e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2010
OR
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o |
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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)
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Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
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75-2678809
(I.R.S. Employer
Identification No.) |
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14160 Dallas Parkway, Suite 300, Dallas, Texas
(Address of Principal Executive Offices)
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75254
(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 has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T
during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes
o 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):
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o
(Do not check if a smaller reporting company)
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Smaller reporting company o |
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 November 1, 2010, the Registrant had 27,080,429 outstanding shares of its Common Stock, $0.01
par value, per share.
CAPITAL SENIOR LIVING CORPORATION
INDEX
2
Part I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
CAPITAL SENIOR LIVING CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands)
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September 30, |
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December 31, |
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2010 |
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2009 |
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(unaudited) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
33,055 |
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$ |
28,972 |
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Restricted cash |
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6,327 |
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2,167 |
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Accounts receivable, net |
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4,029 |
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3,340 |
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Accounts receivable from affiliates |
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346 |
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424 |
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Federal and state income taxes receivable |
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3,242 |
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1,493 |
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Deferred taxes |
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1,147 |
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1,208 |
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Assets held for sale |
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354 |
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354 |
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Property tax and insurance deposits |
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10,128 |
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8,632 |
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Prepaid expenses and other |
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3,830 |
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4,010 |
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Total current assets |
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62,458 |
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50,600 |
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Property and equipment, net |
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296,561 |
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300,678 |
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Deferred taxes |
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4,262 |
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7,781 |
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Investments in joint ventures |
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2,611 |
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6,536 |
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Other assets, net |
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18,900 |
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14,908 |
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Total assets |
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$ |
384,792 |
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$ |
380,503 |
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LIABILITIES AND SHAREHOLDERS EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
1,528 |
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$ |
2,037 |
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Accounts payable to affiliates |
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2 |
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Accrued expenses |
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17,521 |
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12,287 |
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Current portion of notes payable |
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6,564 |
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9,347 |
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Current portion of deferred income |
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7,197 |
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6,838 |
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Current portion of capital lease obligations |
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141 |
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Customer deposits |
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1,388 |
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1,295 |
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Total current liabilities |
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34,341 |
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31,804 |
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Deferred income |
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15,340 |
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16,747 |
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Capital lease obligations, net of current portion |
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99 |
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Other long-term liabilities |
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1,992 |
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Notes payable, net of current portion |
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171,041 |
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173,822 |
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Commitments and contingencies |
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Shareholders equity: |
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Preferred stock, $.01 par value: |
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Authorized shares 15,000; no shares issued or outstanding |
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Common stock, $.01 par value: |
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Authorized shares 65,000; issued and outstanding
shares 27,080 and 26,945 in 2010 and 2009, respectively |
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274 |
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273 |
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Additional paid-in capital |
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132,760 |
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131,576 |
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Retained earnings |
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29,879 |
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27,215 |
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Treasury stock, at cost 350 shares |
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(934 |
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(934 |
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Total shareholders equity |
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161,979 |
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158,130 |
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Total liabilities and shareholders equity |
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$ |
384,792 |
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$ |
380,503 |
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See accompanying notes to consolidated financial statements.
3
CAPITAL SENIOR LIVING CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(unaudited, in thousands, except per share data)
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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2010 |
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2009 |
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2010 |
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2009 |
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Revenues: |
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Resident and health care revenue |
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$ |
50,451 |
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$ |
42,801 |
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$ |
140,253 |
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$ |
127,950 |
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Unaffiliated management services revenue |
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18 |
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18 |
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54 |
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54 |
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Affiliated management services revenue |
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418 |
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692 |
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1,625 |
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1,992 |
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Community reimbursement revenue |
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2,713 |
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4,603 |
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10,089 |
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13,298 |
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Total revenues |
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53,600 |
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48,114 |
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152,021 |
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143,294 |
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Expenses: |
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Operating expenses (exclusive of facility
lease expense and depreciation and
amortization expense shown below) |
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31,209 |
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26,718 |
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85,904 |
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78,707 |
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General and administrative expenses |
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3,246 |
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2,456 |
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9,001 |
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8,820 |
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Facility lease expense |
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8,910 |
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6,502 |
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23,217 |
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19,441 |
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Stock-based compensation expense |
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226 |
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282 |
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783 |
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902 |
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Depreciation and amortization |
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3,536 |
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3,334 |
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10,487 |
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9,862 |
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Community reimbursement expense |
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2,713 |
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4,603 |
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10,089 |
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13,298 |
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Total expenses |
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49,840 |
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43,895 |
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139,481 |
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131,030 |
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Income from operations |
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3,760 |
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4,219 |
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12,540 |
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12,264 |
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Other income (expense): |
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Interest income |
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13 |
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18 |
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32 |
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56 |
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Interest expense |
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(2,815 |
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(2,967 |
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(8,440 |
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(8,871 |
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Gain on settlement of debt |
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684 |
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Other income |
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(9 |
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(14 |
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8 |
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59 |
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Income before provision for income taxes |
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949 |
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1,256 |
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4,824 |
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3,508 |
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Provision for income taxes |
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(468 |
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(506 |
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(2,160 |
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(1,509 |
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Net income |
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$ |
481 |
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$ |
750 |
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$ |
2,664 |
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$ |
1,999 |
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Per share data: |
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Basic net income per share |
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$ |
0.02 |
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$ |
0.03 |
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$ |
0.10 |
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$ |
0.07 |
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Diluted net income per share |
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$ |
0.02 |
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$ |
0.03 |
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$ |
0.10 |
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$ |
0.07 |
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Weighted average shares outstanding basic |
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26,607 |
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26,222 |
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26,574 |
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26,251 |
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Weighted average shares outstanding diluted |
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26,703 |
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26,351 |
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26,671 |
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26,339 |
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See accompanying notes to consolidated financial statements.
4
CAPITAL SENIOR LIVING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
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Nine Months Ended |
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September 30, |
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2010 |
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2009 |
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Operating Activities |
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Net income |
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$ |
2,664 |
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$ |
1,999 |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation |
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10,487 |
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9,851 |
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Amortization |
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11 |
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Amortization of deferred financing charges |
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248 |
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253 |
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Amortization of deferred lease costs, net |
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422 |
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277 |
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Deferred income |
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(2,232 |
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(2,174 |
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Deferred income taxes |
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3,580 |
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1,133 |
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Equity in the earnings of unconsolidated joint ventures |
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(8 |
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(59 |
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Gain on settlement of debt |
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(684 |
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Provision for bad debts |
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139 |
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257 |
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Stock based compensation expense |
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783 |
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902 |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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(828 |
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(897 |
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Accounts receivable from affiliates |
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78 |
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631 |
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Property tax and insurance deposits |
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(1,653 |
) |
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742 |
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Prepaid expenses and other |
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135 |
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2,532 |
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Other assets |
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(2,719 |
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(489 |
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Accounts payable |
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(507 |
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(61 |
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Accrued expenses |
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5,234 |
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(129 |
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Federal and state income taxes receivable |
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(1,749 |
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1,899 |
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Customer deposits |
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93 |
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(206 |
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Net cash provided by operating activities |
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13,483 |
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16,472 |
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Investing Activities |
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Capital expenditures |
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(6,370 |
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(6,343 |
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Acquisition of Signature Transaction |
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(2,000 |
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Distributions from joint ventures |
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5,117 |
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606 |
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Net cash used in investing activities |
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(3,253 |
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(5,737 |
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Financing Activities |
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Increase in restricted cash |
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(4,160 |
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(2,165 |
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Proceeds from notes payable |
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3,591 |
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1,459 |
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Lease incentive from Signature Transaction |
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2,000 |
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Repayments of notes payable |
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(8,220 |
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(6,563 |
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Increase in capital lease obligations |
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240 |
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Cash proceeds from the issuance of common stock |
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350 |
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5 |
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Excess tax benefits on stock options exercised |
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52 |
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Purchases of treasury stock |
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(934 |
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Net cash used in financing activities |
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(6,147 |
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(8,198 |
) |
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Increase in cash and cash equivalents |
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4,083 |
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2,537 |
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Cash and cash equivalents at beginning of period |
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28,972 |
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25,880 |
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Cash and cash equivalents at end of period |
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$ |
33,055 |
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$ |
28,417 |
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Supplemental Disclosures |
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Cash paid during the period for: |
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Interest |
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$ |
8,261 |
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$ |
8,639 |
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Income taxes |
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$ |
1,094 |
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$ |
459 |
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See accompanying notes to consolidated financial statements.
