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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
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 10,333,950 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
26, 1998 was approximately $142,091,813. 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 26, 1998, 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 1998
Annual Meeting of Stockholders (the "Proxy Statement") and filed 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
EXECUTIVE OFFICERS AND KEY EMPLOYEES ................................... 18
ITEM 2. PROPERTIES ................................................... 19
ITEM 3. LEGAL PROCEEDINGS ............................................ 20
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 .................................. 21
ITEM 6. SELECTED FINANCIAL DATA ...................................... 23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ......................... 25
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 ....................................... 33
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 33
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ............... 33
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K ....................................... 34
SIGNATURES ............................................................. 35
INDEX TO EXHIBITS ...................................................... E-1
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PART I
ITEM 1. BUSINESS
GENERAL
Capital Senior Living Corporation (together with its subsidiaries, the
"Company") is one of the largest providers of senior living services in the
United States in terms of resident capacity, according to the Assisted Living
Federation of America's 1996 Annual Largest Provider Survey. As of December 31,
1997, the Company owned interests in and/or operated 33 communities in 17
states with a capacity of approximately 5,000 residents, including 17
communities in which it owned interests, 15 communities that it managed for
third parties pursuant to multi-year management contracts and one community
that it leased from a third party. As of December 31, 1997, the Company was
developing 20 new communities which will have a capacity of approximately 3,500
residents and was expanding 11 existing communities to accommodate
approximately 1,000 additional residents. As of December 31, 1997, the Company
also operated one home health care agency. Approximately 92% of the total
revenues and reimbursable expenses for the senior living communities managed by
the Company as of December 31, 1997 are derived from private pay sources. At
December 31, 1997, communities which the Company operated and in which it owned
interests had an occupancy rate of approximately 96%, its managed communities
had an occupancy rate of approximately 96%, and its leased community had an
occupancy rate of approximately 96%. The Company and its predecessors have
provided senior living services since 1990.
FORMATION TRANSACTIONS
The Company was incorporated in October 1996 in the state of Delaware.
On November 5, 1997, the Company closed its initial public offering in which it
sold 10,350,000 common shares pursuant to a final prospectus, under the
Securities Act of 1933, as amended, at $13.50 per share (the "Offering").
Simultaneously with the consummation of the Offering, the Company, the
Company's founders, Jeffrey L. Beck ("Beck"), James A. Stroud (and his
affiliate) ("Stroud"), Lawrence A. Cohen, Vice Chairman and Chief Financial
Officer of the Company ("Cohen"), and affiliates of Messrs. Beck and Stroud
completed a series of transactions (collectively, the "Formation Transactions")
that resulted in the reorganization of the Company (the "Formation"). In the
Formation Transactions, 7,687,347 shares were issued to Beck, Stroud and Cohen
in the transactions described below bringing the total issued and outstanding
shares of the Company to 19,717,347 shares. Since the Offering, all of the
Company's operations are being conducted by the Company or its wholly owned
subsidiaries.
As part of the Formation Transactions, Messrs. Beck and Stroud
contributed all of the capital stock of Capital Senior Living, Inc., Capital
Senior Management 1, Inc., Capital Senior Management 2, Inc., Capital Senior
Development, Inc., and, with Mr. Cohen, of Quality Home Care, Inc. (the
"Contributed Entities") to the Company in exchange for the issuance of
7,687,347 shares of common stock and the issuance of separate notes to Messrs.
Beck, Stroud and Cohen in the aggregate principal amount of $18,076,380
(collectively, the "Formation Note"). The number of shares of common stock
issued and the principal amount of the Formation Note were established by
Messrs. Beck and Stroud and the Company in connection with the Formation based
on an assessment of the value of the Contributed Entities and the value of the
Acquired Assets (as defined below). The Formation Note was repaid from net
proceeds of the Offering. Such repayment received by Messrs. Beck and Stroud
will in turn be used by them to pay tax obligations which they incurred in
connection with the Formation. The primary assets of the Contributed Entities
consist of third-party management contracts, development contracts and a home
health care agency.
Also as part of the Formation Transactions, the Company purchased
substantially all of the assets (the "Acquired Assets"), other than working
capital items, of Capital Senior Living Communities, L.P., a Delaware limited
partnership ("CSLC"), for the assumption of approximately of $70.8 million of
debt plus cash equal to $5.8 million (the "Asset Acquisition"). The Acquired
Assets of CSLC were: (i) four senior living communities located in Cottonwood,
Arizona, Indianapolis, Indiana, Merrillville, Indiana and Canton, Ohio; (ii)
approximately 56% of the limited partner interests in HealthCare Properties,
L.P., a Delaware limited partnership ("HCP"); and (iii) approximately 31% of
the aggregate principal amount of certain notes (the "NHP Notes") issued by NHP
Retirement Housing Partners I Limited Partnership, a Delaware limited
partnership ("NHP") and approximately 3% of the outstanding limited partnership
interests of NHP. The primary assets of HCP consisted of: (i) approximately
$9.9 million in cash and cash equivalents as of the Offering; (ii) four
physical rehabilitation facilities located in Orlando, Florida, Nashville,
Tennessee, Lancaster, South Carolina, and Martin, Tennessee;
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and (iii) four skilled nursing facilities located in Evansville, Indiana,
Cambridge, Massachusetts, Fort Worth, Texas, and Austin, Texas. The outstanding
principal amount of all of the NHP Notes as of the Offering was $42.7 million.
The NHP Notes accrue interest at a rate of 13% per annum, pay cash interest at
a rate of 7% per annum, are secured by substantially all of the assets of NHP,
and mature on December 31, 2001. The primary assets of NHP consist of five
senior living communities located in Buffalo, New York, Sacramento, California
(two communities), Detroit, Michigan, and Boca Raton, Florida. Messrs. Beck and
Stroud control approximately 66% of the limited partnership interests in CSLC.
The purchase price paid for the Acquired Assets was determined as follows: (i)
CSLC's communities, other than construction in process, were valued based on
the appraised value of the communities; (ii) CSLC's investment in HCP was
valued based on the appraised value of HCP's communities, adjusted for working
capital items and other assets and liabilities that would be settled in cash,
multiplied by the percentage of HCP owned by CSLC; (iii) CSLC's investment in
the NHP Notes was valued based on discounting the amount of principal and
interest payments to be made following the maturity date (December 31, 2001) of
the NHP Notes (assuming a six month lag between maturity and full repayment);
and (iv) CSLC's investment in the NHP limited partnership interests was valued
at its historical cost basis which approximates fair value. The appraised
values for the communities were determined by third-party appraisals.
CSLC, HCP and NHP are limited partnerships required to file periodic
reports under the Securities Exchange Act of 1934, as amended. The general
partner of CSLC is Retirement Living Communities, an Indiana limited
partnership, which is beneficially owned by Messrs. Beck and Stroud. The
general partner of HCP and NHP is Capital Realty Group Senior Housing, Inc.
("Senior Housing"), an entity beneficially owned by Messrs. Beck and Stroud.
The general partners of CSLC, HCP and NHP remained beneficially owned by
Messrs. Beck and Stroud after completion of the Formation Transactions. As part
of the Formation Transactions, the Company received a ten-year option to
purchase all of the capital stock of Senior Housing at fair market value (as
determined by an independent appraisal). Pending such exercise, any fees
received by Senior Housing from HCP or NHP will be assigned to the Company.
The debt assumed by the Company in the Asset Acquisition consisted of
an approximate $70.8 million mortgage loan pursuant to a $77.0 million
commitment made on June 30, 1997 to CSLC by Lehman Brothers Holdings, Inc., an
affiliate of Lehman Brothers (the "LBHI Loan"). Of the proceeds from the LBHI
Loan, $5.5 million was used to repay outstanding amounts under the CSLC's prior
credit facility, $0.8 million was used to fund construction in progress at
CSLC's Cottonwood community, approximately $64.5 million was used by CSLC to
purchase U.S. Treasury securities and the remaining $6.2 million was available
to fund additional expenditures associated with the expansion of the Cottonwood
community. The LBHI Loan was incurred by CSLC for the purpose of refinancing
the outstanding debt due under CSLC's prior credit facility and to provide
construction financing for the expansion of one of CSLC's communities. The U.S.
Treasury securities were acquired with proceeds of the LBHI Loan to provide
collateral for the borrowings thereunder. The U.S. Treasury securities were
sold under a repurchase agreement with Lehman Brothers, with a term equal to
their maturity. Upon consummation of the Offering and as a part of the
Formation Transactions, the Acquired Assets were acquired by the Company
through assumption of the LBHI Loan, the repurchase agreement was canceled and
the LBHI Loan was reduced by the Company with net proceeds of the Offering. The
U.S. Treasury securities reverted to CSLC for use or disposition as determined
by CSLC, and the Company has no interest in such securities.
INDUSTRY BACKGROUND
The senior living services industry encompasses a broad and diverse
range of living accommodations and health care services that are provided
primarily to persons 65 years of age or older. For the elderly who require
limited services, care in independent living residences supplemented at times
by home health care, offers a viable option. Most independent living residences
and retirement centers typically offer community living together with a basic
services package consisting of meals, housekeeping, laundry, security,
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
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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 services 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, such as dementia care and other
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 services 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 health care and other services to the
elderly.
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 ten 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 rising 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 65 and older. This age group is one of the fastest
growing segments of the United States population and is expected to double by
the year 2030. According to United States Census Bureau information, the
segment of the population that is aged 75 and older is expected to increase
from approximately 13.2 million in 1990 to over 16.6 million by 2000, an
increase of 26%. The population of seniors aged 85 and over is expected to
increase from approximately 3.1 million in 1990 to over 4.3 million by 2000, an
increase of 39%. As the number of persons aged 65 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 the United States
General Accounting Office, as of 1990 there are approximately 6.5 million
people aged 65 and older in the United States who needed assistance with ADLs,
and the number of people needing such assistance is expected to double by the
year 2020. 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.
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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 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
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
to continue to enhance the performance of its operations. The Company is
implementing its operating strategy principally through the following methods:
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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. In 1997, the Company achieved a 96% approval rating from
its residents in a 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.
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; and (iii) 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.
Improve Operating Efficiencies
The Company will seek 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.
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.
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 its computerized systems, 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 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 sufficient to support
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future growth and that the Company will have adequate resources to expand these
systems to support the growth envisioned by the Company's business plan.
CARE AND SERVICES PROGRAMS
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 for residents with Alzheimer's and other
forms of dementia), skilled nursing, and home health 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.
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, 1997, the Company had ownership interests in
nine communities and managed an additional 14 communities which provide
independent living services, with an aggregate capacity for 1,607 and 1,913
residents, respectively.
Independent living services provided by the Company include daily
meals, transportation, social and recreational activities, laundry,
housekeeping, security 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), chronic
disease management (such as diabetes with its attendant blood glucose
monitoring), 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 health care agencies. The Company's independent
living residents pay a fee ranging from $1,250 to $2,400 per month, in general,
depending on the specific community, program of services, size of the units,
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 and Memory Impaired 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, 1997, the Company had ownership
interests in seven communities, leased a community from a third party, and
managed an additional 10 communities which provide assisted living services,
with an aggregate capacity for 219, 38, and 399 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.
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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.
In pricing its services, the Company has developed the following three
levels or tiers of assisted living care:
o Level I typically provides for minimum levels of care and service, for
which the Company generally charges a monthly fee per resident ranging
from $1,750 to $1,900, depending upon unit size and the project design
type. Typically, Level I residents need minimal assistance with ADLs.
o 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 $1,900 to $2,250, 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.
o Level III provides for the highest level of care and service, for which
the Company generally charges a monthly fee per resident ranging from
$2,250 to $2,400, 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 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,
1997, the Company had ownership interests in seven facilities, leased a
facility, and managed an additional facility which provides nursing services,
with an aggregate capacity for 746, 60, and 60 residents, respectively.
Home Health Care
As of December 31, 1997, the Company provided home health care
services to clients at one of its senior living communities through an on-site
home health care agency. The Company believes that the provision of home health
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. The
services and products that the Company provides through its home health care
agency include: (i) general and specialty nursing services to clients with
long-term chronic health conditions, permanent disabilities, terminal illnesses
and post-procedural needs; (ii) rehabilitative therapy services including
physical, occupational and speech therapy through outside contractors; (iii)
personal care services and assistance with ADLs; (iv) enhanced hospice care for
clients in the final phases of incurable disease; and (v) extensive
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monitoring and educational services relative to respiratory care, medication
administration, medical equipment, and medical supplies. The Company intends to
expand its home health care service business to additional senior living
communities and to develop, acquire, or manage home health care service
businesses at other such 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. The
Company may elect to provide these services directly or through participation
in managed care networks.
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OPERATING COMMUNITIES
The table below sets forth certain information with respect to the
independent, senior living, and continuum of care communities owned, leased,
and managed by the Company as of December 31, 1997.
