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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A
(MARK ONE)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to ____________
Commission File Number: 1-13445
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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 (Zip Code)
offices)
Registrant's telephone number, including area code: (972) 770-5600
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Name of each exchange on which registered:
COMMON STOCK, $.01 PAR VALUE NEW YORK STOCK EXCHANGE
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Indicate by check mark 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 preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ____
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
The aggregate market value of 10,333,450 shares of the Registrant's
Common Stock held by nonaffiliates, based upon the closing price of the
Registrant's Common Stock as reported by the New York Stock Exchange on March
29, 1999 was approximately $72,313,150. For purposes of this computation, all
officers, directors and 10% beneficial owners of the Registrant are deemed to be
affiliates. Such determination should not be deemed an admission that such
officers, directors or 10% beneficial owners are, in fact, affiliates of the
Registrant. As of March 29, 1999, 19,717,347 shares of Common Stock, $.01 par
value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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Capital Senior Living Corporation, a Delaware corporation (the "Company"),
hereby amends and restates in their entirety Parts I and II of the Company's
Annual Report on Form 10-K for the year ended December 31, 1998, filed with the
Securities and Exchange Commission on March 31, 1999.
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CAPITAL SENIOR LIVING CORPORATION
TABLE OF CONTENTS
PAGE
NUMBER
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PART I
ITEM 1. BUSINESS........................................................................................1
ITEM 2. PROPERTIES.....................................................................................21
ITEM 3. LEGAL PROCEEDINGS..............................................................................22
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............................................23
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.................................................................................................24
ITEM 6. SELECTED FINANCIAL DATA........................................................................26
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS...................................................................................28
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
.......................................................................................................40
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....................................................41
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE....................................................................................41
SIGNATURES.......................................................................................................42
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PART I
ITEM 1. BUSINESS
GENERAL
Capital Senior Living Corporation (together with its subsidiaries, the
"Company") is one of the largest developers and operators of senior living
communities in the United States in terms of resident capacity. As of December
31, 1998, the Company owned interests in and/or operated 34 communities in 17
states with a capacity of approximately 5,700 residents, including 19
communities in which it owned interests and 15 communities that it managed for
third parties pursuant to multi-year management contracts. As of December 31,
1998, the Company was developing 34 new communities which will have a capacity
of approximately 5,000 residents and was expanding 10 existing communities to
accommodate approximately 600 additional residents. As of December 31, 1998, the
Company also operated one home care agency. Approximately 93% of the total
revenues and reimbursable expenses for the senior living communities managed by
the Company as of December 31, 1998 are derived from private pay sources. During
1998, the communities which the Company operated and in which it owned interests
had an average occupancy rate of approximately 95% and its managed communities
had an average occupancy rate of approximately 96%. The Company and its
predecessors have provided senior living services since 1990.
PENDING MERGERS
On February 7, 1999, the Company entered into definitive Agreements and
Plans of Merger with ILM Senior Living, Inc. and ILM II Senior Living, Inc. for
a combined transaction value of approximately $174 million, which includes
approximately $4 million of net liabilities. The primary assets of ILM Senior
Living, Inc. and ILM II Senior Living, Inc. collectively are 13 senior living
communities that have been managed by the Company under management agreements
since 1996. Under the two merger agreements, both ILM Senior Living, Inc. and
ILM II Senior Living, Inc. would separately merge with and into a wholly owned
direct subsidiary of the Company with the aggregate issued and outstanding
shares of ILM Senior Living, Inc. and ILM II Senior Living, Inc. common stock
eligible to receive 65% of the merger consideration in cash (approximately
$110.5 million) and 35% in 8% convertible trust preferred securities (with a
liquidation value of approximately $59.5 million). Both mergers have been
approved by the boards of directors of each company and each transaction
requires the approval of the applicable shareholders of either ILM Senior
Living, Inc. or ILM II Senior Living, Inc. The mergers also are subject to
certain other customary conditions, including regulatory approvals, and are
expected to be completed during the second half of 1999.
FORMATION TRANSACTIONS
The Company was incorporated in October 1996 in the state of Delaware.
On November 5, 1997, the Company closed its initial public offering in which it
sold 10,350,000 common shares pursuant to a final prospectus under the
Securities Act of 1933, as amended, at $13.50 per share (the "Offering").
Simultaneously with the consummation of the Offering, the Company, the Company's
founders Jeffrey L. Beck ("Beck") and James A. Stroud (and his affiliate)
("Stroud"), Lawrence A. Cohen, Vice Chairman and Chief Financial Officer of the
Company ("Cohen"), and affiliates of Messrs. Beck and Stroud completed a series
of transactions (collectively, the "Formation Transactions") that resulted in
the reorganization of the Company (the "Formation"). In the Formation
Transactions, 7,687,347 shares were issued to Beck, Stroud and Cohen in the
transactions described below, bringing the total issued and outstanding shares
of the Company to 19,717,347 shares. Since the Offering, all of the Company's
operations are being conducted by the Company or its subsidiaries.
As part of the Formation Transactions, Messrs. Beck and Stroud
contributed all of the capital stock of Capital Senior Living, Inc., Capital
Senior Management 1, Inc., Capital Senior Management 2, Inc., Capital Senior
Development, Inc., and, with Mr. Cohen, of Quality Home Care, Inc. (the
"Contributed Entities") to the Company in exchange for the issuance of 7,687,347
shares of common stock and the issuance of separate non-interest bearing notes
to Messrs. Beck, Stroud and Cohen in the aggregate principal amount of
$18,076,380 (collectively, the "Formation Note"). The number of
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shares of common stock issued and the principal amount of the Formation Note
were established by the Company in connection with the Formation based on an
assessment of the value of the Contributed Entities and the value of the
Acquired Assets (as defined below). The Formation Note was repaid from net
proceeds of the Offering. The primary assets of the Contributed Entities
consisted of third-party management contracts, development contracts and a home
care agency.
Also as part of the Formation Transactions, the Company purchased
substantially all of the assets (the "Acquired Assets"), other than working
capital items, of Capital Senior Living Communities, L.P., a Delaware limited
partnership ("CSLC"), for the assumption of approximately $70.8 million of debt
plus cash equal to $5.8 million (the "Asset Acquisition"). The Acquired Assets
of CSLC were: (i) four senior living communities located in Cottonwood, Arizona,
Indianapolis, Indiana, Merrillville, Indiana and Canton, Ohio; (ii)
approximately 56% of the limited partner interests in HealthCare Properties,
L.P., a Delaware limited partnership ("HCP"); and (iii) approximately 31% of the
aggregate principal amount of certain notes (the "NHP Notes") issued by NHP
Retirement Housing Partners I Limited Partnership, a Delaware limited
partnership ("NHP") and approximately 3% of the outstanding limited partnership
interests of NHP. The primary assets of HCP consisted of: (i) approximately $9.9
million in cash and cash equivalents as of the Offering; (ii) four physical
rehabilitation facilities located in Orlando, Florida, Nashville, Tennessee,
Lancaster, South Carolina, and Martin, Tennessee; and (iii) four skilled nursing
facilities located in Evansville, Indiana, Cambridge, Massachusetts, Fort Worth,
Texas, and Austin, Texas. The outstanding principal amount of all of the NHP
Notes as of the Offering was $42.7 million. The NHP Notes accrue interest at a
rate of 13% per annum, currently pay cash interest at a rate of 7% per annum,
are secured by substantially all of the assets of NHP, and mature on December
31, 2001. The primary assets, as of the Offering, of NHP consisted of five
senior living communities located in Buffalo, New York, Sacramento, California
(two communities), Detroit, Michigan, and Boca Raton, Florida. Messrs. Beck and
Stroud control approximately 66% of the limited partnership interests in CSLC.
The purchase price paid for the Acquired Assets was determined as follows: (i)
CSLC's communities, other than construction in process, were valued based on the
appraised value of the communities; (ii) CSLC's investment in HCP was valued
based on the appraised value of HCP's communities, adjusted for working capital
items and other assets and liabilities that would be settled in cash, multiplied
by the percentage of HCP owned by CSLC; (iii) CSLC's investment in the NHP Notes
was valued based on discounting the amount of principal and interest payments to
be made following the maturity date (December 31, 2001) of the NHP Notes
(assuming a six month lag between maturity and full repayment); and (iv) CSLC's
investment in the NHP limited partnership interests was valued at its historical
cost basis which approximates fair value. The appraised values for the
communities were determined by third-party appraisals.
CSLC, HCP and NHP are limited partnerships required to file periodic
reports under the Securities Exchange Act of 1934, as amended. The general
partner of CSLC is Retirement Living Communities, an Indiana limited
partnership, which is beneficially owned by Messrs. Beck and Stroud. The general
partner of HCP and NHP is Capital Realty Group Senior Housing, Inc. ("Senior
Housing"), an entity that was beneficially owned by Messrs. Beck and Stroud
until June 10, 1998 when the general partner interest was sold to an unrelated
third-party, Retirement Associates, Inc.
The debt assumed by the Company in the Asset Acquisition consisted of
an approximate $70.8 million mortgage loan pursuant to a $77.0 million
commitment made on June 30, 1997 to CSLC by Lehman Brothers Holdings, Inc., an
affiliate of Lehman Brothers (the "LBHI Loan"). Of the proceeds from the LBHI
Loan, $5.5 million was used to repay outstanding amounts under the CSLC's prior
credit facility, $0.8 million was used to fund construction in progress at
CSLC's Cottonwood community, approximately $64.5 million was used by CSLC to
purchase U.S. Treasury securities and the remaining $6.2 million was available
to fund additional expenditures associated with the expansion of the Cottonwood
community. The LBHI Loan was incurred by CSLC for the purpose of refinancing the
outstanding debt due under CSLC's prior credit facility and to provide
construction financing for the expansion of one of CSLC's communities. The U.S.
Treasury securities were acquired with proceeds of the LBHI Loan to provide
collateral for the borrowings thereunder. The U.S. Treasury securities were sold
under a repurchase agreement with Lehman Brothers, with a term equal to their
maturity. Upon consummation of the Offering and as a part of the Formation
Transactions, the Acquired Assets were acquired by the Company through
assumption of the LBHI Loan, the repurchase agreement was canceled and the LBHI
Loan was reduced by the Company with net proceeds of the Offering. The U.S.
Treasury securities reverted to CSLC for use or disposition as determined by
CSLC, and the Company has no interest in such securities.
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INDUSTRY BACKGROUND
The senior living services industry encompasses a broad and diverse
range of living accommodations and health care services that are provided
primarily to persons 65 years of age or older. For the elderly who require
limited services, care in independent living residences supplemented at times by
home health care, offers a viable option. Most independent living communities
typically offer community living together with a basic services package
consisting of meals, housekeeping, laundry, security, transportation, social and
recreational activities and health care monitoring.
As a senior's need for assistance increases, care in an assisted living
residence is often preferable and more cost-effective than home-based care or
nursing home care. Typically, assisted living represents a combination of
housing and 24-hour a day personal support services designed to aid elderly
residents with activities of daily living ("ADLs"), such as ambulation, bathing,
dressing, eating, grooming, personal hygiene, and monitoring or assistance with
medications. Certain assisted living residences may also provide assistance to
residents with low acuity medical needs, or may offer higher levels of personal
assistance for incontinent residents or residents with Alzheimer's disease or
other cognitive or physical frailties. Generally, assisted living residents
require higher levels of care than residents of independent living residences
and retirement living centers, but require lower levels of care than patients in
skilled nursing facilities. For seniors who need the constant attention of a
skilled nurse or medical practitioner, a skilled nursing facility may be
required.
The senior living services industry is highly fragmented and
characterized by numerous small operators. Moreover, the scope of senior living
services varies substantially from one operator to another. Many smaller senior
living providers do not operate purpose-built residences, do not have
professional training for staff and provide only limited assistance with ADLs.
The Company believes that few senior living operators provide the required
comprehensive range of senior living services designed to permit residents to
"age in place" within the community as they develop further physical or
cognitive frailties.
The Company believes that the senior living services industry will
require large capital infusions over the next 30 years to meet the growing
demand for senior living facilities. The National Investment Conference has
estimated that gross capital expenditures for the senior living marketplace will
grow from $86 billion in 1996 to $126 billion in 2005 and to $490 billion in
2030, in order to accommodate increasing demand. As a result, the Company
believes there will continue to be significant growth opportunities in the
senior living market for providing services to the elderly.
The Company believes that a number of demographic, regulatory, and
other trends will contribute to the continued growth in the senior living
market, the Company's targeted market for future development and expansion,
including the following:
Consumer Preference
The Company believes that senior living communities are increasingly
becoming the setting preferred by prospective residents and their families for
the care of the elderly. Senior living offers residents greater independence and
allows them to "age in place" in a residential setting, which the Company
believes results in a higher quality of life than that experienced in more
institutional or clinical settings.
The likelihood of living alone increases with age. Most of this
increase is due to an aging population in which women outlive men. In 1993,
eight out of ten noninstitutionalized elderly who lived alone were women.
According to the United States Bureau of Census, based on 1993 data, for women
the likelihood of living alone increases from 32% for 65- to 74-year-olds to 57%
for those women aged 85 and older. Men show similar trends with 13% of the 65-
to 74-year-olds living alone rising to 29% of the men aged 85 and older living
alone. Societal changes, such as increased divorce rates and the growing numbers
of persons choosing not to marry, have further increased the number of Americans
living alone. This growth in the number of elderly living alone has resulted in
an increasing demand for services that historically have been provided by a
spouse, other family members or live-in caregivers.
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Demographics
The primary market for the Company's senior living services is
comprised of persons aged 75 and older. This age group is one of the fastest
growing segments of the United States population and is expected to more than
double by the year 2030. The population of seniors aged 85 and over is expected
to increase from approximately 3.1 million in 1990 to over 4.3 million by 2000,
an increase of 39%. As the number of persons aged 75 and over continues to grow,
the Company believes that there will be corresponding increases in the number of
persons who need assistance with ADLs. According to industry analyses,
approximately 19% of persons aged 75-79, approximately 24% of persons aged 80-84
and approximately 45% of persons aged 85 and older need assistance with ADLs.
According to the Alzheimer's Association the number of persons afflicted with
Alzheimer's disease is expected to grow from the current 4.0 million to 14.0
million by the year 2050.
Restricted Supply of Nursing Beds
The majority of states in the United States have adopted Certificate of
Need or similar statutes generally requiring that, prior to the addition of new
skilled nursing beds, the addition of new services, or the making of certain
capital expenditures, a state agency must determine that a need exists for the
new beds or the proposed activities. The Company believes that this Certificate
of Need process tends to restrict the supply and availability of licensed
nursing facility beds. High construction costs, limitations on government
reimbursement for the full costs of construction, and start-up expenses also act
to constrain growth in the supply of such facilities. At the same time, nursing
facility operators are continuing to focus on improving occupancy and expanding
services to subacute patients generally of a younger age and requiring
significantly higher levels of nursing care. As a result, the Company believes
that there has been a decrease in the number of skilled nursing beds available
to patients with lower acuity levels and that this trend should increase the
demand for the Company's senior living communities, including particularly the
Company's assisted living communities and skilled nursing facilities.
Cost-Containment Pressures
In response to rapidly rising health care costs, governmental and
private pay sources have adopted cost containment measures that have reduced
admissions and encouraged reduced lengths of stays in hospitals and other acute
care settings. The federal government had previously acted to curtail increases
in health care costs under Medicare by limiting acute care hospital
reimbursement for specific services to pre-established fixed amounts. Private
insurers have begun to limit reimbursement for medical services in general to
predetermined charges, and managed care organizations (such as health
maintenance organizations) are attempting to limit hospitalization costs by
negotiating for discounted rates for hospital and acute care services and by
monitoring and reducing hospital use. In response, hospitals are discharging
patients earlier and referring elderly patients, who may be too sick or frail to
manage their lives without assistance, to nursing homes and assisted living
residences where the cost of providing care is typically lower than hospital
care. In addition, third-party payors are increasingly becoming involved in
determining the appropriate health care settings for their insureds or clients,
based primarily on cost and quality of care. Based on industry data, the typical
day-rate in an assisted living facility is two thirds of the cost for comparable
care in a nursing home.