5
CAPITAL SENIOR LIVING CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010
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 September 30, 2010, the Company operated 78 senior
living communities in 23 states with an aggregate capacity of approximately 11,000 residents,
including 32 senior living communities which the Company either owned or in which the Company had
an ownership interest, 45 senior living communities that the Company leased and one senior living
community it managed for a third party. As of September 30, 2010, 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, 2009, has been derived from audited
consolidated financial statements of the Company for the year ended December 31, 2009, and the
accompanying unaudited consolidated financial statements, as of September 30, 2010 and 2009, have
been prepared pursuant to the rules and regulations of the Securities and Exchange Commission
(SEC). 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,
2009 included in the Companys Annual Report on Form 10-K filed with the SEC on March 11, 2010.
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 September 30, 2010, results of operations for the three and nine months
ended September 30, 2010 and 2009, respectively, and cash flows for the nine months ended September
30, 2010 and 2009. The results of operations for the nine months ended September 30, 2010 are not
necessarily indicative of the results for the year ending December 31, 2010.
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 owns member interests in seven 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 have substantive kick-out rights or substantive participating rights.
Under the equity method of accounting, the Company records its investments in joint ventures at
cost and adjusts such investments for its share of earnings and losses of the joint ventures.
Development Guarantees
The Company, on three joint venture developments, has guaranteed that the communities will be
completed and operated 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 breakeven.
The budgeted costs include contingency reserves for potential cost overruns and other unforeseen
costs. 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. These
joint ventures are currently in lease up and one of the joint ventures has exhausted all of its
reserves under the existing loan commitment at September 30, 2010. The Company will be required to
fund these deficits until the joint venture reaches breakeven for three consecutive months. Any
amounts funded by the Company under this commitment, up to $0.5 million, may be recoverable from
the joint venture in the event of liquidation. At September 30,
6
2010, the Company has not been required to fund any amounts to the joint ventures. The Company does
not currently anticipate funding any deficits in excess of the amounts estimated to be recoverable
from the joint ventures.
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 September 30, 2010.
The Company currently estimates that the parcel of land held for sale in Fort Wayne, Indiana, has
an aggregate fair value, net of costs of disposal, that exceeds its carrying value of $0.4 million
at September 30, 2010. The amount that the Company will ultimately realize on the parcel of land
could differ materially from this estimate.
Lease Accounting
The Company determines whether to account for its leases as either operating, capital or financing
leases depending on the underlying terms of each 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 September 30, 2010, the Company
leased 45 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 respective lease agreement.
The Companys lease obligations are subject to contingent rent increases based on changes in the
consumer price index or certain operational performance measures. Certain leases entered into by
the Company qualified as sale/leaseback transactions and as such any related gains have been
deferred and are being amortized over the respective lease term.
Facility lease expense in the Companys statement of income includes rent expense plus amortization
expense relating to leasehold acquisition costs offset by the amortization of deferred gains and
lease incentives.
There are various financial covenants and other restrictions in our lease agreements. Under the
terms of certain lease agreements, the Company was required to pay additional cash collateral of
approximately $0.2 million and $0.7 million during the three and nine month periods ended September
30, 2010, respectively. No additional cash collateral was required to be paid by the Company during
the three and nine month periods ended September 30, 2009. Once the Company reaches certain
performance targets, the additional cash collateral paid is returnable to the Company. The Company
was in compliance with all of its lease covenants at September 30, 2010.
Income Taxes
At September 30, 2010, the Company had recorded on its consolidated balance sheet deferred tax
assets of approximately $5.4 million. 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. 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 the evaluation, management has evaluated future
expectations of net income and various tax planning strategies that it believes are both prudent
and feasible, including various strategies to utilize net built-in gains on the Companys
appreciated assets. However, the benefits of the net deferred tax assets might not be realized if
actual results differ from expectations. The Company believes based upon this analysis that the
realization of the net deferred tax assets is reasonably assured and therefore has not provided for
a valuation allowance.
The Company evaluates uncertain tax positions through consideration of accounting and reporting
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 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. 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 2006.
7
Net Income Per Share
Basic net income per common share is computed by dividing net income remaining after allocation to
unvested restricted shares by
the weighted average number of common shares outstanding for the period. Except when the effect
would be anti-dilutive, the
calculation of diluted net income per common share includes the net impact of unvested restricted
shares and shares that could be
issued under outstanding stock options.
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 |
|
|
Nine months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Net income |
|
$ |
481 |
|
|
|
750 |
|
|
$ |
2,664 |
|
|
$ |
1,999 |
|
Net income allocated to unvested restricted shares |
|
|
(8 |
) |
|
|
(18 |
) |
|
|
(47 |
) |
|
|
(48 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Undistributed net income allocated to common shares |
|
$ |
473 |
|
|
$ |
732 |
|
|
$ |
2,617 |
|
|
$ |
1,951 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding basic |
|
|
26,607 |
|
|
|
26,222 |
|
|
|
26,574 |
|
|
|
26,251 |
|
Effects of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee equity compensation plans |
|
|
96 |
|
|
|
129 |
|
|
|
97 |
|
|
|
88 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding diluted |
|
|
26,703 |
|
|
|
26,351 |
|
|
|
26,671 |
|
|
|
26,339 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income per share |
|
$ |
0.02 |
|
|
$ |
0.03 |
|
|
$ |
0.10 |
|
|
$ |
0.07 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income per share |
|
$ |
0.02 |
|
|
$ |
0.03 |
|
|
$ |
0.10 |
|
|
$ |
0.07 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards of unvested restricted stock representing approximately 467,000 and 625,000 shares were
outstanding for the three months ended September 30, 2010 and 2009, respectively, and 469,000 and
644,000 shares were outstanding for the nine months ended September 30, 2010 and 2009,
respectively, and were included in the computation of undistributed net income allocated to common
shares.
Treasury Stock
The Company accounts for treasury stock under the cost method and includes treasury stock as a
component of stockholders equity.
New Accounting Guidance
Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 810-10
(formerly FASB Statement No. 167, Amendments to FASB Interpretation No. 46(R)) requires an
enterprise to perform an analysis to determine whether the enterprises variable interest or
interests give it a controlling financial interest in a variable interest entity. This analysis
identifies the primary beneficiary of a variable interest entity as the enterprise that has both
the power to direct the activities of a variable interest entity that most significantly impact the
entitys economic performance and the obligation to absorb losses of the entity that could
potentially be significant to the variable interest entity or the right to receive benefits from
the entity that could potentially be significant to the variable interest entity. This guidance
also requires ongoing reassessments of whether an enterprise is the primary beneficiary of a
variable interest entity and was effective for the Company on January 1, 2010. The adoption did not
have an impact on the Companys earnings or financial position.
3. TRANSACTIONS WITH AFFILIATES
SHPII/CSL
In November 2004, the Company and Senior Housing Partners II, LP (SHPII) formed four joint
ventures (collectively, SHPII/CSL) that own four senior living communities (the Spring Meadows
Communities). SHPII/CSL is owned 95% by SHPII, a fund managed by Prudential Real Estate Investors
(Prudential), and 5% by the Company. The Company has contributed $1.3 million for its interests
in SHPII/CSL. 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 and $0.2
million in each of the three and nine month periods ended September 30, 2010 and 2009,
respectively. In addition, the Company earned $0.3 million and $0.9 million in management fees on
the Spring Meadows Communities in each of the three and nine month periods ended September 30, 2010
and 2009, respectively.
8
SHPIII/CSL Miami
In May 2007, the Company and Senior Housing Partners III, LP (SHPIII) formed SHPIII/CSL Miami,
L.L.C. (SHPIII/CSL Miami) to develop a senior housing community in Miamisburg, Ohio. Under the
joint venture and related agreements, the Company earns development and management fees and may
receive incentive distributions. The senior housing community opened in August 2008. The Company
has contributed $0.8 million to SHPIII/CSL Miami for its 10% interest. The Company accounts for
its investment in SHPIII/CSL Miami under the equity method of accounting and the Company recognized
losses in the equity of SHPIII/CSL Miami of ($23,000) and ($48,000) during the three month periods
ended September 30, 2010 and 2009, respectively. The Company recognized losses in the equity of
SHPIII/CSL Miami of ($0.1) million in each of the nine month periods ended September 30, 2010. In
addition, the Company earned $37,500 and $0.1 million in management fees on the SHPIII/CSL Miami
community in each of the three and nine month periods ended September 30, 2010 and 2009,
respectively.
SHPIII/CSL Richmond Heights
In November 2007, the Company and SHPIII formed SHPIII/CSL Richmond Heights, L.L.C. (SHPIII/CSL
Richmond Heights) to develop a senior housing community in Richmond Heights, Ohio. Under the joint
venture and related agreements, the Company earns development and management fees and may receive
incentive distributions. The senior housing community opened in April 2009. The Company has
contributed $0.8 million to SHPIII/CSL Richmond Heights for its 10% interest. The Company accounts
for its investment in SHPIII/CSL Richmond Heights under the equity method of accounting and the
Company recognized losses in the equity of SHPIII/CSL Richmond Heights of ($18,800) and ($42,800)
during the three month periods ended September 30, 2010 and 2009, respectively. The Company
recognized losses in the equity of SHPIII/CSL Richmond Heights of ($0.1) million in each of the
nine month periods ended September 30, 2010 and 2009. In addition, the Company earned $37,500 and
$0.1 million in management fees on the SHPIII/CSL Richmond Heights community in each of the three
and nine month periods ended September 30, 2010 and 2009, respectively. Prior to opening SHPIII/CSL
Richmond Heights, the Company earned $12,500 in pre-marketing fees in fiscal 2009.
