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 June 30, 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
-------- ----------
(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 August 11, 2000, the Registrant had outstanding 19,717,347 shares of its
Common Stock, $.01 par value.
<PAGE>
<TABLE>
<CAPTION>
CAPITAL SENIOR LIVING CORPORATION
INDEX
Page
Number
------
<S> <C> <C> <C>
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets - -
June 30, 2000 and December 31, 1999 3
Consolidated Statements of Income - -
Three and Six Months Ended June 30, 2000 and 1999 4
Consolidated Statements of Cash Flows - -
Six Months Ended June 30, 2000 and 1999 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
Part II. Other Information
Item 1. Legal Proceedings 20
Item 4. Submission of Matters to a Vote of Securities Holders 20
Item 6. Exhibits and Reports on Form K 21
Signature
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
CAPITAL SENIOR LIVING CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands)
June 30, December 31,
2000 1999
------------------- ------------------
ASSETS (Unaudited) (Audited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 30,976 $ 32,988
Restricted cash 2,274 --
Accounts receivable, net 3,121 3,392
Accounts receivable from affiliates 4,846 9,055
Interest receivable 1,002 834
Federal and state income taxes receivable 4,647 6,035
Deferred taxes 910 910
Prepaid expenses and other 3,091 508
----------- -------------
Total current assets 50,867 53,722
Property and equipment, net 103,596 104,723
Deferred taxes 9,314 9,516
Notes receivable from affiliates 38,620 30,596
Investments in limited partnerships 9,453 9,123
Assets held for sale 7,573 9,549
Other assets 6,369 4,647
----------- -------------
Total assets $ 225,792 $ 221,876
=========== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,214 $ 2,512
Accrued expenses 2,716 2,127
Current portion of notes payable 3,212 1,199
Customer deposits 1,035 911
----------- -------------
Total current liabilities 8,177 6,749
Deferred income from affiliates 2,161 1,785
Notes payable, net of current portion 57,830 58,416
Line of credit 34,000 34,000
Minority interest in consolidated partnership 11,291 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 June 30, 2000 and December 31, 1999 197 197
Additional paid-in capital 91,935 91,935
Retained earnings 20,201 17,417
----------- -------------
Total shareholders' equity 112,333 109,549
----------- -------------
Total liabilities and shareholders' equity $ 225,792 $ 221,876
=========== =============
</TABLE>
See accompanying notes.
3
<PAGE>
<TABLE>
<CAPTION>
CAPITAL SENIOR LIVING CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(in thousands)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------ -----------------------------------
2000 1999 2000 1999
------------------ ----------------- ----------------- -----------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues:
Resident and healthcare revenue $ 9,998 $ 10,304 $ 20,265 $ 20,512
Rental and lease income 1,029 1,102 2,022 2,195
Unaffiliated management services revenue 626 645 1,260 1,342
Affiliated management services revenue 193 115 405 227
Unaffiliated development fees 208 295 370 848
Affiliated development fees 277 3,496 519 6,301
----------- ------------ ------------ ------------
Total revenues 12,331 15,957 24,841 31,425
Expenses:
Operating expenses 6,086 6,023 12,320 11,991
General and administrative expenses 2,205 2,250 4,352 4,356
Depreciation and amortization 968 1,133 2,002 2,254
----------- ------------ ------------ ------------
Total expenses 9,259 9,406 18,674 18,601
----------- ------------ ------------ ------------
Income from operations 3,072 6,551 6,167 12,824
Other income (expense):
Gain on sale of assets -- -- 303 --
Interest income 1,455 1,659 2,833 3,392
Interest expense (2,011) (1,490) (3,970) (2,969)
----------- ------------ ------------ ------------
Income before income taxes and minority interest in
consolidated partnership 2,516 6,720 5,333 13,247
Provision for income taxes (815) (2,473) (1,705) (4,988)
----------- ------------ ------------ ------------
Income before minority interest in consolidated
partnership 1,701 4,247 3,628 8,259
Minority interest in consolidated partnership (389) (264) (844) (424)
----------- ------------ ------------ ------------
Net income $ 1,312 $ 3,983 $ 2,784 $ 7,835
=========== ============ ============ ============
Net income per share:
Basic $ 0.07 $ 0.20 $ 0.14 $ 0.40
=========== ============ ============ ============
Diluted $ 0.07 $ 0.20 $ 0.14 $ 0.40
=========== ============ ============ ============
Weighted average shares outstanding - basic 19,717 19,717 19,717 19,717
=========== ============ ============ ============
Weighted average shares outstanding - diluted 19,717 19,717 19,732 19,717
=========== ============ ============ ============
</TABLE>
See accompanying notes.
