SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 2005
[ ] 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 [X] No [ ]
As of May 5, 2005, the Registrant had 25,761,704 outstanding shares of its
Common Stock, $.01 par value.
1
CAPITAL SENIOR LIVING CORPORATION
INDEX
Page
Number
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets - -
March 31, 2005 and December 31, 2004 3
Consolidated Statements of Operations - -
Three Months Ended March 31, 2005 and 2004 4
Consolidated Statements of Cash Flows - -
Three Months Ended March 31, 2005 and 2004 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 18
Item 4. Controls and Procedures 19
Part II. Other Information
Item 1. Legal Proceedings 20
Item 6. Exhibits and Reports on Form 8-K 21
Signature
Certifications
2
CAPITAL SENIOR LIVING CORPORATION
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2005 2004
----------- ------------
(in thousands)
ASSETS
Current assets:
Cash and cash equivalents................................................ $ 19,998 $ 19,515
Restricted cash.......................................................... 160 --
Accounts receivable, net................................................. 2,237 2,073
Accounts receivable from affiliates...................................... 368 1,220
Federal and state income taxes receivable................................ 3,205 2,572
Deferred taxes........................................................... 642 642
Assets held for sale..................................................... 1,008 1,008
Property tax and insurance deposits...................................... 3,276 2,731
Prepaid expenses and other............................................... 1,503 2,766
----------- -----------
Total current assets............................................. 32,397 32,527
Property and equipment, net................................................ 378,471 381,051
Deferred taxes............................................................. 6,910 7,011
Investments in limited partnerships........................................ 3,232 3,202
Assets held for sale....................................................... 1,026 1,026
Other assets, net.......................................................... 6,530 6,358
----------- -----------
Total assets..................................................... $ 428,566 $ 431,175
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................................... $ 2,244 $ 2,162
Accounts payable to affiliates........................................... -- 318
Accrued expenses......................................................... 8,266 7,478
Current portion of notes payable......................................... 41,173 42,242
Customer deposits........................................................ 1,957 1,936
----------- -----------
Total current liabilities........................................ 53,640 54,136
Deferred income............................................................ 932 680
Deferred income from affiliates............................................ 135 125
Other long-term liabilities................................................ 6,642 6,909
Notes payable, net of current portion...................................... 218,140 219,526
Minority interest in consolidated partnership.............................. 249 252
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 -- 25,762 and 25,751 in
2005 and 2004, respectively.......................................... 258 258
Additional paid-in capital............................................... 125,002 124,963
Retained earnings........................................................ 23,568 24,326
----------- -----------
Total shareholders' equity....................................... 148,828 149,547
----------- -----------
Total liabilities and shareholders' equity....................... $ 428,566 $ 431,175
=========== ===========
See accompanying notes.
3
Part I. Financial Information.
Item 1. Financial Statements.
CAPITAL SENIOR LIVING CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Three Months Ended
March 31, March 31,
2005 2004
----------- ------------
Revenues:
Resident and health care revenue............................. $ 23,374 $ 22,112
Unaffiliated management services revenue..................... 393 40
Affiliated management services revenue....................... 471 474
----------- -----------
Total revenues.......................................... 24,238 22,626
Expenses:
Operating expenses........................................... 14,274 14,526
General and administrative expenses.......................... 4,175 4,036
Depreciation and amortization................................ 3,134 2,957
----------- -----------
Total expenses.......................................... 21,583 21,519
----------- -----------
Income from operations......................................... 2,655 1,107
Other income (expense):
Interest income.............................................. 23 163
Interest expense............................................. (4,230) (4,084)
Gain on treasury rate lock agreement......................... 267 --
Other income................................................. 110 67
----------- -----------
Loss before income taxes and minority interest in
consolidated partnership..................................... (1,175) (2,747)
Benefit for income taxes....................................... 414 674
----------- -----------
Loss before minority interest in consolidated
partnership.................................................. (761) (2,073)
Minority interest in consolidated partnership.................. 3 27
----------- -----------
Net loss....................................................... $ (758) $ (2,046)
=========== ===========
Per share data:
Basic loss per share......................................... $ (0.03) $ (0.09)
=========== ===========
Diluted loss per share....................................... $ (0.03) $ (0.09)
=========== ===========
Weighted average shares outstanding -- basic.................. 25,754 23,698
=========== ===========
Weighted average shares outstanding -- diluted................ 25,754 23,698
=========== ===========
See accompanying notes.
4
CAPITAL SENIOR LIVING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Three Months Ended March 31,
2005 2004
------------ ------------
Operating Activities
Net loss......................................................... $ (758) $ (2,046)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation................................................... 3,038 2,957
Amortization................................................... 96 --
Amortization of deferred financing charges..................... 191 547
Amortization of debt discount.................................. 55 --
Minority interest in consolidated partnership.................. (3) (27)
Deferred income from affiliates................................ 10 8
Deferred income................................................ 252 (112)
Deferred income taxes.......................................... 101 101
Equity in the earnings of affiliates........................... (110) (67)
Gain on treasury rate lock agreements.......................... (267) --
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable.......................................... (164) 7
Accounts receivable from affiliates.......................... 852 268
Property tax and insurance deposits.......................... (545) (407)
Prepaid expenses and other................................... 1,263 1,174
Other assets................................................. (82) (115)
Accounts payable and accrued expenses........................ 552 (527)
Federal and state income taxes receivable/payable............ (623) (1,137)
Customer deposits............................................ 21 8
----------- -----------
Net cash provided by operating activities.................. 3,879 632
Investing Activities
Capital expenditures............................................. (458) (317)
Advances to affiliates........................................... -- (116)
Distributions from limited partnerships.......................... 80 40
----------- -----------
Net cash used in investing activities............................ (378) (393)
Financing Activities
Repayments of notes payable...................................... (2,510) (17,373)
Restricted cash.................................................. (160) 1,020
Cash proceeds from the exercise of stock options................. 29 113
Cash proceeds from common stock offering......................... -- 32,158
Deferred financing charges paid.................................. (377) --
----------- -----------
Net cash (used in) provided by financing activities.............. (3,018) 15,918
------------ -----------
Increase in cash and cash equivalents............................ 483 16,157
Cash and cash equivalents at beginning of year................... 19,515 6,594
----------- -----------
Cash and cash equivalents at end of year......................... $ 19,998 $ 22,751
=========== ===========
Supplemental Disclosures
Cash paid during the year for:
Interest....................................................... $ 3,258 $ 3,541
=========== ===========
Income taxes................................................... $ 140 $ 369
=========== ===========
See accompanying notes.
