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 September 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 November 11, 2002, the Registrant had outstanding 19,736,837 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 - -
September 30, 2002 and December 31, 2001 3
Consolidated Statements of Income - -
Three and Nine Months Ended September 30, 2002 and 2001 4
Consolidated Statements of Cash Flows - -
Nine Months Ended September 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 24
Item 4. Controls and Procedures 24
Part II. Other Information
Item 1. Legal Proceedings 25
Item 6. Exhibits and Reports on Form 8-K 26
Signature
Certifications
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CAPITAL SENIOR LIVING CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands)
September 30, December 31,
2002 2001
------------------ ------------------
ASSETS (Unaudited) (Audited)
------------------ ------------------
Current assets:
Cash and cash equivalents.......................................... $ 10,516 $ 9,975
Restricted cash.................................................... 7,490 2,100
Accounts receivable, net........................................... 1,251 1,438
Accounts receivable from affiliates................................ 526 366
Interest receivable................................................ 4,877 6,072
Investment in limited partnership.................................. -- 5,774
Federal and state income taxes receivable.......................... 746 1,145
Deferred taxes..................................................... 2,770 2,770
Prepaid expenses and other......................................... 4,441 1,218
------------------ ------------------
Total current assets......................................... 32,617 30,858
Property and equipment, net.............................................. 154,155 196,821
Deferred taxes........................................................... 7,238 7,540
Notes receivable from affiliates......................................... 75,030 59,020
Investments in limited partnerships...................................... 1,375 1,827
Assets held for sale..................................................... 4,494 4,924
Other assets............................................................. 4,862 7,092
------------------ ------------------
Total assets................................................. $ 279,771 $ 308,082
================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................... $ 5,808 $ 3,040
Accrued expenses................................................... 2,302 3,363
Current portion of notes payable................................... 8,997 25,594
Customer deposits.................................................. 1,035 1,144
------------------ ------------------
Total current liabilities.................................... 18,142 33,141
Deferred income.......................................................... -- 507
Deferred income from affiliates.......................................... 1,387 1,750
Notes payable, net of current portion.................................... 134,885 149,202
Line of credit........................................................... 7,387 7,553
Minority interest in consolidated partnership............................ 894 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
19,736,837 and 19,717,347 at September 30, 2002 and
December 31, 2001, respectively.............................. 197 197
Additional paid-in capital......................................... 91,990 91,935
Retained earnings.................................................. 24,889 21,412
------------------ ------------------
Total shareholders' equity................................... 117,076 113,544
------------------ ------------------
Total liabilities and shareholders' equity................... $ 279,771 $ 308,082
================== ==================
See accompanying notes.
3
CAPITAL SENIOR LIVING CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(in thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------- --------------------------------
2002 2001 2002 2001
---------------- ---------------- ---------------- ----------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenues:
Resident and healthcare revenue........... $ 13,401 $ 15,123 $ 44,309 $ 47,262
Rental and lease income................... -- 916 37 3,053
Unaffiliated management services revenue.. 258 446 836 1,478
Affiliated management services revenue.... 609 449 1,463 1,269
Unaffiliated development fees............. -- -- -- 40
Affiliated development fees............... 273 63 672 341
---------------- ---------------- ---------------- ----------------
Total revenues........................ 14,541 16,997 47,317 53,443
Expenses:
Operating expenses........................ 8,148 9,407 25,802 28,386
General and administrative expenses....... 2,945 3,110 9,060 9,705
Depreciation and amortization............. 1,327 1,738 4,507 5,234
---------------- ---------------- ---------------- ----------------
Total expenses........................ 12,420 14,255 39,369 43,325
---------------- ---------------- ---------------- ----------------
Income from operations.......................... 2,121 2,742 7,948 10,118
Other income (expense):
Interest income........................... 1,521 1,616 4,384 4,749
Interest expense.......................... (2,489) (3,743) (8,065) (11,835)
Equity in the gains (losses) of affiliates 14 (62) 45 (398)
Gain on sale of assets.................... -- 2,425 1,929 2,425
---------------- ---------------- ---------------- ----------------
Income before income taxes, minority interest in
consolidated partnership and extraordinary
charge.................................... 1,167 2,978 6,241 5,059
Provision for income taxes...................... (543) (724) (2,127) (1,354)
---------------- ---------------- ---------------- ----------------
Income before minority interest in consolidated
partnership and extraordinary charge...... 624 2,254 4,114 3,705
Minority interest in consolidated partnership... 264 (1,072) (637) (1,493)
---------------- ---------------- ---------------- ----------------
Income before extraordinary charge.............. 888 1,182 3,477 2,212
Extraordinary charge, net of minority interest and
income tax benefit of $187 and $94,
respectively ................................ -- (153) -- (153)
---------------- ---------------- ---------------- ----------------
Net income...................................... $ 888 $ 1,029 $ 3,477 $ 2,059
================ ================ ================ ================
Per share data:
Basic earnings per share:
Income before extraordinary charge........ $ 0.05 $ 0.06 $ 0.18 $ 0.11
Extraordinary charge...................... -- (0.01) -- (0.01)
---------------- ---------------- ---------------- ----------------
Net income................................ $ 0.05 $ 0.05 $ 0.18 $ 0.10
================ ================ ================ ================
Diluted earnings per share:
Income before extraordinary charge........ $ 0.04 $ 0.06 $ 0.17 $ 0.11
Extraordinary charge...................... -- (0.01) -- (0.01)
---------------- ---------------- ---------------- ----------------
Net income................................ $ 0.04 $ 0.05 $ 0.17 $ 0.10
================ ================ ================ ================
Weighted average shares outstanding - basic 19,727 19,717 19,722 19,717
================ ================ ================ ================
Weighted average shares outstanding - diluted 19,845 19,731 19,948 19,722
================ ================ ================ ================
See accompanying notes.
