Sonida Senior Living, Inc. Annual Report 2008

FY2008 Annual Report · Sonida Senior Living, Inc.

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T O O U R F E L L O W S H A R E H O L D E R S

We made progress on a number of fronts in 2008, despite a challenging

economic environment, validating our focus on providing quality housing

and care while enriching the lives of our residents.

grow as seniors age and their needs increase.
We believe that we are in position to take
advantage of the current economic down-
turn to expand our base of operations
and profit from an economic recovery. We
have an established operating platform
with geographic clustering and we provide
multiple levels of care to seniors. We have
a proven track record with same-store
average annual rent growth of 6.1 percent
and same-store annual net operating income
growth of 13.7 percent since 2003.

We also have a solid balance sheet with
available cash and no significant loan
maturities until 2015. The strength of our
financial position led us to recently
announce a stock repurchase plan of up
to $10 million of common stock. We
believe this stock repurchase program
is a prudent use of our capital and
demonstrates our confidence in the
long-term value of Capital Senior Living.

In conclusion, we plan to leverage our
existing base of operations, strong
institutional relationships, proven track
record and strong financial position to
maximize shareholder value through
growth and profitability.

We thank you for your support.

James A. Stroud
Chairman of the Board

Lawrence A. Cohen
Chief Executive Officer

Our communities offer seniors the opportu-
nity to live in well-appointed buildings with
supportive services at affordable rates. We
differentiate our communities as an afford-
able option to seniors who are increasingly
seeking value. Our communities enjoy stable,
well-established reputations in their markets.
Our experienced marketing and sales staffs
are building relationships and implementing
innovative marketing plans to increase our
outreach and contacts with referral sources.
Our disciplined approach to managing
expenses and increasing rates is producing
positive results for our shareholders.

Revenues in 2008 were $193.3 million, an
increase of $4.2 million or 2 percent from
the prior year. Adjusted EBITDAR of $56.6
million also grew 2 percent from the prior
year and our adjusted EBITDAR margin
of 29.3 percent matched the level achieved
in 2007.

At communities under management, excluding
four communities with units being converted
to higher levels of care, same-store revenues
increased 2.6 percent from the prior year
with a 4.2 percent increase in average
monthly rent. Our expense management and
group purchasing program limited expense
increases to 2.3 percent, resulting in same-
store net income growth of 3.0 percent.

At the end of 2008, we operated 64 senior
living communities in 23 states with an
aggregate capacity of approximately 9,500
residents, including 38 senior living
communities which we own or in which we

have an ownership interest, 25 leased
communities and one community we man-
age for a third party. In the communities
operated in 2008, 69 percent of residents
lived independently, 24 percent of residents
required assistance with activities of daily
living and 7 percent of residents lived in
continuing care retirement communities.

We are prudently increasing capacity using
joint venture structures. We recently opened
101 independent living units and 45 assisted
living units in our Dayton, Ohio development.
Two additional developments will open
in the first half of 2009, with 287 units of
incremental capacity. These communities
have been enthusiastically received due to
the attractiveness of the buildings, their
amenities and services. We have suspended
further development until general business
conditions improve.

We are also continuing our program of
converting 207 independent living units in
7 communities to assisted living or dementia
care. Of these conversions, 80 units were
completed in 2007, 42 units were completed
in 2008, 20 units are expected to be licensed
this year and the remaining 65 units should
be completed in 2010.

We believe that the Company is well posi-
tioned to capitalize on opportunities as they
arise. The senior housing market is highly
fragmented with a number of operators
being financially challenged and lacking
access to capital. New supply is severely
constrained and demand will continue to

Total Revenue
(in $ millions)

EBITDAR Comparison
(in $ millions)

Same-Store Comparison
2007-2008 (percentage change)

189.1

193.3

159.1

200

150

100

55.4

56.6

40.5

3.0

2.6

2.3

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K

(Mark One)
¥

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2008

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from

Commission file number: 1-13445

Capital Senior Living Corporation

(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of
incorporation or organization)

14160 Dallas Parkway, Suite 300
Dallas, Texas
(Address of principal executive offices)

75-2678809
(I.R.S. Employer
Identification No.)

75254
(Zip Code)

Registrant’s telephone number, including area code:
(972) 770-5600

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class

Common Stock, $.01 par value

Name of Each Exchange
on which Registered

New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:
None

Indicate by a check mark if the registrant is a well-known seasoned issuer, as defined by Rule 405 of the Securities

Act. Yes n

No ¥

Indicate by a check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the

Act. Yes n

No ¥

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 ¥

No n

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. n

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of
the Exchange Act. (Check One):
Large accelerated filer n Accelerated filer ¥

Smaller reporting company n

Non-accelerated filer n
(Do not check if a smaller reporting company)

Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes n
No ¥
The aggregate market value of the 24,384,608 shares of the Registrant’s common stock, par value $0.01 per share (‘Common
Stock‘), held by nonaffiliates (defined to exclude all executive officers and directors) on December 31, 2008, based upon the closing price
of the Registrant’s Common Stock as reported by the New York Stock Exchange on June 30, 2008, was approximately $183.9 million. As
of March 6, 2009, the Registrant had 26,929,094 shares of Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

The Registrant’s definitive proxy statement pertaining to the 2009 Annual Meeting of Stockholders (the “Proxy Statement”) and
filed or to be filed not later than 120 days after the end of the fiscal year pursuant to Regulation 14A is incorporated herein by reference
into Part III.

CAPITAL SENIOR LIVING CORPORATION

TABLE OF CONTENTS

PART I
Item 1.
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1B. Unresolved Staff Comments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 2.
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 3.
Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 4.

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer

Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Item 6.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of

Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 7A. Quantitative and Qualitative Disclosures About Market Risks . . . . . . . . . . . . . . . . . . . . . .
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 8.
Changes in and Disagreements with Accountants on Accounting and Financial
Item 9.
Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

PART III

Item 10. Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . .
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Security Ownership of Certain Beneficial Owners and Management and Related
Item 12.
Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 13. Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . .
Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 14.

Page
Number

2
18
24
24
25
25

25
28

29
49
49

50
50
50

51
51

51
51
51

PART IV

Item 15. Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Index to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Index to Exhibits

51
52
F-1

ITEM 1. BUSINESS.

Overview

PART I

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 and its predecessors have provided senior living services since 1990. As of December 31, 2008, the
Company operated 64 senior living communities in 23 states with an aggregate capacity of approximately 9,500
residents, including 38 senior living communities which the Company either owned or in which the Company had
an ownership interest, 25 senior living communities that the Company leased and one senior living community it
managed for a third party. As of December 31, 2008, the Company also operated one home care agency. During
2008, approximately 94% of total revenues for the senior living communities operated by the Company were
derived from private pay sources.

The Company’s 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 Company’s 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 Company’s home care agency, sustains residents’ autonomy and independence based on their
physical and mental abilities.

Website

The Company’s internet website www.capitalsenior.com contains an Investor Relations section, which
provides links to the Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports
on Form 8-K, proxy statements, Section 16 filings and amendments to those reports, which reports and filings are
available through the Company’s internet website free of charge as soon as reasonably practicable after such
material is electronically filed with or furnished to the Securities and Exchange Commission (“SEC”).

Industry Background

The senior living industry encompasses a broad and diverse range of living accommodations and supportive

services that are provided primarily to persons 75 years of age or older.

For the elderly who require limited services, independent living residences supplemented at times by home
health care, offers a viable option. Most independent living communities typically offer community living packaged
with basic services consisting of meals, housekeeping, laundry, 24-hour staffing, transportation, social and
recreational activities and health care monitoring. Independent living residents typically are not reliant on
assistance with activities of daily living (“ADL’s”) although some residents may contract out for those services.

As a senior’s need for assistance increases, care in an assisted living residence is often preferable and more
cost-effective than home-based care or nursing home care. Typically, assisted living represents a combination of
housing and support services designed to aid elderly residents with ADL’s such as ambulation, bathing, dressing,
eating, grooming, personal hygiene and monitoring or assistance with medications. Certain assisted living
residences may also provide assistance to residents with low acuity medical needs, or may offer higher levels
of personal assistance for incontinent residents or residents with Alzheimer’s disease or other cognitive or physical
frailties. Generally, assisted living residents require higher levels of care than residents of independent living
residences and retirement living centers, but require lower levels of care than patients in skilled nursing facilities.
For seniors who need the constant attention of a skilled nurse or medical practitioner, a skilled nursing facility may
be required.

According to the American Senior Housing Association Senior Housing Construction Trends Report for 2008,
12% of the senior housing supply in the 100 largest metro areas of the United States (excluding Honolulu, HI) are

assisted living units, 9% are independent living units, 39% are skilled nursing units, 17% are continuing care
retirement units (“CCRC”), 3% are memory care units and 20% relate to age restricted senior apartments. The
largest 100 metro areas contain approximately 65% of the total United States population, 62% of the age 65+
population, and 61% of the age 75+ population, according to the most recent population projections from the
United States Census Bureau.

The senior living industry is highly fragmented and characterized by numerous small operators. Moreover, the
scope of senior living services varies substantially from one operator to another. Many smaller senior living
providers do not operate purpose-built residences, do not have extensive professional training for staff and provide
only limited assistance with ADLs. The Company believes that many senior living operators do not provide the
required comprehensive range of senior living services designed to permit residents to “age in place” within the
community as residents develop further physical or cognitive frailties.

The Company believes that a number of demographic, regulatory and other trends will contribute to the

continued growth in the senior living market, including the following:

Consumer Preference

The Company believes that senior living communities are increasingly becoming the setting preferred by
prospective residents and their families for the care of the elderly. Senior living offers residents greater indepen-
dence and allows them to “age in place” in a residential setting, which the Company believes results in a higher
quality of life than that experienced in more institutional or clinical settings.

The likelihood of living alone increases with age. Most of this increase is due to an aging population in which
women outlive men. Societal changes, such as high divorce rates and the growing numbers of persons choosing not
to marry, have further increased the number of Americans living alone. This growth in the number of elderly living
alone has resulted in an increased demand for services that historically have been provided by a spouse, other family
members or live-in caregivers.

Demographics

The primary market for the Company’s senior living services is comprised of persons aged 75 and older. This
age group is one of the fastest growing segments of the United States population and is expected to grow from
18.3 million in 2006 to approximately 32.6 million in 2030. The population of seniors aged 85 and over is expected
to grow from approximately 5.0 million in 2006 to approximately 8.9 million by 2030 representing an increase of
approximately 78%. As the number of persons aged 75 and over continues to grow, the Company believes that there
will be corresponding increases in the number of persons who need assistance with ADLs.

Senior Affluence

The average net worth of senior citizens is higher than non-senior citizens, partially as a result of accumulated
equity through home ownership. The Company believes that a substantial portion of the senior population has
historically accumulated significant resources available for their retirement and long-term care needs. The
Company’s target population is comprised of moderate to upper income seniors who have, either directly or
indirectly through familial support, the financial resources to pay for senior living communities, including an
assisted living alternative to traditional long-term care. However, recent volatility and downturns in the housing,
financial, and credit markets could negatively affect the timing and ability of senior citizens to relocate into our
communities which could have a significant impact on our business, financial condition, cash flows, and results of
operations.

Reduced Reliance on Family Care

Historically, the family has been the primary provider of care for seniors. The Company believes that the
increase in the percentage of women in the work force, the reduction of average family size, and overall increased
mobility in society is reducing the role of the family as the traditional caregiver for aging parents. The Company

believes that these factors will make it necessary for many seniors to look outside the family for assistance as they
age.

Restricted Supply of Nursing Beds

Several states in the United States have adopted Certificate of Need (“CON”) or similar statutes generally
requiring that, prior to the addition of new skilled nursing beds, the addition of new services, or the making of
certain capital expenditures, a state agency must determine that a need exists for the new beds or the proposed
activities. The Company believes that this CON process tends to restrict the supply and availability of licensed
nursing facility beds. High construction costs, limitations on government reimbursement for the full costs of
construction, and start-up expenses also act to constrain growth in the supply of such facilities. At the same time,
nursing facility operators are continuing to focus on improving occupancy and expanding services to subacute
patients generally of a younger age and requiring significantly higher levels of nursing care. As a result, the
Company believes that there has been a decrease in the number of skilled nursing beds available to patients with
lower acuity levels and that this trend should increase the demand for the Company’s senior living communities,
including, particularly, the Company’s assisted living communities.

Cost-Containment Pressures

In response to rapidly rising health care costs, governmental and private pay sources have adopted cost
containment measures that have reduced admissions and encouraged reduced lengths of stays in hospitals and other
acute care settings. The federal government had previously acted to curtail increases in health care costs under
Medicare by limiting acute care hospital reimbursement for specific services to pre-established fixed amounts.
Private insurers have begun to limit reimbursement for medical services in general to predetermined charges, and
managed care organizations (such as health maintenance organizations) are attempting to limit hospitalization costs
by negotiating for discounted rates for hospital and acute care services and by monitoring and reducing hospital use.
In response, hospitals are discharging patients earlier and referring elderly patients, who may be too sick or frail to
manage their lives without assistance, to nursing homes and assisted living residences where the cost of providing
care is typically lower than hospital care. In addition, third-party payors are increasingly becoming involved in
determining the appropriate health care settings for their insureds or clients, based primarily on cost and quality of
care. Based on industry data, the typical day-rate in an assisted living facility is two-thirds of the cost for
comparable care in a nursing home.

Operating Strategy

The Company’s 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 continuing to enhance the
performance of its operations. The Company is implementing its operating strategy principally through the
following methods.

Provide a Broad Range of Quality Personalized Care

Central to the Company’s operating strategy is its focus on providing quality care and services that are
personalized and tailored to meet the individual needs of each community resident. The Company’s residences and
services are designed to provide a broad range of care that permits residents to “age in place” as their needs change
and as they develop further physical or cognitive frailties. By creating an environment that maximizes resident
autonomy and provides individualized service programs, the Company seeks to attract seniors at an earlier stage,
before they need the higher level of care provided in a skilled nursing facility. The Company also maintains a
comprehensive quality assurance program designed to ensure the satisfaction of its residents and their family
members. The Company conducts annual resident satisfaction surveys that allow residents at each community to
express whether they are “very satisfied,” “satisfied” or “dissatisfied” with all major areas of a community,
including, housekeeping, maintenance, activities and transportation, food service, security and management. In
2008 and 2007, the Company achieved 95% and 94% overall approval ratings, respectively, from the residents’
satisfaction surveys.

Offer Services Across a Range of Pricing Options

The Company’s range of products and services is continually expanding to meet the evolving needs of its
residents. The Company has developed a menu of products and service programs that may be further customized to
serve both the moderate and upper income markets of a particular targeted geographic area. By offering a range of
pricing options that are customized for each target market, the Company believes that it can develop synergies,
economies of scale and operating efficiencies in its efforts to serve a larger percentage of the elderly population
within a particular geographic market.

Improve Occupancy Rates

The Company continually seeks to maintain and improve occupancy rates by: (i) retaining residents as they
“age in place” by extending optional care and service programs; (ii) attracting new residents through the on-site
marketing programs focused on residents and family members; (iii) selecting sites in underserved markets;
(iv) aggressively seeking referrals from professional community outreach sources, including area religious
organizations, senior social service programs, civic and business networks, as well as the medical community;
and (v) continually refurbishing and renovating its communities.

Improve Operating Efficiencies

The Company seeks to improve operating efficiencies at its communities by actively monitoring and managing
operating costs. By having an established national portfolio of communities with regional management in place, the
Company believes it has established a platform to achieve operating efficiencies through economies of scale in the
purchase of bulk items, such as food and supplies and in the spreading of fixed costs, such as corporate overhead,
over a larger revenue base, and to provide more effective management supervision and financial controls. The
Company’s growth strategy includes regional clustering of new communities to achieve further efficiencies.

Emphasize Employee Training and Retention

The Company devotes special attention to the hiring, screening, training, supervising and retention of its
employees and caregivers to ensure that quality standards are achieved. In addition to normal on-site training, the
Company conducts national management meetings and encourages sharing of expertise among managers. The
Company’s commitment to the total quality management concept is emphasized throughout its training program.
This commitment to the total quality management concept means identification of the “best practices” in the senior
living market and communication of those “best practices” to the Company’s executive directors and their staff. The
identification of best practices is realized by a number of means, including: emphasis on regional and executive
directors keeping up with professional trade journals; interaction with other professionals and consultants in the
senior living industry through seminars, conferences and consultations; visits to other properties; leadership and
participation at national and local trade organization events; and information derived from marketing studies and
resident satisfaction surveys. This information is continually processed by regional managers and the executive
directors and communicated to the Company’s employees as part of their training. The Company hires an executive
director for each of its communities and provides them with autonomy, responsibility and accountability. The
Company’s staffing of each community with an executive director allows it to hire more professional employees at
these positions, while the Company’s developed career path helps it to retain the professionals it hires. The
Company believes its commitment to and emphasis on employee training and retention differentiates the Company
from many of its competitors.

Senior Living Services

The Company provides senior living services to the elderly, including independent living, assisted living,
skilled nursing and home care services. By offering a variety of services and encouraging the active participation of
the resident and the resident’s family and medical consultants, the Company is able to customize its service plan to
meet the specific needs and desires of each resident. As a result, the Company believes that it is able to maximize
customer satisfaction and avoid the high cost of delivering unnecessary services to residents.

The Company’s operating philosophy is to provide quality living communities and services to senior citizens
and deliver a continuum of care for its residents as their needs change over time. This continuum of care, which
integrates independent living and assisted living and is bridged by home care, sustains residents’ autonomy and
independence based on their physical and mental abilities. As residents age, in many of the Company’s commu-
nities, they are able to obtain the additional needed services within the same community, avoiding the disruptive and
often traumatic move to a different facility.

Independent Living Services

The Company provides independent living services to seniors who typically do not yet need assistance or
support with ADLs, but who prefer the physical and psychological comfort of a residential community that offers
health care and other services. As of December 31, 2008, the Company had ownership interests in 28 communities,
leased 14 communities and managed one community that provide independent living services, with an aggregate
capacity for approximately 6,500 residents.

Independent living services provided by the Company include daily meals, transportation, social and
recreational activities, laundry, housekeeping and 24-hour staffing. The Company also fosters the wellness of
its residents by offering access to health screenings (such as blood pressure checks), periodic special services (such
as influenza inoculations), dietary and similar programs, as well as ongoing exercise and fitness classes. Classes are
given by health care professionals to keep residents informed about health and disease management. Subject to
applicable government regulation, personal care and medical services are available to independent living residents
through either the community staff or through the Company’s agency or other independent home care agencies. The
Company’s independent living residents pay a fee ranging from $1,155 to $5,545 per month, in general, depending
on the specific community, program of services, size of the unit and amenities offered. The Company’s contracts
with its independent living residents are generally for a term of one year and are typically terminable by either party,
under certain circumstances, upon 30 days notice.

Assisted Living Services

The Company offers a wide range of assisted living care and services, including personal care services, 24 hour
staffing, support services, and supplemental services. As of December 31, 2008, the Company had ownership
interests in 17 communities and leased 15 communities that provide assisted living services, which include
communities that have independent living and other services, with an aggregate capacity for approximately 2,300
residents. The residents of the Company’s assisted living residences generally need help with some or all ADLs, but
do not require the more acute medical care traditionally given in nursing homes. Upon admission to the Company’s
assisted living communities, and in consultation with the resident, the resident’s family and medical consultants,
each resident is assessed to determine his or her health status, including functional abilities and need for personal
care services. The resident also completes a lifestyles assessment to determine the resident’s preferences. From
these assessments, a care plan is developed for each resident to ensure that all staff members who render care meet
the specific needs and preferences of each resident where possible. Each resident’s care plan is reviewed
periodically to determine when a change in care is needed.

The Company has adopted a philosophy of assisted living care that allows a resident to maintain a dignified
independent lifestyle. Residents and their families are encouraged to be partners in the residents’ care and to take as
much responsibility for their well being as possible. The basic types of assisted living services offered by the
Company include the following:

Personal Care Services. These services include assistance with ADLs such as ambulation, bathing,

dressing, eating, grooming, personal hygiene, and monitoring or assistance with medications.

Support Services. These services include meals, assistance with social and recreational activities,

laundry services, general housekeeping, maintenance services and transportation services.

Supplemental Services. These services include extra transportation services, personal maintenance,
extra laundry services, and special care services, such as services for residents with certain forms of dementia.
Certain of these services require extra charges.

The Company’s assisted living residents pay a fee ranging from $1,900 to $7,100 per month, in general,
depending on the specific community, the level of personal care services, support service and supplemental services
provided to the resident, size of the unit and amenities offered.

The Company maintains programs and special units at some of its assisted living communities for residents
with certain forms of dementia, which provide the attention, care and services needed to help those residents
maintain a higher quality of life. Specialized services include assistance with ADLs, behavior management and life
skills based activities programs, the goal of which is to provide a normalized environment that supports residents’
remaining functional abilities. Whenever possible, residents assist with meals, laundry and housekeeping. Special
units for residents with certain forms of dementia are located in a separate area of the community and have their own
dining facilities, resident lounge areas, and specially trained staff. The special care areas are designed to allow
residents the freedom to ambulate as they wish, while keeping them safely contained within a secure area with a
minimum of disruption to other residents. Resident fees for these special units are dependent on the size of the unit,
the design type and the level of services provided.

Continuing Care Retirement Community Services

In its continuing care retirement communities, the Company provides traditional long-term care through
24-hour-per-day skilled nursing care by registered nurses, licensed practical nurses and certified nursing assistants
as well as assisted living and independent living care. The Company also offers a comprehensive range of
restorative nursing and rehabilitation services in its communities including, but not limited to, physical, occupa-
tional, speech and medical social services. The Company’s residents receiving skilled nursing services pay fees
ranging from $4,560 to $10,790 per month, in general, depending on the specific community and the level of care
provided. As of December 31, 2008, the Company had ownership interests in one community and leased one
community providing a continuum of care that includes skilled nursing services with an aggregate capacity for
approximately 700 residents at all levels of care at those two communities.

Home Care Services

As of December 31, 2008, the Company provided home care services to clients at one senior living community
through the Company’s home care agency and made home care services available to clients at a majority of its
senior living communities through third-party providers. The Company believes that the provision of private pay,
home care services is an attractive adjunct to its independent living services because it allows the Company to
provide more services to its residents as they age in place and increases the length of stay in the Company’s
communities. In addition, the Company makes available to residents certain customized physician, dentistry,
podiatry and other health-related services that may be offered by third-party providers.

Operating Communities

The table below sets forth certain information with respect to senior living communities operated by the

Company as of December 31, 2008.