5
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
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, 2004, has been
derived from audited consolidated financial statements of the Company for the
year ended December 31, 2004, and the accompanying unaudited consolidated
financial statements, as of March 31, 2005 and 2004, 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, 2004 included in the Company's
Annual Report on Form 10-K filed with the Securities and Exchange Commission on
March 10, 2005.
In the opinion of the Company, the accompanying consolidated financial
statements contain all adjustments (all of which were normal recurring accruals)
necessary to present fairly the Company's financial position as of March 31,
2005, results of operations for the three months ended March 31, 2005 and 2004,
respectively, and cash flows for the three months ended March 31, 2005 and 2004.
The results of operations for the three months ended March 31, 2005 are not
necessarily indicative of the results for the year ending December 31, 2005.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Net Loss Per Share
Basic net loss per share is calculated by dividing net loss by the weighted
average number of common shares outstanding during the period. Diluted net loss
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 loss per
share (in thousands, except for per share amounts):
Three Months Ended
March 31,
2005 2004
----------- -----------
Net loss $ (758) $ (2,046)
=========== ===========
Weighted average shares outstanding -
basic and diluted 25,754 23,698
=========== ===========
Basic loss per share $ (0.03) $ (0.09)
=========== ===========
Diluted loss per share $ (0.03) $ (0.09)
=========== ===========
Options were not dilutive in the first quarter of fiscal 2005 and 2004 as the
Company reported a net loss in both fiscal periods.
The Company issued 10,757 and 37,651 shares of common stock, during the first
quarter of fiscal 2005 and 2004, respectively, pursuant to the exercise of stock
options by certain employees of the Company.
Stock-Based Compensation
Pro forma information regarding net loss per share has been determined as if the
Company had accounted for its employee stock options under the fair value
6
method. The fair value for these options was estimated at the date of grant
using the Black-Scholes option-pricing model. The Black-Scholes option valuation
model was developed for use in estimating the fair value of traded options that
have no vesting restrictions and are fully transferable. In addition, option
valuation models require the input of highly subjective assumptions including
the expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting periods.
Three Months Ended
March 31,
2005 2004
----------- -----------
Net loss
As reported $ (758) $ (2,046)
Less: fair value stock expense, net of tax (584) (154)
----------- ------------
Pro forma (1,342) (2,200)
=========== ============
Net loss per share - basic
As reported $ (0.03) $ (0.09)
Less: fair value stock expense, net of tax (0.02) 0.00
----------- ------------
Pro forma (0.05) (0.09)
=========== ============
Net loss per share - diluted
As reported $ (0.03) $ (0.09)
Less: fair value stock expense, net of (0.02) 0.00
----------- ------------
Pro forma (0.05) (0.09)
=========== ============
On December 16, 2004, the Financial Accounting Standards Board issued FASB
Statement No. 123, revised 2004 ("Statement 123(R)"), Share-Based Payment, which
is a revision of FASB Statement 123, Accounting for Stock-Based Compensation.
Statement 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to
Employees, and amends FASB Statement No. 95, Statement of Cash Flows. Generally
the approach in Statement 123(R) is similar to the approach described in
Statement 123. However, Statement 123(R) requires all share based payments to
employees, including grants of employee stock options, to be recognized in the
statement of operations based on their fair values. Pro forma disclosure is no
longer an alternative. In April 2005, the effective date for Statement 123(R)
was revised to be effective with the first annual reporting period beginning
after June 15, 2005. The impact of the adoption of Statement 123(R) cannot be
predicted at this time because it will depend on the levels of share-based
payments granted in the future. However, had the Company adopted Statement
123(R) in prior periods, the impact of the standard would have approximated the
impact of Statement 123 as described above in the disclosure of pro forma net
income and earnings per share.
On February 10, 2005, the Company's Compensation Committee of the Board of
Directors accelerated the vesting on 151,976 unvested stock options, with an
option price of $6.30, awarded to officers and employees. These options were
originally scheduled to vest in December 2005. The market price of the Company's
common stock at the close of business on February 10, 2005 was $5.61. The
Compensation Committee's decision to accelerate the vesting of these options was
in response to the FASB's issuance of Statement 123(R). By accelerating the
vesting of these options, the Company believes it will result in the Company not
being required to recognize any compensation expense related to these options.
In addition, on February 10, 2005, the Company's Compensation Committee of the
Board of Directors approved the form of Restricted Stock Award under the 1997
Omnibus Stock and Incentive Plan for Capital Senior Living Corporation. The
Company has not made any grants of restricted stock under this plan.
7
Interest Rate Cap, Lock and Swap Agreements
Effective January 31, 2005, the Company entered into interest rate cap
agreements with two commercial banks to reduce the impact of increases in
interest rates on the Company's variable rate loans. One interest cap agreement
effectively limits the interest rate exposure on a $50 million notional amount
to a maximum LIBOR rate of 5% and expires on January 31, 2006. The second
interest rate cap agreement effectively limits the interest rate exposure on
$100 million notional amount to a maximum LIBOR rate of 5%, as long as one-month
LIBOR is less than 7%. If one-month LIBOR is greater than 7%, the agreement
effectively limits the interest rate on the same $100 million notional amount to
a maximum LIBOR rate of 7%. This second agreement expires on January 31, 2008.
The Company paid $0.4 million for the interest rate caps and the costs of these
agreements are being amortized to interest expense over the life of the
agreements.
