SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report pursuant to Section 13
or 15(d)of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 1997
[ ] Transition report under Section 13
or 15(d) of the Securities Exchange Act of 1934
Commission file number 333-33379
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CAPITAL SENIOR LIVING CORPORATION
---------------------------------
(Exact name of Registrant as specified in its charter)
DELAWARE 75-2678809
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
14160 Dallas Parkway, Suite 300, Dallas, Texas 75240
----------------------------------------------------
(Address of principal executive office)
(972) 770-5600
--------------
(Issuer's telephone number, including area code)
Indicated by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for at least the past 90 days. Yes No X
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CORPDAL:95335.1 10861-00052
CAPITAL SENIOR LIVING CORPORATION
---------------------------------
INDEX
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Page
Number
------
Part I. Financial Information
Item 1. Financial Statements
Condensed Combined Balance Sheets --
September 30, 1997 and December 31, 1996 3
Condensed Combined Statements of Income--
Three and Nine Months Ended September 30, 1997
and 1996 4
Condensed Combined Statements of Equity--
Nine Months Ended September 30, 1997 5
Condensed Combined Statements of Cash Flows--
Nine Months Ended September 30, 1997 and 1996 6
Notes to Condensed Combined Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
2
CORPDAL:95335.1 10861-00052
CAPITAL SENIOR LIVING CORPORATION
CONDENSED COMBINED BALANCE SHEETS
ASSETS
September 30, December 31,
1997 1996
------------- ------------
(Unaudited)
Current assets:
Cash and cash equivalents $ 13,345,392 $ 10,818,512
Cash and cash equivalents, restricted 63,798,552 206,376
Accounts receivable, net 2,546,840 607,028
Accounts receivable from affiliates 57,167 90,075
Prepaid expenses and other 220,281 121,993
------------- -------------
Total current assets 79,968,232 11,843,984
Property and equipment, net 31,177,400 12,668,539
Investments in limited partnerships 11,010,980 8,275,920
Deferred initial public offering costs 549,746 -
Management contract rights, net 255,541 291,487
Other assets 85,703 123,084
------------- -------------
Total assets $ 123,047,602 $ 33,203,014
============= =============
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 4,056,134 $ 1,481,553
Current portion of notes payable to
affiliates 965,712 465,091
Current portion of notes payable 70,563,252 -
Customer deposits 466,733 248,458
Due to affiliates 70,172 81,456
------------- ------------
Total current liabilities 76,122,003 2,276,558
Deferred income - 3,400,684
Notes payable to affiliates, net of current
portion 201,390 201,390
Notes payable, net of current portion 6,390,469 -
Minority interest in combined partnerships 20,748,197 10,123,858
Commitments and contingencies - -
Equity:
Partners' capital 19,934,961 17,257,778
Common stock, $.01 par value,
40,000,000 shares authorized, 1,680,000
shares issued and outstanding 16,800 16,800
Additional paid-in capital 26,558 26,558
Retained earnings (deficit) (392,776) (100,612)
------------- ------------
Total equity 19,585,543 17,200,524
------------- ------------
Total liabilities $ 123,047,602 $ 33,203,014
============= ============
See notes to condensed combined financial statements
3
CORPDAL:95335.1 10861-00052
CAPITAL SENIOR LIVING CORPORATION
CONDENSED COMBINED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------- ---------------------------------
1997 1996 1997 1996
------------- ------------- -------------- ---------------
Revenues:
Resident and health care revenue $ 5,355,971 $ 3,370,847 $ 15,783,442 $ 10,325,714
Rental and lease income 1,056,067 339,065 3,214,040 986,653
Unaffiliated management services revenue 472,351 287,776 1,421,358 341,226
Affiliated management services revenue 322,194 610,942 1,023,320 2,029,506
Development fees 185,205 - 555,615 -
Other 260,468 246,521 721,878 684,565
------------- ------------- --------------- ---------------
Total revenues 7,652,256 4,855,151 22,719,653 14,367,664
------------- ------------- --------------- ---------------
Expenses:
Operating expenses 4,203,402 2,722,176 12,283,464 8,115,956
General and administrative expenses 1,888,467 1,536,456 5,821,475 4,001,034
Depreciation and amortization 601,069 439,752 1,551,023 1,219,569
------------- ------------- --------------- ---------------
Total expenses 6,692,938 4,698,384 19,655,962 13,336,559
------------- ------------- --------------- ---------------
Income from operations 959,318 156,767 3,063,691 1,031,105
Other income (expense):
Interest income 1,271,981 78,529 2,066,420 284,713
Interest expense (1,121,859) (120,921) (1,541,256) (195,977)
Equity in earnings on investments - 92,567 - 491,075
Other 22,200 - 22,200 25,523
------------- ------------- --------------- ---------------