SHPIII/CSL Levis Commons
In December 2007, the Company and SHPIII formed SHPIII/CSL Levis Commons, L.L.C. (SHPIII/CSL Levis
Commons) to develop a senior housing community near Toledo, Ohio. Under the joint venture and
related agreements, the Company earns development and management fees and may receive incentive
distributions. The senior housing community opened in April 2009. The Company has contributed $0.8
million to SHPIII/CSL Levis Commons for its 10% interest. The Company accounts for its investment
in SHPIII/CSL Levis Commons under the equity method of accounting and the Company recognized losses
in the equity of SHPIII/CSL Levis Commons of ($25,700) and ($72,700) during the three month periods
ended September 30, 2010 and 2009, respectively. The Company recognized losses in the equity of
SHPIII/CSL Levis Commons of ($0.1) million in each of the nine month periods ended September 30,
2010 and 2009. In addition, the Company earned $37,500 and $0.1 million in management fees on the
SHPIII/CSL Levis Commons community in each of the three and nine month periods ended September 30,
2010 and 2009, respectively. Prior to opening SHPIII/CSL Levis Commons, the Company earned $12,500
in pre-marketing fees in fiscal 2009.
4. FACILITY LEASE TRANSACTIONS
Signature
Capital Senior Living Acquisition, LLC, a wholly owned subsidiary of the Company, entered into an
Asset Purchase Agreement, dated as of June 25, 2010 (the Asset Purchase Agreement), with
Signature Assisted Living of Texas, LLC (Signature) to acquire the leasehold interests in 12
senior housing communities and certain related personal property from Signature (the Signature
Transaction). On September 10, 2010, the Company completed the Signature Transaction pursuant to
the terms of the Asset Purchase Agreement for $25.8 million. Simultaneously with closing the
Signature Transaction, the Company executed a Master Lease Agreement with affiliates of Health Care
REIT, Inc. (HCN) for the 12 communities (the Master Lease Agreement) valued at $78.8 million.
The Master Lease Agreement has a term of 15 years with one 15-year renewal option beyond the
initial lease term. The initial lease rate is 8.5% and is subject to certain conditional escalation
clauses. The Company has accounted for this lease as an operating lease. The Asset Purchase
Agreement was funded by HCN with the intent to result in the same economic impact to the Company as
a $104.6 million lease at current market rates. The $25.8 million funding provided by HCN for the
transaction is non-recourse to the Company with identical terms as the Master Lease and includes a
lease incentive to act as an agent in acquiring and terminating the leasehold interests of
Signature. Therefore, a principal obligation has not been recorded by the Company within its
consolidated financial statements. As a result of this transaction, the Company recorded within its
consolidated Balance Sheet the assets acquired and retained, which will be amortized over their
respective useful lives and a corresponding lease incentive within
9
Other Long-Term Liabilities, the future benefit of which will be amortized over the initial lease
term as a reduction in Facility Lease Expense. The current estimate of the lease intangibles
acquired and retained and the corresponding lease incentive is $2.0 million and is subject to final
valuation adjustments. Additionally, the Company incurred $0.6 million in lease transaction costs
of which $0.4 million have been deferred and are being amortized within the Companys Statement of
Income over the initial 15-year lease term. The Master Lease Agreement is a triple net lease
pursuant to which the Company pays all expenses of the properties except principal and interest on
any mortgage debt of the properties. The Master Lease Agreement contains customary representations
and warranties as well as affirmative and negative covenants and the lease payments are guaranteed
by subsidiaries of the Company. The Company will file the financial statements required by Item
9.01 on Form 8-K by amendment to the Companys Current Report filed to report the Signature
Transaction on Form 8-K on September 16, 2010, no later than 71 days from the date on which this
report is required to be filed with the SEC.
5. DEBT TRANSACTIONS
Capital Leases
On September 10, 2010, in conjunction with the Signature Transaction described above, a
non-cancelable lease which expires in 2013 for ten 12-passenger Ford Minibuses that are used to
transport residents of the communities was transferred from Signature to the Company. The lease is
classified as a capital lease because it contains a bargain purchase option which resulted in the
Company recording a Capital Lease Obligation for $0.2 million.
Notes Payable
On September 10, 2010, the Company obtained certain insurance policies and entered into a finance
agreement totaling $0.2 million. The finance agreement has a fixed interest rate of 3.30% with
principal being repaid over a 7-month term.
On May 31, 2010, the Company renewed certain insurance policies and entered into a finance
agreement totaling $3.7 million. The finance agreement has a fixed interest rate of 3.30% with
principal being repaid over a 12-month term.
On April 15, 2010, the Company negotiated a pay-off settlement with a Lehman securitized trust for
a promissory note of one of the Companys wholly owned subsidiaries that matured on September 1,
2009. The securitized promissory note carried an outstanding principal balance of $4.6 million
which was collateralized with the assets of the subsidiary and was nonrecourse to the Company. The
pay-off settlement was for $3.7 million, excluding amounts reserved and escrowed, with no further
obligation to the Companys subsidiary and resulted in a gain to the Company of approximately $0.7
million.
On October 31, 2009, the Company renewed certain insurance policies and entered into a finance
agreement totaling $0.5 million. The finance agreement has a fixed interest rate of 3.66% with
principal being repaid over a 10-month term.
On May 31, 2009, the Company renewed certain insurance policies and entered into a finance
agreement totaling $1.6 million. The finance agreement has a fixed interest rate of 3.66% with
principal being repaid over a 10-month term.
The 25 senior housing communities owned by the Company and encumbered by mortgage debt are provided
as collateral under their respective loan agreements. At September 30, 2010, and December 31, 2009,
these communities carried a total net book value of $220.5 million and $224.9 million,
respectively, with total mortgage loans outstanding of $174.9 million and $182.3 million,
respectively.
The Company must maintain certain levels of tangible net worth and comply with other restrictive
covenants under the terms of certain promissory notes. The Company was in compliance with all of
its debt covenants at September 30, 2010 and December 31, 2009.
6. EQUITY
Preferred Stock
The Company is authorized to issue preferred stock in series and to fix and state the voting powers
and such designations, preferences and relative participating, optional or other special rights of
the shares of each such series and the qualifications, limitations and restrictions thereof. Such
action may be taken by the Board without stockholder approval. The rights, preferences and
privileges of
10
holders of common stock are subject to the rights of the holders of preferred stock. No
preferred stock was outstanding as of September 30, 2010 and 2009.
Share Repurchases
On January 22, 2009, the Companys board of directors approved a share repurchase program that
authorized the Company to purchase up to $10.0 million of the Companys common stock. Purchases
may be made from time to time using a variety of methods, which may include open market purchases,
privately negotiated transactions or block trades, or by any combination of such methods, in
accordance with applicable insider trading and other securities laws and regulations. The size,
scope and timing of any purchases will be based on business, market and other conditions and
factors, including price, regulatory and contractual requirements or consents, and capital
availability. The repurchase program does not obligate the Company to acquire any particular
amount of common stock and the share repurchase authorization has no stated expiration date. Shares
of stock repurchased under the program will be held as treasury shares. Pursuant to this
authorization, during fiscal 2009, the Company purchased 349,800 shares at an average cost of $2.67
per share for a total cost to the Company of approximately $0.9 million. All such purchases were
made in open market transactions. No shares have been purchased by the Company during the first
nine months of fiscal 2010.
7. STOCK-BASED COMPENSATION
The Company recognizes compensation expense for share-based stock awards to employees, including
grants of employee stock options and awards of restricted stock, in the statement of income based
on their fair values.
On May 8, 2007, the Companys stockholders 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 1.9 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,
although certain awards remain outstanding 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 more closely
stockholder and employee interests. The Companys options generally vest over a period of one to
five years and the related expense is amortized on a straight-line basis over the vesting period.
A summary of the Companys stock option activity and related information for the nine months ended
September 30, 2010, is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding |
|
|
Options |
|
|
|
Period |
|
|
Granted |
|
|
Exercised |
|
|
Forfeited |
|
|
End of Period |
|
|
Exercisable |
|
Shares |
|
|
642,120 |
|
|
|
|
|
|
|
98,252 |
|
|
|
26,034 |
|
|
|
517,834 |
|
|
|
517,834 |
|
Weighted average price |
|
$ |
4.34 |
|
|
$ |
|
|
|
$ |
3.55 |
|
|
$ |
5.21 |
|
|
$ |
4.44 |
|
|
$ |
4.44 |
|
The stock options outstanding and the options exercisable at September 30, 2010, each had an
intrinsic value of $0.8 million. The Company awarded no stock options during the first nine months
of fiscal 2010.
