SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
[X] Quarterly Report pursuant to Section 13
or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 1999
[ ] 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
----------------------------------------------------
(Issuer's telephone number, including area code)
Indicated 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 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 the past 90 days. Yes x No
--- ---
As of May 13, 1999, the Registrant had outstanding 19,717,347 shares of
its Common Stock, $.01 par value.
1
Capital Senior Living Corporation, a Delaware corporation (the
"Company"), hereby amends and restates in its entirety, the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1999, filed with the
Securities and Exchange Commission on May 17, 1999.
CAPITAL SENIOR LIVING CORPORATION
INDEX
PAGE
NUMBER
------
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets --
March 31, 1999 and December 31, 1998 3
Consolidated Statements of Income--
Three Months Ended March 31, 1999 and 1998 4
Consolidated Statements of Shareholders' Equity--
Three Months Ended March 31, 1999 5
Consolidated Statements of Cash Flows--
Three Months Ended March 31, 1999 and 1998 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risks 18
Part II. Other Information
Item 1. Legal Proceedings 19
Item 2. Changes in Securities 19
Item 6. Exhibits and Reports on Form 8-K 21
Signature
2
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
CAPITAL SENIOR LIVING CORPORATION
CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
1999 1998
------------- ------------
ASSETS (UNAUDITED) (AUDITED)
Current assets:
Cash and cash equivalents............................................... $ 28,769,902 $ 35,827,270
Accounts receivable, net................................................ 3,534,849 2,955,507
Accounts receivable from affiliates..................................... 10,081,883 7,217,127
Interest receivable..................................................... 342,228 189,482
Deferred taxes.......................................................... 287,040 287,040
Prepaid expenses and other.............................................. 433,688 448,790
-------------- --------------
Total current assets................................................. 43,449,590 46,925,216
Property and equipment, net.................................................. 118,597,835 118,943,953
Deferred taxes............................................................... 10,007,805 10,108,715
Notes receivable from affiliates............................................. 20,279,961 11,728,162
Investments in limited partnerships.......................................... 14,259,700 14,536,972
Management contract rights, net.............................................. 183,649 195,631
Goodwill, net................................................................ 1,202,946 1,213,876
Deferred financing charges, net.............................................. 382,124 530,531
Other assets................................................................. 1,176,866 1,083,679
--------------- ---------------
Total assets......................................................... $209,540,476 $205,266,735
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................................ $ 2,504,491 $ 2,780,513
Accrued expenses........................................................ 1,980,054 2,231,895
Current portion of notes payable........................................ 48,444,720 48,419,050
Customer deposits....................................................... 850,358 851,375
Federal and state income taxes payable.................................. 1,763,546 1,668,602
--------------- ---------------
Total current liabilities............................................ 55,543,169 55,951,435
Deferred income from affiliates.............................................. 1,169,183 792,240
Deferred income.............................................................. 205,105 115,062
Notes payable, net of current portion........................................ 13,479,042 13,696,797
Line of credit............................................................... 19,395,275 18,974,186
Minority interest in consolidated partnerships............................... 11,380,145 11,220,836
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 shares -- 19,717,347 at March 31, 1999
and December 31, 1998............................................. 197,173 197,173
Additional paid-in capital.............................................. 91,740,251 91,740,251
Retained earnings....................................................... 16,431,133 12,578,755
--------------- ---------------
Total shareholders' equity........................................... 108,368,557 104,516,179
--------------- ---------------
Total liabilities and shareholders' equity........................... $209,540,476 $205,266,735
=============== ===============
See accompanying notes.
3
CAPITAL SENIOR LIVING CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31,
-----------------------------
1999 1998
------------ -----------
(UNAUDITED) (UNAUDITED)
Revenues:
Resident and health care revenue..................................... $ 9,902,677 $ 4,934,895
Rental and lease income.............................................. 1,092,771 1,067,501
Unaffiliated management services revenue............................. 697,404 637,928
Affiliated management services revenue............................... 112,252 379,449
Unaffiliated development fees........................................ 552,603 470,718
Affiliated development fees.......................................... 2,805,085 639,712
Other................................................................ 304,813 223,912
------------ -----------
Total revenues.................................................... 15,467,605 8,354,115
Expenses:
Operating expenses................................................... 5,968,021 3,755,226
General and administrative expenses.................................. 2,106,185 1,708,569
Depreciation and amortization........................................ 1,120,713 560,172
------------ -----------
Total expenses.................................................... 9,194,919 6,023,967
------------ -----------
Income from operations.................................................... 6,272,686 2,330,148
Other income (expense):
Interest income...................................................... 1,732,615 1,092,819
Interest expense..................................................... (1,478,427) (177,977)
------------ ------------
Income before income taxes and minority interest in
consolidated partnerships........................................... 6,526,874 3,244,990
Provision for income taxes................................................ (2,515,187) (1,232,252)
------------ ------------
Income before minority interest in consolidated partnerships.............. 4,011,687 2,012,738
Minority interest in consolidated partnerships............................ (159,309) (86,572)
------------ ------------
Net income................................................................ $ 3,850,378 $ 1,926,166
============ ============
Net income per share:
Basic and diluted.................................................... $ 0.20 $ 0.10
============ ============
Weighted average shares outstanding.................................. 19,717,347 19,717,347
============ ============
See accompanying notes.
