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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, 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 November 12, 2003, the Registrant had outstanding 19,817,190 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, 2003 and December 31, 2002 3
Consolidated Statements of Income - -
Three and Nine Months Ended September 30, 2003 and 2002 4
Consolidated Statements of Cash Flows - -
Nine Months Ended September 30, 2003 and 2002 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
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 25
Signature
2
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
CAPITAL SENIOR LIVING CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands)
September 30, December 31,
2003 2002
-------------- ---------
(Unaudited) (Note 1)
ASSETS
Current assets:
Cash and cash equivalents..................................... $ 8,741 $ 11,768
Restricted cash and marketable securities..................... 12,356 4,490
Accounts receivable, net...................................... 1,665 1,461
Accounts receivable from affiliates........................... 1,391 218
Federal and state income taxes receivable..................... -- 1,171
Deferred taxes................................................ 462 399
Assets held for sale.......................................... 739 --
Prepaid expenses and other.................................... 2,336 1,164
--------- ---------
Total current assets.................................. 27,690 20,671
Property and equipment, net..................................... 317,499 153,544
Deferred taxes.................................................. 6,741 7,106
Due from affiliates............................................. 1,281 513
Notes receivable from affiliates................................ 20,059 86,470
Investments in limited partnerships............................. 1,725 1,238
Assets held for sale............................................ 2,392 4,131
Other assets, net............................................... 4,491 4,578
--------- ---------
Total assets.......................................... $ 381,878 $ 278,251
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................................. $ 2,261 $ 2,322
Accrued expenses.............................................. 5,839 4,638
Current portion of notes payable.............................. 12,426 9,715
Federal and state income taxes payable........................ 533 --
Customer deposits............................................. 1,488 1,023
---------- ----------
Total current liabilities............................. 22,547 17,698
Deferred income................................................. -- 7
Deferred income from affiliates................................. 250 1,194
Other long-term liabilities..................................... 7,420 --
Notes payable, net of current portion........................... 228,115 140,385
Minority interest in consolidated partnership................... 437 686
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-- 19,806 and 19,737
at September 30, 2003 and December 31, 2002, respectively 198 197
Additional paid-in capital.................................... 92,205 91,990
Retained earnings............................................. 30,706 26,094
---------- ----------
Total shareholders' equity............................ 123,109 118,281
---------- ----------
Total liabilities and shareholders' equity............ $ 381,878 $ 278,251
========== ==========
See accompanying notes.
3
CAPITAL SENIOR LIVING CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------- ---------------------------------
2003 2002 2003 2002
--------------- --------------- --------------- ---------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenues:
Resident and healthcare revenue........... $ 17,973 $ 13,401 $ 44,490 $ 44,309
Rental and lease income................... -- -- -- 37
Unaffiliated management services revenue.. -- 258 295 836
Affiliated management services revenue.... 665 609 2,467 1,463
Affiliated development fees............... 26 273 163 672
----------- ----------- ------------ ------------
Total revenues........................ 18,664 14,541 47,415 47,317
Expenses:
Operating expenses........................ 12,034 8,148 27,877 25,802
General and administrative expenses....... 3,482 2,945 8,749 9,060
Depreciation and amortization............. 2,541 1,327 5,227 4,507
----------- ----------- ------------ ------------
Total expenses........................ 18,057 12,420 41,853 39,369
----------- ----------- ------------ ------------
Income from operations.......................... 607 2,121 5,562 7,948
Other income (expense):
Interest income........................... 441 1,521 3,862 4,384
Interest expense.......................... (3,784) (2,489) (8,954) (8,065)
Equity in the earnings of affiliates...... 69 14 142 45
Gain on sale of assets.................... 3,112 -- 6,603 1,929
----------- ----------- ------------ ------------
Income before income taxes and minority interest in
consolidated partnership.................. 445 1,167 7,215 6,241
Provision for income taxes...................... (171) (543) (2,783) (2,127)
----------- ----------- ------------ ------------
Income before minority interest in consolidated
partnership............................... 274 624 4,432 4,114
Minority interest in consolidated partnership... 6 264 116 (637)
----------- ----------- ------------ ------------
Net income...................................... $ 280 $ 888 $ 4,548 $ 3,477
=========== =========== ============ ============
Net income per share:
Basic..................................... $ 0.01 $ 0.05 $ 0.23 $ 0.18
============ ============ ============ ============
Diluted................................... $ 0.01 $ 0.04 $ 0.23 $ 0.17
============ ============ ============ ============
Weighted average shares outstanding - basic 19,806 19,727 19,764 19,722
============ ============ ============ ============
Weighted average shares outstanding - diluted 20,005 19,845 19,922 19,948
============ ============ ============ ============
See accompanying notes.
4
CAPITAL SENIOR LIVING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Nine Months Ended September 30,
2003 2002
------------ --------
(Unaudited) (Unaudited)
Operating Activities
Net income....................................................... $ 4,548 $ 3,477
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation................................................... 5,227 4,507
Amortization of deferred financing charges..................... 786 615
Minority interest in consolidated partnership.................. (116) 637
Deferred income from affiliates................................ (317) (363)
Deferred income................................................ (7) (507)
Deferred income taxes.......................................... 302 302
Equity in the earnings of affiliates........................... (142) (45)
Gain on sale of assets......................................... (6,603) (1,929)
Writedown of assets held for sale.............................. -- 500
Non-cash compensation.......................................... -- 14
Changes in operating assets and liabilities, net of
acquisitions:
Accounts receivable.......................................... (144) 187
Accounts receivable from affiliates.......................... (1,173) (160)
Prepaid expenses and other................................... (1,189) (3,223)
Other assets................................................. 718 264
Accounts payable and accrued expenses........................ (1,163) 1,989
Federal and state income taxes receivable.................... 1,748 405
Customer deposits............................................ (124) (109)
------------ ------------
Net cash provided by operating activities........................ 2,351 6,561
Investing Activities
Capital expenditures............................................. (1,313) (1,418)
Net cash acquired from Triad Entities acquisition................ 122 --
Proceeds from sale of assets..................................... 5,110 5,187
Proceeds from sale of assets to BRE/CSL.......................... 3,089 7,287
Advances to affiliates........................................... (7,662) (15,680)
Proceeds from limited partnerships............................... 158 7,125
------------ ------------
Net cash (used in) provided by investing activities.............. (496) 2,501
Financing Activities
Proceeds from notes payable...................................... 4,510 4,237
Repayments of notes payable...................................... (9,218) (5,068)
Restricted cash.................................................. -- (5,390)
Cash proceeds from the exercise of stock options................. 122 35
Distributions to minority partners............................... (133) (2,128)
Deferred loan charges paid....................................... (163) (207)
------------ ------------
Net cash used in financing activities............................ (4,882) (8,521)
------------ ------------
(Decrease) increase in cash and cash equivalents................. (3,027) 541
Cash and cash equivalents at beginning of period................. 11,768 9,975
------------ ------------
Cash and cash equivalents at end of period....................... $ 8,741 $ 10,516
============ ============
Supplemental Disclosures
Cash paid during the period for:
Interest....................................................... $ 8,230 $ 7,483
============ ============
Income taxes................................................... $ 1,073 $ 1,690
============ ============
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, 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 September 30, 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 September 30,
2003, results of operations for the three and nine months ended September 30,
2003 and 2002, respectively, and cash flows for the nine months ended September
30, 2003 and 2002. The results of operations for the three and nine months ended
September 30, 2003 are not necessarily indicative of the results for the year
ending December 31, 2003.
