SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report pursuant to Section 13
or 15(d) of the Securities Exchange Act or 1934
For the quarterly period ended March 31, 2000
[ ] Transition report under Section 13
or 15(d) of the Securities Exchange Act of 1934
Commission file number 1-13445.
CAPITAL SENIOR LIVING CORPORATION
---------------------------------
(Exact name of Registrant as specified in its charter)
DELAWARE 75-2678809
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
14160 Dallas Parkway, Suite 300, Dallas, Texas 75240
----------------------------------------------------
(Address of principal executive offices)
972-770-5600
------------
(Registrant's telephone number, including area code)
Indicate by check whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the 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
--- ---
As of May 11, 2000, the Registrant had outstanding 19,717,347 shares of its
Common Stock, $.01 par value.
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<CAPTION>
CAPITAL SENIOR LIVING CORPORATION
INDEX
Page
Number
------
Part I. Financial Information
Item 1. Financial Statements
<S> <C> <C> <C>
Consolidated Balance Sheets - -
March 31, 2000 and December 31, 1999 3
Consolidated Statements of Income - -
Three Months Ended March 31, 2000 and 1999 4
Consolidated Statements of Cash Flows - -
Three Months Ended March 31, 2000 and 1999 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 17
Part II. Other Information
Item 1. Legal Proceedings 17
Item 6. Exhibits and Reports on Form 8-K 18
Signature
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2
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
CAPITAL SENIOR LIVING CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands)
March 31, December 31,
2000 1999
---------------- ----------------
ASSETS (Unaudited) (Audited)
<S> <C> <C>
Current assets:
Cash and cash equivalents........................................... $ 31,078 $ 32,988
Restricted cash..................................................... 2,274 --
Accounts receivable, net............................................ 2,598 3,392
Accounts receivable from affiliates................................. 8,233 9,055
Interest receivable................................................. 1,032 834
Federal and state income taxes receivable........................... 5,234 6,035
Deferred taxes...................................................... 910 910
Prepaid expenses and other.......................................... 486 508
----------- ------------
Total current assets.......................................... 51,845 53,722
Property and equipment, net............................................... 104,014 104,723
Deferred taxes............................................................ 9,415 9,516
Notes receivable from affiliates.......................................... 35,051 30,596
Investments in limited partnerships....................................... 9,325 9,123
Assets held for sale...................................................... 7,573 9,549
Other assets.............................................................. 5,310 4,647
----------- ------------
Total assets.................................................. $ 222,533 $ 221,876
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................... $ 1,539 $ 2,512
Accrued expenses.................................................... 1,833 2,127
Current portion of notes payable.................................... 1,205 1,199
Customer deposits................................................... 928 911
----------- ------------
Total current liabilities..................................... 5,505 6,749
Deferred income from affiliates........................................... 1,970 1,785
Notes payable, net of current portion..................................... 58,205 58,416
Line of credit............................................................ 34,000 34,000
Minority interest in consolidated partnership............................. 11,832 11,377
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.01 par value:
Authorized shares 15,000,000; no shares issued or outstanding. -- --
Common stock, $.01 par value:
Authorized shares 65,000,000; issued and outstanding
19,717,347 at March 31, 2000 and December 31, 1999............ 197 197
Additional paid-in capital.......................................... 91,935 91,935
Retained earnings................................................... 18,889 17,417
----------- ------------
Total shareholders' equity.................................... 111,021 109,549
----------- ------------
Total liabilities and shareholders' equity.................... $ 222,533 $ 221,876
=========== ============
</TABLE>
See accompanying notes.
3
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<TABLE>
<CAPTION>
CAPITAL SENIOR LIVING CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except earnings per share)
Three Months Ended March 31,
-----------------------------
2000 1999
--------------- ------------
(Unaudited) (Unaudited)
<S> <C> <C>
Revenues:
Resident and healthcare revenue................ $ 10,267 $ 10,208
Rental and lease income........................ 993 1,093
Unaffiliated management services revenue....... 726 697
Affiliated management services revenue......... 120 112
Unaffiliated development fees.................. 241 553
Affiliated development fees.................... 163 2,805
---------- -----------
Total revenues............................. 12,510 15,468
Expenses:
Operating expenses............................. 6,234 5,968
General and administrative expenses............ 2,147 2,106
Depreciation and amortization.................. 1,034 1,121
---------- -----------
Total expenses............................. 9,415 9,195
---------- -----------
Income from operations............................... 3,095 6,273
Other income (expense):
Interest income................................ 1,378 1,733
Interest expense............................... (1,959) (1,479)
Gain on sale of properties..................... 303 --
---------- -----------
Income before income taxes and minority interest in
consolidated partnership....................... 2,817 6,527
Provision for income taxes........................... (890) (2,515)
---------- -----------
Income before minority interest in consolidated
partnership.................................... 1,927 4,012
Minority interest in consolidated partnership........ (455) (160)
---------- -----------
Net income........................................... $ 1,472 $ 3,852
========== ===========
Net income per share:
Basic.......................................... $ 0.07 $ 0.20
========== ===========
Diluted........................................ $ 0.07 $ 0.20
========== ===========
Weighted average shares outstanding - basic.... 19,717 19,717
========== ===========
Weighted average shares outstanding - diluted.. 19,746 19,720
========== ===========
</TABLE>
See accompanying notes.
