SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report pursuant to Section 13
or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2002
[ ] Transition report under Section 13
or 15(d) of the Securities Exchange Act of 1934
Commission file number 1-13445.
CAPITAL SENIOR LIVING CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 75-2678809
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
14160 Dallas Parkway, Suite 300, Dallas, Texas 75254
(Address of principal executive offices)
972-770-5600
(Registrant's telephone number, including area code)
Indicate by check whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No
---- ----
As of August 5, 2002, the Registrant had outstanding 19,723,927 shares of its
Common Stock, $.01 par value.
CAPITAL SENIOR LIVING CORPORATION
INDEX
Page
Number
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets - -
June 30, 2002 and December 31, 2001 3
Consolidated Statements of Income - -
Three and Six Months Ended June 30, 2002 and 2001 4
Consolidated Statements of Cash Flows - -
Six Months Ended June 30, 2002 and 2001 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 23
Part II. Other Information
Item 1. Legal Proceedings 24
Item 4. Submission of Matters to a Vote of Securities Holders 25
Item 6. Exhibits and Reports on Form 8-K 26
Signature
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CAPITAL SENIOR LIVING CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands)
June 30, December 31,
2002 2001
------------------ ------------------
ASSETS (Unaudited) (Audited)
Current assets:
Cash and cash equivalents.......................................... $ 14,052 $ 9,975
Restricted cash.................................................... 7,490 2,100
Accounts receivable, net........................................... 1,155 1,438
Accounts receivable from affiliates................................ 680 366
Interest receivable................................................ 4,629 6,072
Investment in limited partnership.................................. 222 5,774
Federal and state income taxes receivable.......................... 871 1,145
Deferred taxes..................................................... 2,770 2,770
Prepaid expenses and other......................................... 4,490 1,218
---------------- ----------------
Total current assets......................................... 36,359 30,858
Property and equipment, net.............................................. 154,868 196,821
Deferred taxes........................................................... 7,339 7,540
Notes receivable from affiliates......................................... 71,936 59,020
Investments in limited partnerships...................................... 1,307 1,827
Assets held for sale..................................................... 4,255 4,924
Other assets............................................................. 5,307 7,092
---------------- ----------------
Total assets................................................. $ 281,371 $ 308,082
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................... $ 4,532 $ 3,040
Accrued expenses................................................... 2,727 3,363
Current portion of notes payable................................... 26,320 25,594
Customer deposits.................................................. 1,025 1,144
---------------- ----------------
Total current liabilities.................................... 34,604 33,141
Deferred income.......................................................... 537 507
Deferred income from affiliates.......................................... 1,500 1,750
Notes payable, net of current portion.................................... 119,077 149,202
Line of credit........................................................... 7,553 7,553
Minority interest in consolidated partnership............................ 1,938 2,385
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.01 par value:
Authorized shares 15,000,000; no shares issued or outstanding -- --
Common stock, $.01 par value:
Authorized shares 65,000,000; issued and outstanding
19,723,927 and 19,717,347 at June 30, 2002 and
December 31, 2001, respectively.............................. 197 197
Additional paid-in capital......................................... 91,964 91,935
Retained earnings.................................................. 24,001 21,412
---------------- ----------------
Total shareholders' equity................................... 116,162 113,544
---------------- ----------------
Total liabilities and shareholders' equity................... $ 281,371 $ 308,082
================ ================
See accompanying notes.
3
CAPITAL SENIOR LIVING CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(in thousands)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------- ---------------------------------
2002 2001 2002 2001
--------------- --------------- --------------- ---------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenues:
Resident and healthcare revenue........... $ 15,329 $ 16,099 $ 30,908 $ 32,139
Rental and lease income................... -- 1,106 37 2,137
Unaffiliated management services revenue.. 212 528 578 1,032
Affiliated management services revenue.... 444 433 854 820
Unaffiliated development fees............. -- 16 -- 40
Affiliated development fees............... 216 221 399 278
----------- ----------- ------------ ------------
Total revenues........................ 16,201 18,403 32,776 36,446
Expenses:
Operating expenses........................ 8,882 9,675 17,654 18,979
General and administrative expenses....... 2,958 3,481 6,115 6,595
Depreciation and amortization............. 1,534 1,753 3,180 3,496
----------- ----------- ------------ ------------
Total expenses........................ 13,374 14,909 26,949 29,070
----------- ----------- ------------ ------------
Income from operations.......................... 2,827 3,494 5,827 7,376
Other income (expense):
Interest income........................... 1,434 1,592 2,863 3,133
Interest expense.......................... (2,748) (3,843) (5,576) (8,092)
Equity in the gains (losses) of affiliates 20 (83) 31 (336)
(Loss) gain on sale of assets............. (354) -- 1,929 --
----------- ----------- ------------ ------------
Income before income taxes and minority interest in
consolidated partnership.................. 1,179 1,160 5,074 2,081
Provision for income taxes...................... (460) (369) (1,584) (630)
----------- ----------- ------------ ------------
Income before minority interest in consolidated
partnership............................... 719 791 3,490 1,451
Minority interest in consolidated partnership... 59 (189) (901) (421)
----------- ----------- ------------ ------------
Net income...................................... $ 778 $ 602 $ 2,589 $ 1,030
=========== =========== ============ ============
Net income per share:
Basic..................................... $ 0.04 $ 0.03 $ 0.13 $ 0.05
============ ============ ============ ============
Diluted................................... $ 0.04 $ 0.03 $ 0.13 $ 0.05
============ ============ ============ ============
Weighted average shares outstanding - basic 19,721 19,717 19,719 19,717
=========== =========== ============ ============
Weighted average shares outstanding - diluted 19,978 19,717 20,000 19,717
=========== =========== ============ ============
See accompanying notes.
4
CAPITAL SENIOR LIVING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Six Months Ended June 30,
-----------------------------------
2002 2001
--------------- ---------------
(Unaudited) (Unaudited)
Operating Activities
Net income.......................................................... $ 2,589 $ 1,030
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization................................. 3,180 3,496
Amortization of deferred financing charges.................... 442 462
Gain on sale of assets........................................ (1,929) --
Equity in the (gains) losses of affiliates.................... (31) 336
Minority interest in consolidated partnership................. 901 421
Deferred tax expense.......................................... 201 201
Change in deferred income..................................... 30 --
Change in deferred income from affiliates..................... (250) (195)
Non-cash compensation......................................... 14 --
Changes in operating assets and liabilities:
Accounts receivable....................................... 283 1,098
Accounts receivable from affiliates....................... (314) 1,563
Interest receivable....................................... (2,590) (1,959)
Notes receivable.......................................... -- 570
Prepaid expenses and other................................ (3,272) (1,707)
Other assets.............................................. (46) (1,009)
Federal and state income taxes............................ 278 1,111
Accounts payable and accrued expenses..................... 1,138 (935)
Customer deposits......................................... (119) 61
--------------- ---------------
Net cash provided by operating activities........................... 505 4,544
Investing Activities
Capital expenditures................................................ (804) (1,485)
Proceeds from the sale of assets.................................... 5,187 --
Proceeds from the sale of assets to BRE/CSL......................... 7,287 --
Advances to affiliates.............................................. (8,955) (8,149)
Distribution from limited partnerships.............................. 6,903 506
--------------- ---------------
Net cash provided by (used in) investing activities................. 9,618 (9,128)
Financing Activities
Proceeds from notes payable and line of credit...................... 4,098 3,112
Repayment of notes payable.......................................... (3,248) (2,571)
Restricted cash..................................................... (5,390) --
Proceeds from the issuance of common stock.......................... 11 --
Distributions to minority partners.................................. (1,348) (2,164)
Deferred loan charges paid.......................................... (169) --
---------------- ---------------
Net cash used in financing activities............................... (6,046) (1,623)
--------------- ----------------
Increase (decrease) in cash and cash equivalents.................... 4,077 (6,207)
Cash and cash equivalents at beginning of period.................... 9,975 23,975
--------------- ---------------
Cash and cash equivalents at end of period.......................... $ 14,052 $ 17,768
=============== ===============
Supplemental disclosures:
Cash paid during the period for:
Interest..................................................... $ 5,119 $ 7,511
=============== ===============
Income taxes................................................. $ 1,325 $ 396
=============== ===============
See accompanying notes.