Income before minority interest in
combined partnerships 1,131,640 206,942 3,611,055 1,636,439
Minority interest in combined partnerships (334,877) (183,015) (1,600,903) (832,607)
------------- ------------- --------------- ---------------
Net income $ 796,763 $ 23,927 $ 2,010,152 $ 803,832
============= ============= =============== ===============
Pro forma net income:
Net income 796,763 23,927 2,010,152 803,832
Pro forma income taxes (314,721) (9,451) (794,010) (317,514)
------------- ------------- --------------- ---------------
Pro forma net income $ 482,042 $ 14,476 $ 1,216,142 $ 486,318
============= ============= =============== ===============
See notes to condensed combined financial statements
4
CORPDAL:95335.1 10861-00052
CAPITAL SENIOR LIVING CORPORATION
CONDENSED COMBINED STATEMENTS OF EQUITY
(Unaudited)
Additional Retained
Partners' Common Stock Paid-In Earnings
Capital Shares Amount Capital (Deficit) Total
--------- ------ ------ ---------- --------- ---------
Balance, December 31, 1996 $ 17,257,778 1,680,000 $ 16,800 $ 26,558 $(100,612) $ 17,200,524
Purchase of BUCs 374,867 374,867
Net income (loss) 2,302,316 (292,164) 2,010,152
------------ --------- -------- -------- --------- ------------
Balance, September 30, 1997 $ 19,934,961 1,680,000 $ 16,800 $ 26,558 $(392,776) $ 19,585,543
============ ========= ======== ======== ========= ============
See notes to condensed combined financial statements
5
CORPDAL:95335.1 10861-00052
CAPITAL SENIOR LIVING CORPORATION
CONDENSED COMBINED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
-------------------------------------
1997 1996
-------------- --------------
Cash flows from operating activities:
Net income $ 2,010,152 $ 803,832
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 1,551,023 1,219,569
Minority interest in combined partnerships 1,600,903 832,607
Equity in earnings on investments - (491,075)
Changes in operating assets and liabilities, net of acquisition:
Accounts receivable (1,939,812) (295,190)
Accounts receivable from affiliates 32,908 82,336
Deferred initial public offering costs (549,746) -
Prepaid expenses and other assets (60,907) (128,959)
Accounts payable and accrued expenses 2,574,581 1,849,899
Customer deposits 218,275 31,122
Due to affiliates (11,284) 20,898
--------------- --------------
Net cash provided by operating activities 5,426,093 3,925,039
--------------- --------------
Cash flows from investing activities:
Capital expenditures (1,250,469) (381,135)
Cash acquired upon acquisition of HCP 8,995,455 -
Investments in limited partnerships (16,027,427) (3,167,979)
Investment in restricted cash equivalents (63,592,176) (840)
--------------- --------------
Net cash used in investing activities (71,874,617) (3,549,954)
--------------- --------------
Cash flows from financing activities:
Proceeds from borrowings 76,131,267 -
Proceeds from affiliate borrowings 500,000 35,000
Repayments of notes payable (6,384,961) (37,995)
Repayments of notes payable to affiliates - (320,501)
Capital contribution - 23,000
Repurchase of BUCs (960,752) (582,004)
Deferred loan charges paid (85,355) (22,852)
Distributions to minority partners (224,795) -
--------------- --------------
Net cash provided by (used in) financing activities 68,975,404 (905,352)
--------------- --------------
Increase (decrease) in cash and cash equivalents 2,526,880 (530,267)
Cash and cash equivalents at beginning of period 10,818,512 10,016,702
--------------- --------------
Cash and cash equivalents at end of period $ 13,345,392 $ 9,486,435
=============== ==============
See notes to condensed combined financial statements
6
CORPDAL:95335.1 10861-00052
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS
September 30, 1997
(Unaudited)
1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES
Capital Senior Living Corporation, a Delaware corporation, was incorporated on
October 25, 1996. Capital Senior Living Corporation was owned up until November
5, 1997 by James A. Stroud (through a trust), Jeffrey L. Beck, and Lawrence A.
Cohen (the Stockholders).
The accompanying condensed combined financial statements include the combined
financial statements of Capital Senior Living Corporation (Corporation); Capital
Senior Living Communities, L.P. (CSLC); Capital Senior Living, Inc. (Living);
Quality Home Care, Inc. (Quality); Capital Senior Development, Inc.
(Development); Capital Senior Management 1, Inc. (Management 1); and Capital
Senior Management 2, Inc. (Management 2) (collectively referred to with Capital
Senior Living Corporation as the Company). CSLC includes the accounts of CSLC
and HealthCare Properties, L.P. (HCP) (as of January 1, 1997). HCP includes the
accounts of HCP and its wholly owned subsidiaries, Danville Care, Inc.,
Foothills Care, Inc., Countryside Care, Inc., Countryside Care, L.P., and
Cambridge Nursing Home Limited Liability Company. All intercompany balances and
transactions have been eliminated in combination.