Effective as of July 1, 2003, the Company acquired the partnership interest of
the general partner and the other third party limited partnership interests in
the Triad Entities (as defined in Footnote 2) for an aggregate of $1.7 million
and the assumption of all outstanding debt and liabilities. The Company now
wholly owns each of the Triad Entities.
In January 2003, the Financial Accounting Standards Board issued FASB
Interpretation No. 46 "Consolidation of Variable Interest Entities" an
interpretation of ARB No. 51. In October 2003, the FASB Board agreed to defer
the effective date of FASB Interpretation No. 46 for variable interests held by
public companies in all entities that were acquired prior to February 1, 2003.
The deferral will require that public companies adopt the provisions of the
Interpretation at the end of periods ending after December 15, 2003. The
Company, therefore, expects to adopt the provisions of this interpretation as a
cumulative effect adjustment on December 31, 2003 and its adoption will result
in the Company consolidating the financial statements of the Triad Senior Living
I, LP ("Triad I") as of December 31, 2003.
2. ACQUISITIONS AND DISPOSITIONS
Triad Entities: In March 2003, the Company made the election to exercise its
options to purchase the partnership interests owned by non-Company parties in
Triad Senior Living II, LP, Triad Senior Living III, LP, Triad Senior Living IV,
LP and Triad Senior Living V, LP (collectively the "Triad Entities"). The
Company and the other partners of the Triad Entities entered into Partnership
Interest Purchase Agreements ("Purchase Agreements") on March 25, 2003, whereby
the Company agreed to purchase the partnership interests of the general partners
and the other third party limited partners for an aggregate of approximately
$1.7 million plus the assumption of debts and liabilities.
Effective as of July 1, 2003, the Company acquired the partnership interest of
the general partner and the other third party limited partnership interests in
the Triad Entities for $1.3 million in cash, $0.4 million in notes payable and
the assumption of all outstanding debt and liabilities. The total purchase price
was $194.4 million and the acquisition was treated as a purchase of property.
The Company now wholly owns each of the Triad Entities. This acquisition
resulted in the Company acquiring ownership of 12 senior living communities with
6
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
a combined resident capacity of approximately 1,670 residents. The resident
capacity mix for the Triad Entities is 95% independent living and 5% assisted
living, with all revenues derived from private pay sources. Prior to the
acquisition the Company had developed the properties owned by and managed the
Triad Entities. Subsequent to the end of the Company's third quarter of 2003,
the Company repaid the $0.4 million in notes payable related to this
acquisition.
Set forth below is information relating to the construction/permanent loan
facilities the Company assumed as a result of the acquisition of the Triad
Entities (dollars in thousands):
Loan Facilities to Triad Entities
----------------------------------------------------
Number of Amount
Entity Communities Commitment Outstanding Type Lender
------ ----------- ---------- ----------- ---- ------
Triad II 3 $26,900 $26,003 mini-perm Key Corporate
Capital, Inc.
Triad III 6 $56,300 $56,270 mini-perm Guaranty Bank
Triad IV 2 $18,600 $18,627 mini-perm Compass Bank
Triad V 1 $ 8,903 $ 8,698 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 not completed its analysis of this purchase and as such the
purchase accounting information disclosed should be considered preliminary. The
following unaudited pro forma financial information combines the results of the
Company and the Triad Entities as if the transaction had taken place at the
beginning of fiscal 2002. The pro forma financial information is presented for
informational purposes only and does not reflect the results of operations of
Capital, which would have actually resulted if the purchase occurred as of the
dates indicated, or future results of operations of Capital.
Nine months ended
Sept. 30,
----------------------
2003 2002
---------- ----------
Net sales $ 56,637 $ 55,482
Net income (loss) 336 (4,871)
Net income (loss) per share - basic $ 0.02 $ (0.25)
Net income (loss) per share - diluted $ 0.02 $ (0.24)
Prudential: In September 2003, the Company sold its Atrium of Carmichael
("Carmichael") community to a subsidiary of Senior Housing Partners II, LP
("SHP"), a fund managed by Prudential Real Estate Investors ("Prudential"), for
$11.7 million before closing costs of $0.6 million. Carmichael is an independent
living community located in Sacramento, California with a resident capacity of
156. As a result of the sale the Company retired $7.4 million in debt and
received $3.6 million in cash and recognized a gain of $3.1 million. The Company
manages the Carmichael community for SHP under a long-term management contract.
HCP: During the third quarter of 2003, HCP sold its Crenshaw Creek facility for
$1.1 million, resulting in cash proceeds of $1.1 million to HCP and the
recognition of a gain on sale of $48,000.
3. TRANSACTIONS WITH AFFILIATES
Triad I: Triad I owns and finances the construction of new senior living
communities. The Company entered into development and management agreements with
Triad I 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.
7
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The Company has opened, in connection with its management agreements, five new
Waterford communities and two expansions pursuant to arrangements with Triad I.
The Company has an approximate 1% limited partnership interest in Triad I and is
accounting for this investment under the equity method of accounting based on
the provisions of the Triad I partnership agreement. The Company defers 1% of
its interest income, development fee income and management fee income earned
from Triad I. As of September 30, 2003, the Company had deferred income of $0.2
million relating to Triad I.
