SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 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 August 11, 2003, the Registrant had outstanding 19,746,901 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, 2003 and December 31, 2002 3
Consolidated Statements of Income - -
Three and Six Months Ended June 30, 2003 and 2002 4
Consolidated Statements of Cash Flows - -
Six Months Ended June 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 13
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 23
Item 4. Controls and Procedures 23
Part II. Other Information
Item 1. Legal Proceedings 24
Item 4. Submission of Matters to a Vote of Securities Holders 24
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)
June 30, December 31,
2003 2002
------------ ---------
(Unaudited) (Note 1)
ASSETS
Current assets:
Cash and cash equivalents..................................... $ 6,268 $ 11,768
Restricted cash............................................... 4,490 4,490
Accounts receivable, net...................................... 1,156 1,461
Accounts receivable from affiliates........................... 424 218
Federal and state income taxes receivable..................... -- 1,171
Deferred taxes................................................ 462 399
Assets held for sale.......................................... 1,739 --
Prepaid expenses and other.................................... 4,728 1,164
--------- ---------
Total current assets.................................. 19,267 20,671
Property and equipment, net..................................... 144,150 153,544
Deferred taxes.................................................. 6,842 7,106
Due from affiliates............................................. 456 513
Notes receivable from affiliates................................ 92,886 86,470
Investments in limited partnerships............................. 1,712 1,238
Assets held for sale............................................ 2,392 4,131
Other assets, net............................................... 4,568 4,578
--------- ---------
Total assets.......................................... $ 272,273 $ 278,251
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................................. $ 1,533 $ 2,322
Accrued expenses.............................................. 4,132 4,638
Current portion of notes payable.............................. 10,408 9,715
Federal and state income taxes payable........................ 680 --
Customer deposits............................................. 939 1,023
---------- ----------
Total current liabilities............................. 17,692 17,698
Deferred income................................................. -- 7
Deferred income from affiliates................................. 916 1,194
Notes payable, net of current portion........................... 130,649 140,385
Minority interest in consolidated partnership................... 443 686
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-- 19,747 and 19,737
at June 30, 2003 and December 31, 2002, respectively..... 197 197
Additional paid-in capital.................................... 92,014 91,990
Retained earnings............................................. 30,362 26,094
---------- ----------
Total shareholders' equity............................ 122,573 118,281
---------- ----------
Total liabilities and shareholders' equity............ $ 272,273 $ 278,251
========== ==========
See accompanying notes.
3
CAPITAL SENIOR LIVING CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------- ---------------------------------
2003 2002 2003 2002
--------------- --------------- --------------- ---------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenues:
Resident and healthcare revenue........... $ 13,309 $ 15,329 $ 26,517 $ 30,908
Rental and lease income................... -- -- -- 37
Unaffiliated management services revenue.. -- 212 295 578
Affiliated management services revenue.... 892 444 1,802 854
Affiliated development fees............... 69 216 137 399
----------- ----------- ------------ ------------
Total revenues........................ 14,270 16,201 28,751 32,776
Expenses:
Operating expenses........................ 8,219 8,882 15,843 17,654
General and administrative expenses....... 2,551 2,958 5,267 6,115
Depreciation and amortization............. 1,339 1,534 2,686 3,180
----------- ----------- ------------ ------------
Total expenses........................ 12,109 13,374 23,796 26,949
----------- ----------- ------------ ------------
Income from operations.......................... 2,161 2,827 4,955 5,827
Other income (expense):
Interest income........................... 1,784 1,434 3,421 2,863
Interest expense.......................... (2,577) (2,748) (5,170) (5,576)
Equity in the gains of affiliates......... 20 20 73 31
Gain (loss) on sale of assets............. 3,491 (354) 3,491 1,929
----------- ----------- ------------ ------------
Income before income taxes and minority interest in
consolidated partnership.................. 4,879 1,179 6,770 5,074
Provision for income taxes...................... (1,867) (460) (2,612) (1,584)
----------- ----------- ------------ ------------
Income before minority interest in consolidated
partnership............................... 3,012 719 4,158 3,490
Minority interest in consolidated partnership... 55 59 110 (901)
----------- ----------- ------------ ------------
Net income...................................... $ 3,067 $ 778 $ 4,268 $ 2,589
=========== =========== ============ ============
Net income per share:
Basic..................................... $ 0.16 $ 0.04 $ 0.22 $ 0.13
============ ============ ============ ============
Diluted................................... $ 0.15 $ 0.04 $ 0.21 $ 0.13
============ ============ ============ ============
Weighted average shares outstanding - basic 19,747 19,721 19,742 19,719
=========== =========== ============ ============
Weighted average shares outstanding - diluted 19,897 19,978 19,880 20,000
=========== =========== ============ ============
See accompanying notes.
4
CAPITAL SENIOR LIVING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Six Months Ended June 30,
2003 2002
------------ ----------
(Unaudited) (Unaudited)
Operating Activities
Net income....................................................... $ 4,268 $ 2,589
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation................................................... 2,686 3,180
Amortization of deferred financing charges..................... 506 442
Minority interest in consolidated partnership.................. (110) 901
Deferred income from affiliates................................ (278) (250)
Deferred income................................................ (7) 30
Deferred income taxes.......................................... 201 201
Equity in the earnings of affiliates........................... (73) (31)
Gain on sale of properties..................................... (3,491) (1,929)
Non-cash compensation.......................................... -- 14
Changes in operating assets and liabilities, net of
acquisitions:
Accounts receivable.......................................... 310 283
Accounts receivable from affiliates.......................... (206) (314)
Prepaid expenses and other................................... (3,580) (3,272)
Other assets................................................. (529) (46)
Accounts payable and accrued expenses........................ (1,295) 1,138
Federal and state income taxes receivable.................... 1,856 278
Customer deposits............................................ (84) (119)
----------- -----------
Net cash provided by operating activities........................ 174 3,095
Investing Activities
Capital expenditures............................................. (1,072) (804)
Proceeds from sale of assets..................................... 408 5,187
Proceeds from sale of assets to BRE/CSL.......................... 3,089 7,287
Advances to affiliates........................................... (6,452) (11,545)
Proceeds from limited partnerships............................... 93 6,903
----------- -----------
Net cash (used in) provided by investing activities.............. (3,934) 7,028
Financing Activities
Proceeds from notes payable...................................... 3,873 4,098
Repayments of notes payable...................................... (5,494) (3,248)
Restricted cash.................................................. -- (5,390)
Cash proceeds from the exercise of stock options................. 14 11
Distributions to minority partners............................... (133) (1,348)
Deferred loan charges paid....................................... -- (169)
----------- -----------
Net cash used in financing activities............................ (1,740) (6,046)
----------- -----------
(Decrease) increase in cash and cash equivalents................. (5,500) 4,077
Cash and cash equivalents at beginning of period................. 11,768 9,975
----------- -----------
Cash and cash equivalents at end of period....................... $ 6,268 $ 14,052
=========== ===========
Supplemental Disclosures
Cash paid during the period for:
Interest....................................................... $ 4,691 $ 5,119
=========== ===========
Income taxes................................................... $ 894 $ 1,325
=========== ===========
See accompanying notes.
