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, 2004
[ ] Transition report under Section 13
or 15(d) of the Securities Exchange Act of 1934
Commission file number 1-13445.
CAPITAL SENIOR LIVING CORPORATION
---------------------------------
(Exact name of Registrant as specified in its charter)
DELAWARE 75-2678809
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
14160 Dallas Parkway, Suite 300, Dallas, Texas 75254
----------------------------------------------------
(Address of principal executive offices)
972-770-5600
------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of May 11, 2004, the Registrant had 25,638,341 outstanding shares of its
Common Stock, $.01 par value.
CAPITAL SENIOR LIVING CORPORATION
INDEX
Page
Number
------
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets - -
March 31, 2004 and December 31, 2003 3
Consolidated Statements of Operations - -
Three Months Ended March 31, 2004 and 2003 4
Consolidated Statements of Cash Flows - -
Three Months Ended March 31, 2004 and 2003 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 18
Item 4. Controls and Procedures 18
Part II. Other Information
Item 1. Legal Proceedings 19
Item 6. Exhibits and Reports on Form 8-K 20
Signature
Certifications
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CAPITAL SENIOR LIVING CORPORATION
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2004 2003
--------- -----------
(In thousands)
ASSETS
Current assets:
Cash and cash equivalents................................................ $ 22,751 $ 6,594
Restricted cash.......................................................... 6,167 7,187
Accounts receivable, net................................................. 1,288 1,295
Accounts receivable from affiliates...................................... 336 604
Federal and state income taxes receivable................................ 2,173 994
Deferred taxes........................................................... 356 385
Property tax and insurance deposits...................................... 2,262 1,855
Prepaid expenses and other............................................... 1,263 2,437
----------- -----------
Total current assets............................................. 36,596 21,351
Property and equipment, net................................................ 377,475 380,115
Deferred taxes............................................................. 6,482 6,554
Notes receivable from affiliates........................................... 5,097 4,981
Investments in limited partnerships........................................ 1,789 1,762
Assets held for sale....................................................... 2,391 2,391
Other assets, net.......................................................... 3,747 4,179
----------- -----------
Total assets..................................................... $ 433,577 $ 421,333
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................................... $ 2,096 $ 2,158
Accrued expenses......................................................... 6,146 6,611
Current portion of notes payable......................................... 7,986 23,488
Customer deposits........................................................ 1,937 1,929
----------- -----------
Total current liabilities........................................ 18,165 34,186
Deferred income............................................................ -- 112
Deferred income from affiliates............................................ 110 102
Other long-term liabilities................................................ 7,928 6,736
Notes payable, net of current portion...................................... 253,678 255,549
Minority interest in consolidated partnership.............................. 254 281
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-- 25,634 and 19,847 at
March 31, 2004 and December 31, 2003, respectively................... 257 198
Additional paid-in capital............................................... 124,590 92,336
Retained earnings........................................................ 28,595 31,833
----------- -----------
Total shareholders' equity....................................... 153,442 124,367
----------- -----------
Total liabilities and shareholders' equity....................... $ 433,577 $ 421,333
=========== ===========
See accompanying notes.
3
CAPITAL SENIOR LIVING CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
-------------------------
March 31, March 31,
2004 2003
----------- -----------
Revenues:
Resident and health care revenue............................. $ 22,112 $ 13,208
Unaffiliated management services revenue..................... 40 295
Affiliated management services revenue....................... 474 910
Affiliated development fees.................................. -- 68
----------- -----------
Total revenues.......................................... 22,626 14,481
Expenses:
Operating expenses........................................... 14,526 7,624
General and administrative expenses.......................... 4,036 2,716
Depreciation and amortization................................ 2,957 1,347
----------- -----------
Total expenses.......................................... 21,519 11,687
----------- -----------
Income from operations......................................... 1,107 2,794
Other income (expense):
Interest income.............................................. 163 1,637
Interest expense............................................. (4,084) (2,593)
Other income................................................. 67 53
----------- -----------
(Loss) income before income taxes and minority interest in
consolidated partnership..................................... (2,747) 1,891
Benefit (provision) for income taxes........................... 674 (745)
----------- -----------
(Loss) income before minority interest in consolidated
partnership.................................................. (2,073) 1,146
Minority interest in consolidated partnership.................. 27 55
----------- -----------
Net (loss) income.............................................. $ (2,046) $ 1,201
=========== ===========
Per share data:
Basic (loss) earnings per share.............................. $ (0.09) $ 0.06
=========== ===========
Diluted (loss) earnings per share............................ $ (0.09) $ 0.06
=========== ===========
Weighted average shares outstanding-- basic.................. 23,698 19,738
=========== ===========
Weighted average shares outstanding-- diluted................ 24,047 19,862
=========== ===========
See accompanying notes
4
CAPITAL SENIOR LIVING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
--------------------------
March 31, March 31,
2004 2003
----------- -----------
Operating Activities
Net (loss) income................................................ $ (2,046) $ 1,201
Adjustments to reconcile net (loss) income to net cash provided by
operating activities:
Depreciation................................................... 2,957 1,347
Amortization of deferred financing charges..................... 547 253
Minority interest in consolidated partnership.................. (27) (55)
Deferred income from affiliates................................ 8 (136)