4
CAPITAL SENIOR LIVING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Nine Months Ended September 30,
-----------------------------------
2002 2001
------------------ ----------------
(Unaudited) (Unaudited)
Operating Activities
Net income.......................................................... $ 3,477 $ 2,059
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization................................. 4,507 5,234
Amortization of deferred financing charges.................... 615 690
Gain on sale of assets........................................ (1,929) (2,425)
Equity in the (gains) losses of affiliates.................... (45) 398
Minority interest in consolidated partnership................. 637 1,493
Deferred tax expense.......................................... 302 302
Change in deferred income..................................... (507) --
Change in deferred income from affiliates..................... (363) (311)
Writedown of assets held for sale............................. 500 --
Non-cash compensation......................................... 14 --
Extraordinary charge, net of minority interest and income tax
benefit....................................................... -- 153
Changes in operating assets and liabilities:
Accounts receivable....................................... 187 1,154
Accounts receivable from affiliates....................... (160) 2,173
Interest receivable....................................... (3,979) (3,101)
Notes receivable.......................................... -- 570
Prepaid expenses and other................................ (3,223) (1,316)
Other assets.............................................. 264 (1,128)
Federal and state income taxes............................ 405 1,586
Accounts payable and accrued expenses..................... 1,989 (490)
Customer deposits......................................... (109) 126
------------------ ----------------
Net cash provided by operating activities........................... 2,582 7,167
Investing Activities
Capital expenditures................................................ (1,418) (1,866)
Proceeds from the sale of assets.................................... 5,187 3,637
Proceeds from the sale of assets to BRE/CSL......................... 7,287 --
Advances to affiliates
Operational................................................... (8,312) (12,952)
Non Operational............................................... (3,389) (197)
Distribution from limited partnerships.............................. 7,125 285
------------------ ----------------
Net cash provided by (used in) investing activities................. 6,480 (11,093)
Financing Activities
Proceeds from notes payable and line of credit...................... 4,237 3,207
Repayment of notes payable.......................................... (5,068) (4,416)
Restricted cash..................................................... (5,390) (2,100)
Proceeds from the issuance of common stock.......................... 35 --
Distributions to minority partners.................................. (2,128) (5,867)
Deferred loan charges paid.......................................... (207) (2)
------------------ ----------------
Net cash used in financing activities............................... (8,521) (9,178)
------------------ ----------------
Increase (decrease) in cash and cash equivalents.................... 541 (13,104)
Cash and cash equivalents at beginning of period.................... 9,975 23,975
------------------ ----------------
Cash and cash equivalents at end of period.......................... $ 10,516 $ 10,871
================== ================
Supplemental disclosures:
Cash paid during the period for:
Interest..................................................... $ 7,483 $ 10,965
================== ================
Income taxes................................................. $ 1,690 $ 545
================== ================
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 material 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 September 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,
except for a writedown on an asset held for sale of $0.5 million) necessary to
present fairly the Company's financial position as of September 30, 2002,
results of operations for the three and nine months ended September 30, 2002 and
2001, respectively, and cash flows for the nine months ended September 30, 2002
and 2001. The results of operations for the three and nine months ended
September 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 for 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 had 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. In addition, the Company entered into a support agreement with the
Triad Entities during the third quarter, whereby, each of Triad II, Triad III,
Triad IV and Triad V agreed to loan excess cash flow of such Triad to any one or
more of Triad I, Triad II, Triad III, Triad IV and Triad V. 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 support
agreement, factors within its control and 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,
including Triad Entities, 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 September 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
----------------------------------------------------------- ------------------------
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% -- $ -- $14,680 $ 75 $ 291
Triad Senior
Living II, L.P. Sept. 25,
(Triad II) -- 15,000 8.0% 2003 15,000 6,180 113 149
Triad Senior
Living III, L.P. Feb. 8,
(Triad III) -- 15,000 8.0% 2004 15,000 9,290 123 292
Triad Senior
Living IV, L.P. Dec. 30,
(Triad IV) -- 10,000 8.0% 2003 9,998 -- 149 107
Triad Senior
Living V, L.P. June 30,
(Triad V) -- 10,000 8.0% 2004 4,882 -- 29 25
The Company continues to classify its notes receivable from Triad II as
long-term as the Company expects to extend the maturity date of its notes
receivable with Triad II.
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.
7
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 partners in the Triad Entities, except for Triad I, for
an amount equal to the amount paid for the partnership interest by the other
partners, plus a noncompounded return of 12% per annum. In addition, each Triad
Entity except Triad I provides the Company with an option, but not the
obligation, to purchase the communities developed by the applicable partnership
upon their completion for an amount equal to the fair market value (based on a
third-party appraisal but not less than hard and soft costs and lease-up costs)
of the applicable community.
The Company has the option to purchase the Triad I communities for an amount
specified in the partnership agreement. Furthermore, Lehman has agreed to
withdraw as a partner in the Triad I partnership to the extent it has received,
on or before November 1, 2004, distributions in an amount equal to its capital
contributions.
The Company is currently reviewing its purchase options relating to the Triad
Entities but 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.
