e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
|
|
|
þ |
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2008
OR
|
|
|
o |
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
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)
|
|
(Zip Code) |
(972) 770-5600
(Registrants telephone number, including area code)
NONE
(Former name, former address and former fiscal year, if changed since last report)
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 þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer, or a smaller reporting company.
See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
o Accelerated filer
þ
Non-accelerated filer
o
Smaller reporting company
o
(Do not check if a smaller reporting company)
Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
As of May 2, 2008, the Registrant had 26,596,819 outstanding shares of its Common Stock, $0.01 par
value.
CAPITAL SENIOR LIVING CORPORATION
INDEX
2
Part I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
CAPITAL SENIOR LIVING CORPORATION
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(In thousands) |
|
ASSETS |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
24,603 |
|
|
$ |
23,359 |
|
Accounts receivable, net |
|
|
4,112 |
|
|
|
3,232 |
|
Accounts receivable from affiliates |
|
|
1,238 |
|
|
|
846 |
|
Federal and state income taxes receivable |
|
|
1,570 |
|
|
|
2,084 |
|
Deferred taxes |
|
|
844 |
|
|
|
996 |
|
Assets held for sale |
|
|
354 |
|
|
|
1,011 |
|
Property tax and insurance deposits |
|
|
6,118 |
|
|
|
7,860 |
|
Prepaid expenses and other |
|
|
2,619 |
|
|
|
4,526 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
41,458 |
|
|
|
43,914 |
|
Property and equipment, net |
|
|
308,894 |
|
|
|
310,442 |
|
Deferred taxes |
|
|
12,609 |
|
|
|
12,824 |
|
Investments in limited partnerships |
|
|
6,848 |
|
|
|
6,199 |
|
Other assets, net |
|
|
16,778 |
|
|
|
16,674 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
386,587 |
|
|
$ |
390,053 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
1,669 |
|
|
$ |
1,201 |
|
Accrued expenses |
|
|
10,912 |
|
|
|
13,561 |
|
Current portion of notes payable |
|
|
7,633 |
|
|
|
9,035 |
|
Current portion of deferred income |
|
|
5,426 |
|
|
|
5,174 |
|
Customer deposits |
|
|
1,932 |
|
|
|
2,024 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
27,572 |
|
|
|
30,995 |
|
Deferred income |
|
|
22,291 |
|
|
|
23,168 |
|
Notes payable, net of current portion |
|
|
184,848 |
|
|
|
185,733 |
|
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 26,597 and 26,596 in 2008 and 2007, respectively |
|
|
266 |
|
|
|
266 |
|
Additional paid-in capital |
|
|
129,388 |
|
|
|
129,159 |
|
Retained earnings |
|
|
22,222 |
|
|
|
20,732 |
|
|
|
|
|
|
|
|
Total shareholders equity |
|
|
151,876 |
|
|
|
150,157 |
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
386,587 |
|
|
$ |
390,053 |
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
3
CAPITAL SENIOR LIVING CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2008 |
|
|
2007 |
|
Revenues: |
|
|
|
|
|
|
|
|
Resident and health care revenue |
|
$ |
42,844 |
|
|
$ |
41,305 |
|
Unaffiliated management services revenue |
|
|
42 |
|
|
|
88 |
|
Affiliated management services revenue |
|
|
1,433 |
|
|
|
539 |
|
Community reimbursement revenue |
|
|
4,198 |
|
|
|
4,294 |
|
|
|
|
|
|
|
|
Total revenues |
|
|
48,517 |
|
|
|
46,226 |
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
Operating expenses (exclusive of facility lease expense
and depreciation and amortization expense shown below) |
|
|
26,606 |
|
|
|
25,385 |
|
General and administrative expenses |
|
|
3,618 |
|
|
|
3,135 |
|
Facility lease expense |
|
|
6,136 |
|
|
|
5,720 |
|
Stock-based compensation expense |
|
|
229 |
|
|
|
251 |
|
Depreciation and amortization |
|
|
3,033 |
|
|
|
2,745 |
|
Community reimbursement expense |
|
|
4,198 |
|
|
|
4,294 |
|
|
|
|
|
|
|
|
Total expenses |
|
|
43,820 |
|
|
|
41,530 |
|
|
|
|
|
|
|
|
Income from operations |
|
|
4,697 |
|
|
|
4,696 |
|
Other income (expense): |
|
|
|
|
|
|
|
|
Interest income |
|
|
127 |
|
|
|
151 |
|
Interest expense |
|
|
(3,065 |
) |
|
|
(3,285 |
) |
Gain on sale of properties |
|
|
600 |
|
|
|
67 |
|
Write-off of deferred loan costs |
|
|
|
|
|
|
(187 |
) |
Other income |
|
|
53 |
|
|
|
55 |
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
2,412 |
|
|
|
1,497 |
|
Provision for income taxes |
|
|
(922 |
) |
|
|
(577 |
) |
|
|
|
|
|
|
|
Net income |
|
$ |
1,490 |
|
|
$ |
920 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share data: |
|
|
|
|
|
|
|
|
Basic income per share |
|
$ |
0.06 |
|
|
$ |
0.04 |
|
|
|
|
|
|
|
|
Diluted income per share |
|
$ |
0.06 |
|
|
$ |
0.03 |
|
|
|
|
|
|
|
|
Weighted average shares outstanding basic |
|
|
26,341 |
|
|
|
26,149 |
|
|
|
|
|
|
|
|
Weighted average shares outstanding diluted |
|
|
26,623 |
|
|
|
26,636 |
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
4
CAPITAL SENIOR LIVING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2008 |
|
|
2007 |
|
Operating Activities |
|
|
|
|
|
|
|
|
Net income |
|
$ |
1,490 |
|
|
$ |
920 |
|
Adjustments to reconcile net income to net cash provided by
operating activities: |
|
|
|
|
|
|
|
|
Depreciation |
|
|
3,025 |
|
|
|
2,733 |
|
Amortization |
|
|
8 |
|
|
|
12 |
|
Amortization of deferred financing charges |
|
|
84 |
|
|
|
120 |
|
Amortization of deferred lease costs |
|
|
90 |
|
|
|
85 |
|
Amortization of debt discount |
|
|
47 |
|
|
|
44 |
|
Deferred income |
|
|
(575 |
) |
|
|
(395 |
) |
Deferred income taxes |
|
|
367 |
|
|
|
(147 |
) |
Equity in the earnings of affiliates |
|
|
(53 |
) |
|
|
(55 |
) |
Gain on sale of properties |
|
|
(734 |
) |
|
|
(67 |
) |
Provision for bad debts |
|
|
15 |
|
|
|
(25 |
) |
Write-off of deferred loan costs |
|
|
|
|
|
|
187 |
|
Write-down of assets held for sale |
|
|
134 |
|
|
|
|
|
Stock compensation expense |
|
|
229 |
|
|
|
251 |
|
Changes in operating assets and liabilities, net of acquisitions: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(895 |
) |
|
|
(2,559 |
) |
Accounts receivable from affiliates |
|
|
(392 |
) |
|
|
508 |
|
Property tax and insurance deposits |
|
|
1,742 |
|
|
|
782 |
|
Prepaid expenses and other |
|
|
1,907 |
|
|
|
(512 |
) |
Other assets |
|
|
(286 |
) |
|
|
1,685 |
|
Accounts payable |
|
|
468 |
|
|
|
(765 |
) |
Accrued expenses |
|
|
(2,649 |
) |
|
|
(2,281 |
) |
Federal and state income taxes receivable/payable |
|
|
514 |
|
|
|
(286 |
) |
Customer deposits |
|
|
(92 |
) |
|
|
(117 |
) |
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
4,444 |
|
|
|
118 |
|
Investing Activities |
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
(1,671 |
) |
|
|
(1,442 |
) |
Proceeds from sale of assets |
|
|
1,401 |
|
|
|
885 |
|
Investments in limited partnerships |
|
|
(596 |
) |
|
|
(67 |
) |
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(866 |
) |
|
|
(624 |
) |
Financing Activities |
|
|
|
|
|
|
|
|
Proceeds from notes payable |
|
|
|
|
|
|
9,500 |
|
Repayments of notes payable |
|
|
(2,334 |
) |
|
|
(13,854 |
) |
Cash proceeds from the issuance of common stock |
|
|
|
|
|
|
129 |
|
Excess tax benefits on stock options exercised |
|
|
|
|
|
|
65 |
|
Deferred financing charges paid |
|
|
|
|
|
|
(382 |
) |
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(2,334 |
) |
|
|
(4,542 |
) |
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
|
1,244 |
|
|
|
(5,048 |
) |
Cash and cash equivalents at beginning of year |
|
|
23,359 |
|
|
|
25,569 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
24,603 |
|
|
$ |
20,521 |
|
|
|
|
|
|
|
|
Supplemental Disclosures |
|
|
|
|
|
|
|
|
Cash paid during the year for: |
|
|
|
|
|
|
|
|
Interest |
|
$ |
2,932 |
|
|
$ |
3,411 |
|
|
|
|
|
|
|
|
Income taxes |
|
$ |
99 |
|
|
$ |
946 |
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
5
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2008
1. BASIS OF PRESENTATION
Capital Senior Living Corporation, a Delaware corporation (together with its subsidiaries, 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. As of March 31, 2008, the Company operated 64 senior
living communities in 23 states with an aggregate capacity of approximately 9,400 residents,
including 37 senior living communities which the Company either owned or in which the Company had
an ownership interest, 25 senior living communities that the Company leased and two senior living
communities it managed for third parties. As of March 31, 2008, the Company also operated one home
care agency. The accompanying consolidated financial statements include the financial statements of
Capital Senior Living Corporation and its wholly owned subsidiaries. All material intercompany
balances and transactions have been eliminated in consolidation. The Company accounts for
significant investments in unconsolidated companies, in which the Company has significant
influence, using the equity method of accounting.
The accompanying consolidated balance sheet, as of December 31, 2007, has been derived from audited
consolidated financial statements of the Company for the year ended December 31, 2007, and the
accompanying unaudited consolidated financial statements, as of March 31, 2008 and 2007, 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, 2007 included in the Companys Annual
Report on Form 10-K filed with the Securities and Exchange Commission on March 12, 2008.
