SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report pursuant to Section 13
or 15(d) of the Securities Exchange Act or 1934
For the quarterly period ended September 30, 1999
[ ] Transition report under Section 13
or 15(d) of the Securities Exchange Act of 1934
Commission file number 1-13445.
CAPITAL SERNIOR LIVING CORPORATION
----------------------------------
(Exact name of Registrant as specified in its charter)
DELAWARE 75-2678809
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
14160 Dallas Parkway, Suite 300, Dallas, Texas 75240
----------------------------------------------------
(Address of principal executive offices)
972-770-5600
------------
(Registrant's telephone number, including area code)
Indicate by check whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No
--- ---
As of November 11, 1999, the Registrant had outstanding 19,717,347 shares of its
Common Stock, $.01 par value.
1
CAPITAL SENIOR LIVING CORPORATION
INDEX
PAGE
NUMBER
------
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets - -
September 30, 1999 and December 31, 1998 3
Consolidated Statements of Income - -
Three and Nine Months Ended September 30, 1999 and 1998 4
Consolidated Statements of Cash Flows - -
Nine Months Ended September 30, 1999 and 1998 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 20
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
Part II. Other Information
Item 1. Legal Proceedings 20
Item 6. Exhibits and Reports on Form 8-K 21
Signature
2
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
CAPITAL SENIOR LIVING CORPORATION
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, December 31,
1999 1998
------------------- -----------------
ASSETS (Unaudited) (Audited)
Current assets:
Cash and cash equivalents.............................................. $ 21,879,628 $ 35,827,270
Accounts receivable, net............................................... 3,583,493 2,955,507
Accounts receivable from affiliates.................................... 17,113,975 7,217,127
Interest receivable.................................................... 1,332,998 189,482
Federal and state income taxes receivable.............................. 1,321,720 --
Deferred taxes......................................................... 287,040 287,040
Prepaid expenses and other............................................. 223,182 448,790
-------------- -------------
Total current assets............................................. 45,742,036 46,925,216
Property and equipment, net.................................................. 115,256,536 118,943,953
Deferred taxes............................................................... 9,805,985 10,108,715
Notes receivable from affiliates............................................. 36,730,837 11,728,162
Investments in limited partnerships.......................................... 13,641,754 14,536,972
Management contract rights, net.............................................. 159,685 195,631
Goodwill, net................................................................ 1,181,087 1,213,876
Deferred financing charges, net.............................................. 742,037 530,531
Other assets................................................................. 2,403,148 1,083,679
------------- -------------
Total assets..................................................... $ 225,663,105 $ 205,266,735
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable....................................................... $ 1,388,863 $ 2,780,513
Accrued expenses....................................................... 2,552,620 2,231,895
Current portion of notes payable....................................... 1,052,781 48,419,050
Customer deposits...................................................... 880,044 851,375
Federal and state income taxes payable................................. -- 1,668,602
------------- -------------
Total current liabilities........................................ 5,874,308 55,951,435
Deferred income from affiliates.............................................. 1,912,300 792,240
Deferred income.............................................................. 4,848 115,062
Notes payable, net of current portion........................................ 58,315,251 13,696,797
Line of credit............................................................... 30,895,275 18,974,186
Minority interest in consolidated partnership................................ 11,923,269 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
19,717,347 at September 30, 1999 and December 31, 1998........... 197,173 197,173
Additional paid-in capital............................................. 91,740,251 91,740,251
Retained earnings...................................................... 24,800,430 12,578,755
------------- -------------
Total shareholders' equity....................................... 116,737,854 104,516,179
------------- -------------
Total liabilities and shareholders' equity....................... $ 225,663,105 $ 205,266,735
============= =============
See accompanying notes.
