders will be suspended until operating results
significantly improve.
Cash received from sales or refinancings of any Partnership Property,
after retirement of applicable mortgage debt and the payment of all
expenses related to the transaction and any payments of debt service on the
Pension Notes including interest at a noncompounded rate of 13% per annum
less any prior payments (see Note 6), is to be distributed in the following
manner:
First, to the Assignee Interest Holders until their adjusted capital
accounts are reduced to zero;
Second, to the Assignee Interest Holders until cumulative cash
distributions received equal a 13% non-compounded return on their
adjusted capital accounts, reduced by prior distributions;
Third, to the General Partner in the form of a disposition fee; and
Fourth, 85% to the Assignee Interest Holders and 15% to the General
Partner.
Taxable net income or loss from operations is allocated to the
Interest Holders as a class and to the General Partner in proportion to
available cash distributed during the fiscal year. If no cash is
distributed during the year, net income or loss is allocated 90% to the
Assignee Holders as a class and 10% to the General Partner. Other
provisions exist if there is net income or loss other than from operations.
As discussed in Note 7, 2% for 1997, 1996 and 1995 of the Cash Available
For Distribution Before Interest Payments was paid to the General Partner.
Accordingly, net loss for each of the three years in the period ended
December 31, 1997 was allocated in the same manner.
The deficit balance in the Assignee Limited Partner account reflects their
percentage interest in the Partnership's cumulative net losses, although
there are no restoration requirements for the Assignee Limited Partner
interest upon termination of the Partnership
6. PENSION NOTES
-------------
The Notes bear stated simple interest at a rate equal to 13% per
annum. Payment of up to 9% of stated interest was subject to deferral
through December 31, 1988 and payment of up to 6% of stated interest is
subject to deferral thereafter. Deferred interest does not bear interest.
13
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NHP RETIREMENT HOUSING PARTNERS I LIMITED PARTNERSHIP
-----------------------------------------------------
A LIMITED PARTNERSHIP
---------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
(Continued)
Interest not deferred is payable quarterly. Using the effective interest
method, interest on principal and accrued interest of the Pension Notes has
been accrued at the rate of approximately 9% per annum compounded
quarterly. The approximate 9% effective interest rate was calculated using
estimates of the amounts of interest that will be deferred and the time
period in which such deferred amounts will be paid and will provide a
liability for the full amount of deferred interest upon the maturity of the
Pension Notes. If interest had been provided based on 13% versus the
effective rate of approximately 9%, an additional liabilit of approximately
$4,113,073 would be recorded at December 31, 1997 and future interest
expense would be reduced by this amount. The Partnership made payments of
$2,987,040, $2,995,574 and $2,987,040 in 1997, 1996 and 1995, respectively,
to Pension Note Holders. The Partnership's obligation to repay the
principal amount of the Notes, which mature on December 31, 2001, and
stated interest thereon, is secured by a lien on the Partnership's assets
(see Note 9). The liability of the Partnership under the Pension Notes is
limited to the assets of the Partnership. The Pension Notes are subject to
redemption in whole or in part upon not less than 30 nor more than 60 days
prior notice, at the election of the Partnership.
7. DISTRIBUTIONS TO PARTNERS
-------------------------
During 1997, 1996 and 1995, the General Partner received
distributions, representing 2% of the Cash Available For Distribution
Before Interest Payments to the Pension Note Holders. The Partnership did
not make a distribution to the holders of Assignee Interests during 1997,
1996 or 1995.
8. INCOME TAXES
------------
The Partnership is not taxed on its income. The partners are taxed in
their individual capacities upon their distributive share of the
Partnership's taxable income and are allowed the benefits to be derived
from possibly off-setting their distributive share of the tax loss against
taxable income from other sources subject to application of passive loss
rules and subject to "At Risk" basis limitation. The taxable income or loss
differs from amounts included in the statement of operations primarily
because of different methods used in computing depreciation and interest on
the Notes and determining start-up and marketing expenses for financial
reporting and Federal income tax purposes.
