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 March 31, 2003
[ ] 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 mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No
---- ----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes No x
---- ----
As of May 13, 2003, the Registrant had outstanding 19,737,837 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 - -
March 31, 2003 and December 31, 2002 3
Consolidated Statements of Income - -
Three Months Ended March 31, 2003 and 2002 4
Consolidated Statements of Cash Flows - -
Three Months Ended March 31, 2003 and 2002 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 21
Item 4. Controls and Procedures 21
Part II. Other Information
Item 1. Legal Proceedings 22
Item 6. Exhibits and Reports on Form 8-K 22
Signature
Certifications
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CAPITAL SENIOR LIVING CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands)
March 31, December 31,
2003 2002
------------ ---------
(Unaudited) (Note 1)
ASSETS
Current assets:
Cash and cash equivalents..................................... $ 5,225 $ 11,768
Restricted cash............................................... 4,490 4,490
Accounts receivable, net...................................... 1,510 1,461
Accounts receivable from affiliates........................... 412 218
Federal and state income taxes receivable..................... 893 1,171
Deferred taxes................................................ 461 399
Assets held for sale.......................................... 739 --
Prepaid expenses and other.................................... 694 1,164
--------- ---------
Total current assets.................................. 14,424 20,671
Property and equipment, net..................................... 152,789 153,544
Deferred taxes.................................................. 6,943 7,106
Due from affiliates............................................. 386 513
Notes receivable from affiliates................................ 90,878 86,470
Investments in limited partnerships............................. 1,297 1,238
Assets held for sale............................................ 3,392 4,131
Other assets, net............................................... 4,617 4,578
--------- ---------
Total assets.......................................... $ 274,726 $ 278,251
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................................. $ 1,971 $ 2,322
Accrued expenses.............................................. 3,558 4,638
Current portion of notes payable.............................. 7,863 9,715
Customer deposits............................................. 1,015 1,023
---------- ----------
Total current liabilities............................. 14,407 17,698
Deferred income................................................. -- 7
Deferred income from affiliates................................. 1,058 1,194
Notes payable, net of current portion........................... 139,145 140,385
Minority interest in consolidated partnership................... 631 686
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.01 par value:
Authorized shares -- 15,000; no shares issued or outstanding -- --
Common stock, $.01 par value:
Authorized shares -- 65,000
Issued and outstanding shares-- 19,738 and 19,737
at March 31, 2003 and December 31, 2002, respectively.... 197 197
Additional paid-in capital.................................... 91,993 91,990
Retained earnings............................................. 27,295 26,094
---------- ----------
Total shareholders' equity............................ 119,485 118,281
---------- ----------
Total liabilities and shareholders' equity............ $ 274,726 $ 278,251
========== ==========
See accompanying notes.
3
CAPITAL SENIOR LIVING CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except earnings per share)
Three Months Ended March 31,
2003 2002
--------------- ---------------
(Unaudited) (Unaudited)
Revenues:
Resident and healthcare revenue................ $ 13,208 $ 15,579
Rental and lease income........................ -- 37
Unaffiliated management services revenue....... 295 366
Affiliated management services revenue......... 910 410
Affiliated development fees.................... 68 183
---------- ---------------
Total revenues............................. 14,481 16,575
Expenses:
Operating expenses............................. 7,624 8,772
General and administrative expenses............ 2,716 3,157
Depreciation and amortization.................. 1,347 1,646
---------- ---------------
Total expenses............................. 11,687 13,575
---------- ---------------
Income from operations............................... 2,794 3,000
Other income (expense):
Interest income................................ 1,637 1,429
Interest expense............................... (2,593) (2,828)
Equity in the earnings of affiliates........... 53 11
Gain on sale of properties..................... -- 2,283
---------- ---------------
Income before income taxes and minority interest in
consolidated partnership....................... 1,891 3,895
Provision for income taxes........................... (745) (1,124)
---------- ---------------
Income before minority interest in consolidated
partnership.................................... 1,146 2,771
Minority interest in consolidated partnership........ 55 (960)
---------- ---------------
Net income........................................... $ 1,201 $ 1,811
========== ===========
Net income per share:
Basic.......................................... $ 0.06 $ 0.09
========= ===========
Diluted........................................ $ 0.06 $ 0.09
========= ===========
Weighted average shares outstanding - basic.... 19,738 19,718
========== ===============
Weighted average shares outstanding - diluted.. 19,862 20,022
========== ===============
See accompanying notes.