Community

Owned:

Resident Capacity(1)

Units

CCRC Total Ownership(2)

Commencement
of Operations(3)

Canton Regency . . . . . . . . . . . . Canton, OH
Gramercy Hill . . . . . . . . . . . . . Lincoln, NE
Heatherwood . . . . . . . . . . . . . . Detroit, MI
Independence Village . . . . . . . . East Lansing, MI
Independence Village . . . . . . . . Peoria, IL
Independence Village . . . . . . . . Raleigh, NC
Independence Village . . . . . . . . Winston-Salem, NC
Sedgwick Plaza . . . . . . . . . . . . Wichita, KS
Waterford at Columbia . . . . . . . Columbia, SC
Waterford at Deer Park . . . . . . . Deer Park, TX

291
148
158
151
158
165
156
144
120
120

—
83
188
162
173
177
161
134
136
136

310
— 310
77 — 160
— — 188
— — 162
— — 173
— — 177
— — 161
35 — 169
— — 136
— — 136

100%
100%
100%
100%
100%
100%
100%
100%
100%
100%

03/91
10/98
01/92
08/00
08/00
08/00
08/00
08/00
11/00
11/00

Community

Resident Capacity(1)

Units

CCRC Total Ownership(2)

Commencement
of Operations(3)

Jackson, MS

Waterford at Edison Lakes . . . . . South Bend, IN
Waterford at Fairfield . . . . . . . . Fairfield, OH
Waterford at Fort Worth . . . . . . . Fort Worth, TX
Waterford at Highland Colony . .
Waterford at Huebner . . . . . . . . San Antonio, TX
Waterford at Ironbridge . . . . . . . Springfield, MO
Waterford at Mansfield . . . . . . . Mansfield, OH
Waterford at Mesquite . . . . . . . . Mesquite, TX
Waterford at Pantego . . . . . . . . . Pantego, TX
Waterford at Plano . . . . . . . . . . Plano, TX
Waterford at Shreveport . . . . . . . Shreveport, LA
Waterford at Thousand Oaks. . . . San Antonio, TX
Wellington at Arapaho . . . . . . . . Richardson, TX
Wellington at North Richland

Hills, TX . . . . . . . . . . . . . . . North Richland Hills, TX

Wellington at Oklahoma City . . . Oklahoma City, OK

Leased:

Ventas:

Amberleigh . . . . . . . . . . . . . Buffalo, NY
Cottonwood Village . . . . . . . . Cottonwood, AZ
Crown Pointe . . . . . . . . . . . . Omaha, NE
Georgetowne Place . . . . . . . . Fort Wayne, IN
Harrison at Eagle Valley(4) . . .
Indianapolis, IN
Rose Arbor. . . . . . . . . . . . . . Maple Grove, MN
Towne Centre . . . . . . . . . . . . Merrillville, IN
Villa Santa Barbara . . . . . . . . Santa Barbara, CA
West Shores . . . . . . . . . . . . . Hot Springs, AR
Whitley Place . . . . . . . . . . . . Keller, TX

HCP:

. . . . . . Sacramento, CA

Atrium of Carmichael
Covenant Place of Abilene . . . Abilene, TX
Covenant Place of Burleson . . Burleson, TX
Covenant Place of

Waxahachie . . . . . . . . . . . . Waxahachie, TX

Crescent Place . . . . . . . . . . . Cedar Hill, TX
Crescent Point
. . . . . . . . . . . Cedar Hill, TX
Crosswood Oaks . . . . . . . . . . Sacramento, CA
Good Place. . . . . . . . . . . . . . North Richland Hills, TX
Meadow Lakes . . . . . . . . . . . North Richland Hills, TX
Tesson Heights . . . . . . . . . . . St. Louis, MO
Veranda Club . . . . . . . . . . . . Boca Raton, FL
Charlotte Square . . . . . . . . . . Charlotte, NC
Chesapeake Place . . . . . . . . . Chesapeake, VA
Greenville Place . . . . . . . . . . Greenville, SC
Myrtle Beach Estates . . . . . . . Myrtle Beach, SC

120
120
151
120
120
119
119
154
120
136
117
120
137

119
120

136
136
174
136
136
136
136
174
136
111
136
136
109

136
136

— — 136
— — 136
— — 174
— — 136
— — 136
— — 136
— — 136
— — 174
— — 136
45 — 156
— — 136
— — 136
45 — 154

— — 136
— — 136

3,503 3,414

202

310

3,926

267
163
132
162
124
137
327
125
137
47

152
50
74

50
80
112
121
72
120
184
189
73
87
87
80

394
135
163
247
138
107
—
87
135
—

156
—
—

— — 394
47 — 182
— — 163
— — 247
— — 138
72 — 179
345
— 345
38 — 125
32 — 167
65
65 —

— — 156
55
55 —
80
80 —

55
55 —
—
85 —
85
—
— — 134
134
— — 127
127
80 —
80
—
— — 145
145
58 — 198
140
235
— — 235
— 109 — 109
— 106 — 106
— 107 — 107
98
98 —
—

3,152 2,343 1,087

345

3,775

100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%

100%
100%

N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A

N/A
N/A
N/A

N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A

12/00
11/00
06/00
11/00
04/99
06/01
10/00
09/99
12/00
12/00
03/99
05/00
05/02

01/02
11/00

01/92
03/91
08/00
10/05
03/91
06/06
03/91
08/00
08/00
02/08

01/92
08/04
08/04

08/04
11/05
08/04
01/92
08/04
08/04
10/98
01/92
12/06
12/06
12/06
12/06

Community
Affiliates:

SHPIII/CSL Miami . . . . . . . . . . Miamisburg, OH
SHPII/CSL:

Libertyville . . . . . . . . . . . . . Libertyville, IL
Naperville . . . . . . . . . . . . . . Naperville, IL
Summit . . . . . . . . . . . . . . . . Summit, NJ
Trumbull . . . . . . . . . . . . . . . Trumbull, CT

Midwest I

The Waterford at Ames . . . . . Ames, IA
The Waterford at

Miracle Hills . . . . . . . . . . . Omaha, NE

The Waterford at

Roxbury Park . . . . . . . . . . Omaha, NE
The Waterford at Van Dorn . . . Lincoln, NE
The Waterford at

Woodbridge. . . . . . . . . . . . Plattsmouth, NE

Midwest II

Keepsake Village of

Columbus . . . . . . . . . . . . . Columbus, IN

The Hearth at Prestwick . . . . . Avon, IN
The Hearth at Windermere . . . Fishers, IN

Resident Capacity(1)

Units

CCRC Total Ownership(2)

Commencement
of Operations(3)

146

151

45 — 196

10%

08/08

197
193
88
150

62
68

171
166
—
117

50 — 221
48 — 214
98 —
98
48 — 165

— 116 — 116

—

—
—

—

74 —

70 —
84 —

45 —

70
84

42
132
126

—
42
42 —
— 144 — 144
— 133 — 133

1367

605

997 — 1,602

5%
5%
5%
5%

11%

11%
11%

11%

15%
15%
15%

03/01
01/01
11/00
09/00

02/06

03/06

02/06
02/06

02/06

08/06
08/06
08/06

Managed:

Harding Place . . . . . . . . . . . . Searcy, AR

115

148

— — 148

N/A

08/04

8,137 6,510 2,286

655

9,451

(1) Independent living (IL) residences, assisted living (AL) residences and continuing care retirement community

(CCRC) beds.

(2) Those communities shown as 5% owned consist of the Company’s ownership of 5% of the member interests in
SHPII/CSL (as defined below). The community shown as 10% owned consist of the Company’s ownership of
10% of the member interest in SHPIII/CSL Miami. Those communities shown as 11% owned consist of the
Company’s ownership of approximately 11% of the member interests in Midwest I. Those communities shown
as 15% owned consist of the Company’s ownership of 15% of the member interests in Midwest II.

(3) Indicates the date on which the Company acquired or commenced operating the community. The Company
operated certain of its communities pursuant to management agreements prior to acquiring interests in or
leasing the communities.

(4) The Company’s home care agency is on-site at The Harrison at Eagle Valley community.

Management Contracts

The Company is party to a series of property management agreements (the “Midwest I Agreements”) to
manage five communities acquired by Midwest Portfolio Holdings, L.P. (“Midwest I”), a joint venture owned
approximately 89% by GE Healthcare Financial Services (“GE Healthcare”) and approximately 11% by the
Company. The Midwest I Agreements are for an initial term of five years and the agreements contain automatic one
year renewals thereafter. The Midwest I Agreements generally provide for a management fee of 5% of gross
revenues.

The Company is party to a series of property management agreements (the “Midwest II Agreements”) to
manage three communities acquired by Midwest Portfolio Holdings II, L.P. (“Midwest II”), a joint venture owned

approximately 85% by GE Healthcare and approximately 15% by the Company. The Midwest II Agreements are for
an initial term of five years and the agreements contain automatic one year renewals thereafter. The Midwest II
Agreements generally provide for a management fee of 5% of gross revenues.

The Company is party to a series of property management agreements with CGI Management, Inc. (the
“CGIM Agreements). During fiscal 2008, the Company managed two communities under the CGIM Agreements.
The CGIM Agreements generally provide for management fees of 5% to 6% of gross revenues, subject to certain
base management fees.

The Company is party to a series of property management agreements (the “SHPII/CSL Management
Agreements”) with four joint ventures (collectively “SHPII/CSL”) owned 95% by Senior Housing Partners II,
L.P. (“SHPII”), a fund managed by Prudential Real Estate Investors (“Prudential”) and 5% by the Company, which
collectively own and operate four senior living communities (collectively the “Spring Meadows Communities”).
The SHPII/CSL Management Agreements 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.

The Company is party to a series of property management agreements (the “SHPIII/CSL Management
Agreements”) with three joint ventures (collectively “SHPIII/CSL”) owned 90% by Senior Housing Partners III,
L.P. (“SHPIII”), a fund managed by Prudential Investment Management, Inc. (“Prudential Investment”) and 10% by
the Company, which will collectively develop, own and operate three senior living communities. During fiscal
2008, the Company managed one community for which development was complete under the SHPIII/CSL
Management Agreements. The SHPIII/CSL Management Agreements are for an initial term of ten years from
the date the certificate of occupancy is issued and generally provide for management fees of 5% of gross revenue
plus reimbursement for costs and expenses related to the communities.

Development Agreements

In May 2007, the Company and SHPIII entered into a joint venture agreement (“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 consists of 101 independent living units and 45 assisted living units and opened in August 2008. As of
December 31, 2008, the Company had made capital contributions of $0.8 million to the joint venture. The Company
accounts for its investment in SHPIII/CSL Miami under the equity method of accounting and the Company
recognized a loss in the equity of SHPIII/CSL Miami of $0.1 million in fiscal 2008. The Company earned
$0.3 million and $0.7 million in development fees from SHPIII/CSL Miami in fiscal 2008 and 2007, respectively. In
addition, the Company earned $0.1 million in pre-marketing fees and $0.1 million in management fees on the
community in fiscal 2008.

In November 2007, the Company and SHPIII entered into a joint venture agreement (“SHPIII/CSL Richmond
Heights”) to develop a senior housing community in Richmond Heights, Ohio. Under the joint venture and related
agreements, the Company will earn development and management fees and may receive incentive distributions.
The senior housing community will consist of 97 independent living units and 45 assisted living units and is
expected to open in the first half of fiscal 2009. As of December 31, 2008, the Company had made capital
contributions of $0.8 million to SHPIII/CSL Richmond Heights. The Company earned $1.0 million and $0.1 million
in development fees from SHPIII/CSL Richmond Heights in fiscal 2008 and 2007, respectively. In addition, the
Company earned $0.1 million in pre-marketing fees on the community in fiscal 2008.

In December 2007, the Company and SHPIII entered into a joint venture agreement (“SHPIII/CSL Levis
Commons”) to develop a senior housing community near Toledo, Ohio. Under the joint venture and related
agreements, the Company will earn development and management fees and may receive incentive distributions.
The senior housing community will consist of 101 independent living units and 45 assisted living units and is
expected to open in the first half of fiscal 2009. As of December 31, 2008, the Company had made capital
contributions of $0.8 million to SHPIII/CSL Levis Commons. The Company earned $1.1 million and $22,000 in
development fees from SHPIII/CSL Levis Commons in fiscal 2008 and 2007, respectively. In addition, the
Company earned $0.1 million in pre-marketing fees on the community in fiscal 2008.

Growth Strategies

The Company believes that the fragmented nature of the senior living industry and the limited capital resources
available to many small, private operators provide an attractive opportunity for the Company to expand its existing
base of senior living operations. The Company believes that its current operations throughout the United States
serve as the foundation on which the Company can build senior living networks in targeted geographic markets and
thereby provide a broad range of high quality care in a cost-efficient manner.

The following are the principal elements of the Company’s growth strategy:

Organic Growth

The Company intends to continue to focus on the lease-up of its non-stabilized communities and to increase its
occupancy, rents and operating margins of its stabilized communities. The Company continually seeks to maintain
and improve occupancy rates by: (i) retaining residents as they “age in place” by extending optional care and service
programs; (ii) attracting new residents through the on-site marketing programs focused on residents and family
members; (iii) aggressively seeking referrals from professional community outreach sources, including area
religious organizations, senior social service programs, civic and business networks, as well as the medical
community; and (iv) continually refurbishing and renovating its communities. Since 2004, our same community
revenue has grown at an average rate of 5.3% per annum and our same community net operating income has grown
at an average rate of 8.7% per annum.

Expansion and Conversion of Existing Communities

The Company intends to increase levels of care and capacity at certain of its existing communities through
expansion and/or conversion of certain units. Increasing our levels of care and capacity is expected to increase
revenue and operating income while meeting the needs of our residents who have an average age of 85 years old.

Pursue Strategic Acquisitions

The Company intends to continue to pursue single or portfolio acquisitions of senior living communities.
Through strategic acquisitions, joint venture investments, or facility leases, the Company seeks to enter new
markets or acquire communities in existing markets as a means to increase market share, augment existing clusters,
strengthen its ability to provide a broad range of care, and create operating efficiencies. As the industry continues to
consolidate, the Company believes that opportunities will arise to acquire other senior living companies. The
Company believes that the current fragmented nature of the senior living industry, combined with the Company’s
financial resources, national presence, and extensive contacts within the industry, can be expected to provide it with
the opportunity to evaluate a number of potential acquisition opportunities in the future. In reviewing acquisition
opportunities, the Company will consider, among other things, geographic location, competitive climate, reputation
and quality of management and communities, and the need for renovation or improvement of the communities.

Pursue Management Agreements

The Company intends to pursue single or portfolio management opportunities for senior living communities.
The Company believes that its management infrastructure and proven operating track record will allow the
Company to take advantage of increased opportunities in the senior living market for new management contracts
and other transactions.

Expand Referral Networks

The Company intends to continue to develop relationships with local and regional hospital systems, managed
care organizations and other referral sources to attract new residents to the Company’s communities. In certain
circumstances these relationships may involve strategic alliances or joint ventures. The Company believes that such
arrangements or alliances, which could range from joint marketing arrangements to priority transfer agreements,
will enable it to be strategically positioned within the Company’s markets if, as the Company believes, senior living
programs become an integral part of the evolving health care delivery system.

Operations

Centralized Management

The Company centralizes its corporate and other administrative functions so that the community-based
management and staff can focus their efforts on resident care. The Company maintains centralized accounting,
finance, human resources, training and other operational functions at its national corporate office in Dallas, Texas.
The Company also has a corporate office in New York, New York. The Company’s corporate offices are generally
responsible for: (i) establishing Company-wide policies and procedures relating to, among other things, resident
care and operations; (ii) performing accounting functions; (iii) developing employee training programs and
materials; (iv) coordinating human resources; (v) coordinating marketing functions; and (vi) providing strategic
direction. In addition, financing, development, construction and acquisition activities, including feasibility and
market studies, and community design, development, and construction management are conducted at
the
Company’s corporate offices.

The Company seeks to control operational expenses for each of its communities through standardized
management reporting and centralized controls of capital expenditures, asset replacement tracking, and purchasing
for larger and more frequently used supplies. Community expenditures are monitored by regional and district
managers who are accountable for the resident satisfaction and financial performance of the communities in their
region.

Regional Management

The Company provides oversight and support to each of its senior living communities through experienced
regional and district managers. A district manager will oversee the marketing and operations of three to six
communities clustered in a small geographic area. A regional manager will cover a larger geographic area
consisting of seven to twelve communities. In most cases, the district and regional managers will office out of the
Company’s senior living communities. Currently, there are regional managers based in the Northeast, Central
Plains, Midwest, Southwest and West regions.

The executive director at each community reports to a regional or district manager. The regional and district
managers report directly to senior management at the Company’s corporate office. The district and regional
managers make regular site visits to each of their communities. The site visits involve a physical plant inspection,
quality assurance review, staff training, financial and systems audits, regulatory compliance, and team building.

Community-Based Management

An executive director manages the day-to-day operations at each senior living community, including oversight
of the quality of care, delivery of resident services, and monitoring of financial performance. The executive director
is also responsible for all personnel, including food service, maintenance, activities, security, assisted living,
housekeeping, and, where applicable, nursing. In most cases, each community also has department managers who
direct the environmental services, nursing or care services, business management functions, dining services,
activities, transportation, housekeeping, and marketing functions.

The assisted living and skilled nursing components of the senior living communities are managed by licensed
professionals, such as a nurse and/or a licensed administrator. These licensed professionals have many of the same
operational responsibilities as the Company’s executive directors, but their primary responsibility is to oversee
resident care. Many of the Company’s senior living communities and all of its skilled nursing facilities are part of a
campus setting, which include independent living. This campus arrangement allows for cross-utilization of certain
support personnel and services, including administrative functions that result in greater operational efficiencies and
lower costs than freestanding facilities.

The Company actively recruits personnel to maintain adequate staffing levels at its existing communities and
hires new staff for new or acquired communities prior to opening. The Company has adopted comprehensive
recruiting and screening programs for management positions that utilize corporate office team interviews and
thorough background and reference checks. The Company offers system-wide training and orientation for all of its
employees at the community level through a combination of Company-sponsored seminars and conferences.

Quality Assurance

Quality assurance programs are coordinated and implemented by the Company’s corporate and regional staff.
The Company’s quality assurance is targeted to achieve maximum resident and resident family member satisfaction
with the care and services delivered by the Company. The Company’s primary focus in quality control monitoring
includes routine in-service training and performance evaluations of caregivers and other support employees.
Additional quality assurance measures include:

Resident and Resident’s Family Input. On a routine basis, the Company provides residents and their
family members the opportunity to provide valuable input regarding the day-to-day delivery of services.
On-site management at each community has fostered and encouraged active resident councils and resident
committees who meet independently. These resident bodies meet with on-site management on a monthly basis
to offer input and suggestions as to the quality and delivery of services. Additionally, at each community the
Company conducts annual resident satisfaction surveys to further monitor the satisfaction levels of both
residents and their family members. These surveys are sent directly to a third party firm for tabulation then to
the Company’s corporate headquarters for distribution to onsite staff. For 2008 and 2007, the Company
achieved a 95% and a 94% approval ratings, respectively, from its residents. For any departmental area of
service scoring below a 90%, a plan of correction is developed jointly by on-site, regional and corporate staff
for immediate implementation.

Regular Community Inspections. Each community is inspected, on at least a quarterly basis, by regional
and/or corporate staff. Included, as part of this inspection is the monitoring of the overall appearance and
maintenance of the community interiors and grounds. The inspection also includes monitoring staff profes-
sionalism and departmental reviews of maintenance, housekeeping, activities, transportation, marketing,
administration and food and health care services, if applicable. The inspections also include observing
residents in their daily activities and the community’s compliance with government regulations.

Independent Service Evaluations. The Company engages the services of outside professional inde-
pendent consulting firms to evaluate various components of the community operations. These services include
mystery shops, competing community analysis, pricing recommendations and product positioning. This
provides management with valuable unbiased product and service information. A plan of action regarding any
areas requiring improvement or change is implemented based on information received. At communities where
health care is delivered, these consulting service reviews include the on-site handling of medications, record
keeping and general compliance with all governmental regulations.

Marketing

Most communities are staffed by on-site sales directors and additional marketing/sales staff depending on the
community size and occupancy status. The primary focus of the on-site marketing staff is to create awareness of the
Company and its services among prospective residents and family members, professional referral sources and other
key decision makers. These efforts incorporate an aggressive marketing plan to include monthly, quarterly and
annual goals for leasing, new lead generation, prospect follow up, community outreach and resident and family
referrals. Additionally, the marketing plan includes a calendar of promotional events and a comprehensive media
program. On-site marketing departments perform a competing community assessment quarterly. Corporate and
regional marketing directors monitor the on-site marketing departments’ effectiveness and productivity on a
monthly basis. Routine detailed marketing department audits are performed on an annual basis or more frequently if
deemed necessary. Corporate and regional personnel assist in the development of marketing strategies for each
community and produce creative media, assist in direct mail programs and necessary marketing collateral. Ongoing
sales training of on-site marketing/sales staff is implemented by corporate and regional marketing directors.

In the case of new development, the corporate and regional staff develops a comprehensive community
outreach program that is implemented at the start of construction. A marketing pre-lease program is developed and
on-site marketing staff are hired and trained to begin the program implementation six to nine months prior to the
community opening. Extensive use of media, including radio, television, print, direct mail and telemarketing, is
implemented during this pre-lease phase.

After the community is opened and sustaining occupancy levels are attained, the on-site marketing staff is
more heavily focused on resident and resident family referrals, as well as professional referrals. A maintenance
program for continued lead generation is then implemented.

Government Regulation

Changes in existing laws and regulations, adoption of new laws and regulations and new interpretations of
existing laws and regulations could have a material effect on the Company’s operations. Failure by the Company to
comply with applicable regulatory requirements could have a material adverse effect on the Company’s business,
financial condition, cash flows, and results of operations. Accordingly, the Company monitors legal and regulatory
developments on local and national levels.

The health care industry is subject to extensive regulation and frequent regulatory change. At this time, no
federal laws or regulations specifically regulate assisted or independent living residences. While a number of states
have not yet enacted specific assisted living regulations, certain of the Company’s assisted living communities are
subject to regulation, licensing, CON and permitting by state and local health care and social service agencies and
other regulatory authorities. While such requirements vary from state to state, they typically relate to staffing,
physical design, required services and resident characteristics. The Company believes that such regulation will
increase in the future. In addition, health care providers are receiving increased scrutiny under anti-trust laws as
integration and consolidation of health care delivery increases and affects competition. The Company’s commu-
nities are also subject to various zoning restrictions, local building codes, and other ordinances, such as fire safety
codes. Failure by the Company to comply with applicable regulatory requirements could have a material adverse
effect on the Company’s business, financial condition, and results of operations. Regulation of the assisted living
industry is evolving. The Company is unable to predict the content of new regulations and their effect on its
business. There can be no assurance that the Company’s operations will not be adversely affected by regulatory
developments.

The Company believes that its communities are in substantial compliance with applicable regulatory
requirements. However, in the ordinary course of business, one or more of the Company’s communities could
be cited for deficiencies. In such cases, the appropriate corrective action would be taken. To the Company’s
knowledge, no material regulatory actions are currently pending with respect to any of the Company’s communities.

Under the Americans with Disabilities Act of 1990 (“ADA”), all places of public accommodation are required
to meet certain federal requirements related to access and use by disabled persons. A number of additional federal,
state and local laws exist that also may require modifications to existing and planned properties to permit access to
the properties by disabled persons. While the Company believes that its communities are substantially in
compliance with present requirements or are exempt therefrom, if required changes involve a greater expenditure
than anticipated or must be made on a more accelerated basis than anticipated, additional costs would be incurred by
the Company. Further legislation may impose additional burdens or restrictions with respect to access by disabled
persons, the costs of compliance with which could be substantial.

The Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), in conjunction with the federal
regulations promulgated thereunder by the Department of Health and Human Services, has established, among
other requirements, standards governing the privacy of certain protected and individually identifiable health
information (“PHI”) that is created, received or maintained by a range of covered entities. HIPAA has also
established standards governing uniform health care transactions, the codes and identifiers to be used by the covered
entities and standards governing the security of certain electronic transactions conducted by covered entities.
Penalties for violations can range from civil money penalties for errors and negligent acts to criminal fines and
imprisonment for knowing and intentional misconduct. HIPAA is a complex set of regulations and many
unanswered questions remain with respect to the manner in which HIPAA applies to businesses such as those
operated by the Company.

In addition, the Company is subject to various federal, state and local environmental laws and regulations.
Such laws and regulations often impose liability whether or not the owner or operator knew of, or was responsible
for, the presence of hazardous or toxic substances. The costs of any required remediation or removal of these
substances could be substantial and the liability of an owner or operator as to any property is generally not limited

under such laws and regulations and could exceed the property’s value and the aggregate assets of the owner or
operator. The presence of these substances or failure to remediate such contamination properly may also adversely
affect the owner’s ability to sell or rent the property, or to borrow using the property as collateral. Under these laws
and regulations, an owner, operator or an entity that arranges for the disposal of hazardous or toxic substances, such
as asbestos-containing materials, at a disposal site may also be liable for the costs of any required remediation or
removal of the hazardous or toxic substances at the disposal site. In connection with the ownership or operation of
its properties, the Company could be liable for these costs, as well as certain other costs, including governmental
fines and injuries to persons or properties. The Company has completed Phase I environmental audits of
substantially all of the communities in which the Company owns interests, typically at the time of acquisition,
to these
and such audits have not revealed any material environmental
communities.

liabilities that exist with respect

Under various federal, state and local environmental laws, ordinances and regulations, a current or previous
owner or operator of real estate may be required to investigate and clean up hazardous or toxic substances or
petroleum product releases at such property, and may be held liable to a governmental entity or to third parties for
property damage and for investigation and clean up costs. The Company is not aware of any environmental liability
with respect to any of its owned, leased or managed communities that the Company believes would have a material
adverse effect on its business, financial condition, or results of operations. The Company believes that its
communities are in compliance in all material respects with all federal, state and local laws, ordinances and
regulations regarding hazardous or toxic substances or petroleum products. The Company has not been notified by
any governmental authority, and is not otherwise aware of any material non-compliance, liability or claim relating
to hazardous or toxic substances or petroleum products in connection with any of the communities the Company
currently operates.

The Company believes that the structure and composition of government and, specifically, health care
regulations will continue to change and, as a result, regularly monitors developments in the law. The Company
expects to modify its agreements and operations from time to time as the business and regulatory environments
change. While the Company believes it will be able to structure all its agreements and operations in accordance with
applicable law, there can be no assurance that its arrangements will not be successfully challenged.

Competition

The senior living industry is highly competitive, and the Company expects that all segments of the industry will
become increasingly competitive in the future. Although there are a number of substantial companies active in the
senior living industry and in the markets in which the Company operates, the industry continues to be very
fragmented and characterized by numerous small operators. The Company primarily competes with Assisted
Living Concepts, Brookdale Senior Living Inc., Emeritus Corporation, Five Star Quality Care, Inc., Holiday
Retirement Corporation and Sunrise Senior Living, Inc. The Company believes that the primary competitive factors
in the senior living industry are: (i) location; (ii) reputation for and commitment to a high quality of service;
(iii) quality of support services offered (such as food services); (iv) price of services; and (v) physical appearance
and amenities associated with the communities. The Company competes with other companies providing inde-
pendent living, assisted living, skilled nursing, home health care, and other similar service and care alternatives,
some of whom may have greater financial resources than the Company. Because seniors tend to choose senior living
communities near their homes, the Company’s principal competitors are other senior living and long-term care
communities in the same geographic areas as the Company’s communities. The Company also competes with other
health care businesses with respect to attracting and retaining nurses, technicians, aides and other high quality
professional and non-professional employees and managers.

Employees

As of December 31, 2008, the Company employed 3,871 persons, of which 2,013 were full-time employees
(62 of whom are located at the Company’s corporate offices) and 1,858 were part-time employees. None of the
Company’s employees are currently represented by a labor union and the Company is not aware of any union
organizing activity among its employees. The Company believes that its relationship with its employees is good.

Executive Officers and Key Employees

The following table sets forth certain information concerning each of the Company’s executive officers and

key employees as of December 31, 2008:

Name

Age

Position(s) with the Company

Lawrence A. Cohen . . . . . . . . . . . . . . .

55 Chief Executive Officer and Vice Chairman of the

Board

James A. Stroud. . . . . . . . . . . . . . . . . .
Keith N. Johannessen . . . . . . . . . . . . . .
Ralph A. Beattie . . . . . . . . . . . . . . . . .
Rob L. Goodpaster . . . . . . . . . . . . . . . .
. . . . . . . . . . . .
David W. Beathard, Sr.
David R. Brickman . . . . . . . . . . . . . . .
Glen H. Campbell . . . . . . . . . . . . . . . .
Gloria Holland . . . . . . . . . . . . . . . . . . .
Jerry D. Lee . . . . . . . . . . . . . . . . . . . .
Robert F. Hollister . . . . . . . . . . . . . . . .

