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, 2000 [ ] Transition report under Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission file number 1-13445. CAPITAL SENIOR LIVING CORPORATION ------------------------------------------------------ (Exact name of Registrant as specified in its charter) DELAWARE 75-2678809 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 14160 Dallas Parkway, Suite 300, Dallas, Texas 75240 ---------------------------------------------------- (Address of principal executive offices) 972-770-5600 ------------ (Registrant's telephone number, including area code) Indicate by check whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No___ As of November 13, 2000, the Registrant had outstanding 19,717,347 shares of its Common Stock, $.01 par value.
<TABLE> <CAPTION> CAPITAL SENIOR LIVING CORPORATION INDEX Page Number <S> <C> <C> Part I. Financial Information Item 1. Financial Statements Consolidated Balance Sheets - - September 30, 2000 and December 31, 1999 3 Consolidated Statements of Income - - Three and Nine Months Ended September 30, 2000 and 1999 4 Consolidated Statements of Cash Flows - - Nine Months Ended September 30, 2000 and 1999 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Item 3. Quantitative and Qualitative Disclosures About Market Risk 21 Part II. Other Information Item 1. Legal Proceedings 22 Item 6. Exhibits and Reports on Form 8-K 23 Signature </TABLE>
PART I. FINANCIAL INFORMATION Item 1. Financial Statements <TABLE> <CAPTION> CAPITAL SENIOR LIVING CORPORATION CONSOLIDATED BALANCE SHEETS (in thousands) September 30, December 31, 2000 1999 ---------------- ------------- ASSETS (Unaudited) (Audited) <S> <C> <C> Current assets: Cash and cash equivalents........................................... $ 27,858 $ 32,988 Accounts receivable, net............................................ 3,381 3,392 Accounts receivable from affiliates................................. 4,778 9,055 Interest receivable................................................. 1,007 834 Federal and state income taxes receivable........................... 4,269 6,035 Deferred taxes...................................................... 565 910 Prepaid expenses and other.......................................... 2,517 508 ----------- ----------- Total current assets.......................................... 44,375 53,722 Property and equipment, net............................................... 205,189 104,723 Deferred taxes............................................................ 9,213 9,516 Notes receivable.......................................................... 569 -- Notes receivable from affiliates.......................................... 38,902 30,596 Investments in limited partnerships....................................... 9,595 9,123 Assets held for sale...................................................... 7,945 9,549 Other assets.............................................................. 8,577 4,647 ----------- ------------ Total assets.................................................. $ 324,365 $ 221,876 =========== ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable.................................................... $ 4,436 $ 2,512 Accrued expenses.................................................... 2,382 2,127 Current portion of notes payable.................................... 4,537 1,199 Customer deposits................................................... 1,044 911 ----------- ------------ Total current liabilities..................................... 12,399 6,749 Deferred income........................................................... 231 -- Deferred income from affiliates........................................... 2,490 1,785 Notes payable, net of current portion..................................... 178,229 58,416 Line of credit............................................................ 8,353 34,000 Minority interest in consolidated partnership............................. 9,257 11,377 Commitments and contingencies Shareholders' equity: Preferred stock, $.01 par value: Authorized shares 15,000,000; no shares issued or outstanding. -- -- Common stock, $.01 par value: Authorized shares 65,000,000; issued and outstanding 19,717,347 at September 30, 2000 and December 31, 1999........ 197 197 Additional paid-in capital.......................................... 91,935 91,935 Retained earnings................................................... 21,274 17,417 ----------- ----------- Total shareholders' equity.................................... 113,406 109,549 ----------- ----------- Total liabilities and shareholders' equity.................... $ 324,365 $ 221,876 =========== =========== See accompanying notes. </TABLE>
<TABLE> <CAPTION> CAPITAL SENIOR LIVING CORPORATION CONSOLIDATED STATEMENTS OF INCOME (in thousands, except earnings per share data) Three Months Ended Nine Months Ended September 30, September 30, ------------------ ----------------- 2000 1999 2000 1999 --------------- --------------- --------------- ---------- (Unaudited) (Unaudited) (Unaudited) (Unaudited) <S> <C> <C> <C> <C> Revenues: Resident and healthcare revenue........... $ 12,955 $ 10,304 $ 33,220 $ 30,816 Rental and lease income................... 1,032 993 3,054 3,188 Unaffiliated management services revenue.. 523 641 1,783 1,983 Affiliated management services revenue.... 285 113 690 341 Unaffiliated development fees............. 106 355 476 1,202 Affiliated development fees............... 1,139 4,154 1,658 10,455 ----------- ------------ ------------ ------------ Total revenues........................ 16,040 16,560 40,881 47,985 Expenses: Operating expenses........................ 7,696 6,270 20,016 18,262 General and administrative expenses....... 2,571 2,130 6,923 6,486 Depreciation and amortization............. 1,460 1,143 3,462 3,397 ----------- ------------ ------------ ------------ Total expenses........................ 11,727 9,543 30,401 28,145 ----------- ------------ ------------ ------------ Income from operations.......................... 4,313 7,017 10,480 19,840 Other income (expense): (Loss) gain on sale of assets.................... (653) 760 (350) 760 Interest income.................................. 1,489 1,798 4,322 5,190 Interest expense................................. (3,322) (1,899) (7,292) (4,867) Income before income taxes and minority interest in consolidated partnership........................ 1,827 7,676 7,160 20,923 Provision for income taxes...................... (655) (2,793) (2,360) (7,781) ----------- ------------ ------------ ------------ Income before minority interest in consolidated partnership............................... 1,172 4,883 4,800 13,142 Minority interest in consolidated partnership... (99) (497) (943) (920) ----------- ------------ ------------ ------------ Net income...................................... $ 1,073 $ 4,386 $ 3,857 $ 12,222 =========== ============ ============ ============ Net income per share: Basic....................................... $ 0.05 $ 0.22 $ 0.20 $ 0.62 ============ ============ ============ ============ Diluted................................... $ 0.05 $ 0.22 $ 0.20 $ 0.62 ============ ============ ============ ============ Weighted average shares outstanding - basic 19,717 19,717 19,717 19,717 =========== ============ ============ ============ Weighted average shares outstanding - diluted 19,717 19,871 19,727 19,835 =========== ============ ============ ============ See accompanying notes. </TABLE>