4
CAPITAL SENIOR LIVING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Three Months Ended March 31,
2003 2002
------------ --------
Operating Activities
Net income....................................................... $ 1,201 $ 1,811
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation................................................... 1,347 1,646
Amortization of deferred financing charges..................... 253 202
Minority interest in consolidated partnership.................. (55) 960
Deferred income from affiliates................................ (136) (122)
Deferred income................................................ (7) 28
Deferred income taxes.......................................... 101 100
Equity in the earnings of affiliates........................... (53) (11)
Gain on sale of properties..................................... -- (2,283)
Changes in operating assets and liabilities, net of
acquisitions:
Accounts receivable.......................................... (49) (1,899)
Accounts receivable from affiliates.......................... (194) (555)
Prepaid expenses and other................................... 470 849
Other assets................................................. (292) --
Accounts payable and accrued expenses........................ (1,431) 792
Federal and state income taxes receivable.................... 279 879
Customer deposits............................................ (8) (153)
----------- ------------
Net cash provided by operating activities........................ 1,426 2,244
Investing Activities
Capital expenditures............................................. (592) (362)
Proceeds from sale of assets..................................... -- 4,396
Advances to affiliates........................................... (4,330) (6,356)
Proceeds from limited partnerships............................... 43 5,552
----------- ------------
Net cash (used in) provided by investing activities.............. (4,879) 3,230
Financing Activities
Repayments of notes payable...................................... (3,092) (1,782)
Cash proceeds from the exercise of stock options................. 2 4
Distributions to minority partners............................... -- (1,348)
----------- ------------
Net cash used in financing activities............................ (3,090) (3,126)
----------- ------------
(Decrease) increase in cash and cash equivalents................. (6,543) 2,348
Cash and cash equivalents at beginning of period................. 11,768 9,975
----------- ------------
Cash and cash equivalents at end of period....................... $ 5,225 $ 12,323
=========== ============
Supplemental Disclosures
Cash paid during the period for:
Interest....................................................... $ 2,346 $ 2,606
=========== ============
Income taxes................................................... $ 439 $ 381
=========== ============
See accompanying notes.
5
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
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, 2002, has been
derived from audited consolidated financial statements of the Company for the
year ended December 31, 2002, and the accompanying unaudited consolidated
financial statements, as of March 31, 2003 and 2002, 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, 2002 included in the Company's
Annual Report on Form 10-K filed with the Securities and Exchange Commission on
March 28, 2003.
In the opinion of the Company, the accompanying consolidated financial
statements contain all adjustments (all of which were normal recurring accruals)
necessary to present fairly the Company's financial position as of March 31,
2003, and results of operations and cash flows for the three months ended March
31, 2003 and 2002. The results of operations for the three months ended March
31, 2003 are not necessarily indicative of the results for the year ending
December 31, 2003.
In January 2003, the Financial Accounting Standards Board issued FASB
Interpretation No. 46 "Consolidation of Variable Interest Entities" an
interpretation of ARB No. 51, effective immediately for variable interest
entities created after January 31, 2003 and effective for the first fiscal year
or interim period beginning after June 15, 2003 for variable interest entities
that existed prior to February 1, 2003. The Company will adopt the provisions of
this interpretation in the third quarter of 2003, and its adoption will result
in the Company consolidating the financial statements of the five partnerships
affiliated with Triad Senior Living, Inc. (the "Triad Entities"), currently
accounted for separately under the equity method of accounting. The Company
expects the implementation of FASB Interpretation No. 46 will have a material
effect on the Company's earnings and financial position. However, see Note 2 for
a description of the Company's agreements to purchase the partnership interests
in Triads II, III, IV and V owned by non-Company parties.
2. TRANSACTIONS WITH AFFILIATES
Triad Entities: The Triad Entities own and finance the construction of new
senior living communities. The Company entered into development and management
agreements with the Triad Entities for the development and management of senior
living communities. These communities are primarily Waterford communities. The
development of senior living communities typically involves a substantial
commitment of capital over an approximate 12-month construction period, during
which time no revenues are generated, followed by a 24 to 36 month lease up
period.
The Company has opened, in connection with its management agreements, seventeen
new Waterford and Wellington communities and two expansions in the last four
years pursuant to arrangements with the Triad Entities. 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 defers
1% of its interest income, development fee income and management fee income
earned from the Triad Entities. As of March 31, 2003, the Company had deferred
income of $1.0 million relating to the Triad Entities.
The Company has loan commitments to the Triad Entities for construction and
pre-marketing expenses, in addition to requirements to fund the Triad Entities'
operating deficits through operating deficit guarantees provided for in its
management agreements with the Triad Entities and other advances, totaling $89.6
million at March 31, 2003. The Company evaluates the carrying value of these
receivables by comparing the cash flows expected from the operations of the
6
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Triad Entities to the carrying value of the receivables. These cash flow models
consider lease-up rates, expected operating costs, debt service requirements and
various other factors. The Company entered into a support agreement with the
Triad Entities, 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 that the carrying value of the notes receivable are fully
recoverable, 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 the Company's operating experience.
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.
The following table sets forth, as of March 31, 2003, 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. March 31,
(Triad I) $ -- $13,000 8.0% 2008 $13,000 $4,913 $ 38 $ 225
Triad Senior
Living II, L.P. March 31,
(Triad II) -- 15,000 8.0 2008 15,000 10,471 58 125
Triad Senior
Living III, L.P. March 31,
(Triad III) -- 26,000 8.0 2008 26,000 3,095 82 247
Triad Senior
Living IV, L.P. March 31,
(Triad IV) -- 10,000 8.0 2008 10,000 1,618 84 95
Triad Senior
Living V, L.P. March 31,
(Triad V) -- 10,000 8.0 2008 5,473 -- 16 22
The Company could be required in the future to revise the terms of its notes
with the Triad Entities to extend the maturity dates, change the interest rate
earned on the notes or modify other terms and conditions of the notes.
The Company has typically received 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 were recorded over the term of the development project on a
basis approximating the percentage of completion method. In addition, when the
properties became 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. See below for a description of the Company's
agreements to purchase the partnership interests in Triads II, III, IV and V
owned by non-Company parties.
7
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The Company has the option, but not the obligation, to purchase the Triad I
communities for an amount specified in the partnership agreement. Furthermore,
Lehman Brothers 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 of $12.4 million.