4
CAPITAL SENIOR LIVING CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
COMMON STOCK ADDITIONAL
--------------------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
----------- ---------- ----------- ----------- ------------
Balance at December 31, 1998............ 19,717,347 $197,173 $91,740,251 $12,578,755 $104,516,179
Net income............................ -- -- -- 3,852,378 3,852,378
---------- -------- ----------- ----------- ------------
Balance at March 31, 1999............... 19,717,347 $197,173 $91,740,251 $16,431,133 $108,368,557
========== ======== =========== =========== ============
See accompanying notes.
5
CAPITAL SENIOR LIVING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31,
1999 1998
------------- ------------
(UNAUDITED) (UNAUDITED)
OPERATING ACTIVITIES
Net income................................................................. $ 3,852,378 $ 1,926,166
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization......................................... 1,120,713 560,172
Amortization of deferred financing charges............................ 143,420 --
Minority interest in consolidated partnerships........................ 159,309 86,572
Deferred taxes........................................................ 100,910 --
Deferred income from affiliates....................................... 376,943 --
Deferred income....................................................... 90,043 (34,006)
Changes in operating assets and liabilities:
Accounts receivable................................................ (579,342) (1,185,059)
Accounts receivable from affiliates................................ (2,864,756) (8,414)
Interest receivable................................................ (152,746) --
Federal and state income taxes payable............................. 94,944 500,417
Prepaid expenses and other......................................... 15,102 70,222
Accounts payable and accrued expenses.............................. (527,863) 257,922
Customer deposits.................................................. (1,017) 14,410
Other assets and due to affiliates................................. (93,975) (417,469)
------------ -----------
Net cash provided by operating activities.................................. 1,734,063 1,770,933
INVESTING ACTIVITIES
Capital expenditures....................................................... (750,895) (1,465,805)
Change in investments in limited partnerships.............................. 277,272 (406,072)
------------ -----------
Net cash used in investing activities...................................... (473,623) (1,871,877)
FINANCING ACTIVITIES
Proceeds from notes payable and line of credit............................. 421,089 1,658,263
Repayments of notes payable................................................ (192,085) (352,603)
Advances to affiliates..................................................... (8,551,799) (1,791,707)
Repurchase of HCP limited partnership interests............................ -- (125,529)
Deferred loan charges paid................................................. 4,987 (9,061)
------------ -----------
Net cash used in financing activities...................................... (8,317,808) (620,637)
------------ -----------
(Decrease) in cash and cash equivalents.................................... (7,057,368) (721,581)
Cash and cash equivalents at beginning of period........................... 35,827,270 48,125,225
------------ -----------
Cash and cash equivalents at end of period................................. $ 28,769,902 $47,403,644
============ ===========
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Interest $ 1,336,920 $ 168,603
=========== ===========
Income taxes $ 1,420,000 $ 692,000
=========== ===========
See accompanying notes.
6
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(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 limited partnerships owned and controlled by it or
under common ownership prior to the transfer of ownership in connection with the
November 5, 1997 public offering and formation transactions. All intercompany
balances and transactions have been eliminated in consolidation.
The accompanying consolidated balance sheet, as of December 31, 1998, has been
derived from audited consolidated financial statements of the Company for the
year ended December 31, 1998, and the accompanying unaudited consolidated
financial statements, as of March 31, 1999 and 1998, 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, 1998 included in the Company's Annual Report on Form
10-K filed with the Securities and Exchange Commission on March 31, 1999.
In the opinion of the Company, the accompanying consolidated financial
statements contain all adjustments (all of which were normal recurring accruals)
necessary to present fairly the Company's financial position as of March 31,
1999, results of operations and cash flows for the three month periods ended
March 31, 1999 and 1998 and changes in shareholders' equity for the three month
period ended March 31, 1999. The results of operations for the three month
period ended March 31, 1999 are not necessarily indicative of the results for
the year ending December 31, 1999.
2. TRANSACTIONS WITH AFFILIATES
Effective April 1, 1998, the Company obtained a 19% limited partnership interest
in Triad Senior Living I, L.P. ("Triad I") for $330,243 in cash. The Company is
accounting for this investment under the equity method of accounting based on
the provisions of the Triad I partnership agreement. The Company is developing
senior living communities for Triad I. Additionally, the Company loaned money to
Triad I pursuant to an unsecured loan facility not to exceed $10,000,000, which
was increased to $13,000,000 on March 31, 1999. The principal is due March 12,
2003. The first draw under this loan facility was made on March 12, 1998.
Interest is due quarterly at 8% per annum. This loan may be prepaid without
penalty. At March 31, 1999, $10,247,730 has been advanced to Triad I under this
loan facility. The Company has deferred interest income and development fees
from Triad I of $105,378 and $272,734, respectively, as of March 31, 1999.