The Company is party to interest rate lock agreements, which were used to hedge
the risk that the costs of future issuance of debt may be adversely affected by
changes in interest rates. Under the treasury lock agreements, the Company
agrees to pay or receive an amount equal to the difference between the net
present value of the cash flows for a notional principal amount of indebtedness
based on the locked rate at the date when the agreement was established and the
yield of a United States Government 10-Year Treasury Note on the settlement date
of January 3, 2006. The notional amounts of the agreements were not exchanged.
These treasury lock agreements were entered into with a major financial
institution in order to minimize counterparty credit risk. The locked rates
range from 7.5% to 9.1%. On December 30, 2004, the Company refinanced the
underlying debt and this refinancing resulted in the interest rate lock
agreements no longer qualifying as an interest rate hedge. The Company now
reflects the interest rate lock agreements at fair value in the Company's
balance sheet (as a long-term liability) and related gains and losses are
recognized in the statement of operations. During the first quarter of fiscal
2005, the Company recognized a gain of $0.3 million relating to the treasury
lock agreements. The Company has the ability settle the treasury lock liability
by converting the liability to a five-year note at any time prior to the
treasury lock settlement date of January 3, 2006. The Company intends to convert
the treasury lock liability to a long-term note on or before its settlement date
and therefore has classified the treasury lock liability as long-term. Prior to
refinancing the underlying debt, the treasury lock agreements were reflected at
fair value in the Company's balance sheet (Other long term liabilities) and the
related gains or losses on these agreements were deferred in stockholders'
equity (as a component of Other comprehensive income).
In addition, the Company was party to interest rate swap agreements in fiscal
2004 that were used to modify variable rate obligations to fixed rate
obligations, thereby reducing the Company's exposure to market rate
fluctuations. On December 30, 2004, the Company settled its interest rate swap
agreements by paying its lender $0.5 million. The differential paid or received
as rates changed was accounted for under the accrual method of accounting and
the amount payable to or receivable from counterparties was included as an
adjustment to accrued interest. The interest rate swap agreements resulted in
the Company recognizing an additional $0.2 million in interest expense during
the first quarter of fiscal 2004.
During the first quarter of fiscal 2004, the Company recognized other
comprehensive loss of $1.2 million from the change in the fair value of the
interest rate swap and treasury lock agreements. Total comprehensive loss (net
loss from operations plus other comprehensive loss) for the three months ended
March 31, 2005 and 2004 was $0.8 million and $3.2 million, respectively.
Liquidity
The Company has $34.3 million in debt outstanding with GMAC that matures in
September 2005. The Company is currently working to refinance the debt and the
Company expects to complete this refinancing during the third quarter of fiscal
2005. However, there can be no assurance that the refinancing will occur or that
it will be on terms acceptable to the Company. This debt is classified as a
current liability in the Company's consolidated balance sheet.
3. TRANSACTIONS WITH AFFILIATES
BRE/CSL: The Company formed three joint ventures (collectively "BRE/CSL") with
an affiliate of Blackstone Real Estate Advisors ("Blackstone") in December 2001,
8
and the joint ventures seek to acquire senior housing properties. BRE/CSL is
owned 90% by Blackstone and 10% by the Company. Pursuant to the terms of the
joint ventures, each of the Company and Blackstone must approve any acquisitions
made by BRE/CSL. Each party must also contribute its pro rata portion of the
costs of any acquisition.
In December 2001, BRE/CSL acquired Amberleigh, a 394 resident capacity
independent living facility. In connection with the acquisition of Amberleigh by
BRE/CSL, the Company contributed $1.8 million to BRE/CSL. During the second
quarter of 2002, BRE/CSL obtained permanent financing for the Amberleigh
community and the Company recovered $1.4 million of its contribution to BRE/CSL.
On June 13, 2002, the Company contributed to BRE/CSL four of its senior living
communities with a capacity of approximately 600 residents. As a result of the
contribution, the Company repaid $29.1 million of long-term debt to GMAC,
received $7.3 million in cash from BRE/CSL, has a 10% equity interest in the
venture of $1.2 million and wrote-off $0.5 million in deferred loan costs.
In addition, on June 30, 2003, the Company contributed to BRE/CSL one of its
senior living communities with a capacity of 182 residents. As part of the
contribution, BRE/CSL assumed $7.4 million of long-term debt on the community
and the Company received $3.1 million in cash from BRE/CSL, and has a 10% equity
interest in BRE/CSL of $0.4 million resulting in the recognition of a gain of
$3.4 million. As part of the 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 debt to be assumed by BRE/CSL. The
Company estimates the carrying value of its obligation under this guarantee as
nominal.
The Company manages the six communities owned by BRE/CSL under long-term
management contracts. The Company accounts for the BRE/CSL investment under the
equity method of accounting and the Company recognized earnings in the equity of
BRE/CSL of $0.1 million in each of the three months ended March 31, 2005 and
2004. The Company has deferred $0.1 million of management services revenue as a
result of its 10% interest in the BRE/CSL joint venture.
SHPII/CSL: In November 2004, the Company formed four joint ventures
(collectively "SHPII/CSL") with a fund managed by Prudential Real Estate
Advisors ("Prudential"). Effective as of November 30, 2004, the Company acquired
Lehman Brothers' ("Lehman's") interest in four joint ventures that own four
communities (the "Spring Meadows Communities") and simultaneously sold the
Spring Meadows Communities to SHPII/CSL, which is owned 95% by SHPII and 5% by
the Company. As a result of these transactions, the Company paid $1.1 million
for Lehman's interest in the joint ventures, received $0.9 million in net assets
and wrote-off the remainder totaling $0.2 million. In addition, the Company
contributed $1.3 million to SHPII/CSL for its 5% interest. The Company accounts
for its investment in SHPII/CSL under the equity method of accounting and the
Company recognized earnings in the equity of SHPII/CSL of $36,000 for the three
months ended March 31, 2005. The Company defers 5% of its management fee income
earned from SHPII/CSL. Deferred management fee income is being amortized into
income over the term of the Company's management contract. As of March 31, 2005,
the Company had deferred income of approximately $15,000 relating to SHPII/CSL.