<TABLE> <CAPTION> CAPITAL SENIOR LIVING CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Nine Months Ended September 30, ------------------------------- 2000 1999 --------------- ------------- (Unaudited) (Unaudited) <S> <C> <C> Operating Activities Net income.......................................................... $ 3,857 $ 12,222 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization................................. 3,462 3,397 Amortization of deferred financing charges.................... 252 474 Loss (gain) on sale of assets................................. 350 (760) Minority interest in consolidated partnership................. 943 920 Deferred tax expense.......................................... 648 303 Deferred income from affiliates............................... 705 1,120 Deferred income............................................... 231 (110) Changes in operating assets and liabilities, net of acquisition: Accounts receivable....................................... 11 (628) Accounts receivable from affiliates....................... 4,277 (9,897) Interest receivable....................................... (173) (1,144) Notes receivable.......................................... (569) -- Prepaid expenses and other................................ (2,009) 226 Other assets.............................................. (615) (1,322) Federal and state income taxes............................ 1,766 (2,990) Accounts payable and accrued expenses..................... 2,179 (1,071) Customer deposits......................................... 133 29 ------------- ------------ Net cash provided by operating activities........................... 15,448 769 Investing Activities Capital expenditures................................................ (1,845) (1,607) Cash paid for acquisition, net of cash acquired of $2,060........... (102,014) -- Proceeds from the sale of assets.................................... 4,504 2,727 Advances to affiliates.............................................. (11,556) (25,002) (Investments in) distribution from limited partnership.............. (472) 895 ------------- ------------ Net cash used in investing activities............................... (111,383) (22,987) Financing Activities Proceeds from notes payable and line of credit...................... 125,248 56,873 Repayment of notes payable.......................................... (27,744) (47,700) Distributions to minority partners.................................. (3,063) (216) Deferred loan charges paid.......................................... (3,636) (686) ------------- ------------ Net cash provided by financing activities........................... 90,805 8,271 ------------- ------------ Decrease in cash and cash equivalents............................... (5,130) (13,947) Cash and cash equivalents at beginning of period.................... 32,988 35,827 ------------- ------------ Cash and cash equivalents at end of period.......................... $ 27,858 $ 21,880 ============= ============ Supplemental disclosures: Cash paid during the period for: Interest..................................................... $ 7,068 $ 3,940 ============= ============ Income taxes................................................. $ 354 $ 10,473 ============= ============ See accompanying notes. </TABLE>
CAPITAL SENIOR LIVING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 1. BASIS OF PRESENTATION Capital Senior Living Corporation, a Delaware corporation (the "Company"), was incorporated on October 25, 1996. The accompanying consolidated financial statements include the financial statements of Capital Senior Living Corporation and its subsidiaries and a limited partnership owned and controlled by it. All intercompany balances and transactions have been eliminated in consolidation. The accompanying consolidated balance sheet, as of December 31, 1999, has been derived from audited consolidated financial statements of the Company for the year ended December 31, 1999, and the accompanying unaudited consolidated financial statements, as of September 30, 2000 and 1999, have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in the annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations. For further information, refer to the financial statements and notes thereto for the year ended December 31, 1999 included in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 30, 2000. In the opinion of the Company, the accompanying consolidated financial statements contain all adjustments (all of which were normal recurring accruals) necessary to present fairly the Company's financial position as of September 30, 2000, results of operations for the three months and nine months ended September 30, 2000 and 1999, respectively, and cash flows for the nine months ended September 30, 2000 and 1999. The results of operations for the three and nine months ended September 30, 2000 are not necessarily indicative of the results for the year ending December 31, 2000. 2. TRANSACTIONS WITH AFFILIATES The Company has entered into development and management agreements with the partnerships set out below (the "Triad Entities") for the development and management of new senior living communities. The Triad Entities own and finance the construction of the new senior living communities. The communities are primarily Waterford communities. The development of senior living communities typically involves a substantial commitment of capital over a 12-month construction period during which time no revenues are generated, followed by a 14- to 18-month lease up period. The Company is accounting for these investments under the equity method of accounting based on the provisions of the Triad Entities partnership agreements.