4
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<TABLE>
<CAPTION>
CAPITAL SENIOR LIVING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Three Months Ended March 31,
-------------------------------
2000 1999
------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C>
Operating Activities
Net income.......................................................... $ 1,472 $ 3,852
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization................................. 1,034 1,121
Amortization of deferred financing charges.................... 46 144
Gain on sale of assets........................................ (303) --
Minority interest in consolidated partnership................. 455 159
Deferred tax expense.......................................... 101 101
Deferred income from affiliates............................... 185 377
Deferred income............................................... -- 90
Changes in operating assets and liabilities, net of
acquisitions:
Restricted cash........................................... (2,274) --
Accounts receivable....................................... 794 (579)
Accounts receivable from affiliates....................... 822 (2,865)
Interest receivable....................................... (198) (153)
Prepaid expenses and other................................ 22 15
Other assets.............................................. (681) (94)
Federal and state income taxes............................ 801 95
Accounts payable and accrued expenses..................... (1,267) (528)
Customer deposits......................................... 17 (1)
------------- ------------
Net cash provided by operating activities........................... 1,026 1,734
Investing Activities
Capital expenditures................................................ (302) (751)
Proceeds from the sale of assets.................................... 2,279 --
Advances to affiliates.............................................. (4,455) (8,551)
Distribution from (investments in) limited partnership.............. (202) 277
------------- ------------
Net cash used in investing activities............................... (2,680) (9,025)
Financing Activities
Proceeds from notes payable and line of credit...................... 206 421
Repayment of notes payable......................................... (411) (192)
Deferred loan charges paid (refunded)............................... (51) 5
------------- ------------
Net cash provided by (used in) financing activities................. (256) 234
------------- ------------
Decrease in cash and cash equivalents............................... (1,910) (7,057)
Cash and cash equivalents at beginning of period.................... 32,988 35,827
------------- ------------
Cash and cash equivalents at end of period.......................... $ 31,078 $ 28,770
============= ============
Supplemental disclosures:
Cash paid during the period for:
Interest..................................................... $ 2,083 $ 1,337
============= ============
Income taxes................................................. $ 30 $ 1,420
============= ============
</TABLE>
See accompanying notes.
5
<PAGE>
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000
(unaudited)
1. BASIS OF PRESENTATION
Capital Senior Living Corporation, a Delaware corporation (the "Company"), was
incorporated on October 25, 1996. The accompanying consolidated financial
statements include the financial statements of Capital Senior Living Corporation
and its subsidiaries and a limited partnership owned and controlled by it. All
intercompany balances and transactions have been eliminated in consolidation.
The accompanying consolidated balance sheet, as of December 31, 1999, has been
derived from audited consolidated financial statements of the Company for the
year ended December 31, 1999, and the accompanying unaudited consolidated
financial statements, as of March 31, 2000 and 1999, have been prepared pursuant
to the rules and regulations of the Securities and Exchange Commission. Certain
information and note disclosures normally included in the annual financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to those rules and regulations. For
further information, refer to the financial statements and notes thereto for the
year ended December 31, 1999 included in the Company's Annual Report on Form
10-K filed with the Securities and Exchange Commission on March 30, 2000.
In the opinion of the Company, the accompanying consolidated financial
statements contain all adjustments (all of which were normal recurring accruals)
necessary to present fairly the Company's financial position as of March 31,
2000, and results of operations and cash flows for the three months ended March
31, 2000 and 1999. The results of operations for the three months ended March
31, 2000 are not necessarily indicative of the results for the year ending
December 31, 2000.
2. TRANSACTIONS WITH AFFILIATES
The Company has entered into development and management agreements with the
partnerships set out below (the "Triad Entities") for the development and
management of new senior living communities. The Triad Entities own and finance
the construction of the new senior living communities. The communities are
primarily Waterford 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
14- to 18-month lease up period. The Company is accounting for these investments
under the equity method of accounting based on the provisions of the Triad
Entities partnership agreements.
