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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to ____________
Commission File Number: 1-13445
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CAPITAL SENIOR LIVING CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 75-2678809
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
14160 DALLAS PARKWAY, SUITE 300
DALLAS, TEXAS 75240
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code: (972) 770-5600
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Name of each exchange on which registered:
COMMON STOCK, $.01 PAR VALUE NEW YORK STOCK EXCHANGE
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the 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
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
The aggregate market value of 10,333,450 shares of the Registrant's
Common Stock held by nonaffiliates, based upon the closing price of the
Registrant's Common Stock as reported by the New York Stock Exchange on March
28, 2000 was approximately $38,750,438. For purposes of this computation, all
officers, directors and 10% beneficial owners of the Registrant are deemed to be
affiliates. Such determination should not be deemed an admission that such
officers, directors or 10% beneficial owners are, in fact, affiliates of the
Registrant. As of March 28, 2000, 19,717,347 shares of Common Stock, $.01 par
value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant's definitive Proxy Statement pertaining to the 2000
Annual Meeting of Stockholders (the "Proxy Statement") and filed or to be filed
not later than 120 days after the end of the fiscal year pursuant to Regulation
14A is incorporated herein by reference into Part III.
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CAPITAL SENIOR LIVING CORPORATION
TABLE OF CONTENTS
PAGE
NUMBER
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PART I
ITEM 1. BUSINESS....................................................................................1
ITEM 2. PROPERTIES.................................................................................19
ITEM 3. LEGAL PROCEEDINGS..........................................................................19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........................................20
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS........................................................................20
ITEM 6. SELECTED FINANCIAL DATA....................................................................22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS..................................................................24
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ................................33
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................................................33
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE...................................................................33
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.........................................33
ITEM 11. EXECUTIVE COMPENSATION.....................................................................34
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.............................34
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K...........................35
SIGNATURES..........................................................................................36
INDEX TO EXHIBITS...................................................................................E-1
PART I
ITEM 1. BUSINESS
OVERVIEW
Capital Senior Living Corporation (together with its subsidiaries, the
"Company") is one of the largest developers and operators of senior living
communities in the United States in terms of resident capacity. As of December
31, 1999, the Company owned interests in and/or operated 36 communities in 18
states with a capacity of approximately 5,900 residents, including 21
communities in which it owned interests and 15 communities that it managed for
third parties pursuant to multi-year management contracts. As of December 31,
1999, the Company was developing 23 new communities, which will have a capacity
of approximately 3,200 residents, and was expanding three existing communities
to accommodate approximately 300 additional residents. As of December 31, 1999,
the Company also operated one home care agency. Approximately 93% of the total
revenues for the senior living communities owned and managed by the Company as
of December 31, 1999 are derived from private pay sources. During 1999, the
communities that the Company operated and in which it owned interests had an
average occupancy rate of approximately 94% and its managed communities had an
average occupancy rate of approximately 95%. The Company and its predecessors
have provided senior living services since 1990.
The Company was incorporated in Delaware in October 1996 in
anticipation of its initial public offering. Simultaneously with the
consummation of its initial public offering, the Company and the Company's
founders engaged in a series of transactions (the "Formation Transactions"),
which resulted in the Company acquiring certain assets, entities and partnership
interests of its founders and entities affiliated with its founders. The primary
components of the Formation Transactions were as follows:
- The stock of Capital Senior Living, Inc., Capital Senior
Management 1, Inc., Capital Senior Management 2, Inc., Capital
Senior Development, Inc., and Quality Home Care, Inc. was
contributed by the Company's founders in exchange for
7,687,347 shares of the Company's common stock and notes
aggregating approximately $18.1 million. The primary assets of
these entities consisted of third-party management contracts,
development contracts and a home health care agency. The notes
were repaid with some of the proceeds of the Company's initial
public offering.
- The Company purchased substantially all of the assets of
Capital Senior Living Communities, L.P. ("CSLC") for the
assumption of approximately $71 million in debt (the "LBHI
Loan") and $5.8 million in cash. The LBHI Loan was repaid with
some of the proceeds of the Company's initial public offering.
The primary assets of CSLC were:
- four senior living communities - Cottonwood Village
in Cottonwood, Arizona; Harrison at Eagle Valley in
Indianapolis, Indiana; Towne Centre in Merrillville,
Indiana; and Canton Regency in Canton, Ohio;
- approximately 56% of the limited partnership
interests in HealthCare Properties, L.P. ("HCP"); and
- approximately 31% of certain notes (the "NHP Notes")
issued by NHP Retirement Housing Partners I Limited
Partnership ("NHP").
The primary assets of HCP consisted of: (i) approximately $9.9 million
in cash and cash equivalents; (ii) four physical rehabilitation facilities
located in Orlando, Florida, Nashville, Tennessee, Lancaster, South Carolina;
and Martin, Tennessee; and (iii) four skilled nursing facilities located in
Evansville, Indiana, Cambridge, Massachusetts, Fort Worth, Texas, and Austin,
Texas. The primary assets of NHP consisted of five senior living communities
located in Buffalo, New York, Sacramento, California (two communities), Detroit,
Michigan, and Boca Raton, Florida. The Company currently owns approximately 57%
of the limited partnership interests of HCP and 33% of the NHP Notes.
1
On September 30, 1998, the Company acquired four of the five senior
living communities from NHP for cash consideration of $40.7 million. The
purchase price for the properties was determined by independent appraisal. The
senior living communities acquired by the Company are The Atrium of Carmichael
in Carmichael, California, Crosswoods Oaks in Citrus Height, California, The
Heatherwood in Southfield, Michigan, and The Veranda Club in Boca Raton,
Florida. The Company has operated these communities under a long-term management
contract since 1992 and continues to manage NHP's remaining community, the
Amberleigh in Buffalo, New York.
On October 28, 1998, the Company acquired two senior living communities
from Gramercy Hill Enterprises ("Gramercy"), and Tesson Heights Enterprises
("Tesson"), for aggregate consideration of approximately $34 million. The senior
living communities acquired by the Company from Gramercy and Tesson are Gramercy
Hill in Lincoln, Nebraska and Tesson Heights, in St. Louis, Missouri.
The Company has entered into definitive Amended and Restated Agreements
and Plans of Merger with ILM Senior Living, Inc. ("ILM I") and ILM II Senior
Living, Inc. ("ILM II") to acquire these companies for a combined cash
consideration of approximately $172 million, and the assumption of liabilities.
The primary assets of ILM I and ILM II collectively are 13 senior living
communities that have been managed by the Company under management agreements
since 1996. Under the two merger agreements, both ILM I and ILM II would
separately merge with and into the Company's wholly owned direct subsidiary with
the aggregate issued and outstanding shares of ILM I and ILM II common stock
eligible to receive $172 million in cash. Both mergers have been approved by the
boards of directors of each company and each transaction requires the approval
of the applicable shareholders of either ILM I or ILM II. The mergers also are
subject to certain other customary conditions, including regulatory approvals,
and are expected to be completed during the second or third quarter of 2000.
Neither merger is dependent upon the occurrence of the other and there can be no
assurances that the shareholders of either ILM I or ILM II will approve their
respective merger.
INDUSTRY BACKGROUND
The senior living industry encompasses a broad and diverse range of
living accommodations and supportive services that are provided primarily to
persons 75 years of age or older. For the elderly who require limited services,
independent living residences supplemented at times by home health care, offers
a viable option. Most independent living communities typically offer community
living together with a basic services package consisting of meals, housekeeping,
laundry, 24-hour staffing, transportation, social and recreational activities
and health care monitoring.
As a senior's need for assistance increases, care in an assisted living
residence is often preferable and more cost-effective than home-based care or
nursing home care. Typically, assisted living represents a combination of
housing and 24- hour a day personal support services designed to aid elderly
residents with activities of daily living ("ADLs"), such as ambulation, bathing,
dressing, eating, grooming, personal hygiene, and monitoring or assistance with
medications. Certain assisted living residences may also provide assistance to
residents with low acuity medical needs, or may offer higher levels of personal
assistance for incontinent residents or residents with Alzheimer's disease or
other cognitive or physical frailties. Generally, assisted living residents
require higher levels of care than residents of independent living residences
and retirement living centers, but require lower levels of care than patients in
skilled nursing facilities. For seniors who need the constant attention of a
skilled nurse or medical practitioner, a skilled nursing facility may be
required.
The senior living industry is highly fragmented and characterized by
numerous small operators. Moreover, the scope of senior living services varies
substantially from one operator to another. Many smaller senior living providers
do not operate purpose-built residences, do not have professional training for
staff and provide only limited assistance with ADLs. The Company believes that
few senior living operators provide the required comprehensive range of senior
living services designed to permit residents to "age in place" within the
community as they develop further physical or cognitive frailties.
The Company believes that the senior living industry will require large
capital infusions over the next 30 years to meet the growing demand for senior
living facilities. The National Investment Conference has estimated that gross
capital expenditures for the senior living marketplace will grow from $86
billion in 1996 to $126 billion in 2005 and to $490 billion in 2030, in order to
accommodate increasing demand. As a result, the Company believes there will
continue to be significant growth opportunities in the senior living market for
providing services to the elderly.
2
The Company believes that a number of demographic, regulatory, and
other trends will contribute to the continued growth in the senior living
market, the Company's targeted market for future development and expansion,
including the following:
CONSUMER PREFERENCE
The Company believes that senior living communities are increasingly
becoming the setting preferred by prospective residents and their families for
the care of the elderly. Senior living offers residents greater independence and
allows them to "age in place" in a residential setting, which the Company
believes results in a higher quality of life than that experienced in more
institutional or clinical settings.
The likelihood of living alone increases with age. Most of this
increase is due to an aging population in which women outlive men. In 1993,
eight out of 10 noninstitutionalized elderly who lived alone were women.
According to the United States Bureau of Census, based on 1993 data, for women
the likelihood of living alone increases from 32% for 65- to 74-year-olds to 57%
for those women aged 85 and older. Men show similar trends with 13% of the 65-
to 74-year-olds living alone rising to 29% of the men aged 85 and older living
alone. Societal changes, such as increased divorce rates and the growing numbers
of persons choosing not to marry, have further increased the number of Americans
living alone. This growth in the number of elderly living alone has resulted in
an increasing demand for services that historically have been provided by a
spouse, other family members or live-in caregivers.
DEMOGRAPHICS
The primary market for the Company's senior living services is
comprised of persons aged 75 and older. This age group is one of the fastest
growing segments of the United States population and is expected to more than
double by the year 2030. The population of seniors aged 85 and over has
increased from approximately 3.1 million in 1990 to over 4.3 million by 2000, an
increase of 39%. As the number of persons aged 75 and over continues to grow,
the Company believes that there will be corresponding increases in the number of
persons who need assistance with ADLs. According to industry analyses,
approximately 19% of persons aged 75 to 79, approximately 24% of persons aged 80
to 84 and approximately 45% of persons aged 85 and older need assistance with
ADLs. According to the Alzheimer's Association the number of persons afflicted
with Alzheimer's disease is expected to grow from the current 4.0 million to
14.0 million by the year 2050.
RESTRICTED SUPPLY OF NURSING BEDS
The majority of states in the United States have adopted Certificate of
Need or similar statutes generally requiring that, prior to the addition of new
skilled nursing beds, the addition of new services, or the making of certain
capital expenditures, a state agency must determine that a need exists for the
new beds or the proposed activities. The Company believes that this Certificate
of Need process tends to restrict the supply and availability of licensed
nursing facility beds. High construction costs, limitations on government
reimbursement for the full costs of construction, and start-up expenses also act
to constrain growth in the supply of such facilities. At the same time, nursing
facility operators are continuing to focus on improving occupancy and expanding
services to subacute patients generally of a younger age and requiring
significantly higher levels of nursing care. As a result, the Company believes
that there has been a decrease in the number of skilled nursing beds available
to patients with lower acuity levels and that this trend should increase the
demand for the Company's senior living communities, including particularly the
Company's assisted living communities and skilled nursing facilities.
COST-CONTAINMENT PRESSURES
In response to rapidly rising health care costs, governmental and
private pay sources have adopted cost containment measures that have reduced
admissions and encouraged reduced lengths of stays in hospitals and other acute
care settings. The federal government had previously acted to curtail increases
in health care costs under Medicare by limiting acute care hospital
reimbursement for specific services to pre-established fixed amounts. Private
insurers have begun to limit reimbursement for medical services in general to
predetermined charges, and managed care organizations (such as health
maintenance organizations) are attempting to limit hospitalization costs by
negotiating for discounted rates for hospital and acute care services and by
monitoring and reducing hospital use. In response, hospitals are discharging
3
patients earlier and referring elderly patients, who may be too sick or frail to
manage their lives without assistance, to nursing homes and assisted living
residences where the cost of providing care is typically lower than hospital
care. In addition, third-party payors are increasingly becoming involved in
determining the appropriate health care settings for their insureds or clients,
based primarily on cost and quality of care. Based on industry data, the typical
day-rate in an assisted living facility is two thirds of the cost for comparable
care in a nursing home.
SENIOR AFFLUENCE
The average net worth of senior citizens is higher than non-senior
citizens, partially as a result of accumulated equity through home ownership.
The Company believes that a substantial portion of the senior population thus
has significant resources available for their retirement and long-term care
needs. The Company's target population is comprised of moderate- to upper-income
seniors who have, either directly or indirectly through familial support, the
financial resources to pay for senior living communities, including an assisted
living alternative to traditional long-term care.
REDUCED RELIANCE ON FAMILY CARE
Historically, the family has been the primary provider of care for
seniors. The Company believes that the increase in the percentage of women in
the work force, the reduction of average family size, and the increased mobility
in society is reducing the role of the family as the traditional caregiver for
aging parents. The Company believes that these factors will make it necessary
for many seniors to look outside the family for assistance as they age.
OPERATING STRATEGY
The Company's operating strategy is to provide high quality, senior
living services at an affordable price to its residents while achieving and
sustaining a strong, competitive position within its chosen markets, as well as
continuing to enhance the performance of its operations. The Company is
implementing its operating strategy principally through the following methods.
CONTINUE TO PROVIDE BROAD RANGE OF HIGH-QUALITY PERSONALIZED CARE
Central to the Company's operating strategy is its focus on providing
high-quality care and services that are personalized and tailored to meet the
individual needs of each community resident. The Company's residences and
services are designed to provide a broad range of care that permits residents to
"age in place" as their needs change and as they develop further physical or
cognitive frailties. By creating an environment that maximizes resident autonomy
and provides individualized service programs, the Company seeks to attract
seniors at an earlier stage, before they need the higher level of care provided
in a skilled nursing facility. The Company also maintains a comprehensive
quality assurance program designed to ensure the satisfaction of its residents
and their family members. The Company conducts annual resident satisfaction
surveys, which allow residents at each community to express whether they are
"very satisfied," "satisfied" or "dissatisfied" with all major areas of a
community -- housekeeping, maintenance, activities and transportation, food
service, security and management. In 1999 and 1998, the Company achieved a 94%
and 95% overall approval rating (satisfied or very satisfied), respectively,
from its residents in this polling of its residents' satisfaction.
OFFER SERVICES ACROSS A RANGE OF PRICING OPTIONS
The Company's range of products and services is continually expanding
to meet the evolving needs of its residents. The Company has developed a menu of
products and service programs which may be further customized to serve both the
moderate and upper income markets of a particular targeted geographic area. By
offering a range of pricing options that are customized for each target market,
the Company believes that it can develop synergies, economies of scale, and
operating efficiencies in its efforts to serve a larger percentage of the
elderly population within a particular geographic market.
4
MAINTAIN AND IMPROVE OCCUPANCY RATES
The Company continually seeks to maintain and improve occupancy rates
by: (i) retaining residents as they "age in place" by extending optional care
and service programs; (ii) attracting new residents through the on-site
marketing program focus on residents and family members; (iii) selecting sites
in underserved markets; (iv) aggressively seeking referrals from professional
community outreach sources, including area religious organizations, senior
social service programs, civic and business networks, as well as the medical
community; and (v) continually refurbishing and renovating its communities.
IMPROVE OPERATING EFFICIENCIES
The Company seeks to improve operating efficiencies at its communities
by continuing to actively monitor and manage operating costs. By having an
established national portfolio of communities with regional management in place,
the Company believes it has established a platform to achieve operating
efficiencies through economies of scale in the purchase of bulk items, such as
food, and in the spreading of fixed costs, such as corporate overhead, over a
larger revenue base, and to provide more effective management supervision and
financial controls. The Company's development strategy includes regional
clustering of new communities to achieve further efficiencies.
EMPHASIZE EMPLOYEE TRAINING AND RETENTION
The Company devotes special attention to the hiring, screening,
training, supervising, and retention of its employees and caregivers to ensure
that quality standards are achieved. In addition to the normal on-site training,
the Company conducts annual national management meetings and encourages sharing
of expertise among managers. The Company's commitment to the total quality
management concept is emphasized throughout its training program. This
commitment to the total quality management concept means identification of the
"best practices" in the senior living market and communication of those best
practices to our executive directors and their staff. The identification of best
practices is realized by a number of means, including: emphasis on regional and
executive directors keeping up with professional trade journals; interaction
with other professionals and consultants in the senior living industry through
seminars, conferences, and consultations; visits to other properties; leadership
and participation at national and local trade organization events; and
information derived from marketing studies and resident satisfaction surveys.
This information is continually processed by regional managers and the executive
directors and communicated to the Company's employees as part of their training.
The Company's staffing each community with an executive director allows it to
hire more professional employees at these positions, while the Company's
developed career path helps it to retain the professionals it hires. The Company
hires an executive director for each of its communities and provides them with
autonomy, responsibility and accountability. The Company believes its commitment
to and emphasis on employee training and retention differentiates the Company
from many of its competitors.
UTILIZE COMPREHENSIVE INFORMATION SYSTEMS
The Company employs comprehensive proprietary information systems to
manage financial and operating data in connection with the management of its
communities. Utilizing the Company's PC-based network, the Company is able to
collect and monitor on a regular basis key operating data for its communities.
Reports are routinely prepared and distributed to on-site, district and regional
managers for use in managing the profitability of the Company's communities. The
Company's management information systems provide senior management with the
ability to identify emerging trends, monitor and control costs and develop
current pricing strategies. The Company believes that its proprietary
information systems are scalable to support future growth.
SENIOR LIVING SERVICES
The Company provides a wide array of senior living services to the
elderly at its communities, including independent living, assisted living (with
special programs and living units at some of its communities for residents with
Alzheimer's and other forms of dementia), skilled nursing, and home care
services. By offering a variety of services and encouraging the active
participation of the resident and the resident's family and medical consultants,
the Company is able to customize its service plan to meet the specific needs and
desires of each resident. As a result, the Company believes that it is able to
maximize customer satisfaction and avoid the high cost of delivering unnecessary
services to residents.
5
The Company's operating philosophy is to provide affordable, quality
living communities and services to senior citizens and deliver a continuum of
care for its residents as their needs change over time. This continuum of care,
which integrates independent living and assisted living and is bridged by home
care, sustains residents' autonomy and independence based on their physical and
mental abilities. As residents age, in many of the Company's communities, they
are able to obtain the additional needed services within the same community,
avoiding the disruptive and often traumatic move to a different facility.
INDEPENDENT LIVING SERVICES
The Company provides independent living services to seniors who do not
yet need assistance or support with ADLs, but who prefer the physical and
psychological comfort of a residential community that offers health care and
other services. As of December 31, 1999, the Company had ownership interests in
14 communities and managed an additional 14 communities which provide
independent living services, with an aggregate capacity for 2,360 and 2,140
residents, respectively.
Independent living services provided by the Company include daily
meals, transportation, social and recreational activities, laundry,
housekeeping, 24-hour staffing and health care monitoring. The Company also
fosters the wellness of its residents by offering health screenings (such as
blood pressure checks), periodic special services (such as influenza
inoculations), dietary and similar programs, as well as ongoing exercise and
fitness classes. Classes are given by health care professionals to keep
residents informed about health and disease management. Subject to applicable
government regulation, personal care and medical services are available to
independent living residents through either the community staff or through the
Company's or independent home care agencies. The Company's independent living
residents pay a fee ranging from $1,295 to $3,150 per month, in general,
depending on the specific community, program of services, size of the unit, and
amenities offered. The Company's contracts with its independent living residents
are generally for a term of one year and are typically terminable by the
resident upon 30 days' notice.
ASSISTED LIVING SERVICES
The Company offers a wide range of assisted living care and services 24
hours per day, including personal care services, support services, and
supplemental services. As of December 31, 1999, the Company had ownership
interests in nine communities, and managed an additional 10 communities that
provide assisted living services, with an aggregate capacity for 341 and 412
residents, respectively. The residents of the Company's assisted living
residences generally need help with some or all ADLs, but do not require the
more acute medical care traditionally given in nursing homes. Upon admission to
the Company's assisted living communities, and in consultation with the
resident, the resident's family and medical consultants, each resident is
assessed to determine his or her health status, including functional abilities,
and need for personal care services, and completes a lifestyles assessment to
determine the resident's preferences. From these assessments, a care plan is
developed for each resident to ensure that all staff members who render care
meet the specific needs and preferences of each resident where possible. Each
resident's care plan is reviewed periodically to determine when a change in care
is needed.
The Company has adopted a philosophy of assisted living care that
allows a resident to maintain a dignified independent lifestyle. Residents and
their families are encouraged to be partners in their care and to take as much
responsibility for their well being as possible. The basic types of assisted
living services offered by the Company include the following:
PERSONAL CARE SERVICES. These services include assistance with ADLs
such as ambulation, bathing, dressing, eating, grooming, personal
hygiene, and monitoring or assistance with medications.
SUPPORT SERVICES. These services include meals, assistance with social
and recreational activities, laundry services, general housekeeping,
maintenance services, and transportation services.
SUPPLEMENTAL SERVICES. These services include extra transportation
services, personal maintenance, extra laundry services, non-routine
care services, and special care services, such as services for
residents with Alzheimer's and other forms of dementia. Certain of
these services require an extra charge in addition to the pricing
levels described below.