CAPITAL SENIOR LIVING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) The following table sets forth the percentage ownership the Company has in each of the Triad Entities, the capital invested, information related to loans made by the Company to each Triad Entity and information on deferred income related to each Triad Entity (dollars in thousands): <TABLE> <CAPTION> Notes Receivable Deferred Income --------------------------------------------- --------------------------------- Balance Ownership Capital Committed September Interest Development Management Entity Interest Investment Amount 30, 2000 Maturity Rate Interest Fees Fees ------ -------- ---------- ------ -------- -------- ---- -------- ---- ---- <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> Triad Senior Living I, L.P. (Triad I) 19.0% $3,000 $ -- $4,513(1) -- 8.0% $ 251 $ 393 $ 114 Triad Senior Living II, September L.P. 19.0 74 15,000 12,434 25, 2003 10.5 313 245 -- (Triad II) Triad Senior Living III, February L.P. 19.0 143 15,000 10,703 8, 2004 10.5 268 456 -- (Triad III) Triad Senior Living IV, December L.P. 19.0 143 10,000 6,130 30, 2003 10.5 175 120 -- (Triad IV) Triad Senior Living V, L.P. June 30, (Triad V) 10.0 -- 10,000 5,088 2004 12.0 58 92 -- Triad Senior Living VI, October L.P. 5.0 -- 3,000 34 1, 2004 12.0 6 -- -- (Triad VI) <FN> - ---------------------------- (1) Pursuant to operating deficit loan obligations. </FN> </TABLE> Each Triad Entity finances the development of new communities through a combination of equity funding, traditional construction loans and permanent financing with institutional lenders secured by first liens on the communities and unsecured loans from the Company. The Company loans may be prepaid without penalty. The financings from institutional lenders are secured by first liens on the communities, are solely the responsibility of the Triad Entities, and are not guaranteed by the Company. The financing agreements the Triad Entities have with the institutional lenders also include the assignment to the lenders of the construction contracts and the development and management agreements with the Company. The management agreements contain an obligation of the Company to make operating deficit loans to the Triad Entities if other funding sources available to the Triad Entities have been fully exhausted. These operating deficit loan obligations include making loans to fund debt service obligations to the lenders. The Company typically receives a development fee of 4% of project costs, as well as reimbursement of expenses and overhead not to exceed 4% of project costs. These fees are recorded over the term of the development project on a basis approximating the percentage of completion method. In addition, when properties become operational, the Company typically receives management fees in an amount equal to the greater of 5% of gross revenues or $5,000 per month per community, and other fees relating to lease up, plus overhead reimbursement not to exceed 1% of gross revenue. The Company has the option to purchase the partnership interests of the other parties in each of the Triad Entities, except in Triad I, for an amount equal to the amount paid for the partnership interest by the other partners, plus a noncompounded return of 12% per annum. In addition, each Triad Entity, except Triad I, provides the Company with an option to purchase the community developed by the applicable partnership upon their completion for an amount equal to the fair market value (based on a third-party appraisal but not less than hard and soft costs and lease-up costs) of the community. In December 1999, Triad I completed a recapitalization in which an affiliate of Lehman Brothers purchased from a third party 80% of the limited partnership interests in Triad I. The Company continues to own a 19% limited partnership interest in Triad I. The Company has the option to purchase the Triad I communities prior to December 31, 2001 for an amount specified in the partnership agreement, has an option to purchase the partnership interest of the other partners for an amount specified in the partnership agreement and is subject to the buy-sell provisions of the partnership agreement. The Company will continue to develop and manage the communities in the Triad I partnership. The Company has made no determination as to whether it will exercise any of these purchase options. 3. NET INCOME PER SHARE Basic net income per share is calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted net income per share considers the dilutive effect of outstanding options calculated using the treasury stock method. The following table sets forth the computation of basic and diluted earnings per share (in thousands, except for per share amounts): <TABLE> <CAPTION> Three Months Ended Nine Months Ended September 30, September 30, --------------------------- -------------------- 2000 1999 2000 1999 --------- --------- --------- ------- <S> <C> <C> <C> <C> Net income $ 1,073 $ 4,386 $ 3,857 $ 12,222 Weighted average shares outstanding - basic 19,717 19,717 19,717 19,717 Effect of dilutive securities: Employee stock options -- 154 10 118 --------- --------- --------- --------- Weighted average shares outstanding - diluted 19,717 19,871 19,727 19,835 ========= ========= ========= ========= Basic earnings per share $ 0.05 $ 0.22 $ 0.20 $ 0.62 ========= ========= ========= ========= Diluted earnings per share $ 0.05 $ 0.22 $ 0.20 $ 0.62 ========= ========= ========= ========= </TABLE> Options to purchase 1.8 million shares of common stock at prices ranging from $3.63 to $13.50 per share were not included in the computation of diluted earnings per share for the three months ended September 30, 2000 because the average daily price of the common stock during the second quarter of fiscal 2000 did not exceed the exercise price of the options, and therefore, the effect would be antidilutive. 4. CONTINGENCIES On or about October 23, 1998, Robert Lewis filed a putative class action complaint on behalf of certain holders of assignee interests (the "Assignee Interests") in NHP Retirement Housing Partners I Limited Partnership ("NHP") in the Delaware Court of Chancery against NHP, the Company, Capital Senior Living Properties 2-NHPCT, Inc. and Capital Realty Group Senior Housing, Inc. (collectively, the "Defendants"). Mr. Lewis purchased ninety Assignee Interests in February 1993 for $180. The complaint alleges, among other things, that the Defendants breached, or aided and abetted a breach of, the express and implied terms of the NHP Partnership Agreement in connection with the sale of four properties by NHP to Capital Senior Living Properties 2-NHPCT, Inc. The complaint seeks, among other relief, rescission of the sale of those properties and unspecified damages. The Company believes the complaint is without merit and is vigorously defending itself in this action. The Company has filed a Motion to Dismiss in this case, which is currently pending. The Company is unable to estimate the liability related to this claim, if any. The Company has pending claims incurred in the normal course of business, which, in the opinion of management, based on the advice of legal counsel, will not have a material effect on the financial statements of the Company. 