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 Companys
financial position as of March 31, 2008, results of operations and cash flows for the three months
ended March 31, 2008 and 2007. The results of operations for the three months ended March 31, 2008
are not necessarily indicative of the results for the year ending December 31, 2008.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Investments in Joint Ventures
The Company accounts for its investments in joint ventures under the equity method of accounting.
The Company is the general partner in two partnerships and owns member interests in four other
joint ventures. The Company has not consolidated these joint venture interests because the Company
has concluded that the limited partners or the other members of each joint venture has substantive
kick-out rights or substantive participating rights as defined in EITF Issue 04-05 Determining
Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or
Similar Entity When the Limited Partners Have Certain Rights (EITF 04-05). Under the equity
method of accounting the Company records its investments in joint ventures at cost and adjusts such
investment for its share of earnings and losses of the joint venture.
Development Guarantees
The Company, on three joint venture developments, has guarantees that the communities will be
completed at budgeted costs approved by the joint venture members. These costs include the hard and
soft construction costs and operating costs until each community reaches stabilization. The
budgeted costs include contingency reserves for potential costs overruns and other unforeseen
costs. In addition, each of these joint ventures has entered into a guaranteed fixed price
construction contract with the general contractor on each of the developments. The Company would be
required to fund these guarantees if the actual development costs incurred by the joint venture
exceed the budgeted costs for the development. The terms of these guarantees generally do not
provide for a limitation on the maximum potential future payments. The Company has not made any
payments under these guarantees and currently does not expect to be required to make any payments
under these guarantees.
6
Assets Held for Sale
Assets are classified as held for sale when the Company has committed to selling the asset and
believes that it will be disposed of within one year. The Company determines the fair value, net of
costs of disposal, of an asset on the date the asset is categorized as held for sale, and the asset
is recorded at the lower of its fair value, net of cost of disposal, or carrying value on that
date. The Company periodically reevaluates assets held for sale to determine if the assets are
still recorded at the lower of fair value, net of cost of disposal, or carrying value. The fair
value of properties are generally determined based on market rates, industry trends and recent
comparable sales transactions. The Company had one parcel of land, in Fort Wayne, Indiana, held for
sale at March 31, 2008.
In March 2007, the Company sold one parcel of land located in Baton Rouge, Louisiana that had been
classified as held for sale. The land parcel sold for $0.5 million, net of closing costs, resulting
in a gain on sale of approximately $0.1 million.
In May 2007, the Company sold one parcel of land located in Miami Township, Ohio that had been
classified as held for sale to a joint venture (SHP III/CSL Miami), which is owned 90% by Senior
Housing Partners III LP (SHP III), a fund owned by Prudential Real Estate Investors
(Prudential), and 10% by the Company, for $0.6 million resulting in a loss on sale of
approximately $3,000. In addition, during the second quarter of fiscal 2007, management
reclassified a parcel of land in Carmichael, California to held for sale. The Company estimated on
the date of reclassification that the fair value of the land parcel exceeded its carrying value of
$0.5 million. In February 2008, the Company sold the parcel of land located in Carmichael,
California for $1.2 million, net of closing costs, resulting in a gain on sale of approximately
$0.6 million.
In November 2007, the Company sold one parcel of land located in Richmond Heights, Ohio that had
been classified as held for sale to a joint venture (SHP III/CSL Richmond Heights) which is owned
90% by SHP III and 10% by the Company, for $0.8 million resulting in a gain on sale of
approximately $0.3 million, which has been deferred and will be recognized into income over the
period required to construct and stabilize the senior living community.
During the first quarter of fiscal 2008, the Company recorded a write-down of approximately $0.1
million on the remaining parcel of land, in Fort Wayne, Indiana, held for sale.
The Company estimates that the parcel of land held for sale at March 31, 2008 had an aggregate fair
value, net of costs of disposal, that exceeds its carrying value of $0.4 million. The amount that
the Company will ultimately realize on the parcel of land could differ materially from this
estimate.
Leases Accounting
The Company determines whether to account for its leases as either operating, capital or financing
leases depending on the underlying terms of the lease agreement. This determination of
classification is complex and requires significant judgment relating to certain information
including the estimated fair value and remaining economic life of the community, the Companys cost
of funds, minimum lease payments and other lease terms. As of March 31, 2008, the Company leased 25
communities and classified each of the leases as an operating lease. The Company incurs lease
acquisition costs and amortizes these costs over the term of the lease agreement. Certain leases
entered into by the Company qualified as sale/leaseback transactions under the provisions of
Financial Accounting Standard No. 98 (FAS 98) and as such any related gains have been deferred
and are being amortized over the lease term.
Facility lease expense in the Companys statement of operations includes rent expense plus
amortization expense relating to leasehold acquisition costs offset by the amortization of deferred
gains.
Financial Instruments
Effective January 31, 2005, the Company entered into an interest rate cap agreement with a
commercial bank to reduce the impact of increases in interest rates on the Companys variable rate
loans. The interest rate cap agreement effectively limited the interest rate exposure on the
notional amount to a maximum London Interbank Offered Rate (LIBOR) of 5%, as long as one-month
LIBOR is less than 7%. If one-month LIBOR is greater than 7%, the agreement effectively limited the
interest rate on the same notional amount to a maximum LIBOR of 7%. This interest rate cap
agreement had a notional amount of $33 million and was sold in May 2007, resulting in net proceeds
of $0.1 million and a gain on sale of approximately $28,000. During the three months ended March
31, 2007, the Company received $28,000 under the terms of this interest rate cap agreement and
recorded the amount received as a reduction in interest expense. The cost of this agreement was
being amortized to interest expense over the life of the agreement.
7
Income Taxes
The Company accounts for income taxes under the provision of SFAS No. 109, Accounting for Income
Taxes (FAS 109). Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes. At March 31, 2008, the Company had recorded on its
consolidated balance sheet deferred tax assets of $13.5 million. Management regularly evaluates the
future realization of deferred tax assets and provides a valuation allowance, if considered
necessary, based on such evaluation. As part of that evaluation, management has evaluated future
expectations of net income. However, the benefits of the net deferred tax asset might not be
realized if actual results differ from expectations. The Company believes that based upon this
analysis that the realization of the net deferred tax asset is reasonably assured and therefore has
not provided for a valuation allowance.
The Company accounts for uncertain tax positions under the provisions of Financial Accounting
Standards Board (FASB) Interpretation No. 48, Accounting for Uncertainty in Income Taxes An
Interpretation of FASB Statement No. 109 (FIN 48). This standard clarifies the accounting for
income tax benefits that are uncertain in nature. Under FIN 48, the Company is required to
recognize a tax benefit in its financial statements for an uncertain tax position only if
managements assessment is that its position is more likely than not (i.e., a greater than 50
percent likelihood) to be upheld on audit based only on the technical merits of the tax position.
FIN 48 also provides guidance on thresholds, measurement, derecognition, classification, interest
and penalties, accounting in interim periods, disclosure, and transition that is intended to
provide better financial-statement comparability among different companies. The Companys policy is
to recognize interest related to unrecognized tax benefits as interest expense and penalties as
income tax expense. The Company is not subject to income tax examinations for tax years prior to
2003.
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 and non-vested stock calculated using the treasury stock method.
The following table sets forth the computation of basic and diluted net income per share (in
thousands, except for per share amounts):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2008 |
|
|
2007 |
|
Net income |
|
$ |
1,490 |
|
|
$ |
920 |
|
|
|
|
|
|
|
|
Weighted average shares outstanding basic |
|
|
26,341 |
|
|
|
26,149 |
|
Effects of dilutive securities: |
|
|
|
|
|
|
|
|
Employee equity compensation plans |
|
|
282 |
|
|
|
487 |
|
|
|
|
|
|
|
|
Weighted average shares outstanding diluted |
|
|
26,623 |
|
|
|
26,636 |
|
|
|
|
|
|
|
|
Basic income per share |
|
$ |
0.06 |
|
|
$ |
0.04 |
|
|
|
|
|
|
|
|
Diluted income per share |
|
$ |
0.06 |
|
|
$ |
0.03 |
|
|
|
|
|
|
|
|
Reclassifications
Certain prior year amounts have been reclassified to conform to current year presentation. These
reclassifications include reclassifying the amortization of deferred gains on sale leaseback
transactions from gain on sale of assets to facility lease expense to better conform with industry
practice.
3. TRANSACTIONS WITH AFFILIATES
SHPII/CSL
The Company accounts for its investment in four joint ventures (collectively SHPII/CSL) under the
equity method of accounting and the Company recognized earnings in the equity of SHPII/CSL of $0.1
million in each of the three months ended March 31, 2008 and 2007. In addition, the Company earned
$0.3 million in management fees on the four senior living communities owned by SHPII/CSL (the
Spring Meadows Communities) in each of the three months ended March 31, 2008 and 2007.
8
SHPIII/CSL Miami
In May 2007, the Company and SHPIII entered into SHPIII/CSL Miami to develop a senior housing
community in Miamisburg, Ohio. Under the joint venture and related agreements, the Company will
earn development and management fees and may receive incentive distributions. The senior housing
community will consist of 101 independent living units and 45 assisted living units and is expected
to open in the second or third quarter of 2008. As of March 31, 2008 the Company had made capital
contributions of $0.8 million to the joint venture. During the first quarter of fiscal 2008, the
Company earned $0.2 million and $38,000 in development and marketing fees, respectively, from
SHPIII/CSL Miami.
SHPIII/CSL Richmond Heights
In November 2007, the Company and SHPIII entered into SHPIII/CSL Richmond Heights to develop a
senior housing community in Richmond Heights, Ohio. Under the joint venture and related agreements,
the Company will earn development and management fees and may receive incentive distributions. The
senior housing community will consist of 97 independent living units and 45 assisted living units
and is expected to open in the first quarter of 2009. As of March 31, 2008 the Company had made
capital contributions of $0.7 million to the joint venture. During the first quarter of fiscal
2008, the Company earned $0.3 million in development fees from SHPIII/CSL Richmond Heights.
SHPIII/CSL Levis Commons
In December 2007, the Company and SHPIII entered into SHPIII/CSL Levis Commons, LLC (SHPIII/CSL
Levis Commons) to develop a senior housing community near Toledo, Ohio. Under the joint venture
and related agreements, the Company will earn development and management fees and may receive
incentive distributions. The senior housing community will consist of 101 independent living units
and 45 assisted living units and is expected to open in the first quarter of 2009. As of March 31,
2008 the Company had made capital contributions of $0.5 million to the joint venture. During the
first quarter of fiscal 2008, the Company earned $0.3 million in development fees from SHPIII/CSL
Levis Commons.