For Federal income tax purposes, the Partnership computes depreciation
of buildings and improvements using the Modified Accelerated Cost Recovery
System (MACRS) and the Accelerated Cost Recovery System (ACRS), while for
financial statement purposes, depreciation is computed using the
straight-line method. Interest on Pension Notes is computed in accordance
with Internal Revenue Service regulations for original issue discount for
Federal income tax purposes, while for financial statement purposes,
interest on Pension Notes is computed using the effective interest method.
Start-up and marketing costs incurred prior to initial occupancy were
capitalized and amortized over sixty months for Federal income tax
purposes, while for financial statement purposes, only those start-up and
marketing costs that are expected to benefit future operations have been
capitalized and amortized over sixty months.
14
<PAGE>
NHP RETIREMENT HOUSING PARTNERS I LIMITED PARTNERSHIP
-----------------------------------------------------
A LIMITED PARTNERSHIP
---------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
(Continued)
A reconciliation between financial statement net loss and net loss for
tax purposes follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------
<S> <C> <C> <C>
1997 1996 1995
---- ---- ----
Net loss per financial statements $ 3,522,917 $ 3,574,668 $ 3,690,549
Temporary differences in determining losses for
Federal income tax purposes:
Depreciation 617,872 667,874 671,332
Amortization of start-up and marketing costs (48,116) (48,116) (48,116)
Interest expense - pension notes (3,136,298) (2,903,363) (2,673,201)
Miscellaneous 5,966 37,148 (18,001)
------------ ------------ ------------
Loss per tax return $ 962,341 $ 1,328,211 $ 1,622,563
============ ============ ============
</TABLE>
The basis of building and improvements, net of accumulated depreciation,
for Federal income tax purposes was $35,166,014 and $36,967,094 at December
31, 1997 and 1996, respectively.
9. FUTURE OPERATIONS AND CASH FLOWS
--------------------------------
Although cash flow from operations improved in 1997 , cash generated
from operations over the past several years prior to 1994 was not adequate
to meet the Partnership's minimum interest payment requirements. The
shortfall was funded by Partnership's cash reserves, which principally
resulted from funds remaining from the initial offering of Partnership
Assignee Interests and Pension Notes, after the acquisition of the
Partnership's Properties. Given the level of the Partnership's cash
reserves at December 31, 1997 , if the Partnership is unable to increase
cash generated from operations over time, cash reserves may not be
sufficient to satisfy future obligations of the Partnership.
If interest payments continue to be deferred at the current rate (see
Note 6), the total accrual for unpaid interest and principal will
approximate $81 million at December 31, 2001, the maturity date of the
Pension Notes, which is far in excess of projected cash reserves.
Accordingly, there will need to be very significant improvements in cash
flows from operations and/or increases in the disposition and refinancing
values of the Properties to fund both the accrued interest and the face
value of the Pension Notes upon their maturity.
Management plans to continue to manage the Properties prudently to
achieve positive cash flows from operations after interest payments.
15
<PAGE>
NHP RETIREMENT HOUSING PARTNERS I LIMITED PARTNERSHIP
-----------------------------------------------------
A LIMITED PARTNERSHIP
---------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
(Continued)
10. VALUATION OF RENTAL PROPERTY
----------------------------
In accordance with FASB Statement No 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of", the Partnership records impairment losses on long-lived assets used in
operations when events and circumstances indicate that the assets might be
impaired and the undiscounted cash flows estimated to be generated by those
assets are less than the carrying amounts of those assets. If such a
shortfall exists, a write-down would be warranted based on the estimated
shortfall of discounted cash flows. The Partnership performs such
evaluations on an ongoing basis by comparing each property's net book value
to the total estimated future operating cash flow for years through 2001
(the year the Pension Notes mature) plus cash projected to be received upon
an assumed sale of the properties on December 31, 2001. Sales proceeds, net
of an estimated 3% cost of disposal, are estimated using a 10%
capitalization rate of the net operating incom projected for each property
for the year 2001. During July 1997, the Partnership obtained appraisals of
the current market value of its properties. As of December 31, 1997, the
July 1997 appraised values exceeded the partnership's net book value of its
properties. The Partnership, however, does not intend to sell any
Properties in the near future, but rather intends to continue to hold and
operate them as rental properties. The Partnership does not believe there
are any indicators that would require an adjustment to the carrying value
of the properties or their remaining useful lives as of December 31, 1997
or 1996.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS:
-----------------------------------
The carrying amounts and fair values of financial instruments at
December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
------------------------ ------------------------
<S> <C> <C> <C> <C>
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ----- -------- -----
Cash and cash equivalents $ 4,495,733 $ 4,495,733 $ 4,017,181 $ 4,017,181
Pension Notes 42,672,000 60,714,122 42,672,000 27,753,050
</TABLE>
The following methods and assumptions were used by the General Partner in
estimating its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the
balance sheet for cash and cash equivalents approximate fair value.