5. ACQUISITION AND PENDING MERGER On August 15, 2000, the Company completed its merger with ILM Senior Living, Inc. ("ILM") and the acquisition of the Villa Santa Barbara property interest held by ILM II Senior Living, Inc. ("ILM II"). This transaction resulted in the Company acquiring ownership of eight senior living communities with a capacity of approximately 1,300 residents. The Company had managed the ILM communities since 1996 pursuant to a management agreement with ILM. The Company will continue to manage the five remaining ILM II communities pursuant to its existing management agreement. The merger was accounted for as a purchase and included total cash consideration for the eight communities of approximately $97.6 million, consisting of $87.5 million to the ILM shareholders and $10.1 million for ILM II's interest in the Villa Santa Barbara property. The consideration was agreed upon as the result of arm's-length negotiations between the parties to the merger and with ILM II. The Company also refinanced three of its existing communities in conjunction with the merger and repaid approximately $25.8 million of a $34.0 million line of credit with Bank One Texas, N.A., as agent, resulting in an amended loan facility of up to $9.0 million. GMAC Commercial Mortgage Corporation ("GMAC") provided approximately $102.0 million and Newman Financial Services, Inc. provided approximately $20.0 million of financing for the merger and the refinancing. The balance of the merger consideration and amounts necessary for the refinancing came from the Company's existing cash resources. The GMAC loans are for a five-year term, payable monthly, bear interest at LIBOR plus a spread of 240 basis points and are amortized over a twenty-five year period. The Newman loans are for a two-year term, bear interest at LIBOR plus a spread of 550 basis points with interest due monthly and the principal due at the loan maturity date. The Company has not completed its analysis of this merger transaction and as such the purchase accounting information disclosed in this report should be considered preliminary. The following unaudited pro forma financial information combines the results of operations for the Company and ILM as if the acquisition had taken place at the beginning of fiscal 1999. The pro forma financial information is presented for informational purposes only and does not necessarily reflect the results of operations of Capital which would have actually resulted with ILM if the mergers occurred as of the dates indicated, or future results of operations of Capital. <TABLE> <CAPTION> Nine months ended Sept. 30, 2000 1999 --------- ------- <S> <C> <C> Net sales $ 53,762 $ 63,927 Net income 2,225 10,261 Net income per share - basic $ 0.11 $ 0.52 Net income per share - diluted $ 0.11 $ 0.52 </TABLE> As part of the above referenced transaction, the Company amended the partnership agreement for Triad Senior Living II, L.P. ("Triad II"), a partnership in which the Company owns a 19% interest, in order to allow the pledge as collateral for the Newman loans of such subsidiary's loans and interest in Triad II. The Company also purchased the $0.6 million loan held by Fleet National Bank ("Fleet") in which ILM II is the borrower. This loan is secured by the five communities owned by ILM II. The Company is continuing discussions with various financing sources in order to obtain the capital required to complete the merger with ILM II. In addition, the Company and ILM II are discussing modifications of certain terms of the merger agreement. There can, however, be no assurance that such financing sources will be available on terms acceptable to the Company. As previously announced, on April 18, 2000, the Company reduced the merger consideration to the shareholders of ILM II to $67.6 million. The $10.1 million paid for ILM II's interest in the Villa Santa Barbara property is a part of this $67.6 million. The primary assets of ILM II are five senior living communities that have been managed by the Company under a management agreement since 1996. Under the amended merger agreement, ILM II will merge with and into a wholly owned subsidiary of the Company with the aggregate issued and outstanding shares of ILM II common stock receiving 100% of the merger consideration in cash. The merger is subject to certain other customary conditions including regulatory approvals. The Company filed a Current Report on Form 8-K on May 9, 2000, with a copy of the amendment to the amended merger agreement attached thereto.
CAPITAL SENIOR LIVING CORPORATION Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview The following discussion and analysis addresses (i) the Company's results of operations for the three and nine months ended September 30, 2000 and 1999, respectively, and (ii) liquidity and capital resources of the Company and should be read in conjunction with the Company's consolidated financial statements contained elsewhere in this report. The Company generates revenue from a variety of sources. For the three months ended September 30, 2000, the Company's revenue was derived as follows: 80.8% from the operation of nineteen owned senior living communities that are operated by the Company, including revenue from eight ILM communities acquired during the quarter; 6.4% from lease rentals for triple net leases of three skilled nursing communities and two physical rehabilitation centers owned by HealthCare Properties L.P. ("HCP"); 5.1% from management fees arising from management services provided for eight affiliate owned senior living communities and seventeen third party owned senior living communities and 7.8% 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, 2000, the Company's revenue was derived as follows: 81.3% from the operation of nineteen owned senior living communities; 7.5% from lease rentals for triple net leases of three skilled nursing communities and two physical rehabilitation centers owned by HCP; 6.1% from management fees arising from management services provided for eight affiliate owned senior living communities and seventeen third party owned senior living communities and 5.3% derived from development fees earned for managing the development and construction of new senior living communities for affiliated and unaffiliated third parties, including the Triad Entities. The Company believes that the factors affecting the financial performance of communities managed under contracts with third parties do not vary substantially from the factors affecting the performance of owned and leased communities, although there are different business risks associated with these activities. The Company's third-party management fees are primarily based on a percentage of gross revenues. As a result, the cash flows and profitability of such contracts to the Company are more dependent on the revenues generated by such communities and less dependent on net cash flow than for owned communities. Further, the Company is not responsible for capital investments in managed communities. While the management contracts are generally terminable only for cause, in certain cases the contracts can be terminated upon the sale of a community, subject to the Company's rights to offer to purchase such community. The triple net leases extend through the year 2000 for two of its owned communities and through the year 2001 for three of its owned communities. The base payments under these leases are fixed and are not subject to change based upon the operating performance of these communities. Certain of these leases have additional rent based on operating performance. Following termination of the lease agreements (unless renewal options are utilized by the lessees), the Company may either convert and