Senior Affluence
The average net worth of senior citizens is higher than non-senior
citizens, partially as a result of accumulated equity through home ownership.
The Company believes that a substantial portion of the senior population thus
has significant resources available for their retirement and long-term care
needs. The Company's target population is comprised of moderate- to upper-income
seniors who have, either directly or indirectly through familial support, the
financial resources to pay for senior living communities, including an assisted
living alternative to traditional long-term care.
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Reduced Reliance on Family Care
Historically, the family has been the primary provider of care for
seniors. The Company believes that the increase in the percentage of women in
the work force, the reduction of average family size, and the increased mobility
in society is reducing the role of the family as the traditional caregiver for
aging parents. The Company believes that these factors will make it necessary
for many seniors to look outside the family for assistance as they age.
OPERATING STRATEGY
The Company's operating strategy is to provide high quality senior
living services at an affordable price to its residents, while achieving and
sustaining a strong, competitive position within its chosen markets, as well as
to continue to enhance the performance of its operations. The Company is
implementing its operating strategy principally through the following methods:
Continue to Provide Broad Range of High-Quality Personalized Care
Central to the Company's operating strategy is its focus on providing
high-quality care and services that are personalized and tailored to meet the
individual needs of each community resident. The Company's residences and
services are designed to provide a broad range of care that permits residents to
"age in place" as their needs change and as they develop further physical or
cognitive frailties. By creating an environment that maximizes resident autonomy
and provides individualized service programs, the Company seeks to attract
seniors at an earlier stage, before they need the higher level of care provided
in a skilled nursing facility. The Company also maintains a comprehensive
quality assurance program designed to ensure the satisfaction of its residents
and their family members. The Company conducts annual resident satisfaction
surveys, which allow the residents at each community to express whether they are
"very satisfied," "satisfied" or "dissatisfied" with all major areas of a
community - housekeeping, maintenance, activities and transportation, food
service, security and management. In 1998 and 1997, the Company achieved a 95%
and 96% overall approval rating (satisfied or very satisfied), respectively,
from its residents in this polling of its residents' satisfaction.
Offer Services Across a Range of Pricing Options
The Company's range of products and services is continually expanding
to meet the evolving needs of its residents. The Company has developed a menu of
products and service programs which may be further customized to serve both the
moderate and upper income markets of a particular targeted geographic area. By
offering a range of pricing options that are customized for each target market,
the Company believes that it can develop synergies, economies of scale, and
operating efficiencies in its efforts to serve a larger percentage of the
elderly population within a particular geographic market.
Maintain and Improve Occupancy Rates
The Company continually seeks to maintain and improve occupancy rates
by: (i) retaining residents as they "age in place" by extending optional care
and service programs; (ii) attracting new residents through the on-site
marketing program focus on residents and family members; and (iii) aggressively
seeking referrals from professional community outreach sources, including area
religious organizations, senior social service programs, civic and business
networks, as well as the medical community.
Improve Operating Efficiencies
The Company seeks to improve operating efficiencies at its communities
by continuing to actively monitor and manage operating costs. By having an
established national portfolio of communities with regional management in place,
the Company believes it has established a platform to achieve operating
efficiencies through economies of scale in the purchase of bulk items, such as
food, and in the spreading of fixed costs, such as corporate overhead, over a
larger
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revenue base, and to provide more effective management supervision and financial
controls. The Company's development strategy includes regional clustering of new
communities to achieve further efficiencies.
Emphasize Employee Training and Retention
The Company devotes special attention to the hiring, screening,
training, supervising, and retention of its employees and caregivers to ensure
that quality standards are achieved. In addition to the normal on-site training,
the Company conducts annual national management meetings and encourages sharing
of expertise among managers. The Company's commitment to the total quality
management concept is emphasized throughout its training program. This
commitment to the total quality management concept means identification of the
"best practices" in the senior living market and communication of those best
practices to our executive directors and their staff. The identification of best
practices is realized by a number of means, including, emphasis on regional and
executive directors keeping up with professional trade journals; interaction
with other professionals and consultants in the senior living industry through
seminars, conferences, and consultations; visits to other properties; leadership
and participation at national and local trade organization events; as well as
information derived from marketing studies and resident satisfaction surveys.
This information is continually processed by regional managers and the executive
directors and communicated to the Company's employees as part of their training.
The Company believes its commitment to and emphasis on employee training and
retention differentiates the Company from many of its competitors.
Utilize Comprehensive Information Systems
The Company employs comprehensive proprietary information systems to
manage financial and operating data in connection with the management of its
communities. Utilizing its computerized systems, the Company is able to collect
and monitor on a regular basis key operating data for its communities. Reports
are routinely prepared and distributed to on-site, district and regional
managers for use in managing the profitability of the communities. The Company's
management information systems provide senior management with the ability to
identify emerging trends, monitor and control costs and develop current pricing
strategies. The Company believes that its proprietary information systems are
sufficient to support future growth and that the Company will have adequate
resources to expand these systems to support the growth envisioned by the
Company's business plan.
CARE AND SERVICES PROGRAMS
The Company provides a wide array of senior living services to the
elderly at its communities, including independent living, assisted living (with
special programs and living units at some of its communities for residents with
Alzheimer's and other forms of dementia), skilled nursing, and home care
services. By offering a variety of services and encouraging the active
participation of the resident and the resident's family and medical consultants,
the Company is able to customize its service plan to meet the specific needs and
desires of each resident. As a result, the Company believes that it is able to
maximize customer satisfaction and avoid the high cost of delivering unnecessary
services to residents.
Independent Living Services
The Company provides independent living services to seniors who do not
yet need assistance or support with ADLs, but who prefer the physical and
psychological comfort of a residential community that offers health care and
other services. As of December 31, 1998, the Company had ownership interests in
11 communities and managed an additional 14 communities which provide
independent living services, with an aggregate capacity for 1,914 and 2,140
residents, respectively.
Independent living services provided by the Company include daily
meals, transportation, social and recreational activities, laundry,
housekeeping, security and health care monitoring. The Company also fosters the
wellness of its residents by offering health screenings (such as blood pressure
checks), periodic special services (such as influenza inoculations), chronic
disease management (such as diabetes with its attendant blood glucose
monitoring), dietary and similar programs, as well as ongoing exercise and
fitness classes. Classes are given by health care professionals to keep
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residents informed about health and disease management. Subject to applicable
government regulation, personal care and medical services are available to
independent living residents through either the community staff or through the
Company's or independent home care agencies. The Company's independent living
residents pay a fee ranging from $1,250 to $2,400 per month, in general,
depending on the specific community, program of services, size of the unit, and
amenities offered. The Company's contracts with its independent living residents
are generally for a term of one year and are typically terminable by the
resident upon 30 days' notice.
Assisted Living and Memory Impaired Services
The Company offers a wide range of assisted living care and services 24
hours per day, including personal care services, support services, and
supplemental services. As of December 31, 1998, the Company had ownership
interests in 10 communities, and managed an additional 10 communities which
provide assisted living services, with an aggregate capacity for 383 and 412
residents, respectively. The residents of the Company's assisted living
residences generally need help with some or all ADLs, but do not require the
more acute medical care traditionally given in nursing homes. Upon admission to
the Company's assisted living communities, and in consultation with the
resident, the resident's family and medical consultants, each resident is
assessed to determine his or her health status, including functional abilities,
and need for personal care services, and completes a lifestyles assessment to
determine the resident's preferences. From these assessments, a care plan is
developed for each resident to ensure that all staff members who render care
meet the specific needs and preferences of each resident where possible. Each
resident's care plan is reviewed periodically to determine when a change in care
is needed.
The Company has adopted a philosophy of assisted living care that
allows a resident to maintain a dignified independent lifestyle. Residents and
their families are encouraged to be partners in their care and to take as much
responsibility for their well being as possible. The basic types of assisted
living services offered by the Company include the following:
Personal Care Services. These services include assistance with ADLs
such as ambulation, bathing, dressing, eating, grooming, personal
hygiene, and monitoring or assistance with medications.
Support Services. These services include meals, assistance with social
and recreational activities, laundry services, general housekeeping,
maintenance services, and transportation services.
Supplemental Services. These services include extra transportation
services, personal maintenance, extra laundry services, non-routine
care services, and special care services, such as services for
residents with Alzheimer's and other forms of dementia. Certain of
these services require an extra charge in addition to the pricing
levels described below.
In pricing its services, the Company has developed the following three
levels or tiers of assisted living care:
o Level I typically provides for minimum levels of care and service, for
which the Company generally charges a monthly fee per resident ranging
from $1,750 to $1,900, depending upon unit size and the project design
type. Typically, Level I residents need minimal assistance with ADLs.
o Level II provides for relatively higher levels and increased frequency
of care, for which the Company generally charges a monthly fee per
resident ranging from $1,900 to $2,250, depending upon the unit size
and the project design type. Typically, Level II residents require
moderate assistance with ADLs and may need additional personal care,
support, and supplemental services.
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o Level III provides for the highest level of care and service, for
which the Company generally charges a monthly fee per resident ranging
from $2,250 to $2,400, depending upon the unit size and the project
design type. Typically, Level III residents are either very frail or
impaired and utilize many of the Company's services on a regular
basis.
The Company maintains programs and special units at some of its
assisted living communities for residents with Alzheimer's and other forms of
dementia, which provide the attention, care and services needed to help those
residents maintain a higher quality of life. Specialized services include
assistance with ADLs, behavior management and a lifeskills based activities
program, the goal of which is to provide a normalized environment that supports
residents' remaining functional abilities. Whenever possible, residents assist
with meals, laundry and housekeeping. Special units for residents with
Alzheimer's and other forms of dementia are located in a separate area of the
community and have their own dining facilities, resident lounge areas, and
specially trained staff. The special care areas are designed to allow residents
the freedom to ambulate as they wish while keeping them safely contained within
a secure area with a minimum of disruption to other residents. Special
nutritional programs are used to help ensure caloric intake is maintained in
residents. Resident fees for these special units are dependent on the size of
the unit, the design type and the level of services provided.
Skilled Nursing Services
In its skilled nursing facilities, the Company provides traditional
long-term care through 24-hour per day skilled nursing care by registered
nurses, licensed practical nurses and certified nursing assistants. The Company
also offers a comprehensive range of restorative nursing and rehabilitation
services in its communities including, but not limited to, physical,
occupational, speech and medical social services. As of December 31, 1998, the
Company had ownership interests in seven facilities and managed an additional
facility which provides nursing services, with an aggregate capacity for 746 and
60 residents, respectively.
Home Care
As of December 31, 1998, the Company provided private pay home care
services to clients at one of its senior living communities through the
Company's on-site home care agency and made private pay home care services
available to clients at a majority of its senior living communities through
third party providers. The Company believes that the provision of private pay
home care services is an attractive adjunct to its independent living services
because it allows the Company to provide more services to its residents as they
age in place and increase the length of stay in the Company's communities. The
services and products that the Company provides through its home care agency
include: (i) general and specialty nursing services to clients with long-term
chronic health conditions, permanent disabilities, terminal illnesses and
post-procedural needs; (ii) rehabilitative therapy services including physical,
occupational and speech therapy through outside contractors; (iii) personal care
services and assistance with ADLs; (iv) enhanced hospice care for clients in the
final phases of incurable disease; and (v) extensive monitoring and educational
services relative to respiratory care, medication administration, medical
equipment, and medical supplies. The Company intends to expand its home care
service business to additional senior living communities and to develop, acquire
or manage home care service businesses at other such communities. In addition,
the Company will make available to residents certain customized physician,
dentistry, podiatry and other health-related services that may be offered by
third-party providers. The Company may elect to provide these services directly
or through participation in managed care networks.
OPERATING COMMUNITIES
The table below sets forth certain information with respect to the
independent, senior living, and continuum of care communities owned, leased, and
managed by the Company as of December 31, 1998. The Company is expanding certain
of these communities, primarily to add assisted living units. See "Growth
Strategies - Expand Existing Communities." These expansions, along with the
availability of private pay home care services, allow the Company to broaden its
continuum of care services to allow residents to age in place.
8
<PAGE>
<TABLE>
<CAPTION>
RESIDENT CAPACITY (1)
COMMENCEMENT OCCUPANCY
OWNER- OF DATE RATE AT
COMMUNITY LOCATION IL AL SN TOTAL SHIP(2) OPERATIONS (3) BUILT 12-31-98
----------- ---------- ---- ---- ---- ----- ------- -------------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OWNED:
Amberleigh............. Buffalo, NY 365 29 -- 394 33% 1/92 1989 95%
Atrium of Carmichael... Sacramento, CA 156 -- -- 156 100% 1/92 1984 97%
Cambridge Nursing
Home................. Cambridge, MA -- -- 120 120 57% 7/93 1967 90%
Canton Regency......... Canton, OH 164 34 50 248 100% 3/91 1987 96%
Cottonwood Village..... Cottonwood, AZ 135 47 -- 182 100% 3/91 1985 54%(5)
Crosswood Oaks......... Sacramento, CA 127 -- -- 127 100% 1/92 1978 95%
Gramercy Hill.......... Lincoln, NE 101 59 -- 160 100% 10/98 1985 98%
Harrison at Eagle Valley Indianapolis, IN 138 -- -- 138 100% 3/91 1985 99%(7)
Heatherwood............ Detroit, MI 188 -- -- 188 100% 1/92 1986 92%
Tesson Heights......... St Louis, MO 140 58 -- 198 100% 10/98 1986 98%
Towne Centre........... Merrillville, IN 165 34 64 263 100% 3/91 96%
Veranda Club........... Boca Raton, FL 235 -- -- 235 100% 1/92 1987 89%
------ ---- ---- ----- ------
Subtotal............. 1,914 261 234 2,409 94%
OWNED AND LEASED TO
OTHERS:
Cane Creek............. Martin, TN -- 8 36 44 57% 7/93 1985 100%(4)
Cedarbrook............. Nashville, TN -- 42 -- 42 57% 7/93 1985 100%(4)
Crenshaw Creek......... Lancaster, SC -- 36 -- 36 57% 7/93 1988 100%(4)
Hearthstone............ Austin, TX -- -- 120 120 57% 7/93 1988 100%(4)
McCurdy................ Evansville, IN -- -- 236 236 57% 7/93 1916 100%(4)
Sandybrook............. Orlando, FL -- 36 -- 36 57% 7/93 1985 100%(4)
Trinity Hills.......... Fort Worth, TX -- -- 120 120 57% 7/93 1971 100%(4)
------ ---- ---- -----
Subtotal............. -- 122 512 634
MANAGED:
Buckner Parkway Place.. Houston, TX 243 82 60 385 1/98 1998 89%(5)
Buckner Westminster
Place................ Longview, TX 117 -- -- 117 6/96 1996 99%(8)
Crown Pointe........... Omaha, NE 163 -- -- 163 8/96 1984 99%(8)
Crown Villa............ Omaha, NE -- 73 -- 73 8/96 1992 99%(8)
Independence Village... East Lansing, MI 162 -- -- 162 8/96 1989 91%(8)
Independence Village... Peoria, IL 173 -- -- 173 8/96 1990 99%(8)
Independence Village... Raleigh, NC 155 22 -- 177 8/96 1991 93%(8)
Independence Village... Winston-Salem, NC 145 16 -- 161 8/96 1986 94%(8)
Overland Park Place.... Kansas City, KS 126 25 -- 151 8/96 1994 99%(8)
The Palms.............. Fort Myers, FL 235 20 -- 255 8/96 1988 94%(8)
Rio Las Palmas......... Stockton, CA 142 50 -- 192 8/96 1988 95%(8)
Sedgwick Plaza......... Wichita, KS 117 54 -- 171 8/96 1984 93%(8)
Villa at Riverwood..... St. Louis, MO 140 -- -- 140 8/96 1986 96%(8)
Villa Santa Barbara.... Santa Barbara, CA 87 38 -- 125 8/96 1979 99%(8)
West Shores............ Hot Springs, AR 135 32 -- 167 8/96 1986 96%(8)
------ ---- ---- ----- ------
Subtotal/Average..... 2,140 412 60 2,612 95%
------ ---- ---- ----- ------
Grand Total.......... 4,054 795 806 5,655 95%(6)
====== ==== ==== ===== ======
<FN>
- ----------
(1) Independent living (IL) residences, assisted living (AL) residences
(including areas dedicated to residents with Alzheimer's and other
forms of dementia) and skilled nursing (SN) beds.