In January 2003, the Financial Accounting Standards Board issued FASB
Interpretation No. 46 "Consolidation of Variable Interest Entities" an
interpretation of ARB No. 51, effective immediately for variable interest
entities created after January 31, 2003 and effective for the first fiscal year
or interim period beginning after June 15, 2003 for variable interest entities
that existed prior to February 1, 2003. The Company will adopt the provisions of
this interpretation in the third quarter of 2003, and its adoption will result
in the Company consolidating the financial statements of the Triad Entities,
currently accounted for separately under the equity method of accounting. The
Company expects the implementation of FASB Interpretation No. 46 will have a
material effect on the Company's earnings and financial position. However, see
below for a description of the Company's agreements to purchase the partnership
interests in Triads II, III, IV and V owned by non-Company parties.
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.
The Company's 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 March 31, 2003 (dollars in
thousands):
Loan Facilities to Triads
---------------------------------------------------
Number of Amount
Entity Communities Commitment Outstanding Type Lender
------ ----------- ---------- ----------- ---- ------
Triad I 7 $50,000 $48,250 take-out GMAC
Triad II 3 $26,900 $26,165 mini-perm Key Corporate
Capital, Inc.
Triad III 6 $56,300 $56,270 mini-perm Guaranty Bank
Triad IV 2 $18,600 $18,591 mini-perm Compass Bank
Triad V 1 $ 8,903 $ 8,742 mini-perm Bank of America
At December 31, 2002, Triad II was in violation of a certain financial covenant
with its lender. The lender and Triad II subsequently signed a loan modification
in March 2003.
The Company has recently made the election to exercise its options to purchase
the partnership interests owned by non-Company parties in the Triad Entities,
with the exception of Triad I. The Company and the other partners of the Triad
Entities, with the exception of Triad I, entered into Partnership Interest
Purchase Agreements ("Purchase Agreements") on March 25, 2003, whereby the
Company will purchase the partnership interests of the general partners and the
other third party limited partners for an aggregate of approximately $1.7
million. Upon completion of these transactions, which the Company expects to
take place during the third fiscal quarter of 2003, the Company will wholly own
each of the Triad Entities, other than Triad I. The Company will treat these
transactions as a purchase of real estate and therefore does not expect any
8
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
goodwill or other intangibles to be recognized related to these transactions.
The Purchase Agreements are subject to customary terms and conditions.
Summary financial information regarding the financial position of the Triad
Entities as of March 31, 2003 and 2002 and results of operations for the three
months ended March 31, 2003 and 2002 of the Triad Entities is presented below.
The Company is also presenting unaudited pro forma financial information as if
the Company's purchase of the Triad Entities (except Triad I) were effective
January 1, 2003. In addition, the unaudited pro forma financial information
includes consolidating Triad I as if the provisions of FASB Interpretation No.
46 were effective January 1, 2003. Beginning in the third quarter of 2003, FASB
Interpretation No. 46 will require the Company to consolidate the financial
position and results of operation of Triad I with the Company's financial
information. The unaudited pro forma financial information, which may not be
indicative of future results, includes the elimination of significant
intercompany balances and assumes incomes taxes at a 39% effective tax rate (in
thousands):
Company
Triad Entities Pro Forma
Mar. 31, Mar. 31, Mar. 31,
2003 2002 2003
---------- ---------- ---------
Current assets........................... $ 4,641 $ 3,537 $ 18,786
Property and equipment, net.............. 183,765 189,009 385,155
Other assets............................. 11,018 9,895 31,855
--------- -------- ----------
Total assets......................... $ 199,424 $202,441 $ 435,796
========= ======== ==========
Current liabilities...................... $ 24,378 $ 13,110 $ 26,069
Long-term debt........................... 232,476 218,817 297,163
Other long-term liabilities.............. -- -- 697
Partnership deficit / shareholders'
equity................................... (57,430) (29,486) 111,867
--------- -------- ----------
Total liabilities and partnership
deficit / shareholders' equity....... $ 199,424 $202,441 $ 435,796
========= ======== ==========
Mar. 31, Mar. 31, Mar. 31,
2003 2002 2003
----------- ----------- ----------
Net revenue.............................. $ 8,364 $ 5,677 $ 22,845
Operating and general & administrative... 7,851 6,530 18,190
Depreciation............................. 1,398 1,391 2,745
Operating (loss) income.................. (885) (2,244) 1,910
Net loss................................. (4,402) (5,240) (1,790)
The unaudited pro forma consolidated amounts are presented for informational
purposes only and do not necessarily reflect the financial position or results
of operations of the Company that would have actually occurred had the
transactions occurred on January 1, 2003.
BRE/CSL: The Company formed two joint ventures ("BRE/CSL") with an affiliate of
Blackstone Real Estate Advisors ("Blackstone") in December 2001, and the joint
ventures 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 BRE/CSL. Each party must also contribute its pro rata
portion of the costs of any acquisition.
In December 2001, BRE/CSL 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 BRE/CSL. 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 BRE/CSL.
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 BRE/CSL, has a 10% equity interest in BRE/CSL of $1.2 million and wrote-off
$0.5 million in deferred loan costs, resulting in the recognition of a loss of
$0.5 million.
9
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The Company manages the five communities owned by BRE/CSL under long-term
management contracts. The Company accounts for the BRE/CSL investments under the
equity method of accounting. As of March 31, 2003 the Company has deferred
$65,000 of management fee income as a result of its 10% interest in the BRE/CSL
joint venture.