The Company has loan commitments to Triad I for construction and pre-marketing
expenses, in addition to requirements to fund Triad I's operating deficits
through operating deficit guarantees provided for in its management agreements
with Triad I and other advances, totaling $19.8 million at September 30, 2003.
The Company evaluates the carrying value of these receivables by comparing the
cash flows expected from the operations of Triad I 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
Entity to any one or more of Triad I, Triad II, Triad III, Triad IV and Triad V.
The carrying value of the note receivable from Triad I could be adversely
affected by a number of factors, including Triad I 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 note receivable is 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 Triad I. Deferred development and
management fee income is being amortized into income over the expected remaining
life of the Triad I partnership.
The following table sets forth, as of September 30, 2003, the capital invested
in Triad I, information related to loans made by the Company to Triad I and
information on deferred income related to Triad I (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 $5,667 $ -- $ 158
The Company could be required in the future to revise the terms of its note with
Triad I to extend the maturity date, change the interest rate earned on the note
or modify other terms and conditions of the note.
During the development phase of the Triad I communities the Company 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, after 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 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. In October 2003, the FASB Board agreed to defer
the effective date of FASB Interpretation No. 46 for variable interests held by
public companies in all entities that were acquired prior to February 1, 2003.
8
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The deferral will require that public companies adopt the provisions of the
interpretation at the end of periods ending after December 15, 2003. The
Company, therefore, expects to adopt the provisions of this interpretation as a
cumulative effect adjustment on December 31, 2003 and its adoption will result
in the Company consolidating the financial statements of Triad I as of December
31, 2003.
Triad I financed 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 Triad I if the other financing sources of Triad I have
been fully utilized. These operating deficit-funding obligations are guaranteed
by the Company and include making loans to fund debt service obligations to
Triad I's lenders. Amounts funded to date under these operating deficit
agreements are disclosed in the table above. The Company could 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 Triad I as of September 30, 2003 (dollars in thousands):
Loan Facilities to Triad I
---------------------------------------------------
Number of Amount
Entity Communities Commitment Outstanding Type Lender
------ ----------- ---------- ----------- --------- ------
Triad I 7 $50,000 $47,794 take-out GMAC
At September 30, 2003, one community in Triad I was in violation of a certain
financial covenant with its lender. The lender has provided Triad I with a
waiver for this covenant violation.
Summary financial information regarding the financial position of Triad I as of
September 30, 2003 and 2002 and results of operations for the nine months ended
September 30, 2003 and 2002 of Triad I is presented below. The Company is also
presenting unaudited pro forma financial information consolidating Triad I under
the provisions of FASB Interpretation No. 46 as if FASB Interpretation No. 46
was effective January 1, 2003. In October 2003, the FASB Board agreed to defer
the effective date of FASB Interpretation No. 46 for variable interests held by
public companies in all entities that were acquired prior to February 1, 2003.
The deferral will require that public companies adopt the provisions of the
interpretation at the end of periods ending after December 15, 2003. The
Company, therefore, expects to adopt the provisions of this interpretation as a
cumulative effect adjustment on December 31, 2003 and its adoption will result
in the Company consolidating the financial statements of Triad I as of December
31, 2003.
9
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 I -----------
--------------------- Pro Forma
Sept. 30, Sept. 30, Sept. 30,
2003 2002 2003
--------- ---------- -----------
Current assets........................... $ 2,996 $ 1,610 $ 30,100
Property and equipment, net.............. 54,381 56,279 379,571
Other assets............................. 1,697 1,498 21,911
-------- -------- ----------
Total assets......................... $ 59,074 $ 59,387 $ 431,582
======== ======== ==========
Current liabilities...................... $ 6,301 $ 4,078 $ 24,549
Long-term debt........................... 60,633 59,709 275,908
Other long-term liabilities.............. 68 -- 8,016
Partnership deficit / shareholders'
equity................................... (7,928) (4,400) 123,109
-------- -------- ----------
Total liabilities and partnership
deficit / shareholders' equity........... $ 59,074 $ 59,387 $ 431,582
======== ======== ==========
Nine Months
Nine Months Ended Ended
Sept. 30, Sept. 30, Sept. 30,
2003 2002 2003
--------- ----------- -----------
Net revenue.............................. $ 11,123 $ 10,415 $ 57,894
Operating and general & administrative... 9,379 8,762 45,360
Depreciation............................. 1,259 1,254 6,486
Operating income......................... 485 399 6,048
Net (loss) income........................ (2,540) (1,837) 2,008
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 three joint ventures ("BRE/CSL") with an affiliate
of Blackstone Real Estate Advisors ("Blackstone") and the joint ventures seek to
acquire senior housing properties. BRE/CSL is owned 90% by Blackstone and 10% by
the Company. Pursuant to the terms of the joint ventures, 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.
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. In addition, on June 30, 2003 the Company contributed to BRE/CSL its
Cottonwood facility with a capacity of approximately 182 residents. As a result
of the contribution, the Company repaid $7.4 million of long-term debt to Bank
One, NA, received $3.1 million in cash from BRE/CSL, has a 10% equity interest
in BRE/CSL of $0.4 million and recognized a gain of $3.4 million.
As part of the Cottonwood contribution to BRE/CSL, the Company guaranteed 25% or
$1.9 million of BRE/CSL's debt with Bank One. The Company made this guarantee to
induce Bank One to allow the Cottonwood debt to be assumed by BRE/CSL. The
Company's performance under this debt guarantee would be triggered by an event
of default under the loan agreement by BRE/CSL. The Company estimates the
carrying value of its obligation under the guarantee as nominal.
10
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
In addition, the Company maintains a right of first offer to purchase the
BRE/CSL communities as well as an option to purchase Blackstone's interest in
the ventures at fair market value. In the event any of the BRE/CSL communities
are sold by BRE/CSL, the Company's receipt of proceeds from the sale would be
subject to certain terms and conditions, including Blackstone receiving a
certain internal rate of return.
The Company manages the six 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 September 30, 2003, the Company has
cumulatively deferred $91,000 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 from LCOR. These joint ventures own four
independent and assisted living communities (the "Spring Meadows Communities").
