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 or 1934
For the quarterly period ended June 30, 2001
[ ] 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 75240
(Address of principal executive offices)
972-770-5600
(Registrant's telephone number, including area code)
Indicate by check whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No
----- -----
As of August 10, 2001, the Registrant had outstanding 19,717,347 shares of its
Common Stock, $.01 par value.
CAPITAL SENIOR LIVING CORPORATION
INDEX
Page
Number
------
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets - -
June 30, 2001 and December 31, 2000 3
Consolidated Statements of Income - -
Three and Six Months Ended June 30, 2001 and 2000 4
Consolidated Statements of Cash Flows - -
Six Months Ended June 30, 2001 and 2000 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
Part II. Other Information
Item 1. Legal Proceedings 20
Item 4. Submission of Matters to a Vote of Securities Holders 20
Item 6. Exhibits and Reports on Form 8-K 21
Signature
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CAPITAL SENIOR LIVING CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands)
June 30, December 31,
2001 2000
---------------- ----------------
ASSETS (Unaudited) (Audited)
Current assets:
Cash and cash equivalents........................................... $ 17,768 $ 23,975
Accounts receivable, net............................................ 2,123 3,221
Accounts receivable from affiliates................................. 2,201 3,764
Interest receivable................................................. 4,033 2,074
Federal and state income taxes receivable........................... 2,617 3,728
Deferred taxes...................................................... 1,208 1,208
Prepaid expenses and other.......................................... 3,642 1,935
---------------- ----------------
Total current assets.......................................... 33,592 39,905
Property and equipment, net............................................... 202,799 204,764
Deferred taxes............................................................ 8,671 8,872
Notes receivable.......................................................... -- 570
Notes receivable from affiliates.......................................... 51,378 43,388
Investments in limited partnerships....................................... 5,843 6,526
Assets held for sale...................................................... 6,920 6,920
Other assets.............................................................. 8,100 7,599
---------------- ----------------
Total assets.................................................. $ 317,303 $ 318,544
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................... $ 2,151 $ 3,907
Accrued expenses.................................................... 4,015 3,194
Current portion of notes payable.................................... 9,515 4,770
Customer deposits................................................... 1,073 1,012
---------------- ----------------
Total current liabilities..................................... 16,754 12,883
Deferred income from affiliates........................................... 2,046 2,241
Notes payable, net of current portion..................................... 172,303 176,507
Line of credit............................................................ 7,553 7,553
Minority interest in consolidated partnership............................. 6,829 8,572
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.01 par value:
Authorized shares 15,000,000; no shares issued or outstanding. -- --
Common stock, $.01 par value:
Authorized shares 65,000,000; issued and outstanding
19,717,347 at June 30, 2001 and December 31, 2000............. 197 197
Additional paid-in capital.......................................... 91,935 91,935
Retained earnings................................................... 19,686 18,656
---------------- ----------------
Total shareholders' equity.................................... 111,818 110,788
---------------- ----------------
Total liabilities and shareholders' equity.................... $ 317,303 $ 318,544
================ ================
See accompanying notes.
3
CAPITAL SENIOR LIVING CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(in thousands)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------- ---------------------------------
2001 2000 2001 2000
--------------- --------------- --------------- ---------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenues:
Resident and healthcare revenue........... $ 16,099 $ 9,998 $ 32,139 $ 20,265
Rental and lease income................... 1,106 1,029 2,137 2,022
Unaffiliated management services revenue.. 528 626 1,032 1,260
Affiliated management services revenue.... 433 193 820 405
Unaffiliated development fees............. 16 208 40 370
Affiliated development fees............... 221 277 278 519
----------- ----------- ------------ ------------
Total revenues........................ 18,403 12,331 36,446 24,841
Expenses:
Operating expenses........................ 9,675 6,086 18,979 12,320
General and administrative expenses....... 3,481 2,205 6,595 4,352
Depreciation and amortization............. 1,753 968 3,496 2,002
----------- ----------- ------------ ------------
Total expenses........................ 14,909 9,259 29,070 18,674
----------- ----------- ------------ ------------
Income from operations.......................... 3,494 3,072 7,376 6,167
Other income (expense):
Interest income........................... 1,592 1,455 3,133 2,833
Interest expense.......................... (3,843) (2,011) (8,092) (3,970)
Equity in the losses of affiliates........ (83) -- (336) --
Gain on sale of assets.................... -- -- -- 303
----------- ----------- ------------ ------------
Income before income taxes and minority interest in
consolidated partnership.................. 1,160 2,516 2,081 5,333
Provision for income taxes...................... (369) (815) (630) (1,705)
----------- ----------- ------------ ------------
Income before minority interest in consolidated
partnership............................... 791 1,701 1,451 3,628
Minority interest in consolidated partnership... (189) (389) (421) (844)
----------- ----------- ------------ ------------
Net income...................................... $ 602 $ 1,312 $ 1,030 $ 2,784
=========== =========== ============ ============
Net income per share:
Basic..................................... $ 0.03 $ 0.07 $ 0.05 $ 0.14
============ ============ ============ ============
Diluted................................... $ 0.03 $ 0.07 $ 0.05 $ 0.14
============ ============ ============ ============
Weighted average shares outstanding - basic 19,717 19,717 19,717 19,717
=========== =========== ============ ============
Weighted average shares outstanding - diluted 19,717 19,717 19,717 19,732
=========== =========== ============ ============
See accompanying notes.