Spring Meadows Communities: During the fourth quarter of 2002, the Company
acquired the interest of affiliates of LCOR Incorporated ("LCOR") in four joint
ventures in which LCOR was a member, which joint ventures own four independent
and assisted living communities (the "Spring Meadows Communities"), from LCOR as
well as loans made by LCOR to the joint ventures for $0.9 million in addition to
funding $0.4 million to the ventures for working capital and anticipated
negative cash requirements of the communities. The Company's interests in the
four joint ventures which own the Spring Meadows Communities include interests
in certain loans to the ventures and an approximate 19% member interest in each
venture. The Company has managed the Spring Meadows Communities since the
opening of each community in late 2000 and early 2001 and will continue to
manage the communities under long-term management contracts. In addition, the
Company receives an asset management fee relating to each of the four
communities. The Company recorded its initial advances of $1.3 million to the
ventures as notes receivable as the amount assigned for the 19% member interests
were nominal. The Company accounts for its investment in the Spring Meadows
Communities under the equity method of accounting based on the provisions of the
partnership agreements. The Company has the obligation to fund certain future
operating deficits of the Spring Meadows Communities to the extent of its 19%
member interest.
3. NET INCOME PER SHARE AND STOCK OPTIONS
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
March 31,
2003 2002
------------ -------------
Net income $ 1,201 $ 1,811
Weighted average shares outstanding -
basic 19,738 19,718
Effect of dilutive securities:
Employee stock options 124 304
----------- -----------
Weighted average shares outstanding -
diluted 19,862 20,022
=========== ===========
Basic earnings per share $ 0.06 $ 0.09
=========== ===========
Diluted earnings per share $ 0.06 $ 0.09
=========== ===========
Options to purchase 1.0 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 first quarter of fiscal 2003 did not exceed the exercise price of the
options, and therefore, the effect would not be dilutive. For the first quarter
of fiscal 2002, options to purchase 0.8 million shares of common stock at prices
ranging from $4.14 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.
On January 16, 2003, the Company granted options to certain employees, to
purchase 22,000 shares of the Company's common stock at an exercise price of
$2.73. In addition, the Company issued 1,000 shares of common stock on March 17,
2003 pursuant to the exercise of stock options by certain employees of the
Company.
Pro forma information regarding net income per share has been determined as if
the Company had accounted for its employee stock options under the fair value
method. The fair value for these options was estimated at the date of grant
10
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
using the Black-Scholes option-pricing model. The Black-Scholes option valuation
model was developed for use in estimating the fair value of traded options that
have no vesting restrictions and are fully transferable. In addition, option
valuation models require the input of highly subjective assumptions including
the expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting periods.
Three Months Ended
March 31,
2003 2002
------------ -------------
Net income
As reported $ 1,201 $ 1,811
Less: fair value stock expense, net of
tax 188 186
----------- -----------
Pro forma 1,013 1,625
=========== ===========
Net income per share - basic
As reported $ 0.06 $ 0.09
Less: fair value stock expense, net of
tax 0.01 0.01
----------- -----------
Pro forma 0.05 0.08
=========== ===========
Net income per share - diluted
As reported $ 0.06 $ 0.09
Less: fair value stock expense, net of
tax 0.01 0.01
----------- -----------
Pro forma 0.05 0.08
=========== ===========
4. CONTINGENCIES
In the fourth quarter of 2002, the Company (and two of its management
subsidiaries), Buckner Retirement Services, Inc. ("Buckner"), and a related
Buckner entity, and other unrelated entities were named as defendants in a
lawsuit in district court in Fort Bend County, Texas brought by the heir of a
former resident who obtained nursing home services at Parkway Place from
September 1998 to March 2001. The Company managed Parkway Place for Buckner
through December 31, 2001. The plaintiff alleges gross negligence, malice and
intentional injury in the treatment of the resident at Parkway Place and seeks
various damages including wrongful death and punitive damages. The Company's
insurers have hired counsel to investigate and defend this claim. The insurers
have issued reservation of rights letters, subject to certain exclusions in the
applicable insurance policies. The Company is unable at this time to estimate
its liability, if any, related to this claim.
The Company has other pending claims not mentioned above ("Other Claims")
incurred in the course of its business. Most of these Other 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 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. SUBSEQUENT EVENTS
On April 29, 2003, the Company granted options to certain employees, to purchase
16,000 shares of the Company's common stock at an exercise price of $3.37.
As of March 31, 2003, the Company was in violation of a certain financial
covenant with Bank One on the financing of the Cottonwood property, which has
been waived by the bank.
11
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 months ended March 31, 2003 and 2002, 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 affordable prices 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 March 31, 2003, the Company's revenue was derived as follows: 91.2% from
the operation of 14 owned senior living communities that are operated by the
Company; 6.3% from management fees arising from management services provided for
28 affiliate owned senior living communities, 2.0% from management fees arising
from management services provided for a third party and 0.5% derived from the
recognition of deferred development fees.
The Company believes that the factors affecting the financial performance of
communities managed under contracts with affiliates and third parties do not
vary substantially from the factors affecting the performance of owned
communities, although there are different business risks associated with these
activities.
The Company's management service 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 generally upon 5% of gross
revenues. In addition, certain of the contracts provide for supplemental
incentive fees that vary by contract based upon the financial performance of the
managed community. The Company's development fees are generally based upon a
percentage of construction cost and are earned over the period commencing with
the initial development activities and ending with the opening of the community.
The Company owns 57% of Healthcare Properties, L.P. ("HCP") partnership and the
assets, liabilities, minority interest and results of operations of HCP have
been consolidated into the Company's financial statements. HCP owns one
community that is currently classified as held for sale.