RESIDENT CAPACITY(1)
---------------------------------
COMMENCEMENT OCCUPANCY
OWNER- OF RATE AT
COMMUNITY LOCATION IL AL SN TOTAL SHIP(2) OPERATIONS(3) 12-31-97
--------- -------- -- -- -- ----- ------------------------------
OWNED:
Amberleigh ............. Buffalo, NY 365 29 -- 394 31% 1/92 97%
Atrium of Carmichael ... Sacramento, CA 156 -- -- 156 31% 1/92 99%
Cambridge Nursing
Home ................. Cambridge, MA -- -- 120 120 56% 7/93 98%
Canton Regency ......... Canton, OH 164 34 50 248 100% 3/91 96%
Cottonwood Village ..... Cottonwood, AZ 69 -- -- 69 100% 3/91 100%
Crosswood Oaks ......... Sacramento, CA 127 -- -- 127 31% 1/92 91%
Harrison at Eagle
Valley ................ Indianapolis, IN 138 -- -- 138 100% 3/91 97%
Heatherwood ............ Detroit, MI 188 -- -- 188 31% 1/92 98%
Towne Centre ........... Merrillville, IN 165 34 64 263 100% 3/91 92%
Veranda Club ........... Boca Raton, FL 235 -- -- 235 31% 1/92 96%
----- --- --- ----- ----
Subtotal ............. 1,607 97 234 1,938 96%
OWNED AND LEASED TO
OTHERS:
Cane Creek ............. Martin, TN -- 8 36 44 56% 7/93 100%(4)
Cedarbrook ............. Nashville, TN -- 42 -- 42 56% 7/93 100%(4)
Crenshaw Creek ......... Lancaster, SC -- 36 -- 36 56% 7/93 100%(4)
Hearthstone ............ Austin, TX -- -- 120 120 56% 7/93 100%(4)
McCurdy ................ Evansville, IN -- -- 236 236 56% 7/93 100%(4)
Sandybrook ............. Orlando, FL -- 36 -- 36 56% 7/93 100%(4)
Trinity Hills .......... Fort Worth, TX -- -- 120 120 56% 7/93 100%(4)
----- --- --- ----- ----
Subtotal ............. -- 122 512 634
LEASED FROM OTHERS:
Maryland Gardens(5) .... Phoenix, AZ -- 38 60 98 6/97 96%
----- --- --- ----- ----
Subtotal ............. -- 38 60 98
MANAGED:
Buckner Haven .......... Houston, TX 16 69 60 145 4/97 (6)
Buckner Westminster
Place ................ Longview, TX 117 -- -- 117 6/96 89%(7)
Crown Pointe ........... Omaha, NE 163 -- -- 163 8/96 100%
Crown Villa ............ Omaha, NE -- 73 -- 73 8/96 97%
Independence Village ... East Lansing, MI 162 -- -- 162 8/96 93%
Independence Village ... Peoria, IL 173 -- -- 173 8/96 100%
Independence Village ... Raleigh, NC 155 22 -- 177 8/96 97%
Independence Village ... Winston-Salem, NC 145 16 -- 161 8/96 96%
Overland Park Place .... Kansas City, KS 126 25 -- 151 8/96 99%
The Palms .............. Fort Myers, FL 235 20 -- 255 8/96 100%
Rio Las Palmas ......... Stockton, CA 142 50 -- 192 8/96 93%
Sedgwick Plaza ......... Wichita, KS 117 54 -- 171 8/96 93%
Villa at Riverwood ..... St. Louis, MO 140 -- -- 140 8/96 94%
Villa Santa Barbara .... Santa Barbara, CA 87 38 -- 125 8/96 99%
West Shores ............ Hot Springs, AR 135 32 -- 167 8/96 93%
----- --- --- ----- ----
Subtotal/Average ..... 1,913 399 60 2,372 96%
----- --- --- ----- ----
Grand Total .......... 3,520 656 866 5,042 96%(8)
===== === === ===== ====
- ----------
(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 those communities shown as 31% owned by the Company,
this represents ownership of approximately 31% of the outstanding NHP
Notes which are secured by the properties. In the case of those
communities shown as approximately 56% owned, this represents the
Company's ownership of approximately 56% of the limited partner
interests in HCP.
(3) Indicates the date on which the Company acquired each of its owned and
leased communities, or commenced operating its managed communities.
The Company operated certain of its communities pursuant to management
agreements prior to acquiring the communities.
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(4) 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. Does not represent
occupancy rate, but rather percentage of property leased pursuant to
the master lease. These leases were in place at the time the Company
acquired its interest in these communities.
(5) This community was leased pursuant to a 14-month operating lease
entered into by the Company on June 1, 1997, under which the Company
had an option to purchase the community. The Company terminated this
lease effective January 31, 1998.
(6) It is anticipated that this community will be closed in 1998 and the
residents transferred to Buckner Parkway Place upon its completion in
the first quarter of 1998.
(7) The Buckner Westminister Place community was in its initial lease-up
phase at December 31, 1997.
(8) Excludes communities owned and leased to others.
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 Senior Living, Inc. and ILM II Senior
Living, Inc. (collectively, "ILM") that operate 13 senior living communities.
The ILM Management Agreements commenced on July 29, 1996 and will expire on
December 31, 1999 and December 31, 2000, respectively, 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 facilities 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 facilities
(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 facilities, subject to the Company's
rights to offer to purchase the facilities. 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 facilities subject to the ILM Management Agreements. The Company earned a
total of $854,948 and $734,755 under the two ILM Management Agreements for the
year ended December 31, 1997, which includes the incentive management fee, and
$344,765 and $312,496 for the period July 29, 1996 through December 31, 1996.
The Company believes there is a reasonable likelihood that it will earn such
incentive fee in the future.
The Company is also a 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 1997 and expire on March 31,
2001 and 2002, respectively, except that either party may terminate the
agreements for cause under limited circumstances. Under the terms of the
Buckner Agreement for Buckner Baptist Haven, the Company earns a base
management fee equal to 5% of the gross revenues of the facility (as defined)
or $5,000 per month, whichever is greater. Under the terms of the Buckner
Westminster Place Agreement, the Company earns a base management fee of $6,050
per month. In the case of one of the two Buckner Agreements, the Company was
also entitled, through August 31, 1997, to a marketing lease-up fee of $500 for
each unit at the time it is initially occupied. Also in the case of one of the
two Buckner Agreements, the Company is also eligible to receive a productivity
reward (prior to the first tenant occupying a unit in the addition) equal to 5%
of the Gross Revenues generated during the immediately preceding month that
exceed $121,000. The productivity reward took the place of the incentive fee
during 1997. 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
services 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:
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Expand Existing Communities
The Company plans to expand certain of its existing communities to
include additional independent living, assisted living residences (including
special programs and living units for residents with Alzheimer's and other
forms of dementia), and, possibly skilled nursing beds. As of December 31,
1997, the Company had one expansion project under construction and 10 expansion
projects under development, representing an aggregate increase in capacity to
accommodate an additional 944 residents. Of these 11 expansion projects, one is
at a community which is owned by the Company, three are at communities in which
the Company owns an interest and manages under multi-year agreements, and seven
are at communities which the Company manages for third parties. The costs of
the expansion of managed communities is borne by the community owner and not by
the Company. However, with respect to the four expansion projects in which the
Company has a partial 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 the Company's existing senior living communities as of December 31,
1997.
SCHEDULED
COMMUNITY LOCATION COMPLETION IL AL TOTAL STATUS(1)
--------- -------- ---------- -- -- ----- ---------
Cottonwood Village ............ Cottonwood, AZ 2nd half 1998 66 47 113 Construction
Buckner Westminster Village ... Longview, TX 1st half 1999 -- 60 60 Development
Towne Centre .................. Merrillville, IN 1st half 1999 66 70 136 Development
Canton Regency ................ Canton, OH 1st half 1999 100 30 130 Development
Independence Village .......... Raleigh, NC 1st half 1999 -- 50 50 Development
West Shores ................... Hot Springs, AR 2nd half 1998 -- 65 65 Development
The Palms ..................... Ft. Myers, FL 1st half 1999 -- 48 48 Development
Independence Village .......... Peoria, IL 1st half 1999 46 30 76 Development
Crown Point/Crown Villa ....... Omaha, NE 1st half 1999 102 24 126 Development
Amberleigh .................... Buffalo, NY 1st half 1999 -- 80 80 Development
Independence Village .......... East Lansing, MI 2nd half 1999 -- 60 60 Development
--- --- ---
Total ..................... 380 564 944
=== === ===
- ----------
(1) "Development" indicates that development activities, such as site
surveys, preparation of architectural plans, or initiation of zoning
processes, have commenced (but construction has not commenced).
"Construction" indicates that construction activities, such as
ground-breaking activities, exterior construction, or interior
build-out have commenced.
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 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, having developed in excess of $350 million of senior living
communities. 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 rapidly expand its operations into new
markets and strengthen its presence within its existing markets utilizing its
existing residence models, such as the Waterford model, discussed below.
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Development with Triad. Eleven of the 21 senior living communities
referred to in the table below will be Waterford communities, and will be
developed pursuant to an arrangement with Triad Senior Living, L.P. ("Triad"),
a limited partnership owned 19% by a wholly owned subsidiary of the Company and
81% by unaffiliated third parties, under which Triad will pay development and
management fees to the Company for development and management services and the
Company will have options to purchase the communities upon their completion
during the term of the management contracts. Triad will be responsible for
funding and obtaining financing for the construction and lease-up costs. The
Company may make available to Triad an unsecured credit facility of up to $10
million. These communities will have an aggregate capacity for approximately
1,496 residents at an aggregate estimated cost of completion and lease-up of
approximately $80.0 million to $100.0 million. 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 Company had previously entered into a development agreement to
develop the Waterford communities with Tri Point Communities, L.P. ("Tri
Point"), a limited partnership owned by the Company's founders (Messrs. Beck
and Stroud) and their affiliates. Effective April 1, 1998, Tri Point will be
reorganized and the interests of Messrs. Beck and Stroud will be sold at their
cost to Triad Senior Living, Inc. and its affiliates, which are unrelated
third-parties. Triad Senior Living, Inc. and its affiliates have previously
owned, developed, operated and sold senior living communities for their own
account. Tri Point will be renamed Triad Senior Living, L.P. ("Triad"). The new
general partner of Triad, owning 1%, will be Triad Senior Living, Inc. The
limited partners will be Blake N. Fail (principal owner of Triad Senior Living,
Inc.), owning 80%, and a wholly owned subsidiary of the Company, owning 19%.
Triad will continue to be bound by the existing Development and Turnkey
Services Agreement and all existing development agreements previously entered
into between the Company and Tri Point, except the development fee will be
reduced from 7% to 4%, but will also include reimbursements for expenses and
overhead. Triad will also continue to be bound by all existing property
management agreements. The Company's subsidiary will have an option to purchase
the partnership interests of Triad Senior Living, Inc. and Blake N. Fail for an
amount equal to the amount such party paid for its interest, plus
non-compounded interest of 12% per annum. The property management agreements
also provide the Company with an option to purchase the communities developed
by Triad upon their completion for an amount equal to the fair market value
(based on a third-party appraisal but not less than hard and soft costs and
lease-up costs). The Company has made no determination as to whether it will
exercise its 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 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, or site. In addition, the Waterford design has
been developed to facilitate the prompt, efficient, cost-effective delivery of
health care and personal services. Site requirements for the various designs
range from 4.5 to 6.0 acres. The Waterford design may also provide for
specially designed residential units, common areas, and dining rooms for
residents with Alzheimer's and other forms of dementia.
The Company believes that its designs meet the desire of many of its
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: (i) lessening the trauma
of change for residents and their families; (ii) facilitating resident mobility
and caregiver access; (iii) enhancing operating efficiencies; (iv) enhancing
the Company's ability to match its products to targeted markets; and (v)
differentiating the Company from its competitors.
Development through Other Strategic Alliances. The Company has also
formed strategic alliances with for-profit (LCOR Incorporated) and
not-for-profit organizations (Buckner Retirement Services, Inc.) to develop,
market and manage additional communities while reducing the investment of, and
associated risks to, the Company. The Company's alliances are with established
development companies or not-for-profit owner/operators of senior living
communities. Ten of the 21 senior living communities referred to in the table
below will be developed through strategic alliances. The for-profit entities
generally provide construction management experience, existing relationships
with local contractors, suppliers, and municipal authorities, knowledge of
local and state building codes and building laws, and assistance with site
selection for new communities. The not-for-profit organizations generally
provide existing relationships with religious organizations, a community
reputation of caring for seniors, a tax-exempt status that permits tax-exempt
bond financing, and in certain instances, home health care services. The
Company contributes its operational and industry expertise, and has had, in
most cases, leasing and management responsibilities for communities owned by
these organizations, as well as has the right of first refusal to acquire the
communities in most cases. The Company intends to continue to evaluate
opportunities to form similar joint ventures and strategic alliances in the
future.
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The Company has entered into a strategic alliance with LCOR
Incorporated ("LCOR") to develop, market and manage senior living communities
developed by LCOR. As of February 28, 1998, six sites have been put under
contract for the development and operation of independent and assisted living
communities. The sites under contract are Trumbull, Connecticut; Dallas, Texas;
Libertyville, Illinois; Summit, New Jersey; Montclair, 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 5 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 is currently evaluating a number of potential development
projects. The table below summarizes information regarding those developments
which the Company expects to be completed by 2000.