3
CAPITAL SENIOR LIVING CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
1999 1998 1999 1998
--------------- ----------- ---------------- -----------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenues:
Resident and healthcare revenue.............. $ 10,304,371 $ 5,443,695 $ 30,815,664 $ 15,942,900
Rental and lease income...................... 992,832 1,073,421 3,187,874 3,204,391
Unaffiliated management services revenue..... 640,789 604,333 1,983,042 1,812,136
Affiliated management services revenue....... 113,661 374,698 340,926 1,191,782
Unaffiliated development fees................ 354,604 153,529 1,202,103 931,800
Affiliated development fees.................. 4,154,094 2,906,262 10,455,429 5,061,244
------------ ------------ ------------ ------------
Total revenues........................... 16,560,351 10,555,938 47,985,038 28,144,253
Expenses:
Operating expenses........................... 6,270,523 3,644,611 18,261,530 10,957,025
General and administrative expenses.......... 2,130,434 1,433,166 6,486,385 4,858,546
Depreciation and amortization................ 1,142,619 571,996 3,396,820 1,695,494
------------ ------------ ------------ ------------
Total expenses........................... 9,543,576 5,649,773 28,144,735 17,511,065
------------ ------------ ------------ ------------
Income from operations............................. 7,016,775 4,906,165 19,840,303 10,633,188
Other income (expense):
Gain on sale of assets......................... 759,869 -- 759,869 --
Interest income................................ 1,797,880 1,207,146 5,190,252 3,403,035
Interest expense............................... (1,898,749) (187,836) (4,867,279) (547,724)
------------ ------------ ------------ ------------
Income before income taxes and minority interest in
consolidated partnership.................. 7,675,775 5,925,475 20,923,145 13,488,499
Provision for income taxes...................... (2,792,573) (2,289,103) (7,781,066) (5,185,848)
------------ ------------ ------------ ------------
Income before minority interest in consolidated
partnership.................................. 4,883,202 3,636,372 13,142,079 8,302,651
Minority interest in consolidated partnership...... (496,926) (130,380) (920,404) (359,912)
------------ ------------ ------------ ------------
Net income......................................... $ 4,386,276 $ 3,505,992 $ 12,221,675 $ 7,942,739
============ ============ ============ ============
Net income per share:
Basic and diluted............................ $ 0.22 $ 0.18 $ 0.62 $ 0.40
------------ ------------ ------------ ------------
Weighted average shares outstanding - basic.. 19,717,347 19,717,347 19,717,347 19,717,347
============ ============ ============ ============
Weighted average shares outstanding - diluted 19,870,532 19,717,347 19,834,982 19,717,347
============ ============ ============ ============
See accompanying notes.
4
CAPITAL SENIOR LIVING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------------
1999 1998
----------------------- ---------------
(Unaudited) (Unaudited)
OPERATING ACTIVITIES
Net income............................................................. $ 12,221,675 $ 7,942,739
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization..................................... 3,396,820 1,695,494
Amortization of deferred financing charges........................ 474,526 27,883
Gain on sale of assets............................................ (759,869) --
Minority interest in consolidated partnership..................... 920,404 359,912
Deferred tax expense.............................................. 302,730 302,730
Deferred income from affiliated................................... 1,120,060 --
Deferred income................................................... (110,214) 465,507
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable.......................................... (627,986) (1,676,749)
Accounts receivable from affiliates.......................... (9,896,848) (4,495,877)
Interest receivable.......................................... (1,143,516) --
Prepaid expenses and other................................... 225,608 (449,310)
Other assets................................................. (1,322,135) (50,064)
Federal and state income taxes............................... (2,990,322) 283,293
Accounts payable and accrued expenses........................ (1,070,925) 844,723
Customer deposits............................................ 28,669 37,267
------------ ------------
Net cash provided by operating activities.............................. 768,677 5,287,548
INVESTING ACTIVITIES
Capital expenditures................................................... (1,607,015) (5,119,177)
Proceeds from the sale of assets....................................... 2,727,301 --
Cash paid for acquisition of NHP assets................................ -- (8,246,007)
Advances to affiliates................................................. (25,002,675) (7,354,617)
Distribution from (investments in) limited partnership................. 895,218 (2,204,083)
------------ ------------
Net cash used in investing activities.................................. (22,987,171) (22,923,884)
FINANCING ACTIVITIES
Proceeds from notes payable and line of credit......................... 56,873,274 4,558,651
Repayment of notes payable............................................ (47,700,000) --
Repurchase of HCP limited partnership interests........................ (216,389) (144,791)
Deferred loan charges paid............................................. (686,033) (524,673)
------------ ------------
Net cash provided by financing activities.............................. 8,270,852 3,889,187
------------ ------------
Decrease in cash and cash equivalents.................................. (13,947,642) (13,747,149)
Cash and cash equivalents at beginning of period....................... 35,827,270 48,125,225
------------ ------------
Cash and cash equivalents at end of period............................. $ 21,879,628 $ 34,378,076
============ ============
Supplemental disclosures:
Cash paid during the period for:
Interest........................................................ $ 3,940,335 $ 516,745
============ ============
Income taxes.................................................... $ 10,473,437 $ 4,600,487
============ ============
See accompanying notes.