CAPITAL SENIOR LIVING CORPORATION MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) operate the communities as assisted living and Alzheimer's care communities, sell the communities or evaluate other alternatives. The Company's current management contracts expire on various dates through June 2010 and provide for management fees based generally upon rates that vary by contract from 4% of net revenues to 7% of net revenues. In addition, certain of the contracts provide for supplemental incentive fees, including fees related to lease up, that vary by contract based upon the financial performance of the managed community. The Company's development fees are generally based upon a percentage of construction costs and are earned over the period commencing with the initial development activities and ending with the opening of the community. As of September 30, 2000, development fees have been earned for services performed on 18 communities under development or expansion for third parties. Results of Operations The following table sets forth for the periods indicated, selected statements of income data in thousands of dollars and expressed as a percentage of total revenues. <TABLE> <CAPTION> Three Months Ended Nine Months Ended September 30, September 30, 2000 1999 2000 1999 ------------------ ------------------ ------------------ ------------- $ % $ % $ % $ % ---------- -------- --------- --------- ---------- --------- ---------- ----------- <S> <C> <C> <C> <C> <C> <C> <C> <C> Revenues: Resident and healthcare $ 12,955 80.8 $ 10,304 62.2 $33,220 81.3 $30,816 64.2 revenue................... Rental and lease income... 1,032 6.4 993 6.0 3,054 7.5 3,188 6.6 Unaffiliated management service revenue........... 523 3.3 641 3.9 1,783 4.4 1,983 4.1 Affiliated management service revenue........... 285 1.8 113 0.7 690 1.7 341 0.7 Unaffiliated development 106 0.7 355 2.1 476 1.2 1,202 2.5 fees...................... Affiliated development fees 1,139 7.1 4,154 25.1 1,658 4.1 10,455 21.8 --------- ----- ---- --- ---- --------- -------- --------- ------- Total revenue......... 16,040 100.0 16,560 100.0 40,881 100.0 47,985 100.0 Expenses: Operating expenses........ 7,696 48.0 6,270 37.9 20,016 49.0 18,262 38.1 General and administrative 2,571 16.0 2,130 12.9 6,923 16.9 6,486 13.5 expenses............... Depreciation and amortization........... 1,460 9.1 1,143 6.9 3,462 8.5 3,397 7.1 ------ ---- ----- ---- ------ ---- ------ ----- Total expenses 11,727 73.1 9,543 57.6 30,401 74.4 28,145 58.7 ------ ---- ----- ---- ------ ---- ------ ----- Income from operations ........ 4,313 26.9 7,017 42.4 10,480 25.6 19,840 41.3 Other income (expense): (Loss) gain on sales of (653) (4.1) 760 4.6 (350) (0.9) 760 1.6 assets.................... Interest income........... 1,489 9.3 1,798 10.9 4,322 10.6 5,190 10.8 Interest expense.......... (3,322) (20.7) 1,899 (11.5) (7,292) (17.8) (4,867) (10.1) ------ ---- ----- ---- ------ ---- ------ ----- Income before income taxes and minority interest in consolidated partnership............... 1,827 11.4 7,676 46.4 7,160 17.5 20,923 43.6 Provision for income taxes..... (655) (4.1) (2,793) (16.9) (2,360) (5.8) (7,781) (16.2) ------ ---- ----- ---- ------ ---- ------ ----- Income before minority interest in consolidated partnership.... 1,172 7.3 4,883 29.5 4,800 11.7 13,142 27.4 Minority interest in consolidated partnership.............. (99) (0.6) (497) (3.0) (943) (2.3) (920) (1.9) ------ ---- ----- ---- ------ ---- ------ ----- Net income..................... $1,073 6.7 $4,386 26.5 $3,857 9.4 $ 12,222 25.5 ====== ==== ====== ==== ====== ==== ======== ==== </TABLE>
Three Months Ended September 30, 2000 Compared to the Three Months Ended September 30, 1999 Revenues. Total revenues were $16.0 million in the three months ended September 30, 2000 compared to $16.6 million for the three months ended September 30, 1999, representing a decrease of $0.6 million or 3.1%. This decrease in revenue is primarily the result of a $3.3 million decrease in development fee revenue offset by a $2.7 million increase in resident and healthcare revenue. The reduction in development fee revenue reflects the Company's strategic initiatives aimed at enhancing cash flows and discontinuing the use of joint ventures for future development. During the third quarter of fiscal 2000, the Company received development fee revenue on 14 communities compared to 42 communities in the third quarter of fiscal 1999. The increase in resident and healthcare revenue primarily reflects revenue from the eight former ILM communities the Company acquired during the third quarter of fiscal 2000. The decrease in unaffiliated management services revenue reflects the loss of management services revenue related to the ILM communities acquired. The increase in affiliated management services revenue reflects additional fees earned from the Triad Entities. Expenses. Total expenses were $11.7 million in the third quarter of fiscal 2000 compared to $9.5 million in the third quarter of fiscal 1999, representing an increase of $2.2 million or 22.9%. This increase is due to an increase in operating expenses of $1.4 million, an increase in general and administrative expenses of $0.4 million and an increase in depreciation and amortization expense of $0.3 million. These increases are primarily due to operating and other costs associated with the eight former ILM communities acquired during the current quarter. Other income and expense. Other income and expense decreased from a gain of $0.7 million in the third quarter of fiscal 1999 to a charge of $2.5 million in the third quarter of fiscal 2000. This $3.1 million reduction is the result of a $1.4 million increase in interest expense, a loss on the sale of two HCP properties in fiscal 2000 of $0.7 million compared to a gain on sale of one HCP property for $0.8 million in fiscal 1999 and a reduction in interest income of $0.3 million. The increased interest expense is the result of additional debt outstanding from the financing of the Company's ILM acquisition. Interest income decreased primarily as a result of a decrease in interest earned from the NHP notes due to the revaluation of the NHP notes in fiscal 1999. Provision for income taxes. Provision for income taxes in the third quarter of fiscal 2000 was $0.7 million or 37.9% of taxable income, compared to $2.8 million or 38.9% of taxable income in the comparable quarter for 1999. The effective tax rates for the second quarter of 2000 and 1999 differ from the statutory tax rates because of state income taxes and permanent tax differences. Minority interest. Minority interest decreased $0.4 million to $0.1 million primarily due to losses incurred by HCP on the sale of two properties during the third quarter of 2000 compared to a gain on sale of a property by HCP in the third quarter of fiscal 1999. Net income. As a result of the foregoing factors, net income decreased $3.3 million to $1.1 