4
<PAGE>
<TABLE>
<CAPTION>
CAPITAL SENIOR LIVING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Six Months Ended June 30,
--------------------------------------
2000 1999
------------------- ------------------
(Unaudited) (Unaudited)
<S> <C> <C>
Operating Activities
Net income $ 2,784 $ 7,835
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 2,002 2,254
Amortization of deferred financing charges 96 302
Gain on sale of assets (303) --
Minority interest in consolidated partnership 844 424
Deferred tax expense 202 202
Deferred income from affiliates 376 852
Deferred income -- 84
Changes in operating assets and liabilities:
Restricted cash (2,274) --
Accounts receivable 271 (995)
Accounts receivable from affiliates 4,209 (5,817)
Interest receivable (168) (373)
Prepaid expenses and other (2,583) 60
Other assets (1,775) (1,231)
Federal and state income taxes 1,388 (2,265)
Accounts payable and accrued expenses (709) (884)
Customer deposits 124 (11)
--------------- ------------
Net cash provided by operating activities 4,484 437
Investing Activities
Capital expenditures (831) (1,243)
Proceeds from the sale of assets 2,279 --
Advances to affiliates (8,024) (15,981)
Distribution from (investments in) limited partnership (330) 511
--------------- ------------
Net cash used in investing activities (6,906) (16,713)
Financing Activities
Proceeds from notes payable and line of credit 2,383 49
Repayment of notes payable (956) (216)
Distributions to minority partners (930) --
Deferred loan charges paid (87) (170)
--------------- ------------
Net cash provided by (used in) financing activities 410 (337)
--------------- ------------
Decrease in cash and cash equivalents (2,012) (16,613)
Cash and cash equivalents at beginning of period 32,988 35,827
--------------- ------------
Cash and cash equivalents at end of period $ 30,976 $ 19,214
=============== ============
Supplemental disclosures:
Cash paid during the period for:
Interest $ 4,191 $ 2,671
=============== ============
Income taxes $ 246 $ 7,056
=============== ============
</TABLE>
5
See accompanying notes.
<PAGE>
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 June 30, 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 June 30,
2000, results of operations for the three months and six months ended June 30,
2000 and 1999, respectively, and cash flows for the six months ended June 30,
2000 and 1999. The results of operations for the three and six months ended June
30, 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
<PAGE>
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):
<TABLE>
<CAPTION>
Notes Receivable Deferred Income
-------------------------------------------------- -----------------------
Balance
Ownership Capital Committed June 30, 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 $ -- $ 2,913(1) -- 8.0% $ 239 $ 404
Triad Senior
Living II, September
L.P. 19.0 74 15,000 12,197 25, 2003 10.5 250 204
(Triad II)
Triad Senior
Living III, February 8,
L.P. 19.0 143 15,000 10,429 2004 10.5 213 390
(Triad III)
Triad Senior
Living IV, December
L.P. 19.0 143 10,000 7,108 30, 2003 10.5 137 115
(Triad IV)
Triad Senior
Living V, June 30,
L.P. 10.0 -- 10,000 4,646 2004 12.0 42 89
(Triad V)
Triad Senior
Living VI, October 1,
L.P. 5.0 -- 3,000 1,327 2004 12.0 4 --
(Triad VI)
<FN>
----------------------
(1) Pursuant to operating deficit loan obligations.