5
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 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 September 30, 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, as amended by the Company's Annual Report on Form 10-K/A filed
with the Securities and Exchange Commission on November 8, 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 September 30,
1999 and 1998, results of operations for the three and nine months ended
September 30, 1999 and 1998, respectively, and cash flows for the nine months
ended September 30, 1999 and 1998. The results of operations for the three and
nine month periods ended September 30, 1999 are not necessarily indicative of
the results for the year ending December 31, 1999.
2. TRANSACTIONS WITH AFFILIATES
The Company has entered into development and management agreements with the
partnerships set out below (the "Triad Entities") for the development and
management of new senior living communities. The Triad Entities own and finance
the construction of the new communities. These communities are primarily
Waterford communities. The development of senior living communities typically
involves a substantial commitment of capital over a 12-month construction period
during which time no revenues are generated, followed by a 12 to 14-month lease
up period.
6
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(UNAUDITED)
The following table sets forth the limited partnership percentage ownership the
Company has in each of the Triad Entities, the capital invested for that
ownership interest, information related to loans committed by the Company to
each Triad Entity and information on deferred income related to each Triad
Entity (dollars in thousands):
NOTES RECEIVABLE DEFERRED INCOME
-------------------------------------------------- --------------------------
BALANCE AT
OWNERSHIP CAPITAL COMMITTED SEPT. 30, INTEREST DEVELOPMENT
ENTITY INTEREST INVESTMENT AMOUNT 1999 MATURITY RATE INTEREST FEES
- -------------- ------------- ------------ ------------- -------------- ------------- --------- ------------ -------------
Triad Senior
Living I, March 12,
L.P. 19.0% $330 $15,000 $12,345 2003 8.0% $194 $347
(Triad I)
Triad Senior
Living II, September
L.P. 19.0 74 10,000 9,743 25, 2003 10.5 83 170
(Triad II)
TriadSenior
Living III, February 8,
L.P. 19.0 143 10,000 7,031 2004 10.5 66 328
(Triad III)
TriadSenior
Living IV, December
L.P. 19.0 143 10,000 5,689 30, 2003 10.5 36 164
(Triad IV)
TriadSenior
Living V, June 30,
L.P. 10.0 -- 10,000 1,923 2004 12.0 3 138
(Triad V)
In addition to the deferred developmemt fees income listed in the table above,
the Company has additional deferred development fees of $383,000 relating to
future Triad developments.
The Company typically receives from each Triad Entity a development fee of 4% of
project costs, as well as reimbursement of expenses and overhead not to exceed
4% of project costs. The Company typically receives management fees in an amount
equal to the greater of 5% of gross revenues or $5,000 per month per community,
plus overhead not to exceed 1% of gross revenue. The Company has the option to
purchase the partnership interests of the other parties in each Triad Entity for
an amount equal to the amount paid for the partnership interest by the other
partners, plus a noncompounded return of 12% to 20% per annum. In addition, each
Triad Entity provides the Company with an option to purchase the communities
developed by the applicable partnership upon
7
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(UNAUDITED)
their completion for an amount equal to the fair market value (based on a
third-party appraisal but not less than hard and soft costs and lease-up costs)
of each community. The Company has made no determination as to whether it will
exercise any of these purchase options.
3. NET INCOME PER SHARE
Basic net income per share is calculated by dividing net income by the weighted
average number of common shares outstanding during the period. Diluted net
income per share considers the dilutive effect of outstanding options calculated
using the treasury stock method.
The following table set forth the computation of basic and diluted earnings per
share (in thousands except for per share amounts):
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------- ------------------------------------
1999 1998 1999 1998
------------- --------------- --------------- -----------------
Net income $ 4,386 $ 3,506 $ 12,222 $ 7,943
========= ========== ========== ========
Weighted average shares outstanding - basic 19,717 19,717 19,717 19,717
Effect of dilutive securities:
Employee stock options 154 -- 118 --
--------- ---------- ---------- --------
Weighted average shares outstanding - dilutive 19,871 19,717 19,835 19,717
========= ========== ========== ========
Basic earnings per share $ 0.22 $ 0.18 $ 0.62 $ 0.40
========== =========== ========== ========
Diluted earnings per share $ 0.22 $ 0.18 $ 0.62 $ 0.40
========== =========== ========== ========
Options to purchase 805,500 shares of common stock at prices ranging from $10.19
to $13.50 per share were not included in the computation of diluted earnings per
share because the average daily price of the common stock during the first nine
months of 1999 did not exceed the exercise price of the options, and therefore,
the effect would be antidulitive.