The Company's interests in the four joint ventures include interests in certain
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 and an approximate 19% member interest in each
venture. As of September 30, 2003, the Company had notes and accrued interest
receivable from the Spring Meadows Communities of $1.5 million. 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 since
the amounts 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.
4. 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 Nine Months Ended
September 30, September 30,
--------------------------- --------------------
2003 2002 2003 2002
--------- --------- --------- -------
Net income............................... $ 280 $ 888 $ 4,548 $ 3,477
Weighted average shares outstanding - basic 19,806 19,727 19,764 19,722
Effect of dilutive securities:
Employee stock options................ 199 118 158 226
--------- --------- --------- ---------
Weighted average shares outstanding -
diluted.................................. 20,005 19,845 19,922 19,948
========= ========= ========= =========
Basic earnings per share................. $ 0.01 $ 0.05 $ 0.23 $ 0.18
========= ========= ========= =========
Diluted earnings per share............... $ 0.01 $ 0.04 $ 0.23 $ 0.17
========= ========= ========= =========
Options to purchase 0.2 million shares of common stock at prices ranging from
$4.14 to $10.50 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 2003 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 2002, 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
11
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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. 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. On May 22, 2003, the Company granted options to certain directors to
purchase 9,000 shares of the Company's common stock at an exercise price of
$3.02. On August 12, 2003, the Company granted options to certain employees to
purchase 22,000 shares of the Company's common stock at an exercise price of
$3.69. In addition, during the first nine months of fiscal 2003, the Company
issued 69,188 shares of common stock pursuant to the exercise of stock options
by certain employees of the Company.
In May 2003, certain employees of the Company elected to forfeit 452,500 options
originally priced at $7.06. These options were added back to the pool of options
available to grant.
Pro forma information regarding net income per share has been determined as if
the Company had accounted for its employee stock options under the fair value
method. The fair value for these options was estimated at the date of grant
using the Black-Scholes option-pricing model. 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 stock
options is amortized to expense over the options' vesting periods (in thousands,
except per share data).
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- -------------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Net income
As reported.................................. $ 280 $ 888 $ 4,548 $ 3,477
Less: fair value stock compensation expense,
net of tax.................................. 24 187 274 559
--------- --------- --------- ---------
Pro forma.................................... 256 701 4,274 2,918
========= ========= ========= =========
Net income per share - basic
As reported.................................. $ 0.01 $ 0.05 $ 0.23 $ 0.18
Less: fair value stock compensation expense,
net of tax................................. $ 0.00 $ 0.01 $ 0.01 $ 0.03
--------- --------- --------- ---------
Pro forma.................................... $ 0.01 $ 0.04 $ 0.22 $ 0.15
========= ========= ========= =========
Net income per share - diluted
As reported.................................. $ 0.01 $ 0.04 $ 0.23 $ 0.17
Less: fair value stock compensation expense,
net of tax................................. $ 0.00 $ 0.01 $ 0.01 $ 0.03
--------- --------- --------- ---------
Pro forma.................................... $ 0.01 $ 0.03 $ 0.22 $ 0.14
========= ========= ========= =========
5. 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 defend this claim. The insurers have issued
reservation of rights letters, subject to certain exclusions in the applicable
12
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
insurance policies. The parties are currently going through initial discovery.
The Company is unable at this time to estimate its liability, if any, related to
this claim. However, the Company denies any wrongdoing and intends to vigorously
defend 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
Other 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.
6. SUBSEQUENT EVENTS
The Company owns 57% of Healthcare Properties, L.P. ("HCP") and the assets,
liabilities, minority interest and results of operations of HCP have been
consolidated into the Company's financial statements. During the third quarter
of 2003, HCP sold its Crenshaw Creek facility for $1.1 million, resulting in
cash proceeds of $1.1 million to HCP and the recognition of a gain on sale of
$48,000. Subsequent to the end of the Company's third quarter of 2003 HCP has
commenced the liquidation process.
13
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, 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 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 September 30, 2003, the Company's revenue was derived as follows: 96.3%
from the operation of 25 owned senior living communities that are operated by
the Company; 3.6% from management fees arising from management services provided
for 17 affiliate owned senior living communities and 0.1% derived from the
recognition of deferred development fees.
For the nine months ended September 30, 2003, the Company's revenue was derived
as follows: 93.8% from the operation of 26 owned senior living communities that
are operated by the Company; 5.2% from management fees arising from management
services provided for 28 affiliate owned senior living communities, 0.6% from
management fees arising from management services provided for a third party and
0.4% 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") and the assets,
liabilities, minority interest and results of operations of HCP have been
consolidated into the Company's financial statements. During the third quarter
of 2003, HCP sold its Crenshaw Creek facility for $1.1 million, resulting in
cash proceeds of $1.1 million to HCP and the recognition of a gain on sale of
$48,000. Subsequent to the end of the Company's third quarter of 2003 HCP has
commenced the liquidation process.
In March 2003, the Company made the election to exercise its options to purchase
the partnership interests owned by non-Company parties in the Triad Entities.
The Company and the other partners of the Triad Entities, entered into Purchase
Agreements on March 25, 2003, whereby the Company agreed to purchase the
partnership interests of the
14
CAPITAL SENIOR LIVING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
general partners and the other third party limited partners for an aggregate of
approximately $1.7 million plus the assumption of debts and liabilities.
Effective as of July 1, 2003, the Company acquired the partnership interest of
the general partner and the other third party limited partnership interests in
the Triad Entities for $1.3 million in cash, $0.4 million in notes payable and
the assumption of all outstanding debt and liabilities. The total purchase price
was $194.4 million and the acquisition was treated as a purchase of property.
The Company now wholly owns each of the Triad Entities. This acquisition
resulted in the Company acquiring ownership of 12 senior living communities with
a combined resident capacity of approximately 1,670 residents. The resident
capacity mix for the Triad Entities Acquired is 95% independent living and 5%
assisted living, with all revenues derived from private pay sources. Prior to
the acquisition the Company had developed the properties owned by and managed
the Triad Entities. Subsequent to the end of the Company's third quarter of
2003, the Company repaid the $0.4 million in notes payable related to this
acquisition. (See Footnote 2)
The Company formed BRE/CSL with Blackstone and the joint ventures seek to
acquire senior housing properties. BRE/CSL is owned 90% by Blackstone and 10% by
the Company. Pursuant to the terms of the joint ventures, 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.