SCHEDULED
LOCATION OF DEVELOPMENT PROJECTS: COMPLETION IL AL SN TOTAL STATUS(1)
- --------------------------------- ---------- -- -- -- ----- ---------
Houston, TX(2) ................. 1st half 1998 243 82 60 385 Completed
San Antonio, TX ................ 2nd half 1998 136 -- -- 136 Construction
Shreveport, LA ................. 2nd half 1998 136 -- -- 136 Construction
Mesquite, TX ................... 2nd half 1998 136 -- -- 136 Development
Jacksonville, FL ............... 1st half 1999 136 -- -- 136 Development
N. Richland Hills, TX .......... 1st half 1999 136 -- -- 136 Development
Mesa, AZ ....................... 1st half 1999 136 -- -- 136 Development
Lawrenceville, GA .............. 1st half 1999 136 -- -- 136 Development
Brownwood, TX(2) ............... 1st half 1999 125 30 -- 155 Development
Oklahoma City, OK .............. 1st half 1999 136 -- -- 136 Development
San Antonio, TX ................ 1st half 1999 136 -- -- 136 Development
Las Vegas, NV .................. 1st half 1999 136 -- -- 136 Development
Beaumont, TX(2) ................ 1st half 1999 156 54 30 240 Development
Oklahoma City, OK .............. 1st half 1999 136 -- -- 136 Development
Trumbull, CT(3) ................ 1st half 1999 120 30 -- 150 Development
Dallas, TX(3) .................. 1st half 1999 270 40 -- 310 Development
Georgetown, TX(2) .............. 2nd half 1999 270 84 40 394 Development
Libertyville, IL(3) ............ 2nd half 1999 140 -- -- 140 Development
Summit, NJ(3) .................. 1st half 2000 -- 90 -- 90 Development
Montclair, NJ(3) ............... 1st half 2000 100 30 -- 130 Development
Naperville, IL(3) .............. 1st half 2000 135 -- -- 135 Development
----- --- --- -----
Total ..................... 3,055 440 130 3,625
===== === === =====
- ----------
(1) "Development" indicates that development activities, such as site
surveys, preparation of architectural plans, or initiation of zoning
processes, have commenced (but construction has not commenced).
"Construction" indicates that construction activities, such as
ground-breaking activities, exterior construction, or interior
build-out have commenced. The Houston, Texas community was completed
on January 15, 1998.
(2) Represent communities being developed with Buckner Retirement Services,
Inc.
(3) Represent communities being developed with LCOR Incorporated.
Development of Joint Venture Operations in China
The Company has entered into a joint venture agreement with New World
Development, Ltd. ("New World") for the purpose of investing, developing and
managing senior living communities in several cities in mainland China. New
World is a publicly traded property development company based in Hong Kong that
currently develops condominium and office projects in China. New World has
estimated that it has invested approximately $2.6 billion in real estate
ventures in China. Pursuant to the agreement with New World, the Company and
New World will form an entity which will develop and operate senior living
communities in major cities in China. New World will contribute its expertise
in constructing properties in China and will bear substantially of all of the
construction costs. The Company will be responsible for development of senior
living communities and for property management services. The Company currently
expects that following its initial development of senior living communities in
China, the joint venture will sell individual units in the communities to
prospective residents, and the Company will retain the operating
responsibilities in such communities. The Company's target cities currently
include Shanghai, Guangzhou and Beijing. The Company's management is
continually monitoring the various issues that are arising in Asia in order to
evaluate the proper timing for any development to occur there.
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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.
Develop and Acquire Additional Home Health Care Agencies
The Company intends to expand its home health care services by
developing, acquiring, and managing new home health care agencies and expanding
its range of existing home health care services. The Company currently
anticipates that its home health care agencies will be based at the Company's
communities, and will serve both the Company's communities and the surrounding
area. The Company believes that the expansion of its home health care services
will enhance its ability to provide a broad range of health care services,
increase its market visibility, augment the creation of senior living networks
in targeted areas, and further enhance efforts to coordinate with managed care
networks, increase company profitability, as well as aid in the maintaining of
current occupancy levels. As of December 31, 1997, the Company operated one
home health care agency, and intends to establish approximately three new home
health care agencies at its owned properties by the fourth quarter of 1998.
Expand Referral Networks
The Company intends to continue to develop relationships (which, in
certain instances, may involve strategic alliances or joint ventures) with
local and regional hospital systems, managed care organizations, and other
referral sources to attract new residents to the Company's communities. 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.
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.
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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, which 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 as well as 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.
Home Health Management
The Company collects all home health care financial data through the
use of an electronic data system. This system gives senior management the
ability to identify emerging trends, monitor cost controls and develop current
pricing strategies. All accounting functions are performed at the corporate
office.
The Company's home health care agency is managed under the auspices of
the executive director of the community where that agency is located and under
the direct control of an agency director who is a registered nurse. This
director and his or her team of registered nurses, licensed practical nurses,
home health care aides and various allied medical professionals focus on
assessing and subsequently managing the health care needs of residents in that
senior living community.
Quality Assurance
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 1997, the Company achieved a 96% approval rating 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
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community interiors and grounds. The inspection also includes monitoring staff
professionalism and departmental reviews of maintenance, housekeeping,
activities, transportation, marketing, administration and food service as well
as health care, 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 materials. 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 to
include 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.
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, the
Company's communities are subject to regulation, licensing, Certificate of Need
and permitting by state and local health 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.
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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 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.
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 services 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 services industry and in the markets in which the
Company operates, the industry continues to be very fragmented and
characterized by numerous small operators. For example, the Company competes
with American Retirement Corporation in Texas, Sunrise Assisted Living, Inc. in
North Carolina and New York, Atria Communities in New York, and Marriott Senior
Living Services in Florida. The Company believes that the primary competitive
factors in the senior living services industry are: (i) reputation for and
commitment to a high quality of service; (ii) quality of support services
offered (such as home health care and 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.
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EMPLOYEES
As of December 31, 1997, the Company employed approximately 1,600
persons, of which approximately 900 were full-time employees (approximately 39
of whom are located at the Company's corporate offices) and 700 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, directors and key employees as of December
31, 1997:
NAME AGE POSITION(S) WITH THE COMPANY
- ---- --- ----------------------------
Jeffrey L. Beck 52 Co-Chairman and Chief Executive Officer
James A. Stroud 47 Co-Chairman, Chief Operating Officer, and Secretary
Lawrence A. Cohen 44 Vice Chairman and Chief Financial Officer
Keith N. Johannessen 41 President
Rob L. Goodpaster 44 Vice President -- National Marketing
David W. Beathard, Sr. 50 Vice President -- Operations
Charles W. Allison 49 Vice President -- Development
David R. Brickman 39 Vice President and General Counsel
Kathleen L. Granzberg 36 Controller -- Corporate
Robert F. Hollister 42 Controller -- Property
JEFFREY L. BECK has served as a director and Chief Executive Officer
of the Company and its predecessors since January 1986. He currently serves as
Co-Chairman and Chief Executive Officer of the Company. Mr. Beck also serves on
the boards of various educational, religious and charitable organizations and
in varying capacities with several trade associations. Mr. Beck served as Vice
Chairman of the American Seniors Housing Association from 1992 to 1994, and as
Chairman from 1994 to 1996, and remains a member of its Executive Board, and is
a council member of the Urban Land Institute. Mr. Beck is Chairman of the Board
of Directors of United Texas Bank of Dallas and is Chairman and President of
Beck Properties Trophy Club.
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
Co-Chairman and Chief Operating Officer 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, and as Housing Commissioner, President-Elect, and as a member of
the Board of Directors of the National Association For Senior Living
Industries. Mr. Stroud also serves as an Advisory Group member to the National
Investment Conference. Mr. Stroud 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.
LAWRENCE A. COHEN has served as a director and Vice Chairman and Chief
Financial Officer of the Company since November 1996. 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. Mr. Cohen is also president and a member of the
boards of directors of ILM Senior Living, Inc. and ILM II Senior Living, Inc.,
and is a member of the boards of directors of ILM I Lease Corporation and ILM
II Lease Corporation. In addition, he serves as a member of the Corporate
Finance Committee and chairman of the Direct Participation Programs
Subcommittee 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,
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is a licensed attorney and is also a Certified Public Accountant. Mr. Cohen has
had positions with businesses involved in senior living for 13 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. 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 19
years.
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 21 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 serves as a Designated Alternate member of the Board of Directors of
the Texas Assisted Living Association. Mr. Beathard has been active in the
operational, sales and marketing, and construction oversight aspects of senior
housing for 23 years.
CHARLES W. ALLISON has served as Vice President - Development of the
Company and its predecessors since February 1997. From 1996 to 1997, Mr.
Allison served as Vice President of Development with Greenbriar Corporation,
and from 1993 to 1996 as Regional Director of Development for Sterling House
Corporation, both of which are in the senior housing and health care
development and operational business. Mr. Allison has been active in site
selection, feasibility phase, design phase, and construction of senior housing
properties and multi-family commercial real estate for 29 years. Mr. Allison
has earned a Masters Degree in Business Administration.
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 which 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 11 years.
KATHLEEN L. GRANZBERG, a Certified Public Accountant, has served as
the Corporate Controller for the Company and its predecessors since December
1991, and as Property Controller since 1987. Ms. Granzberg 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 NASD 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 14,000 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 1998 and that suitable additional space will be available, as
needed, to accommodate further physical expansion of corporate operations.
As of December 31, 1997, the Company owned, leased and/or managed the
senior living communities referred to in Item 1 above. Occupancy rate
information as of December 31, 1997, is also presented for each community in
Item 1 above.
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ITEM 3. LEGAL PROCEEDINGS
On July 29, 1996, ILM terminated management agreements with Angeles
Housing Concepts, Inc. ("AHC") covering the management of its senior living
communities and entered into the ILM Management Agreements described herein
under "Business--Third-Party Management Contracts." AHC filed a lawsuit
currently pending in the U.S. District Court of California against the Company
and certain of its subsidiaries and officers alleging that the defendants
intentionally interfered with AHC's property management agreements with ILM by
inducing ILM to terminate the Agreements. The complaint seeks damages of at
least $2 million. Trial in the action is currently expected to occur in June
1998 and discovery in the action is ongoing. The Company is vigorously
defending these claims. The Company believes that it has meritorious defenses
to AHC's claims and is evaluating with counsel the various legal options it has
against AHC and others. While the Company believes that ultimately its
insurance will cover this claim if determined adversely to the Company, the
Company's insurance carrier formally denied coverage. The Company has filed
suit against the carrier for coverage and the insurance carrier has indicated
it will reconsider its original decision. No assurance can be made that the
Company will have adequate insurance coverage for any damage award against the
Company in the AHC lawsuit. In an action pending in the U.S. District Court for
the Eastern District of Virginia in which the Company is not a party, ILM
initiated a lawsuit against AHC for breach of contact and other claims and AHC
filed a counterclaim against ILM. AHC has obtained a judgment against ILM in
this action in the amount of $1 million, which judgment ILM has appealed.
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 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 $10.0 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, 1997.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) On October 31, 1997, the Company listed its shares of common stock
on the New York Stock Exchange ("NYSE") under the symbol "CSU." During the
period of October 31, 1997 through December 31, 1997, the high and low sales
prices were $17 1/2 and $9 13/16, respectively. There was no trading in the
Company's common stock prior to October 31, 1997.
At December 31, 1997, there were approximately 3,200 shareholders of
record of the Company's common stock.
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, operations, capital requirements, financial condition,
restrictions in then existing financing agreements, and other factors deemed
relevant by the Board of Directors.
Since the respective dates of their incorporation, the Contributed
Entities had elected to operate as S corporations under Subchapter S of the
Internal Revenue Code. As a result, the Contributed Entities' earnings for the
period commencing on the dates of their incorporation and ending on the day
preceding the date of termination of their S corporation status have been or
will be, as the case may be, taxed for Federal income tax purposes, with
certain exceptions, directly to the stockholders of the Contributed Entities.
The termination of the Contributed Entities' S corporation status occurred on
the date of the completion of the Offering. Subsequent to completion of the
Offering, the Contributed Entities are no longer treated as S corporations and,
accordingly, are fully subject to federal income taxes.
(b) Recent Sales of Unregistered Securities. Information with respect
to this Item is set forth above under the caption "Item 1. Business--Formation
Transactions." The issuance therein described of the Company's Common Stock to
Messrs. Jeffrey L. Beck, James A. Stroud (through a trust) and Lawrence A.
Cohen in the Formation Transactions in exchange for the 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 the Registration
Statement filed in connection with the Offering. In connection with the
organization of the Company, during 1996, the Company issued 1,680,000 shares
of its Common Stock to Messrs. Beck, Stroud (through a trust) and Cohen for
$16,800. The shares were issued in equal amounts of 560,000 shares to each in
consideration for a cash payment by each of $5,600. Such issuances were made in
reliance on the exemption from registration contained in Section 4(2) of the
Securities Act of 1933, as amended.
(c) Use of Proceeds. As described above in "Business," the Company has
completed the Offering. The following information relates to the use of
proceeds of the Offering:
(1) Effective Date of Registration Statement and Commission
File Number: The Company's Registration Statement on Form S-1, File No.
333-33379 (the "Registration Statement"), relating to the Offering, became
effective on October 30, 1997.
(2) Offering Date: The closing date of the Offering was
November 5, 1997.
(3) Managing Underwriters: Lehman Brothers Inc.; J.C.
Bradford & Co.; Donaldson, Lufkin & Jenrette Securities Corporation; and Smith
Barney Inc.
(4) Securities Registered and Proposed Aggregate Offering
Price: The Company registered a total 10,350,000 shares of Common Stock. The
proposed maximum aggregate offering price was $134,550,000.
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(5) Securities Sold: A total of 10,350,000 shares of Common
Stock were sold pursuant to the Offering. The aggregate gross proceeds from the
Offering were $139,725,000.
(6) Aggregate Gross Proceeds, Expenses and Aggregate Net
Proceeds: The sale of the 10,350,000 shares of Common Stock generated aggregate
gross proceeds of $139,725,000. The aggregate net proceeds to the Company from
the sale of the 10,350,000 shares of Common Stock were approximately
$128,407,000, after deducting underwriting discounts and commissions of
approximately $9,742,000 and expenses of the Offering of approximately
$1,576,000 paid by the Company.