8
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Set forth below is information on the construction/permanent loan facilities
entered into by each of the Triad Entities as of September 30, 2002 (dollars in
thousands):
Loan Facilities to Triads
---------------------------------------------------
Number of Amount
Entity Communities Commitment Outstanding Type Lender
--------------------- ----------- ---------- ----------- ---------- -------------
Triad I 7 $50,000 $48,647 take-out GMAC
Key Corporate
Triad II 3 $26,900 $26,473 mini-perm Capital, Inc.
Triad III 6 $56,300 $56,270 mini-perm Guaranty Bank
Triad IV 2 $18,600 $18,404 construction; Compass Bank
mini-perm
Triad V 1 $ 8,903 $ 8,823 mini-perm Bank of America
Summary financial information regarding the financial position as of September
30, 2002 and December 31, 2001 and results of operations for the nine months
ended September 30, 2002 and 2001 of the Triad Entities is as follows (in
thousands):
Sept. 30, Dec. 31,
2002 2001
---------- ---------
Current assets........................... $ 4,139 $ 4,827
Property and equipment, net.............. 186,457 188,651
Other assets............................. 10,983 8,662
Total assets......................... $ 201,579 $202,140
Current liabilities...................... $ 15,101 $ 17,374
Long-term debt........................... 226,245 208,991
Other long-term liabilities.............. -- 21
Partnership deficit...................... (39,767) (24,246)
Total liabilities and partnership
deficit.............................. $ 201,579 $202,140
Nine Months Ended
-----------------------
Sept. 30, Sept. 30,
2002 2001
--------- ----------
Net revenue.............................. $ 19,185 $ 11,901
Operating and general & administrative... 21,208 17,232
Depreciation............................. 4,130 3,792
Operating loss........................... (6,153) (9,123)
Net loss................................. (15,521) (18,546)
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.
9
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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. The Company has deferred $34,000 of management fee income
as a result of its 10% interest in the BRE/CSL joint venture.
3. NET INCOME PER SHARE
Basic net income per share is calculated by dividing net income by the weighted
average number of common shares outstanding during the period. Diluted net
income per share considers the dilutive effect of outstanding options calculated
using the treasury stock method.
The following table sets forth the computation of basic and diluted earnings per
share (in thousands, except for per share amounts):
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
2002 2001 2002 2001
Income before extraordinary charge $ 888 $ 1,182 $ 3,477 $ 2,212
Extraordinary charge -- (153) -- (153)
Net income $ 888 $ 1,029 $ 3,477 $ 2,059
Weighted average shares outstanding - basic 19,727 19,717 19,722 19,717
Effect of dilutive securities:
Employee stock options 118 14 226 5
Weighted average shares outstanding - 19,845 19,731 19,948 19,722
diluted
Basic earnings per share:
Income before extraordinary charge $ 0.05 $ 0.06 $ 0.18 $ 0.11
Extraordinary charge $ -- $ (0.01) $ -- $ (0.01)
Net income $ 0.05 $ 0.05 $ 0.18 $ 0.10
Diluted earnings per share:
Income before extraordinary charge $ 0.04 $ 0.06 $ 0.17 $ 0.11
Extraordinary charge $ -- $ (0.01) $ -- $ (0.01)
Net income $ 0.04 $ 0.05 $ 0.17 $ 0.10
Options to purchase 1.1 million shares of common stock at prices ranging from
$3.13 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 third quarter and first nine months of fiscal 2002 did not exceed the
exercise price of the options, and therefore, the effect would not be dilutive.
For the third quarter and first nine months of fiscal 2001, options to purchase
1.0 million shares of common stock at prices ranging from $2.00 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 19,490
shares of common stock pursuant to the exercise of stock options by certain
employees of the Company.
10
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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").
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 sought, among other relief, rescission of the 1998
Transaction and unspecified damages. 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 December 6, 2001, Leonard
Kalmenson filed a motion to intervene in the Delaware Action on 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.
On October 18, 2002, the Delaware Court of Chancery entered a Final Order and
Judgment (i) certifying a class consisting of all record and beneficial holders
of Assignee Interests of NHP as of September 30, 1998 or any time thereafter,
(ii) approving as fair, reasonable and adequate a settlement of the Delaware
Action calling for the creation of a settlement fund in the amount of
approximately $0.8 million, (iii) dismissing the Delaware Action with prejudice
and releasing, among other things, all the claims asserted therein, and (iv)
awarding attorneys' fees and expenses in the amount of $0.3 million to be paid
from the settlement fund to counsel for the class. NHP previously contributed
$0.3 million to the creation of the settlement fund, which is 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 was contributed by various insurance brokers and
agents, and their insurers, in connection with the resolution of certain claims
for coverage under the D&O Policy. In accordance with the settlement,
approximately $0.6 million (the amount of the settlement fund minus the award
for attorneys' fees and expenses) will be distributed to the class of Assignee
Holders on a pro rata basis after the settlement becomes final.
On October 9, 2002, the Company entered into a settlement agreement (the
"Agreement") with Buckner Retirement Services, Inc. ("Buckner") relating to the
Company's claim for reimbursement of health care expenses pursuant to the
Management Agreement between the parties. Pursuant to the Agreement, Buckner
waived any claims against the Company for early termination by the Company of
its Management Agreement with Buckner at the Parkway Place facility ("Parkway
Place") and additionally agreed to pay certain damages to the Company.
In the third quarter, the insurance carriers of Buckner and the Company settled
a claim, at no cost to the Company, on behalf of the Company (and two of its
management subsidiaries), Buckner, and a related Buckner entity who had been
named as defendants in a lawsuit brought by the heirs of a deceased resident who
obtained nursing home services at Parkway Place. The Company managed Parkway
Place for Buckner through December 31, 2001. The Company and Buckner vigorously
denied any wrongdoing occurred in the treatment of the deceased.