5
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
Capital Senior Living Corporation, a Delaware corporation (the "Company"), was
incorporated on October 25, 1996. The accompanying consolidated financial
statements include the financial statements of Capital Senior Living Corporation
and its subsidiaries. All intercompany balances and transactions have been
eliminated in consolidation.
The accompanying consolidated balance sheet, as of December 31, 2001, has been
derived from audited consolidated financial statements of the Company for the
year ended December 31, 2001, and the accompanying unaudited consolidated
financial statements, as of June 30, 2002 and 2001, have been prepared pursuant
to the rules and regulations of the Securities and Exchange Commission. Certain
information and note disclosures normally included in the annual financial
statements prepared in accordance with accounting principles generally accepted
in the United States have been condensed or omitted pursuant to those rules and
regulations. For further information, refer to the financial statements and
notes thereto for the year ended December 31, 2001 included in the Company's
Annual Report on Form 10-K filed with the Securities and Exchange Commission on
March 28, 2002.
In the opinion of the Company, the accompanying consolidated financial
statements contain all adjustments (all of which were normal recurring accruals)
necessary to present fairly the Company's financial position as of June 30,
2002, results of operations for the three and six months ended June 30, 2002 and
2001, respectively, and cash flows for the six months ended June 30, 2002 and
2001. The results of operations for the three and six months ended June 30, 2002
are not necessarily indicative of the results for the year ending December 31,
2002.
In October 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets", effective for years beginning after December 15,
2001. This statement supersedes FASB Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" and
FASB Statement No. 30, "Reporting the Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events", while retaining many of the fundamental
provisions of SFAS 121 regarding the recognition and measurement of the
impairment of long-lived assets to be held and used. The Statement provides
guidance on estimating cash flows when performing recoverability test and
establishes more restrictive criteria to classify an asset as held to sale. The
adoption of SFAS 144 did not have a material effect on the Company's net income
or financial position.
2. TRANSACTIONS WITH AFFILIATES
The Company has entered into development and management agreements with the
partnerships set out below (the "Triad Entities") for the development and
management of new senior living communities. The Triad Entities own and finance
the construction of new senior living communities. These communities are
primarily Waterford communities. The development of senior living communities
typically involves a substantial commitment of capital over an approximate
12-month construction period, during which time no revenues are generated,
followed by an 18 to 24 month lease up period.
The Company has an approximate 1% limited partnership interest in each of the
Triad Entities and is accounting for these investments under the equity method
of accounting based on the provisions of the Triad Entities partnership
agreements. The Company has loan commitments to the Triad Entities for
construction and pre-marketing expenses, in addition to requirements to fund the
Triad Entities' operating deficits through
6
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
operating deficit guarantees provided for in its management agreements with the
Triad Entities. The Company evaluates the carrying value of these receivables by
comparing the cash flows expected from the operations of the Triad Entities to
the carrying value of the receivables. These cash flow models consider lease-up
rates, expected operating costs, debt service requirements and various other
factors. The carrying value of the notes receivable from the Triad Entities
could be adversely affected by a number of factors including the Triad
communities experiencing slower than expected lease-up, lower than expected
lease rates, higher than expected operating costs, increases in interest rates,
issues involving debt service requirements, general adverse market conditions,
other economic factors and changes in accounting guidelines. Management
believes, based on the future achievement of the assumptions used in these cash
flow models, which are consistent with our operating experience, that the
carrying value of the notes receivable are fully recoverable.
The Financial Accounting Standards Board issued an exposure draft on a proposed
interpretation of ARB No. 51 relating to the "Consolidation of Certain
Special-Purpose Entities." This draft interpretation if adopted could result in
the Company consolidating the financial statements of certain partnerships
currently accounted for separately under the equity method of accounting. If
adopted, this draft interpretation would be applied to periods beginning after
March 15, 2003. There can be no assurance that the draft interpretation will be
adopted, or if adopted, will or will not be modified significantly and there can
be no assurance as to the effective date if adopted.
The following table sets forth, as of June 30, 2002, the capital invested in
each of the Triad Entities, information related to loans made by the Company to
each Triad Entity and information on deferred income related to each Triad
Entity (dollars in thousands):
Notes Receivable Deferred Income
------------------------------------------------------------ -------------------------
Operating Development/
Capital Committed Interest Note Deficit Management
Entity Investment Amount Rate Maturity Balance Funding Interest Fees
------ ---------- --------- -------- -------- ------- ---------- -------- ------------
Triad Senior
Living I, L.P.
(Triad I) $ -- $ -- 8.0% -- $ -- $14,090 $ 93 $ 324
Triad Senior
Living II, L.P. Sept. 25,
(Triad II) -- 15,000 8.0% 2003 15,000 5,146 139 161
Triad Senior
Living III, L.P. Feb. 8,
(Triad III) -- 15,000 8.0% 2004 15,000 7,596 142 314
Triad Senior
Living IV, L.P. Dec. 30,
(Triad IV) -- 10,000 8.0% 2003 10,000 336 147 113
Triad Senior
Living V, L.P. -- June 30,
(Triad V) -- 10,000 8.0% 2004 4,768 -- 29 26
The Company typically receives a development fee of 4% of project costs, as well
as reimbursement of expenses and overhead not to exceed 4% of project costs.
These fees are recorded over the term of the development project on a basis
approximating the percentage of completion method. In addition, when the
properties become operational, the Company typically receives management fees in
an amount equal to the greater of 5% of gross revenues or $5,000 per month per
community, plus overhead expenses.
7
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The Company has the option, but not the obligation, to purchase the partnership
interests of the other parties in Triad Entities for an amount equal to the
amount paid for the partnership interest by the other partners, plus a
noncompounded return of 12% per annum except for Triad I. In addition, each
Triad Entity except Triad I provides the Company with an option, but not the
obligation, to purchase the community developed by the applicable partnership
upon their completion for an amount equal to the fair market value (based on a
third-party appraisal but not less than hard and soft costs and lease-up costs)
of the community. The Company has the option to purchase the Triad I communities
for an amount specified in the partnership agreement.
The Company has made no determination as to whether it will exercise any of
these purchase options.
Deferred interest income is being amortized into income over the life of the
loan commitment that the Company has with each of the Triad Entities. Deferred
development and management fee income is being amortized into income over the
expected remaining life of the Triad partnerships.
Each of the Triad Entities finances the development of new communities through a
combination of equity funding, traditional construction loans and permanent
financing with institutional lenders secured by first liens on the communities
and unsecured loans from the Company. The Company loans may be prepaid without
penalty. The financings from institutional lenders are secured by first liens on
the communities, as well as assignment to the lenders of the construction
contracts and the development and management agreements with the Company. Each
development and management agreement assigned to an institutional lender is also
guaranteed by the Company and those guarantees are also assigned to the lenders.
In most cases, the management agreements contain an obligation of the Company to
fund operating deficits to the Triad Entities if the other financing sources of
the Triad Entities have been fully utilized. These operating deficit funding
obligations are guaranteed by the Company and include making loans to fund debt
service obligations to the Triad Entities' lenders. Amounts funded to date under
these operating deficit agreements are disclosed in the table above. The Company
expects to be required to fund additional amounts under these operating deficit
agreements in the future.
Set forth below is information on the construction loan facilities entered into
by each of the Triad Entities as of June 30, 2002 (dollars in thousands):
Loan Facilities to Triads
---------------------------------------------------
Amount
Entity Commitment Outstanding Type Lender
-------------------------------------- ----------- ------ ---------
Triad I $50,000 $48,967 take-out GMAC
Key Corporate
Triad II $26,900 $26,623 mini-perm Capital, Inc.