6
In pricing its services, the Company has developed the following three
levels or tiers of assisted living care:
Level I typically provides for minimum levels of care and service, for
which the Company generally charges a monthly fee per resident ranging
from $1,340 to $3,140 depending upon unit size and the project design
type. Typically, Level I residents need minimal assistance with ADLs.
Level II provides for relatively higher levels and increased frequency
of care, for which the Company generally charges a monthly fee per
resident ranging from $1,600 to $3,310, depending upon the unit size
and the project design type. Typically, Level II residents require
moderate assistance with ADLs and may need additional personal care,
support, and supplemental services.
Level III provides for the highest level of care and service, for which
the Company generally charges a monthly fee per resident ranging from
$1,910 to $3,475, depending upon the unit size and the project design
type. Typically, Level III residents are either very frail or impaired
and utilize many of the Company's services on a regular basis.
The Company maintains programs and special units at some of its
assisted living communities for residents with Alzheimer's and other forms of
dementia, which provide the attention, care and services needed to help those
residents maintain a higher quality of life. Specialized services include
assistance with ADLs, behavior management and a lifeskills based activities
program, the goal of which is to provide a normalized environment that supports
residents' remaining functional abilities. Whenever possible, residents assist
with meals, laundry and housekeeping. Special units for residents with
Alzheimer's and other forms of dementia are located in a separate area of the
community and have their own dining facilities, resident lounge areas, and
specially trained staff. The special care areas are designed to allow residents
the freedom to ambulate as they wish while keeping them safely contained within
a secure area with a minimum of disruption to other residents. Special
nutritional programs are used to help ensure caloric intake is maintained in
residents. Resident fees for these special units are dependent on the size of
the unit, the design type and the level of services provided.
SKILLED NURSING SERVICES
In its skilled nursing facilities, the Company provides traditional
long-term care through 24-hour-per-day skilled nursing care by registered
nurses, licensed practical nurses and certified nursing assistants. The Company
also offers a comprehensive range of restorative nursing and rehabilitation
services in its communities including, but not limited to, physical,
occupational, speech and medical social services. As of December 31, 1999, the
Company had ownership interests in seven facilities and managed an additional
facility that provides nursing services, with an aggregate capacity for 746 and
60 residents, respectively.
HOME CARE SERVICES
As of December 31, 1999, the Company provided private pay, home care
services to clients at one of its senior living communities through the
Company's on-site, home care agency and made private pay, home care services
available to clients at a majority of its senior living communities through
third-party providers. The Company believes that the provision of private pay,
home care services is an attractive adjunct to its independent living services
because it allows the Company to provide more services to its residents as they
age in place and increase the length of stay in the Company's communities. In
addition, the Company will make available to residents certain customized
physician, dentistry, podiatry and other health-related services that may be
offered by third-party providers.
OPERATING COMMUNITIES
The table below sets forth certain information with respect to senior
living communities owned, leased, and managed by the Company as of December 31,
1999. The Company is expanding certain of these communities, primarily to add
assisted living units. See "Growth Strategies -- Expand Existing Communities."
These expansions, along with the availability of private pay home care services,
allow the Company to broaden its continuum of care services to allow residents
to age in place.
7
RESIDENT CAPACITY (1)
--------------------------------
OWNER- COMMENCEMENT OF
COMMUNITY LOCATION IL AL SN TOTAL SHIP(2) OPERATIONS (3)
---------------------- -------------- ----- ----- ------ ------ --------- -----------------
OWNED:
Amberleigh............. Buffalo, NY 365 29 -- 394 33% 1/92
Atrium of Carmichael... Sacramento, CA 156 -- -- 156 100% 1/92
Cambridge Nursing
Home................. Cambridge, MA -- -- 120 120 57% 7/93
Canton Regency......... Canton, OH 164 34 50 248 100% 3/91
Cottonwood Village..... Cottonwood, AZ 135 47 -- 182 100% 3/91
Crosswood Oaks......... Sacramento, CA 127 -- -- 127 100% 1/92
Gramercy Hill.......... Lincoln, NE 101 59 -- 160 100% 10/98
Harrison at Eagle Indianapolis, IN 138 -- -- 138 100% 3/91
Valley................. (4)
Heatherwood............ Detroit, MI 188 -- -- 188 100% 1/92
Waterford.............. Mesquite, TX 174 -- -- 174 19% 9/99
Waterford.............. San Antonio, TX 136 -- -- 136 19% 4/99
Waterford.............. Shreveport, LA 136 -- -- 136 19% 3/99
Tesson Heights......... St Louis, MO 140 58 -- 198 100% 10/98
Towne Centre........... Merrillville, IN 165 34 64 263 100% 3/91
Veranda Club........... Boca Raton, FL 235 -- -- 235 100% 1/92
------- ------- ------- -----
Subtotal............. 2,360 261 234 2,855
MANAGED:
BUCKNER COMMUNITIES
Buckner Parkway Place.. Houston, TX 243 82 60 385 1/98
Buckner Westminster
Place................ Longview, TX 117 -- -- 117 4/96
ILM COMMUNITIES(5)
Crown Pointe........... Omaha, NE 163 -- -- 163
Crown Villa............ Omaha, NE -- 73 -- 73 8/96
Independence Village... East Lansing, MI 162 -- -- 162 8/96
Independence Village... Peoria, IL 173 -- -- 173 8/96
Independence Village... Raleigh, NC 155 22 -- 177 8/96
Independence Village... Winston-Salem, NC 145 16 -- 161 8/96
Overland Park Place.... Kansas City, KS 126 25 -- 151 8/96
The Palms.............. Fort Myers, FL 235 20 -- 255 8/96
Rio Las Palmas......... Stockton, CA 142 50 -- 192 8/96
Sedgwick Plaza......... Wichita, KS 117 54 -- 171 8/96
Villa at Riverwood..... St. Louis, MO 140 -- -- 140 8/96
Villa Santa Barbara.... Santa Barbara, CA 87 38 -- 125 8/96
West Shores............ Hot Springs, AR 135 32 -- 167 8/96
--------- --------- ------- -----
Subtotal............. 2,140 412 60 2,612
--------- -------- -------- ------
OWNED AND LEASED TO
OTHERS(6):
Cane Creek(7).......... Martin, TN -- 8 36 44 57% N/A
Crenshaw Creek......... Lancaster, SC -- 36 -- 36 57% N/A
Hearthstone............ Austin, TX -- -- 120 120 57% N/A
McCurdy................ Evansville, IN -- -- 236 236 57% N/A
Sandybrook............. Orlando, FL -- 36 -- 36 57% N/A
Trinity Hills.......... Fort Worth, TX -- -- 120 120 57% N/A
------- ------- --------- -----
Subtotal ............ -- 80 512 634
Grand Total.......... 4,500 753 806 6,059
========= ======== ======= ======
- ----------
(1) Independent living (IL) residences, assisted living (AL) residences
(including areas dedicated to residents with Alzheimer's and other
forms of dementia) and skilled nursing (SN) beds.
(2) In the case of a community shown as 33% owned, this represents the
Company's ownership of approximately 33% of the outstanding NHP Notes
that are secured by the property. In the case of those communities
shown as approximately 57% owned, this represents the Company's
ownership of approximately 57% of the limited partner interests in HCP.
In the case of those communities shown as approximately 19% owned, this
represents the Company's ownership of approximately 19% of the limited
partnership interests in Triad I.
(3) Indicates the date on which the Company acquired each of its owned
communities or commenced operating its managed communities. The Company
operated certain of its communities pursuant to management agreements
prior to acquiring the communities.
(4) The Company's home care agency is on-site at the Harrison at Eagle
Valley community.
(5) Communities the Company currently manages but is in the process of
acquiring.
(6) Represents communities owned by the Company and leased to third parties
pursuant to master leases under which the Company receives rent
regardless of whether the units are occupied. These leases were in
place at the time the Company acquired its interest in these
communities.
(7) This property was sold to a third party on January 11, 2000.
8
THIRD-PARTY MANAGEMENT CONTRACTS
The Company is a party to two separate property management agreements
(the "ILM Management Agreements") with ILM I Lease Corporation and ILM II Lease
Corporation, corporations formed by ILM I and ILM II (collectively, "ILM") that
operate 13 senior living communities. The ILM Management Agreements commenced on
July 29, 1996. The term of the ILM Management Agreement with ILM I Lease
Corporation is being extended on a month-to-month basis from its original
termination date of December 31, 1999. The ILM Management Agreement with ILM II
Lease Corporation will expire on December 31, 2000, subject to extension under
certain circumstances, but not beyond July 29, 2001. Under the terms of the ILM
Management Agreements, the Company earns a base management fee equal to 4% of
the gross operating revenues of the communities under management (as defined),
and is also eligible to receive an incentive management fee equal to 25% of the
amount by which the average monthly net cash flow of the communities (as
defined) for the 12-month period ending on the last day of each calendar month
exceeds a specified base amount. The ILM Management Agreements are terminable
upon the sale of the related communities, subject to the Company's rights to
offer to purchase the communities. In the event of a sale, the Company has the
right to make the first and last offer with respect to the purchase of the
communities subject to the ILM Management Agreements. The Company earned a total
of $1,202,966 and $790,281, respectively, under the two ILM Management
Agreements for the year ended December 31, 1999, which includes the incentive
management fee, and $980,159 and $969,068, respectively, for the year ended
December 31, 1998.
On October 19, 1999, the Company entered into separate Amended and
Restated Agreements and Plans of Merger with ILM I and ILM II. Upon completion
of such mergers, the Company will own the 13 communities currently managed under
the ILM Management Agreements and will terminate the ILM Management Agreements.
The Amended and Restated Agreements and Plans of Merger amended and restated the
definitive Agreements and Plans of Merger the Company entered into with ILM I
and ILM II, on February 7, 1999.
The Company is party to two separate property management agreements
(the "Buckner Agreements") with Buckner Retirement Services, Inc., a
not-for-profit corporation that operates two senior living communities. The
Buckner Agreements commenced on April 1, 1996 and January 1, 1998 and expire on
March 31, 2001 and December 31, 2002, respectively, except that either party may
terminate the agreements for cause under limited circumstances. Under the terms
of the Buckner Agreement for Buckner Parkway Place, the Company earns a base
management fee of $33,000 per month. Under the terms of the Buckner Westminster
Place Agreement, the Company earns a base management fee of $6,050 per month.
Also, in the case of both of the Buckner Agreements, the Company is also
eligible to receive a productivity reward equal to 5% of the Gross Revenues
generated during the immediately preceding month that exceed $660,000 and
$121,000, respectively. Both agreements have a productivity reward limit of 20%
of the base management fee per month. The amounts that exceed the limit are
deferred. Pursuant to the terms of the Buckner Agreements, the Company has a
right of first refusal with respect to purchasing the communities subject to
these agreements.
GROWTH STRATEGIES
The Company believes that the fragmented nature of the senior living
industry and the limited capital resources available to many small, private
operators provide an attractive opportunity for the Company to expand its
existing base of senior living operations. The Company believes that its current
operations throughout the United States serve as the foundation on which the
Company can build senior living networks in targeted geographic markets and
thereby provide a broad range of high quality care in a cost-efficient manner.
The following are the principal elements of the Company's growth
strategy:
DEVELOP NEW SENIOR LIVING COMMUNITIES
GENERAL. The Company intends to continue to expand its operations
through the development, construction, marketing and management of new senior
living communities in selected markets which provide a quality lifestyle that is
affordable to a large segment of seniors. The Company's national presence
provides it with extensive research and experience in various markets which
serve as the basis for the formulation of its development strategy in the
selection of new markets. The Company's development plan calls for the
identification of multiple markets in which construction can occur within the
Company's targeted time frame and budget. The Company has developed a list of
target markets and
9
submarkets based upon local market conditions, the availability of development
sites and local construction capabilities, the existence of development barriers
to entry, the overall health and growth trends of the local economies, and the
presence of a significant elderly population.
The Company's senior management has extensive experience in senior
living development. The Company has an integrated internal development approach
pursuant to which the Company's management and other personnel (including
designers and architects, market analysts, and construction managers) locate
sites for, develop, and open its communities. Personnel who are experienced in
site selection conduct extensive market and site-specific feasibility studies
prior to the Company's committing significant financial resources to new
projects. The Company believes it can expand its operations into new markets and
strengthen its presence within its existing markets utilizing its existing
residence models, such as the Waterford model described herein.
TRIAD ENTITIES. The Company is currently developing new senior living
communities pursuant to arrangements with Triad Senior Living, Inc., and its
affiliates, which are unrelated third parties (the "Triad Entities"). Sixteen of
the 23 communities currently under development are Waterford communities that
are being developed through the Triad Entities. The Waterford community model is
designed to provide middle income residents with a senior living community
having amenities typical of higher-priced communities, through more efficient
space design, emphasizing common areas and providing more efficient layouts of
the living areas.
The Waterford design may be configured in a number of different ways
thereby providing the Company with flexibility in adapting to a particular
geographic market, neighborhood, site or care need. In addition, the Waterford
design has been developed to facilitate the prompt, efficient, cost-effective
delivery of senior care and personal services. Site requirements for the various
designs range from 4.5 to 6.0 acres.
The Company believes that the Waterford designs meet the desire of many
of the Company's residents to move into a new residence that approximates, as
nearly as possible, the comfort of their prior home. The Company also believes
that its designs achieve several other objectives, including:
- lessening the trauma of change for residents and their
families;
- facilitating resident mobility and caregiver access;
- enhancing operating efficiencies;
- enhancing the Company's ability to match its products to
targeted markets; and
- differentiating the Company from its competitors.
The Waterford communities being developed through the Triad Entities
are as set out below:
NUMBER OF ESTIMATED COST
WATERFORD APPROXIMATE OF COMPLETION COMPANY LOAN
ENTITY COMMUNITIES RESIDENT CAPACITY AND LEASE-UP COMMITMENT(2)
-------------- -------------- ------------------- ------------------ ----------------
Triad I(1) 2 310 $23 - $26 million --
Triad II 3 428 $30 - $35 million $15 million
Triad III 6 816 $65 - $70 million $10 million
Triad IV 2 290 $22 - $24 million $10 million
Triad V 3 408 $33 - $36 million $10 million
- ---------
(1) Triad I is developing two additional communities which are not
Waterford communities.
(2) The Company has operating deficit loan obligations in management
agreements in addition to the committed amounts shown relating to
unsecured loans from the Company.
The development agreements between each Triad Entity and the Company
generally provide for a development fee of 4% of project costs, plus
reimbursements for expenses and overhead not to exceed 4% of project costs. The
Triad Entities also enter into management agreements with the Company providing
for management fees to the Company in an amount equal to the greater of 5% of
gross revenues or $5,000 per month per community, plus overhead reimbursements
10
not to exceed 1% of gross revenues. The Company has the option to purchase the
partnership interests of the other partners in the Triad Entities for an amount
equal to the amount paid for the partnership interest by the other partners,
plus a noncompounded return of 12% per annum, except for Triad I. The property
management agreements also provide the Company with an option to purchase the
communities developed by the Triad Entities, other than Triad I, upon their
completion for an amount equal to the fair market value, based on a third-party
appraisal but not less than hard and soft costs and lease-up costs. 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 for an investment of $12,000,000. Lehman Brothers affiliate's
investment enabled Triad I to repay the Company approximately $9,000,000 in
loans. The Company increased its equity contribution in Triad I to $3,000,000
and continues to own a 19% limited partnership interest in Triad I. The Company
has the option to purchase the Triad I communities for an amount specified in
the partnership agreement. The Company will continue to develop and manage the
communities in Triad I. 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 upon the business and financial
factors which may exist at the time those options may be exercised.
The Company recently announced that the capital market and financial
environment has reduced the availability of attractive financing for joint
venture development. Consequently, the Company will develop future communities
in which it has an ownership interest on its balance sheet to capture 100% of
the benefits from lower construction costs and higher appreciation potential.
The Company has entered into a strategic alliance with Buckner
Retirement Services, Inc. ("Buckner") to develop, market and manage senior
living communities developed by Buckner. As of December 31, 1999, one site in
Beaumont, Texas has been purchased for the development and operation of
independent living, assisted living and skilled nursing care. The management
agreement between Buckner and the Company generally provides for a base
management fee plus a productivity reward equal to 5% of the gross revenues
generated during the immediately preceding month that exceed a base figure. The
productivity reward has a limit of 20% of the base management fee per month. The
amounts that exceed the limit are deferred. The term is for five years
commencing with the certificate of occupancy. The development agreements
generally provide for a development fee of 7% of project costs.
The Company is party to a property management agreement with LCOR
Incorporated ("LCOR") to market and manage four independent living and assisted
living communities being developed by LCOR. The sites covered by the agreement
are: Trumbull, Connecticut; Libertyville, Illinois; Summit, New Jersey; and
Naperville, Illinois. The management agreements between LCOR and the Company
generally provide for a base management fee of the greater of $15,000 per month
or 5% of gross revenues plus an incentive fee equal to 25% of the excess cash
flow over budgeted amounts. The terms are for 10 years with a five year renewal
at the Company's option. The Company is also entitled to a fee of $50,000 for
development consulting services for each development and a monthly marketing fee
of approximately $10,000 per month for each community, which generally covers
the period prior to the expected opening of the communities, usually six to nine
months.
The Company has also entered into a strategic alliance with The Emmaus
Calling, Inc. ("Emmaus") to develop, market and manage a senior living community
developed by Emmaus. As of December 31, 1999, two sites have been purchased for
the development and operation of assisted living communities. The sites are in
Mesquite, Texas and Houston, Texas. The management agreements between Emmaus and
the Company provide for a base management fee of $8,000 per month adjusted
yearly by the difference between the Consumer Price Index for the year less the
Consumer Price Index for the year of completion. The term is for 15 years.
As of December 31, 1999, there were 23 communities under development.
Seven communities were being developed for Buckner, Emmaus and LCOR, where the
Company will manage these communities under management agreements and has no
equity interest, and 16 of these communities were being developed with the Triad
Entities where the Company will manage these communities under management
agreements and where the Company has a 10% to 19% limited partner interest in
each of the Triad Entities. The following table summarizes information regarding
those developments that the Company expects to be completed through 2001.
11
RESIDENT CAPACITY
------------------------------
SCHEDULED
LOCATION OF DEVELOPMENT COMPLETION IL AL SN TOTAL STATUS(1)
- ----------------------- ---------- -- -- -- ----- ---------
TRIAD I
Fort Worth, TX............. 1st Half 2000 174 - - 174 Construction
San Antonio, TX............ 1st Half 2000 136 - - 136 Construction
---- ---- ---- ----
310 - - 310
---- ---- ---- ----
TRIAD II
Fairfield, OH.............. 2nd Half 2000 136 - - 136 Construction
Oklahoma City, OK.......... 2nd Half 2000 136 - - 136 Construction
Plano, TX.................. 2nd Half 2000 111 45 - 156 Construction
---- --- --- ----
383 45 - 428
---- --- --- ----
TRIAD III
Columbia, SC............... 2nd Half 2000 136 - - 136 Construction
Deer Park, TX.............. 2nd Half 2000 136 - - 136 Construction
Jackson, MS................ 2nd Half 2000 136 - - 136 Construction
Mansfield, OH.............. 2nd Half 2000 136 - - 136 Construction
Pantego, TX................ 2nd Half 2000 136 - - 136 Construction
South Bend, IN............. 2nd Half 2000 136 - - 136 Construction
---- --- --- ----
816 - - 816
---- --- --- ----
TRIAD IV
North Richland Hills, TX 1st Half 2001 136 - - 136 Construction
Richardson, TX............. 1st Half 2001 109 45 0 154 Development
---- --- --- ----
245 45 0 290
---- --- --- ----
TRIAD V
Greenville, SC............. 2nd Half 2001 136 - - 136 Development
Miami, OH.................. 2nd Half 2001 136 - - 136 Development
Springfield, MO............ 1st Half 2001 136 - - 136 Development
---- --- --- ----
408 - - 408
---- --- --- ----
BUCKNER
Beaumont, TX............... 2nd Half 2000 124 46 30 200 Construction
---- --- --- ----
EMMAUS CALLING
Houston, TX................ 2nd Half 2001 - 85 - 85 Development
Mesquite, TX............... 1st Half 2000 - 105 - 105 Construction
----- ---- --- ----
- 190 - 190
----- ---- --- ----
LCOR
Libertyville, IL........... 2nd Half 2000 140 - - 140 Construction
Naperville, IL............. 2nd Half 2000 135 - - 135 Construction
Summit, NJ................. 1st Half 2000 - 90 - 90 Construction
Trumbull, CT............... 1st Half 2000 136 30 - 166 Construction
---- ---- --- ----
411 120 - 531
---- ---- --- ----
Total 2,697 446 30 3,173
===== === == =====
- ------------------------
(1) "Development" indicates that development activities, such as surveys,
preparation of architectural plans, or zoning processes, have commenced,
but construction has not commenced. "Construction" indicates that
construction activities, such as groundbreaking activities, exterior
construction or interior build-out have commenced.
12
EXPAND EXISTING COMMUNITIES
The Company plans to expand certain of its existing communities to
include additional independent living and assisted living residences (including
special programs and living units for residents with Alzheimer's and other forms
of dementia). As of December 31, 1999, the Company had three expansion projects
under construction, representing an aggregate increase in capacity to
accommodate an additional 176 residents. Of these three expansion projects, two
are at communities in which the Company owns an interest and manages under
multi-year agreements, and one community that the Company manages for a third
party. The costs of the expansion of managed communities is borne by the
community owner and not by the Company. However, with respect to the two
expansion projects in which the Company has an ownership interest, the Company
will manage the expansion and have rights to purchase the expansion facilities.
The expansion of existing senior living communities allows the Company to create
operating efficiencies and capitalize on its local presence, community
familiarity and reputation in markets in which the Company operates.