4
CAPITAL SENIOR LIVING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Six Months Ended June 30,
-------------------------------------
2001 2000
--------------- ---------------
(Unaudited) (Unaudited)
Operating Activities
Net income.......................................................... $ 1,030 $ 2,784
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization................................. 3,496 2,002
Amortization of deferred financing charges.................... 462 96
Gain on sale of assets........................................ -- (303)
Equity in the losses of affiliates............................ 336 --
Minority interest in consolidated partnership................. 421 844
Deferred tax expense.......................................... 201 202
Change in deferred income from affiliates..................... (195) 376
Changes in operating assets and liabilities:
Restricted cash........................................... -- (2,274)
Accounts receivable....................................... 1,098 271
Accounts receivable from affiliates....................... 1,563 4,209
Interest receivable....................................... (1,959) (168)
Notes receivable.......................................... 570 --
Prepaid expenses and other................................ (1,707) (2,583)
Other assets.............................................. (1,009) (1,775)
Federal and state income taxes............................ 1,111 1,388
Accounts payable and accrued expenses..................... (935) (709)
Customer deposits......................................... 61 124
--------------- ---------------
Net cash provided by operating activities........................... 4,544 4,484
Investing activities
Capital expenditures................................................ (1,485) (831)
Proceeds from the sale of assets.................................... -- 2,279
Advances to affiliates.............................................. (8,149) (8,024)
Distribution from (investments in) limited partnership.............. 506 (330)
--------------- ---------------
Net cash used in investing activities............................... (9,128) (6,906)
Financing activities
Proceeds from notes payable and line of credit...................... 3,112 2,383
Repayment of notes payable.......................................... (2,571) (956)
Distributions to minority partners.................................. (2,164) (930)
Deferred loan charges paid.......................................... -- (87)
--------------- ---------------
Net cash provided by (used in) financing activities................. (1,623) 410
---------------- ---------------
Decrease in cash and cash equivalents............................... (6,207) (2,012)
Cash and cash equivalents at beginning of period.................... 23,975 32,988
--------------- ---------------
Cash and cash equivalents at end of period.......................... $ 17,768 $ 30,976
=============== ===============
Supplemental disclosures:
Cash paid during the period for:
Interest..................................................... $ 7,511 $ 4,191
=============== ===============
Income taxes................................................. $ 396 $ 246
=============== ===============
See accompanying notes.
5
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2001
(Unaudited)
1. BASIS OF PRESENTATION
Capital Senior Living Corporation, a Delaware corporation (the "Company"), was
incorporated on October 25, 1996. The accompanying consolidated financial
statements include the financial statements of Capital Senior Living Corporation
and its subsidiaries. All intercompany balances and transactions have been
eliminated in consolidation.
The accompanying consolidated balance sheet, as of December 31, 2000, has been
derived from audited consolidated financial statements of the Company for the
year ended December 31, 2000, and the accompanying unaudited consolidated
financial statements, as of June 30, 2001 and 2000, 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, 2000 included in the Company's
Annual Report on Form 10-K filed with the Securities and Exchange Commission on
March 21, 2001.
In the opinion of the Company, the accompanying consolidated financial
statements contain all adjustments (all of which were normal recurring accruals)
necessary to present fairly the Company's financial position as of June 30,
2001, results of operations for the three months and six months ended June 30,
2001 and 2000, respectively, and cash flows for the six months ended June 30,
2001 and 2000. The results of operations for the three and six months ended June
30, 2001 are not necessarily indicative of the results for the year ending
December 31, 2001.
The Financial Accounting Standards Board issued Statement 133, "Accounting for
Derivative Instruments and Hedging Activities" in June 1998. The Statement is
effective for all fiscal quarters of all fiscal years beginning after June 15,
2000. Because of the Company's minimal use of derivatives the adoption of FAS
133 by the Company in the first quarter of fiscal 2001 did not have a material
effect on the Company's earnings or financial position.
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, Business Combinations, and No. 142,
Goodwill and Other Intangible Assets, effective for years beginning after
December 15, 2001. Under the new rules, goodwill and intangible assets deemed to
have indefinite lives will no longer be amortized but will be subject to annual
impairment tests in accordance with the Statements. Other intangible assets will
continue to be amortized over their useful lives. The Company will apply the new
rules on accounting for goodwill and other intangible assets beginning in the
first quarter of 2002. Application of the non-amortization provisions of the
Statement is expected to result in an increase in net income, but the amount has
not yet been determined, as previous business combinations have not yet been
analyzed under the new rules. During 2002, the Company will perform the first of
the required impairment tests of goodwill and indefinite lived intangible assets
as of January 1, 2002 and has not yet determined what the effects of these tests
will be on the earnings and financial position of the Company.
6
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. TRANSACTIONS WITH AFFILIATES
The Company has entered into development and management agreements with the
partnerships set out below (the "Triad Entities") for the development and
management of new senior living communities. The Triad Entities own and finance
the construction of the new senior living communities. The communities are
primarily Waterford communities. The development of senior living communities
typically involves a substantial commitment of capital over a 12-month
construction period during which time no revenues are generated, followed by an
18 to 24-month lease up period. The Company is accounting for these investments
under the equity method of accounting based on the provisions of the Triad
Entities partnership agreements.