Midwest I
The Company accounts for its investment in Midwest Portfolio Holdings, LP (Midwest I) under the
equity method of accounting and the Company recognized earnings in the equity of Midwest I of
$30,000 and $27,000 in the three months ended March 31, 2008 and 2007, respectively. The Company
earned $0.1 million in management fees on the five communities owned by Midwest I in each of the
three months ended March 31, 2008 and 2007.
Midwest II
The Company accounts for its investment in Midwest Portfolio Holdings II, LP (Midwest II) under
the equity method of accounting and the Company recognized a loss in the equity of Midwest II of
$47,000 and $24,000 in the three months ended March 31, 2008 and 2007, respectively. The Company
earned $0.1 million in management fees on the three communities owned by Midwest II in each of the
three months ended March 31, 2008 and 2007.
BRE/CSL
In March 2007, the Company received a final distribution from three joint ventures (collectively
BRE/CSL) of $0.4 million relating to the sale of the six communities owned by BRE/CSL to Ventas
Healthcare Properties, Inc. (Ventas). This distribution resulted in the recognition of an
additional gain of $0.4 million, which has been deferred and is being amortized in the Companys
statement of operations over the remaining initial lease term.
4. DEBT REFINANCINGS
On May 3, 2007, the Company refinanced $30.0 million of mortgage debt on four senior living
communities with Federal National Mortgage Association (Fannie Mae). As part of the refinancing,
the Company repaid approximately $2.7 million of mortgage debt on the four communities. The new
mortgage loans have a ten-year term with interest fixed at 5.91% and principal amortized over a
30-year term. The Company incurred $0.5 million in deferred financing costs related to this loan,
which is being amortized over ten years. In addition, as part of this refinancing, the Company
wrote-off $0.4 million in deferred loan costs. The new loans replaced $32.7 million of variable
rate debt with an effective interest rate of 7.6%.
9
On March 21, 2007, the Company refinanced $9.5 million of mortgage debt on one of its senior living
communities (Gramercy Hill) with Federal Home Loan Mortgage Corporation (Freddie Mac). As part
of the refinancing, the Company received approximately $2.1 million in cash proceeds, net of
closing costs. The new mortgage loan has a ten-year term with a one-year extension available at the
Companys option, interest fixed at 5.75% and requires interest only payments in the first two
years with principal amortized thereafter over a 25-year term. The Company incurred $0.2 million in
deferred financing costs related to this loan, which is being amortized over ten years. In
addition, as part of this refinancing, the Company wrote-off $13,000 in deferred loan costs and
paid $0.2 million in loan exit fees to the prior lender. The loan exit fees are a component of
write-off of deferred loan costs in the accompanying statement of operations.
5. NEW ACCOUNTING STANDARDS
Financial Accounting Standards Board (FASB) Statement No. 157, Fair Value Measurements (FAS
157). FAS 157 defines fair value, establishes a framework for measuring fair value and expands
disclosures about fair value measurements. FAS 157 does not require any new fair value measurements
but would apply to assets and liabilities that are required to be recorded at fair value under
other accounting standards. The Company adopted FAS 157 on January 1, 2008 and elected to defer the
provisions of FAS 157 for its nonfinancial assets and liabilities. Under the provisions of FAS 157
nonfinancial assets and liabilities will be subject to the provisions of FAS 157 on January 1,
2009. The Companys adoption of FAS 157 did not have a material effect on the Companys financial
statements.
FASB Statement No. 159, Fair Value Option for Financial Assets and Financial Liabilities -
Including an amendment of FASB Statement 115 (FAS 159). In February 2007, FASB issued FAS 159,
which permits, but does not require, entities to measure many financial instruments, including
liabilities and certain other items, at fair value with resulting changes in fair value reported in
earnings. The Company has elected not to apply the fair value option to any of its financial
instruments not already carried at fair value in accordance with other accounting standards, and
therefore the adoption of FAS 159 did not impact the Companys consolidated financial statements.
FASB Statement No. 141(R) Business Combinations (FAS 141(R)). In December 2007 FASB issued FAS
141(R) which requires the acquiring entity in a business combination to recognize the full fair
value of assets acquired and liabilities assumed in the transaction (whether a full or partial
acquisition); establishes the acquisition-date fair value as the measurement objective for all
assets acquired and liabilities assumed; requires expensing of most transaction and restructuring
costs; and requires the acquirer to disclose to investors and other users all of the information
needed to evaluate and understand the nature and financial effect of the business combination. FAS
141(R) applies prospectively to business combinations for which the acquisition date is on or after
January 1, 2009. The impact of FAS 141(R) on the Companys consolidated financial statements will
depend upon the nature, terms and size of the acquisitions we consummate after the effective date.
6. STOCK-BASED COMPENSATION
The Company accounts for share-based payments under the provisions of Statement of Financial
Accounting Standards No. 123 (revised), Share-based Payment (FAS 123R), which requires all
share-based payments to employees, including grants of employee stock options and awards of
restricted stock to be recognized in the statement of operations based on their fair values. Under
FAS 123R the Company recognizes compensation expense for share-based awards.
On May 8, 2007, the Companys shareholders approved the 2007 Omnibus Stock and Incentive Plan for
Capital Senior Living Corporation (the 2007 Plan) which provides for, among other things, the
grant of restricted stock awards and stock options to purchase shares of the Companys common
stock. The 2007 Plan authorizes the Company to issue up to 2.6 million shares of common stock and
the Company has reserved 2.5 million shares of common stock for future issuance pursuant to awards
under the 2007 Plan. Effective May 8, 2007, the 1997 Omnibus Stock and Incentive Plan (as amended,
the 1997 Plan) was terminated and no additional shares will be granted under the 1997 Plan. The
Company has reserved 0.9 million shares of common stock for future issuance upon the exercise of
outstanding stock options pursuant to the 1997 Plan.
Stock Options
The Companys stock option program is a long-term retention program that is intended to attract,
retain and provide incentives for employees, officers and directors and to align stockholder and
employee interest. The Companys options generally vest over one to five years and the related
expense is amortized on a straight-line basis over the vesting period.
10
A summary of the Companys stock option activity and related information for the three months ended
March 31, 2008, is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of |
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding |
|
Options |
|
|
|
|
|
|
Period |
|
Granted |
|
Exercised |
|
Forfeited |
|
End of Period |
|
Exercisable |
|
|
|
|
Shares |
|
|
937,334 |
|
|
|
|
|
|
|
|
|
|
|
4,000 |
|
|
|
933,334 |
|
|
|
929,834 |
|
Weighted average price |
|
$ |
4.87 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
3.69 |
|
|
$ |
4.88 |
|
|
$ |
4.88 |
|
The options outstanding and the options exercisable at March 31, 2008 had an intrinsic value of
$3.1 million and $3.0 million, respectively.
Restricted Stock
The Company grants restricted stock awards to employees and officers. Restricted stock granted
generally vests over a period of three and one half to four years but such awards are considered
outstanding at the time of grant, since the holders thereof are entitled to dividends and voting
rights.
A summary of the Companys restricted stock awards activity and related information for the three
months ended March 31, 2008, is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of |
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding |
|
|
Period |
|
Issued |
|
Vested |
|
Forfeited |
|
End of Period |
Shares |
|
|
256,858 |
|
|
|
11,500 |
|
|
|
4,500 |
|
|
|
10,990 |
|
|
|
252,868 |
|
The restricted stock outstanding at March 31, 2008 had an intrinsic value of $2.0 million.
During the three months ended March 31, 2008, the Company awarded 11,500 shares of restricted
common stock to certain employees of the Company. The average market value of the common stock on
the date of grant was $7.16. These awards of restricted shares vest over a four-year period and had
an intrinsic value of $0.1 million on the date of issue.
Stock Based Compensation
The Company accounts for share-based compensation under the principles of FAS 123R. The Company
uses the Black-Scholes option pricing model to estimate the grant date fair value of its stock. The
Black-Scholes model requires the input of certain assumptions including expected volatility,
expected dividend yield, expected life of the option and the risk free interest rate. The expected
volatility used by the Company is based primarily on an analysis of historical prices of the
Companys common stock. The expected term of options granted is based primarily on historical
exercise patterns on the Companys outstanding stock options. The risk free rate is based on
zero-coupon U.S. Treasury yields in effect at the date of grant with the same period as the
expected option life. The Company does not currently plan to pay dividends on its common stock and
therefore has used a dividend yield of zero in determining the fair value of its awards. The option
forfeiture rate assumption used by the Company, which affects the expense recognized as opposed to
the fair value of the award, is based primarily on the Companys historical option forfeiture
patterns. The Company issued no stock options during the first quarter of fiscal 2008 and 2007.
The Company has total stock-based compensation expense of $1.6 million not recognized as of March
31, 2008, and expects this expense to be recognized over approximately a four-year period.
7. CONTINGENCIES
The Company has claims incurred in the normal course of its business. Most of these claims are
believed by management to be covered by insurance, subject to normal reservations of rights by the
insurance companies and possibly subject to certain exclusions in the applicable insurance
policies. Whether or not covered by insurance, these claims, in the opinion of management, based on
advice of legal counsel, should not have a material effect on the consolidated financial statements
of the Company if determined adversely to the Company.
11
Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
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, would, intend, could, believe, 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 Companys future business prospects, revenues, working capital, liquidity, capital
needs, interest costs, and income, are subject to certain risks and uncertainties that could cause
actual results to differ materially from those indicated in the forward-looking statements, due to
several important factors herein identified. These factors include the Companys ability to find
suitable acquisition properties at favorable terms, financing, licensing, business conditions,
risks of downturn in economic conditions 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 Companys reports filed with the SEC.
Overview
The following discussion and analysis addresses (i) the Companys results of operations for the
three months ended March 31, 2008 and 2007, respectively, and (ii) liquidity and capital resources
of the Company and should be read in conjunction with the Companys consolidated financial
statements contained elsewhere in this report.
The Company is one of the largest operators of senior living communities in the United States. The
Companys 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, 2008, the Company operated 64 senior living communities in 23 states with an
aggregate capacity of approximately 9,400 residents, including 25 senior living communities which
the Company owned, 12 senior living communities in which the Company had an ownership interest, 25
senior living communities that the Company leased and two senior living communities it managed for
third parties. As of March 31, 2008, the Company also operated one home care agency.