(7) Use of Proceeds: Through December 31, 1997, the Company
had used approximately $1.6 million of the net proceeds of the Offering for
expenses associated with the Offering. In addition, the Company used a portion
of such net proceeds as follows: (i) approximately $70.8 million of such net
proceeds to repay the indebtedness incurred by the Company to acquire assets
(including construction in progress) in the Formation Transactions; (ii)
approximately $18.1 million to repay the Formation Note; (iii) approximately
$5.8 million to pay the balance of the purchase price to an affiliate related
to the purchase of assets on the Formation Transactions; and (iv) approximately
$1.2 million of such net proceeds to repay indebtedness to affiliates. The
Company anticipates using the balance of such net proceeds primarily to
purchase additional interests in the Company's existing senior living
communities and for working capital and other general corporate purposes. The
amounts actually expended for such purposes will depend on numerous factors,
including the cost of purchasing such additional interests and the cost and
availability of other projects that fit within the Company's growth strategy
and other factors.
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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, 1997, 1996, 1995
and 1994 are derived from the audited consolidated financial statements of the
Company. The selected financial data for the year ended December 31, 1993 is
derived from the unaudited consolidated financial statements of the Company.
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
1997 1996 1995 1994 1993
----------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Statements of Income Data:
Revenues:
Resident and health care revenue .... $ 21,207 $ 13,692 $ 13,238 $ 12,761 $ 12,140
Rental and lease income ............. 4,276 1,101 1,231 1,235 1,175
Unaffiliated management
services revenue ................... 1,920 801 -- -- --
Affiliated management
services revenue ................... 1,378 2,708 2,778 3,113 3,458
Development fees .................... 977 673 -- -- --
Other ............................... 952 924 871 800 1,022
-------- -------- -------- -------- --------
Total revenues .................... 30,710 19,899 18,118 17,909 17,795
-------- -------- -------- -------- --------
Expenses:
Operating expenses .................. 17,474 10,798 10,287 10,142 9,653
General and administrative
expenses(1) ........................ 6,312 5,493 4,364 4,595 5,406
Depreciation and
amortization ....................... 2,118 1,481 1,776 1,707 1,609
-------- -------- -------- -------- --------
Total expenses .................... 25,904 17,772 16,427 16,444 16,668
-------- -------- -------- -------- --------
Income from operations ............... 4,806 2,127 1,691 1,465 1,127
Other income (expense):
Interest income ..................... 3,186 432 368 122 89
Interest expense .................... (2,022) (221) (278) (261) (307)
Gain on sale of
properties(2) ...................... -- 438 -- -- --
Equity in earnings on
investments ......................... -- 459 -- -- --
Other ............................... 440 42 -- (16) (20)
-------- -------- -------- -------- --------
Income before income taxes
and minority interest in
consolidated partnerships............ 6,410 3,277 1,781 1,310 889
(Provision) benefit for
income taxes(3) ..................... (793) -- (18) (130) 62
-------- -------- -------- -------- --------
Income before minority
interest in consolidated
partnerships ........................ 5,617 3,277 1,763 1,180 951
Minority interest in
consolidated partnerships ........... (1,936) (1,224) (760) (634) (572)
-------- -------- -------- -------- --------
Net income .......................... $ 3,681 $ 2,053 $ 1,003 $ 546 $ 379
======== ======== ======== ======== ========
Net income per share:
Basic and Diluted ................... $ 0.33
========
Weighted average shares
outstanding ....................... 11,150
========
Pro Forma Net Income
Data (unaudited)(4):
Net income .......................... $ 3,681 $ 2,053
Pro forma income taxes .............. (965) (811)
-------- --------
Pro forma net income ................ $ 2,716 $ 1,242
======== ========
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AT DECEMBER 31,
--------------------------------------------------------
($ IN THOUSANDS)
1997 1996 1995 1994 1993
-------- ------- ------- ------- -------
Balance Sheet Data:
Cash and cash equivalents ............ $ 48,125 $10,819 $10,017 $ 8,799 $ 2,065
Working capital ...................... 42,860 9,567 6,784 5,938 48
Total assets ......................... 117,371 33,203 29,747 29,913 27,861
Long-term debt, including current
portion .............................. 6,677 666 2,687 2,192 2,556
Equity ............................... 92,560 17,201 14,447 12,495 10,631
- ----------
(1) General and administrative expenses include officers' salaries of
$3,342,000, $3,372,000, $2,976,000, $3,443,000 and $4,009,000 for the
years ended December 31, 1997, 1996, 1995, 1994 and 1993, respectively.
These amounts are primarily comprised 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 Offering, these federal income tax regulations no
longer applied to the Company. Compensation of the founders since October
1, 1997 have been based on the founders' employment agreements.
(2) The statement of income for the year ended December 31, 1996 includes a
gain of $438,000 on the sale of two multi-family rental properties on
November 1, 1996.
(3) Aprovision 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 Offering, were S corporations or partnerships and
accordingly were not subject to income taxes during the period.
(4) 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%.
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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 an historical consolidated basis for the years ended December
31, 1997, 1996 and 1995. 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.
On September 15, 1997, the Company increased its authorized common
shares from 40,000,000 to 65,000,000 shares and authorized 15,000,000 shares of
preferred stock. On November 5, 1997, the Company issued 18,037,347 additional
shares of common stock (including 1,350,000 shares issued upon exercise of an
option granted underwriters to purchase additional common shares in conjunction
with the Offering) bringing its total issued and outstanding shares of common
stock to 19,717,347 shares. Of the 18,037,347 shares issued, 7,687,347 shares
were issued to Messrs. Beck, Stroud and Cohen in the Formation Transactions
described below and 10,350,000 shares were registered with the Securities and
Exchange Commission for trading in public markets.
On November 5, 1997, the Company also entered into Formation
Transactions with Messrs. Beck and Stroud whereby they contributed all of their
owned capital stock of Capital Senior Living, Inc., Capital Senior Management
1, Inc., Capital Senior Management 2, Inc., Capital Senior Development, Inc.,
and with Mr. Cohen, of Quality Home Care, Inc. (the "Contributed Entities") to
the Company in exchange for the issuance of 7,687,347 shares of common stock of
the Company and the issuance of separate notes in the aggregate amount of
$18,076,380 to Messrs. Beck, Stroud and Cohen, which were subsequently repaid
by the Company from the net proceeds received from the sale of the Company's
common stock in the Offering.
As part of the Formation Transactions, the Company simultaneously
purchased substantially all of the operating assets of CSLC (including CSLC's
investment in HCP and NHP and excluding CSLC's cash, U.S. Treasury securities
purchased under the LBHI Loan agreement and working capital items) for an
aggregate purchase price of approximately $76.6 million, comprised of the
assumption by the Company of CSLC's outstanding LBHI Loan of approximately
$70.8 million and payment of cash of approximately $5.8 million to CSLC. On
November 7, 1997, the Company repaid the LBHI Loan from the proceeds received
from the Offering.
In October 1997, the combined Companies declared and paid dividends of
$457,647 to Messrs. Beck, Stroud and Cohen in preparation for the Formation
Transactions that transformed the combined companies from closely held
corporations and S corporations to non-closely held C corporations for federal
income tax purposes.
The Formation Transactions transferred ownership of the various
entities previously under common control to the Company whereby all of the
Company's operations are now conducted by the Company or its wholly owned
subsidiaries. The Formation has been accounted for at historical cost in a
manner similar to a pooling of interests to the extent of the percentage
ownership by the Stockholders prior to the Formation.
Due to all of these entities being under the common control of Messrs.
Beck and Stroud, the Company's 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 combined
results for the periods indicated through the date of the Offering even though
they have historically operated as separate entities. The Formation
Transactions have been accounted for at historical cost in a manner similar to
a pooling of interests to the extent of the percentage ownership by Messrs.
Beck and Stroud of the Company. Acquired assets and liabilities of CSLC have
been recorded at fair value to the extent of minority interest. CSLC's assets
include investments in HCP and NHP.
From 1990 through December 31, 1997, the Company acquired interests in
17 communities and entered into an operating lease with respect to one
community. In 1996, the Company expanded its senior living management services
by taking over the management service contracts on 15 communities for four
independent third-party owners and commenced
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providing development and construction management services for new residence
properties in addition to adding a home health care service agency.
The Company generates revenue from a variety of sources. For the year
ended December 31, 1997, the Company's revenue was derived as follows: 69.1%
from the operation of five owned and one leased senior living communities that
were operated by the Company; 13.9% from lease rentals from triple net leases
of three skilled nursing facilities and four physical rehabilitation centers;
10.7% from management fees arising from management services provided for five
affiliate owned senior living communities and fifteen third-party owned senior
living communities; and 3.2% derived from development fees earned for managing
the development and construction of new senior living communities for third
parties.
As the Company continues to implement its business plan, management
believes that the mix of the Company's revenues may change and that development
activities will take on an increased importance to the Company. The Company
believes that the factors affecting the financial performance of communities
managed under contracts with third parties do not vary substantially from the
factors affecting the performance of owned and leased communities, although
there are different business risks associated with these activities.
The Company's third-party management fees are primarily based on a
percentage of gross revenues. As a result, the cash flow and profitability of
such contracts to the Company are more dependent on the revenues generated by
such communities and less dependent on net cash flow than for owned
communities. Further, the Company is not responsible for capital investments in
managed communities. While the management contracts are generally terminable
only for cause, in certain cases the contracts can be terminated upon the sale
of a community, subject to the Company's rights to offer to purchase such
community.
The Company's triple net leases extend through the year 2000 for three
of its owned communities and through the year 2001 for four of its owned
communities. The 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, the Company intends to convert and operate
the communities as assisted living and Alzheimer's care facilities.
The Company's current management contracts expire on various dates
between July 1998 and February 2004 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, 1997, development fees have been earned for
services performed for seven communities under development for third parties.
During 1997, 1996 and 1995, the Company made various purchases of
limited partnership interests in HCP, an affiliated partnership whose
properties are managed by the Company under management contracts. 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 four
physical rehabilitation centers. During 1997, 1996 and 1995, the Company paid
approximately $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. 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.
During 1997, 1996 and 1995, the Company made various purchases of
outstanding notes of NHP, an affiliated partnership whose properties are
managed by the Company under management contracts. NHP owns and operates five
senior living communities. Prior to the Offering, the Company had cumulatively
paid $10,790,828 for ownership of 30.8% of the outstanding NHP Notes, which
represents $13,142,976 of the outstanding balance of these notes and $7,308,965
of the accrued interest. The NHP Notes bear simple interest at 13% per annum
and mature on December 31, 2001. Interest is paid quarterly at a rate of 7%,
with the remaining 6% interest deferred. Prior to April 1997, the Company did
not accrue the deferred interest on the NHP Notes due to uncertainties
regarding its ultimate realization; rather, the Company based its interest
accrual on the interest received on its investment. Beginning April 1, 1997,
the Company began accruing a portion of the deferred interest
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income due to improved NHP cash flows and the results of an independent
valuation of NHP's properties, which supported management's analysis that the
investment in the NHP Notes and the deferred interest are recoverable. The
operations of NHP have demonstrated continuing improvement since 1992, and,
although there can be no assurance, management believes that the performance of
NHP will be sustained through the time the NHP Notes mature. The Company
acquired the NHP Notes at discounts to the outstanding principal balance of
those Notes based on the prevailing secondary market prices for the NHP Notes
at the dates of acquisition. The Company believes that the NHP Notes have
traded at a significant discount due primarily to the lack of an organized
secondary market for such Notes, and believes that such discount is not a
function of the credit risks associated with such Notes. The Company acquired
the NHP Notes owned by CSLC in the Formation Transactions for $18,664,128.
Subsequent to the acquisition, the Company has been recording 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). Also, during 1996, the Company paid
$1,364 for a 3% ownership of limited partnership interests in NHP. The Company
accounts for its investment in NHP on the cost method with respect to the NHP
limited partnership interests and as held-to-maturity securities and reported
at amortized cost with respect to the NHP Notes.
The Company will continue to develop senior living communities. The
development of senior living communities typically involves a substantial
commitment of capital over a 12-month construction period during which time no
revenues are generated, followed by a 12-month lease-up period. The Company
anticipates that newly opened or expanded communities will operate at a loss
during a substantial portion of the lease-up period. The Company's growth
strategy may also include the acquisition of senior living communities, home
health care agencies, and other properties or businesses that are complementary
to the Company's operations and growth strategy.
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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.