Restricted Stock
The Company may also grant restricted stock awards to employees, officers, and directors in order
to attract, retain, and provide incentives for such individuals and to more closely align
stockholder and employee interests. Restricted stock awards generally vest over a period of three
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. The Company recognizes compensation expense of
a restricted stock award over its vesting period based on the fair value of the award on the grant
date, net of forfeitures.
11
A summary of the Companys restricted stock awards activity and related information for the nine
months ended September 30, 2010, is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of |
|
|
|
|
|
|
|
|
|
|
|
Outstanding |
|
|
|
Period |
|
|
Granted |
|
|
Vested |
|
|
Forfeited |
|
|
End of Period |
|
Shares |
|
|
649,207 |
|
|
|
55,000 |
|
|
|
218,222 |
|
|
|
18,562 |
|
|
|
467,423 |
|
The restricted stock awards outstanding at September 30, 2010, had an intrinsic value of $2.5
million.
During the nine months ended September 30, 2010, the Company awarded 55,000 shares of restricted
common stock to certain employees and directors of the Company. The average market value of the
common stock on the date of grant was $4.92. These awards of restricted shares vest over a three to
four-year period and had an intrinsic value of $0.3 million on the date of issue.
Stock Based Compensation
The Company uses the Black-Scholes option pricing model to estimate the grant date fair value of
its stock options. 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 has total stock-based compensation expense, net of estimated forfeitures, of $1.2
million not recognized as of September 30, 2010, and expects this expense to be recognized over
approximately a three to four year period.
8. 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.
9. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and fair values of financial instruments are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010 |
|
|
December 31, 2009 |
|
|
|
Carrying |
|
|
|
|
|
|
Carrying |
|
|
|
|
|
|
Amount |
|
|
Fair Value |
|
|
Amount |
|
|
Fair Value |
|
Cash and cash equivalents |
|
$ |
33,055 |
|
|
$ |
33,055 |
|
|
$ |
28,972 |
|
|
$ |
28,972 |
|
Restricted cash |
|
|
6,327 |
|
|
|
6,327 |
|
|
|
2,167 |
|
|
|
2,167 |
|
Notes payable |
|
|
177,605 |
|
|
|
167,777 |
|
|
|
183,169 |
|
|
|
170,393 |
|
The following methods and assumptions were used in estimating its fair value disclosures for
financial instruments:
Cash and cash equivalents and Restricted cash: The carrying amounts reported in the balance sheets
for cash and cash equivalents and restricted cash approximate fair value.
Notes payable: The fair value of notes payable is estimated using discounted cash flow analysis,
based on current incremental borrowing rates for similar types of borrowing arrangements.
The global markets have experienced disruption in the credit markets. The full extent of these
disruptions on the market and the ultimate severity and length is not predictable. Therefore, the
estimated fair value of these assets and liabilities could be affected by
these market changes and this effect could be material.
12
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 and nine months ended September 30, 2010 and 2009, 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 and the Companys Annual Report on Form
10-K for the year ended December 31, 2009.
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 September 30, 2010, the Company operated 78 senior living communities in 23 states with an
aggregate capacity of approximately 11,000 residents, including 25 senior living communities that
the Company owned, 7 senior living communities in which the Company had an ownership interest, 45
senior living communities that the Company leased and one senior living community that it managed
for a third party. As of September 30, 2010, the Company also operated one home care agency.
Significant Financial and Operational Highlights
The Companys operating strategy is to provide quality senior living communities and 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. Many of the Companys communities offer a continuum of care to meet
its residents needs as they change over time. This continuum of care, which integrates independent
living and assisted living and is bridged by home care through independent home care agencies or
the Companys home care agency, sustains residents autonomy and independence based on their
physical and mental abilities.
The Company primarily derives its revenue by providing senior living and healthcare services to the
elderly and operating senior living communities leased from real estate investment trusts (REITs)
and under joint venture arrangements. Despite challenging economic conditions, the Company has been
able to increase total revenues approximately $8.7 million, or 6.1%, during the first nine months
of fiscal 2010 of which approximately 92.3% of revenues were derived from resident and healthcare
services, compared to the first nine months of fiscal 2009 when approximately 89.3% of revenues
were derived from resident and healthcare services.
On September 10, 2010, the Company acquired the leasehold interests in 12 senior housing
communities and certain related personal property from Signature for aggregate consideration of
$25.8 million and executed a Master Lease Agreement with affiliates of HCN valued at $78.8 million.
Funds for the transaction were provided by HCN and are non-recourse to the Company, the intent of
which was to result in the same economic impact to the Company as a $104.6 million lease at current
market rates. Therefore, a principal obligation has not been recorded by the Company within its
consolidated financial statements. The Master Lease Agreement has a term of 15 years with one
15-year renewal option beyond the initial lease term. The Master Lease Agreement is a triple net
lease pursuant to which the Company pays all expenses of the properties except principal and
interest on any mortgage debt of the properties. The Master Lease Agreement contains customary
representations and warranties as well as affirmative and negative covenants and the lease payments
are guaranteed by subsidiaries of the Company.
13
During the first nine months of fiscal 2010, the Company extinguished $5.6 million of its
outstanding debt obligations, which further reduced the Companys exposure to the volatility in the
credit markets and enabled the Company to reduce interest expense by approximately $0.4 million, or
4.9%, during the first nine months of fiscal 2010 when compared to the first nine months of fiscal
2009.
The senior living industry continues to be negatively impacted by unfavorable conditions in the
housing, credit and financial markets and deteriorating conditions in the overall economy,
generally resulting in lower than anticipated occupancy rates. During the first nine months of
fiscal 2010, in response to these conditions, the Company has continued to focus on maintaining an
emphasis on occupancy increases, improvement in rental rates, expense management and growth in net
operating income per unit, increasing levels of care through conversions, and other opportunities
to enhance cash flow and shareholder value.
Joint Venture Transactions and Management Contracts
As of September 30, 2010, the Company managed 7 communities owned by joint ventures in which the
Company has a minority interest and one community owned by a third party. For communities owned by
joint ventures and third parties, the Company typically receives a management fee of 5% of gross
revenues.
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 or upon the sale of a
community, subject to the Companys right to offer to purchase such community.
SHPII/CSL Transactions
In November 2004, the Company formed SHPII/CSL with SHPII. SHPII/CSL is owned 95% by SHPII and 5%
by the Company. In November 2004, SHPII/CSL acquired the Spring Meadows Communities which currently
comprise 628 units with a combined capacity of 758 residents. The Company has contributed $1.3
million for its interests in SHPII/CSL. 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 and $0.2 million in each of the three and nine month periods ended September 30, 2010
and 2009, respectively. In addition, the Company earned $0.3 million and $0.9 million in management
fees on the Spring Meadows Communities in each of the three and nine month periods ended September
30, 2010 and 2009, respectively.
The Company is party to a series of property management agreements (the SHPII/CSL Management
Agreements) with SHPII/CSL, owned 95% by SHPII, a fund managed by Prudential, and 5% by the
Company, which collectively own and operate the Spring Meadows Communities. The SHPII/CSL
Management Agreements currently extend until various dates through November 2014. The SHPII/CSL
Management Agreements generally provide for management fees of 5% of gross revenue plus
reimbursement for costs and expenses related to the communities.
SHP III Transactions
In May 2007, the Company and SHPIII formed SHPIII/CSL Miami to develop a senior housing community
in Miamisburg, Ohio. Under the joint venture and related agreements, the Company earns development
and management fees and may receive incentive distributions. The senior housing community currently
consists of 101 independent living units and 45 assisted living units and opened in August 2008.
The Company has contributed $0.8 million to SHPIII/CSL Miami for its 10% interest. The Company
accounts for its investment in SHPIII/CSL Miami under the equity method of accounting and the
Company recognized losses in the equity of SHPIII/CSL Miami of ($23,000) and ($48,000) during the
three month periods ended September 30, 2010 and 2009, respectively. The Company recognized losses
in the equity of SHPIII/CSL Miami of ($0.1) million in each of the nine month periods ended
September 30, 2010. In addition, the Company earned $37,500 and $0.1 million in management fees on
the SHPIII/CSL Miami community in each of the three and nine month periods ended September 30, 2010
and 2009, respectively.