6
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CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table sets forth the percentage ownership the Company has in each
of the Triad Entities, the capital invested, information related to loans made
by the Company to each Triad Entity and information on deferred income related
to each Triad Entity (dollars in thousands):
Notes Receivable Deferred Income
----------------------------------------------- ---------------------
Balance
Ownership Capital Committed Mar. 31, Interest Development
Entity Interest Investment Amount 2000 Maturity Rate Interest Fees
------ -------- ---------- ------ ---- -------- ---- -------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Triad Senior
Living I, L.P.
(Triad I) 19.0% $3,000 $ -- $ 1,302 -- 8.0% $ 231 $ 409
Triad Senior
Living II, L.P. September
(Triad II) 19.0 74 15,000 11,888 25, 2003 10.5 189 201
Triad Senior
Living III, February
L.P. 19.0 143 15,000 10,165 8, 2004 10.5 162 383
(Triad III)
Triad Senior
Living IV, L.P. December
(Triad IV) 19.0 143 10,000 6,333 30, 2003 10.5 103 111
Triad Senior
Living V, L.P. June 30,
(Triad V) 10.0 -- 10,000 4,069 2004 12.0 29 85
Triad Senior
Living VI, L.P. October 1,
(Triad VI) 5.0 -- 3,000 1,294 2004 12.0 2 --
</TABLE>
The Company typically receives a development fee of 4% of project costs, as well
as reimbursement of expenses and overhead not to exceed 4% of project costs.
These fees are recorded over the term of the development project on a basis
approximating the percentage of completion method. In addition, when properties
become operational, the Company typically receives management fees in an amount
equal to the greater of 5% of gross revenues or $5,000 per month per community,
plus overhead not to exceed 1% of gross revenue.
The Company has the option to purchase the partnership interests of the other
parties in each of the Triad Entities, except in Triad I, for an amount equal to
the amount paid for the partnership interest by the other partners, plus a
noncompounded return of 12% per annum. In addition, each Triad Entity, except
Triad I, provides the Company with an option to purchase the community developed
by the applicable partnership 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) of the community.
7
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CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
In December 1999, Triad I completed a recapitalization in which an affiliate of
Lehman Brothers purchased from a third party 80% of the limited partnership
interests in Triad I. The Company continues to own a 19% limited partnership
interest in Triad I. The Company has the option to purchase the Triad I
communities prior to December 31, 2001 for an amount specified in the
partnership agreement, has an option to purchase the partnership interest of the
other partners for an amount specified in the partnership agreement and is
subject to the buy-sell provisions of the partnership agreement. The Company
will continue to develop and manage the communities in the Triad I partnership.
The Company has made no determination as to whether it will exercise any of
these purchase options.
3. NET INCOME PER SHARE
Basic net income per share is calculated by dividing net income by the weighted
average number of common shares outstanding during the period. Diluted net
income per share considers the dilutive effect of outstanding options calculated
using the treasury stock method.
The following table sets forth the computation of basic and diluted earnings per
share (in thousands, except for per share amounts):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------
2000 1999
------------ -----------
<S> <C> <C> <C>
Net income $ 1,472 $ 3,852
=========== ===========
Weighted average shares outstanding - basic 19,717 19,717
Effect of dilutive securities:
Employee stock options 29 3
----------- -----------
Weighted average shares outstanding - diluted 19,746 19,720
=========== ===========
Basic earnings per share $ 0.07 $ 0.20
=========== ===========
Diluted earnings per share $ 0.07 $ 0.20
=========== ===========
</TABLE>
Options to purchase 1.5 million shares of common stock at prices ranging from
$7.06 to $13.50 per share were not included in the computation of diluted
earnings per share because the average daily price of the common stock during
the first three months of fiscal 2000 did not exceed the exercise price of the
options, and therefore, the effect would be antidulitive.
4. CONTINGENCIES
On or about October 23, 1998, Robert Lewis filed a putative class action
complaint on behalf of certain holders of assignee interests (the "Assignee
Interests") in NHP Retirement Housing Partners I Limited Partnership ("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 ninety 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 those properties
and unspecified damages. The Company believes the complaint is without merit and
is vigorously defending itself in this action. The Company has filed a Motion to
8
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CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Dismiss in this case, which is currently pending. The Company is unable to
estimate the liability related to this claim, if any.