Deferred income................................................ (112) (7)
Deferred income taxes.......................................... 101 101
Equity in the gains of affiliates.............................. (67) (53)
Changes in operating assets and liabilities, net of
acquisitions:
Accounts receivable.......................................... 7 (49)
Accounts receivable from affiliates.......................... 268 (194)
Property tax and insurance deposits.......................... (407) (588)
Prepaid expenses and other................................... 1,174 470
Other assets................................................. (115) 296
Accounts payable and accrued expenses........................ (527) (1,431)
Federal and state income taxes receivable/payable............ (1,137) 279
Customer deposits............................................ 8 (8)
----------- -----------
Net cash provided by operating activities.................. 632 1,426
Investing Activities
Capital expenditures............................................. (317) (592)
Advances to affiliates........................................... (116) (4,330)
Investments in limited partnerships.............................. 40 43
----------- -----------
Net cash used in investing activities............................ (393) (4,879)
Financing Activities
Repayments of notes payable...................................... (17,373) (3,092)
Restricted cash.................................................. 1,020 --
Proceeds from the exercise of stock options...................... 113 2
Proceeds from common stock offering.............................. 32,158 --
----------- -----------
Net cash provided by (used in) financing activities.............. 15,918 (3,090)
----------- -----------
Increase in cash and cash equivalents............................ 16,157 (6,543)
Cash and cash equivalents at beginning of year................... 6,594 11,768
----------- -----------
Cash and cash equivalents at end of year......................... $ 22,751 $ 5,225
=========== ===========
Supplemental Disclosures
Cash paid during the year for:
Interest....................................................... $ 3,541 $ 2,346
=========== ===========
Income taxes................................................... $ 369 $ 439
=========== ===========
See accompanying notes.
5
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
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, 2003, has been
derived from audited consolidated financial statements of the Company for the
year ended December 31, 2003, and the accompanying unaudited consolidated
financial statements, as of March 31, 2004 and 2003, 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, 2003 included in the Company's
Annual Report on Form 10-K filed with the Securities and Exchange Commission on
March 29, 2004.
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,
2004, results of operations for the three months ended March 31, 2004 and 2003,
respectively, and cash flows for the three months ended March 31, 2004 and 2003.
The results of operations for the three months ended March 31, 2004 are not
necessarily indicative of the results for the year ending December 31, 2004.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Net Income Per Share
Basic net income per share is calculated by dividing net income by the weighted
average number of common shares outstanding during the period. Diluted net
income per share considers the dilutive effect of outstanding options calculated
using the treasury stock method.
The following table sets forth the computation of basic and diluted earnings per
share (in thousands, except for per share amounts):
Three Months Ended
March 31,
2004 2003
----------- ------------
Net (loss) income $ (2,046) $ 1,201
Weighted average shares outstanding - basic 23,698 19,738
Effect of dilutive securities:
Employee stock options 349 124
----------- ------------
Weighted average shares outstanding - diluted 24,047 19,862
=========== ============
Basic (loss) earnings per share $ (0.09) $ 0.06
=========== ============
Diluted (loss) earnings per share $ (0.09) $ 0.06
=========== ============
Options to purchase 0.1 million shares of common stock at prices ranging from
$6.63 to $10.50 per share were not included in the computation of diluted
earnings per share because the average daily price of the common stock during
the first quarter of fiscal 2004 did not exceed the exercise price of the
options, and therefore, the effect would not be dilutive. For the first quarter
of fiscal 2003, options to purchase 1.0 million shares of common stock at prices
ranging from $3.13 to $13.50 per share were not included in the computation of
diluted earnings per share because the average daily price of the common stock
did not exceed the exercise price of the options, and therefore, the effect
would not be dilutive.
6
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
On January 28, 2004, the Company granted options to certain employees to
purchase 10,000 shares of the Company's common stock at an exercise price of
$6.63. In addition, during the first quarter of 2004, the Company issued 37,651
shares of common stock pursuant to the exercise of stock options by certain
employees of the Company.
Stock-Based Compensation
Pro forma information regarding net income per share has been determined as if
the Company had accounted for its employee stock options under the fair value
method. The fair value for these options was estimated at the date of grant
using the Black-Scholes option-pricing model. The Black-Scholes option valuation
model was developed for use in estimating the fair value of traded options that
have no vesting restrictions and are fully transferable. In addition, option
valuation models require the input of highly subjective assumptions including
the expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting periods.
Three Months Ended
March 31,
----------------------
2004 2003
--------- ---------
Net (loss) income
As reported $ (2,046) $ 1,201
Less: fair value stock expense, net of tax (154) (188)
--------- ---------
Pro forma (2,200) 1,013
========= =========
Net (loss) income per share - basic
As reported $ (0.9) $ 0.06
Less: fair value stock expense, net of tax 0.0 (0.01)
--------- ---------
Pro forma (0.9) 0.05
========= =========
Net (loss) income per share - diluted
As reported $ (0.9) $ 0.06
Less: fair value stock expense, net of 0.0 (0.01)
--------- ---------
Pro forma (0.9) 0.05
========= =========
Swap Agreements
The Company uses interest rate and treasury lock swap agreements for purposes
other than trading. Interest rate swap agreements are used to modify variable
rate obligations to fixed rate obligations, thereby reducing the Company's
exposure to market rate fluctuations. The differential to be paid or received as
rates change is accounted for under the accrual method of accounting and the
amount payable to or receivable from counterparties is included as an adjustment
to accrued interest. The Company had interest rate swap agreements on $25.7
million notional amounts of indebtedness at March 31, 2004. The interest rate
swap agreements resulted in the Company recognizing an additional $0.2 million
in interest expense during the first quarter of 2004.