The following table, as of June 30, 2001, sets forth the percentage ownership
and capital investment the Company has in each of the Triad Entities,
information related to loans made by the Company to each Triad Entity and
information on deferred income related to each Triad Entity (dollars in
thousands):
Notes Receivable Deferred Income
------------------------------------------- ---------------------------------
LP
Entity Ownership Capital Committed Interest Development Management
------ Interest Investment Amount Balance Maturity Rate Interest Fees Fees
-------- ---------- ------ ------- -------- ---- -------- ---- ----
Triad Senior
Living I,
L.P. 1.0% $ -- $ -- $11,630(1) -- 8.0% $ 162 $ 354 $112
(Triad I)
Triad Senior
Living II, September
L.P. 1.0 -- 15,000 14,316 25, 2003 8.0 241 208 1
(Triad II)
Triad Senior
Living III,
L.P. February
(Triad III) 1.0 -- 15,000 14,272 8, 2004 8.0 215 401 2
Triad Senior
Living IV,
L.P. December
(Triad IV) 1.0 -- 10,000 7,487 30, 2003 8.0 140 120 --
Triad Senior
Living V, L.P. June
(Triad V) 1.0 -- 10,000 3,673 30, 2004 8.0 57 33 --
<FN>
- ----------------------
(1) Pursuant to operating deficit loan obligations.
</FN>
The Company typically receives a development fee of 4% of project costs, as well
as reimbursement of expenses and overhead not to exceed 4% of project costs.
These fees are recorded over the term of the development project on a basis
approximating the percentage of completion method. The Company earned
development fees on three communities in fiscal 2001 compared to 15 communities
in fiscal 2000. In addition, when properties become operational, the Company
typically receives management fees in an amount equal to the greater of 5% of
gross revenues or $5,000 per month per community, plus overhead expenses.
7
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The Company has the option to purchase the partnership interests of the other
parties in each of the Triad Entities, except in Triad I, for an amount equal to
the amount paid for the partnership interest by the other partners, plus a
noncompounded return of 12% per annum. In addition, each Triad Entity, except
Triad I, provides the Company with an option to purchase the communities
developed by the applicable partnership upon such community's completion for an
amount equal to the fair market value (based on a third-party appraisals but not
less than hard and soft costs and lease-up costs) of the community.
In December 1999, Triad I completed a recapitalization in which an affiliate of
Lehman Brothers purchased from a third party 80% of the limited partnership
interests in Triad I. The Company has the option to purchase the Triad I
communities prior to December 31, 2001 for an amount specified in the
partnership agreement, has an option to purchase the partnership interest of the
other partners for an amount specified in the partnership agreement and is
subject to the buy-sell provisions of the partnership agreement. The Company
continues to manage the communities in the Triad I partnership. The Company has
made no determination as to whether it will exercise any of these purchase
options.
3. NET INCOME PER SHARE
Basic net income per share is calculated by dividing net income by the weighted
average number of common shares outstanding during the period. Diluted net
income per share considers the dilutive effect of outstanding options calculated
using the treasury stock method.
The following table sets forth the computation of basic and diluted earnings per
share (in thousands, except for per share amounts):
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- -----------------
2001 2000 2001 2000
--------- --------- --------- -------
Net income $ 602 $ 1,312 $ 1,030 $ 2,784
Weighted average shares
outstanding - basic 19,717 19,717 19,717 19,717
Effect of dilutive securities:
Employee stock options -- -- -- 15
--------- --------- --------- ---------
Weighted average shares
outstanding - diluted 19,717 19,717 19,717 19,732
========= ========= ========= =========
Basic earnings per share $ 0.03 $ 0.07 $ 0.05 $ 0.14
========= ========= ========= =========
Diluted earnings per share $ 0.03 $ 0.07 $ 0.05 $ 0.14
========= ========= ========= =========
Options to purchase 1.2 million shares of common stock at prices ranging from
$1.80 to $13.50 per share were not included in the computation of diluted
earnings per share because the average daily price of the common stock during
the second quarter and first six months of fiscal 2001 did not exceed the
exercise price of the options, and therefore, the effect would be antidilutive.
For the second quarter and first six months of fiscal 2000, options to purchase
1.8 million shares of common stock at prices ranging from $3.63 to $13.50 per
share were not included in the computation of diluted earnings per share because
the average daily price of the common stock did not exceed the exercise price of
the options, and therefore, the effect would be antidilutive.
8
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. ACQUISITIONS
On August 15, 2000, the Company completed its merger with ILM Senior Living,
Inc. ("ILM") and the acquisition of the Villa Santa Barbara property interest
held by ILM II Senior Living, Inc. ("ILM II"). This transaction resulted in the
Company acquiring ownership of eight senior living communities with a capacity
of approximately 1,300 residents. The Company had managed the ILM communities
since 1996 pursuant to a management agreement with ILM. The merger was accounted
for as a purchase and included total cash consideration for the eight
communities of approximately $97.6 million, net of closing costs of $4.4
million, consisting of $87.5 million to the ILM shareholders and $10.1 million
for ILM II's interest in the Villa Santa Barbara property. The consideration was
agreed upon as the result of arm's-length negotiations between the parties to
the merger and with ILM II. The Company also refinanced three of its existing
communities in conjunction with the merger and repaid approximately $25.8
million of a $34.0 million line of credit with Bank One Texas, N.A., as agent,
resulting in an amended loan facility of up to $9.0 million. GMAC Commercial
Mortgage Corporation ("GMAC") provided approximately $102.0 million and Newman
Financial Services, Inc. ("Newman") provided approximately $20.0 million of
financing for the merger and the refinancing. The balance of the merger
consideration and amounts necessary for the refinancing came from the Company's
existing cash resources. The allocation of the purchase price of the ILM
acquisition is tentative pending the resolution of certain tax issues that
existed at the time of acquisition. The allocation may change with the
resolution of these tax issues.