Effective September 23, 1998, the Company obtained a 19% limited partnership
interest in Triad Senior Living II, L.P. ("Triad II") for $74,100 in cash. The
Company is accounting for this investment under the equity method of accounting
based on the provisions of the Triad II partnership agreement. The Company is
developing senior living communities for Triad II. Additionally, the Company
loaned money to Triad II pursuant to an unsecured loan facility not to exceed
$7,000,000, which was increased to $10,000,000 on January 15, 1999. The
principal is due September 25, 2003. The first draw under this
7
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(UNAUDITED)
loan facility was made on September 25, 1998. Interest is due quarterly at 10.5%
per annum. This loan may be prepaid without penalty. At March 31, 1999,
$4,795,966 has been advanced to Triad II under this loan facility. The Company
has deferred interest income and development fees from Triad II of $17,119 and
$110,815, respectively, as of March 31, 1999.
Effective November 10, 1998, the Company obtained a 19% limited partnership
interest in Triad Senior Living III, L.P. ("Triad III") for $142,500 in cash.
The Company is accounting for this investment under the equity method of
accounting based on the provisions of the Triad III partnership agreement. The
Company is developing senior living communities for Triad III. Additionally, the
Company loaned money to Triad III pursuant to an unsecured loan facility not to
exceed $10,000,000. The principal is due February 8, 2004. The first draw under
this loan facility was made on February 8, 1999. Interest is due quarterly at
10.5% per annum. This loan may be prepaid without penalty. At March 31, 1999,
$3,455,039 has been advanced to Triad III under this loan facility. The Company
has deferred interest income and development fees from Triad III of $6,313 and
$216,836, respectively, as of March 31, 1999.
Effective December 22, 1998, the Company obtained a 19% limited partnership
interest in Triad Senior Living IV, L.P. ("Triad IV") for $142,500 in cash. The
Company is accounting for this investment under the equity method of accounting
based on the provisions of the Triad IV partnership agreement. The Company is
developing senior living communities for Triad IV. Additionally, the Company
loaned money to Triad IV pursuant to an unsecured loan facility not to exceed
$10,000,000. The principal is due December 30, 2003. The first draw under this
loan facility was made on December 30, 1998. Interest is due quarterly at 10.5%
per annum. This loan may be prepaid without penalty. At March 31, 1999,
$1,781,225 has been advanced to Triad IV under this loan facility. The Company
has deferred interest income and development fees from Triad IV of $7,369 and
$108,249, respectively, as of March 31, 1999.
The management agreements with the Triad entities provide the Company with an
option to purchase the communities developed by the Triad entities upon their
completion for an amount equal to the fair market value (based on a third-party
appraisal but not less than hard and soft costs and lease-up costs). The Company
also can purchase the partnership interests of the non-Company partners for an
amount equal to the amount such party paid for its interest, plus noncompounded
interest at 12% per annum. The Company has no commitments or obligations to
acquire any properties or additional partnership interests. Also, the Company
has no commitments relating to any of the secured loan facilities of any of the
above Triad entities.
The Company provides a guarantee of its subsidiaries' development agreement and
management agreement, which includes an operating deficit obligation.
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 average daily price of the common stock during the first quarter of 1999 did
not exceed the exercise price of the options, and therefore, the options are not
considered dilutive for purposes of calculating diluted net income per share.
8
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
(UNAUDITED)
4. CONTINGENCIES
On or about October 23, 1998, Robert Lewis filed a putative class action
complaint on behalf of certain holders of 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 90 Assignee Interests in February 1993 for $180. The complaint
alleges among other things, that the Defendants breached, or aided and abetted a
breach of, the express and implied terms of the NHP Partnership Agreement in
connection with the sale of four properties by NHP to Capital Senior Living
Properties 2-NHPCT, Inc. The complaint seeks, among other relief, rescission of
the sale of those properties and unspecified damages. The Company believes the
complaint is without merit and intends to vigorously defend itself in this
action.
Triad I, Triad II, Triad III and the Company have agreed to settle (the
"Settlement") with Holiday Retirement Corporation as well as Colson & Colson
Construction Company and their architects (collectively, "Holiday") resolving
all claims among the parties relating to a lawsuit filed by Holiday, alleging
that copyright and related trade dress had been violated by the Company on five
communities owned by Triad I, in which the Company is a 19% limited partner and
provides development services under a third party development agreement. The
Company had denied all allegations and had filed a counterclaim against Holiday.
The Settlement was resolved without any cost to the Company.
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 February 7, 1999, the Company entered into definitive Agreements and Plans of
Merger with ILM Senior Living, Inc. and ILM II Senior Living, Inc. for a
combined transaction value of approximately $174 million, which includes
approximately $4 million of net liabilities. The primary assets of ILM Senior
Living, Inc. and ILM II Senior Living, Inc. collectively are 13 senior living
communities that have been managed by the Company under management agreements
since 1996. Under the two merger agreements, both ILM Senior Living, Inc. and
ILM II Senior Living, Inc. would separately merge with and into a wholly owned
direct subsidiary of the Company with the aggregate issued and outstanding
shares of ILM Senior Living, Inc. and ILM II Senior Living, Inc. common stock
eligible to receive 65% of the merger consideration in cash (approximately
$110.5 million) and 35% in 8% convertible trust preferred securities (with a
liquidation value of approximately $59.5 million). Both mergers have been
approved by the boards of directors of each company and each transaction
requires the approval of the applicable shareholders of either ILM Senior
Living, Inc. or ILM II Senior Living, Inc. The mergers also are subject to
certain other customary conditions, including regulatory approvals, and are
expected to be completed during the second half of 1999.
