NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2016
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, and manages senior living communities in geographically concentrated regions throughout the United States. As of March 31,
2016, the Company operated 126 senior living communities in 23 states with an aggregate capacity of approximately 15,800 residents, including 76 senior living communities that the Company owned and 50 senior living communities that the Company
leased. As of March 31, 2016, 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 accompanying Consolidated Balance Sheet, as of December 31, 2015, has
been derived from audited consolidated financial statements of the Company for the year ended December 31, 2015, and the accompanying unaudited consolidated financial statements, as of and for the three month periods ended March 31, 2016 and 2015,
have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in the annual financial statements prepared in accordance with accounting principles
generally accepted in the United States have been condensed or omitted pursuant to those rules and regulations. For further information, refer to the financial statements and notes thereto for the year ended December 31, 2015, included in the
Companys Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 26, 2016.
In the opinion of the Company, the
accompanying consolidated financial statements contain all adjustments (all of which were normal recurring accruals) necessary to present fairly the Companys financial position as of March 31, 2016, results of operations for the three month
periods ended March 31, 2016 and 2015, and cash flows for the three month periods ended March 31, 2016 and 2015. The results of operations for the three month period ended March 31, 2016, are not necessarily indicative of the results for the year
ending December 31, 2016.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 March 31, 2016, the Company leased 50 senior living communities, 48 of which the
Company classified as operating leases and two of which the Company classified as capital lease and financing obligations. The Company incurs lease acquisition costs and amortizes these costs over the term of the respective lease agreement. 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 Consolidated
Statements of Operations and Comprehensive Loss 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 the Companys lease agreements. The Company was in compliance with all of its lease covenants at March 31, 2016.
6
Credit Risk and Allowance for Doubtful Accounts
The Companys resident receivables are generally due within 30 days from the date billed. Accounts receivable are reported net of an allowance for
doubtful accounts, and represent the Companys estimate of the amount that ultimately will be collected. The adequacy of the Companys allowance for doubtful accounts is reviewed on an ongoing basis, using historical payment trends,
write-off experience, analyses of receivable portfolios by payor source and aging of receivables, as well as a review of specific accounts, and adjustments are made to the allowance as necessary. Credit losses on resident receivables have
historically been within managements estimates, and management believes that the allowance for doubtful accounts adequately provides for expected losses.
Employee Health and Dental Benefits, Workers Compensation, and Insurance Reserves
The Company offers certain full-time employees an option to participate in its health and dental plans. The Company is self-insured up to certain limits and is
insured if claims in excess of these limits are incurred. The cost of employee health and dental benefits, net of employee contributions, is shared between the corporate office and the senior living communities based on the respective number of plan
participants. Funds collected are used to pay the actual program costs including estimated annual claims, third-party administrative fees, network provider fees, communication costs, and other related administrative costs incurred by the plans.
Claims are paid as they are submitted to the Companys third-party administrator. The Company records a liability for outstanding claims and claims that have been incurred but not yet reported. This liability is based on the historical claim
reporting lag and payment trends of health insurance claims. Management believes that the liability for outstanding losses and expenses is adequate to cover the ultimate cost of losses and expenses incurred at March 31, 2016; however, actual claims
and expenses may differ. Any subsequent changes in estimates are recorded in the period in which they are determined.
The Company uses a combination of
insurance and self-insurance for workers compensation. Determining the reserve for workers compensation losses and costs that the Company has incurred as of the end of a reporting period involves significant judgments based on projected
future events including potential settlements for pending claims, known incidents which may result in claims, estimates of incurred but not yet reported claims, changes in insurance premiums, estimated litigation costs and other factors. The Company
regularly adjusts these estimates to reflect changes in the foregoing factors. However, since this reserve is based on estimates, the actual expenses incurred may differ from the amounts reserved. Any subsequent changes in estimates are recorded in
the period in which they are determined.