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996 1995
---------------------- --------------------- ----------------------
$ % $ % $ %
-------- ------- -------- ------- -------- --------
Revenues:
Resident and health care
revenue ........................ $ 21,207 69.1% $ 13,692 68.8% $ 13,238 73.1%
Rental and lease income .......... 4,276 13.9 1,101 5.5 1,231 6.8
Unaffiliated management
services revenue ............... 1,920 6.2 801 4.0 -- --
Affiliated management services
revenue ........................ 1,378 4.5 2,708 13.6 2,778 15.3
Development fees ................. 977 3.2 673 3.4 -- --
Other ............................ 952 3.1 924 4.7 871 4.8
-------- ------- -------- ------- -------- -------
Total revenues ................. 30,710 100.0 19,899 100.0 18,118 100.0
-------- ------- -------- ------- -------- -------
Expenses:
Operating expenses ............... 17,474 56.9 10,798 54.3 10,287 56.8
General and administrative
expenses ....................... 6,312 20.6 5,493 27.6 4,364 24.1
Depreciation and amortization .... 2,118 6.9 1,481 7.4 1,776 9.8
-------- ------- -------- ------- -------- -------
Total expenses ................. 25,904 84.4 17,772 89.3 16,427 90.7
-------- ------- -------- ------- -------- -------
Income from operations ............. 4,806 15.6 2,127 10.7 1,691 9.3
Other income (expense):
Interest income .................. 3,186 10.4 432 2.2 368 2.0
Interest expense ................. (2,022) (6.5) (221) (1.1) (278) (1.5)
Gain on sale of properties ....... -- -- 438 2.2 -- --
Equity in earnings on
investments .................... -- -- 459 2.3 -- --
Other ............................ 440 1.4 42 0.2 -- --
-------- ------- -------- ------- -------- -------
Income before income taxes and
minority interest in
consolidated partnerships .......... 6,410 20.9 3,277 16.5 1,781 9.8
Provision for income taxes ......... (793) (2.6) -- -- (18) (0.1)
-------- ------- -------- ------- -------- -------
Income before minority interest
in consolidated partnerships ..... 5,617 18.3 3,277 16.5 1,763 9.7
Minority interest in
consolidated partnerships .......... (1,936) (6.3) (1,224) (6.2) (760) (4.2)
-------- ------- -------- ------- -------- -------
Net income ......................... $ 3,681 12.0% $ 2,053 10.3% $ 1,003 5.5%
======== ======= ======== ======= ======== =======
YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED DECEMBER 31, 1996
Revenues. Total revenues were $30,710,000 in 1997 compared to
$19,899,000 in 1996, representing an increase of $10,811,000, or 54.3%. The
inclusion of HCP revenues in 1997 from January 1, 1997 contributed $8,978,000
of the increase, as HCP was not consolidated in 1996. Resident and health care
revenue increased $7,515,000, of which $4,702,000 is a result of the HCP
consolidation, $1,157,000 is improvement in CSLC's revenues due to realization
of additional reimbursements previously limited under the Medicare program for
1994 and 1992 combined with improved CSLC rental rates and occupancies and
$1,543,000 related to the Maryland Gardens facility leased on June 1, 1997.
Rental and lease income increased $3,175,000, of which $4,276,000 was due to
the HCP consolidation, offset by $1,101,000 due to the sale of CSLC's
multi-family properties on November 1, 1996. Unaffiliated management services
revenue increased $1,119,000 due to 15 third-party management contracts added
in the third and fourth quarter of 1996 and one additional third-party
management
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contract added in the second quarter of 1997. Affiliated management services
revenue decreased by $1,330,000, of which $1,177,000 was due to the HCP
consolidation. Development fees increased $304,000 and is due to new
development contract management revenue for managing the development and
construction of new third-party owned senior living communities.
Expenses. Total expenses were $25,904,000 in 1997 compared to
$17,772,000 in 1996, representing an increase of $8,132,000, or 45.8%. The
inclusion of HCP expenses from January 1, 1997 contributed $6,538,000 of the
increase. Operating expenses increased $6,676,000 of which $4,251,000 is a
result of the HCP consolidation, $1,561,000 due to Maryland Gardens operating
expenses, and an increase in development operating expenses of $631,000 owing
to increased development operations. General and administrative expenses
increased $819,000, which was due to the HCP consolidation of $1,078,000 offset
by an overall decrease in general and administrative expenses. Depreciation and
amortization increased $637,000, of which $1,209,000 is related to the HCP
consolidation, offset by a $572,000 decrease in CSLC's depreciation which is
primarily due to the sale of CSLC's multi-family rental properties in November
1996.
Other income and expenses. Interest income increased $2,754,000,
primarily as a result of CSLC's increase in interest income of $1,116,754
associated with its investment in U.S. Treasury Bills, $1,230,000 as a result
of the Company's increase in interest income associated with its increased
investment in NHP Notes combined with the commencement of accruing a portion of
the deferred income on the these notes beginning in April 1997, as a result of
NHP's improved financial position and performance and increased valuation of
the underlying properties, $288,361 associated with income from temporary
investment of net proceeds from the Offering for November and December 1997,
and the consolidation of HCP of $359,000. Interest expense increased $1,801,000
as a result of higher debt balances including the LBHI Loan borrowings on July
1, 1997 and $679,000 as a result of the HCP consolidation. Income from equity
in earnings on investments decreased $459,000 as a result of the HCP
consolidation on January 1, 1997. In connection with the sale of its investment
in HCP to the Company immediately following completion of the Offering, CSLC
incurred short swing profits, as defined by the Securities and Exchange
Commission, and was, accordingly, required to remit such profits to HCP which
recorded the remittance as other income. A gain of $438,000 was recorded on
November 1, 1996, as a result of the sale of multi-family properties with no
corresponding gain being realized in 1997.
Minority interest. Minority interest in limited partnerships increased
$712,000 primarily as a result of the HCP consolidation.
Provision for income taxes. Provision for income taxes was
approximately $793,000 in 1997 compared to no provision in 1996. 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 income taxes is provided on earnings after the
Formation Transactions.
Net income. As a result of the foregoing factors, net income increased
$1,628,000 to $3,681,000 for 1997 from $2,053,000 for 1996.
YEAR ENDED DECEMBER 31, 1996 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1995
Revenues. Total revenues were $19,899,000 in 1996 compared to
$18,118,000 in 1995, representing an increase of $1,781,000, or 9.8%. Resident
and health care revenue increased $454,000 as a result of $241,000 of 1996
revenues associated with the home health care business established in 1996 and
a $213,000 increase in CSLC's senior living and health care revenues caused
primarily by increased rates. Rental and lease income decreased $130,000 as a
result of the sale of CSLC's multi-family properties on November 1, 1996.
Unaffiliated management services revenue increased $801,000 due to the 15
third-party management contracts added in 1996. Affiliated management services
revenue decreased by $70,000, with $181,000 of the decrease a result of the
sale of two HCP managed properties in 1995 and 1996, offset by improved
occupancies in managed properties and an overall increase in management fees to
unconsolidated affiliates of $110,000. Development fees of $673,000 in 1996
were due to new development contract management revenue for managing the
development and construction of new third-party owned senior living
communities.
Expenses. Total expenses were $17,772,000 in 1996 compared to
$16,427,000 in 1995, representing an increase of $1,345,000, or 8.2%. Operating
expenses increased $511,000 as a result of $142,000 of expenses associated with
property development and $218,000 of expenses due to the home health care
businesses established in 1996, and a $150,000 increase
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in expenses related to increased resident and health care revenues. General and
administrative expenses increased $1,129,000. This increase was due to an
increase in officers' salaries and bonuses and an increase in other general and
administrative expenses of $733,000, which was primarily the result of expanded
business operations. Depreciation and amortization decreased $295,000 and was
primarily related to decreases in depreciation of $245,000 associated with
multi-family rental properties sold on November 1, 1996, and amortization of
deferred income associated with the equity method of accounting of acquired
interests in HCP in 1996 of $119,000, offset by a $69,000 increase in
amortization expense.
Other income and expenses. Interest and other income increased
$106,000 primarily as a result of increased income associated with investment
of cash reserves and interest received on CSLC's investment in the NHP Notes.
Interest expense decreased $57,000 primarily as a result of the retirement of
the mortgage loans associated with the properties sold on November 1, 1996.
Equity in earnings on investments was $459,000 in 1996 as a result of the
application of the equity method of accounting for CSLC's investment in HCP in
the first quarter of 1996. A gain of $438,000 was recorded on November 1, 1996
as a result of the sale of properties with no corresponding gains being
realized in 1995.
Provision for income taxes. Prior to February 1, 1995, one of the
Company's predecessor entities (Capital Senior Living, Inc.) incurred federal
and state income taxes. Effective February 1, 1995, Capital Senior Living, Inc.
became an S corporation and consequently was not subject to income taxes after
February 1, 1995. CSLC and HCP are not subject to Federal income taxes as the
partners are responsible for their respective shares of partnership net income
or loss for income tax purposes and the companies owned by HCP did not generate
taxable income for Federal income tax purposes. As a result, the provision for
income taxes decreased from $18,000 in 1995 to no tax provision in 1996.
Minority interest. Minority interest in combined partnerships
increased $464,000 in 1996 primarily as a result of increased earnings of CSLC
offset by a decrease in minority interest from 42.6% in 1995 to 37.2% in 1996.
Net income. As a result of the foregoing factors, net income increased
$1,050,000 or 104.7% to $2,053,000 for 1996 from $1,003,000 for 1995.
QUARTERLY RESULTS
The following table presents certain quarterly financial information
for the four quarters ended December 31, 1997 and 1996. 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.
1997 Calendar Quarters
----------------------------------------
First Second Third Fourth
------ ------ ------ -------
(in thousands, except per share amounts)
Total revenues ......................... $7,091 $7,977 $7,652 $ 7,990
Income from operations ................. 1,124 980 959 1,743
Net income ............................. 583 630 797 1,671
Net income per share ................... $ 0.06 $ 0.07 $ 0.09 $ 0.10
Weighted average shares outstanding .... 9,367 9,367 9,367 16,440
1996 Calendar Quarters
----------------------------------------
First Second Third Fourth
------ ------ ------ -------
(in thousands)
Total revenues ......................... $4,754 $4,758 $4,855 $ 5,532
Income from operations ................. 481 393 157 1,096
Net income ............................. $ 313 $ 467 $ 24 $ 1,249
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LIQUIDITY AND CAPITAL RESOURCES
As described in the notes to the accompanying consolidated financial
statements, the Company repaid all of its notes payable to affiliates and the
mortgage loan payable to Lehman Brothers Holdings, Inc. with proceeds from the
Offering in November 1997 leaving only the mortgage property loans of HCP
outstanding thereafter. The Company also secured a three year revolving line of
credit of $20 million which may be used for acquisition of additional interest
in HCP and NHP, expansion of owned communities, acquisition of additional
properties and general working capital purposes.
In addition to approximately $48 million of cash balances on hand as
of December 31, 1997, after payment of all Formation Transactions and expenses
associated with the Offering, the Company's principal sources of liquidity are
expected to be cash flows from operations and amounts available for borrowing
under its $20 million revolving line of credit. There can be no assurance,
however, that the Company will continue to generate cash flows at or above
current levels or that the Company will be able to meet its anticipated need
for working capital.
The Company derives the benefits and bears the risk attendant to the
communities it owns. The cash flows and profitability of owned communities
depends on the operating results of such communities and are subject to certain
risks of ownership, including the need for capital expenditures, financing and
other risks such as those relating to environmental matters.
The cash flows and profitability of the Company's owned communities
that are leased to third parties depend on the ability of the lessee to make
timely lease payments. At December 31, 1997, HCP was operating one of its
properties and had leased seven of its owned properties under triple net leases
to third parties until year 2000 or 2001. Four of these properties are leased
until year 2001 to HealthSouth Rehabilitation Corp. ("HealthSouth"), which
provides acute spinal injury intermediate care at these properties. HealthSouth
closed one of these facilities in 1994 and closed another facility in February
of 1997 due to low occupancy. HealthSouth has continued to make lease payments
on a timely basis for all four properties. Should the operators of the leased
properties default on payment of their lease obligations prior to termination
of the lease agreements, six of the seven lease contracts contain a continuing
guarantee of payment and performance by the parent company of the operators,
which the Company intends to pursue in the event of default. Following
termination of these leases, the Company intends to convert and operate the
facilities as assisted living and Alzheimer's care facilities. HCP's facility
leases are all current in their lease obligations to HCP. The lessee for one
property continues to fund a deficit between the required lease payment and
operators' cash flow.
The cash flows and profitability of the Company's third-party
management fees are dependent upon the revenues and profitability of the
communities managed. While the management contracts are generally terminable
only for cause, in certain cases the contracts can be terminated upon the sale
of a community, subject to the Company's rights to offer to purchase such
community.
The Company plans to continue to develop senior living communities.
The development of senior living communities typically involves a substantial
commitment of capital over a 12-month construction period during which time no
revenues are generated, followed by a 12-month lease-up period. The Company
anticipates that newly opened or expanded communities will operate at a loss
during a substantial portion of the lease-up period.
On September 16, 1997, the Company and Tri Point Communities, L.P.
("Tri Point"), a limited partnership owned by the Company's founders (Messrs.
Beck and Stroud) and their affiliates, entered into a Development and Turnkey
Services Agreement in connection with the development and management of the
Company's planned new communities (Waterford Communities) where Tri Point will
own and finance the construction of planned new Waterford Communities. In
connection with these communities the Company will have an option to purchase
the communities developed by Tri Point upon their completion at a price equal
to fair market value (based upon a third-party appraisal). The Company has made
no determination as to whether it will exercise its purchase options. The
Company believes that the arrangement with Tri Point provides it with an
attractive mechanism to develop new communities without employing its own
capital and which will not be dilutive to earnings during the development and
lease-up phases. Further, the Company will receive development fees of between
4% and 7% of total project costs. Tri Point has received and accepted
commitments for loan facilities aggregating up to $100 million to fund its
development activities.
Effective April 1, 1998, Tri Point will be reorganized and the
interests of Messrs. Beck and Stroud will be sold at their cost to Triad Senior
Living, Inc. and its affiliates, which are unrelated third-parties. Triad
Senior Living, Inc. and its affiliates have previously owned, developed,
operated and sold senior living communities for their own account. Tri Point
will be renamed Triad
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Senior Living, L.P. ("Triad"). The new general partner of Triad, owning 1%,
will be Triad Senior Living, Inc. The limited partners will be Blake N. Fail
(principal owner of Triad Senior Living, Inc.), owning 80%, and a wholly owned
subsidiary of the Company, owning 19%. Triad will continue to be bound by the
existing Development and Turnkey Services Agreement and all existing
development agreements, except the development fee will be reduced from 7% to
4%, but will include reimbursements for expenses and overhead. Triad will also
continue to be bound by all existing property management agreements. The
Company's subsidiary will have an option to purchase the partnership interests
of Triad Senior Living, Inc. and Blake N. Fail for an amount equal to the
amount such party paid for its interest, plus non-compounded interest of 12%
per annum. The property management agreements also provide the Company with an
option to purchase the communities developed by Triad upon their completion for
an amount equal to the fair market value (based on a third-party appraisal but
not less than hard and soft costs and lease-up costs). The Company has made no
determination as to whether it will exercise its 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.