</FN>
</TABLE>
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, are solely the responsibility of the Triad Entities, and are
not guaranteed by the Company. The financing agreements the Triad Entities have
with the institutional lenders also include the assignment to the lenders of the
construction contracts and the development and management agreements with the
Company. The management agreements contain an obligation of the Company to make
operating deficit loans to the Triad Entities if other funding sources available
to the Triad Entities have been fully exhausted. These operating deficit loan
obligations include making loans to fund debt service obligations to the
lenders.
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
7
<PAGE>
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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, other fees relating to lease up,
plus overhead reimbursement 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.
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 Six Months Ended
June 30, June 30,
---------------------------- -------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $ 1,312 $ 3,983 $ 2,784 $ 7,835
Weighted average shares outstanding
- basic 19,717 19,717 19,717 19,717
Effect of dilutive securities:
Employee stock options -- -- 15 --
--------- --------- --------- ---------
Weighted average shares outstanding
- diluted 19,717 19,717 19,732 19,717
========= ========= ========= =========
Basic earnings per share $ 0.07 $ 0.20 $ 0.14 $ 0.40
========= ========= ========= =========
Diluted earnings per share $ 0.07 $ 0.20 $ 0.14 $ 0.40
========= ========= ========= =========
</TABLE>
Options to purchase 1.8 million shares of common stock at prices ranging from
$3.63 to $13.50 per share were not included in the computation of diluted
earnings per share for the three months ended June 30, 2000 because the average
daily price of the common stock during the second quarter of fiscal 2000 did not
exceed the exercise price of the options, and therefore, the effect would be
antidulitive.
8
<PAGE>
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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
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 had 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 the
shareholders of ILM I and ILM II. 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. 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
expected to have sufficient cash and cash flow from operations to fund the ILM
mergers. However, during GMAC's underwriting process, it was determined that
increases in the London InterBank Offered Rates ("LIBOR") would reduce the loan
proceeds by approximately $8.5 million which would result in the Company not
having sufficient financing proceeds with which to close both ILMs at this time.
The Company expects to finalize the merger with ILM I and the eight communities
it owns, including the 75% interest of one of the communities owned with ILM II,
in August 2000. The Company is continuing
9
<PAGE>
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
to have discussions with other financing sources to complete the merger with ILM
II. There can be no assurance that such financing sources will be available on
terms acceptable to the Company. However, the Company will continue to manage
the remaining ILM II communities pursuant to its existing management agreement.
6. SUBSEQUENT EVENTS
On July 12, 2000, HealthCare Properties L.P. ("HCP") sold one of its properties,
which it had classified as held for sale, for $0.4 million, which will result in
the recognition of a gain on sale of less than $0.1 million in the Company's
third fiscal quarter.
On August 4, 2000, HCP sold another of its communities, which it had classified
as held for sale, for $2.0 million, which will result in the recognition of a
loss on sale of approximately $0.3 million in the Company's third fiscal
quarter.
10
<PAGE>
CAPITAL SENIOR LIVING CORPORATION
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 and six months ended June 30, 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 June 30, 2000, the Company's revenue was derived as follows: 81.1% from
the operation of eleven owned senior living communities that are operated by the
Company; 8.3% from lease rentals for triple net leases of three skilled nursing
communities and two physical rehabilitation centers owned by HCP; 6.7% from
management fees arising from management services provided for six affiliate
owned senior living communities and sixteen third party owned senior living
communities and 3.9% 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.
For the six months ended June 30, 2000, the Company's revenue was derived as
follows: 81.6% from the operation of eleven owned senior living communities;
8.1% from lease rentals for triple net leases of three skilled nursing
communities and two physical rehabilitation centers owned by HCP; 6.7% from
management fees arising from management services provided for six affiliate
owned senior living communities and sixteen third party owned senior living
communities and 3.6% 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.