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 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. In addition, on June 30, 2003 the
Company contributed to BRE/CSL its Cottonwood facility with a capacity of
approximately 182 residents. As a result of the contribution, the Company repaid
$7.4 million of long-term debt to Bank One, NA, received $3.1 million in cash
from BRE/CSL, has a 10% equity interest in BRE/CSL of $0.4 million and
recognized a gain of $3.4 million.
As part of the Cottonwood contribution to BRE/CSL, the Company guaranteed 25% or
$1.9 million of BRE/CSL's debt with Bank One. The Company made this guarantee to
induce Bank One to allow the Cottonwood debt to be assumed by BRE/CSL. The
Company's performance under this debt guarantee would be triggered by an event
of default under the loan agreement by BRE/CSL. The Company estimates the
carrying value of its obligation under the guarantee as nominal.
In addition, the Company maintains a right of first offer to purchase the
BRE/CSL communities as well as an option to purchase Blackstone's interest in
the ventures at fair market value. In the event any of the BRE/CSL communities
are sold by BRE/CSL, the Company's receipt of proceeds from the sale would be
subject to certain terms and conditions, including Blackstone receiving a
certain internal rate of return.
The Company manages the six 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 September 30, 2003, the Company has
cumulatively deferred $91,000 of management fee income as a result of its 10%
interest in the BRE/CSL joint venture.
During the fourth quarter of 2002, the Company acquired the interest of
affiliates of LCOR in four joint ventures in which LCOR was a member from LCOR.
These joint ventures own the Spring Meadows Communities. The Company's interests
in the four joint ventures include interests in certain 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 and an approximate 19% member interest in each venture. As of
September 30, 2003, the Company had notes and accrued interest receivable from
15
CAPITAL SENIOR LIVING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
the Spring Meadows Communities of $1.5 million. 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 since the amounts
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.
In September 2003, the Company sold its Carmichael community to SHP, a fund
managed by Prudential, for $11.7 million, before closing costs of $0.6 million.
Carmichael is an independent living community located in Sacramento, California
with a resident capacity of 156. As a result of the sale the Company retired
$7.4 million in debt and received $3.6 million in cash and recognized a gain of
$3.1 million. The Company manages the Carmichael community for SHP under a
long-term management contract.
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,
--------------------------------------- ----------------------------------------
2003 2002 2003 2002
------------------ ------------------ ------------------ -------------------
$ % $ % $ % $ %
Revenues:
Resident and healthcare revenue $ 17,973 96.3 $ 13,401 92.2 $44,490 93.8 $44,309 93.6
Rental and lease income..... -- -- -- -- -- -- 37 0.1
Unaffiliated management service
revenue................ -- -- 258 1.8 295 0.6 836 1.8
Affiliated management service
revenue.................. 665 3.6 609 4.1 2,467 5.2 1,463 3.1
Unaffiliated development fees -- -- -- -- -- -- -- --
Affiliated development fees. 26 0.1 273 1.9 163 0.4 672 1.4
---------- ------ --------- ----- -------- ----- -------- -----
Total revenue............. 18,664 100.0 14,541 100.0 47,415 100.0 47,317 100.0
Expenses:
Operating expenses.......... 12,034 64.5 8,148 56.0 27,877 58.8 25,802 54.5
General and administrative
expenses.................... 3,482 18.7 2,945 20.3 8,749 18.5 9,060 19.1
Depreciation and amortization 2,541 13.6 1,327 9.1 5,227 11.0 4,507 9.5
---------- -------- --------- --------- ---------- --------- ---------- --------
Total expenses............ 18,057 96.7 12,420 85.4 41,853 88.3 39,369 83.2
---------- -------- --------- --------- ---------- --------- ---------- --------
Income from operations ........ 607 3.3 2,121 14.6 5,562 11.7 7,948 16.8
Other income (expense):
Interest income............. 441 2.4 1,521 10.5 3,862 8.1 4,384 9.3
Interest expense............ (3,784) (20.3) (2,489) (17.1) (8,954) (18.9) (8,065) (17.0)
Equity in the earnings of
affiliates.................. 69 0.4 14 0.1 142 0.3 45 0.1
Gain on sales of assets..... 3,112 16.7 -- -- 6,603 13.9 1,929 4.1
---------- -------- --------- --------- ---------- --------- ---------- --------
Income before income taxes and
minority interest in
consolidated partnership. 445 2.4 1,167 8.0 7,215 15.2 6,241 13.2
Provision for income taxes.. (171) (0.9) (543) (3.7) (2,783) (5.9) (2,127) (4.5)
---------- -------- --------- --------- ---------- --------- ---------- --------
Income before minority interest in
consolidated partnership.... 274 1.5 624 4.3 4,432 9.3 4,114 8.7
Minority interest in consolidated
partnership................ 6 0.0 264 1.8 116 0.3 (637) (1.3)
---------- -------- --------- --------- ---------- --------- ---------- --------
Net income..................... $ 280 1.5 $ 888 6.1 $4,548 9.6 $ 3,477 7.3
========== ======== ========= ========= ========== ========= ========== ========
16
CAPITAL SENIOR LIVING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Three Months Ended September 30, 2003 Compared to the Three Months Ended
September 30, 2002
Revenues. Total revenues were $18.7 million in the three months ended September
30, 2003 compared to $14.5 million for the three months ended September 30,
2002, representing an increase of approximately $4.1 million or 28.4%. This
increase in revenue is primarily the result of a $4.6 million increase in
resident and healthcare revenue, an increase in affiliated management fees of
$0.1 million, offset by a $0.3 million decrease in unaffiliated management
services revenue and a $0.3 million decrease in affiliated development fee
revenue. The increase in resident and healthcare revenue reflects the
acquisition of the Triad Entities, which resulted in an increase in resident and
healthcare revenue of $5.4 million offset by a loss of revenue of $0.8 million
on the contribution of the Cottonwood community to BRE/CSL in June 2003.
Unaffiliated management services revenue decreased $0.2 million primarily due to
the Company acquiring an interest in the Spring Meadows Communities. Development
fee income decreased as a result of the completion of the Company's development
projects during fiscal 2002.