The Company formed BRE/CSL with Blackstone in December 2001, and the joint
venture seeks 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 BRE/CSL acquired The Amberleigh at Woodside Farms, a 394
resident capacity independent living facility. In connection with the
acquisition of Amberleigh by BRE/CSL, the Company contributed $1.8 million to
the joint venture. Subsequent to the end of the first 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 in
June 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,
12
CAPITAL SENIOR LIVING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
received $7.3 million in cash from BRE/CSL, has a 10% equity interest in the
venture of $1.2 million and wrote-off $0.5 million in deferred loan costs.
The Company manages the five communities owned by BRE/CSL under long-term
management contracts. The Company accounts for the BRE/CSL investments under the
equity method of accounting. The Company has deferred $65,000 of management fee
income as a result of its 10% interest in BRE/CSL.
During the fourth quarter of 2002, the Company acquired LCOR's interests in the
joint ventures, which own the Spring Meadows Communities, from LCOR as well as
loans made by LCOR to the joint ventures for $0.9 million in addition to funding
$0.4 million to the ventures for working capital and anticipated negative cash
requirements of the communities. The Company's interests in the four joint
ventures which own the Spring Meadows Communities include interests in certain
loans to the ventures and an approximate 19% member interest in each venture.
The Company has managed the Spring Meadows Communities since the opening of each
community in late 2000 and early 2001 and will continue to manage the
communities under long-term management contracts. In addition, the Company
receives an asset management fee relating to each of the four communities. The
Company recorded its initial advances of $1.3 million to the ventures as notes
receivable as the amount assigned for the 19% member interests were nominal. The
Company accounts for its investment in the Spring Meadows Communities under the
equity method of accounting based on the provisions of the partnership
agreements. The Company has the obligation to fund certain future operating
deficits of the Spring Meadows Communities to the extent of its 19% member
interest.
13
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
March 31,
---------------------------------------
2003 2002
------------------- -------------------
$ % $ %
--------- --------- ---------- --------
Revenues:
Resident and healthcare revenue.. $ 13,208 91.2 $ 15,579 94.0
Rental and lease income.......... -- -- 37 0.2
Unaffiliated management service
revenue..................... 295 2.0 366 2.2
Affiliated management service
revenue..................... 910 6.3 410 2.5
Affiliated development fees...... 68 0.5 183 1.1
---------- --------- ---------- --------
Total revenue.................... 14,481 100.0 16,575 100.0
Expenses:
Operating expenses............... 7,624 52.6 8,772 52.9
General and administrative expenses 2,716 18.8 3,157 19.1
Depreciation and amortization.... 1,347 9.3 1,646 9.9
---------- --------- ---------- --------
Total expenses................... 11,687 80.7 13,575 81.9
---------- --------- ---------- --------
Income from operations .............. 2,794 19.3 3,000 18.1
Other income (expense):
Interest income.................. 1,637 11.3 1,429 8.6
Interest expense................. (2,593) (17.9) (2,828) (17.1)
Equity in the losses of affiliates 53 0.4 11 0.1
Gain on sales of assets.......... -- -- 2,283 13.8
---------- --------- ---------- --------
Income before income taxes and minority
interest in consolidated 1,891 13.1 3,895 23.5
partnership......................
Provision for income taxes....... (745) (5.1) (1,124) (6.8)
---------- --------- ---------- --------
Income before minority interest in
consolidated partnership........ 1,146 7.9 2,771 16.7
Minority interest in consolidated
partnership...................... 55 0.4 (960) (5.8)
---------- --------- ---------- --------
Net income....................... $ 1,201 8.3 $ 1,811 10.9
========== ========= ========== ========
Three Months Ended March 31, 2003 Compared to the Three Months Ended March 31,
2002
Revenues. Total revenues were $14.5 million in the three months ended March 31,
2003 compared to $16.6 million for the three months ended March 31, 2002,
representing a decrease of approximately $2.1 million or 12.6%. This decrease in
revenue is primarily the result of a $2.4 million decrease in resident and
healthcare revenue offset by an increase in affiliated management fees of $0.5
million. The decrease in resident and healthcare revenue reflects the loss of
revenue on four communities contributed to BRE/CSL in June of 2002 of $2.8
million offset by an overall increase at the Company's other communities of $0.4
million. Affiliated management services revenue increased by $0.5 million
primarily as a result of higher management fees earned on the Triad communities
along with management services revenue earned on the BRE/CSL and the Spring
Meadows communities.
Expenses. Total expenses were $11.7 million in the first quarter of fiscal 2003
compared to $13.6 million in the first quarter of fiscal 2002, representing a
decrease of $1.9 million or 13.9%. This decrease is primarily the result of a
$1.1 million decrease in operating expenses, a $0.4 million decrease in general
14
CAPITAL SENIOR LIVING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
and administrative expenses and a $0.3 million decrease in depreciation and
amortization expense. The contribution of the four communities to BRE/CSL
resulted in a decrease in operating expenses of $1.3 million, a decrease in
general and administrative expenses of $0.4 million and a decrease in
depreciation and amortization expense of $0.3 million.
Other income and expense. Interest expense decreased $0.2 million to $2.6
million in the first quarter of 2003 compared to $2.8 million in the first
quarter of 2002. This 8.3% decrease in interest expense is the result of lower
debt outstanding in the current fiscal year compared to fiscal 2002 primarily
resulting from the payoff of debt relating to the communities contributed to
BRE/CSL. Interest income increased $0.2 million or 14.6% to $1.6 million in
fiscal 2003 compared to $1.4 million in fiscal 2002. Interest income primarily
represents interest earned on loans the Company has made to the Triad Entities.