Income Taxes
Income taxes are computed using the asset and liability method and current income taxes are recorded based on amounts refundable or payable in the current
year. The effective tax rates for the first quarters of fiscal 2016 and 2015 differ from the statutory tax rates due to state income taxes, permanent tax differences, and changes in the deferred tax asset valuation allowance. The Company is impacted
by the Texas Margin Tax (TMT), which effectively imposes tax on modified gross revenues for communities within the State of Texas. During each of the first quarters of fiscal 2016 and 2015, the Company consolidated 37 Texas communities
and the TMT increased the overall provision for income taxes.
Deferred income taxes are recorded based on the estimated future tax effects of loss
carryforwards and temporary differences between financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates that are expected to
apply to taxable income in the years in which we expect those carryforwards and temporary differences to be recovered or settled. 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 taxable income in carryback years, future reversals of taxable temporary differences, feasible tax planning strategies, and future expectations of
income. Based upon this analysis, an adjustment to the valuation allowance of $1.9 million and $2.5 million was recorded during the first quarters of fiscal 2016 and 2015, respectively, to increase the valuation allowance provided to $24.1 million
and $19.8 million at March 31, 2016 and 2015, respectively, and reduce the Companys net deferred tax assets to the amount that is more likely than not to be realized. However, in the event that we were to determine that it would be more likely
than not that the Company would realize the benefit of deferred tax assets in the future in excess of their net recorded amounts, adjustments to deferred tax assets would increase net income in the period such determination was made
.
The
benefits of the net deferred tax assets might not be realized if actual results differ from expectations.
7
The Company evaluates uncertain tax positions through consideration of accounting and reporting guidance on
criteria, 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 such position is more likely than not (i.e., a greater than 50% 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 generally no longer subject to
federal and state income tax audits for tax years prior to 2012.
Net Loss Per Share
Basic net loss per common share is computed by dividing net loss by the weighted average number of common shares outstanding for the period. Potentially
dilutive securities consist of unvested restricted shares and shares that could be issued under outstanding stock options. Potentially dilutive securities are excluded from the computation of net loss per common share if their effect is
antidilutive.
The following table sets forth the computation of basic and diluted net loss per share (in thousands, except for per share amounts):
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Three Months Ended
March 31,
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2016
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|
|
2015
|
|
Net loss
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|
$
|
(5,984
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)
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|
$
|
(6,039
|
)
|
Net loss allocable to unvested restricted shares
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|
|
|
|
|
|
(168
|
)
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|
|
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|
|
|
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Undistributed net loss attributable to common shares
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|
$
|
(5,984
|
)
|
|
$
|
(5,871
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)
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|
|
|
|
|
|
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|
Weighted average shares outstanding basic
|
|
|
28,751
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|
|
|
28,565
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|
Effects of dilutive securities:
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Employee equity compensation plans
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Weighted average shares outstanding diluted
|
|
|
28,751
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|
|
|
28,565
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|
|
|
|
|
|
|
|
|
|
Basic net loss per share
|
|
$
|
(0.21
|
)
|
|
$
|
(0.21
|
)
|
|
|
|
|
|
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Diluted net loss per share
|
|
$
|
(0.21
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)
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|
$
|
(0.21
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)
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Awards of unvested restricted stock representing approximately 1,034,000 and 801,000 shares were outstanding for the three
months ended March 31, 2016 and 2015, respectively, and were antidilutive. During fiscal 2015, the unvested restricted stock did not meet all of the requirements to be deemed participating securities. Therefore, for current and future reporting
periods, (losses) earnings per share will be calculated under the treasury method and the two-class method will no longer be utilized by the Company.
Treasury Stock
The Company accounts for treasury stock
under the cost method and includes treasury stock as a component of stockholders equity. During the three months ended March 31, 2016, the Company repurchased 144,315 shares of its common stock in open market transactions.