Expenses. Total expenses were $18.1 million in the third quarter of fiscal 2003
compared to $12.4 million in the third quarter of fiscal 2002, representing an
increase of $5.6 million or 45.4%. This increase is primarily the result of a
$3.9 million increase in operating expenses, a $0.5 million increase in general
and administrative expenses and a $1.2 million increase in depreciation and
amortization expense. The $3.9 million increase in operating expenses primarily
resulted from the acquisition of the Triad Entities, which increased in
operating expenses by $4.4 million offset by a reduction in operating expenses
of $0.4 million related to the Company's Cottonwood community, which was
contributed in June 2003. The $0.5 million increase in general and
administrative expenses primarily results from the acquisition of the Triad
Entities offset by a reduction in general and administrative expenses related to
the sale of the Cottonwood community. The increase in depreciation expense of
$1.2 million results from the acquisition of the Triad Entities offset by a
reduction in depreciation expenses related to the sale of the Cottonwood
community.
Other income and expense. Interest income decreased $1.1 million or 71.0% to
$0.4 million in the third quarter of fiscal 2003 compared to $1.5 million in the
third quarter of fiscal 2002. Interest income primarily represents interest
earned on loans the Company has made to Triad I and the Spring Meadows
Communities. The decrease in interest income results from the acquisition of the
Triad Entities. Interest expense increased $1.3 million to $3.8 million in the
third quarter of 2003 compared to $2.5 million in the third quarter of 2002.
This 52.0% increase in interest expense is the result of the acquisition of the
Triad Entities. 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
Triad I. Gain on sale of assets in the third quarter of fiscal 2003 reflects the
sale of the Carmichael community to SHP and the sale of Crenshaw Creek community
for net proceeds of $4.7 million, which resulted in the recognition of a $3.1
million gain on sale.
Provision for income taxes. Provision for income taxes in the third quarter of
fiscal 2003 was $0.2 million or 37.9% of taxable income, compared to $0.5
million or 37.9% of taxable income in the comparable quarter for 2002. The
effective tax rates for the third quarter of 2003 and 2002 differ from the
statutory tax rates because of state income taxes and permanent tax differences.
Minority interest. Minority interest results from the losses incurred at HCP in
both fiscal 2003 and 2002.
Net income. As a result of the foregoing factors, net income decreased $0.6
million to $0.3 million for the three months ended September 30, 2003, as
compared to $0.9 million for the three months ended September 30, 2002.
Nine Months Ended September 30, 2003 Compared to the Nine Months Ended September
30, 2002
Revenues. For the nine months ended September 30, 2003, total revenues were
$47.4 million compared to $47.3 million for the nine months ended September 30,
2002, representing an increase of $0.1 million or 0.2%. This increase in revenue
is primarily the result of a $0.2 million increase in resident and healthcare
revenue, an increase in affiliated management services revenue of $1.0 million
offset by a decrease of $0.5 million in unaffiliated management services revenue
and a decrease of $0.5 million in affiliated development fees. The increase in
17
CAPITAL SENIOR LIVING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
resident and healthcare revenue reflects an increase in revenue of $5.4 million
from the acquisition of the Triad Entities, an overall increase at the Company's
other communities of $0.7 million, offset by loss of revenue on four communities
contributed to BRE/CSL in June 2002 and the contribution of the Cottonwood
community to BRE/CSL in June 2003 of $5.9 million. Affiliated management
services revenue increased by $1.0 million primarily as the result of increased
revenue at Triad I, and the Triad Entities during the first six months of fiscal
2003, and the Company's management of the BRE/CSL communities and the Spring
Meadows Communities. Unaffiliated management services revenue decreased
primarily due to the Company acquiring an interest in the Spring Meadows
Communities. Development fee income decreased as a result of the completion of
the Company's development projects during fiscal 2002.
Expenses. Total expenses increased $2.5 million or 6.3% to $41.9 million in the
first nine months of fiscal 2003 compared to $39.4 million in the first nine
months of fiscal 2002. This increase in expenses is the result of a $2.1 million
increase in operating expenses, a $0.3 million decrease in general and
administrative expenses and an increase in depreciation expense of $0.7 million.
The increase in operating expenses reflects an increase in expenses of $4.4
million from the acquisition of the Triad Entities, an overall increase in
operating expenses of $0.5 at the Company's other communities, offset by the
contribution of the five communities to BRE/CSL, which resulted in a decrease in
operating expenses of $2.8 million. The increase in depreciation expense
reflects the increased depreciation from the Triad Entities offset by the
reduction in depreciation relating to the communities contributed to BRE/CSL.
Other income and expense. Interest income decreased $0.5 million or 11.9% to
$3.9 million in the first nine months of fiscal 2003 compared to $4.4 million in
the first nine months of fiscal 2002. Interest income primarily represents
interest earned on loans the Company has made to Triad I, the Triad Entities in
the first six months of fiscal 2003 and the Spring Meadows Communities. The
decrease in interest income results from the loss of interest earned on the
Triad Entities after they were acquired in July 2003. Interest expense increased
$0.9 million to $9.0 million in the first nine months of 2003 compared to $8.1
million in the first nine months of 2002. This 11.0% increase in interest
expense is the result of interest incurred on the Triad Entities acquired offset
by interest incurred in the prior year on communities contributed to BRE/CSL.
Equity in the earnings of affiliates represents the Company's share of the
earnings and losses from the Company's investments in BRE/CSL, Triad I and the
Triad Entities. Gain on sale of assets in fiscal 2003 reflects the
sale/contribution of the Cottonwood community to BRE/CSL, sale of the Company's
Carmichael community to SHP, the sale of the Company's Crenshaw Creek community
and the sale of one parcel of land for net proceeds of $8.2 million, which
resulted in the recognition of a $6.6 million gain on sale. Gain on sale of
assets in the first nine months of 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.
Provision for income taxes. Provision for income taxes in the first nine months
of fiscal 2003 was $2.8 million or 38.0% of taxable income, compared to $2.1
million or 38.0% of taxable income in the comparable period of fiscal 2002. The
effective tax rates for the first nine months of fiscal 2003 and 2002 differ
from the statutory tax rates because of state income taxes and permanent tax
differences.
Minority interest. Minority interest decreased primarily due to the sale of two
HCP communities in fiscal 2002. The sale of the two HCP communities increased
minority interest in fiscal 2002 by approximately $0.9 million.
Net income. As a result of the foregoing factors, net income increased $1.0
million to $4.5 million for the nine months ended September 30, 2003, as
compared to $3.5 million for the nine months ended September 30, 2002.