(2) In the case of those communities shown as 33% owned by the Company,
this represents ownership of approximately 33% of the outstanding NHP
Notes which are secured by the properties. In the case of those
communities shown as approximately 57% owned, this represents the
Company's ownership of approximately 57% of the limited partner
interests in HCP.
(3) Indicates the date on which the Company acquired each of its owned
communities or commenced operating its managed communities. The Company
operated certain of its communities pursuant to management agreements
prior to acquiring the communities.
(4) Represents communities owned by the Company and leased to third parties
pursuant to master leases under which the Company receives rent
regardless of whether the units are occupied. Does not represent
occupancy rate, but rather percentage of property leased pursuant to
the master lease. These leases were in place at the time the Company
acquired its interest in these communities.
(5) The Cottonwood Village and Buckner Parkway Place communities were in
their initial lease-up phase at December 31, 1998. At Cottonwood, the
expansion, along with renovations to the existing building, resulted in
a temporary reduction of occupancy.
(6) Excludes communities owned and leased to others.
(7) The Company's home care agency is on-site at the Harrison at Eagle
Valley Community.
(8) Communities managed for ILM I Lease Corporation and ILM II Lease
Corporation.
</FN>
</TABLE>
9
<PAGE>
THIRD-PARTY MANAGEMENT CONTRACTS
The Company is a party to two separate property management agreements
(the "ILM Management Agreements") with ILM I Lease Corporation and ILM II Lease
Corporation, corporations formed by ILM Senior Living, Inc. and ILM II Senior
Living, Inc. (collectively, "ILM") that operate 13 senior living communities.
The ILM Management Agreements commenced on July 29, 1996 and will expire on
December 31, 1999 and December 31, 2000, respectively, subject to extension
under certain circumstances, but not beyond July 29, 2001. Under the terms of
the ILM Management Agreements, the Company earns a base management fee equal to
4% of the gross operating revenues of the facilities under management (as
defined), and is also eligible to receive an incentive management fee equal to
25% of the amount by which the average monthly net cash flow of the facilities
(as defined) for the 12-month period ending on the last day of each calendar
month exceeds a specified base amount. The ILM Management Agreements are
terminable upon the sale of the related facilities, subject to the Company's
rights to offer to purchase the facilities. In the event of a sale, the Company
has the right to make the first and last offer with respect to the purchase of
the facilities subject to the ILM Management Agreements. The Company earned a
total of $980,159 and $969,068, respectively, under the two ILM Management
Agreements for the year ended December 31, 1998, which includes the incentive
management fee, and $854,948 and $734,755, respectively, for the year ended
December 31, 1997.
On February 7, 1999, the Company entered into separate agreements and
plans of merger with ILM Senior Living, Inc. and ILM II Senior Living, Inc. Upon
completion of such mergers, the Company will own the 13 communities currently
managed under the ILM Management Agreements and will terminate the ILM
Management Agreements. See "Pending Mergers" for a description of these
transactions and the conditions which must be satisfied for their completion.
The Company is also a party to two separate property management
agreements (the "Buckner Agreements") with Buckner Retirement Services, Inc., a
not-for-profit corporation that operates two senior living communities. The
Buckner Agreements commenced on April 1, 1996 and 1997 and expire on March 31,
2001 and 2002, respectively, except that either party may terminate the
agreements for cause under limited circumstances. Under the terms of the Buckner
Agreement for Buckner Parkway Place, the Company earns a base management fee of
$25,300 per month. Under the terms of the Buckner Westminster Place Agreement,
the Company earns a base management fee of $6,050 per month. In the case of the
Buckner Westminister Place Agreement, the Company was also entitled, through
August 31, 1997, to a marketing lease-up fee of $500 for each unit at the time
it was initially occupied. Also, in the case of both of the Buckner Agreements,
the Company is also eligible to receive a productivity reward equal to 5% of the
Gross Revenues generated during the immediately preceding month that exceed
$507,000 and $121,000, respectively. Both agreements have a productivity reward
limit of 20% of the base management fee per month. The amounts that exceed the
limit are deferred. The productivity reward took the place of the incentive fee
during 1997. Pursuant to the terms of the Buckner Agreements, the Company has a
right of first refusal with respect to purchasing the communities subject to
these agreements.
GROWTH STRATEGIES
The Company believes that the fragmented nature of the senior living
services industry and the limited capital resources available to many small,
private operators provide an attractive opportunity for the Company to expand
its existing base of senior living operations. The Company believes that its
current operations throughout the United States serve as the foundation on which
the Company can build senior living networks in targeted geographic markets and
thereby provide a broad range of high quality care in a cost-efficient manner.
The following are the principal elements of the Company's growth
strategy:
Develop New Senior Living Communities
General. The Company intends to continue to expand its operations
through the development, construction, marketing and management of new senior
living communities in selected markets which provide a quality lifestyle that is
10
<PAGE>
affordable to a large segment of seniors. The Company's national presence
provides it with extensive research and experience in various markets which
serve as the basis for the formulation of its development strategy in the
selection of new markets. The Company's development plan calls for the
identification of multiple markets in which construction can occur within the
Company's targeted time frame and budget. The Company has developed a list of
target markets and submarkets based upon local market conditions, the
availability of development sites and local construction capabilities, the
existence of development barriers to entry, the overall health and growth trends
of the local economies, and the presence of a significant elderly population.
The Company's senior management has extensive experience in senior
living development, having developed in excess of $400.0 million of senior
living communities. The Company has an integrated internal development approach
pursuant to which the Company's management and other personnel (including
designers and architects, market analysts, and construction managers) locate
sites for, develop, and open its communities. Personnel who are experienced in
site selection conduct extensive market and site-specific feasibility studies
prior to the Company's committing significant financial resources to new
projects. The Company believes it can expand its operations into new markets and
strengthen its presence within its existing markets utilizing its existing
residence models, such as the Waterford model, discussed below.
Development with Triad. Twenty-seven of the 34 senior living
communities referred to in the table below will be Waterford Communities and
will be developed pursuant to an arrangement with 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. The Waterford community model is designed to
provide middle income residents with a senior living community having amenities
typical of higher-priced communities, through more efficient space design,
emphasizing common areas and providing more efficient layouts of the living
areas.
The Waterford design may be configured in a number of different ways
thereby providing the Company with flexibility in adapting to a particular
geographic market, neighborhood, site or care need. In addition, the Waterford
design has been developed to facilitate the prompt, efficient, cost-effective
delivery of senior care and personal services. Site requirements for the various
designs range from 4.5 to 6.0 acres. The Waterford design may also provide for
specially designed residential units, common areas and dining rooms for
residents with Alzheimer's and other forms of dementia.
The Company believes that its designs meet the desire of many of its
residents to move into a new residence that approximates, as nearly as possible,
the comfort of their prior home. The Company also believes that its designs
achieve several other objectives, including: (i) lessening the trauma of change
for residents and their families; (ii) facilitating resident mobility and
caregiver access; (iii) enhancing operating efficiencies; (iv) enhancing the
Company's ability to match its products to targeted markets; and (v)
differentiating the Company from its competitors.
The Company had previously entered into a development agreement to
develop the Waterford communities with Tri Point Communities, L.P. ("Tri
Point"), a limited partnership owned by the Company's founders (Messrs. Beck and
Stroud) and their affiliates. 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. Tri Point was renamed Triad Senior
Living I, L.P. ("Triad I"). The new general partner of Triad I, owning 1%, is
Triad Senior Living, Inc.
Five of the 34 senior living communities referred to in the table below
will be Waterford communities developed pursuant to an arrangement with Triad I,
a limited partnership owned 19% by the Company and 81% by unrelated third
parties, under which Triad I will pay development and management fees to the
Company for development and management services and the Company will have
options to purchase the partnership interests in Triad I of the non-Company
partners and to purchase the communities upon their completion and during the
term of the management contracts. Triad I will be responsible for funding and
obtaining financing for the construction and lease-up costs. The Company made
available to Triad I an unsecured credit facility not to exceed $10 million.
These communities will have an aggregate capacity for approximately 756
residents at an aggregate estimated cost of completion and lease-up of
approximately $40.0 million to $50.0 million.
Three of the 34 senior living communities referred to in the table
below will be Waterford communities developed pursuant to an arrangement with
Triad Senior Living II, L.P. ("Triad II"), a limited partnership owned 19% by
11
<PAGE>
the Company and 81% by unrelated third parties. Triad II will pay development
and management fees to the Company for development and management services and
the Company will have options to purchase the partnership interests in Triad II
of the non-Company partners and to purchase the communities upon their
completion during the term of the management contracts. Triad II will be
responsible for funding and obtaining financing for the construction and
lease-up costs. The Company has made available to Triad II an unsecured credit
facility not to exceed $10 million. These communities will have an aggregate
capacity for approximately 408 residents at an aggregate estimated cost of
completion and lease-up of approximately $25 million to $30 million.
Six of the 34 senior living communities referred to in the table below
will be Waterford communities developed pursuant to an arrangement with Triad
Senior Living III, L.P. ("Triad III"), a limited partnership owned 19% by the
Company and 81% by unrelated third parties. Triad III will pay development and
management fees to the Company for development and management services and the
Company will have options to purchase the partnership interests in Triad III of
the non-Company partners and to purchase the communities upon their completion
during the term of the management contracts. Triad III will be responsible for
funding and obtaining financing for the construction and lease-up costs. The
Company has made available to Triad III, an unsecured credit facility not to
exceed $10 million. These communities will have an aggregate capacity for
approximately 816 residents at an aggregate estimated cost of completion and
lease-up of approximately $50 million to $60 million.
Up to six of the 34 senior living communities referred to in the table
below will be Waterford communities developed pursuant to an arrangement with
Triad Senior Living IV, L.P. ("Triad IV"), a limited partnership owned 19% by
the Company and 81% by unrelated third parties. Triad IV will pay development
and management fees to the Company for development and management services and
the Company will have options to purchase the partnership interests in Triad IV
of the non-Company partners and to purchase the communities upon their
completion during the term of the management contracts. Triad IV will be
responsible for funding and obtaining financing for the construction and
lease-up costs. The Company has made available to Triad IV an unsecured credit
facility not to exceed $10 million. These communities will have an aggregate
capacity for approximately 816 residents at an aggregate estimated cost of
completion and lease-up of approximately $50 million to $60 million.
Up to seven of the 34 senior living communities referred to in the
table below will be Waterford communities developed pursuant to an arrangement
with another Triad limited partnership, which has not yet been formed. It is
expected that the limited partnership will be owned 19% by a wholly owned
subsidiary of the Company and 81% by unrelated third parties.
The development agreements between each Triad entity and the Company
provide for a development fee of 4%, plus reimbursements for expenses and
overhead not to exceed 4%. The Triad entities also enter into management
agreements with the Company providing for management fees to the Company in an
amount equal to the greater of 5% of gross revenues or $5,000 per month per
community, plus overhead reimbursements not to exceed 1% of gross revenues.
Under each Triad partnership agreement, the Company has an option to purchase
the partnership interests of the non- Company partners for an amount equal to
the amount such party paid for its interest, plus noncompounded interest of 12%
per annum. The property management agreements also provide the Company with an
option to purchase the communities developed by the Triad entities 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 option based
upon the business and financial factors which may exist at the time those
options may be exercised.
Development through Other Strategic Alliances. The Company has also
formed strategic alliances with for-profit (LCOR Incorporated - "LCOR") and
not-for-profit organizations (Buckner Retirement Services, Inc. and The Emmaus
Calling, Inc.) to develop, market and manage additional communities while
reducing the investment of, and associated risks to, the Company. The Company's
alliances are with established development companies or not-for-profit
owner/operators of senior living communities. Seven of the 34 senior living
communities referred to in the table below will be developed through strategic
alliances. The for-profit entities generally obtain construction financing and
provide construction management experience, existing relationships with local
contractors, suppliers, and municipal authorities, knowledge of local and state
building codes and building laws, and assistance with site selection for new
communities. The
12
<PAGE>
not-for-profit organizations generally provide existing relationships with
religious organizations, a community reputation of caring for seniors, a
tax-exempt status that permits tax-exempt bond financing, and in certain
instances, home care services. The Company contributes its operational and
industry expertise, and has had, in most cases, leasing and management
responsibilities for communities owned by these organizations, as well as has
the right of first refusal to acquire the communities in most cases. The Company
intends to continue to evaluate opportunities to form similar joint ventures and
strategic alliances in the future.
As of December 31, 1998, four sites have been purchased for the
development and operation of independent and assisted living communities by
LCOR. The sites are Trumbull, Connecticut; Libertyville, Illinois; Summit, New
Jersey; and Naperville, Illinois. The Management Agreements between LCOR and the
Company generally provide for a base management fee of the greater of $15,000
per month or 5% of gross revenues plus an incentive fee equal to 25% of the
excess cash flow over budgeted amounts. The terms are for 10 years with a five
year renewal at the Company's option. The Company is also entitled to a fee of
$50,000 for development consulting services for each development and a monthly
marketing fee of approximately $10,000 per month for each community, which
generally covers the period prior to the expected opening of the communities,
usually six to nine months.
The Company has entered into a strategic alliance with Buckner
Retirement Services, Inc. ("Buckner") to develop, market and manage senior
living communities developed by Buckner. As of December 31, 1998, two sites have
been purchased for the development and operation of independent, assisted living
and skilled nursing communities. The sites are Beaumont, Texas and Georgetown,
Texas. The Management Agreements between Buckner and the Company generally
provide for a base management fee plus a productivity reward equal to 5% of the
gross revenues generated during the immediately preceding month that exceed a
base figure. The productivity reward has a limit of 20% of the base management
fee per month. The amounts that exceed the limit are deferred. The terms are for
five years.
The Company has also entered into a strategic alliance with The Emmaus
Calling, Inc. ("Emmaus") to develop, market and manage a senior living community
developed by Emmaus. As of December 31, 1998, one site has been purchased for
the development and operation of an assisted living community. The site is in
Mesquite, Texas. The Management Agreement between Emmaus and the Company
provides for a base management fee of $8,000 per month adjusted yearly by the
difference between the Consumer Price Index for the year less the Consumer Price
Index for the year of completion. The term is for 15 years.
As of December 31, 1998, there were 34 communities under development.
Seven of these communities (Beaumont, Texas; Mesquite, Texas; Libertyville,
Illinois; Naperville, Illinois; Trumbull, Connecticut; Summit, New Jersey; and
Georgetown, Texas) were being developed for third parties where the Company will
manage these communities under management agreements and has no equity interest
and 27 of these communities were being developed with the Triad entities where
the Company will manage these communities under management agreements and where
the Company has a 19% limited partner interest in each of the Triad entities.