Joint Venture Transactions and Management Contracts
As of March 31, 2008, the Company managed 12 communities owned by joint ventures in which the
Company has a minority interest and two communities owned by third parties. For communities owned
by joint ventures and third parties, the Company typically receives a management fee of 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 believes that the factors affecting the financial performance of communities managed
under contracts with third parties do not vary substantially from the factors affecting the
performance of owned and leased communities, although there are different business risks associated
with these activities.
The Companys 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 or
leased communities. Further, the Company is not responsible for capital investments in managed
communities. The management contracts are generally terminable only for cause and upon the sale of
a community, subject to the Companys rights to offer to purchase such community.
Midwest I
The Company and GE Healthcare Financial Services (GE Healthcare) own a joint venture, Midwest I,
that owns five senior living communities. Midwest I is owned approximately 89% by GE Healthcare and
11% by the Company. The Company contributed $2.7 million for its interests in Midwest I. The
Company manages the five communities under long-term management agreements with Midwest I. The
Company earned $0.1 million in management fees on the Midwest I communities in each of the first
quarters of fiscal 2008 and 2007, respectively. The Company accounts for its investment in Midwest
I under the equity method of accounting and the Company recognized earnings in the equity of
Midwest I of $30,000 and $27,000 in the three months ended March 31, 2008 and 2007,
12
respectively. During the second quarter of fiscal 2007, Midwest I finalized its purchase price
allocation on the five communities it acquired in fiscal 2006, resulting in a noncash charge of
$0.1 million being recognized by the Company. The final purchase price allocation resulted in more
of the purchase price being allocated to assets with shorter economic lives, which resulted in
additional depreciation and amortization expense.
Midwest II
The Company and GE Healthcare own a joint venture, Midwest II, that owns three senior living
communities. Midwest II is owned approximately 85% by GE Healthcare and 15% by the Company. The
Company has contributed $1.5 million for its interests in Midwest II. The Company manages the three
communities under long-term management agreements with Midwest II. The Company earned $0.1 million
in management fees on the Midwest II communities in each of the first quarters of fiscal 2008 and
2007, respectively. The Company accounts for its investment in Midwest II under the equity method
of accounting and the Company recognized a loss in the equity of Midwest II of $47,000 and $24,000
in the three months ended March 31, 2008 and 2007, respectively. During the second quarter of
fiscal 2007, Midwest II finalized its purchase price allocation on the three communities it
acquired in fiscal 2006, resulting in a noncash charge of $0.2 million being recognized by the
Company. The final purchase price allocation resulted in more of the purchase price being allocated
to assets with shorter economic lives, which resulted in additional depreciation and amortization
expense.
SHPII/CSL
The Company and Senior Housing Partners II, LP (SHPII) own four joint ventures, collectively
SHPII/CSL, that own the Spring Meadows Communities. SHPII/CSL is owned 95% by SHPII and 5% by the
Company. The Company contributed $1.3 million to SHPII/CSL for its 5% interest. The Company manages
the four communities under long-term management agreements with SHPII/CSL. The Company earned $0.3
million in management fees on the Spring Meadows Communities in each of the first quarters of
fiscal 2008 and 2007, respectively. 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 $0.1
million in each of the three months ended March 31, 2008 and 2007, respectively.
BRE/CSL
The Company and Blackstone Real Estate Advisors (Blackstone) own three joint ventures,
collectively BRE/CSL, and the joint ventures are owned 90% by Blackstone and 10% by the Company.
BRE/CSL previously owned six senior living communities. The Company managed the six communities
owned by BRE/CSL under long-term management contracts. In September 2005, Ventas acquired the six
communities owned by BRE/CSL and the Company entered into a series of lease agreements whereby the
Company leases the six communities from Ventas. In March 2007, the Company received a final
distribution from BRE/CSL of $0.4 million relating to the sale of six communities owned by BRE/CSL
to Ventas. This distribution resulted in the recognition of an additional gain of $0.4 million,
which has been deferred and is being amortized in the Companys statement of operations over the
remaining initial lease term.
Development Agreements
SHPIII/CSL Miami
In May 2007, the Company and SHPIII entered into SHPIII/CSL Miami to develop a senior housing
community in Miamisburg, Ohio. Under the joint venture and related agreements, the Company will
earn development and management fees and may receive incentive distributions. The senior housing
community will consist of 101 independent living units and 45 assisted living units and is expected
to open in the second or third quarter of 2008. As of March 31, 2008 the Company had made capital
contributions of $0.8 million to the joint venture. During the first quarter of fiscal 2008, the
Company earned $0.2 million and $38,000 in development and marketing fees, respectively, from
SHPIII/CSL Miami.
SHPIII/CSL Richmond Heights
In November 2007, the Company and SHPIII entered into SHPIII/CSL Richmond Heights to develop a
senior housing community in Richmond Heights, Ohio. Under the joint venture and related agreements,
the Company will earn development and management fees and may receive incentive distributions. The
senior housing community will consist of 97 independent living units and 45 assisted living units
and is expected to open in the first quarter of 2009. As of March 31, 2008 the Company had made
capital contributions of
13
$0.7 million to the joint venture. During the first quarter of fiscal 2008, the Company earned $0.3
million in development fees from SHPIII/CSL Richmond Heights.
SHPIII/CSL Levis Commons
In December 2007, the Company and SHPIII entered into SHPIII/CSL Levis Commons to develop a senior
housing community near Toledo, Ohio. Under the joint venture and related agreements, the Company
will earn development and management fees and may receive incentive distributions. The senior
housing community will consist of 101 independent living units and 45 assisted living units and is
expected to open in the first quarter of 2009. As of March 31, 2008 the Company had made capital
contributions of $0.5 million to the joint venture. During the first quarter of fiscal 2008, the
Company earned $0.3 million in development fees from SHPIII/CSL Levis Commons.
Facility Lease Transactions
The Company currently leases 25 communities with certain real estate investment trusts (REITs)
and accounts for each of the leases as an operating lease. The lease terms are generally for ten
years with renewal options for 10-20 years at the Companys option. Under these agreements the
Company is responsible for all operating costs, maintenance and repairs, insurance and property
taxes. The following table further describes each of the lease agreements (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease |
|
|
Deferred |
|
|
|
|
|
|
|
Number of |
|
|
Value of |
|
|
|
|
|
|
Initial |
|
|
Acquisition Costs |
|
|
Gains/Lease |
|
Landlord |
|
Date of Lease |
|
Communities |
|
|
Transaction |
|
|
Term |
|
Lease Rate (1) |
|
|
(2) |
|
|
Concession (3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10 years |
|
|
|
|
|
|
|
|
|
|
|
|
Ventas |
|
September 30, 2005 |
|
|
6 |
|
|
$ |
84.6 |
|
|
(Two five-year renewals) |
|
|
8 |
% |
|
$ |
1.3 |
|
|
$ |
4.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10 years |
|
|
|
|
|
|
|
|
|
|
|
|
Ventas |
|
October 18, 2005 |
|
|
1 |
|
|
|
19.5 |
|
|
(Two five-year renewals) |
|
|
8 |
% |
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10 years |
|
|
|
|
|
|
|
|
|
|
|
|
Ventas |
|
March 31, 2006 |
|
|
1 |
|
|
|
29.0 |
|
|
(Two five-year renewals) |
|
|
8 |
% |
|
|
0.1 |
|
|
|
14.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9.5 years |
|
|
|
|
|
|
|
|
|
|
|
|
Ventas |
|
June 8, 2006 |
|
|
1 |
|
|
|
19.1 |
|
|
(Two five-year renewals) |
|
|
8 |
% |
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10 years |
|
|
|
|
|
|
|
|
|
|
|
|
Ventas |
|
January 31, 2008 |
|
|
1 |
|
|
|
5.0 |
|
|
(Two five-year renewals) |
|
|
7.75 |
% |
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10 years |
|
|
|
|
|
|
|
|
|
|
|
|
HCP |
|
May 1, 2006 |
|
|
3 |
|
|
|
54.0 |
|
|
(Two ten-year renewals) |
|
|
8 |
% |
|
|
0.2 |
|
|
|
12.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10 years |
|
|
|
|
|
|
|
|
|
|
|
|
HCP |
|
May 31, 2006 |
|
|
6 |
|
|
|
43.0 |
|
|
(Two ten-year renewals) |
|
|
8 |
% |
|
|
0.2 |
|
|
|
0.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10 years |
|
|
|
|
|
|
|
|
|
|
|
|
HCP |
|
December 1, 2006 |
|
|
4 |
|
|
|
51.0 |
|
|
(Two ten-year renewals) |
|
|
8 |
% |
|
|
0.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10 years |
|
|
|
|
|
|
|
|
|
|
|
|
HCP |
|
December 14, 2006 |
|
|
1 |
|
|
|
18.0 |
|
|
(Two ten-year renewals) |
|
|
7.75 |
% |
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10 years |
|
|
|
|
|
|
|
|
|
|
|
|
HCP |
|
April 11, 2007 |
|
|
1 |
|
|
|
8.0 |
|
|
(Two ten-year renewals) |
|
|
7.25 |
% |
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.7 |
|
|
|
32.3 |
|
Accumulated amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.7 |
|
|
|
|
|
Accumulated deferred gain recognized |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net lease acquisition costs / deferred gains as of March 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3.0 |
|
|
$ |
25.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Initial lease rates are subject to conditional lease escalation provisions as set forth in
each lease agreement. |
|
(2) |
|
Lease acquisition costs are being amortized over the leases initial term. |
|
(3) |
|
Deferred gains of $31.7 million and lease concessions of $0.6 million are being
recognized in the Companys statement of operations as a reduction in facility rent
expense over the leases initial term. Lease concessions relate to the HCP transaction on
May 31, 2007. |
In January 2008, Ventas acquired a senior living community in Keller, Texas (Whitley Place), in a
transaction valued at approximately $5.0 million and immediately leased Whitley Place to the
Company. Whitley Place is comprised of 47 assisted living units with a resident capacity of 65.
Recently Issued Accounting Standards
FASB Statement No. 157, Fair Value Measurements. FAS 157 defines fair value, establishes a
framework for measuring fair value and expands disclosures about fair value measurements. FAS 157
does not require any new fair value measurements but would apply
14
to assets and liabilities that are required to be recorded at fair value under other accounting
standards. The Company adopted FAS 157 on January 1, 2008 and elected to defer the provisions of
FAS 157 for its nonfinancial assets and liabilities. Under the provisions of FAS 157 nonfinancial
assets and liabilities will be subject to the provisions of FAS 157 on January 1, 2009. The
Companys adoption of FAS 157 did not have a material effect on the Companys financial statements.