Triad III $56,300 $56,270 mini-perm Guaranty Bank
Triad IV $18,600 $17,417 construction; Compass Bank
mini-perm
Triad V $ 8,903 $ 8,791 mini-perm Bank of
America
During 2001, Triad V was notified by the lender of its failure to comply
with certain terms of its loan agreement with the lender. The lender, however,
expressed its intention to work with Triad V and the lender and Triad V
subsequently signed a new loan agreement in April 2002.
8
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Summary financial information regarding the financial position as of June 30,
2002 and December 31, 2001 and results of operations for the six months ending
June 30, 2002 and 2001 of the Triad Entities is as follows (in thousands):
June 30, Dec. 31,
2002 2001
---------- -------
Current assets........................... $ 3,447 $ 4,827
Property and equipment, net.............. 188,656 188,651
Other assets............................. 10,784 8,662
-------- --------
Total assets......................... $202,887 $202,140
======== ========
Current liabilities...................... $ 13,455 $ 17,374
Long-term debt........................... 224,075 208,991
Other long-term liabilities.............. -- 21
Partnership deficit...................... (34,643) (24,246)
-------- --------
Total liabilities and partnership
deficit.............................. $202,887 $202,140
======== ========
Six Months Ended
June 30, June 30,
2002 2001
---------- -------
Net revenue.............................. $ 11,980 $ 7,138
Net loss................................. (10,397) (12,765)
The Company formed a joint venture ("BRE/CSL") with an affiliate of Blackstone
Real Estate Advisors ("Blackstone") in December 2001, and the joint venture will
seek to acquire in excess of $200 million of senior housing properties. BRE/CSL
is owned 90% by Blackstone and 10% by the Company. Pursuant to the terms of the
joint venture, each of the Company and Blackstone must approve any acquisitions
made by the joint venture. Each party must also contribute its pro rata portion
of the costs of any acquisition. In December 2001, the joint venture acquired
The Amberleigh at Woodside Farms ("Amberleigh"), a 394 resident capacity
independent living facility. In connection with the acquisition of Amberleigh by
BRE/CSL, the Company contributed $1.8 million to the joint venture. During the
second quarter of 2002, BRE/CSL obtained permanent financing for the Amberleigh
community and the Company recovered $1.4 million of its contribution to the
joint venture.
In addition, on June 13, 2002, the Company contributed to BRE/CSL four of its
senior living communities with a capacity of approximately 600 residents. As a
result of the contribution, the Company repaid $29.1 million of long-term debt
to GMAC Commercial Mortgage Corporation ("GMAC"), received $7.3 million in cash
from the venture and has a 10% equity interest in the venture.
The Company manages the five communities owned by BRE/CSL under long-term
management contracts.
3. NET INCOME PER SHARE
Basic net income per share is calculated by dividing net income by the weighted
average number of common shares outstanding during the period. Diluted net
income per share considers the dilutive effect of outstanding options calculated
using the treasury stock method.
9
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table sets forth the computation of basic and diluted earnings per
share (in thousands, except for per share amounts):
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- -----------------
2002 2001 2002 2001
--------- --------- --------- -------
Net income $ 778 $ 602 $ 2,589 $ 1,030
Weighted average shares outstanding - basic 19,721 19,717 19,719 19,717
Effect of dilutive securities:
Employee stock options 257 -- 281 --
--------- --------- --------- ---------
Weighted average shares outstanding - 19,978 19,717 20,000 19,717
========= ========= ========= =========
diluted
Basic earnings per share $ 0.04 $ 0.03 $ 0.13 $ 0.05
========= ========= ========= =========
Diluted earnings per share $ 0.04 $ 0.03 $ 0.13 $ 0.05
========= ========= ========= =========
Options to purchase 1.1 million shares of common stock at prices ranging from
$3.63 to $13.50 per share were not included in the computation of diluted
earnings per share because the average daily price of the common stock during
the second quarter and first six months of fiscal 2002 did not exceed the
exercise price of the options, and therefore, the effect would not be dilutive.
For the second quarter and first six months of fiscal 2001, options to purchase
1.2 million shares of common stock at prices ranging from $1.80 to $13.50 per
share were not included in the computation of diluted earnings per share because
the average daily price of the common stock did not exceed the exercise price of
the options, and therefore, the effect would not be dilutive.
During fiscal 2002, the Company granted options to certain employees to purchase
112,000 shares of the Company's common stock at exercise prices ranging from
$3.13 to $4.14. In addition, during fiscal 2002, the Company issued 6,580 shares
of common stock pursuant to the exercise of stock options by certain employees
of the Company.
4. CONTINGENCIES
On or about October 23, 1998, Robert Lewis filed a putative class action
complaint on behalf of certain holders of assignee interests (the "Assignee
Interests") in NHP Retirement Housing Partners I Limited Partnership ("NHP") in
the Delaware Court of Chancery, Civil Action No. 16725 (the "Delaware Action")
against NHP, the general partner of NHP ("General Partner"), the Company and
Capital Senior Living Properties 2-NHPCT, Inc. (collectively, the "Defendants").
Mr. Lewis purchased ninety Assignee Interests in NHP in February 1993 for $180.
The complaint alleges, among other things, that the Defendants breached, or
aided and abetted a breach of, the express and implied terms of the NHP
Partnership Agreement in connection with the sale of four properties by NHP to
Capital Senior Living Properties 2-NHPCT, Inc. in September 1998 (the "1998
Transaction"). The complaint seeks, among other relief, rescission of the 1998
Transaction and unspecified damages. On July 9, 1999, the Defendants filed a
motion to dismiss the case. Subsequently, the plaintiff amended his complaint
adding allegations challenging the terms of the sale in December 2001 of the
Amberleigh retirement facility to BRE/CSL.
On January 31, 2002, the parties to the Delaware Action entered into a
Memorandum of Understanding providing for the settlement of the Delaware Action
subject to certain terms and conditions, including the filing of an amended
complaint and receipt of the approval of the Court of Chancery. The proposed
settlement contemplates the creation of a settlement fund in the amount of
approximately $0.8 million, of which NHP will contribute approximately $0.3
million, the amount of the deductible of NHP's directors and officers' liability
10
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
insurance policy at the time the Delaware Action was filed (the "D&O Policy").
Virtually all of the balance of the settlement fund will be contributed by the
various insurance brokers and agents, and their insurers, in connection with the
resolution of certain claims for coverage under the D&O Policy. The settlement
contribution of the Company and its affiliates will be $43,000. If approved by
the Court of Chancery, the settlement fund, less any award of attorney's fees
for plaintiff's counsel approved by the court, will be distributed to a class of
Assignee Holders of NHP. The parties have engaged in discussions subsequent to
entering into the Memorandum of Understanding and the Company expects the
parties to enter into additional settlement agreements in the near future;
however, the Company cannot make any assurances that the parties will enter into
any further settlement agreements or any assurances regarding the terms of any
other settlement agreement.
On December 6, 2001, Leonard Kalmenson filed a motion to intervene in the
Delaware Action on the behalf of a putative class of holders of Pension Notes of
NHP in the event the Court of Chancery determines that the claims asserted in
the Delaware Action are derivative in nature. The Complaint in Intervention
filed by Mr. Kalmenson names as defendants the Defendants in the Delaware Action
as well as Retirement Associates, Inc., the sole stockholder of the General
Partner of NHP, and various current and former directors of the General Partner.
The Complaint in Intervention essentially alleges, among other things, a variety
of claims challenging the 1998 Transaction and a claim for breach of contract
relating to the failure of NHP to pay the full amount of principal and interest
owed on the Pension Notes on their maturity date. NHP and the Company believe
that the allegations asserted by Mr. Kalmenson are without merit and that his
motion to intervene is moot in view of the proposed settlement of the Delaware
Action. The Company is unable at this time to estimate any liability related to
this claim, if any.