11
<PAGE>
CAPITAL SENIOR LIVING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
The Company's current management contracts expire on various dates through June
2010 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, including fees related to
lease up, 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
development activities and ending with the opening of the community. As of June
30, 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.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------------------ ---------------------------------------------------
June 30, June 30,
------------------------------------ ---------------------------------------------------
2000 1999 2000 1999
------------------ ---------------------- --------------------- -------------------------
$ % $ % $ % $ %
------- ---------- ---------- ---------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Resident and healthcare revenue $ 9,998 81.1 $10,304 64.6 $20,265 81.6 $20,512 65.3
Rental and lease income 1,029 8.3 1,102 6.9 2,022 8.1 2,195 7.0
Unaffiliated management service
revenue 626 5.1 645 4.0 1,260 5.1 1,342 4.3
Affiliated management service
revenue 193 1.6 115 0.7 405 1.6 227 0.7
Unaffiliated development fees 208 1.7 295 1.8 370 1.5 848 2.7
Affiliated development fees 277 2.2 3,496 21.9 519 2.1 6,301 20.1
-------- ---------- ---------- ---------- ----------- ---------- ----------- -----------
Total revenue 12,331 100.0 15,957 100.0 24,841 100.0 31,425 100.0
Expenses:
Operating expenses 6,086 49.4 6,023 37.7 12,320 49.6 11,991 38.2
General and admiistrative
expenses 2,205 17.9 2,250 14.1 4,352 17.5 4,356 13.9
Depreciation and amortization 968 7.9 1,133 7.1 2,002 8.1 2,254 7.2
-------- ---------- ---------- ---------- ----------- ---------- ----------- -----------
Total expenses 9,259 75.1 9,406 58.9 18,674 75.2 18,601 59.2
-------- ---------- ---------- ---------- ----------- ---------- ----------- -----------
Income from operations 3,072 24.9 6,551 41.1 6,167 24.8 12,824 40.8
Other income (expense):
Gain on sales of assets -- -- -- -- 303 1.2 -- --
Interest income 1,455 11.8 1,659 10.4 2,833 11.4 3,392 10.8
Interest expense (2,011) (16.3) (1,490) (9.3) (3,970) (16.0) (2,969) (9.4)
-------- ---------- ---------- ---------- ----------- ---------- ----------- -----------
Income before income taxes and
minority interest in
consolidated partnership 2,516 20.4 6,720 42.1 5,333 21.5 13,247 42.2
Provision for income taxes (815) (6.6) (2,473) (15.5) (1,705) (6.9) (4,988) (15.9)
-------- ---------- ---------- ---------- ----------- ---------- ----------- -----------
Income before minority interest in
consolidated partnership 1,701 13.8 4,247 26.6 3,628 14.6 8,259 26.3
Minority interest in consolidated
partnership (389) (3.2) (264) (1.7) (844) (3.4) (424) (1.3)
-------- ---------- ---------- ---------- ----------- ---------- ----------- -----------
Net income $ 1,312 10.6 $ 3,983 25.0 $2,784 11.2 $7,835 24.9
======== ========== ========== ========== =========== ========== =========== ===========
</TABLE>
12
<PAGE>
CAPITAL SENIOR LIVING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Three Months Ended June 30, 2000 Compared to the Three Months Ended June 30,
1999
Revenues. Total revenues were $12.3 million in the three months ended June 30,
2000 compared to $16.0 million for the three months ended June 30, 1999,
representing a decrease of $3.7 million or 22.7%. This decrease in revenue is
primarily the result of a $3.3 million decrease in development fee revenue, and
a $0.3 million decrease in resident and healthcare revenue. The reduction in
development fee revenue reflects the Company's strategic initiatives aimed at
enhancing cash flows and discontinuing the use of joint ventures for future
development. During the second quarter of fiscal 2000, the Company received
development fee revenue on 15 communities compared to 45 communities in the
second quarter of fiscal 1999. Resident and healthcare revenue was reduced by
approximately $0.4 million as units have been temporarily taken out of service
for capital improvements as part of the expansion of the continuum care programs
at two of the Company's communities.