FASB Statement No. 159, Fair Value Option for Financial Assets and Financial Liabilities -
Including an amendment of FASB Statement 115. In February 2007, FASB issued FAS 159, which
permits, but does not require, entities to measure many financial instruments, including
liabilities and certain other items, at fair value with resulting changes in fair value reported in
earnings. The Company has elected not to apply the fair value option to any of its financial
instruments not already carried at fair value in accordance with other accounting standards, and
therefore the adoption of FAS 159 did not impact the Companys consolidated financial statements.
FASB Statement No. 141(R) Business Combinations. In December 2007, FASB issued FAS 141(R) which
requires the acquiring entity in a business combination to recognize the full fair value of assets
acquired and liabilities assumed in the transaction (whether a full or partial acquisition);
establishes the acquisition-date fair value as the measurement objective for all assets acquired
and liabilities assumed; requires expensing of most transaction and restructuring costs; and
requires the acquirer to disclose to investors and other users all of the information needed to
evaluate and understand the nature and financial effect of the business combination. FAS 141(R)
applies prospectively to business combinations for which the acquisition date is on or after
January 1, 2009. The impact of FAS 141(R) on the Companys consolidated financial statements will
depend upon the nature, terms and size of the acquisitions we consummate after the effective date.
Website
The Companys internet website www.capitalsenior.com contains an Investor Relations
section, which provides links to the Companys 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).
15
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, |
|
|
|
2008 |
|
|
2007 |
|
|
|
$ |
|
|
|
% |
|
|
$ |
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Resident and healthcare revenue |
|
$ |
42,844 |
|
|
|
88.3 |
|
|
$ |
41,305 |
|
|
|
89.3 |
|
Unaffiliated management service revenue |
|
|
42 |
|
|
|
0.1 |
|
|
|
88 |
|
|
|
0.2 |
|
Affiliated management service revenue |
|
|
1,433 |
|
|
|
3.0 |
|
|
|
539 |
|
|
|
1.2 |
|
Community reimbursement income |
|
|
4,198 |
|
|
|
8.7 |
|
|
|
4,294 |
|
|
|
9.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
48,517 |
|
|
|
100.0 |
|
|
|
46,226 |
|
|
|
100.0 |
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses (exclusive of facility lease expense and
depreciation and amortization shown below) |
|
|
26,606 |
|
|
|
54.8 |
|
|
|
25,385 |
|
|
|
54.9 |
|
General and administrative expenses |
|
|
3,618 |
|
|
|
7.5 |
|
|
|
3,135 |
|
|
|
6.8 |
|
Facility lease expense |
|
|
6,136 |
|
|
|
12.6 |
|
|
|
5,720 |
|
|
|
12.4 |
|
Stock-based compensation expense |
|
|
229 |
|
|
|
0.5 |
|
|
|
251 |
|
|
|
0.5 |
|
Depreciation and amortization |
|
|
3,033 |
|
|
|
6.3 |
|
|
|
2,745 |
|
|
|
5.9 |
|
Community reimbursement expense |
|
|
4,198 |
|
|
|
8.7 |
|
|
|
4,294 |
|
|
|
9.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
43,820 |
|
|
|
90.3 |
|
|
|
41,530 |
|
|
|
89.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
4,697 |
|
|
|
9.7 |
|
|
|
4,696 |
|
|
|
10.2 |
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
127 |
|
|
|
0.3 |
|
|
|
151 |
|
|
|
0.3 |
|
Interest expense |
|
|
(3,065 |
) |
|
|
(6.3 |
) |
|
|
(3,285 |
) |
|
|
(7.1 |
) |
Gain on sale of properties |
|
|
600 |
|
|
|
1.2 |
|
|
|
67 |
|
|
|
0.1 |
|
Write-off of deferred loan costs |
|
|
|
|
|
|
|
|
|
|
(187 |
) |
|
|
(0.4 |
) |
Other income |
|
|
53 |
|
|
|
0.1 |
|
|
|
55 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
2,412 |
|
|
|
5.0 |
|
|
|
1,497 |
|
|
|
3.2 |
|
Provision for income taxes |
|
|
(922 |
) |
|
|
(1.9 |
) |
|
|
(577 |
) |
|
|
(1.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
1,490 |
|
|
|
3.1 |
|
|
$ |
920 |
|
|
|
2.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2008 Compared to the Three Months Ended March 31, 2007
Revenues.
Total revenues were $48.5 million for the three months ended March 31, 2008 compared to $46.2
million for the three months ended March 31, 2007, representing an increase of approximately $2.3
million or 5.0%. This increase in revenue is primarily the result of a $1.5 million increase in
resident and healthcare revenue, an increase in affiliated management services revenue of $0.9
million offset by a decrease in unaffiliated management services revenue of $46,000 and a decrease
in community reimbursement revenue of $0.1 million.
|
|
|
Resident and healthcare revenue increased 3.7% as a result of an increase of $0.7
million from the addition of Crescent Place, which the Company leased from HCP on April 11,
2007, an increase of $0.2 million from the addition of Whitley Place, which was leased from
Ventas on January 31, 2008, along with an increase in resident and healthcare revenue at
the Companys other communities of $0.6 million as a result of higher rental rates in the
current fiscal year. |
|
|
|
|
Affiliated management services revenue increased primarily due to an increase in
development and pre-marketing fees of $0.9 million earned on three joint venture
communities under development. |
|
|
|
|
The decrease in unaffiliated management services revenue primarily results from the
Company managing two communities for third parties in the first quarter of fiscal 2008
compared to three communities during the first quarter of fiscal 2007. |
|
|
|
|
Community reimbursement revenue is comprised of reimbursable expenses from
non-consolidated communities that the Company operates under long-term management
agreements. |
16
Expenses.
Total expenses were $43.8 million in the first quarter of fiscal 2008 compared to $41.5 million in
the first quarter of fiscal 2007, representing an increase of $2.3 million or 5.5%. This increase
is primarily the result of a $1.2 million increase in operating expenses, a $0.5 million increase
in general and administrative expenses, a $0.4 million increase in facility lease expense, and a
$0.3 million increase in depreciation and amortization expense offset by a $22,000 decrease in
stock-based compensation and a decrease in community reimbursement expense of $0.1 million.
|
|
|
Operating expenses increased 4.8% primarily due to an increase of $0.4 million from the
addition of Crescent Place, an increase of $0.2 million from the addition of Whitley Place,
and an increase in operating expenses at the Companys other communities of $0.6 million. |
|
|
|
|
General and administrative expenses increased $0.5 million primarily due to due
diligence costs of $0.3 million related to a potential acquisition that the Company
terminated in February 2008, $0.1 million in legal fees and $0.1 million in information
systems costs. |
|
|
|
|
Facility lease expenses increased $0.4 million primarily due to the Company leasing 25
senior living communities in the first quarter of fiscal 2008 compared to 23 senior living
communities in the first quarter of fiscal 2007 along with an increase in contingent rent. |
|
|
|
|
Stock-based compensation decreased $22,000 in the first quarter of fiscal 2008 compared
to the first quarter of fiscal 2007. |
|
|
|
|
Depreciation and amortization expense increased $0.3 million primarily as a result of
additional depreciation related to capital improvements at certain of the Companys owned
and leased facilities along with depreciation incurred in fiscal 2008 related to the
Companys new information systems, which were put in service on January 1, 2008. |
|
|
|
|
Community reimbursement expense represents payroll and administrative costs paid by the
Company for the benefit of non-consolidated communities and joint ventures. |
Other income and expense.
|
|
|
Interest income decreased $24,000 in the first quarter of 2008 compared to the same
period in fiscal 2007 as a result of a lower balances invested and slightly lower interest
rates. This interest income results from the investment of cash balances and escrowed
funds. |
|
|
|
|
Interest expense decreased $0.2 million to $3.1 million in the first quarter of 2008
compared to $3.3 million in the comparable period of 2007. This decrease in interest
expense primarily results from lower debt outstanding during first quarter of fiscal 2008
compared to the first quarter of fiscal 2007 along with a lower average interest rate in
the current fiscal year compared to the prior year as a result of refinancings completed
during fiscal 2007. |
|
|
|
|
Gain on sale of assets in the first quarter of fiscal 2008 represents gains associated
with the sale of two parcels of land of $0.7 million and the amortization of a deferred
gain on the sale of the Richmond Heights land in fiscal 2007 to a joint venture in which
the Company has an equity interest offset by a $0.1 million impairment adjustment on a
parcel of land, located in Fort Wayne, Indiana, which is classified as held for sale. Gain
on sale of assets in the first quarter of fiscal 2007 represents the recognition of a gain
of $0.1 million related to the sale of a parcel of land located in Baton Rouge, Louisiana. |
|
|
|
|
Other income in the first quarter of fiscal 2008 and 2007 relates to the Companys
equity in the earnings of unconsolidated affiliates, which represents the Companys share
of the earnings/losses on its investments in SHPII/CSL, Midwest I and Midwest II. |
Provision for income taxes.
Provision for income taxes in the first quarter of fiscal 2008 was $0.9 million or 38.2% of income
before taxes compared to a provision for income taxes of $0.6 million, or 38.5% of income before
taxes, in the first quarter of fiscal 2007. The effective tax rates for the first quarter of 2008
and 2007 differ from the statutory tax rates because of state income taxes and permanent tax
differences.
17
Management regularly evaluates the future realization of deferred tax assets and provides a
valuation allowance, if considered necessary, based on such evaluation. At March 31, 2008, no
valuation allowance was considered necessary based on this evaluation.
Net income/loss.
As a result of the foregoing factors, the Company reported net income of $1.5 million and $0.9
million for the three months ended March 31, 2008 and 2007, respectively.
Liquidity and Capital Resources
In addition to approximately $24.6 million of cash balances on hand as of March 31, 2008, the
Companys principal sources of liquidity are expected to be cash flows from operations, proceeds
from the sale of assets, cash flows from SHPII/CSL, Midwest I and Midwest II and/or additional debt
refinancing. The Company expects its available cash and cash flows from operations, proceeds from
the sale of assets, and cash flows from SHPII/CSL, Midwest I and Midwest II to be sufficient to
fund its short-term working capital requirements. The Companys 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 Companys short and long-term capital
requirements.