Net cash provided by operating activities of $9,684,000 for the year
ended December 31, 1997 increased $5,782,000, or 148%, over that of the
comparable year ended December 31, 1996, which was primarily comprised of
increased cash flow created by improved earnings of $3,855,000 (after non-cash
adjustments) combined with $1,927,000 of cash provided by a comparative
decrease in working capital.
Net cash used in investing activities of $81,502,000 for the year
ended December 31, 1997 increased $79,799,000 over that of the comparable year
ended December 31, 1996. This increase was comprised of increased capital
expenditures of $1,589,000 primarily related to the Cottonwood expansion, the
lack of comparable proceeds from sale of properties in 1997 compared to 1996's
proceeds of $2,549,000 (1996 sale of multi-family properties), an increase in
investments in 1997 in limited partnerships (CSLC, HCP and NHP pension notes)
of $12,208,000, the $64,203,000 investment by the Company in restricted cash
securities from the proceeds obtained from the LBHI Loan and cash paid for the
November 1997 purchase of assets acquired from CSLC and cash not retained
offset by HCP's beginning cash balance of $8,995,000 as a result of the
consolidation of HCP at January 1, 1997.
Net cash provided by financing activities of $109,125,000 for the year
ended December 31, 1997 increased $110,521,000 over that of the comparable year
ended December 31, 1996. This increase was due to $110,331,000 of net proceeds
received by the Company in November 1997 from the Offering.
YEAR 2000 ISSUE
The Company has developed a plan to modify its information technology
to be ready for the year 2000. The Company relies upon PC-based systems and
does not expect to incur material costs to transition to Year 2000 compliant
systems in its internal operations. The Company does not expect this project to
have a significant effect on operations. The Company will continue to implement
systems and all new investments are expected to be with Year 2000 compliant
software.
IMPACT OF INFLATION
To date, inflation has not had a significant impact on the Company.
Inflation could, however, 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,
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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 Securities and Exchange Commission.
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.
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" 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.
33
36
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 did not file any reports on Form 8-K during the quarterly
period ended December 31, 1997.
34
37
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, thereunto duly authorized, on March 27, 1998.
CAPITAL SENIOR LIVING CORPORATION
By: /s/ Jeffrey L. Beck
---------------------------------
Jeffrey L. Beck
Co-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 Jeffrey L. Beck and
James A. Stroud and each of the, 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/ Jeffrey L. Beck Co-Chairman of the Board, Chief March 27, 1998
- --------------------------------- Executive Officer (Principal
Jeffrey L. Beck Executive Officer)
/s/ James A. Stroud Co-Chairman of the Board, Chief March 27, 1998
- --------------------------------- Operating Officer
James A. Stroud
/s/ Lawrence A. Cohen Vice Chairman, Chief Financial March 27, 1998
- --------------------------------- Officer (Principal Financial and
Lawrence A. Cohen Accounting Officer)
/s/ Dr. Gordon I. Goldstein Director March 27, 1998
- ---------------------------------
Dr. Gordon I. Goldstein
/s/ J. Frank Miller, III Director March 27, 1998
- ---------------------------------
J. Frank Miller, III
/s/ James A. Moore Director March 27, 1998
- ---------------------------------
James A. Moore
/s/ Dr. Victor W. Nee Director March 27, 1998
- ---------------------------------
Dr. Victor W. Nee
35
38
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 Peat Marwick LLP, Independent Auditors.................................. F-3
Consolidated Balance Sheets - December 31, 1997 and 1996............................... F-4
Consolidated Statements of Income - December 31, 1997, 1996 and 1995................... F-5
Consolidated Statements of Equity - December 31, 1997, 1996 and 1995................... F-6
Consolidated Statements of Cash Flows - December 31, 1997, 1996 and 1995............... F-7
Notes to Consolidated Financial Statements............................................. F-8
F-1
39
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, 1997 and 1996, and the related
consolidated statements of income, equity, and cash flows for each of the three
years in the period ended December 31, 1997. 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 56% owned subsidiary, which statements reflect total assets of
$32,801,853 as of December 31, 1997, and total revenues of $8,977,628 for the
year ended December 31, 1997. 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
other auditors.
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 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, 1997 and 1996, and the results of their consolidated operations and
their consolidated cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
Ernst & Young LLP
Dallas, Texas
February 6, 1998
F-2
40
INDEPENDENT AUDITORS' REPORT
The Partners
HealthCare Properties, L.P.
We have audited the accompanying consolidated balance sheet of HealthCare
Properties, L.P. and subsidiaries (a Delaware limited partnership) as of
December 31, 1997, and the related consolidated statements of income,
partnership equity, and cash flows for the year ended December 31, 1997. 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 audit.
We conducted our audit 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 audit provides 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, 1997, and the results of
their operations and their cash flows for the year ended December 31, 1997, in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Dallas, Texas
February 4, 1998
F-3
41
CAPITAL SENIOR LIVING CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
DECEMBER 31,
-----------------------
1997 1996
---- ----
Current assets:
Cash and cash equivalents................................................. $ 48,125,225 $ 10,818,512
Cash, restricted.......................................................... - 206,376
Accounts receivable, net.................................................. 1,966,357 607,028
Accounts receivable from affiliates....................................... 26,696 90,075
Deferred taxes............................................................ 8,280 -
Prepaid expenses and other................................................ 481,149 121,993
------------ -----------
Total current assets.................................................... 50,607,707 11,843,984
Deferred taxes............................................................... 10,090,997 -
Property and equipment, net.................................................. 41,120,448 12,668,539
Investments in limited partnerships ......................................... 13,741,940 8,275,920
Management contract rights, net.............................................. 243,559 291,487
Goodwill, net................................................................ 1,257,595 -
Deferred financing charges, net.............................................. 108,435 106,440
Other assets................................................................. 200,229 16,644
------------ -----------
Total assets.......................................................... $117,370,910 $33,203,014
============ ===========
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable.......................................................... $ 2,566,392 $ 396,867
Accrued expenses.......................................................... 1,259,410 1,084,686
Line of credit............................................................ 1,830,130 -
Current portion of notes payable to affiliates............................ - 465,091
Current portion of notes payable.......................................... 932,664 -
Customer deposits......................................................... 277,413 248,458
Federal and state income taxes payable.................................... 831,682 -
Due to affiliates......................................................... 50,064 81,456
------------ -----------
Total current liabilities............................................. 7,747,755 2,276,558
Deferred income ............................................................. 231,256 3,400,684
Notes payable to affiliates, net of current portion.......................... - 201,390
Notes payable, net of current portion ....................................... 5,744,767 -
Minority interest in consolidated partnerships .............................. 11,087,512 10,123,858
Commitments and contingencies
Equity:
Partners' capital......................................................... - 17,257,778
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 1997
and 1,680,000 in 1996............................................... 197,173 16,800
Additional paid-in capital................................................ 91,740,251 26,558
Retained earnings (deficit)............................................... 622,196 (100,612)
------------ -----------
Total equity.......................................................... 92,559,620 17,200,524
------------ -----------
Total liabilities and equity.......................................... $117,370,910 $33,203,014
============ ===========
See accompanying notes.
F-4
42
CAPITAL SENIOR LIVING CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
---- ---- ----
Revenues:
Resident and health care revenue............................... $ 21,206,865 $ 13,691,984 13,237,891
Rental and lease income........................................ 4,275,611 1,101,317 1,230,859
Unaffiliated management services revenue....................... 1,919,618 800,961 -
Affiliated management services revenue......................... 1,378,444 2,708,077 2,778,644
Development fees............................................... 976,694 673,587 -
Other.......................................................... 952,650 923,700 870,717
------------ ------------ -----------
Total revenues............................................ 30,709,882 19,899,626 18,118,111
Expenses:
Operating expenses............................................. 17,474,127 10,798,431 10,286,743
General and administrative expenses............................ 6,311,986 5,492,873 4,363,707
Depreciation and amortization.................................. 2,117,288 1,481,056 1,776,268
------------ ------------ -----------
Total expenses............................................ 25,903,401 17,772,360 16,426,718
------------ ------------ -----------
Income from operations........................................... 4,806,481 2,127,266 1,691,393
Other income (expense):
Interest income................................................ 3,185,815 432,342 367,715
Interest expense............................................... (2,022,494) (221,521) (278,065)
Gain on sale of properties..................................... - 437,819 -
Equity in earnings on investments.............................. - 458,992 -
Other.......................................................... 440,007 42,042 -
------------ ------------ -----------
Income before income taxes and minority interest in
consolidated partnerships...................................... 6,409,809 3,276,940 1,781,043
Provision for income taxes....................................... (792,524) - (18,242)
------------ ------------ -----------
Income before minority interest in consolidated partnerships..... 5,617,285 3,276,940 1,762,801
Minority interest in consolidated partnerships................... (1,936,122) (1,223,997) (759,407)
------------ ------------ -----------
Net income....................................................... $ 3,681,163 $ 2,052,943 $ 1,003,394
============ ============ ===========
Net income per share:
Basic and diluted.............................................. $ 0.33
============
Weighted average shares outstanding........................... 11,150,087
============
Pro forma net income (unaudited):
Net income..................................................... $ 3,681,163 $ 2,052,943
Pro forma income taxes......................................... (964,776) (810,912)
------------ ============
Pro forma net income............................................. $ 2,716,387 $ 1,242,031
============ ============
See accompanying notes.
F-5
43
CAPITAL SENIOR LIVING CORPORATION
CONSOLIDATED STATEMENTS OF EQUITY
COMMON STOCK ADDITIONAL RETAINED
PARTNERS' -------------------- PAID-IN EARNINGS
CAPITAL SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
------- ------ ------ ------- --------- -----
Balance at January 1, 1995............. $12,257,996 1,680,000 $ 16,800 $ (13,242) $ 233,738 $12,495,292
Dividend upon acquisition of
management contract rights........ - - - - (517,719) (517,719)
Purchase of BUCs.................... 1,466,411 - - - - 1,466,411
Net income.......................... 931,262 - - - 72,132 1,003,394
----------- ---------- ---------- ----------- ---------- -----------
Balance at December 31, 1995........... 14,655,669 1,680,000 16,800 (13,242) (211,849) 14,447,378
Issuance of common stock ........... - - - 16,800 - 16,800
Capital contributions............... - - - 23,000 - 23,000
Purchase of BUCs ................... 660,403 - - - - 660,403
Net income.......................... 1,941,706 - - - 111,237 2,052,943
----------- ---------- ---------- ----------- ---------- -----------
Balance at December 31, 1996........... 17,257,778 1,680,000 16,800 26,558 (100,612) 17,200,524
Purchase of BUCs ................... 374,867 - - - - 374,867
Distributions prior to Offering .... - - - (457,647) (457,647)
Issuance of stock resulting from
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
=========== =========== ========== =========== ========== ===========
See accompanying notes.
F-6
44
CAPITAL SENIOR LIVING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
---------------------------------
1997 1996 1995
---- ---- ----
OPERATING ACTIVITIES
Net income....................................... $ 3,681,163 $ 2,052,943 $ 1,003,394
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation................................... 1,894,665 1,397,258 1,632,371
Amortization................................... 222,623 83,798 143,897
Deferred income tax benefit.................... (39,158) - -
Non cash interest expense...................... - - 1,616
Minority interest in consolidated
partnerships................................. 1,936,122 1,223,997 759,407
Equity in earnings on investments.............. - (458,992) -
Gain on sale of properties..................... - (437,819) -
Provision for bad debts........................ 43,254 22,312 71,098
Changes in operating assets and
liabilities:
Cash, restricted............................ 186,416 (2,588) (152,803)
Accounts receivable......................... (1,556,965) (219,854) (215,233)
Accounts receivable from affiliates......... 90,955 58,811 (294,237)
Federal and state income taxes payable...... 831,682 - -
Prepaid expenses and other.................. (373,006) 23,359 (36,141)
Other assets................................ (184,910) (14,940) 6,766
Accounts payable............................ 2,698,550 85,328 256,183
Accrued expenses............................ 23,529 (5,402) (1,136,510)
Customer deposits........................... 28,955 32,295 26,204
Deferred income............................. 231,256 - -
Due to affiliates........................... (31,392) 61,310 655,936
----------- ----------- -----------
Net cash provided by operating activities........ 9,683,739 3,901,816 2,721,948
INVESTING ACTIVITIES
Capital expenditures............................. (2,441,106) (851,732) (400,701)
Proceeds from sale of properties................. - 2,549,352 -
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) - -
Investments in limited partnerships.............. (15,609,034) (3,401,207) (896,405)
----------- ----------- -----------
Net cash used in investing
activities..................................... (81,501,525) (1,703,587) (1,297,106)
FINANCING ACTIVITIES
Proceeds from notes payable and line of credit... 78,663,883 $ - $ -
Repayments of notes payable and line of credit... (77,363,736) (145,319) (58,565)
Repayments of notes payable to affiliates........ (1,166,481) (455,592) (65,091)
Proceeds from notes payable to affiliates........ 500,000 470,000 250,000
Distributions to minority partners............... (224,795) - -
Distributions prior to Offering.................. (457,647) - -
Issuance of common stock, net.................... 110,330,915 16,800 -
Capital contribution............................. - 23,000 -
Repurchase of BUCs............................... (960,752) (1,262,355) -
Deferred loan charges paid....................... (196,888) (42,953) (130,829)
Cash portion of dividend ........................ - - (202,698)
----------- ----------- -----------
Net cash provided by (used in) financing
activities..................................... 109,124,499 (1,396,419) (207,183)
----------- ----------- -----------
Increase in cash and cash
equivalents.................................... 37,306,713 801,810 1,217,659
Cash and cash equivalents at beginning of
year........................................... 10,818,512 10,016,702 8,799,043
----------- ----------- -----------
Cash and cash equivalents at end of
year........................................... $48,125,225 $10,818,512 $10,016,702
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES
Cash paid during the year for:
Interest....................................... $ 2,041,366 $ 188,510 $ 276,062
=========== =========== ===========
Income taxes................................... $ - $ - $ 21,633
=========== =========== ===========
See accompanying notes
F-7
45
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION, FORMATION AND INITIAL PUBLIC OFFERING
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 Properties including HealthCare Properties,
L.P. (HCP) (as of January 1, 1997).; Capital Senior Living, Inc. (Living);
Quality Home Care, Inc. (Quality); Capital Senior Development, Inc.