The table below summarizes information regarding those developments which the
Company expects to be completed through 2000.
<TABLE>
<CAPTION>
RESIDENT CAPACITY(1)
LOCATION OF DEVELOPMENT ----------------------------------------------
- ----------------------- SCHEDULED
PROJECTS: COMPLETION IL AL SN TOTAL STATUS(2)
- --------- ---------- -- -- -- ------ ---------
<S> <C> <C> <C> <C> <C>
San Antonio I, TX.............. 1st half 1999 136 - - 136 Completed
Shreveport, LA................. 1st half 1999 136 - - 136 Completed
Beaumont, TX (3)............... 2nd half 1999 124 46 30 200 Construction
Fort Worth, TX................. 2nd half 1999 174 - - 174 Construction
Mesquite, TX................... 2nd half 1999 174 - - 174 Construction
San Antonio II, TX............. 2nd half 1999 136 - - 136 Construction
Libertyville, IL (4)........... 1st half 2000 140 - - 140 Construction
Mesquite, TX (5)............... 1st half 2000 - 105 - 105 Construction
Naperville, IL (4)............. 1st half 2000 135 - - 135 Construction
Oklahoma City, OK.............. 1st half 2000 136 - - 136 Construction
Trumbull, CT (4)............... 1st half 2000 120 30 - 150 Construction
13
<PAGE>
Baton Rouge, LA................ 1st half 2000 136 - - 136 Development
Columbia, SC .................. 1st half 2000 136 - - 136 Development
Crestview Hills, KY............ 1st half 2000 136 - - 136 Development
Dayton, OH..................... 1st half 2000 136 - - 136 Development
Deer Park, TX.................. 1st half 2000 136 - - 136 Development
Fairfield, OH ................. 1st half 2000 136 - - 136 Development
Gilbert, AZ.................... 1st half 2000 158 - - 158 Development
Greenville, SC................. 1st half 2000 136 - - 136 Development
Hilliard, OH................... 1st half 2000 136 - - 136 Development
Jackson, MS.................... 1st half 2000 136 - - 136 Development
Mansfield, OH ................. 1st half 2000 136 - - 136 Development
North Richland Hills, TX ...... 1st half 2000 136 - - 136 Development
Pantego, TX ................... 1st half 2000 136 - - 136 Development
Plano, TX...................... 1st half 2000 156 - - 156 Development
Richardson II, TX.............. 1st half 2000 136 - - 136 Development
South Bend, IN ................ 1st half 2000 136 - - 136 Development
Springfield, MO................ 1st half 2000 136 - - 136 Development
Summit, NJ (4)................. 1st half 2000 - 90 - 90 Development
Des Moines, IA................. 2nd half 2000 136 - - 136 Development
Georgetown, TX (3)............. 2nd half 2000 270 84 40 394 Development
Richardson I, TX .............. 2nd half 2000 176 - - 176 Development
Richmond Heights, OH........... 2nd half 2000 164 - - 164 Development
Tucson, AZ..................... 2nd half 2000 136 - - 136 Development
---- --- --- ----
Total 4,647 355 70 5,072
===== === == =====
<FN>
- ------------------------
(1) Independent living (IL) residences, assisted living (AL) residences
(including areas dedicated to residents with Alzheimer's and other
forms of dementia) and skilled nursing (SN) beds.
(2) "Development" indicates that development activities, such as surveys,
preparation of architectural plans, or zoning processes, have commenced
(but construction has not commenced). "Construction" indicates that
construction activities, such as groundbreaking activities, exterior
construction or interior build-out have commenced. "Completed"
indicates that construction has been completed and the community is in
the lease-up period.
(3) Represent communities being developed with Buckner.
(4) Represent communities being developed with LCOR.
(5) Represent a community being developed with Emmaus.
</FN>
</TABLE>
Expand Existing Communities
The Company plans to expand certain of its existing communities to
include additional independent living and assisted living residences (including
special programs and living units for residents with Alzheimer's and other forms
of dementia). As of December 31, 1998, the Company had three expansion projects
under construction and seven expansion projects under development, representing
an aggregate increase in capacity to accommodate an additional 564 residents. Of
these ten expansion projects, four are at communities in which the Company owns
an interest and manages under multi-year agreements, and six are at communities
which the Company manages for third parties. The costs of the expansion of
managed communities is borne by the community owner and not by the Company.
However, with respect to the four expansion projects in which the Company has an
ownership interest, the Company will manage the expansion and have rights to
purchase the expansion facilities. The expansion of existing senior living
communities allows the Company to create operating efficiencies and capitalize
on its local presence, community familiarity and reputation in markets in which
the Company operates.
The table below summarizes information regarding the expansion of
certain of the Company's existing senior living communities as of December 31,
1998.
14
<PAGE>
<TABLE>
<CAPTION>
RESIDENT CAPACITY (1)
SCHEDULED ---------------------
COMMUNITY LOCATION COMPLETION IL AL TOTAL STATUS(2)
--------- -------- ------------- -- -- ----- ---------
<S> <C> <C> <C> <C> <C> <C>
Buckner Westminister Village.............. Longview, TX 2nd half 1999 24 30 54 Construction
Canton Regency............................ Canton, OH 2nd half 1999 - 62 62 Construction (3)
Towne Centre.............................. Merrillville, IN 2nd half 1999 - 60 60 Construction (3)
Crown Point............................... Omaha, NE 1st half 2000 72 - 72 Development
Crown Villa............................... Omaha, NE 1st half 2000 - 24 24 Development
Independence Village...................... East Lansing, MI 1st half 2000 - 60 60 Development
Independence Village...................... Raleigh, NC 1st half 2000 - 50 50 Development
The Heatherwood........................... Southfield, MI 1st half 2000 - 50 50 Development (4)
The Palms................................. Ft Myers, FL 1st half 2000 - 52 52 Development
The Amberleigh at Woodside Farms.......... Williamsville, NY 2nd half 2000 - 80 80 Development
-- --- ---
Total 96 468 564
== === ===
<FN>
- ----------
(1) Independent living (IL) residences, assisted living (AL) residences
(including areas dedicated to residents with Alzheimer's and other
forms of dementia) and skilled nursing (SN) beds.
(2) "Development" indicates that development activities, such as surveys,
preparation of architectural plans, or zoning processes, have commenced
(but construction has not commenced). "Construction" indicates that
construction activities, such as groundbreaking activities, exterior
construction or interior build-out have commenced.
(3) Triad I purchased the land and will develop the expansions on the
campus of the Company's existing communities.
(4) Triad IV will purchase the land and develop the expansion on the campus
of the Company's existing community.
</FN>
</TABLE>
Pursue Strategic Acquisitions
The Company intends to continue to pursue single or portfolio
acquisitions of senior living communities and, to a lesser extent, other
assisted living and long-term care communities. Through strategic acquisitions,
the Company plans to enter new markets or acquire communities in existing
markets as a means to increase market share, augment existing clusters,
strengthen its ability to provide a broad range of care, and create operating
efficiencies. As the industry continues to consolidate, the Company believes
that opportunities will arise to acquire other senior living companies. The
Company believes that the current fragmented nature of the senior living
industry, combined with the Company's financial resources, national presence,
and extensive contacts within the industry, should provide it with the
opportunity to evaluate a number of potential acquisition opportunities. In
reviewing acquisition opportunities, the Company will consider, among other
things, geographic location, competitive climate, reputation and quality of
management and communities, and the need for renovation or improvement of the
communities.
Expand Home Care Services
The Company intends to expand its home care services by developing,
acquiring, or managing new home care agencies and expanding its range of
existing home care services at its communities. The Company currently
anticipates that its home care agencies will be based at some of the Company's
communities, and revenues will be derived from private pay sources. The Company
believes that the expansion of its home care services will enhance its ability
to provide a broad range of services, increase its market visibility, and
further increase Company profitability, as well as aid in the maintaining of
current occupancy levels. As of December 31, 1998, the Company operated one home
care agency, and intends to establish additional home care agencies at certain
of its communities.
Expand Referral Networks
The Company intends to continue to develop relationships (which, in
certain instances, may involve strategic alliances or joint ventures) with local
and regional hospital systems, managed care organizations, and other referral
sources to attract new residents to the Company's communities. The Company
believes that such arrangements or alliances, which could range from joint
marketing arrangements to priority transfer agreements, will enable it to be
strategically positioned within the Company's markets if, as the Company
believes, senior living programs become an integral part of the evolving health
care delivery system.
15
<PAGE>
OPERATIONS
Centralized Management
The Company centralizes its corporate and other administrative
functions so that the community-based management and staff can focus their
efforts on resident care. The Company maintains centralized accounting, finance,
human resources, training, and other operational functions at its national
corporate office in Dallas, Texas. The Company's corporate office is generally
responsible for: (i) establishing Company-wide policies and procedures relating
to, among other things, resident care and operations; (ii) performing accounting
functions; (iii) developing employee training programs and materials; (iv)
coordinating human resources; (v) coordinating marketing functions; and (vi)
providing strategic direction. In addition, financing, development, construction
and acquisition activities, including feasibility and market studies, and
community design, development, and construction management, are conducted by the
Company's corporate offices.
The Company seeks to control operational expenses for each of its
communities through standardized management reporting and centralized controls
of capital expenditures, asset replacement tracking, and purchasing for larger
and more frequently used supplies. Community expenditures are monitored by
regional and district managers who are accountable for the resident satisfaction
and financial performance of the communities in their region.
Community-Based Management
An executive director manages the day-to-day operations at each senior
living community, including oversight of the quality of care, delivery of
resident services, and monitoring of financial performance, and is responsible
for all personnel, including food service, maintenance, activities, security,
assisted living, housekeeping, and, where applicable, nursing. In most cases,
each community also has department managers who direct the environmental
services, nursing or care services, business management functions, dining
services, activities, transportation, housekeeping, and marketing functions.
The assisted living and skilled nursing components of the senior living
communities are managed by licensed professionals, such as a nurse and/or a
licensed administrator. These licensed professionals have many of the same
operational responsibilities as the Company's executive directors, but their
primary responsibility is to oversee resident care. Many of the Company's senior
living communities and some of its skilled nursing facilities are part of a
campus setting, which includes independent living. This campus arrangement
allows for cross-utilization of certain support personnel and services,
including administrative functions, which results in greater operational
efficiencies and lower costs than free-standing facilities.
The Company actively recruits personnel to maintain adequate staffing
levels at its existing communities as well as new staff for new or acquired
communities prior to opening. The Company has adopted comprehensive recruiting
and screening programs for management positions that utilize corporate office
team interviews and thorough background and reference checks. The Company offers
system-wide training and orientation for all of its employees at the community
level through a combination of Company-sponsored seminars and conferences.
Quality Assurance
Quality assurance programs are coordinated and implemented by the
Company's corporate and regional staff. The Company's quality assurance is
targeted to achieve maximum resident and resident family member satisfaction
with the care and services delivered by the Company. The Company's primary focus
in quality control monitoring includes routine in- service training and
performance evaluations of care givers and other support employees. Additional
quality assurance measures include:
16
<PAGE>
Resident and Resident Family Input. On a routine basis the Company
provides residents and family members the opportunity to provide valuable input
regarding the day-to-day delivery of services. On-site management at each
community has fostered and encouraged active resident councils and resident
committees who meet independently. These resident bodies meet with on-site
management on a monthly basis to offer input and suggestions to the quality and
delivery of services. Additionally, at each community the Company conducts
annual resident satisfaction surveys to further monitor the satisfaction levels
of both residents and family members. These surveys are sent directly to the
corporate headquarters for tabulation and distribution to on-site staff and
residents. For 1998 and 1997, the Company achieved a 95% and 96% approval
rating, respectively, from its residents. For any departmental area of service
scoring below a 90%, a plan of correction is developed jointly by on-site,
regional and corporate staff for immediate implementation.
Regular Community Inspections. On a monthly basis a community
inspection is conducted by regional and/or corporate staff. Included as part of
this inspection is the monitoring of the overall appearance and maintenance of
the community interiors and grounds. The inspection also includes monitoring
staff professionalism and departmental reviews of maintenance, housekeeping,
activities, transportation, marketing, administration and food service as well
as health care, if applicable. The monthly inspection also includes the
observation of residents in their daily activities and community compliance with
government regulations.
Independent Service Evaluations. The Company engages the services of
outside professional independent consulting firms to evaluate various components
of the community operations. These services include "mystery shops," competing
community analysis, pricing recommendations and product positioning. This
provides management with valuable unbiased product and service information. A
plan of action regarding any areas requiring improvement or change is
implemented based on information received. At communities where health care is
delivered, these consulting service reviews include the on-site handling of
medications, record-keeping, and general compliance with all governmental
regulations.
Marketing
Each community is staffed by on-site marketing directors and additional
marketing staff depending on the community size. The primary focus of the
on-site marketing staff is to create awareness of the Company and its services
among prospective residents and family members, professional referral sources
and other key decision makers. The marketing efforts incorporate an aggressive
marketing plan to include monthly and annual goals for leasing, new lead
generation, prospect follow up, community outreach, and resident and family
referrals. Additionally, the marketing plan includes a calendar of promotional
events and a comprehensive media program. On-site marketing departments perform
a competing community assessment twice annually. Corporate and regional
marketing directors monitor the on-site marketing departments' effectiveness and
productivity on a monthly basis. Routine detailed marketing department audits
are performed on an annual basis or more frequently if deemed necessary.
Corporate and regional personnel assist in the development of marketing
strategies for each community and produce creative media, assist in direct mail
programs and necessary marketing collateral materials. Ongoing sales training of
on-site marketing staff is implemented by corporate and regional marketing
directors.
In the case of new development, the corporate and regional staff
develop a comprehensive community outreach program that is implemented at the
start of construction. A marketing pre-lease program is developed and on-site
marketing staff are hired and trained to begin the program implementation six to
nine months prior to the community opening. Extensive use of media to include
radio, television, print, direct mail and telemarketing is implemented during
this pre- lease phase.
After the community is opened and sustaining occupancy levels are
attained, the on-site marketing staff is more heavily focused on resident and
resident family referrals, as well as professional referrals. A maintenance
program of print media and direct mail is then implemented.
17
<PAGE>
GOVERNMENT REGULATION
Changes in existing laws and regulations, adoption of new laws and
regulations and new interpretations of existing laws and regulations could have
a material effect on the Company's operations. Failure by the Company to comply
with applicable regulatory requirements could have a material adverse effect on
the Company's business, financial condition, and results of operations.
Accordingly, the Company monitors legal and regulatory developments on local and
national levels.
The health care industry is subject to extensive regulation and
frequent regulatory change. At this time, no federal laws or regulations
specifically regulate assisted or independent living residences. While a number
of states have not yet enacted specific assisted living regulations, certain of
the Company's assisted living communities are subject to regulation, licensing,
Certificate of Need and permitting by state and local health and social service
agencies and other regulatory authorities. While such requirements vary from
state to state, they typically relate to staffing, physical design, required
services, and resident characteristics. The Company believes that such
regulation will increase in the future. In addition, health care providers are
receiving increased scrutiny under anti-trust laws as integration and
consolidation of health care delivery increases and affects competition. The
Company's communities are also subject to various zoning restrictions, local
building codes, and other ordinances, such as fire safety codes. Failure by the
Company to comply with applicable regulatory requirements could have a material
adverse effect on the Company's business, financial condition, and results of
operations. Regulation of the assisted living industry is evolving. The Company
is unable to predict the content of new regulations and their effect on its
business. There can be no assurance that the Company's operations will not be
adversely affected by regulatory developments.