5
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003
1. BASIS OF PRESENTATION
Capital Senior Living Corporation, a Delaware corporation (the "Company"), was
incorporated on October 25, 1996. The accompanying consolidated financial
statements include the financial statements of Capital Senior Living Corporation
and its subsidiaries. All material intercompany balances and transactions have
been eliminated in consolidation.
The accompanying consolidated balance sheet, as of December 31, 2002, has been
derived from audited consolidated financial statements of the Company for the
year ended December 31, 2002, and the accompanying unaudited consolidated
financial statements, as of June 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 June 30,
2003, results of operations for the three and six months ended June 30, 2003 and
2002, respectively, and cash flows for the six months ended June 30, 2003 and
2002. The results of operations for the three and six months ended June 30, 2003
are not necessarily indicative of the results for the year ending December 31,
2003.
In January 2003, the Financial Accounting Standards Board issued FASB
Interpretation No. 46 "Consolidation of Variable Interest Entities" an
interpretation of ARB No. 51, effective immediately for variable interest
entities created after January 31, 2003 and effective for the first fiscal year
or interim period beginning after June 15, 2003 for variable interest entities
that existed prior to February 1, 2003. The Company will adopt the provisions of
this interpretation in the third quarter of 2003 as a cumulative effect
adjustment, and its adoption will result in the Company consolidating the
financial statements of the five partnerships affiliated with Triad Senior
Living, Inc. (the "Triad Entities"), currently accounted for separately under
the equity method of accounting. The Company expects the implementation of FASB
Interpretation No. 46 will have a material effect on the Company's earnings and
financial position. However, see Note 2 for a description of the Company's
purchase of the partnership interests in Triads II, III, IV and V owned by
non-Company parties.
2. TRANSACTIONS WITH AFFILIATES
Triad Entities: The Triad Entities own and finance the construction of new
senior living communities. The Company entered into development and management
agreements with the Triad Entities for the development and management of senior
living communities. These communities are primarily Waterford communities. The
development of senior living communities typically involves a substantial
commitment of capital over an approximate 12-month construction period, during
which time no revenues are generated, followed by a 24 to 36 month lease up
period.
The Company has opened, in connection with its management agreements, seventeen
new Waterford and Wellington communities and two expansions pursuant to
arrangements with the Triad Entities. The Company has an approximate 1% limited
partnership interest in each of the Triad Entities and is accounting for these
investments under the equity method of accounting based on the provisions of the
Triad Entities partnership agreements. The Company defers 1% of its interest
income, development fee income and management fee income earned from the Triad
Entities. As of June 30, 2003, the Company had deferred income of $0.8 million
relating to the Triad Entities.
6
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The Company has loan commitments to the Triad Entities for construction and
pre-marketing expenses, in addition to requirements to fund the Triad Entities'
operating deficits through operating deficit guarantees provided for in its
management agreements with the Triad Entities and other advances, totaling $91.9
million at June 30, 2003. The Company evaluates the carrying value of these
receivables by comparing the cash flows expected from the operations of the
Triad Entities to the carrying value of the receivables. These cash flow models
consider lease-up rates, expected operating costs, debt service requirements and
various other factors. The Company entered into a support agreement with the
Triad Entities, whereby each of Triad II, Triad III, Triad IV and Triad V agreed
to loan excess cash flow of such Triad to any one or more of Triad I, Triad II,
Triad III, Triad IV and Triad V. The carrying value of the notes receivable from
the Triad Entities could be adversely affected by a number of factors, including
the Triad communities experiencing slower than expected lease-up, lower than
expected lease rates, higher than expected operating costs, increases in
interest rates, issues involving debt service requirements, general adverse
market conditions, other economic factors and changes in accounting guidelines.
Management believes that the carrying value of the notes receivable are fully
recoverable, based on the support agreement, factors within its control and the
future achievement of the assumptions used in these cash flow models, which are
consistent with the Company's operating experience.
Deferred interest income is being amortized into income over the life of the
loan commitment that the Company has with each of the Triad Entities. Deferred
development and management fee income is being amortized into income over the
expected remaining life of the Triad partnerships.
The following table sets forth, as of June 30, 2003, the capital invested in
each of the Triad Entities, information related to loans made by the Company to
each Triad Entity and information on deferred income related to each Triad
Entity (dollars in thousands):
Notes Receivable Deferred Income
Development/
Capital Committed Interest Note Deficit Management
Entity Investment Amount Rate Maturity Balance Funding Interest Fees
Triad Senior
Living I, L.P. March 31,
(Triad I) $ -- $13,000 8.0% 2008 $13,000 $ 5,266 $ 19 $ 192
Triad Senior
Living II, L.P. March 31,
(Triad II) -- 15,000 8.0 2008 15,000 11,072 29 113
Triad Senior
Living III, L.P. March 31,
(Triad III) -- 26,000 8.0 2008 26,000 3,833 61 224
Triad Senior
Living IV, L.P. March 31,
(Triad IV) -- 10,000 8.0 2008 10,000 1,704 76 90
Triad Senior
Living V, L.P. March 31,
(Triad V) -- 10,000 8.0 2008 5,594 -- 14 20
The Company could be required in the future to revise the terms of its notes
with the Triad Entities to extend the maturity dates, change the interest rate
earned on the notes or modify other terms and conditions of the notes.
The Company has typically received a development fee of 4% of project costs, as
well as reimbursement of expenses and overhead not to exceed 4% of project
costs. These fees were recorded over the term of the development project on a
basis approximating the percentage of completion method. In addition, when the
properties became operational, the Company typically receives management fees in
an amount equal to the greater of 5% of gross revenues or $5,000 per month per
community, plus overhead expenses.
The Company has the option, but not the obligation, to purchase the partnership
interests of the other partners in the Triad Entities, except for Triad I, for
7
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
an amount equal to the amount paid for the partnership interest by the other
partners, plus a noncompounded return of 12% per annum. In addition, each Triad
Entity except Triad I provides the Company with an option, but not the
obligation, to purchase the communities developed by the applicable partnership
upon their completion for an amount equal to the fair market value (based on a
third-party appraisal but not less than hard and soft costs and lease-up costs)
of the applicable community. See below for a description of the Company's
purchase of the partnership interests in Triads II, III, IV and V owned by
non-Company parties.
The Company has the option, but not the obligation, to purchase the Triad I
communities for an amount specified in the partnership agreement. Furthermore,
Lehman Brothers has agreed to withdraw as a partner in the Triad I partnership
to the extent it has received, on or before November 1, 2004, distributions in
an amount equal to its capital contributions of $12.4 million.
