NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2017
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 housing communities in the United States in terms of resident capacity. The Company owns, operates, and manages senior housing communities in geographically concentrated regions throughout the United States. As of
March 31, 2017, the Company operated 129 senior housing communities in 23 states with an aggregate capacity of approximately 16,500 residents, including 83 senior housing communities that the Company owned and 46 senior housing communities that
the Company leased. As of March 31, 2017, 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, 2016, has been derived from audited consolidated financial statements of the Company for the year ended December 31, 2016, and the accompanying unaudited consolidated financial statements, as of and for the three month
periods ended March 31, 2017 and 2016, 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, 2016, included in the Companys Annual Report on Form
10-K
filed with the Securities and Exchange Commission on March 1, 2017.
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, 2017, results of operations for the three month periods ended March 31, 2017 and 2016, and cash flows for the three month periods ended March 31, 2017
and 2016. Certain reclassifications have been made to prior period amounts to conform to current period presentation. Certain reclassifications have been made to prior period amounts to conform to current period presentation. The results of
operations for the three month period ended March 31, 2017, are not necessarily indicative of the results for the year ending December 31, 2017.
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, 2017, the Company leased 46 senior housing communities, 44 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, 2017. On January 31, 2017, the Company acquired the underlying real estate associated with four of its operating leases. For additional information refer to Note 3, Acquisitions.
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 housing 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, 2017; 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 2017 and 2016 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 the first quarters of fiscal 2017 and 2016, the Company consolidated 38 and 37 Texas communities,
respectively, 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 $13.1 million and $1.9 million was recorded during the first quarters of fiscal 2017 and 2016, respectively, to increase the valuation allowance
provided to $43.9 million and $24.1 million at March 31, 2017 and 2016, respectively, and reduce the Companys net deferred tax assets to the amount that is more likely than not to be realized. The adjustment to the valuation
allowance during the first quarter of fiscal 2017 includes a net increase of $4.9 million for the adoption of ASU
2016-09
which was effective for the Company January 1, 2017. The valuation allowance
increased $5.3 million to recognize net operating loss carryforwards attributable to excess tax benefits on stock compensation that had not been previously recognized to additional paid in capital, which was slightly offset by a reduction of
$0.4 million for stock compensation activity during the first quarter of fiscal 2017. 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 2013.
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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2017
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2016
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|
Net loss
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$
|
(21,842
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)
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$
|
(5,984
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)
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Net loss allocable to unvested restricted shares
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Undistributed net loss attributable to common shares
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|
$
|
(21,842
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)
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|
$
|
(5,984
|
)
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|
|
|
|
|
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Weighted average shares outstanding basic
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29,288
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|
|
|
28,751
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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
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|
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29,288
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|
|
|
28,751
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|
|
|
|
|
|
|
|
|
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Basic net loss per share
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|
$
|
( 0.75
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)
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$
|
( 0.21
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)
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Diluted net loss per share
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$
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( 0.75
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)
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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 849,000 and 1,034,000 shares were outstanding for the three
months ended March 31, 2017 and 2016, respectively, and were antidilutive.
Treasury Stock
The Company accounts for treasury stock under the cost method and includes treasury stock as a component of stockholders equity. There were no
repurchases of the Companys common stock during the during the three months ended March 31, 2017. All shares acquired by the Company have been purchased in open-market transactions.
Recently Issued Accounting Guidance
In January 2017, the
Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU)
2017-01,
Business Combinations Clarifying the Definition of a Business
. ASU
2017-01
provides guidance in accounting for business combinations when determining if the transaction represents acquisitions or disposals of assets or of a business. Under ASU
2017-01,
when determining whether an integrated set of assets and activities constitutes a business, entities must compare the fair value of gross assets acquired to the fair value of a single identifiable
asset or group of similar identifiable assets. If substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in the single identifiable assets or group of similar identifiable assets, the integrated set of
assets and activities is not characterized as a business. ASU
2017-01
is applied prospectively and is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal
years. Early application is permitted. Management does not expect the adoption of ASU
2017-01
to have a material impact on the Companys financial position, results of operations or cash flows.
8
In November 2016, the FASB issued ASU
2016-18,
Statement of Cash
Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force)
. ASU
2016-18
requires an entity to include in its cash and cash-equivalent balances in the statement of cash
flows those amounts that are deemed to be restricted cash and restricted cash equivalents. ASU
2016-18
is effective for interim and annual reporting periods beginning after December 15, 2017. Management
does not expect the adoption of ASU
2016-18
to have a material impact on the companys financial position, results of operations or cash flows.