President and Chief Operating Officer

58 Chairman of the Board
52
59 Executive Vice President and Chief Financial Officer
55 Vice President — National Marketing
61 Vice President — Operations
50 Vice President Secretary and General Counsel
64 Vice President — Development
41 Vice President — Finance
48 Corporate Controller
53

Property Controller

Lawrence A. Cohen has served as one of our directors and as Vice Chairman of the Board since November
1996. He has served as our Chief Executive Officer since May 1999 and was our Chief Financial Officer from
November 1996 to May 1999. From 1991 to 1996, Mr. Cohen served as President and Chief Executive Officer of
Paine Webber Properties Incorporated, which controlled a real estate portfolio having a cost basis of approximately
$3.0 billion, including senior living facilities of approximately $110.0 million. Mr. Cohen serves on the boards of
various charitable organizations and was a founding member and is on the executive committee of the Board of
Directors of the American Seniors Housing Association. Mr. Cohen has earned a Masters in Law, is a licensed
attorney and is also a Certified Public Accountant. Mr. Cohen has had positions with businesses involved in senior
living for 24 years.

James A. Stroud has served as one of our directors and officers since January 1986. Effective as of
December 31, 2008, Mr. Stroud resigned as Chairman of the Company, however he currently continues to serve
as the Chairman of the Board. Mr. Stroud also serves on the board of directors of various educational and charitable
organizations and in varying capacities with several trade organizations, including as an Owner/Operator Advisory
Group member to the National Investment Conference. Mr. Stroud has served as a member of the Founder’s Council
and Leadership Counsel of the Assisted Living Federation of America and as a Founding Sponsor of The Johns
Hopkins University Senior Housing and Care Program. Mr. Stroud was the past President and a member of the
Board of Directors of the National Association for Senior Living Industry Executives. He was also a Founder of the
Texas Assisted Living Association and served as a member of its Board of Directors. Mr. Stroud has earned a
Masters in Law, is a licensed attorney and is also a Certified Public Accountant. Mr. Stroud has had positions with
businesses involved in senior living for 24 years.

Keith N. Johannessen has served as President of the Company and its predecessors since March 1994, and
previously served as Executive Vice President from May 1993 until February 1994. Mr. Johannessen has served as a
director and Chief Operating Officer since May 1999. From 1992 to 1993, Mr. Johannessen served as Senior
Manager in the health care practice of Ernst & Young LLP. From 1987 to 1992, Mr. Johannessen was Executive Vice
President of Oxford Retirement Services, Inc. Mr. Johannessen has served on the State of the Industry and Model
Assisted Living Regulations Committees of the American Seniors Housing Association. Mr. Johannessen has been
active in operational aspects of senior housing for 30 years.

Ralph A. Beattie joined the Company as Executive Vice President and Chief Financial Officer in May 1999.
From 1997 to 1999, he served as Executive Vice President and the Chief Financial Officer of Universal Sports
America, Inc., which was honored as the number one growth company in Dallas for 1998. For the eight years prior
to that he was Executive Vice President and Chief Financial Officer for Haggar Clothing Company, during which

time Haggar successfully completed its initial public offering. Mr. Beattie has earned his Masters of Business
Administration and is both a Certified Management Accountant and a Certified Financial Planner.

Rob L. Goodpaster has served as Vice President — National Marketing of the Company and its predecessors
since December 1992. From 1990 to 1992, Mr. Goodpaster was National Director for Marketing for Autumn
America, an owner and operator of senior housing facilities. Mr. Goodpaster has been active in professional industry
associations and formerly served on the Board of Directors for the National Association for Senior Living
Industries. Mr. Goodpaster has been active in the operational, development and marketing aspects of senior housing
for 32 years.

David W. Beathard, Sr. has served as Vice President — Operations of the Company and its predecessors since
August 1996. From 1992 to 1996, Mr. Beathard owned and operated a consulting firm, which provided operational,
marketing, and feasibility consulting regarding senior housing facilities. Mr. Beathard has been active in the
operational, sales and marketing, and construction oversight aspects of senior housing for 35 years.

David R. Brickman has served as Vice President and General Counsel of the Company and its predecessors
since July 1992 and has served as Secretary of the Company since May 2007. From 1989 to 1992, Mr. Brickman
served as in-house counsel with LifeCo Travel Management Company, a corporation that provided travel services to
U.S. corporations. Mr. Brickman has also earned a Masters of Business Administration and a Masters in Health
Administration and currently serves on the Board of Advisors for the Southern Methodist University Corporate
Counsel Symposium. Mr. Brickman has either practiced law or performed in-house counsel functions for 22 years.

Glen H. Campbell has served as Vice President — Development of the Company since September 1997. From
1990 to 1997 Mr. Campbell served as Vice President of Development for Greenbrier Corporation, an assisted living
development and management company. From 1985 to 1990 Mr. Campbell served as Director of Facility
Management for Retirement Corporation of America. Mr. Campbell has been active in the design and development
of retirement communities for 34 years.

Gloria M. Holland has served as Vice President — Finance since June 2004. From 2001 to 2004, Ms. Holland
served as Assistant Treasurer and a corporate officer for Aurum Technology, Inc., a privately held company that
provided technology and outsourcing to community banks. From 1996 to 2001, Ms. Holland held positions in
Corporate Finance and Treasury at Brinker International, an owner and operator of casual dining restaurants. From
1989 to 1996, Ms. Holland was a Vice President in the Corporate Banking division of NationsBank and predecessor
banks. Ms. Holland received a BBA in Finance from the University of Mississippi in 1989.

Jerry D. Lee, a Certified Public Accountant, who had served as Corporate Controller since April 1999,
resigned from the Company effective January 2, 2009. Prior to joining the Company, Mr. Lee served as the Senior
Vice President of Finance, from 1997 to 1999, for Universal Sports America, Inc., a company that produced sporting
events and provided sports marketing services for collegiate conferences and universities. From 1984 to 1997,
Mr. Lee held various accounting management positions with Haggar Clothing Company. Mr. Lee is a member of the
Financial Executives International, the American Institute of Certified Public Accountants and is also a member of
the Texas Society of Certified Public Accountants.

Robert F. Hollister, a Certified Public Accountant, has served as Property Controller for the Company and its
predecessors since April 1992. From 1985 to 1992, Mr. Hollister was Chief Financial Officer and Controller of
Kavanaugh Securities, Inc., a National Association of Securities Dealers broker dealer. Mr. Hollister is a member of
the American Institute of Certified Public Accountants.

Subsidiaries

Capital Senior Living Corporation is the parent company of several direct and indirect subsidiaries. Although
Capital Senior Living Corporation and its subsidiaries are referred to for ease of reference in this Form 10-K as the
Company, these subsidiaries are separately incorporated and maintain their legal existence separate and apart from
the parent, Capital Senior Living Corporation.

New York Stock Exchange Certification and SEC Certifications

In May 2008, as required in Section 303A.12(a) of the New York Stock Exchange Listed Company Manual, the
Chief Executive Officer of the Company certified to the New York Stock Exchange that he was not aware of any
violations by the Company of New York Stock Exchange corporate governance listing standards. The certifications
of the Chief Executive Officer and Chief Financial Officer required under Section 302 of the Sarbanes-Oxley Act
have been filed as Exhibits 31.1 and 31.2 of this Form 10-K annual report.

ITEM 1A. RISK FACTORS

Our business involves various risks. When evaluating our business the following information should be
carefully considered in conjunction with the other information contained in our periodic filings with the SEC.
Additional risks and uncertainties not known to us currently or that currently we deem to be immaterial also may
impair our business operations. If we are unable to prevent events that have a negative effect from occurring, then
our business may suffer. Negative events are likely to decrease our revenue, increase our costs, make our financial
results poorer and/or decrease our financial strength, and may cause our stock price to decline.

We have significant debt and our failure to generate cash flow sufficient to cover required interest and
principal payments could result in defaults of the related debt.

As of December 31, 2008, we had mortgage and other indebtedness totaling approximately $189.6 million. We
cannot assure you that we will generate cash flow from operations or receive proceeds from refinancings, other
financings or the sales of assets sufficient to cover required interest and principal payments. Any payment or other
default could cause the applicable lender to foreclose upon the communities securing the indebtedness with a
consequent loss of income and asset value to us. Further, because some of our mortgages contain cross-default and
cross-collateralization provisions, a payment or other default by us with respect to one community could affect a
significant number of our other communities.

We have significant operating lease obligations and our failure to generate cash flows sufficient to cover
these lease obligations could result in defaults under the lease agreements.

As of December 31, 2008, we leased 25 communities with future lease obligations totaling approximately
$206.2 million, with minimum lease obligations of $28.6 million in fiscal 2009. We cannot assure you that we will
generate cash flow from operations or receive proceeds from refinancings, other financings or the sales of assets
sufficient to cover these required operating lease obligations. Any payment or other default under any such lease
could result in the termination of the lease, with a consequent loss of income and asset value to us. Further, because
our leases contain cross-default provisions, a payment or other default by us with respect to one leased community
could affect all of our other leased communities with related lessors. Certain of our leases contain various financial
and other restrictive covenants, which could limit our flexibility in operating our business. Failure to maintain
compliance with the lease obligations as set forth in our lease agreements could have a material adverse impact on
us.

Our failure to comply with financial covenants and other restrictions contained in debt instruments and
lease agreements could result in the acceleration of the related debt or lease or in the exercise of other
remedies.

Our outstanding indebtedness and leases are secured by our communities, and, in certain cases, a guaranty by
one or more of our subsidiaries. Therefore, an event of default under the outstanding indebtedness or leases, subject
to cure provisions in certain instances, would give the respective lenders or lessors, as applicable, the right to declare
all amounts outstanding to be immediately due and payable, terminate the lease, or foreclose on collateral securing
the outstanding indebtedness and leases.

There are various financial covenants and other restrictions in certain of our debt instruments and lease

agreements, including provisions which:

(cid:129) require us to meet specified financial tests at the subsidiary company level, which include, but are not limited

to, tangible net worth requirements;

(cid:129) require us to meet specified financial tests at the community level, which include, but are not limited to,

occupancy requirements and lease coverage tests; and

(cid:129) require consent for changes in control of us.

If we fail to comply with any of these requirements, then the related indebtedness or lease obligations could
become due and payable prior to their stated dates. We cannot assure that we could pay these debt or lease
obligations if they became due.

We will require additional financing and/or refinancings in the future and may issue equity securities.

Our ability to obtain such financing or refinancing on terms acceptable to us could have a material adverse
effect on our business, financial condition, cash flows, and results of operations. Our ability to meet our long-term
capital requirements, including the repayment of certain long-term debt obligations, will depend, in part, on our
ability to obtain additional financing or refinancings on acceptable terms from available financing sources,
including through the use of mortgage financing, joint venture arrangements, by accessing the debt and/or equity
markets and possibly through operating leases or other types of financing, such as lines of credit. Recent turmoil in
the financial markets has severely restricted the availability of funds for borrowing and may make it more difficult
or costly for us to raise capital. There can be no assurance that financing or refinancings will be available or that, if
available, will be on terms acceptable to us. Moreover, raising additional funds through the issuance of equity
securities could cause existing stockholders to experience dilution and could adversely affect the market price of our
common stock. The disruptions in the financial markets have had and may continue to have a significant adverse
effect on the market value of our common stock and other adverse effects on us and our business. Our inability to
obtain additional financing or refinancings on terms acceptable to us could delay or eliminate some or all of our
growth plans, necessitate the sales of assets at unfavorable prices or both, and would have a material adverse effect
on our business, financial condition, cash flows, and results of operations.

Any future floating rate debt and lease obligations could expose us to rising interest rates.

Future indebtedness and lease obligations, if applicable, may be based on floating interest rates prevailing from
time to time. Therefore, increases in prevailing interest rates could increase in the future our interest or lease
payment obligations and could in the future have a material adverse effect on our business, financial condition, cash
flows, and results of operations.

We cannot assure that we will be able to effectively manage our growth.

We intend to expand our operations, directly or indirectly, through the acquisition of existing senior living
communities, the expansion of some of our existing senior living communities, the development of new senior
living communities and/or through an increase in the number of communities which we manage under management
agreements. The success of our growth strategy will depend, in large part, on our ability to implement these plans
and to effectively operate these communities. If we are unable to manage our growth effectively, our business,
financial condition, cash flows, and results of operations may be adversely affected.

We cannot assure that we will attempt to, or be able to, acquire additional senior living communities,
develop new senior living communities or expand existing senior living communities.

The acquisition of existing communities or other businesses involves a number of risks. Existing communities
available for acquisition frequently serve or target different markets than those presently served by us. We may also
determine that renovations of acquired communities and changes in staff and operating management personnel are
necessary to successfully integrate those communities or businesses into our existing operations. The costs incurred
to reposition or renovate newly acquired communities may not be recovered by us. In undertaking acquisitions, we

also may be adversely impacted by unforeseen liabilities attributable to the prior operators of those communities or
businesses, against whom we may have little or no recourse. The success of our acquisition strategy will be
determined by numerous factors, including our ability to identify suitable acquisition candidates; the competition
for those acquisitions; the purchase price; the requirement to make operational or structural changes and
improvements; the financial performance of the communities or businesses after acquisition; our ability to finance
the acquisitions; and our ability to integrate effectively any acquired communities or businesses into our man-
agement, information, and operating systems. We cannot assure that our acquisition of senior living communities or
other businesses will be completed at the rate currently expected, if at all, or if completed, that any acquired
communities or businesses will be successfully integrated into our operations.

Our ability to successfully develop new senior living communities or expand existing senior living commu-
nities will depend on a number of factors, including, but not limited to, our ability to acquire suitable sites at
reasonable prices; our success in obtaining necessary zoning, licensing, and other required governmental permits
and authorizations; and our ability to control construction costs and accurately project completion schedules.
Additionally, we anticipate that the development of new senior living communities or the expansion of existing
senior living communities may involve a substantial commitment of capital for a period of time of two years or more
until the new senior living communities or expansions are operating and producing revenue, the consequence of
which could be an adverse impact on our liquidity. We cannot assure that our developments or expansion of existing
senior living communities will be completed at the rate currently expected, if at all, or if completed, that such
developments or expansions will be profitable.

Termination of resident agreements and resident attrition could affect adversely our revenues and
earnings.

State regulations governing assisted living facilities require written resident agreements with each resident.
Most of these regulations also require that each resident have the right to terminate the resident agreement for any
reason on reasonable notice. Consistent with these regulations, the resident agreements signed by us allow residents
to terminate their agreement on 30 days’ notice. Thus, we cannot contract with residents to stay for longer periods of
time, unlike typical apartment leasing arrangements that involve lease agreements with specified leasing periods of
up to a year or longer. If a large number of residents elected to terminate their resident agreements at or around the
same time, then our revenues and earnings could be adversely affected. In addition, the advanced age of our average
resident means that the resident turnover rate in our senior living facilities may be difficult to predict.

We largely rely on private pay residents and circumstances that adversely affect the ability of the elderly
to pay for our services could have a material adverse effect on us.

Approximately 94% of our total revenues from communities that we operated were attributable to private pay
sources and approximately 6% of our revenues from these communities were attributable to reimbursements from
Medicare and Medicaid during fiscal 2008. We expect to continue to rely primarily on the ability of residents to pay
for our services from their own or family financial resources. The current unfavorable economic conditions in the
housing, financial, and credit markets, inflation, or other circumstances that adversely affect the ability of the
elderly to pay for our services could have a material adverse effect on our business, financial condition, cash flows,
and results of operations.

We are subject to risks related to third-party management agreements.

At December 31, 2008, we managed one senior living community for a third party and 13 senior living
communities for joint ventures in which we have a minority interest pursuant to multi-year management agree-
ments. The management agreements generally have initial terms of five years, subject to certain renewal rights.
Under these agreements we provide management services to third party and joint venture owners to operate senior
living communities and have provided, and may in the future provide, management and consulting services to third
parties on market and site selection, pre-opening sales and marketing, start-up training and management services for
facilities under development and construction. In most cases, either party to the agreements may terminate them
upon the occurrence of an event of default caused by the other party. In addition, subject to our rights to cure
deficiencies, community owners may terminate us as manager if any licenses or certificates necessary for operation

are revoked, or if we have a change of control. Also, in some instances, a community owner may terminate the
management agreement relating to a particular community if we are in default under other management agreements
relating to other communities owned by the same community owner or its affiliates. In addition, in certain cases the
community owner may terminate the agreement upon 30 days’ notice to us in the event of a sale of the community.
In those agreements, which are terminable in the event of a sale of the community, we have certain rights to offer to
purchase the community. The termination of a significant portion of our management agreements could have a
material adverse effect on our business, financial condition, cash flows, and results of operations.

Failure to perform our obligations under our joint venture arrangements could have a material adverse
effect on us.

We hold minority interests ranging from approximately 5% to 15% in several joint ventures with affiliates of
Prudential and GE Healthcare. We also manage the communities owned by these joint ventures. Under the terms of
the joint venture agreements with Prudential covering four properties, we are obligated to meet certain cash flow
targets and failure to meet these cash flow targets could result in termination of the management agreements. Under
the terms of the joint venture agreements with GE Healthcare covering eight properties, we are obligated to meet
certain net operating income targets and failure to meet these net operating income targets could result in
termination of the management agreements.

We are currently developing two communities and recently opened a third community, which are owned in
three separate joint ventures with affiliates of Prudential. As part of development agreements, we are obligated to
meet certain completion and costs guarantees. We will provide per-opening marketing services for each of the
communities and upon completion we will manage the three communities owned by the joint ventures. Under the
terms of the joint venture agreements with Prudential covering the three communities, we are obligated to meet
certain cash flow targets and failure to meet these cash flow targets could result in termination of the management
agreements.

All of the management agreements with the joint ventures contain termination and renewal provisions. We do
not control these joint venture decisions covering termination or renewal. Performance of the above obligations or
termination or non-renewal of the management agreements could have a material adverse effect on our business,
financial condition, cash flows, and results of operations.

The senior living services industry is very competitive and some competitors may have substantially
greater financial resources than us.

The senior living services industry is highly competitive, and we expect that all segments of the industry will
become increasingly competitive in the future. We compete with other companies providing independent living,
assisted living, skilled nursing, home health care and other similar services and care alternatives. We also compete
with other health care businesses with respect to attracting and retaining nurses, technicians, aides and other high
quality professional and non-professional employees and managers. Although we believe there is a need for senior
living communities in the markets where we operate residences, we expect that competition will increase from
existing competitors and new market entrants, some of whom may have substantially greater financial resources
than us. In addition, some of our competitors operate on a not-for-profit basis or as charitable organizations and have
the ability to finance capital expenditures on a tax-exempt basis or through the receipt of charitable contributions,
neither of which are available to us. Furthermore, if the development of new senior living communities outpaces the
demand for those communities in the markets in which we have senior living communities, those markets may
become saturated. Regulation in the independent and assisted living industry, which represents a substantial portion
of our senior living services, is not substantial. Consequently, development of new senior living communities could
outpace demand. An oversupply of those communities in our markets could cause us to experience decreased
occupancy, reduced operating margins and lower profitability.

We rely on the services of key executive officers and the loss of these officers or their services could have
a material adverse effect on us.

We depend on the services of our executive officers for our management. The loss of some of our executive
officers and the inability to attract and retain qualified management personnel could affect our ability to manage our
business and could adversely affect our business, financial condition, cash flows, and results of operations.

A significant increase in our labor costs could have a material adverse effect on us.

We compete with other providers of senior living services with respect to attracting and retaining qualified
management personnel responsible for the day-to-day operations of each of our communities and skilled personnel
responsible for providing resident care. A shortage of nurses or trained personnel may require us to enhance our
wage and benefits package in order to compete in the hiring and retention of these personnel or to hire more
expensive temporary personnel. We also will be dependent on the available labor pool of semi-skilled and unskilled
employees in each of the markets in which we operate. No assurance can be given that our labor costs will not
increase, or that, if they do increase, they can be matched by corresponding increases in rates charged to residents.
Any significant failure by us to control our labor costs or to pass on any increased labor costs to residents through
rate increases could have a material adverse effect on our business, financial condition, cash flows, and results of
operations.

There is an inherent risk of liability in the provision of personal and health care services, not all of which
may be covered by insurance.

The provision of personal and health care services in the long-term care industry entails an inherent risk of
liability. In recent years, participants in the long-term care industry have become subject to an increasing number of
lawsuits alleging negligence or related legal theories, many of which involve large claims and result in the
incurrence of significant defense costs. Moreover, senior living communities offer residents a greater degree of
independence in their daily living. This increased level of independence may subject the resident and, therefore, us
to risks that would be reduced in more institutionalized settings. We currently maintain insurance in amounts we
believe are comparable to those maintained by other senior living companies based on the nature of the risks, our
historical experience and industry standards, and we believe that this insurance coverage is adequate. However, we
may become subject to claims in excess of our insurance or claims not covered by our insurance, such as claims for
punitive damages, terrorism and natural disasters. A claim against us not covered by, or in excess of, our insurance
could have a material adverse effect upon us.

In addition, our insurance policies must be renewed annually. Based upon poor loss experience, insurers for the
long-term care industry have become increasingly wary of liability exposure. A number of insurance carriers have
stopped writing coverage to this market, and those remaining have increased premiums and deductibles substan-
tially. Therefore, we cannot assure that we will be able to obtain liability insurance in the future or that, if that
insurance is available, it will be available on acceptable economic terms.

We are subject to government regulations and compliance, some of which are burdensome and some of
which may change to our detriment in the future.

Federal and state governments regulate various aspects of our business. The development and operation of
senior living communities and the provision of health care services are subject to federal, state and local licensure,
certification and inspection laws that regulate, among other matters, the number of licensed beds, the provision of
services, the distribution of pharmaceuticals, billing practices and policies, equipment, staffing (including pro-
fessional licensing), operating policies and procedures, fire prevention measures, environmental matters and
compliance with building and safety codes. Failure to comply with these laws and regulations could result in the
denial of reimbursement, the imposition of fines, temporary suspension of admission of new residents, suspension
or decertification from the Medicare program, restrictions on the ability to acquire new communities or expand
existing communities and, in extreme cases, the revocation of a community’s license or closure of a community. We
believe that such regulation will increase in the future and we are unable to predict the content of new regulations or
their effect on our business, any of which could materially adversely affect us.

Various states, including several of the states in which we currently operate, control the supply of licensed
skilled nursing beds, assisted living communities and home health care agencies through CON or other programs. In
those states, approval is required for the construction of new health care communities, the addition of licensed beds
and some capital expenditures at those communities, as well as the opening of a home health care agency. To the
extent that a CON or other similar approval is required for the acquisition or construction of new communities, the
expansion of the number of licensed beds, services, or existing communities, or the opening of a home health care
agency, we could be adversely affected by our failure or inability to obtain that approval, changes in the standards
applicable for that approval, and possible delays and expenses associated with obtaining that approval. In addition,
in most states, the reduction of the number of licensed beds or the closure of a community requires the approval of
the appropriate state regulatory agency and, if we were to seek to reduce the number of licensed beds at, or to close, a
community, we could be adversely affected by a failure to obtain or a delay in obtaining that approval.

Federal and state anti-remuneration laws, such as “anti-kickback” laws, govern some financial arrangements
among health care providers and others who may be in a position to refer or recommend patients to those providers.
These laws prohibit, among other things, some direct and indirect payments that are intended to induce the referral
of patients to, the arranging for services by, or the recommending of, a particular provider of health care items or
services. Federal anti-kickback laws have been broadly interpreted to apply to some contractual relationships
between health care providers and sources of patient referral. Similar state laws vary, are sometimes vague, and
seldom have been interpreted by courts or regulatory agencies. Violation of these laws can result in loss of licensure,
civil and criminal penalties, and exclusion of health care providers or suppliers from participation in Medicare and
Medicaid programs. There can be no assurance that those laws will be interpreted in a manner consistent with our
practices.

Under the Americans with Disabilities Act of 1990, all places of public accommodation are required to meet
federal requirements related to access and use by disabled persons. A number of additional federal, state and local
laws exist that also may require modifications to existing and planned communities to create access to the properties
by disabled persons. Although we believe that our communities are substantially in compliance with present
requirements or are exempt therefrom, if required changes involve a greater expenditure than anticipated or must be
made on a more accelerated basis than anticipated, additional costs would be incurred by us. Further legislation may
impose additional burdens or restrictions with respect to access by disabled persons, the costs of compliance with
which could be substantial.

The Health Insurance Portability and Accountability Act of 1996, in conjunction with the federal regulations
promulgated thereunder by the Department of Health and Human Services, has established, among other
requirements, standards governing the privacy of certain protected and individually identifiable health information
that is created, received or maintained by a range of covered entities. HIPAA has also established standards
governing uniform health care transactions, the codes and identifiers to be used by the covered entities and
standards governing the security of certain electronic transactions conducted by covered entities. Penalties for
violations can range from civil money penalties for errors and negligent acts to criminal fines and imprisonment for
knowing and intentional misconduct. HIPAA is a complex set of regulations and many unanswered questions
remain with respect to the manner in which HIPAA applies to businesses such as those operated by us.

We may be subject to liability for environmental damages.

Under various federal, state and local environmental laws, ordinances and regulations, a current or previous
owner or operator of real estate may be required to investigate and clean up hazardous or toxic substances or
petroleum product releases at the property, and may be held liable to a governmental entity or to third parties for
property damage and for investigation and clean up costs incurred by those parties in connection with the
contamination. These laws typically impose clean-up responsibility and liability without regard to whether the
owner knew of or caused the presence of the contaminants, and liability under these laws has been interpreted to be
joint and several unless the harm is divisible and there is a reasonable basis for allocation of responsibility. The costs
of investigation, remediation or removal of the substances may be substantial, and the presence of the substances, or
the failure to properly remediate the property, may adversely affect the owner’s ability to sell or lease the property or
to borrow using the property as collateral. In addition, some environmental laws create a lien on the contaminated
site in favor of the government for damages and costs it incurs in connection with the contamination. Persons who

arrange for the disposal or treatment of hazardous or toxic substances also may be liable for the costs of removal or
remediation of the substances at the disposal or treatment facility, whether or not the facility is owned or operated by
the person. Finally, the owner of a site may be subject to common law claims by third parties based on damages and
costs resulting from environmental contamination emanating from a site. If we become subject to any of these
claims the costs involved could be significant and could have a material adverse effect on our business, financial
condition, cash flows, and results of operations.