On January 16, 2002, the Company filed a claim with the American Arbitration
Association seeking reimbursement of certain health care expenses, as well as
severance compensation from Buckner Retirement Services, Inc. ("Buckner")
pursuant to a management agreement between the parties. Buckner has filed an
answer and a counterclaim in this arbitration and proceedings are continuing.
The Company (and two of its management subsidiaries) and Buckner Retirement
Services, Inc. and a related Buckner entity have been named as defendants in a
lawsuit brought by the heirs of a deceased resident who obtained nursing home
services at a facility called Parkway Place. The Company managed Parkway Place
through December 31, 2001. The plaintiffs in the lawsuit allege that the
defendants were negligent in the care and treatment of the deceased and that her
injuries and death were a direct and proximate result of the acts and omissions
of the defendants. Plaintiffs recently made a demand of $7 million from the
defendants. The Company vigorously denies any wrongdoing occurred in the
treatment of the deceased and is vigorously defending the lawsuit. Furthermore,
this claim is currently being defended by Company's insurance carrier, and the
Company believes that there is sufficient liability insurance to cover any
settlement or judgment rendered in the above stated case, subject to the
insurance company's ordinary reservation of rights.
The Company has other pending claims incurred in the normal course of business,
that, in the opinion of management, based on the advice of legal counsel, will
not have a material effect on the financial statements of the Company.
5. NOTES PAYABLE
The Company is currently renegotiating the mortgage loan on its Sedgwick Plaza
community as a result of the contribution to BRE/CSL of four of the five
communities covered by a master loan with GMAC and the resulting repayment of
11
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
the GMAC loan related to such four communities. On June 13, 2002, GMAC required
the Company to pledge $5.4 million as collateral on the outstanding mortgage
loan relating to the Sedgwick Plaza community. The pledged cash has been
classified as restricted cash on the Company's balance sheet and is expected to
be released upon the completion of a new mortgage loan on the Sedgwick Plaza
community.
The Company is also renegotiating the terms and extending the maturity on its
$20 million note payable to Newman Financial Services Inc., which is currently
due on October 15, 2002.
The Company expects to complete these refinancings during the third quarter of
fiscal 2002; however, there can be no assurance that the refinancings will be
completed or if completed, that the terms will be as expected by the Company.
6. MANAGEMENT AGREEMENTS
On February 28, 2002, ILM Senior Living II, Inc. ("ILM II") notified the Company
that it had entered into an agreement to sell the five senior living communities
managed by the Company and would, therefore, be terminating the Company's
management agreement for these five communities effective April 1, 2002. As of
April 1, 2002, the Company no longer manages these communities.
On March 1, 2002, affiliates of LCOR Incorporated ("LCOR") notified the Company
of its intent to terminate the LCOR Management Agreements, effective May 31,
2002, as a result of the Company not funding certain alleged operating deficits,
which the Company could optionally fund under the LCOR Management Agreements.
The Company notified LCOR that the Company believes this termination was without
cause and continues to manage the four senior living communities under its
management agreement with LCOR. In addition, the Company is currently
negotiating with the owners of the four senior living communities to assume
LCOR's ownership position.
12
CAPITAL SENIOR LIVING CORPORATION
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
The following discussion and analysis addresses (i) the Company's results of
operations for the three and six months ended June 30, 2002 and 2001,
respectively, and (ii) liquidity and capital resources of the Company and should
be read in conjunction with the Company's consolidated financial statements
contained elsewhere in this report.
The Company is one of the largest operators of senior living communities in the
United States in terms of resident capacity. The Company's operating strategy is
to provide high quality senior living services at an affordable price to its
residents, while achieving and sustaining a strong, competitive position within
its chosen markets, as well as to continue to enhance the performance of its
operations. The Company provides a wide array of senior living services to the
elderly at its communities, including independent living, assisted living (with
special programs and living units at some of its communities for residents with
Alzheimer's and other forms of dementia), skilled nursing and home care
services.
The Company generates revenue from a variety of sources. For the three months
ended June 30, 2002, the Company's revenue was derived as follows: 94.6% from
the operation of 18 owned senior living communities that are operated by the
Company; 4.1% from management fees arising from management services provided for
20 affiliate owned senior living communities and five third party owned senior
living communities and 1.3% derived from development fees earned for managing
the development and construction of new senior living communities for the Triad
Entities.
For the six months ended June 30, 2002, the Company's revenue was derived as
follows: 94.3% from the operation of 18 owned senior living communities that are
operated by the Company; 0.1% from lease rentals for triple net leases; 4.4%
from management fees arising from management services provided for 20 affiliate
owned senior living communities and 10 third party owned senior living
communities and 1.2% derived from development fees earned for managing the
development and construction of new senior living communities for the Triad
Entities.
The Company believes that the factors affecting the financial performance of
communities managed under contracts with third parties do not vary substantially
from the factors affecting the performance of owned and leased communities,
although there are different business risks associated with these activities.
The Company's third-party management fees are primarily based on a percentage of
gross revenues. As a result, the cash flows and profitability of such contracts
to the Company are more dependent on the revenues generated by such communities
and less dependent on net cash flow than for owned communities. Further, the
Company is not responsible for capital investments in managed communities. While
the management contracts are generally terminable only for cause, in certain
cases the contracts can be terminated upon the sale of a community, subject to
the Company's rights to offer to purchase such community.
The Company's current management contracts expire on various dates through May
2012 and provide for management fees based generally upon rates that vary by
contract from 4% of net revenues to 5% 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.
13
CAPITAL SENIOR LIVING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
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. The Company
completed the development and opened two communities for Triad IV, one on
January 2, 2002 and the other on May 1, 2002. The Company manages these
communities for the Triad Entities under long-term management contracts.
The Company, through its ownership in Healthcare Properties, L.P. ("HCP"),
leased two properties under triple net leases both of which were sold during the
first quarter of 2002. After the sale of these properties, HCP owns one
community that is currently classified as held for sale.
The Company formed BRE/CSL with Blackstone in December 2001, and the joint
venture will seek to acquire in excess of $200 million of senior housing
properties. BRE/CSL is owned 90% by Blackstone and 10% by the Company. Pursuant
to the terms of the joint venture, each of the Company and Blackstone must
approve any acquisitions made by the joint venture. Each party must also
contribute its pro rata portion of the costs of any acquisition. In December
2001, the joint venture acquired The Amberleigh at Woodside Farms, a 394
resident capacity independent living facility. In connection with the
acquisition of Amberleigh by BRE/CSL, the Company contributed $1.8 million to
the joint venture. During the second quarter of 2002, BRE/CSL obtained permanent
financing for the Amberleigh community and the Company recovered $1.4 million of
its contribution to the joint venture.
In addition, on June 13, 2002, the Company contributed to BRE/CSL four of its
senior living communities with a capacity of approximately 600 residents. As a
result of the contribution, the Company repaid $29.1 million of long-term debt
to GMAC, received $7.3 million in cash from the venture and has a 10% equity
interest in the venture.
The Company manages the five communities owned by BRE/CSL under long-term
management contracts.
14
CAPITAL SENIOR LIVING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Results of Operations
The following table sets forth for the periods indicated, selected statements of
income data in thousands of dollars and expressed as a percentage of total
revenues.