In August 2016, the FASB issued ASU
2016-15,
Classification of Certain Cash Receipts and Cash
Payments
. ASU
2016-15
amends the guidance in Accounting Standards Codification (ASC) 230, which often requires judgment to determine the appropriate classification of cash flows as
operating, investing or financing activities and has resulted in diversity in practice in how certain cash receipts and cash payments are classified. ASU
2016-15
is effective for interim and annual reporting
periods beginning after December 15, 2017 and should be applied on a retrospective basis. Management does not expect the adoption of ASU
2016-15
to have a material impact on the companys cash flows.
In March 2016, the FASB issued 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 adopted the provisions of ASU
2016-09
on January 1, 2017, and incorporated the provisions of this update into its consolidated financial statements upon adoption. Upon adoption, the Company
elected to change its accounting policy to account for forfeitures as they occur. This change was applied on a modified retrospective basis with a cumulative effect adjustment to retained earnings of $0.2 million. Additionally, the adoption of
ASU
2016-09
resulted in the Company recording an adjustment of $5.3 million, which resulted in an increase to the Companys deferred tax asset valuation allowance, to recognize net operating loss
carryforwards attributable to excess tax benefits on stock compensation that had not been previously recognized to additional paid in capital. Excess tax benefits for share-based payments are now included in net operating activities rather than net
financing activities within the Companys Consolidated Statements of Cash Flows. As a result of the adoption of ASU
2016-09,
these reporting changes have been applied prospectively and prior periods have
not been adjusted.
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. The Company is currently evaluating the impact of adopting the new leases standard on our
consolidated financial statements.
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; however, based on our initial assessment we do not believe it will have a significant impact on the Companys financial statements. Additionally, the Company is still evaluating
if it will adopt the standard under the full retrospective adoption or modified retrospective adoption.
9
3. ACQUISITIONS
Fiscal 2017
Effective January 31, 2017 (the
Closing Date), the Company acquired the underlying real estate through an asset acquisition associated with four of the senior housing communities previously leased from Ventas , Inc. (Ventas) for an acquisition price of
$85.0 million (the Four Property Lease Transaction). The Company obtained interest only, bridge financing from Berkadia Commercial Mortgage LLC (Berkadia) for $65.0 million of the acquisition price with an initial
variable interest rate of LIBOR plus 4.0% and a
36-month
term, with the balance of the acquisition price paid from the Companys existing cash resources. Additionally, the Company agreed to continue
paying $2.3 million of the annual rents associated with the four communities acquired over the remaining lease term of the seven communities remaining in the Ventas Lease Portfolio. As such, the total additional lease payments to be paid over
the remaining lease term were discounted back to the Closing Date utilizing a credit-adjusted risk-free rate to calculate $16.0 million for the fair value of the lease termination financing obligation. The fair value of the four communities
acquired was determined to approximate $88.1 million. The fair values of the property, plant, and equipment of the acquired communities were determined utilizing a direct capitalization method considering facility net operating income and
market capitalization rates. These fair value measurements were based on current market conditions as of the acquisition date and are considered Level 3 measurements (fair value measurements using significant unobservable inputs) within the
fair value hierarchy of ASC
820-10,
Fair Value Measurement
. The range of capitalization rates utilized was 7.25% to 8.50%, depending upon the property type, geographical location, and overall quality of
each respective community. The acquisition price of $85.0 million and lease termination obligation of $16.0 million resulted in total aggregate consideration by the Company for the acquisition of the four communities of
$101.0 million. The Company recorded the difference between the total aggregate consideration ($101.0 million) and the estimated fair value of the four communities acquired ($88.1 million) of $12.9 million as a loss on facility lease
termination during the first quarter ended March 31, 2017. The Company incurred approximately $0.4 million in transaction costs related to this acquisition which have been capitalized as a component of the cost of the assets acquired.
As a result of this acquisition, the Company recorded additions to property and equipment of approximately $88.1 million within the Companys
Consolidated Balance Sheets which will be depreciated or amortized over the estimated useful lives. The purchase accounting for the Springfield Transaction and Cincinnati Transaction, which closed during fiscal 2016, was finalized during the first
quarter of fiscal 2017 and valuation adjustments resulted in the Company reclassifying approximately $1.3 million from property and equipment to other assets to reflect the final purchase price allocation.
Fiscal 2016
Effective November 2, 2016, the Company
closed the acquisition of one senior housing community located in Cincinnati, Ohio, for $29.0 million (the Cincinnati Transaction). The community consists of 45 independent living units and 77 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 $22.0 million of the acquisition price at a fixed interest rate of 4.24% with a
10-year
term with the balance of the acquisition price paid
from the Companys existing cash resources.