4. ACQUISITIONS
Triad I: Effective as of November 30, 2004, the Company acquired Lehman's
approximate 81% limited partner's interest in Triad Senior Living I, LP ("Triad
I") for $4.0 million in cash and the issuance of a note with a net present value
of $2.8 million. In addition, the Company acquired the general partner's
interest in Triad I by assuming a $3.6 million note payable from the general
partner to a subsidiary of the Company. The acquisition was recorded as a
purchase of property. The entire purchase price of $10.4 million was recorded as
a step-up in basis of the property as Triad I had been previously consolidated
under FIN 46 as of December 31, 2003. These transactions resulted in the Company
now wholly owning Triad I. Triad I owned five Waterford senior living
communities and two expansions. The two expansions were subsequently deeded to a
subsidiary of the Company in order for the two expansions to be consolidated
with their primary community.
9
Prior to acquiring the remaining interests of the general partner and the other
third party limited partner the Company had an approximate 1% limited partner's
interest in Triad I and accounted for this investments under the equity method
of accounting based on the provisions of the Triad I partnership agreement until
December 31, 2003.
In 2003, the Financial Accounting Standards Board issued FASB Interpretation No.
46 (Revised December 2003) "Consolidation of Variable Interest Entities" an
interpretation of ARB No. 51, effective immediately for variable interest
entities created after January 31, 2003 and effective as of December 31, 2003
for variable interest entities that existed prior to February 1, 2003. The
Company adopted the provisions of this interpretation at December 31, 2003, and
its adoption resulted in the Company consolidating the financial position of
Triad I at December 31, 2003 and resulted in the Company consolidating the
operations of Triad I beginning in the Company first quarter of 2004. The
consolidation of Triad I under the provisions of FIN 46 as of December 31, 2003
resulted in an increase in property and equipment of $62.5 million.
CGIM: Effective August 18, 2004, the Company acquired from Covenant Group of
Texas ("Covenant") all of the outstanding stock of Covenant's wholly owned
subsidiary, CGI Management, Inc. ("CGIM"). The Company paid approximately $2.3
million in cash (including closing costs of approximately $0.1 million) and
issued a note with a fair value of approximately $1.1 million, subject to
various adjustments set forth in the purchase agreement, to acquire all of the
outstanding stock of CGIM. The note is due in three installments of
approximately $0.3 million, $0.4 million and $0.7 million due on the first,
third and fifth anniversaries of the closing, respectively, subject to reduction
if the management fees earned from the third party owned communities with
various terms are terminated and not replaced by substitute agreements during
the period, and certain other adjustments. The total purchase price was $3.5
million and the acquisition was treated as a purchase. This acquisition resulted
in the Company assuming the management contracts on 14 senior living communities
with a combined resident capacity of approximately 1,800 residents. In addition,
the Company has the right to acquire seven of the properties owned by Covenant
(which are part of the 14 communities managed by CGIM) based on sales prices
specified in the stock purchase agreement.
The purchase price of $3.5 million was allocated to management contract rights,
which are included in other assets on the consolidated balance sheet. The
Company is amortizing the management contract rights over the remaining life of
the management contracts acquired and accumulated amortization was $0.2 million
at March 31, 2005.
5. CONTINGENCIES
In the fourth quarter of 2002, the Company (and two of its management
subsidiaries), Buckner Retirement Services, Inc. ("Buckner"), and a related
Buckner entity, and other unrelated entities were named as defendants in a
lawsuit in district court in Fort Bend County, Texas brought by the heir of a
former resident who obtained nursing home services at Parkway Place from
September 1998 to March 2001. The Company managed Parkway Place for Buckner
through December 31, 2001. The Company and its subsidiaries denied any
wrongdoing. On March 16, 2004, the Court granted the Company's Motion to
Dismiss.
In February 2004, the Company and certain subsidiaries, along with numerous
other senior living companies in California, were named as defendants in a
lawsuit in the superior court in Los Angeles, California. This lawsuit was
brought by two public interest groups on behalf of seniors in California
residing at the California facilities of the defendants. The plaintiffs alleged
that pre-admission fees charged by the defendants' facilities were actually
security deposits that must be refunded in accordance with California law. On
November 30, 2004, the court approved a settlement involving the Company's
independent living communities. Under the terms of the settlement, (a) all
non-refundable fees collected at the independent living facilities since January
1, 2003 will be treated as a refundable security deposits and (b) the attorney
for the plaintiffs received nominal attorney fees. There were no other
settlement costs to the Company or its affiliates and the Company's assisted
living community in California was not named.
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
10
the applicable insurance policies. Whether or not covered by insurance, these
Other Claims, in the opinion of management, based on advice of legal counsel,
should not have a material effect on the financial statements of the Company if
determined adversely to the Company.
11
CAPITAL SENIOR LIVING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
The following discussion and analysis addresses (i) the Company's results of
operations for the three months ended March 31, 2005 and 2004, 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 owns, operates,
develops and manages senior living communities throughout the United States. The
Company's operating strategy is to provide quality senior living services 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 senior living services to the elderly,
including independent living, assisted living, skilled nursing and home care
services.
As of March 31, 2005, the Company operated 54 senior living communities in 20
states with an aggregate capacity of approximately 8,700 residents, including 39
senior living communities which the Company owned or in which the Company had an
ownership interest and 15 communities it managed for third parties. As of March
31, 2005, the Company also operated one home care agency.
The Company generates revenue from a variety of sources. For the three months
ended March 31, 2005, the Company's revenue was derived as follows: 96.4% from
the operation of 29 owned senior living communities, and 3.6% from management
fees arising from management services provided for 10 affiliate owned senior
living communities and 15 unaffiliated senior living communities.