In addition, the Company is party to interest rate lock agreements, which are
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 swap
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 treasury lock swap
agreements are reflected at fair value in the Company's balance sheet (other
long term liabilities) and the related gains or losses on these agreements are
deferred in stockholders' equity (as a component of other comprehensive income).
During the first quarter of fiscal 2004, the Company recognized other
comprehensive loss of $1.2 million from the change in fair value of the interest
rate and treasury lock swap agreements. Total comprehensive
7
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
loss (net loss from operations plus other comprehensive loss) for the three
months ended March 31, 2004 was $3.2 million.
3. TRANSACTIONS WITH AFFILIATES
BRE/CSL: The Company is party to three joint ventures (collectively "BRE/CSL")
with an affiliate of Blackstone Real Estate Advisors ("Blackstone") and the
joint ventures own six senior living communities and seek to acquire additional
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.
On June 30, 2003, the Company contributed to BRE/CSL one of its senior living
communities with a capacity of 182 residents. As a result of the contribution
the Company repaid $7.4 million of long-term debt, 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.
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.
Spring Meadows: The Company is party to four joint ventures which collectively
own four senior living communities (the "Spring Meadows Communities"). The
Company's interests in the joint ventures that own the Spring Meadows
Communities include interests in certain loans to the ventures and an
approximate 19% member interest in each venture. The Company recorded its
initial advances of $1.3 million to the ventures as notes receivable as the
amount assigned for the 19% member interests was nominal. The Company accounts
for its investment in the Spring Meadows Communities under the equity method of
accounting based on the provisions of the partnership agreements. The Company
has managed the Spring Meadows Communities since the opening of each community
in late 2000 and early 2001 and will continue to manage the communities under
long-term management contracts. In addition, the Company receives an asset
management fee relating to each of the four communities. The Company has the
obligation to fund certain future operating deficits of the Spring Meadows
Communities to the extent of its 19% member interest. No amounts were funded by
the Company under this obligation as of March 31, 2004.
Triad I: In 2003, the Financial Accounting Standards Board issued FASB
Interpretation No. 46, revised December 2003, ("FIN 46") "Consolidation of
Variable Interest Entities" an interpretation of ARB No. 51, effective
immediately for variable interest entities created after January 31, 2003 and
effective 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 Senior Living I, L.P. ("Triad I")
at December 31, 2003 and resulted in the Company consolidating the operations of
Triad I beginning January 1, 2004. Prior to adopting FIN 46 the Company
accounted for Triad I under the equity method of accounting.
The Company has the option, but not the obligation, to purchase the Triad I
communities for an amount specified in the partnership agreement. Furthermore,
Lehman Brothers has agreed to withdraw as a partner in the Triad I partnership
to the extent it has received, on or before November 1, 2004, distributions in
an amount equal to its capital contributions of $12.4 million.
8
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following unaudited pro forma financial information for the three months
ended March 31, 2003 combines the results of the Company and Triad I as if the
provisions of FIN 46 had been applied at the beginning of fiscal 2003. The pro
forma financial information is presented for informational purposes only and
does not reflect the results of operations of the Company, which would have
actually resulted if Triad I had been consolidated as of the dates indicated, or
future results of operations of the Company (in thousands).
March 31,
2003
--------
Net revenue $ 17,926
Net income $ 416
Net income per share - basic $ 0.02
Net income per share - diluted $ 0.02
4. ACQUISITIONS
Effective as of July 1, 2003, the Company acquired the partnership interest of
the general partner and the other third party limited partnership interests in
Triad Senior Living II, L.P., Triad Senior Living III, L.P., Triad Senior Living
IV, L.P. and Triad Senior Living V, L.P. (collectively the "Triad Entities") for
$1.3 million in cash, $0.4 million in notes payable and the assumption of all
outstanding debt and liabilities ($109.6 million bank debts, $73.2 million debt
due to the Company, and $9.9 million net working capital liabilities). The total
purchase price was $194.4 million and the acquisition was treated as a purchase
of property. The Company now wholly owns each of the Triad Entities. This
acquisition resulted in the Company acquiring ownership of 12 senior living
communities with a combined resident capacity of approximately 1,670 residents.
The resident capacity mix for the Triad Entities is 95% independent living and
5% assisted living, with all revenues derived from private pay sources. Prior to
the acquisition the Company had developed and managed the properties owned by
the Triad Entities. In the fourth quarter of 2003, the Company repaid the $0.4
million in notes payable related to this acquisition.
The purchase price was allocated as follows:
Net cash acquired $ 122
Fair value of tangible assets acquired 11,720
Property and equipment 182,601
----------
Total purchase price $ 194,443
==========
Set forth below is information relating to the construction/permanent loan
facilities the Company assumed as a result of the acquisition of the Triad
Entities at July 1, 2003 (dollars in thousands):
Loan Facilities to Triad Entities
-----------------------------------------------------
Number of Amount
Entity Communities Commitment Outstanding Type Lender
------ ----------- ---------- ----------- --------- --------------
Triad II 3 $26,900 $ 26,003 mini-perm Key Corporate
Capital, Inc.