Gain on sale of assets in fiscal 2002 reflects the sale of two communities by
HCP for net proceeds of $4.4 million, which resulted in the recognition of a
$2.3 million gain on sale. Equity in the earnings of affiliates represents the
Company's share of the earnings and losses from the Company's investments in
BRE/CSL and the Triad Entities.
Provision for income taxes. Provision for income taxes in the first quarter of
fiscal 2003 was $0.7 million or 38.3% of taxable income, compared to $1.1
million or 38.3% of taxable income in the comparable quarter for 2002. The
effective tax rates for the first quarter of 2003 and 2002 differ from the
statutory tax rates because of state income taxes and permanent tax differences.
Minority interest. Minority interest decreased $1.0 million primarily due to
minority interest recognized in fiscal 2002 on the sale of two HCP communities.
The sale of the two communities resulted in a net gain on sale of $2.3 million
and the recognition of $1.0 million in minority interest.
Net income. As a result of the foregoing factors, net income decreased $0.6
million to $1.2 million for the three months ended March 31, 2003, as compared
to $1.8 million for the three months ended March 31, 2002.
Liquidity and Capital Resources
In addition to approximately $5.2 million of cash balances on hand as of March
31, 2003, the Company's principal source of liquidity is expected to be cash
flows from operations, proceeds from the sale of assets, cash flows from BRE/CSL
and/or additional financing. Of the $5.2 million in cash balances, $0.6 million
relates to cash held by HCP. The Company expects its available cash and cash
flows from operations, proceeds from the sale of assets, cash flows from BRE/CSL
and/or additional financing to be sufficient to fund its short-term working
capital requirements. The Company's long-term capital requirements, primarily
for acquisitions, the payment of operating deficit guarantees, 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 short and long-term capital requirements.
The Company had net cash provided by operating activities of $1.4 million in the
first three months of fiscal 2003 compared to $2.2 million in the first three
months of fiscal 2002. In first quarter of fiscal 2003, net cash provided by
operating activities was primarily derived from net income of $1.2 million, net
noncash charges of $1.4 million, a decrease in prepaid and other assets of $0.4
million, and a decrease in federal and state income taxes receivable of $0.3
million offset by an increase in accounts receivable of $0.2 million, a decrease
in accounts payable and accrued expenses of $1.4 million and an increase in
other assets of $0.3 million. In the first quarter of fiscal 2002, the net cash
provided by operating activities was primarily derived from net income of $1.8
million, net non-cash charges of $0.5 million, a decrease in prepaid and other
expenses of $0.8 million, an increase in accounts payable and accrued expenses
of $0.8 million and a decrease in federal and state income taxes receivable of
$0.9 million offset by an increase in accounts receivable of $2.4 million and an
increase in customer deposit of $0.2 million.
The Company had net cash used in investing activities of $4.9 million in the
first three months of fiscal 2003 compared to net cash provide by investing
activities of $3.2 million in the first three months of fiscal 2002. In the
first quarter of fiscal 2003, the net cash used in investing activities was
primarily the result of advances to the Triad Entities of $4.3 million, and
capital expenditures of $0.6 million offset by proceeds from limited
partnerships. In the first quarter of fiscal 2002, the net cash provided by
15
CAPITAL SENIOR LIVING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
investing activities resulted from net proceeds of $4.4 million from the sale of
two communities, proceeds of $5.6 million from the NHP Pension Note redemption
offset by advances to the Triad Entities of $6.4 million and capital
expenditures of $0.4 million.
The Company had net cash used in financing activities of $3.1 million in both
the first three months of fiscal 2003 and 2002. For the first quarter of fiscal
2003 the net cash used in financing activities primarily results from repayments
of notes payable of $3.1 million. Net cash used in financing activities in the
first quarter of fiscal 2002 resulted primarily from repayment of notes payable
of $1.8 million and distribution to minority partners of $1.3 million.
The Company derives the benefits and bears the risks related to the communities
it owns. The cash flows and profitability of owned communities depends on the
operating results of such communities and are subject to certain risks of
ownership, including the need for capital expenditures, financing and other
risks such as those relating to environmental matters.
The Company believes that the factors affecting the financial performance of
communities managed under contracts with affiliates and third parties do not
vary substantially from the factors affecting the performance of owned
communities, although there are different business risks associated with these
activities.
The Company's management service 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 generally upon 5% of gross
revenues. In addition, certain of the contracts provide for supplemental
incentive fees that vary by contract based upon the financial performance of the
managed community. The Company's development fees are generally based upon a
percentage of construction cost and are earned over the period commencing with
the initial development activities and ending with the opening of the community.
The Company owns 57% of the HCP partnership and the assets, liabilities,
minority interest and results of operations of HCP have been consolidated into
the Company's financial statements. HCP owns one community that is currently
classified as held for sale.
The Company formed BRE/CSL with Blackstone in December 2001, and the joint
venture seeks 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 BRE/CSL acquired The Amberleigh at Woodside Farms, a 394
resident capacity independent living facility. In connection with the
acquisition of Amberleigh by BRE/CSL, the Company contributed $1.8 million to
the joint venture. Subsequent to the end of the first 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 in
June 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 BRE/CSL, has a 10% equity interest in the
venture of $1.2 million and wrote-off $0.5 million in deferred loan costs.