9
CAPITAL SENIOR LIVING CORPORATION
MARCH 31, 1999
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The following discussion and analysis addresses (i) the Company's results of
operations for the three months ended March 31, 1999 and 1998, respectively, and
(ii) liquidity and capital resources of the Company and should be read in
conjunction with the Company's consolidated financial statements contained
elsewhere in this report.
The Company generates revenue from a variety of sources. For the three months
ended March 31, 1999, the Company's revenue was derived as follows: 64.0% from
the operation of 11 owned senior living communities that are operated by the
Company; 7.1% from lease rentals from triple net leases of three skilled nursing
communities and four physical rehabilitation centers; 5.2% from management fees
arising from management services provided for one affiliate owned and operated
senior living community and 15 third party owned and operated senior living
communities; and 21.7% derived from development fees earned for managing the
development and construction of new senior living communities for affiliated and
unaffiliated third parties.
The Company believes that the factors affecting the financial performance of
communities managed under contracts with third parties do not vary substantially
from the factors affecting the performance of owned and leased communities,
although there are different business risks associated with these activities.
The Company's third-party management fees are primarily based on a percentage of
gross revenues. As a result, the cash flow and profitability of such contracts
to the Company are more dependent on the revenues generated by such communities
and less dependent on net cash flow than for owned communities. Further, the
Company is not responsible for capital investments in managed communities. While
the management contracts are generally terminable only for cause, in certain
cases the contracts can be terminated upon the sale of a community, subject to
the Company's rights to offer to purchase such community.
The Company's triple net leases extend through the year 2000 for three of its
owned communities and through the year 2001 for four of its owned communities.
The 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, the Company may either convert and operate
the communities as assisted living and Alzheimer's care communities, sell the
communities or evaluate other alternatives.
The Company's current management contracts expire on various dates between
December 1999 and September 2009 and provide for management fees based generally
upon rates that vary by contract from 4% of net revenues to 7% of net revenues.
In addition, certain of the contracts provide for supplemental incentive fees
that vary by contract based upon the financial performance of the managed
community. The Company's development fees are generally based upon a percentage
of construction costs and are earned over the period commencing with the initial
development activities and ending with the opening of the community. As of March
31, 1999, development fees have been earned for services performed on 35
communities under development or expansion for third parties.
10
CAPITAL SENIOR LIVING CORPORATION
MARCH 31, 1999
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Results of Operations
The following tables set forth for the periods indicated, selected statements of
income data in thousands of dollars and expressed as a percentage of total
revenues.
THREE MONTHS ENDED
MARCH 31,
1999 1998
----------------------------- ------------------------------
$ % $ %
-------------- ------------- ---------------- -------------
Revenues:
Resident and healthcare revenue $ 9,903 64.0% $ 4,935 59.1%
Rental and lease income 1,093 7.1 1,068 12.8
Unaffiliated management services revenue 697 4.5 638 7.6
Affiliated management services revenue 112 0.7 379 4.5
Unaffiliated development fees 553 3.6 471 5.6
Affiliated development fees 2,805 18.1 639 7.7
Other 305 2.0 224 2.7
------- ----- ------- -----
Total revenue 15,468 100.0 8,354 100.0
------- ----- ------- -----
Expenses:
Operating expenses 5,968 38.6 3,755 44.9
General and administrative expenses 2,108 13.6 1,709 20.5
Depreciation and amortization 1,121 7.2 560 6.7
------- ----- ------- -----
Total expenses 9,197 59.4 6,024 72.1
------- ----- ------- -----
Income from operations 6,271 40.6 2,330 27.9
Other income (expense):
Interest income 1,733 11.2 1,093 13.0
Interest expense (1,478) (9.6) (178) (2.1)
------- ----- ------- -----
Income before income taxes and minority interest
in consolidated partnerships 6,526 42.2 3,245 38.8
Provision for income taxes (2,515) (16.3) (1,232) (14.7)
------- ----- ------- -----
Income before minority interest in
consolidated partnerships 4,011 25.9 2,013 24.1
Minority interest in consolidated partnerships (159) (1.0) (87) (1.0)
------- ----- ------- -----
Net income $ 3,852 24.9% $ 1,926 23.1%
======= ===== ======= =====
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
1998
Revenues. Total revenues were $15,468,000 in the three months ended March 31,
1999 compared to $8,354,000 for the three months ended March 31, 1998,
representing an increase of $7,114,000, or 85.2%. The primary components of this
increase were resident and healthcare revenue of $4,968,000, and development
fees of $2,248,000, offset by a decrease in affiliated management fees of
$267,000. The increases were due to the acquisition of six communities in 1998
and the addition of 23 development contracts for managing the development and
construction of new senior living communities owned by third parties. The
decrease is due to the loss of management fees from four of the communities
acquired in 1998.