Expenses. Total expenses were $9.3 million in the second quarter of fiscal 2000
compared to $9.4 million in the second quarter of fiscal 1999, representing a
decrease of $0.1 million or 1.6%. This decrease is due to slightly lower
depreciation expense during the second quarter as a result of assets that have
been sold or reclassified to held for sale, in the fourth quarter of fiscal
1999, and valued at the lower of their carrying value or fair value less
estimated selling costs.
Other income and expense. Other income and expense decreased $0.7 million due to
an increase in interest expense of $0.5 million, and a decrease in interest
income of $0.2 million. Interest expense increased as a result of slightly
higher interest rates and debt outstanding in the second quarter of fiscal 2000
compared to the same period in fiscal 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 fiscal 1999.
Provision for income taxes. Provision for income taxes in the second quarter of
fiscal 2000 was $0.8 million or 38.3% of taxable income, compared to $2.5
million or 38.3% of taxable income in the comparable quarter for 1999. The
effective tax rates for the second 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 $0.1 million to $0.4 million
primarily due to an increase in net income at HCP.
Net income. As a result of the foregoing factors, net income decreased $2.7
million to $1.3 million for the three months ended June 30, 2000, as compared to
$4.0 million for the three months ended June 30, 1999.
Six Months Ended June 30, 2000 Compared to the Six Months Ended June 30, 1999
Revenues. For the six months ended June 30, 2000, total revenues were $24.8
million compared to $31.4 million for the six months ended June 30, 1999,
representing a decrease of $6.6 million or 21.0%. This decrease in revenue is
primarily the result of a $6.3 million decrease in development fee revenue, a
$0.2 million decrease in resident and healthcare revenue and a $0.2 million
decrease in rental and lease income. The reduction in development fee revenue
reflects the Company's strategic initiatives aimed at enhancing cash flows and
discontinuing the use of joint ventures for future development. During the first
six months of fiscal 2000, the Company received development fee revenue on 15
communities compared to 46
13
<PAGE>
CAPITAL SENIOR LIVING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
communities in the first six months of fiscal 1999. During the first six months
of fiscal 2000, resident and healthcare revenue was reduced by approximately
$0.8 million as units have been temporarily taken out of service for capital
improvements as part of the expansion of the continuum care programs at two of
the Company's communities.
Expenses. Total expenses increased $0.1 million or 0.4% to $18.7 million in the
first six months of fiscal 2000 compared to $18.6 million in the first half of
fiscal 1999. This increase reflects slightly higher operating costs at our
senior living communities.
Other income and expense. Other income and expense decreased $1.3 million
primarily due to an increase in interest expense of $1.0 million, a decrease in
interest income of $0.6 million offset by a gain on 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 six months
of fiscal 2000 compared to the same period in fiscal 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 fiscal 1999.
Provision for income taxes. Provision for income taxes in the first six months
of fiscal 2000 was $1.7 million or 38.0% of taxable income, compared to $5.0
million or 38.9% of taxable income in the comparable period of fiscal 1999. The
effective tax rates for the second 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 $0.4 million to $0.8 million
primarily due to an increase in net income at HCP and the sale of the HCP
community. 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 $5.1
million to $2.8 million for the six months ended June 30, 2000, as compared to
$7.8 million for the six months ended June 30, 1999.