Recently Issued Accounting Guidance
In March 2016, the
Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-09,
Improvements to Employee Share-based Payment Accounting
. ASU 2016-09 simplifies several aspects of the accounting for
share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The amendments in ASU 2016-09 are effective for annual periods
beginning after December 15, 2016, and interim periods within those annual periods. Early application is permitted. The Company is currently evaluating the impact the adoption of ASU 2014-09 will have on the Companys consolidated financial
statements and disclosures.
In February 2016, the FASB issued ASU 2016-02,
Leases
. ASU 2016-02 amends the existing accounting standards for lease
accounting, including requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting. ASU 2016-02 will be effective beginning in 2019. Early adoption of ASU 2016-02 as of its issuance is
permitted. The new leases standard requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. We are currently evaluating
the impact of adopting the new leases standard on our consolidated financial statements.
8
In September 2015, the FASB issued ASU 2015-16,
Business Combinations Simplifying the Accounting for
Measurement-Period Adjustments
. ASU 2015-16 eliminates the requirement for an acquirer in a business combination to account for the measurement-period adjustment retrospectively. Instead, acquirers must recognize measurement-period adjustments
during the period in which they determine the amounts, including the effect on earnings of any amounts they would have recorded in previous periods if the accounting had been completed at the acquisition date. ASU 2015-16 is applied prospectively
and is effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early application is permitted. The Company adopted the provisions of ASU 2015-16 on January 1, 2016, and incorporated the provisions
of this update to its consolidated financial statements upon adoption. During the first quarter of fiscal 2016, final valuation adjustments resulted in the Company reclassifying approximately $1.3 million from other assets to property and equipment
to reflect the final purchase price allocation. As a result of adoption of ASU 2015-16, prior periods were not adjusted and recast to reflect this reclassification within the Companys Consolidated Balance Sheets.
In August 2014, the FASB issued ASU 2014-15,
Disclosure of Uncertainties about an Entitys Ability to Continue as a Going Concern
. This ASU
requires management to perform interim and annual assessments of an entitys ability to continue as a going concern within one year of the date the financial statements are issued and to provide certain disclosures if conditions or events raise
substantial doubt about the entitys ability to continue as a going concern. ASU 2014-15 is effective for annual reporting periods ending after December 15, 2016 and subsequent interim reporting periods. Management does not expect the adoption
of ASU 2014-15 to have a material impact on the companys financial position, results of operations or cash flows.
In May 2014, the FASB issued ASU
2014-09,
Revenue from Contracts with Customers
. ASU 2014-09 affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets. Under ASU 2014-09,
an entity will recognize revenue when it transfers promised goods or services to customers in an amount that reflects what it expects in exchange for the goods or services. ASU 2014-09 is effective for annual periods beginning after December 15,
2017. The Company is currently evaluating the impact the adoption of ASU 2014-09 will have on the Companys consolidated financial statements and disclosures.
3. ACQUISITIONS
Fiscal 2016
Effective February 16, 2016, the Company closed the acquisition of two senior living communities located in Pensacola, Florida, for approximately $48.0 million
(the Pensacola Transaction). The two communities consist of 179 assisted living units. The Company incurred approximately $0.3 million in transaction costs related to this acquisition which have been included in general and
administrative expenses within the Companys Consolidated Statements of Operations and Comprehensive Loss. The Company obtained financing from Protective Life Insurance Company (Protective Life) for $35.0 million of the acquisition
price at a fixed interest rate of 4.38% with a 10-year term with the balance of the acquisition price paid from the Companys existing cash resources.
Effective January 26, 2016, the Company closed the acquisition of three senior living communities located in Colby, Park Falls, and Wisconsin Rapids,
Wisconsin, for approximately $16.8 million (the Pine Ridge Transaction). The three communities consist of 138 assisted living units. The Company incurred approximately $0.1 million in transaction costs related to this acquisition which
have been included in general and administrative expenses within the Companys Consolidated Statements of Operations and Comprehensive Loss. The Company obtained financing from Protective Life for $11.3 million of the acquisition price at a
fixed interest rate of 4.50% with a 10-year term with the balance of the acquisition price paid from the Companys existing cash resources.