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 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 flow 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
approximately 5% of net 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 is party to a series of property management agreements (the "BRE/CSL
Management Agreements") with BRE/CSL owned 90% by Blackstone and 10% by the
Company, which collectively own and operate six senior living communities. The
BRE/CSL Management Agreements extend until various dates through June 2008. The
BRE/CSL Management Agreements provide for management fees of 5% of gross revenue
plus reimbursement for costs and expenses related to the communities. The
Company earned $0.2 million under the terms of the BRE/CSL Management Agreements
for the three months ended March 31, 2005.
Effective August 18, 2004, the Company acquired from Covenant all of the
outstanding stock of CGIM. This acquisition resulted in the Company assuming the
management contracts (the "CGIM Management Agreements") on 14 senior living
communities with a combined resident capacity of approximately 1,800 residents.
The CGIM Management Agreements expire on various dates through August 2019. The
12
CGIM Management Agreements generally provide for management fees of 5% to 5.5%
of gross revenues, subject to certain base management fees. The Company earned
$0.4 million under the terms of the CGIM Management Agreements for the three
months ended March 31, 2005. In addition, the Company has the right to acquire
seven of the properties owned by Covenant (which are part of the 14 communities
managed by CGIM) based on sales prices specified in the stock purchase
agreement.
The Company is party to a property management agreement (the "SHPII Management
Agreement") with SHPII, a fund managed by Prudential, to manage one senior
living community. The SHP Management Agreement extends until June 2008 and
provides for management fees of 5% of gross revenue plus reimbursement for costs
and expenses related to the communities. The Company earned $40,000 under the
terms of the SHP Management Agreement for the three months ended March 31, 2005.
The Company entered into a series of property management agreements (the
"SHPII/CSL Management Agreements"), effective November 30, 2004, with SHPII/CSL,
which is owned 95% by SHPII and 5% by the Company, which collectively own and
operate the Spring Meadows Communities. The SHPII/CSL Management Agreements
extend until various dates through November 2014. The SHPII/CSL Management
Agreements provide for management fees of 5% of gross revenue plus reimbursement
for costs and expenses related to the communities. The Company earned $0.2
million under the terms of the SHPII/CSL Management Agreements for the three
months ended March 31, 2005.
Website
The Company's internet website www.capitalsenior.com contains an Investor
Relations section, which provides links to the Company's annual reports on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy
statements, Section 16 filings and amendments to those reports, which reports
and filings are available free of charge as soon as reasonably practicable after
such material is electronically filed with or furnished to the Securities and
Exchange Commission ("SEC").
13
Results of Operations
The following table sets forth for the periods indicated selected statements of
income data in thousands of dollars and expressed as a percentage of total
revenues.
Three Months Ended March 31,
----------------------------------------
2005 2004
------------------- --------------------
$ % $ %
---------- -------- ---------- ---------
Revenues:
Resident and healthcare revenue.............. $ 23,374 96.4 $ 22,112 97.7
Unaffiliated management service revenue...... 393 1.6 40 0.2
Affiliated management service revenue........ 471 2.0 474 2.1
--------- ----- --------- -----
Total revenues............................... 24,238 100.0 22,626 100.0
Expenses:
Operating expenses........................... 14,274 58.9 14,526 64.2
General and administrative expenses.......... 4,175 17.2 4,036 17.8
Depreciation and amortization................ 3,134 12.9 2,957 13.1
--------- ----- --------- -----
Total expenses............................... 21,583 89.0 21,519 95.1
--------- ----- --------- -----
Income from operations ........................ 2,655 11.0 1,107 4.9
Other income (expense):
Interest income.............................. 23 0.1 163 0.7
Interest expense............................. (4,230) (17.5) (4,084) (18.1)
Gain on treasury lock agreement.............. 267 1.1 -- --
Other income................................. 110 0.5 67 0.3
--------- ----- --------- -----
Loss before income taxes and minority
interest in consolidated partnership...... (1,175) (4.8) (2,747) (12.1)
Benefit for income taxes....................... 414 1.7 674 3.0
--------- ----- --------- -----
Loss before minority interest in
consolidated partnership..................... (761) (3.1) (2,073) (9.1)
Minority interest in consolidated partnership.. 3 0.0 27 0.1
--------- ----- --------- -----
Net loss....................................... $ (758) (3.1) $ (2,046) (9.0)
========= ===== ========= =====
Three Months Ended March 31, 2005 Compared to the Three Months Ended March 31,
2004
Revenues. Total revenues were $24.2 million in the three months ended March 31,
2005 compared to $22.6 million for the three months ended March 31, 2004,
representing an increase of approximately $1.6 million or 7.1%. This increase in
revenue is primarily the result of a $1.3 million increase in resident and
healthcare revenue and an increase in unaffiliated management services revenue
of $0.3 million. The 5.7% increase in resident and healthcare revenue reflects
improved occupancy and higher average monthly rents per unit at the Company's 29
owned communities. The increase in unaffiliated management services revenue in
the first quarter of fiscal 2005 reflects the management of 15 senior living
communities compared to one community under management in the first quarter of
fiscal 2004. The increase in unaffiliated senior living communities under
management in fiscal 2005 resulted from the Company's acquisition of CGIM.
Affiliated management services revenue results from the management of 10 senior
living communities in both fiscal 2005 and 2004.
Expenses. Total expenses were $21.6 million in the first quarter of fiscal 2005
compared to $21.5 million in the first quarter of fiscal 2004, representing an
increase of $0.1 million or 0.3%. This increase is primarily the result of a
$0.1 million increase in general and administrative expenses and a $0.2 million
increase in depreciation and amortization expense offset by a decrease in
operating expenses of $0.2 million. The decrease in operating expenses results
from the Company's initiatives to reduce and control costs at its communities.
The increase in general and administrative expenses reflects an increase of $0.3
million in administrative labor and professional fees in the current fiscal year
offset by a reduction of $0.1 million in administrative costs at the Company's
29 owned communities. The increase in depreciation and amortization expense
primarily results from the amortization of the CGIM management contracts and
additional depreciation expense resulting from the Company's acquisition of
Triad I.