The results of operations for the above acquisitions are included in the
Company's statement of income from the date of acquisition.
The following pro forma consolidated results of operations for the six months
ended June 30, 2000, have been prepared as if the above-mentioned acquisitions
had occurred on January 1, 2000, and are as follows (in thousands):
2000
----
Net sales $ 35,595
Net income $ 1,490
Net income per share - basic $ 0.08
Net income per share - diluted $ 0.08
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 resulted had the
acquisitions occurred on January 1, 2000.
On February 9, 2001, the Company announced that it was terminating its merger
agreement with ILM II Senior Living, Inc. ("ILM II"). A tax issue disclosed in
ILM II's Form 10-K filed on January 31, 2001 could have caused a material
adverse change under the merger agreement with ILM II, and therefore put the
Company in the position of having to terminate the merger. The Company does not
expect to incur any additional costs related to this terminated merger. The
Company continues to manage the five ILM II communities pursuant to the existing
management agreement.
9
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. CONTINGENCIES
On or about October 23, 1998, Robert Lewis filed a putative class action
complaint on behalf of certain holders of assignee interests (the "Assignee
Interests") in Retirement Housing Partners I Limited Partnership ("NHP") in the
Delaware Court of Chancery against NHP, the Company, Capital Senior Living
Properties 2-NHPCT, Inc. and Capital Realty Group Senior Housing, Inc.
(collectively, the "Defendants"). Mr. Lewis purchased ninety Assignee Interests
in NHP in February 1993 for $180. The complaint alleges, among other things,
that the Defendants breached, or aided and abetted a breach of, the express and
implied terms of the NHP Partnership Agreement in connection with the sale of
four properties by NHP to Capital Senior Living Properties 2-NHPCT, Inc. The
complaint seeks, among other relief, rescission of the sale of those properties
and unspecified damages. The Company believes the complaint is without merit and
is vigorously defending itself in this action. The Company has filed a Motion to
Dismiss in this case, which is currently pending. The Company is unable to
estimate any liability related to this claim, if any.
The Company has pending claims incurred in the normal course of business, that,
in the opinion of management, based on the advice of legal counsel, will not
have a material effect on the financial statements of the Company.
10
CAPITAL SENIOR LIVING CORPORATION
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
The following discussion and analysis addresses (i) the Company's results of
operations for the three and six months ended June 30, 2001 and 2000,
respectively, and (ii) the 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 generates revenue from a variety of sources. For the three months
ended June 30, 2001, the Company's revenue was derived as follows: 87.5% from
the operation of 19 owned senior living communities that are operated by the
Company; 6.0% from lease rentals for triple net leases; 5.2% from management
fees arising from management services provided for 17 affiliate owned senior
living communities and 12 third-party owned senior living communities and 1.3%
derived from development fees earned for managing the development and
construction of new senior living communities for the Triad Entities.
For the six months ended June 30, 2001, the Company's revenue was derived as
follows: 88.2% from the operation of 19 owned senior living communities; 5.9%
from lease rentals for triple net leases; 5.0% from management fees arising from
management services provided for 17 affiliate owned senior living communities
and 12 third-party owned senior living communities and 0.9% derived from
development fees earned for managing the development and construction of new
senior living communities for the Triad Entities.
The Company believes that the factors affecting the financial performance of
communities managed under contracts with third parties do not vary substantially
from the factors affecting the performance of owned and leased communities,
although there are different business risks associated with these activities.
The Company's third-party management fees are primarily based on a percentage of
gross revenues. As a result, the cash flows and profitability of such contracts
to the Company are more dependent on the revenues generated by such communities
and less dependent on net cash flow than for owned communities. Further, the
Company is not responsible for capital investments in managed communities. While
the management contracts are generally terminable only for cause, in certain
cases the contracts can be terminated upon the sale of a community, subject to
the Company's rights to offer to purchase such community.
The Company's triple net leases currently extend through various dates through
2006. The base payments under these leases are fixed and are not subject to
change based upon the operating performance of these communities. Following
termination of the lease agreements, unless the operators extend their leases,
the Company may either convert and operate the communities as assisted living
and Alzheimer's care communities, sell the communities or evaluate other
alternatives.
The Company's current management contracts expire on various dates through June
2012 and provide for management fees based generally upon rates that vary by
contract from 4% of net revenues to 7% of net
11
CAPITAL SENIOR LIVING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
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 costs and are earned over the period commencing with the initial
development activities and ending with the opening of the community. As of June
30, 2001, development fees have been earned for services performed on three
communities under development or expansion for the Triad Entities.
Results of Operations
The following table sets forth for the periods indicated, selected statements of
income data in thousands of dollars and expressed as a percentage of total
revenues.
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------------- ----------------------------------------
2001 2000 2001 2000
------------------ ------------------ ------------------ ---------------------
$ % $ % $ % $ %
Revenues:
Resident and healthcare $ 16,099 87.5 $9,998 81.1 $32,139 88.2 $20,265 81.6
revenue................
Rental and lease income... 1,106 6.0 1,029 8.3 2,137 5.9 2,022 8.1
Unaffiliated management
service revenue........ 528 2.9 626 5.1 1,032 2.8 1,260 5.1
Affiliated management
service revenue........ 433 2.3 193 1.6 820 2.2 405 1.6
Unaffiliated development 16 0.1 208 1.7 40 0.1 370 1.5
fees...................