As a
result of these acquisitions, for which the purchase accounting is preliminary as it is subject to final valuation adjustments, the Company recorded additions to property and equipment of approximately $58.9 million and other assets of approximately
$5.9 million, primarily consisting of in-place lease intangibles, within the Companys Consolidated Balance Sheets which will be depreciated or amortized over the estimated useful lives.
9
Fiscal 2015
Effective October 30, 2015, the Company closed the acquisition of one senior living community located in Virginia Beach, Virginia, for $38.0 million (the
Virginia Beach Transaction). The community consists of 111 assisted living units. The Company incurred approximately $0.1 million in transaction costs related to this acquisition which have been included in general and administrative
expenses within the Companys Consolidated Statements of Operations and Comprehensive Loss. The Company obtained financing from Protective Life for $28.0 million of the acquisition price at a fixed interest rate of 4.25% with a 10-year term
with the balance of the acquisition price paid from the Companys existing cash resources.
Effective September 30, 2015, the Company closed the
acquisition of one senior living community located in Mahomet, Illinois, for $15.5 million (the Mahomet Transaction). The community consists of 78 assisted living units. The Company incurred approximately $0.1 million in transaction
costs related to this acquisition which have been included in general and administrative expenses within the Companys Consolidated Statements of Operations and Comprehensive Loss. The Company obtained financing from Fannie Mae for
approximately $11.1 million of the acquisition price at a fixed interest rate of 4.69% with a 10-year term with the balance of the acquisition price paid from the Companys existing cash resources.
Effective August 11, 2015, the Company closed the acquisition of one senior living community located in Indianapolis, Indiana, for $21.0 million (the
Indianapolis Transaction). The community consists of 124 assisted living units. The Company incurred approximately $0.1 million in transaction costs related to this acquisition which have been included in general and administrative
expenses within the Companys Consolidated Statements of Operations and Comprehensive Loss. The Company obtained financing from Protective Life for $13.2 million of the acquisition price at a fixed interest rate of 4.25% with a 10-year term
with the balance of the acquisition price paid from the Companys existing cash resources. The note with Protective Life associated with the Indianapolis Transaction includes a loan commitment for up to $2.6 million of supplemental funding at
the same terms and 4.25% fixed interest rate. The loan commitment is based on meeting certain funding requirements and is available through February 28, 2018.
Effective July 28, 2015, the Company closed the acquisition of one senior living community located in Columbiana, Ohio, for approximately $13.3 million (the
Columbiana Transaction). The community consists of 68 assisted living units. The Company incurred approximately $0.1 million in transaction costs related to this acquisition which have been included in general and administrative expenses
within the Companys Consolidated Statements of Operations and Comprehensive Loss. The Company obtained financing from Protective Life for approximately $9.9 million of the acquisition price at a fixed interest rate of 4.25% with a 10-year term
with the balance of the acquisition price paid from the Companys existing cash resources.
Effective May 29, 2015, the Company closed the
acquisition of one senior living community located in Oneonta, New York, for $14.9 million (the Heritage Transaction). The community consists of 64 independent living units and 44 assisted living units. The Company incurred approximately
$0.4 million in transaction costs related to this acquisition which have been included in general and administrative expenses within the Companys Consolidated Statements of Operations and Comprehensive Loss. The Company obtained financing from
Fannie Mae for approximately $11.2 million of the acquisition price at a fixed interest rate of 4.79% with a 10-year term with the balance of the acquisition price paid from the Companys existing cash resources.
Effective May 21, 2015, the Company closed the acquisition of two senior living communities located in Hartford and West Bend, Wisconsin, for $12.0 million
(the Emerald Transaction). The two communities consist of 79 assisted living units. The Company incurred approximately $0.2 million in transaction costs related to this acquisition which have been included in general and administrative
expenses within the Companys Consolidated Statements of Operations and Comprehensive Loss. The Company obtained financing from Fannie Mae for approximately $9.2 million of the acquisition price at a fixed interest rate of 4.55% with a 10-year
term with the balance of the acquisition price paid from the Companys existing cash resources.