In January 2003, the Financial Accounting Standards Board issued FASB
Interpretation No. 46 "Consolidation of Variable Interest Entities" an
interpretation of ARB No. 51, effective immediately for variable interest
entities created after January 31, 2003 and effective for the first fiscal year
or interim period beginning after June 15, 2003 for variable interest entities
that existed prior to February 1, 2003. The Company will adopt the provisions of
this interpretation in the third quarter of 2003 as a cumulative effect
adjustment, and its adoption will result in the Company consolidating the
financial statements of the Triad Entities, currently accounted for separately
under the equity method of accounting. The Company expects the implementation of
FASB Interpretation No. 46 will have a material effect on the Company's earnings
and financial position. However, see below for a description of the Company's
purchase of the partnership interests in Triads II, III, IV and V owned by
non-Company parties.
Each of the Triad Entities finances the development of new communities through a
combination of equity funding, traditional construction loans and permanent
financing with institutional lenders secured by first liens on the communities
and unsecured loans from the Company. The Company loans may be prepaid without
penalty. The financings from institutional lenders are secured by first liens on
the communities, as well as assignment to the lenders of the construction
contracts and the development and management agreements with the Company. Each
development and management agreement assigned to an institutional lender is also
guaranteed by the Company and those guarantees are also assigned to the lenders.
The Company's management agreements contain an obligation of the Company to fund
operating deficits to the Triad Entities if the other financing sources of the
Triad Entities have been fully utilized. These operating deficit-funding
obligations are guaranteed by the Company and include making loans to fund debt
service obligations to the Triad Entities' lenders. Amounts funded to date under
these operating deficit agreements are disclosed in the table above. The Company
expects to be required to fund additional amounts under these operating deficit
agreements in the future.
Set forth below is information on the construction/permanent loan facilities
entered into by each of the Triad Entities as of June 30, 2003 (dollars in
thousands):
Loan Facilities to Triads
Number of Amount
Entity Communities Commitment Outstanding Type Lender
Triad I 7 $50,000 $48,024 take-out GMAC
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.
8
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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,
with the exception of Triad I. The Company and the other partners of the Triad
Entities, with the exception of Triad I, entered into Partnership Interest
Purchase Agreements ("Purchase Agreements") on March 25, 2003, whereby the
Company 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. Effective July 1, 2003, the Company completed these transactions and
now wholly owns each of the Triad Entities, other than Triad I. These Triad
Entities own twelve communities with a capacity of approximately 1,670
residents. These transactions were treated as a purchase of real estate and
therefore the Company did not record any goodwill or other intangibles.
Summary financial information regarding the financial position of the Triad
Entities as of June 30, 2003 and 2002 and results of operations for the six
months ended June 30, 2003 and 2002 of the Triad Entities is presented below.
The Company is also presenting unaudited pro forma financial information as if
the Company's purchase of the Triad Entities (except Triad I) were effective
January 1, 2003. In addition, the unaudited pro forma financial information
includes consolidating Triad I as if the provisions of FASB Interpretation No.
46 were effective January 1, 2003. Beginning in the third quarter of 2003, FASB
Interpretation No. 46 will require the Company to consolidate the financial
position and results of operations of Triad I with the Company's financial
information. The unaudited pro forma financial information, which may not be
indicative of future results, includes the elimination of significant
intercompany balances and assumes incomes taxes at a 39% effective tax rate (in
thousands):
Company
Triad Entities Pro Forma
June 30, June 30, June 30,
2003 2002 2003
--------- ---------- -----------
Current assets........................... $ 3,876 $ 3,447 $ 21,242
Property and equipment, net.............. 182,521 188,656 388,529
Other assets............................. 10,904 10,784 31,169
-------- -------- ----------
Total assets......................... $197,301 $202,887 $ 440,940
======== ======== ==========
Current liabilities...................... $ 26,392 $ 13,455 $ 22,090
Long-term debt........................... 232,455 224,075 288,271
Other long-term liabilities.............. -- -- 8,006
Partnership deficit / shareholders'
equity................................. (61,546) (34,643) 122,573
-------- -------- ----------
Total liabilities and partnership
deficit / shareholders' equity..... $ 197,301 $202,887 $ 440,940
========= ======== ==========
Six Months
Six Months Ended Ended
June 30, June 30, June 30,
2003 2002 2003
--------- ----------- ----------
Net revenue.............................. $ 17,061 $ 11,980 $ 45,812
Operating and general & administrative... 16,039 13,556 37,148
Depreciation............................. 2,799 2,732 5,486
Operating (loss) income.................. (1,777) (4,308) 3,178
Net loss................................. (8,518) (10,397) (1,557)
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 in excess of $200 million of senior housing properties. BRE/CSL is owned
90% by Blackstone and 10% by the Company. Pursuant to the terms of the joint
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
9
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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.
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 June 30, 2003, the Company has deferred
$77,000 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 June 30, 2003, the Company had notes and accrued interest
receivable from the Spring Meadows Communities of $1.4 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 as the
amount assigned for the 19% member interests were nominal. The Company accounts
for its investment in the Spring Meadows Communities under the equity method of
accounting based on the provisions of the partnership agreements. The Company
has the obligation to fund certain future operating deficits of the Spring
Meadows Communities to the extent of its 19% member interest.
3. NET INCOME PER SHARE AND STOCK OPTIONS
Basic net income per share is calculated by dividing net income by the weighted
average number of common shares outstanding during the period. Diluted net
income per share considers the dilutive effect of outstanding options calculated
using the treasury stock method.
10
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table sets forth the computation of basic and diluted earnings per
share (in thousands, except for per share amounts):
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- -------------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Net income............................... $ 3,067 $ 778 $ 4,268 $ 2,589
Weighted average shares outstanding - basic 19,746 19,721 19,742 19,719
Effect of dilutive securities:
Employee stock options................ 151 257 138 281
--------- --------- --------- ---------
Weighted average shares outstanding - diluted 19,897 19,978 19,880 20,000
========= ========= ========= =========
Basic earnings per share................. $ 0.16 $ 0.04 $ 0.22 $ 0.13
========= ========= ========= =========
Diluted earnings per share............... $ 0.15 $ 0.04 $ 0.21 $ 0.13
========= ========= ========= =========
Options to purchase 0.5 million shares of common stock at prices ranging from
$3.13 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 second quarter and first six months of fiscal 2003 did not exceed the
exercise price of the options, and therefore, the effect would not be dilutive.
For the second quarter and first six months of fiscal 2002, options to purchase
1.1 million shares of common stock at prices ranging from $3.63 to $13.50 per
share were not included in the computation of diluted earnings per share because
the average daily price of the common stock 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. In addition, during the first six months of fiscal 2003, the Company
issued 10,064 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.