11
CAPITAL SENIOR LIVING CORPORATION
MARCH 31, 1999
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Expenses. Total expenses were $9,197,000 in the first quarter of 1999 compared
to $6,024,000 in the first quarter of 1998, representing an increase of
$3,173,000 due mainly to the acquisition of the six communities in 1998.
Other income and expenses. Other income and expenses decreased $660,000, due to
an increase in interest income of $640,000 offset by an increase in interest
expense of $1,300,000. Interest income increased as a result of an increase in
interest earned from Triad I, Triad II, Triad III and Triad IV and interest from
NHP Notes due to the partial redemption of the NHP Notes and payment of accrued
interest. The increase in interest expense is due to the financing of the
acquisition of the six communities acquired in 1998.
Provision for income taxes. Provision for income taxes in the first quarter of
1999 was $2,515,000 compared to $1,232,000 in the first quarter of 1998. This
increase is due to the increase in income before income taxes.
Minority interest. Minority interest increased $72,000 due to the increase in
net income at HealthCare Properties, L.P. ("HCP").
Net income. As a result of the foregoing factors, net income increased
$1,926,000 to $3,852,000 for the three months ended March 31, 1999, as compared
to $1,926,000 for the three months ended March 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
In addition to approximately $29 million of cash balances on hand as of March
31, 1999, the Company's principal sources of liquidity are expected to be cash
flows from operations and amounts available for borrowing under its revolving
line of credit, which was amended on April 8, 1999 to increase the commitment
from $20 million to $34 million. The Company expects the funds available under
its line of credit along with its net income and cash flow from operations to be
sufficient to fund its short-term working capital requirements. The Company
plans to refinance $47,700,000 of short-term variable rate debt to a long-term
loan in the third quarter of fiscal 1999. The Company's long-term capital
requirements, primarily for acquisitions, development and other corporate
initiatives, will be dependent on the Company's ability to access additional
funds through the debt and/or equity markets. There can be no assurance that the
Company will continue to generate cash flows at or above current levels or that
the Company will be able to obtain the capital necessary to meet its long-term
capital requirements.
The Company had net cash provided by operating activities of $1,734,000, in the
first three months of fiscal 1999 compared to $1,771,000 in the comparable
period of the prior year. In the first quarter of fiscal 1999, cash from
operating activities was primarily derived from net income of $3,852,000 along
with non-cash charges of $1,991,000 offset by increases in accounts receivable
of $3,444,000 and a decrease in accounts payable and accrued expenses of
$528,000. Net cash provided by operating activities in the first quarter of
fiscal 1998 was primarily comprised of net income of $1,926,000 and net non-cash
charges of $613,000 and an increase in income taxes payable of $500,000 offset
by an increase in accounts receivable of $1,193,000.
The Company had cash used in investing activities of $473,000 and $1,872,000 in
the first quarter of fiscal
12
CAPITAL SENIOR LIVING CORPORATION
MARCH 31, 1999
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
1999 and 1998, respectively. In the first quarter of fiscal 1999, the cash used
in investing activities was primarily the result of capital expenditures. In the
first three months of fiscal 1998 cash used in investing activities consisted
primarily of $1,466,000 in capital expenditures and $406,000 invested in limited
partnerships.
The Company had net cash used in financing activities, in the first three months
of fiscal 1999 of $8,318,000, primarily as the result of advances to affiliates.
In the three months of fiscal 1998, the Company had net cash used in financing
activities of $621,000 which was the result of the net cash provided by advances
under the Company's line of credit and notes payable of $1,306,000 offset by
advances to affiliates of $1,792,000.
The Company derives the benefits and bears the risks attendant to the
communities it owns. The cash flows and profitability of owned communities
depends on the operating results of such communities and are subject to certain
risks of ownership, including the need for capital expenditures, financing and
other risks such as those relating to environmental matters.
The cash flows and profitability of the Company's owned communities that are
leased to third parties depend on the ability of the lessee to make timely lease
payments. At March 31, 1999, HCP was operating one of its properties and had
leased seven of its owned properties under triple net leases to third parties
until year 2000 or 2001. Four of these properties are leased until year 2001 to
HealthSouth Rehabilitation Corp. ("HealthSouth"), which provides acute spinal
injury intermediate care at the properties which are still operating.
HealthSouth closed one of these communities in 1994 and closed another community
in February of 1997 due to low occupancy. HealthSouth has continued to make
lease payments on a timely basis for all four properties. Should the operators
of the leased properties default on payment of their lease obligations prior to
termination of the lease agreements, six of the seven lease contracts contain a
continuing guarantee of payment and performance by the parent company of the
operators, which the Company intends to pursue in the event of default.
Following termination of these leases, the Company will either convert and
operate the communities as assisted living and Alzheimer's care communities,
sell the communities or evaluate other alternatives. HCP's communities' lessees
are all current in their lease obligations to HCP. The lessee for one property
(other than HealthSouth) continues to fund a deficit between the required lease
payment and operator's cash flow.
The cash flows and profitability of the Company's third-party management fees
are dependent upon the revenues and profitability of the communities managed.