14
In November 2007, the Company and SHPIII formed SHPIII/CSL Richmond Heights to develop a senior
housing community in Richmond Heights, Ohio. Under the joint venture and related agreements, the
Company earns development and management fees and may receive incentive distributions. The senior
housing community currently consists of 96 independent living units and 45 assisted living units
and opened in April 2009. The Company has contributed $0.8 million to SHPIII/CSL Richmond Heights
for its 10% interest. The Company accounts for its investment in SHPIII/CSL Richmond Heights under
the equity method of accounting and the Company recognized losses in the equity of SHPIII/CSL
Richmond Heights of ($18,800) and ($42,800) during the three month periods ended September 30, 2010
and 2009, respectively. The Company recognized losses in the equity of SHPIII/CSL Richmond Heights
of ($0.1) million in each of the nine month periods ended September 30, 2010 and 2009. In addition,
the Company earned $37,500 and $0.1 million in management fees on the SHPIII/CSL Richmond Heights
community in each of the three and nine month periods ended September 30, 2010 and 2009,
respectively. Prior to opening SHPIII/CSL Richmond Heights, the Company earned $12,500 in
pre-marketing fees in fiscal 2009.
In December 2007, the Company and SHPIII formed SHPIII/CSL Levis Commons to develop a senior
housing community near Toledo, Ohio. Under the joint venture and related agreements, the Company
earns development and management fees and may receive incentive distributions. The senior housing
community currently consists of 101 independent living units and 45 assisted living units and
opened in April 2009. The Company has contributed $0.8 million to SHPIII/CSL Levis Commons for its
10% interest. The Company accounts for its investment in SHPIII/CSL Levis Commons under the equity
method of accounting and the Company recognized losses in the equity of SHPIII/CSL Levis Commons of
($25,700) and ($72,700) during the three month periods ended September 30, 2010 and 2009,
respectively. The Company recognized losses in the equity of SHPIII/CSL Levis Commons of ($0.1)
million in each of the nine month periods ended September 30, 2010 and 2009. In addition, the
Company earned $37,500 and $0.1 million in management fees on the SHPIII/CSL Levis Commons
community in each of the three and nine month periods ended September 30, 2010 and 2009,
respectively. Prior to opening SHPIII/CSL Levis Commons, the Company earned $12,500 in
pre-marketing fees in fiscal 2009.
The Company is party to a series of property management agreements (the SHPIII/CSL Management
Agreements) with SHPIII/CSL Miami, SHPIII/CSL Richmond Heights, and SHPIII/CSL Levis Commons
(collectively SHPIII/CSL), which joint ventures are owned 90% by Senior Housing Partners III,
L.P. (SHPIII), a fund managed by Prudential Investment Management, Inc. and 10% by the Company,
which collectively own and operate SHPIII/CSL. The SHPIII/CSL Management Agreements are for initial
terms of ten years from the date the certificate of occupancy was issued and currently extend until
various dates through January 2019. The SHPIII/CSL Management Agreements generally provide for
management fees of 5% of gross revenue plus reimbursement for costs and expenses related to the
communities.
CGIM Transaction
The Company is party to a series of property management agreements with CGIM (the CGIM
Agreements) currently expiring in August 2011. The CGIM Agreements generally provide for
management fees of 5% to 6% of gross revenues, subject to certain base management fees. As of
September 30, 2010, the Company managed one community under the CGIM Agreements.
15
Facility Lease Transactions
The Company currently leases 45 communities with certain REITs and accounts for each of the leases
as an operating lease. The lease terms are generally for 10-15 years with renewal options for 5-15
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):
|
|
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|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease |
|
Deferred |
|
|
|
|
Number of |
|
Value of |
|
|
|
Initial |
|
Acquisition |
|
Gains/Lease |
Landlord |
|
Effective Date of Lease |
|
Communities |
|
Transaction |
|
Term |
|
Lease Rate (1) |
|
Costs(2) |
|
Concessions (3) |
Ventas
|
|
September 30, 2005
|
|
|
6 |
|
|
$ |
84.6 |
|
|
10 years
(Two five-year renewals)
|
|
|
8 |
% |
|
$ |
1.3 |
|
|
$ |
4.6 |
|
Ventas
|
|
October 18, 2005
|
|
|
1 |
|
|
|
19.5 |
|
|
10 years
(Two five-year renewals)
|
|
|
8 |
% |
|
|
0.2 |
|
|
|
|
|
Ventas
|
|
March 31,2006
|
|
|
1 |
|
|
|
29.0 |
|
|
10 years
(Two five-year renewals)
|
|
|
8 |
% |
|
|
0.1 |
|
|
|
14.3 |
|
Ventas
|
|
June 8, 2006
|
|
|
1 |
|
|
|
19.1 |
|
|
9.5 years
(Two five-year renewals)
|
|
|
8 |
% |
|
|
0.4 |
|
|
|
|
|
Ventas
|
|
January 31, 2008
|
|
|
1 |
|
|
|
5.0 |
|
|
10 years
(Two five-year renewals)
|
|
|
7.75 |
% |
|
|
0.2 |
|
|
|
|
|
HCP
|
|
May 1, 2006
|
|
|
3 |
|
|
|
54.0 |
|
|
(4)
(Two ten-year renewals)
|
|
|
8 |
% |
|
|
0.2 |
|
|
|
12.8 |
|
HCP
|
|
May 31, 2006
|
|
|
6 |
|
|
|
43.0 |
|
|
10 years
(Two ten-year renewals)
|
|
|
8 |
% |
|
|
0.2 |
|
|
|
0.6 |
|
HCP
|
|
December 1, 2006
|
|
|
4 |
|
|
|
51.0 |
|
|
(4)
(Two ten-year renewals)
|
|
|
8 |
% |
|
|
0.7 |
|
|
|
|
|
HCP
|
|
December 14, 2006
|
|
|
1 |
|
|
|
18.0 |
|
|
(4)
(Two ten-year renewals)
|
|
|
7.75 |
% |
|
|
0.3 |
|
|
|
|
|
HCP
|
|
April 11, 2007
|
|
|
1 |
|
|
|
8.0 |
|
|
(4)
(Two ten-year renewals)
|
|
|
7.25 |
% |
|
|
0.1 |
|
|
|
|
|
HCN
|
|
April 16, 2010
|
|
|
5 |
|
|
|
48.5 |
|
|
15 years
(One 15-year renewal)
|
|
|
8.25 |
% |
|
|
0.6 |
|
|
|
0.8 |
|
HCN
|
|
May 1, 2010
|
|
|
3 |
|
|
|
36.0 |
|
|
15 years
(One 15-year renewal)
|
|
|
8.25 |
% |
|
|
0.2 |
|
|
|
0.4 |
|
HCN
|
|
September 10, 2010
|
|
|
12 |
|
|
|
104.6 |
|
|
15 years
(One 15-year renewal)
|
|
|
8.50 |
% |
|
|
0.4 |
|
|
|
2.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
4.9 |
|
|
|
35.5 |
|
Accumulated lease acquisition cost amortization through September 30, 2010 |
|
|
(1.6 |
) |
|
|
|
|
Accumulated deferred gains / lease concessions recognized through September 30, 2010 |
|
|
|
|
|
|
(15.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net lease acquisition costs / deferred gains / lease concessions as of September 30, 2010 |
|
$ |
3.3 |
|
|
$ |
20.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 $32.8 million and lease concessions of $2.6 million are being
recognized in the Companys statement of income as a reduction in facility lease expense
over the leases initial term. Lease concessions of $0.6 million relate to the HCP
transaction on May 31, 2006, and $2.0 million relate to the Signature transaction on
September 10, 2010. |
|
(4) |
|
Initial lease term expires on October 31, 2018. |
Facility lease expense in the Companys statement of income includes rent expense plus
amortization expense relating to leasehold acquisition costs offset by the amortization of deferred
gains and lease incentives.
There are various financial covenants and other restrictions in our lease agreements. Under the
terms of certain lease agreements, the Company was required to pay additional cash collateral of
approximately $0.2 million and $0.7 million during the three and nine month periods ended September
30, 2010, respectively. No additional cash collateral was required to be paid by the Company during
the three and nine month periods ended September 30, 2009. Once the Company reaches certain
performance targets, the additional cash collateral paid is returnable to the Company. The Company
was in compliance with all of its lease covenants at September 30, 2010.
Recently Issued Accounting Standards
FASB ASC 810-10 (formerly FASB Statement No. 167, Amendments to FASB Interpretation No. 46(R))
requires an enterprise to perform an analysis to determine whether the enterprises variable
interest or interests give it a controlling financial interest in a variable interest entity. This
analysis identifies the primary beneficiary of a variable interest entity as the enterprise that
has both the power to direct the activities of a variable interest entity that most significantly
impact the entitys economic performance and the obligation to absorb losses of the entity that
could potentially be significant to the variable interest entity or the right to receive benefits
from the entity that could potentially be significant to the variable interest entity. This
guidance also requires ongoing reassessments of whether an enterprise is the primary beneficiary of
a variable interest entity and was effective for the Company on January 1, 2010. The adoption did
not have an impact on the Companys earnings or financial position.