Affiliated development fees 221 1.2 277 2.2 278 0.8 519 2.1
--------- ------- -------- -------- --------- -------- --------- -------
Total revenue............. 18,403 100.0 12,331 100.0 36,446 100.0 24,841 100.0
Expenses:
Operating expenses........ 9,675 52.6 6,086 49.4 18,979 52.1 12,320 49.6
General and administrative 3,481 18.9 2,205 17.9 6,595 18.1 4,352 17.5
expenses...............
Depreciation and
amortization........... 1,753 9.5 968 7.9 3,496 9.6 2,002 8.1
--------- ------- -------- -------- --------- -------- -------- -------
Total expenses 14,909 81.0 9,259 75.1 29,070 79.8 18,674 75.2
--------- ------- -------- -------- --------- -------- -------- -------
Income from operations ........ 3,494 19.0 3,072 24.9 7,376 20.2 6,167 24.8
Other income (expense):
Interest income........... 1,592 8.7 1,455 11.8 3,133 8.6 2,833 11.4
Interest expense.......... (3,843) (20.9) (2,011) (16.3) (8,092) (22.2) (3,970) (16.0)
Equity in the losses of
affiliates............. (83) (0.5) (336) (0.9) -- --
Gain on sales of assets... -- -- -- -- -- -- 303 1.2
---------- ------ -------- -------- ---------- -------- ------- -------
Income before income taxes
and minority interest in
consolidated partnership 1,160 6.3 2,516 20.4 2,081 5.7 5,333 21.5
Provision for income taxes (369) (2.0) (815) (6.6) (630) (1.7) (1,705) (6.9)
--------- ------- -------- -------- --------- -------- ------- -------
Income before minority interest
in consolidated partnership. 791 4.3 1,701 13.8 1,451 4.0 3,628 14.6
Minority interest in consolidated
partnership.............. (189) (1.0) (389) (3.2) (421) (1.2) (844) (3.4)
---------- ------- --------- -------- --------- -------- --------- -------
Net income..................... $ 602 3.3 $ 1,312 10.6 $ 1,030 2.8 $ 2,784 11.2
========== ======= ========= ======== ========= ======== ========= =======
12
CAPITAL SENIOR LIVING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Three Months Ended June 30, 2001 Compared to the Three Months Ended June 30,
2000
Revenues. Total revenues were $18.4 million in the three months ended June 30,
2001 compared to $12.3 million for the three months ended June 30, 2000,
representing an increase of $6.1 million or 49.2%. This increase in revenue is
the result of a $6.1 million increase in resident and healthcare revenue, which
reflects the revenue from the eight communities that were acquired in the third
quarter of fiscal 2000.
Expenses. Total expenses were $14.9 million in the second quarter of fiscal 2001
compared to $9.3 million in the second quarter of fiscal 2000, representing an
increase of $5.6 million or 61.0%. This increase is primarily due to the
operations related to the eight communities acquired in the third quarter of
fiscal 2000, along with slightly higher operating costs at the Company's senior
living communities.
Other income and expense. Interest expense increased $1.8 million in the second
quarter of fiscal 2001 compared to the prior year as a result of additional debt
incurred by the Company to acquire the eight communities and refinancing three
of the Company's owned communities. Interest income increased $0.1 million in
the second quarter of fiscal 2001 compared to the same period in 2000 as a
result of additional income earned on loans made to the Triad Entities. The
Company's equity in the losses of affiliates represents the Company's share of
the startup losses incurred by the Triad Entities.
Provision for income taxes. Provision for income taxes in the second quarter of
fiscal 2001 was $0.4 million or 38.0% of taxable income, compared to $0.8
million or 38.3% of taxable income in the comparable quarter for 2000. The
effective tax rates for the first quarter of 2001 and 2000 differ from the
statutory tax rates because of state income taxes and permanent tax differences.
Minority interest. Minority interest decreased $0.2 million due to the decrease
in net income at HealthCare Properties L.P. ("HCP") in the second quarter of
fiscal 2001 compared to fiscal 2000.
Net income. As a result of the foregoing factors, net income decreased $0.7
million to $0.6 million for the three months ended June 30, 2001, as compared to
$1.3 million for the three months ended June 30, 2000.
Six Months Ended June 30, 2001 Compared to the Six Months Ended June 30, 2000
Revenues. For the six months ended June 30, 2001, total revenues were $36.4
million compared to $24.8 million for the six months ended June 30, 2000,
representing an increase of $11.6 million or 46.7%. This increase in revenue is
primarily the result of an $11.9 million increase in resident and healthcare
revenue, an increase of $0.2 million in management fees offset by a decrease in
development fee revenue of $0.6. The increase in resident and healthcare revenue
reflects revenue from the eight communities that were acquired in the third
quarter of fiscal 2000. The increase in management fee revenue is primarily from
increased fees earned related to the Triad Entities. The reduction in
development fee revenue reflects the Company's strategic initiatives aimed at
enhancing cash flows and discontinuing the use of joint ventures for future
development. During the first six months of fiscal 2001, the Company received
development fee revenue on three communities compared to 15 communities in the
first six months of fiscal 2000.
13
CAPITAL SENIOR LIVING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Expenses. Total expenses increased $10.4 million or 55.7% to $29.1 million in
the first six months of fiscal 2001 compared to $18.7 million in the first half
of fiscal 2000. This increase is primarily due to the operations related to the
eight communities acquired in the third quarter of fiscal 2000 along with
slightly higher operating costs at the Company's senior living communities.
