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 <TABLE> <CAPTION> Page Number ------ <S> <C> <C> 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 </TABLE> 2
PART I. FINANCIAL INFORMATION Item 1. Financial Statements CAPITAL SENIOR LIVING CORPORATION CONSOLIDATED BALANCE SHEETS (in thousands) <TABLE> <CAPTION> June 30, December 31, 2001 2000 ---------------- ---------------- ASSETS (Unaudited) (Audited) <S> <C> <C> 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 ================ ================ </TABLE> See accompanying notes. 3
CAPITAL SENIOR LIVING CORPORATION CONSOLIDATED STATEMENTS OF INCOME (in thousands) <TABLE> <CAPTION> Three Months Ended Six Months Ended June 30, June 30, -------------------------------- --------------------------------- 2001 2000 2001 2000 --------------- --------------- --------------- --------------- (Unaudited) (Unaudited) (Unaudited) (Unaudited) <S> <C> <C> <C> <C> 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 =========== =========== ============ ============ </TABLE> See accompanying notes. 4
CAPITAL SENIOR LIVING CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) <TABLE> <CAPTION> Six Months Ended June 30, ------------------------------------- 2001 2000 --------------- --------------- (Unaudited) (Unaudited) <S> <C> <C> 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 =============== =============== </TABLE> 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): <TABLE> <CAPTION> Notes Receivable Deferred Income ------------------------------------------- --------------------------------- LP Entity Ownership Capital Committed Interest Development Management ------ Interest Investment Amount Balance Maturity Rate Interest Fees Fees -------- ---------- ------ ------- -------- ---- -------- ---- ---- <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> 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> </TABLE> 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): <TABLE> <CAPTION> Three Months Ended Six Months Ended June 30, June 30, --------------------------- ----------------- 2001 2000 2001 2000 --------- --------- --------- ------- <S> <C> <C> <C> <C> 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 ========= ========= ========= ========= </TABLE> 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. <TABLE> <CAPTION> Three Months Ended Six Months Ended June 30, June 30, --------------------------------------- ---------------------------------------- 2001 2000 2001 2000 ------------------ ------------------ ------------------ --------------------- $ % $ % $ % $ % <S> <C> <C> <C> <C> <C> <C> <C> <C> 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 ========== ======= ========= ======== ========= ======== ========= ======= </TABLE> 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): <TABLE> <CAPTION> Notes Receivable Loan Facilities ---------------------------------------------- Balance Committed June 30, Interest Entity Amount 2000 Maturity Rate Amount Type Lender ------ ------ ---- -------- ---- ------ ---- ------ <S> <C> <C> <C> <C> <C> <C> <C> 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> </TABLE> 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