The Company believes that its communities are in substantial compliance
with applicable regulatory requirements. However, in the ordinary course of
business, one or more of the Company's communities could be cited for
deficiencies. In such cases, the appropriate corrective action would be taken.
To the Company's knowledge, no material regulatory actions are currently pending
with respect to any of the Company's communities.
Under the Americans with Disabilities Act of 1990, all places of public
accommodation are required to meet certain federal requirements related to
access and use by disabled persons. A number of additional federal, state, and
local laws exist that also may require modifications to existing and planned
properties to permit access to the properties by disabled persons. While the
Company believes that its communities are substantially in compliance with
present requirements or are exempt therefrom, if required changes involve a
greater expenditure than anticipated or must be made on a more accelerated basis
than anticipated, additional costs would be incurred by the Company. Further
legislation may impose additional burdens or restrictions with respect to access
by disabled persons, the costs of compliance with which could be substantial.
In addition, the Company is subject to various federal, state and local
environmental laws and regulations. Such laws and regulations often impose
liability whether or not the owner or operator knew of, or was responsible for,
the presence of hazardous or toxic substances. The costs of any required
remediation or removal of these substances could be substantial and the
liability of an owner or operator as to any property is generally not limited
under such laws and regulations and could exceed the property's value and the
aggregate assets of the owner or operator. The presence of these substances or
failure to remediate such contamination properly may also adversely affect the
owner's ability to sell or rent the property, or to borrow using the property as
collateral. Under these laws and regulations, an owner, operator or an entity
that arranges for the disposal of hazardous or toxic substances, such as
asbestos-containing materials, at a disposal site may also be liable for the
costs of any required remediation or removal of the hazardous or toxic
substances at the disposal site. In connection with the ownership or operation
of its properties, the Company could be liable for these costs, as well as
certain other costs, including governmental fines and injuries to persons or
properties. The Company has completed Phase I environmental audits of the
communities in which the Company owns interests, and such surveys have not
revealed any material environmental liabilities that exist with respect to these
communities.
The Company believes that the structure and composition of government,
and specifically health care, regulations will continue to change and, as a
result, regularly monitors developments in the law. The Company expects to
modify its agreements and operations from time to time as the business and
regulatory environments change. While the Company
18
<PAGE>
believes it will be able to structure all its agreements and operations in
accordance with applicable law, there can be no assurance that its arrangements
will not be successfully challenged.
COMPETITION
The senior living services industry is highly competitive, and the
Company expects that all segments of the industry will become increasingly
competitive in the future. Although there are a number of substantial companies
active in the senior living services industry and in the markets in which the
Company operates, the industry continues to be very fragmented and characterized
by numerous small operators. The Company competes with American Retirement
Corporation and Holiday Retirement Corporation in Texas, Sunrise Assisted
Living, Inc. in North Carolina and New York, Atria Senior Quarters in New York,
and Marriott Senior Living Services in Florida. The Company believes that the
primary competitive factors in the senior living services industry are: (i)
reputation for and commitment to a high quality of service; (ii) quality of
support services offered (such as food services); (iii) price of services; (iv)
physical appearance and amenities associated with the communities; and (v)
location. The Company competes with other companies providing independent
living, assisted living, skilled nursing, home health care, and other similar
service and care alternatives, some of whom may have greater financial resources
than the Company. Because seniors tend to choose senior living communities near
their homes, the Company's principal competitors are other senior living and
long-term care communities in the same geographic areas as the Company's
communities. The Company also competes with other health care businesses with
respect to attracting and retaining nurses, technicians, aides, and other high
quality professional and non-professional employees and managers.
EMPLOYEES
As of December 31, 1998, the Company employed approximately 1,800
persons, of which approximately 1,009 were full-time employees (approximately 39
of whom are located at the Company's corporate offices) and 791 are part-time
employees. None of the Company's employees is currently represented by a labor
union and the Company is not aware of any union organizing activity among its
employees. The Company believes that its relationship with its employees is
good.
EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table sets forth certain information concerning each of
the Company's executive officers and key employees as of December 31, 1998:
<TABLE>
<CAPTION>
NAME AGE POSITION(S) WITH THE COMPANY
- ---- --- ----------------------------
<S> <C> <C>
Jeffrey L. Beck........................ 53 Co-Chairman and Chief Executive Officer
James A. Stroud........................ 48 Co-Chairman, Chief Operating Officer and Secretary
Lawrence A. Cohen...................... 45 Vice Chairman and Chief Financial Officer
Keith N. Johannessen................... 42 President
Rob L. Goodpaster...................... 45 Vice President -- National Marketing
David W. Beathard, Sr.................. 51 Vice President -- Operations
David G. Suarez........................ 46 Vice President -- Development
David R. Brickman...................... 40 Vice President and General Counsel
Kathleen L. Granzberg.................. 37 Controller -- Corporate
Robert F. Hollister.................... 43 Controller -- Property
</TABLE>
JEFFREY L. BECK has served as a director and Chief Executive Officer of
the Company and its predecessors since January 1986. He currently serves as
Co-Chairman of the Board. Mr. Beck also serves on the boards of various
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<PAGE>
educational, religious and charitable organizations and in varying capacities
with several trade associations. Mr. Beck served as Vice Chairman of the
American Seniors Housing Association from 1992 to 1994, and as Chairman from
1994 to 1996, and remains a member of its Executive Board, and is a council
member of the Urban Land Institute. Mr. Beck is Chairman of the Board of
Directors of United Texas Bank of Dallas. Mr. Beck has recently taken a leave of
absence to attend to the needs of a seriously ill family member.
JAMES A. STROUD has served as a director and Chief Operating Officer of
the Company and its predecessors since January 1986. He currently serves as
Co-Chairman of the Board and Chairman, Chief Operating Officer and Secretary of
the Company. Mr. Stroud also serves on the boards of various educational and
charitable organizations, and in varying capacities with several trade
organizations, including as a member of the Founder's Council and Board of
Directors of the Assisted Living Federation of America, and as President and as
a member of the Board of Directors of the National Association For Senior Living
Industry Executives. Mr. Stroud also serves as an Advisory Group member to the
National Investment Conference. Mr. Stroud was a Founder of the Texas Assisted
Living Association and serves as a member of its Board of Directors. Mr. Stroud
has earned a Masters in Law, is a licensed attorney and is also a Certified
Public Accountant.
LAWRENCE A. COHEN has served as a director and Vice Chairman and Chief
Financial Officer of the Company since November 1996. During Mr. Beck's leave of
absence, Mr. Cohen is acting as Chief Executive Officer. From 1991 to 1996, Mr.
Cohen served as President, and Chief Executive Officer of Paine Webber
Properties Incorporated, which controlled a real estate portfolio having a cost
basis of approximately $3.0 billion, including senior living facilities of
approximately $110.0 million. Mr. Cohen serves as a member of the Corporate
Finance Committee of the NASD Regulation, Inc., and was a founding member of the
executive committee of the Board of the American Seniors Housing Association.
Mr. Cohen has earned a Masters in Law, is a licensed attorney and is also a
Certified Public Accountant. Mr. Cohen has had positions with businesses
involved in senior living for 14 years.
KEITH N. JOHANNESSEN has served as President of the Company and its
predecessors since March 1994, and previously served as Executive Vice-President
since May 1993. From 1992 to 1993, Mr. Johannessen served as Senior Manager in
the health care practice of Ernst & Young. From 1987 to 1992, Mr. Johannessen
was Executive Vice President of Oxford Retirement Services, Inc. Mr. Johannessen
has served on the State of the Industry and Model Assisted Living Regulations
Committees of the American Seniors Housing Association. Mr. Johannessen has been
active in operational aspects of senior housing for 20 years.
ROB L. GOODPASTER has served as Vice President - National Marketing of
the Company and its predecessors since December 1992. From 1990 to 1992, Mr.
Goodpaster was National Director for Marketing for Autumn America, an owner and
operator of senior housing facilities. Mr. Goodpaster is a member of the Board
of Directors of the National Association For Senior Living Industries. Mr.
Goodpaster has been active in the operational, development and marketing aspects
of senior housing for 22 years.
DAVID W. BEATHARD, SR. has served as Vice President - Operations of the
Company and its predecessors since August 1996. From 1992 to 1996, Mr. Beathard
owned and operated a consulting firm which provided operational, marketing and
feasibility consulting regarding senior housing facilities. Mr. Beathard has
been active in the operational, sales and marketing, and construction oversight
aspects of senior housing for 24 years.
DAVID G. SUAREZ has recently joined the Company as Vice President -
Development. From 1996 to 1998, Mr. Suarez served as Project Manager for the
Western Group of Columbia/HCA. Prior to that, Mr. Suarez served as Vice
President of Development for PDC Facilities, a healthcare design-build
developer. Mr. Suarez has been in the healthcare industry in development for 20
years. His architectural and construction management degrees provide experience
and expertise in the Company's site selection process, building design and
budgeting, and construction methods and material procedures for the Company's
senior living communities.
DAVID R. BRICKMAN has served as Vice President of the Company and its
predecessors since July 1992 and General Counsel of the Company since October
1997. From 1989 to 1992, Mr. Brickman served as in-house counsel with LifeCo
Travel Management Company, a corporation which provided travel services to U.S.
corporations. Mr. Brickman
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<PAGE>
has earned a Masters of Business Administration and a Masters in Health
Administration. Mr. Brickman has either practiced law or performed in-house
counsel functions for 12 years.
KATHLEEN L. GRANZBERG, a Certified Public Accountant, has served as the
Corporate Controller for the Company and its predecessors since December 1991,
and as Property Controller since 1987. Ms. Granzberg is a member of the American
Institute of Certified Public Accountants and is also a member of the Texas
Society of Certified Public Accountants. Ms. Granzberg has announced that she is
leaving the Company sometime during the second quarter of 1999.
ROBERT F. HOLLISTER, a Certified Public Accountant, has served as
Property Controller for the Company and its predecessors since April 1992. From
1985 to 1992, Mr. Hollister was Chief Financial Officer and Controller of
Kavanaugh Securities, Inc., a NASD broker dealer. Mr. Hollister is a Certified
Financial Planner. Mr. Hollister is a member of the American Institute of
Certified Public Accountants and is also a member of the Texas Society of
Certified Public Accountants.
ITEM 2. PROPERTIES
The executive and administrative offices of the Company are located at
14160 Dallas Parkway, Suite 300, Dallas, Texas 75240, and consist of
approximately 14,000 square feet. The lease on the premises extends through
August 31, 2002. The Company also leases an executive office space in New York,
New York pursuant to a monthly lease agreement. The Company believes that its
corporate office facilities are adequate to meet its requirements through at
least fiscal 1999 and that suitable additional space will be available, as
needed, to accommodate further physical expansion of corporate operations.
As of December 31, 1998, the Company owned, leased and/or managed the
senior living communities referred to in Item 1 above. Occupancy rate
information as of December 31, 1998, is also presented for each community in
Item 1 above.
ITEM 3. LEGAL PROCEEDINGS
On August 11, 1998, the Company executed a settlement agreement with
Angeles Housing Concepts, Inc. ("AHC"), ILM I Lease Corporation and ILM II Lease
Corporation (collectively, "ILM Lease") resolving all claims among the parties
relating to a lawsuit filed by AHC against the Company alleging interference
with AHC's management agreements with ILM Lease (the "Settlement Agreement") and
calling for a dismissal with prejudice of this lawsuit. The Settlement Agreement
did not involve any payment of damages to AHC or any other party by the Company.
On or about October 23, 1998, Robert Lewis filed a putative class
action complaint on behalf of certain holders of Assignee Interests in NHP in
the Delaware Court of Chancery against NHP, the Company, Capital Senior Living
Properties 2-NHPCT, Inc. and Capital Realty Group Senior Housing, Inc.
(collectively, the "Defendants"). Mr. Lewis purchased 90 Assignee Interests in
February 1993 for $180. The complaint alleges, among other things, that the
Defendants breached, or aided and abetted a breach of, the express and implied
terms of the NHP Partnership Agreement in connection with the sale of four
properties by NHP to Capital Senior Living Properties 2 - NHPCT, Inc. The
complaint seeks, among other relief, rescission of the sale of these properties
and unspecified damages The Company believes the complaint is without merit and
intends to vigorously defend itself in this action.
On February 12, 1999 a competitor of the Company, Holiday Retirement
Corporation ("Holiday"), as well as Colson & Colson Construction Company and
their architects, Curry Brandaw Architects, filed suit against the Company in
U.S. District Court in Dallas. The complaint alleges, among other claims, that
the Company infringed the copyrighted architectural plans and trade dress of
Holiday on at least three of the Company's communities. The communities using
this Waterford prototype design are owned by Triad I, in which the Company is a
19% limited partner and provides development services under a third party
development agreement. The plaintiffs are additionally seeking a preliminary and
permanent injunction to bar further use of their allegedly copyrighted
architectural plans and trade dress as well as damages, including punitive
damages. The defense of this suit has been turned over to the Company's insurer
for
21
<PAGE>
handling. The Company vigorously denies the allegations mentioned in the lawsuit
and has filed an answer and counterclaim.
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.
The provision of personal and health care services entails an inherent
risk of liability. In recent years, participants in the senior living and health
care services industry have become subject to an increasing number of lawsuits
alleging negligence or related legal theories, many of which involve large
claims and result in the incurrence of significant defense costs. The Company
currently maintains property, liability and professional medical malpractice
insurance policies for the Company's owned and managed communities under a
master insurance program in amounts and with such coverages and deductibles that
the Company believes are within normal industry standards based upon the nature
and risks of the Company's business, and the Company believes that such
insurance coverage is adequate. The Company also has an umbrella excess
liability protection policy in the amount of $15.0 million per location. There
can be no assurance that a claim in excess of the Company's insurance will not
arise. A claim against the Company not covered by, or in excess of, the
Company's insurance could have a material adverse effect upon the Company. In
addition, the Company's insurance policies must be renewed annually. There can
be no assurance that the Company will be able to obtain liability insurance in
the future or that, if such insurance is available, it will be available on
acceptable terms.
Under various federal, state, and local environmental laws, ordinances,
and regulations, a current or previous owner or operator of real estate may be
required to investigate and clean up hazardous or toxic substances or petroleum
product releases at such property, and may be held liable to a governmental
entity or to third parties for property damage and for investigation and clean
up costs. The Company is not aware of any environmental liability with respect
to any of its owned, leased, or managed communities that it believes would have
a material adverse effect on the Company's business, financial condition, or
results of operations. The Company believes that its communities are in
compliance in all material respects with all federal, state, and local laws,
ordinances, and regulations regarding hazardous or toxic substances or petroleum
products. The Company has not been notified by any governmental authority, and
is not otherwise aware of any material non-compliance, liability, or claim
relating to hazardous or toxic substances or petroleum products in connection
with any of the communities it currently operates.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the Company's security
holders during the fourth quarter ended December 31, 1998.
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<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) The Company's shares of common stock are listed for trading on the
New York Stock Exchange ("NYSE") under the symbol "CSU." The following table
sets forth, for the periods indicated, the high and low sales prices for the
Company's common stock, as reported on the NYSE. At December 31, 1998, there
were approximately 3,900 shareholders of record of the Company's common stock.
YEAR HIGH LOW
- --------------------------------- -------- ------------
1997
Fourth Quarter................ $ 171/2 $ 9 13/16
1998
First Quarter................. $ 14 $ 8 5/8
Second Quarter................ 15 1/2 11 1/2
Third Quarter................. 12 11/16 5 1/8
Fourth Quarter................ 14 3/4 9 1/2
It is the policy of the Company's Board of Directors to retain all
future earnings to finance the operation and expansion of the Company's
business. Accordingly, the Company has not and does not anticipate declaring or
paying cash dividends on the common stock in the foreseeable future. The payment
of cash dividends in the future will be at the sole discretion of the Company's
Board of Directors and will depend on, among other things, the Company's
earnings, operations, capital requirements, financial condition, restrictions in
then existing financing agreements, and other factors deemed relevant by the
Board of Directors.