The table below summarizes information regarding the expansion of certain
of our existing senior living communities as of December 31, 1999.
SCHEDULED RESIDENT CAPACITY
COMMUNITY LOCATION COMPLETION IL AL TOTAL STATUS
- --------- -------- ---------- --- --- ----- ------
TRIAD I
Canton Regency................... Canton, OH 1st half 2000 - 62 62 Construction
Towne Centre..................... Merrilville, IN 1st half 2000 - 60 60 Construction
---- ---- -----
- 122 122
---- ---- ----
BUCKNER
Buckner Westminister Village..... Longview, TX 1st half 2000 24 30 54 Construction
--- --- ----
Total 24 152 176
=== ==== ====
PURSUE STRATEGIC ACQUISITIONS
The Company intends to continue to pursue single or portfolio acquisitions
of senior living communities and, to a lesser extent, other assisted living and
long-term care communities. Through strategic acquisitions, the Company plans to
enter new markets or acquire communities in existing markets as a means to
increase market share, augment existing clusters, strengthen its ability to
provide a broad range of care, and create operating efficiencies. As the
industry continues to consolidate, the Company believes that opportunities will
arise to acquire other senior living companies. The Company believes that the
current fragmented nature of the senior living industry, combined with the
Company's financial resources, national presence, and extensive contacts within
the industry, should provide it with the opportunity to evaluate a number of
potential acquisition opportunities. In reviewing acquisition opportunities, the
Company will consider, among other things, geographic location, competitive
climate, reputation and quality of management and communities, and the need for
renovation or improvement of the communities.
EXPAND REFERRAL NETWORKS
The Company intends to continue to develop relationships with local and
regional hospital systems, managed care organizations, and other referral
sources to attract new residents to the Company's communities. In certain
circumstances these relationships may involve strategic alliances or joint
ventures. The Company believes that such arrangements or alliances, which could
range from joint marketing arrangements to priority transfer agreements, will
enable it to be strategically positioned within the Company's markets if, as the
Company believes, senior living programs become an integral part of the evolving
health care delivery system.
13
OPERATIONS
CENTRALIZED MANAGEMENT
The Company centralizes its corporate and other administrative functions so
that the community-based management and staff can focus their efforts on
resident care. The Company maintains centralized accounting, finance, human
resources, training, and other operational functions at its national corporate
office in Dallas, Texas. The Company's corporate office is generally responsible
for: (i) establishing Company-wide policies and procedures relating to, among
other things, resident care and operations; (ii) performing accounting
functions; (iii) developing employee training programs and materials; (iv)
coordinating human resources; (v) coordinating marketing functions; and (vi)
providing strategic direction. In addition, financing, development, construction
and acquisition activities, including feasibility and market studies, and
community design, development, and construction management, are conducted by the
Company's corporate offices.
The Company seeks to control operational expenses for each of its
communities through standardized management reporting and centralized controls
of capital expenditures, asset replacement tracking, and purchasing for larger
and more frequently used supplies. Community expenditures are monitored by
regional and district managers who are accountable for the resident satisfaction
and financial performance of the communities in their region.
REGIONAL MANAGEMENT
The Company provides oversight and support to each of its senior living
communities through experienced regional and district managers. A district
manager will oversee the marketing and operations of two to four communities
clustered in a small geographic area. A regional manager will cover a larger
geographic area consisting of five to twelve communities. In most cases, the
district and regional managers will office out of our senior living communities.
Currently there are regional managers based in the Northeast, Southeast,
Midwest, Southwest and West regions.
The executive director at each community reports to a regional or district
manager. The regional and district managers report directly to the President and
Chief Operating Officer of the Company. The district and regional managers make
regular site visits to each of their communities. The site visits involve a
physical plant inspection; quality assurance; staff training; financial and
systems audits; regulatory compliance; and team building.
COMMUNITY-BASED MANAGEMENT
An executive director manages the day-to-day operations at each senior
living community, including oversight of the quality of care, delivery of
resident services, and monitoring of financial performance, and is responsible
for all personnel, including food service, maintenance, activities, security,
assisted living, housekeeping, and, where applicable, nursing. In most cases,
each community also has department managers who direct the environmental
services, nursing or care services, business management functions, dining
services, activities, transportation, housekeeping, and marketing functions.
The assisted living and skilled nursing components of the senior living
communities are managed by licensed professionals, such as a nurse and/or a
licensed administrator. These licensed professionals have many of the same
operational responsibilities as the Company's executive directors, but their
primary responsibility is to oversee resident care. Many of the Company's senior
living communities and some of its skilled nursing facilities are part of a
campus setting, which includes independent living. This campus arrangement
allows for cross-utilization of certain support personnel and services,
including administrative functions, that results in greater operational
efficiencies and lower costs than free-standing facilities.
The Company actively recruits personnel to maintain adequate staffing
levels at its existing communities and hires new staff for new or acquired
communities prior to opening. The Company has adopted comprehensive recruiting
and screening programs for management positions that utilize corporate office
team interviews and thorough background and reference checks. The Company offers
system-wide training and orientation for all of its employees at the community
level through a combination of Company-sponsored seminars and conferences.
QUALITY ASSURANCE
14
Quality assurance programs are coordinated and implemented by the Company's
corporate and regional staff. The Company's quality assurance is targeted to
achieve maximum resident and resident family member satisfaction with the care
and services delivered by the Company. The Company's primary focus in quality
control monitoring includes routine in-service training and performance
evaluations of care givers and other support employees. Additional quality
assurance measures include:
RESIDENT AND RESIDENT FAMILY INPUT. On a routine basis the Company provides
residents and family members the opportunity to provide valuable input regarding
the day-to-day delivery of services. On-site management at each community has
fostered and encouraged active resident councils and resident committees who
meet independently. These resident bodies meet with on-site management on a
monthly basis to offer input and suggestions to the quality and delivery of
services. Additionally, at each community the Company conducts annual resident
satisfaction surveys to further monitor the satisfaction levels of both
residents and family members. These surveys are sent directly to the corporate
headquarters for tabulation and distribution to on-site staff and residents. For
1999 and 1998, the Company achieved a 94% and 95% approval rating, respectively,
from its residents. For any departmental area of service scoring below a 90%, a
plan of correction is developed jointly by on-site, regional and corporate staff
for immediate implementation.
REGULAR COMMUNITY INSPECTIONS. On a monthly basis, a community inspection
is conducted by regional and/or corporate staff. Included as part of this
inspection is the monitoring of the overall appearance and maintenance of the
community interiors and grounds. The inspection also includes monitoring staff
professionalism and departmental reviews of maintenance, housekeeping,
activities, transportation, marketing, administration, and food and health care
services, if applicable. The monthly inspection also includes the observation of
residents in their daily activities and community compliance with government
regulations.
INDEPENDENT SERVICE EVALUATIONS. The Company engages the services of
outside professional independent consulting firms to evaluate various components
of the community operations. These services include "mystery shops," competing
community analysis, pricing recommendations and product positioning. This
provides management with valuable unbiased product and service information. A
plan of action regarding any areas requiring improvement or change is
implemented based on information received. At communities where health care is
delivered, these consulting service reviews include the on-site handling of
medications, record keeping, and general compliance with all governmental
regulations.
MARKETING
Each community is staffed by on-site marketing directors and additional
marketing staff depending on the community size. The primary focus of the
on-site marketing staff is to create awareness of the Company and its services
among prospective residents and family members, professional referral sources
and other key decision makers. The marketing efforts incorporate an aggressive
marketing plan to include monthly and annual goals for leasing, new lead
generation, prospect follow up, community outreach, and resident and family
referrals. Additionally, the marketing plan includes a calendar of promotional
events and a comprehensive media program. On-site marketing departments perform
a competing community assessment twice annually. Corporate and regional
marketing directors monitor the on-site marketing departments' effectiveness and
productivity on a monthly basis. Routine detailed marketing department audits
are performed on an annual basis or more frequently if deemed necessary.
Corporate and regional personnel assist in the development of marketing
strategies for each community and produce creative media, assist in direct mail
programs and necessary marketing collateral. Ongoing sales training of on-site
marketing staff is implemented by corporate and regional marketing directors.
In the case of new development, the corporate and regional staff develop a
comprehensive community outreach program that is implemented at the start of
construction. A marketing pre-lease program is developed and on-site marketing
staff are hired and trained to begin the program implementation six to nine
months prior to the community opening. Extensive use of media including radio,
television, print, direct mail and telemarketing is implemented during this
pre-lease phase.
After the community is opened and sustaining occupancy levels are attained,
the on-site marketing staff is more heavily focused on resident and resident
family referrals, as well as professional referrals. A maintenance program of
print media and direct mail is then implemented.
15
GOVERNMENT REGULATION
Changes in existing laws and regulations, adoption of new laws and
regulations and new interpretations of existing laws and regulations could have
a material effect on the Company's operations. Failure by the Company to comply
with applicable regulatory requirements could have a material adverse effect on
the Company's business, financial condition, and results of operations.
Accordingly, the Company monitors legal and regulatory developments on local and
national levels.
The health care industry is subject to extensive regulation and frequent
regulatory change. At this time, no federal laws or regulations specifically
regulate assisted or independent living residences. While a number of states
have not yet enacted specific assisted living regulations, certain of the
Company's assisted living communities are subject to regulation, licensing,
Certificate of Need and permitting by state and local health care and social
service agencies and other regulatory authorities. While such requirements vary
from state to state, they typically relate to staffing, physical design,
required services, and resident characteristics. The Company believes that such
regulation will increase in the future. In addition, health care providers are
receiving increased scrutiny under anti-trust laws as integration and
consolidation of health care delivery increases and affects competition. The
Company's communities are also subject to various zoning restrictions, local
building codes, and other ordinances, such as fire safety codes. Failure by the
Company to comply with applicable regulatory requirements could have a material
adverse effect on the Company's business, financial condition, and results of
operations. Regulation of the assisted living industry is evolving. The Company
is unable to predict the content of new regulations and their effect on its
business. There can be no assurance that the Company's operations will not be
adversely affected by regulatory developments.
The Company believes that its communities are in substantial compliance
with applicable regulatory requirements. However, in the ordinary course of
business, one or more of the Company's communities could be cited for
deficiencies. In such cases, the appropriate corrective action would be taken.
To the Company's knowledge, no material regulatory actions are currently pending
with respect to any of the Company's communities.
Under the Americans with Disabilities Act of 1990, all places of public
accommodation are required to meet certain federal requirements related to
access and use by disabled persons. A number of additional federal, state, and
local laws exist that also may require modifications to existing and planned
properties to permit access to the properties by disabled persons. While the
Company believes that its communities are substantially in compliance with
present requirements or are exempt therefrom, if required changes involve a
greater expenditure than anticipated or must be made on a more accelerated basis
than anticipated, additional costs would be incurred by the Company. Further
legislation may impose additional burdens or restrictions with respect to access
by disabled persons, the costs of compliance with which could be substantial.
In addition, the Company is subject to various federal, state and local
environmental laws and regulations. Such laws and regulations often impose
liability whether or not the owner or operator knew of, or was responsible for,
the presence of hazardous or toxic substances. The costs of any required
remediation or removal of these substances could be substantial and the
liability of an owner or operator as to any property is generally not limited
under such laws and regulations and could exceed the property's value and the
aggregate assets of the owner or operator. The presence of these substances or
failure to remediate such contamination properly may also adversely affect the
owner's ability to sell or rent the property, or to borrow using the property as
collateral. Under these laws and regulations, an owner, operator or an entity
that arranges for the disposal of hazardous or toxic substances, such as
asbestos-containing materials, at a disposal site may also be liable for the
costs of any required remediation or removal of the hazardous or toxic
substances at the disposal site. In connection with the ownership or operation
of its properties, the Company could be liable for these costs, as well as
certain other costs, including governmental fines and injuries to persons or
properties. The Company has completed Phase I environmental audits of
substantially all of the communities in which the Company owns interests, and
such surveys have not revealed any material environmental liabilities that exist
with respect to these communities.
Under various federal, state, and local environmental laws, ordinances, and
regulations, a current or previous owner or operator of real estate may be
required to investigate and clean up hazardous or toxic substances or petroleum
product releases at such property, and may be held liable to a governmental
entity or to third parties for property damage and for investigation and clean
up costs. The Company is not aware of any environmental liability with respect
to any of its owned, leased, or managed communities that the Company believes
would have a material adverse effect on its business,
16
financial condition, or results of operations. The Company believes that its
communities are in compliance in all material respects with all federal, state,
and local laws, ordinances, and regulations regarding hazardous or toxic
substances or petroleum products. The Company has not been notified by any
governmental authority, and is not otherwise aware of any material
non-compliance, liability, or claim relating to hazardous or toxic substances or
petroleum products in connection with any of the communities the Company
currently operates.
The Company believes that the structure and composition of government and,
specifically, health care regulations will continue to change and, as a result,
regularly monitors developments in the law. The Company expects to modify its
agreements and operations from time to time as the business and regulatory
environments change. While the Company believes it will be able to structure all
its agreements and operations in accordance with applicable law, there can be no
assurance that its arrangements will not be successfully challenged.
COMPETITION
The senior living industry is highly competitive, and the Company expects
that all segments of the industry will become increasingly competitive in the
future. Although there are a number of substantial companies active in the
senior living industry and in the markets in which the Company operates, the
industry continues to be very fragmented and characterized by numerous small
operators. The Company competes with Alterra Healthcare Corporation, American
Retirement Corporation, Brookdale Living Communities, CareMatrix Corp., Holiday
Retirement Corporation, Marriott Senior Living Services, and Sunrise Assisted
Living, Inc. The Company believes that the primary competitive factors in the
senior living industry are: (i) reputation for and commitment to a high quality
of service; (ii) quality of support services offered (such as food services);
(iii) price of services; (iv) physical appearance and amenities associated with
the communities; and (v) location. The Company competes with other companies
providing independent living, assisted living, skilled nursing, home health
care, and other similar service and care alternatives, some of whom may have
greater financial resources than the Company. Because seniors tend to choose
senior living communities near their homes, the Company's principal competitors
are other senior living and long-term care communities in the same geographic
areas as the Company's communities. The Company also competes with other health
care businesses with respect to attracting and retaining nurses, technicians,
aides, and other high quality professional and non-professional employees and
managers.
EMPLOYEES
As of December 31, 1999, the Company employed approximately 1,861 persons,
of which approximately 1,005 were full-time employees (approximately 47 of whom
are located at the Company's corporate offices) and 856 are part-time employees.
None of the Company's employees is currently represented by a labor union and
the Company is not aware of any union organizing activity among its employees.
The Company believes that its relationship with its employees is good.
EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table sets forth certain information concerning each of the
Company's executive officers and key employees as of December 31, 1999:
NAME AGE POSITION(S) WITH THE COMPANY
- ---- ---- ----------------------------
James A. Stroud........................ 49 Chairman of the Board and Chairman and Secretary of the
Company
Lawrence A. Cohen...................... 46 Vice Chairman and Chief Executive Officer
Keith N. Johannessen................... 43 President and Chief Operating Officer
Ralph A. Beattie....................... 50 Executive Vice President and Chief Financial Officer
Rob L. Goodpaster...................... 46 Vice President -- National Marketing
David W. Beathard, Sr.................. 52 Vice President -- Operations
David R. Brickman...................... 41 Vice President and General Counsel
David G. Suarez........................ 47 Vice President -- Development
17
Paul T. Lee............................ 34 Vice President -- Finance
Jerry D. Lee........................... 39 Corporate Controller
Robert F. Hollister.................... 44 Controller -- Property
JAMES A. STROUD has served as a director and Chief Operating Officer of the
Company and its predecessors since January 1986. He currently serves as Chairman
of the Board, Chairman, and Secretary of the Company. Mr. Stroud also serves on
the boards of various educational and charitable organizations, and in varying
capacities with several trade organizations, including as a member of the
Founder's Council and board of directors of the Assisted Living Federation of
America. Mr. Stroud also serves as an Advisory Group member to the National
Investment Conference. Mr. Stroud was the past President and Member of the board
of directors of the National Association for Senior Living Industry Executives.
He also was a Founder of the Texas Assisted Living Association and serves as a
member of its board of directors. Mr. Stroud has earned a Masters in Law, is a
licensed attorney and is also a Certified Public Accountant. Mr. Stroud has had
positions with businesses involved in senior living for 15 years.
LAWRENCE A. COHEN has served as a director and Vice Chairman since November
1996. He served as Chief Financial Officer from November 1996 to May 1999 and
has served as Chief Executive Officer since May 1999. From 1991 to 1996, Mr.
Cohen served as President and Chief Executive Officer of Paine Webber Properties
Incorporated, which controlled a real estate portfolio having a cost basis of
approximately $3.0 billion, including senior living facilities of approximately
$110.0 million. From 1991 to 1998 Mr. Cohen was President and a member of the
boards of directors of ILM and ILM II. Mr. Cohen serves as a member of the
Corporate Finance Committee of the NASD Regulation, Inc., and was a founding
member of the executive committee of the Board of the American Seniors Housing
Association. Mr. Cohen has earned a Masters in Law, is a licensed attorney and
is also a Certified Public Accountant. Mr. Cohen has had positions with
businesses involved in senior living for 15 years.
KEITH N. JOHANNESSEN has served as President of the Company and its
predecessors since March 1994, and previously served as Executive Vice President
since May 1993. Mr. Johannessen has served as a director and Chief Operating
Officer since May 1999. From 1992 to 1993, Mr. Johannessen served as Senior
Manager in the health care practice of Ernst & Young. From 1987 to 1992, Mr.
Johannessen was Executive Vice President of Oxford Retirement Services, Inc. Mr.
Johannessen has served on the State of the Industry and Model Assisted Living
Regulations Committees of the American Seniors Housing Association. Mr.
Johannessen has been active in operational aspects of senior housing for 21
years.
RALPH A. BEATTIE joined the Company as Executive Vice President and Chief
Financial Officer in May 1999. From 1997 to 1999, he served as an Executive Vice
President and the Chief Financial Offer of Universal Sports America, Inc., which
was honored as the number one growth company in Dallas for 1998. For the eight
years prior to that he was an Executive Vice President and the Chief Financial
Officer for Haggar Clothing Company, during which time Haggar successfully
completed its initial public offering. Mr. Beattie has earned his Masters of
Business Administration and is both a Certified Management Accountant and a
Certified Financial Planner.
ROB L. GOODPASTER has served as Vice President - National Marketing of the
Company and its predecessors since December 1992. From 1990 to 1992, Mr.
Goodpaster was National Director for Marketing for Autumn America, an owner and
operator of senior housing facilities. Mr. Goodpaster is a member of the Board
of Directors of the National Association For Senior Living Industries. Mr.
Goodpaster has been active in the operational, development and marketing aspects
of senior housing for 23 years.
DAVID W. BEATHARD, SR. has served as Vice President - Operations of the
Company and its predecessors since August 1996. From 1992 to 1996, Mr. Beathard
owned and operated a consulting firm which provided operational, marketing, and
feasibility consulting regarding senior housing facilities. Mr. Beathard has
been active in the operational, sales and marketing, and construction oversight
aspects of senior housing for 25 years.
DAVID R. BRICKMAN has served as Vice President and General Counsel of the
Company and its predecessors since July 1992. From 1989 to 1992, Mr. Brickman
served as in-house counsel with LifeCo Travel Management Company, a corporation
that provided travel services to U.S. corporations. Mr. Brickman has earned a
Masters of Business Administration and a Masters in Health Administration. Mr.
Brickman has either practiced law or performed in-house counsel functions for 13
years.
18
DAVID G. SUAREZ has served as Vice President - Development since October
1998. From 1996 to 1998, Mr. Suarez served as Project Manager for the Western
Group of Columbia/HCA. Prior to that, Mr. Suarez served as Vice President of
Development for PDC Facilities, a healthcare design-build developer. Mr. Suarez
has been in the healthcare industry in development for 20 years. His
architectural and construction management degrees provide experience and
expertise in the Company's site selection process, building design and
budgeting, and construction methods and material procedures for the Company's
senior living communities.
PAUL T. LEE has served as Vice President - Finance since February 1999.
From 1992 to 1998, Mr. Lee served in various management positions of Chief Auto
Parts Inc. which was one of the nation's largest automotive aftermarket retail
chains. From 1995 to 1998, he held the position of Assistant Treasurer. Prior to
joining Chief Auto Parts, Mr. Lee held various positions in the finance
department of Brice Foods, Inc. from 1988 to 1992.
JERRY D. LEE, a Certified Public Accountant, has served as Corporate
Controller since April 1999. Prior to joining the Company, Mr. Lee served as the
Senior Vice President of Finance, from 1997 to 1999, for Universal Sports
America, Inc., which produced sporting events and provided sports marketing
services for collegiate conferences and universities. From 1984 to 1997, Mr. Lee
held various accounting management positions with Haggar Clothing Company. Mr.
Lee is a member of the American Institute of Certified Public Accountants and is
also a member of the Texas Society of Certified Public Accountants.
ROBERT F. HOLLISTER, a Certified Public Accountant, has served as Property
Controller for the Company and its predecessors since April 1992. From 1985 to
1992, Mr. Hollister was Chief Financial Officer and Controller of Kavanaugh
Securities, Inc., a National Association of Securities Dealers broker dealer.
Mr. Hollister is a Certified Financial Planner. Mr. Hollister is a member of the
American Institute of Certified Public Accountants and is also a member of the
Texas Society of Certified Public Accountants.
ITEM 2. PROPERTIES
The executive and administrative offices of the Company are located at
14160 Dallas Parkway, Suite 300, Dallas, Texas 75240, and consist of
approximately 20,000 square feet. The lease on the premises extends through
August 31, 2002. The Company also leases an executive office space in New York,
New York pursuant to a monthly lease agreement. The Company believes that its
corporate office facilities are adequate to meet its requirements through at
least fiscal 2000 and that suitable additional space will be available, as
needed, to accommodate further physical expansion of corporate operations.