Effective March 27, 2015, the Company closed the
acquisition of one senior living community located in Baytown, Texas, for approximately $29.6 million (the Baytown Transaction). The community consists of 9 independent living cottages and 120 assisted living units. The Company incurred
approximately $0.2 million in transaction costs related to this acquisition which have been included in general and administrative expenses within the Companys Consolidated Statements of Operations and Comprehensive Loss. The Company obtained
financing from Protective Life for approximately $21.4 million of the acquisition price at a fixed interest rate of 3.55% with a 10-year term with the balance of the acquisition price paid from the Companys existing cash resources.
Effective January 13, 2015, the Company closed the acquisition of one senior living community located in Green Bay, Wisconsin, for approximately $18.3 million
(the Green Bay Transaction). The community consists of 78 assisted living units. The Company incurred approximately $0.1 million in transaction costs related to this acquisition which have been included in general and
10
administrative expenses within the Companys Consolidated Statements of Operations and Comprehensive Loss. The Company obtained financing from Fannie Mae for approximately $14.1 million of
the acquisition price at a fixed interest rate of 4.35% with a 10-year term with the balance of the acquisition price paid from the Companys existing cash resources.
As a result of these acquisitions, during fiscal 2015 the Company recorded additions to property and equipment of approximately $148.0 million and other
assets of approximately $14.6 million, primarily consisting of in-place lease intangibles, within the Companys Consolidated Balance Sheets which will be depreciated or amortized over the estimated useful lives. The purchase accounting for the
Virginia Beach Transaction which closed during the fourth quarter of fiscal 2015, was preliminary as it was subject to final valuation adjustments. During the first quarter of fiscal 2016, final valuation adjustments resulted in the Company
reclassifying approximately $1.3 million from other assets to property and equipment to reflect the final purchase price allocation.
4. DISPOSITIONS
Effective August 6, 2015, the Company closed a transaction to sell one of its senior living communities located in Wichita, Kansas, for approximately
$14.8 million (the Sedgwick Sale Transaction). As a result of the sale, outstanding mortgage debt totaling approximately $6.8 million was assumed by the buyer. The Company recognized a gain on sale of approximately $6.4 million and
received net proceeds, less the debt assumption, of approximately $8.0 million. For income tax purposes, the Company executed a like-kind exchange and acquired a replacement property shortly after the sale which resulted in the deferral of the gain
without the Company incurring any current federal or state income tax liabilities. The Company contracted with a qualified intermediary for purposes of reaching its determination that the transaction satisfied all requirements of a like-kind
exchange under applicable federal and state income tax law.
Effective January 22, 2015, the Company closed a transaction to sell four of its senior
living communities located in Oklahoma City, Oklahoma, Shreveport, Louisiana, Southfield, Michigan, and Winston-Salem, North Carolina, in a single transaction for approximately $36.5 million (the Four Property Sale Transaction). As a
result of the sale, the outstanding mortgage debt on the Companys senior living communities located in Oklahoma City and Shreveport was repaid without incurring any prepayment penalties as these notes were short-term, bridge loan interim
financing. However, the mortgage loan associated with the Companys senior living community located in Winston-Salem could not be prepaid under the existing loan agreement as it did not offer a prepayment provision. Additionally, this mortgage
loan was cross-collateralized with another mortgage loan on one of the Companys senior living communities located in Peoria, Illinois, which also did not offer a prepayment provision. Therefore, the Company determined it would defease the
Winston-Salem and Peoria mortgage loans by acquiring certain treasury securities to serve as collateral for the outstanding principal balance as of the date of the sale until the note matured on September 1, 2015. The Company contracted with a third
party trust to assume the mortgage debt and assigned all of its rights to the treasury securities to serve as collateral until the balance remaining comes due. Based on this structure, the Company concluded it met the requirements to report the debt
transaction as a legal defeasance which resulted in the Company removing the respective assets and liabilities from its Consolidated Balance Sheet during the first quarter of fiscal 2015 when the transaction closed. The Company had reported these
assets as held for sale at December 31, 2014, and recorded a remeasurement write-down of approximately $0.6 million to adjust the carrying values of these assets to the sales price, less costs to sell. As a result of the sale, the Company received
net proceeds of approximately $35.7 million.