11
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 Six Months Ended
June 30, June 30,
--------------------------- -------------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Net income
As reported.................................. $ 3,067 $ 778 $ 4,268 $ 2,589
Less: fair value stock compensation expense,
net of tax................................. 62 186 250 372
--------- --------- --------- ---------
Pro forma.................................... 3,005 592 4,018 2,217
========= ========= ========= =========
Net income per share - basic
As reported.................................. $ 0.16 $ 0.04 $ 0.22 $ 0.13
Less: fair value stock compensation expense,
net of tax................................. $ 0.01 $ 0.01 $ 0.02 $ 0.02
--------- --------- --------- ---------
Pro forma.................................... $ 0.15 $ 0.03 $ 0.20 $ 0.11
========= ========= ========= =========
Net income per share - diluted
As reported.................................. $ 0.15 $ 0.04 $ 0.21 $ 0.13
Less: fair value stock compensation expense,
net of tax................................. $ 0.00 $ 0.01 $ 0.01 $ 0.02
--------- --------- --------- ---------
Pro forma.................................... $ 0.15 $ 0.03 $ 0.20 $ 0.11
========= ========= ========= =========
4. CONTINGENCIES
In the fourth quarter of 2002, the Company (and two of its management
subsidiaries), Buckner Retirement Services, Inc. ("Buckner"), and a related
Buckner entity, and other unrelated entities were named as defendants in a
lawsuit in district court in Fort Bend County, Texas brought by the heir of a
former resident who obtained nursing home services at Parkway Place from
September 1998 to March 2001. The Company managed Parkway Place for Buckner
through December 31, 2001. The plaintiff alleges gross negligence, malice and
intentional injury in the treatment of the resident at Parkway Place and seeks
various damages including wrongful death and punitive damages. The Company's
insurers have hired counsel to investigate and defend this claim. The insurers
have issued reservation of rights letters, subject to certain exclusions in the
applicable insurance policies. The parties are currently going through initial
discovery. The Company is unable at this time to estimate its liability, if any,
related to this claim.
The Company has other pending claims not mentioned above ("Other Claims")
incurred in the course of its business. Most of these Other Claims are believed
by management to be covered by insurance, subject to normal reservations of
rights by the insurance companies and possibly subject to certain exclusions in
the applicable insurance policies. Whether or not covered by insurance, these
claims, in the opinion of management, based on advice of legal counsel, should
not have a material effect on the financial statements of the Company if
determined adversely to the Company.
12
CAPITAL SENIOR LIVING CORPORATION
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
The following discussion and analysis addresses (i) the Company's results of
operations for the three and six months ended June 30, 2003 and 2002,
respectively, and (ii) liquidity and capital resources of the Company and should
be read in conjunction with the Company's consolidated financial statements
contained elsewhere in this report.
The Company is one of the largest operators of senior living communities in the
United States in terms of resident capacity. The Company's operating strategy is
to provide high quality senior living services at affordable prices to its
residents, while achieving and sustaining a strong, competitive position within
its chosen markets, as well as to continue to enhance the performance of its
operations. The Company provides a wide array of senior living services to the
elderly at its communities, including independent living, assisted living (with
special programs and living units at some of its communities for residents with
Alzheimer's and other forms of dementia), skilled nursing and home care
services.
The Company generates revenue from a variety of sources. For the three months
ended June 30, 2003, the Company's revenue was derived as follows: 93.3% from
the operation of 14 owned senior living communities that are operated by the
Company; 6.2% from management fees arising from management services provided for
28 affiliate owned senior living communities and 0.5% derived from the
recognition of deferred development fees.
For the six months ended June 30, 2003, the Company's revenue was derived as
follows: 92.2% from the operation of 14 owned senior living communities that are
operated by the Company; 6.3% from management fees arising from management
services provided for 28 affiliate owned senior living communities, 1.0% from
management fees arising from management services provided for a third party and
0.5% derived from the recognition of deferred development fees.
The Company believes that the factors affecting the financial performance of
communities managed under contracts with affiliates and third parties do not
vary substantially from the factors affecting the performance of owned
communities, although there are different business risks associated with these
activities.
The Company's management service fees are primarily based on a percentage of
gross revenues. As a result, the cash flows and profitability of such contracts
to the Company are more dependent on the revenues generated by such communities
and less dependent on net cash flow than for owned communities. Further, the
Company is not responsible for capital investments in managed communities. While
the management contracts are generally terminable only for cause, in certain
cases the contracts can be terminated upon the sale of a community, subject to
the Company's rights to offer to purchase such community.
The Company's current management contracts expire on various dates through
September 2022 and provide for management fees based generally upon 5% of gross
revenues. In addition, certain of the contracts provide for supplemental
incentive fees that vary by contract based upon the financial performance of the
managed community. The Company's development fees are generally based upon a
percentage of construction cost and are earned over the period commencing with
the initial development activities and ending with the opening of the community.
The Company owns 57% of Healthcare Properties, L.P. ("HCP") and the assets,
liabilities, minority interest and results of operations of HCP have been
consolidated into the Company's financial statements. HCP owns one community
that is currently classified as held for sale. Subsequent to the end of the
Company's second fiscal quarter of 2003, HCP entered into an Agreement to Sell
and Purchase Real Estate ("Agreement") relating to the sale of its Crenshaw
Creek facility for $1.1 million. HCP expects this transaction to close during
the third quarter of fiscal 2003.
13
CAPITAL SENIOR LIVING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
The Company formed BRE/CSL with Blackstone and the joint ventures seek to
acquire in excess of $200 million of senior housing properties. BRE/CSL is owned
90% by Blackstone and 10% by the Company. Pursuant to the terms of the joint
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, 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 June 30, 2003, the Company has deferred
$77,000 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 four 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
June 30, 2003, the Company had notes and accrued interest receivable from the
Spring Meadows Communities of $1.4 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 as the amount assigned for the 19%
member interests were nominal. The Company accounts for its investment in the
Spring Meadows Communities under the equity method of accounting based on the
provisions of the partnership agreements. The Company has the obligation to fund
certain future operating deficits of the Spring Meadows Communities to the
extent of its 19% member interest.
14
CAPITAL SENIOR LIVING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Results of Operations
The following table sets forth for the periods indicated, selected statements of
income data in thousands of dollars and expressed as a percentage of total
revenues.