(b) Recent Sales of Unregistered Securities. Information with respect
to this Item is set forth above under the caption "Item 1. Business--Formation
Transactions." The issuance therein described of the Company's Common Stock to
Messrs. Jeffrey L. Beck, James A. Stroud (including a trust) and Lawrence A.
Cohen in the Formation Transactions in exchange for the Contributed Entities was
carried out in reliance on the exemption from registration contained in Section
4(2) of the Securities Act of 1933, as amended, pursuant to a binding written
agreement entered into prior to the filing of the Registration Statement filed
in connection with the Offering. In connection with the organization of the
Company, during 1996, the Company issued 1,680,000 shares of its Common Stock to
Messrs. Beck, Stroud (through a trust) and Cohen for $16,800. The shares were
issued in equal amounts of 560,000 shares to each in consideration for a cash
payment by each of $5,600. Such issuances were made in reliance on the exemption
from registration contained in Section 4(2) of the Securities Act of 1933, as
amended.
(c) Use of Proceeds. As described above in "Business," the Company has
completed the Offering. The following information relates to the use of proceeds
of the Offering:
(1) Effective Date of Registration Statement and Commission File
Number: The Company's Registration Statement on Form S-1,
File No. 333-33379, relating to the Offering, became
effective on October 30, 1997.
(2) Aggregate Gross Proceeds, Expenses and Aggregate Net
Proceeds: The sale of the 10,350,000 shares of Common Stock
generated aggregate gross proceeds of $139,725,000. The
aggregate net proceeds to the Company from the sale of the
10,350,000 shares of Common Stock were approximately
$128,407,000, after deducting underwriting discounts and
commissions of approximately $9,742,000 and expenses of the
Offering of approximately $1,576,000 paid by the Company.
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<PAGE>
(3) Use of Proceeds: Through December 31, 1998, the Company had
used approximately $1.6 million 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 $70.8 million of such net
proceeds to repay the indebtedness incurred by the Company
to acquire assets (including construction in progress) in
the Formation Transactions; (ii) approximately $18.1 million
to repay the Formation Note; (iii) approximately $5.8
million to pay the balance of the purchase price to an
affiliate related to the purchase of assets on the Formation
Transactions; (iv) approximately $1.2 million of such net
proceeds to repay indebtedness to affiliates; (v)
approximately $8,246,000 of such net proceeds to acquire the
four senior living communities from NHP; (vi) approximately
$505,000 of such net proceeds to purchase land in
Carmichael, CA; and (vii) approximately $9,636,000, $932,000
and $1,160,000 advanced to Triad, Triad II and Triad IV,
respectively. There has not been a material change in the
use of proceeds described in the Company's prospectus.
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ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial data of the Company.
The selected financial data for the years ended December 31, 1998, 1997, 1996,
1995 and 1994 are derived from the audited consolidated financial statements of
the Company.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1998 1997 1996 1995 1994
----------- --------- ------------ ------------ --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Statements of Income Data:
<S> <C> <C> <C> <C> <C>
Revenues:
Resident and health care
revenue............. $24,790 $21,207 $13,692 $13,238 $12,761
Rental and lease income 4,282 4,276 1,101 1,231 1,235
Unaffiliated management
services revenue... 2,465 1,920 801 - -
Affiliated management
services revenue... 1,327 1,378 2,708 2,778 3,113
Unaffiliated development
fees............... 1,234 804 673 - -
Affiliated development fees 7,473 173 - - -
Other.................. 1,197 952 924 871 800
-------- ---------- --------- ---------- ----------
Total revenues..... 42,768 30,710 19,899 18,118 17,909
-------- --------- -------- ---------- ----------
Expenses:
Operating expenses..... 17,067 16,701 10,656 10,287 10,142
General and administrative
expenses(1)........ 6,594 7,085 5,635 4,364 4,595
Depreciation and
amortization....... 2,734 2,118 1,481 1,776 1,707
-------- --------- -------- ---------- ----------
Total expenses..... 26,395 25,904 17,772 16,427 16,444
-------- --------- -------- ---------- ----------
Income from operations. 16,373 4,806 2,127 1,691 1,465
Other income (expense):
Interest income.... 4,939 3,186 432 368 122
Interest expense... (1,922) (2,022) (221) (278) (261)
Gain on sale of
properties...... 422 - 438 - -
Equity in earnings on
investments...... - - 459 - -
Other.................. - 440 42 - (16)
-------- --------- -------- ---------- ----------
Income before income
taxes and minority
interest in consolidated
partnerships........ 19,812 6,410 3,277 1,781 1,310
(Provision) benefit for
income taxes(2)..... (7,476) (793) - (18) (130)
-------- --------- -------- ---------- ----------
Income before minority
interest in consolidated
partnerships........ 12,336 5,617 3,277 1,763 1,180
Minority interest in
consolidated
partnerships........... (379) (1,936) (1,224) (760) (634)
--------- --------- -------- ---------- ----------
Net income............. $11,957 $ 3,681 $ 2,053 $1,003 $ 546
========= ========= ======== ========== ==========
Net income per share:
Basic and Diluted...... $ 0.61 $ 0.33
========= =========
Weighted average
shares outstanding.. 19,717 11,150
========= =========
Pro forma net income
data (unaudited)(3):
Net income............. $ 3,681 $ 2,053
Pro forma income taxes. (965) (811)
--------- --------
Pro forma net income... $ 2,716 $ 1,242
========= ========
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents $ 35,827 $ 48,125 $10,819 $10,017 $ 8,799
Working capital (8,680)(4) 44,690 9,567 6,784 5,938
Total assets 205,267 117,371 33,203 29,747 29,913
Long-term debt, excluding current portion 32,671 7,575 201 337 177
Equity 104,516 92,560 17,201 14,447 12,495
<FN>
- ----------
(1) General and administrative expenses include officers' salaries of
$670,000, $3,342,000, $3,372,000, $2,976,000 and $3,443,000 for the
years ended December 31, 1998, 1997, 1996, 1995 and 1994, respectively.
Prior to November 1997, these amounts were primarily composed of
salaries and bonuses paid to the founders and were based in part on
federal income tax regulations regarding distributions of closely held
corporations and S corporations. Effective with the Offering, these
federal income tax regulations no longer applied to the Company.
Compensation of the founders since October 1, 1997 has been based on
the founders' employment agreements.
(2) A provision for income taxes was recorded by the Company from inception
through February 1, 1995. No provision for income taxes has been
recorded from February 1, 1995 through completion of the Formation
Transactions as the operating companies included in the historical
financial statements, prior to the Offering, were S corporations or
partnerships and accordingly were not subject to income taxes during
the period.
(3) Pro forma income taxes have been calculated based on the assumption
that the S corporations and partnerships were subject to income taxes.
Pro forma income tax expense has been calculated using statutory
federal and state tax rates, estimated at 39.5%.
(4) The Company expects to complete a refinancing of its $47,700,000
mortgage loan due October 1, 1999 with long term fixed rate mortgage
loans during the second quarter of 1999. However, there can be no
assurance that the Company will complete this refinancing as expected.
</FN>
</TABLE>
26
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The following discussion and analysis addresses the Company's results
of operations on a historical consolidated basis for the years ended December
31, 1998, 1997 and 1996. The following should be read in conjunction with the
Company's historical consolidated financial statements and the selected
financial data contained elsewhere in this report.
On September 15, 1997, the Company increased its authorized common
shares from 40,000,000 to 65,000,000 shares and authorized 15,000,000 shares of
preferred stock. On November 5, 1997, the Company issued 18,037,347 additional
shares of common stock (including 1,350,000 shares issued upon exercise of an
option granted underwriters to purchase additional common shares in conjunction
with the Offering) bringing its total issued and outstanding shares of common
stock to 19,717,347 shares. Of the 18,037,347 shares issued, 7,687,347 shares
were issued to Messrs. Beck, Stroud and Cohen in the Formation Transactions
described herein and 10,350,000 shares were registered with the Securities and
Exchange Commission for trading in public markets.
On November 5, 1997, the Company also entered into Formation
Transactions (herein so called) with Messrs. Beck and Stroud whereby they
contributed all of their owned capital stock of Capital Senior Living, Inc.,
Capital Senior Management 1, Inc., Capital Senior Management 2, Inc., Capital
Senior Development, Inc., and with Mr. Cohen, of Quality Home Care, Inc. (the
"Contributed Entities") to the Company in exchange for the issuance of 7,687,347
shares of common stock of the Company and the issuance of separate notes in the
aggregate amount of $18,076,380 to Messrs. Beck, Stroud and Cohen, which were
subsequently repaid by the Company from the net proceeds received from the sale
of the Company's common stock in the Offering.
As part of the Formation Transactions, the Company simultaneously
purchased substantially all of the operating assets of CSLC (including CSLC's
investment in HCP and NHP and excluding CSLC's cash, U.S. Treasury securities
purchased under the LBHI Loan agreement and working capital items) for an
aggregate purchase price of approximately $76.6 million, comprised of the
assumption by the Company of CSLC's outstanding LBHI Loan of approximately $70.8
million and payment of cash of approximately $5.8 million to CSLC. On November
7, 1997, the Company repaid the LBHI Loan from the proceeds received from the
Offering.
In October 1997, the combined Companies declared and paid dividends of
$457,647 to Messrs. Beck, Stroud and Cohen in preparation for the Formation
Transactions that transformed the combined companies from closely held
corporations and S corporations to non-closely held C corporations for federal
income tax purposes.
Due to all of the entities involved in the Formation Transactions being
under the common control of Messrs. Beck and Stroud, the Company's consolidated
financial statements reflect the assets and liabilities at their historical
values and the accompanying consolidated statements of income, equity, and cash
flows reflect the combined results for the periods indicated through the date of
the Offering even though they have historically operated as separate entities.
The Formation Transactions have been accounted for at historical cost in a
manner similar to a pooling of interests to the extent of the percentage
ownership by Messrs. Beck and Stroud of the Company. Acquired assets and
liabilities of CSLC have been recorded at fair value to the extent of minority
interest. CSLC's assets include investments in HCP and NHP.
On September 30, 1998, the Company entered into a mortgage loan
agreement with Lehman Brothers Holdings, Inc. ("Lehman Loan"), under which the
Company borrowed $47,700,000. The purpose of the Lehman Loan was 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
and were approximately 6.95% at December 31, 1998. The loan agreement matures
October 1, 1999, and the Company expects to complete a refinancing of this
mortgage loan with long term fixed rate mortgage loans during the second quarter
of 1999. However, there can be no assurance that the Company will complete this
refinancing as expected.
27
<PAGE>
On September 30, 1998, the Company acquired four senior living
communities from NHP for cash consideration of $40,650,000. The funds for the
transaction were provided from working capital of the Company and from the
proceeds of the Lehman Loan.
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. The Company had 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 performed services for NHP have been
employees of the Company. NHP (prior to the acquisitions) reimbursed the Company
for the salaries, related benefits, and overhead reimbursements of such
personnel. Capital Realty Group Brokerage, Inc., a company wholly owned by
Messrs. Beck and Stroud, 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
and the Company's operations have included the operations of NHP since September
30, 1998.
On October 28, 1998, the Company acquired two senior living communities
from Gramercy Hill Enterprises, a Texas limited partnership ("Gramercy"), and
Tesson, for aggregate consideration of approximately $34,000,000. The funds for
the Tesson transaction were provided from working capital of the Company and
from $15,400,000 of proceeds from the Lehman Loan. The funds for the Gramercy
transaction were provided from working capital of the Company, the assumption of
the $6,334,660 Washington Mortgage Financial Group, Ltd. ("WMFG") promissory
note (assigned to Fannie Mae) and from the proceeds of the $1,980,000 WMF
Washington Mortgage Corp. ("WMFC") loan described below.
On October 28, 1998, the Company entered into a $6,334,660 Assumption
and Release Agreement with Fannie Mae and a $1,980,000 multifamily note in favor
of WMFC. The purpose of the loans was to provide financing for the Gramercy
acquisition. The senior living community acquired from Gramercy has been pledged
as collateral under these loans. Interest costs are 7.69% and 7.08%,
respectively. The Assumption and Release Agreement and WMFC note mature in
January 2008 and January 2010, respectively.
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 acquisitions were accounted for as purchase business combinations,
and the Company's operations have included the operations of Tesson Heights and
Gramercy Hill since October 28, 1998.
From 1990 through December 31, 1998, the Company acquired interests in
19 communities and entered into an operating lease with respect to one
community, which was terminated effective January 31, 1998. Since 1996, the
Company expanded its senior living management services by entering into the
management service contracts on 15 communities for four independent third-party
owners and commenced providing development and construction management services
for new residence properties in addition to adding a home care service agency.
The Company generates revenue from a variety of sources. For the year
ended December 31, 1998, the Company's revenue was derived as follows: 58.0%
from the operation of 11 owned communities that were operated by the Company;
10.0% from lease rentals from triple net leases of three skilled nursing
facilities and four physical rehabilitation centers; 8.9% from management fees
arising from management services provided for four affiliate owned senior living
communities from January 1, 1998 through September 30, 1998 and one affiliate
owned senior living community from January 1, 1998 through December 31, 1998 and
15 third-party owned senior living communities; and 20.4% from development fees
earned for managing the development and construction of new senior living
communities for third parties.
28
<PAGE>
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 third-party management fees are primarily based on a
percentage of gross revenues. As a result, the cash flow and profitability of
such contracts to the Company are more dependent on the revenues generated by
such communities and less dependent on net cash flow than for owned communities.
Further, the Company is not responsible for capital investments in managed
communities. 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.
The Company's triple net leases extend through the year 2000 for three
of its owned communities and through the year 2001 for four of its owned
communities. The payments under these leases are fixed and are not subject to
change based upon the operating performance of these communities. Following
termination of the lease agreements, the Company may either convert and operate
the communities as assisted living and Alzheimer's care facilities, sell the
facilities or evaluate other alternatives.
The Company's current management contracts expire on various dates
between December 1999 and September 2009 and provide for management fees based
generally upon rates that vary by contract from 4% of net revenues to 7% of net
revenues. In addition, certain of the contracts provide for supplemental
incentive fees that vary by contract based upon the financial performance of the
managed community. The Company's 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.
As of December 31, 1998, development fees have been earned for services
performed for 39 communities under development or expansions for third parties.
During 1998, 1997, 1996 and 1995, the Company made various purchases of
limited partnership interests in HCP. HCP owns and operates a skilled nursing
facility and owns and leases to third-party operators (under triple net leases)
three skilled nursing facilities and four physical rehabilitation centers.
During 1998, 1997, 1996 and 1995, the Company paid approximately $101,000,
$5,605,000, $3,201,000 and $309,000, respectively, for partnership interests in
HCP. The Company changed its method of accounting for its investment in HCP from
the cost method in 1995 to the equity method in 1996. As a result of additional
purchases, the Company's ownership interest in HCP exceeded 50% on June 26,
1997. Accordingly, this partial acquisition has been accounted for by the
purchase method of accounting, and the assets, liabilities, minority interest,
and the results of operations of HCP have been consolidated in the Company's
financial statements since January 1, 1997.
The Company acquired, on November 1, 1997, the NHP Notes owned by CSLC
in the Formation Transactions for $18,664,128. The NHP Notes bear simple
interest at 13% per annum and mature on December 31, 2001. Interest is currently
paid quarterly at a rate of 7%, with the remaining 6% interest deferred.