The Company manages the five communities owned by BRE/CSL under long-term
management contracts. The Company accounts for the BRE/CSL investments under the
equity method of accounting. The Company has deferred $65,000 of management fee
income as a result of its 10% interest in BRE/CSL.
16
CAPITAL SENIOR LIVING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
During the fourth quarter of 2002, the Company acquired LCOR's interests in the
joint ventures, which own the Spring Meadows Communities, from LCOR as well as
loans made by LCOR to the joint ventures for $0.9 million in addition to funding
$0.4 million to the ventures for working capital and anticipated negative cash
requirements of the communities. The Company's interests in the four joint
ventures which own the Spring Meadows Communities include interests in certain
loans to the ventures and an approximate 19% member interest in each venture.
The Company has managed the Spring Meadows Communities since the opening of each
community in late 2000 and early 2001 and will continue to manage the
communities under long-term management contracts. In addition, the Company
receives an asset management fee relating to each of the four communities. The
Company recorded its initial advances of $1.3 million to the ventures as notes
receivable as the amount assigned for the 19% member interests were nominal. The
Company accounts for its investment in the Spring Meadows Communities under the
equity method of accounting based on the provisions of the partnership
agreements. The Company has the obligation to fund certain future operating
deficits of the Spring Meadows Communities to the extent of its 19% member
interest.
The Company has entered into development and management agreements with the
Triad Entities for the development and management of new senior living
communities. The Triad Entities own and finance the construction of new senior
living communities. These communities are primarily Waterford communities. The
development of senior living communities typically involves a substantial
commitment of capital over an approximate 12-month construction period, during
which time no revenues are generated, followed by a 24 to 36 month lease up
period.
The Company has opened, in connection with its management agreements, seventeen
new Waterford and Wellington communities and two expansions in the last four
years pursuant to arrangements with the Triad Entities. 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 defers
1% of its interest income, development fee income and management fee income
earned from the Triad Entities. As of March 31, 2003, the Company had deferred
income of $1.0 million relating to the Triad Entities.
The Company has loan commitments to the Triad Entities for construction and
pre-marketing expenses, in addition to requirements to fund the Triad Entities'
operating deficits through operating deficit guarantees provided for in its
management agreements with the Triad Entities and other advances, totaling $89.6
million at March 31, 2003. The Company evaluates the carrying value of these
receivables by comparing the cash flows expected from the operations of the
Triad Entities to the carrying value of the receivables. These cash flow models
consider lease-up rates, expected operating costs, debt service requirements and
various other factors. The Company entered into a support agreement with the
Triad Entities, 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 that the carrying value of the notes receivable are fully
recoverable, 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 the Company's operating experience.
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.
17
CAPITAL SENIOR LIVING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
The following table sets forth, as of March 31, 2003 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. March 31,
(Triad I) $ -- $13,000 8.0% 2008 $13,000 $ 4,913 $ 38 $ 225
Triad Senior
Living II, L.P. March 31,
(Triad II) -- 15,000 8.0 2008 15,000 10,471 58 125
Triad Senior
Living III, L.P. March 31,
(Triad III) -- 26,000 8.0 2008 26,000 3,095 82 247
Triad Senior
Living IV, L.P. March 31,
(Triad IV) -- 10,000 8.0 2008 10,000 1,618 84 95
Triad Senior
Living V, L.P. March 31,
(Triad V) -- 10,000 8.0 2008 5,473 -- 16 22
The Company could be required in the future to revise the terms of its notes
with the Triad Entities to extend the maturity dates, change the interest rate
earned on the notes or modify other terms and conditions of the notes.
The Company has typically received 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 were recorded over the term of the development project on a
basis approximating the percentage of completion method. In addition, when the
properties became 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. See below for a description of the Company's
agreements to purchase the partnership interests in Triads II, III, IV and V
owned by non-Company parties.
The Company has the option, but not the obligation, to purchase the Triad I
communities for an amount specified in the partnership agreement. Furthermore,
Lehman Brothers 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 of $12.4 million.
In January 2003, the Financial Accounting Standards Board issued FASB
Interpretation No. 46 "Consolidation of Variable Interest Entities" an
interpretation of ARB No. 51, effective immediately for variable interest
entities created after January 31, 2003 and effective for the first fiscal year
or interim period beginning after June 15, 2003 for variable interest entities
that existed prior to February 1, 2003. The Company will adopt the provisions of
this interpretation in the third quarter of 2003, and its adoption will result
in the Company consolidating the financial statements of the Triad Entities,
currently accounted for separately under the equity method of accounting. The
Company expects the implementation of FASB Interpretation No. 46 will have a
18
CAPITAL SENIOR LIVING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
material effect on the Company's earnings and financial position. However, see
below for a description of the Company's agreements to purchase the partnership
interests in Triads II, III, IV and V owned by non-Company parties.
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.
The Company's 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 March 31, 2003 (dollars in
thousands):
Loan Facilities to Triads
------------------------------------------------------
Number of Amount
Entity Communities Commitment Outstanding Type Lender
- ------ ----------- ---------- ----------- ---- ------
Triad I 7 $50,000 $48,250 take-out GMAC
Triad II 3 $26,900 $26,165 mini-perm Key Corporate
Capital, Inc.
Triad III 6 $56,300 $56,270 mini-perm Guaranty Bank
Triad IV 2 $18,600 $18,591 mini-perm Compass Bank
Triad V 1 $ 8,903 $ 8,742 mini-perm Bank of America
At December 31, 2002, Triad II was in violation of a certain financial covenant
with its lender. The lender and Triad II subsequently signed a loan modification
in March 2003.