The Company has other pending claims incurred in the course of business. Most of
these claims are believed by management to be covered by insurance, subject to
normal reservations of rights by the insurance companies and possibly subject to
certain exclusions in the applicable insurance policies. Whether or not covered
11
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
by insurance, these claims, in the opinion of management, based on advice of
legal counsel, should not have a material effect on the financial statements of
the Company if determined adversely to the Company.
5. NOTES PAYABLE
During the third quarter of fiscal 2002 the Company and Bank One, N.A. modified
the terms of the Company's line of credit with the lender. The new terms extend
the maturity date of the line of credit to January 15, 2006 and modify certain
loan covenants. The agreement also required the Company to begin making monthly
principal payments in addition to payments of interest commencing on August 1,
2002 and as a result the Company has classified $0.2 million to current portion
of notes payable.
Subsequent to the end of the third quarter of fiscal 2002, the Company completed
the renegotiation with GMAC of the mortgage loan on its Sedgwick Plaza
community. The new terms modified certain loan covenants. The mortgage loan has
a maturity date of September 1, 2005. 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 is classified as
restricted cash on the Company's balance sheet. Subsequent to the end of the
Company's third quarter of fiscal 2002, GMAC released $2.0 million of the
pledged cash and upon the Company achieving certain performance measures, all or
a portion of the remainder of the pledged cash may be released in fiscal 2003.
In addition, subsequent to the end of the third quarter, the Company
renegotiated the terms and extended the maturity on its $20 million note payable
to Newman Financial Services Inc. ("Newman") to October 15, 2004. The terms of
the new agreement with Newman require the Company to begin making quarterly
principal payments on one of its two promissory notes with Newman beginning on
January 15, 2003 and as a result the Company has classified $3.5 million to
current portion of notes payable.
6. MANAGEMENT AGREEMENTS
The Company's current management contracts expire on various dates through
September 2022 and provide for management fees based on 5% of net revenues. In
addition, certain of the contracts provide for supplemental incentive fees
and/or require subordination of a portion of the Company's management fee based
upon the financial performance of the managed community.
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 their 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 LCOR and the entities, which own the four senior living
communities to acquire LCOR's interests in these entities.
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 nine months ended September 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 September 30, 2002, the Company's revenue was derived as follows: 92.2%
from the operation of 14 owned senior living communities that are operated by
the Company; 5.9% from management fees arising from management services provided
for 24 affiliate owned senior living communities and five third party owned
senior living communities and 1.9% derived from development fees earned for
managing the development and construction of new senior living communities for
the Triad Entities.
For the nine months ended September 30, 2002, the Company's revenue was derived
as follows: 93.6% from the operation of 18 (14 after June 13, 2002) owned senior
living communities that are operated by the Company; 0.1% from lease rentals for
triple net leases; 4.9% from management fees arising from management services
provided for 24 affiliate owned senior living communities and ten (five after
April 1, 2002) third party owned senior living communities and 1.4% 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
September 2022 and provide for management fees based on 5% of net revenues. In
addition, certain of the contracts provide for supplemental incentive fees
and/or require subordination of a portion of the Company's management fee 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
13
CAPITAL SENIOR LIVING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
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. In the third quarter of
fiscal 2002, HCP recorded a $0.5 million writedown on the carrying value of its
remaining community.
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 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, 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 Nine Months Ended
September 30, September 30,
--------------------------------------- ----------------------------------------
2002 2001 2002 2001
---------------------------------- ------------------- ------------------- -------------------- -------------------
$ % $ % $ % $ %
---------- -------- --------- --------- ---------- --------- ---------- --------
Revenues:
Resident and healthcare
revenue................... $ 13,401 92.2 $ 15,123 89.0 $44,309 93.6 $47,262 88.4
Rental and lease income... -- -- 916 5.4 37 0.1 3,053 5.7
Unaffiliated management
service revenue........... 258 1.8 446 2.6 836 1.8 1,478 2.8
Affiliated management
service revenue........... 609 4.1 449 2.6 1,463 3.1 1,269 2.4
Unaffiliated development
fees...................... -- -- -- -- -- -- 40 0.1
Affiliated development fees 273 1.9 63 0.4 672 1.4 341 0.6
---------- -------- --------- --------- ---------- --------- ---------- --------
Total revenue............. 14,541 100.0 16,997 100.0 47,317 100.0 53,443 100.0
Expenses:
Operating expenses........ 8,148 56.0 9,407 55.4 25,802 54.5 28,386 53.1
General and administrative
expenses............... 2,945 20.3 3,110 18.3 9,060 19.1 9,705 18.2
Depreciation and
amortization........... 1,327 9.1 1,738 10.2 4,507 9.5 5,234 9.8
---------- -------- --------- --------- ---------- --------- ---------- --------
.. Total expenses 12,420 85.4 14,255 83.9 39,369 83.2 43,325 81.1
---------- -------- --------- --------- ---------- --------- ---------- --------
Income from operations ........ 2,121 14.6 2,742 16.1 7,948 16.8 10,118 18.9
Other income (expense):
Interest income........... 1,521 10.5 1,616 9.5 4,384 9.3 4,749 8.9
Interest expense.......... (2,489) (17.1) (3,743) (22.0) (8,065) (17.0) (11,835) (22.1)
Equity in the gains