The Company has pending claims incurred in the normal course of business, which,
in the opinion of management, based on the advice of legal counsel, will not
have a material effect on the financial statements of the Company.
5. PENDING MERGERS
On April 18, 2000, the Company announced that it has reduced the merger
consideration to the shareholders of ILM Senior Living, Inc. ("ILM I") and ILM
II Senior Living, Inc. ("ILM II), collectively, to $155.0 million from $172.0
million. The parties have amended the merger agreements, which were announced on
February 8, 1999 and previously amended on October 19, 1999. The amended merger
agreements have been approved by the Board of Directors of each party and
require the approval of the shareholders of ILM I and ILM II. If approved, the
mergers are expected to be completed in July 2000. The primary assets of ILM I
and ILM II, collectively, are 13 senior living communities that have been
managed by the Company under management agreements since 1996. Under the two
amended merger agreements, each of ILM I and ILM II will separately merge with
and into a wholly-owned direct subsidiary of the Company with the aggregate
issued and outstanding shares of ILM I and ILM II common stock receiving 100% of
the merger consideration in cash. The outside termination date of the amended
merger agreements is September 30, 2000. Each transaction requires the approval
of two-thirds of the applicable shareholders of either ILM I or ILM II. The
mergers are also subject to certain other customary conditions including
regulatory approvals. Form 8-K's were filed by the Company on May 9, 2000, with
copies of the amendments to the amended merger agreements attached thereto.
The Company also announced that it had signed commitment letters with GMAC
Commercial Mortgage Corporation and its affiliate to provide, subject to certain
customary terms and conditions, acquisition financing for the cash consideration
to be paid in each of the mergers with ILM I and ILM II and to refinance three
communities owned by the Company. With the GMAC commitments, the Company will
have sufficient cash and cash flow from operations to fund the ILM mergers.
9
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CAPITAL SENIOR LIVING CORPORATION
March 31, 2000
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
The following discussion and analysis addresses (i) the Company's results of
operations for the three months ended March 31, 2000 and 1999, respectively, and
(ii) liquidity and capital resources of the Company and should be read in
conjunction with the Company's consolidated financial statements contained
elsewhere in this report.
The Company generates revenue from a variety of sources. For the three months
ended March 31, 2000, the Company's revenue was derived as follows: 82.1% from
the operation of eleven owned senior living communities that are operated by the
Company; 7.9% from lease rentals for triple net leases of three skilled nursing
communities and two physical rehabilitation centers owned by HealthCare
Properties L.P. ("HCP"); 6.8% from management fees arising from management
services provided for four affiliate owned senior living communities and fifteen
third party owned senior living communities and 3.2% derived from development
fees earned for managing the development and construction of new senior living
communities for affiliated and unaffiliated third parties, including the Triad
Entities.
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 flows 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 triple net leases extend through the year 2000 for two of its owned
communities and through the year 2001 for three of its owned communities. The
base payments under these leases are fixed and are not subject to change based
upon the operating performance of these communities. Certain of these leases
have additional rent based on operating performance. Following termination of
the lease agreements (unless renewal options are utilized by the lessees), the
Company may either convert and operate the communities as assisted living and
Alzheimer's care communities, sell the communities or evaluate other
alternatives.
The Company's current management contracts expire on various dates through
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 costs and are earned over the period commencing with the initial
10
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CAPITAL SENIOR LIVING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
development activities and ending with the opening of the community. As of March
31, 2000, development fees have been earned for services performed on 15
communities under development or expansion for third parties.
Results of Operations
The following table sets forth for the periods indicated, selected statements of
income data in thousands of dollars and expressed as a percentage of total
revenues.