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------------- ----------------------------------------
2003 2002 2003 2002
------------------ ------------------ ------------------ ---------------------
$ % $ % $ % $ %
---------- -------- --------- --------- ---------- --------- ---------- --------
Revenues:
Resident and healthcare revenue $ 13,309 93.3 $ 15,329 94.6 $26,517 92.2 $30,908 94.3
Rental and lease income..... -- -- -- -- -- -- 37 0.1
Unaffiliated management service
revenue................ -- -- 212 1.3 295 1.0 578 1.8
Affiliated management service
revenue.................. 892 6.2 444 2.8 1,802 6.3 854 2.6
Unaffiliated development fees -- -- -- -- -- -- -- --
Affiliated development fees. 69 0.5 216 1.3 137 0.5 399 1.2
---------- -------- --------- --------- ---------- --------- ---------- --------
Total revenue............. 14,270 100.0 16,201 100.0 28,751 100.0 32,776 100.0
Expenses:
Operating expenses.......... 8,219 57.6 8,882 54.8 15,843 55.1 17,654 53.9
General and administrative
expenses................... 2,551 17.9 2,958 18.3 5,267 18.3 6,115 18.7
Depreciation and amortization 1,339 9.4 1,534 9.5 2,686 9.4 3,180 9.7
---------- -------- --------- --------- ---------- --------- ---------- --------
Total expenses............ 12,109 84.9 13,374 82.6 23,796 82.8 26,949 82.2
---------- -------- --------- --------- ---------- --------- ---------- --------
Income from operations ........ 2,161 15.1 2,827 17.4 4,955 17.2 5,827 17.8
Other income (expense):
Interest income............. 1,784 12.5 1,434 8.9 3,421 11.9 2,863 8.7
Interest expense............ (2,577) (18.1) (2,748) (17.0) (5,170) (18.0) (5,576) (17.0)
Equity in the earnings of
affiliates................. 20 0.1 20 0.1 73 0.3 31 0.1
Gain (loss) on sales of assets 3,491 24.5 (354) (2.2) 3,491 12.1 1,929 5.9
---------- -------- --------- --------- ---------- --------- ---------- --------
Income before income taxes and
minority interest in
consolidated
partnership............ 4,879 34.2 1,179 7.3 6,770 23.5 5,074 15.5
Provision for income taxes.. (1,867) (13.1) (460) (2.8) (2,612) (9.1) (1,584) (4.8)
---------- -------- --------- --------- ---------- --------- ---------- --------
Income before minority interest in
consolidated partnership.... 3,012 21.1 719 4.4 4,158 14.4 3,490 10.6
Minority interest in consolidated
Partnership................. 55 0.4 59 (0.4) 110 0.4 (901) (2.7)
---------- -------- --------- --------- ---------- --------- ---------- --------
Net income..................... $ 3,067 21.5 $ 778 4.8 $ 4,268 14.8 $ 2,589 7.9
========== ======== ========= ========= ========== ========= ========== ========
Three Months Ended June 30, 2003 Compared to the Three Months Ended June 30,
2002
Revenues. Total revenues were $14.3 million in the three months ended June 30,
2003 compared to $16.2 million for the three months ended June 30, 2002,
representing a decrease of approximately $1.9 million or 11.9%. This decrease in
revenue is primarily the result of a $2.0 million decrease in resident and
healthcare revenue, a $0.2 million decrease in unaffiliated management services
revenue and a $0.1 million decrease in affiliated development fee revenue offset
by an increase in affiliated management fees of $0.4 million. The decrease in
resident and healthcare revenue reflects the loss of revenue on four communities
contributed to BRE/CSL in June of 2002 of $2.3 million offset by an overall
increase at the Company's other communities of $0.3 million. Unaffiliated
management services revenue decreased $0.2 million primarily due to the Company
acquiring an interest in the Spring Meadows Communities. Affiliated management
services revenue increased by $0.4 million primarily as a result of higher
management fees earned on the Triad communities along with management services
revenue earned on the BRE/CSL and the Spring Meadows communities. Development
fee income decreased as a result of the completion of the Company's development
projects during fiscal 2002.
15
CAPITAL SENIOR LIVING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Expenses. Total expenses were $12.1 million in the second quarter of fiscal 2003
compared to $13.4 million in the second quarter of fiscal 2002, representing a
decrease of $1.3 million or 9.5%. This decrease is primarily the result of a
$0.7 million decrease in operating expenses, a $0.4 million decrease in general
and administrative expenses and a $0.2 million decrease in depreciation and
amortization expense. The contribution of the four communities to BRE/CSL
resulted in a decrease in operating expenses of $1.1 million, a decrease in
general and administrative expenses of $0.3 million and a decrease in
depreciation and amortization expense of $0.2 million.
Other income and expense. Interest income increased $0.4 million or 24.4% to
$1.8 million in fiscal 2003 compared to $1.4 million in fiscal 2002. Interest
income primarily represents interest earned on loans the Company has made to the
Triad Entities and the Spring Meadows Communities. Interest expense decreased
$0.2 million to $2.6 million in the second quarter of 2003 compared to $2.8
million in the second quarter of 2002. This 6.2% decrease in interest expense is
the result of lower debt outstanding in the second quarter of fiscal 2003
compared to the second quarter of fiscal 2002 primarily resulting from the
payoff of debt relating to the 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 and the Triad Entities. Gain on sale
of assets in fiscal 2003 reflects the sale/contribution of the Cottonwood
community to BRE/CSL and one parcel of land for net proceeds of $3.5 million,
which resulted in the recognition of a $3.5 million gain on sale. Gain on sale
of assets in fiscal 2002 reflects the sale of two communities by HCP for net
proceeds of $4.4 million, which resulted in the recognition of a $2.3 million
gain on sale.
Provision for income taxes. Provision for income taxes in the second quarter of
fiscal 2003 was $1.9 million or 37.8% of taxable income, compared to $0.5
million or 37.2% of taxable income in the comparable quarter for 2002. The
effective tax rates for the first quarter of 2003 and 2002 differ from the
statutory tax rates because of state income taxes and permanent tax differences.
Minority interest. Minority interest results from the losses incurred at HCP in
both fiscal 2003 and 2002.
Net income. As a result of the foregoing factors, net income increased $2.3
million to $3.1 million for the three months ended June 30, 2003, as compared to
$0.8 million for the three months ended June 30, 2002.
Six Months Ended June 30, 2003 Compared to the Six Months Ended June 30, 2002
Revenues. For the six months ended June 30, 2003, total revenues were $28.8
million compared to $32.8 million for the six months ended June 30, 2002,
representing a decrease of $4.0 million or 12.3%. This decrease in revenue is
primarily the result of a $4.4 million decrease in resident and healthcare
revenue, a decrease of $0.3 million in unaffiliated management services revenue
and a decrease of $0.3 million in affiliated development fees offset by an
increase in affiliated management services revenue of $1.0 million. The decrease
in resident and healthcare revenue reflects the loss of revenue on four
communities contributed to BRE/CSL in June of 2002 of $5.1 million offset by an
overall increase at the Company's other communities of $0.7 million. Affiliated
management services revenue increased by $1.0 million primarily as the result of
increase revenue at the Triad Entities and the Company's management of the
BRE/CSL communities and the Spring Meadows Communities. Unaffiliated management
services revenue decreased $0.3 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 decreased $3.2 million or 11.7% to $23.8 million in the
first six months of fiscal 2003 compared to $27.0 million in the first six
months of fiscal 2002. This decrease in expenses is the result of a $1.8 million
decrease in operating expenses, a $0.9 million decrease in general and
administrative expenses and a decrease in depreciation expense of $0.5 million.
The contribution of the four communities to BRE/CSL resulted in a decrease in
operating expenses of $2.4 million, a decrease in general and administrative
expenses of $0.8 million and a decrease in depreciation and amortization expense
of $0.5 million.