Other income and expense. Interest expense increased $4.1 million in the first
six months of fiscal 2001 compared to the prior year as a result of additional
debt incurred by the Company to acquire the eight communities and refinancing
three of the Company's owned communities. Interest income increased $0.3 million
in the first six months of fiscal 2001 compared to the same period in 2000 as a
result of additional income earned on loans made to the Triad Entities. The
Company's equity in the losses of affiliates of $0.3 million represents the
Company's share of the startup losses incurred by the Triad Entities. The gain
on sale in fiscal 2000 relates to the sale of a community owned by HCP.
Provision for income taxes. Provision for income taxes in the first six months
of fiscal 2001 was $0.6 million or 38.0% of taxable income, compared to $1.7
million or 38.0% of taxable income in the comparable period of fiscal 2000. The
effective tax rates for the second quarter of 2000 and 1999 differ from the
statutory tax rates because of state income taxes and permanent tax differences.
Minority interest. Minority interest decreased $0.4 million due to the decrease
in net income at HCP in the first six months of fiscal 2001 compared to fiscal
2000.
Net income. As a result of the foregoing factors, net income decreased $1.8
million to $1.0 million for the six months ended June 30, 2001, as compared to
$2.8 million for the six months ended June 30, 2000.
Liquidity and Capital Resources
In addition to approximately $17.8 million of cash balances on hand as of June
30, 2001, the Company's principal source of liquidity is expected to be cash
flows from operations. The Company expects its cash and cash equivalents along
with its net income, cash flow from operations and the proceeds from sale of
non-core assets to be sufficient to fund its short-term working capital
requirements. The Company's long-term capital requirements, primarily for
acquisitions, development and other corporate initiatives, will be dependent on
the Company's ability to access funds through the debt and/or equity markets or
the formation of joint ventures. 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 its long-term capital
requirements.
The Company had net cash provided by operating activities of $4.5 million in
each of the first six months of fiscal 2001 and 2000, respectively. In the first
six months of fiscal 2001, the net cash provided by operating activities was
primarily derived from net income of $1.0 million, net non-cash charges of $4.7
million, a decrease in accounts and income tax receivable of $3.8 million and a
reduction of notes receivable of $0.6 million, offset by an increase in interest
receivable of $2.0 million, increase in prepaid expenses of $1.7 million,
increase in other assets of $1.0 million and a decrease in accounts payable and
accrued expenses of $0.9 million. In the first six months of fiscal 2000, the
net cash provided by operating activities was primarily derived from net income
of $2.8 million, net non-cash charges of $3.2 million and a decrease in accounts
and income tax receivable of $5.9 million, offset by an increase in restricted
cash of $2.3 million, increase in prepaid expenses of $2.6 million, increase in
other assets of $1.8 million and a decrease in accounts payable and accrued
expenses of $0.7 million.
14
CAPITAL SENIOR LIVING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
The Company had net cash used in investing activities of $9.1 million and $6.9
million in the first six months of fiscal 2001 and 2000, respectively. In the
first six months of fiscal 2001, the Company's net cash used in investing
activities was primarily the result of advances to the Triad Entities of $8.1
million and capital expenditures of $1.5 million offset by distributions from
limited partnerships of $0.5 million. In the first six months of fiscal 2000,
the Company's net cash used in investing activities was primarily the result of
advances to the Triad Entities of $8.0 million, capital expenditures of $0.8
million and investments in limited partnerships of $0.3 million, offset by the
proceeds from the sale of one of the HCP communities for $2.3 million.
The Company had net cash used in financing activities of $1.6 million in first
six months of fiscal 2001, compared to net cash provided by financing activities
of $0.4 million in the comparable period of fiscal 2000. For the first six
months of fiscal 2001 net cash used in financing activities was primarily the
result of repayment of notes payable of $2.6 million and distribution to
minority partners of $2.2 million offset by proceeds from notes payable of $3.1
million. For the first six months of fiscal 2000, net cash provided by financing
activities was primarily the result of increases in notes payable, net of note
payments, of $1.4 million offset by distributions to minority partners of $0.9
million and deferred loan charges paid of $0.1 million.
The Company derives the benefits and bears the risks attendant to the
communities it owns. The cash flows and profitability of owned communities
depends on the operating results of such communities and are subject to certain
risks of ownership, including the need for capital expenditures, financing and
other risks such as those relating to environmental matters.
The cash flows and profitability of the HCP owned communities that are leased to
third parties depend on the ability of the lessee to make timely lease payments.
There are currently leases for seven properties by HCP to third parties. Four of
these properties are leased until the end of fiscal 2001 to HealthSouth
Rehabilitation Corp. ("HealthSouth"), under a master lease agreement. Three of
the four properties were closed by the lessee and effective August 25, 1999,
HealthSouth agreed to transfer control of the closed communities to the Company.
The Company has subsequently sold the three properties with the exception of a
small facility not adjacent to the main campus of one of the properties.
HealthSouth, however, agreed to continue making its full lease payments related
to all four properties. Of the remaining three triple net leases, one has been
leased to an unaffiliated party for five years and all payments have been
timely. One of the leases expired in fiscal 2000. The lessee continues to make
its monthly lease payment to HCP. However, this lessee and its parent
company/guarantor have filed for chapter 11 bankruptcy in the United States
Bankruptcy Court and the Company is uncertain if the bankruptcy protection will
disrupt future payments of lease obligations. The Company is reviewing all of
its options regarding this property, including finding a new lessee for the
property, renewing the lease with the current operator or selling the property.