Liquidity and Capital Resources
In addition to approximately $8.7 million of cash balances on hand as of
September 30, 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
18
CAPITAL SENIOR LIVING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
BRE/CSL and/or additional financing. Of the $8.7 million in cash balances, $1.1
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 HCP 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 $2.4 million in the
first nine months of fiscal 2003 compared to $6.6 million in the first nine
months of fiscal 2002. In the first nine months of fiscal 2003, net cash
provided by operating activities was primarily derived from net income of $4.5
million, a decrease in other assets of $0.7 million and a decrease in federal
and state income taxes receivable of $1.7 million, offset by net noncash
benefits of $0.8 million, an increase in accounts receivable of $1.3 million, an
increase in prepaid and other assets of $1.2 million, and a decrease in accounts
payable and accrued expenses of $1.2 million. 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 prepaid expenses of $3.2 million and a
decrease in customer deposits of $0.1 million.
The Company had net cash used in investing activities of $0.5 million in the
first nine months of fiscal 2003 compared to net cash provided by investing
activities of $2.5 million in the first nine months of fiscal 2002. In the first
nine months of fiscal 2003, net cash used in investing activities was primarily
the result of advances to affiliates of $7.7 million, and capital expenditures
of $1.3 million offset by net proceeds $5.1 million from the sale of two
communities and one parcel of land, net proceeds of $3.1 million from the
contribution of Cottonwood to BRE/CSL, $0.2 million relating to distributions
from BRE/CSL and $0.1 million in net cash acquired from the acquisition of the
Triad Entities. Advances to affiliates include loans made to Triad I and the
Triad Entities along with interest earned on loans to Triad I, the Triad
Entities and the Spring Meadows Communities. 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 $15.7 million and capital expenditures of $1.4 million.
The Company had net cash used in financing activities of $4.9 million in the
first nine months of fiscal 2003 compared to $8.5 million in the first nine
months of 2002. For the first nine months of fiscal 2003, net cash used in
financing activities primarily results from repayments of notes payable of $9.2
million, distributions to minority partners of $0.1 million and deferred loan
charges paid of $0.2 million offset by proceeds from the issuance of notes
payable of $4.5 million and proceeds from the exercise of common stock of $0.1
million. 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.
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
19
CAPITAL SENIOR LIVING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
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") and the assets,
liabilities, minority interest and results of operations of HCP have been
consolidated into the Company's financial statements. During the third quarter
of 2003, HCP sold its Crenshaw Creek facility for $1.1 million, resulting in
cash proceeds of $1.1 million to HCP and the recognition of a gain on sale of
$48,000. Subsequent to the end of the Company's third quarter of 2003 HCP has
commenced the liquidation process.
The Company formed BRE/CSL with Blackstone and the joint ventures seek to
acquire senior housing properties. BRE/CSL is owned 90% by Blackstone and 10% by
the Company. Pursuant to the terms of the joint ventures, 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.
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 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. In addition, on June 30, 2003 the
Company contributed to BRE/CSL its Cottonwood facility with a capacity of
approximately 182 residents. As a result of the contribution, the Company repaid
$7.4 million of long-term debt to Bank One, NA, received $3.1 million in cash
from BRE/CSL, has a 10% equity interest in BRE/CSL of $0.4 million and
recognized a gain of $3.4 million.
As part of the Cottonwood contribution to BRE/CSL, the Company guaranteed 25% or
$1.9 million of BRE/CSL's debt with Bank One. The Company made this guarantee to
induce Bank One to allow the Cottonwood debt to be assumed by BRE/CSL. The
Company's performance under this debt guarantee would be triggered by an event
of default under the loan agreement by BRE/CSL. The Company estimates the
carrying value of its obligation under the guarantee as nominal.
In addition, the Company maintains a right of first offer to purchase the
BRE/CSL communities as well as an option to purchase Blackstone's interest in
the ventures at fair market value. In the event any of the BRE/CSL communities
are sold by BRE/CSL, the Company's receipt of proceeds from the sale would be
subject to certain terms and conditions, including Blackstone receiving a
certain internal rate of return.
The Company manages the six 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 September 30, 2003, the Company has
cumulatively deferred $91,000 of management fee income as a result of its 10%
interest in the BRE/CSL joint venture.
20
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 the interest of
affiliates of LCOR in four joint ventures in which LCOR was a member from LCOR.
These joint ventures own the Spring Meadows Communities. The Company's interests
in the four joint ventures include interests in certain 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 and an approximate 19% member interest in each venture. As of
September 30, 2003, the Company had notes and accrued interest receivable from
the Spring Meadows Communities of $1.5 million. 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 since the amounts
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.
In September 2003, the Company sold its Carmichael community to SHP, a fund
managed by Prudential, for $11.7 million, before closing costs of $0.6 million.
Carmichael is an independent living community located in Sacramento, California
with a resident capacity of 156. As a result of the sale the Company retired
$7.4 million in debt and received $3.6 million in cash and recognized a gain of
$3.1 million. The Company manages the Carmichael community for SHP under a
long-term management contract.
Triad I owns and finances the construction of new senior living communities. The
Company entered into development and management agreements with Triad I 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, five new
Waterford communities and two expansions pursuant to arrangements with Triad I.
The Company has an approximate 1% limited partnership interest in Triad I and is
accounting for this investments under the equity method of accounting based on
the provisions of the Triad I partnership agreement. The Company defers 1% of
its interest income, development fee income and management fee income earned
from Triad I. As of September 30, 2003, the Company had deferred income of $0.2
million relating to Triad I.
The Company has loan commitments to Triad I for construction and pre-marketing
expenses, in addition to requirements to fund Triad I's operating deficits
through operating deficit guarantees provided for in its management agreements
with Triad I and other advances, totaling $19.8 million at September 30, 2003.
The Company evaluates the carrying value of these receivables by comparing the
cash flows expected from the operations of Triad I 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
Entity to any one or more of Triad I, Triad II, Triad III, Triad IV and Triad V.
The carrying value of the note receivable from the Triad I could be adversely
affected by a number of factors, including the Triad I 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 note receivable is 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 Triad I. Deferred development and
management fee income is being amortized into income over the expected remaining
life of the Triad I partnership.