Website
The Companys 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 as well as amendments to such
reports and filings, which are available free of charge through the Companys website as soon as
reasonably practicable after such material is electronically filed with or furnished to the SEC.
16
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.
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
$ |
|
|
% |
|
|
$ |
|
|
% |
|
|
$ |
|
|
% |
|
|
$ |
|
|
% |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Resident and healthcare revenue |
|
$ |
50,451 |
|
|
|
94.1 |
|
|
$ |
42,801 |
|
|
|
89.0 |
|
|
$ |
140,253 |
|
|
|
92.3 |
|
|
$ |
127,950 |
|
|
|
89.3 |
|
Unaffiliated management service revenue |
|
|
18 |
|
|
|
0.0 |
|
|
|
18 |
|
|
|
0.0 |
|
|
|
54 |
|
|
|
0.0 |
|
|
|
54 |
|
|
|
0.0 |
|
Affiliated management service revenue |
|
|
418 |
|
|
|
0.8 |
|
|
|
692 |
|
|
|
1.4 |
|
|
|
1,625 |
|
|
|
1.1 |
|
|
|
1,992 |
|
|
|
1.4 |
|
Community reimbursement revenue |
|
|
2,713 |
|
|
|
5.1 |
|
|
|
4,603 |
|
|
|
9.6 |
|
|
|
10,089 |
|
|
|
6.6 |
|
|
|
13,298 |
|
|
|
9.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
53,600 |
|
|
|
100.0 |
|
|
|
48,114 |
|
|
|
100.0 |
|
|
|
152,021 |
|
|
|
100.0 |
|
|
|
143,294 |
|
|
|
100.0 |
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses (exclusive of
depreciation and amortization shown
below) |
|
|
31,209 |
|
|
|
58.2 |
|
|
|
26,718 |
|
|
|
55.5 |
|
|
|
85,904 |
|
|
|
56.5 |
|
|
|
78,707 |
|
|
|
54.9 |
|
General and administrative expenses |
|
|
3,246 |
|
|
|
6.1 |
|
|
|
2,456 |
|
|
|
5.1 |
|
|
|
9,001 |
|
|
|
5.9 |
|
|
|
8,820 |
|
|
|
6.1 |
|
Facility lease expense |
|
|
8,910 |
|
|
|
16.6 |
|
|
|
6,502 |
|
|
|
13.5 |
|
|
|
23,217 |
|
|
|
15.3 |
|
|
|
19,441 |
|
|
|
13.6 |
|
Stock-based compensation |
|
|
226 |
|
|
|
0.4 |
|
|
|
282 |
|
|
|
0.6 |
|
|
|
783 |
|
|
|
0.5 |
|
|
|
902 |
|
|
|
0.6 |
|
Depreciation and amortization |
|
|
3,536 |
|
|
|
6.6 |
|
|
|
3,334 |
|
|
|
6.9 |
|
|
|
10,487 |
|
|
|
6.9 |
|
|
|
9,862 |
|
|
|
6.9 |
|
Community reimbursement expense |
|
|
2,713 |
|
|
|
5.1 |
|
|
|
4,603 |
|
|
|
9.6 |
|
|
|
10,089 |
|
|
|
6.7 |
|
|
|
13,298 |
|
|
|
9.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
49,840 |
|
|
|
93.0 |
|
|
|
43,895 |
|
|
|
91.2 |
|
|
|
139,481 |
|
|
|
91.8 |
|
|
|
131,030 |
|
|
|
91.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
3,760 |
|
|
|
7.0 |
|
|
|
4,219 |
|
|
|
8.8 |
|
|
|
12,540 |
|
|
|
8.2 |
|
|
|
12,264 |
|
|
|
8.6 |
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
13 |
|
|
|
0.0 |
|
|
|
18 |
|
|
|
0.0 |
|
|
|
32 |
|
|
|
0.0 |
|
|
|
56 |
|
|
|
0.0 |
|
Interest expense |
|
|
(2,815 |
) |
|
|
(5.2 |
) |
|
|
(2,967 |
) |
|
|
(6.2 |
) |
|
|
(8,440 |
) |
|
|
(5.5 |
) |
|
|
(8,871 |
) |
|
|
(6.2 |
) |
Gain on settlement of debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
684 |
|
|
|
0.5 |
|
|
|
|
|
|
|
|
|
Other income (expense) |
|
|
(9 |
) |
|
|
(0.0 |
) |
|
|
(14 |
) |
|
|
0.0 |
|
|
|
8 |
|
|
|
0.0 |
|
|
|
59 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes |
|
|
949 |
|
|
|
1.8 |
|
|
|
1,256 |
|
|
|
2.6 |
|
|
|
4,824 |
|
|
|
3.2 |
|
|
|
3,508 |
|
|
|
2.5 |
|
Provision for income taxes |
|
|
(468 |
) |
|
|
(0.9 |
) |
|
|
(506 |
) |
|
|
(1.0 |
) |
|
|
(2,160 |
) |
|
|
(1.4 |
) |
|
|
(1,509 |
) |
|
|
(1.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
481 |
|
|
|
0.9 |
|
|
$ |
750 |
|
|
|
1.6 |
|
|
$ |
2,664 |
|
|
|
1.8 |
|
|
$ |
1,999 |
|
|
|
1.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2010 Compared to the Three Months Ended September 30, 2009
Revenues.
Total revenues were $53.6 million for the three months ended September 30, 2010 compared to $48.1
million for the three months ended September 30, 2009, representing an increase of approximately
$5.5 million, or 11.4%. This increase in revenue is primarily the result of an increase in resident
and healthcare revenue of $7.7 million offset by a decrease in affiliated management services
revenue of $0.3 million and a decrease in community reimbursement revenue of $1.9 million.
|
|
|
The increase in resident and healthcare revenue primarily results from an increase of
$5.7 million from the consolidation of eight communities previously owned by Midwest I and
Midwest II that were sold to HCN and leased back by the Company in April 2010, an increase
of $1.8 million from the addition of the leasehold interests in 12 communities from
Signature in September 2010, and an increase in average rental rates of 0.3% and occupancy
of 0.3% at the Companys other consolidated communities. |
|
|
|
|
The decrease in affiliated management services revenue of $0.3 million primarily results
from the sale of the eight communities owned by Midwest I and Midwest II to HCN and leased
back by the Company in April 2010. |
|
|
|
|
Community reimbursement revenue is comprised of reimbursable expenses from
non-consolidated communities that the Company operates under long-term management
agreements. |
17
Expenses.
Total expenses were $49.8 million in the third quarter of fiscal 2010 compared to $43.9 million in
the third quarter of fiscal 2009, representing an increase of $5.9 million, or 13.5%. This increase
in expenses is primarily the result of a $4.5 million increase in operating expenses, a $0.8
million increase in general and administrative expenses, a $2.4 million increase in facility lease
expense, and a $0.2 million increase in depreciation and amortization expense offset by a $0.1
million decrease in stock-based compensation expense and a $1.9 million decrease in community
reimbursement expense.
|
|
|
The increase in operating expenses primarily results from an increase of $3.3 million
from the consolidation of eight communities previously owned by Midwest I and Midwest II
that were sold to HCN and leased back by the Company in April 2010, an increase of $0.9
million from the addition of the leasehold interests in 12 communities from Signature in
September 2010, and an increase in operating costs at the Companys other consolidated
communities of $0.3 million primarily due to an increase in labor and benefit costs of $0.1
million and utilities of $0.2 million. |
|
|
|
|
General and administrative expenses increased $0.8 million, or 32.2%, primarily due to an
increase in employee benefit claims paid, which resulted in higher health insurance costs to
the Company. |
|
|
|
|
Facility lease expense increased $1.7 million from the consolidation of eight communities
previously owned by Midwest I and Midwest II that were sold to HCN and leased back by the
Company in April 2010, $0.6 million from the addition of the leasehold interests in 12
communities from Signature in September 2010, and $0.1 million for contingent annual rental
rate escalations for certain existing leases. |
|
|
|
|
Depreciation and amortization expense increased $0.2 million primarily as a result of an
increase in depreciable assets at the Companys consolidated communities. |
|
|
|
|
Stock-based compensation decreased $0.1 million in the third quarter of fiscal
2010 compared to the third quarter of fiscal 2009 primarily due to a decrease in the number
of unvested restricted shares outstanding during these periods. |
|
|
|
|
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 reflects interest earned on the investment of cash balances and interest
earned on escrowed funds. Interest income decreased primarily due to lower interest rates in
the third quarter of fiscal 2010 compared to the third quarter of fiscal 2009. |
|
|
|
|
Interest expense decreased $0.2 million in the third quarter of fiscal 2010 when compared
to the third quarter of fiscal 2009. The decrease in interest expense results from less debt
outstanding during the third quarter of fiscal 2010 compared to the third quarter of fiscal
2009. |
|
|
|
|
Other (expense) income in the third quarters of fiscal 2010 and 2009 relates to the
Companys equity in the net losses of unconsolidated affiliates, which represents the
Companys share of the net losses on its investments in joint ventures. |
Provision for income taxes.