4. CONTINGENCIES
On or about October 23, 1998, Robert Lewis filed a putative class action
complaint on behalf of certain holders of assignee interests (the "Assignee
Interests") in NHP Retirement Housing Partners I Limited Partnership ("NHP") in
the Delaware Court of Chancery against NHP, the Company, Capital Senior Living
Properties 2-NHPCT, Inc. and Capital Realty Group Senior Housing, Inc.
(collectively, the "Defendants"). Mr. Lewis purchased ninety Assignee Interests
in February 1993 for $180. The complaint alleges, among other things, that the
Defendants breached, or aided and abetted a breach of, the express and implied
terms of the NHP Partnership Agreement in connection with the sale of four
properties by NHP to Capital Senior Living Properties 2-NHPCT, Inc. The
8
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(UNAUDITED)
complaint seeks, among other relief, rescission of the sale of those properties
and unspecified damages. The Company believes the complaint is without merit and
is vigorously defending itself in this action. The Company has filed a Motion to
Dismiss in this case, which is currently pending.
The Company 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 October 19, 1999, the Company executed Amended and Restated Agreements and
Plans of Merger with each of ILM Senior Living, Inc. and ILM II Senior Living,
Inc. for a combined transaction value of approximately $176 million, including
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 amended merger agreements, both ILM Senior Living,
Inc. and ILM II Senior Living, Inc. will 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 receiving 100% of the merger consideration in cash. The Amended and
Restated Agreements and Plans of Merger amend and restate the Agreements and
Plans of Merger dated February 7, 1999 among the parties. The outside
termination date of the amended merger agreements has been extended to September
30, 2000. Both mergers had been previously approved by the boards of directors
of each company. Each transaction requires the approval of two-thirds of the
applicable shareholders of either ILM Senior Living, Inc. or ILM II Senior
Living, Inc. The mergers are also subject to certain other customary conditions
including regulatory approvals and are expected to be completed during the first
half of 2000. Form 8-K's were filed by the Company on October 25, 1999 with
copies of the Amended and Restated Agreements and Plans of Merger attached
thereto.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The following discussion and analysis addresses (i) the Company's results of
operations for the three and nine months ended September 30, 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 September 30, 1999, the Company's revenue was derived as follows: 62.2%
from the operations of eleven owned senior living communities that are operated
by the Company; 6.0% from lease rentals for triple net leases of three skilled
nursing communities and four physical rehabilitation centers (one of which was
sold in the third quarter of 1999); 4.6% from management fees arising from
management services provided for three affiliate owned and operated senior
living communities and fifteen third party owned and operated senior living
communities; and 27.2% derived from development fees earned for managing the
development and construction of new senior living communities for affiliated and
unaffiliated third parties, including the Triad Entities.
For the nine months ended September 30, 1999, the Company's revenue was derived
as follows: 64.2% from the operation of eleven owned senior living communities
that are operated by the Company; 6.6% from lease rentals from triple net leases
of three skilled nursing communities and four physical rehabilitation centers
(one of which was sold in the third quarter of 1999); 4.8% from management fees
arising from management services provided for three affiliate owned and operated
senior living communities and fifteen third party owned and operated senior
living communities; and 24.3% derived from development fees earned for managing
the development and construction of new senior living communities for third
parties, including the Triad Entities.
The Company believes that the factors affecting the financial performance of
communities managed under contracts with third parties do not vary substantially
from the factors affecting the performance of owned and leased communities,
although there are different business risks associated with these activities.
The Company's third-party management fees are primarily based on a percentage of
gross revenues. As a result, the cash flows and profitability of such contracts
to the Company are more dependent on the revenues generated by such communities
and less dependent on net cash flow than for owned communities. Further, the
Company is not responsible for capital investments in managed communities. While
the management contracts are generally terminable only for cause, in certain
cases the contracts can be terminated upon the sale of a community, subject to
the Company's rights to offer to purchase such community.
The 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.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The Company's current management contracts expire on various dates between
December 1999 and September 2010 and provide for management fees based generally
upon rates that vary by contract from 4% of net revenues to 7% of net revenues.
In addition, certain of the contracts provide for supplemental incentive fees
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
September 30, 1999, development fees have been earned for services performed on
46 communities under development or expansion for third parties.