Other income and expense. Interest income increased $0.5 million or 19.5% to
$3.4 million in the first six months of fiscal 2003 compared to $2.9 million in
16
CAPITAL SENIOR LIVING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
the first six months of fiscal 2002. Interest income primarily represents
interest earned on loans the Company has made to the Triad Entities and the
Spring Meadows Communities. Interest expense decreased $0.4 million to $5.2
million in the first six months of 2003 compared to $5.6 million in the first
six months of 2002. This 7.3% decrease in interest expense is the result of
lower debt outstanding in the second quarter of fiscal 2003 compared to the
second quarter of fiscal 2002 primarily resulting from the payoff of debt
relating to the 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 and the Triad Entities. Gain on sale of assets
in fiscal 2003 reflects the sale/contribution of the Cottonwood community to
BRE/CSL and one parcel of land for net proceeds of $3.5 million, which resulted
in the recognition of a $3.5 million gain on sale. Gain on sale of assets in the
first six 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 six months
of fiscal 2003 was $2.6 million or 38.0% of taxable income, compared to $1.6
million or 38.0% of taxable income in the comparable period of fiscal 2002. The
effective tax rates for the first six 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 $1.0 million.
Net income. As a result of the foregoing factors, net income increased $1.7
million to $4.3 million for the six months ended June 30, 2003, as compared to
$2.6 million for the six months ended June 30, 2002.
Liquidity and Capital Resources
In addition to approximately $6.3 million of cash balances on hand as of June
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 BRE/CSL
and/or additional financing. Of the $6.3 million in cash balances, $0.1 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/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 $0.2 million in the
first six months of fiscal 2003 compared to $3.1 million in the first six months
of fiscal 2002. In the first six months of fiscal 2003, net cash provided by
operating activities was primarily derived from net income of $4.3 million and a
decrease in federal and state income taxes receivable of $1.9 million offset by
net noncash benefits of $0.6 million, an increase in prepaid and other assets of
$3.6 million, an increase in other assets of $0.5 million and a decrease in
accounts payable and accrued expenses of $1.3 million. In the first six months
of fiscal 2002, net cash provided by operating activities was primarily derived
from net income of $2.6 million, net non-cash charges of $2.5 million, a
decrease in federal and state income tax receivable of $0.3 million, an increase
in accounts payable and accrued expenses of $1.1 million offset by an increase
in prepaid expenses of $3.3 million and a decrease in customer deposits of $0.1
million.
The Company had net cash used in investing activities of $3.9 million in the
first six months of fiscal 2003 compared to net cash provide by investing
activities of $7.0 million in the first six months of fiscal 2002. In the first
six months of fiscal 2003, net cash used in investing activities was primarily
the result of advances to affiliates of $6.5 million, and capital expenditures
of $1.1 million offset by net proceeds $0.4 million from the sale of one parcel
of land, net proceeds of $3.1 million from the contribution of Cottonwood to
BRE/CSL and $0.1 million relating to distributions from BRE/CSL. Advances to
affiliates include loans made to the Triad Entities along with interest earned
17
on loans to the Triad Entities and the Spring Meadows Communities. In the first
six months of fiscal 2002, net cash provided by investing activities resulted
from net proceeds of $5.2 million from the sale of two senior living communities
and one parcel of land, net proceeds of $7.3 million from the contribution of
four senior living communities to BRE/CSL, proceeds of $6.9 million from the NHP
Pension Note redemption and distributions from BRE/CSL offset by advances to the
Triad Entities of $11.5 million and capital expenditures of $0.8 million.
The Company had net cash used in financing activities of $1.7 million in the
first six months of fiscal 2003 compared to $6.0 million in the first six months
of 2002. For the first six months of fiscal 2003, net cash used in financing
activities primarily results from repayments of notes payable of $5.5 million
and distributions to minority partners of $0.1 million offset by proceeds from
the issuance of notes payable of $3.9 million. Net cash used in financing
activities in the first six months of fiscal 2002, primarily resulted from
repayment of notes payable of $3.2 million, cash restricted under loan
agreements of $5.4 million, distributions to minority partners of $1.3 million
and deferred loan charges paid of $0.2 million offset by proceeds from the
issuance of notes payable of $4.1 million.
The Company derives the benefits and bears the risks related to the communities
it owns. The cash flows and profitability of owned communities depends on the
operating results of such communities and are subject to certain risks of
ownership, including the need for capital expenditures, financing and other
risks such as those relating to environmental matters.
The Company believes that the factors affecting the financial performance of
communities managed under contracts with affiliates and third parties do not
vary substantially from the factors affecting the performance of owned
communities, although there are different business risks associated with these
activities.
The Company's management service fees are primarily based on a percentage of
gross revenues. As a result, the cash flows and profitability of such contracts
to the Company are more dependent on the revenues generated by such communities
and less dependent on net cash flow than for owned communities. Further, the
Company is not responsible for capital investments in managed communities. While
the management contracts are generally terminable only for cause, in certain
cases the contracts can be terminated upon the sale of a community, subject to
the Company's rights to offer to purchase such community.
The Company's current management contracts expire on various dates through
September 2022 and provide for management fees based generally upon 5% of gross
revenues. In addition, certain of the contracts provide for supplemental
incentive fees that vary by contract based upon the financial performance of the
managed community. The Company's development fees are generally based upon a
percentage of construction cost and are earned over the period commencing with
the initial development activities and ending with the opening of the community.
The Company owns 57% of 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. HCP owns one community
that is currently classified as held for sale. Subsequent to the end of the
Company's second fiscal quarter of 2003, HCP entered into an Agreement to Sell
and Purchase Real Estate ("Agreement") relating to the sale of its Crenshaw
Creek facility for $1.1 million. HCP expects this transaction to close during
the third quarter of fiscal 2003.
The Company formed BRE/CSL with Blackstone and the joint ventures seek to
acquire in excess of $200 million of senior housing properties. BRE/CSL is owned
90% by Blackstone and 10% by the Company. Pursuant to the terms of the joint
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
18
CAPITAL SENIOR LIVING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
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, 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 June 30, 2003, the Company has deferred
$77,000 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 four 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
June 30, 2003, the Company had notes and accrued interest receivable from the
Spring Meadows Communities of $1.4 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 as the amount assigned for the 19%
member interests were nominal. The Company accounts for its investment in the
Spring Meadows Communities under the equity method of accounting based on the
provisions of the partnership agreements. The Company has the obligation to fund
certain future operating deficits of the Spring Meadows Communities to the
extent of its 19% member interest.
The Triad Entities own and finance the construction of new senior living
communities. The Company entered into development and management agreements with
the Triad Entities for the development and management of senior living
communities. These communities are primarily Waterford communities. The
development of senior living communities typically involves a substantial
commitment of capital over an approximate 12-month construction period, during
which time no revenues are generated, followed by a 24 to 36 month lease up
period.
The Company has opened, in connection with its management agreements, seventeen
new Waterford and Wellington communities and two expansions pursuant to
arrangements with the Triad Entities. The Company has an approximate 1% limited
partnership interest in each of the Triad Entities and is accounting for these
investments under the equity method of accounting based on the provisions of the
Triad Entities partnership agreements. The Company defers 1% of its interest
income, development fee income and management fee income earned from the Triad
Entities. As of June 30, 2003, the Company had deferred income of $0.8 million
relating to the Triad Entities.