Triad III 6 $56,300 $ 56,270 mini-perm Guaranty Bank
Triad IV 2 $18,600 $ 18,627 mini-perm Compass Bank
Triad V 1 $ 8,903 $ 8,698 mini-perm Bank of America
--------
Total $109,598
========
The Company has not completed its analysis of this purchase and as such the
purchase accounting information disclosed should be considered preliminary. The
following unaudited pro forma financial information for the three months ended
March 31, 2003 combines the results of the Company and the Triad Entities as if
the transaction had taken place at the beginning of fiscal 2003. The pro forma
financial information is presented for informational purposes only and does not
9
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
reflect the results of operations of the Company, which would have actually
resulted if the purchase occurred as of the dates indicated, or future results
of operations of the Company (in thousands).
March 31,
2003
--------
Net sales $ 18,896
Net (loss) $ (1,005)
Net (loss) per share - basic $ (0.05)
Net (loss) per share - diluted $ (0.05)
5. EQUITY
In the first quarter of fiscal 2004, the Company sold 5,750,000 shares of common
stock at a price of $6.00 per share. The net proceeds to the Company after
commissions and expenses were approximately $32.2 million. The Company used
$13.7 million of the net proceeds to retire debt that was scheduled to mature in
October 2004 and which had a current interest rate of 9.0%. In addition, the
Company wrote off $0.3 million of deferred loan costs relating to the retired
debt to interest expense.
6. 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
based on the Plaintiff's failure to comply with certain statutory requirements
in Texas relating to the filing of preliminary expert report. Specifically, the
Plaintiff's preliminary expert report failed to set forth the causal connection
between any act of the Company and the resident's death. The Plaintiffs have
filed a Motion for Reconsideration by the Court and a hearing is scheduled in
July 2004.
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 a district court in Los Angeles, California. This lawsuit was brought
by two public interest groups on behalf of seniors in California residing at the
facilities of the defendants. The plaintiffs allege that pre-admission fees
charged by the defendants' facilities were actually security deposits that must
be refunded in accordance with California law. The plaintiffs seek restitution,
treble damages, penalties, costs and injunctive relief. The Company at this time
is unable to estimate its liability, if any, related to this claim. The
Company's insurer is defending this claim subject to a reservation of rights
letter. The Company intends to vigorously defend against this claim.
The Company has other pending claims not mentioned above ("Other Claims")
incurred in the course of its business. Most of these Other Claims are believed
by management to be covered by insurance, subject to normal reservations of
rights by the insurance companies and possibly subject to certain exclusions in
the applicable insurance policies. Whether or not covered by insurance, these
Other Claims, in the opinion of management, based on advice of legal counsel,
should not have a material effect on the financial statements of the Company if
determined adversely to the Company.
7. SUBSEQUENT EVENTS
As of March 31, 2004, the Company was in violation of certain financial
covenants relating to four properties in Triad I. Subsequent to March 31, 2004,
Triad I exercised its option under its loan agreement to cure these loan
covenant violations by depositing $0.3 million with its lender.
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 months ended March 31, 2004 and 2003, respectively, and
(ii) liquidity and capital resources of the Company and should be read in
conjunction with the Company's consolidated financial statements contained
elsewhere in this report.
The Company is one of the largest operators of senior living communities in the
United States in terms of resident capacity. The Company's operating strategy is
to provide quality senior living services at an affordable price 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, 2004, the Company operated 42 senior living communities in 20
states with an aggregate capacity of approximately 6,900 residents, including 41
senior living communities which the Company owned or in which the Company had an
ownership interest and one community it managed for a third party. As of March
31, 2004, the Company also operated one home care agency.
The Company generates revenue from a variety of sources. For the three months
ended March 31, 2004, the Company's revenue was derived as follows: 97.7% from
the operation of 31 owned and/or consolidated senior living communities that are
operated by the Company, and 2.3% from management fees arising from management
services provided for 10 affiliate owned senior living communities and one
unaffiliated senior living community.
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 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.
Effective as of July 1, 2003, the Company acquired the partnership interest of
the general partners and the other third party limited partnership interests in
the Triad Entities for $1.3 million in cash, $0.4 million in notes payable and
the assumption of all outstanding debt and liabilities. The total purchase price
was $194.4 million and the acquisition was treated as a purchase of property.
The Company now wholly owns each of the Triad Entities. This acquisition
resulted in the Company acquiring the 12 senior living communities owned by the
Triad Entities with a combined resident capacity of approximately 1,670
residents. The resident capacity mix for the Triad Entities is 95% independent
living and 5% assisted living, with all revenues derived from private pay
sources. Subsequent to the end of the Company's third quarter of 2003, the
Company repaid the $0.4 million in notes payable related to this acquisition.
Prior to this acquisition, the Company owned 1% of the limited partnership
interests and managed the properties owned by the Triad Entities under a series
of long-term management contracts.
In 2003, the Financial Accounting Standards Board issued FIN 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,
11
CAPITAL SENIOR LIVING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
2003. The Company adopted the provisions of this interpretation, as of December
31, 2003, and its adoption resulted in the Company consolidating Triad I's
financial position as of December 31, 2003 and resulted in the Company
consolidating Triad I's results of operations beginning January 1, 2004. The
Company operates the five senior living communities and two expansion
communities in Triad I under a series of long-term management agreements and
accounted for Triad I under the equity method of accounting prior to adopting
the provisions of FIN 46 revised.