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<CAPTION>
Three Months Ended
March 31,
----------------------------------------
2000 1999
-------------------- -------------------
$ % $ %
---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenues:
Resident and healthcare
revenue................ $ 10,267 82.1 $10,208 66.0
Rental and lease income... 993 7.9 1,093 7.1
Unaffiliated management
service revenue........ 726 5.8 697 4.5
Affiliated management
service revenue........ 120 1.0 112 0.7
Unaffiliated development
fees................... 241 1.9 553 3.6
Affiliated development
fees................... 163 1.3 2,805 18.1
-------- ----- ------- -----
Total revenue............. 12,510 100.0 15,468 100.0
Expenses:
Operating expenses........ 6,234 49.8 5,968 38.6
General and administrative
expenses............... 2,147 17.2 2,106 13.6
Depreciation and
amortization........... 1,034 8.3 1,121 7.2
-------- ----- ------- -----
Total expenses............ 9,415 75.3 9,195 59.4
-------- ----- ------- -----
Income from operations ........ 3,095 24.7 6,273 40.6
Other income (expense):
Gain on sales of assets... 303 2.4 -- --
Interest income........... 1,378 11.0 1,733 11.2
Interest expense.......... (1,959) (15.7) (1,479) (9.6)
-------- ----- ------- -----
Income before income taxes and
minority interest in
consolidated partnership.. 2,817 22.5 6,527 42.2
Provision for income taxes..... (890) (7.1) (2,515) (16.3)
-------- ----- ------- -----
Income before minority interest
in consolidated
partnership............... 1,927 15.4 4,012 25.9
Minority interest in
consolidated partnership.. (455) (3.6) (160) (1.0)
-------- ----- ------- -----
Net income..................... $ 1,472 11.8 $ 3,852 24.9
======== ===== ======= =====
</TABLE>
Three Months Ended March 31, 2000 Compared to the Three Months Ended March 31,
1999
Revenues. Total revenues were $12.5 million in the three months ended March 31,
2000 compared to $15.5 million for the three months ended March 31, 1999,
representing a decrease of $3.0 million or 19.1%. This decrease in revenue is
the result of a $3.0 million decrease in development fee revenue. The reduction
in development fee revenue reflects the Company's strategic initiatives aimed at
ownership of assets, enhancing cash flows and discontinuing the use of joint
ventures for future development. During the first quarter of fiscal 2000, the
Company received development fee revenue on 15 communities compared to 35
communities in the first quarter of fiscal 1999.
11
<PAGE>
CAPITAL SENIOR LIVING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Expenses. Total expenses were $9.4 million in the first quarter of fiscal 2000
compared to $9.2 million in the first quarter of fiscal 1999, representing an
increase of $0.2 million or 2.4%. This increase is primarily due to slightly
higher operating costs at our senior living communities.
Other income and expense. Other income and expense decreased $0.5 million due to
an increase in interest expense of $0.5 million, and a decrease in interest
income of $0.3 million offset by a gain on the sale of one community, in Martin,
TN, owned by HCP of $0.3 million. Interest expense increased as a result of
slightly higher interest rates and debt outstanding in the first quarter of
fiscal 2000 compared to 1999. Interest income decreased primarily as a result of
a decrease in interest earned from NHP notes due to the revaluation of the NHP
notes in the fourth quarter of fiscal 1999.
Provision for income taxes. Provision for income taxes in the first quarter of
fiscal 2000 was $0.9 million or 37.7% of taxable income, compared to $2.5
million or 39.5% of taxable income in the comparable quarter for 1999. The
effective tax rates for the first quarter of 2000 and 1999 differ from the
statutory tax rates because of state income taxes and permanent tax differences.
Minority interest. Minority interest increased $0.3 million primarily due to the
sale of one of the HCP communities and an increase in net income at HCP. The
sale of the HCP community increased minority interest by approximately $0.1
million.
Net income. As a result of the foregoing factors, net income decreased $2.4
million to $1.5 million for the three months ended March 31, 2000, as compared
to $3.9 million for the three months ended March 31, 1999.
Liquidity and Capital Resources
In addition to approximately $31.1 million of cash balances on hand as of March
31, 2000, the Company's principal source of liquidity is expected to be cash
flows from operations. The Company expects its cash and cash equivalents along
with its net income and cash flow from operations to be sufficient to fund its
short-term working capital requirements. 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 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 $1.0 million and
$1.7 million in the first three months of fiscal 2000 and 1999, respectively. In
the first quarter of fiscal 2000, the net cash provided by operating activities
was primarily derived from net income of $1.5 million, net non-cash charges of
$1.5 million and a decrease in accounts and income tax receivable of $2.4
million, offset by an increase in restricted cash of $2.3 million, increases in
interest receivable and other assets of $0.9 million and a decrease in accounts
payable and accrued expenses of $1.3 million. In the first quarter of fiscal
1999, cash from operating activities was primarily derived from net income of
$3.9 million along with non-cash charges of $2.0 million, offset by increases in
accounts and interest receivable of $3.6 million and a decrease in accounts
payable and accrued expenses of $0.5 million.
12
<PAGE>
CAPITAL SENIOR LIVING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The Company had net cash used in investing activities of $2.7 million and $9.0
million in the first three months of fiscal 2000 and 1999, respectively. In the
first three months of fiscal 2000, the Company's net cash used in investing
activities was primarily the result of advances to the Triad Entities of $4.5
million, capital expenditures of $0.3 million and investments in limited
partnerships of $0.2 million, offset by the proceeds from the sale of one of the
HCP communities for $2.3 million. In the first three months of fiscal 1999, the
Company's net cash used in investing activities was primarily from advances to
the Triad Entities of $8.6 million, and capital expenditures of $0.8 million,
offset by distributions from partnerships of $0.3 million.