21
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, 2003, the capital invested
in Triad I, information related to loans made by the Company to Triad I and
information on deferred income related to Triad I (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 $5,667 $ -- $ 158
The Company could be required in the future to revise the terms of its note with
the Triad I to extend the maturity date, change the interest rate earned on the
note or modify other terms and conditions of the note.
During the development phase of the Triad I communities the Company 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, after 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 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. In October 2003, the FASB Board agreed to defer
the effective date of FASB Interpretation No. 46 for variable interests held by
public companies in all entities that were acquired prior to February 1, 2003.
The deferral will require that public companies adopt the provisions of the
interpretation at the end of periods ending after December 15, 2003. The
Company, therefore, expects to adopt the provisions of this interpretation as a
cumulative effect adjustment on December 31, 2003 and its adoption will result
in the Company consolidating the financial statements of the Triad I as of
December 31, 2003.
Triad I financed 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 Triad I if the other financing sources of Triad I have
been fully utilized. These operating deficit-funding obligations are guaranteed
by the Company and include making loans to fund debt service obligations to
Triad I's lenders. Amounts funded to date under these operating deficit
agreements are disclosed in the table above. The Company could be required to
fund additional amounts under these operating deficit agreements in the future.
22
CAPITAL SENIOR LIVING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Set forth below is information on the construction/permanent loan facilities
entered into by Triad I as of September 30, 2003 (dollars in thousands):
Loan Facilities to Triad I
--------------------------------------------------
Number of Amount
Entity Communities Commitment Outstanding Type Lender
------ ----------- ---------- ----------- ---- ------
Triad I 7 $50,000 $47,794 take-out GMAC
At September 30, 2003, one community in Triad I was in violation of a certain
financial covenant with its lender. The lender has provided Triad I with a
waiver for this covenant violation.
Summary financial information regarding the financial position of Triad I as of
September 30, 2003 and 2002 and results of operations for the nine months ended
September 30, 2003 and 2002 of Triad I is presented below. The Company is also
presenting unaudited pro forma financial information consolidating Triad I under
the provisions of FASB Interpretation No. 46 as if FASB Interpretation No. 46
was effective January 1, 2003. In October 2003, the FASB Board agreed to defer
the effective date of FASB Interpretation No. 46 for variable interests held by
public companies in all entities that were acquired prior to February 1, 2003.
The deferral will require that public companies adopt the provisions of the
interpretation at the end of periods ending after December 15, 2003. The
Company, therefore, expects to adopt the provisions of this interpretation as a
cumulative effect adjustment on December 31, 2003 and its adoption will result
in the Company consolidating the financial statements of Triad I as of December
31, 2003. 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 I Pro Forma
Sept. 30, Sept. 30, Sept. 30,
2003 2002 2003
--------- ---------- -----------
Current assets........................... $ 2,996 $ 1,610 $ 30,100
Property and equipment, net.............. 54,381 56,279 379,571
Other assets............................. 1,697 1,498 21,911
-------- -------- ----------
Total assets......................... $ 59,074 $ 59,387 $ 431,582
======== ======== ==========
Current liabilities...................... $ 6,301 $ 4,078 $ 24,549
Long-term debt........................... 60,633 59,709 275,908
Other long-term liabilities.............. 68 -- 8,016
Partnership deficit / shareholders'
equity................................... (7,928) (4,400) 123,109
-------- -------- ----------
Total liabilities and partnership
deficit / shareholders' equity........... $ 59,074 $ 59,387 $ 431,582
========= ======== ==========
Nine Months
Nine Months Ended Ended
Sept. 30, Sept. 30, Sept. 30,
2003 2002 2003
--------- ----------- -----------
Net revenue.............................. $ 11,123 $ 10,415 $ 57,894
Operating and general & administrative... 9,379 8,762 45,360
Depreciation............................. 1,259 1,254 6,486
Operating (loss) income.................. 485 399 6,048
Net loss................................. (2,540) (1,837) 2,008
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.
23
CAPITAL SENIOR LIVING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
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.
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, 2003 the Company had $240.5 million in
outstanding debt comprised of various fixed and variable rate debt instruments
of $73.0 million and $167.5 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. A portion of the Company's variable rate
debt includes interest rate floors, which exceed current market rates. Once
these interest rate floors are reached each percentage point change in interest
rates, would increase the Company's annual interest expense by approximately
$1.7 million based on the Company's outstanding variable debt as of September
30, 2003. In addition, an increase in interest rates could result in operating
deficit obligations, relating to Triad I, that could require funding by the
Company. Triad I, as of September 30, 2003, had $47.8 million in outstanding
bank debt comprised of variable rate debt instruments.
Item 4. CONTROLS AND PROCEDURES.
The Company's management, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, has evaluated the effectiveness
of the Company's disclosure controls and procedures (as such term is defined in
Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the
period covered by this report. Based on such evaluation, the Company's Chief
Executive Officer and Chief Financial Officer have concluded that, as of the end
of such period, the Company's disclosure controls and procedures are effective
in recording, processing, summarizing and reporting, on a timely basis,
information required to be disclosed by the Company in the reports that it files
or submits under the Exchange Act.
There have not been any changes in the Company's internal control over financial
reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) during the fiscal quarter to which this report relates that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
24
CAPITAL SENIOR LIVING CORPORATION
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
In the fourth quarter of 2002, the Company (and two of its management
subsidiaries), 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 defend this claim. The
insurers have issued reservation of rights letters, subject to certain
exclusions in the applicable insurance policies. The parties are currently going
through initial discovery. The Company is unable at this time to estimate its
liability, if any, related to this claim. However, the Company denies any
wrongdoing and intends to vigorously defend this claim.
The Company has Other Claims pending not mentioned above 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 Other 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:
10.1 Management Agreement between Capital Senior Living,
Inc. and SHP II Carmichael, LLC
31.1 Certification of the Chief Executive Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of the Chief Financial Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
32 Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
25
CAPITAL SENIOR LIVING CORPORATION
PART II. OTHER INFORMATION (continued)
(B) Reports on Form 8-K
Current Report on Form 8-K filed with the Commission
on July 30, 2003 reporting the acquisition of the
partnership interest of the general partner and the
other third party limited partnership interests in
Triad Senior Living II, LP, Triad Senior Living III,
LP, Triad Senior Living IV, LP and Triad Senior
Living V, LP. The Current Report on Form 8-K also
reports the issuance of a press release to report the
Company's earnings for the second quarter of 2003.
26
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 13, 2003