As of March 31, 2004, the Company was in violation of certain financial
covenants relating to four properties in Triad I. Subsequent to March 31, 2004,
Triad I exercised its option under its loan agreement to cure these loan
covenant violations by depositing $0.3 million with its lender.
The Company is party to three joint ventures with Blackstone and the joint
ventures own six senior living communities and seek to acquire additional 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 the joint venture. Each party must also
contribute its pro rata portion of the costs of any acquisition. 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 BRE/CSL.
The Company is party to four joint ventures which collectively own the Spring
Meadows Communities. The Company's interests in the joint ventures that own the
Spring Meadows Communities include interests in certain loans to the ventures
and an approximate 19% member interest in each venture. The Company recorded its
initial advances of $1.3 million to the ventures as notes receivable as the
amount assigned for the 19% member interests was nominal. The Company accounts
for its investment in the Spring Meadows Communities under the equity method of
accounting based on the provisions of the partnership agreements. The Company
has managed the Spring Meadows Communities since the opening of each community
in late 2000 and early 2001 and will continue to manage the communities under
long-term management contracts. In addition, the Company receives an asset
management fee relating to each of the four communities. The Company has the
obligation to fund certain future operating deficits of the Spring Meadows
Communities to the extent of its 19% member interest. No amounts were funded by
the Company under this obligation as of March 31, 2004.
Recent Events
In the first quarter of fiscal 2004, the Company sold 5,750,000 shares of common
stock at a price of $6.00 per share. The net proceeds to the Company after
commissions and expenses were approximately $32.2 million. The Company used
$13.7 million of the net proceeds to retire debt that was scheduled to mature in
October 2004 and which had a current interest rate of 9.0%. In addition, the
Company wrote off $0.3 million of deferred loan costs relating to the retired
debt to interest expense.
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").
12
CAPITAL SENIOR LIVING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Results of Operations
The following table sets forth for the periods indicated, selected statements of
income data in thousands of dollars and expressed as a percentage of total
revenues.
Three Months Ended March 31,
--------------------------------------
2004 2003
------------------ -----------------
$ % $ %
--------- ------- --------- -------
Revenues:
Resident and healthcare revenue........ $ 22,112 97.7 $ 13,208 91.2
Unaffiliated management service revenue 40 0.2 295 2.0
Affiliated management service revenue.. 474 2.1 910 6.3
Affiliated development fees............ -- -- 68 0.5
--------- ---- --------- ------
Total revenue.......................... 22,626 100.0 14,481 100.0
Expenses:
Operating expenses..................... 14,526 64.2 7,624 52.6
General and administrative expenses.... 4,036 17.8 2,716 18.8
Depreciation and amortization.......... 2,957 13.1 1,347 9.3
--------- ----- --------- -----
Total expenses......................... 21,519 95.1 11,687 80.7
--------- ----- --------- -----
Income from operations .................. 1,107 4.9 2,794 19.3
Other income (expense):
Interest income........................ 163 0.7 1,637 11.3
Interest expense....................... (4,084) (18.1) (2,593) (17.9)
Other income........................... 67 0.3 53 0.4
--------- ----- --------- ------
(Loss) income before income taxes and minority
interest in consolidated partnership (2,747) (12.1) 1,891 13.1
---------- -------- ---------- --------
Provision for income taxes............... 674 3.0 (745) (5.1)
--------- ----- --------- -----
Income before minority interest in
consolidated partnership............... (2,073) (9.1) 1,146 7.9
Minority interest in consolidated partnership 27 0.1 55 0.4
--------- ----- --------- -----
Net income............................... $ (2,046) (9.0) $ 1,201 8.3
========= ===== ========= =====
Three Months Ended March 31, 2004 Compared to the Three Months Ended March 31,
2003
Revenues. Total revenues were $22.6 million in the three months ended March 31,
2004 compared to $14.5 million for the three months ended March 31, 2003,
representing an increase of approximately $8.1 million or 56.2%. This increase
in revenue is primarily the result of an $8.9 million increase in resident and
healthcare revenue offset by a decrease in unaffiliated management services
revenue of $0.3 million, a decrease in affiliated management fees of $0.4
million and a decrease in affiliated development fee revenue of $0.1 million.
The increase in resident and healthcare revenue reflects an increase of $6.1
million from the acquisition of the Triad Entities (12 communities) and an
increase of $3.7 million from the consolidation of Triad I (five communities and
two expansions) under the provisions of FIN 46 revised offset by a decrease in
resident and healthcare revenue of $1.6 million relating to two communities that
were sold during the third and fourth quarters of fiscal 2003. Unaffiliated
management services revenue in fiscal 2004 represents the Company's management
services revenue on a community it manages for a third party. Unaffiliated
management services revenue in fiscal 2003 resulted from the settlement of a
management contract with Buckner. Affiliated management services revenue
decreased $0.4 million primarily as a result of the Company's acquisition of the
Triad Entities and the consolidation of Triad I.