As of December 31, 1999, the Company owned, leased and/or managed the
senior living communities referred to in Item 1 above.
ITEM 3. 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 90 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 these 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 any 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.
The provision of personal and health care services entails an inherent risk
of liability. In recent years, participants in the senior living and health care
services industry have become subject to an increasing number of lawsuits
alleging
19
negligence or related legal theories, many of which involve large claims and
result in the incurrence of significant defense costs. The Company currently
maintains property, liability and professional medical malpractice insurance
policies for the Company's owned and managed communities under a master
insurance program in amounts and with such coverages and deductibles that the
Company believes are within normal industry standards based upon the nature and
risks of the Company's business, and the Company believes that such insurance
coverage is adequate. The Company also has an umbrella excess liability
protection policy in the amount of $15.0 million per location. There can be no
assurance that a claim in excess of the Company's insurance will not arise. A
claim against the Company not covered by, or in excess of, the Company's
insurance could have a material adverse effect upon the Company. In addition,
the Company's insurance policies must be renewed annually. There can be no
assurance that the Company will be able to obtain liability insurance in the
future or that, if such insurance is available, it will be available on
acceptable terms.
Under various federal, state, and local environmental laws, ordinances, and
regulations, a current or previous owner or operator of real estate may be
required to investigate and clean up hazardous or toxic substances or petroleum
product releases at such property, and may be held liable to a governmental
entity or to third parties for property damage and for investigation and clean
up costs. The Company is not aware of any environmental liability with respect
to any of its owned, leased, or managed communities that it believes would have
a material adverse effect on the Company's business, financial condition, or
results of operations. The Company believes that its communities are in
compliance in all material respects with all federal, state, and local laws,
ordinances, and regulations regarding hazardous or toxic substances or petroleum
products. The Company has not been notified by any governmental authority, and
is not otherwise aware of any material non-compliance, liability, or claim
relating to hazardous or toxic substances or petroleum products in connection
with any of the communities it currently operates.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the Company's security holders
during the fourth quarter ended December 31, 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
(a) The Company's shares of common stock are listed for trading on the New
York Stock Exchange ("NYSE") under the symbol "CSU." The following table sets
forth, for the periods indicated, the high and low sales prices for the
Company's common stock, as reported on the NYSE. At December 31, 1999 there were
approximately 3,900 shareholders of record of the Company's common stock.
YEAR HIGH LOW
1998
First Quarter................. $ 14 $ 8 5/8
Second Quarter................ 15 1/2 11 1/2
Third Quarter................. 12 11/16 5 1/8
Fourth Quarter................ 14 3/4 9 1/2
1999
First Quarter................. $15 $ 6 3/4
Second Quarter................ 11 11/16 6 7/8
Third Quarter................. 11 3/16 7
Fourth Quarter................ 7 7/16 4 3/4
It is the policy of the Company's Board of Directors to retain all future
earnings to finance the operation and expansion of the Company's business.
Accordingly, the Company has not and does not anticipate declaring or paying
cash dividends on the Common Stock in the foreseeable future. The payment of
cash dividends in the future will be at the sole discretion of the Company's
Board of Directors and will depend on, among other things, the Company's
earnings,
20
operations, capital requirements, financial condition, restrictions in
then existing financing agreements, and other factors deemed relevant by the
Board of Directors.
(b) Recent Sales of Unregistered Securities. Information with respect to
this Item is set forth above under the caption "Item 1. Business--Overview." The
issuance therein described of the Company's Common Stock to Messrs. Jeffrey L.
Beck, James A. Stroud (including a trust) and Lawrence A. Cohen in the Formation
Transactions in exchange for the capital stock of certain contributed entities
was carried out in reliance on the exemption from registration contained in
Section 4(2) of the Securities Act of 1933, as amended, pursuant to a binding
written agreement entered into prior to the filing of a registration statement
filed in connection with the Company's initial public offering.
(c) Use of Proceeds. Not Applicable.
21
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial data of the Company. The
selected financial data for the years ended December 31, 1999, 1998, 1997, 1996
and 1995 are derived from the audited consolidated financial statements of the
Company.
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ------------ ------------ ------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Statements of Income Data:
Revenues:
Resident and health
care revenue........... $41,071 $25,988 $22,159 $14,616 $14,109
Rental and lease income 4,304 4,281 4,276 1,101 1,231
Unaffiliated management
services revenue... 2,695 2,465 1,920 801 -
Affiliated management
services revenue... 456 1,327 1,378 2,708 2,778
Unaffiliated
development fees... 1,341 1,234 804 673 -
Affiliated development
fees 14,085 7,473 173 - -
------ --------- ---------- ----------- -------------
Total revenues..... 63,952 42,768 30,710 19,899 18,118
------ -------- --------- -------- ----------
Expenses:
Operating expenses..... 24,470 17,067 16,701 10,656 10,287
General and
administrative
expenses(1)........ 9,212 6,094 7,042 5,613 4,293
Provision for bad debts 15,896 500 43 22 71
Depreciation and
amortization....... 4,671 2,734 2,118 1,481 1,776
----- -------- --------- -------- ---------
Total expenses..... 54,249 26,395 25,904 17,772 16,427
------ ------- -------- ------- --------
Income from operations. 9,703 16,373 4,806 2,127 1,691
Other income (expense):
Interest income........ 5,822 4,939 3,186 432 368
Interest expense....... (7,089) (1,922) (2,022) (221) (278)
Gain on sale of
properties............. 748 422 - 438 -
Equity in earnings on
investments...... - - - 459 -
Other.................. - - 440 42 -
------------- ------------ ---------- ---------- ------------
Income before income
taxes and minority
interest in
consolidated
partnerships....... 9,184 19,812 6,410 3,277 1,781
(Provision) benefit for
income taxes(2)..... (2,992) (7,476) (793) - (18)
------- --------- ---------- ----------- ----------
Income before minority
interest in
consolidated
partnerships........ 6,192 12,336 5,617 3,277 1,763
Minority interest in
consolidated
partnerships........ (1,354) (379) (1,936) (1,224) (760)
------- --------- --------- --------- ----------
Net income.............. $4,838 $11,957 $ 3,681 $ 2,053 $ 1,003
====== ======= ======== ======== ========
Net income per share:
Basic.................. $0.25 $ 0.61 $ 0.33
===== ======== =========
Diluted................ $0.24 $ 0.61 $ 0.33
===== ======== =========
Weighted average shares
outstanding
Basic.................. 19,717 19,717 11,150
====== ====== =========
Diluted................ 19,806 19,717 11,150
====== ====== =========
Pro forma net income
data
(unaudited)(3):
Net income.............. $ 3,681 $ 2,053
Pro forma income
taxes............... (965) (811)
---------- ---------
Pro forma net income.... $ 2,716 $ 1,242
========== =========
22
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
($ IN THOUSANDS)
Balance Sheet Data:
Cash and cash equivalents.............. $32,988 $35,827 $48,125 $10,819 $10,017
Working capital........................ 46,973 (9,026)(4) 44,690 9,567 6,784
Total assets........................... 221,876 205,267 117,371 33,203 29,747
Long-term debt, excluding current
portion............................. 92,416 32,671 7,575 201 337
Equity................................. 109,549 104,516 92,560 17,201 14,447
- ----------
(1) General and administrative expenses include officers' salaries of
$914,000, $670,000, $3,342,000, $3,372,000 and $2,976,000 for the years
ended December 31, 1999, 1998, 1997, 1996 and 1995, respectively. Prior
to November 1997, these amounts were primarily composed of salaries and
bonuses paid to the founders and were based in part on federal income
tax regulations regarding distributions of closely held corporations
and S corporations. Effective with the Company's initial public
offering, these federal income tax regulations no longer applied to the
Company. Compensation of the founders since October 1, 1997 has been
based on the founders' employment agreements.
(2) A provision for income taxes was recorded by the Company from inception
through February 1, 1995. No provision for income taxes has been
recorded from February 1, 1995 through completion of the Formation
Transactions as the operating companies included in the historical
financial statements, prior to the Company's initial public offering,
were S corporations or partnerships and accordingly were not subject to
income taxes during the period.
(3) Pro forma income taxes have been calculated based on the assumption
that the S corporations and partnerships were subject to income taxes.
Pro forma income tax expense has been calculated using statutory
federal and state tax rates, estimated at 39.5%.
(4) The Company refinanced $47,700,000 of mortgage loans reflected as short
term debt in fiscal 1998 to long term fixed rate mortgage loans in
fiscal 1999.
23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The following discussion and analysis addresses the Company's results
of operations on a historical consolidated basis for the years ended December
31, 1999, 1998, and 1997. The following should be read in conjunction with the
Company's historical consolidated financial statements and the selected
financial data contained elsewhere in this report.
The Company is one of the largest operators and developers of senior
living communities in the United States in terms of resident capacity. The
Company's operating strategy is to provide high quality senior living services
at an affordable price to its residents, while achieving and sustaining a
strong, competitive position within its chosen markets, as well as to continue
to enhance the performance of its operations. The Company provides a wide array
of senior living services to the elderly at its communities, including
independent living, assisted living (with special programs and living units at
some of its communities for residents with Alzheimer's and other forms of
dementia), skilled nursing, and home care services.
The Company completed its initial public offering in November 1997 in
conjunction with a series of transactions that resulted in the Company acquiring
various companies, partnership interests and assets from the Company's founders
and entities affiliated with its founders. These transactions are collectively
called the "Formation Transactions." Because certain of the entities and assets
acquired in the Formation Transactions were subchapter S corporations,
partnership interests or other flow-through entities for tax purposes, and
because certain debt obligations were assumed in the Formation Transactions and
subsequently repaid with some of the proceeds from the Company's initial public
offering, the year-to-year changes in the Company's financial statements are not
directly comparable.
During the years 1990 through 1999, the Company acquired interests in
and continues to own 21 communities and expanded its senior living management
services by entering into management service contracts on 15 communities for
three independent third-party owners and commenced providing development and
construction management services for new residence properties in addition to
adding a home care service agency.
The Company generates revenue from a variety of sources. For the year
ended December 31, 1999, the Company's revenue was derived as follows: 64.2%
from the operation of 11 owned communities that were operated by the Company;
6.7% from lease rentals from triple net leases of three skilled nursing
facilities and four physical rehabilitation centers; 4.9% from management fees
arising from management services provided for four affiliate owned senior living
communities and 15 third-party owned senior living communities; and 24.1% from
development fees earned for managing the development and construction of new
senior living communities for third parties.
The Company believes that the factors affecting the financial
performance of communities managed under contracts with third parties do not
vary substantially from the factors affecting the performance of owned and
leased communities, although there are different business risks associated with
these activities.
The Company's third-party management fees are primarily based on a
percentage of gross revenues. As a result, the cash flow and profitability of
such contracts to the Company are more dependent on the revenues generated by
such communities and less dependent on net cash flow than for owned communities.
Further, the Company is not responsible for capital investments in managed
communities. While the management contracts are generally terminable only for
cause, in certain cases the contracts can be terminated upon the sale of a
community, subject to the Company's rights to offer to purchase such community.
The Company's triple net leases extend through the year 2000 for two of
its owned communities and through the year 2001 for four of its owned
communities (one of which was sold on January 11, 2000). The payments under
these leases are fixed and are not subject to change based upon the operating
performance of these communities. Following termination of the lease agreements,
unless the operators extend their leases, the Company may either convert and
operate the communities as assisted living and Alzheimer's care facilities, sell
the facilities or evaluate other alternatives.
24
The Company's current management contracts expire on various dates
through September 2009 and provide for management fees based generally upon
rates that vary by contract from 4% of net revenues to 7% of net revenues. In
addition, certain of the contracts provide for supplemental incentive fees that
vary by contract based upon the financial performance of the managed community.
The Company's development fees are generally based upon a percentage of
construction cost and are earned over the period commencing with the initial
development activities and ending with the opening of the community. As of
December 31, 1999, development fees have been earned for services performed for
44 communities under development or expansions for third parties.
During 1998, 1997, 1996, and 1995, the Company made various purchases
of limited partnership interests in HCP. HCP owns and operates a skilled nursing
facility and owns and leases to third-party operators (under triple net leases)
three skilled nursing facilities and three physical rehabilitation centers (two
of which have been sold). During 1999, 1998, 1997, 1996, and 1995, the Company
paid approximately $101,000, $5,605,000, $3,201,000, and $309,000, respectively,
for partnership interests in HCP. The Company changed its method of accounting
for its investment in HCP from the cost method in 1995 to the equity method in
1996. As a result of additional purchases, the Company's ownership interest in
HCP exceeded 50% on June 26, 1997 and was 57% at December 31, 1999. Accordingly,
this partial acquisition has been accounted for by the purchase method of
accounting, and the assets, liabilities, minority interest, and the results of
operations of HCP have been consolidated in the Company's financial statements
since January 1, 1997.
The Company acquired, on November 1, 1997, the NHP Notes owned by CSLC
in the Formation Transactions for $18,664,128. The NHP Notes bear simple
interest at 13% per annum and mature on December 31, 2001. Interest is currently
paid quarterly at a rate of 7%, with the remaining 6% interest deferred. From
November 1, 1997 through September 30, 1998, the Company recorded interest
income at 10.5% of the purchase price paid, which was determined based on the
discounted amount of principal and interest payments to be made following the
maturity date (December 31, 2001) of the NHP Notes (using a six-month lag
between maturity and full repayment), due to uncertainties regarding the
ultimate realization of the accrued interest. On September 30, 1998, the Company
purchased four properties from NHP. NHP in turn redeemed $7,500,000 of the
Company's investment in the NHP Notes and distributed approximately $5,300,000
of deferred interest not previously paid on such notes. From October 1, 1998
through December 31, 1998, the Company reevaluated its investment in the NHP
Notes and began recording additional income after giving consideration to
current payment of interest, partial redemption of the NHP Notes with accrued
interest and the estimated residual value in NHP. This change in estimate
resulted in $579,278 of additional income in 1998. In the fourth quarter of
fiscal 1999, the Company reevaluated the assumptions related to its investment
in the NHP Notes, and as a result reduced the income expected to be earned from
the NHP Notes. This change in estimate resulted in a $1,206,000 reduction in
interest income in the fourth quarter. In addition, future interest income is
expected to decrease by approximately $1,253,842 and $1,687,705 in 2000 and
2001, respectively.
The Company will continue to develop and acquire senior living
communities. The development of senior living communities typically involves a
substantial commitment of capital over an approximate 12-month construction
period during which time no revenues are generated, followed by a 14- to
18-month lease-up period. The Company anticipates that newly opened or expanded
communities will operate at a loss during a substantial portion of the lease-up
period. The Company's growth strategy may also include the acquisition of senior
living communities, home care agencies, and other properties or businesses that
are complementary to the Company's operations and growth strategy.
RESULTS OF OPERATIONS
The following tables set forth, for the periods indicated, selected
historical consolidated statements of income data in thousands of dollars and
expressed as a percentage of total revenues.
25
YEAR ENDED
-----------------------------------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1997
---------------------- ------------------------ ----------------------
$ % $ % $ %
----------- --------- ------------- ---------- ------------ ---------
Revenues:
Resident and healthcare revenue..... $ 41,071 64.2% $25,988 60.8% $22,159 72.2%
Rental and lease income............. 4,304 6.7% 4,281 10.0% 4,276 13.9%
Unaffiliated management services
revenue........................... 2,695 4.2% 2,465 5.8% 1,920 6.3%
Affiliated management services
revenue........................... 456 0.7% 1,327 3.1% 1,378 4.5%
Unaffiliated development fees....... 1,341 2.1% 1,234 2.9% 804 2.6%
Affiliated development fees......... 14,085 22.0% 7,473 17.5% 173 0.6%
------- ------- -------- ------- -------- -------
Total revenues................... 63,952 100.0% 42,768 100.0% 30,710 100.0%
Expenses:
Operating expenses.................. 24,470 38.3% 17,067 39.9% 16,701 54.4%
General and administrative expenses. 9,212 14.4% 6,094 14.2% 7,042 23.1%
Bad debt expense.................... 15,896 24.9% 500 1.2% 43 0.0%
Depreciation and amortization....... 4,671 7.3% 2,734 6.4% 2,118 6.9%
------- ------- ------- ------- ------- -------
Total expenses.................... 54,249 84.8% 26,395 61.7% 25,904 84.4%
------ ----- ------- ----- ------- ------
Income from operations................ 9,703 15.2% 16,373 38.3% 4,806 15.6%
Other income (expense):
Interest income..................... 5,822 9.1% 4,939 11.5% 3,186 10.4%
Interest expense.................... (7,089) (11.1%) (1,922) (4.5%) (2,022) (6.6%)
Gain on sale of properties.......... 748 1.2% 422 1.0% - 0.0%
Other............................... - 0.0% - 0.0% 440 1.4
------- ------- -------- ------- -------- -------
Income before income taxes and
minority interest in consolidated
partnerships...................... 9,184 14.4% 19,812 46.3% 6,410 20.9%
Provision for income taxes............ (2,992) (4.7%) (7,476) (17.5%) (793) (2.6%)
--------- ------- -------- ---------- -------- -------
Income before minority interest in
consolidated partnerships........... 6,192 9.7% 12,336 28.8% 5,617 18.3%
Minority interest in consolidated
partnerships........................ (1,354) (2.1%) (379) (0.9%) (1,936) (6.3%)
------------ ------ ---------- ------ -------- -----
Net income............................ $ 4,838 7.6% $ 11,957 28.0% $3,681 12.0%
============ ===== ======== ===== ======= ======
YEAR ENDED DECEMBER 31, 1999 COMPARED TO THE YEAR ENDED DECEMBER 31, 1998
REVENUES. Total revenues were $63,952,000 in 1999 compared to
$42,768,000 in 1998, representing an increase of $21,184,000, or 49.5%. Resident
and health care revenue increased $15,083,000, of which $14,441,000 is related
to owning the six communities purchased in the third and fourth quarters of
fiscal 1998 for the full year in 1999, along with an increase in revenue at the
HCP properties. Affiliated management services revenue decreased $871,000 due to
the Company's acquisition of four NHP properties that the Company managed in
1998. Affiliated development fee revenue increased $6,612,000, reflecting the
addition of 15 new development contracts for managing the development and
construction of new senior living communities owned by joint ventures with third
parties in which the Company owns interests of 10% to 19% (Triad Entities).
EXPENSES. Total expenses were $54,249,000 in 1999 compared to
$26,395,000 in 1998, representing an increase of $27,854,000 or 105.5%. This
increase primarily results from $15,896,000 in bad debt expenses along with
additional expenses related to the acquisition of six communities in 1998. The
bad debt expenses primarily relate to writing off or reserving $10,482,000 in
development fees, $1,598,000 in pursuit cost from affiliates, and $3,927,000 in
notes receivable from joint ventures. These joint ventures were in various
stages of developing 19 Waterford communities and they were unable to secure
financing on attractive terms for completion of these communities. Operating
expenses increased $7,403,000 primarily due to expenses associated with the six
properties acquired in 1998 and an expansion of one of the Company's
communities. General and administrative expenses increased $3,118,000 due to
additional salary expenses, office rent, legal expenses and expenses relating to
the six communities that were acquired.
OTHER INCOME AND EXPENSES. Other income and expense decreased
$3,958,000 to a net expense of $519,000 in 1999 compared to a net income of
$3,439,000 in 1998. Interest income increased $883,000 primarily due to an
increase of $2,023,000 in interest income on loans to the Triad Entities offset
by a decrease of $1,108,000 in interest income from cash balances available for
investing and a $32,000 reduction in interest income relating to the NHP Notes.
In the fourth quarter, the Company changed its estimate relating to the value of
its investment in the NHP Notes resulting in a write down of approximately
$1,206,000. Interest expense increased $5,167,000 due to financing of the
acquisition of the six properties in the fourth
26
quarter of 1998 along with funding of loans made to the Triad Entities. Gain on
the sale of properties increased $326,000 resulting from the gain on the sale of
one community owned by HCP of $748,288 in 1999 compared to a gain of $422,000 on
the sale of two properties in the fourth quarter of 1998.
PROVISION FOR INCOME TAXES. Provision for income taxes in 1999 was
$2,992,000 or 38.2% of income before taxes, compared to $7,476,000 or 38.5% of
income before taxes in 1998. The effective tax rates for 1999 and 1998 differ
from the statutory tax rates because of state income taxes and permanent tax
differences.
MINORITY INTEREST. Minority interest increased $975,000 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 decreased
$7,119,000 to $4,838,000 for 1999, as compared to $11,957,000 for 1998.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31, 1997
REVENUES. Total revenues were $42,768,000 in 1998 compared to
$30,710,000 in 1997, representing an increase of $12,058,000, or 39.3%. Resident
and health care revenue increased $3,584,000, of which $4,015,000 is a result of
purchasing the four NHP properties, Gramercy Hill and Tesson Heights, along with
a decrease of $190,000 relating to the HCP properties. Unaffiliated management
services revenue increased $545,000 due to a significant improvement in the
performance at the property level resulting in incentive payments and one
additional third-party management contract added in the first quarter of 1998.
Unaffiliated development fees increased $430,000, of which $894,000 is a result
of two additional third-party development contracts and the continuation of four
projects that earned fees for seven months in 1998 as compared to two months for
1997 and a decrease of $464,000 resulting from one development project completed
on December 31, 1997 and three development projects terminated by a third party.
Affiliated development fees increased $7,300,000, resulting from fees earned on
29 projects in 1998 compared to one in 1997.
EXPENSES. Total expenses were $26,395,000 in 1998 compared to
$25,904,000 in 1997, representing an increase of $491,000, or 1.9%. Operating
expenses increased $366,000 due to an increase of $1,954,000 as a result of
acquiring six properties in the fourth quarter of 1998, along with a decrease of
$1,361,000 related to the termination of a lease on Maryland Gardens and offset
by an overall decrease in operating expenses. General and administrative
expenses decreased $491,000 due to a decrease in officers' salaries of
$2,670,000 offset by a $325,000 increase due to the acquisition of six
properties in the fourth quarter of 1998, a $185,000 increase in development
expenses due to the increase in development projects, a $200,000 increase in
professional fees that relate to legal fees, a $100,000 increase in license and
fee expense, a $289,000 increase in HCP general and administrative expenses,
along with an overall increase in general and administrative expenses.