million for the three months ended September 30, 2000, as compared to $4.4 million for the three months ended September 30, 1999. Nine Months Ended September 30, 2000 Compared to the Nine Months Ended September 30, 1999 Revenues. For the nine months ended September 30, 2000, total revenues were $40.9 million compared to $48.0 million for the nine months ended September 30, 1999, representing a decrease of $7.1 million or 14.8%. This decrease in revenue is primarily the result of a $9.5 million decrease in development fee revenue offset by a $2.4 million increase in resident and healthcare revenue. The reduction in development fee revenue reflects the Company's strategic initiatives aimed at enhancing cash flows and discontinuing the use of joint ventures for future development. During the first nine months of fiscal 2000, the Company received development fee revenue on 18 communities compared to 46 communities in the first nine months of fiscal 1999. During the first nine months of fiscal 2000, resident and healthcare revenue increased primarily due to the acquisition of the eight ILM communities in the third quarter of fiscal 2000. Expenses. Total expenses increased $2.3 million or 8.0% to $30.4 million in the first nine months of fiscal 2000 compared to $28.1 million in the first nine months of fiscal 1999. This increase primarily results from the operating and other costs associated with the eight former ILM communities acquired by the Company in the third quarter of fiscal 2000. Other income and expense. Other income and expense decreased to a charge of $3.3 million in the nine months ended September 30, 2000 from a gain of $1.1 million in the nine months ended September 30, 1999. This decrease of $4.4 million is primarily due to an increase in interest expense of $2.4 million, a decrease in interest income of $0.9 million along with a net loss on sale of three properties in fiscal 2000 of $0.4 million compared to a gain on sale of $0.8 million in fiscal 1999. Interest expense increased as a result of the financing of the eight ILM communities acquired by the Company, along with slightly higher interest rates. Interest income decreased primarily as a result of a decrease in interest earned on the NHP notes. Provision for income taxes. Provision for income taxes in the first nine months of fiscal 2000 was $2.4 million or 38.0% of taxable income, compared to $7.8 million or 38.9% of taxable income in the comparable period of fiscal 1999. The effective tax rates for the second quarter of 2000 and 1999 differ from the statutory tax rates because of state income taxes and permanent tax differences. Net income. As a result of the foregoing factors, net income decreased $8.3 million to $3.9 million for the nine months ended September 30, 2000, as compared to $12.2 million for the nine months ended September 30, 1999. Liquidity and Capital Resources In addition to approximately $27.9 million of cash balances on hand as of September 30, 2000, the Company's principal source of liquidity is expected to be cash flows from operations. The Company expects its cash and cash equivalents along with its net income and cash flow from operations and proceeds from the sale of assets held for sale to be sufficient to fund its short-term working capital requirements. The Company's long-term capital requirements, primarily for acquisitions, development and other corporate initiatives, will be dependent on the Company's ability to access funds through the debt and/or equity markets. There can be no assurance that the Company will continue to generate cash flows at or above current levels or that the Company will be able to obtain the capital necessary to meet its long-term capital requirements. The Company had net cash provided by operating activities of $15.4 million and $0.8 million in the first nine months of fiscal 2000 and 1999, respectively. In the first nine months of fiscal 2000, the net cash provided by operating activities was primarily derived from net income of $3.9 million, net non-cash charges of $6.6 million, a decrease in accounts and income tax receivable of $6.0 million and an increase in accounts payable and accrued expenses of $2.2 million, offset by an increase in prepaid expenses of $2.0 million, and an increase in notes receivable and other assets of $1.2 million. In the first nine months of fiscal 1999, cash from operating activities was primarily derived from net income of $12.2 million along with non-cash charges of $5.3 million, offset by increases in accounts and interest receivable of $11.7 million, an increase in other assets of $1.3 million, a decrease in federal and state income taxes payable of $3.0 million and a decrease in accounts payable and accrued expenses of $1.1 million. The Company had net cash used in investing activities of $111.4 million and $23.0 million in the first nine months of fiscal 2000 and 1999, respectively. In the first nine months of fiscal 2000, the Company's net cash used in investing activities was primarily the result of cash paid for the acquisition of the eight ILM communities of $102.0 million, net of cash acquired, advances to the Triad Entities of $11.6 million, capital expenditures of $1.8 million and investments in limited partnerships of $0.5 million, offset by the proceeds from the sale of three of the HCP properties in the amount of $4.5 million. In the first nine months of fiscal 1999, the Company's net cash used in investing activities was primarily from advances to the Triad Entities of $25.0 million and capital expenditures of $1.6 million, offset by the proceeds from the sale of one community in the amount of $2.7 million and distributions from partnerships of $0.9 million. The Company had net cash provided by financing activities of $90.8 million in first nine months of fiscal 2000, compared to net cash provided by financing activities of $8.3 million in the comparable period of fiscal 1999. For the first nine months of fiscal 2000, net cash provided by financing activities was primarily the result of increases in notes payable, net of note payments, of $97.5 million which primarily resulted from the financing of the Company's acquisition of eight ILM communities offset by distributions to minority partners of $3.1 million and deferred loan charges paid of $3.6 million. For the first nine months of fiscal 1999, net cash provided by financing activities was the result of increases in notes payable, net of note payments, of $9.1 million offset by distributions to minority partners and deferred loan charges paid of $0.9 million. The Company derives the benefits and bears the risks attendant to the communities it owns. The cash flows and profitability of owned communities depends on the operating results of such communities and are subject to certain risks of ownership, including the need for capital expenditures, financing and other risks such as those relating to environmental matters. The cash flows and profitability of the HCP's owned communities that are leased to third parties depend on the ability of the lessee to make timely lease payments. Four of these properties had been leased until the year 2001 to HealthSouth Rehabilitation Corp. ("HealthSouth"), which provides acute spinal injury intermediate care at the property, which is still operating. In August 