With regard to the final triple net leased property, the lessee defaulted on its
minimum lease payments as of January 2001. HCP made the decision not to put
additional money into the property (which was built in 1916) and notified the
lender that they would not continue paying the lender's mortgage payment on the
property. Consequently, the lender has begun foreclosure proceedings on the
property and HCP is evaluating its options. HCP currently operates one of its
communities and has received a purchase offer for this property for $3.6
million. This offer has been accepted and the closing is expected on this
facility sometime in the third quarter of 2001.
15
CAPITAL SENIOR LIVING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
The cash flows and profitability of the Company's third-party management fees
are dependent upon the revenues and profitability of the communities managed.
While the management contracts are generally terminable only for cause, in
certain cases contracts can be terminated upon the sale of a community, subject
to the Company's rights to offer to purchase such community.
The Company plans to continue to develop and acquire senior living communities.
The development of senior living communities typically involves a substantial
commitment of capital over a 12-month construction period during which time no
revenues are generated, followed by an 18 to 24-month lease up period.
The Company has entered into development and management agreements with the
Triad Entities for the development and management of new senior living
communities. The Triad Entities will own and finance the construction of the new
communities. These communities are primarily Waterford communities. The Company
typically receives a development fee of 4% of project costs, as well as
reimbursement of expenses and overhead not to exceed 4% of project costs. In
addition, when the properties become operational, the Company typically receives
management fees in an amount equal to the greater of 5% of gross revenues or
$5,000 per month per community, other fees relating to lease up, plus overhead
expenses.
The Company holds one percent limited partnership interests in each of the Triad
Entities. The Company has the option to purchase the partnership interests of
the other parties in the Triad Entities, except for Triad I, for an amount equal
to the amount paid for the partnership interest by the other partners, plus a
noncompounded return of 12% per annum. In addition, each Triad Entity, except
Triad I, provides the Company with an option to purchase the communities
developed by the applicable partnership upon such community's completion for an
amount equal to the fair market value (based on a third-party appraisals but not
less than hard and soft costs and lease-up costs) of the community.
In December 1999, Triad I completed a recapitalization in which an affiliate of
Lehman Brothers purchased from a third party 80% of the limited partnership
interests in Triad I. The Company owns a 1% limited partnership interest in
Triad I. The Company has the option to purchase the Triad I communities prior to
December 31, 2001 for an amount specified in the partnership agreement, has an
option to purchase the partnership interest of the other partners for an amount
specified in the partnership agreement and is subject to the buy-sell provisions
of the partnership agreement. The Company will continue to develop and manage
the communities in the Triad I partnership.
The Company has made no determination as to whether it will exercise any of
these purchase options. The Company will evaluate the possible exercise of each
purchase option based on the business and financial factors that may exist at
the time these options may be exercised.
16
CAPITAL SENIOR LIVING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Each Triad Entity finances the development of new communities through a
combination of equity funding, traditional construction loans and permanent
financing with institutional lenders secured by first liens on the communities
and unsecured loans from the Company. The Company loans may be prepaid without
penalty. The financings from institutional lenders are secured by first liens on
the communities, are solely the responsibility of the Triad Entities and are not
guaranteed by the Company. The financing agreements the Triad Entities have with
the institutional lenders also include the assignment to the lenders of the
construction contracts and the development and management agreements with the
Company. The management agreements contain an obligation of the Company to make
operating deficit loans to the Triad Entities if other funding sources available
to the Triad Entities have been fully exhausted. These operating deficit loan
obligations include making loans to fund debt service obligations to the
lenders.
The chart below sets forth information about Company loans made to the Triad
Entities and financings from institutional lenders obtained by the Triad
Entities (dollars in thousands):
Notes Receivable Loan Facilities
----------------------------------------------
Balance
Committed June 30, Interest
Entity Amount 2000 Maturity Rate Amount Type Lender
------ ------ ---- -------- ---- ------ ---- ------
Triad Senior
Living I, L.P.
(Triad I) $ -- $11,630(1) -- 8.0% $50,000 permanent GMAC
Triad Senior
Living II, L.P. September 25, construction, Key
(Triad II) $15,000 $14,316 2003 8.0% $26,800 mini-perm Bank
Triad Senior
Living III, February 8, construction, Guaranty
L.P. $15,000 $14,272 2004 8.0% $56,300 mini-perm Federal
(Triad III)
Triad Senior
Living IV, L.P. December 30, construction, Compass
(Triad IV) $10,000 $ 7,487 2003 8.0% $18,600 mini-perm Bank
Triad Senior
Living V, L.P. June 30, construction, Bank of
(Triad V) $10,000 $ 3,673 2004 8.0% $ 9,333 mini-perm America
<FN>
- -----------------------
(1) Pursuant to operating deficit loan obligations.
</FN>
Pending Mergers
On February 9, 2001, the Company announced that it was terminating its
merger agreement with ILM II Senior Living, Inc. ("ILM II"). A tax issue
disclosed in ILM II's Form 10-K filed on January 31, 2001 could have caused a
material adverse change under the merger agreement with ILM II, and therefore
put the Company in the position of having to terminate the merger. The Company
does not expect to incur any additional costs related to this terminated merger.
The Company continues to manage the five ILM II communities pursuant to the
existing management agreement.
17
CAPITAL SENIOR LIVING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
New Pronouncements
The Financial Accounting Standards Board issued Statement 133, "Accounting for
Derivative Instruments and Hedging Activities" in June 1998. The Statement is
effective for all fiscal quarters of all fiscal years beginning after June 15,
2000. Because of the Company's minimal use of derivatives the adoption of FAS
133 by the Company in the first quarter of fiscal 2001 did not have a material
effect on the Company's earnings or financial position.