Due to these entities being under common control by Messrs. Beck and Stroud (and
his affiliates) for all periods presented, the condensed combined financial
statements reflect the assets and liabilities at their historical values and the
accompanying condensed combined statements of income, equity, and cash flows
reflect the combined results for the periods indicated even though they have
historically operated as separate entities.
Through September 30, 1997, CSLC had increased its ownership in HCP to 56% of
the limited partner units. In the accompanying condensed combined financial
statements, HCP is consolidated as though a controlling financial interest in
HCP had been acquired by CSLC at January 1, 1997. At December 31, 1996, CSLC
owned approximately 31% of HCP's limited partner units and CSLC accounted for
its interest in HCP on the equity accounting method in 1996.
The accompanying condensed combined balance sheet, as of December 31, 1996, has
been derived from audited financial statements of the Company for the year ended
December 31, 1996, and the accompanying unaudited condensed combined financial
statements 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, 1996 included in
the Registration Statement on Form S-1 (Registration No. 333-33379) relating to
the Company's initial public offering (Offering).
In the opinion of the Company, the accompanying condensed combined financial
statements contain all adjustments (all of which were normal recurring accruals)
necessary to present fairly the Company's financial position as of September 30,
1997 and December 31, 1996, its results of operations for the three and nine
month periods ended September 30, 1997 and 1996, respectively, its changes in
equity for the nine months ended September 30, 1997, and cash flows for the nine
month periods ended September 30, 1997 and 1996, respectively.
The results of operations for the three and nine month periods ended September
30, 1997 are not necessarily indicative of the results for the year ending
December 31, 1997.
7
CORPDAL:95335.1 10861-00052
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS
September 30, 1997
(Unaudited)
2. FINANCING TRANSACTIONS OF CSLC
On June 30, 1997, CSLC entered into a $77,000,000 mortgage loan agreement with
Lehman Brothers Holdings, Inc. (LBHI Loan) and pledged four retirement community
properties and its investments in HCP and NHP Retirement Housing Partners I,
L.P. (NHP) as collateral. Subsequent to June 30, 1997, approximately $70,000,000
was borrowed under the loan agreement; approximately $5,500,000 was used to
repay the prior credit facility and approximately $64,500,000 was used to fund
the liquidity and collateral requirements under the loan agreement, through the
purchase of U.S. Treasury securities, which are included in cash and cash
equivalents, restricted in the accompanying condensed combined balance sheet.
The U.S. Treasury securities were sold under a repurchase agreement with a term
equal to their maturity. The LBHI Loan had a maturity date of December 31, 1997
with interest based on 30-day LIBOR plus 50 basis points. This loan was assumed
by the Company and repaid on November 7, 1997 from proceeds of the Offering
described below with the U.S. Treasury securities reverting to CSLC in
connection with the Formation Transactions described below.
CSLC's prior credit facility from a non-affiliated mortgage company was for
$17,500,000. CSLC borrowed $5,500,000 under this prior credit facility in 1997,
and repaid the loan on July 1, 1997 from proceeds of the LBHI Loan.
3. FORMATION TRANSACTIONS AND INITIAL PUBLIC OFFERING
On November 5, 1997, the Company closed its initial public offering at $13.50
per share (Offering). The Company sold 10,350,000 shares (including 1,350,000
shares issued upon exercise of an option granted to the underwriters to purchase
additional common shares in conjunction with the Offering). In addition,
7,687,347 shares were issued to Messrs. Beck and Stroud (and his affiliates) in
the Formation Transactions described below bringing the total issued and
outstanding shares of the Company to 19,717,347 shares. The 9,367,347 common
shares (including 1,680,000 shares previously issued and outstanding) that are
held by Messrs. Beck, Stroud (and his affiliates) and Cohen are restricted
securities within the meaning of Rule 144 of the Securities Act and may not be
resold in the public markets unless registered under the Securities Act or
exempted therefrom.
At the close of the Company's initial public offering, the Company also
consummated the Formation Transactions with Messrs. Beck, Stroud (and his
affiliates) and Cohen, whereby Messrs. Beck and Stroud (and his affiliates)
contributed all of their owned capital stock of Capital Senior Living, Inc.,
Capital Senior Management 1, Inc., Capital Senior Management 2, Inc., Capital
Senior Development, Inc., and, with Mr. Cohen, of Quality Home Care, Inc. (the
"Contributed Entities") to the Company in exchange for the issuance of 7,687,347
shares of common stock of the Company and the issuance of separate notes in the
aggregate amount of $18,076,380 to Messrs. Beck, Stroud (and his affiliates) and
Cohen which were subsequently paid by the Company from the net proceeds received
from sale of the Company's common stock in the Offering.
As part of the Formation Transactions, the Company purchased substantially all
of the operating assets of CSLC (including CSLC's investment in HCP and NHP and
excluding CSLC's cash, U.S. Treasury securities purchased under the LBHI Loan
agreement and working capital items) for an aggregate purchase price of
$76,617,993, comprised of the assumption by the Company of CSLC's outstanding
LBHI Loan of $70,833,798 and payment of cash of $5,784,195 to CSLC. On November
7, 1997, the Company repaid the LBHI Loan from the proceeds received from the
Offering.