The Company had net cash used in financing activities of $0.3 million in first
quarter of fiscal 2000, compared to net cash provided by financing activities of
$0.2 million in the comparable quarter of fiscal 1999. For the first three
months of fiscal 2000, net cash used in financing activities was primarily the
result of reductions in the Company's debt outstanding under the Company's notes
payable. For the first three months of fiscal 1999, net cash provided by
financing activities was primarily the result of increases in debt outstanding
under the Company's line of credit and notes payable.
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 HCP's owned communities that are leased
to third parties depend on the ability of the lessee to make timely lease
payments. Four of these properties had been leased until the year 2001 to
HealthSouth Rehabilitation Corp. ("HealthSouth"), which provides acute spinal
injury intermediate care at the property which is still operating. In August
1999, HealthSouth agreed to transfer control of two of these communities both of
which had been closed since 1997 to HCP. HealthSouth agreed, however, to
continue making its full lease payments to HCP. In the third quarter of fiscal
1999, the main campus of one property was sold for $2.7 million, resulting in a
gain from sale of approximately $0.8 million. Two small facilities not adjacent
to the main campus and the other community are for sale. During the first
quarter of fiscal 2000 HCP sold the third of these communities to HealthSouth
for $2.4 million, resulting in a gain of approximately $0.3 million. HCP's three
other leases are all current in their lease obligations. However, the parent
companies of two of these leases have filed for chapter 11 bankruptcy in the
United States Bankruptcy Court for the district of Delaware. At this time, it is
uncertain if bankruptcy protection would disrupt future payments of lease
obligations. Following termination of these leases, the Company will either
convert and operate the communities as assisted living and Alzheimer's care
communities, attempt to sell the communities or evaluate other alternatives. HCP
currently operates one of its communities.
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 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 14 to 18-month lease up period.
13
<PAGE>
CAPITAL SENIOR LIVING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The Company has entered into development and management agreements with the
Triad Entities for the development and management of new senior living
communities. The Triad Entities will own and finance the construction of the new
communities. These communities are primarily Waterford communities. The Company
typically receives a development fee of 4% of project costs, as well as
reimbursement of expenses and overhead not to exceed 4% of project costs. In
addition, when the properties become operational, the Company typically receives
management fees in an amount equal to the greater of 5% of gross revenues or
$5,000 per month per community, plus overhead not to exceed 1% of gross revenue.
The Company holds 5% to 19% limited partnership interests in each of the Triad
Entities. The Company has the option to purchase the partnership interests of
the other parties in the Triad Entities, except for Triad I, for an amount equal
to the amount paid for the partnership interest by the other partners, plus a
noncompounded return of 12% per annum. In addition, each Triad Entity, except
Triad I, provides the Company with an option to purchase the community developed
by the applicable partnership 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) of the community.
In December 1999, Triad I completed a recapitalization in which an affiliate of
Lehman Brothers purchased from a third party 80% of the limited partnership
interests in Triad I. The Company continues to own a 19% limited partnership
interest in Triad I. The Company has the option to purchase the Triad I
communities prior to December 31, 2001 for an amount specified in the
partnership agreement, has an option to purchase the partnership interest of the
other partners for an amount specified in the partnership agreement and is
subject to the buy-sell provisions of the partnership agreement. The Company
will continue to develop and manage the communities in the Triad I partnership.
The Company has made no determination as to whether it will exercise any of
these purchase options. The Company will evaluate the possible exercise of each
purchase option based on the business and financial factors that may exist at
the time these options may be exercised.
Each Triad Entity finances the development of new communities through a
combination of equity funding, traditional construction loans and permanent
financing with institutional lenders secured by first liens on the communities
and unsecured loans from the Company. The Company loans may be prepaid without
penalty. The financings from institutional lenders are secured by first liens on
the communities as well as assignment to the lenders of the construction
contracts and the development and management agreements with the Company. Each
development and management agreement assigned to an institutional lender is also
guaranteed by the Company and those guarantees are also assigned to the lenders.
In certain cases, the management agreements contain an obligation of the Company
to make operating deficit loans to the Triad Entities if the other financing
sources of the Triad Entities have been fully utilized. These operating deficit
loan obligations, which are guaranteed by the Company, include making loans to
fund debt service obligations to the lenders.