Pension Notes: The fair values of Pension Notes are based on
discounted cash flows at December 31, 1997 and quoted market prices at
December 31, 1996.
16
<PAGE>
(b) Pro forma financial information.
INTRODUCTION TO PRO FORMA COMBINED FINANCIAL STATEMENTS
The unaudited Pro Forma Combined Balance Sheet as of September 30, 1998
and unaudited Pro Forma Combined Statements of Income for the nine months ended
September 30, 1998 and the year ended December 31, 1997, represent the financial
position and results of operations of the Company for such periods after giving
effect to the adjustments described in the accompanying notes, relating to the
acquisitions of properties from NHP and Gramercy Hill Enterprises and Tesson
Heights Enterprises, as if these transactions had occurred as of September 30,
1998 for the unaudited Pro forma Combined Balance Sheet, and as of January 1,
1997 for the unaudited Pro Forma Combined Statements of Income.
The unaudited Pro Forma Combined Balance Sheet and unaudited Pro Forma
Combined Statements of Income are preliminary and are presented for
informational purposes only and do not necessarily reflect the financial
position or results of operations of the Company which would have actually
resulted had the acquisitions occurred as of the dates indicated, or the future
results of operations of the Company.
17
<PAGE>
<TABLE>
<CAPTION>
CAPITAL SENIOR LIVING CORPORATION
PRO FORMA COMBINED BALANCE SHEET
(Unaudited)
Assets
September 30, 1998
-----------------------------------------------------------------------------------
The Company Gramercy Tesson Pro Forma The Company
Historical Historical Historical Adjustments Pro Forma
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Current Assets:
Cash and Cash Equivalents $ 34,378,076 $ 523,972 $ 582,334 (1) $(1,106,306) $ 34,378,076
Accounts Receivable, Net 3,254,751 2,604 4,663 - 3,262,018
Accounts Rec from Affiliates, Net 4,910,928 - - - 4,910,928
Deferred Taxes 8,280 - - - 8,280
Prepaid Expenses and Other 636,724 199,368 279,582 (2) (113,147) 1,002,527
-----------------------------------------------------------------------------------
Total Current Assets 43,188,759 725,944 866,579 (1,219,453) 43,561,829
Deferred Taxes 9,788,267 - - - 9,788,267
Property and Equipment, Net 85,299,053 4,772,254 5,524,425 (3) 23,925,945 119,521,677
Investments in Limited Partnerships 15,049,802 - - - 15,049,802
Note Receivable from Affiliate 7,354,617 - - - 7,354,617
Management Contract Rights, Net 207,613 - - - 207,613
Goodwill, Net 1,224,806 - - - 1,224,806
Deferred Financing Charges, Net 603,815 98,534 - (4) 25,112 727,461
Deferred Interest 968,605 - - - 968,605
Other Assets 455,866 - 179,815 (2) (179,815) 455,866
-----------------------------------------------------------------------------------
Total Assets $ 164,141,203 $ 5,596,732 $ 6,570,819 $22,551,789 $ 198,860,543
===================================================================================
Liabilities and Equity
Current Liabilities:
Accounts Payable $ 2,793,414 $ 75,862 $ 49,193 (2) $ (31,068) $ 2,887,401
Accrued Expenses 1,845,039 263,224 158,632 (2) (237,286) 2,029,609
Line of Credit 6,808,239 - - (5) 10,440,643 17,248,882
Current Portion of Notes Payable 591,114 - - (6) 117,386 708,500
Customer Deposits 620,880 77,000 156,000 (2) (2,050) 851,830
Federal and State Income Taxes Payable 1,114,975 - - - 1,114,975
-----------------------------------------------------------------------------------
Total Current Liabilities 13,773,661 416,086 363,825 10,287,625 24,841,197
Deferred Income 696,763 65,459 119,271 (2) (122,705) 758,788
Notes Payable, Net of Current Portion 37,966,859 6,349,366 8,103,460 (7) 9,136,953 61,556,638
Minority Interest in Consolidated Partnerships 11,201,561 - - - 11,201,561
Equity:
Partners' Capital (Deficit) - (1,019,679) - (2) 1,019,679 -