5. DEBT TRANSACTIONS
On February 16, 2016, in conjunction with the Pensacola Transaction, the Company obtained $35.0 million of mortgage debt from Protective Life. The new mortgage
loan has a 10-year term with a 4.38% fixed interest rate and the principal amortized over a 30-year term. The Company incurred approximately $0.4 million in deferred financing costs related to this loan, which are being amortized over 10 years.
On January 26, 2016, in conjunction with the Pine Ridge Transaction, the Company obtained approximately $11.3 million of mortgage debt from Protective Life.
The new mortgage loan has a 10-year term with a 4.50% fixed interest rate and the principal amortized over a 30-year term. The Company incurred approximately $0.2 million in deferred financing costs related to this loan, which are being amortized
over 10 years.
The Company issued standby letters of credit, totaling approximately $3.9 million, for the benefit of Hartford Financial Services
(Hartford) associated with the administration of workers compensation.
11
The Company issued standby letters of credit, totaling approximately $6.6 million, for the benefit of Welltower,
Inc. (Welltower), formerly Healthcare REIT, Inc. on certain leases between Welltower and the Company.
The Company issued standby letters of
credit, totaling approximately $2.7 million, for the benefit of HCP, Inc. (HCP) on certain leases between HCP and the Company.
The senior
housing communities owned by the Company and encumbered by mortgage debt are provided as collateral under their respective loan agreements. At March 31, 2016 and December 31, 2015, these communities carried a total net book value of approximately
$876.3 million and $818.7 million, respectively, with total mortgage loans outstanding, excluding deferred loan costs, of approximately $818.3 million and $777.1 million, respectively.
In connection with the Companys loan commitments described above, the Company incurred financing charges that were deferred and amortized over the terms
of the respective notes. At March 31, 2016 and December 31, 2015, the Company had gross deferred loan costs of approximately $10.9 million and $10.3 million, respectively. Accumulated amortization was approximately $2.1 million and $1.8 million at
March 31, 2016 and December 31, 2015, respectively. The Company was in compliance with all aspects of its outstanding indebtedness at March 31, 2016, and December 31, 2015.
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 Companys board of directors without stockholder approval. The
rights, preferences and privileges of holders of common stock are subject to the rights of the holders of preferred stock. No preferred stock was outstanding as of March 31, 2016 and December 31, 2015.
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. On January 14, 2016, the Company announced that its board of directors approved a continuation of the share repurchase
program. Pursuant to this authorization, during the first quarter of fiscal 2016, the Company purchased 144,315 shares of its common stock at an average cost of $17.29 per share for a total cost to the Company of approximately $2.5 million. All
such purchases were made in open market transactions.
7. STOCK-BASED COMPENSATION
The Company recognizes compensation expense for share-based stock awards to certain employees and directors, including grants of employee stock options and
awards of restricted stock, in the Companys Consolidated Statements of Operations and Comprehensive Loss 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 (as amended, 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 4.6 million shares
12
of common stock and the Company has reserved shares of common stock for future issuance pursuant to awards under the 2007 Plan. Effective May 8, 2007, the 1997 Omnibus Stock and Incentive Plan
(as amended, the 1997 Plan) was terminated and no additional shares will be granted under the 1997 Plan. The Company has reserved shares of common stock for future issuance upon the exercise of stock options that remain outstanding
pursuant to the 1997 Plan.