Effective September 30, 2016, the Company closed the acquisition of one senior housing community
located in Springfield, Massachusetts, for $27.0 million (the Springfield Transaction). The community consists of 97 independent living units and 90 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 Fannie Mae for
$20.3 million of the acquisition price at a fixed interest rate of 4.10% with a
10-year
term with the balance of the acquisition price paid from the Companys existing cash resources.
Effective September 27, 2016, the Company closed the acquisition of one senior housing community located in Kingwood, Texas for $18.0 million (the
Kingwood Transaction). The community consists of 96 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 Insurance Company (Protective Life) for $13.0 million of the acquisition price at a
fixed interest rate of 4.13% with a
15-year
term with the balance of the acquisition price paid from the Companys existing cash resources.
10
Effective February 16, 2016, the Company closed the acquisition of two senior housing communities located in
Pensacola, Florida, for $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 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 housing 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, the Company recorded additions to property and equipment of approximately $126.0 million and other assets of
approximately $12.8 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.
4. DEBT TRANSACTIONS
On January 31,
2017, in conjunction with the Four Property Lease Transaction, the Company obtained $65.0 million of mortgage debt from Berkadia. The new mortgage loan is interest-only and has a
3-year
term with an
initial variable interest rate of LIBOR plus 4.00%. The Company incurred approximately $0.9 million in deferred financing costs related to this loan, which are being amortized over 3 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.
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 $2.8 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, 2017 and December 31, 2016, these communities carried a total net book value of approximately $1.0 billion and $935.6 million, respectively, with total mortgage loans outstanding, excluding deferred loan costs, of
approximately $968.1 million and $907.2 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, 2017 and December 31, 2016, the Company had gross deferred loan costs of approximately $13.7 million and
$12.8 million, respectively. Accumulated amortization was approximately $3.4 million and $3.0 million at March 31, 2017 and December 31, 2016, respectively. The Company was in compliance with all aspects of its outstanding
indebtedness at March 31, 2017, and December 31, 2016.
5. 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, 2017 and December 31, 2016.
11
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. The Company did not purchase any additional
shares of its common stock pursuant to the Companys share repurchase program during the three months ended March 31, 2017.
6. 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
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.
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. No stock options were outstanding at March 31, 2017, as all outstanding options previously granted have fully vested and been exercised.
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
and market-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 and
market-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 for performance-based awards.
12
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 actual forfeitures. A summary of the Companys restricted stock awards activity and related information for the three-month period ended March 31, 2017 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
|
|
|
829,766
|
|
|
|
308,457
|
|
|
|
(271,486
|
)
|
|
|
(17,969
|
)
|
|
|
848,768
|
|
The restricted stock outstanding at March 31, 2017 had an intrinsic value of approximately $11.9 million.
During the three month period ended March 31, 2017, the Company awarded 308,457 shares of restricted common stock to certain employees of the Company, of
which 147,847 shares were subject to performance and market-based vesting conditions. The average market value of the common stock on the date of grant was $13.95. These awards of restricted stock vest over a three to four-year period and had an
intrinsic value of approximately $4.3 million on the date of grant.
Stock-Based Compensation
Unrecognized stock-based compensation expense is $12.0 million as of March 31, 2017, and the Company expects this expense to be recognized over a one
to three-year period for performance stock awards and a three to four-year period for nonperformance stock awards.
7. CONTINGENCIES
The Company has claims incurred in the normal course of its business. Most of these claims are believed by management to be covered by insurance, subject to
normal reservations of rights by the insurance companies and possibly subject to certain exclusions in the applicable insurance policies. Whether or not covered by insurance, these claims, in the opinion of management, based on advice of legal
counsel, should not have a material effect on the consolidated financial statements of the Company if determined adversely to the Company.
8. FAIR
VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and fair values of financial instruments at March 31, 2017 and December 31, 2016 are as
follows (in thousands):
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2017
|
|
|
2016
|
|
|
|
Carrying
Amount
|
|
|
Fair Value
|
|
|
Carrying
Amount
|
|
|
Fair Value
|
|
Cash and cash equivalents
|
|
$
|
12,612
|
|
|
$
|
12,612
|
|
|
$
|
34,026
|
|
|
$
|
34,026
|
|
Restricted cash
|
|
|
13,301
|
|
|
|
13,301
|
|
|
|
13,297
|
|
|
|
13,297
|
|
Notes payable, excluding deferred loan costs
|
|
|
969,948
|
|
|
|
932,317
|
|
|
|
910,234
|
|
|
|
879,448
|
|
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.
13