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-19,717,347 197,173 - - - 197,173
Additional Paid-in Capital 91,740,251 - - - 91,740,251
Retained Earnings (Deficit) 8,564,935 (214,500) (2,015,737) (2) 2,230,237 8,564,935
-----------------------------------------------------------------------------------
Total Equity 100,502,359 (1,234,179) (2,015,737) 3,249,916 100,502,359
-----------------------------------------------------------------------------------
Total Liabilities and Equity $ 164,141,203 $ 5,596,732 $ 6,570,819 $22,551,789 $ 198,860,543
===================================================================================
</TABLE>
The accompanying notes are an integral part of these pro forma combined
financial statements.
18
<PAGE>
<TABLE>
<CAPTION>
CAPITAL SENIOR LIVING CORPORATION
PRO FORMA COMBINED STATEMENT OF INCOME
(Unaudited)
For the Nine Months Ended September 30, 1998
------------------------------------------------------------------------------------------------
The
Company NHP, L.P. Gramercy Tesson Pro Forma The Company
Historical Historical Historical Historical Adjustments Pro Forma
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Resident and Health Care Revenue $15,237,396 $12,066,536 $2,366,049 $3,044,770 (1) $(3,863,672) $28,851,079
Rental and Lease Income 3,204,391 - - - - 3,204,391
Unaffiliated Management
Services Revenue 1,812,136 - - - - 1,812,136
Affiliated Management
Services Revenue 1,191,782 - - - (2) (767,349) 424,433
Development Fees 5,993,044 - - - - 5,993,044
Other 705,504 195,513 99,924 47,305 (1) (49,984) 998,262
------------------------------------------------------------------------------------------------
Total Revenues 28,144,253 12,262,049 2,465,973 3,092,075 (4,681,005) 41,283,345
Expenses:
Operating Expenses 11,635,108 6,555,003 1,120,299 1,142,521 (1) (2,023,371) 18,429,560
General and Administration
Expenses 4,180,463 1,676,703 444,437 497,923 (1) (1,734,978) 5,064,548
Depreciation and Amortization 1,695,494 1,549,536 301,499 271,042 (3) 96,020 3,913,591
------------------------------------------------------------------------------------------------
Total Expenses 17,511,065 9,781,242 1,866,235 1,911,486 (3,662,329) 27,407,699
------------------------------------------------------------------------------------------------
Income From Operations 10,633,188 2,480,807 599,738 1, 180,589 (1,018,676) 13,875,646
Other Income (Expense):
Interest Income 3,403,035 116,343 - - (1) (376,883) 3,142,495
Interest Expense (547,724) (4,748,950) (338,805) (563,172) (4) 1,942,224 (4,256,427)
Other - 9,276,111 (1,815) (104,528) (5) (9,276,111) (106,343)
------------------------------------------------------------------------------------------------
Income Before Income
Taxes and Minority
Interest in Consolidated
Partnerships 13,488,499 7,124,311 259,118 512,889 (8,729,446) 12,655,371
Provision for Income Taxes (5,185,848) - - - (6) 329,142 (4,856,706)
------------------------------------------------------------------------------------------------
Income Before Minority Interest
in Consolidated Partnerships 8,302,651 7,124,311 259,118 512,889 (8,400,304) 7,798,665
Minority Interest in Consolidated
Partnerships (359,912) - - - - (359,912)
------------------------------------------------------------------------------------------------
Net Income (Loss) $ 7,942,739 $ 7,124,311 $ 259,118 $ 512,889 $(8,400,304) $ 7,438,753
================================================================================================
Net Income Per Share:
Basic And Diluted $ 0.40 $ 0.38
============= =============
Weighted Average Shares Outstanding 19,717,347 19,717,347
============= =============
</TABLE>
The above Pro Forma Adjustments do not reflect the additional deferred
interest income earned by the Company on its investments in the NHP
Pension Notes.