11
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------------- ---------------------------------------
1999 1998 1999 1998
---------------- ---------------- ----------------- -------------------
$ % $ % $ % $ %
Revenues:
Resident and healthcare revenue.... $10,304 62.2 $5,444 51.6 $30,816 64.2 $15,943 56.6
Rental and lease income............ 993 6.0 1,073 10.2 3,188 6.6 3,204 11.4
Unaffiliated management service revenue 641 3.9 604 5.7 1,983 4.1 1,812 6.4
Affiliated management service revenue 114 0.7 375 3.5 341 0.7 1,192 4.2
Unaffiliated development fees...... 354 2.1 154 1.5 1,202 2.5 932 3.3
Affiliated development fees........ 4,154 25.1 2,906 27.5 10,455 21.8 5,061 18.0
------- ----- ------ ----- ------- ----- ------- -----
Total revenue.................. 16,560 100.0 10,556 100.0 47,985 100.0 28,144 100.0
Expenses:
Operating expenses................. 6,271 37.9 3,645 34.5 18,262 38.1 10,957 38.9
General and administrative expenses 2,130 12.9 1,433 13.6 6,486 13.5 4,859 17.3
Depreciation and amortization...... 1,143 6.9 572 5.4 3,397 7.1 1,695 6.0
------- ----- ------ ----- ------- ----- ------- -----
Total expenses................. 9,544 57.6 5,650 53.5 28,145 58.7 17,511 62.2
------- ----- ------ ----- ------- ----- ------- -----
Income from operations.................. 7,017 42.4 4,906 46.5 19,840 41.3 10,633 37.8
Other income (expense):
Gain on sales of assets............ 760 4.6 -- -- 760 1.6 -- --
Interest income.................... 1,798 10.9 1,207 11.4 5,190 10.8 3,403 12.1
Interest expense................... (1,899) (11.5) (188) (1.8) (4,867) (10.1) (548) (1.9)
------- ----- ------ ----- ------- ----- ------- -----
Income before income taxes and
minority interest in
consolidated partnership...... 7,676 46.4 5,925 56.1 20,923 43.6 13,489 47.9
Provision for income taxes.......... (2,793) (16.9) (2,289) (21.7) (7,781) (16.2) (5,186) (18.4)
------- ----- ------ ----- ------- ----- ------- -----
Income before minority interest in
consolidated partnership........ 4,883 29.5 3,636 34.4 13,142 27.4 8,303 29.5
Minority interest in consolidated
partnership..................... (497) (3.0) (130) (1.2) (920) (1.9) (360) (1.3)
------- ----- ------ ----- ------- ----- ------- -----
Net income.............................. 4,386 26.5 3,506 33.2 12,222 25.5 7,943 28.2
======= ===== ====== ===== ======= ===== ======= =====
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1998
Revenues. Total revenues were $16,560,000 in the three months ended September
30, 1999 compared to $10,556,000 for the three months ended September 30, 1998,
representing an increase of $6,004,000 or 56.9%. The primary components of this
increase were increases in resident and healthcare revenue of $4,860,000 and
development fee revenue of $1,448,000, offset by a decrease in affiliated
management services revenue of $261,000. The increase in resident and healthcare
revenue reflects revenue from six communities that were acquired in the third
and fourth quarters of 1998. The increase in development fee revenue reflects
the addition of 18 development contracts for managing the development and
construction of new senior living communities owned by third parties.
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Expenses. Total expenses of $9,544,000 in the third quarter of 1999 compared to
$5,650,000 in the third quarter of 1998, representing an increase of $3,894,000
or 68.9%. This increase is primarily due to the acquisition of six communities
in 1998.
Other income and expense. Other income and expense decreased $360,000 due to an
increase in interest expense of $1,711,000 partially offset by a gain on the
sale of one community owned by Healthcare Properties, L.P. ("HCP") of $760,000
and an increase in interest income of $591,000. Interest income increased
primarily as a result of an increase in interest earned from loans to Triad
Entities along with investment income from NHP notes due to the partial
redemption of the NHP notes and payment of deferred interest. Interest expense
increased due to the financing of the acquisition of the six communities
acquired in 1998 and the funding of loans to Triad Entities.
Provision for income taxes. Provision for income taxes in the third quarter of
1999 was $2,793,000 or 38.9% of income before taxes, compared to $2,289,000 or
39.5% of income before taxes in the third quarter of 1998. The effective tax
rates for the third quarter of 1999 and 1998 differ from the statutory tax rates
because of state income taxes and permanent tax differences.