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------------- ----------------------------------------
2002 2001 2002 2001
------------------ ------------------ ------------------ ---------------------
$ % $ % $ % $ %
---------- -------- --------- --------- ---------- --------- ---------- --------
Revenues:
Resident and healthcare
revenue................... $ 15,329 94.6 $ 16,099 87.5 $30,908 94.3 $32,139 88.2
Rental and lease income... -- -- 1,106 6.0 37 0.1 2,137 5.9
Unaffiliated management
service revenue........... 212 1.3 528 2.9 578 1.8 1,032 2.8
Affiliated management
service revenue........... 444 2.8 433 2.3 854 2.6 820 2.2
Unaffiliated development
fees...................... -- -- 16 0.1 -- -- 40 0.1
Affiliated development fees 216 1.3 221 1.2 399 1.2 278 0.8
--------- ------- -------- -------- --------- -------- --------- -----
Total revenue............. 16,201 100.0 18,403 100.0 32,776 100.0 36,446 100.0
Expenses:
Operating expenses........ 8,882 54.8 9,675 52.6 17,654 53.9 18,979 52.1
General and administrative
expenses............... 2,958 18.3 3,481 18.9 6,115 18.7 6,595 18.1
Depreciation and
amortization........... 1,534 9.5 1,753 9.5 3,180 9.7 3,496 9.6
---------- -------- --------- --------- ---------- --------- ---------- --------
Total expenses 13,374 82.6 14,909 81.0 26,949 82.2 29,070 79.8
---------- -------- --------- --------- ---------- --------- ---------- --------
Income from operations ........ 2,827 17.4 3,494 19.0 5,827 17.8 7,376 20.2
Other income (expense):
Interest income........... 1,434 8.9 1,592 8.7 2,863 8.7 3,133 8.6
Interest expense.......... (2,748) (17.0) (3,843) (20.9) (5,576) (17.0) (8,092) (22.2)
Equity in the losses of
affiliates................ 20 0.1 (83) (0.5) 31 0.1 (336) (0.9)
Gain on sales of assets... (354) (2.2) -- -- 1,929 5.9 -- --
---------- -------- --------- --------- ---------- --------- ---------- --------
Income before income taxes
and minority interest in
consolidated partnership.. 1,179 7.3 1,160 6.3 5,074 15.5 2,081 5.7
Provision for income taxes (460) (2.8) (369) (2.0) (1,584) (4.8) (630) (1.7)
---------- -------- --------- --------- ---------- --------- ---------- --------
Income before minority interest
in consolidated partnership.... 719 4.4 791 4.3 3,490 10.6 1,451 4.0
Minority interest in consolidated
partnership.............. (59) (0.4) (189) (1.0) (901) (2.7) (421) (1.2)
---------- -------- --------- --------- ---------- --------- ---------- --------
Net income..................... $ 778 4.8 $ 602 3.3 $ 2,589 7.9 $ 1,030 2.8
========== ======== ========= ========= ========== ========= ========== ========
Three Months Ended June 30, 2002 Compared to the Three Months Ended June 30,
2001
Revenues. Total revenues were $16.2 million in the three months ended June 30,
2002 compared to $18.4 million for the three months ended June 30, 2001,
representing an decrease of $2.2 million or 12.0%. This decrease in revenue is
primarily the result of a $0.8 million decrease in resident and healthcare
revenue, a decrease of $1.1 million in rental and lease income and a decrease in
unaffiliated management services revenue of $0.3 million. The decrease in
resident and healthcare revenue reflects the loss of revenue from the Cambridge
community of $1.4 million, which was sold in August 2001, along with a loss of
revenue on the four communities contributed to BRE/CSL of approximately $0.3
offset by an overall increase in revenue at the Company's other communities of
approximately $0.9 million. The decrease in rental and lease income results from
the expiration of the HealthSouth master lease on four communities owned by HCP
and the sale by HCP of its two remaining communities that were previously leased
to third parties. HCP continues to own one community, which is currently held
for sale. Management services revenue decreased by $0.3 million primarily as a
result of the termination of the Company's management contracts with Buckner.
15
CAPITAL SENIOR LIVING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Expenses. Total expenses were $13.4 million in the second quarter of fiscal 2002
compared to $14.9 million in the second quarter of fiscal 2001, representing a
decrease of $1.5 million or 10.3%. This decrease in expenses is the result of a
$0.8 million decrease in operating expenses, a $0.5 million decrease in general
and administrative expenses and a decrease in depreciation expense of $0.2
million. This reduction in expenses primarily results from the sale of the
Cambridge community and the contribution of the four communities to BRE/CSL.
Other income and expense. Interest expense decreased $1.1 million to $2.7
million in the second quarter of 2002 compared to $3.8 million in the second
quarter of 2001. This 28.5% decrease in interest expense is the result of lower
interest rates on the Company's variable rate loans and slightly lower debt
outstanding in the current year. Interest income represents interest earned on
loans the Company has made to the Triad Entities along with interest earned on
the Company's investment in the NHP Pension Notes. Interest income decreased as
a result of the NHP Pension Notes being redeemed in January 2002. The loss on
sale of assets reflects the sale of one parcel of land and the contribution of
four senior living communities to BRE/CSL for net proceeds of $8.1 million,
which including the write-off of deferred loan costs resulted in the recognition
of a $0.4 million loss on sale. Equity in the earnings of affiliates represents
the Company's share of the earnings and losses from the Company's investments in
BRE/CSL and the Triad Entities.
Provision for income taxes. Provision for income taxes in the second quarter of
fiscal 2002 was $0.5 million or 37.2% of taxable income, compared to $0.4
million or 38.0% of taxable income in the comparable quarter for 2001. The
effective tax rates for the second quarter of 2002 and 2001 differ from the
statutory tax rates because of state income taxes and permanent tax differences.
Minority interest. Minority interest reflects a net loss at HCP in the second
quarter of fiscal 2002 compared to net income at HCP in the second quarter of
fiscal 2001. HCP currently owns one community, which is classified as held for
sale.
Net income. As a result of the foregoing factors, net income increased $0.2
million to $0.8 million for the three months ended June 30, 2002, as compared to
$0.6 million for the three months ended June 30, 2001.
Six Months Ended June 30, 2002 Compared to the Six Months Ended June 30, 2001
Revenues. For the six months ended June 30, 2002, total revenues were $32.8
million compared to $36.4 million for the six months ended June 30, 2001,
representing a decrease of $3.6 million or 10.1%. This decrease in revenue is
primarily the result of a $1.2 million decrease in resident and healthcare
revenue, a decrease of $2.1 million in rental and lease income, a decrease of
$0.4 million in management services revenue offset by an increase in development
fee revenue of $0.1 million. The decrease in resident and healthcare revenue
reflects the loss of revenue from the Cambridge community of $2.8 million, which
was sold in August 2001, along with a loss of revenue on the four communities
contributed to BRE/CSL of approximately $0.3 offset by an overall increase in
revenue at the Company's other communities of approximately $1.9 million. The
decrease in rental and lease income results from the expiration of the
HealthSouth master lease on four communities owned by HCP and the sale by HCP of
its two remaining communities that were previously leased to third parties.
Management services revenue decreased by $0.4 million primarily as a result of
the termination of the Company's management contracts with Buckner. Development
fee income increased as result of the completion of two communities for Triad IV
during the first half of fiscal 2002.
16
CAPITAL SENIOR LIVING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Expenses. Total expenses decreased $2.2 million or 7.3% to $26.9 million in the
first six months of fiscal 2002 compared to $29.1 million in the first six
months of fiscal 2001. This decrease in expenses is the result of a $1.3 million
decrease in operating expenses, a $0.5 million decrease in general and
administrative expenses and a decrease in depreciation expense of $0.3 million.
This reduction in expenses primarily results from the sale of the Cambridge
community and the contribution of the four communities to BRE/CSL.
Other income and expense. Interest expense decreased $2.5 million to $5.6
million in the first six months of 2002 compared to $8.1 million in the first
six months of 2001. This 31.1% decrease in interest expense is the result of
lower interest rates on the Company's variable rate loans and slightly lower
debt outstanding in the current year. Interest income represents interest earned
on loans the Company has made to the Triad Entities along with interest earned
on the Company's investment in the NHP Pension Notes. Interest income decreased
as a result of the NHP Pension Notes being redeemed in January 2002. Gain on
sale of assets reflects the sale/contribution of six communities and one parcel
of land for net proceeds of $12.5 million, which resulted in the recognition of
a $1.9 million gain on sale. Equity in the earnings of affiliates represents the
Company's share of the earnings and losses from the Company's investments in
BRE/CSL and the Triad Entities.