The accompanying notes are an integral part of these pro forma combined
financial statements.
19
<PAGE>
<TABLE>
<CAPTION>
CAPITAL SENIOR LIVING CORPORATION
PRO FORMA COMBINED STATEMENT OF INCOME
(Unaudited)
For the Year Ended December 31, 1997
--------------------------------------------------------------------------------------------------
The
Company NHP, L.P. Gramercy Tesson Pro Forma The Company
Historical Historical Historical Historical Adjustments Pro Forma
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Resident and Health Care
Revenue $21,206,865 $15,243,028 $2,818,687 $3,908,599 (1) $(4,940,669) $38,236,510
Rental and Lease Income 4,275,611 - - - - 4,275,611
Unaffiliated Management
Services Revenue 1,919,618 - - - - 1,919,618
Affiliated Management
Services Revenue 1,378,444 - - - (2) (932,496) 445,948
Development Fees 976,694 - - - - 976,694
Other 952,650 215,238 91,969 35,431 (1) (66,883) 1,228,405
---------------------------------------------------------------------------------------------------
Total Revenues 30,709,882 15,458,266 2,910,656 3,944,030 (5,940,048) 47,082,786
Expenses:
Operating Expenses 17,474,127 5,260,883 1,351,959 1,415,886 (1) (2,701,332) 22,801,523
General and Administration
Expenses 6,311,986 5,417,788 728,611 758,347 (1) (2,268,263) 10,948,469
Depreciation and
Amortization 2,117,288 2,007,801 301,873 276,836 (3) 407,340 5,111,138
---------------------------------------------------------------------------------------------------
Total Expenses 25,903,401 12,686,472 2,382,443 2,451,069 (4,562,255) 38,861,130
---------------------------------------------------------------------------------------------------
Income from Operations 4,806,481 2,771,794 528,213 1,492,961 (1,377,793) 8,221,656
Other Income (Expense):
Interest Income 3,185,815 89,872 5,477 17,020 (1) (487,608) 2,810,576
Interest Expense (2,022,494) (6,036,275) (615,951) (769,100) (4) 1,819,883 (7,623,937)
Other 440,007 (348,308) - - - 91,699
---------------------------------------------------------------------------------------------------
Income before Income
Taxes and Minority
Interest in Consolidated
Partnerships 6,409,809 (3,522,917) (82,261) 740,881 (45,518) 3,499,994
Provision for Income Taxes (792,524) - - - (6) 174,795 (617,729)
---------------------------------------------------------------------------------------------------
Income before Minority
Interest in Consolidated
Partnerships 5,617,285 (3,522,917) (82,261) 740,881 129,277 2,882,265
Minority Interest in
Consolidated Partnerships (1,936,122) - - - - (1,936,122)
---------------------------------------------------------------------------------------------------
Net Income (Loss) $ 3,681,163 $(3,522,917) $ (82,261) $ 740,881 $ 129,277 $ 946,143
===================================================================================================
Net Income Per Share:
Basic and Diluted $ 0.33 $ 0.08
============= ==============
Weighted Average Shares 11,150,087 11,150,087
============= ==============
</TABLE>
The above Pro Forma Adjustments do not reflect the additional deferred
interest income earned by the Company on its investments in the NHP
Pension Notes.
The accompanying notes are an integral part of these pro forma combined
financial statements.