Minority interest. Minority interest increased $367,000 primarily due to the
sale of one of the HCP communities and an increase in net income at HCP. The
sale of the one HCP community increased minority interest by approximately
$329,000.
Net income. As a result of the foregoing factors, net income increased $880,000
to $4,386,000 for the three months ended September 30, 1999, as compared to
$3,505,000 for the three months ended September 30, 1998.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 1998
Revenues. Total revenues were $47,985,000 in the nine months ended September 30,
1999 compared to $28,144,000 for the nine months ended September 30, 1998,
representing an increase of $19,841,000, or 70.5%. The primary components of
this increase were increases in resident and healthcare revenue of $14,873,000
and development fee revenue of $5,664,000, offset by a decrease in affiliated
management services revenue of $851,000. The increase in resident and healthcare
revenue reflects revenue from six communities that were acquired in the third
and fourth quarters of 1998. The increase in development fee revenue reflects
the addition of 18 development contracts for managing the development and
construction of new senior living communities owned by third parties.
Expenses. Total expenses of $28,145,000 in the nine months ended September 30,
1999 compared to $17,511,000 in the nine months ended September 30, 1998,
representing an increase of $10,634,000 or 60.7%. This increase is primarily due
to the acquisition of six communities in 1998.
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Other income and expense. Other income and expense decreased $1,772,000 in
the first nine months of 1999 due to an increase in interest expense of
$4,319,000 offset by an increase in interest income of $1,787,000 and a
$760,000 gain relating to the sale of the one HCP community. Interest
income increased primarily as a result of an increase in interest earned
from loans to Triad Entities along with investment income from NHP notes
due to the partial redemption of the NHP notes and payment of deferred
interest. Interest expense increased due to the financing of the
acquisition of the six communities acquired in 1998 and the funding of
loans to Triad Entities.
Provision for income taxes. Provision for income taxes for the first nine
months of 1999 increased to $7,781,000 or 38.9% of income before taxes,
compared to $5,186,000 or 39.5% of income before taxes in the first nine
months of 1998. The effective tax rates for the first nine months of 1999
and 1998 differ from the statutory tax rates because of state income taxes
and permanent tax differences.
Minority interest. Minority interest increased $560,000 primarily due to an
increase in net income at HCP and the gain on the sale of one of the HCP
communities. The sale of the one HCP community increased minority interest
by approximately $329,000.
Net income. As a result of the foregoing factors, net income increased
$4,279,000 to $12,222,000 for the nine months ended September 30, 1999, as
compared to $7,943,000 for the nine months ended September 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
In addition to approximately $21,880,000 of cash balances on hand as of
September 30, 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 has a commitment of $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'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 $769,000 and
$5,288,000 in the first nine months of fiscal 1999 and 1998, respectively.
In fiscal 1999, the net cash provided by operating activities was primarily
derived from net income of $12,222,000 along with net noncash charges of
$5,344,000 offset by increases in accounts and interest receivables of
$11,668,000, an increase in other assets of $1,322,000 and a reduction in
federal and state income taxes and accounts payable of $2,990,000 and
$1,071,000, respectively. In fiscal 1998, the net cash provided by
operating activities was primarily derived from net income of $7,943,000,
noncash charges of $2,852,000 and an increase in accounts payable of
$845,000 offset by increases in accounts receivable of $6,173,000.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The Company had net cash used in investing activities of $22,987,000 and
$22,924,000 in the first nine months of fiscal 1999 and 1998, respectively.
In the first nine months of fiscal 1999, the Company's net cash used in
investing activities was primarily the result of advances to Triad Entities
of $25,003,000 and capital expenditures of $1,607,000 offset by the
proceeds from the sale of the HCP property of $2,727,000 and a distribution
from a limited partnership of $895,000. In the first nine months of fiscal
1998, the Company's net cash used in investing activities was primarily
from the acquisition of the NHP assets for $8,246,000, advances to Triad
Entities of $7,355,000, investments in a limited partnership of $2,204,000
and capital expenditures of $5,119,000.
The Company had net cash provided by financing activities of $8,271,000 and
$3,889,000 in the first nine months of fiscal 1999 and 1998, respectively.
For the first nine months of fiscal 1999 and 1998, the net cash provided by
financing activities was primarily the result of increases in debt
outstanding under the Company's line of credit and notes payable.