(Development); Capital Senior Management 1, Inc. (Management 1); and Capital
Senior Management 2, Inc. (Management 2) (collectively referred to with Capital
Senior Living Corporation as the Company). 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 intercompany balances and transactions have been
eliminated in consolidation.
The Company is a provider of senior living services. The Company owns,
operates and manages senior living communities throughout the United States.
The Company has completed the registration of its common stock in an initial
public offering (Offering) on November 5, 1997. Simultaneously with the closing
of the Offering, 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 owns a portfolio of
five independent senior living communities.
As of December 31, 1997, the Company had increased its ownership in HCP to
56% of the limited partner units. In the accompanying consolidated financial
statements, HCP is consolidated as though a controlling financial interest in
HCP had been acquired by the Company at January 1, 1997. At December 31, 1996
and 1995, the Company owned approximately 31% and 6% 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 seven properties are leased
to qualified operators who provide specialized health care services. Capital
Realty Group Senior Housing, Inc. (Housing), an entity controlled by the
Stockholders, is the general partner.
F-8
46
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The general partner of CSLC is Retirement Living Communities, L.P., an
Indiana limited partnership (RLC). RLC is owned by the Stockholders.
Additionally, CSLC has issued 1,264,000 Beneficial Unit Certificates (BUCs). At
December 31, 1996 and 1995, BUCs outstanding were 1,172,146 and 1,264,000,
respectively. At December 31, 1996 and 1995, James A. Stroud, Jeffrey L. Beck,
and RLC collectively owned 63.4% and 57.4% of the outstanding BUCs,
respectively.
Prior to February 1, 1995, Living's operations were limited to payroll
services provided to affiliated entities. On February 1, 1995, Living acquired
14 management contracts from Housing in exchange for a note payable to Housing
of $467,164. The acquisition was accounted for in a manner similar to a pooling
of interests as it was under the common control of the Stockholders.
Accordingly, the management contracts were recorded at Housing's historical
basis and the financial statements were restated to include the operations
stemming from the management contracts for all periods prior to the February 1,
1995 acquisition date. Effective February 1, 1995, a dividend of $517,719
(including cash of $202,698) was recorded to eliminate the carrying value of the
net assets of the business stemming from the property management contracts which
were not acquired.
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 which exceed Federal
Deposit Insurance Corporation insurance limits. Management believes that credit
risk related to these deposits is minimal.
Property and Equipment
Property and equipment are stated at cost and depreciated on a straight-line
basis over the estimated useful lives of the assets, which range from three to
31 years.
Management Contract Rights and Goodwill
Management contract rights 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, 1997 and 1996, was
$272,604 and $224,676, respectively. Goodwill 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, 1997, was $7,286.
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 intangible asset, including contract
changes, local market developments, and other publicly available information. If
these external factors indicate the intangible assets and property and equipment
will not be recoverable, the carrying value of the intangible assets and
property and equipment will be analyzed and adjusted accordingly. During 1996
and 1995, management contract rights of $44,755 and $52,771, respectively, were
written off due to the termination of certain contracts which has been reflected
as additional amortization expense. 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, 1997 or 1996.
F-9
47
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
CSLC and HCP are partnerships and, consequently, are not subject to income
taxes. Taxable income or loss is directly allocated to the individual partners.
Prior to the Formation, Living, Quality, Development, Management 1, and
Management 2 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. Prior to February 1, 1995,
Living was subject to federal and state income taxes.
Revenue Recognition
Resident and healthcare 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 22% in 1997
(that also related to exceptions granted for 1992 and 1994, as discussed below,)
and less than 10% in 1996 and 1995 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 which 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 reimbursement under the foregoing programs in amounts determined
based on the filing of an annual cost report prepared in accordance with Federal
regulations, which reports 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
reimbursable 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 to these
facilities are 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 1992 through 1996, as of
December 31, 1997, and recorded $345,831 in 1997, as a result of being granted
exception requests for 1992 and 1994. There can be no assurance that an
exception to a facility's routine cost limits will be granted. 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 2002 and provide for
termination fees upon early cancellation. Management services revenue are shown
net of reimbursed expenses. The reimbursed expenses to affiliates were
$3,892,526, $6,477,199 and $7,015,250, for the years ended December 31, 1997,
1996 and 1995, respectively. Reimbursed expenses to unaffiliated parties were
$8,941,343, $2,600,529 and $-0-, for the years ended December 31, 1997, 1996 and
1995, respectively.
F-10
48
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Credit Risk
The Company's receivables are generally due within 30 days. The Company does
not require collateral. Credit losses have been within management's
expectations, and management believes that the allowance for doubtful accounts
adequately provides for any expected losses.
Advertising
Advertising expenses are expensed as incurred. Advertising expenses for the
years ended December 31, 1997, 1996 and 1995 were $336,738, $210,028 and
$223,862, 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.
Net income per share for periods prior to 1997 are not comparable to
subsequent period amounts due to the Company's Formation and Offering in October
1997 and, consequently, are not included.
Stock-Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee 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 of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("FASB 123").
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.
New Accounting Pronouncements
The Financial Accounting Standards Board issued Statement No. 130,
Reporting Comprehensive Income and Statement No. 131, Disclosures about Segments
of an Enterprise and Related Information, both effective for fiscal 1998.
Statement No. 130 requires reporting and display of comprehensive income and its
components in the financial statements. Statement No. 131 requires reporting
about operating segments and other disclosures about the business in its annual
and interim financial statements. These new Statements will only expand the
Company's disclosures with respect to these items.
F-11
49
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
DECEMBER 31,
--------------------------
1997 1996
------------ -----------
Land................................................................................ $ 2,777,087 $ 879,723
Land improvements................................................................... 3,906 127,481
Buildings and building improvements................................................. 47,562,214 13,562,383
Furniture and equipment............................................................. 2,387,485 4,606,048
Construction in process............................................................. 2,049,574 280,946
------------ -----------
54,780,266 19,456,581
Less accumulated depreciation....................................................... 13,659,818 6,788,042
------------ -----------
Property and equipment, net......................................................... $ 41,120,448 $12,668,539
============ ===========
On November 1, 1996, CSLC sold its two multi-family properties to a
non-related third party for a combined sales price of $4,793,000. This sale
resulted in the recognition of a $437,819 gain and net cash proceeds of
$2,549,352 after repayment of the related mortgage payable of $1,889,829.
4. ACCRUED EXPENSES
Accrued expenses consist of the following:
DECEMBER 31,
---------------------------
1997 1996
---------- ----------
Accrued salaries, bonuses and related expenses.................................. $ 432,249 $ 460,646
Accrued property taxes.......................................................... 493,796 506,418
Other........................................................................... 333,365 117,622
---------- ----------
$1,259,410 $1,084,686
========== ==========
5. NOTES PAYABLE TO AFFILIATES
Notes payable to affiliates consist of the following:
DECEMBER 31,
------------------------------
1997 1996
------------- -------------
Demand notes payable to stockholders; interest at 10%........................... $ - $ 400,000
Note payable to Housing; interest at 10%........................................ - 266,481
------------- -------------
- 666,481
Less current portion............................................................ - 465,091
------------- -------------
$ - $ 201,390
============= =============
F-12
50
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. NOTES PAYABLE AND LINE OF CREDIT
Notes payable consists of the following:
DECEMBER 31,
-------------------------------
1997 1996
-------------- -------------
HCP mortgage loans, bearing interest ranging from 6.6% to 10.75%; payable in
monthly installments of $100,812 including interest, maturing from 2001 to
2012 secured by certain properties of HCP.................................... $ 6,677,431 $ -
-------------- ------------
Less current portion............................................................ 932,664 $ -
-------------- ------------
$ 5,744,767 $ -
============== ============
The aggregate maturities of notes payable at December 31, 1997, are as
follows:
1998 $ 932,664
1999 382,640
2000 417,147
2001 378,170
Thereafter 4,566,810
-----------
$ 6,677,431
===========
On December 10, 1997, the Company entered into a $20 million revolving line
of credit with a bank which expires December 10, 2001. Borrowings under the line
of credit are secured by three senior living communities and bear interest at
the prime rate or LIBOR plus 1.7% (7.42% at December 31, 1997). The line of
credit may be used for acquisition of additional interests in HCP and NHP,
acquisition of additional properties, development of expansions to existing
properties and general working capital purposes. Amounts outstanding under the
line of credit at December 31, 1997, were $1,830,130. In connection with
obtaining the line of credit, the Company incurred $111,533 in deferred
financing charges, which are amortized over the life of the line of credit using
the straight line method. Accumulated amortization was $3,098 at December 31,
1997.
Under the line of credit, the Company must maintain certain levels of
tangible net worth and comply with other restrictive covenants.
On June 30, 1997, CSLC entered into a $77,000,000 mortgage loan agreement
with Lehman Brothers Holdings, Inc., and pledged four senior living communities
and its investments in HCP and NHP as collateral. Subsequent to June 30, 1997,
approximately $70,800,000 became outstanding under this loan agreement;
$5,500,000 was used to repay an outstanding mortgage loan commitment (the prior
credit facility) and approximately $64,500,000 was used to fund the liquidity
requirement under the loan agreement through the purchase of three-month U.S.
Treasury Securities. The U.S. Treasury Securities were sold under a repurchase
agreement with a term equal to their maturity. The repurchase agreement was
cancelled and the outstanding debt was assumed and repaid by the Corporation
from the proceeds of the Offering. The U.S. Treasury Securities reverted to CSLC
for use or disposition as determined by CSLC, and the Company has no interest in
such securities.
CSLC's prior credit facility from a non-affiliated mortgage company was for
$17,500,000. This facility was canceled in connection with the Offering.
F-13
51
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In connection with obtaining the prior credit facility, the Company incurred
$273,070 in deferred financing charges, which were amortized over the life of
the loan commitment using the straight-line method. In connection with obtaining
the mortgage loan agreement, the Company incurred $85,355 in deferred financing
charges. Accumulated amortization was $329,617 and $166,630 in 1997 and 1996,
respectively. The unamortized balance at the Offering date of $28,808 was not
retained in the Asset Purchase.
HCP leases four of its properties under a master lease. The rentals under
the master lease provide additional security for two notes payable used to
finance two of the master lease properties. These notes are due December 1,
2001.
7. EQUITY
In connection with the Offering, the Company is authorized to issue
preferred stock in series and to fix and state the voting powers, full or
limited, or no 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.
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.
During 1996, the Company issued 1,680,000 shares of $.01 par value common
stock for $16,800 in cash. For financial reporting purposes, as the combined
entities were under common control, the Company's common stock is presented as
outstanding as of January 1, 1995.
During 1996, Development, Management 1, Management 2 and Quality each issued
1,000 shares of $.01 par value common stock for $1,000. All shares authorized
are outstanding at December 31, 1996. At December 31, 1996 and 1995, Living has
1,000 shares of $.01 par value common stock authorized, issued and outstanding.
The par value and associated paid-in capital are included in additional paid-in
capital in the accompanying financial statements.
Common stock reserved for future issuance is 1,565,000 for stock options.
The rights, preferences and privileges of holders of common stock are subject to
the rights of the holders of Preferred Stock.
Purchases of BUCs during 1997, 1996 and 1995 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 as a reduction in minority interest. CSLC
purchased 55,316 BUCs for $960,762 during 1997, at an average cost of $17.37 per
unit. CSLC purchased 91,854 BUCs for $1,262,355 during 1996, at an average cost
of $13.74 per unit. These repurchases of BUCs have been reflected as a reduction
in minority interest at December 31, 1996.
F-14
52
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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. HCP made a $224,795 distribution in 1997 to minority partners.
8. 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 provides for the grant of options to purchase up to 1,565,000 shares. The
option exercise price and vesting provisions of such options are fixed when the
option is granted. The options expire 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 year ended December 31, 1997, is presented below:
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
----------- -----------------
Outstanding at beginning of year - -
Granted 776,250 $ 13.50
Exercised - -
Forfeited - -
Expired - -
----------- -----------------
Outstanding at end of year 776,250 $ 13.50
=========== =================
Exercisable at end of year 121,500 $ 13.50
=========== =================
The weighted average remaining contractual life of the options at December
31, 1997, is approximately 9.8 years. Unoptioned shares available for the
granting of options at December 31, 1997 is 788,750.
The average daily price of the stock during 1997 subsequent to the Offering
was $13.04 per share, and therefore, the options are considered anti-dilutive
for the calculation of diluted net income per share.