14
Other income and expense. Interest income decreased $0.1 million or 85.9% to
$23,000 in fiscal 2005 compared to $0.2 million in fiscal 2004. Interest expense
increased $0.1 million to $4.2 million in the first quarter of 2005 compared to
$4.1 million in the first quarter of 2004. This 3.6% increase in interest
expense is primarily the result of higher interest rates in the current fiscal
year offset by a reduction in debt outstanding of $2.4 million. During the first
quarter of fiscal 2005, the Company recognized a gain of $0.3 million as a
result of the change in fair value of its treasury lock agreements. Other income
in the first quarter of fiscal 2005 and 2004 relates to the Company's equity in
the earnings of affiliates, which represents the Company's share of the earnings
on its investments in BRE/CSL and SHPII/CSL.
Benefit for income taxes. Benefit for income taxes in the first quarter of
fiscal 2005 was $0.4 million or 35.3% of loss before taxes, compared to a
benefit for income taxes of $0.7 million or 24.8% in the first quarter of fiscal
2004. The effective tax rates for the first quarter of 2005 and 2004 differ from
the statutory tax rates because of state income taxes and permanent tax
differences. The permanent tax differences in the first quarter of fiscal 2004
include $0.9 million in net losses incurred by Triad I, which was consolidated
during the first quarter of fiscal 2004 under the provisions of FIN 46.
Minority interest. Minority interest represents the minority holder's share of
the losses incurred by HealthCare Properties Liquidating Trust ("HCP").
Net income. As a result of the foregoing factors, net loss decreased $1.2
million to a net loss of $0.8 million for the three months ended March 31, 2005,
as compared to a net loss of $2.0 million for the three months ended March 31,
2004.
Liquidity and Capital Resources
In addition to approximately $20.0 million of cash balances on hand as of March
31, 2005, the Company's principal sources of liquidity are expected to be cash
flows from operations, proceeds from the sale of assets, cash flows from BRE/CSL
and/or additional refinancing. Of the $20.0 million in cash balances, $0.6
million relates to cash held by HCP. The Company expects its available cash and
cash flows from operations, proceeds from the sale of assets, and cash flows
from BRE/CSL and SHPII/CSL to be sufficient to fund its short-term working
capital requirements. The Company's long-term capital requirements, primarily
for acquisitions and other corporate initiatives, could be dependent on its
ability to access additional funds through joint ventures and the debt and/or
equity markets. The Company from time to time considers and evaluates
transactions related to its portfolio including refinancings, purchases and
sales, reorganizations and other transactions. 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 has $34.3 million in debt outstanding with GMAC that matures in
September 2005. The Company is currently working to refinance the debt and the
Company expects to complete this refinancing during the third quarter of fiscal
2005. However, there can be no assurance that the refinancing will occur or that
it will be on terms acceptable to the Company. This debt is classified as a
current liability in the Company's consolidated balance sheet.
The Company had net cash provided by operating activities of $3.9 million and
$0.6 million in the first three months of fiscal 2005 and 2004, respectively. In
first quarter of fiscal 2005, net cash provided by operating activities was
primarily derived from net noncash charges of $3.4 million, a decrease in
accounts receivable of $0.7 million, a decrease in prepaid expenses and other of
$1.3 million and an increase in accounts payable and accrued expenses of $0.5
million, offset by a net loss of $0.8 million, an increase in property tax and
insurance deposits of $0.5 million, an increase in other assets of $0.1 million,
and an increase in federal and state income tax receivable of $0.6 million. In
first quarter of fiscal 2004, net cash provided by operating activities was
primarily derived from net noncash charges of $3.4 million, a decrease in
accounts receivable of $0.3 million, a decrease in prepaid expenses and other of
$1.2 million, offset by a net loss of $2.0 million, an increase in property tax
and insurance deposits of $0.4 million, an increase in other assets of $0.1
million, an increase in federal and state income tax receivable of $1.1 million
and a decrease in accounts payable and accrued expenses of $0.5 million.
15
The Company had net cash used in investing activities of $0.4 million in both
the first three months of fiscal 2005 and 2004, respectively. In the first
quarter of fiscal 2005, the net cash used in investing activities was primarily
the result of capital expenditures of $0.5 million offset by $0.1 million in
distributions from limited partnerships. In the first quarter of fiscal 2004,
the net cash used in investing activities was primarily the result of advances
to affiliates of $0.1 million, and capital expenditures of $0.3 million offset
by proceeds from limited partnerships.
The Company had net cash used in financing activities of $3.0 million in the
first quarter of fiscal 2005 compared to net cash provided by financing
activities of $15.9 million in the first quarter of fiscal 2004. For the first
quarter of fiscal 2005 the net cash used in financing activities primarily
results from repayments of notes payable of $2.5 million, cash restricted under
the terms of the Company's treasury lock agreements of $0.2 million and deferred
financing costs paid relating to the Company's interest rate caps of $0.4
million offset by proceeds from the exercise of stock options. For the first
quarter of fiscal 2004 the net cash provided by financing activities primarily
results from the Company's sale of 5,750,000 shares of common stock for net
proceeds of $32.2 million, proceeds from the exercise of stock options of $0.1
million and proceeds from the release of restricted cash of $1.0 million, offset
by repayments of notes payable of $17.4 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 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 third-party management fees are primarily based on a percentage of
gross revenues. As a result, the cash flow 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
approximately 5% of net 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 formed BRE/CSL with Blackstone in December 2001, and the joint
ventures seek to acquire senior housing properties. BRE/CSL is owned 90% by
Blackstone and 10% by the Company. Pursuant to the terms of the joint ventures,
each of the Company and Blackstone must approve any acquisitions made by
BRE/CSL. Each party must also contribute its pro rata portion of the costs of
any acquisition.
In December 2001, BRE/CSL acquired Amberleigh, a 394 resident capacity
independent living facility. In connection with the acquisition of Amberleigh by
BRE/CSL, the Company contributed $1.8 million to BRE/CSL. During the second
quarter of 2002, BRE/CSL obtained permanent financing for the Amberleigh
community and the Company recovered $1.4 million of its contribution to BRE/CSL.