Provision for income taxes. Provision for income taxes in the first six months
of fiscal 2002 was $1.6 million or 38.0% of taxable income, compared to $0.6
million or 38.0% of taxable income in the comparable period of fiscal 2001. The
effective tax rates for the first six months of fiscal 2002 and 2001 differ from
the statutory tax rates because of state income taxes and permanent tax
differences.
Minority interest. Minority interest increased $0.5 million primarily due to the
sale of two HCP communities in fiscal 2002 offset by a decrease in net operating
income at HCP during the first six months of fiscal 2002 compared to the same
period in fiscal 2001. The sale of the two HCP communities increased minority
interest by approximately $1.0 million.
Net income. As a result of the foregoing factors, net income increased $1.6
million to $2.6 million for the six months ended June 30, 2002, as compared to
$1.0 million for the six months ended June 30, 2001.
Liquidity and Capital Resources
In addition to approximately $14.1 million of cash balances on hand as of June
30, 2002, the Company's principal source of liquidity is expected to be cash
flows from operations, proceeds from the sale of noncore assets, and cash flows
from BRE/CSL. Of the $14.1 million in cash balances, $2.6 million relates to
cash held by HCP. The Company expects its available cash and cash flows from
operations, proceeds from the sale of assets, and cash flows from BRE/CSL to be
sufficient to fund its short-term working capital requirements. The Company's
long-term capital requirements, primarily for acquisitions, the payment of
operating deficit guarantees, development, and other corporate initiatives, will
be dependent on its ability to access additional funds through joint ventures
and the debt and/or equity markets. There can be no assurance that the Company
will continue to generate cash flows at or above current levels or that the
Company will be able to obtain the capital necessary to meet the Company's
long-term capital requirements.
The Company had net cash provided by operating activities of $0.5 million and
$4.5 million in the first six months of fiscal 2002 and 2001, respectively. In
the first six months of fiscal 2002, the net cash provided by operating
activities was primarily derived from net income of $2.6 million, net non-cash
charges of $2.5 million, a decrease in federal and state income tax receivable
of $0.3 million, an increase in accounts payable and accrued expenses of $1.1
million offset by an increase in interest receivable of $2.6 million, an
17
CAPITAL SENIOR LIVING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
increase in prepaid expenses of $3.3 million and a decrease in customer deposits
of $0.1 million. In the first six months of fiscal 2001, the net cash provided
by operating activities was primarily derived from net income of $1.0 million,
net non-cash charges of $4.7 million, a decrease in accounts and income tax
receivable of $3.8 million and a reduction in notes receivable of $0.6 million,
offset by an increase in interest receivable of $2.0 million, an increase in
prepaid expenses of $1.7 million, an increase in other assets of $1.0 million
and a decrease in accounts payable and accrued expenses of $0.9 million.
The Company had net cash provided by investing activities of $9.6 million in the
first six months of fiscal 2002 compared to net cash used in investing
activities of $9.1 million in the first six months of fiscal 2001. In the first
six months of fiscal 2002, the net cash provided by investing activities
resulted from net proceeds of $5.2 million from the sale of two senior living
communities and one parcel of land, net proceeds of $7.3 million from the
contribution of four senior living communities to BRE/CSL, proceeds of $6.9
million from the NHP Pension Note redemption and distributions from BRE/CSL
offset by advances to the Triad Entities of $9.0 million and capital
expenditures of $0.8 million. In the first six months of fiscal 2001, net cash
used in investing activities was primarily derived from advances to the Triad
Entities of $8.1 million, capital expenditures of $1.5 million offset by
distributions from limited partnerships of $0.5 million.
The Company had net cash used in financing activities of $6.0 million and $1.6
million in first six months of fiscal 2002 and 2001, respectively. Net cash used
in financing activities in the first six months of fiscal 2002 resulted
primarily from repayment of notes payable of $3.2 million, cash restricted under
loan agreements of $5.4 million, distributions to minority partners of $1.3
million and deferred loan charges paid of $0.2 million offset by proceeds from
the issuance of notes payable of $4.1 million. Net cash used in financing
activities in the first six months of fiscal 2001 resulted from repayment of
notes payable of $2.6 million and distribution to minority partners of $2.2
million offset by proceeds from the issuance of notes payable of $3.1 million.
The Company derives the benefits and bears the risks attendant to the
communities it owns. The cash flows and profitability of owned communities
depends on the operating results of such communities and are subject to certain
risks of ownership, including the need for capital expenditures, financing and
other risks such as those relating to environmental matters.
The Company, through its ownership in HCP, leased two properties under triple
net leases both of which were sold during the first quarter of 2002. On January
1, 2002, HCP sold its Hearthstone community for net proceeds of $2.7 million
after the payment of settlement costs, resulting in a gain of $1.8 million. On
February 28, 2002, HCP sold its Trinity Hills community for net proceeds of $1.7
million after the payment of settlement costs, resulting in a gain of $0.5
million. After the sale of these properties, HCP owns one community that is
currently classified as held for sale.
The cash flows and profitability of the Company's third-party management fees
are dependent upon the revenues and profitability of the communities managed.
While the management contracts are generally terminable only for cause, in
certain cases contracts can be terminated upon the sale of a community, subject
to the Company's rights to offer to purchase such community.
On February 28, 2002, ILM II notified the Company that it had entered into an
agreement to sell the five senior living communities managed by the Company and
would, therefore, be terminating the Company's management agreement for these
five communities effective April 1, 2002. As of April 1, 2002, the Company no
longer manages these communities.
18
CAPITAL SENIOR LIVING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
On March 1, 2002, LCOR notified the Company of its intent to terminate the LCOR
Management Agreements, effective May 31, 2002, as a result of the Company not
funding certain alleged operating deficits, which the Company could optionally
fund under the LCOR Management Agreements. The Company notified LCOR that the
Company believes this termination was without cause and continues to manage the
four senior living communities under its management agreement with LCOR. In
addition, the Company is currently negotiating with the owners of the four
senior living communities to assume LCOR's ownership position.
The Company has entered into development and management agreements with the
partnerships set out below (the "Triad Entities") for the development and
management of new senior living communities. The Triad Entities own and finance
the construction of new senior living communities. These communities are
primarily Waterford communities. The development of senior living communities
typically involves a substantial commitment of capital over an approximate
12-month construction period, during which time no revenues are generated,
followed by an 18 to 24 month lease up period.
The Company has an approximate 1% limited partnership interest in each of the
Triad Entities and is accounting for these investments under the equity method
of accounting based on the provisions of the Triad Entities partnership
agreements. The Company has loan commitments to the Triad Entities for
construction and pre-marketing expenses, in addition to requirements to fund the
Triad Entities' operating deficits through an operating deficit guarantee
provided for in its management agreement with the Triad Entities. The Company
evaluates the carrying value of these receivables by comparing the cash flows
expected from the operations of the Triad Entities to the carrying value of the
receivables. These cash flow models consider lease-up rates, expected operating
costs, debt service requirements and various other factors. The carrying value
of the notes receivable from the Triad Entities could be adversely affected by a
number of factors including the Triad communities experiencing slower than
expected lease-up, lower than expected lease rates, higher than expected
operating costs, increases in interest rates, issues involving debt service
requirements, general adverse market conditions, other economic factors and
changes in accounting guidelines. Management believes, based on the future
achievement of the assumptions used in these cash flow models, which are
consistent with our operating experience, that the carrying value of the notes
receivable are fully recoverable.
The Company is currently renegotiating the mortgage loan on its Sedgwick Plaza
community as a result of the contribution to BRE/CSL of four of the five
communities covered by a master loan with GMAC and the resulting repayment of
the GMAC loan related to such four communities. On June 13, 2002, GMAC required
the Company to pledge $5.4 million as collateral on the outstanding mortgage
loan relating to the Sedgwick Plaza community. The pledged cash has been
classified as restricted cash on the Company's balance sheet and is expected to
be released upon the completion of a new mortgage loan on the Sedgwick Plaza
community.