In summary, the Companys cash flows were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
March 31, |
|
|
2008 |
|
2007 |
Net cash provided by operating activities |
|
$ |
4,444 |
|
|
$ |
118 |
|
Net cash used in investing activities |
|
|
(866 |
) |
|
|
(624 |
) |
Net cash used in financing activities |
|
|
(2,334 |
) |
|
|
(4,542 |
) |
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
1,244 |
|
|
|
(5,048 |
) |
|
|
|
|
|
|
|
|
|
Operating Activities
The net cash provided by operating activities for the first quarter of fiscal 2008 primarily
results from net income of $1.5 million, net non-cash charges of $2.6, a decrease in property tax
and insurance deposits of $1.7 million, a decrease in prepaid expenses and other of $1.9 million,
an increase in accounts payable of $0.5 million and a decrease in federal and state income tax
receivable of $0.5 million offset by an increase in accounts receivable of $1.3 million, an
increase in other assets of $0.3 million, a decrease in accrued expenses of $2.6 million and a
decrease in customer deposits of $0.1 million. The net cash provided by operating activities for
the first quarter of fiscal 2007 primarily results from net income of $0.9 million, net non-cash
charges of $2.7, a decrease in property tax and insurance deposits of $0.8 million and a decrease
in other assets of $1.7 million offset by an increase in accounts receivable of $2.1 million, an
increase in prepaid and other assets of $0.5 million, an increase in income tax receivable of $0.3
million, a decrease in accounts payable and accrued expenses of $3.0 million, and a decrease in
customer deposits of $0.1 million.
Investing Activities
The net cash used in investing activities for the first quarter of fiscal 2008 primarily results
from capital expenditures of $1.7 million, net investments in joint ventures of $0.6 million offset
by proceeds from the sale of two parcels of land, one in Carmichael, California and the other in
Lincoln, Nebraska, for $1.4 million. The net cash used in investing activities for the first
quarter of fiscal 2007 primarily results from capital expenditures of $1.4 million, net investments
in joint ventures of $0.1 million offset by proceeds from the sale of a parcel of land that the
Company owned in Baton Rouge, Louisiana for $0.5 million and proceeds from a final distribution
from the BRE/CSL joint venture of $0.4 million.
Financing Activities
The net cash used in financing activities for the first quarter of fiscal 2008 results from
repayments of notes payable of $2.3 million. The net cash used in financing activities for the
first quarter of fiscal 2007 primarily results from net repayments of notes payable of $4.4
million, deferred loan cost paid of $0.4 million offset by proceeds from the issuance of common
stock of $0.1 million and excess tax benefits on the issuance of common stock of $0.1 million.
18
Community Refinancings
On May 3, 2007, the Company refinanced $30.0 million of mortgage debt on four senior living
communities with Fannie Mae. As part of the refinancing, the Company repaid approximately $2.7
million of mortgage debt on the four communities. The new mortgage loans have a ten-year term with
interest fixed at 5.91% and principal amortized over a 30-year term. The Company incurred $0.5
million in deferred financing costs related to this loan, which is being amortized over ten years.
In addition, as part of this refinancing, the Company wrote-off $0.4 million in deferred loan
costs. The new loans replaced $32.7 million of variable rate debt with an effective interest rate
of 7.6%.
On March 21, 2007, the Company refinanced $9.5 million of mortgage debt on its Gramercy Hill
community with Freddie Mac. As part of the refinancing, the Company received approximately $2.1
million in cash proceeds, net of closing costs. The new mortgage loan has a ten-year term with a
one-year extension available at the Companys option, interest fixed at 5.75% and requires interest
only payments in the first two years with principal amortized thereafter over a 25-year term. The
Company incurred $0.2 million in deferred financing costs related to this loan, which is being
amortized over ten years. In addition, as part of this refinancing, the Company wrote-off $13,000
in deferred loan costs and paid $0.2 million in loan exit fees to the prior lender. The loan exit
fees are a component of write-off of deferred loan costs in the accompanying statement of
operations.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Companys primary market risk is exposure to changes in interest rates on debt and lease
instruments. As of March 31, 2008, the Company had $192.5 million in outstanding debt comprised
solely of fixed rate debt instruments. In addition, as of March 31, 2008, the Company had $218.4
million in future lease obligations with contingent rent increases based on changes in the consumer
price index.
Changes in interest rates would affect the fair market value of the Companys fixed rate debt
instruments but would not have an impact on the Companys earnings or cash flows. Increase in the
consumer price index could have an effect on future facility lease expense if the leased community
exceeds the contingent rent escalation thresholds set forth in each of the Companys lease
agreements.
Interest Rate Cap, Lock and Swap Agreements
Effective January 31, 2005, the Company entered into an interest rate cap agreement with a
commercial bank to reduce the impact of increases in interest rates on the Companys variable rate
loans. The interest rate cap agreement effectively limited the interest rate exposure on the
notional amount to a maximum LIBOR of 5%, as long as one-month LIBOR is less than 7%. If one-month
LIBOR is greater than 7%, the agreement effectively limited the interest rate on the same notional
amount to a maximum LIBOR of 7%. This interest rate cap agreement had a notional amount of $33
million and was sold in May 2007, resulting in net proceeds of $0.1 million and a gain on sale of
approximately $28,000. During the three months ended March 31, 2007, the Company received $28,000
under the terms of this interest rate cap agreement and recorded the amount received as a reduction
in interest expense. The cost of this agreement was being amortized to interest expense over the
life of the agreement.
Item 4. CONTROLS AND PROCEDURES.
Effectiveness of Controls and Procedures
The Companys management, with the participation of the Companys Chief Executive Officer (CEO)
and Chief Financial Officer (CFO), has evaluated the effectiveness of the Companys disclosure
controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the Exchange Act)) as of the end of the period
covered by this report. The Companys disclosure controls and procedures are designed to ensure
that information required to be disclosed by the Company in the reports that it files or submits
under the Exchange Act is recorded, processed, summarized and reported within the time periods
specified in the SECs rules and forms. The Companys disclosure controls and procedures are also
designed to ensure that such information is accumulated and communicated to the Companys
management, including the CEO and CFO, as appropriate to allow timely decisions regarding required
disclosure.
Based upon the controls evaluation, the Companys CEO and CFO have concluded that, as of the end of
the period covered by this report, the Companys disclosure controls and procedures are effective.
19
There have not been any changes in the Companys 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 Companys
fiscal quarter ended March 31, 2008 that have materially affected, or are reasonably likely to
materially affect, the Companys internal control over financial reporting.
Part II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.
The Company has claims incurred in the normal course of its business. Most of these claims are
believed by management to be covered by insurance, subject to normal reservations of rights by the
insurance companies and possibly subject to certain exclusions in the applicable insurance
policies. Whether or not covered by insurance, these claims, in the opinion of management, based on
advice of legal counsel, should not have a material effect on the consolidated financial statements
of the Company if determined adversely to the Company.
Item 1A. RISK FACTORS.
Our business involves various risks. When evaluating our business the following information should
be carefully considered in conjunction with the other information contained in our periodic filings
with the SEC. Additional risks and uncertainties not known to us currently or that currently we
deem to be immaterial also may impair our business operations. If we are unable to prevent events
that have a negative effect from occurring, then our business may suffer. Negative events are
likely to decrease our revenue, increase our costs, make our financial results poorer and/or
decrease our financial strength, and may cause our stock price to decline.
We have significant debt and our failure to generate cash flow sufficient to cover required
interest and principal payments could result in defaults of the related debt.
As of March 31, 2008, we had mortgage and other indebtedness totaling approximately $192.5 million.
We cannot assure you that we will generate cash flow from operations or receive proceeds from
refinancings, other financings or the sales of assets sufficient to cover required interest and
principal payments. Any payment or other default could cause the applicable lender to foreclose
upon the communities securing the indebtedness with a consequent loss of income and asset value to
us. Further, because some of our mortgages contain cross-default and cross-collateralization
provisions, a payment or other default by us with respect to one community could affect a
significant number of our other communities.
We have significant operating lease obligations and our failure to generate cash flows sufficient
to cover these lease obligations could result in defaults under the lease agreements.
As of March 31, 2008, we leased 25 communities with future lease obligations totaling approximately
$218.4 million, with minimum lease obligations of $27.4 million in fiscal 2008. We cannot assure
you that we will generate cash flow from operations or receive proceeds from refinancings, other
financings or the sales of assets sufficient to cover these required operating lease obligations.
Any payment or other default under any such lease could result in the termination of the lease,
with a consequent loss of income and asset value to us. Further, because our leases contain
cross-default provisions, a payment or other default by us with respect to one leased community
could affect all of our other leased communities with related lessors. Certain of our leases
contain various financial and other restrictive covenants, which could limit our flexibility in
operating our business. Failure to maintain compliance with the lease obligations as set forth in
our lease agreements could have a material adverse impact us.
Our failure to comply with financial covenants and other restrictions contained in debt instruments
and lease agreements could result in the acceleration of the related debt or lease.
There are various financial covenants and other restrictions in certain of our debt instruments and
lease agreements, including provisions which:
|
|
|
require us to meet specified financial tests at the subsidiary company level, which
include, but are not limited to, tangible net worth requirements; |
|
|
|
|
require us to meet specified financial tests at the community level, which include, but
are not limited to, occupancy requirements and lease coverage tests; and |
20
|
|
|
require consent for changes in control of us. |
If we fail to comply with any of these requirements, then the related indebtedness or lease
obligations could become due and payable prior to their stated dates. We cannot assure that we
could pay these debt or lease obligations if they became due.
We will require additional financing and/or refinancings in the future and may issue equity
securities.
Our ability to obtain such financing or refinancing on terms acceptable to us could have a material
adverse effect on our business, financial condition and results of operations. Our ability to meet
our long-term capital requirements, including the repayment of certain long-term debt obligations,
will depend, in part, on our ability to obtain additional financing or refinancings on acceptable
terms from available financing sources, including through the use of mortgage financing, joint
venture arrangements, by accessing the debt and/or equity markets and possibly through operating
leases or other types of financing, such as lines of credit. There can be no assurance that
financing or refinancings will be available or that, if available, will be on terms acceptable to
us. Moreover, raising additional funds through the issuance of equity securities could cause
existing stockholders to experience dilution and could adversely affect the market price of our
common stock. Our inability to obtain additional financing or refinancings on terms acceptable to
us could delay or eliminate some or all of our growth plans, necessitate the sales of assets at
unfavorable prices or both, and would have a material adverse effect on our business, financial
condition and results of operations.