Depreciation and amortization increased $616,000 due to an increase of $424,000
as a result of the acquisition of the six properties in the fourth quarter of
1998, an $80,000 increase for the expansion of Cottonwood and an increase of
$37,000 in the amortization of goodwill for twelve months in 1998 as opposed to
two months in 1997.
OTHER INCOME AND EXPENSES. Interest and other income increased
$1,835,000, primarily as a result of a $1,365,000 increase in income associated
with investment of cash reserves, a $1,600,000 increase in NHP Notes interest
due to a partial redemption of the notes and payment of accrued interest, a
$308,000 increase in interest earned from the Triad Entities unsecured credit
facilities, which is offset by a $1,400,000 decrease in interest due to the
divestment of an investment from June 1997 through October 1997 by CSLC.
Interest expense decreased $100,000 due to a decrease of $1,267,000 of interest
related to the Lehman debt incurred in the Formation Transactions and a decrease
of $44,000 in HCP interest expense due to refinancing. These decreases are
offset by an increase of $1,201,000 in interest expense due to the acquisition
of the six properties in the fourth quarter of 1998. A gain of $422,000 was
recorded on the sale of two properties in the fourth quarter of 1998. In
connection with the sale of its investment in HCP to the Company immediately
following completion of the Company's initial public offering, CSLC incurred
short swing profits, as defined by the Securities and Exchange Commission
("SEC"), and was, accordingly, required to remit such profits to HCP, which
recorded the remittance of $440,000 as other income in 1997.
27
MINORITY INTEREST. Minority interest in limited partnerships decreased
$1,557,000, primarily due to the CSLC minority interest being included in 1997
through October and not included in 1998.
PROVISION FOR INCOME TAXES. Provision for income taxes was
approximately $7,476,000 in 1998 compared to $793,000 in 1997. As a result of
the Formation Transactions, the Company and its consolidated subsidiaries were
converted from S corporations that are taxed at the shareholder level to C
corporations that are subject to corporate income taxes. Accordingly, a
provision for federal and state taxes was provided on the earnings for 12 months
in 1998 compared to two months in 1997.
NET INCOME. As a result of the foregoing factors, net income increased
$8,276,000 to $11,957,000 for 1998 from $3,681,000 for 1997.
QUARTERLY RESULTS
The following table presents certain quarterly financial information
for the four quarters ended December 31, 1999 and 1998. This information has
been prepared on the same basis as the audited Consolidated Financial Statements
of the Company appearing elsewhere in this report and include, in the opinion of
management, all adjustments (consisting of normal recurring adjustments)
necessary to present fairly the quarterly results when read in conjunction with
the audited Consolidated Financial Statements of the Company and the related
notes thereto.
1999 Calendar Quarters
---------------------------------------------------
First Second Third Fourth
--------- --------- --------- ----------
($ in thousands, except per share amounts)
Total revenues............................................... $ 15,467 $ 15,957 $ 16,560 $ 15,967
Income from operations....................................... 6,273 6,551 7,017 (10,137)
Net income (loss)............................................ 3,852 3,983 4,386 (7,384)
Net income (loss) per share, basic........................... $ 0.20 $ 0.20 $ 0.22 $ (0.37)
Net income (loss) per share, diluted......................... $ 0.20 $ 0.20 $ 0.22 $ (0.37)
Weighted average shares outstanding, basic................... 19,717 19,717 19,717 19,717
Weighted average shares outstanding, fully diluted........... 19,720 19,917 19,871 19,717
1998 Calendar Quarters
---------------------------------------------------
First Second Third Fourth
--------- --------- --------- ----------
($ in thousands, except per share amounts)
Total revenues............................................... $ 8,354 $ 9,234 $ 10,556 $ 14,624
Income from operations....................................... 2,330 3,397 4,906 5,740
Net income................................................... 1,926 2,511 3,506 4,014
Net income per share, basic.................................. $ 0.10 $ 0.13 $ 0.18 $ 0.20
Net income per share, diluted................................ $ 0.10 $ 0.13 $ 0.18 $ 0.20
Weighted average shares outstanding, basic................... 19,717 19,717 19,717 19,717
Weighted average shares outstanding, fully diluted........... 19,717 19,717 19,717 19,717
LIQUIDITY AND CAPITAL RESOURCES
In addition to approximately $32,988,000 of cash balances on hand as of
December 31, 1999, the Company's principal source of liquidity is expected to be
cash flows from operations. Of the $32,988,000 in cash balances, $13,724,000
relate to cash held by HCP. The Company expects its available cash 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
its 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 the Company's long-term capital requirements.
The Company had net cash provided by operating activities of $3,103,000
in fiscal 1999 compared to $6,689,000 and $9,684,000 in fiscal 1998 and 1997,
respectively. In fiscal 1999, the net cash provided by operating activities was
primarily derived from net income of $4,838,000 along with net noncash charges
of $22,733,000 offset by increases in accounts and interest receivables of
$14,120,000, an increase in other assets of $1,504,000, a reduction in federal
and state income taxes of $7,704,000. In fiscal 1998, the net cash provided by
operating activities was primarily derived from net income of $11,957,000,
noncash charges of $3,054,000 offset by increases in accounts and interest
receivable of
28
$8,978,000. In fiscal 1997, the net cash provided by operating activities was
primarily derived from net income of $3,681,000, along with noncash charges of
$4,115,000 and increases in accounts payable and income taxes payable of
$2,667,000 and $832,000, respectively, offset by an increase in accounts
receivable of $1,371,000.
The Company had net cash used in investing activities of $16,527,000,
$86,501,859 and $81,502,000 in fiscal 1999, 1998 and 1997, respectively. In
fiscal 1999, the Company's net cash used in investing activities was primarily
the result of advances to Triad Entities of $22,794,000 and capital expenditures
of $1,887,000 offset by the proceeds from the sale of the HCP property of
$2,740,000 and a distribution from a limited partnership of $5,414,000. In
fiscal 1998, the Company's net cash used in investing activities was primarily
from acquisitions of $67,728,000, advances to Triad Entities of $11,728,000,
capital expenditures of $6,027,000 and investments in a limited partnership of
$1,694,000.
The Company had net cash provided by financing activities of
$10,585,000, $67,514,000 and $109,125,000 in fiscal 1999, 1998 and 1997,
respectively. For fiscal 1999 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. For fiscal 1998, the net cash provided by financing
activities was primarily the result of increases in debt used to finance the
Company's acquisitions. For fiscal 1997, the net cash provided by financing
activities was primarily the result of the issuance of common stock.
The Company derives the benefits and bears the risks related 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 December 31, 1999, HCP was operating one of its
properties and had leased six of its owned properties under triple net leases to
third parties until year 2000 or 2001. Three 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. HealthSouth agreed, however, to continue making its
full lease payments to HCP with no reduction in payment. Effective September 20,
1998, the main campus of one of those communities was sold to an independent
third-party buyer for $2,825,000. HCP will explore its options with regard to
the remainder of the community as well as the other community, including the
possibility of a sale of these assets. Should the operators of the leased
properties default on payment of their lease obligations prior to termination of
the lease agreements, five of the six 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, unless the operators extend their 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 communities' lessees are all current in their lease
obligations to HCP. The lessee for another property (other than HealthSouth)
continues to fund a deficit between the required lease payment and operator's
cash flows. Additionally, on January 11, 2000 the Cane Creek facility in Martin,
Tennessee was sold to HealthSouth Corporation for $2,350,000. HealthSouth
agreed, however, to continue making its full lease payments to HCP with no
reduction in payments.
The cash flows and profitability of the Company's third-party
management fees are dependent upon the revenues and profitability of the
communities the Company manages. 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's plans to continue to develop and acquire senior living
communities. The development of senior living communities typically involves a
substantial commitment of capital over an approximate 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 set out below 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
29
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 reimbursement not to
exceed 1%. The Company holds a 10% to 19% limited partnership interest in each
of the Triad Entities and has the option to purchase the partnership interests
of the other partners in each Triad Entity for an amount equal to the amount
paid for the partnership interest by the other partners, plus noncompounded
interest of 12% per annum, except Triad I. In addition, each management
agreement entered into with the Triad Entities, except Triad I, provides the
Company with an option to purchase the community developed by the applicable
partnership upon its 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 third
parties 80% of the limited partnership interest in Triad I for an investment of
$12,000,000. Lehman Brothers affiliate's investment enabled Trial I to repay the
Company approximately $9,000,000 in loans. The Company increased its equity
contribution in Triad I to $3,000,000 and continues to own a 19% limited
partnership interest in Triad I. The Company has the option to purchase the
Triad I communities for an amount specified on the partnership agreement. The
Company will continue to develop and manage the communities in Triad I. 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 upon the business and financial factors which may exist at
the time those 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 chart below sets forth information
about the financings from institutional lenders and the Company loans. The
Company loans may be prepaid without penalty. The financings from institutional
lenders are secured by first liens on the communities as well as by assignment
to the lenders of the construction contracts and the development and management
agreements with subsidiaries of 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 most cases, the
management agreements contain an obligation of the Company to make operating
deficit loans to the Triad Entities if the other financing sources of the Triad
Entities have been fully utilized. These operating deficit loan obligations,
which are guaranteed by the Company, include making loans to fund debt service
obligations to the lenders.
Set forth below is information regarding the Company's loans to the
Triad Entities, as well as information on the construction loan facilities
entered into by each of the Triad Entities.
30
COMPANY LOANS TO TRIADS(1) CONSTRUCTION LOAN FACILITIES TO TRIADS
--------------------------------------------------- ----------------------------------------
OUTSTANDING
COMMITTED ON INTEREST
ENTITY AMOUNT DEC. 31, 1999 MATURITY RATE AMOUNT TYPE LENDER
- ----------------- ---------- ------------- ------------------ ------ ----------- -------------- ---------
($ IN THOUSANDS)
Triad Senior (2) $30 (2) -% $50,000 construction; Bank One
Living I, L.P. $50,000 take-out GMAC
("Triad I")
Triad Senior $15,000 $11,510 September 25, 10.5% $26,800 construction; Key Bank
Living II, L.P. 2003 mini-perm
("Triad II")
Triad Senior $10,000 $9,810 February 8, 2004 10.5% $56,300 construction; Guaranty
Living III, L.P. mini-perm Federal
("Triad III")
Triad Senior $10,000 $5,178 December 30, 2003 10.5% $18,600 construction; Compass
Living IV, L.P. mini-perm Bank
("Triad IV")
Triad Senior $10,000 $3,467 June 30, 12.0% $27,000 construction; Bank of
Living V, L.P. 2004 mini-perm America
("Triad V")
Triad Senior $3,000 $600 October 1, 12.0% - - -
Living VI, L.P. 2004
("Triad VI")
(1) The Company has operating deficit loan obligations in management
agreements in addition to the committed amounts shown relating to
unsecured loans from the Company.
(2) The amount shown was funded by the Company pursuant to operating
deficit loan obligations.
FINANCING OF THE ILM MERGERS
The Company has entered into definitive Amended and Restated Agreements
and Plans of Merger with ILM and ILM II to acquire these companies for a
combined cash consideration of approximately $172 million, and the assumption of
liabilities. The primary assets of ILM I and ILM II collectively are 13 senior
living communities that have been managed by the Company under management
agreements since 1996. The Company received a term sheet from GMAC to provide
acquisition financing for the purchase of these 13 senior living communities and
to provide interim financing on three senior living communities currently owned
by the Company. The financing is expected to provide up to $180,000,000, subject
to certain terms and conditions.
YEAR 2000 ISSUE
The Year 2000 issue results from the historical use in computer
software programs and operating systems of a two-digit number to represent the
applicable year. Concerns arose as to whether certain software and hardware
would fail to properly function when confronted with dates that contain "00" as
a two-digit year. To address the potential risk of disruption of operations, the
Company developed and implemented a program to replace certain software and
hardware, so that its systems would properly recognize and utilize dates beyond
December 31, 1999. The Company also upgraded its general ledger and reporting
software to avoid compatibility issues with certain of the reporting tools used
in conjunction with the general ledger. The costs to the Company to achieve Year
2000 readiness were approximately $100,000.
To date, the Company has not experienced any material problems relating
to the Year 2000 issue. The Company will continue to monitor and evaluate
internal Year 2000 compliance and the compliance of key suppliers.
31
IMPACT OF INFLATION
To date, inflation has not had a significant impact on the Company.
However, inflation could affect the Company's future revenues and results of
operations because of, among other things, the Company's dependence on senior
residents, many of whom rely primarily on fixed incomes to pay for the Company's
services. As a result, during inflationary periods, the Company may not be able
to increase resident service fees to account fully for increased operating
expenses. In structuring its fees, the Company attempts to anticipate inflation
levels, but there can be no assurance that the Company will be able to
anticipate fully or otherwise respond to any future inflationary pressures.
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 other risks and
factors identified from time to time in the Company's reports filed with the
SEC.
32
ITEM 7A. 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 December 31, 1999, the Company had $93,615,000
in outstanding debt comprised of various fixed and variable rate debt
instruments of $59,479,000 and $34,136,000, 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 $341,000 based on the Company's outstanding variable
debt as of December 31, 1999.
The following table summarizes information on the Company's debt
instruments outstanding as of December 31, 1999. The table presents the
principal due and weighted average interest rates for the Company's various debt
instruments by fiscal year. Weighted average variable interest rates are based
on the Company's floating rate as of December 31, 1999.
INTEREST RATE RISK
PRINCIPAL AMOUNT AND AVERAGE INTEREST RATE BY EXPECTED MATURITY DATE
($ IN THOUSANDS)
2000 2001 2002 2003 2004 THEREAFTER TOTAL FAIR VALUE
--------- -------- ---------- ---------- --------- ------------ ---------- ------------
Long-term debt:
Fixed rate debt....... $1,063 $1,186 $1,133 $1,153 $1,255 $53,689 $59,479 $59,479
Average interest rate. 8.3% 8.3% 8.3% 8.3% 8.3% 8.3%
Variable rate debt.......... $136 - - - - - $136 $136
Average interest rate....... 6.8% - - - - 0.0%
Line of Credit:
Variable rate debt.... - - $34,000 - - - $34,000 $34,000
Average interest rate. - - 8.2% - - -
Total Debt.................. $93,615 $93,615
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements are included under Item 14 of this Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Company had no disagreements on accounting or financial disclosure
matters with its independent accountants to report under this Item 9.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information contained under the caption "Election of Directors" in the
Proxy Statement is incorporated herein by reference in response to this Item 10.
See also Item 1.
33
ITEM 11. EXECUTIVE COMPENSATION
Information contained under the captions "Executive Compensation" and
"Election of Directors" in the Proxy Statement is incorporated herein by
reference in response to this Item 11.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information contained under the caption "Principal Stockholders and Stock
Ownership of Management" in the Proxy Statement is incorporated herein by
reference in response to this Item 12.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information contained under the caption "Certain Relationships and Related
Transactions" in the Proxy Statement is incorporated herein by reference in
response to this Item 13.
34
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
The following documents are filed as part of this report:
(1) Financial Statements:
The response to this portion of Item 14 is submitted as a separate
section of this report. See Index to Financial Statements at page F-1.
(2) Financial Statement Schedules:
All schedules have been omitted as the required information is
inapplicable or the information is presented in the financial
statements or related notes.
(3) Exhibits:
The exhibits listed on the accompanying index to exhibits at page E-1
are filed as part of this Report.
(4) The Company filed the following reports on Form 8-K during the quarterly
period ended December 31, 1999:
(a) Current Report on Form 8-K, dated October 19, 1999.
(b) Current Report on Form 8-K, dated October 19, 1999.
35
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, hereunto duly authorized, on March 29, 2000.
CAPITAL SENIOR LIVING CORPORATION
By: /s/ Lawrence A. Cohen
-------------------------------------------------------
Lawrence A. Cohen
VICE CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated. Each person whose signature to
this report appears below hereby appoints Lawrence A. Cohen and James A. Stroud
and each of them, any one of whom may act without the joinder of the other, as
his or her attorney-in-fact to sign on his behalf, individually and in each
capacity stated below, and to file all amendments to this report, which
amendment or amendments may make such changes in and additions to the report as
any such attorney-in-fact may deem necessary or appropriate.
Signature Title Date
/s/ James A. Stroud Chairman of the Board and Chairman March 29, 2000
- --------------------------------------- of the Company
James A. Stroud
/s/ Lawrence A. Cohen Vice Chairman of the Board and March 29, 2000
- --------------------------------------- Chief Executive Officer (Principal
Lawrence A. Cohen Executive Officer)
/s/ Keith N. Johannessen President and Chief Operating Officer March 29, 2000
- --------------------------------------- and Director
Keith N. Johannessen
/s/ Ralph A. Beattie Executive Vice President and Chief March 29, 2000
- --------------------------------------- Financial Officer (Principal Financial
Ralph A. Beattie and Accounting Officer)
/s/ Gordon I. Goldstein Director March 29, 2000
- ---------------------------------------
Dr. Gordon I. Goldstein
/s/ James A. Moore Director March 29, 2000
- ---------------------------------------
James A. Moore
/s/ Victor W. Nee Director March 29, 2000
- ---------------------------------------
Dr. Victor W. Nee
36
INDEX TO EXHIBITS
The following documents are filed as a part of this report. Those exhibits
previously filed and incorporated herein by reference are identified below.
Exhibits not required for this report have been omitted.
Exhibit
Number Description
*3.1 - Amended and Restated Certificate of Incorporation of the Registrant
(i)3.1.1 - Amendment to Amended and Restated Certificate of Incorporation of the Registrant (Exhibit 3.1)
*3.2 - Amended and Restated Bylaws of the Registrant
(i)3.2.1 - Amendments to Amended and Restated Bylaws of the Registrant (Exhibit 3.2)
*10.1 - Asset Purchase Agreement, dated as of July 8, 1997, by and between Capital Senior Living
Communities, L.P. and Capital Senior Living Corporation
*10.2 - Contribution Agreement, dated as of August 1, 1997, by and among Capital Senior Living
Corporation, Jeffrey L. Beck, James A. Stroud, Senior Living Trust, and Lawrence A. Cohen
*10.3 - Stock Purchase and Stockholders' Agreement, dated as of November 1, 1996, by and among
Capital Senior Living Corporation, Jeffrey L. Beck, Senior Living Trust, and Lawrence Cohen
*10.4 - Amended and Restated Exchange Agreement, dated as of June 30, 1997, by and between
Lawrence A. Cohen and Jeffrey L. Beck
*10.5 - Amended and Restated Exchange Agreement, dated as of June 30, 1997, by and among Lawrence
A. Cohen and James A. Stroud
+(m)10.6 - 1997 Omnibus Stock and Incentive Plan for Capital Senior Living Corporation, as amended
(Exhibit 4.1)
+(m)10.6.1 - Form of Stock Option Agreement (Exhibit 4.2)
*10.7 - Senior Living Agreement, by and between Capital Senior Living, Inc. and New World Development
(China) Limited
*10.8 - Amended and Restated Loan Agreement, dated as of June 30, 1997, by and between Lehman
Brothers Holdings Inc., d/b/a/ Lehman Capital, A Division of Lehman Brothers Holdings Inc., and Capital
Senior Living Communities, L.P.
+*10.9 - Amended and Restated Employment Agreement, dated as of May 7, 1997, by and between Capital
Senior Living, Inc. and Jeffrey L. Beck
+*10.10 - Amended and Restated Employment Agreement, dated as of May 7, 1997, by and between Capital
Senior Living, Inc. and James A. Stroud
+*10.11 - Employment Agreement, dated as of November 1, 1996, by and between Capital Senior Living
Corporation and Lawrence A. Cohen
+*10.12 - Employment Agreement, dated as of November 26, 1996, by and between Capital Senior Living,
Inc. and David R. Brickman
E-1
+*10.13 - Employment Agreement, dated as of November 26, 1996, by and between Capital Senior Living,
Inc. and Keith N. Johannessen
*10.14 - Engagement Letter, dated as of June 30, 1997, by and between Lehman Brothers Holdings Inc.
D/B/A Lehman Capital, A Division of Lehman Brothers Holdings Inc. and Capital Senior Living
Corporation
*10.15 - Lease Agreement, dated as of June 1, 1997, by and between G&L Gardens, LLC, as lessor, and
Capital Senior Management 1, Inc., as lessee
*10.16 - Pre-Opening Consulting Agreement, dated as of June 16, 1997, by and between The Emmaus
Calling, Inc., as owner, and Capital Senior Management 1, Inc., as consultant
*10.17 - Management Agreement, dated as of February 1, 1995, by and between Capital Senior Living
Communities, L.P., as owner, and Capital Senior Living, Inc., as manager, regarding Canton
Regency Retirement Community, in Canton, Ohio
*10.18 - Management Agreement, dated as of February 1, 1995, by and between Capital Senior Living
Communities, L.P., as owner, and Capital Senior Living, Inc., as manager, regarding Cottonwood
Village, in Cottonwood, Arizona
*10.19 - Management Agreement, dated as of February 1, 1995, by and between Capital Senior Living
Communities, L.P., as owner, and Capital Senior Living, Inc., as manager, regarding The
Harrison At Eagle Valley, in Indianapolis, Indiana
*10.20 - Management Agreement, dated as of February 1, 1995, by and between Capital Senior Living
Communities, L.P., as owner and Capital Senior Living, Inc., as manager, regarding Towne
Centre, in Merrillville, Indiana
*10.21 - Management Agreement, dated as of August 1, 1996, by and between Capital Senior Living, Inc.,
as manager, and Cambridge Nursing Home Limited Liability Company, as lessee
*10.22 - Management Agreement, dated as of April 1, 1996, by and between Buckner Retirement Services, Inc.
and Capital Senior Management 1, Inc.