Stock Options
Although
the Company has not granted stock options in recent years, 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 more closely
align stockholder interests with those of our employees and directors. The Companys stock 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 three-month period ended March 31, 2016 is presented below:
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Outstanding at
Beginning of
Period
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Granted
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Exercised
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Forfeited
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Outstanding at
End of Period
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Options
Exercisable
|
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Shares
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3,000
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|
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3,000
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|
|
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3,000
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|
Weighted average exercise price
|
|
$
|
10.97
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|
|
$
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$
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$
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$
|
10.97
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$
|
10.97
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|
The options outstanding and the options exercisable at March 31, 2016, each had an intrinsic value of approximately $30,000.
Restricted Stock
The Company may grant restricted
stock awards and units 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. For restricted stock awards and units without
performance-based vesting conditions, the Company records compensation expense for the entire award on a straight-line basis over the requisite service period, which is generally a period of one to four years, unless the award is subject to certain
accelerated vesting requirements. Restricted stock awards are considered outstanding at the time of grant since the holders thereof are entitled to dividends, upon vesting, and voting rights. For restricted stock awards with performance-based
vesting conditions, total compensation expense is recognized over the requisite service period for each separately vesting tranche of the award as if the award is, in substance, multiple awards once the performance target is deemed probable of
achievement. Performance goals are evaluated periodically, and if such goals are not ultimately met or it is not probable the goals will be achieved, no compensation expense is recognized and any previously recognized compensation expense is
reversed.
The Company recognizes compensation expense of a restricted stock award over its respective vesting or performance period based on the fair
value of the award on the grant date, net of forfeitures. A summary of the Companys restricted stock awards activity and related information for the three-month period ended March 31, 2016 is presented below:
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Outstanding at
Beginning of
Period
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Granted
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Vested
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Cancelled
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Outstanding at
End of Period
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Shares
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783,310
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553,233
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295,292
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7,436
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1,033,815
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The restricted stock outstanding at March 31, 2016 had an intrinsic value of approximately $19.1 million.
During the three month period ended March 31, 2016, the Company awarded 553,233 shares of restricted common stock to certain employees of the Company, of
which 199,692 shares were subject to performance-based vesting conditions. The average market value of the common stock on the date of grant was $15.88. These awards of restricted stock vest over a one to four-year period and had an intrinsic value
of approximately $8.8 million on the date of grant.
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
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of the Companys common stock. The expected term of options granted is based primarily on historical exercise and vesting 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 awards, is based primarily on the Companys historical
option forfeiture patterns. The Company issued no stock options during each of the first quarters of fiscal 2016 and 2015.
Unrecognized stock-based
compensation expense, net of estimated forfeitures, is $15.0 million as of March 31, 2016. and the Company expects this expense to be recognized over a one-year period for performance stock awards and a three to four-year period for nonperformance
stock awards.
8. CONTINGENCIES
The Company has
claims incurred in the normal course of its business. Most of these claims are believed by management to be covered by insurance, subject to normal reservations of rights by the insurance companies and possibly subject to certain exclusions in the
applicable insurance policies. Whether or not covered by insurance, these claims, in the opinion of management, based on advice of legal counsel, should not have a material effect on the consolidated financial statements of the Company if determined
adversely to the Company.
9. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and fair values of financial instruments at March 31, 2016 and December 31, 2015 are as follows (in thousands):
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2016
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2015
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Carrying
Amount
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Fair Value
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Carrying
Amount
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Fair Value
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Cash and cash equivalents
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$
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31,808
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$
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31,808
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$
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56,087
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$
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56,087
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Restricted cash
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13,163
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13,163
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13,159
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13,159
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Notes payable, excluding deferred loan costs
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818,959
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805,959
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777,116
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724,769
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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 Companys Consolidated Balance Sheets for cash and cash
equivalents and restricted cash approximate fair value, which represent level 1 inputs as defined in the accounting standards codification.
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, which represent level 2 inputs as defined in the accounting
standards codification.
The estimated fair value of these assets and liabilities could be affected by market changes and this effect could be material.
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