While the management contracts are generally terminable only for cause, in
certain cases contracts can be terminated upon the sale of a community, subject
to the Company's rights to offer to purchase such community.
The Company plans to continue to develop and acquire senior living communities.
The development of senior living communities typically involves a substantial
commitment of capital over a 12-month construction period during which time no
revenues are generated, followed by a 12- to 14-month lease-up period.
Effective April 1, 1998, Tri Point Communities, L.P. ("Tri Point"), a limited
partnership owned by the Company's founders (Messrs. Beck and Stroud ) and their
affiliates, was organized and the interests of Messrs. Beck and Stroud were sold
at their cost to Triad Senior Living, Inc. and its affiliates which are
13
CAPITAL SENIOR LIVING CORPORATION
MARCH 31, 1999
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
unrelated third parties. Tri Point was renamed Triad I. The new general partner
of Triad I, owning 1%, is Triad Senior Living, Inc. The limited partners are
Blake N. Fail (principal owner of Triad Senior Living, Inc.) owning 80%, and the
Company, owning 19%. The development agreements between Triad I and the Company
provide for a development fee of 4% to the Company, as well as reimbursement of
expenses and overhead not to exceed 4%. Triad I has also entered into management
agreements with the Company providing for management fees in an amount equal to
the greater of 5% of gross revenues or $5,000 per month per community, plus
overhead reimbursement not to exceed 1% of gross revenues and a $500 per unit
lease up fee. The Company has an option to purchase the partnership interests of
Triad Senior Living, Inc. and Blake N. Fail for an amount equal to the amount
such party paid for its interest, plus noncompounded interest of 12% per annum.
The management agreements also provide the Company with an option to purchase
the communities developed by Triad I upon their completion for an amount equal
to the fair market value (based on a third-party appraisal but not less than
hard and soft costs and, lease-up costs).
Triad I has entered into construction loan facilities aggregating approximately
$50,000,000 to fund its development activities and a take-out facility
aggregating approximately $50,000,000.
During 1998, the Company agreed to loan Triad I up to $10,000,000. On March 31,
1999, the loan amount was amended to $13,000,000. The principal is due March 12,
2003. The first draw under this loan facility was made on March 12, 1998.
Interest is due quarterly at 8% per annum. This loan may be prepaid without
penalty. At March 31, 1999, approximately $10,248,000 has been advanced to Triad
I under this loan facility.
Effective September 24, 1998, the Company and Triad II, a limited partnership,
entered into a Development and Turnkey Services Agreement in connection with the
development and management of the Company's planned new Waterford communities
where Triad II would own and finance the construction of the new communities.
Triad II was organized on September 23, 1998. The general partner of Triad II,
owning 1%, is Triad Partners II, Inc. The limited partners are Triad Partner II,
Inc., owning 80%, and the Company, owning 19%.
The Company has an option to purchase the partnership interests of Triad
Partners II, Inc. in Triad II for an amount equal to the amount such party paid
for its interests, plus noncompounded interest of 12% per annum. The management
agreements with Triad II also provide the Company with an option to purchase the
communities developed by Triad II upon their completion for an amount equal to
the fair market value (based on a third-party appraisal but not less than hard
and soft costs and lease-up costs).
Triad II has entered into construction and mini-perm loan facilities aggregating
approximately $26,000,000 to fund its development activities.
During the third quarter of 1998, the Company agreed to loan Triad II up to
$7,000,000. On January 15, 1999, the loan amount was amended to up to
$10,000,000. The principal is due September 25, 2003. The first draw under this
loan facility was made on September 25, 1998. Interest is due quarterly at 10.5%
per annum. This loan may be prepaid without penalty. At March 31, 1999,
approximately $4,800,000 has been advanced to Triad II under this loan facility.
14
CAPITAL SENIOR LIVING CORPORATION
MARCH 31, 1999
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Effective November 10, 1998, the Company and Triad III, a limited partnership,
entered into a Development and Turnkey Services Agreement in connection with the
development and management of the Company's planned new Waterford communities
where Triad III would own and finance the construction of the new communities.
Triad III was organized on November 10, 1998. The general partner of Triad III,
owning 1%, is Triad Partners III, Inc. The limited partners are Triad Partners
III, Inc., owning 80%, and the Company, owning 19%.
The Company has an option to purchase the partnership interests of Triad
Partners III, Inc. in Triad III for an amount equal to the amount such party
paid for its interests, plus noncompounded interest of 12% per annum. The
management agreements with Triad III also provide the Company with an option to
purchase the communities developed by Triad III upon their completion for an
amount equal to the fair market value (based on a third-party appraisal but not
less than hard and soft costs and lease-up costs).
Triad III has entered into construction and mini-perm loan facilities
aggregating approximately $51,000,000 to fund its development activities.
During the fourth quarter of 1998, the Company agreed to loan Triad III up to
$10,000,000. The principal is due February 8, 2004. Interest is due quarterly at
10.5% per annum. This loan may be prepaid without penalty. At March 31, 1999,
approximately $3,455,000 had been advanced to Triad III under this loan
facility.