1999, HealthSouth agreed to transfer control of two of these communities, both of which had been closed since 1997, to HCP. HealthSouth agreed, however, to continue making its full lease payments to HCP. In the third quarter of fiscal 1999, the main campus of one property was sold for $2.7 million, resulting in a gain from sale of approximately $0.8 million. Two small facilities not adjacent to the main campus and the other community were marketed for sale. During the first quarter of fiscal 2000, HCP sold the third of these communities to HealthSouth for $2.3 million, resulting in a gain of approximately $0.3 million. During the Company's third fiscal quarter the Company sold one community and one of the small facilities owned by HCP for $2.2 million, resulting in a combined net loss on sale of $0.7 million. While HealthSouth has shut down its remaining property, effective April 1, 2000, it continues to make full lease payments for all four properties. Except for three participation payments owed by one lessee, HCP's other lessees are current in their lease obligations. However, two lessees and their parent companies have filed for Chapter 11 bankruptcy in the United States Bankruptcy Court for the district of Delaware. At this time, it is uncertain if bankruptcy protection would disrupt future payments of lease obligations. Following termination of these leases, unless otherwise extended, the Company will either convert and operate the communities as assisted living and Alzheimer's care communities, attempt to sell the communities or evaluate other alternatives. HCP currently operates one of its communities. The cash flows and profitability of the Company's third-party management fees are dependent upon the revenues and profitability of the communities managed. While the management contracts are generally terminable only for cause, in certain cases contracts can be terminated upon the sale of a community, subject to the Company's rights to offer to purchase such community. The Company plans to continue to develop and acquire senior living communities. The development of senior living communities typically involves a substantial commitment of capital over a 12-month construction period during which time no revenues are generated, followed by a 14 to 18-month lease up period. The Company has entered into development and management agreements with the Triad Entities for the development and management of new senior living communities. The Triad Entities will own and finance the construction of the new communities. These communities are primarily Waterford communities. The Company typically receives a development fee of 4% of project costs, as well as reimbursement of expenses and overhead not to exceed 4% of project costs. In addition, when the properties become operational, the Company typically receives management fees in an amount equal to the greater of 5% of gross revenues or $5,000 per month per community, other fees relating to lease up, plus overhead reimbursement not to exceed 1% of gross revenue. The Company holds 5% to 19% limited partnership interests in each of the Triad Entities. The Company has the option to purchase the partnership interests of the other parties in the Triad Entities, except for Triad I, for an amount equal to the amount paid for the partnership interest by the other partners, plus a noncompounded return of 12% per annum. In addition, each Triad Entity, except Triad I, provides the Company with an option to purchase the community developed by the applicable partnership upon their completion for an amount equal to the fair market value (based on a third-party appraisal but not less than hard and soft costs and lease-up costs) of the community. In December 1999, Triad I completed a recapitalization in which an affiliate of Lehman Brothers purchased from a third party 80% of the limited partnership interests in Triad I. The Company continues to own a 19% limited partnership interest in Triad I. The Company has the option to purchase the Triad I communities prior to December 31, 2001 for an amount specified in the partnership agreement, has an option to purchase the partnership interest of the other partners for an amount specified in the partnership agreement and is subject to the buy-sell provisions of the partnership agreement. The Company will continue to develop and manage the communities in the Triad I partnership. The Company has made no determination as to whether it will exercise any of these purchase options. The Company will evaluate the possible exercise of each purchase option based on the business and financial factors that may exist at the time these options may be exercised. Each Triad Entity finances the development of new communities through a combination of equity funding, traditional construction loans and permanent financing with institutional lenders secured by first liens on the communities and unsecured loans from the Company. The Company loans may be prepaid without penalty. The financings from institutional lenders are secured by first liens on the communities, are solely the responsibility of the Triad Entities and are not guaranteed by the Company. The financing agreements the Triad Entities have with the institutional lenders also include the assignment to the lenders of the construction contracts and the development and management agreements with the Company. The management agreements contain an obligation of the Company to make operating deficit loans to the Triad Entities if other funding sources available to the Triad Entities have been fully exhausted. These operating deficit loan obligations include making loans to fund debt service obligations to the lenders.
The chart below sets forth information about Company loans made to the Triad Entities and financings from institutional lenders obtained by the Triad Entities (dollars in thousands): <TABLE> <CAPTION> Notes Receivable Construction Loan Facilities --------------------------------------------------- ---------------------------------------------- Balance Committed Sept. 30, Interest Entity Amount 2000 Maturity Rate Amount Type Lender ------ ------ ---- -------- ---- ------ ---- ------ <S> <C> <C> <C> <C> <C> <C> <C> Triad Senior Living I, L.P. $50,000 construction, Bank One GMAC (Triad I) $ -- $ 4,513(1) -- 8.0% $50,000 take-out Triad Senior Living II, L.P. September 25, construction, Key (Triad II) $15,000 $12,434 2003 10.5% $26,800 mini-perm Bank Triad Senior Living III, February 8, construction, Guaranty L.P. $15,000 $10,703 2004 10.5% $56,300 mini-perm Federal (Triad III) Triad Senior Living IV, L.P. December 30, construction, Compass (Triad IV) $10,000 $ 6,130 2003 10.5% $18,600 mini-perm Bank Triad Senior Living V, L.P. construction, Bank of (Triad V) $10,000 $ 5,088 June 30, 2004 12.0% $27,000 mini-perm America Triad Senior Living VI, L.P. October 1, (Triad VI) $ 3,000 $ 34 2004 12.0% $ -- -- -- </TABLE> (1) Pursuant to operating deficit loan obligations. ACQUISITION AND PENDING MERGER On August 15, 2000, the Company completed its merger with ILM Senior Living, Inc. ("ILM") and the acquisition of the Villa Santa Barbara property interest held by ILM II Senior Living, Inc. ("ILM II"). This transaction resulted in the Company acquiring ownership of eight senior living communities with a capacity of