14
<PAGE>
CAPITAL SENIOR LIVING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The chart below sets forth information about Company loans made to the Triad
Entities and financings from institutional lenders obtained by the Triad
Entities (dollars in thousands):
<TABLE>
<CAPTION>
Notes Receivable Construction Loan Facilities
--------------------------------------------------- ----------------------------------------
Balance
Committed Mar. 31, Interest
Entity Amount 2000 Maturity Rate Amount Type Lender
------ ------ ---- -------- ---- ------ ---- ------
<S> <C> <C> <C> <C> <C> <C> <C>
TriadSenior
Living I, L.P. $50,000 construction, Bank One GMAC
(Triad I) $ -- $ 1,302 -- 8.0% $50,000 take-out
Triad Senior
Living II, L.P. September 25, construction, Key
(Triad II) $15,000 $11,888 2003 10.5% $26,800 mini-perm Bank
TriadSenior
Living III, February 8, construction, Guaranty
L.P. $15,000 $10,165 2004 10.5% $56,300 mini-perm Federal
(Triad III)
TriadSenior
Living IV, L.P. December 30, construction, Compass
(Triad IV) $10,000 $ 6,333 2003 10.5% $18,600 mini-perm Bank
TriadSenior
Living V, L.P. June 30, construction, Bank of
(Triad V) $10,000 $ 4,069 2004 12.0% $27,000 mini-perm America
TriadSenior
Living VI, L.P. October 1,
(Triad VI) $ 3,000 $ 1,294 2004 12.0% $ -- -- --
</TABLE>
Pending Mergers
On April 18, 2000, the Company announced that it has reduced the merger
consideration to the shareholders of ILM Senior Living, Inc. ("ILM I") and ILM
II Senior Living, Inc. ("ILM II), collectively, to $155.0 million from $172.0
million. The parties have amended the merger agreements, which were announced on
February 8, 1999 and previously amended on October 19, 1999. The amended merger
agreements have been approved by the Board of Directors of each party and
require the approval of the shareholders of ILM I and ILM II. If approved, the
mergers are expected to be completed in July 2000. The primary assets of ILM I
and ILM II, collectively, are 13 senior living communities that have been
managed by the Company under management agreements since 1996. Under the two
amended merger agreements, each of ILM I and ILM II will separately merge with
and into a wholly-owned direct subsidiary of the Company with the aggregate
issued and outstanding shares of ILM I and ILM II common stock receiving 100% of
the merger consideration in cash. The outside termination date of the amended
merger agreements is September 30, 2000. Each transaction requires the approval
15
<PAGE>
CAPITAL SENIOR LIVING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
of two-thirds of the applicable shareholders of either ILM I or ILM II. The
mergers are also subject to certain other customary conditions including
regulatory approvals.
The Company also announced that it had signed commitment letters with GMAC
Commercial Mortgage Corporation and its affiliate to provide, subject to certain
customary terms and conditions, acquisition financing for the cash consideration
to be paid in each of the mergers with ILM I and ILM II and to refinance three
communities owned by the Company. With the GMAC commitments, the Company will
have sufficient cash and cash flow from operations to fund the ILM mergers.
Forward-Looking Statements
Certain information contained in this report constitutes "Forward-Looking
Statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended,
which can be identified by the use of forward-looking terminology such as "may,"
"will," "expect," "anticipate," "estimate" or "continue" or the negative thereof
or other variations thereon or comparable terminology. The Company cautions
readers that forward-looking statements, including, without limitation, those
relating to the Company's future business prospects, revenues, working capital,
liquidity, capital needs, interest costs and income, are subject to certain
risks and uncertainties that could cause actual results to differ materially
from those indicated in the forward-looking statements, due to several important
factors herein identified, among others, and their risks and factors identified
from time to time in the Company's reports filed with the Securities and
Exchange Commission.
16
<PAGE>
CAPITAL SENIOR LIVING CORPORATION
March 31, 2000
Item 3. QUANTITATIVE AND QUALIITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company's primary market risk is exposure to changes in interest rates on
debt instruments. As of March 31, 2000 the Company had $93.4 million in
outstanding debt comprised of various fixed and variable rate debt instruments
of $59.4 million and $34.0 million, 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's 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 $0.3 million based on its current outstanding variable debt.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
On or about October 23, 1998, Robert Lewis filed a putative class action
complaint on behalf of certain holders of assignee interests (the "Assignee
Interests") in NHP Retirement Housing Partners I Limited Partnership ("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 ninety Assignee Interests
in NHP 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 those properties
and unspecified damages. The Company believes the complaint is without merit and
is vigorously defending itself in this action. The Company has filed a Motion to
Dismiss in this case, which is currently pending. The Company is unable to
estimate the liability related to this claim, if any.