Liquidity and Capital Resources
In addition to approximately $33.3 million of cash balances on hand as of June
30, 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 $4.5 million and
$0.4 million in the first six months of fiscal 2000 and 1999, respectively. In
the first six months of fiscal 2000, the net cash provided by operating
activities was primarily derived from net income of $2.8 million, net non-cash
charges of $3.2 million and a decrease in accounts and income tax receivable of
$5.9 million, offset by an increase in restricted cash of $2.3 million, increase
in prepaid expenses of $2.6 million, increase in other assets of $1.8 million
and a decrease in accounts payable and accrued expenses of $0.7 million. In the
first six months
14
<PAGE>
CAPITAL SENIOR LIVING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
of fiscal 1999, cash from operating activities was primarily derived from net
income of $7.8 million along with non-cash charges of $4.1 million, offset by
increases in accounts and interest receivable of $7.2 million, increase in other
assets of $1.2 million, a decrease in federal and state income taxes payable of
$2.3 and a decrease in accounts payable and accrued expenses of $0.9 million.
The Company had net cash used in investing activities of $6.9 million and $16.7
million in the first six months of fiscal 2000 and 1999, respectively. In the
first six months of fiscal 2000, the Company's net cash used in investing
activities was primarily the result of advances to the Triad Entities of $8.0
million, capital expenditures of $0.8 million and investments in limited
partnerships of $0.3 million, offset by the proceeds from the sale of one of the
HCP communities for $2.3 million. In the first six months of fiscal 1999, the
Company's net cash used in investing activities was primarily from advances to
the Triad Entities of $16.0 million and capital expenditures of $1.2 million,
offset by distributions from partnerships of $0.5 million.
The Company had net cash provided by financing activities of $0.4 million in
first six months of fiscal 2000, compared to net cash used in financing
activities of $0.3 million in the comparable period of fiscal 1999. For the
first six months of fiscal 2000, net cash provided by financing activities was
primarily the result of increases in notes payable, net of note payments, of
$1.4 million offset by distributions to minority partners of $0.9 million and
deferred loan charges paid of $0.1 million. For the first six months of fiscal
1999, net cash used in financing activities was the result of repayments of
notes payable and deferred loan charges paid.
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 were marketed for sale. During the
first quarter of fiscal 2000 HCP sold the third of these communities to
HealthSouth for $2.3 million, resulting in a gain of approximately $0.3 million.
While HealthSouth has shut down its remaining property, effective April 1, 2000,
it continues to make full lease payments for all four properties. Except for two
participation payments owed by one lessee, HCP's other lessees are 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, unless otherwise extended, 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. Subsequent to the end of the Company's second
quarter, HCP sold two properties which it had classified as held for sale. On
July 12, 2000, HCP
15
<PAGE>
CAPITAL SENIOR LIVING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
sold one of the properties for $0.4 million, which will result in the
recognition of a gain of a gain on sale of less than $0.1 million in the
Company's third fiscal quarter. On August 4, 2000, HCP sold one of its
communities for $2.0 million, which will result in the recognition of a loss on
sale of approximately $0.3 million in the Company's third fiscal quarter.
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.
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, other fees relating to lease up, plus overhead
reimbursement 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
16
<PAGE>
CAPITAL SENIOR LIVING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
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, are solely the responsibility of the Triad
Entities and are not guaranteed by the Company. The financing agreements the
Triad Entities have with the institutional lenders also include the assignment
to the lenders of the construction contracts and the development and management
agreements with the Company. The management agreements contain an obligation of
the Company to make operating deficit loans to the Triad Entities if other
funding sources available to the Triad Entities have been fully exhausted. These
operating deficit loan obligations include making loans to fund debt service
obligations to the lenders.