approximately 1,300 residents. The Company had managed the ILM communities since 1996 pursuant to a management agreement with ILM. The Company will continue to manage the five remaining ILM II communities pursuant to its existing management agreement. The merger was accounted for as a purchase and included total cash consideration for the eight communities of approximately $97.6 million, consisting of $87.5 million to the ILM shareholders and $10.1 million for ILM II's interest in the Villa Santa Barbara property. The consideration was agreed upon as the result of arm's-length negotiations between the parties to the merger and with ILM II. The Company also refinanced three of its existing communities in conjunction with the merger and repaid approximately $25.8 million of a $34.0 million line of credit with Bank One Texas, N.A., as agent, resulting in an amended loan facility of up to $9.0 million. GMAC Commercial Mortgage Corporation ("GMAC") provided approximately $102.0 million and Newman Financial Services, Inc. provided approximately $20.0 million of financing for the merger and the refinancing. The balance of the merger consideration and amounts necessary for the refinancing came from the Company's existing cash resources. The GMAC loans are for a five-year term, payable monthly, bear interest at LIBOR plus a spread of 240 basis points and are amortized over a twenty-five year period. The Newman loans are for a two-year term, bear interest at LIBOR plus a spread of 550 basis points with interest due monthly and the principal due at the loan maturity date. The Company has not completed its analysis of this merger transaction and as such the purchase accounting information disclosed in this report should be considered preliminary. As part of the above referenced transaction, the Company amended the partnership agreement for Triad Senior Living II, L.P. ("Triad II"), a partnership in which the Company owns a 19% interest, in order to allow the pledge as collateral for the Newman loans of such subsidiary's loans and interest in Triad II. The Company also purchased the $0.6 million loan held by Fleet National Bank ("Fleet") in which ILM II is the borrower. This loan is secured by the five communities owned by ILM II. The Company is continuing discussions with various financing sources in order to obtain the capital required to complete the merger with ILM II. In addition, the Company and ILM II are discussing the modifications of certain terms of the merger agreement. There can, however, be no assurance that such financing sources will be available on terms acceptable to the Company. As previously announced, on April 18, 2000, the Company reduced the merger consideration to the shareholders of ILM II to $67.6 million. The $10.1 million paid for ILM II's interest in the Villa Santa Barbara property is a part of this $67.6 million. The primary assets of ILM II are five senior living communities that have been managed by the Company under a management agreement since 1996. Under the amended merger agreement, ILM II will merge with and into a wholly owned direct subsidiary of the Company with the aggregate issued and outstanding shares of ILM II common stock receiving 100% of the merger consideration in cash. The merger is subject to certain other customary conditions including regulatory approvals. The Company a Current Report on filed Form 8-K on May 9, 2000, with a copy of the amendment to the amended merger agreement attached thereto. 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.
CAPITAL SENIOR LIVING CORPORATION 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, 2000 the Company had $191.1 million in outstanding debt comprised of various fixed and variable rate debt instruments of $60.9 million and $130.2 million, respectively. Changes in interest rates would affect the fair market value of the Company's fixed rate debt instruments but would not have an impact on the Company's earnings or cash flows. Fluctuations in interest rates on the Company's variable rate debt instruments, which are tied to either the LIBOR or the prime rate, would affect the Company's earnings and cash flows but would not affect the fair market value of the variable rate debt. For each percentage point change in interest rates the Company's annual interest expense would increase by approximately $1.3 million based on its current outstanding variable debt. The Company is planning to convert a portion of its variable rate loans to fixed rate debt during fiscal 2001.
CAPITAL SENIOR LIVING CORPORATION OTHER INFORMATION (continued) OTHER INFORMNATION PART II. OTHER INFORMATION Item 1. LEGAL PROCEEDINGS On or about October 23, 1998, Robert Lewis filed a putative class action complaint on behalf of certain holders of assignee interests (the "Assignee Interests") in NHP Retirement Housing Partners I Limited Partnership ("NHP") in the Delaware Court of Chancery against NHP, the Company, Capital Senior Living Properties 2-NHPCT, Inc. and Capital Realty Group Senior Housing, Inc. (collectively, the "Defendants"). Mr. Lewis purchased ninety Assignee Interests in NHP in February 1993 for $180. The complaint alleges, among other things, that the Defendants breached, or aided and abetted a breach of, the express and implied terms of the NHP Partnership Agreement in connection with the sale of four properties by NHP to Capital Senior Living Properties 2-NHPCT, Inc. The complaint seeks, among other relief, rescission of the sale of those properties and unspecified damages. The Company believes the complaint is without merit and is vigorously defending itself in this action. The Company has filed a Motion to Dismiss in this case, which is currently pending. The Company is unable to estimate the liability related to this claim, if any. The Company has pending claims incurred in the normal course of business, which, in the opinion of management, based on the advice of legal counsel, will not have a material effect on the financial statements of the Company. Item 2. CHANGES IN SECURITIES (And use of proceeds) Not Applicable Item 3. DEFAULTS UPON SENIOR SECURITIES Not Applicable Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable Item 5. OTHER INFORMATION Not Applicable
Item 6. EXHIBITS AND REPORTS ON FORM 8-K (A) Exhibits: 27.1Financial Data Schedule (B) Reports on Form 8-K (i) The Registrant filed a report on Form 8-K, dated August 30, 2000 to report the completion of the merger of ILM Senior Living, Inc. with and into Capital Senior Living ILM-A, Inc. pursuant to the Amended and Restated Agreement and Plan of Merger, dated as of October 19, 1999, as amended by and among the Company and ILM. (ii) The Registrant filed a report on Form 8-K/A, dated October 30, 2000 to provide the financial data related to the consummation of the merger of ILM Senior Living, Inc. with and into Capital Senior Living ILM-A, Inc. pursuant to the Amended and Restated Agreement and Plan of Merger, dated as of October 19, 1999, as amended by and among the Company and ILM. (iii) The Registrant filed an amendment to a report on Form 8-K/A, dated November 9, 2000, to amend certain items of disclosure contained in the financial statements, and the notes thereto, in a report on Form 8-K/A, dated October 30, 2000.
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 13, 2000