Anti-takeover provisions in our governing documents, governing law, material agreements and our
shareholder rights plan may discourage, delay or prevent a merger or acquisition that our stockholders
may consider favorable or prevent the removal of our current board of directors and management.

Certain provisions of our amended and restated certificate of incorporation and our amended and restated by-
laws may discourage, delay or prevent a merger or acquisition that our stockholders may consider favorable or
prevent the removal of our current board of directors and management. We have a number of anti-takeover devices
in place that will hinder takeover attempts, including: a staggered board of directors consisting of three classes of
directors, each of whom serve three-year terms; removal of directors only for cause, and only with the affirmative
vote of at least a majority of the voting interest of stockholders entitled to vote; right of our directors to issue
preferred stock from time to time with voting, economic and other rights superior to those of our common stock
without the consent of our stockholders; provisions in our amended and restated certificate of incorporation and
amended and restated by-laws limiting the right of our stockholders to call special meetings of stockholders;
advance notice requirements for stockholders with respect to director nominations and actions to be taken at annual
meetings; requirement for two-thirds stockholder approval for amendment of our by-laws and certain provisions of
our certificate of incorporation; and no provision in our amended and restated certificate of incorporation for
cumulative voting in the election of directors, which means that the holders of a majority of the outstanding shares
of our common stock can elect all the directors standing for election.

Several of our leases, loan documents and other material agreements require approval in case of a change of
control of our company. These provisions may have the effect of delaying or preventing a change of control of our
company even if this change of control would benefit our stockholders.

In addition to the anti-takeover provisions described above, we are subject to Section 203 of the Delaware
General Corporation Law. Section 203 generally prohibits a person beneficially owning, directly or in directly, 15%
or more of our outstanding common stock from engaging in a business combination with us for three years after the
person acquired the stock. However, this prohibition does not apply if (A) our directors approve in advance the
person’s ownership of 15% or more of the shares or the business combination or (B) the business combination is
approved by our stockholders by a vote of at least two-thirds of the outstanding shares not owned by the acquiring
person. Also, our board of directors adopted a stockholder rights plan, which may discourage a third party from
making an unsolicited proposal to acquire us.

ITEM 1B. UNRESOLVED STAFF COMMENTS.

None.

ITEM 2. PROPERTIES

The executive and administrative offices of the Company are located at 14160 Dallas Parkway, Suite 300,
Dallas, Texas 75254, and consist of approximately 26,000 square feet. The lease on the premises extends through
May 2013. The Company believes that its corporate office facilities are adequate to meet its requirements through at
least fiscal 2009 and that suitable additional space will be available, as needed, to accommodate further physical
expansion of corporate operations. The Company also leases executive office space in New York, New York
pursuant to an annual lease agreement.

As of December 31, 2008, the Company owned, leased and/or managed the senior living communities referred

to in Item 1 above under the caption “Operating Communities.”

ITEM 3. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

There were no matters submitted to a vote of the Company’s security holders during the fourth quarter ended

December 31, 2008.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS

AND ISSUER PURCHASES OF EQUITY SECURITIES.

(a) Market Price of and Dividends on the Registrant’s Common Equity and Related Stockholder Matters.

Market Information and Holders

The Company’s shares of common stock are listed for trading on the New York Stock Exchange (“NYSE”)
under the symbol “CSU”. The following table sets forth, for the periods indicated, the high and low sales prices for
the Company’s common stock, as reported on the NYSE. At March 6, 2009 there were approximately 150
stockholders of record of the Company’s common stock.

Year

2008

2007

High

Low

High

Low

First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $9.97
8.95
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8.78
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7.59
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$6.32
7.36
6.41
1.94

$11.78
12.22
10.10
10.12

$9.65
9.41
7.61
7.68

Dividends

It is the policy of the Company’s Board of Directors to retain all future earnings to finance the operation and
expansion of the Company’s business and the funding of the Company’s stock repurchase program. Accordingly,
the Company has not and does not anticipate declaring or paying cash dividends on the common stock in the
foreseeable future. The payment of cash dividends in the future will be at the sole discretion of the Company’s
Board of Directors and will depend on, among other things, the Company’s earnings, operations, capital require-
ments, financial condition, restrictions in then existing financing agreements, and other factors deemed relevant by
the Board of Directors.

Securities Authorized for Issuance under Equity Compensation Plans.

The following table presents information relating to the Company’s equity compensation plans as of

December 31, 2008:

Number of Securities to
be Issued Upon
Exercise of Outstanding
Options, Warrants and
Rights

Weighted-Average
Exercise Price of the
Outstanding
Options, Warrants
and Rights

Number of Securities
Remaining Available for
Future Issuance Under
Equity Compensation Plans
(Excluding Securities
Reflected in First Column)

Plan Category

Equity compensation plans
approved by security
holders . . . . . . . . . . . . . . .

Equity compensation plans
not approved by security
holders . . . . . . . . . . . . . . .

895,334

—

Total . . . . . . . . . . . . . . . . . . .

895,334

$4.83

—

$4.83

2,431,000

—

2,431,000

Performance Graph

The following Performance Graph shows the changes for the five year period ended December 31, 2008 in the
value of $100 invested in: (1) the Company’s common stock; (2) the Standard & Poor’s Broad Market Index (the
“S&P 500”); and (3) the common stock of the Peer Group (as defined below) of companies, whose returns represent
the arithmetic average of such companies. The values with each investment as of the beginning of each year are
based on share price appreciation and the reinvestment with dividends on the respective ex-dividend dates.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Capital Senior Living Corporation, The S&P 500 Index,
And A Peer Group

Capital Senior Living Corporation

S&P 500

Peer Group

S
R
A
L
L
O
D

350
350

300

250

200

150

100

12/03

12/04

12/05

12/06

12/07

12/08

* $100 invested on 12/31/03 in stock & index-including reinvestment of dividends.

Fiscal year ending December 31.

The preceding graph assumes $100 invested at the beginning of the measurement period, including rein-
vestment of dividends, in the Company’s common stock, the S&P 500, and the Peer Group was plotted using the
following data:

Capital Senior Living Corporation

S & P 500
Peer Group

Cumulative Total Returns

12/03

100.00

100.00
100.00

12/04

96.26

110.88
126.17

12/05

175.85

116.33
181.92

12/06

180.95

134.70
241.22

12/07

168.88

142.10
175.76

12/08

50.68

89.53
38.92

The Company’s Peer Group consists of Assisted Living Concepts, Brookdale Senior Living, Inc., Emeritus

Corporation, Five Star Quality Care, Inc., and Sunrise Senior Living, Inc.

(b) Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities.

Not Applicable.

ITEM 6. SELECTED FINANCIAL DATA.

The following table presents selected financial data of the Company which has been derived from the audited
consolidated financial statements of the Company. The selected financial data should be read in conjunction with
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated
financial statements and related notes thereto included in this Annual Report.

2008

At and for the Year Ended December 31,
2006
(In thousands, except per share data)

2005

2007

2004

Statements of Operations Data:

Total revenues(1) . . . . . . . . . . . . . . . . . . . . .
Income from operations(2) . . . . . . . . . . . . . .
Net income (loss) . . . . . . . . . . . . . . . . . . . . .
Net income (loss) per share:

$193,274
17,015
3,724

$189,052
20,006
4,360

$159,070
14,068
(2,600)

$126,404
11,066
(5,354)

$108,935
6,731
(6,758)

Basic income (loss) per share . . . . . . . . . .
Diluted income (loss) per share . . . . . . . . .

0.14
0.14

0.17
0.16

(0.10)
(0.10)

(0.21)
(0.21)

(0.27)
(0.27)

Balance Sheet Data:

Cash and cash equivalents . . . . . . . . . . . . . . .
Working capital (deficit)(3) . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt, excluding current portion . . .
Shareholders’ equity . . . . . . . . . . . . . . . . . . .

$ 25,880
13,799
388,120
177,541
$155,149

$ 23,359
12,919
390,053
185,733
$150,157

$ 25,569
15,331
394,488
196,647
$144,084

$ 21,831
10,860
434,051
252,733
$145,415

$ 19,515
(22,289)
431,175
219,526
$149,547

Other Data:

Communities (at end of period)

Owned or leased . . . . . . . . . . . . . . . . . . . .
Joint ventures & managed . . . . . . . . . . . . .

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Resident capacity:

Owned or leased . . . . . . . . . . . . . . . . . . . .
Joint ventures & managed . . . . . . . . . . . . .

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

50
14

7,701
1,750

9,451

49
15

7,636
1,908

9,544

48
16

7,551
1,993

9,544

36
19

6,247
2,668

8,915

29
25

4,831
3,837

8,668

(1) Total revenues for 2004 — 2005 were revised to include community reimbursement revenue. The amounts
included as community reimbursement revenue were $21,174 and $15,673 for fiscal 2005 and 2004, respec-
tively, which had no impact on income from operations.

(2) Income from operations for fiscal 2007, 2006 and 2005 was revised to reduce facility lease costs to include
amortization of deferred gains on sales of assets of $3,243, $2,401, and $104 respectively, which had no impact
on net income.

(3) Working capital for fiscal 2007 and 2006 was revised to reclassify capital replacement reserves and certain
escrow deposits of $220 and $76, respectively, from current assets to other assets, which had no impact on total
assets.

ITEM 7. MANAGEMENT’S 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 Company’s 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 Company’s 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 Company’s reports filed with the SEC.

Overview

The following discussion and analysis addresses (i) the Company’s results of operations on a historical
consolidated basis for the years ended December 31, 2008, 2007 and 2006, and (ii) liquidity and capital resources of
the Company and should be read in conjunction with the Company’s historical consolidated financial statements
and the selected financial data contained elsewhere in this report.

The Company is one of the largest operators of senior living communities in the United States. The Company’s
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 December 31, 2008, the Company operated 64 senior living communities in 23 states with an aggregate
capacity of approximately 9,500 residents, including 38 senior living communities which the Company either
owned or in which the Company had an ownership interest, 25 senior living communities that the Company leased
and one senior living community it managed for a third party. As of December 31, 2008, the Company also operated
one home care agency.

Significant Financial and Operational Highlights

The Company primarily derives its revenue by providing senior living and healthcare services to the elderly
and managing senior living communities for other healthcare providers and under joint venture arrangements.
Despite unfavorable economic conditions in the housing, financial and credit markets and a weakening overall
economy during 2008, the Company was able to grow total revenue approximately 2.2%, of which approximately
89.0% of these revenues consisted of senior living and healthcare services.

During 2008, the Company sold two parcels of land, one in Carmichael, CA, and the other in Lincoln, NE, for

approximately $1.4 million, net of closing costs, resulting in a gain on sale of approximately $0.7 million.

During 2008, total expenses increased $7.2 million primarily due to the addition of a new senior living
community, labor and benefit cost adjustments, retirement and separation benefits paid to development department
employees, write-offs of accumulated due diligence and expansion costs for projects no longer being pursued,
increases in facility lease expenses combined with increases in contingent rent on certain leases, and increased
depreciation and amortization for consolidated communities and leasehold improvements.

Despite the increases that occurred in expenses during fiscal 2008, the Company was able to repay
$10.0 million of its outstanding debt obligations, further reducing its exposure to the volatility in the credit
markets. These repayments combined with the note refinancings that occurred in fiscal 2007 and 2006 to fixed rate
debt enabled the Company to reduce interest expense by approximately $0.5 million in fiscal 2008.

During 2008, the Company entered into a lease on the Whitley Place community located in Keller, TX. The
Company has leased this community for a ten-year term with two five-year renewal options. Additionally, effective
December 15, 2008, the Mountain Creek management contract was terminated by CGIM.

During 2008, the Company announced that a Special Committee of its Board of Directors (“the Special
Committee”) had engaged Banc of America Securities LLC (“BAS”) as its financial advisor to assist the Special
Committee in exploring and considering a range of strategic alternatives for the Company that would enhance
shareholder value. BAS is a nationally recognized investment banking firm with expertise in the senior living
industry and is prominent in both healthcare and real estate. The strategic alternatives explored by BAS included the
following considerations: (A) a sale of the Company for cash or stock, (B) a going private transaction, (C) a
restructuring of the Company’s portfolio, which may include sales and/or acquisitions of assets, (D) a merger with a
private company in which the Company’s stockholders may or may not retain a majority equity interest in the
surviving entity, (E) the institution of a share buyback or dividend (recurring or extraordinary), (F) the execution of
the Company’s existing business plan without alteration, and (G) any other alternative or combination of
alternatives that has the potential to enhance shareholder value. Subsequent to December 31, 2008, the Special
Committee recommended, and the Company’s Board of Directors approved, the implementation of a stock
repurchase program of up to $10 million of the Company’s common stock. Under the stock repurchase program, the
Company is authorized to repurchase shares of its common stock in the open market and in privately negotiated
transactions. The timing and extent to which the Company may repurchase its shares of common stock will depend
upon market conditions and other corporate considerations. The Company anticipates that it will finance the stock
repurchase program with available cash. The strategic alternatives review process has not led to a material
modification in the operational direction of the Company or a change in management style or intent.

The senior living industry has been negatively impacted by unfavorable conditions in the housing, credit and
financial markets and by deteriorating conditions in the overall economy, generally resulting in lower than
anticipated occupancy rates. During 2008, in response to these conditions, the Company announced that it plans to
suspend new development activities until economic conditions improve following the opening of two senior
housing communities in the first half of 2009. Consequently, the Company is taking steps to reduce overhead in
conjunction with these revised plans and has eliminated three related positions in the development area as of
December 31, 2008. While the Company is excluding development from its 2009 Business Plan, it continues to
focus 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 shareholder
value. Additionally, this will provide an opportunity for the Company to shift its focus to renovating and updating
the amenities at existing senior living communities currently owned and operated.

Management Agreements

As of December 31, 2008, the Company managed 13 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. In addition,
certain of the contracts provide for supplemental incentive fees that vary by contract based upon the financial
performance of the managed community.

The Company believes that the factors affecting the financial performance of communities managed under
contracts with third parties do not vary substantially from the factors affecting the performance of owned and leased
communities, although there are different business risks associated with these activities.

The Company’s third-party management fees are primarily based on a percentage of gross revenues. As a
result, the cash flow and profitability of such contracts to the Company are more dependent on the revenues
generated by such communities and less dependent on net cash flow than for owned communities. Further, the
Company is not responsible for capital investments in managed communities. The management contracts are
generally terminable only for cause and upon the sale of a community, subject to the Company’s rights to offer to
purchase such community.

Lease Transactions

The Company currently leases 25 senior living communities with certain real estate investment trusts
(“REITs”). The lease terms are generally for ten years with renewal options for 10-20 years at the Company’s
option. Under these lease agreements the Company is responsible for all operating costs, maintenance and repairs,
insurance and property taxes.

As of December 31, 2008, the Company leased ten senior living facilities (collectively the “Ventas Lease
Agreements’), from Ventas Healthcare Properties, Inc. (“Ventas”). The Ventas Lease Agreements each have an
initial term of approximately ten years, with two five-year renewal extensions available at the Company’s option.
The initial lease rate under each of the Ventas Lease Agreements range from 7.75% to 8% and are subject to certain
conditional escalation clauses which will be recognized when estimatable or incurred. The initial terms on the
Ventas Lease Agreements expire on various dates through January 2018. The Company incurred $2.2 million in
lease acquisition costs related to the Ventas Lease Agreements. These deferred lease acquisition costs are being
amortized over the initial 10 year lease terms and are included in facility lease expense in the Company’s statement
of operations. The Company accounts for each of the Ventas Lease Agreements as operating leases.

As of December 31, 2008, the Company leased 15 senior living facilities (collectively the “HCP Lease
Agreements”), from HCP, Inc. (“HCP”). The HCP Lease Agreements each have an initial term of ten years, with
two ten year renewal extensions available at the Company’s option. The initial lease rate under the HCP Lease
Agreements range from 7.25% to 8% and are subject to certain conditional escalation clauses, which will be
recognized when estimatable or incurred. The initial terms on the HCP Lease Agreements expire on various dates
through December 2017. The Company incurred $1.5 million in lease acquisition costs related to the HCP Lease
Agreements. These deferred lease acquisition costs are being amortized over the initial 10 year lease terms and are
included in facility lease expense in the Company’s statement of operations. The Company accounts for each of the
HCP Lease Agreements as operating leases.

The following table summarizes each of the Company’s lease agreements (dollars in millions):

Number of
Communities

Value of
Transaction

Term

Initial
Lease Rate(1)

Lease
Acquisition
Costs(2)

Deferred
Gains/Lease
Concessions(3)

Landlord

Date of Lease

Ventas

September 30, 2005

Ventas

October 18, 2005

Ventas

March 31,2006

Ventas

June 8, 2006

Ventas

January 31, 2008

HCP

May 1, 2006

May 31, 2006

HCP

December 1, 2006

HCP

December 14, 2006

HCP

April 11, 2007

Subtotal
Accumulated amortization
Accumulated deferred gain recognized

$84.6

19.5

29.0

19.1

5.0

54.0

43.0

51.0

18.0

8.0

10 years
(Two five-year renewals)
10 years
(Two five-year renewals)
10 years
(Two five-year renewals)
9.5 years
(Two five-year renewals)
10 years
(Two five-year renewals)
10 years
(Two ten-year renewals)
10 years
(Two ten-year renewals)
10 years
(Two ten-year renewals)
10 years
(Two ten-year renewals)
10 years
(Two ten-year renewals)

7.75%

7.25%

$ 1.3

$ 4.6

0.2

0.1

0.4

0.2

0.7

0.3

0.1

3.7
(1.0)
—

—

14.3

—

12.8

0.6

—

32.3
—
(9.1)

Net lease acquisition costs/deferred gains as of December 31, 2008

$ 2.7

$23.2

(1) Initial lease rates are subject to conditional lease escalation provisions as forth in each lease agreement.

(2) Lease acquisition costs are being amortized over the leases’ initial term.

(3) Deferred gains of $31.7 million and lease concessions of $0.6 million are being recognized in the Company’s
statement of operations as a reduction in facility rent expense over the leases’ initial term. Lease concessions
relate to the HCP transaction on May 31, 2006.

Joint Venture Transactions

Midwest I Transaction

In January 2006, the Company and GE Healthcare formed Midwest I to acquire five senior housing
communities from a third party. Midwest I is owned approximately 89% by GE Healthcare and 11% by the
Company. As of December 31, 2008, the Company has contributed $2.7 million for its interest in Midwest I.
Midwest I paid approximately $46.9 million for the five communities. The five communities comprise 293 assisted
living units with a resident capacity of 389. The Company manages the five acquired communities under long-term
management agreements with Midwest I. The Company accounts for its investment in Midwest I under the equity
method of accounting and the Company recognized earnings in the equity of Midwest I of $0.2 million and $8,000
for fiscal 2008 and 2007, respectively, and a loss in the equity of Midwest I of $9,000 for fiscal 2006. The Company
earned $0.5 million in management fees on the Midwest I communities in both fiscal 2008 and 2007 and
$0.4 million in management fees on the Midwest I communities in fiscal 2006.

Midwest II Transaction

In August 2006, the Company and GE Healthcare formed Midwest II to acquire three senior housing
communities from a third party. Midwest II is owned approximately 85% by GE Healthcare and 15% by the
Company. As of December 31, 2008, the Company has contributed $1.6 million for its interest in Midwest II.
Midwest II paid approximately $38.2 million for the three communities. The three communities comprise 300
assisted living and memory care units with a resident capacity of 319. The Company manages the three acquired
communities under long-term management agreements with Midwest II. The Company accounts for its investment
in Midwest II under the equity method of accounting and the Company recognized a loss in the equity of Midwest II
of $0.1 million, $0.3 million and $0.1 million for fiscal 2008, 2007 and 2006, respectively. The Company earned
$0.5 million in management fees on the Midwest II communities in both fiscal 2008 and 2007 and $0.2 million in
management fees on the Midwest I communities in fiscal 2006.

SHPII/CSL Transactions

In November 2004, the Company formed SHPII/CSL with SHPII. Effective as of November 30, 2004, SHPII/
CSL acquired the Spring Meadows Communities which have a combined capacity of 698 residents. As of
December 31, 2008, the Company has contributed $1.3 million for its interests in SHPII/CSL. The Company
manages the Spring Meadows Communities under long-term management contracts with 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 $0.3 million for both fiscal 2008 and 2007 and $0.1 million for
fiscal 2006. The Company earned $1.2 million in management fees on the SHPII/CSL communities in both fiscal
2008 and 2007 and $1.1 million in management fees on the SHPII/CSL communities in fiscal 2006.

SHP III Transactions

In May 2007, the Company and SHPIII entered into SHPIII/CSL Miami to develop a senior housing
community in Miamisburg, Ohio. Under the joint venture and related agreements, the Company will earn
development and management fees and may receive incentive distributions. The senior housing community
consists of 101 independent living units and 45 assisted living units and was opened in August 2008. As of
December 31, 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 a loss in the equity of SHPIII/CSL Miami of $0.1 million for fiscal 2008. The Company

earned $0.2 million and $0.7 million in development fees from SHPIII/CSL Miami in fiscal 2008 and 2007,
respectively. In addition, the Company earned $0.1 million in pre-marketing fees and $0.1 million in management
fees on the community in fiscal 2008.

In November 2007, the Company and SHPIII entered into SHPIII/CSL Richmond Heights to develop a senior
housing community in Richmond Heights, Ohio. Under the joint venture and related agreements, the Company will
earn development and management fees and may receive incentive distributions. The senior housing community
will consist of 97 independent living units and 45 assisted living units and is expected to open in the first half of
2009. As of December 31, 2008, the Company has contributed $0.8 million to SHPIII/CSL Richmond Heights for
its 10% interest and will account for its investment in SHPIII/CSL Richmond Heights under the equity method of
accounting. The Company earned $1.0 million and $0.1 million in development fees from SHPIII/CSL Richmond
Heights in fiscal 2008 and 2007, respectively. In addition, the Company earned $0.1 million in pre-marketing fees
on the community in fiscal 2008.

In December 2007, the Company and SHPIII entered into SHPIII/CSL Levis Commons to develop a senior
housing community near Toledo, Ohio. Under the joint venture and related agreements, the Company will earn
development and management fees and may receive incentive distributions. The senior housing community will
consist of 101 independent living units and 45 assisted living units and is expected to open in the first half of 2009.
As of December 31, 2008, the Company has contributed $0.8 million to SHPIII/CSL Levis Commons for its 10%
interest and will account for its investment in SHPIII/CSL Levis Commons under the equity method of accounting.
The Company earned $1.1 million and $22,000 in development fees from SHPIII/CSL Levis Commons in fiscal
2008 and 2007, respectively. In addition, the Company earned $0.1 million in pre-marketing fees on the community
in fiscal 2008.

CGIM Transaction

In August 2004, the Company acquired from Covenant Group of Texas, Inc. (“Covenant”) all of the
outstanding stock of Covenant’s wholly owned subsidiary, CGIM. The Company paid approximately $2.3 million
in cash (including closing costs of approximately $0.1 million) and issued a non-interest bearing note with a fair
value of approximately $1.1 million (face amount $1.4 million discounted at 5.7%), subject to various adjustments
set forth in the purchase agreement, to acquire all of the outstanding stock of CGIM. The note was due in three
installments of approximately $0.3 million, $0.4 million and $0.7 million due on the first, third and fifth
anniversaries of the closing, respectively, subject to reduction if the management fees earned from the third party
owned communities with various terms are terminated and not replaced by substitute agreements during the period,
and certain other adjustments. This acquisition resulted in the Company assuming the management contracts on 14
senior living communities with a combined resident capacity of approximately 1,800 residents. The acquisition was
accounted for as a purchase and the entire purchase price of $3.5 million was allocated to management contract
rights. The Company’s first installment payment under the Covenant note was reduced by $0.2 million under the
terms of the stock purchase agreement and the $0.2 million installment reduction was recorded as an adjustment to
the purchase price. The second installment, which was due on August 15, 2007, was reduced by $0.4 million,
resulting in no amount due to Covenant and a reduction in the Company’s note payable to Covenant of
approximately $0.3 million, which was reflected as management fee income in the Company’s consolidated
statement of operations. In addition, under the terms of the purchase agreement, the Company has the right to
recapture certain contingent payments made to Covenant if the Company did not receive the required minimum
management fee income set forth in the purchase agreement. As a result of these provisions, the Company recorded
a receivable and management fee income of approximately $0.4 million. During the fourth quarter of fiscal 2007,
Covenant paid this receivable and executed an amendment to the stock purchase agreement releasing the Company
from any future obligations under the Company’s note payable to Covenant. As a result, the Company recognized
additional management fee income of approximately $0.6 million in the fourth quarter of fiscal 2007. As of
December 31, 2008, the Company managed one community under the management agreement with CGIM.

BRE/CSL Transactions

In March 2007, the Company received a final distribution from three joint ventures (collectively “BRE/CSL”)
of $0.4 million relating to the sale of the six communities owned by BRE/CSL to Ventas Healthcare Properties, Inc.

(“Ventas”). This distribution resulted in the recognition of an additional gain of $0.4 million, which has been
deferred and is being amortized in the Company’s statement of operations as a reduction in facility rent expense
over the remaining initial lease term.

Community Refinancings and Other Debt Transactions

On December 1, 2008, the Company renewed certain insurance policies and entered into a finance agreement
totaling $2.7 million. The finance agreement has a fixed interest rate of 4.78% with principal being repaid over a
10-month term.

On November 21, 2008, the Company repaid the Lehman Brothers’ (“Lehman”) acquisition financing non-

interest bearing note in its entirety for a total cost of $3.5 million.

On October 31, 2008 and 2007, the Company renewed certain insurance policies and entered into finance
agreements totaling $0.5 million and $0.6 million, respectively. The finance agreements have fixed interest rates of
4.78% and 5.50%, respectively, with principal being repaid over 10-month terms.

On May 31, 2008 and 2007, the Company renewed certain insurance policies and entered into finance
agreements totaling $1.5 million and $4.5 million, respectively. The finance agreements have fixed interest rates of
3.75% and 5.60%, respectively, with principal being repaid over 10-month terms.