20
<PAGE>
CAPITAL SENIOR LIVING CORPORATION
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
1. Basis of Presentation
The unaudited Pro Forma Combined Balance Sheet as of September 30, 1998
and unaudited Pro Forma Combined Statements of Income for the nine months ended
September 30, 1998 and the year ended December 31, 1997, represent the financial
position and results of operations of the Company for such periods after giving
effect to the adjustments described in the accompanying notes, relating to the
acquisitions of properties from NHP and Gramcery Hill Enterprises and Tesson
Heights Enterprises, as if these transactions had occurred as of September 30,
1998 for the unaudited Pro Forma Combined Balance Sheet, and as of January 1,
1997 for the unaudited Pro Forma Combined Statements of Income.
2. Financing Transaction of NHP and Tesson Heights Enterprises
On September 30, 1998, the Company, through Capital Senior Living
Properties 2-NHPCT, Inc. ("CSLP 2-NHPCT"), an indirect wholly-owned subsidiary,
entered into a $60,000,000 mortgage loan agreement with Lehman Brothers
Holdings, Inc. ("LBHI Loan"). The purpose of the LBHI Loan is to provide
financing for the acquisition of four NHP senior living communities, as well as
for the Tesson Heights Enterprises ("Tesson") senior living community, all of
which have been pledged as collateral. Interest costs are based on 30-day LIBOR,
which was approximately 7.25% at September 30, 1998. The loan agreement matures
October 1, 1999.
3. Financing Transaction of Gramercy Hill Enterprises
On October 28, 1998, the Company, through Capital Senior Living
Properties 2-Gramercy, Inc. ("CSLP 2-Gramercy"), an indirect wholly-owned
subsidiary, entered into a $6,400,000 Assumption and Release Agreement with
Fannie Mae in favor of Washington Mortgage Financial Group, Ltd. ("WMFG") and a
$1,980,000 multifamily note in favor of WMF Washington Mortgage Corp. ("WMFC").
The purpose of the loans is to provide financing for the acquisition. The senior
living community has been pledged as collateral under these loans. Interest
costs are approximately 7.50%, respectively. The Assumption and Release
Agreement and WMFC note mature on January, 2008 and January, 2010, respectively.
4. Acquisitions of Assets
NHP Transection.
---------------
On September 30, 1998, the Company, through CSLP 2-NHPCT, an indirect
wholly-owned subsidiary, completed the acquisition of four senior living
communities from NHP Retirement Housing Partners I Limited Partnership ("NHP")
for cash consideration of $40,650,000, pursuant to the terms of the Asset
Purchase Agreement, which was previously filed as Exhibit 2.1, dated as of July
24, 1998, by and between NHP and CSLP 2-NHPCT. The funds for the transaction
were provided from working capital of the Company and from the proceeds of the
LBHI Loan pursuant to the terms of the Loan Agreement, which was previously
filed as Exhibit 2.3, dated as of September 30, 1998, by and between Purchaser
and Lehman Brothers Holdings Inc. d/b/a Lehman Capital, a division of Lehman
Brothers Holdings Inc.
21
<PAGE>
CAPITAL SENIOR LIVING CORPORATION
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS - (Continued)
The senior living communities acquired by the Company from NHP are The
Atrium of Carmichael in Carmichael, California; Crosswoods Oaks in Citrus
Heights, California; The Heatherwood in Southfield, Michigan; and The Veranda
Club in Boca Raton, Florida. Capital Senior Living, Inc. ("CSL"), a subsidiary
of the Company, has operated these communities under a long-term management
contract since 1992. The purchase price for the properties was determined by
independent appraisal. Personnel working at the property sites and certain home
office personnel who perform services for NHP are employees of CSL. NHP
(prior to the acquisitions) reimbursed CSL for the salaries, related benefits,
and overhead reimbursements of such personnel. Capital Realty Group Brokerage,
Inc., a company wholly-owned by Messrs. Jeffrey L. Beck and James A. Stroud, the
Chief Executive and Chief Operating Officers of the Company, respectively,
received a brokerage fee of $1,219,500 related to this transaction, which was
paid by NHP.