Beginning November 1, 1997 through September 30, 1998, the Company has been
recording interest income at 10.5% of the purchase price paid, which was
determined based on the discounted amount of principal and interest payments to
be made following the maturity date (December 31, 2001) of the NHP Notes (using
a six-month lag between maturity and full repayment), due to uncertainties
regarding the ultimate realization of the accrued interest. On September 30,
1998, the Company purchased four properties from NHP. NHP is in turn redeeming
$7,500,000 of the Company's investment in the NHP Notes and is distributing
approximately $5,300,000 of deferred interest not previously paid on such notes.
From October 1, 1998 through December 31, 1998, the Company reevaluated its
investment in the NHP Notes, and is recording additional income, after giving
consideration to current payment of interest, partial redemption of the NHP
Notes with accrued interest and the estimated residual value in NHP. Also,
during 1998 and 1996, the Company paid $344 and $1,364 for 4% and 3%,
respectively, ownership of limited partnership interests in NHP. The Company
accounts for its investment in NHP on the cost method with respect to the NHP
limited partnership interests and as held-to-maturity securities and reported at
amortized cost with respect to the NHP Notes.
The Company will continue to develop and acquire senior living
communities. The development of senior living communities typically involves a
substantial commitment of capital over a 12 to 14-month construction period
during
29
<PAGE>
which time no revenues are generated, followed by a 12-month lease-up period.
The Company anticipates that newly opened or expanded communities will operate
at a loss during a substantial portion of the lease-up period. The Company's
growth strategy may also include the acquisition of senior living communities,
home care agencies, and other properties or businesses that are complementary to
the Company's operations and growth strategy.
30
<PAGE>
RESULTS OF OPERATIONS
The following tables set forth, for the periods indicated, selected
historical consolidated statements of income data in thousands of dollars and
expressed as a percentage of total revenues.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------------
1998 1997 1996
---------------------------- -------------------------- ----------------------------
$ % $ % $ %
------------- -------------- ------------- ------------ ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Resident and health care revenue $24,791 58.0% $21,207 69.1% $13,692 68.8%
Rental and lease income 4,281 10.0 4,276 13.9 1,101 5.5
Unaffiliated management services revenue 2,465 5.8 1,920 6.2 801 4.0
Affiliated management services revenue 1,327 3.1 1,378 4.5 2,708 13.6
Unaffiliated development fees 1,234 2.9 804 2.6 673 3.4
Affiliated development fees 7,473 17.5 173 0.6 - 0.0
Other 1,197 2.7 952 3.1 924 4.7
------- ------ ------- ------ ------- -----
Total revenues 42,768 100.0 30,710 100.0 19,899 100.0
------- ------ ------- ------ ------- -----
Expenses:
Operating expenses 17,067 39.9 16,701 54.4 10,656 53.6
General and administrative expenses 6,594 15.4 7,085 23.1 5,635 28.3
Depreciation and amortization 2,734 6.4 2,118 6.9 1,481 7.4
------- ------ ------- ------ ------- -----
Total expenses 26,395 61.7 25,904 84.4 17,772 89.3
------- ------ ------- ------ ------- -----
Income from operations 16,373 38.3 4,806 15.6 2,127 10.7
Other income (expense):
Interest income 4,939 11.5 3,186 10.4 432 2.2
Interest expense (1,922) (4.5) (2,022) (6.5) (221) (1.1)
Gain on sale of properties 422 1.0 - - 438 2.2
Equity in earnings on investments - - - - 459 2.3
Other - - 440 1.4 42 0.2
------- ------ ------- ------ ------- -----
Income before income taxes and minority
interest in consolidated partnerships 19,812 46.3 6,410 20.9 3,277 16.5
Provision for income taxes (7,476) (17.5) (793) (2.6) - -
------- ------ ------- ------ ------- -----
Income before minority interest in
consolidated partnerships 12,336 28.8 5,617 18.3 3,277 16.5
Minority interest in consolidated
partnerships (379) (0.8) (1,936) (6.3) (1,224) (6.2)
------- ------ ------- ------ ------- -----
Net income $11,957 28.0% $3,681 12.0% $ 2,053 10.3%
======= ====== ======= ====== ======= =====
</TABLE>
YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31, 1997
Revenues. Total revenues were $42,768,000 in 1998 compared to
$30,710,000 in 1997, representing an increase of $12,058,000, or 39.3%. Resident
and health care revenue increased $3,584,000, of which $4,015,000 is a result of
purchasing the four NHP properties, Gramercy Hill and Tesson Heights, along with
a decrease of $237,000 relating to the HCP properties. Unaffiliated management
services revenue increased $545,000 due to a significant improvement in the
performance at the property level resulting in incentive payments and one
additional third-party management contract added in the first quarter of 1998.
Unaffiliated development fees increased $430,000, of which $894,000 is a result
of two additional third party development contracts and the continuation of four
projects that earned fees for seven months in 1998 as compared to two months for
1997 and a decrease of $464,000 resulting from one development project completed
on December 31, 1997 and three development projects terminated by a third party.
Affiliated development fees increased $7,300,000, resulting from fees earned on
29 projects in 1998 compared to one in 1997.
Expenses. Total expenses were $26,395,000 in 1998 compared to
$25,904,000 in 1997, representing an increase of $491,000, or 1.9%. Operating
expenses increased $366,000 due to an increase of $1,954,000 as a result of
acquiring six properties in the fourth quarter of 1998, along with a decrease of
$1,361,000 related to the termination of Maryland Gardens lease and offset by an
overall decrease in operating expenses. General and administrative expenses
decreased $491,000 due to a decrease in officers' salaries of $2,670,000 offset
by a $325,000 increase due to the acquisition of six properties in the fourth
quarter of 1998, a $185,000 increase in development expenses due to the increase
in development projects, a $200,000 increase in professional fees that relate to
legal fees, a $100,000 increase in license and fee expense, a $320,000 increase
in HCP general and administrative expenses, along with an overall increase in
general and
31
<PAGE>
administrative expenses. Depreciation and amortization increased $616,000 due to
an increase of $424,000 as a result of the acquisition of the six properties in
the fourth quarter of 1998, an $80,000 increase for the expansion of Cottonwood
and an increase of $37,000 in the amortization of goodwill for twelve months in
1998 as opposed to two months in 1997.
Other income and expenses. Interest and other income increased
$1,835,000, primarily as a result of a $1,365,000 increase in income associated
with investment of cash reserves, a $1,600,000 increase in NHP Notes interest
due to a partial redemption of the notes and payment of accrued interest, a
$308,000 increase in interest earned from the Triad, Triad II and Triad IV (as
hereinafter defined) unsecured credit facilities, which is offset by a
$1,400,000 decrease in interest due to the divestment of an investment from June
1997 through October 1997 by CSLC. Interest expense decreased $100,000 due to a
decrease of $1,267,000 of interest related to the Lehman debt incurred in the
Formation Transactions and a decrease of $44,000 in HCP interest expense due to
refinancing. These decreases are offset by an increase of $1,201,000 in interest
expense due to the acquisition of the six properties. A gain of $422,000 was
recorded on the sale of two properties in the fourth quarter of 1998. In
connection with the sale of its investment in HCP to the Company immediately
following completion of the offering, CSLC incurred short swing profits, as
defined by the Securities and Exchange Commission, and was, accordingly,
required to remit such profits to HCP, which recorded the remittance of $440,000
as other income in 1997.
Minority interest. Minority interest in limited partnerships decreased
$1,557,000, primarily due to the CSLC minority interest being included in 1997
through October and not included in 1998.
Provision for income taxes. Provision for income taxes was
approximately $7,476,000 in 1998 compared to $793,000 in 1997. As a result of
the Formation Transactions, the Company and its consolidated subsidiaries were
converted from S corporations that are taxed at the shareholder level to C
corporations that are subject to corporate income taxes. Accordingly, a
provision for federal and state taxes was provided on the earnings for 12 months
in 1998 compared to two months in 1997.
Net Income. As a result of the foregoing factors, net income increased
$8,276,000 to $11,957,000 for 1998 from $3,681,000 for 1997.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED DECEMBER 31, 1996
Revenues. Total revenues were $30,710,000 in 1997 compared to
$19,899,000 in 1996, representing an increase of $10,811,000, or 54.3%. The
inclusion of HCP revenues in 1997 from January 1, 1997 contributed $8,978,000 of
the increase, as HCP was not consolidated in 1996. Resident and health care
revenue increased $7,515,000, of which $4,702,000 is a result of the HCP
consolidation, $1,157,000 was improvement in CSLC's revenues due to realization
of additional reimbursements previously limited under the Medicare program for
1994 and 1992 combined with improved CSLC rental rates and occupancies and
$1,543,000 related to the Maryland Gardens facility leased on June 1, 1997.
Rental and lease income increased $3,175,000, of which $4,276,000 was due to the
HCP consolidation, offset by $1,101,000 due to the sale of CSLC's multi-family
properties on November 1, 1996. Unaffiliated management services revenue
increased $1,119,000 due to 15 third-party management contracts added in the
third and fourth quarter of 1996 and one additional third-party management
contract added in the second quarter of 1997. Affiliated management services
revenue decreased by $1,330,000, of which $1,177,000 was due to the HCP
consolidation. Development fees increased $304,000 and was due to new
development contract management revenue for managing the development and
construction of new third-party owned senior living communities.
Expenses. Total expenses were $25,904,000 in 1997 compared to
$17,772,000 in 1996, representing an increase of $8,132,000, or 45.8%. The
inclusion of HCP expenses from January 1, 1997 contributed $6,538,000 of the
increase. Operating expenses increased $6,045,000 of which $4,251,000 was a
result of the HCP consolidation and $1,561,000 due to Maryland Gardens operating
expenses. General and administrative expenses increased $1,450,000, which was
due to the HCP consolidation of $1,078,000 offset by an overall decrease in
general and administrative expenses. Depreciation and amortization increased
$637,000, of which $1,209,000 was related to the HCP consolidation, offset by a
$572,000 decrease in CSLC's depreciation which was primarily due to the sale of
CSLC's multi-family rental properties in November 1996.
32
<PAGE>
Other income and expenses. Interest income increased $2,754,000,
primarily as a result of CSLC's increase in interest income of $1,116,754
associated with its investment in U.S. Treasury Bills, $1,230,000 as a result of
the Company's increase in interest income associated with its increased
investment in NHP Notes combined with the commencement of accruing a portion of
the deferred income on these notes beginning in April 1997, as a result of NHP's
improved financial position and performance and increased valuation of the
underlying properties, $288,361 associated with income from temporary investment
of net proceeds from the Offering for November and December 1997, and the
consolidation of HCP of $359,000. Interest expense increased $1,801,000 as a
result of higher debt balances including the LBHI Loan borrowings on July 1,
1997 and $679,000 as a result of the HCP consolidation. Income from equity in
earnings on investments decreased $459,000 as a result of the HCP consolidation
on January 1, 1997. In connection with the sale of its investment in HCP to the
Company immediately following completion of the Offering, CSLC incurred short
swing profits, as defined by the Securities and Exchange Commission, and was,
accordingly, required to remit such profits to HCP which recorded the remittance
as other income. A gain of $438,000 was recorded on November 1, 1996, as a
result of the sale of multi-family properties with no corresponding gain being
realized in 1997.
Minority interest. Minority interest in limited partnerships increased
$712,000 primarily as a result of the HCP consolidation.
Provision for income taxes. Provision for income taxes was
approximately $793,000 in 1997 compared to no provision in 1996. As a result of
the Formation Transactions, the Company and its consolidated subsidiaries were
converted from S corporations that are taxed at the shareholder level to C
corporations that are subject to corporate income taxes. Accordingly, a
provision for federal and state income taxes is provided on earnings after the
Formation Transactions.
Net income. As a result of the foregoing factors, net income increased
$1,628,000 to $3,681,000 for 1997 from $2,053,000 for 1996.
QUARTERLY RESULTS
The following table presents certain quarterly financial information
for the four quarters ended December 31, 1998 and 1997. This information has
been prepared on the same basis as the audited Consolidated Financial Statements
of the Company appearing elsewhere in this report and include, in the opinion of
management, all adjustments (consisting of normal recurring adjustments)
necessary to present fairly the quarterly results when read in conjunction with
the audited Consolidated Financial Statements of the Company and the related
notes thereto.
<TABLE>
<CAPTION>
1998 Calendar Quarters
--------------------------------------------------
First Second Third Fourth
--------- ---------- --------- ---------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Total revenues............................................... $ 8,354 $ 9,234 $10,556 $14,624
Income from operations....................................... 2,330 3,397 4,906 5,740
Net income................................................... 1,926 2,511 3,506 4,014
Net income per share......................................... $ 0.10 $ 0.13 $ 0.18 $ 0.20
Weighted average shares outstanding.......................... 19,717 19,717 19,717 19,717
1997 Calendar Quarters
--------------------------------------------------
First Second Third Fourth
--------- ---------- --------- ---------
(in thousands, except per share amounts)
Total revenues............................................... $ 7,091 $ 7,977 $7,652 $ 7,990
Income from operations....................................... 1,124 980 959 1,743
Net income................................................... 583 630 797 1,671
Net income per share......................................... $ 0.06 $ 0.07 $ 0.09 $ 0.10
Weighted average shares outstanding.......................... 9,367 9,367 9,367 16,440
</TABLE>
33
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
As described in the notes to the accompanying consolidated financial
statements, the Company repaid all of its notes payable to affiliates and the
mortgage loan payable to Lehman Brothers Holdings, Inc. with proceeds from the
Offering in November 1997, leaving only the mortgage property loans of HCP
outstanding thereafter. The Company also secured a three year revolving line of
credit of $20 million which may be used for acquisition of additional interests
in HCP and NHP, expansion of owned communities, acquisition of additional
properties and general working capital purposes.
In addition to approximately $36 million of cash balances on hand as of
December 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
million revolving line of credit. Subsequent to December 31, 1998, the Company
received a commitment to increase its line of credit to $34 million. The Company
expects the funds available under its line of credit along with its net income
and cash flow from operations to be sufficient to fund its short-term working
capital requirements. The Company plans to refinance $47,700,000 of short-term
variable rate debt to a long-term loan in 1999. The Company's long-term capital
requirements, primarily for acquisitions, development and other corporate
initiatives, will be dependent on the Company's ability to access additional
funds through the debt and/or equity markets. There can be no assurance that the
Company will continue to generate cash flows at or above current levels or that
the Company will be able to obtain the capital necessary to meet its long-term
capital requirements.
The Company had net cash provided by operating activities of $6,689,000
in fiscal 1998 compared to $9,684,000 in the prior year. In fiscal 1998, cash
from operating activities was primarily derived from net income of $11,957,000
along with non-cash charges of $3,055,000 and an increase in federal income
taxes of $837,000 offset by increases in accounts receivable and other assets of
$8,672,000 and $1,059,000, respectively. Net cash provided by operating
activities in fiscal 1997 was primarily comprised of net income of $3,681,000
and net non-cash charges of $4,115,000 offset by an increase in accounts
receivable of $1,648,000.
The Company had cash used in investing activities of $86,502,000 and
$81,507,000 in fiscal 1998 and 1997, respectively. In fiscal 1998, the cash used
in investing activities was primarily the result of the acquisition of six
properties for $77,408,000, advances to affiliates of $11,778,000 and capital
expenditures of $6,027,000. In fiscal 1997 cash used in investing activities
consisted primarily $64,203,000 invested in restricted cash equivalents,
$8,244,000 in asset purchases and $15,608,000 invested in limited partnerships,
offset by $8,995,000 in cash acquired upon the acquisition of HCP.