The Company’s second installment on its note payable to Covenant, which was due on August 15, 2007, was
reduced by $0.4 million pursuant to the terms of the stock purchase agreement, resulting in no amount due to
Covenant and a reduction in the Company’s note payable to Covenant of approximately $0.3 million, which was
reflected as management services revenue in the Company’s consolidated statement of operations. In addition,
under the terms of the purchase agreement, the Company had the right to recapture certain contingent payments
made to Covenant if the Company did not receive the required minimum management services revenue set forth in
the stock purchase agreement. As a result of these provisions, during the third quarter of fiscal 2007, the Company
recorded a receivable and management services revenue of approximately $0.4 million. During the fourth quarter of
fiscal 2007, Covenant paid this receivable and executed an amendment to the stock purchase agreement releasing
the Company from any future obligations under the Company’s note payable to Covenant. As a result the Company
recognized additional management services revenue of approximately $0.6 million in the fourth quarter of fiscal
2007.

On May 3, 2007, the Company refinanced $30.0 million of mortgage debt on four senior living communities
with Federal National Mortgage Association (“Fannie Mae”). As part of the refinancing, the Company repaid
approximately $2.7 million of mortgage debt on the four communities. The new mortgage loans have a ten-year
term with interest fixed at 5.91% and principal amortized over a 30-year term. The Company incurred $0.5 million
in deferred financing costs related to this loan, which is being amortized over ten years. In addition, as part of this
refinancing, the Company wrote-off $0.4 million in deferred loan costs. The new loans replaced $32.7 million of
variable rate debt with an effective interest rate of 7.6%.

On March 21, 2007, the Company refinanced $9.5 million of mortgage debt on one of its senior living
communities (“Gramercy Hill”) with Federal Home Loan Mortgage Corporation (“Freddie Mac”). As part of the
refinancing, the Company received approximately $2.1 million in cash proceeds, net of closing costs. The new
mortgage loan has a ten-year term with a one-year extension available at the Company’s option, interest fixed at
5.75% and requires interest only payments in the first two years with principal amortized thereafter over a 25-year
term. The Company incurred $0.2 million in deferred financing costs related to this loan, which is being amortized
over ten years. In addition, as part of this refinancing, the Company wrote-off $13,000 in deferred loan costs and
paid $0.2 million in loan exit fees to the prior lender. The loan exit fees are a component of write-off of deferred loan
costs in the accompanying statement of operations.

On March 15, 2007, the Company issued three standby letters of credit, totaling $2.2 million, for the benefit of
HCP on certain leases between HCP and the Company. The fees on the letters of credit are based on 2.0% of the
issued amount.

On June 9, 2006, the Company refinanced $110.0 million of mortgage debt on 15 senior living communities
with Freddie Mac. As part of the refinancing, the Company repaid approximately $14.8 million of mortgage debt on
the 15 communities. The new mortgage loans each have a ten-year term with interest rates fixed at 6.29% for the
first nine years and with principal amortized over a 25-year term. At the beginning of the tenth year, the loans will
convert to a floating interest rate to provide flexibility regarding financing alternatives. The loans are cross-
collateralized and cross-defaulted with release provisions. The Company incurred $1.9 million in deferred
financing costs related to these loans, which is being amortized over ten years. In addition, the Company
wrote-off $0.8 million in deferred loan costs on the loans refinanced and paid $0.2 million in loan exit fees to
the prior lender. The loan exit fees are a component of the write-off of deferred loan costs in the accompanying
statement of operations.

Recent Events

On January 22, 2009, the Special Committee of the Board of Directors recommended, and the Company’s
Board of Directors approved, the implementation of a stock repurchase program for up to $10 million of the
Company’s common stock. Under the stock repurchase program, the Company is authorized to repurchase shares of
its common stock in the open market and in privately negotiated transactions. The timing and extent to which the
Company may repurchase its shares of common stock will depend upon market conditions and other corporate
considerations. The Company anticipates that it will finance the stock repurchase program with available cash. As
of March 9, 2009, the Company has purchased 272,200 shares at a total cost of $0.7 million.

Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the
United States requires management to make estimates and assumptions that affect the amounts reported in the
accompanying financial statements and related notes. Management bases its estimates and assumptions on
historical experience, observance of industry trends and various other sources of information and factors, the
results of which form the basis for making judgments about the carrying value of assets and liabilities that are not
readily apparent from other sources. Actual results could differ from these estimates. Critical accounting policies
are defined as those that are reflective of significant judgments and uncertainties, and potentially could result in
materially different results under different assumptions and conditions. The Company believes the following
critical accounting policies require management’s most difficult, subjective and complex judgments.

Revenue Recognition

Resident and health care revenue is recognized at estimated net realizable amounts, based on historical

experiences, due from residents in the period to which the rental and other services are provided.

Revenues from the Medicare and Medicaid programs accounted for approximately 6% of the Company’s
revenue in fiscal 2008, 2007 and 2006. Six communities are providers of services under Medicaid programs.
Accordingly, the communities are entitled to reimbursement under the foregoing program at established rates that
are lower than private pay rates. Patient service revenue for Medicaid patients is recorded at the reimbursement rates
as the rates are set prospectively by the state upon the filing of an annual cost report. Two communities are providers
of services under the Medicare program and are entitled to payment under the foregoing programs in amounts
determined based on rates established by the federal government.

Laws and regulations governing the Medicare and Medicaid programs are complex and subject to interpre-
tation. The Company believes that it is in compliance with all applicable laws and regulations and is not aware of
any pending or threatened investigations involving allegations of potential wrongdoing. While no such regulatory
inquiries have been made, compliance with such laws and regulations can be subject to future government review
and interpretation as well as significant regulatory action including fines, penalties, and exclusion from the
Medicare and Medicaid programs.

usually based on exceeding certain gross revenue targets. These contingent revenues are recognized based on actual
results according to the calculations specified in the various management agreements.

Community reimbursement revenue is comprised of reimbursable expenses from non-consolidated commu-

nities that the Company operates under long-term management agreements.

Investments in Joint Ventures

The Company accounts for its investments in joint ventures under the equity method of accounting. The
Company is the general partner in two partnerships and owns member interests in seven other joint ventures. The
Company has not consolidated these joint venture interests because the Company has concluded that the limited
partners or the other members of each joint venture has substantive kick-out rights or substantive participating rights
as defined in EITF Issue 04-05 “Determining Whether a General Partner, or the General Partners as a Group,
Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights.” (“EITF 04-05”)
Under the equity method of accounting, the Company records its investments in joint ventures at cost and adjusts
such investments for its share of earnings and losses of the joint venture.

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 Company has one
parcel of land classified as held for sale at December 31, 2008. The fair value of this property is generally
determined based on market rates, industry trends and recent comparable sales transactions. The actual sales price
of this asset could differ significantly from the Company’s 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 the lease agreement. This determination of classification is complex and
requires significant judgment relating to certain information including the estimated fair value and remaining
economic life of the community, the Company’s cost of funds, minimum lease payments and other lease terms. As
of December 31, 2008, the Company leased 25 communities and classified each of the leases as an operating lease.
The Company incurs lease acquisition costs and amortizes these costs over the term of the lease agreement. Facility
lease expense in the Company’s statement of operations includes rent expense plus amortization expense relating to
leasehold acquisition costs.

Certain leases entered into by the Company qualified as sale/leaseback transactions under the provisions of
Financial Accounting Standard No. 98 (“FAS 98”) and as such any related gains have been deferred and are being
amortized over the lease term. The amortization of the deferred gains is included in facility lease expense in the
statement of operations.

Long-Lived Assets

Property and equipment are stated at cost and depreciated on a straight-line basis over the estimated useful
lives of the assets. The estimated useful lives are 10 to 40 years for buildings and building improvements, 3 to
10 years for leasehold improvements, 5 to 20 years for land improvements and 5 to 10 years for furniture, equipment
and automobiles.

At each balance sheet date, the Company reviews the carrying value of its property and equipment to determine
if facts and circumstances suggest that they may be impaired or that the depreciation period may need to be changed.
The Company considers internal factors such as net operating losses along with external factors relating to each
asset, including contract changes, local market developments, and other publicly available information. The
carrying value of a long-lived asset is considered impaired when the anticipated undiscounted cash flows from such

asset is separately identifiable and is less than its carrying value. In that event, a loss is recognized based on the
amount the carrying value exceeds the fair market value, generally based on discounted cash flows, of the long-lived
asset. The Company analyzed certain long-lived assets with operating losses, under the undiscounted cash flow
method, for impairment. The Company does not believe there are any material indicators that would require, and the
cash flow analysis did not require, an adjustment to the carrying value of the property and equipment or their
remaining useful lives as of December 31, 2008 and 2007.

Income Taxes

The Company accounts for income taxes under the provisions of SFAS No. 109, “Accounting for Income
Taxes” (“FAS 109”) and Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109” (“FIN 48”). Under FIN 48, the
Company is required to recognize a tax benefit in its financial statements for an uncertain tax position only if
management’s 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. 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. The
Company’s policy is to recognize interest related to unrecognized tax benefits as interest expense and penalties as
income tax expense. The Company 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
Company’s appreciated assets. The Company believes based upon this analysis that the realization of the net
deferred tax asset is reasonably assured and therefore has not provided for a valuation allowance. The Company is
not subject to income tax examinations for tax years prior to 2004.

Recently Issued Accounting Standards

FASB Statement No. 157, “Fair Value Measurements” (“FAS 157”). FAS 157 defines fair value, establishes a
framework for measuring fair value and expands disclosures about fair value measurements. FAS 157 does not
require any new fair value measurements but would apply to assets and liabilities that are required to be recorded at
fair value under other accounting standards. The Company adopted FAS 157 on January 1, 2008 and elected to defer
the provisions of FAS 157 for its nonfinancial assets and liabilities. Under the provisions of FAS 157 nonfinancial
assets and liabilities will be subject to the provisions of FAS 157 on January 1, 2009. The Company’s adoption of
FAS 157 did not have a material effect on the Company’s consolidated financial statements.

FASB Statement No. 159, “Fair Value Option for Financial Assets and Financial Liabilities — Including an
amendment of FASB Statement 115” (“FAS 159”) permits, but does not require, entities to measure many financial
instruments, including liabilities and certain other items, at fair value with resulting changes in fair value reported in
earnings. The Company has elected not to apply the fair value option to any of its financial instruments not already
carried at fair value in accordance with other accounting standards, and therefore the adoption of FAS 159 did not
impact the Company’s consolidated financial statements.

FASB Statement No. 141(R) “Business Combinations” (“FAS 141(R)”) requires the acquiring entity in a
business combination to recognize the full fair value of assets acquired and liabilities assumed in the transaction
(whether a full or partial acquisition); establishes the acquisition-date fair value as the measurement objective for all
assets acquired and liabilities assumed; requires expensing of most transaction and restructuring costs; and requires
the acquirer to disclose to investors and other users all of the information needed to evaluate and understand the
nature and financial effect of the business combination. FAS 141(R) applies prospectively to business combinations
for which the acquisition date is on or after January 1, 2009. The impact of FAS 141(R) on the Company’s
consolidated financial statements will depend upon the nature, terms and size of any acquisitions the Company
consummates after the effective date.

equivalents (whether paid or unpaid) are participating securities and are to be included in the computation of
earnings per share under the two-class method described in SFAS No. 128, “Earnings Per Share.” This FSP is
effective for the Company on January 1, 2009 and requires all presented prior-period earnings per share data to be
adjusted retrospectively. The Company’s adoption of FSP 03-6-1 on January 1, 2009, did not have a significant
impact on the Company’s consolidated financial statements.

Results of Operations

The following tables set forth, for the periods indicated, selected historical consolidated statements of income

data in thousands of dollars and expressed as a percentage of total revenues.

2008

Year Ended December 31,
2007

2006

Revenues:

Resident and healthcare revenue . . . . . . . . . $172,025
Unaffiliated management services

revenue . . . . . . . . . . . . . . . . . . . . . . . . .
Affiliated management services revenue . . .
Community reimbursement income . . . . . . .

194
4,882
16,173

89.0% $167,563

88.6% $139,456

87.7%

0.1%
1,591
3,117
2.5%
8.4% 16,781

0.8%
994
1,767
1.7%
8.9% 16,853

0.6%
1.1%
10.6%

Total revenues . . . . . . . . . . . . . . . . . . . .

193,274

100.0% 189,052

100.0% 159,070

100.0%

Expenses:

Operating expenses (exclusive of facility
lease expense and depreciation and
amortization shown below) . . . . . . . . . . .
General and administrative expenses . . . . . .
Facility lease expense . . . . . . . . . . . . . . . . .
Provision for bad debts. . . . . . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . .
Community reimbursement expense . . . . . .

107,315
13,654
25,057
556
1,036
12,468
16,173

55.5% 103,804
7.1% 12,046
13.0% 23,811
330
0.3%
979
0.5%
6.5% 11,295
8.4% 16,781

54.9%

89,184
6.4% 11,420
14,209
12.6%
121
0.2%
870
0.5%
6.0% 12,345
8.9% 16,853

Total expenses . . . . . . . . . . . . . . . . . . . .

176,259

91.2% 169,046

89.4% 145,002

Income from operations . . . . . . . . . . . . . . . . .
Other income (expense):

Interest income . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . .
Gain on sale of properties. . . . . . . . . . . . . .
Write-down of assets held for sale . . . . . . .
Write-off of deferred loan costs . . . . . . . . .
Other (expense) income . . . . . . . . . . . . . . .

Income (loss) before income taxes . . . . . . . . .
(Provision) benefit for income taxes . . . . . . . .

17,015

8.8% 20,006

10.6%

14,068

422
(12,217)
681
(134)
—
270

6,037
(2,313)

0.2%
674
(6.3)% (12,763)
108
0.4%
—
(0.1)%
(538)
—%
(37)
0.1%

0.4%
843
(6.8)% (16,610)
94
0.1%
—
—%
(0.3)% (1,867)
(37)
0.0%

3.1%
7,450
(1.2)% (3,090)

3.9%
(1.6)%

(3,509)
909

56.1%
7.2%
8.9%
0.1%
0.5%
7.8%
10.6%

91.2%

8.8%

0.5%
(10.4)%
0.1%
—%
(1.2)%
0.0%

(2.2)%
0.6%

Net income (loss) . . . . . . . . . . . . . . . . . . . . . $

3,724

1.9% $

4,360

2.3% $ (2,600)

(1.6)%

Year Ended December 31, 2008 Compared to the Year Ended December 31, 2007

Revenues.

Total revenues were $193.3 million for the year ended December 31, 2008 compared to $189.1 million for the
year ended December 31, 2007, representing an increase of approximately $4.2 million or 2.2%. This increase in
revenue is primarily the result of a $4.4 million increase in resident and healthcare revenue and a $1.8 million
increase in affiliated management services revenue offset by a decrease in unaffiliated management services
revenue of $1.4 million and a $0.6 million decrease in community reimbursement revenue.

(cid:129) Resident and healthcare revenue increased $4.4 million or 2.7% from the addition of the Whitley Place
community which was leased from HCP on January 31, 2008 combined with an increase in the average
monthly rent of 4.0% at the Company’s consolidated communities offset by a decrease in occupancy at the
Company’s consolidated communities of 3.4%. The Company consolidated 50 communities in fiscal 2008
compared to 49 communities in fiscal 2007.

(cid:129) Affiliated management services revenue increased $1.8 million due to an increase in development and pre-
marketing fees. The Company earned development and pre-marketing fees on three communities under
development of $2.5 million in fiscal 2008 compared to $0.9 in fiscal 2007.

(cid:129) Unaffiliated management services revenue decreased $1.4 million due to the recovery of management fees
of $0.4 million from Covenant, the reduction of a contingent note payable to Covenant of $0.9 million under
the provisions of the CGIM purchase and sale agreement, and additional management fees of $0.1 million in
fiscal 2007. The Company managed two communities owned by third parties throughout most of fiscal 2008
compared to three communities managed in fiscal 2007.

(cid:129) Community reimbursement revenue is comprised of reimbursable expenses from non-consolidated com-

munities that the Company operates under long-term management agreements.

Expenses.

Total expenses were $176.3 million in fiscal 2008 compared to $169.0 million in fiscal 2007, representing an
increase of $7.2 million or 4.3%. This increase is primarily the result of a $3.5 million increase in operating
expenses, a $1.6 million increase in general and administrative expenses, a $0.1 million increase in stock-based
compensation, a $1.2 million increase in facility lease expense, an increase of $0.2 million in bad debt expense, and
a $1.2 million increase in depreciation and amortization expense offset by and a decrease in community
reimbursement expense of $0.6 million.

(cid:129) Operating expenses increased $3.5 million or 3.4% due to an increase of $0.8 million from the addition of the
Whitley Place community along with an increase in operating expenses at the Company’s other communities
of $2.7 million. The primary increases in operating expenses at the Company’s other communities include an
increase in labor and benefit costs of $1.9 million, an increase in utility costs of $0.5 million, an increase in
provision for doubtful accounts of $0.2 million, along with an increase of $0.3 million in taxes.

(cid:129) General and administrative expenses increased $1.6 million primarily due to $0.6 million in costs incurred
for the retirement of the Chairman of the Company and separation of development department employees,
write-offs of accumulated due diligence and expansion costs of $0.6 million related to potential acquisitions
and developments that the Company terminated, along with an increase in other general and administrative
costs of $0.4 million.

(cid:129) Facility lease expenses increased $1.2 million primarily due to the Company leasing 25 senior living
communities in fiscal 2008 compared to 24 senior living communities in fiscal 2007 along with increases in
contingent rent on certain leases. As of December 31, 2008, the Company had net deferred gains on sale/
leaseback transactions of $23.2 million that are being recognized into income over their respective initial
lease terms. Facility lease expenses incurred by the Company in fiscal 2008 were offset by the recognition of
deferred gains of $3.3 million.

(cid:129) Stock-based compensation increased $0.1 million in fiscal 2008 compared to fiscal 2007 primarily due to the

award of additional restricted shares to certain employees and directors of the Company.

(cid:129) Depreciation and amortization expense increased $1.2 million primarily as an increase in depreciation
expense at the Company’s 50 consolidated communities of $0.8 million along with depreciation expense of
$0.4 million primarily related to leasehold improvements at the Company’s corporate offices and new
information systems which were put into service on January 1, 2008.

(cid:129) 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.

(cid:129) Interest income results from interest earned on investment of cash balances and interest earned on escrowed
funds. Interest income decreased $0.3 million primarily due to lower interest rates in the current fiscal year.

(cid:129) Interest expense decreased $0.5 million to $12.2 million in fiscal 2008 compared to $12.8 million in fiscal
2007. This decrease in interest expense primarily results from slightly lower debt outstanding during fiscal
2008 compared to fiscal 2007 along with a lower average interest rate in the current fiscal year compared to
the prior year.

(cid:129) Gain on sale of assets in fiscal 2008 represents gains associated with the sale of two parcels of land of
$0.7 million. Gain on sale of assets in fiscal 2007 represents the recognition of a gain of $0.1 million related
to the sale of a parcel of land located in Baton Rouge, Louisiana and a gain on the sale of a treasury rate lock
agreement.

(cid:129) Write-down of assets held for sale represents an impairment adjustment on a parcel of land, located in
Fort Wayne, Indiana, of approximately $0.1 million recorded by the Company during the first quarter of
fiscal 2008.

(cid:129) Other expense/income in fiscal 2008 and 2007 relates to the Company’s equity in the earnings/losses of
unconsolidated affiliates, which represents the Company’s share of the earnings/losses on its investments in
SHPII/CSL, Midwest I and Midwest II.

Provision (benefit) for income taxes.

Provision for income taxes for fiscal 2008 was $2.3 million or 38.3% of income before taxes compared to a
provision for income taxes of $3.1 million, or 41.5% of income before taxes, for fiscal 2007. The effective tax rates
for fiscal 2008 and 2007 differ from the statutory tax rates due to state income taxes and permanent tax differences.
Management regularly evaluates the future realization of deferred tax assets and provides a valuation allowance, if
considered necessary, based on such evaluation. The Company 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 Company’s appreciated assets. The Company believes based upon this analysis that the
realization of the net deferred tax asset is reasonably assured and therefore has not provided for a valuation
allowance.

Net income/loss.

As a result of the foregoing factors, the Company reported net income of $3.7 million for the fiscal year ended

December 31, 2008 compared to net income of $4.4 million for the fiscal year ended December 31, 2007.

Year Ended December 31, 2007 Compared to the Year Ended December 31, 2006

Revenues.

Total revenues were $189.1 million for the year ended December 31, 2007 compared to $159.1 million for the
year ended December 31, 2006, representing an increase of approximately $30.0 million or 18.8%. This increase in
revenue is primarily the result of a $28.1 million increase in resident and healthcare revenue, an increase in

unaffiliated management services revenue of $0.6 million, an increase in affiliated management services revenue of
$1.4 million offset by a decrease in community reimbursement revenue of $0.1 million.

(cid:129) Resident and healthcare revenue increased 20.2% as a result of an increase of $4.9 million from the addition
of the Covenant communities which the Company leased from HCP on May 31, 2006, an increase of
$1.9 million from the addition of Rose Arbor which was leased from Ventas on June 8, 2006, an increase of
$12.2 million from the addition of four senior living communities (the “Hunt Communities”) which were
leased from HCP on December 1, 2006, an increase of $3.1 million from the addition of the Atrium of
Carmichael which was leased from HCP on December 14, 2006, an increase of $1.4 million from the
addition of Crescent Place which was leased from HCP on April 11, 2007 and an increase in resident and
healthcare revenue at the Company’s other communities of $4.6 million as a result of higher rental rates and
community fees in the current fiscal year.

(cid:129) The increase in unaffiliated management services revenue primarily results from the recovery of manage-
ment fees from Covenant under the provisions of the CGIM purchase and sale agreement offset by the
expiration of third party management agreements and the sale of the eight communities previously owned by
Covenant and managed by the Company, seven of which the Company now leases from HCP.

(cid:129) Affiliated management services revenue increased due to an increase in management fees earned on the
communities owned by SHPII/CSL, Midwest I and Midwest II along with development fees of $0.9 million
earned on the development of three senior living communities. The Company earned affiliated management
fees on 12 communities and three development project in fiscal 2007 compared to management fees on 12
communities in fiscal 2006.

(cid:129) Community reimbursement revenue is comprised of reimbursable expenses from non-consolidated com-

munities that the Company operates under long-term management agreements.

Expenses.

Total expenses were $169.0 million in fiscal 2007 compared to $145.0 million in fiscal 2006, representing an
increase of $24.0 million or 16.6%. This increase is primarily the result of a $14.6 million increase in operating
expenses, a $0.6 million increase in general and administrative expenses, a $9.5 million increase in facility lease
expense, a $0.1 million increase in stock-based compensation, and an increase of $0.2 million in bad debt expense
offset by a $1.1 million decrease in depreciation and amortization expense and a decrease in community
reimbursement expense of $0.1 million.

(cid:129) Operating expenses increased 16.4% primarily due to an increase of $3.2 million from the addition of the
Covenant communities, an increase of $1.3 million from the addition of Rose Arbor, an increase of
$7.7 million from the addition of the Hunt Communities, an increase of $1.9 million from the addition of the
Atrium of Carmichael, and an increase of $1.0 million from the addition of Crescent Place offset by a
decrease in operating expenses at the Company’s other communities of $0.5 million.

(cid:129) General and administrative expenses increased $0.6 million primarily due to an increase in health insurance
costs of $0.9 million and an increase in information systems costs of $0.3 million relating to the
implementation of the Company’s new accounting software offset by lower legal fees of $0.3 million
and a reduction in other general and administrative costs of $0.3 million.

(cid:129) Facility lease expenses increased $9.5 million primarily due to the Company leasing 24 senior living
communities in fiscal 2007 compared to 23 senior living communities in fiscal 2006 which include 12 leases
that began during fiscal 2006. As of December 31, 2007, the Company had net deferred gains on sale/
leaseback transactions of $26.4 million that are being recognized into income over their respective initial
lease terms. Facility lease expenses incurred by the Company in fiscal 2007 were offset by the recognition of
deferred gains of $3.2 million.

(cid:129) Stock-based compensation increased $0.1 million in fiscal 2007 compared to fiscal 2006 primarily due to the

award of additional restricted shares to certain employees and directors of the Company.

(cid:129) Depreciation and amortization expense decreased $1.1 million primarily as a result of the write-off of
contract rights in fiscal 2006 along with the sale/leaseback of four communities previously owned by the
Company.

(cid:129) 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.

(cid:129) Interest income results from interest earned on investment of cash balances and interest earned on escrowed

funds.

(cid:129) Interest expense decreased $3.8 million to $12.8 million in fiscal 2007 compared to $16.6 million in fiscal
2006. This decrease in interest expense primarily results from lower debt outstanding during fiscal 2007
compared to fiscal 2006 primarily resulting from property sales, along with a lower average interest rate in
the current fiscal year compared to the prior year as a result of the Company’s debt refinancings.

(cid:129) Gain on sale of assets in fiscal 2007 represents net gains on the sale of two parcels of land of $80,000 along
with a gain of $28,000 on the sale of the Company’s treasury rate lock. The gain on a third parcel of land of
$0.3 million, sold to SHPIII/CSL Richmond Heights, has been deferred and will be recognized into income
over the period required to construct and stabilize the senior living community. Gain on sale of assets in
fiscal 2006 represents the recognition of a gain of $0.1 million on the sale of a portion of the Company’s
treasury rate lock.

(cid:129) Other expense/income in fiscal 2007 and 2006 relates to the Company’s equity in the earnings/losses of
unconsolidated affiliates, which represents the Company’s share of the earnings/losses on its investments in
SHPII/CSL, Midwest I and Midwest II. During the second quarter of fiscal 2007, Midwest I and Midwest II
finalized their purchase price allocation on the eight communities they acquired, resulting in a noncash
charge of $0.3 million being recognized by the Company. The final purchase price allocation resulted in
more of the purchase price being allocated to assets with shorter economic lives which resulted in additional
depreciation and amortization expense.