8
CORPDAL:95335.1 10861-00052
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS
September 30, 1997
(Unaudited)
In October 1997, the combined companies declared and paid dividends of $457,000
to Messrs. Beck, Stroud (and his affiliates) and Cohen in preparation for the
Formation Transactions that resulted in the combined companies converting from
closely held corporations and S corporations to non-closely held C corporations
for Federal income tax purposes
The Formation Transactions transferred ownership of the various entities
previously under common control to the Company. All of the Company's operations
subsequent to the Offering and the Formation Transactions will be conducted by
the Company or its wholly owned subsidiaries. The Formation Transactions will be
accounted for at historical cost in a manner similar to a pooling of interests
to the extent of the percentage ownership by the Stockholders prior to the
Formation Transactions.
9
CORPDAL:95335.1 10861-00052
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS
September 30, 1997
(Unaudited)
4. NOTES PAYABLE AND LINE OF CREDIT
Notes Payable consist of the following:
September 30, December 31,
1997 1996
-------------- ---------------
Notes Payable to Affiliates:
Demand notes payable to stockholders; principal
and interest at 10%; due December 31, 1997 $ 900,621 $ 400,000
Note payable to an affiliate; interest at 10%; payable
in seven annual installments of $65,091 on or
before December 31 of each year and in one
final installment of $6,117 266,481 266,481
-------------- --------------
1,167,102 666,481
Less current portion 965,712 465,091
-------------- --------------
$ 201,390 $ 201,390
============== ==============
Notes Payable:
Mortgage Loan payable to Lehman Brothers Holdings,
Inc.; due December 31, 1997 with interest at
30-day LIBOR plus 50 basis points. Secured by
substantially all assets of CSLC. $ 70,131,267 $ -
HCP mortgage loans, bearing interest ranging
from 6.8% to 10.75%; payable in monthly
installments of $101,092 including interest,
secured by certain properties of HCP 6,822,454 -
-------------- --------------
76,953,721 -
Less current portion 70,563,252 -
-------------- --------------
$ 6,390,469 $ -
============== ==============
On December 10, 1997, the Company entered into a $20 million, three year,
revolving line of credit with a major bank. Borrowings under the line of credit
are secured by the Company's Towne Centre, Canton Regency and Harrison at Eagle
Valley properties and bear interest at the prime rate or LIBOR plus 1.7%. The
line of credit may be used for acquisition of additional interests in HCP and
NHP, acquisition of additional properties, development of expansions to existing
properties and general working capital purposes.
5. EARNINGS PER SHARE
Historical earnings per share data is not presented for the nine-month and
three-month periods ended September 30, 1997 and 1996, respectively. The
outstanding shares and equity interest of the combined entities differed
substantially from shares outstanding after the Offering and Formation
Transactions. Therefore, management does not believe historical earnings per
share data is meaningful.
10
CORPDAL:95335.1 10861-00052
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS
September 30, 1997
(Unaudited)
6. PRO FORMA INCOME TAXES
The pro forma income taxes reflected on the condensed combined statements of
income assume that the S corporations and partnerships included in the condensed
combined financial statements of the Company were subject to income taxes for
the periods presented. Pro forma income tax expense is calculated assuming a
combined Federal and state effective income tax rate of 39.5%
7. PRO FORMA RESULTS OF OPERATIONS
Shown below are unaudited pro forma combined statements of income for the nine
months ended September 30, 1997 and 1996, respectively, representing the results
of operations of the Company for such periods after giving effect to the
adjustments relating to the transactions contemplated in connection with the
Offering and the Formation Transactions, as if the transactions had occurred as
of January 1, 1996. The unaudited pro forma combined statements of income are
presented for informational purposes only and do not necessarily reflect the
financial position or results of operations of the Company which would have
actually resulted had the Offering and Formation Transactions occurred as of the
dates indicated, or the future results of operations of the Company. These
unaudited pro forma combined statements of income should be read in conjunction
with the pro forma financial statements and notes thereto included in the
Registration Statement on Form S-1 relating to the Company's initial public
offering.