*10.23 - Management Agreement, dated as of May 23, 1997, by and between The Emmaus Calling, Inc., as owner,
and Capital Senior Management 1, Inc., as manager
*10.24 - Property Management Agreement, dated as of February 1, 1995, by and between NHP Retirement
Housing Partners I Limited Partnership, as owner, and Capital Senior Living, Inc., as agent
*10.25 - Management Agreement, dated as of April 1, 1997, by and between Buckner Retirement Services, Inc.
and Capital Senior Management 1, Inc.
*10.26 - Management Agreement, dated as of November 30, 1992, by and between Capital Realty Group
Senior Housing, Inc. d/b/a Capital Senior Living, Inc., as manager, and Jacques-Miller Healthcare
Properties, L.P., as owner
*10.27 - Management Agreement, dated as of July 29, 1996, by and between ILM I Lease Corporation, as owner,
and Capital Senior Management 2, Inc., as manager, and Capital Senior Living, Inc., as guarantor
*10.28 - Management Agreement, dated as of July 29, 1996, by and between ILM II Lease Corporation, as owner,
and Capital Senior Management 2, Inc., as manager, and Capital Senior Living,
Inc., as guarantor
E-2
*10.29 - Development Agreement, by and between Capital Senior Development, Inc., as developer, and Tri
Point Communities, L.P., as owner
*10.30 - Development and Turnkey Services Agreement, dated as of September 1, 1997, by and between Capital
Senior Development Corporation and Tri-Point Communities, L.P.
*10.31 - Management Agreement, by and between Tri Point Communities, L.P., as owner, and Capital
Senior Living, Inc.
(a)10.32 - Amended and Restated Loan Agreement, dated as of December 10, 1997, by and between Bank
One, Texas, N.A. and Capital Senior Living Properties, Inc.
(a)10.33 - Alliance Agreement, dated as of December 10, 1997, by and between LCOR Incorporated and
Capital Senior Living Corporation
(a)10.34 - Development Agreement, dated as of December 10, 1997, by and between Capital Senior
Development, Inc. and Tri Point Communities, L.P., regarding senior living community
in San Antonio, Texas
(a)10.35 - Development Agreement, dated as of February 3, 1998, by and between Capital Senior
Development, Inc. and Tri Point Communities, L.P., regarding senior living community in
Shreveport, Louisiana
(a)10.36 - Management Agreement, dated as of December 23, 1997, by and between Tri Point Communities,
L.P. and Capital Senior Living, Inc., regarding senior living community in San Antonio, Texas
(a)10.37 - Management Agreement, dated as of February 3, 1998, by and between Tri Point Communities,
L.P. and Capital Senior Living, Inc., regarding senior living community in Shreveport, Louisiana
(b)10.38 - Draw Promissory Note, dated April 1, 1998, of Triad Senior Living I, L.P. in favor of Capital
Senior Living Properties, Inc.
(c)10.39 - Draw Promissory Note, dated September 24, 1998, of Triad Senior Living II, L.P., in favor of
Capital Senior Living Properties, Inc. (Exhibit 10.1)
(d)10.40 - Asset Purchase Agreement, dated as of July 24, 1998, by and between Capital Senior Living
Properties, Inc. and NHP Retirement Housing Partners I Limited Partnership (Exhibit 2.1)
(d)10.41 - Assignment and Amendment to Asset Purchase Agreement, effective as of September 29, 1998,
by and among NHP Retirement Housing Partners I Limited Partnership, Capital
Senior Living Properties, Inc., and Capital Senior Living
Properties 2 - NHPCT, Inc. (Exhibit 2.2)
(d)10.42 - Loan Agreement, dated as of September 30, 1998, by and between Capital Senior Living
Properties 2 -NHPCT, Inc. and Lehman Brothers Holdings Inc. d/b/a Lehman Capital, a division of Lehman
Brothers Holdings Inc. (Exhibit 2.3)
(e)10.43 - Asset Purchase Agreement, dated as of July 28, 1998, by and between Capital Senior Living
Properties, Inc. and Gramercy Hill Enterprises (Exhibit 2.1)
(e)10.44 - Asset Purchase Agreement, dated as of July 28, 1998, by and between Capital Senior Living
Properties, Inc. and Tesson Heights Enterprises (Exhibit 2.2)
(e)10.45 - Assumption and Release Agreement, effective as of October 28, 1998, among Gramercy Hill
Enterprises, Andrew C. Jacobs, Capital Senior Living Properties 2-Gramercy, Inc., Capital Senior
Living Corporation and Fannie Mae (Exhibit 2.4)
E-3
(e)10.46 - Multifamily Note, dated December 4, 1997, of Gramercy Hill Enterprises in favor of Washington
Mortgage Financial Group, Ltd. (Exhibit 2.5)
(e)10.47 - Multifamily Deed of Trust, dated December 4, 1997, among Gramercy Hill Enterprises, Ticor
Title Insurance Company and Washington Mortgage Financial Group, Inc. (Exhibit 2.6)
(e)10.48 - Multifamily Note, dated October 28, 1998, of Capital Senior Living Properties 2-Gramercy, Inc.
in favor of WMF Washington Mortgage Corp. (Exhibit 2.7)
(e)10.49 - Multifamily Deed of Trust, Assignment of Rents and Security Agreement, dated October 28, 1998,
among Capital Senior Living Properties 2-Gramercy, Inc., Chicago Title Insurance Company and
WMF Washington Mortgage Corp. (Exhibit 2.8)
+(f)10.50 - Employment Agreement, dated as of December 10, 1996, by and between Capital Senior Living,
Inc. and Rob L. Goodpaster (Exhibit 10.50)
(f)10.51 - Draw Promissory Note dated November 1, 1998 of Triad Senior Living III, L.P., in favor of
Capital Senior Living Properties, Inc. (Exhibit 10.51)
(f)10.52 - Draw Promissory Note dated December 30, 1998 of Triad Senior Living IV, L.P., in favor of
Capital Senior Living Properties, Inc. (Exhibit 10.52)
(f)10.53 - Form of Development and Turnkey Services Agreement by and between Capital Senior
Development, Inc. and applicable Triad entity (Exhibit 10.53)
(f)10.54 - Form of Development Agreement by and between Capital Senior Development, Inc. and
applicable Triad entity (Exhibit 10.54)
(f)10.55 - Form of Management Agreement by and between Capital Senior Living, Inc. and applicable Triad
entity (Exhibit 10.55)
(f)10.56 - Agreement of Limited Partnership of Triad Senior Living I, L.P. dated April 1, 1998 (Exhibit
10.56)
(f)10.57 - Agreement of Limited Partnership of Triad Senior Living II, L.P. dated September 23, 1998
(Exhibit 10.57)
(f)10.58 - Agreement of Limited Partnership of Triad Senior Living III, L.P. dated November 10, 1998
(Exhibit 10.58)
(f)10.59 - Agreement of Limited Partnership of Triad Senior Living IV, L.P. dated December 22, 1998
(Exhibit 10.59)
(g)10.60 - 1999 Amended and Restated Loan Agreement, dated as of April 8, 1999, by and among Capital
Senior Living Properties, Inc., Bank One, Texas, N.A. and the other Lenders signatory
thereto (Exhibit 10.1)
(g)10.61 - Amended and Restated Draw Promissory note, dated March 31, 1999, of Triad Senior Living I,
L.P., in favor of Capital Senior Living Properties, Inc. (Exhibit 10.2)
(g)10.62 - Amended and Restated Draw Promissory Note (Fairfield), dated January 15, 1999, of Triad Senior
Living II, L.P., in favor of Capital Senior Living Properties, Inc. (Exhibit 10.3)
(g)10.63 - Amended and Restated Draw Promissory Note (Baton Rouge), dated January 15, 1999, of Triad
Senior Living II, L.P., in favor of Capital Senior Living Properties, Inc. (Exhibit 10.4)
E-4
(g)10.64 - Amended and Restated Draw Promissory Note (Oklahoma City), dated January 15, 1999, of Triad
Senior Living II, L.P., in favor of Capital Senior Living Properties, Inc. (Exhibit 10.5)
(h)10.65 - Amended and Restated Draw Promissory Note dated June 30, 1999 of Triad Senior Living I, L.P.
in favor of Capital Senior Living Properties, Inc. (Exhibit 10.1)
(h)10.66 - Amended and Restated Draw Promissory Note (Plano, Texas) dated January 15, 1999 of Triad
Senior Living II, L.P. in favor of Capital Senior Living Properties, Inc. (Exhibit 10.2)
(h)10.67 - Letter Agreement dated July 28, 1999 among the Company and ILM Senior Living, Inc. and ILM
II Senior Living, Inc. (Exhibit 10.3)
(i)10.68 - Draw Promissory Note dated July 1, 1999 of Triad Senior Living V, L.P. in favor of Capital
Senior Living Properties, Inc. (Exhibit 10.1)
+(i)10.69 - 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 (Exhibit 10.2)
+(i)10.70 - 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 (Exhibit 10.3)
+(i)10.71 - Employment Agreement, dated May 26, 1999, by and between Lawrence A. Cohen and Capital
Senior Living Corporation (Exhibit 10.4)
(j)10.72 - Agreement and Plan of Merger, dated February 7, 1999, by and among Capital Senior Living
Corporation, Capital Senior Living Acquisition, LLC, Capital Senior Living Trust I and ILM
Senior Living, Inc. (Exhibit 1)
(k)10.73 - Agreement and Plan of Merger, dated February 7, 1999, by and among Capital Senior Living
Corporation, Capital Senior Living Acquisition, LLC, Capital Senior Living Trust I and ILM II
Senior Living, Inc. (Exhibit 1)
(l)10.74 - Amended and Restated Agreement and Plan of Merger, dated October 19, 1999, by and among Capital
Senior Living Corporation, Capital Senior Living Acquisition, LLC and ILM Senior Living, Inc.
(Exhibit 1)
(m)10.75 - Amended and Restated Agreement and Plan of Merger, dated October 19, 1999, by and among Capital
Senior Living Corporation, Capital Senior Living Acquisition, LLC and ILM II
Senior Living, Inc. (Exhibit 1)
+(o)10.76 - Employment Agreement, dated May 25, 1999, by and between Ralph A. Beattie and Capital
Senior Living Corporation
+(o)10.77 - Consulting/Severance Agreement, dated May 20, 1999, by and between Jeffrey L. Beck and
Capital Senior Living Corporation
(o)10.78 - Second Amended and Restated Agreement of Limited Partnership of Triad Senior Living I, L.P.
(o)21.1 - Subsidiaries of the Company
(o)23.1 - Consent of Ernst & Young LLP
(o)23.2 - Consent of KPMG LLP
(o)27.1 - Financial Data Schedule
E-5
- -----------------------------
* Incorporated by reference to exhibit of corresponding number included
in Registration Statement No. 333- 33379 on Form S-1 filed by the
Company with the Securities and Exchange Commission.
+ Compensation plan, benefit plan or employment contract or arrangement.
(a) Incorporated by reference to exhibit of corresponding number from the
Company's Annual Report on Form 10-K for the year ended December 31,
1997, filed by the Company with the Securities and Exchange Commission.
(b) Incorporated by reference to the exhibit of corresponding number from
the Company's Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 1998, filed by the Company with the Securities and
Exchange Commission.
(c) Incorporated by reference to the exhibit shown in parentheses from the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1998, filed by the Company with the Securities and
Exchange Commission.
(d) Incorporated by reference to the exhibit shown in parentheses from the
Company's Current Report on Form 8-K, dated September 30, 1998, filed
by the Company with the Securities and Exchange Commission.
(e) Incorporated by reference to the exhibit shown in parentheses from the
Company's Current Report on Form 8-K, dated October 29, 1998, filed by
the Company with the Securities and Exchange Commission.
(f) Incorporated by reference to the exhibit shown in parentheses from the
Company's Annual Report on Form 10-K for the year ended December 31,
1998, filed by the Company with the Securities and Exchange Commission.
(g) Incorporated by reference to the exhibit shown in parentheses from the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 1999, filed by the Company with the Securities and Exchange
Commission.
(h) Incorporated by reference to the exhibit shown in parentheses from the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1999, filed by the Company with the Securities and Exchange
Commission.
(i) Incorporated by reference to the exhibit shown in parentheses from the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1999, filed by the Company with the Securities and
Exchange Commission.
(j) Incorporated by reference to the exhibit shown in parentheses from the
Company's Current Report on Form 8-K, dated February 7, 1999, filed by
the Company with the Securities and Exchange Commission.
(k) Incorporated by reference to the exhibit shown in parentheses from the
Company's Current Report on Form 8-K, dated February 7, 1999, filed by
the Company with the Securities and Exchange Commission.
(l) Incorporated by reference to the exhibit shown in parentheses from the
Company's Current Report on Form 8-K, dated October 19, 1999, filed by
the Company with the Securities and Exchange Commission.
(m) Incorporated by reference to the exhibit shown in parentheses from the
Company's Current Report on Form 8-K, dated October 19, 1999, filed by
the Company with the Securities and Exchange Commission.
(n) Incorporated by reference to the exhibit shown in parentheses from the
Company's Registration Statement on Form S-8, filed on December 3,
1999, by the Company with Securities and Exchange Commission.
(o) Filed herewith.
E-6
INDEX TO FINANCIAL STATEMENTS
PAGE
------
Consolidated Financial Statements of Capital Senior Living Corporation
Report of Ernst & Young LLP, Independent Auditors................................................. F-2
Report of KPMG LLP, Independent Auditors.......................................................... F-3
Consolidated Balance Sheets - December 31, 1999 and 1998.......................................... F-4
Consolidated Statements of Income - December 31, 1999, 1998 and 1997.............................. F-5
Consolidated Statements of Shareholders' Equity - December 31, 1999, 1998 and 1997................ F-6
Consolidated Statements of Cash Flows - December 31, 1999, 1998 and 1997.......................... F-7
Notes to Consolidated Financial Statements........................................................ F-8
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Shareholders
Capital Senior Living Corporation
We have audited the accompanying consolidated balance sheets of Capital
Senior Living Corporation as of December 31, 1999 and 1998, and the related
consolidated statements of income, shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits. We did not audit the consolidated financial statements of
HealthCare Properties, L.P. and subsidiaries, a 57% owned subsidiary, which
statements reflect total assets of $32,055,252 and $32,758,958 as of December
31, 1999 and 1998, respectively, and total revenues of $9,499,819, $8,787,575
and $8,977,628 for the years ended December 31, 1999, 1998 and 1997,
respectively. Those statements were audited by other auditors whose report
has been furnished to us, and our opinion, insofar as it relates to data
included for HealthCare Properties, L.P., is based solely on the report of
the other auditors.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audits to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the report of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of Capital Senior Living Corporation as of
December 31, 1999 and 1998, and the consolidated results of their operations and
their cash flows for each of the three years in the period ended December 31,
1999, in conformity with generally accepted accounting principles in the United
States.
Ernst & Young LLP
Dallas, Texas
February 4, 2000
F-2
INDEPENDENT AUDITORS' REPORT
The Partners
HealthCare Properties, L.P.
We have audited the consolidated balance sheets of HealthCare Properties,
L.P. and subsidiaries (a Delaware limited partnership) as of December 31,
1999 and 1998, and the related consolidated statements of income, partnership
equity, and cash flows for each of the years in the three-year period ended
December 31, 1999. These consolidated financial statements are the
responsibility of the Partnership's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of HealthCare
Properties, L.P. and subsidiaries as of December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1999, in conformity with generally accepted
accounting principles.
/s/ KPMG LLP
Dallas, Texas
February 4, 2000, except
as to the third paragraph of
Note 13 which is as of
March 1, 2000
F-3
CAPITAL SENIOR LIVING CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
DECEMBER 31,
---------------------------------
1999 1998
-------------- ----------------
Current assets:
Cash and cash equivalents................................................. $ 32,988,024 $ 35,827,270
Accounts receivable, net.................................................. 3,391,803 2,955,507
Accounts receivable from affiliates....................................... 9,054,970 7,217,127
Interest receivable from affiliates....................................... 834,209 189,482
Federal and state income taxes receivable................................. 6,035,032 -
Deferred taxes............................................................ 909,939 287,040
Prepaid expenses and other................................................ 508,410 448,790
--------------- --------------
Total current assets.................................................... 53,722,387 46,925,216
Property and equipment, net.................................................. 104,723,216 118,943,953
Deferred taxes............................................................... 9,516,051 10,108,715
Notes receivable from affiliates............................................. 30,595,610 11,728,162
Investments in limited partnership .......................................... 9,122,850 14,536,972
Assets held for sale......................................................... 9,549,084 -
Other assets, net............................................................ 4,646,561 3,023,717
--------------- --------------
Total assets.......................................................... $ 221,875,759 $ 205,266,735
=============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................................... $ 2,512,202 $ 2,780,513
Accrued expenses.......................................................... 2,127,374 2,231,895
Current portion of notes payable.......................................... 1,199,299 48,419,050
Customer deposits......................................................... 910,693 851,375
Federal and state income taxes payable.................................... - 1,668,602
----------------- ------------
Total current liabilities............................................. 6,749,568 55,951,435
Deferred income from affiliates ............................................. 1,784,600 792,240
Deferred income.............................................................. - 115,062
Notes payable, net of current portion ....................................... 58,415,956 13,696,797
Line of credit............................................................... 34,000,000 18,974,186
Minority interest in consolidated partnership ............................... 11,376,972 11,220,836
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.01 par value:
Authorized shares - 15,000,000; no shares issued or outstanding......... - -
Common stock, $.01 par value:
Authorized shares - 65,000,000
Issued and outstanding shares - 19,717,347 in 1999
and 1998.............................................................. 197,173 197,173
Additional paid-in capital................................................ 91,934,811 91,740,251
Retained earnings ........................................................ 17,416,679 12,578,755
----------------- --------------
Total shareholders' equity............................................ 109,548,663 104,516,179
--------------- --------------
Total liabilities and shareholders' equity............................ $ 221,875,759 $ 205,266,735
=============== =============
See accompanying notes.
F-4
CAPITAL SENIOR LIVING CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31,
1999 1998 1997
------------- ------------- ---------
Revenues:
Resident and health care revenue............................... $ 41,070,673 $ 25,987,776 $22,159,515
Rental and lease income........................................ 4,303,739 4,281,603 4,275,611
Unaffiliated management services revenue....................... 2,694,887 2,464,677 1,919,618
Affiliated management services revenue......................... 455,636 1,327,019 1,378,444
Unaffiliated development fees.................................. 1,341,102 1,234,050 803,767
Affiliated development fees.................................... 14,085,547 7,472,501 172,927
------------- ------------- -------------
Total revenues............................................ 63,951,584 42,767,626 30,709,882
Expenses:
Operating expenses............................................. 24,469,798 17,067,451 16,701,127
General and administrative expenses............................ 9,212,250 6,093,810 7,041,732
Provision for bad debts....................................... 15,895,566 500,000 43,254
Depreciation and amortization.................................. 4,671,076 2,733,658 2,117,288
------------- ------------- -------------
Total expenses............................................ 54,248,690 26,394,919 25,903,401
------------- ------------- -------------
Income from operations........................................... 9,702,894 16,372,707 4,806,481
Other income (expense):
Interest income................................................ 5,822,277 4,938,989 3,185,815
Interest expense............................................... (7,089,229) (1,921,897) (2,022,494)
Gain on sale of properties..................................... 748,288 421,718 -
Other.......................................................... - - 440,007
------------- ------------- -------------
Income before income taxes and minority interest in
consolidated partnership....................................... 9,184,230 19,811,517 6,409,809
Provision for income taxes....................................... (2,991,723) (7,475,771) (792,524)
------------ ------------- -------------
Income before minority interest in consolidated partnership...... 6,192,507 12,335,746 5,617,285
Minority interest in consolidated partnership.................... (1,354,583) (379,187) (1,936,122)
------------ ------------- -------------
Net income....................................................... $ 4,837,924 $ 11,956,559 $ 3,681,163
============ ============ ============
Net income per share:
Basic.......................................................... $ 0.25 $ 0.61 $ 0.33
============ ============ ============
Diluted....................................................... $ 0.24 $ 0.61 $ 0.33
============ ============ ============
Weighted average shares outstanding - basic................... 19,717,347 19,717,347 11,150,087
============ ============ ============
Weighted average shares outstanding - diluted................. 19,806,341 19,717,347 11,150,087
============ ============ ============
Pro forma net income (unaudited):
Net income..................................................... $ 3,681,163
Pro forma income taxes......................................... (964,776)
-------------
Pro forma net income............................................. $ 2,716,387
============
See accompanying notes.
F-5
CAPITAL SENIOR LIVING CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
COMMON STOCK ADDITIONAL RETAINED
PARTNERS' ------------------------ PAID-IN EARNINGS
CAPITAL SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
----------- ---------- ----------- ----------- ------------ -------------
Balance at January 1, 1997............. $17,257,778 1,680,000 $ 16,800 $ 26,558 $ (100,612) $ 17,200,524
Purchase of Beneficial Unit
Certificates of CSLC ............. 374,867 - - - - 374,867
Distributions prior to Offering .... - - - (457,647) (457,647)
Issuance of stock resulting from the
Formation......................... - 7,687,347 76,873 (76,873) - -
Issuance of stock in Offering, net.. - 10,350,000 103,500 110,227,415 - 110,330,915
Equity not retained in Asset Purchase (20,133,353) - - (18,436,849) - (38,570,202)
Net income.......................... 2,500,708 - - - 1,180,455 3,681,163
----------- ----------- ---------- ----------- ------------ -------------
Balance at December 31, 1997........... - 19,717,347 197,173 91,740,251 622,196 92,559,620
Net income.......................... - - - - 11,956,559 11,956,559
----------- ------------ ---------- ----------- ------------ -------------
Balance at December 31, 1998 - 19,717,347 197,173 91,740,251 12,578,755 104,516,179
Non cash compensation............... - - - 194,560 - 194,560
Net income.......................... - - - - 4,837,924 4,837,924
----------- ------------ ---------- ----------- ------------ -------------
Balance at December 31, 1999 $ - 19,717,347 $ 197,173 $91,934,811 $ 17,416,679 $109,548,663
=========== ============ ========== =========== =========== -============
See accompanying notes.