Provision (benefit) for income taxes.

Provision for income taxes for fiscal 2007 was $3.1 million or 41.5% of income before taxes compared to a
benefit for income taxes of $0.9 million, or 25.9% of loss before taxes, for fiscal 2006. The effective tax rates for
fiscal 2007 and 2006 differ from the statutory tax rates because of state income taxes and permanent tax differences.
Management regularly evaluates the future realization of deferred tax assets and provides a valuation allowance, if
considered necessary, based on such evaluation. At December 31, 2007, no valuation allowance was considered
necessary based on this evaluation.

Net income/loss.

As a result of the foregoing factors, the Company reported net income of $4.4 million for the year ended

December 31, 2007 compared to a net loss of $2.6 million for the year ended December 31, 2006.

Quarterly Results

The following table presents certain unaudited quarterly financial information for each of the four quarters
ended December 31, 2008 and 2007, respectively. This information has been prepared on the same basis as the
audited Consolidated Financial Statements of the Company appearing elsewhere in this report and include, in the
opinion of the Company’s management, all adjustments (consisting of normal recurring adjustments) necessary to

present fairly the quarterly results when read in conjunction with the audited Consolidated Financial Statements of
the Company and the related notes thereto.

2008 Calendar Quarters

First

Second

Third

Fourth

(In thousands, except per share amounts)

Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income (loss) per share, basic . . . . . . . . . . . . . . . . . . . . . . . .
Net income (loss) per share, diluted . . . . . . . . . . . . . . . . . . . . . . .
Weighted average shares outstanding, basic . . . . . . . . . . . . . . . . .
Weighted average shares outstanding, fully diluted . . . . . . . . . . . .

$48,517
4,697
1,490
$ 0.06
$ 0.06
26,341
26,623

$49,032
4,869
1,246
$ 0.05
$ 0.05
26,349
26,670

$47,717
4,807
1,202
0.05
0.05
26,396
26,705

$
$

$48,008
2,642
(214)
$ (0.01)
$ (0.01)
26,423
26,423

2007 Calendar Quarters

First

Second

Third

Fourth

(In thousands, except per share amounts)

Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income per share, basic. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income per share, diluted . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average shares outstanding, basic . . . . . . . . . . . . . . . . .
Weighted average shares outstanding, fully diluted . . . . . . . . . . . .

$46,226
4,696
920
$ 0.04
$ 0.03
26,149
26,636

$46,881
4,626
770
$ 0.03
$ 0.03
26,182
26,680

$47,758
5,173
1,367
0.05
0.05
26,201
26,593

$
$

$48,187
5,511
1,303
0.05
0.05
26,286
26,624

$
$

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 or buyers of the Company’s properties more difficult or on terms not acceptable to
the Company.

In addition to approximately $25.9 million of cash balances on hand as of December 31, 2008, the Company’s
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, SHPIII/CSL Levis Commons, SHPII/CSL,
Midwest I and Midwest II 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, SHPIII/CSL Levis Commons, SHPII/CSL, Midwest I and Midwest II to be sufficient to fund its
short-term working capital requirements and the Company’s stock repurchase program. The Company’s 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, reorga-
nizations 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 Company’s short
and long-term capital requirements.

In summary, the Company’s cash flows were as follows (in thousands):

Year Ended December 31,
2007

2006

2008

Net cash provided by (used in) operating activities . . . . . . . . . . . .
Net cash (used in) provided by investing activities . . . . . . . . . . . . .
Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . . .

$15,012
(7,372)
(5,119)

$12,453
(7,332)
(7,331)

$ (4,647)
29,958
(21,573)

Net increase (decrease) in cash and cash equivalents . . . . . . . . . . .

$ 2,521

$ (2,210)

$ 3,738

Operating Activities

The Company had net cash provided by operating activities of $15.0 million and $12.5 million in fiscal 2008
and 2007, respectively, compared to net cash used in operating activities of $4.6 million in fiscal 2006. The net cash
provided by operating activities for fiscal 2008 primarily results from net income of $3.7 million, net non-cash
charges of $13.7 million, a decrease in other assets of $1.1 million, and an increase in accounts payable and accrued
expenses of $0.8 million offset by an increase in federal and state income taxes receivable of $0.3 million, an
increase in accounts receivable of $1.4 million, an increase in prepaid and other assets of $1.4 million, an increase in
property tax and insurance deposits of $0.8 million and a decrease in customer deposits of $0.4 million. The net cash
provided by operating activities for fiscal 2007 primarily results from net income of $4.4 million, net non-cash
charges of $12.7 million, and a decrease in accounts receivable of $0.2 million offset by an increase in federal and
state income taxes receivable of $1.8 million, an increase in property tax and insurance deposits of $1.4 million, an
increase in prepaid and other assets of $1.1 million, and a decrease in customer deposits of $0.5 million. In fiscal
2006, net cash used in operating activities was primarily the result of a net loss of $2.6 million, an increase in
accounts receivable of $1.7 million, an increase in property tax and insurance deposits of $1.4 million, an increase in
prepaid and other expenses of $0.8 million, an increase in other assets of $7.8 million offset by net noncash charges
of $6.5 million, an increase in accounts payable and accrued expenses of $1.8 million and a decrease in federal and
state income taxes receivable of $1.4 million.

Investing Activities

The Company had net cash used in investing activities of $7.4 million and $7.3 million in fiscal 2008 and 2007,
respectively, compared to net cash provided by investing activities of $30.0 million in fiscal 2006. The net cash used
in investing activities for fiscal 2008 primarily results from capital expenditures of $8.1 million, net investments in
joint ventures of $0.7 million offset by proceeds from the sale of two parcels of land, one in Carmichael, California,
and the other in Lincoln, Nebraska, for $1.4 million. In fiscal 2007, net cash provided by investing activities
primarily results from capital expenditures of $8.6 million, net investments in joint ventures of $1.0 million offset
by proceeds from the sale of three parcels of land for $1.9 million and proceeds from a final distribution from BRE/
CSL of $0.4. In fiscal 2006, net cash provided by investing activities primarily results from net proceeds from the
sale of assets of $40.5 million offset by capital expenditures of $6.7 million and investments in limited partnerships
of $3.9 million.

Financing Activities

The Company had net cash used in financing activities of $5.1 million, $7.3 million and $21.6 million in fiscal
2008, 2007 and 2006, respectively. The net cash used in financing activities for fiscal 2008 primarily results from
net repayments of notes payable of $5.3 million offset by proceeds from the issuance of common stock of
$0.2 million. For fiscal 2007, net cash used in financing activities was primarily the result of net repayments of notes
payable of $7.3 million, deferred loan costs paid in connection with the refinancing of five communities of
$0.9 million offset by proceeds from the issuance of common stock of $0.5 million, excess tax benefits on the
issuance of common stock of $0.2 million and proceeds from the sale of the Company’s treasury rate lock of
$0.1 million. For fiscal 2006, net cash used in financing activities was primarily the result of net repayments of notes
payable of $18.2 million, cash paid to settle interest rate lock agreements of $1.8 million, deferred financing charges
paid in connection with the refinancing of 19 communities of $3.1 million and excess tax benefits on stock options

exercised of $0.2 million offset by the release of restricted cash of $1.0 million, proceeds from the exercise of stock
options of $0.6 million.

Community Refinancings and Other Debt Transactions

On November 21, 2008, the Company repaid the Lehman acquisition financing non-interest bearing note in its

entirety for a total cost of $3.5 million.

the 15 communities. The new mortgage loans each have a ten-year term with interest rates fixed at 6.29% for the
first nine years and with principal amortized over a 25-year term. At the beginning of the tenth year, the loans will
convert to a floating interest rate to provide flexibility regarding financing alternatives. The loans are cross-
collateralized and cross-defaulted with release provisions. The Company incurred $1.9 million in deferred
financing costs related to these loans, which is being amortized over ten years. In addition, the Company
wrote-off $0.8 million in deferred loan costs on the loans refinanced and paid $0.2 million in loan exit fees to
the prior lender. The loan exit fees are a component of the write-off of deferred loan costs in the accompanying
statement of operations.

Lease Transactions

The Company currently leases 25 senior living communities with certain REITs. The lease terms are generally
for ten years with renewal options for 10-20 years at the Company’s option. Under these lease agreements the
Company is responsible for all operating costs, maintenance and repairs, insurance and property taxes.

As of December 31, 2008, the Company leased ten senior living facilities from Ventas. The Ventas Lease
Agreements each have an initial term of approximately ten years, with two five-year renewal extensions available at
the Company’s option. The initial lease rate under each of the Ventas Lease Agreements range from 7.75% to 8%
and are subject to certain conditional escalation clauses which will be recognized when estimatable or incurred. The
initial terms on the Ventas Lease Agreements expire on various dates through January 2018. The Company incurred
$2.2 million in lease acquisition costs related to the Ventas Lease Agreements. These deferred lease acquisition
costs are being amortized over the initial 10 year lease terms and are included in facility lease expense in the
Company’s statement of operations. The Company accounts for each of the Ventas Lease Agreements as operating
leases.

As of December 31, 2008, the Company leased 15 senior living facilities from HCP. The HCP Lease
Agreements each have an initial term of ten years, with two ten year renewal extensions available at the Company’s
option. The initial lease rate under the HCP Lease Agreements range from 7.25% to 8% and are subject to certain
conditional escalation clauses which will be recognized when estimatable or incurred. The initial terms on the HCP
Lease Agreements expire on various dates through December 2017. The Company incurred $1.5 million in lease
acquisition costs related to the HCP Lease Agreements. These deferred lease acquisition costs are being amortized
over the initial 10 year lease terms and are included in facility lease expense in the Company’s statement of
operations. The Company accounts for each of the HCP Lease Agreements as operating leases.

The following table summarizes each of the Company’s lease agreements (dollars in millions):

Number of
Communities

Value of
Transaction

Term

Initial
Lease Rate(1)

Lease
Acquisition
Costs(2)

Deferred
Gains/Lease
Concessions(3)

Landlord

Date of Lease

Ventas

September 30, 2005

Ventas

October 18, 2005

Ventas

March 31,2006

Ventas

June 8, 2006

Ventas

January 31, 2008

HCP

May 1, 2006

May 31, 2006

HCP

December 1, 2006

HCP

December 14, 2006

HCP

April 11, 2007

Subtotal
Accumulated amortization
Accumulated deferred gain recognized

$84.6

19.5

29.0

19.1

5.0

54.0

43.0

51.0

18.0

8.0

7.75%

7.25%

$ 1.3

$ 4.6

0.2

0.1

0.4

0.2

0.7

0.3

0.1

3.7
(1.0)
—

—

14.3

—

12.8

0.6

—

32.3
—
(9.1)

Net lease acquisition costs/deferred gains as of December 31, 2008

$ 2.7

$23.2

(1) Initial lease rates are subject to conditional lease escalation provisions as forth in each lease agreement.

(2) Lease acquisition costs are being amortized over the leases’ initial term.

Joint Ventures

Midwest I Transactions

In January 2006, the Company announced the formation of a joint venture, Midwest I with GE Healthcare to
acquire five senior housing communities from a third party. Midwest I is owned approximately 89% by GE
Healthcare and 11% by the Company. As of December 31, 2008, the Company has contributed $2.7 million for its
interests in Midwest I. Midwest I paid approximately $46.9 million for the five communities. The five communities
comprise 293 assisted living units with a resident capacity of 389. Effective as of February 1, 2006, Midwest I
acquired four of the five communities and on March 31, 2006, Midwest I closed on the fifth community. The
Company manages the five acquired communities under long-term management agreements with Midwest I. The
Company accounts for its investment in Midwest I under the equity method of accounting and the Company
recognized earnings in the equity of Midwest I of $0.2 million and $8,000 in fiscal 2008 and 2007, respectively,
compared to a loss in the equity of Midwest I of $9,000 in fiscal 2006. The Company earned $0.5 million in
management fees on the Midwest I communities in both fiscal 2008 and 2007 and $0.4 million in management fees
on the Midwest I communities in fiscal 2006.

Midwest II Transactions

In August 2006, the Company announced the formation of a joint venture, Midwest II, with GE Healthcare to
acquire three senior housing communities from a third party. Midwest II is owned approximately 85% by GE
Healthcare and 15% by the Company. As of December 31, 2008, the Company has contributed $1.5 million for its
interest in Midwest II. Midwest II paid approximately $38.2 million for the three communities. The three
communities comprise 300 assisted living units with a resident capacity of 319. On August 11, 2006, Midwest II
acquired the three senior living communities. The Company manages the three acquired communities under long-
term management agreements with Midwest II. The Company accounts for its investment in Midwest II under the
equity method of accounting and the Company recognized a loss in the equity of Midwest II of $0.1 million,
$0.3 million and $0.1 million in fiscal 2008, 2007 and 2006, respectively. The Company earned $0.5 million in
management fees on the Midwest II communities in both fiscal 2008 and 2007 and $0.2 million in management fees
on the Midwest I communities in fiscal 2006.

SHPII/CSL Transactions

In November 2004, the Company formed SHPII/CSL with SHPII. Effective as of November 30, 2004, SHPII/
CSL acquired the Spring Meadows Communities which have a combined capacity of 698 residents. As of
December 31, 2008, the Company has contributed $1.3 million for its interests in SHPII/CSL. The Company
manages the Spring Meadows Communities under long-term management contracts with 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 $0.3 million in both fiscal 2008 and 2006 and $0.1 million in
fiscal 2006. The Company earned $1.2 million in management fees on the SHPII/CSL communities in both fiscal
2008 and 2007 and $1.1 million in management fees on the SHP II/CSL communities in fiscal 2006.

SHP III/CSL Transactions

2008 and 2007, respectively. In addition, the Company earned $0.1 million in pre-marketing fees on the community
in fiscal 2008.

Disclosures About Contractual Obligations

The following table provides the amounts due under specified contractual obligations for the periods indicated

as of December 31, 2008 (in thousands):

Less Than
One Year

One to
Three Years

Four to
Five Years

More Than
Five Years

Total

Long-term debt, including interest

expense . . . . . . . . . . . . . . . . . . . .
Operating leases . . . . . . . . . . . . . . . .

$23,369
29,350

$29,191
58,388

$29,191
57,968

$179,641
63,343

$261,392
209,049

Total contractual cash obligations . . .

$52,719

$87,579

$87,159

$242,984

$470,441

Long-term debt relates to the aggregate maturities of the Company’s notes payable. The Company leases its
corporate headquarters, an executive office in New York, 25 senior living communities and certain equipment used
at the Company’s communities.

Impact of Inflation

To date, inflation has not had a significant impact on the Company. However, inflation could affect the
Company’s future revenues and results of operations because of, among other things, the Company’s dependence on
senior residents, many of whom rely primarily on fixed incomes to pay for the Company’s services. As a result,
during inflationary periods, the Company may not be able to increase resident service fees to account fully for
increased operating expenses. In structuring its fees, the Company attempts to anticipate inflation levels, but there
can be no assurance that the Company will be able to anticipate fully or otherwise respond to any future inflationary
pressures.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS.

The Company’s primary market risk is exposure to changes in interest rates on debt and lease instruments. As
of December 31, 2008, the Company had $189.6 million in outstanding debt comprised solely of fixed rate debt
instruments. In addition, as of December 31, 2008, the Company had $206.2 million in future facility lease
obligations with contingent rent increases based on changes in the consumer price index.

Changes in interest rates would affect the fair market value of the Company’s fixed rate debt instruments but
would not have an impact on the Company’s earnings or cash flows. Increase in the consumer price index could have
an effect on future facility lease expense if the leased community exceeds the contingent rent escalation thresholds
set forth in each of the Company’s lease agreements.

The following table summarizes information on the Company’s debt instruments outstanding as of Decem-
ber 31, 2008. The table presents the principal due and weighted average interest rates by expected maturity date for
the Company’s debt instruments by fiscal year.

Principal Amount and Average Interest Rate by Expected Maturity Date at December 31, 2008 ($ in

thousands):

Long-term debt:

Fixed rate debt . . . .
Average interest rate . .

2009

2010

2011

2012

2013

Thereafter

Total

Fair
Value

$12,026

$3,845

$4,087

$4,314

$4,614

$160,681

$189,567

$182,378

6.0%

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

The financial statements are included under Item 15 of this Annual Report.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND

FINANCIAL DISCLOSURES.

The Company had no disagreements on accounting or financial disclosure matters with its independent

accountants to report under this Item 9.

ITEM 9A. CONTROLS AND PROCEDURES.

Effectiveness of Controls and Procedures

The Company’s management, with the participation of the Company’s Chief Executive Officer (“CEO”) and
Chief Financial Officer (“CFO”), has evaluated the effectiveness of the Company’s disclosure controls and
procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended (the “Exchange Act”)) as of the end of the period covered by this report. The Company’s 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 SEC’s rules and forms. Disclosure controls and procedures are also designed to ensure
that such information is accumulated and communicated to the Company’s management, including the CEO and
CFO, as appropriate to allow timely decisions regarding required disclosure.

Based upon the controls evaluation, the Company’s CEO and CFO have concluded that, as of the end of the

period covered by this report, the Company’s disclosure controls and procedures are effective.

There have not been any changes in the Company’s internal control over financial reporting (as such term is
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the Company’s fiscal quarter ended
December 31, 2008 that have materially affected, or are reasonably likely to materially affect, the Company’s
internal control over financial reporting.

Internal Controls Over Financial Reporting

Management’s Report On Internal Control Over Financial Reporting

Management of the Company, including the Chief Executive Officer and the Chief Financial Officer, is
responsible for establishing and maintaining adequate internal control over financial reporting, as defined in
Rules 13a-15(f) under the Exchange Act. The Company’s internal controls were designed to provide reasonable
assurance to the Company’s management and board of directors regarding the preparation and fair presentation of
published financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance
with respect to financial statement preparation and presentation.

Management assessed the effectiveness of the Company’s internal control over financial reporting as of
December 31, 2008. In making this assessment, management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control — Integrated Framework.
Based on our assessment, we believe that, as of December 31, 2008, the Company’s internal control over financial
reporting is effective based on those criteria.

The effectiveness of our internal control over financial reporting as of December 31, 2008, has been audited by
Ernst & Young LLP, the independent registered public accounting firm that audited our consolidated financial
statements included in this Annual Report on Form 10-K, as stated in their report which is included as part of this
Annual Report on Form 10-K. The Ernst & Young report is on page F-25 of this report.

ITEM 9B. OTHER INFORMATION.

None.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.*

ITEM 11. EXECUTIVE COMPENSATION.*

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

AND RELATED STOCKHOLDER MATTERS.*

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR

INDEPENDENCE.*

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.*

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

The following documents are filed as part of this Report:

(1) Financial Statements:

The response to this portion of Item 15 is submitted as a separate section of this Report. See Index to

Financial Statements at page F-1.

(2) Financial Statement Schedules:

All schedules have been omitted as the required information is inapplicable or the information is

presented in the financial statements or related notes.

(3) Exhibits:

The exhibits listed on the accompanying Index To Exhibits at page E-1 are filed as part of this

Report.

* Information required by Items 10, 11, 12, 13 and 14 is or will be set forth in the definitive proxy statement
relating to the 2009 Annual Meeting of Stockholders of Capital Senior Living Corporation, which is to be filed with
SEC pursuant to Regulation 14A under the Exchange Act. This definitive proxy statement relates to a meeting of
stockholders involving the election of directors and the portions therefrom required to be set forth in this 10-K by
Items 10, 11, 12, 13 and 14 are incorporated herein by reference pursuant to General Instruction G(3) to Form 10-K.

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized, on March 9, 2009.

SIGNATURES

CAPITAL SENIOR LIVING CORPORATION

By: /s/ LAWRENCE A. COHEN

Lawrence A. Cohen
Vice Chairman of the Board
and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the
following persons on behalf of the Registrant and in the capacities and on the dates indicated. Each person whose
signature to this report appears below hereby appoints Lawrence A. Cohen and James A. Stroud and each of them,
any one of whom may act without the joinder of the other, as his or her attorney-in-fact to sign on his behalf,
individually and in each capacity stated below, and to file all amendments to this report, which amendment or
amendments may make such changes in and additions to the report as any such attorney-in-fact may deem necessary
or appropriate.

Signature

Title

Date

/s/ LAWRENCE A. COHEN

Lawrence A. Cohen

/s/

JAMES A. STROUD
James A. Stroud

Chief Executive Officer and
Vice Chairman of the Board
(Principal Executive Officer)

March 9, 2009

Chairman of the Board

March 9, 2009

/s/ KEITH N. JOHANNESSEN

Keith N. Johannessen

President and Chief Operating Officer and
Director

March 9, 2009

/s/ RALPH A. BEATTIE

Ralph A. Beattie

/s/ HARVEY I. HANERFELD

Harvey I. Hanerfeld

/s/ CRAIG F. HARTBERG

Craig F. Hartberg

/s/

JILL M. KRUEGER
Jill M. Krueger

Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)

March 9, 2009

Director

March 9, 2009

Director

March 9, 2009

Director

March 9, 2009

Signature

/s/ PETER L. MARTIN

Peter L. Martin

/s/

JAMES A. MOORE
James A. Moore

/s/ DR. VICTOR W. NEE

Dr. Victor W. Nee

Title

Director

Date

March 9, 2009

Director

March 9, 2009

Director

March 9, 2009

INDEX TO FINANCIAL STATEMENTS

Consolidated Financial Statements of Capital Senior Living Corporation

Report of Independent Registered Public Accounting Firm, Ernst & Young LLP . . . . . . . . . . . . . . . .
Consolidated Balance Sheets — December 31, 2008 and 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Operations — For the years ended December 31, 2008, 2007 and 2006 . .
Consolidated Statements of Shareholders’ Equity — For the years ended December 31, 2008, 2007

and 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows — For the years ended December 31, 2008, 2007 and 2006 . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Report of Independent Registered Public Accounting Firm on Internal Control over Financial

Page

F-2
F-3
F-4

F-5
F-6
F-7

Reporting, Ernst & Young LLP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-28

F-1

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders
Capital Senior Living Corporation

We have audited the accompanying consolidated balance sheets of Capital Senior Living Corporation as of
December 31, 2008 and 2007, and the related consolidated statements of operations, shareholders’ equity, and cash
flows for the each of the three years in the period ended December 31, 2008. These financial statements are the
responsibility of the Company’s management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the
consolidated financial position of Capital Senior Living Corporation at December 31, 2008 and 2007, and the
consolidated results of its operations and its cash flows for each of the three years in the period ended December 31,
2008, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), Capital Senior Living Corporation’s internal control over financial reporting as of December 31,
2008, based on criteria established in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission and our report dated March 9, 2009, expressed an
unqualified opinion thereon.

Dallas, Texas
March 9, 2009

/s/ Ernst & Young LLP

F-2

CAPITAL SENIOR LIVING CORPORATION

CONSOLIDATED BALANCE SHEETS

December 31,

2008

2007

(In thousands)

Current assets:

ASSETS

Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 25,880
3,809
Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,152
Accounts receivable from affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,364
Federal and state income taxes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,052
Deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
354
Assets held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8,632
Property tax and insurance deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,930
Prepaid expenses and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investments in joint ventures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets, net

49,173
305,881
11,062
7,173
14,831

$ 23,359
3,232
846
2,084
996
1,011
7,860
4,526

43,914
310,442
12,824
6,199
16,674

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $388,120

$390,053

Current liabilities:

LIABILITIES AND SHAREHOLDERS’ EQUITY

Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Accrued expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current portion of notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current portion of deferred income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,920
13,661
12,026
6,174
1,593

Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes payable, net of current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commitments and contingencies
Shareholders’ equity:

35,374
20,056
177,541

1,201
13,561
9,035
5,174
2,024

30,995
23,168
185,733

Preferred stock, $.01 par value:

Authorized shares — 15,000; no shares issued or outstanding . . . . . . . . . . . . . . . .

—

Common stock, $.01 par value:

Authorized shares — 65,000; issued and outstanding shares 26,679 and 26,596 in
2008 and 2007, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

267
130,426
24,456

266
129,159
20,732

Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

155,149

150,157

Total liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $388,120

$390,053

See accompanying notes to consolidated financial statements.

F-3

CAPITAL SENIOR LIVING CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

Year Ended December 31,
2007
(In thousands, except per share data)

2006

2008

Revenues:

Resident and health care revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unaffiliated management services revenue . . . . . . . . . . . . . . . . . . . . . .
Affiliated management services revenue . . . . . . . . . . . . . . . . . . . . . . . .
Community reimbursement revenue . . . . . . . . . . . . . . . . . . . . . . . . . . .

$172,025
194
4,882
16,173

$167,563
1,591
3,117
16,781

$139,456
994
1,767
16,853

Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

193,274

189,052

159,070

Expenses:

Operating expenses (exclusive of facility lease expense and

depreciation and amortization expense shown below) . . . . . . . . . . . .
General and administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . .
Facility lease expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for bad debts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Community reimbursement expense . . . . . . . . . . . . . . . . . . . . . . . . . . .

107,315
13,654
25,057
556
1,036
12,468
16,173

103,804
12,046
23,811
330
979
11,295
16,781

89,184
11,420
14,209
121
870
12,345
16,853

Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

176,259

169,046

145,002

Income from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income (expense):

Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sale of properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Write-down of assets held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Write-off of deferred loan costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income (loss). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Income (loss) before income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Provision) benefit for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . .

17,015

20,006

14,068

422
(12,217)
681
(134)
—
270

6,037
(2,313)

674
(12,763)
108
—
(538)
(37)

7,450
(3,090)

843
(16,610)
94
—
(1,867)
(37)

(3,509)
909

Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3,724

4,360

$ (2,600)

Per share data:

Basic income (loss) per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Diluted income (loss) per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

0.14

0.17

0.16

(0.10)

Weighted average shares outstanding — basic . . . . . . . . . . . . . . . . . . .

26,377

Weighted average shares outstanding — diluted . . . . . . . . . . . . . . . . . .