Pro forma information regarding net income per share is required by
Statement of Financial Accounting Standards No. 123, and has been determined as
if the Company had accounted for its employee stock options under the fair value
method of that statement. 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: risk free interest rate of 5.7 percent; dividend
yield of zero percent; expected lives of seven years; and volatility of 70.1
percent. The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which 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.
F-15
53
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting periods. The Company's
pro forma information follows for fiscal 1997:
Net income
As reported..................................................... $3,681,000
Pro forma....................................................... 2,787,000
Net income per share
As reported..................................................... 0.33
Pro forma....................................................... 0.25
9. INCOME TAXES
The provision (benefit) for income taxes consists of the following:
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1997 1996 1995
--------------- -------------- ---------------
Current:
Federal................................................ $ 730,184 $ - $ 15,903
State.................................................. 101,498 - 2,339
Deferred:
Federal................................................ (39,404) - -
State.................................................. 246 - -
-------------- -------------- ---------------
$ 792,524 $ - $ 18,242
============== ============== ===============
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,
-----------------------------------------------------
1997 1996 1995
--------------- -------------- --------------
Tax expense at federal statutory rates.................... $ 1,521,053 $ - $ 15,903
Tax expense at federal statutory rates on income earned
prior to Formation and Asset Purchase ................. (831,026) - -
State income tax expense.................................. 101,744 - 2,339
Conversion of S corporations to C corporation status ..... (41,085) - -
Other..................................................... 41,838 - -
--------------- -------------- --------------
$ 792,524 $ - $ 18,242
=============== ============== ==============
A summary of the Company's deferred tax assets and liabilities at December
31, 1997, are as follows:
Deferred tax assets:
Tax basis in excess of book basis arising from the Asset Purchase............................... $10,060,119
Other........................................................................................... 128,000
-----------
Total deferred tax assets....................................................................... 10,188,119
Deferred tax liabilities........................................................................... 88,842
-----------
$10,099,277
===========
F-16
54
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. 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 $679,423,
$552,586, and $351,387 for the years ended December 31, 1997, 1996 and 1995,
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 is also a director of the third-party companies. Management fees
received for the years ended December 31, 1997 and 1996 were $1,589,703 and
$657,260, respectively.
In October 1997, HCP paid an affiliate a refinancing fee of $13,245.
Upon sale of the multi-family properties in November 1996, an affiliate
received a $79,883 brokerage fee.
One of the Stockholders is chairman of the board of a bank where the Company
holds the majority of its operating cash accounts.
11. CONTINGENCIES
Angeles Housing Concepts, Inc. ("AHC") has filed a lawsuit currently pending
in the U.S. District Court of California against the Company and certain of its
subsidiaries and officers alleging that the defendants intentionally interfered
with AHC's property management agreements with a third party by inducing such
party to terminate the agreements. The complaint seeks damages of at least $2
million. Trial in the action is currently expected to occur in June 1998 and
discovery in the action is ongoing. The Company is vigorously defending these
claims. The Company believes the claims filed by AHC are spurious and is
evaluating with counsel the various legal options it has against AHC and others.
While the Company believes that ultimately its insurance will cover this claim
if determined adversely to the Company, the Company's insurance carrier formally
denied coverage. The Company has filed suit against the carrier for coverage and
the insurance carrier has indicated it will reconsider its original decision. No
assurance can be made that the Company will have adequate insurance coverage for
any damage award against the Company in this lawsuit.
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.
F-17
55
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and fair values of financial instruments at December 31,
1997 and 1996, are as follows:
1997 1996
----------------------------------- -------------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
--------------- --------------- ------------ --------------
Cash and cash equivalents.................. $ 48,125,225 $ 48,125,225 $10,818,512 $ 10,818,512
Cash, restricted........................... - - 206,376 206,376
Investments in limited partnerships, net of
related deferred income in 1996......... 13,741,940 18,665,492 4,875,236 6,348,776
Line of credit............................. 1,830,130 1,830,130 - -
Notes payable.............................. 6,677,431 6,611,128 - -
Notes payable to affiliates................ - - 666,481 666,481
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.
Investment in limited partnerships: The fair values are based on discounted
cash flow analysis in 1997 and the most recent purchase price in 1996.
Line of credit, notes payable and notes payable to affiliates: 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.
13. INVESTMENTS IN LIMITED PARTNERSHIPS
The investments in limited partnerships balance consists of the following:
DECEMBER 31,
-------------------------------
1997 1996
------------ ----------
HCP limited partnership interests (including
deferred income and equity in earnings).................................... $ - $7,487,818
NHP pension notes............................................................. 13,740,576 786,738
NHP limited partnership interests............................................. 1,364 1,364
------------ -----------
$ 13,741,940 $ 8,275,920
============ ===========
During 1997, 1996 and 1995, the Company paid $5,604,944, $3,200,686 and
$308,825, respectively, for partnership interests in HCP and, as of December 31,
1997 and 1996, the Company owned a 56% and 31% ownership in HCP, respectively.
F-18
56
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As a result, the Company changed its method of accounting for its investment
in HCP from the equity method to the consolidation of HCP in its financial
statements in 1997. Had HCP been consolidated in 1996, using its weighted
average ownership interest of 23%, the results of operations on a pro forma
basis for the year ended December 31, 1996 would have been:
Revenue....................................................... $ 26,504,461
Income before extraordinary item and minority
interest.................................................... 1,166,289
Net income.................................................... 2,118,981
Pro forma net income, assuming a tax rate of 39.5%, is $1,281,984.
In the second quarter of 1996, CSLC purchased a 9.36% in limited partnership
interest in HCP from Housing. CSLC paid $1,269,077 to Housing, who recognized a
gain of $878,592 on the transaction. As a result of this purchase, the Company
exceeded a 20% ownership in HCP and changed its method of accounting from the
cost method to the equity method. The change resulted in recognizing $3,519,315
of deferred income for the difference between cost and the underlying equity in
HCP, which was being amortized over 20 years. At the Offering date, the
unamortized deferred income was eliminated as a result of applying the purchase
method of accounting for CSLC's acquisition of HCP limited partnership units. At
the Offering date, the allocation of purchase price to the assets and
liabilities of HCP was based on independent valuation information from third
party valuation firms. Subsequent to year-end through February 6, 1998, the
Company disbursed $101,072 for additional investments in HCP units. These
purchases bring the Company's ownership in HCP limited partnership interests to
56.4%.
Summary financial information regarding the financial position and results
of operations of HCP for 1996 is as follows:
1996
------------
Cash................................................................. $ 8,995,455
Property and equipment, net.......................................... 22,112,619
Other assets......................................................... 1,379,473
-----------
Total assets......................................................... $32,487,547
===========
Liabilities.......................................................... $ 1,215,508
Mortgage loans....................................................... 7,207,414
Partnership capital.................................................. 24,064,625
-----------
Total liabilities and partnership capital............................ $32,487,547
===========
Net revenue.......................................................... $7,560,104
Net income........................................................... 1,637,343
During 1997, 1996 and 1995, the Company made various purchases of
outstanding pension notes of NHP (the NHP Notes). During 1997, 1996 and 1995,
the Company paid $10,004,090, $199,158 and $587,580, respectively, for purchases
of NHP Notes. As of December 31, 1997, the Company has cumulatively paid
$10,790,828 for an ownership of 30.8% of the outstanding NHP Notes. Upon
purchase of the NHP Notes by the Company from CSLC, the Company recorded a
step-up in basis of $2,692,669 to fair market value over CSLC's historical basis
of $11,047,907 (which included cost of $10,790,828 plus deferred interest of
minority interest in the NHP Notes). The pension notes bear simple interest at
13% per annum. Interest of 7% is paid quarterly, with the remaining 6% interest
deferred. Deferred interest and principal matures on December 31, 2001. The
Company accrued the interest income on the pension notes at 7% through December
31, 1996, at 10.5% from April 1, 1997 through October 31, 1997, and at 10.5% of
the fair value of the NHP Notes since the Asset Purchase, due to uncertainties
F-19
57
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
regarding the ultimate realization of the accrued interest. The ultimate
realization of the NHP Notes is expected to be based primarily upon the value of
the underlying properties, which have an appraised value in excess of the NHP
Notes as of December 31, 1997. During 1996, the Company paid $1,364 for a 3.1%
ownership of limited partnership interests in NHP. Subsequent to year end and
through February 6, 1998, the Company disbursed $173,900 for an additional
investment in NHP Notes. These purchases bring the Company's ownership of NHP
Notes to 31.1% at February 6, 1998. The Company classifies its investment in NHP
as held to maturity in NHP.
Summary financial information regarding financial position and results of
operations of NHP as of December 31 and for the years then ended is as follows:
DECEMBER 31,
--------------------------------
1997 1996
----------- -----------
Cash.................................................................. $ 4,495,733 $ 4,017,181
Property and equipment, net........................................... 49,490,473 50,171,241
Other assets.......................................................... 1,599,634 1,883,462
----------- -----------
Total assets..................................................... $55,585,840 $56,071,884
=========== ===========
Pension notes......................................................... $42,672,000 $42,672,000
Interest payable...................................................... 23,730,407 20,681,172
Other liabilities..................................................... 1,203,421 1,154,823
Partnership deficit................................................... (12,019,988) (8,436,111)
----------- -----------
Total liabilities and partnership deficit........................ $55,585,840 $56,071,884
=========== ===========
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1997 1996 1995
----------- ----------- -----------
Net revenue.......................................... $15,548,138 $14,488,099 $14,020,626
Net loss............................................. (3,522,917) (3,574,668) (3,690,549)
14. ALLOWANCE FOR DOUBTFUL ACCOUNTS
The components of the allowance for doubtful accounts are as follows:
DECEMBER 31,
-------------------------------------------------
1997 1996 1995
-------- -------- ---------
Balance at beginning of year......................... $164,822 $141,452 $ 86,049
Provision for bad debts........................... 43,254 22,312 71,098
Write-offs and other.............................. (17,474) 1,058 (15,695)
Allowances not assumed in Asset Purchase.......... (145,602) - -
Allowance arising from consolidation of HCP....... 256,042 - -
-------- -------- --------
Balance at end of year............................... $301,042 $164,822 $141,452
======== ======== ========
F-20
58
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. 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 a duration of 5 years or less and are on a
fee basis as services are rendered. Rent expense under these leases was $188,986
during 1997. Future commitments are as follows:
1998 $ 266,590
1999 271,573
2000 277,753
2001 279,187
2002 182,472
-----------
$ 1,277,575
===========
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 $271,340 in 1997.
Minimum rentals for the next two years for the HCP leases are $3,971,328 per
year, subject to change based on changes in interest rates. Minimum rentals are
$3,761,262 and $2,858,619 for the years 2000 and 2001. There are no minimum
rentals thereafter. Property and equipment less accumulated depreciation
attributable to such rentals, amounted to $19,339,886 at December 31, 1997.
Four of HCP's senior living communities are subject to a master lease with a
single operator. 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, 1997,
no contingent rentals have been accrued on the master lease. Prior to February
28, 1997, two of the four communities under the master lease were closed by the
operator. Despite these closures, the operator has continued making its full
lease payments under the terms of the master lease.
16. OFFICERS' SALARIES AND BONUS
General and administrative expense includes officers' salaries and bonuses
of $3,342,360, $3,371,887, and $2,976,302 for the years ended December 31, 1997,
1996 and 1995, respectively. Compensation of the Stockholders and Cohen, all
officers of the Company, are based on their respective employment agreements
since October 1, 1997.
17. PRO FORMA INCOME TAXES (UNAUDITED)
The income taxes on earnings of the S corporations and partnerships for
fiscal 1996 and 1995 and 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%.
F-21
59
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. PRO FORMA RESULTS OF OPERATIONS (UNAUDITED)
Shown below are unaudited pro forma consolidated amounts for the year ended
December 31, 1997 and 1996, respectively, representing the results of operations
of the Company for such periods after giving effect to the adjustments relating
to the Offering and the Formation, as if the transactions had occurred as of
January 1, 1996. 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, 1996, or
the future results of operations of the Company.
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996
----------- -----------
Total revenues........................................................ $30,709,882 $26,504,461
Net income............................................................ 4,991,288 3,396,742
Net income per share.................................................. $ 0.25 $ 0.17
Shares used in computing pro forma net income per share............... 19,717,347 19,717,347
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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
*3.2 -- Amended and Restated Bylaws of the Registrant
*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
+*10.6 -- 1997 Omnibus Stock and Incentive Plan
*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
+*10.13 -- Employment Agreement, dated as of November 26, 1996, by and between Capital
Senior Living, Inc. and Keith N. Johannessen
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61
*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
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62
*10.29 -- Option Agreement, by and between Capital Realty Group Corporation, as optionor,
and Capital Senior Living Corporation, as optionee
*10.30 -- Development Agreement, by and between Capital Senior Development, Inc., as
developer, and Tri Point Communities, L.P., as owner
*10.31 -- Development and Turnkey Services Agreement, dated as of September 1, 1997, by and
between Capital Senior Development Corporation and Tri-Point Communities, L.P.
*10.32 -- Management Agreement, by and between Tri Point Communities, L.P., as owner, and
Capital Senior Living, Inc. **10.33 -- 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.
**10.33 -- 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.
**10.34 -- Alliance Agreement, dated as of December 10, 1997, by and between LCOR
Incorporated and Capital Senior Living Corporation
**10.35 -- 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
**10.36 -- 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
**10.37 -- 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
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**10.38 -- 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
**21.1 -- Subsidiaries of the Company
**27.1 -- Financial Data Schedule
- -----------------------------
* 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.
** Filed herewith.
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