F-6
CAPITAL SENIOR LIVING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
-----------------------------------------
1999 1998 1997
------------ ------------ -----------
OPERATING ACTIVITIES
Net income............................................ $ 4,837,924 $ 11,956,559 $ 3,681,163
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation..................................... 4,567,172 2,639,883 1,894,665
Amortization..................................... 103,904 93,775 222,623
Amortization of deferred financing charges....... 518,842 163,708 -
Minority interest in consolidated
partnership.................................... 1,354,583 379,187 1,936,122
Deferred interest................................ - (679,619) (173,456)
Deferred income from affiliates.................. 992,360 792,240 -
Deferred income.................................. (115,062) (116,194) 231,256
Deferred income taxes............................ (30,235) (296,478) (39,158)
Gain on sale of property......................... (748,288) (421,718) -
Non cash compensation............................ 194,560 - -
Provision for bad debts.......................... 15,895,566 500,000 43,254
Changes in operating assets and liabilities,
net of acquisitions:
Cash, restricted............................. - - 186,416
Accounts receivable.......................... (1,011,705) (1,481,883) (1,556,965)
Accounts receivable from affiliates.......... (12,463,743) (7,190,431) 90,955
Interest receivable from affiliates.......... (644,727) (306,108) -
Prepaid expenses and other................... (59,620) 4,110 (373,006)
Other assets................................. (1,503,759) (1,059,034) (11,454)
Accounts payable............................. (268,311) 311,734 2,667,158
Accrued expenses............................. (871,927) 525,944 23,529
Federal and state income taxes payable....... (7,703,634) 836,920 831,682
Customer deposits............................. 59,318 36,812 28,955
------------ ------------ ------------
Net cash provided by operating activities............. 3,103,218 6,689,407 9,683,739
INVESTING ACTIVITIES
Capital expenditures.................................. (1,887,448) (6,027,361) (2,441,106)
Cash paid for acquisitions............................ - (67,728,438) -
Proceeds from sale of property........................ 2,740,217 676,036 -
Advances to affiliates................................ (22,794,299) (11,728,162) -
Cash acquired upon acquisition of HCP................. - - 8,995,455
Investment in restricted cash equivalents............. - - (64,202,763)
Cash paid for Asset Purchase and cash not retained - - (8,244,077)
Proceeds from (investments in) limited partnerships 5,414,122 (1,693,934) (15,609,034)
------------ ----------- -----------
Net cash used in investing activities................. (16,527,408) (86,501,859) (81,501,525)
FINANCING ACTIVITIES
Proceeds from notes payable and line of credit........ 61,506,256 67,039,026 78,663,883
Repayments of notes payable and line of credit........ (48,981,034) (791,214) (77,363,736)
Repayments of notes payable to affiliates............. - - (1,166,481)
Proceeds from notes payable to affiliates............. - - 500,000
Distributions to minority partners.................... (1,198,447) - (224,795)
Distributions prior to Offering....................... - - (457,647)
Issuance of common stock, net......................... - - 110,330,915
Cash received for redemption of NHP limited
partnership interest................................ - 1,997,280 -
Repurchase of HCP limited partnership interests by
HCP................................................. - (144,791) -
Repurchase of Beneficial Unit Certificates of CSLC.... - - (960,752)
Deferred financing charges paid....................... (741,831) (585,804) (196,888)
----------- ----------- -----------
Net cash provided by financing activities............. 10,584,944 67,514,497 109,124,499
----------- ----------- -----------
(Decrease) increase in cash and cash equivalents..... (2,839,246) (12,297,955) 37,306,713
Cash and cash equivalents at beginning of year....... 35,827,270 48,125,225 10,818,512
----------- ----------- -----------
Cash and cash equivalents at end of year............. $32,988,024 $35,827,270 $48,125,225
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES
Cash paid during the year for:
Interest............................................ $ 6,475,989 $ 1,956,812 $ 2,041,366
=========== =========== ===========
Income taxes........................................ $10,275,592 $ 6,935,330 $ -
=========== =========== ===========
See accompanying notes
F-7
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
1. ORGANIZATION AND FORMATION
Capital Senior Living Corporation, a Delaware corporation, was incorporated
on October 25, 1996. The accompanying financial statements include the
consolidated financial statements of Capital Senior Living Corporation
("Corporation"); Capital Senior Living, Inc. ("Living"); Capital Senior
Development, Inc. ("Development"); Capital Senior Management 1, Inc.
("Management 1"); Capital Senior Management 2, Inc. ("Management 2"); Capital
Senior Living Trust I ("Trust I"); Quality Home Care, Inc. ("Quality"); Capital
Senior Living Properties, Inc. including HealthCare Properties, L.P. ("HCP");
and Capital Senior Living Properties 2, Inc. ("Properties 2"), which includes
Capital Senior Living Properties 2-Gramercy, Inc. ("Gramercy"), Capital Senior
Living Properties 2-NHPCT, Inc. ("NHPCT") and Capital Senior Living Properties 2
- - NHPT, Inc. ("NHPT") (collectively referred to with Capital Senior Living
Corporation as the "Company"). The accompanying financial statements are
presented on a combined basis prior to November 5, 1997, and include Capital
Senior Living Communities, L.P. ("CSLC") through that date. CSLC included the
accounts of CSLC and HCP. All material intercompany balances and transactions
have been eliminated in consolidation.
The Company is a provider of senior living services. The Company owns,
operates, develops and manages senior living communities throughout the United
States.
The Company completed the registration of its common stock in an initial
public offering ("Offering") on November 5, 1997. Simultaneously with the
closing of the Offering, the Corporation acquired Living, Quality, Development,
Management 1, and Management 2 ("Formation") in exchange for 7,687,347 shares of
common stock and a note payable for $18,076,380 ("Formation Note") to Jeffrey L.
Beck and James A. Stroud or a related trust (collectively, the "Stockholders")
and Lawrence A. Cohen, all officers of the Company. Additionally, Corporation
purchased substantially all of the assets, other than working capital items, of
CSLC (the "Asset Purchase") for the assumption of a $70,833,752 note payable and
a cash payment of $5,782,927. The Stockholders owned 46% of the common stock of
the Company after the Offering.
Due to all of these entities being under the common control of the
Stockholders for all periods presented prior to the Offering, these consolidated
financial statements reflect the assets and liabilities at their historical
values and the accompanying consolidated statements of income, equity, and cash
flows reflect the consolidated results for the periods indicated even though
they have historically operated as separate entities prior to the Formation. The
Formation was accounted for at historical cost in a manner similar to a pooling
of interests to the extent of the percentage ownership by the Stockholders. The
Asset Purchase was recorded at fair value to the extent of the minority
interest. A step-up in basis of $9,282,202 was recorded for property and
equipment and $2,692,669 for the investment in NHP Notes. Additionally, a
deferred tax asset of $10,060,119 and goodwill of $1,264,881 was recorded.
Assets that were not acquired from CSLC in the Asset Purchase that were combined
in the financial statements until such date were charged to paid-in capital.
CSLC's assets included investments in HCP and NHP Retirement Housing Partners I,
L.P. ("NHP") which were acquired in the Asset Purchase. NHP owned a portfolio of
five independent senior living communities. On September 30, 1998, the Company
purchased four of the five independent senior living communities from NHP (See
Note 4).
In the accompanying consolidated financial statements, HCP is consolidated
as the Company had acquired a controlling financial interest in HCP during 1997.
At December 31, 1999, 1998 and 1997, the Company owned approximately 57%, 57%
and 56% of HCP's limited partner units, respectively. Preacquisition earnings
for 1997 applicable to HCP are included in minority interest.
HCP is a Delaware limited partnership established for the purpose of
acquiring, leasing and operating existing or newly constructed long-term health
care properties. One property is operated by HCP and six properties are leased
to qualified operators who provide specialized healthcare services. Capital
Realty Group Senior Housing, Inc. ("Housing"), an entity controlled by the
Stockholders until June 10, 1998, is the general partner. On June 10, 1998,
Housing's parent corporation, Capital Realty Group Corporation, sold 100% of its
stock in Housing to an
F-8
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
unrelated third party.
HCP and NHP are subject to the reporting obligations of the Securities and
Exchange Commission.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
Investments with original maturities of three months or less are considered
to be cash equivalents. The Company has deposits in banks that exceed Federal
Deposit Insurance Corporation insurance limits. Management believes that credit
risk related to these deposits is minimal. Cash and cash equivalents, at
December 31, 1999 and 1998, includes the cash and cash equivalents of the HCP
partnership of $13,723,936 and $11,971,405, respectively.
LONG-LIVED ASSETS
Property and equipment are stated at cost and depreciated on a straight-line
basis over the estimated useful lives of the assets. The estimated useful lives
are 30 to 40 years for buildings, 20 years for land improvements and 5 to 10
years for furniture, equipment and automobiles.
Management contract rights of $516,163, included in other assets, are stated
at cost and amortized on a straight-line basis over their respective contract
lives. Accumulated amortization for management contract rights at December 31,
1999 and 1998, was $368,460 and $320,530, respectively. Goodwill of $1,264,881,
included in other assets, is the excess purchase price over the fair value of
the assets acquired in the Asset Purchase to the extent of the minority interest
and is amortized over 30 years on a straight-line basis. Accumulated
amortization for goodwill at December 31, 1999 and 1998, was $94,723 and
$51,005, respectively.
At each balance sheet date, the Company reviews the carrying value of its
management contract rights, goodwill, and property and equipment to determine if
facts and circumstances suggest that they may be impaired or that the
amortization or depreciation period may need to be changed. The Company
considers external factors relating to each asset, including contract changes,
local market developments, and other publicly available information. The
carrying value of a long-lived asset is considered impaired when the anticipated
undiscounted cash flows from such asset is separately identifiable and is less
than its carrying value. In that event, a loss is recognized based on the amount
the carrying value exceeds the fair market value, generally based on discounted
cash flows, of the long-lived asset. The Company does not believe there are any
indicators that would require an adjustment to the carrying value of the
management contract rights, goodwill or property and equipment or their
remaining useful lives as of December 31, 1999 and 1998.
ASSETS HELD FOR SALE
During 1999, the Company reclassified four of its properties in HCP to
assets held for sale. Two of the properties had been leased to Rebound Inc., a
subsidiary of HealthSouth Corporation ("HealthSouth"), under a master lease
agreement and both properties were closed prior to February 28, 1997. Effective
August 25, 1999, HealthSouth agreed to transfer control of the two closed
communities to the Company. The assets of one of the two communities, with the
exception of two houses, were sold on September 20, 1999. The Company estimates
the properties held for sale have an aggregate fair value, net of costs of
disposal, of $9,549,084 at December 31, 1999. The amounts the Company will
ultimately realize could differ materially from this estimate.
INCOME TAXES
The Company accounts for income taxes under the liability method. Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes.
F-9
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Prior to the Formation, the predecessor companies were S corporations and
consequently, were not subject to income taxes. Thus, taxable income or loss is
directly allocated to the individual stockholders. Upon Formation, these
corporations converted from S corporations to C corporations. A deferred tax
benefit of $41,085 was recorded in the consolidated statements of income upon
conversion.
REVENUE RECOGNITION
Resident and health care revenue is recognized at estimated net realizable
amounts due from residents in the period to which the rental and other services
are provided.
Revenues from the Medicare and Medicaid programs accounted for 11%, 16% and
22% in 1999, 1998 and 1997, respectively of the Company's net revenues. One
community is a provider of services under the Indiana Medicaid program.
Accordingly, the community is entitled to reimbursement under the foregoing
program at established rates that are lower than private pay rates. Patient
service revenue for Medicaid patients is recorded at the reimbursement rates as
the rates are set prospectively by the state upon the filing of an annual cost
report. Two communities are providers of services under the Medicare program and
are entitled to payment under the foregoing programs in amounts determined based
on established rates that differ from private pay rates. In 1998 and prior
years, payments were based on the filing of an annual cost report prepared in
accordance with federal regulations, which are subject to audit and retroactive
adjustments in future periods. Revenue from the Medicare program is recorded at
established rates and adjusted for differences between such rates and estimated
amounts payable from the program. Any differences between estimated and actual
reimbursements are included in operations in the year of settlement, which have
not been material. Under federal regulations, Medicare reimbursements through
1998 to these facilities were limited to routine cost limits determined on a
geographical region. The Company has filed exception reports to request
reimbursement in excess of its routine cost limits for the years 1997 through
1998, as of December 31, 1999, and recorded revenue of approximately $43,000 in
1998, as a result of being granted exception requests for 1997 and approximately
$346,000 in 1997, as a result of being granted exception requests for 1992 and
1994. CSLC retained cost report exposure for cost years prior to the Offering.
Laws and regulations governing the Medicare and Medicaid programs are
complex and subject to interpretation. The Company believes that it is in
compliance with all applicable laws and regulations and is not aware of any
pending or threatened investigations involving allegations of potential
wrongdoing. While no such regulatory inquiries have been made, compliance with
such laws and regulations can be subject to future government review and
interpretation as well as significant regulatory action including fines,
penalties, and exclusion from the Medicare and Medicaid programs.
Management services revenue, resident and healthcare revenue and development
fees are recognized when earned. Management services revenue relates to
providing certain management and administrative support services under
management contracts, which have terms expiring through 2009. Management
services revenue is shown net of reimbursed expenses. The reimbursed expenses
from affiliates were $1,655,459, $3,486,163 and $3,892,526, for the years ended
December 31, 1999, 1998 and 1997, respectively. Reimbursed expenses from
unaffiliated parties were $12,539,616, $11,203,790 and $8,941,343, for the years
ended December 31, 1999, 1998 and 1997, respectively.
Affiliated development fees in the accompanying statements of income
represent development fees earned from the Triad Entities (see Note 3).
CREDIT RISK
The Company's resident receivables are generally due within 30 days and
development fee receivables are due through completion of construction, which is
generally one year. The Company does not require collateral. Credit losses, on
resident receivables, have been within management's expectations, and management
believes that the allowance for doubtful accounts adequately provides for any
expected losses.
F-10
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
ADVERTISING
Advertising is expensed as incurred. Advertising expenses for the years ended
December 31, 1999, 1998 and 1997 were $357,208, $243,720 and $336,738,
respectively.
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 net
income per share (in thousands except for per share amounts):
1999 1998 1997
----------- ----------- -----------
Net income $ 4,838 $ 11,957 $ 3,681
Weighted average shares outstanding - basic 19,717 19,717 11,150
Effect of dilutive securities:
Employee stock options 89 -- --
----------- ----------- -----------
Weighted average shares outstanding - dilutive 19,806 19,717 19,717
=========== =========== ===========
Basic net income per share $ 0.25 $ 0.61 $ 0.33
=========== =========== ===========
Diluted net income per share $ 0.24 $ 0.61 $ 0.33
=========== =========== ===========
STOCK-BASED COMPENSATION
The Company has elected to follow the intrinsic value method in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25") and related interpretations in accounting for its employee and
director stock options. In accordance with APB 25, since the exercise price of
the Company's employee stock options equals the market price of the underlying
stock on the date of grant, no compensation expense is recognized. The Company
has adopted the disclosure-only provisions for the fair value method of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("FASB 123"). Stock option grants to non-employees are accounted
for in accordance with the fair value method of FASB 123.
SEGMENT INFORMATION
The Company evaluates the performance and allocates resources of its senior
living facilities based on current operations and market assessments on a
property by property basis. The Company does not have a concentration of
operations geographically or by product or service as its management functions
are integrated at the property level.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to 1999
presentation.
F-11
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. 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 new senior living communities. These communities are
primarily Waterford communities. The development of senior living communities
typically involves a substantial commitment of capital over an approximate 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.
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):
Notes Receivable Deferred Income
----------------------------------------------- ---------------------
LP
Ownership Capital Committed Balance Interest Development
Interest Investment Amount Dec. 31, Maturity Rate Interest Fees
----------- ---------- ---------- ---------- ----------- ---------- --------- -----------
ENTITY
Triad Senior
Living I, L.P.
(Triad I)
1999 19.0% $3,000 $ -- $ 30 -- 8.0% $230 $426
1998 19.0 330 9,636 8.0 67 223
Triad Senior
Living II, L.P.
(Triad II)
1999 19.0 74 15,000 11,510 September 10.5 130 197
1998 19.0 74 10,000 932 25, 2003 10.5 3 95
Triad Senior
Living III,
L.P.
(Triad III) 19.0 143 10,000 9,810 February 10.5 111 377
1999 19.0 143 10,000 -- 8, 2004 10.5 -- 163
1998
Triad Senior
Living IV, L.P.
(Triad IV)
1999 19.0 143 10,000 5,178 December 10.5 73 106
1998 19.0 143 10,000 1,160 30, 2003 10.5 -- 238
Triad Senior
Living V, L.P.
(Triad V) June 30,
1999 10.0 -- 10,000 3,467 2004 12.0 17 80
Triad Senior
Living VI, L.P.
(Triad VI) October 1,
1999 5.0 -- 3,000 600 2004 12.0 2 --
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 the
properties become
F-12
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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, plus
overhead not to exceed 1% of gross revenue.
The Company has the option to purchase the partnership interests of the
other parties in Triad Entities for an amount equal to the amount paid for the
partnership interest by the other partners, plus a noncompounded return of 12%
per annum except for Triad I. 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 Lehman
Brothers purchased from third parties 80% of the limited partnership interest in
Triad I for an investment of $12,000,000. The investment enabled Triad I to
repay the Company approximately $9,000,000 in loans. The Company increased its
equity contribution in Triad I to $3,000,000 and continues to own a 19% limited
partnership interest. The Company has the option to purchase the Triad I
communities for an amount specified in 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.
Each of the Triad Entities finances the development of the new communities
though the 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.
4. ACQUISITIONS
On September 30, 1998, the Company acquired four senior living communities
from NHP for $40,683,281 by entering into a $32,300,000 mortgage loan agreement
with Lehman Brothers Holdings, Inc. ("Lehman"), a cash payment of $8,246,007 and
assuming net liabilities of $137,274. The acquisition was accounted for as a
purchase. The Company's preliminary purchase price allocation was based on
independent valuations from third party valuation firms.
On October 28, 1998, the Company acquired a senior living community from
Tesson Heights Enterprises, a Texas limited partnership, for $23,051,786 by
borrowing $15,400,000 pursuant to the existing mortgage loan agreement with
Lehman and $7,376,632 under an existing line of credit and assuming $275,154 of
net liabilities. The Company also acquired a senior living community from
Gramercy Hill Enterprises, a Texas limited partnership, for $11,036,655 by
assuming a $6,334,660 note, borrowing $1,980,000 from WMF Washington Mortgage
Corp. ("WMF") on a second lien basis and $2,425,798 under an existing line of
credit and assuming net liabilities of $296,197. The acquisitions were accounted
for as a purchase. The Company's preliminary purchase price allocations were
based on independent valuations from third-party valuation firms.
The results of operations for the above acquisitions are included in the
Company's statement of income from the date of acquisition.
F-13
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Pro forma results of operations as if the NHP, Tesson Heights and Gramercy Hill
acquisitions had occurred on January 1, 1997 are as follows:
YEAR ENDED DECEMBER 31,
-----------------------------------
1998 1997
---------------- ---------------
Total revenues................................................................ $56,559,920 $47,082,786
Net income.................................................................... 11,518,250 946,143
Net income per share - basic and diluted...................................... $ 0.58 $ 0.08
Shares used in computing pro forma net income per share....................... 19,717,347 11,150,087
The unaudited pro forma consolidated amounts are presented for
informational purposes only and do not necessarily reflect the financial
position or results of operations of the Company that would have actually
resulted had the acquisitions occurred on January 1, 1997.
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
DECEMBER 31,
--------------------------------
1999 1998
------------------ -------------
Land.........................................................................$ 9,173,178 $ 10,641,671
Land improvements............................................................ 107,232 6,400
Buildings and building improvements.......................................... 101,824,613 119,759,970
Furniture and equipment...................................................... 5,047,046 4,685,174
Automobiles.................................................................. 169,361 73,890
Construction in process...................................................... 54,354 71,611
--------------- --------------
116,375,784 135,238,716
Less accumulated depreciation................................................ 11,652,568 16,294,763
--------------- --------------
Property and equipment, net..................................................$ 104,723,216 $ 118,943,953
=============== ==============
On September 20, 1999, the Company sold one of its properties for
$2,740,000, net of sales commission, which resulted in the recognition of a gain
of $748,248. On December 7, 1998, the Company sold land on one of its properties
for $12,662, which resulted in the recognition of a $8,545 gain and net cash
proceeds of $11,052. On November 24, 1998, the Company sold land on one of its
properties for $738,385. This sale resulted in a $415,847 gain and net cash
proceeds of $664,984.
The Company capitalized $0 and $348,626 of interest as part of building and
building improvements during 1999 and 1998, respectively.