(losses) of affiliates.... 14 0.1 (62) (0.4) 45 0.1 (398) (0.7)
Gain on sales of assets... -- -- 2,425 14.3 1,929 4.1 2,425 4.5
---------- -------- --------- --------- ---------- --------- ---------- --------
Income before income taxes
minority interest in
consolidated partnership
and extraordinary charge.. 1,167 8.0 2,978 17.5 6,241 13.2 5,059 9.5
Provision for income taxes (543) (3.7) (724) (4.2) (2,127) (4.5) (1,354) (2.5)
---------- -------- --------- --------- ---------- --------- ---------- --------
Income before minority interest
in consolidated partnership
and extraordinary charge....... 624 4.3 2,254 13.3 4,114 8.7 3,705 7.0
Minority interest in consolidated
Partnership.............. 264 1.8 (1,072) (6.3) (637) (1.3) (1,493) (2.8)
---------- -------- --------- --------- ---------- --------- ---------- --------
Net income before extraordinary
charge......................... 888 6.1 1,182 7.0 3,477 7.3 2,212 4.1
Extraordinary charge, net of
minority interest and income tax
benefit of $187 and $94,
respectively................... -- -- (153) (0.9) -- -- (153) (0.3)
---------- -------- --------- --------- ---------- --------- ---------- --------
Net income..................... $ 888 6.1 $ 1, 029 6.1 $3,477 7.3 $2,059 3.9
========== ======== ========= ========= ========== ========= ========== ========
CAPITAL SENIOR LIVING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Three Months Ended September 30, 2002 Compared to the Three Months Ended
September 30, 2001
Revenues. Total revenues were $14.5 million in the three months ended September
30, 2002 compared to $17.0 million for the three months ended September 30,
2001, representing a decrease of $2.5 million or 14.4%. This decrease in revenue
is primarily the result of a $1.7 million decrease in resident and healthcare
revenue, a decrease of $0.9 million in rental and lease income and a decrease in
unaffiliated management services revenue of $0.2 million offset by an increase
in affiliated management services revenue of $0.1 million and an increase in
affiliated development fees of $0.2 million. The decrease in resident and
healthcare revenue reflects the loss of revenue from the Cambridge community of
$0.1 million, which was sold in August 2001, along with a loss of revenue on the
15
four communities contributed to BRE/CSL of approximately $2.8 million offset by
an overall increase in revenue at the Company's other communities of
approximately $1.2 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. Unaffiliated management services revenue decreased by $0.2 million
primarily as a result of the termination of the Company's management contracts
with Buckner.
Expenses. Total expenses were $12.4 million in the third quarter of fiscal 2002
compared to $14.3 million in the third quarter of fiscal 2001, representing a
decrease of $1.9 million or 12.9%. This decrease in expenses is the result of a
$1.3 million decrease in operating expenses, a $0.2 million decrease in general
and administrative expenses and a decrease in depreciation expense of $0.4
million. This reduction in expenses primarily results from the sale of the
Cambridge community and the contribution of the four communities to BRE/CSL.
Operating expenses in fiscal 2002 included a $0.5 million writedown on the
carrying value of HCP's community that is held for sale.
Other income and expense. Interest expense decreased $1.2 million to $2.5
million in the third quarter of 2002 compared to $3.7 million in the third
quarter of 2001. This 33.5% decrease in interest expense is the result of lower
interest rates on the Company's variable rate loans and lower debt outstanding
in the current year primarily from the repayment of debt related to the four
communities contributed to BRE/CSL. 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 gain on
sales of properties of $2.4 million in fiscal 2001 resulted from the sale of the
Cambridge community owned by HCP along with another small facility owned by HCP.
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 third quarter of
fiscal 2002 was $0.5 million or 37.9% of taxable income, compared to $0.7
million or 38.0% of taxable income in the comparable quarter for 2001. The
effective tax rates for the third 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 third
quarter of fiscal 2002 compared to net income at HCP in the third quarter of
fiscal 2001 primarily from the sale of the Cambridge community and another small
facility owned by HCP.
Net income. As a result of the foregoing factors, net income decreased to $0.9
million for the three months ended September 30, 2002, as compared to $1.0
million for the three months ended September 30, 2001.
Nine Months Ended September 30, 2002 Compared to the Nine Months Ended September
30, 2001
Revenues. For the nine months ended September 30, 2002, total revenues were
$47.3 million compared to $53.4 million for the nine months ended September 30,
2001, representing a decrease of $6.1 million or 11.5%. This decrease in revenue
is primarily the result of a $3.0 million decrease in resident and healthcare
revenue, a decrease of $3.0 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 $0.3 million. The decrease in resident and healthcare revenue
reflects the loss of revenue from the Cambridge community of $2.9 million, which
was sold in August 2001, along with a loss of revenue on the four communities
16
CAPITAL SENIOR LIVING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
contributed to BRE/CSL of approximately $3.0 million offset by an overall
increase in revenue at the Company's other communities of approximately $2.9
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.
The increase in development fee income results from fees earned on the
completion of two communities for Triad IV.
Expenses. Total expenses decreased $4.0 million or 9.1% to $39.3 million in the
first nine months of fiscal 2002 compared to $43.3 million in the first nine
months of fiscal 2001. This decrease in expenses is the result of a $2.6 million
decrease in operating expenses, a $0.7 million decrease in general and
administrative expenses and a decrease in depreciation expense of $0.7 million.
This reduction in expenses primarily results from the sale of the Cambridge
community and the contribution of the four communities to BRE/CSL. Operating
expenses in fiscal 2002 included a $0.5 million writedown on the carrying value
of HCP's community that is held for sale.