Any future floating rate debt and lease obligations could expose us to rising interest rates.
Future indebtedness and lease obligations, if applicable, may be based on floating interest rates
prevailing from time to time. Therefore, increases in prevailing interest rates would increase in
the future our interest or lease payment obligations and could in the future have a material
adverse effect on our business, financial condition and results of operations.
We cannot assure that we will be able to effectively manage our growth.
We intend to expand our operations, directly or indirectly, through the acquisition of existing
senior living communities, the expansion of some of our existing senior living communities, the
development of new senior living communities and/or through an increase in the number of
communities which we manage under management agreements. The success of our growth strategy will
depend, in large part, on our ability to implement these plans and to effectively operate these
communities. If we are unable to manage our growth effectively, our business, results of operations
and financial condition may be adversely affected.
We cannot assure that we will be able to acquire additional senior living communities, develop new
senior living communities or expand existing senior living communities.
The acquisition of existing communities or other businesses involves a number of risks. Existing
communities available for acquisition frequently serve or target different markets than those
presently served by us. We may also determine that renovations of acquired communities and changes
in staff and operating management personnel are necessary to successfully integrate those
communities or businesses into our existing operations. The costs incurred to reposition or
renovate newly acquired communities may not be recovered by us. In undertaking acquisitions, we
also may be adversely impacted by unforeseen liabilities attributable to the prior operators of
those communities or businesses, against whom we may have little or no recourse. The success of our
acquisition strategy will be determined by numerous factors, including our ability to identify
suitable acquisition candidates; the competition for those acquisitions; the purchase price; the
requirement to make operational or structural changes and improvements; the financial performance
of the communities or businesses after acquisition; our ability to finance the acquisitions; and
our ability to integrate effectively any acquired communities or businesses into our management,
information, and operating systems. We cannot assure that our acquisition of senior living
communities or other businesses will be completed at the rate currently expected, if at all, or if
completed, that any acquired communities or businesses will be successfully integrated into our
operations.
Our ability to successfully develop new senior living communities or expand existing senior living
communities will depend on a number of factors, including, but not limited to, our ability to
acquire suitable sites at reasonable prices; our success in obtaining necessary zoning, licensing,
and other required governmental permits and authorizations; and our ability to control construction
costs and accurately project completion schedules. Additionally, we anticipate that the development
of new senior living communities or the expansion of existing senior living communities may involve
a substantial commitment of capital for a period of time of two years or more until the new senior
living communities or expansions are operating and producing revenue, the consequence of which
could be an adverse impact on our liquidity. We cannot assure that our developments or expansion of
existing senior living communities will be completed at the rate currently expected, if at all, or
if completed, that such developments or expansions will be profitable.
21
Termination of resident agreements and resident attrition could affect adversely our revenues and
earnings.
State regulations governing assisted living facilities require written resident agreements with
each resident. Most of these regulations also require that each resident have the right to
terminate the resident agreement for any reason on reasonable notice. Consistent with these
regulations, the resident agreements signed by us allow residents to terminate their agreement on
30 days notice. Thus, we cannot contract with residents to stay for longer periods of time, unlike
typical apartment leasing arrangements that involve lease agreements with specified leasing periods
of up to a year or longer. If a large number of residents elected to terminate their resident
agreements at or around the same time, then our revenues and earnings could be adversely affected.
In addition, the advanced age of our average resident means that the resident turnover rate in our
senior living facilities may be difficult to predict.
We largely rely on private pay residents and circumstances that adversely affect the ability of the
elderly to pay for our services could have a material adverse effect on us.
Approximately 95% of our total revenues from communities that we operated were attributable to
private pay sources and approximately 5% of our revenues from these communities were attributable
to reimbursements from Medicare and Medicaid during fiscal 2007. We expect to continue to rely
primarily on the ability of residents to pay for our services from their own or familial financial
resources. Inflation or other circumstances that adversely affect the ability of the elderly to pay
for our services could have a material adverse effect on our business, financial condition and
results of operations.
We are subject to risks related to third-party management agreements.
At March 31, 2008, we managed two senior living communities for third parties and 12 senior living
communities for joint ventures in which we have a minority interest pursuant to multi-year
management agreements. The management agreements generally have initial terms of five years,
subject to certain renewal rights. Under these agreements we provide management services to third
party and joint venture owners to operate senior living communities and have provided, and may in
the future provide, management and consulting services to third parties on market and site
selection, pre-opening sales and marketing, start-up training and management services for
facilities under development and construction. In most cases, either party to the agreements may
terminate them upon the occurrence of an event of default caused by the other party. In addition,
subject to our rights to cure deficiencies, community owners may terminate us as manager if any
licenses or certificates necessary for operation are revoked, or if we have a change of control.
Also, in some instances, a community owner may terminate the management agreement relating to a
particular community if we are in default under other management agreements relating to other
communities owned by the same community owner or its affiliates. In addition, in certain cases the
community owner may terminate the agreement upon 30 days notice to us in the event of a sale of
the community. In those agreements, which are terminable in the event of a sale of the community,
we have certain rights to offer to purchase the community. The termination of a significant portion
of our management agreements could have a material adverse effect on our business, financial
condition and results of operations.
Failure to perform our obligations under our joint venture arrangements could have a material
adverse effect on us.
We hold minority interests ranging from approximately 5% to 15% in several joint ventures with
affiliates of Prudential and GE Healthcare. We also manage the communities owned by these joint
ventures. Under the terms of the joint venture agreements with Prudential covering four properties,
we are obligated to meet certain cash flow targets and failure to meet these cash flow targets
could result in termination of the management agreements. Under the terms of the joint venture
agreements with GE Healthcare covering eight properties, we are obligated to meet certain net
operating income targets and failure to meet these net operating income targets could result in
termination of the management agreements.
We are currently developing three communities in three separate joints ventures with affiliates of
Prudential. As part of development agreements, we are obligated to meet certain completion and
costs guarantees. We will provide pre-opening marketing services for each of the communities and
upon completion we will manage the three communities owned by the joint ventures. Under the terms
of the joint venture agreements with Prudential covering the three communities, we will be
obligated to meet certain cash flow targets and failure to meet these cash flow targets could
result in termination of the management agreements.
All of the management agreements with the joint ventures contain termination and renewal
provisions. We do not control these joint venture decisions covering termination or renewal.
Performance of the above obligations or termination or non-renewal of the management agreements
could have a material adverse effect on our business, financial condition and results of
operations.
22
The senior living services industry is very competitive and some competitors may have substantially
greater financial resources than us.
The senior living services industry is highly competitive, and we expect that all segments of the
industry will become increasingly competitive in the future. We compete with other companies
providing independent living, assisted living, skilled nursing, home health care and other similar
services and care alternatives. We also compete with other health care businesses with respect to
attracting and retaining nurses, technicians, aides and other high quality professional and
non-professional employees and managers. Although we believe there is a need for senior living
communities in the markets where we operate residences, we expect that competition will increase
from existing competitors and new market entrants, some of whom may have substantially greater
financial resources than us. In addition, some of our competitors operate on a not-for-profit basis
or as charitable organizations and have the ability to finance capital expenditures on a tax-exempt
basis or through the receipt of charitable contributions, neither of which are available to us.
Furthermore, if the development of new senior living communities outpaces the demand for those
communities in the markets in which we have senior living communities, those markets may become
saturated. Regulation in the independent and assisted living industry, which represents a
substantial portion of our senior living services, is not substantial. Consequently, development of
new senior living communities could outpace demand. An oversupply of those communities in our
markets could cause us to experience decreased occupancy, reduced operating margins and lower
profitability.
We rely on the services of key executive officers and the loss of these officers or their services
could have a material adverse effect on us.
We depend on the services of our executive officers for our management. The loss of some of our
executive officers and the inability to attract and retain qualified management personnel could
affect our ability to manage our business and could adversely affect our business, financial
condition and results of operations.
A significant increase in our labor costs could have a material adverse effect on us.
We compete with other providers of senior living services with respect to attracting and retaining
qualified management personnel responsible for the day-to-day operations of each of our communities
and skilled personnel responsible for providing resident care. A shortage of nurses or trained
personnel may require us to enhance our wage and benefits package in order to compete in the hiring
and retention of these personnel or to hire more expensive temporary personnel. We also will be
dependent on the available labor pool of semi-skilled and unskilled employees in each of the
markets in which we operate. No assurance can be given that our labor costs will not increase, or
that, if they do increase, they can be matched by corresponding increases in rates charged to
residents. Any significant failure by us to control our labor costs or to pass on any increased
labor costs to residents through rate increases could have a material adverse effect on our
business, financial condition and results of operations.
There is an inherent risk of liability in the provision of personal and health care services, not
all of which may be covered by insurance.
The provision of personal and health care services in the long-term care industry entails an
inherent risk of liability. In recent years, participants in the long-term care industry have
become subject to an increasing number of lawsuits alleging negligence or related legal theories,
many of which involve large claims and result in the incurrence of significant defense costs.
Moreover, senior living communities offer residents a greater degree of independence in their daily
living. This increased level of independence may subject the resident and, therefore, us to risks
that would be reduced in more institutionalized settings. We currently maintain insurance in
amounts we believe are comparable to those maintained by other senior living companies based on the
nature of the risks, our historical experience and industry standards, and we believe that this
insurance coverage is adequate. However, we may become subject to claims in excess of our insurance
or claims not covered by our insurance, such as claims for punitive damages, terrorism and natural
disasters. A claim against us not covered by, or in excess of, our insurance could have a material
adverse effect upon us.
In addition, our insurance policies must be renewed annually. Based upon poor loss experience,
insurers for the long-term care industry have become increasingly wary of liability exposure. A
number of insurance carriers have stopped writing coverage to this market, and those remaining have
increased premiums and deductibles substantially. Therefore, we cannot assure that we will be able
to obtain liability insurance in the future or that, if that insurance is available, it will be
available on acceptable economic terms.
23
We are subject to government regulations and compliance, some of which are burdensome and some of
which may change to our detriment in the future.