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, Business Combinations, and No. 142,
Goodwill and Other Intangible Assets, effective for years beginning after
December 15, 2001. Under the new rules, goodwill and intangible assets deemed to
have indefinite lives will no longer be amortized but will be subject to annual
impairment tests in accordance with the Statements. Other intangible assets will
continue to be amortized over their useful lives. The Company will apply the new
rules on accounting for goodwill and other intangible assets beginning in the
first quarter of 2002. Application of the non-amortization provisions of the
Statement is expected to result in an increase in net income, but the amount has
not yet been determined, as previous business combinations have not yet been
analyzed under the new rules. During 2002, the Company will perform the first of
the required impairment tests of goodwill and indefinite lived intangible assets
as of January 1, 2002 and has not yet determined what the effects of these tests
will be on the earnings and financial position of the Company.
Forward-Looking Statements
Certain information contained in this report constitutes "Forward-Looking
Statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended,
which can be identified by the use of forward-looking terminology such as "may,"
"will," "expect," "anticipate," "estimate" or "continue" or the negative thereof
or other variations thereon or comparable terminology. The Company cautions
readers that forward-looking statements, including, without limitation, those
relating to the Company's future business prospects, revenues, working capital,
liquidity, capital needs, interest costs and income, are subject to certain
risks and uncertainties that could cause actual results to differ materially
from those indicated in the forward-looking statements, due to several important
factors herein identified, among others, and their risks and factors identified
from time to time in the Company's reports filed with the Securities and
Exchange Commission.
18
CAPITAL SENIOR LIVING CORPORATION
Item 3. QUANTITATIVE AND QUALIITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company's primary market risk is exposure to changes in interest rates on
debt instruments. As of June 30, 2001, the Company had $189.4 million in
outstanding debt comprised of various fixed and variable rate debt instruments
of $61.0 million and $128.4 million, respectively.
Changes in interest rates would affect the fair market value of the Company's
fixed rate debt instruments, but would not have an impact on the Company's
earnings or cash flows. Fluctuations in interest rates on the Company's variable
rate debt instruments, which are tied to either the LIBOR or the prime rate,
would affect the Company's earnings and cash flows, but would not affect the
fair market value of the variable rate debt. For each percentage point change in
interest rates, the Company's annual interest expense would change by
approximately $1.3 million based on its current outstanding variable debt.
19
CAPITAL SENIOR LIVING CORPORATION
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
On or about October 23, 1998, Robert Lewis filed a putative class action
complaint on behalf of certain holders of assignee interests (the "Assignee
Interests") in NHP in the Delaware Court of Chancery against NHP, the Company,
Capital Senior Living Properties 2-NHPCT, Inc. and Capital Realty Group Senior
Housing, Inc. (collectively, the "Defendants"). Mr. Lewis purchased ninety
Assignee Interests in NHP in February 1993 for $180. The complaint alleges,
among other things, that the Defendants breached, or aided and abetted a breach
of, the express and implied terms of the NHP Partnership Agreement in connection
with the sale of four properties by NHP to Capital Senior Living Properties
2-NHPCT, Inc. The complaint seeks, among other relief, rescission of the sale of
those properties and unspecified damages. The Company believes the complaint is
without merit and is vigorously defending itself in this action. The Company has
filed a Motion to Dismiss in this case, which is currently pending. The Company
is unable to estimate any liability related to this claim, if any.
The Company has pending claims incurred in the normal course of business, that,
in the opinion of management, based on the advice of legal counsel, will not
have a material effect on the financial statements of the Company.
Item 2. CHANGES IN SECURITIES (And use of proceeds)
Not Applicable
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders was held on May 1, 2001. At the
meeting, the stockholders voted to elect two directors of the Company, James A.
Moore and Dr. Victor W. Nee to hold office until the annual meeting to be held
in 2004 or until each person's successor is duly elected and qualified
("Proposal 1"). The other directors whose terms continued after the annual
meeting were James A. Stroud, Lawrence A. Cohen, Keith N. Johannessen, Dr.
Gordon I. Goldstein and Craig F. Hartberg.
In addition, the stockholders were asked to consider and act upon a proposal to
ratify Ernst & Young, LLP as the independent public accountants for the Company
for the year 2001 ("Proposal 2"). No other matters were voted on at the annual
meeting. A total of 18,943,288 shares were represented at the meeting in person
or by proxy.
20
CAPITAL SENIOR LIVING CORPORATION
OTHER INFORMATION (continued)
The number of shares that were voted for, and that were withheld from, each of
the director nominees in Proposal 1 were as follows:
Director Nominee For Withheld
James A Moore 18,806,907 136,381
Dr. Victor W. Nee 18,804,907 138,381
With respect to Proposal 2, Ernst & Young LLP was ratified as the independent
public accountants for the Company for fiscal 2001, with 18,881,788 shares
voting for, 56,450 shares voting against and 5,050 shares abstaining.
Item 5. OTHER INFORMATION
Not Applicable
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits:
Not Applicable
(B) Reports on Form 8-K
Not Applicable
21
CAPITAL SENIOR LIVING CORPORATION
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Capital Senior Living Corporation
(Registrant)
By: /s/ Ralph A. Beattie
---------------------------------------
Ralph A. Beattie
Executive Vice President and Chief Financial Officer
(Principal Financial Officer and Duly Authorized Officer)
Date: August 10, 2001