Nine Months Ended
September 30,
-----------------------------------
1997 1996
---------------- ----------------
(Pro Forma)
Revenues:
Resident and health care revenue $ 15,783,442 $ 12,048,376
Rental and lease income 3,214,040 4,550,442
Unaffiliated management services revenue 1,421,358 341,226
Affiliated management services revenue 1,023,320 1,256,103
Development fees 555,615 -
Other 744,078 684,565
---------------- ----------------
Total revenues 22,741,853 18,880,712
---------------- ----------------
Expenses:
Operating expenses 12,283,464 9,698,125
General and administrative expenses 3,601,629 3,475,845
Depreciation and amortization 1,537,045 1,670,295
---------------- ----------------
Total expenses 17,422,138 14,844,265
---------------- ----------------
Income from operations 5,319,715 4,036,447
Other income (expenses):
Interest income 1,496,524 310,794
Interest expense (635,389) (777,973)
Gain on sale of properties - 387,617
Other - (60,058)
---------------- -----------------
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CORPDAL:95335.1 10861-00052
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS
September 30, 1997
(Unaudited)
Nine Months Ended
September 30,
-----------------------------------
1997 1996
---------------- ----------------
(Pro Forma)
Income before income taxes and minority interest
in combined partnerships 6,180,850 3,896,827
Provision for income taxes (2,235,383) (1,345,721)
Income before minority interst in combined partnerships 3,945,467 2,551,106
Minority interest in combined partnerships (521,652) (489,937)
---------------- -----------------
Net income $ 3,423,815 $ 2,061,169
================ =================
Pro forma net income per share $ 0.17 $ 0.10
================ =================
Shares used in computing pro forma net income per share 19,717,347 19,717,347
================ =================
12
CORPDAL:95335.1 10861-00052
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS
September 30, 1997
(Unaudited)
8. OFFICER'S SALARIES AND BONUSES
Operating, general and administrative expenses include officers' salaries and
bonuses of $3,225,221 and $2,612,750 for the nine months ended September 30,
1997 and 1996, respectively. Bonus distributions were paid based in part on
Federal income tax regulations relating to distributions of closely held
corporations and S corporations that will not apply to the Company after the
Offering.
13
CORPDAL:95335.1 10861-00052
CAPITAL SENIOR LIVING CORPORATION
September 30, 1997
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 on an historical combined basis for the three and nine months ended
September 30, 1997 and 1996, respectively, and (ii) liquidity and capital
resources of the Company, and should be read in conjunction with the Company's
condensed combined financial statements contained elsewhere in this report.
The Company's historical financial statements include the combined financial
statements of Capital Senior Living Corporation, Capital Senior Living, Inc.,
Quality Home Care, Inc., Capital Senior Development, Inc., Capital Senior
Management 1, Inc. and Capital Senior Management 2, Inc. (the "Contributed
Entities"), CSLC, and since January 1, 1997, HCP. The Contributed Entities up
until the closing of the Offering were owned and controlled 50% by James A.
Stroud (individually and through a trust) and 50% by Jeffrey L. Beck, except
that Lawrence A. Cohen was also a stockholder of Quality Home Care, Inc. In
addition, Messrs. Beck and Stroud or entities owned and controlled by them are
the managing general partners of CSLC and HCP.
Due to all of these entities being under the common control of Messrs. Beck and
Stroud (and his affiliates), the Company's condensed combined financial
statements reflect the assets and liabilities at their historical values and the
accompanying condensed combined statements of income, equity, and cash flows
reflect the combined results for the periods indicated even though they have
historically operated as separate entities. The Formation Transactions (see Note
3 to condensed combined financial statements) will be accounted for at
historical cost in a manner similar to a pooling of interests to the extent of
the percentage ownership by Messrs. Beck, Stroud (and his affiliates) and Cohen
of the Company prior to the Formation Transactions. Acquired assets and
liabilities of CSLC will be recorded at fair value to the extent of any minority
interest. CSLC's assets acquired in the Formation Transactions include CSLC's
investments in HCP and NHP.
From 1990 through September 30, 1997, the Company acquired interests in 17
communities and entered into an operating lease with respect to one community.
In 1996, the Company expanded its senior living management services by taking
over the management service contracts on 15 communities for four independent
third-party owners and commenced providing development and construction
management services for new senior living communities in addition to adding a
home health care service agency.
The Company generates revenue from a variety of sources. For the nine months
ended September 30, 1997, the Company's revenue was derived as follows: 69.5%
from the operation of five owned and one leased senior living community that is
operated by the Company; 14.1% from lease rentals from triple net leases of
three skilled nursing facilities and four physical rehabilitation centers; 10.8%
from management fees arising from management services provided for five
affiliate owned and operated senior living communities and fifteen third-party
owned and operated senior living communities; and 2.4% derived from development
fees earned for managing the development and construction of new senior living
communities for third parties. As the Company implements its current business
plan, management believes that the mix of the Company's revenues may change and
that development activities will take on an increased importance to the Company.
The Company's management fees are primarily based on a percentage of gross
revenues, with the management contracts expiring on various dates between July
1998 and February 2004. In addition, certain of the management contracts provide
for supplemental incentive fees that vary by contract based upon the financial
performance of the managed
14
CORPDAL:95335.1 10861-00052
CAPITAL SENIOR LIVING CORPORATION
September 30, 1997
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
community. The Company's development fees are generally based upon a percentage
of construction cost and are earned over the period commencing with the initial
development activities and ending with the opening of the community.