Expenses. Total expenses were $21.5 million in the first quarter of fiscal 2004
compared to $11.7 million in the first quarter of fiscal 2003, representing an
increase of $9.8 million or 84.1%. This increase is primarily the result of a
$6.9 million increase in operating expenses, a $1.3 million increase in general
and administrative expenses and a $1.6 million increase in depreciation and
amortization expense. Operating expenses increased $4.5 million as a result of
the Company's acquisition of the Triad Entities and by $2.6 million due to the
consolidation of Triad I offset by a decrease
13
CAPITAL SENIOR LIVING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
of $0.8 million relating to the two communities that were sold during fiscal
2003. General and administrative expenses increased $1.1 million as a result of
the Company's acquisition of the Triad Entities and by $0.6 million due to the
consolidation of Triad I offset by a decrease of $0.1 million relating to the
two communities that were sold during fiscal 2003. Depreciation expense
increased $1.2 million as a result of the Company's acquisition of the Triad
Entities and by $0.5 million due to the consolidation of Triad I offset by a
decrease of $0.1 million relating to the two communities that were sold during
2003.
Other income and expense. Interest income decreased $1.5 million or 90.0% to
$0.2 million due to the Company's acquisition of the Triad Entities and the
consolidation of Triad I. The Company earned $1.5 million in interest income on
loans to the Triad Entities and Triad I during the first quarter of fiscal 2003.
Interest expense increased $1.5 million to $4.1 million in the first quarter of
2004 compared to $2.6 million in the first quarter of 2003. This 57.5% increase
in interest expense is primarily the result of higher debt outstanding in the
current fiscal year compared to fiscal 2003 due to the assumption of $109.6
million of debt related to the acquisition of the Triad Entities and due to
$47.6 million of debt consolidated related to Triad I offset by $14.9 million of
debt repaid related to the two communities sold during 2003 and $17.4 million of
debt retired during the first quarter of 2004. Equity in the earnings of
affiliates represents the Company's share of the earnings and losses on its
investments in BRE/CSL.
Provision/benefit for income taxes. Benefit for income taxes in the first
quarter of fiscal 2004 was $0.7 million or 24.8% of loss before taxes, compared
to a provision for income taxes of $0.7 million or 38.3% of income before taxes
in the first quarter of fiscal 2003. The effective tax rates for the first
quarter of 2004 and 2003 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.
Minority interest. Minority interest represents the minority holder's share of
the losses incurred by Helathcare Properties, L.P. ("HCP").
Net income. As a result of the foregoing factors, net income decreased $3.2
million to a net loss of $2.0 million for the three months ended March 31, 2004,
as compared to a net income of $1.2 million for the three months ended March 31,
2003.
Liquidity and Capital Resources
In addition to approximately $22.8 million of cash balances on hand as of March
31, 2004, the Company's principal source of liquidity is expected to be cash
flows from operations, proceeds from the sale of assets, cash flows from BRE/CSL
and/or additional financing. Of the $22.8 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 to be sufficient to fund its short-term working capital requirements.
The Company's long-term capital requirements, primarily for acquisitions, the
payment of operating deficit guarantees, and other corporate initiatives, could
be dependent on its ability to access additional funds through joint ventures
and the debt and/or equity markets. There can be no assurance that the Company
will continue to generate cash flows at or above current levels or that the
Company will be able to obtain the capital necessary to meet the Company's short
and long-term capital requirements.
The Company had net cash provided by operating activities of $0.6 million and
$1.4 million in the first three months of fiscal 2004 and 2003, respectively. 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 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. In first
quarter of fiscal 2003, net cash provided by operating activities was primarily
derived from net income of $1.2 million, net noncash charges of $1.4 million, a
decrease in prepaid and other of $0.4 million, a decrease in other assets of
$0.3 million and a decrease in federal and state income taxes receivable of $0.3
million offset by an increase in accounts receivable of $0.2 million, an
increase in property tax and insurance deposits of $0.6 million and a decrease
in accounts payable and accrued expenses of $1.4 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 $0.4 million and $4.9
million in the first three months of fiscal 2004 and 2003, respectively. 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. In
the first quarter of fiscal 2003, the net cash used in investing activities was
primarily the result of advances to the Triad Entities of $4.3 million, and
capital expenditures of $0.6 million offset by proceeds from limited
partnerships.
The Company had net cash provided by financing activities of $15.9 million in
the first quarter of fiscal 2004 compared to net cash used in financing
activities of $3.1 million in the first quarter of fiscal 2003. 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. For the first quarter of fiscal
2003 the net cash used in financing activities primarily resulted from
repayments of notes payable of $3.1 million.
The Company derives the benefits and bears the risks related to the communities
it owns. The cash flows and profitability of owned communities depends on the
operating results of such communities and are subject to certain risks of
ownership, including the need for capital expenditures, financing and other
risks such as those relating to environmental matters.
The Company believes that the factors affecting the financial performance of
communities managed under contracts with affiliates and third parties do not
vary substantially from the factors affecting the performance of owned
communities, although there are different business risks associated with these
activities.
The Company's third-party management service fees are primarily based on a
percentage of gross revenues. As a result, the cash flows and profitability of
such contracts to the Company are more dependent on the revenues generated by
such communities and less dependent on net cash flow than for owned communities.
Further, the Company is not responsible for capital investments in managed
communities. While the management contracts are generally terminable only for
cause, in certain cases the contracts can be terminated upon the sale of a
community, subject to the Company's rights to offer to purchase such community.