Effective December 30, 1998, the Company and Triad IV, a limited partnership,
entered into a Development and Turnkey Services Agreement in connection with the
development and management of the Company's planned new Waterford communities
where Triad IV would own and finance the construction of the new communities.
Triad IV was organized on December 22, 1998. The general partner of Triad IV,
owning 1%, is Triad Partners IV, Inc. The limited partners are Triad Partners
IV, Inc., owning 80%, and the Company, owning 19%.
The Company has an option to purchase the partnership interests of Triad
Partners IV, Inc. in Triad IV for an amount equal to the amount such party paid
for its interests, plus noncompounded interest of 12% per annum. The management
agreements with Triad IV also provide the Company with an option to purchase the
communities developed by Triad IV upon their completion for an amount equal to
the fair market value (based on a third-party appraisal but not less than hard
and soft costs and lease-up costs).
Triad IV is negotiating commitments for loan facilities aggregating up to
$50,000,000 to fund its development activities.
During the fourth quarter of 1998, the Company agreed to loan Triad IV up to
$10,000,000. The principal is due December 30, 2003. The first draw under this
loan facility was made on December 30, 1998. Interest is due quarterly at 10.5%
per annum. This loan may be prepaid without penalty. At March 31, 1999,
approximately $1,781,000 has been advanced to Triad IV under this loan facility.
The Company has made no determination as to whether it will exercise its
purchase options in Triad I, Triad II, Triad III and Triad IV. The Company will
evaluate the possible exercise of each purchase option based upon the business
and financial factors which may exist at the time those options may be
exercised.
15
CAPITAL SENIOR LIVING CORPORATION
MARCH 31, 1999
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
YEAR 2000 ISSUE
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs or hardware that have date- sensitive software or embedded
chips may recognize the year 2000 as a date other than the year 2000. This could
result in a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices or engage in similar normal business activities.
Based on ongoing assessments, the Company has developed a program to modify or
replace significant portions of its software and certain hardware, which are
generally PC-based systems, so that those systems will properly recognize and
utilize dates beyond December 31, 1999. The Company has substantially completed
software reprogramming and software and hardware replacement as of March 31,
1999, with 100% completion targeted for December 31, 1999. The cost of the
completed and future modifications and replacement of hardware and software will
result in expenditures of approximately $100,000. The Company expects to spend
approximately $50,000 in the fourth quarter to complete its Year 2000
initiative. All of the Company's systems have been upgraded with the exception
of its general ledger program. The general ledger program is Year 2000
compliant, however some of the reporting tools used in conjunction with the
general ledger will not work properly with the current version of the Company's
general ledger after December 31, 1999. As a result of this issue, the Company
is currently in the process of upgrading its current general ledger and
reporting software and expects this process to be completed by December 31,
1999. The Company presently believes that these modifications and replacement of
existing software and certain hardware will mitigate the Year 2000 Issue.
However, if such modifications and replacements are not completed timely, the
Year 2000 Issue could have a material impact on the operations of the Company.
The Company has completed a survey requiring written responses from its critical
service providers. Based on the responses from the Company's critical services
providers, 90 to 95% of the respondents indicate that they are currently Year
2000 compliant and the remaining respondents indicate that they will be Year
2000 compliant by the end of the year. The Company therefore is not aware of any
external critical service provider with a Year 2000 Issue that would materially
impact the Company's results of operations, liquidity or capital resources.
However, the Company has no other means of determining whether or ensuring that
its critical service providers are or will be Year 2000-ready. The inability of
critical service providers to complete their Year 2000 resolution process in a
timely fashion could materially impact the Company.
The Company has assessed its exposure to operating equipment, and such exposure
is not significant due to the nature of the Company's business. The Company
operates in a relatively low technology dependent industry and does not
anticipate any industry or Company specific Year 2000 risks beyond those
discussed above.
Significant Year 2000 problems could result in the Company not having timely the
operating information
16
CAPITAL SENIOR LIVING CORPORATION
MARCH 31, 1999
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
necessary to efficiently manage and monitor its business activities. This could
result disruptions of operations, including, among other things, a temporary
inability to process transactions, send invoices or engage in similar normal
business activities. The Company does not foresee Year 2000 issues effecting the
day-to-day operation of its senior living communities due to their limited use
of technology and the Company's evaluation of their operating equipment. The
Company considers the possibility of significant Year 2000 problems based, on
the evaluation of our internal systems and the response from our critical
service providers, to be remote.
Management of the Company believes it has an effective program in place to
resolve the Year 2000 Issue in a timely manner. As noted above, the Company has
completed most but not all necessary phases of its Year 2000 program. In the
event that the Company does not complete the current program or any additional
phases, the Company could incur disruptions to its operations. In addition,
disruptions in the economy generally resulting from Year 2000 Issues could also
materially adversely affect the Company. The Company could be subject to
litigation or computer systems failure. The amount of potential liability and
cost cannot be reasonably estimated at this time.
The Company currently has no contingency plans in place in the event it does not
complete all phases of its Year 2000 program. The Company plans to continue to
monitor the status of completion of its Year 2000 initiatives to determine
whether such a plan is necessary.
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.