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 June 30, Interest
Entity Amount 2000 Maturity Rate Amount Type Lender
------ ----------- -------- -------- -------- ------ ---- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Triad Senior
Living I, L.P. $50,000 construction, Bank One
(Triad I) $ -- $ 2,913(1) -- 8.0% $50,000 take-out GMAC
Triad Senior
Living II, September 25, construction, Key
L.P. $15,000 $12,197 2003 10.5% $26,800 mini-perm Bank
(Triad II)
Triad Senior
Living III, February 8, construction, Guaranty
L.P. $15,000 $10,429 2004 10.5% $56,300 mini-perm Federal
(Triad III)
Triad Senior
Living IV, December 30, construction, Compass
L.P. $10,000 $ 7,108 2003 10.5% $18,600 mini-perm Bank
(Triad IV)
Triad Senior
Living V, June 30, construction, Bank of
L.P. $10,000 $ 4,646 2004 12.0% $27,000 mini-perm America
(Triad V)
Triad Senior
Living VI, October 1,
L.P. $ 3,000 $ 1,327 2004 12.0% $ -- -- --
(Triad VI)
<FN>
---------------------
(1) Pursuant to operating deficit loan obligations.
</FN>
</TABLE>
17
<PAGE>
CAPITAL SENIOR LIVING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Pending Mergers
On April 18, 2000, the Company announced that it had reduced the merger
consideration to the shareholders of ILM and 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 the shareholders of ILM I and ILM II. 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. 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
expected to have sufficient cash and cash flow from operations to fund the ILM
mergers. However, during GMAC's underwriting process, it was determined that
increases in the London InterBank Offered Rates ("LIBOR") would reduce the loan
proceeds by approximately $8.5 million which would result in the Company not
having sufficient financing proceeds with which to close both ILMs at this time.
The Company expects to finalize the merger with ILM I and the eight communities
it owns, including the 75% interest of one of the communities owned with ILM II,
in August 2000. The Company is continuing to have discussions with other
financing sources to complete the merger with ILM II. There can be no assurance
that such financing sources will be available on terms acceptable to the
Company. However, the Company will continue to manage the remaining ILM II
communities pursuant to its existing management agreement.
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.
18
<PAGE>
CAPITAL SENIOR LIVING CORPORATION
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 June 30, 2000 the Company had $95.0 million in
outstanding debt comprised of various fixed and variable rate debt instruments
of $61.0 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.
19
<PAGE>
CAPITAL SENIOR LIVING CORPORATION
OTHER INFORMNATION
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
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders was held on May 19, 2000. At the
meeting James A. Stroud, Keith N. Johannessen and Dr. Gordon I. Goldstein were
elected to serve as directors of the Company until the annual meeting to be held
in 2003 and until each person's successor is duly elected and qualified. Of the
19,252,371 shares represented at the meeting or by proxy, James A. Stroud
received 19,170,531 shares voting for his for election, Keith N. Johannessen
received 19,116,886 shares voting for his election and Dr. Gordon L. Goldstein
received 19,119,231 shares voting for his election. The other directors whose
terms continue after the annual meeting are Lawrence A. Cohen, James A. Moore
and Dr. Victor W. Nee.
At this year's annual meeting, Ernst & Young LLP was ratified as the independent
public accountants for the Company for the year 2000, with 19,213,669 shares
voting for, 58,120 shares voting against and 10,582 shares abstaining.
20
<PAGE>
CAPITAL SENIOR LIVING CORPORATION
OTHER INFORMATION (continued)
Item 5. OTHER INFORMATION
Not Applicable
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits:
27.1 Financial Data Schedule
(B) Reports on Form 8-K
(i) The Registrant filed a report on Form 8-K, dated May 9,
2000 to report entering into a First Amendment to
Amended and Restated Agreement and Plan of Merger,
dated as of April 18, 2000, by and among Capital Senior
Living Corporation, Capital Senior Living Acquisition,
LLC and ILM Senior Living, Inc.
(ii) The Registrant filed a report on Form 8-K, dated May 9,
2000 to report entering into a First Amendment to
Amended and Restated Agreement and Plan of Merger,
dated as of April 18, 2000, by and among Capital Senior
Living Corporation, Capital Senior Living Acquisition,
LLC and ILM II Senior Living, Inc.
21
<PAGE>
CAPITAL SENIOR LIVING CORPORATION
OTHER INFORMATION (continued)
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: August 11, 2000
22