The Company's current management contracts expire on various dates through
September 2022 and provide for management fees based generally upon 5% of gross
revenues. In addition, certain of the contracts provide for supplemental
incentive fees that vary by contract based upon the financial performance of the
managed community. The Company's development fees are generally based upon a
percentage of construction cost and are earned over the period commencing with
the initial development activities and ending with the opening of the community.
The Company is party to three joint ventures with an affiliate of Blackstone and
the joint ventures own six senior living communities and seek to acquire
additional 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.
On June 30, 2003, the Company contributed to BRE/CSL one of its senior living
communities with a capacity of 182 residents. As a result of the contribution
the Company repaid $7.4 million of long-term debt, 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.
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.
15
CAPITAL SENIOR LIVING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
The Company is party to four joint ventures which collectively own the Spring
Meadows Communities. The Company's interests in the joint ventures that own the
Spring Meadows Communities include interests in certain loans to the ventures
and an approximate 19% member interest in each venture. The Company recorded its
initial advances of $1.3 million to the ventures as notes receivable as the
amount assigned for the 19% member interests was nominal. The Company accounts
for its investment in the Spring Meadows Communities under the equity method of
accounting based on the provisions of the partnership agreements. The Company
has managed the Spring Meadows Communities since the opening of each community
in late 2000 and early 2001 and will continue to manage the communities under
long-term management contracts. In addition, the Company receives an asset
management fee relating to each of the four communities. The Company has the
obligation to fund certain future operating deficits of the Spring Meadows
Communities to the extent of its 19% member interest. No amounts were funded by
the Company under this obligation during the first quarter of fiscal 2004.
In 2003, the FASB issued FIN 46 "Consolidation of Variable Interest Entities" an
interpretation of ARB No. 51, effective immediately for variable interest
entities created after January 31, 2003 and effective 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 with the Company first quarter of fiscal 2004.
Prior to adopting FIN 46 the Company accounted for Triad I under the equity
method of accounting.
As of March 31, 2004, the Company was in violation of certain financial
covenants relating to four properties in Triad I. Subsequent to March 31, 2004,
Triad I exercised its option under its loan agreement to cure these loan
covenant violations by depositing $0.3 million with its lender.
The Company has the option, but not the obligation, to purchase the Triad I
communities for an amount specified in the partnership agreement. Furthermore,
Lehman Brothers has agreed to withdraw as a partner in the Triad I partnership
to the extent it has received, on or before November 1, 2004, distributions in
an amount equal to its capital contributions of $12.4 million.
The following unaudited pro forma financial information for the three months
ended March 31, 2003 combines the results of the Company and Triad I as if the
provisions of FIN 46 had been applied at the beginning of fiscal 2003. The pro
forma financial information is presented for informational purposes only and
does not reflect the results of operations of the Company, which would have
actually resulted if Triad I had been consolidated as of the dates indicated, or
future results of operations of the Company (in thousands).
March 31,
2003
----------
Net revenue $ 17,926
Net income $ 416
Net income per share - basic $ 0.02
Net income per share - diluted $ 0.02
Effective as of July 1, 2003, the Company acquired the partnership interest of
the general partner and the other third party limited partnership interests in
the Triad Entities for $1.3 million in cash, $0.4 million in notes payable and
the assumption of all outstanding debt and liabilities ($109.6 million bank
debts, $73.2 million debt due to the Company, and $9.9 million net working
capital liabilities). The total purchase price was $194.4 million and the
acquisition was treated as a purchase of property. The Company now wholly owns
each of the Triad Entities. This acquisition resulted in the Company acquiring
ownership of 12 senior living communities with a combined resident capacity of
approximately 1,670 residents. The resident capacity mix for the Triad Entities
is 95% independent living and 5% assisted living, with all revenues derived from
private pay sources. Prior to the acquisition the Company had developed and
managed the properties owned by the Triad Entities. In the fourth quarter of
2003, the Company repaid the $0.4 million in notes payable related to this
acquisition.
16
CAPITAL SENIOR LIVING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
The purchase price was allocated as follows:
Net cash acquired $ 122
Fair value of tangible assets acquired 11,720
Property and equipment 182,601
----------
Total purchase price $ 194,443
==========
Set forth below is information relating to the construction/permanent loan
facilities the Company assumed as a result of the acquisition of the Triad
Entities at July 1, 2003 (dollars in thousands):
Loan Facilities to Triad Entities
-----------------------------------------------------
Number of Amount
Entity Communities Commitment Outstanding Type Lender
------ ----------- ---------- ----------- --------- --------------
Triad II 3 $26,900 $26,003 mini-perm Key Corporate
Capital, Inc.
Triad III 6 $56,300 $56,270 mini-perm Guaranty Bank
Triad IV 2 $18,600 $18,627 mini-perm Compass Bank
Triad V 1 $ 8,903 $ 8,698 mini-perm Bank of America
-------
Total $109,598
========
The Company has not completed its analysis of this purchase and as such the
purchase accounting information disclosed should be considered preliminary. The
following unaudited pro forma financial information for the three months ended
March 31, 2003 combines the results of the Company and the Triad Entities as if
the transaction had taken place at the beginning of fiscal 2003. The pro forma
financial information is presented for informational purposes only and does not
reflect the results of operations of the Company, which would have actually
resulted if the purchase occurred as of the dates indicated, or future results
of operations of the Company (in thousands).