The acquisitions were accounted for as a purchase business
combination. This transaction is included in the Company's historical balance
sheet as of September 30, 1998.
Gramercy/Tesson Transactions.
----------------------------
On October 28, 1998, the Company, through CSLP 2-Gramercy and CSLP
2-NHPCT, both indirect wholly-owned subsidiaries, completed the acquisition of
two senior living communities from Gramercy Hill Enterprises, a Texas limited
partnership ("Gramercy"), and Tesson, for aggregate consideration of
approximately $34,000,000, pursuant to the terms of certain Asset Purchase
Agreements (previously filed as Exhibit 2.1 and Exhibit 2.2 to the Company's
Current Report on Form 8-K, dated October 28, 1998) dated as of July 28, 1998,
by and between Gramercy and Tesson, respectively, and CSLP 2-Gramercy and CSLP
2-NHPCT, respectively. The funds for the Tesson transaction were provided from
working capital of the Company and from the proceeds of the LBHI Loan, dated as
of September 30, 1998, with Lehman Brothers Holdings Inc. d/b/a Lehman Capital,
a division of Lehman Brothers Holdings Inc. The funds for the Gramercy
transaction were provided from working capital of the Company, the assumption of
the $6,400,000 WMFG promissory note and from the proceeds of the $1,980,000 WMFC
loan.
The senior living communities acquired by the Company from Gramercy and
Tesson are Gramercy Hill in Lincoln, Nebraska and Tesson Heights, in St. Louis,
Missouri. The purchase price for the properties was determined through
negotiations between the parties.
The acquisitions were accounted for as a purchase business
combination.
5. Basis of Valuation
The Company has obtained independent valuations of the senior living
communities from third party valuation firms, which were utilized in determining
the purchase accounting of the NHP, Gramercy and Tesson businesses acquired.
6. Pro Forma Adjustments
The pro forma adjustments to the combined balance sheet and combined
statements of income, and related assumptions, are detailed below:
22
<PAGE>
<TABLE>
<CAPTION>
CAPITAL SENIOR LIVING CORPORATION
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS - (Continued)
Pro Forma Combined Balance Sheet
September 30, 1998
------------------
<S> <C>
(1) Reduction for Gramercy cash of $523,972 and Tesson cash of
$582,334 not acquired by the Company.
(2) Adjustment to reflect the reduction for certain working capital items
of Gramercy and Tesson which were not acquired or assumed by the
Company.
(3) Increase in value of property and equipment acquired based upon the
fair market value of the assets (Gramercy $6,149,498 and Tesson
$17,776,449). The property and equipment acquired is being depreciated
on a straight line basis over the lives of the assets, which range
from four to forty years.
(4) Adjustment to reflect the increase in deferred financing charges
of Gramercy as a result of the WMFC note.
(5) Adjustment to reflect the advance against the Company's line of
credit to acquire Gramercy and Tesson.
(6) Adjustment to reflect the increase in notes payable-current due to the
acquisitions.
(7) Adjustment to reflect the increase in notes payable:
Recording of the additional funding of the LBHI Loan $15,400,000
Repayment of the Tesson loan with proceeds from the purchase (8,103,460)
Recording of the WMFC Loan 1,957,799
Reclassing the current portion of the WMFC Loan (117,386)
---------------------------
$9,136,953
===========================
(8) Adjustment to eliminate the historical partners' capital and retained
earnings of Gramercy and Tesson as the acquisitions were accounted for
as a purchase.
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
CAPITAL SENIOR LIVING CORPORATION
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS - (Continued)
Pro Forma Combined Statements of Income
Nine Months
Ended Year Ended
September 30, 1998 December 31, 1997
-------------------------- -----------------------
<S> <C> <C>
(1) Adjustments to reflect the elimination of revenue, interest income,
other revenue, operating expenses and general and administrative
expenses for NHP entities and partnership level activity not acquired
or assumed by the Company and interest income foregone relating to
the use of the Company's existing working capital.
(2) Adjustment to reflect the elimination of intercompany
management fees relating to the NHP properties acquired.