The Company had net cash provided by financing activities in fiscal
1998, of $67,514,000, primarily from $67,039,000 of advances under the Company's
line of credit and notes payable. In 1997 the Company had net cash provided by
financing activities of $109,124,000 which was the result of the net cash
provided by the Company's initial public offering.
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 December 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 year 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
of 1997 due to low occupancy. HealthSouth has continued to make lease payments
on a timely basis for all four properties. 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.
34
<PAGE>
Following termination of these leases, the Company will either convert and
operate the facilities as assisted living and Alzheimer's care facilities, sell
the facilities or evaluate other alternatives. HCP's facility lessees are all
current in their lease obligations to HCP. The lessee for one property continues
to fund a deficit between the required lease payment and operators' 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.
The Company plans to continue to develop and acquire senior living
communities. The development of senior living communities typically involves a
substantial commitment of capital over a 12-month construction period during
which time no revenues are generated, followed by a 12- to 14-month lease-up
period.
Effective April 1, 1998, Tri Point Communities, L.P. ("Tri Point"), a
limited partnership owned by the Company's founders (Messrs. Beck and Stroud)
and their affiliates 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. Tri Point was renamed Triad I. The new
general partner of Triad I, owning 1%, is Triad Senior Living, Inc. The limited
partners are Blake N. Fail (principal owner of Triad Senior Living, Inc.),
owning 80%, and the Company, owning 19%. The development agreements between
Triad I and the Company provide for a development fee of 4% to the Company, as
well as reimbursement of expenses and overhead not to exceed 4%. Triad I has
also entered into management agreements with the Company providing for
management fees in an amount equal to the greater of 5% of gross revenues or
$5,000 per month per community, plus overhead reimbursement not to exceed 1% of
gross revenues. The Company has 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 noncompounded interest of 12% per annum.
The management agreements also provide the Company with an option to purchase
the communities developed by Triad I 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 option based upon the business and
financial factors that may exist at the time those options may be exercised.
Triad I has entered into construction loan facilities aggregating
approximately $50,000,000 to fund its development activities and a take-out
facility aggregating approximately $50,000,000.
During 1998, the Company agreed to loan Triad I 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 December 31, 1998, approximately $9,636,000 has
been advanced to Triad I under this loan facility.
Effective September 24, 1998, the Company and Triad II, a limited
partnership, entered into a Development and Turnkey Services Agreement in
connection with the development and management of the Company's planned new
Waterford communities where Triad II would own and finance the construction of
the new communities. Triad II was organized on September 23, 1998. The general
partner of Triad II, owning 1%, is Triad Partners II, Inc. The limited partners
are Triad Partners II, Inc., owning 80%, and the Company, owning 19%.
The Company has an option to purchase the partnership interests of
Triad Partners II, Inc. in Triad II for an amount equal to the amount such party
paid for its interests, plus noncompounded interest of 12% per annum. The
management agreements with Triad II also provide the Company with an option to
purchase the communities developed by Triad II upon their completion for an
amount equal to the fair market value (based on a third-party appraisal but not
less than hard and soft costs and lease-up costs). The Company has made no
determination as to whether it will exercise its purchase options. The Company
will evaluate the possible exercise of each purchase based upon the business and
financial factors which may exist at the time those options may be exercised.
35
<PAGE>
Triad II has entered into construction and mini-perm loan facilities
aggregating approximately $26,000,000 to fund its development activities.
During the third quarter, the Company agreed to loan Triad II up to
$7,000,000. On January 15, 1999, the loan amount was amended to up to
$10,000,000. The principal is due September 25, 2003. The first draw under this
loan facility was made on September 25, 1998. Interest is due quarterly at 10.5%
per annum. This loan may be prepaid without penalty. At December 31, 1998,
approximately $932,000 has been advanced to Triad II under this loan facility.
On September 30, 1998, the Company acquired four senior living
communities from NHP for $40,683,281 by entering into the $32,300,000 Lehman
Loan, a cash payment of $8,246,007 and assumption of net assets and liabilities
of $137,274. The Company has mortgaged the four senior living communities as
collateral. The acquisition was accounted for as a purchase.
On October 28, 1998, the Company acquired a senior living community
from Tesson for $23,051,786. The Company borrowed $15,400,000 pursuant to the
existing mortgage loan agreement with Lehman and mortgaged the senior living
community as collateral. The Company also acquired a senior living community
from Gramercy for $11,036,655. The Company assumed a $6,334,660 note from Fannie
Mae, and borrowed an additional $1,980,000 from WMFC on a second lien basis and
mortgaged the senior living community as collateral for both loans. The Company
paid the remaining purchase prices with a cash payment of $7,376,632 and
$2,425,798, respectively, and assumption of liabilities of $275,154 and
$296,197, respectively.
Effective November 10, 1998, the Company and Triad III, a limited
partnership, entered into a Development and Turnkey Services Agreement in
connection with the development and management of the Company's planned new
Waterford communities where Triad III would own and finance the construction of
the new communities. Triad III was organized on November 10, 1998. The general
partner of Triad III, owning 1%, is Triad Partners III, Inc. The limited
partners are Triad Partners III, Inc., owning 80%, and the Company, owning 19%.
The Company has an option to purchase the partnership interests of
Triad Partners III, Inc. in Triad III for an amount equal to the amount such
party paid for its interests, plus noncompounded interest of 12% per annum. The
management agreements with Triad III also provide the Company with an option to
purchase the communities developed by Triad III 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 III has entered into construction and mini-perm loan facilities
aggregating approximately $51,000,000 to fund its development activities.
During the fourth quarter, the Company agreed to loan Triad III up to
$10,000,000. The principal is due February 8, 2004. Interest is due quarterly at
10.5% per annum. This loan may be prepaid without penalty. At December 31, 1998,
no monies have been advanced to Triad III under this loan facility.
Effective December 30, 1998, the Company and Triad IV, a limited
partnership, entered into a Development and Turnkey Services Agreement in
connection with the development and management of the Company's planned new
Waterford communities where Triad IV would own and finance the construction of
the new communities. Triad IV was organized on December 22, 1998. The general
partner of Triad IV, owning 1%, is Triad Partners IV, Inc. The limited partners
are Triad Partners IV, Inc., owning 80%, and the Company, owning 19%.
The Company has an option to purchase the partnership interests of
Triad Partners IV, Inc. in Triad IV for an amount equal to the amount such party
paid for its interests, plus noncompounded interest of 12% per annum. The
management agreements with Triad IV also provide the Company with an option to
purchase the communities developed by Triad IV upon their completion for an
amount equal to the fair market value (based on a third-party appraisal but not
36
<PAGE>
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 IV is negotiating commitments for loan facilities aggregating up
to $50,000,000 to fund its development activities.
During the fourth quarter, the Company agreed to loan Triad IV up to
$10,000,000. The principal is due December 30, 2003. The first draw under this
loan facility was made on December 30, 1998. Interest is due quarterly at 10.5%
per annum. This loan may be prepaid without penalty. At December 31, 1998,
approximately $1,160,000 has been advanced to Triad IV under this loan facility.
Net cash provided by operating activities, of $6,689,000 for the year
ended December 31, 1998, decreased $2,994,000, or 31%, over that of the
comparable year ended December 31, 1997, which was composed of increased cash
flow created by improved earnings of $7,215,000 (after noncash adjustments)
combined with $10,209,000 of cash derived from working capital.
Net cash used in investing activities of $25,094,000 for the year ended
December 31, 1998 decreased $56,408,000 over that of the comparable year ended
December 31, 1997. This decrease was composed of increased capital expenditures
of $3,586,000 primarily related to the Cottonwood expansion, the lack of
comparable proceeds from sale of properties in 1997 compared to 1998's proceeds
of $676,000, a decrease in investments in 1998 in limited partnerships (CSLC,
HCP and NHP Notes) of $13,915,000, the $64,203,000 investment by the Company in
restricted cash securities from the proceeds obtained from the LBHI Loan and the
difference in 1997 for cash paid for the September 1998 purchase of assets
acquired from NHP, and the October 1998 purchase of assets acquired from Tesson
and Gramercy, offset by the November 1997 purchase of assets from CSLC and
offset by HCP's beginning cash balance of $8,995,000 as a result of the
consolidation of HCP at January 1, 1997 in the amount of $9,805,000.
Net cash provided by financing activities, of $6,106,000 for the year
ended December 31, 1998, decreased $103,019,000 over that of the comparable year
ended December 31, 1997. This decrease was due to $110,331,000 of net proceeds
received by the Company in November 1997 from the Offering.
YEAR 2000 ISSUE
The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Company's computer programs or hardware that have date-sensitive software or
embedded chips may recognize the year 2000 as a date other than the year 2000.
This could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices or engage in similar normal business activities.
Based on ongoing assessments, the Company has developed a program to
modify or replace significant portions of its software and certain hardware,
which are generally PC-based systems, so that those systems will properly
recognize and utilize dates beyond December 31, 1999. The Company expects to
substantially complete software reprogramming and software and hardware
replacement by March 31, 1999, with 100% completion targeted for December 31,
1999. The cost of the completed and future modifications and replacement of
hardware and software is expected to result in expenditures of approximately
$100,000. The general ledger program is Year 2000 compliant, however some of the
reporting tools used in conjunction with the general ledger will not work
properly with the current version of the Company's general ledger after December
31, 1999. As a result of this issue, the Company is currently in the process of
upgrading its current general ledger and reporting software and expects this
process to be completed by December 31, 1999. The Company presently believes
that these modifications and replacement of existing software and certain
hardware will mitigate the Year 2000 Issue. However, if such modifications and
replacements are not completed timely, the Year 2000 Issue could have a material
impact on the operations of the Company.
37
<PAGE>
The Company expects to complete a survey and required written responses
from its critical service providers in 1999. The Company is not currently aware
of any external critical service provider with a Year 2000 Issue that would
materially impact the Company's results of operations, liquidity or capital
resources. However, the Company has no other means of determining whether or
ensuring that its critical service providers are or will be Year 2000-ready. The
inability of critical service providers to complete their Year 2000 resolution
process in a timely fashion could materially impact the Company.
The Company has assessed its exposure to operating equipment, and such
exposure is not significant due to the nature of the Company's business. The
Company operates in a relatively low technology dependent industry and does not
anticipate any industry or Company specific Year 2000 risks beyond those
discussed above.
Significant Year 2000 problems could result in the Company not having
timely the operating information necessary to efficiently manage and monitor its
business activities. This could result in disruptions of operations, including,
among other things, a temporary inability to process transactions, send invoices
or engage in similar normal business activities. The Company does not foresee
Year 2000 issues effecting the day-to-day operation of its senior living
communities due to their limited use of technology and the Company's evaluation
of their operating equipment. The Company considers the possibility of
significant Year 2000 problems based, on the evaluation of our internal systems
and the response from our critical service providers, to be remote.
Management of the Company believes it has an effective program in place
to resolve the Year 2000 Issue in a timely manner. As noted above, the Company
has completed most but not all necessary phases of its Year 2000 program. In the
event that the Company does not complete the current program or any additional
phases, the Company could incur disruptions to its operations. In addition,
disruptions in the economy generally resulting from Year 2000 Issues could also
materially adversely affect the Company. The Company could be subject to
litigation or computer systems failure. The amount of potential liability and
cost cannot be reasonably estimated at this time.
The Company currently has no contingency plans in place in the event it
does not complete all phases of its Year 2000 program. The Company plans to
continue to monitor the status of completion of its Year 2000 initiatives to
determine whether such a plan is necessary.
IMPACT OF INFLATION
To date, inflation has not had a significant impact on the Company.
Inflation could, however, affect the Company's future revenues and results of
operations because of, among other things, the Company's dependence on senior
residents, many of whom rely primarily on fixed incomes to pay for the Company's
services. As a result, during inflationary periods, the Company may not be able
to increase resident service fees to account fully for increased operating
expenses. In structuring its fees, the Company attempts to anticipate inflation
levels, but there can be no assurance that the Company will be able to
anticipate fully or otherwise respond to any future inflationary pressures.
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 other risks and
factors identified from time to time in the Company's reports filed with the
Securities and Exchange Commission.
38
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary market risk is exposure to changes in interest
rates on debt instruments. As of December 31, 1998, the Company had $81,090,000
in outstanding debt comprised of various fixed and variable rate debt
instruments of $13,483,000 and $67,607,000, respectively.
Changes in interest rates would affect the fair market value of the
Company's fixed rate debt instruments but would not have an impact on the
Company's earnings or cash flows. Fluctuations in interest rates on the Company
variable rate debt instruments, which are tied to either the LIBOR or the prime
rate, would affect the Company's earnings and cash flows but would not affect
the fair market value of the variable rate debt. For each percentage point
change in interest rates the Company's annual interest expense would increase by
approximately $676,000 based on its current outstanding variable rate debt. In
fiscal 1999 the Company expects to convert $47,700,000 of its variable rate debt
to a fixed rate loan which will be based on the 10 year treasury rate on the
date of the conversion plus an agreed to point spread.
The following table summarizes information on the Company's debt
instruments outstanding as of December 31, 1998. The table presents the
principal due and weighted average interest rates for the Company's various debt
instruments by fiscal year. Weighted average variable interest rates are based
on the Company's floating rate as of December 31, 1998.
<TABLE>
<CAPTION>
Interest Rate Risk
Principal Amount and Average Interest Rate by Expected Maturity Date
(dollars in thousands)
1999 2000 2001 2002 2003 Thereafter Total Fair Value
-------- ---------- ----------- ---------- ----------- ------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long-term debt:
Fixed rate debt $ 304 $343 $378 $ 415 $455 $11,588 $13,483 $13,483
Average interest rate 8.7% 8.7% 8.7% 8.7% 8.7% 8.6%
Variable rate debt $ 416 $333 $184 - - - $ 933 $ 933
Average interest rate 6.2% 6.2% 6.2% 0.0% 0.0% 0.0%
Short-term debt:
Variable rate debt $47,700 - - - - - $47,700 $47,700
Average interest rate 7.1% - - - - -
Lines of credit:
Variable rate debt - - - $18,974 - - $18,974 $18,974
Average interest rate - - - 7.3% - -
------- -------
Total Debt $81,090 $81,090
</TABLE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements are included under Item 14 of this Annual
Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Company had no disagreements on accounting or financial disclosure
matters with its independent accountants to report under this Item 9.
39
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Form 10-K/A to be
signed on its behalf by the undersigned, thereunto duly authorized, on November
4, 1999.
CAPITAL SENIOR LIVING CORPORATION
By: /s/ Lawrence A. Cohen
--------------------------------------
Lawrence A. Cohen
Vice Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Form 10-K/A has been signed by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ * Co-Chairman of the Board, November 4, 1999
- ---------------------------------------
James A. Stroud Chairman and Secretary
/s/ Lawrence A. Cohen Vice Chairman of the Board and November 4, 1999
- --------------------------------------- Chief Executive Officer (Principal
Executive, Officer)
/s/ * President, Chief Operating Officer November 4, 1999
- --------------------------------------- and Director
Keith N. Johannessen
/s/ * Director November 4, 1999
- ---------------------------------------
Dr. Gordon I. Goldstein
/s/ * Director November 4, 1999
- ---------------------------------------
James A. Moore
/s/ * Director November 4, 1999
- ---------------------------------------
Dr. Victor W. Nee
/s/ Ralph A. Beattie Executive Vice President and Chief November 4, 1999
- --------------------------------------- Financial Officer (Chief Financial and
Ralph A. Beattie Accounting Officer)
40
<PAGE>
by */s/ Lawrence A. Cohen November 4, 1999
- ----------------------------------------
Lawrence A. Cohen
attorney -in-fact
</TABLE>
41