The Company is also renegotiating the terms and extending the maturity on its
$20 million note payable to Newman Financial Services Inc., which is currently
due on October 15, 2002.
The Company expects to complete these refinancings during the third quarter of
fiscal 2002; however, there can be no assurance that the refinancings will be
completed or if completed, that the terms will be as expected by the Company.
19
CAPITAL SENIOR LIVING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
The Financial Accounting Standards Board issued an exposure draft on a proposed
interpretation of ARB No. 51 relating to the "Consolidation of Certain
Special-Purpose Entities." This draft interpretation if adopted could result in
the Company consolidating the financial statements of certain partnerships
currently accounted for separately under the equity method of accounting. If
adopted, this draft interpretation would be applied to periods beginning after
March 15, 2003. There can be no assurance that the draft interpretation will be
adopted, or if adopted, will or will not be modified significantly and there can
be no assurance as to the effective date if adopted.
The following table sets forth, as of June 30, 2002, the capital invested in
each of the Triad Entities, information related to loans made by the Company to
each Triad Entity and information on deferred income related to each Triad
Entity (dollars in thousands):
Notes Receivable Deferred Income
----------------------------------------------------------- -------------------------
Operating Development/
Capital Committed Interest Note Deficit Management
Entity Investment Amount Rate Maturity Balance Funding Interest Fees
------ ---------- --------- -------- -------- ------- -------- -------- -------------
Triad Senior
Living I, L.P.
(Triad I) $ -- $ -- 8.0% -- $ -- $14,090 $ 93 $ 324
Triad Senior
Living II, L.P. Sept. 25,
(Triad II) -- 15,000 8.0% 2003 15,000 5,146 139 161
Triad Senior
Living III, L.P. Feb. 8,
(Triad III) -- 15,000 8.0% 2004 15,000 7,596 142 314
Triad Senior
Living IV, L.P. Dec. 30,
(Triad IV) -- 10,000 8.0% 2003 10,000 336 147 113
Triad Senior
Living V, L.P. June 30,
(Triad V) -- 10,000 8.0% 2004 4,768 -- 29 26
The Company typically receives a development fee of 4% of project costs, as well
as reimbursement of expenses and overhead not to exceed 4% of project costs.
These fees are recorded over the term of the development project on a basis
approximating the percentage of completion method. In addition, when the
properties become operational, the Company typically receives management fees in
an amount equal to the greater of 5% of gross revenues or $5,000 per month per
community, plus overhead expenses.
The Company has the option, but not the obligation, to purchase the partnership
interests of the other parties in Triad Entities for an amount equal to the
amount paid for the partnership interest by the other partners, plus a
noncompounded return of 12% per annum except for Triad I. In addition, each
Triad Entity except Triad I provides the Company with an option, but not the
obligation, to purchase the community developed by the applicable partnership
upon their completion for an amount equal to the fair market value (based on a
third-party appraisal but not less than hard and soft costs and lease-up costs)
of the community. The Company has the option to purchase the Triad I communities
for an amount specified in the partnership agreement.
The Company has made no determination as to whether it will exercise any of
these purchase options.
Deferred interest income is being amortized into income over the life of the
loan commitment that the Company has with each of the Triad Entities. Deferred
development and management fee income is being amortized into income over the
expected remaining life of the Triad partnerships.
20
CAPITAL SENIOR LIVING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Each of the Triad Entities finances the development of new communities through a
combination of equity funding, traditional construction loans and permanent
financing with institutional lenders secured by first liens on the communities
and unsecured loans from the Company. The Company loans may be prepaid without
penalty. The financings from institutional lenders are secured by first liens on
the communities, as well as assignment to the lenders of the construction
contracts and the development and management agreements with the Company. Each
development and management agreement assigned to an institutional lender is also
guaranteed by the Company and those guarantees are also assigned to the lenders.
In most cases, the management agreements contain an obligation of the Company to
fund operating deficits to the Triad Entities if the other financing sources of
the Triad Entities have been fully utilized. These operating deficit funding
obligations are guaranteed by the Company and include making loans to fund debt
service obligations to the Triad Entities' lenders. Amounts funded to date under
these operating deficit agreements are disclosed in the table above. The Company
expects to be required to fund additional amounts under these operating deficit
agreements in the future.
Set forth below is information on the construction loan facilities entered into
by each of the Triad Entities as of June 30, 2002 (dollars in thousands):
Loan Facilities to Triads
---------------------------------------------------
Amount
Entity Commitment Outstanding Type Lender
-------------------------------------- ----------- ---- ------
Triad I $50,000 $48,967 take-out GMAC
Key Corporate
Triad II $26,900 $26,623 mini-perm Capital, Inc.
Triad III $56,300 $56,270 mini-perm Guaranty Bank
Triad IV $18,600 $17,417 construction; Compass Bank
mini-perm
Triad V $ 8,903 $ 8,791 mini-perm Bank of
America
During 2001, Triad V was notified by the lender of its failure to comply
with certain terms of its loan agreement with the lender. The lender, however,
expressed its intention to work with Triad V and the lender and Triad V
subsequently signed a new loan agreement in April 2002.
Summary financial information regarding the financial position as of June 30,
2002 and December 31, 2001 and results of operations for the six months ending
June 30, 2002 and 2001 of the Triad Entities is as follows (in thousands):
21
CAPITAL SENIOR LIVING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
June 30, Dec. 31,
2002 2001
---------- -------
Current assets........................... $ 3,447 $ 4,827
Property and equipment, net.............. 188,656 188,651
Other assets............................. 10,784 8,662
-------- --------
Total assets......................... $202,887 $202,140
======== ========
Current liabilities...................... $ 13,455 $ 17,374
Long-term debt........................... 224,075 208,991
Other long-term liabilities.............. -- 21
Partnership deficit...................... (34,643) (24,246)
-------- --------
Total liabilities and partnership
deficit.............................. $202,887 $202,140
======== ========
Six Months Ended
June 30, June 30,
2002 2001
---------- -------
Net revenue.............................. $ 11,980 $ 7,138
Net loss................................. (10,397) (12,765)
The Company formed BRE/CSL with Blackstone in December 2001, and the joint
venture will seek to acquire in excess of $200 million of senior housing
properties. BRE/CSL is owned 90% by Blackstone and 10% by the Company. Pursuant
to the terms of the joint venture, each of the Company and Blackstone must
approve any acquisitions made by the joint venture. Each party must also
contribute its pro rata portion of the costs of any acquisition. In December
2001, the joint venture acquired The Amberleigh at Woodside Farms, a 394
resident capacity independent living facility. In connection with the
acquisition of Amberleigh by BRE/CSL, the Company contributed $1.8 million to
the joint venture. During the second quarter of 2002, BRE/CSL obtained permanent
financing for the Amberleigh community and the Company recovered $1.4 million of
its contribution to the joint venture.
In addition, on June 13, 2002, the Company contributed to BRE/CSL four of its
senior living communities with a capacity of approximately 600 residents. As a
result of the contribution, the Company repaid $29.1 million of long-term debt
to GMAC, received $7.3 million in cash from the venture and has a 10% equity
interest in the venture.
The Company manages the five communities owned by BRE/CSL under long-term
management contracts.
Forward-Looking Statements
Certain information contained in this report constitutes "Forward-Looking
Statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended,
which can be identified by the use of forward-looking terminology such as "may,"
"will," "expect," "anticipate," "estimate" or "continue" or the negative thereof
or other variations thereon or comparable terminology. The Company cautions
readers that forward-looking statements, including, without limitation, those
relating to the Company's future business prospects, revenues, working capital,
liquidity, capital needs, interest costs and income, are subject to certain
risks and uncertainties that could cause actual results to differ materially
from those indicated in the forward-looking statements, due to several important
factors herein identified. These factors include the Company's ability to find
suitable acquisition properties at favorable terms, financing, licensing,
business conditions, risks of downturns in economic condition generally,
satisfaction of closing conditions such as those pertaining to licensure, and
changes in accounting principles and interpretations among others, and other
risks and factors identified from time to time in the Company's reports filed
with the Securities and Exchange Commission.