6. ACCRUED EXPENSES
Accrued expenses consists of the following:
DECEMBER 31,
--------------------------------
1999 1998
------------- --------------
Accrued salaries, bonuses and related expenses............................. $ 936,469 $ 847,722
Accrued property taxes..................................................... 665,663 538,697
Other...................................................................... 525,242 845,476
------------- --------------
$ 2,127,374 $ 2,231,895
============= ==============
F-14
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. NOTES PAYABLE AND LINE OF CREDIT
Notes payable consists of the following:
DECEMBER 31,
---------------------------------
1999 1998
--------------- --------------
WMF mortgage loan, bearing interest at 7.69%, payable in monthly installments
of principal and interest of $48,089, maturing on January 2008 secured by
a certain property of Gramercy with a net book value of $10,819,112 at
December 31, 1999......................................................... $ 6,217,055 $ 6,312,032
WMF second mortgage loans, bearing interest at 7.08%, payable
in monthly installments of principal and interest of $14,095,
maturing on January 2010 secured by a certain property of Gramercy
with a net book value of $10,819,112 at December 31, 1999................. 1,944,885 1,975,159
Lehman mortgage loan, bearing interest at 8.20%, payable in
monthly installments of principal and interest of $360,915,
maturing on September 2009 secured by certain properties of NHPT
with a net book value of $62,378,615 at December 31, 1999................. 45,801,968 -
Lehman $60 million mortgage loan, bearing interest at prime
or LIBOR plus 1.875% (6.95% at December 31, 1998),
payable in monthly installments of interest only, maturing on
October 1, 1999, secured by the certain properties of NHPT................ - 47,700,000
A.I. Credit Corp insurance premium financing, bearing interest at 7.09%,
payable in monthly installments of principal and interest of $19,205,
maturing on April 2002.................................................... 478,066 -
HCP mortgage loans, bearing interest ranging from 6.2% to 10.75%, payable in
monthly installments of $99,212 including interest, maturing from 2001 to
2012 secured by certain properties of HCP with a net book value of
$8,431,900 at December 31, 1999........................................... 5,173,281 6,128,656
------------- -------------
59,615,255 62,115,847
Less current portion...................................................... 1,199,299 48,419,050
------------- -------------
$ 58,415,956 $ 13,696,797
============= =============
The aggregate maturities of notes payable at December 31, 1999, are as
follows:
2000 $ 1,199,299
2001 1,185,465
2002 1,132,665
2003 1,153,302
2004 1,255,320
Thereafter 53,689,204
---------------
$ 59,615,255
===============
In August 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. The fixed rate loans are non-recourse loans secured by certain properties
owned by the Company. These loans are for 10-year terms, bear interest at 8.2%
with the principal being amortized over a 25-year period. In connection with
obtaining these mortgage loans the Company incurred $574,138 in financing
charges, that were deferred and amortized over the life of the loans using the
straight-line method. Accumulated amortization was $19,138 at December 31, 1999.
F-15
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
In connection with obtaining the 1998 Lehman and other 1998 mortgage loans,
the Company incurred $576,904 in financing charges, that were deferred and
amortized over the life of the loans using the straight-line method. Accumulated
amortization was $528,985 and $123,727 at December 31, 1999 and 1998,
respectively.
On December 10, 1997, the Company entered into a $20 million revolving line
of credit with a bank, that was to expire December 10, 2000. In April 1999, the
line of credit was amended to increase the availability under the credit
facility to $34 million and extend the maturity date to April 2002. Under the
terms of the line of credit, interest is due monthly and the principle is due at
the end of the term of the credit agreement. Borrowings under the line of credit
are secured by four senior living communities with a net book value of
$32,158,248 at December 31, 1999, and bear interest at the prime rate or LIBOR
plus 1.7% (8.18% and 7.33% at December 31, 1999 and 1998, respectively). The
line of credit may be used for the acquisition of additional properties,
development of expansions to existing properties, acquisition of additional
interests in HCP and NHP and general working capital purposes. Amounts
outstanding under the line of credit at December 31, 1999 and 1998 were
$34,000,000 and $18,974,186, respectively. In connection with obtaining the line
of credit and the subsequent amendment, the Company incurred $160,684, $6,847
and $111,533 in 1999, 1998 and 1997, respectively, in financing charges, that
were deferred and amortized over the life of the line of credit. Accumulated
amortization was $133,497, $41,066 and $3,098 at December 31, 1999, 1998 and
1997, respectively.
Under the line of credit, the Company must maintain certain levels of
tangible net worth and comply with other restrictive covenants.
HCP leased four of its properties under a master lease to HealthSouth (see
Note 17). Prior to February 28, 1997, HealthSouth closed two of the communities.
Effective August 5, 1999, HealthSouth agreed to transfer control of the two
closed communities to HCP. HealthSouth also agreed to continue making its full
lease payments on all four communities. The rentals under the master lease
provide additional security for one note payable used to finance one of the
master lease properties. The note is due December 1, 2001.
8. EQUITY
The Company is authorized to issue preferred stock in series and to fix and
state the voting powers and such designations, preferences and relative
participating, optional or other special rights of the shares of each such
series and the qualifications, limitations and restrictions, thereof. Such
action may be taken by the Board without stockholder approval. The rights,
preferences and privileges of holders of common stock are subject to the rights
of the holders of preferred stock.
On November 5, 1997, the Company issued 10,350,000 shares of $.01 par value
common stock for cash of $110,330,915, net of issuance costs of $11,317,705 and
payment of the Formation Note of $18,076,380, in connection with the Offering.
Additionally, the Company issued 7,687,347 shares of $.01 par value common stock
in connection with the Formation. For financial reporting purposes, the shares
issued in connection with the Formation are presented as outstanding as of
January 1, 1997.
Purchases of Beneficial Unit Certificates ("BUCs") of CSLC during 1997
represent additional purchases by the Stockholders and are accounted for at the
book value of the BUCs and as an addition to partners' capital and a reduction
in minority interest. CSLC purchased 55,316 BUCs during 1997, at an average cost
of $17.37 per unit.
Net income (loss) of HCP is generally allocated 98% to the limited partners
and 2% to the general partner. The net income of HCP from the disposition of a
property is allocated: (i) to partners with deficit capital accounts on a pro
rata basis; (ii) to limited partners until they have been paid an amount equal
to the amount of their adjusted investment (as defined); (iii) to the limited
partners until they have been allocated income equal to their 12% Liquidation
Preference; and (iv) thereafter, 80% to the limited partners and 20% to the
general partner. The net loss of HCP from the disposition of a property is
allocated: (i) to partners with positive capital accounts on a
F-16
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
pro rata basis and (ii) thereafter, 98% to the limited partners and 2% to the
general partner. Distributions of available cash flow are generally distributed
98% to the limited partners and 2% to the general partner, until the limited
partners have received an annual preferential distribution, as defined.
Thereafter, available cash flow is distributed 90% to the limited partners and
10% to the general partner. During 1998, HCP repurchased $144,791 of its limited
partnership interests. HCP made distributions of $1,198,447 and $224,795 to
minority partners in 1999 and 1997, respectively.
9. STOCK OPTIONS
The Company adopted a stock option plan during 1997, providing for the grant
of incentive and nonqualified stock options to employees and directors. This
plan was amended during the year to increase the number of options available for
grant under the plan from 1,565,000 to 2,000,000 shares and 2,000,000 shares of
common stock are reserved for future issuance. The option exercise price and
vesting provisions of such options are fixed when the option is granted. The
options expire four to ten years from the date of grant and vest from zero to
five years. The option exercise price is the fair market value of a share of
common stock on the date the option is granted.
A summary of the Company's stock option activity, and related information
for the years ended December 31, 1999 and 1998 is presented below:
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
-------------- --------------------
Outstanding at January 1, 1997 - -
Granted 776,250 13.50
Exercised - -
Forfeited - -
Expired - -
-------------- --------------------
Outstanding at December 31, 1997 776,250 $13.50
Granted - -
Exercised - -
Forfeited 76,750 13.50
Expired - -
-------------- --------------------
Outstanding at December 31, 1998 699,500 $13.50
Granted 874,500 $7.54
Exercised - -
Forfeited 76,000 $11.62
Expired - -
-------------- --------------------
Outstanding at December 31, 1999 1,498,000 $10.13
============== ====================
Exercisable at December 31, 1999 421,780 $13.42
============== ====================
============== ====================
Exercisable at December 31, 1998 258,010 $13.50
============== ====================
============== ====================
Exercisable at December 31, 1997 121,500 $13.50
============== ====================
The weighted average remaining contractual life of the options at December
31, 1999 and 1998, is approximately 8.4 years and 8.8 years, respectively.
Options outstanding, as of December 31, 1999, are exercisable at prices ranging
from $7.06 to $13.50. Unoptioned shares available for the granting of options at
December 31, 1999 and 1998 was 502,000 and 865,500, respectively.
During 1999, the Company recorded compensation expense of $194,560 relating
to 52,500 options held by a former officer of the Company that became vested in
conjunction with his change in employee status. These options are included in
the table above.
F-17
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The average daily price of the stock during 1999, 1998 and 1997 subsequent
to the Offering was $8.94, $11.73 and $13.04 respectively, per share. For 1998
and 1997 the options were anti-dilutive and therefore were not used in the
calculation of diluted net income per share.
Pro forma information regarding net income per share has been determined as if
the Company had accounted for its employee stock options under the fair value
method. The fair value for these options was estimated at the date of grant
using the Black-Scholes option pricing model with the following weighted average
assumptions for 1999, 1998 and 1997, respectively: risk free interest rate of
6.5, 5.7 and 5.7 percent; dividend yields of zero percent for all years;
expected lives of seven and one-half years for all years; and volatility factors
of the expected market price of the Company's common stock of 58.4, 70.1 and
70.1 percent. The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting periods.
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1999 1998 1997
---------------- --------------- ---------------
Net income:
As reported............................................ $ 4,838,000 $ 11,957,000 $ 3,681,000
Pro forma.............................................. 3,428,000 10,848,000 2,787,000
Net income per share - basic:
As reported............................................ $ 0.25 $ 0.61 $ 0.33
Pro forma.............................................. 0.17 0.55 0.25
Net income per share - diluted:
As reported............................................ 0.24 0.61 0.33
Pro forma.............................................. 0.17 0.55 0.25
10. INCOME TAXES
The provision for income taxes consists of the following:
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1999 1998 1997
---------------- --------------- ---------------
Current:
Federal................................................ $ 2,523,024 $ 6,308,319 $ 730,184
State.................................................. 498,934 1,463,930 101,498
Deferred:
Federal................................................ (174,264) (240,635) (39,404)
State.................................................. 144,029 (55,843) 246
------------- -------------- ------------
$ 2,991,723 $ 7,475,771 $ 792,524
============= ============== ============
F-18
The provision for income taxes differed from the amounts computed by
applying the U.S. federal income tax rate to income before provision for income
taxes as a result of the following:
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1999 1998 1997
---------------- --------------- ----------------
Tax expense at federal statutory rates................ $ 2,662,080 $ 6,606,992 $1,521,053
State income tax expense, net of federal benefit.......... 325,557 937,532 101,744
Tax expense at federal statutory rates on income earned
prior to Formation and Asset Purchase ................. - - (831,026)
Conversion of S corporations to C corporation status ..... - - (41,085)
Other..................................................... 4,086 (68,753) 41,838
---------------- --------------- ----------------
$ 2,991,723 $ 7,475,771 $ 792,524
================ =============== ================
A summary of the Company's deferred tax assets and liabilities are as
follows:
DECEMBER 31,
-------------------------------
1999 1998
-------------------------------
Deferred tax assets:
Tax basis in excess of book basis arising from the Asset Purchase................. $ 9,377,655 $ 9,644,505
Other............................................................................. 2,098,825 1,113,530
--------------- ---------------
Total deferred tax assets......................................................... 11,476,480 10,758,035
Deferred tax liabilities............................................................. 1,050,490 362,280
--------------- ---------------
Total deferred tax assets, net.................................................... $10,425,990 $ 10,395,755
=============== ===============
11. EMPLOYEE BENEFIT PLANS
Effective January 1, 1999, the Company adopted a 401(k) salary deferral plan
(the `Plan'). Contributions to the Plan are in the form of employee salary
deferrals, which are subject to employer matching contributions of up to 2% of
the employee's annual salary. All employees of the Company meeting minimum
service and age requirements are eligible to participate in the Plan. The
Company incurred no administrative expenses related to the Plan in 1999.
Matching contributions of $147,000 were contributed to the Plan in 1999.
12. RELATED PARTY TRANSACTIONS
Certain administrative and occupancy costs were incurred by an affiliate on
behalf of the Company. Total costs allocated to the Company were $0, $0 and
$679,423 for the years ended December 31, 1999, 1998 and 1997, respectively.
Prior to the Offering, the Company paid premiums to a related party for
employee medical coverage. The related party insured the Company for any claims
exceeding the premiums paid. Accordingly, no amounts have been accrued at
December 31, 1997, for claims incurred prior to the Offering but unpaid.
The Company manages properties for a third party, in which an officer of the
Company was also a director of the third-party companies until July 1, 1998.
Management fees received for the period ended June 30, 1998 and for the year
ended December 31, 1997 were $987,840 and $1,589,703, respectively.
Upon sale of the four NHP properties on September 30, 1998, an affiliate
received a $1,219,500 brokerage fee.
Upon sale of the four CSLC properties in November 1997, an affiliate
received a $4,597,080 brokerage fee.
F-19
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
In October 1997, HCP paid an affiliate a refinancing fee of $13,245.
A former officer and significant shareholder of the Company is chairman of
the board of a bank where the Company holds the majority of its operating cash
accounts.
13. 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 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 any liability related to this claim, if any.
The Company has pending claims incurred in the normal course of business,
that, 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.
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and fair values of financial instruments at December 31,
1999 and 1998 are as follows:
1999 1998
---------------------------------- -----------------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
--------------- ---------------- --------------- ---------------
Cash and cash equivalents.................. $ 32,988,024 $32,988,024 $35,827,270 $35,827,270
Line of credit............................. 34,000,000 34,000,000 18,974,186 18,974,186
Notes payable.............................. 59,615,255 59,615,255 62,115,845 62,115,845
The following methods and assumptions were used in estimating its fair value
disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the balance
sheet for cash and cash equivalents approximate fair value.
Line of credit and notes payable: The fair value of notes payable is
estimated using discounted cash flow analysis, based on current incremental
borrowing rates for similar types of borrowing arrangements.
F-20
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
15. INVESTMENTS IN LIMITED PARTNERSHIPS
The investments in limited partnerships balance consists of the following:
DECEMBER 31,
-------------------------------------
1999 1998
---------------- ---------------
NHP pension notes............................................................. $ 5,761,664 $ 12,646,471
NHP limited partnership interests............................................. 2,086 1,708
Triad I limited partner interest.............................................. 3,000,000 330,243
Triad II limited partner interest............................................. 74,100 74,100
Triad III limited partner interest............................................ 142,500 142,500
Triad IV limited partner interest............................................. 142,500 142,500
Triad V limited partner interest.............................................. - -
Triad VI limited partner interest............................................. - -
------------- ------------
$ 9,122,850 $ 13,337,522
============= ============
HCP:
During 1999, 1998 and 1997, the Company paid $0, $144,791, and $5,604,944,
respectively, for partnership interests in HCP and as of December 31, 1999 and
1998, the Company had a 57% ownership in HCP.
NHP:
The Company acquired, on November 1, 1997, the NHP Notes owned by CSLC in
the Formation Transactions for $18,664,128. The NHP Notes bear simple interest
at 13% per annum and mature on December 31, 2001. Interest is currently paid
quarterly at a rate of 7%, with the remaining 6% interest deferred. From
November 1, 1997 through September 30, 1998, the Company recorded interest
income at 10.5% of the purchase price paid, which was determined based on the
discounted amount of principal and interest payments to be made following the
maturity date (December 31, 2001) of the NHP Notes (using a six-month lag
between maturity and full repayment), due to uncertainties regarding the
ultimate realization of the accrued interest. On September 30, 1998, the Company
purchased four properties from NHP. NHP in turn redeemed $7,500,000 of the
Company's investment in the NHP Notes and distributed approximately $5,300,000
of deferred interest on such notes. From October 1, 1998 through December 31,
1998, the Company began recording additional income, after giving consideration
to current payment of interest, partial redemption of the NHP Notes with accrued
interest and the estimated residual value in NHP. This change in estimate
resulted in $579,278 of additional income in 1998. In the fourth quarter of
fiscal 1999, the Company reevaluated the assumptions related to its investment
in the NHP Notes, and as a result is reducing the income expected to be earned
from the NHP Notes. This change in estimate resulted in a $1,206,000 reduction
in interest income in the fourth quarter. In addition, future interest income is
expected to decrease by approximately $1,253,842 and $1,687,705 in 2000 and
2001, respectively (the NHP Notes redemption is December 31, 2001).
During 1999 and 1998, the Company paid $378 and $344, respectively,
increasing the ownership of limited partnership units in NHP to 4.8% from 3.9%.
In addition, the Company invested $13,500 in NHP Notes, during 1999, bring the
Company's ownership of NHP Notes to 33.1%. The Company classifies its investment
in NHP Notes as held to maturity.
F-21
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Summary financial information regarding the financial position and results
of operations of NHP as of December 31 and for the years then ended is as
follows:
DECEMBER 31,
--------------------------------------
1999 1998
----------------- -----------------
Cash.................................................................. $ 5,553,357 $ 5,821,300
Property and equipment, net........................................... 18,392,872 18,849,354
Other assets.......................................................... 387,343 592,146
----------------- -----------------
Total assets..................................................... $24,333,572 $25,262,800
================= =================
Pension notes......................................................... $20,157,826 $20,157,826
Interest payable...................................................... 14,879,063 13,142,864
Other liabilities..................................................... 471,532 633,817
Partnership deficit................................................... (11,174,849) (8,671,707)
----------------- -----------------
Total liabilities and partnership deficit............................. $24,333,572 $25,262,800
================= =================
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1999 1998 1997
--------------- --------------- -----------------
Net revenue.......................................... $5,322,600 $ 13,746,088 $15,548,138
Net income (loss).................................... (2,474,347) 3,409,569 (3,522,917)
16. ALLOWANCE FOR DOUBTFUL ACCOUNTS
The components of the allowance for doubtful accounts are as follows:
DECEMBER 31,
--------------------------------------------------------
1999 1998 1997
--------------- ----------------- ----------------
Balance at beginning of year......................... $ 801,042 $ 301,042 $ 164,822
Provision for bad debts........................... 15,895,566 500,000 43,254
Write-offs and other.............................. (14,352,728) - (17,474)
Recoveries........................................ 700,000
Allowances not assumed in Asset Purchase.......... - - (145,602)
Allowance arising from consolidation of HCP....... - - 256,042
--------------- --------------- -----------------
Balance at end of year............................... $ 3,043,880 $ 801,042 $ 301,042
=============== =============== =================
In the fourth quarter of fiscal 1999, the Company wrote off notes receivable
and development fees receivable from Triad Entities that were unable to secure
financing on favorable terms for the development of their senior living
communities. These joint ventures were in various stages of developing 19
Waterford communities. In addition, the Company will be acquiring six sites
currently owned be these joint ventures and will receive the contractual rights
to the remaining thirteen sites that were being developed by these joint
ventures. Recoveries relate to a settlement with the Bankruptcy Trustee for NCA
Cambridge on rental income written off prior to August 1996.
17. LEASES
The Company leases its corporate headquarters under an operating lease
expiring in 2002. Additionally, the senior living communities have entered into
various contracts for services for duration of 5 years or less and are on
F-22
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
a fee basis as services are rendered. Rent expense under these leases was
$297,662, $266,590 and $188,986 for 1999, 1998 and 1997, respectively. Future
commitments are as follows:
2000 $ 441,217
2001 447,465
2002 284,858
2003 4,695
2004 1,600
---------------
$1,179,835
===============
HCP leases its property and equipment to tenants under noncancelable
operating leases. The lease terms range from 9 to 12 years with options to renew
for additional five-year terms and options to purchase the leased property at
the current fair market value at the end of the initial lease term. The leases
generally provide for contingent rentals based on the performance of the
property. Contingent rentals aggregated $332,411, $310,275 and $271,340 in 1999,
1998 and 1997, respectively.
Minimum rentals for the HCP leases are $3,761,262 and $2,858,619 per year in
2000 and 2001, respectively, subject to change based on changes in interest
rates. There are no minimum rentals thereafter. Property and improvements less
accumulated depreciation attributable to such rentals amounted to $15,354,292
and $18,329,061 at December 31, 1999 and 1998, respectively.
Three of HCP's senior living communities are subject to a master lease with
a single operator, HealthSouth. This master lease, as amended, contains a
nine-year renewal option and provides for contingent rentals equal to 4% of the
revenue differential, as defined, effective January 30, 1997. As of December 31,
1999 and 1998, no contingent rentals have been accrued on the master lease.
HealthSouth has agreed to continue making its full lease payments on all four
communities.
18. PRO FORMA INCOME TAXES (UNAUDITED)
The income taxes on earnings of the S corporations and partnerships for the
period from January 1, 1997 through October 31, 1997 are the responsibility of
the Stockholders and partners. The pro forma adjustments reflected on the
statements of income assume these S corporations and partnerships were subject
to income taxes. Pro forma income tax expense has been calculated using
statutory federal and state tax rates, estimated at 39.5%.
19. PRO FORMA RESULTS OF OPERATIONS (UNAUDITED)
Shown below are unaudited pro forma consolidated amounts for the year ended
December 31, 1997 representing the results of operations of the Company for such
period after giving effect to the adjustments relating to the Offering and the
Formation, as if the transactions had occurred as of January 1, 1997. The
unaudited pro forma consolidated amounts are presented for informational
purposes only and do not necessarily reflect the financial position or results
of operations of the Company which would have actually resulted had the Offering
and the Formation occurred as of January 1, 1997, or the future results of
operations of the Company.
Total revenues........................................................ $30,709,882
Net income............................................................ 4,991,288
Net income per share.................................................. $ 0.25
Shares used in computing pro forma net income per share............... 19,717,347
F-23
20. PENDING MERGERS
On October 19, 1999, the Company executed Amended and Restated
Agreements of Plans of Merger with each of ILM Senior Living, Inc. and ILM II
Senior Living, Inc. for a combined purchase price of $172 million cash plus
assumed 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. The outside termination date of the amended merger agreements
was 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.
During 1999, the Company received management and incentive fees of
$1,202,966 and $790,281 from ILM Senior Living, Inc. and ILM II Senior Living,
Inc., respectively. ILM Senior Living, Inc. and ILM II Senior Living, Inc. are
subject to the reporting requirements of the Securities and Exchange Commission.
F-24