The Company derives the benefits and bears the risks attendant to the
communities it owns. The cash flows and profitability of owned communities
depends on the operating results of such communities and are subject to
certain risks of ownership, including the need for capital expenditures,
financing and other risks such as those relating to environmental matters.
The cash flows and profitability of the 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, 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. Effective August 5, 1999, HealthSouth agreed
to transfer control of the two closed communities to HCP. In the Company's
third quarter, one of these properties was sold for $2,727,000, net of
closing costs, resulting in a gain from sale of approximately $760,000.
HealthSouth has agreed to continue making its full lease payments to HCP on
all four properties with no reduction in payment. HCP will continue to
explore its options with regard to the other community, including the
possibility of a sale. 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,
except the lessee for one community that has not been able to make its
lease payment since July 1999. The lessee for another property (other than
HealthSouth) continues to fund a deficit between the required lease payment
and operator's cash flow.
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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.
The Company has entered into development and management agreements with the
Triad Entities for the development and management of new senior living
communities. The Triad Entities will own and finance the construction of
the new communities. These communities are primarily Waterford communities.
The Company typically receives a development fee of 4% of project costs, as
well as reimbursement of expenses and overhead not to exceed 4% of project
costs. The Company typically receives management fees in an amount equal to
the greater of 5% of gross revenues or $5,000 per month per community, plus
overhead not to exceed 1% of gross revenue. The Company holds 10% to 19%
limited partnership interests in each of the Triad Entities and has the
option to purchase the partnership interests of the other parties in each
Triad Entity for an amount equal to the amount paid for the partnership
interest by the other partners, plus a noncompounded return of 12% to 20%
per annum. In addition, the Triad Entities provide the Company with an
option to purchase the communities developed by the applicable partnership
upon their completion for an amount equal to the fair market value (based
on a third-party appraisal but not les than hard and soft costs and
lease-up costs) of each community. The Company has made no determination as
to whether we will exercise any of these purchase options.
Each Triad Entity finances the development of new communities through a
combination of equity funding, traditional construction loans and permanent
financing with institutional lenders secured by first liens on the
communities and unsecured loans from the Company. The Company loans may be
prepaid without penalty. The financings from institutional lenders are
secured by first liens on the communities as well as assignment to the
lenders of the construction contracts and the development and management
agreements with the Company. Each development and management agreement
assigned to an institutional lender is also guaranteed by the Company and
those guarantees are also assigned to the lenders. In certain cases, the
management agreements contain an obligation of the Company to fund
operating deficits to the Triad Entities if the other financing sources of
the Triad Entities have been fully utilized. These operating deficit
funding obligations are guaranteed by the Company.
The chart below sets forth information about Company loans committed to the
Triad Entities and financings from institutional lenders obtained by the
Triad Entities (dollars in thousands):
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
NOTES RECEIVABLE CONSTRUCTION LOAN FACILITIES
--------------------------------------------- -------------------------------
BALANCE AT
COMMITTED SEPT. 30, INTEREST
ENTITY AMOUNT 1999 MATURITY RATE AMOUNT TYPE LENDER
- --------------- -------------- -------------- ---------------- ---------- ----------- ------------ ----------
Triad Senior
Living I, March 12, $50,000 construction Bank One
L.P. $15,000 $12,345 2003 8.0% 50,000 take-out GMAC
(Triad I)
Triad Senior
Living II, September construction; Key
L.P. 10,000 9,743 25, 2003 10.5 27,000 mini-perm Bank
(Triad II)
Triad Senior
Living III, February 8, construction; Guaranty
L.P. 10,000 7,031 2004 10.5 56,000 mini-perm Bank
(Triad III)
Triad Senior
Living IV, December 30, construction; Compass
L.P. 10,000 5,689 2003 10.5 27,000 mini-perm Bank
(Triad IV)
Triad Senior
Living V, June 30,
L.P. 10,000 1,923 2004 12.0 27,000 construction; Bank of
(Triad V) mini-perm America
17
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 June 30, 1999, with 100% completion targeted for December
31, 1999. The costs of the completed and future modifications and
replacement of hardware and software is expected to 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 in 1999. Based on the responses from the
Company's critical service providers, 90 to 95% of the respondents
indicated 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 is therefore 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 services 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.
18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Significant Year 2000 problems could result in the Company not having
timely the operating information necessary to efficiently manage and
monitor its business activities. This could result in disruptions in
operation, 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 affecting the
day-to-day operations of its senior living communities due to their limited
use of technology and the Company's evaluation of its operating equipment.