17
CAPITAL SENIOR LIVING CORPORATION
MARCH 31, 1999
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's market risk has not changed significantly from that set forth
under the caption "Quantitative and Qualitative Disclosures About Market Risk,"
in Item 7A of Part II of its 1998 annual report on Form 10-K/A. Those
disclosures should be read in conjunction with this Form 10-Q/A.
18
CAPITAL SENIOR LIVING CORPORATION
MARCH 31, 1999
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 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 90 Assignee Interests in February 1993 for $180. The complaint
alleges among other things, that the Defendant's breach, 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 intends to vigorously defend itself in this
action.
Triad I, Triad II, Triad III and the Company have agreed to settle (the
"Settlement") with Holiday Retirement Corporation as well as Colson & Colson
Construction Company and their architects (collectively, "Holiday") resolving
all claims among the parties relating to a lawsuit filed by Holiday, alleging
that copyright and related trade dress had been violated by the Company on five
communities owned by Triad I, in which the Company is a 19% limited partner and
provides development services under a third party development agreement. The
Company had denied all allegations and had filed a counterclaim against Holiday.
The Settlement was resolved without any cost to the Company.
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 (Use of proceeds from public offering)
The Company's initial Registration Statement on Form S-1, File No. 333-33379,
was declared effective by the Securities and Exchange Commission on October 30,
1997 (the "Offering"). The Offering was managed by Lehman Brothers Inc., J.C.
Bradford & Co., Donaldson, Lufkin & Jenrette Securities Corporation and Smith
Barney Inc. A total of 10,350,000 shares of Common Stock, including 1,350,000
shares subject to an over-allotment option, were registered. The net proceeds to
the Company from the sale of such shares were approximately $128,407,000, after
deducting underwriting discounts and commissions of approximately $9,742,000 and
Offering expenses of approximately $1,576,000 paid by the Company. From the
effective date of the Registration Statement through the end date of the period
covered by this report, the Company has used approximately $1,600,000 of the net
proceeds of the Offering for expenses associated with the Offering. In addition,
the Company used a portion of such net proceeds as follows: (i) approximately
$70,800,000 of such net proceeds to repay the indebtedness incurred by the
Company to acquire assets (including construction in progress) in the
transactions undertaken at the closing of the Offering (the "Formation
Transactions"); (ii) approximately $18,100,000 to repay certain notes issued in
conjunction with the Formation Transactions (the "Formation Note"); (iii)
approximately $5,800,000 to pay the balance of the purchase price to an
affiliate related to the purchase of assets on the Formation Transactions; (iv)
approximately $1,200,000 of such net proceeds to repay indebtedness to
affiliates; (v) approximately $8,246,000 of such net proceeds to acquire the
four senior
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CAPITAL SENIOR LIVING CORPORATION
MARCH 31, 1999
living communities from NHP; (vi) approximately $505,000 of such net proceeds to
purchase land in Carmichael, CA; and (vii) approximately $10,248,000,
$4,800,000, $3,455,000 and $1,781,000 advanced to Triad I, Triad II, Triad III
and Triad IV, respectively. There has not been a material change in the use of
proceeds described in the Company's prospectus.
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
20
CAPITAL SENIOR LIVING CORPORATION
MARCH 31, 1999
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits:
*10.1 1999 Amended and Restated Loan Agreement, dated as of
April 8, 1999, by and among Capital Senior Living
Properties, Inc., Bank One, Texas, N.A. and the other
Lenders signatory thereto.
*10.2 Amended and Restated Draw Promissory Note, dated March 31,
1999, of Triad Senior Living I, L.P., in favor of Capital
Senior Living Properties, Inc.
*10.3 Amended and Restated Draw Promissory Note (Fairfield),
dated January 15, 1999, of Triad Senior Living II, L.P.,
in favor of Capital Senior Living Properties, Inc.
*10.4 Amended and Restated Draw Promissory Note (Baton Rouge),
dated January 15, 1999, of Triad Senior Living II, L.P.,
in favor of Capital Senior Living Properties, Inc.
*10.5 Amended and Restated Draw Promissory Note (Oklahoma City),
dated January 15, 1999, of Triad Senior Living II, L.P.,
in favor of Capital Senior Living Properties, Inc.
*27.1 Financial Data Schedule
(B) Reports on Form 8-K
*(i) The Registrant filed a report on Form 8-K, dated February
7, 1999 to report entering into an Agreement and Plan of
Merger, dated February 7, 1999, by and among the
Registrant, Capital Senior Living Acquisition, LLC,
Capital Senior Living Trust I and ILM Senior Living, Inc.
*(ii) The Registrant filed a report on Form 8-K, dated February
7, 1999 to report entering into an Agreement and Plan of
Merger, dated February 7, 1999, by and among the
Registrant, Capital Senior Living Acquisition, LLC,
Capital Senior Living Trust I and ILM II Senior Living,
Inc.
- --------------------------------------------------------------------------------
*Previously filed with the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1999, filed with the Securities and Exchange Commission
on May 17, 1999.
21
CAPITAL SENIOR LIVING CORPORATION
MARCH 31, 1999
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Form 10-Q/A 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: November 4, 1999
22