Other income and expense. Interest expense decreased $3.7 million to $8.1
million in the first nine months of 2002 compared to $11.8 million in the first
nine months of 2001. This 31.9% decrease in interest expense is the result of
lower interest rates on the Company's variable rate loans and lower debt
outstanding in the current year primarily from the repayment of debt related to
the four communities contributed to BRE/CSL. 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 in fiscal 2002 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. The gain on sales of
properties of $2.4 million in fiscal 2001 resulted from the sale of the
Cambridge community owned by HCP along with another small facility owned by HCP.
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 nine months
of fiscal 2002 was $2.1 million or 38.0% of taxable income, compared to $1.4
million or 38.0% of taxable income in the comparable period of fiscal 2001. The
effective tax rates for the first nine months of fiscal 2002 and 2001 differ
from the statutory tax rates because of state income taxes and permanent tax
differences.
Minority interest. The reduction in minority interest of $0.9 million in the
first nine months of fiscal 2002 compared to the prior year is primarily due to
the sale of the Cambridge community and another small facility owned by HCP
during the third quarter of fiscal 2001.
Extraordinary charge. The Company recognized an extraordinary charge, net of
minority interest and income tax benefit, of $0.2 million in fiscal 2001. This
charge resulted from a loan foreclosure on HCP's McCurdy community.
Net income. As a result of the foregoing factors, net income increased $1.4
million to $3.5 million for the nine months ended September 30, 2002, as
compared to $2.1 million for the nine months ended September 30, 2001.
17
CAPITAL SENIOR LIVING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Liquidity and Capital Resources
In addition to approximately $10.5 million of cash balances on hand as of
September 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 $10.5 million in cash balances, $0.8 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,
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 $2.6 million and
$7.2 million in the first nine months of fiscal 2002 and 2001, respectively. In
the first nine months of fiscal 2002, the net cash provided by operating
activities was primarily derived from net income of $3.5 million, net non-cash
charges of $3.7 million, a decrease in other assets of $0.3 million, a decrease
in federal and state income tax receivable of $0.4 million, an increase in
accounts payable and accrued expenses of $2.0 million offset by an increase in
interest receivable of $4.0 million, an increase in prepaid expenses of $3.2
million and a decrease in customer deposits of $0.1 million. In the first nine
months of fiscal 2001, the net cash provided by operating activities was
primarily derived from net income of $2.1 million, net non-cash charges of $5.5
million, a decrease in accounts receivable of $3.3 million, a decrease in income
tax receivable of $1.6 million, a reduction of notes receivable of $0.6 million
and a decrease in customer deposits of $0.1 million, offset by an increase in
interest receivable of $3.1 million, an increase in prepaid expenses of $1.3
million, an increase in other assets of $1.1 million and a decrease in accounts
payable and accrued expenses of $0.5 million.
The Company had net cash provided by investing activities of $6.5 million in the
first nine months of fiscal 2002 compared to net cash used in investing
activities of $11.1 million in the first nine months of fiscal 2001. In the
first nine 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 $7.1
million from the NHP Pension Note redemption and distributions from BRE/CSL
offset by advances to the Triad Entities of $11.7 million and capital
expenditures of $1.4 million. In the first nine months of fiscal 2001, the
Company's net cash used in investing activities was primarily the result of
advances to the Triad Entities of $13.1 million and capital expenditures of $1.9
million, offset by proceeds from the sale of assets of $3.6 million and
distributions from limited partnerships of $0.3 million.
The Company had net cash used in financing activities of $8.5 million and $9.2
million in first nine months of fiscal 2002 and 2001, respectively. Net cash
used in financing activities in the first nine months of fiscal 2002 resulted
primarily from repayment of notes payable of $5.1 million, cash restricted under
loan agreements of $5.4 million, distributions to minority partners of $2.1
million and deferred loan charges paid of $0.2 million offset by proceeds from
the issuance of notes payable of $4.2 million. For the first nine months of
fiscal 2001, net cash used in financing activities was primarily the result of
repayment of notes payable of $4.4 million, cash restricted by loan
modifications of $2.1 million and distribution to minority partners of $5.9
million, offset by proceeds from notes payable of $3.2 million.
18
CAPITAL SENIOR LIVING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
During the third quarter of fiscal 2002, the Company and Bank One, N.A. modified
the terms of the Company's line of credit with the lender. The new terms extend
the maturity date of the line of credit to January 15, 2006 and modify certain
loan covenants. The agreement also required the Company to begin making monthly
principal payments in addition to payments of interest commencing on August 1,
2002 and as a result the Company has classified $0.2 million to current portion
of notes payable.
Subsequent to the end of the third quarter of fiscal 2002, the Company completed
the renegotiation with GMAC of the mortgage loan on its Sedgwick Plaza
community. The new terms modified certain loan covenants. The mortgage loan has
a maturity date of September 1, 2005. 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 is classified as
restricted cash on the Company's balance sheet. Subsequent to the end of the
Company's third quarter of fiscal 2002, GMAC released $2.0 million of the
pledged cash and upon the Company achieving certain performance measures, all or
a portion of the remainder of the pledged cash may be released in fiscal 2003.
In addition, subsequent to the end of the third quarter, the Company
renegotiated the terms and extended the maturity on its $20 million note payable
to Newman to October 15, 2004. The terms of the new agreement with Newman
require the Company to begin making quarterly principal payments on one of its
two promissory notes with Newman beginning on January 15, 2003 and as a result
the Company has classified $3.5 million to current portion of notes payable.
The Company derives the benefits and bears the risks attendant to the
communities it owns. The cash flows and profitability of owned communities
depends on the operating results of such communities and are subject to certain
risks of ownership, including the need for capital expenditures, financing and
other risks such as those relating to environmental matters.
The 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.