26,620

26,205

26,637

26,014

See accompanying notes to consolidated financial statements.

F-4

CAPITAL SENIOR LIVING CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

Common Stock

Amount

Balance at January 1, 2006 . . . . . . . . . . . . . . . . . . . . 26,290
94
40
—
—
—

Exercise of stock options . . . . . . . . . . . . . . . . . . . .
Restricted stock awards . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . . . . . . . . . .
Excess tax benefits . . . . . . . . . . . . . . . . . . . . . . . .
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Balance at December 31, 2006. . . . . . . . . . . . . . . . . . 26,424
81
91
—
—
—

Balance at December 31, 2007. . . . . . . . . . . . . . . . . . 26,596
38
45
—
—
—

Exercise of stock options . . . . . . . . . . . . . . . . . . . .
Restricted stock awards . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . . . . . . . . . .
Excess tax benefits . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$263
1
—
—
—
—

264
1
1
—
—
—

266
—
1
—
—
—

Additional
Paid-In
Capital

(In thousands)
$126,180
585
—
870
(187)
—

Retained
Earnings

Total

$18,972
—
—
—
—
(2,600)

$145,415
586
—
870
(187)
(2,600)

127,448
501
—
979
231
—

129,159
258
—
1,036
(27)
—

16,372
—
—
—
—
4,360

20,732
—
—
—
—
3,724

144,084
502
1
979
231
4,360

150,157
258
1
1,036
(27)
3,724

Balance at December 31, 2008. . . . . . . . . . . . . . . . . . 26,679

$267

$130,426

$24,456

$155,149

See accompanying notes to consolidated financial statements.

F-5

CAPITAL SENIOR LIVING CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

2008

Year Ended December 31,
2007
(In thousands)

2006

Operating Activities
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,724
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating

$ 4,360

(2,600)

activities:
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of deferred financing charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of deferred lease costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of debt discount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income from affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity in the (earnings) losses of unconsolidated joint ventures . . . . . . . . . . . . . . . . . . .
Gain on sale of properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for bad debts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Write-off of deferred loan costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Write-down of assets held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reduction of contingent note payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in operating assets and liabilities:

Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable from affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property tax and insurance deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal and state income taxes receivable/payable . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by (used in) operating activities . . . . . . . . . . . . . . . . . . . . . . . .

12,432
36
338
367
177
—
(2,112)
1,706
(270)
(680)
556
—
134
—
1,036

(1,133)
(306)
(772)
(1,404)
1,102
719
100
(307)
(431)
15,012

Investing Activities
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investments in joint ventures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash (used in) provided by investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financing Activities
4,645
Proceeds from notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(10,023)
Repayments of notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
232
Cash proceeds from the issuance of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
27
Excess tax benefits on stock options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Cash paid to settle interest rate lock agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Deferred financing charges paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(5,119)
Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,521
Increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
23,359
Cash and cash equivalents at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 25,880

(8,065)
1,397
(704)
(7,372)

11,218
77
386
350
184
—
(2,676)
2,300
37
(108)
330
538
—
(921)
979

276
(62)
(1,428)
(1,081)
19
(1,389)
1,361
(1,843)
(454)
12,453

(8,637)
2,319
(1,014)
(7,332)

11,208
1,137
601
183
200
(48)
(2,312)
(7,312)
37
(94)
121
1,867
—
—
870

(1,373)
(352)
(1,351)
(760)
(7,856)
255
1,525
1,412
(5)
(4,647)

(6,650)
40,497
(3,889)
29,958

44,617
(51,869)
—
503
231
60
(873)
(7,331)
(2,210)
25,569
$ 23,359

146,590
(164,759)
973
399
187
(1,823)
(3,140)
(21,573)
3,738
21,831
$ 25,569

Supplemental Disclosures
Cash paid during the year for:

Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,668

$ 12,178

$ 16,465

Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,179

$ 2,532

6,379

Non-cash transactions:
Conversion of interest rate cap agreement to notes payable . . . . . . . . . . . . . . . . . . . . . . . . $

Debt assumed by Ventas / HCP in sale/leaseback transactions . . . . . . . . . . . . . . . . . . . . . . $

— $

5,727

— $ 45,535

See accompanying notes to consolidated financial statements.

F-6

CAPITAL SENIOR LIVING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008

1. Organization

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
December 31, 2008, the Company operated 64 senior living communities in 23 states with an aggregate capacity of
approximately 9,500 residents, including 38 senior living communities which the Company either owned or in
which the Company had an ownership interest, 25 senior living communities that the Company leased and one
senior living community it managed for a third party. As of December 31, 2008, the Company also operated one
home care agency. The accompanying consolidated financial statements include the financial statements of Capital
Senior Living Corporation and its wholly owned subsidiaries. All material intercompany balances and transactions
have been eliminated in consolidation. The Company accounts for significant investments in unconsolidated
companies, in which the Company has significant influence, using the equity method of accounting.

2. Summary of Significant Accounting Policies

Cash and Cash Equivalents and Restricted Cash

The Company considers all highly liquid investments with original maturities of three months or less at the
date of acquisition to be cash equivalents. The Company has deposits in banks that exceed Federal Deposit
Insurance Corporation insurance limits. Management believes that credit risk related to these deposits is minimal.

Long-Lived Assets

Property and equipment are stated at cost and depreciated on a straight-line basis over the estimated useful
lives of the assets. At each balance sheet date, the Company reviews the carrying value of its property and
equipment to determine if facts and circumstances suggest that they may be impaired or that the depreciation period
may need to be changed. The Company considers internal factors such as net operating losses along with external
factors relating to each asset, including contract changes, local market developments, and other publicly available
information. The carrying value of a long-lived asset is considered impaired when the anticipated undiscounted cash
flows from such asset is separately identifiable and is less than its carrying value. In that event, a loss is recognized
based on the amount the carrying value exceeds the fair market value, generally based on discounted cash flows, of
the long-lived asset. The Company analyzed certain long-lived assets with operating losses, under the undiscounted
cash flow method, for impairment. Based on this analysis, the Company does not believe there are any indicators
that would require an adjustment to the carrying value of the property and equipment or their remaining useful lives
as of December 31, 2008 and 2007.

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 actual sales price of these assets could differ significantly from the Company’s estimates. The Company had
one parcel of land, in Fort Wayne, Indiana, held for sale at December 31, 2008.

In March 2007, the Company sold one parcel of land located in Baton Rouge, Louisiana that had been
classified as held for sale. The land parcel sold for $0.5 million, net of closing costs, resulting in a gain on sale of
approximately $0.1 million.

F-7

CAPITAL SENIOR LIVING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

In May 2007, the Company sold one parcel of land located in Miami Township, Ohio that had been classified as
held for sale to a joint venture (“SHP III/CSL Miami”), which is owned 90% by Senior Housing Partners III LP
(“SHP III”), a fund owned by Prudential Real Estate Investors (“Prudential”), and 10% by the Company, for
$0.6 million, resulting in a loss on sale of approximately $3,000. In addition, during the second quarter of fiscal
2007, management reclassified a parcel of land in Carmichael, California to held for sale. The Company estimated
on the date of reclassification that the fair value of the land parcel, net of selling expenses, exceeded its carrying
value of $0.5 million. In February 2008, the Company sold the parcel of land located in Carmichael, California for
$1.2 million, net of closing costs, resulting in a gain on sale of approximately $0.6 million.

In November 2007, the Company sold one parcel of land located in Richmond Heights, Ohio that had been
classified as held for sale to a joint venture (“SHP III/CSL Richmond Heights”) which is owned 90% by SHP III and
10% by the Company, for $0.8 million resulting in a gain on sale of approximately $0.3 million, which has been
deferred and will be recognized into income over the period required to stabilize the senior living community.

In accordance with the provisions of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-
Lived Assets” (“FAS 144”), the parcel of land held for sale in Fort Wayne, Indiana, with a carrying amount of
$0.5 million was written down approximately $0.1 million to its fair value, less costs to sell, to $0.4 million during
the first quarter of fiscal 2008. The Company currently estimates that this parcel of land held for sale had an
aggregate fair value, net of costs of disposal, that exceeds its carrying value of $0.4 million at December 31, 2008.
The amount that the Company will ultimately realize on the parcel of land could differ materially from this estimate.

Investments in Joint Ventures

The Company accounts for its investments in joint ventures under the equity method of accounting. The
Company is the general partner in two partnerships and owns member interests in seven other joint ventures. The
Company has not consolidated these joint venture interests because the Company has concluded that the limited
partners or the other members of each joint venture has substantive kick-out rights or substantive participating rights
as defined in EITF Issue 04-05 “Determining Whether a General Partner, or the General Partners as a Group,
Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights.” (“EITF 04-05”)
Under the equity method of accounting the Company records its investments in joint ventures at cost and adjusts
such investment for its share of earnings and losses of the joint venture.

Development Guarantees

The Company, on three joint venture developments, has guarantees that the communities will be completed at
the budgeted costs approved by the joint venture members. These costs include the hard and soft construction costs
and operating costs until the community reaches stabilization. The budgeted costs include contingency reserves for
potential costs overruns and other unforeseen costs. In addition, each of these joint ventures has entered into
guaranteed fixed price construction contracts with the general contractors on each of the developments. The
Company would be required to fund these guarantees if the actual development costs incurred by the joint venture
exceed the budgeted costs for the development. The terms of these guarantees generally do not provide for a
limitation on the maximum potential future payments. The Company has not made any payments under these
guarantees and currently does not expect to be required to make any payments under these guarantees.

Income Taxes

The Company accounts for income taxes under the provisions of SFAS No. 109, “Accounting for Income
Taxes” (“FAS 109”). Deferred income taxes reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. At
December 31, 2008, the Company had recorded on its consolidated balance sheet net deferred tax assets of
$12.1 million. Management regularly evaluates the future realization of deferred tax assets and provides a valuation
allowance, if considered necessary, based on such evaluation. As part of that evaluation, management has evaluated

F-8

CAPITAL SENIOR LIVING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

future expectations of net income. However, the benefits of the net deferred tax assets might not be realized if actual
results differ from expectations. The Company believes that based upon this analysis that the realization of the net
deferred tax assets is reasonably assured and therefore has not provided for a valuation allowance.

The Company accounts for uncertain tax positions under the provisions of Financial Accounting Standards
Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — An Interpretation of FASB
Statement No. 109” (“FIN 48”). This standard clarifies the accounting for income tax benefits that are uncertain in
nature. Under FIN 48, the Company is required to recognize a tax benefit in its financial statements for an uncertain
tax position only if management’s assessment is that its position is “more likely than not” (i.e., a greater than
50 percent likelihood) to be upheld on audit based only on the technical merits of the tax position. FIN 48 also
provides guidance on thresholds, measurement, derecognition, classification, interest and penalties, accounting in
interim periods, disclosure, and transition that is intended to provide better financial-statement comparability
among different companies. The Company’s 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 2004.

Revenue Recognition

Resident and health care revenue is recognized at estimated net realizable amounts, based on historical

experiences, due from residents in the period to which the rental and other services are provided.

Revenues from the Medicare and Medicaid programs accounted for approximately 6% of the Company’s
revenue in fiscal 2008, 2007 and 2006. Six communities are providers of services under the Medicaid program.
Accordingly, the communities are entitled to reimbursement under the foregoing program at established rates that
are lower than private pay rates. Patient service revenue for Medicaid patients is recorded at the reimbursement rates
as the rates are set prospectively by the state upon the filing of an annual cost report. Two communities are providers
of services under the Medicare program and are entitled to payment under the foregoing programs in amounts
determined based upon rates established by the federal government.

Management services revenue is recognized when earned. Management services revenue relates to providing
certain management and administrative support services under management contracts, which have terms expiring
through 2014. The Company’s management contracts include contingent management services revenue, usually
based on exceeding certain gross revenue targets. These contingent revenues are recognized based on actual results
according to the calculations specified in the various management agreements.

Community reimbursement revenue is comprised of reimbursable expenses from non-consolidated commu-

nities that the Company operates under long-term management agreements.

Lease Accounting

F-9

CAPITAL SENIOR LIVING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

leases entered into by the Company qualified as sale/leaseback transactions under the provisions of Financial
Accounting Standard No. 98 “Accounting for Leases” (“FAS 98”) and as such any related gains have been deferred
and are being amortized over the lease term.

Facility lease expense in the Company’s statement of operations includes rent expense plus amortization

expense relating to leasehold acquisition costs offset by the amortization of deferred gains.

Financial Instruments

Effective January 31, 2005, the Company entered into interest rate cap agreements with two commercial banks
to reduce the impact of increases in interest rates on the Company’s variable rate loans. One interest rate cap
agreement effectively limited the interest rate exposure on $100 million notional amount to a maximum London
Interbank Offered Rate (“LIBOR”) of 5%, as long as one-month LIBOR was less than 7%. If one-month LIBOR
was greater than 7%, the agreement effectively limited the interest rate on the same $100 million notional amount to
a maximum LIBOR of 7%. In March 2006, the Company sold $67 million of the notional amount of this interest rate
cap and as a result received $0.3 million in cash and recorded a gain on sale of $0.1 million. The remaining balance
of the interest rate cap was sold in May 2007, resulting in net proceeds of $0.1 million and a gain on sale of
approximately $28,000. During fiscal 2007 and 2006, the Company received 37,000 and $0.1 million under the
terms of this interest rate cap agreement and recorded the amount received as a reduction in interest expense. The
second interest cap agreement effectively limited the interest rate exposure on a $50 million notional amount to a
maximum LIBOR of 5% and expired on January 31, 2006. The Company paid $0.4 million for the interest rate caps
and the costs of these agreements were being amortized to interest expense over the life of the agreements.

The Company used interest rate lock and interest rate swap agreements for purposes other than trading. The
Company was party to interest rate lock agreements, which were used to hedge the risk that the costs of future
issuance of debt may be adversely affected by changes in interest rates. Under the interest rate lock agreements, the
Company agreed to pay or receive an amount equal to the difference between the net present value of the cash flows
for a notional principal amount of indebtedness based on the locked rate at the date when the agreement was
established and the yield of a United States Government 10-Year Treasury Note on the settlement date of January 3,
2006. The notional amounts of the agreements were not exchanged. These interest rate lock agreements were
entered into with a major financial institution in order to minimize counterparty credit risk. The locked rates ranged
from 7.5% to 9.1%. The Company reflected the interest rate lock agreements at fair value in the Company’s
consolidated balance sheet (Other long-term liabilities) and related gains and losses were recognized in the
consolidated statements of operations. The Company settled the interest rate lock liability on January 3, 2006 by
paying $1.8 million in cash and converting the remaining balance of $5.7 million to a five-year note. In January
2007, the Company paid $5.0 million to KeyBank to repay the note.

Credit Risk

The Company’s resident receivables are generally due within 30 days. Credit losses on resident receivables
have been within management’s expectations, and management believes that the allowance for doubtful accounts
adequately provides for any expected losses.

Advertising

Advertising is expensed as incurred. Advertising expenses for the years ended December 31, 2008, 2007 and

2006 were $5.9 million, $6.0 million and $5.6 million, respectively.

Net Income (Loss) Per Share

Basic net income (loss) per share is calculated by dividing net income (loss) by the weighted average number
of common shares outstanding during the period. Diluted net income (loss) per share considers the dilutive effect of

F-10

CAPITAL SENIOR LIVING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

outstanding options calculated using the treasury stock method. The average daily price of the stock during 2008,
2007 and 2006 was $6.89, $9.79 and $10.15, respectively, per share. Options to purchase 149,000 and 39,000 shares
of common stock were outstanding during fiscal 2008 and 2007, respectively, but were not included in the
computation of diluted earnings per share as the effect would have been antidilutive. In addition, due to a net loss in
fiscal 2006, no common stock equivalents were considered in the calculation of diluted earnings per share. The
Company has not considered restricted stock awards in the computation of basic income (loss) per share.

The following table set forth the computation of basic and diluted net income (loss) per share (in thousands,

except for per share amounts):

Year Ended December 31,
2007

2006

2008

Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 3,724

$ 4,360

$ (2,600)

Weighted average shares outstanding — basic . . . . . . . . . . . . . . . . .
Effect of dilutive securities:

26,377

26,205

26,014

Employee stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

243

432

—

Weighted average shares outstanding — diluted . . . . . . . . . . . . . . .

26,620

26,637

26,014

Basic income (loss) per share . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 0.14

$ 0.17

$ (0.10)

Diluted income (loss) per share . . . . . . . . . . . . . . . . . . . . . . . . .

$ 0.14

$ 0.16

$ (0.10)

Stock-Based Compensation

The Company accounts for its stock-based compensation in accordance with the provisions of Financial
Accounting Standards No. 123 (revised), “Share-based Payment” (“FAS 123R”), which requires all share-based
payments to employees, including grants of employee stock options and awards of restricted stock to be recognized
in the statement of operations based on their fair values.

On May 8, 2007, the Company’s shareholders approved the 2007 Omnibus Stock and Incentive Plan for
Capital Senior Living Corporation (the “2007 Plan”) which provides for, among other things, the grant of restricted
stock awards and stock options to purchase shares of the Company’s common stock. The 2007 Plan authorizes the
Company to issue up to 2.6 million shares of common stock and the Company has reserved 2.5 million shares of
common stock for future issuance pursuant to awards under the 2007 Plan. Effective May 8, 2007, the 1997
Omnibus Stock and Incentive Plan (as amended, the “1997 Plan”) was terminated and no additional shares will be
granted under the 1997 Plan. The Company has reserved 0.9 million shares of common stock for future issuance
upon the exercise of outstanding stock options pursuant to the 1997 Plan.

Recently Issued Accounting Standards

F-11

CAPITAL SENIOR LIVING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

earnings. The Company has elected not to apply the fair value option to any of its financial instruments not already
carried at fair value in accordance with other accounting standards, and therefore the adoption of FAS 159 did not
impact the Company’s consolidated financial statements.

FASB Staff Position (“FSP”) Emerging Issues Task Force (“EITF”) 03-6-1, “Determining Whether Instru-
ments Granted in Share-Based Payment Transactions are Participating Securities” (“FSP 03-6-1”). FSP 03-6-1
clarifies that unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend
equivalents (whether paid or unpaid) are participating securities and are to be included in the computation of
earnings per share under the two-class method described in SFAS No. 128, “Earnings Per Share.” This FSP is
effective for the Company on January 1, 2009, and requires all presented prior-period earnings per share data to be
adjusted retrospectively. The Company’s adoption of FSP 03-6-1 on January 1, 2009, did not have a significant
impact on the Company’s consolidated financial statements.

Segment Information

The Company evaluates the performance and allocates resources of its senior living facilities based on current
operations and market assessments on a property-by-property basis. The Company does not have a concentration of
operations geographically or by product or service as its management functions are integrated at the property level.
As such, the Company operates in one segment.

Reclassifications

Certain prior year amounts have been reclassified to conform to the current year presentation. These
reclassifications include reclassifying the amortization of deferred gains on sale leaseback transactions from gain
on sale of assets to facility lease expense to better conform with industry practice. Additionally, capital replacement
reserves and certain escrow deposits have been reclassified from current assets to other assets to better reflect the
long-term nature of these assets.

Use of Estimates and Critical Accounting Policies

The preparation of financial statements in conformity with U.S. generally accepted accounting principles
requires management to make estimates and assumptions that affect the amounts reported in the accompanying
financial statements and related footnotes. Management bases its estimates and assumptions on historical expe-
rience, observance of industry trends and various other sources of information and factors, the results of which form
the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from
other sources. Actual results could differ from these estimates. Critical accounting policies are defined as those that
are reflective of significant judgments and uncertainties, and potentially could result in materially different results
under different assumptions and conditions. The Company believes revenue recognition, investments in limited
partnerships, leases, long-lived assets, income taxes and assets held for sale are its most critical accounting policies
and require management’s most difficult, subjective and complex judgments.

F-12

CAPITAL SENIOR LIVING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

3. Transactions with Affiliates

Midwest I

In January 2006, the Company announced the formation of Midwest Portfolio Holdings, L.P., (“Midwest I”)
with GE Healthcare Financial Services (“GE Healthcare”) to acquire five senior housing communities from a third
party. Midwest I is owned approximately 89% by GE Healthcare and 11% by the Company. As of December 31,
2008, the Company has contributed $2.7 million for its interests in Midwest I. The Company manages the five
acquired communities under long-term management agreements with Midwest I. The Company accounts for its
investment in Midwest I under the equity method of accounting and the Company recognized earnings in the equity
of Midwest I of $0.2 million and $8,000 in fiscal 2008 and 2007, respectively, compared to a loss in the equity of
Midwest I of $9,000 in fiscal 2006. The Company earned $0.5 million in management fees on the Midwest I
communities in both fiscal 2008 and 2007 and $0.4 million in management fees on the Midwest I communities in
fiscal 2006. During the second quarter of fiscal 2007, Midwest I finalized its purchase price allocation on the five
communities it acquired in fiscal 2006, resulting in a noncash charge of $0.1 million being recognized by the
Company. The final purchase price allocation resulted in more of the purchase price being allocated to assets with
shorter economic lives, which resulted in additional depreciation and amortization expense.

Midwest II

In August 2006, the Company announced the formation of Midwest Portfolio Holding II, L.P. (“Midwest II”),
with GE Healthcare to acquire three senior housing communities from a third party. Midwest II is owned
approximately 85% by GE Healthcare and 15% by the Company. As of December 31, 2008, the Company has
contributed $1.6 million for its interests in Midwest II. The Company manages the three acquired communities
under long-term management agreements with Midwest II. The Company accounts for its investment in Midwest II
under the equity method of accounting and the Company recognized a loss in the equity of Midwest II of
$0.1 million, $0.3 million and $0.1 million in fiscal 2008, 2007 and 2006, respectively. The Company earned
$0.5 million in management fees on the Midwest II communities both in fiscal 2008 and 2007 and $0.2 million in
management fees on the Midwest II communities in fiscal 2006. During the second quarter of fiscal 2007,
Midwest II finalized its purchase price allocation on the three communities it acquired in fiscal 2006, resulting in a
noncash charge of $0.2 million being recognized by the Company. The final purchase price allocation resulted in
more of the purchase price being allocated to assets with shorter economic lives, which resulted in additional
depreciation and amortization expense.

SHPII/CSL

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 and 5% by the Company. As of December 31, 2008, 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
$0.3 million for both fiscal 2008 and 2007 and $0.1 million in fiscal 2006. In addition, the Company earned
$1.2 million in management fees on the Spring Meadows Communities both in fiscal 2008 and 2007 and
$1.1 million in management fees on the Spring Meadows Communities in fiscal 2006.

SHPIII/CSL Miami

F-13

CAPITAL SENIOR LIVING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Company accounts for its investment in SHPIII/CSL Miami under the equity method of accounting and the
Company recognized a loss in the equity of SHPIII/CSL Miami of $0.1 million for fiscal 2008. The Company
earned $0.2 million and $0.7 million in development fees from SHPIII/CSL Miami in fiscal 2008 and 2007,
respectively. In addition, the Company earned $0.1 million in pre-marketing fees and $0.1 in management fees on
the community in fiscal 2008.

SHPIII/CSL Richmond Heights

SHPIII/CSL Levis Commons

BRE/CSL

In December 2001, the Company formed three joint ventures (collectively “BRE/CSL”) with Blackstone Real
Estate Advisors (“Blackstone”) and the joint ventures are owned 90% by Blackstone and 10% by the Company.
BRE/CSL previously owned six senior living communities. The Company managed the six communities owned by
BRE/CSL under long-term management contracts. In September 2005, Ventas acquired the six communities owned
by BRE/CSL and the Company entered into a series of lease agreements whereby the Company leases the six
communities from Ventas. In March 2007, the Company received a final distribution from BRE/CSL of $0.4 million
relating to the sale of six communities owned by BRE/CSL to Ventas. This distribution resulted in the recognition of
an additional gain of $0.4 million, which has been deferred and is being amortized in the Company’s statement of
operations over the remaining initial lease term.

5. Facility Lease Transactions

The Company currently leases 25 communities with certain real estate investment trusts (“REITs”) and
accounts for each of the leases as an operating lease. The lease terms are generally for ten years with renewal options
for 10-20 years at the Company’s option. Under these agreements the Company is responsible for all operating

F-14

CAPITAL SENIOR LIVING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

costs, maintenance and repairs, insurance and property taxes. The following table further describes each of the lease
agreements (dollars in millions):

Number of
Communities

Value of
Transaction

Term

Initial
Lease Rate(1)

Lease
Acquisition
Costs(2)

Deferred
Gains/Lease
Concession(3)

Landlord

Date of Lease

Ventas

September 30, 2005

Ventas

October 18, 2005

Ventas

March 31,2006

Ventas

June 8, 2006

Ventas

January 31, 2008

HCP

May 1, 2006

May 31, 2006

December 1, 2006

December 14, 2006

April 11, 2007

$84.6

19.5

29.0

19.1

5.0

54.0

43.0

51.0

18.0

8.0

7.75%

7.25%

Subtotal
Accumulated amortization
Accumulated deferred gain recognized

Net lease acquisition costs/deferred gains as of December 31, 2008

$ 1.3

$ 4.6

0.2

0.1

0.4

0.2

0.7

0.3

0.1

—

14.3

—

12.8

0.6

—

3.7
(1.0)
—

32.3
—
(9.1)

$ 2.7

$23.2

(1) Initial lease rates are subject to conditional lease escalation provisions as forth in each lease agreement.
(2) Lease acquisition costs are being amortized over the leases’ initial term.

In April 2007, HCP acquired a senior living community in Cedar Hill, Texas (“Crescent Place”), which was
previously owned by the Covenant and managed by the Company, in a transaction valued at approximately
$8.0 million and immediately leased Crescent Place to the Company. In connection with this transaction, the
Company’s previous management agreement with Covenant was terminated.

In January 2008, the Company leased a senior living community in Keller, Texas (“Whitley Place”) from
Ventas which was acquired by Ventas from a third party in a transaction valued at approximately $5.0 million.