On June 13, 2002, the Company contributed to BRE/CSL four of its senior living
communities with a capacity of approximately 600 residents. As a result of the
contribution, the Company repaid $29.1 million of long-term debt to GMAC,
received $7.3 million in cash from BRE/CSL, has a 10% equity interest in the
venture of $1.2 million and wrote-off $0.5 million in deferred loan costs.
In addition, on June 30, 2003, the Company contributed to BRE/CSL one of its
senior living communities with a capacity of 182 residents. As part of the
16
contribution, BRE/CSL assumed $7.4 million of long-term debt on the community
and the Company received $3.1 million in cash from BRE/CSL, and has a 10% equity
interest in BRE/CSL of $0.4 million resulting in the recognition of a gain of
$3.4 million. As part of the 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 debt to be assumed by BRE/CSL. The
Company estimates the carrying value of its obligation under this guarantee as
nominal.
The Company manages the six communities owned by BRE/CSL under long-term
management contracts. The Company accounts for the BRE/CSL investment under the
equity method of accounting. The Company has deferred $0.1 million of management
services revenue as a result of its 10% interest in the BRE/CSL joint venture.
Effective August 18, 2004, the Company acquired from Covenant all of the
outstanding stock of Covenant's wholly owned subsidiary, CGIM. The Company paid
approximately $2.3 million in cash (including closing costs of approximately
$0.1 million) and issued a note with a fair value of approximately $1.1 million,
subject to various adjustments set forth in the purchase agreement, to acquire
all of the outstanding stock of CGIM. The note is due in three installments of
approximately $0.3 million, $0.4 million and $0.7 million due on the first,
third and fifth anniversaries of the closing, respectively, subject to reduction
if the management fees earned from the third party owned communities with
various terms are terminated and not replaced by substitute agreements during
the period, and certain other adjustments. The total purchase price was $3.5
million and the acquisition was treated as a purchase of property. This
acquisition resulted in the Company assuming the management contracts on 14
senior living communities with a combined resident capacity of approximately
1,800 residents. In addition, the Company has the right to acquire seven of the
properties owned by Covenant (which are part of the 14 communities managed by
CGIM) based on sales prices specified in the stock purchase agreement. The
purchase price of $3.5 million was allocated to management contracts.
Effective as of November 30, 2004, the Company acquired Lehman's approximate 81%
interest in the Spring Meadows Communities and simultaneously sold the Spring
Meadows Communities to SHPII/CSL, which is owned 95% by SHPII and 5% by the
Company. As a result of these transactions, the Company paid $1.1 million for
Lehman's interests in the joint ventures, received net assets of $0.9 million
and wrote-off the remainder totaling $0.2 million. In addition, the Company
contributed $1.3 million to SHPII/CSL for its 5% interest. The Company will
manage the communities for SHPII/CSL under long-term management contracts.
Prior to SHPII/CSL's acquisition of the Spring Meadows Communities, the Company,
had an approximate 19% member interests in the four joint ventures that owned
the Spring Meadows Communities. The Company's interests in the joint ventures
that owned the Spring Meadows Communities included interests in certain loans to
the ventures and its member interest in each venture. The Company accounted for
its investment in the Spring Meadows Communities under the equity method of
accounting based on the provisions of the partnership agreements. The Company
managed the Spring Meadows Communities since the opening of each community in
late 2000 and early 2001 and continued to manage the communities under long-term
management contracts until November 2004 when the joint ventures were sold to
SHPII/CSL.
Effective as of November 30, 2004, the Company acquired Lehman's approximate 81%
limited partner's interest in Triad I for $4.0 million in cash and the issuance
of a note with a net present value of $2.8 million. In addition, the Company
acquired the general partner's interest in Triad I by assuming a $3.6 million
note payable from the general partner to a subsidiary of the Company. The
acquisition was recorded as a purchase of property. The entire purchase price of
$10.4 million was recorded as a step-up in basis of the property as Triad I had
been previously consolidated under FIN 46 as of December 31, 2003. These
transactions resulted in the Company now wholly owning Triad I. Triad I owns
five Waterford senior living communities and two expansions. The two expansions
were subsequently deeded to a subsidiary of the Company in order for the two
expansions to be consolidated with their primary community.
Prior to acquiring the remaining interests of the general partner and the other
third party limited partner in Triad I the Company had an approximate 1% limited
partner's interest in Triad I and accounted for these investments under the
equity method of accounting based on the provisions of the Triad I partnership
agreement until December 31, 2003.
In 2003, the Financial Accounting Standards Board issued FASB Interpretation No.
46 (Revised December 2003) "Consolidation of Variable Interest Entities" an
17
interpretation of ARB No. 51, effective immediately for variable interest
entities created after January 31, 2003 and effective as of December 31, 2003
for variable interest entities that existed prior to February 1, 2003. The
Company adopted the provisions of this interpretation at December 31, 2003, and
its adoption resulted in the Company consolidating the financial position of
Triad I at December 31, 2003 and resulted in the Company consolidating the
operations of Triad I beginning in the Company first quarter of 2004. The
consolidation of Triad I under the provisions of FIN 46 as of December 31, 2003
resulted in an increase in property and equipment of $62.5 million.
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 March 31, 2005, the Company had $259.3 million in
outstanding debt comprised of various fixed and variable rate debt instruments
of $47.4 million and $211.9 million, respectively.
Changes in interest rates would affect the fair market value of the Company's
fixed rate debt instruments but would not have an impact on the Company's
earnings or cash flows. Fluctuations in interest rates on the Company's variable
rate debt instruments, which 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. Each percentage point change in interest
rates would increase the Company's annual interest expense by approximately $2.1
million (subject to certain interest rate caps) based on the Company's
outstanding variable debt as of March 31, 2005.