The Company's current management contracts expire on various dates through
September 2022 and provide for management fees based on 5% of net revenues. In
addition, certain of the contracts provide for supplemental incentive fees
and/or require subordination of a portion of the Company's management fee based
upon the financial performance of the managed 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.
19
CAPITAL SENIOR LIVING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
On March 1, 2002, affiliates of LCOR notified the Company of their 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 LCOR and the
entities, which own the four senior living communities to acquire LCOR's
interests in these entities.
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 had loan commitments to the Triad Entities for
construction and pre-marketing expenses, in addition to requirements to fund the
Triad Entities' operating deficits through 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. In addition, the
Company entered into a support agreement with the Triad Entities during the
third quarter, whereby, each of Triad II, Triad III, Triad IV and Triad V agreed
to loan excess cash flow of such Triad to any one or more of Triad I, Triad II,
Triad III, Triad IV and Triad V. 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 support agreement, factors within its control
and 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,
including Triad Entities, 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.
20
CAPITAL SENIOR LIVING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
The following table sets forth, as of September 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
----------------------------------------------------------- --------------------------
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% -- $ -- $14,680 $ 75 $ 291
Triad Senior
Living II, L.P. Sept. 25,
(Triad II) -- 15,000 8.0% 2003 15,000 6,180 113 149
Triad Senior
Living III, L.P. Feb. 8,
(Triad III) -- 15,000 8.0% 2004 15,000 9,290 123 292
Triad Senior
Living IV, L.P. Dec. 30,
(Triad IV) -- 10,000 8.0% 2003 9,998 -- 149 107
Triad Senior
Living V, L.P. June 30,
(Triad V) -- 10,000 8.0% 2004 4,882 -- 29 25
The Company continues to classify its notes receivable from Triad II as
long-term as the Company expects to extend the maturity date of its notes
receivable with Triad II.
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 partners in the Triad Entities, except Triad I, for an
amount equal to the amount paid for the partnership interest by the other
partners, plus a noncompounded return of 12% per annum. In addition, each Triad
Entity except Triad I provides the Company with an option, but not the
obligation, to purchase the communities developed by the applicable partnership
upon their completion for an amount equal to the fair market value (based on a
third-party appraisal but not less than hard and soft costs and lease-up costs)
of the applicable community.
The Company has the option to purchase the Triad I communities for an amount
specified in the partnership agreement. Furthermore, Lehman has agreed to
withdraw as a partner in the Triad I partnership to the extent it has received,
on or before November 1, 2004, distributions in an amount equal to its capital
contributions.
The Company is currently reviewing its purchase options relating to the Triad
Entities but 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.
21
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/permanent loan facilities
entered into by each of the Triad Entities as of September 30, 2002 (dollars in
thousands):
Number of Amount
Entity Communities Commitment Outstanding Type Lender
-------------------- ----------- ---------- ----------- ---------- ---------------
Triad I 7 $50,000 $48,647 take-out GMAC
Key Corporate
Triad II 3 $26,900 $26,473 mini-perm Capital, Inc.
Triad III 6 $56,300 $56,270 mini-perm Guaranty Bank
Triad IV 2 $18,600 $18,404 construction; Compass Bank
mini-perm
Triad V 1 $ 8,903 $ 8,823 mini-perm Bank of America
Summary financial information regarding the financial position as of September
30, 2002 and December 31, 2001 and results of operations for the nine months
ended September 30, 2002 and 2001 of the Triad Entities is as follows (in
thousands):
Sept. 30, Dec. 31,
2002 2001
--------- ---------
Current assets........................... $ 4,139 $ 4,827
Property and equipment, net.............. 186,457 188,651
Other assets............................. 10,983 8,662
Total assets......................... $ 201,579 $202,140
Current liabilities...................... $ 15,101 $ 17,374
Long-term debt........................... 226,245 208,991
Other long-term liabilities.............. -- 21
Partnership deficit...................... (39,767) (24,246)
Total liabilities and partnership
deficit.................................. $ 201,579 $202,140
22
CAPITAL SENIOR LIVING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Nine Months Ended
Sept. 30, Sept. 30,
2002 2001
--------- ---------
Net revenue.............................. $ 19,185 $ 11,901
Operating and general & administrative... 21,208 17,232
Depreciation............................. 4,130 3,792
Operating loss........................... (6,153) (9,123)
Net loss................................. (15,521) (18,546)
The Company formed a joint venture BRE/CSL with an affiliate of 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 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, 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. The Company has deferred $34,000 of management fee income
as a result of its 10% interest in the BRE/CSL joint venture.
The Company continues to analyze the extent to which its operations are covered
by Health Insurance Portability and Accountability Act ("HIPAA"). Compliance
with these rules could impose significant costs and administrative burdens on
the Company depending upon the extent to which its operations are covered by
HIPAA.
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,
availability of insurance at commercially reasonable rates, and changes in
23
CAPITAL SENIOR LIVING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
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.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company's primary market risk is exposure to changes in interest rates on
debt instruments. As of September 30, 2002 the Company had $151.3 million in
outstanding debt comprised of various fixed and variable rate debt instruments
of $54.6 million and $96.7 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 increase 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.
Item 4. CONTROLS AND PROCEDURES.
The Company's management, including its Chief Executive Officer and Chief
Financial Officer, after evaluating the effectiveness of the Company's
disclosure controls and procedures (as defined in Rules 13a-14(c) and 15-d-14(c)
under the Securities Exchange Act of 1934) as of a date (the "Evaluation Date"),
which was within 90 days of this quarterly report on Form 10-Q, have concluded
in their judgment that, as of the Evaluation Date, the Company's disclosure
controls and procedures were adequate and designed to ensure that material
information relating to the Company and its subsidiaries would be made known to
them.