22
Item 3. QUANTITATIVE AND QUALIITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company's primary market risk is exposure to changes in interest rates on
debt instruments. As of June 30, 2002 the Company had $152.9 million in
outstanding debt comprised of various fixed and variable rate debt instruments
of $55.8 million and $97.1 million, respectively.
Changes in interest rates would affect the fair market value of the Company's
fixed rate debt instruments but would not have an impact on the Company's
earnings or cash flows. Fluctuations in interest rates on the Company's variable
rate debt instruments, which are tied to either the LIBOR or the prime rate,
would affect the Company's earnings and cash flows but would not affect the fair
market value of the variable rate debt. For each percentage point change in
interest rates the Company's annual interest expense would increase by
approximately $1.0 million based on its current outstanding variable debt. In
addition, an increase in interest rates could result in operating deficit
obligations, relating to the Triad Entities, that could require funding by the
Company.
23
CAPITAL SENIOR LIVING CORPORATION
OTHER INFORMATION
II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
On or about October 23, 1998, Robert Lewis filed a putative class action
complaint on behalf of certain holders of assignee interests (the "Assignee
Interests") in NHP in the Delaware Court of Chancery, Civil Action No. 16725
(the "Delaware Action") against NHP, the general partner of NHP ("General
Partner"), the Company and Capital Senior Living Properties 2-NHPCT, Inc.
(collectively, the "Defendants"). Mr. Lewis purchased ninety Assignee Interests
in NHP in February 1993 for $180. The complaint alleges, among other things,
that the Defendants breached, or aided and abetted a breach of, the express and
implied terms of the NHP Partnership Agreement in connection with the sale of
four properties by NHP to Capital Senior Living Properties 2-NHPCT, Inc. in
September 1998 (the "1998 Transaction"). The complaint seeks, among other
relief, rescission of the 1998 Transaction and unspecified damages. On July 9,
1999, the Defendants filed a motion to dismiss the case. Subsequently, the
plaintiff amended his complaint adding allegations challenging the terms of the
sale in December 2001 of the Amberleigh retirement facility to BRE/CSL.
On January 31, 2002, the parties to the Delaware Action entered into a
Memorandum of Understanding providing for the settlement of the Delaware Action
subject to certain terms and conditions, including the filing of an amended
complaint and receipt of the approval of the Court of Chancery. The proposed
settlement contemplates the creation of a settlement fund in the amount of
approximately $0.8 million, of which NHP will contribute approximately $0.3
million, the amount of the deductible of NHP's directors and officers' liability
insurance policy at the time the Delaware Action was filed (the "D&O Policy").
Virtually all of the balance of the settlement fund will be contributed by the
various insurance brokers and agents, and their insurers, in connection with the
resolution of certain claims for coverage under the D&O Policy. The settlement
contribution of the Company and its affiliates will be $43,000. If approved by
the Court of Chancery, the settlement fund, less any award of attorney's fees
for plaintiff's counsel approved by the court, will be distributed to a class of
Assignee Holders of NHP. The parties have engaged in discussions subsequent to
entering into the Memorandum of Understanding and the Company expects the
parties to enter into additional settlement agreements in the near future;
however, the Company cannot make any assurances that the parties will enter into
any further settlement agreements or any assurances regarding the terms of any
other settlement agreement.
On December 6, 2001, Leonard Kalmenson filed a motion to intervene in the
Delaware Action on the behalf of a putative class of holders of Pension Notes of
NHP in the event the Court of Chancery determines that the claims asserted in
the Delaware Action are derivative in nature. The Complaint in Intervention
filed by Mr. Kalmenson names as defendants the Defendants in the Delaware Action
as well as Retirement Associates, Inc., the sole stockholder of the General
Partner of NHP, and various current and former directors of the General Partner.
The Complaint in Intervention essentially alleges, among other things, a variety
of claims challenging the 1998 Transaction and a claim for breach of contract
relating to the failure of NHP to pay the full amount of principal and interest
owed on the Pension Notes on their maturity date. NHP and the Company believe
that the allegations asserted by Mr. Kalmenson are without merit and that his
motion to intervene is moot in view of the proposed settlement of the Delaware
Action. The Company is unable at this time to estimate any liability related to
this claim, if any.
On January 16, 2002, the Company filed a claim with the American Arbitration
Association seeking reimbursement of certain health care expenses, as well as
severance compensation from Buckner pursuant to a management agreement between
the parties. Buckner has filed an answer and a counterclaim in this arbitration
and proceedings are continuing.
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CAPITAL SENIOR LIVING CORPORATION
OTHER INFORMATION (continued)
The Company (and two of its management subsidiaries) and Buckner Retirement
Services, Inc. and a related Buckner entity have been named as defendants in a
lawsuit brought by the heirs of a deceased resident who obtained nursing home
services at a facility called Parkway Place. The Company managed Parkway Place
through December 31, 2001. The plaintiffs in the lawsuit allege that the
defendants were negligent in the care and treatment of the deceased and that her
injuries and death were a direct and proximate result of the acts and omissions
of the defendants. Plaintiffs recently made a demand of $7 million from the
defendants. The Company vigorously denies any wrongdoing occurred in the
treatment of the deceased and is vigorously defending the lawsuit. Furthermore,
this claim is currently being defended by Company's insurance carrier, and the
Company believes that there is sufficient liability insurance to cover any
settlement or judgment rendered in the above stated case, subject to the
insurance company's ordinary reservation of rights.
The Company has other pending claims incurred in the normal course of business,
that, in the opinion of management, based on the advice of legal counsel, will
not have a material effect on the financial statements of the Company.
Item 2. CHANGES IN SECURITIES (and use of proceeds)
Not Applicable
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders was held on May 16, 2002. At the
meeting, the stockholders voted to re-elect two directors of the Company,
Lawrence A. Cohen and Craig F. Hartberg, to hold office until the annual meeting
to be held in 2005 or until each person's successor is duly elected and
qualified ("Proposal 1"). The other directors whose terms continue after the
annual meeting are James A. Stroud, Keith N. Johannessen, Dr. Gordon I.
Goldstein, James A. Moore and Dr. Victor Nee.
In addition, the stockholders were asked to consider and act upon a proposal to
ratify Ernst & Young, LLP as the independent public accountants for the Company
for the year 2002 ("Proposal 2"). No other matters were voted on at the annual
meeting. A total of 18,860,084 shares were represented at the meeting in person
or by proxy.
The number of shares that were voted for and that were withheld from, each of
the director nominees in Proposal 1 was as follows:
Director Nominee For Withheld
Lawrence A. Cohen 18,328,684 531,400
Craig F. Hartberg 18,817,484 42,600
In Proposal 2, Ernst & Young LLP was ratified as the independent public
accountants for the Company for fiscal 2002, with 18,815,552 shares voting for,
32,230 shares voting against and 12,302 shares abstaining.
25
Item 5. OTHER INFORMATION
Not Applicable
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits:
10.97 Amended and Restated Limited Liability Company
Agreement of BRE/CSL Portfolio L.L.C. dated as of
June 13, 2002 among BRE/CSL Holdings L.L.C., Capital
Senior Living A, Inc. and Capital Senior Living
Properties, Inc.
10.98 Contribution Agreement dated December 31, 2001
between Capital Senior Living A, Inc. and BRE/CSL
Holdings L.L.C.
99.1 Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(B) Reports on Form 8-K
Not Applicable
26
CAPITAL SENIOR LIVING CORPORATION
June 30, 2002
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Capital Senior Living Corporation
(Registrant)
By: /s/ Ralph A. Beattie
------------------------------------
Ralph A. Beattie
Executive Vice President and Chief Financial Officer
(Principal Financial Officer and Duly Authorized Officer)
Date: August 5, 2002
27