Effective January 31, 2005, the Company entered into interest rate cap
agreements with two commercial banks to reduce the impact of increases in
interest rates on the Company's variable rate loans. One interest cap agreement
effectively limits the interest rate exposure on a $50 million notional amount
to a maximum LIBOR rate of 5% and expires on January 31, 2006. The second
interest rate cap agreement effectively limits the interest rate exposure on
$100 million notional amount to a maximum LIBOR rate of 5%, as long as one-month
LIBOR is less than 7%. If one-month LIBOR is greater than 7%, the agreement
effectively limits the interest rate on the same $100 million notional amount to
a maximum LIBOR rate of 7%. This second agreement expires on January 31, 2008.
The Company paid $0.4 million for the interest rate caps and the costs of these
contracts are being amortized to interest expense over the life of the
agreements.
The Company is party to interest rate lock agreements, which were used to hedge
the risk that the costs of future issuance of debt may be adversely affected by
changes in interest rates. Under the treasury lock agreements, the Company
agrees to pay or receive an amount equal to the difference between the net
present value of the cash flows for a notional principal amount of indebtedness
based on the locked rate at the date when the agreement was established and the
yield of a United States Government 10-Year Treasury Note on the settlement date
18
of January 3, 2006. The notional amounts of the agreements were not exchanged.
These treasury lock agreements were entered into with a major financial
institution in order to minimize counterparty credit risk. The locked rates
range from 7.5% to 9.1%. On December 30, 2004, the Company refinanced the
underlying debt and this refinancing resulted in the interest rate lock
agreements no longer qualifying as an interest rate hedge. The Company now
reflects the interest rate lock agreements at fair value in the Company's
balance sheet (as a long-term liability) and related gains and losses are
recognized in the statement of operations. During the first quarter of fiscal
2005, the Company recognized a gain of $0.3 million relating to the treasury
lock agreements. The Company has the ability settle the treasury lock liability
by converting the liability to a five-year note at any time prior to the
treasury lock settlement date of January 3, 2006. The Company intends to convert
the treasury lock liability to a long-term note on or before its settlement date
and therefore has classified the treasury lock liability as long-term. Prior to
refinancing the underlying debt, the treasury lock agreements were reflected at
fair value in the Company's balance sheet (Other long term liabilities) and the
related gains or losses on these agreements were deferred in stockholders'
equity (as a component of other comprehensive income).
In addition, the Company was party to interest rate swap agreements in fiscal
2004 that were used to modify variable rate obligations to fixed rate
obligations, thereby reducing the Company's exposure to market rate
fluctuations. On December 30, 2004, the Company settled its interest rate swap
agreements by paying its lender $0.5 million. The differential paid or received
as rates changed was accounted for under the accrual method of accounting and
the amount payable to or receivable from counterparties was included as an
adjustment to accrued interest. The interest rate swap agreements resulted in
the Company recognizing an additional $0.2 million in interest expense during
the first quarter of fiscal 2004.
Item 4. CONTROLS AND PROCEDURES.
The Company's management, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, has evaluated the effectiveness
of the Company's disclosure controls and procedures (as such term is defined in
Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the
period covered by this report. Based on such evaluation, the Company's Chief
Executive Officer and Chief Financial Officer have concluded that, as of the end
of such period, the Company's disclosure controls and procedures are effective
in recording, processing, summarizing and reporting, on a timely basis,
information required to be disclosed by the Company in the reports that it files
or submits under the Exchange Act.
There have not been any changes in the Company's internal control over financial
reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) during the fiscal quarter to which this report relates that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
19
CAPITAL SENIOR LIVING CORPORATION
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, 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 Company and its
subsidiaries denied any wrongdoing. On March 16, 2004, the Court granted the
Company's Motion to Dismiss.
In February 2004, the Company and certain subsidiaries, along with numerous
other senior living companies in California, were named as defendants in a
lawsuit in the superior court in Los Angeles, California. This lawsuit was
brought by two public interest groups on behalf of seniors in California
residing at the California facilities of the defendants. The plaintiffs alleged
that pre-admission fees charged by the defendants' facilities were actually
security deposits that must be refunded in accordance with California law. On
November 30, 2004, the court approved a settlement involving the Company's
independent living communities. Under the terms of the settlement, (a) all
non-refundable fees collected at the independent living facilities since January
1, 2003 will be treated as a refundable security deposits and (b) the attorney
for the plaintiffs received nominal attorney fees. There were no other
settlement costs to the Company or its affiliates and the Company's assisted
living community in California was not named.
The Company has other pending claims not mentioned above ("Other Claims")
incurred in the course of its business. Most of these Other Claims are believed
by management to be covered by insurance, subject to normal reservations of
rights by the insurance companies and possibly subject to certain exclusions in
the applicable insurance policies. Whether or not covered by insurance, these
Other Claims, in the opinion of management, based on advice of legal counsel,
should not have a material effect on the financial statements of the Company if
determined adversely to the Company.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Not Applicable
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
Item 5. OTHER INFORMATION
Not Applicable
20
Item 6. EXHIBITS
Exhibits:
31.1 Certification of Chief Executive Officer required
by Rule 13a-14(a) or Rule 15d- 14(a).
31.2 Certification of Chief Financial Officer required
by Rule 13a-14(a) or Rule 15d- 14(a).
32.1 Certification of Lawrence A. Cohen pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Ralph A. Beattie pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
CAPITAL SENIOR LIVING CORPORATION
March 31, 2004
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Capital Senior Living Corporation
(Registrant)
By: /s/ Ralph A. Beattie
--------------------
Ralph A. Beattie
Executive Vice President and Chief Financial Officer
(Principal Financial Officer and Duly Authorized Officer)
Date: May 5, 2005
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------- -----------
31.1 Certification of Chief Executive Officer required
by Rule 13a-14(a) or Rule 15d- 14(a).
31.2 Certification of Chief Financial Officer required
by Rule 13a-14(a) or Rule 15d- 14(a).
32.1 Certification of Lawrence A. Cohen pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Ralph A. Beattie pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.