Federal and state governments regulate various aspects of our business. The development and
operation of senior living communities and the provision of health care services are subject to
federal, state and local licensure, certification and inspection laws that regulate, among other
matters, the number of licensed beds, the provision of services, the distribution of
pharmaceuticals, billing practices and policies, equipment, staffing (including professional
licensing), operating policies and procedures, fire prevention measures, environmental matters and
compliance with building and safety codes. Failure to comply with these laws and regulations could
result in the denial of reimbursement, the imposition of fines, temporary suspension of admission
of new residents, suspension or decertification from the Medicare program, restrictions on the
ability to acquire new communities or expand existing communities and, in extreme cases, the
revocation of a communitys license or closure of a community. We believe that such regulation will
increase in the future and we are unable to predict the content of new regulations or their effect
on our business, any of which could materially adversely affect us.
Various states, including several of the states in which we currently operate, control the supply
of licensed skilled nursing beds, assisted living communities and home health care agencies through
CON or other programs. In those states, approval is required for the construction of new health
care communities, the addition of licensed beds and some capital expenditures at those communities,
as well as the opening of a home health care agency. To the extent that a CON or other similar
approval is required for the acquisition or construction of new communities, the expansion of the
number of licensed beds, services, or existing communities, or the opening of a home health care
agency, we could be adversely affected by our failure or inability to obtain that approval, changes
in the standards applicable for that approval, and possible delays and expenses associated with
obtaining that approval. In addition, in most states, the reduction of the number of licensed beds
or the closure of a community requires the approval of the appropriate state regulatory agency and,
if we were to seek to reduce the number of licensed beds at, or to close, a community, we could be
adversely affected by a failure to obtain or a delay in obtaining that approval.
Federal and state anti-remuneration laws, such as anti-kickback laws, govern some financial
arrangements among health care providers and others who may be in a position to refer or recommend
patients to those providers. These laws prohibit, among other things, some direct and indirect
payments that are intended to induce the referral of patients to, the arranging for services by, or
the recommending of, a particular provider of health care items or services. Federal anti-kickback
laws have been broadly interpreted to apply to some contractual relationships between health care
providers and sources of patient referral. Similar state laws vary, are sometimes vague, and seldom
have been interpreted by courts or regulatory agencies. Violation of these laws can result in loss
of licensure, civil and criminal penalties, and exclusion of health care providers or suppliers
from participation in Medicare and Medicaid programs. There can be no assurance that those laws
will be interpreted in a manner consistent with our practices.
Under the Americans with Disabilities Act of 1990, all places of public accommodation are required
to meet federal requirements related to access and use by disabled persons. A number of additional
federal, state and local laws exist that also may require modifications to existing and planned
communities to create access to the properties by disabled persons. Although we believe that our
communities are substantially in compliance with present requirements or are exempt therefrom, if
required changes involve a greater expenditure than anticipated or must be made on a more
accelerated basis than anticipated, additional costs would be incurred by us. Further legislation
may impose additional burdens or restrictions with respect to access by disabled persons, the costs
of compliance with which could be substantial.
The Health Insurance Portability and Accountability Act of 1996, in conjunction with the federal
regulations promulgated thereunder by the Department of Health and Human Services, has established,
among other requirements, standards governing the privacy of certain protected and individually
identifiable health information that is created, received or maintained by a range of covered
entities. HIPAA has also established standards governing uniform health care transactions, the
codes and identifiers to be used by the covered entities and standards governing the security of
certain electronic transactions conducted by covered entities. Penalties for violations can range
from civil money penalties for errors and negligent acts to criminal fines and imprisonment for
knowing and intentional misconduct. HIPAA is a complex set of regulations and many unanswered
questions remain with respect to the manner in which HIPAA applies to businesses such as those
operated by us.
We may be subject to liability for environmental damages.
Under various federal, state and local environmental laws, ordinances and regulations, a current or
previous owner or operator of real estate may be required to investigate and clean up hazardous or
toxic substances or petroleum product releases at the property, and may be held liable to a
governmental entity or to third parties for property damage and for investigation and clean up
costs incurred by
24
those parties in connection with the contamination. These laws typically impose clean-up
responsibility and liability without regard to whether the owner knew of or caused the presence of
the contaminants, and liability under these laws has been interpreted to be joint and several
unless the harm is divisible and there is a reasonable basis for allocation of responsibility. The
costs of investigation, remediation or removal of the substances may be substantial, and the
presence of the substances, or the failure to properly remediate the property, may adversely affect
the owners ability to sell or lease the property or to borrow using the property as collateral. In
addition, some environmental laws create a lien on the contaminated site in favor of the government
for damages and costs it incurs in connection with the contamination. Persons who arrange for the
disposal or treatment of hazardous or toxic substances also may be liable for the costs of removal
or remediation of the substances at the disposal or treatment facility, whether or not the facility
is owned or operated by the person. Finally, the owner of a site may be subject to common law
claims by third parties based on damages and costs resulting from environmental contamination
emanating from a site. If we become subject to any of these claims the costs involved could be
significant and could have a material adverse effect on our business, financial condition and
results of operations.
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
Item 6. EXHIBITS.
The exhibits to this Form 10-Q are listed on the Exhibit Index page hereof, which is incorporated
by reference in this Item 6.
25
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, 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 6, 2008
INDEX TO EXHIBITS
The following documents are filed as a part of this report. Those exhibits previously filed
and incorporated herein by reference are identified below. Exhibits not required for this report
have been omitted.
|
|
|
|
|
|
|
|
|
|
|
Exhibit |
|
|
|
|
|
|
Number |
|
|
|
Description |
|
|
|
3.1 |
|
|
|
|
Amended and Restated Certificate of Incorporation of the
Registrant. (Incorporated by reference to exhibit 3.1
to the Registration Statement No. 333-33379 on Form
S-1/A filed by the Company with the Securities and
Exchange Commission on September 8, 1997.) |
|
|
|
3.1.1 |
|
|
|
|
Amendment to Amended and Restated Certificate of
Incorporation of the Registrant. (Incorporated by
reference to exhibit 3.1 to the Companys Quarterly
Report on Form 10-Q for the quarterly period ended
September 30, 1999, filed by the Company with the
Securities and Exchange Commission.) |
|
|
|
3.2 |
|
|
|
|
Bylaws of the Registrant. (Incorporated by reference to
exhibit 3.2 to the Registration Statement No. 333-33379
on Form S-1/A filed by the Company with the Securities
and Exchange Commission on September 8, 1997.) |
|
|
|
3.2.2 |
|
|
|
|
Amended and Restated Bylaws of the Registrant.
(Incorporated by reference to exhibit 3.2 to the
Companys Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1999, filed by the
Company with the Securities and Exchange Commission.) |
|
|
|
3.2.3 |
|
|
|
|
Amendment No. 2 to the Amended and Restated Bylaws of
the Registrant. (Incorporated by reference to exhibit
3.2.2 to the Companys Annual Report on Form 10-K for
the year period ended December 31, 2002, filed by the
Company with the Securities and Exchange Commission.) |
|
|
|
4.1 |
|
|
|
|
Rights Agreement, dated as of March 9, 2000, between
Capital Senior Living Corporation and ChaseMellon
Shareholder Services, L.L.C., which includes the form
of Certificate of Designation of Series A Junior
Participating Preferred Stock, $.01 par value, as
Exhibit A, the form of Right Certificate as Exhibit B,
and the Summary of Rights as Exhibit C. (Incorporated
by reference to exhibit 4.1 to the Companys Current
Report on Form 8-K filed by the Company with the
Securities and Exchange Commission on March 20, 2000.) |
|
|
|
4.2 |
|
|
|
|
Form of Certificate of Designation of Series A Junior
Participating Preferred Stock, $.01 par value.
(Incorporated by reference to exhibit 4.1 to the
Companys Current Report on Form 8-K filed by the
Company with the Securities and Exchange Commission on
March 20, 2000.) |
|
|
|
4.3 |
|
|
|
|
Form of Right Certificate. (Incorporated by reference
to exhibit 4.1 to the Companys Current Report on Form
8-K filed by the Company with the Securities and
Exchange Commission on March 20, 2000.) |
|
|
|
4.4 |
|
|
|
|
Form of Summary of Rights. (Incorporated by reference
to exhibit 4.1 to the Companys Current Report on Form
8-K filed by the Company with the Securities and
Exchange Commission on March 20, 2000.) |
|
|
|
4.5 |
|
|
|
|
Specimen of legend to be placed, pursuant to Section
3(c) of the Rights Agreement, on all new Common Stock
certificates issued after March 20, 2000 and prior to
the Distribution Date upon transfer, exchange or new
issuance. (Incorporated by reference to exhibit 4.1 to
the Companys Current Report on Form 8-K filed by the
Company with the Securities and Exchange Commission on
March 20, 2000.) |
|
|
|
4.6 |
|
|
|
|
2007 Omnibus Stock and Incentive Plan for Capital
Senior Living Corporation. (Incorporated by reference
to exhibit 4.6 to the Companys Current Report on Form
8-K filed by the Company with the Securities and
Exchange Commission on May 31, 2007.) |
27
|
|
|
|
|
|
|
|
|
|
|
Exhibit |
|
|
|
|
|
|
Number |
|
|
|
Description |
|
|
|
4.7 |
|
|
|
|
First Amendment to 2007 Omnibus Stock and Incentive
Plan for Capital Senior Living Corporation.
(Incorporated by reference to exhibit 4.7 to the
Companys Current Report on Form 8-K filed by the
Company with the Securities and Exchange Commission on
May 31, 2007.) |
|
|
|
10.1 |
|
|
|
|
Settlement Agreement, dated March 19, 2008, by and
among Capital Senior Living Corporation, West Creek
Capital LLC, Harvey Hanerfeld and Roger Feldman.
(Incorporated by reference to the Exhibit 10.1 to the
Companys Current Report on Form 8-K filed by the
Company with the Securities and Exchange Commission on
March 26, 2008.) |
|
|
|
10.2 |
|
|
|
|
Settlement Agreement, dated March 19, 2008, by and
among Capital Senior Living Corporation, Boston Avenue
Capital, LLC, York town Avenue Capital, LLC, Stephen J.
Heyman, and James F. Adelson (Incorporated by reference
to the Exhibit 10.1 to the Companys Current Report on
Form 8-K filed by the Company with the Securities and
Exchange Commission on March 26, 2008.). |
|
|
|
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. |
28