During the nine months ended September 30, 1997, the Company purchased
additional limited partnership interests in HCP, an affiliated partnership whose
properties are managed by the Company under management contracts, that resulted
in CSLC owning 56% of HCP at September 30, 1997. As a result of these purchases,
CSLC's ownership interest in HCP exceeded 50% on June 26, 1997. Accordingly,
this partial acquisition has been accounted for by the purchase method of
accounting and the assets, liabilities, minority interest, and the results of
operations of HCP have been consolidated in the Company's condensed combined
financial statements since January 1, 1997.
Results of Operations
The following table sets forth for the periods indicated, selected Statements of
Operations data in thousands of dollars and expressed as a percentage of total
revenues.
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------------- -----------------------------------
1997 1996 1997 1996
------------------- ----------------- ----------------- ---------------
$ % $ % $ % $ %
------ ----- ------ ----- ----- ----- ----- -----
Revenues:
Resident and health care revenue $ 5,356 70.0% $ 3,371 69.4% $ 15,783 69.5% $10,326 71.9%
Rental and lease income 1,056 13.8% 339 7.0% 3,214 14.1% 987 6.9%
Unaffiliated management services
revenue 472 6.2% 288 5.9% 1,421 6.3% 341 2.4%
Affiliated management services
revenue 322 4.2% 611 12.6% 1,023 4.5% 2,029 14.1%
Development fees 185 2.4% - 0.0% 556 2.4% - 0.0%
Other 261 3.4% 246 5.1% 722 3.2% 685 4.8%
-------- ------ ------- ------ -------- ------ ------- ------
Total 7,652 100.0% 4,855 100.0% 22,719 100.0% 14,368 100.0%
-------- ------ ------- ------ -------- ------ ------- ------
Expenses:
Operating expenses 4,203 54.9% 2,722 56.1% 12,283 54.1% 8,116 56.5%
General and administrative expense 1,888 24.7% 1,536 31.6% 5,821 25.6% 4,001 27.8%
Depreciation and amortization 601 7.9% 440 9.1% 1,551 6.8% 1,220 8.5%
-------- ------ ------- ------ -------- ------ ------- ------
Total expenses 6,692 87.5% 4,698 96.8% 19,655 86.5% 13,337 92.8%
-------- ------ ------- ------ -------- ------ ------- ------
Income from operations 960 12.5% 157 3.2% 3,064 13.5% 1,031 7.2%
Other income (expense):
Interest income 1,272 16.6% 78 1.6% 2,066 9.1% 285 2.0%
Interest expense (1,122) -14.7% (121) -2.5% (1,541) -6.8% (196) -1.4%
Equity in earnings on investments - 0.0% 93 1.9% - 0.0% 491 3.4%
Other 22 0.3% - 0.0% 22 0.1% 25 0.2%
-------- ------ ------- ------ -------- ------ ------- ------
Income before minority interest
in combined partnerships 1,132 14.8% 207 4.3% 3,611 15.9% 1,636 11.4%
Minority interest in combined partne (335) -4.4% (183) -3.8% (1,601) -7.0% (832) -5.8%
-------- ------ ------- ------ -------- ------ ------ ------
Net income $ 797 10.4% $ 24 0.5% $ 2,010 8.8% $ 804 5.6%
======== ====== ======= ====== ======== ====== ====== ======
15
CORPDAL:95335.1 10861-00052
CAPITAL SENIOR LIVING CORPORATION
September 30, 1997
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Three Months Ended September 30, 1997 Compared to the Three Months Ended
September 30, 1996
Revenues. Total revenues were $7,652,000 in the three months ended September 30,
1997 (third quarter) compared to $4,855,000 for third quarter of 1996,
representing an increase of $2,797,000, or 57.6%. The inclusion of HCP revenues
in 1997 from January 1, 1997 contributed $1,997,000 of the increase, as HCP was
not consolidated in 1996. Resident and health care revenue increased $1,985,000,
of which $1,174,000 is a result of the HCP consolidation, $157,000 is
improvement in CSLC's revenue due to improved rental rates and occupancies and
$642,000 related to the Maryland Gardens facility leased on June 1, 1997. Rental
and lease income increased $717,000, of which $1,056,000 was due to the HCP
consolidation, offset by $339,000 due to the sale of CSLC's multifamily
properties on November 1, 1996. Unaffiliated management services revenue
increased $184,000 due to the addition of 15 third-party management contracts
added in the third and fourth quarter of 1996 and one additional third-party
management contract added in the second quarter of 1997. Affiliated management
services revenue decreased $289,000, of which $233,000 was due to the HCP
consolidation. Development fees of $185,000 in the third quarter of 1997 were
due to a new development contract for managing the development and construction
of a new third-party owned senior living community.