There were no significant changes in the Company's internal controls or, to its
knowledge, in other factors that could significantly affect its disclosure
controls and procedures subsequent to the Evaluation Date.
24
CAPITAL SENIOR LIVING CORPORATION
Part II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
On or about October 23, 1998, Robert Lewis filed a putative class action
complaint on behalf of certain holders of assignee interests (the "Assignee
Interests") in NHP Retirement Housing Partners I Limited Partnership ("NHP") in
the Delaware Court of Chancery, 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").
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 sought, among other relief, rescission of the 1998
Transaction and unspecified damages. 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 December 6, 2001, Leonard
Kalmenson filed a motion to intervene in the Delaware Action on 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.
On October 18, 2002, the Delaware Court of Chancery entered a Final Order and
Judgment (i) certifying a class consisting of all record and beneficial holders
of Assignee Interests of NHP as of September 30, 1998 or any time thereafter,
(ii) approving as fair, reasonable and adequate a settlement of the Delaware
Action calling for the creation of a settlement fund in the amount of
approximately $0.8 million, (iii) dismissing the Delaware Action with prejudice
and releasing, among other things, all the claims asserted therein, and (iv)
awarding attorneys' fees and expenses in the amount of $0.3 million to be paid
from the settlement fund to counsel for the class. NHP previously contributed
$0.3 million to the creation of the settlement fund, which is 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 was contributed by various insurance brokers and
agents, and their insurers, in connection with the resolution of certain claims
for coverage under the D&O Policy. In accordance with the settlement,
approximately $0.6 million (the amount of the settlement fund minus the award
for attorneys' fees and expenses) will be distributed to the class of Assignee
Holders on a pro rata basis after the settlement becomes final.
On October 9, 2002, the Company entered into a settlement agreement (the
"Agreement") with Buckner relating to the Company's claim for reimbursement of
health care expenses pursuant to the Management Agreement between the parties.
Pursuant to the Agreement, Buckner waived any claims against the Company for
early termination by the Company of its Management Agreement with Buckner at the
Parkway Place facility and additionally agreed to pay certain damages to the
Company.
In the third quarter, the insurance carriers of Buckner and the Company settled
a claim, at no cost to the Company, on the behalf of the Company (and two of its
management subsidiaries), Buckner, and a related Buckner entity who had been
named as defendants in a lawsuit brought by the heirs of a deceased resident who
obtained nursing home services at Parkway Place. The Company managed Parkway
Place for Buckner through December 31, 2001 The Company and Buckner vigorously
denied any wrongdoing occurred in the treatment of the deceased.
The Company has other pending claims incurred in the course of business. Most of
these claims are believed by management to be covered by insurance, subject to
normal reservations of rights by the insurance companies and possibly subject to
certain exclusions in the applicable insurance policies. Whether or not
25
CAPITAL SENIOR LIVING CORPORATION
OTHER INFORMATION (continued)
covered by insurance, these claims, in the opinion of management, based on
advice of legal counsel, should not have a material effect on the financial
statements of the Company if determined adversely to the Company.
Item 2. CHANGES IN SECURITIES (and use of proceeds)
Not Applicable
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
Item 5. OTHER INFORMATION
Not Applicable
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits:
10.99 Third Amendment to Promissory Note and Loan Agreement
dated October 15, 2002 by and between Capital Senior
Living ILM -B, Inc. and Newman Financial Services,
Inc. (Newman Pool B loan).
10.100 Third Amendment to Promissory Note and Loan Agreement
dated October 15, 2002 by and between Capital Senior
Living ILM -C, Inc. and Newman Financial Services,
Inc. (Newman Pool C loan).
10.101 Omnibus Modification Agreement dated September 25,
2002 by and between Capital Senior Living Properties,
Inc. and Bank One N.A.
10.102 Support Agreement dated as of September 11, 2002 by
and between Capital Senior Living, Inc. Triad I,
Triad II, Triad, III, Triad IV and Triad V.
10.103 Form of Amendments to Loan Agreement, Promissory
Note, Mortgage and Guaranty between GMAC and Capital
entities owning Sedgwick, Canton Regency and Towne
Center property.
10.104 Amended and Restated Account Control Agreement with
GMAC relating to Sedgwick property.
10.105 Amendment No. 1 to Second Amended and Restated
Agreement of Limited Partnership of Triad Senior
Living I, L.P.
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
September 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: November 11, 2002
CAPITAL SENIOR LIVING CORPORATION
September 30, 2002
CERTIFICATIONS
I, Lawrence A. Cohen, Chief Executive Officer of Capital Senior Living
Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Capital Senior
Living Corporation ("Registrant");
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations, and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date.
5. The Registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the Registrant's auditors and the
audit committee of the Registrant's board of directors:
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the Registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The Registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
/s/ Lawrence A. Cohen
------------------------------
Lawrence A. Cohen
Chief Executive Officer
November 11, 2002
CAPITAL SENIOR LIVING CORPORATION
September 30, 2002
CERTIFICATIONS
I, Ralph A. Beattie, Chief Financial Officer of Capital Senior Living
Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Capital Senior
Living Corporation ("Registrant");
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations, and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date.
5. The Registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the Registrant's auditors and the
audit committee of the Registrant's board of directors:
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the Registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The Registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
/s/ Ralph A. Beattie
---------------------------
Ralph A. Beattie
Executive Vice President
Chief Financial Officer
November 11, 2002