Provision for income taxes for the third quarter of fiscal 2010 was $0.5 million, or 49.3% of
income before taxes, compared to a provision for income taxes of $0.5 million, or 40.1% of income
before taxes, for the third quarter of fiscal 2009. The effective tax rates for the third quarters
of fiscal 2010 and 2009 differ from the statutory tax rates due to state income taxes and permanent
tax differences. The Company is impacted by the Texas Margin Tax (TMT) and Michigan Business Tax
(MBT), which effectively impose taxes on modified gross revenues for communities within the
States of Texas and Michigan, respectively. As of September 30, 2010, the Company consolidated 29
Texas communities and two Michigan communities and the TMT and MBT increased the overall provision
for income taxes. Management regularly evaluates the future realization of deferred tax assets and
provides a valuation allowance, if considered necessary, based on such evaluation. At September 30,
2010, no valuation allowance was considered necessary based on this evaluation.
Net income.
As a result of the foregoing factors, the Company reported net income of $0.5 million for the three
months ended September 30, 2010, compared to net income of $0.8 million for the three months ended
September 30, 2009.
18
Nine Months Ended September 30, 2010 Compared to the Nine Months Ended September 30, 2009
Revenues.
Total revenues were $152.0 million for the nine months ended September 30, 2010 compared to $143.3
million for the nine months
ended September 30, 2009, representing an increase of approximately $8.7 million, or 6.1%. This
increase in revenue is primarily the result of a $12.3 million increase in resident and healthcare
revenue offset by a decrease in affiliated management services revenue of $0.4 million and a
decrease in community reimbursement revenue of $3.2 million.
|
|
|
The increase in resident and healthcare revenue primarily results from an increase of
$9.9 million from the consolidation of eight communities previously owned by Midwest I and
Midwest II that were sold to HCN and leased back by the Company in April 2010, an increase
of $1.8 million from the addition of the leasehold interests in 12 communities from
Signature in September 2010, and an increase in average rental rates of 0.6% which was
partially offset by a decrease in occupancy of 0.3% at the Companys other consolidated
communities. |
|
|
|
|
The decrease in affiliated management services revenue reflects a decrease of $0.5
million from the sale of the eight communities owned by Midwest I and Midwest II to HCN and
leased back by the Company in April 2010, offset by an increase of $0.1 million for
management services revenue earned by the Company from the two SHPIII/CSL joint venture
communities that opened in April 2009. |
|
|
|
|
Community reimbursement revenue is comprised of reimbursable expenses from
non-consolidated communities that the Company operates under long-term management
agreements. |
Expenses.
Total expenses were $139.5 million in the first nine months of fiscal 2010 compared to $131.0
million in the first nine months of fiscal 2009, representing an increase of $8.5 million, or 6.4%.
This increase is primarily the result of a $7.2 million increase in operating expenses, a $0.2
million increase in general and administrative expenses, a $3.8 million increase in facility lease
expense, and a $0.6 million increase in depreciation and amortization expense, offset by a $0.1
million decrease in stock-based compensation, and a $3.2 million decrease in community
reimbursement expense.
|
|
|
The increase in operating expenses primarily results from an increase of $5.6 million
from the consolidation of eight communities previously owned by Midwest I and Midwest II
that were sold to HCN and leased back by the Company in April 2010, an increase of $0.9
million from the addition of the leasehold interests in 12 communities from Signature in
September 2010, and an increase in operating costs at the Companys other consolidated
communities of $0.7 million primarily due to an increase in labor and benefit costs of $0.4
million, utilities of $0.2 million, and promotional advertising of $0.1 million. |
|
|
|
|
General and administrative expenses increased $0.2 million or 2.1% primarily due to an
increase in employee benefit claims paid, which resulted in higher health insurance costs to
the Company. |
|
|
|
|
Facility lease expense increased $3.1 million from the consolidation of eight communities
previously owned by Midwest I and Midwest II that were sold to HCN and leased back by the
Company in April 2010, $0.6 million from the addition of the leasehold interests in 12
communities from Signature in September 2010, and $0.1 million for contingent annual rental
rate escalations for certain existing leases. |
|
|
|
|
Depreciation and amortization expense increased $0.6 million primarily as a result of an
increase in depreciable assets at the Companys consolidated communities. |
|
|
|
|
Stock-based compensation decreased $0.1 million in the first nine months of fiscal 2010
compared to the first nine months of fiscal 2009 primarily due to a decrease in the number
of unvested restricted shares outstanding during these periods. |
|
|
|
|
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 reflects interest earned on the investment of cash balances and interest
earned on escrowed funds. Interest income decreased primarily due to lower interest rates in
the first nine months of fiscal 2010 compared to the first nine months of fiscal 2009. |
|
|
|
|
Interest expense decreased $0.4 million in the first nine months of fiscal 2010 when
compared to the first nine months of
|
19
|
|
|
fiscal 2009. The decrease in interest expense results from less debt outstanding during the
first nine months of fiscal 2010 compared to the first nine months of fiscal 2009. |
|
|
|
Gain on settlement of debt represents the recognition of the gain associated
with the pay-off settlement of the promissory note with the Lehman securitized trust in
April 2010. |
|
|
|
|
Other income in the first nine months of fiscal 2010 and 2009 relates to the Companys
equity in the net earnings of unconsolidated affiliates, which represents the Companys
share of the net earnings on its investments in joint ventures. |
Provision for income taxes.
Provision for income taxes for the first nine months of fiscal 2010 was $2.2 million, or 44.8% of
income before taxes, compared to a provision for income taxes of $1.5 million, or 43.0% of income
before taxes, for the first nine months of fiscal 2009. The effective tax rates for the first nine
months of fiscal 2010 and 2009 differ from the statutory tax rates due to state income taxes and
permanent tax differences. The Company is impacted by the Texas Margin Tax (TMT) and Michigan
Business Tax (MBT), which effectively impose taxes on modified gross revenues for communities
within the States of Texas and Michigan, respectively. As of September 30, 2010, the Company
consolidated 29 Texas communities and two Michigan communities and the TMT and MBT increased the
overall provision for income taxes. Management regularly evaluates the future realization of
deferred tax assets and provides a valuation allowance, if considered necessary, based on such
evaluation. At September 30, 2010, no valuation allowance was considered necessary based on this
evaluation.
Net income.
As a result of the foregoing factors, the Company reported net income of $2.7 million for the nine
months ended September 30, 2010, compared to net income of $2.0 million for the nine months ended
September 30, 2009.
Liquidity and Capital Resources
The impact of the current economic environment could result in decreases in the fair value of
assets, slowing of transactions, and tightening liquidity and credit markets. These impacts could
make securing debt for acquisitions or refinancings for the Company, its joint ventures, or buyers
of the Companys properties more difficult or on terms not acceptable to the Company. Additionally,
the Company may be more susceptible to being negatively impacted by operating or performance
deficits based on the exposure associated with certain of its development guarantees or lease
coverage requirements.
In addition to approximately $33.1 million of unrestricted cash balances on hand as of September
30, 2010, the Companys principal sources of liquidity are expected to be cash flows from
operations, proceeds from the sale of assets, cash flows from SHPIII/CSL Miami, SHP III/CSL
Richmond Heights, and SHPIII/CSL Levis Commons and/or additional debt refinancings. The Company
expects its available cash and cash flows from operations, proceeds from the sale of assets, and
cash flows from SHPIII/CSL Miami, SHP III/CSL Richmond Heights, and SHPIII/CSL Levis Commons to be
sufficient to fund its short-term working capital requirements and the Companys stock repurchase
program. 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):
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
Net cash provided by operating activities |
|
$ |
13,483 |
|
|
$ |
16,472 |
|
Net cash used in investing activities |
|
|
(3,253 |
) |
|
|
(5,737 |
) |
Net cash used in financing activities |
|
|
(6,147 |
) |
|
|
(8,198 |
) |
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
$ |
4,083 |
|
|
$ |
2,537 |
|
|
|
|
|
|
|
|
20
Operating Activities.