Expenses. Total expenses were $6,692,000 in the third quarter of 1997 compared
to $4,698,000 in the third quarter of 1996, representing an increase of
$1,994,000, or 42.4%. The inclusion of HCP expenses from January 1, 1997
contributed $1,599,000 of the increase. Operating expenses increased $624,000 as
a result of the HCP consolidation, $619,000 due to Maryland Gardens operating
expenses, and an increase in development operating expenses of $178,000 owing to
increased development operations. General and administrative expenses increased
$352,000, which was due to the HCP consolidation of $642,000, offset by a
decrease of $330,000 in officers salaries. Depreciation and amortization
increased $161,000, of which $333,000 is related to the HCP consolidation,
offset by a $172,000 decrease in CSLC's depreciation which is primarily due to
the sale of CSLC's multi-family rental properties on November 1, 1996.
Other income and expenses. Interest and other income increased $1,216,000,
primarily as a result of CSLC's increase in interest income of $823,000
associated with its investment in U.S. Treasury securities, with the remaining
increase comprised of CSLC's increased investment in NHP notes combined with the
commencement of the accrual of a portion of the deferred income on the these
notes in April 1997 as a result of NHP's improved financial position and
performance. Interest expense increased $1,001,000 as a result of higher debt
balances, including the LBHI Loan borrowings on July 1, 1997, and $169,000 as a
result of the HCP consolidation. Income from equity in earnings on investments
decreased $93,000 as a result of the HCP consolidation on January 1, 1997.
Minority interest. Minority interest in limited partnerships increased $152,000
primarily as a result of the HCP consolidation of $126,000.
Net income. As a result of the foregoing factors, net income increased $773,000
to $797,000 for the three months ended September 30, 1997 from that of the
comparable three month period of 1996 of $24,000.
Nine Months Ended September 30, 1997 Compared to the Nine Months Ended September
30, 1996
Revenues. Total revenues were $22,719,000 in the first nine months of 1997
compared to $14,368,000 for the first nine months of 1996, representing an
increase of $8,351,000, or 58.1%. The inclusion of HCP revenues in 1997 from
January 1, 1997 contributed $6,187,000 of the increase, as HCP was not
consolidated in 1996. Resident and health care
16
CORPDAL:95335.1 10861-00052
CAPITAL SENIOR LIVING CORPORATION
September 30, 1997
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
revenue increased $5,457,000, of which $3,669,000 is a result of the HCP
consolidation, $872,000 is improvement in CSLC's revenue due to recovery of
additional billings previously limited under the Medicare program for 1994
combined with improved CSLC rental rates and occupancies and $862,000 related to
the Maryland Gardens facility leased on June 1, 1997. Rental and lease income
increased $2,227,000, of which $3,214,000 was due to the HCP consolidation,
offset by $987,000 due to the sale of CSLC's multifamily properties on November
1, 1996. Unaffiliated management services revenue increased $1,080,000 due to
the addition of 15 third-party management contracts added in the third and
fourth quarter of 1996 and one additional third-party management contract added
in the second quarter of 1997. Affiliated management services revenue decreased
$1,006,000, of which $696,000 was due to the HCP consolidation with the
remaining decrease of $310,000 resulting from the sale of one HCP managed
property combined with the special service fees earned in 1996 that did not
re-occur in 1997. Development fees of $556,000 in the first nine months of 1997
is due to a new development contract for managing the development and
construction of a new third-party owned senior living community.
Expenses. Total expenses were $19,655,000 in the first nine months of 1997
compared to $13,337,000 in the first nine months of 1996, representing an
increase of $6,318,000, or 47.4%. The inclusion of HCP expenses from January 1,
1997 contributed $4,789,000 of the increase. Operating expenses increased
$2,895,000 as a result of the HCP consolidation, $833,000 due to Maryland
Gardens operating expenses, and an increase in development operating expenses of
$519,000 owing to increased development operations. General and administrative
expenses increased $1,820,000, which was due to the HCP consolidation of
$1,038,000, an increase in officers salaries of $612,000 and an overall increase
in general and administrative expenses as a result of expanded business
operations. Depreciation and amortization increased $331,000, of which $856,000
is related to the HCP consolidation, offset by a $536,000 decrease in CSLC's
depreciation which is primarily due to the sale of CSLC's multi-family rental
properties on November 1, 1996.
Other income and expenses. Interest and other income increased $1,778,000,
primarily as a result of CSLC's increase in interest income of $823,000
associated with its investment in U.S. Treasury securities, $698,000 as a result
of CSLC's increase in interest income associated with its increased investment
in NHP notes combined with the commencement of the accrual of a portion of the
deferred income on the these notes beginning in April 1997 as a result of NHP's
improved financial position and performance and increased valuation of the
underlying properties, and the consolidation of HCP of $257,000. Interest
expense increased $1,345,000 as a result of higher debt balances including the
LBHI Loan borrowings on July 1, 1997 and $512,000 as a result of the HCP
consolidation. Income from equity in earnings on investments decreased $491,000
as a result of the HCP consolidation on January 1, 1997.
Minority interest. Minority interest in limited partnerships increased $769,000
primarily as a result of the HCP consolidation of $522,000 with the remaining
resulting from minority partner's interest in improved earnings of CSLC.