19
CAPITAL SENIOR LIVING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
The Company has loan commitments to the Triad Entities for construction and
pre-marketing expenses, in addition to requirements to fund the Triad Entities'
operating deficits through operating deficit guarantees provided for in its
management agreements with the Triad Entities and other advances, totaling $91.9
million at June 30, 2003. The Company evaluates the carrying value of these
receivables by comparing the cash flows expected from the operations of the
Triad Entities to the carrying value of the receivables. These cash flow models
consider lease-up rates, expected operating costs, debt service requirements and
various other factors. The Company entered into a support agreement with the
Triad Entities, whereby each of Triad II, Triad III, Triad IV and Triad V agreed
to loan excess cash flow of such Triad to any one or more of Triad I, Triad II,
Triad III, Triad IV and Triad V. The carrying value of the notes receivable from
the Triad Entities could be adversely affected by a number of factors, including
the Triad communities experiencing slower than expected lease-up, lower than
expected lease rates, higher than expected operating costs, increases in
interest rates, issues involving debt service requirements, general adverse
market conditions, other economic factors and changes in accounting guidelines.
Management believes that the carrying value of the notes receivable are fully
recoverable, based on the support agreement, factors within its control and the
future achievement of the assumptions used in these cash flow models, which are
consistent with the Company's operating experience.
Deferred interest income is being amortized into income over the life of the
loan commitment that the Company has with each of the Triad Entities. Deferred
development and management fee income is being amortized into income over the
expected remaining life of the Triad partnerships.
The following table sets forth, as of June 30, 2003, the capital invested in
each of the Triad Entities, information related to loans made by the Company to
each Triad Entity and information on deferred income related to each Triad
Entity (dollars in thousands):
Notes Receivable Deferred Income
---------------------------------------------------------- --------------------------
Development/
Capital Committed Interest Note Deficit Management
Entity Investment Amount Rate Maturity Balance Funding Interest Fees
- ---------------- ---------- --------- -------- -------- --------- ------- -------- -------------
Triad Senior
Living I, L.P. March 31,
(Triad I) $ -- $13,000 8.0% 2008 $13,000 $ 5,266 $ 19 $ 192
Triad Senior
Living II, L.P. March 31,
(Triad II) -- 15,000 8.0 2008 15,000 11,072 29 113
Triad Senior
Living III, L.P. March 31,
(Triad III) -- 26,000 8.0 2008 26,000 3,833 61 224
Triad Senior
Living IV, L.P. March 31,
(Triad IV) -- 10,000 8.0 2008 10,000 1,704 76 90
Triad Senior
Living V, L.P. March 31,
(Triad V) -- 10,000 8.0 2008 5,594 -- 14 20
The Company could be required in the future to revise the terms of its notes
with the Triad Entities to extend the maturity dates, change the interest rate
earned on the notes or modify other terms and conditions of the notes.
The Company has typically received a development fee of 4% of project costs, as
well as reimbursement of expenses and overhead not to exceed 4% of project
costs. These fees were recorded over the term of the development project on a
basis approximating the percentage of completion method. In addition, when the
properties became operational, the Company typically receives management fees in
an amount equal to the greater of 5% of gross revenues or $5,000 per month per
community, plus overhead expenses.
The Company has the option, but not the obligation, to purchase the partnership
interests of the other partners in the Triad Entities, except for Triad I, for
20
CAPITAL SENIOR LIVING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
an amount equal to the amount paid for the partnership interest by the other
partners, plus a noncompounded return of 12% per annum. In addition, each Triad
Entity except Triad I provides the Company with an option, but not the
obligation, to purchase the communities developed by the applicable partnership
upon their completion for an amount equal to the fair market value (based on a
third-party appraisal but not less than hard and soft costs and lease-up costs)
of the applicable community. See below for a description of the Company's
purchase of the partnership interests in Triads II, III, IV and V owned by
non-Company parties.
The Company has the option, but not the obligation, to purchase the Triad I
communities for an amount specified in the partnership agreement. Furthermore,
Lehman Brothers has agreed to withdraw as a partner in the Triad I partnership
to the extent it has received, on or before November 1, 2004, distributions in
an amount equal to its capital contributions of $12.4 million.
In January 2003, the Financial Accounting Standards Board issued FASB
Interpretation No. 46 "Consolidation of Variable Interest Entities" an
interpretation of ARB No. 51, effective immediately for variable interest
entities created after January 31, 2003 and effective for the first fiscal year
or interim period beginning after June 15, 2003 for variable interest entities
that existed prior to February 1, 2003. The Company will adopt the provisions of
this interpretation in the third quarter of 2003 as a cumulative effect
adjustment, and its adoption will result in the Company consolidating the
financial statements of the Triad Entities, currently accounted for separately
under the equity method of accounting. The Company expects the implementation of
FASB Interpretation No. 46 will have a material effect on the Company's earnings
and financial position. However, see below for a description of the Company's
purchase of the partnership interests in Triads II, III, IV and V owned by
non-Company parties.
Each of the Triad Entities finances the development of new communities through a
combination of equity funding, traditional construction loans and permanent
financing with institutional lenders secured by first liens on the communities
and unsecured loans from the Company. The Company loans may be prepaid without
penalty. The financings from institutional lenders are secured by first liens on
the communities, as well as assignment to the lenders of the construction
contracts and the development and management agreements with the Company. Each
development and management agreement assigned to an institutional lender is also
guaranteed by the Company and those guarantees are also assigned to the lenders.
The Company's management agreements contain an obligation of the Company to fund
operating deficits to the Triad Entities if the other financing sources of the
Triad Entities have been fully utilized. These operating deficit-funding
obligations are guaranteed by the Company and include making loans to fund debt
service obligations to the Triad Entities' lenders. Amounts funded to date under
these operating deficit agreements are disclosed in the table above. The Company
expects to be required to fund additional amounts under these operating deficit
agreements in the future.
Set forth below is information on the construction/permanent loan facilities
entered into by each of the Triad Entities as of June 30, 2003 (dollars in
thousands):
Loan Facilities to Triads
--------------------------------------------------------
Number of Amount
Entity Communities Commitment Outstanding Type Lender
----------- ----------- ---------- ----------- ---------- ------------------
Triad I 7 $50,000 $48,024 take-out GMAC
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.
21
CAPITAL SENIOR LIVING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
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,
with the exception of Triad I. The Company and the other partners of the Triad
Entities, with the exception of Triad I, entered into Partnership Interest
Purchase Agreements ("Purchase Agreements") on March 25, 2003, whereby the
Company 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. Effective July 1, 2003, the Company completed these transactions and
now wholly owns each of the Triad Entities, other than Triad I. These Triad
Entities own twelve communities with a capacity of approximately 1,670
residents. These transactions were treated as a purchase of real estate and
therefore the Company did not record any goodwill or other intangibles.
Summary financial information regarding the financial position of the Triad
Entities as of June 30, 2003 and 2002 and results of operations for the six
months ended June 30, 2003 and 2002 of the Triad Entities is presented below.
The Company is also presenting unaudited pro forma financial information as if
the Company's purchase of the Triad Entities (except Triad I) were effective
January 1, 2003. In addition, the unaudited pro forma financial information
includes consolidating Triad I as if the provisions of FASB Interpretation No.