The Company has pending claims incurred in the normal course of business, which,
in the opinion of management, based on the advice of legal counsel, will not
have a material effect on the financial statements of the Company.
Item 2. CHANGES IN SECURITIES (And use of proceeds)
Not Applicable
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
17
<PAGE>
CAPITAL SENIOR LIVING CORPORATION
March 31, 2000
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
Item 5. OTHER INFORMATION
Not Applicable
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits:
10.1 Amended and Restated Draw Promissory Note,
dated March 1, 2000, of Triad Senior
Living III, L.P., in favor of Capital
Senior Living Properties, Inc.
27.1 Financial Data Schedule
(B) Reports on Form 8-K
(i) The Registrant filed a report on Form 8-K,
dated February 15, 2000 to disclose a press
release from January 27, 2000 relating to
the Company's announcement to accelerate
certain strategic initiatives.
(ii) The Registrant filed a report on Form 8-K,
dated March 17, 2000 to disclose a Rights
Agreement between the Company and Chase
Mellon Shareholder Services, L.L.C. dated as
of March 9, 2000.
18
<PAGE>
CAPITAL SENIOR LIVING CORPORATION
March 31, 2000
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Capital Senior Living Corporation
(Registrant)
By: /s/ Ralph A. Beattie
--------------------
Ralph A. Beattie
Executive Vice President and Chief Financial Officer
(Principal Financial Officer and Duly Authorized Officer)
Date: May 12, 2000
19
Exhibit 10.1
- ------------
AMENDED AND RESTATED DRAW PROMISSORY NOTE
Amount: $15,000,000.00 Date: March 1, 2000
------------------- -----------------
FOR VALUE RECEIVED, the undersigned, promises to pay to Capital Senior
Living Properties, Inc., a Texas corporation, the sum draw down up to Fifteen
Million and No/100 Dollars ($15,000,000.00), the principal due five (5) years
from the date of the first draw down and interest due quarterly at a rate of ten
and one-half percent (10.5%) per annum, both principal and interest payable at
office at 14160 Dallas Parkway, Suite 300, Dallas, Texas 75240.
This note amends and restates the Draw Promissory Note dated November
1, 1998, between Maker and Capital Senior Living Properties, Inc.
The accrued interest on this note is payable quarterly after the first
draw down.
All past due principal and interest shall bear interest from maturity
at the rate of twelve percent (12%) per annum.
This note may be prepaid without penalty.
Failure to pay any installment of principal and interest, or any other
part thereof, when due shall, at the election of the holder and without notice,
mature the whole note and it shall at once become due and payable.
It is hereby specifically agreed that if this note is placed in the
hands of an attorney for collection, or if collected by suit or through the
Probate Court or any other legal proceedings, the undersigned agrees to pay
reasonable attorneys' fees.
All makers, endorsers, sureties and guarantors hereby waive presentment
for payment of this note, notice of nonpayment, protest, notice of protest,
diligence, or any notice of, or defense on account of, any extension,
extensions, renewal, renewals, or change in any manner of or in this note, or in
any of its terms, provisions or covenants, or of any delay, indulgence or other
act of any holder of the aforesaid note.
TRIAD SENIOR LIVING III, L.P.,
a Texas limited partnership
By: Triad Partners III, Inc.,
Its General Partner
BY: /s/ Blake N. Fail
-------------------------------
TITLE: President of General Partner
----------------------------
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Financial Data Schedule for Capital Senior Living Corporation
</LEGEND>
<CIK> 0001043000
<NAME> Capital Senior Living Corporation
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollar
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<EXCHANGE-RATE> 1
<CASH> 33,352
<SECURITIES> 0
<RECEIVABLES> 13,345
<ALLOWANCES> (2,514)
<INVENTORY> 0
<CURRENT-ASSETS> 51,845
<PP&E> 116,677
<DEPRECIATION> (12,663)
<TOTAL-ASSETS> 222,533
<CURRENT-LIABILITIES> 5,505
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 111,021
<TOTAL-LIABILITY-AND-EQUITY> 222,533
<SALES> 0
<TOTAL-REVENUES> 14,191
<CGS> 0
<TOTAL-COSTS> 9,415
<OTHER-EXPENSES> 455
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,959
<INCOME-PRETAX> 2,362
<INCOME-TAX> 890
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,472
<EPS-BASIC> .07
<EPS-DILUTED> .07
</TABLE>