March 31,
2003
---------
Net sales $ 18,896
Net (loss) $ (1,005)
Net (loss) per share - basic $ (0.05)
Net (loss) per share - diluted $ (0.05)
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.
17
CAPITAL SENIOR LIVING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
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, 2004 the Company had $261.7 million in
outstanding debt comprised of various fixed and variable rate debt instruments
of $69.7 million and $192.0 million, respectively.
Changes in interest rates would affect the fair market value of the Company's
fixed rate debt instruments but would not have an impact on the Company's
earnings or cash flows. Fluctuations in interest rates on the Company's variable
rate debt instruments, that are tied to either LIBOR or the prime rate, would
affect the Company's earnings and cash flows but would not affect the fair
market value of the variable rate debt. A portion of the Company's variable rate
debt includes interest rate floors, which exceed current market rates. Once
these interest rate floors are reached each percentage point change in interest
rates, would increase the Company's annual interest expense by approximately
$1.9 million based on the Company's outstanding variable debt as of March 31,
2004.
The Company uses interest rate and treasury lock swap agreements for purposes
other than trading. Interest rate swap agreements are used to modify variable
rate obligations to fixed rate obligations, thereby reducing the Company's
exposure to market rate fluctuations. The differential to be paid or received as
rates change is accounted for under the accrual method of accounting and the
amount payable to or receivable from counterparties is included as an adjustment
to accrued interest. The Company had interest rate swap agreements on $25.7
million notional amounts of indebtedness at March 31, 2004. The interest rate
swap agreements resulted in the Company recognizing an additional $0.2 million
in interest expense during the first quarter of 2004.
In addition, the Company is party to interest rate lock agreements, which are
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 swap
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 treasury lock swap
agreements are reflected at fair value in the Company's balance sheet (other
long term liabilities) and the related gains or losses on these agreements are
deferred in stockholders' equity (as a component of other comprehensive income).
During the first quarter of fiscal 2004, the Company recognized other
comprehensive loss of $1.2 million from the change in fair value of the interest
rate and treasury lock swap agreements. Total comprehensive loss (net loss from
operations plus other comprehensive loss) for the three months ended March 31,
2004 was $3.2 million.
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.
18
CAPITAL SENIOR LIVING CORPORATION
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
In the fourth quarter of 2002, the Company (and two of its management
subsidiaries), Buckner, and a related Buckner entity, and other unrelated
entities were named as defendants in a lawsuit in district court in Fort Bend
County, Texas brought by the heir of a former resident who obtained nursing home
services at Parkway Place from September 1998 to March 2001. The Company managed
Parkway Place for Buckner through December 31, 2001. The Company and its
subsidiaries denied any wrongdoing. On March 16, 2004, the Court granted the
Company's Motion to Dismiss based on the Plaintiff's failure to comply with
certain statutory requirements in Texas relating to the filing of preliminary
expert report. Specifically, the Plaintiff's preliminary expert report failed to
set forth the causal connection between any act of the Company and the
resident's death. The Plaintiffs have filed a Motion for Reconsideration by the
Court and a hearing is scheduled in July 2004.
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 a district court in Los Angeles, California. This lawsuit was brought
by two public interest groups on behalf of seniors in California residing at the
facilities of the defendants. The plaintiffs allege that pre-admission fees
charged by the defendants' facilities were actually security deposits that must
be refunded in accordance with California law. The plaintiffs seek restitution,
treble damages, penalties, costs and injunctive relief. The Company at this time
is unable to estimate its liability, if any, related to this claim. The
Company's insurer is defending this claim subject to a reservation of rights
letter. The Company intends to vigorously defend against this claim.
The Company has other pending claims not mentioned above ("Other Claims")
incurred in the course of its business. Most of these Other Claims are believed
by management to be covered by insurance, subject to normal reservations of
rights by the insurance companies and possibly subject to certain exclusions in
the applicable insurance policies. Whether or not covered by insurance, these
Other Claims, in the opinion of management, based on advice of legal counsel,
should not have a material effect on the financial statements of the Company if
determined adversely to the Company.
Item 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF
EQUITY SECURITIES
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
19
CAPITAL SENIOR LIVING CORPORATION
OTHER INFORMATION (continued)
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits:
10.1 Third Amendment to the Employment Agreement of Lawrence A. Cohen.
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.
(B) Reports on Form 8-K
Current Report on Form 8-K filed with the Commission on January 14, 2004 reporting the
risk factors relating to the Company's business and attaching a revised slide show presentation.
Current Report on Form 8-K filed with the Commission on January 28, 2004 in order to furnish the
Independent Auditor's Consent of Lane Gorman Trubitt, L.L.P.
Current Report on Form 8-K filed with the Commission on January 29, 2004 in order to furnish an
Underwriting Agreement, dated January 28, 2004, by and among Capital Senior Living Corporation,
Jefferies & Company, Inc. and Southwest Securities, Inc.
Current Report on Form 8-K filed with the Commission on January 30, 2004 reporting the issuance
of a press release reporting Capital Senior Living Corporations Announcing Pricing of a Public
Offering of 5,000,000 Shares of Common Stock.
Current Report on Form 8-K filed with the Commission on March 3, 2004 reporting the issuance of a press
release to report the Company's earnings the fourth quarter of fiscal 2003 and for fiscal 2003.
20
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 12, 2004