46 were effective January 1, 2003. Beginning in the third quarter of 2003, FASB
Interpretation No. 46 will require the Company to consolidate the financial
position and results of operations of Triad I with the Company's financial
information. The unaudited pro forma financial information, which may not be
indicative of future results, includes the elimination of significant
intercompany balances and assumes incomes taxes at a 39% effective tax rate (in
thousands):
Company
Triad Entities Pro Forma
June 30, June 30, June 30,
2003 2002 2003
--------- ---------- -----------
Current assets........................... $ 3,876 $ 3,447 $ 21,242
Property and equipment, net.............. 182,521 188,656 388,529
Other assets............................. 10,904 10,784 31,169
-------- -------- ----------
Total assets......................... $197,301 $202,887 $ 440,940
======== ======== ==========
Current liabilities...................... $ 26,392 $ 13,455 $ 22,090
Long-term debt........................... 232,455 224,075 288,271
Other long-term liabilities.............. -- -- 8,006
Partnership deficit / shareholders'
equity.................................. (61,546) (34,643) 122,573
-------- -------- ----------
Total liabilities and partnership
deficit / shareholders' equity..... $ 197,301 $202,887 $ 440,940
========= ======== ==========
Six Months
Six Months Ended Ended
June 30, June 30, June 30,
2003 2002 2003
--------- ----------- --------
Net revenue.............................. $ 17,061 $ 11,980 $ 45,812
Operating and general & administrative... 16,039 13,556 37,148
Depreciation............................. 2,799 2,732 5,486
Operating (loss) income.................. (1,777) (4,308) 3,178
Net loss................................. (8,518) (10,397) (1,557)
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.
22
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 June 30, 2003 the Company had $141.1 million in
outstanding debt comprised of various fixed and variable rate debt instruments
of $55.1 million and $86.0 million, respectively.
Changes in interest rates would affect the fair market value of the Company's
fixed rate debt instruments but would not have an impact on the Company's
earnings or cash flows. Fluctuations in interest rates on the Company's variable
rate debt instruments, that are tied to either LIBOR or the prime rate, would
affect the Company's earnings and cash flows but would not affect the fair
market value of the variable rate debt. For each percentage point change in
interest rates, the Company's annual interest expense would increase by
approximately $0.9 million based on the Company's outstanding variable debt as
of June 30, 2003. In addition, an increase in interest rates could result in
operating deficit obligations, relating to the Triad Entities, that could
require funding by the Company. The Triad Entities, as of June 30, 2003, have
$157.6 million in outstanding bank debt comprised of various fixed and variable
rate debt instruments of $26.0 million and $131.6 million, respectively.
Item 4. CONTROLS AND PROCEDURES.
The Company's management, including its Chief Executive Officer and Chief
Financial Officer, after evaluating the effectiveness of the Company's
disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c)
under the Securities Exchange Act of 1934) as of a date (the "Evaluation Date"),
which was within 90 days of this quarterly report on Form 10-Q, have concluded
in their judgment that, as of the Evaluation Date, the Company's disclosure
controls and procedures were adequate and designed to ensure that material
information relating to the Company and its subsidiaries would be made known to
them.
There were no significant changes in the Company's internal controls or, to its
knowledge, in other factors that could significantly affect its disclosure
controls and procedures subsequent to the Evaluation Date.
23
CAPITAL SENIOR LIVING CORPORATION
PART II. OTHER INFORMATION
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
In the fourth quarter of 2002, the Company (and two of its management
subsidiaries), Buckner Retirement Services, Inc. ("Buckner"), and a related
Buckner entity, and other unrelated entities were named as defendants in a
lawsuit in district court in Fort Bend County, Texas brought by the heir of a
former resident who obtained nursing home services at Parkway Place from
September 1998 to March 2001. The Company managed Parkway Place for Buckner
through December 31, 2001. The plaintiff alleges gross negligence, malice and
intentional injury in the treatment of the resident at Parkway Place and seeks
various damages including wrongful death and punitive damages. The Company's
insurers have hired counsel to investigate and defend this claim. The insurers
have issued reservation of rights letters, subject to certain exclusions in the
applicable insurance policies. The parties are currently going through initial
discovery. The Company is unable at this time to estimate its liability, if any,
related to this claim.
The Company has other pending claims not mentioned above ("Other Claims")
incurred in the course of its business. Most of these Other Claims are believed
by management to be covered by insurance, subject to normal reservations of
rights by the insurance companies and possibly subject to certain exclusions in
the applicable insurance policies. Whether or not covered by insurance, these
claims, in the opinion of management, based on advice of legal counsel, should
not have a material effect on the financial statements of the Company if
determined adversely to the Company.
Item 2. CHANGES IN SECURITIES (and use of proceeds)
Not Applicable
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders was held on May 22, 2003. At the
meeting, the stockholders voted to re-elect two directors of the Company, James
A. Stroud and Keith N. Johannessen, to hold office until the annual meeting to
be held in 2005 or until each person's successor is duly elected and qualified
("Proposal 1"). The stockholders failed to re-elect Dr. Gordon I. Goldstein as a
director. The other directors whose terms continue after the annual meeting are
Lawrence A. Cohen, Craig F. Hartberg, James A. Moore and Dr. Victor Nee.
In addition, the stockholders were asked to consider and act upon a proposal to
ratify Ernst & Young, LLP as the independent public accountants for the Company
for the year 2003 ("Proposal 2"). No other matters were voted on at the annual
meeting. A total of 19,438,537 shares were represented at the meeting in person
or by proxy.
The number of shares that were voted for and that were withheld from, each of
the director nominees in Proposal 1 was as follows:
Director Nominee For Withheld
---------------- --- --------
James A. Stroud 13,471,614 5,966,923
Keith N. Johannessen 13,468,564 5,969,973
Dr. Gordon I. Goldstein 9,019,674 10,418,863
In Proposal 2, Ernst & Young LLP was ratified as the independent public
accountants for the Company for fiscal 2003, with 12,782,814 shares voting for,
6,653,323 shares voting against and 2,400 shares abstaining.
24
CAPITAL SENIOR LIVING CORPORATION
PART II. OTHER INFORMATION
Item 5. OTHER INFORMATION
Not Applicable
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits:
10.1 Contribution Agreement dated June 30, 2003 between Capital
Senior Living Properties, Inc. and BRE/CLS Holdings II,
L.L.C.
10.2 BRE/CSL II L.L.C. Limited Liability Company Agreement.
10.3 Management Agreement between Capital Senior Living, Inc. and
BRE/Cottonwood L.L.C.
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.
(B) Reports on Form 8-K
Current Report on Form 8-K filed with the Commission on May 6,
2003 reporting the issuance of a press release to report the
Company's earnings for the first quarter of 2003.
25
CAPITAL SENIOR LIVING CORPORATION
June 30, 2003
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Capital Senior Living Corporation
(Registrant)
By: /s/ Ralph A. Beattie
----------------------------------------
Ralph A. Beattie
Executive Vice President and Chief Financial Officer
(Principal Financial Officer and Duly Authorized Officer)
Date: August 11, 2003
26