The net cash provided by operating activities for the first nine months of fiscal 2010 primarily
results from net income of $2.7 million, net non-cash charges of $12.7 million, an increase in
accounts payable and accrued expenses of $4.7 million, and an increase in customer deposits of $0.1
million, offset by an increase in accounts receivable of $0.7 million, an increase in property tax
and insurance deposits of $1.7 million, and an increase in prepaid expenses and other assets of
$2.6 million, and an increase in federal and state income taxes receivable of $1.7 million,. The
net cash provided by operating activities for the first nine months of fiscal 2009 primarily
results from net income of $2.0 million, net non-cash charges of $10.5 million, a decrease in
property tax and insurance deposits of $0.7 million, a decrease in prepaid expenses and other
assets of $2.0 million, and a decrease in federal and state income taxes receivable of $1.9 million
offset by an increase in accounts receivable of $0.2 million, a decrease in accounts payable and
accrued expenses of $0.2 million, and a decrease in customer deposits of $0.2 million.
Investing Activities.
The net cash used in investing activities for the first nine months of fiscal 2010 primarily
results from capital expenditures of $6.4 million and $2.0 million for the acquisition of the
Signature Transaction offset by distributions from joint ventures of $5.1 million. The net cash
used in investing activities for the first nine months of fiscal 2009 primarily results from
capital expenditures of $6.3 million offset by distributions from joint ventures of $0.6 million.
Financing Activities.
The net cash used in financing activities for the first nine months of fiscal 2010 results from net
repayments of notes payable of $4.6 million and additions to restricted cash of $4.2 million offset
by $2.0 million in lease incentives from the Signature Transaction, an increase in capital lease
obligations of $0.2 million and proceeds and excess tax benefits from the issuance of common stock
of $0.4 million. The net cash used in financing activities for the first nine months of fiscal 2009
primarily results from net repayments of notes payable of $5.1 million, additions to restricted
cash of $2.2 million, and purchases of treasury stock of $0.9 million.
Debt Transactions.
On September 10, 2010, in conjunction with the Signature Transaction described above, a
non-cancelable lease which expires in 2013 for ten 12-passenger Ford Minibuses that are used to
transport residents of the communities was transferred from Signature to the Company. The lease is
classified as a capital lease because it contains a bargain purchase option which resulted in the
Company recording a Capital Lease Obligation for $0.2 million.
On September 10, 2010, the Company obtained certain insurance policies and entered into a finance
agreement totaling $0.2 million. The finance agreement has a fixed interest rate of 3.30% with
principal being repaid over a 7-month term.
On May 31, 2010, the Company renewed certain insurance policies and entered into a finance
agreement totaling $3.7 million. The finance agreement has a fixed interest rate of 3.30% with
principal being repaid over a 12-month term.
On April 15, 2010, the Company negotiated a pay-off settlement with a Lehman securitized trust for
a promissory note of one of the Companys wholly owned subsidiaries that matured on September 1,
2009. The securitized promissory note carried an outstanding principal balance of $4.6 million
which was collateralized with the assets of the subsidiary and was nonrecourse to the Company. The
pay-off settlement was for $3.7 million, excluding amounts reserved and escrowed, with no further
obligation to the Companys subsidiary and resulted in a gain to the Company of approximately $0.7
million.
On October 31, 2009, the Company renewed certain insurance policies and entered into a finance
agreement totaling $0.5 million. The finance agreement has a fixed interest rate of 3.66% with
principal being repaid over a 10-month term.
On May 31, 2009, the Company renewed certain insurance policies and entered into a finance
agreement totaling $1.6 million. The finance agreement has a fixed interest rate of 3.66% with
principal being repaid over a 10-month term.
The 25 senior housing communities owned by the Company and encumbered by mortgage debt are provided
as collateral under their respective loan agreements. At September 30, 2010, and December 31, 2009,
these communities carried a total net book value of $220.5 million and $224.9 million,
respectively, with total mortgage loans outstanding of $174.9 million and $182.3 million,
respectively.
21
The Company must maintain certain levels of tangible net worth and comply with other restrictive
covenants under the terms of certain promissory notes. The Company was in compliance with all of
its debt covenants at September 30, 2010 and 2009.
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 September 30, 2010, the Company had $177.6 million in outstanding debt comprised
solely of fixed rate debt instruments. In addition, as of September 30, 2010, the Company had
$420.1 million in future lease obligations with contingent rent increases based on changes in the
consumer price index or certain operational performance measures.
Changes in interest rates would affect the fair market values of the Companys fixed rate debt
instruments, but would not have an impact on the Companys earnings or cash flows. Increases 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.
Item 4. 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.
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 September 30, 2010 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. There have been no
material changes in our risk factors from those disclosed in Part 1, Item 1A of our Annual Report
on Form 10-K for the fiscal year ended December 31, 2009.
22
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
(c) Purchases of Equity Securities by the Issuer and Affiliated Purchasers
The following information is provided pursuant to Item 703 of Regulation S-K. The Company did not
purchase any shares of its common stock pursuant to the Companys share repurchase program (as
described below) during the nine month period ended September 30, 2010. The information set forth
in the table below reflects shares purchased by the Company pursuant to this repurchase program
prior to the nine month period ended September 30, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of Shares |
|
|
Approximate Dollar Value of |
|
|
|
Total Number |
|
|
Average |
|
|
Purchased as Part of |
|
|
Shares that May Yet Be |
|
|
|
of Shares |
|
|
Price Paid |
|
|
Publicly Announced |
|
|
Purchased Under the Plans or |
|
Period |
|
Purchased |
|
|
per Share |
|
|
Plans or Programs |
|
|
Programs (1) |
|
Total at June 30, 2010 |
|
|
349,800 |
|
|
$ |
2.67 |
|
|
|
349,800 |
|
|
$ |
9,065,571 |
|
July 1 July 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 1 August 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 1 September
30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total at September 30, 2010 |
|
|
349,800 |
|
|
$ |
2.67 |
|
|
|
349,800 |
|
|
$ |
9,065,571 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
On January 22, 2009, the Companys board of directors approved a share repurchase program
that authorized the Company to purchase up to $10.0 million of the Companys common stock.
The repurchase program does not obligate the Company to acquire any particular amount of
common stock and the share repurchase authorization has no stated expiration date. All shares
that have been purchased by the Company under this program were purchased in open-market
transactions. |
Item 3. DEFAULTS UPON SENIOR SECURITIES.
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 into this Item 6.
23
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.
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Capital Senior Living Corporation
(Registrant)
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By: |
/s/ Ralph A. Beattie
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Ralph A. Beattie |
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Executive Vice President and Chief Financial Officer
(Principal Financial Officer and Duly Authorized Officer) |
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Date:
November 5, 2010
24
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.
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Exhibit |
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Number |
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Description |
2.1
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Asset Purchase Agreement, dated as of June 25, 2010,
between Capital Senior Living Acquisition, L.L.C. and
Signature Assisted Living of Texas, LLC. (Incorporated
by reference to exhibit 2.1 to the Companys Current
Report on Form 8-K filed by the Company with the
Securities and Exchange Commission on June 28, 2010.) |
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3.1.1
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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.) |
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3.1.2
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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.) |
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3.2.1
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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.) |
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3.2.2
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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.) |
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3.2.3
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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.) |
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4.1
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Rights Agreement, dated as of February 25, 2010,
between Capital Senior Living Corporation and Mellon
Investor Services, L.L.C., including all exhibits
thereto. (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
February 25, 2010.) |
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4.2
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Form of Certificate of Designation of Series A Junior
Participating Preferred Stock, $0.01 par value.
(Incorporated by reference to exhibit 4.2 to the
Companys Current Report on Form 8-K filed by the
Company with the Securities and Exchange Commission on
February 25, 2010.) |
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4.3
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Form of Right Certificate. (Included as Exhibit B to
the Rights Agreement, which is Exhibit 4.1 hereto.) |
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4.4
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Form of Summary of Rights. (Included as Exhibit C to
the Rights Agreement, which is Exhibit 4.1 hereto.) |
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4.5
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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.) |
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4.6
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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.) |
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10.1
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Master Lease Agreement, dated as of September 10, 2010,
between Capital Texas S, LLC and the Landlord parties
thereto. (Incorporated by reference to exhibit 10.1 to
the Companys Current Report on Form 8-K filed with the
Securities and Exchange Commission on September 16,
2010.) |
25
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Exhibit |
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Number |
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Description |
10.2
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Note, dated as of September 10, 2010, by Capital Texas
S, LLC in favor of Health Care REIT, Inc. (Incorporated
by reference to exhibit 10.2 to the Companys Current
Report on Form 8-K filed with the Securities and
Exchange Commission on September 16, 2010.) |
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31.1*
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Certification of Chief Executive Officer required by
Rule 13a-14(a) or Rule 15d-14(a). |
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31.2*
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Certification of Chief Financial Officer required by
Rule 13a-14(a) or Rule 15d-14(a). |
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32.1*
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Certification of Lawrence A. Cohen pursuant to Section
906 of the Sarbanes-Oxley Act of 2002. |
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32.2*
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Certification of Ralph A. Beattie pursuant to Section
906 of the Sarbanes-Oxley Act of 2002. |
26