The Company considers the possibility of significant Year 2000 problems,
based on the evaluation of its internal systems and the response from its
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.
19
CAPITAL SENIOR LIVING CORPORATION
SEPTEMBER 30, 1999
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary market risk is exposure to changes in interest rates
on debt instruments. As of September 30, 1999, the Company had $90,263,000
in outstanding debt comprised of various fixed and variable rate debt
instruments of $59,174,000 and $31,089,000, respectively.
In the third quarter of fiscal 1999, the Company repaid $47,700,000 in
outstanding short-term variable rate debt and replaced it with $45,970,000
of long-term fixed rate loans. These fixed rate loans are non-recourse
loans secured by certain properties owned by the Company. These loans are
for a 10-year term, bear interest at 8.2% with the principal being
amortized over a 25-year period.
Changes in interest rates would affect the fair market value of the
Company's fixed rate debt instruments but would not have an impact on the
Company's earnings or cash flows. Fluctuations in interest rates on the
Company's variable rate debt instruments, which are tied to either the
LIBOR or the prime rate, would affect the Company's earnings and cash flows
but would not affect the fair market value of the variable rate debt. For
each percentage point change in interest rates the Company's annual
interest expense would increase by approximately $311,000 based on its
current outstanding variable debt.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
On or about October 23, 1998, Robert Lewis filed a putative class action
complaint on behalf of certain holders of assignee interests (the "Assignee
Interests") in NHP Retirement Housing Partners I Limited Partnership
("NHP") in the Delaware Court of Chancery against NHP, the Company, Capital
Senior Living Properties 2-NHPCT, Inc. and Capital Realty Group Senior
Housing, Inc. (collectively, the "Defendants"). Mr. Lewis purchased ninety
Assignee Interests in NHP in February 1993 for $180. The complaint alleges,
among other things, that the Defendants breached, or aided and abetted a
breach of, the express and implied terms of the NHP Partnership Agreement
in connection with the sale of four properties by NHP to Capital Senior
Living Properties 2-NHPCT, Inc. The complaint seeks, among other relief,
rescission of the sale of those properties and unspecified damages. The
Company believes the complaint is without merit and is vigorously defending
itself in this action. The Company has filed a Motion to Dismiss in this
case, which is currently pending.
The Company 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.
20
CAPITAL SENIOR LIVING CORPORATION
SEPTEMBER 30, 1999
Item 2. CHANGES IN SECURITIES (And use of proceeds)
Not Applicable
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
Item 5. OTHER INFORMATION
Not Applicable
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits:
3.1 Amendment to Amended and Restated Certificate of
Incorporation of Capital Senior Living Corporation
3.2 Amendments to Amended and Restated Bylaws off Capital
Senior Living Corporation
10.1 Draw Promissory Note dated July 1, 1999 of Triad Senior
Living V, L.P. in favor of Capital Senior Living
Properties, Inc.
10.2 First Amendment to Amended and Restated Employment
Agreement of James A. Stroud, dated March 22, 1999, by
and between James A. Stroud and Capital Senior Living
Corporation
10.3 Second Amendment to Amended and Restated Employment
Agreement of James A. Stroud, dated May 31, 1999, by
and between James A. Stroud and Capital Senior Living
Corporation
10.4 Employment Agreement, dated May 26, 1999, by and
between Lawrence A. Cohen and Capital Senior Living
Corporation
21
CAPITAL SENIOR LIVING CORPORATION
SEPTEMBER 30, 1999
27.1 Financial Data Schedule
(B) Reports on Form 8-K
(i) The Registrant filed a report on Form 8-K, dated
October 25, 1999 to report entering into an Amended and
Restated Plan of Merger dated October 19, 1999, by and
among the Registrant, Capital Senior Living
Acquisition, and ILM Senior Living, Inc.
(ii) The Registrant filed a report on Form 8-K, dated
October 25, 1999 to report entering into an Amended and
Restated Plan of Merger dated October 19, 1999, by and
among the Registrant, Capital Senior Living
Acquisition, and ILM II Senior Living, Inc.
22
CAPITAL SENIOR LIVING CORPORATION
SEPTEMBER 30, 1999
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Capital Senior Living Corporation
(Registrant)
By: /s/ Ralph A. Beattie
----------------------------------------------
Ralph A. Beattie
Executive Vice President and Chief Financial Officer
(Principal Financial Officer and Duly Authorized Officer)
Date: November 15, 1999
23