Net Income. As a result of the foregoing factors, net income increased
$1,206,000 to $2,010,000 for the nine months ended September 30, 1997 from that
of the comparable nine month period of 1996 of $804,000.
17
CORPDAL:95335.1 10861-00052
CAPITAL SENIOR LIVING CORPORATION
September 30, 1997
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
As described in notes to the accompanying condensed combined financial
statements, the Company paid all of its notes payable to affiliates and the
mortgage loan payable to Lehman Brothers Holdings, Inc. with proceeds from the
Offering in November 1997, leaving only the mortgage property loans of HCP
outstanding thereafter. On December 10, 1997, the Company entered into a three
year revolving line of credit of $20 million which may be used for acquisition
of additional interests in HCP and NHP, acquisition of additional properties,
development of expansions to existing properties and general working capital
purposes.
In addition to approximately $44 million of cash balances on hand as of November
30, 1997 after payment of all Formation Transaction amounts owing and expenses
associated with the initial public offering, the Company's principal sources of
liquidity are expected to be cash flow from operations and amounts available for
borrowing under its $20 million revolving line of credit. There can be no
assurance, however, that the Company will continue to generate cash flow at or
above current levels or that the Company will be able to meet its anticipated
needs for working capital.
The Company derives the benefits and bears the risks attendant to the
communities it owns. The cash flow and profitability of owned communities depend
on the operating results of such communities and are subject to certain risks of
ownership, including the need for capital expenditures, financing and other
risks such as those relating to environmental matters.
The cash flows and profitability of the Company's owned communities that are
leased to third parties depend on the ability of the lessee to make timely lease
payments. At September 30, 1997, HCP was operating one of its properties and had
leased seven of its owned properties under triple net leases to third parties
until 2000 or 2001. Four of these properties are leased until year 2001 to
HealthSouth Rehabilitation Corp. (HealthSouth), which provides acute spinal
injury intermediate care at these properties. HealthSouth closed one of these
facilities in 1994 and closed another facility in February of 1997 due to low
occupancy. HealthSouth has continued to make lease payments on a timely basis on
all four properties. Should the operators of the leased properties default on
payment of their lease obligations prior to termination of the lease agreements,
six of the seven lease contracts contain a continuing guarantee of payment and
performance by the parent company of the operators, which the Company intends to
pursue in the event of default. Following termination of these leases, the
Company intends to convert and operate the facilities as assisted living and
Alzheimer's care facilities. HCP's other facility leases are all current in
their lease obligations to HCP. The lessee for the remaining property continues
to fund the deficit between the required lease payment and operating cash flow.
The cash flow and profitability of the Company's third-party management fees are
dependent upon the revenues and profitability of the communities managed. While
the management contracts are generally terminable only for cause, in certain
cases the contracts can be terminated upon the sale of a community, subject to
the Company's rights to offer to purchase such community.
The Company plans to continue to develop senior living communities. The
development of senior living communities typically involves a substantial
commitment of capital over a 12-month construction period during which time no
revenues are generated, followed by a 12-month lease-up period. The Company
anticipates that newly opened or expanded communities will operate at a loss
during a substantial portion of the lease-up period.
18
CORPDAL:95335.1 10861-00052
CAPITAL SENIOR LIVING CORPORATION
September 30, 1997
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company and Tri Point Communities, L.P. (Tri Point), a limited partnership
owned by the Company's founders (Messrs. Beck and Stroud) and their affiliates,
have entered into a Development and Turnkey Agreement in connection with the
development and management of the Company's planned new communities (Waterford
Communities) where Tri Point will own and finance the construction of planned
new Waterford Communities. The agreement also provides the Company with an
option to purchase the communities developed by Tri Point upon their completion
at a price equal to fair market value (based upon a third-party appraisal). The
Company has made no determination as to whether it will exercise its purchase
options. The Company believes that the arrangement with Tri Point provides it
with an attractive mechanism to develop new communities without employing its
own capital and which will not be dilutive to earnings during the development
and lease-up phases. Further, the agreement provides for development fees
payable to the Company of between 4% and 7% of total project costs. Tri Point
has received and accepted commitments for loan facilities aggregating up to $100
million to fund its development activities.
19
CORPDAL:95335.1 10861-00052
CAPITAL SENIOR LIVING CORPORATION
September 30, 1997
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Not Applicable
Item 2. CHANGES IN SECURITIES
Not Applicable
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
Item 5. OTHER INFORMATION
Not Applicable
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
None
(B) Reports on Form 8-K
The Company did not file any reports on Form 8-K
during the quarterly period ended September 30, 1997.
20
CORPDAL:95335.1 10861-00052
CAPITAL SENIOR LIVING CORPORATION
September 30, 1997
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Capital Senior Living Corporation
(Registrant)
By:
/s/ Lawrence A. Cohen
-----------------------
Lawrence A. Cohen
Chief Financial Officer
(Principal Financial Officer and Duly Authorized Officer)
Date: December 15, 1997
21
CORPDAL:95335.1 10861-00052