The Company has recently made the election to exercise its options to purchase
the partnership interests owned by non-Company parties in the Triad Entities,
with the exception of Triad I. The Company and the other partners of the Triad
Entities, with the exception of Triad I, entered into Partnership Interest
Purchase Agreements ("Purchase Agreements") on March 25, 2003, whereby the
Company will purchase the partnership interests of the general partners and the
other third party limited partners for an aggregate of approximately $1.7
million. Upon completion of these transactions, which the Company expects to
take place during the third fiscal quarter of 2003, the Company will wholly own
each of the Triad Entities, other than Triad I. The Company will treat these
transactions as a purchase of real estate and therefore does not expect any
goodwill or other intangibles to be recognized related to these transactions.
The Purchase Agreements are subject to customary terms and conditions.
Summary financial information regarding the financial position of the Triad
Entities as of March 31, 2003 and 2002 and results of operations for the three
months ended March 31, 2003 and 2002 of the Triad Entities is presented below.
The Company is also presenting unaudited pro forma financial information as if
the Company's purchase of the Triad Entities (except Triad I) were effective
January 1, 2003. In addition, the unaudited pro forma financial information
includes consolidating Triad I as if the provisions of FASB Interpretation No.
46 were effective January 1, 2003. Beginning in the third quarter of 2003, FASB
Interpretation No. 46 will require the Company to consolidate the financial
position and results of operation of Triad I with the Company's financial
information. The unaudited pro forma financial information, which may not be
19
CAPITAL SENIOR LIVING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
indicative of future results, includes the elimination of significant
intercompany balances and assumes incomes taxes at a 39% effective tax rate (in
thousands):
Company
Triad Entities Pro Forma
Mar. 31, Mar. 31, Mar. 31,
2003 2002 2003
---------- ---------- ----------
Current assets........................ $ 4,641 $ 3,537 $ 18,786
Property and equipment, net........... 183,765 189,009 385,155
Other assets.......................... 11,018 9,895 31,855
--------- -------- ----------
Total assets...................... $ 199,424 $202,141 $ 435,796
========= ======== ==========
Current liabilities................... $ 24,378 $ 13,110 $ 26,069
Long-term debt........................ 232,476 218,817 297,163
Other long-term liabilities........... -- -- 697
Partnership deficit / shareholders'
equity................................ (57,430) (29,486) 111,867
--------- -------- ----------
Total liabilities and partnership
deficit / shareholders' equity.... $ 199,424 $202,441 $ 435,796
========== ======== ==========
Mar. 31, Mar. 31, Mar. 31,
2003 2002 2003
----------- ----------- ----------
Net revenue............................ $ 8,364 $ 5,677 $ 22,845
Operating and general & administrative. 7,851 6,530 18,190
Depreciation........................... 1,398 1,391 2,745
Operating income (loss)................ (885) (2,244) 1,910
Net loss............................... (4,402) (5,240) (1,790)
The unaudited pro forma consolidated amounts are presented for informational
purposes only and do not necessarily reflect the financial position or results
of operations of the Company that would have actually occurred had the
transactions occurred on January 1, 2003.
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, the purchase of the Triad Entities, 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 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.
20
CAPITAL SENIOR LIVING CORPORATION
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company's primary market risk is exposure to changes in interest rates on
debt instruments. As of March 31, 2003 the Company had $147.0 million in
outstanding debt comprised of various fixed and variable rate debt instruments
of $52.1 million and $94.9 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, that are tied to either LIBOR or the prime rate, would
affect the Company's earnings and cash flows but would not affect the fair
market value of the variable rate debt. For each percentage point change in
interest rates, the Company's annual interest expense would increase by
approximately $0.9 million based on the Company's outstanding variable debt as
of March 31, 2003. 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. The Triad Entities, as of March 31, 2003, have
$158.0 million in outstanding bank debt comprised of various fixed and variable
rate debt instruments of $26.2 million and $131.8 million, respectively.
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 15d-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.
21
CAPITAL SENIOR LIVING CORPORATION
PART II. OTHER INFORMATION
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
In the fourth quarter of 2002, the Company (and two of its management
subsidiaries), Buckner Retirement Services, Inc. ("Buckner"), and a related
Buckner entity, and other unrelated entities were named as defendants in a
lawsuit in district court in Fort Bend County, Texas brought by the heir of a
former resident who obtained nursing home services at Parkway Place from
September 1998 to March 2001. The Company managed Parkway Place for Buckner
through December 31, 2001. The plaintiff alleges gross negligence, malice and
intentional injury in the treatment of the resident at Parkway Place and seeks
various damages including wrongful death and punitive damages. The Company's
insurers have hired counsel to investigate and defend this claim. The insurers
have issued reservation of rights letters, subject to certain exclusions in the
applicable insurance policies. The Company is unable at this time to estimate
its liability, if any, related to this claim.
The Company has other pending claims not mentioned above ("Other Claims")
incurred in the course of its business. Most of these Other 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 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:
99.1 Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(B) Reports on Form 8-K
Not Applicable
22
CAPITAL SENIOR LIVING CORPORATION
March 31, 2003
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: May 13, 2003
23
CAPITAL SENIOR LIVING CORPORATION
March 31, 2003
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
May 13, 2003
24
CAPITAL SENIOR LIVING CORPORATION
March 31, 2003
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
May 13, 2003
25