(3) Adjustment to reflect the net increase (decrease) in
depreciation and amortization expense:
Elimination of depreciation expense for NHP entities
not acquired or assumed by the Company $(648,308) $(860,379)
Addition of depreciation expense as a result of the
purchase of property and reevaluation of asset lives 744,328 1,267,719
-------------------------- -----------------------
$96,020 $407,340
========================== =======================
(4) Adjustment to reflect the net increase (decrease) in
interest expense:
Elimination of interest expense for NHP and Tesson
debt relating to properties and operations not
acquired or assumed by the Company $(5,312,122) $(6,805,375)
Elimination of amortization of deferred loan costs for
debt related to properties not acquired (11,984) (36,389)
Addition of interest expense as a result of the
financing of the properties 3,373,449 4,499,773
Addition of amortization expense relating to
deferred loan costs 8,433 522,108
-------------------------- -----------------------
$(1,942,224) $(1,819,883)
========================== =======================
(5) Adjustment to eliminate NHP and entities gain on the
sale of the four properties.
(6) The Company was an S corporation for federal income tax purposes
through November 5, 1997 and NHP, Gramercy and Tesson operated as
partnerships, and accordingly, incurred no income taxes. The Pro
Forma adjustment is to reflect income taxes on the Pro Forma company
as if it operated as a C corporation using an effective tax rate of
39.5%.
</TABLE>
7. Other
The unaudited Pro Forma Combined Balance Sheet and unaudited Pro Forma
Combined Statements of Income are preliminary and are presented for
informational purposes only and do not necessarily reflect the financial
position or results of operations of the Company which would have actually
resulted had the acquisitions occurred as of the dates indicated, or the future
results of operations of the Company.
24
<PAGE>
(c) Exhibits.
*2.1 Asset Purchase Agreement, dated as of July 24, 1998, by and between
Capital Senior Living Properties, Inc. and NHP Retirement Housing
Partners I Limited Partnership.
*2.2 Assignment and Amendment to Asset Purchase Agreement, effective as of
September 29, 1998, by and among NHP Retirement Housing Partners I
Limited Partnership, Capital Senior Living Properties, Inc., and
Capital Senior Living Properties 2 - NHPCT, Inc.
*2.3 Loan Agreement, dated as of September 30, 1998, by and between Capital
Senior Living Properties 2 - NHPCT, Inc. and Lehman Brothers Holdings
Inc. d/b/a Lehman Capital, a division of Lehman Brothers Holdings Inc.
*99.1 Press Release, dated October 5, 1998.
- ----------------------
* Filed previously with the Current Report on Form 8-K of the Company,
dated September 30, 1998.
25
<PAGE>
SIGNATURES
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 hereunto duly authorized.
CAPITAL SENIOR LIVING CORPORATION
(Registrant)
Date: December 14, 1998
By: /s/ Lawrence A. Cohen
--------------------------------
Lawrence A. Cohen
Chief Financial Officer
26
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
Sequentially
Exhibit No. Exhibit Description Numbered Page
- ----------- ------------------- -------------
<S> <C> <C>
*2.1 Asset Purchase Agreement, dated as of July 24, 1998,
by and between Capital Senior Living Properties, Inc.
and NHP Retirement Housing Partners I Limited
Partnership.
*2.2 Assignment and Amendment to Asset Purchase Agreement,
effective as of September 29, 1998, by and among NHP
Retirement Housing Partners I Limited Partnership, Capital
Senior Living Properties, Inc., and Capital Senior Living
Properties 2 - NHPCT, Inc.
*2.3 Loan Agreement, dated as of September 30, 1998, by
and between Capital Senior Living Properties 2 - NHPCT,
Inc. and Lehman Brothers Holdings Inc. d/b/a Lehman
Capital, a division of Lehman Brothers Holdings Inc.
*99.1 Press Release, dated October 5, 1998
<FN>
- ---------------------
* Filed previously with the Current Report on Form 8-K of the Company,
dated September 30, 1998.
</FN>
</TABLE>
27