F-15

CAPITAL SENIOR LIVING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

6. Property and Equipment

Property and equipment consists of the following (in thousands):

Asset Lives

2008

2007

December 31,

Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Land improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Buildings and building improvements . . . . . . . . . . . . . . . .
Furniture and equipment . . . . . . . . . . . . . . . . . . . . . . . . . .
Automobiles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leasehold improvements. . . . . . . . . . . . . . . . . . . . . . . . . .
Construction in progress . . . . . . . . . . . . . . . . . . . . . . . . . .

5 to 20 years
10 to 40 years
5 to 10 years
5 to 7 years
(1)
(2)

Less accumulated depreciation and amortization . . . . . . . .

$ 17,787
1,158
326,654
14,683
833
11,456
330

372,901
67,020

$ 17,981
936
324,435
11,767
553
7,752
1,606

365,030
54,588

Property and equipment, net . . . . . . . . . . . . . . . . . . . . .

$305,881

$310,442

(1) Leasehold improvements are amortized over the shorter of the useful life of the asset or the remaining lease

term.

(2) Construction in progress in fiscal 2007 includes $1.6 million of capitalized computer software development

costs which were transferred to furniture and equipment when placed in service during fiscal 2008.

Furniture and equipment includes $2.1 million in capitalized computer software development costs of which
$0.4 million has been amortized and is included as a component of accumulated depreciation and amortization at
December 31, 2008.

7. Other Assets

Other assets consist of the following (in thousands):

Deferred loan costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred lease costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Security and other deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 2,462
2,684
9,674
11

$ 2,801
2,887
10,357
629

$14,831

$16,674

December 31,

2008

2007

F-16

CAPITAL SENIOR LIVING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

8. Accrued Expenses

Accrued expenses consist of the following (in thousands):

December 31,

2008

2007

Accrued salaries, bonuses and related expenses . . . . . . . . . . . . . . . . . . . . . . . .
Accrued property taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued health claims and workers comp . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued professional fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 3,719
5,957
988
1,327
421
1,249

$ 4,259
5,436
1,002
1,166
476
1,222

$13,661

$13,561

9. Notes Payable

Notes payable consists of the following (in thousands):

Lender

Freddie Mac . . . . . . . . . .
Capmark . . . . . . . . . . . . .
Fannie Mae . . . . . . . . . . .
Freddie Mac . . . . . . . . . .
Lehman . . . . . . . . . . . . . .
Lehman(1) . . . . . . . . . . . .
Insurance Financing . . . . .
Insurance Financing . . . . .
Insurance Financing . . . . .

Less current portion . . . . .

Average
Monthly
Payment

$ 736
242
178
55
44
—
275
150
49

$1,729

Net Book Value
of Collateral(2)

Interest
Rate

Maturity Date

2008

2007

Notes Payable
December 31,

$135,874
44,961
34,630
8,292
7,051
—
—
—
—

July 2015
August 2015
May 2017
March 2017
September 2009
November 2008
October 2009
April 2009
October 2009

6.29%
5.46
5.91
5.75
8.20
5.75
4.78
3.75
4.78

6.06%(3)

$105,545
36,578
29,479
9,500
4,745
—
2,688
595
437

$107,468
37,397
29,835
9,500
4,872
3,323

1,833
540

189,567

194,768

12,026

9,035

$177,541

$185,733

(1) Acquisition financing bearing no interest (discounted at 5.7%). The note was repaid by the Company on

November 21, 2008.

(2) The 25 facilities owned by the Company and encumbered by mortgage debt are provided as collateral under

their respective loan agreements.

(3) Weighted average interest rate on current debt outstanding.

F-17

CAPITAL SENIOR LIVING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The aggregate scheduled maturities of notes payable at December 31, 2008, are as follows (in thousands):

2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

12,026
3,845
4,087
4,314
4,614
160,681

$189,567

On November 21, 2008, the Company repaid the Lehman acquisition financing non-interest bearing note in its

entirety for a total cost of $3.5 million.

F-18

CAPITAL SENIOR LIVING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

over ten years. In addition, as part of this refinancing, the Company wrote-off $13,000 in deferred loan costs and
paid $0.2 million in loan exit fees to the prior lender. The loan exit fees are a component of write-off of deferred loan
costs in the accompanying statement of operations.

Effective January 31, 2005, the Company entered into interest rate cap agreements with two commercial banks
to reduce the impact of increases in interest rates on the Company’s variable rate loans. One interest rate cap
agreement effectively limited the interest rate exposure on $100 million notional amount to a maximum LIBOR of
5%, as long as one-month LIBOR was less than 7%. If one-month LIBOR was greater than 7%, the agreement
effectively limited the interest rate on the same $100 million notional amount to a maximum LIBOR of 7%. In
March 2006, the Company sold $67 million of the notional amount of this interest rate cap and as a result received
$0.3 million in cash and recorded a gain on sale of $0.1 million. The remaining balance of the interest rate cap was
sold in May 2007, resulting in net proceeds of $0.1 million and a gain on sale of approximately $28,000. During
fiscal 2007 and 2006, the Company received $37,000 and $0.1 million under the terms of this interest rate cap
agreement and recorded the amount received as a reduction in interest expense. The second interest cap agreement
effectively limited the interest rate exposure on a $50 million notional amount to a maximum LIBOR of 5% and
expired on January 31, 2006. The Company paid $0.4 million for the interest rate caps and the costs of these
agreements were being amortized to interest expense over the life of the agreements.

In connection with the Company’s loan commitments described above, the Company incurred financing
charges that were deferred and amortized over the life of the notes. At December 31, 2008 and 2007, the Company
had gross deferred loan costs of $3.4 million. Accumulated amortization was $0.9 million and $0.6 million at
December 31, 2008 and 2007, respectively. Amortization expense is expected to be $0.3 million in each of fiscal
2009, 2010, 2011 2012 and 2013. In connection with the refinancings and the repayment of notes, the Company
wrote-off $0.5 million in deferred loan costs in fiscal 2007.

F-19

CAPITAL SENIOR LIVING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The Company must maintain certain levels of tangible net worth and comply with other restrictive covenants
under the terms of the notes. The Company was in compliance with all of its debt covenants at December 31, 2008
and 2007.

10. Equity

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 holders of common stock are subject to the rights of
the holders of preferred stock. No preferred stock was outstanding as of December 31, 2008 and 2007.

11. Stock-Based Compensation

On May 8, 2007, the Company’s shareholders approved the 2007 Omnibus Stock and Incentive Plan for
Capital Senior Living Corporation which provides for, among other things, the grant of restricted stock awards and
stock options to purchase shares of the Company’s common stock. The 2007 Plan authorizes the Company to issue
up to 2.6 million shares of common stock and the Company reserved 2.5 million shares of common stock for future
issuance pursuant to awards under the 2007 Plan. Effective May 8, 2007, the 1997 Omnibus Stock and Incentive
Plan was terminated and no additional shares will be granted under the 1997 Plan. The Company reserved
1.0 million shares of common stock for future issuance upon the exercise of outstanding stock options pursuant to
the 1997 Plan.

Stock Options

The Company’s stock option program is a long-term retention program that is intended to attract, retain and
provide incentives for employees, officers and directors and to align stockholder and employee interest. The
Company’s options generally vest over one to five years and the related expense is amortized on a straight-line basis
over the vesting period.

A summary of the Company’s stock option activity and related information for the years ended December 31,

2008, 2007 and 2006 is presented below:

Outstanding at
Beginning of
Year

Granted

Exercised

Forfeited

Outstanding
End of Year

Options
Exercisable

December 31, 2008
Shares . . . . . . . . . . . . . . . . . . . .
Weighted average price . . . . . . .
December 31, 2007
Shares . . . . . . . . . . . . . . . . . . . .
Weighted average price . . . . . . .
December 31, 2006
Shares . . . . . . . . . . . . . . . . . . . .
Weighted average price . . . . . . .

937,334
4.87

—

38,000
$ — $ 6.06

4,000
$ 3.69

1,026,682
4.80
$

—

81,348
$ — $ 4.07

8,000
$ 3.40

895,334
4.83

895,334
4.83
$

937,334
4.87

932,334
4.87
$

1,109,225
4.69
$

12,000
$ 10.97

93,543
$ 4.27

1,000
$ 2.73

1,026,682
4.80

995,182
4.73

The options outstanding and the options exercisable at December 31, 2008 and 2007, had an intrinsic value of
$250,000 and $4.8 million, respectively. The fair value of the 5,000 shares, 18,500 shares and 41,000 shares that
vested in fiscal 2008, 2007 and 2006 was $29,000, $0.2 million and $0.2 million, respectively.

F-20

CAPITAL SENIOR LIVING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following table summarizes information relating to the Company’s options outstanding and options

exercisable as of December 31, 2008.

Range of Exercise
Prices

Number
Outstanding at
12/31/08

$1.80 to $ 2.73 . .
$3.02 to $ 4.85 . .
$5.30 to $10.97 . .

214,224
231,230
449,880

$1.80 to $10.97 . .

895,334

Options Outstanding
Weighted Average
Remaining
Contractual Life

Weighted Average
Exercise Price

Options Exercisable

Number
Exercisable at
12/31/08

Weighted Average
Exercise Price

2.73
1.57
3.61

2.87

$1.81
$3.68
$6.86

$4.83

214,224
231,230
449,880

895,334

$1.81
$3.68
$6.86

$4.83

Restricted Stock

The Company can grant restricted stock to its employees and directors under its incentive stock plan.
Restricted stock granted generally vest over a period of three to four years but are considered outstanding at the time
of grant, as the stockholders are entitled to dividends and voting rights.

A summary of the Company’s restricted common stock awards activity and related information for the year

ended December 31, 2008, is presented below:

Outstanding at
Beginning of
Year

Issued

Vested

Forfeited

Outstanding
End of Year

December 31, 2008
Shares . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2007
Shares . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2006
Shares . . . . . . . . . . . . . . . . . . . . . . .

256,858

66,000

50,586

20,640

251,632

283,445

113,000

117,857

21,730

256,858

356,750

54,000

113,305

14,000

283,445

The restricted stock outstanding at December 31, 2008 and 2007 had an intrinsic value of $0.7 million and

$2.6 million, respectively.

During fiscal 2008, the Company awarded 66,000 shares of restricted common stock to certain employees of
the Company. The average market value of the common stock on the date of grant was $7.45. These awards of
restricted shares vest over a four-year period and had an intrinsic value of $0.5 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
awards. 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 Company’s common stock. The expected term
of options granted is based primarily on historical exercise patterns on the Company’s 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 expect 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
Company’s historical option forfeiture patterns.

F-21

CAPITAL SENIOR LIVING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following table presents the Company’s assumptions utilized to estimate the grant date fair value of stock

options (no stock options have been granted during fiscal 2008 and 2007):

Year Ended
December 31,
2007

2006

2008

Expected volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —
Expected dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —
Expected term in years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —
Risk free rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —
Expected forfeiture rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —

— 50.8%
—
0%
—
—
—

7.5
5.1%
2.0%

The Company has total stock-based compensation expense of $1.1 million not recognized as of December 31,

2008 and expects this expense to be recognized over approximately a four-year period.

12.

Income Taxes

The provision (benefit) for income taxes consists of the following (in thousands):

Year Ended December 31,
2007

2006

2008

Current:

Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 109
498

(81)
871

$ 5,099
1,304

Deferred:

Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,502
204

3,351
(1,051)

(6,171)
(1,141)

$2,313

$ 3,090

$ (909)

The provision (benefit) for income taxes differed from the amounts of income tax provision (benefit)
determined by applying the U.S. federal statutory income tax rate to income (loss) before benefit for income
taxes as a result of the following (in thousands):

Year Ended December 31,
2007

2006

2008

Tax provision (benefit) at federal statutory rates . . . . . . . . . . . . . . . . .
State income tax (benefit) expense, net of federal effects . . . . . . . . . . .
Federal and state income tax return true up. . . . . . . . . . . . . . . . . . . . .
State effective rate changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$2,053
463
(222)
5
14

$2,533
(119)
667
—
9

$(1,193)
107
178
—
(1)

$2,313

$3,090

$ (909)

F-22

CAPITAL SENIOR LIVING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

A summary of the Company’s deferred tax assets and liabilities, are as follows (in thousands):

December 31,

2008

2007

Deferred tax assets:

Deferred gain on sale/leaseback transaction . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net operating loss carryforward (expiring up to 2027) . . . . . . . . . . . . . . . . .
Compensation costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment in partnerships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 9,143
1,610
1,482
1,614
2,489
1,099

$10,442
2,660
923
1,393
2,178
553

Total deferred tax assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

17,437

18,149

Deferred tax liabilities:

Triad partnership interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5,319
4

5,323

4,311
18

4,329

Total deferred tax assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$12,114

$13,820

Current deferred tax assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term deferred tax assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 1,052
11,062

996
12,824

Total deferred tax assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$12,114

$13,820

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. The Company 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 Company’s appreciated assets. The Company believes that based upon this analysis that the realization
of the net deferred tax asset is reasonably assured and therefore has not provided for a valuation allowance.

As of December 31, 2008, the Company has federal and state net operating loss carryforwards of $1.5 million

and $23.7 million, respectively, and related deferred tax assets of $0.5 million and $1.0 million, respectively.

The Company is generally no longer subject to federal and state tax audits for years before 2004.

13. Employee Benefit Plans

The Company has a 401(k) salary deferral plan (the “Plan”) in which all employees of the Company meeting
minimum service and age requirements are eligible to participate. Contributions to the Plan are in the form of
employee salary deferrals, which are subject to employer matching contributions of up to 2% of the employee’s
annual salary. The Company’s contributions are funded semi-monthly to the Plan administrator. Matching
contributions of $0.4 million, $0.4 million and $0.3 million were contributed to the Plan in fiscal 2008, 2007
and 2006, respectively. The Company incurred administrative expenses related to the Plan of $12,400, $10,800 and
$10,250 in fiscal 2008, 2007 and 2006, respectively.

14. Contingencies

F-23

CAPITAL SENIOR LIVING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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.

15. Fair Value of Financial Instruments

The carrying amounts and fair values of financial instruments at December 31, 2008 and 2007 are as follows

(in thousands):

2008

2007

Cash and cash equivalents . . . . . . . . . . . . . . . . . . . $ 25,880
189,567
Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Carrying
Amount

Fair Value

$ 25,880
182,378

Carrying
Amount

$ 23,359
194,768

Fair Value

$ 23,359
192,932

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 sheet for cash

and cash equivalents 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.

In 2008 the global markets have experienced disruption in the credit markets. The full extent of these
disruptions will have 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.

16.

Investments in Joint Ventures

The investments in joint ventures consist of the following (in thousands):

December 31,

2008

2007

Midwest I member interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,597
1,131
Midwest II member interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,177
SHPII/CSL member interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
680
SHPIII/CSL Miami member interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
777
SHPIII/CSL Richmond Heights member interest . . . . . . . . . . . . . . . . . . . . . . . . .
811
SHPIII/CSL Levis Commons member interest . . . . . . . . . . . . . . . . . . . . . . . . . . .

$2,656
1,083
1,211
758
250
241

$7,173

$6,199

Midwest I:

In January 2006, the Company announced the formation of a joint venture, Midwest I with GE
Healthcare to acquire five senior housing communities from a third party. Midwest I is owned approximately 89%
by GE Healthcare and 11% by the Company. As of December 31, 2008, the Company has contributed $2.7 million
for its interests in Midwest I. Midwest I paid approximately $46.9 million for the five communities. The five
communities comprise 293 assisted living units with a resident capacity of 389. Effective as of February 1, 2006,
Midwest I acquired four of the five communities and on March 31, 2006, Midwest I closed on the fifth community.
The Company manages the five acquired communities under long-term management agreements with Midwest I.
The Company accounts for its investment in Midwest I under the equity method of accounting and the Company
recognized earnings in the equity of Midwest I of $0.2 million and $8,000 in fiscal 2008 and 2007, respectively,
compared to a loss in the equity of Midwest I of $9,000 in fiscal 2006. The Company earned $0.5 million in

F-24

CAPITAL SENIOR LIVING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

management fees on the Midwest I communities in both fiscal 2008 and 2007 and $0.4 million in management fees
on the Midwest I communities in fiscal 2006.

Midwest II:

In August 2006, the Company announced the formation of a joint venture, Midwest II, with GE
Healthcare to acquire three senior housing communities from a third party. Midwest II is owned approximately 85%
by GE Healthcare and 15% by the Company. As of December 31, 2008, the Company has contributed $1.5 million
for its interest in Midwest II. Midwest II paid approximately $38.2 million for the three communities. The three
communities comprise 300 assisted living units with a resident capacity of 319. On August 11, 2006, Midwest II
acquired the three senior living communities. The Company manages the three acquired communities under long-
term management agreements with Midwest II. The Company accounts for its investment in Midwest II under the
equity method of accounting and the Company recognized a loss in the equity of Midwest II of $0.1 million,
$0.3 million and $0.1 million in fiscal 2008, 2007 and 2006, respectively. The Company earned $0.5 million in
management fees on the Midwest II communities in both fiscal 2008 and 2007 and $0.2 million in management fees
on the Midwest I communities in fiscal 2006.

SHPII/CSL:

In November 2004, the Company formed SHPII/CSL with SHPII. Effective as of November 30,
2004, SHPII/CSL acquired the Spring Meadows Communities which have a combined capacity of 698 residents. As
of December 31, 2008, the Company has contributed $1.3 million for its interests in SHPII/CSL. The Company
manages the Spring Meadows Communities under long-term management contracts with 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 $0.3 million in both fiscal 2008 and 2007 and $0.1 million in
fiscal 2006. The Company earned $1.2 million in management fees on the SHP II/CSL communities in both fiscal
2008 and 2007 and $1.1 million in management fees on the SHP II/CSL communities in fiscal 2006.

SHPIII/CSL Miami:

In May 2007, the Company and SHPIII entered into SHPIII/CSL Miami to develop a
senior housing community in Miamisburg, Ohio. Under the joint venture and related agreements, the Company will
earn development and management fees and may receive incentive distributions. The senior housing community
consists of 101 independent living units and 45 assisted living units and was opened in August 2008. As of
December 31, 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 a loss in the equity of SHPIII/CSL Miami of $0.1 million for fiscal 2008. The Company
earned $0.2 million and $0.7 million in development fees from SHPIII/CSL Miami in fiscal 2008 and 2007,
respectively. In addition, the Company earned $0.1 million in pre-marketing fees and $0.1 million in management
fees on the community in fiscal 2008.

SHPIII/CSL Richmond Heights:

In November 2007, the Company and SHPIII entered into SHPIII/CSL
Richmond Heights to develop a senior housing community in Richmond Heights, Ohio. Under the joint venture and
related agreements, the Company will earn development and management fees and may receive incentive
distributions. The senior housing community will consist of 97 independent living units and 45 assisted living
units and is expected to open in the first half of 2009. As of December 31, 2008, the Company has contributed
$0.8 million to SHPIII/CSL Richmond Heights for its 10% interest and will account for its investment in SHPIII/
CSL Richmond Heights under the equity method of accounting. The Company earned $1.0 million and $0.1 million
in development fees from SHPIII/CSL Richmond Heights in fiscal 2008 and 2007, respectively. In addition, the
Company earned $0.1 million in pre-marketing fees on the community in fiscal 2008.

SHPIII/CSL Levis Commons:

In December 2007, the Company and SHPIII entered into SHPIII/CSL Levis
Commons to develop a senior housing community near Toledo, Ohio. Under the joint venture and related
agreements, the Company will earn development and management fees and may receive incentive distributions.
The senior housing community will consist of 101 independent living units and 45 assisted living units and is
expected to open in the first half of 2009. As of December 31, 2008, the Company has contributed $0.8 million to
SHPIII/CSL Levis Commons for its 10% interest and will account for its investment in SHPIII/CSL Levis
Commons under the equity method of accounting. The Company earned $1.1 million and $22,000 in development

F-25

CAPITAL SENIOR LIVING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

fees from SHPIII/CSL Levis Commons in fiscal 2008 and 2007, respectively. In addition, the Company earned
$0.1 million in pre-marketing fees on the community in fiscal 2008.

17. Allowance for Doubtful Accounts

The components of the allowance for doubtful accounts and notes receivable are as follows (in thousands):

Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for bad debts, net of recoveries . . . . . . . . . . . . . . . . . . . . . . . .
Write-offs and other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$1,043
556
(58)

$ 807
330
(94)

December 31,
2007

2008

2006

$769
121
(83)

Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$1,541

$1,043

$807

18. Leases

The Ventas Lease Agreements, which cover ten senior living facilities, each have an initial term of approx-
imately ten years, with two five year renewal extensions available at the Company’s option. The initial lease rate
under each of the Ventas Lease Agreements range from 7.75% to 8% and are subject to certain conditional
escalation clauses which will be recognized when estimatable or incurred. The initial terms of the Ventas Lease
Agreements expire on various dates through January 2018. The Company incurred $2.2 million in lease acquisition
costs related to the Ventas Lease Agreements. These deferred lease acquisition costs are being amortized over the
initial 10 year lease term and are included in facility lease expense in the Company’s statement of operations. The
Company accounts for each of the Ventas Lease Agreements as operating leases.

The HCP Lease Agreements, which cover 15 senior living facilities, each have an initial term of ten years, with
two ten year renewal extensions available at the Company’s option. The initial lease rate under the HCP Lease
Agreements range from 7.25% to 8% and are subject to certain conditional escalation clauses which will be
recognized when estimatable or incurred. The initial terms on the HCP Lease Agreements expire on various dates
through December 2017. The Company incurred $1.5 million in lease acquisition costs related to the HCP Lease
Agreements. These deferred lease acquisition costs are being amortized over the initial 10 year lease terms and are
included in facility lease expense in the Company’s statement of operations. The Company accounts for each of the
HCP Lease Agreements as operating leases.

At December 31, 2008 and 2007, the Company had gross deferred lease costs of $3.7 million and $3.5 million,
respectively. Accumulated amortization at December 31, 2008 and 2007 was $1.0 million and $0.6 million,
respectively. Amortization expense is expected to be $0.4 million in each of the next five fiscal years.

In addition, the Company leases its corporate headquarters in Dallas, Texas, an office in New York City and
various lease contracts for a duration of 5 years or less on autos, buses and office equipment. The lease on the
corporate headquarters expires in February 2013. The Company incurred $28.8 million, $27.5 million and
$17.1 million in lease expense during fiscal 2008, 2007 and 2006, respectively.

F-26

CAPITAL SENIOR LIVING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Future minimum lease commitments as of December 31, 2008, are as follows (in thousands):

2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 29,350
29,211
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
29,177
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
29,158
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
28,810
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
63,343
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$209,049

19. Subsequent Event

On January 22, 2009, the Special Committee of the Company’s Board of Directors recommended, and the
Company’s Board of Directors approved, the implementation of a stock repurchase program for up to $10 million of
the Company’s common stock. Under the stock repurchase program, the Company is authorized to repurchase
shares of its common stock in the open market and in privately negotiated transactions. The timing and extent to
which the Company may repurchase its shares of common stock will depend upon market conditions and other
corporate considerations. The Company anticipates that it will finance the stock repurchase program with available
cash. As of March 9, 2009, the Company has purchased 272,200 shares at a total cost of $0.7 million.

F-27

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders
Capital Senior Living Corporation

We have audited Capital Senior Living Corporation’s internal control over financial reporting as of Decem-
ber 31, 2008, based on criteria established in Internal Control — Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (the COSO criteria). Capital Senior Living Corporation’s
management is responsible for maintaining effective internal control over financial reporting, and for its assessment
of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report
on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal
control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in all material respects. Our audit
included obtaining an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the
assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.

In our opinion, Capital Senior Living Corporation maintained, in all material respects, effective internal

control over financial reporting as of December 31, 2008, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the consolidated balance sheets of Capital Senior Living Corporation as of December 31, 2008 and
2007, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the
three years in the period ended December 31, 2008, and our report dated March 9, 2009, expressed an unqualified
opinion thereon.

Dallas, Texas
March 9, 2009

/s/ Ernst & Young LLP

F-28

INDEX TO EXHIBITS

The following documents are filed as a part of this report. Those exhibits previously filed and incorporated

herein by reference are identified below. Exhibits not required for this report have been omitted.

Exhibit
Number

Description

3.1 — Amended and Restated Certificate of Incorporation of the Registrant (Incorporated by reference to
Exhibit 3.1 to the Registration Statement No. 333-33379 on Form S-1/A filed by the Company with the
Securities and Exchange Commission on September 8, 1997.)

3.1.1 — Amendment to Amended and Restated Certificate of Incorporation of the Registrant (Incorporated by
reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 1999, filed by the Company with the Securities and Exchange Commission.)
3.2 — Bylaws of the Registrant (Incorporated by reference to Exhibit 3.2 to the Registration Statement
No. 333-33379 on Form S-1/A filed by the Company with the Securities and Exchange Commission on
September 8, 1997.)

3.2.1 — Amended and Restated Bylaws of the Registrant (Incorporated by reference to Exhibit 3.2 to the
Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1999, filed
by the Company with the Securities and Exchange Commission.)

3.2.2 — Amendment No. 2 to Amended and Restated Bylaws of the Registrant (Incorporated by reference to
Exhibit 3.2.2 to the Company’s Annual Report on Form 10-K for the year period ended December 31,
2002, filed by the Company with the Securities and Exchange Commission.)

4.1 — Rights Agreement, dated as of March 9, 2000, between Capital Senior Living Corporation and
ChaseMellon Shareholder Services, L.L.C., which includes the form of Certificate of Designation of
Series A Junior Participating Preferred Stock, $.01 par value, as Exhibit A, the form of Right
Certificate as Exhibit B, and the Summary of Rights as Exhibit C (Incorporated by reference to
Exhibit 4.1 to the Company’s Current Report on Form 8-K, dated March 9, 2000, filed by the Company
with the Securities and Exchange Commission.)

4.2 — Form of Certificate of Designation of Series A Junior Participating Preferred Stock, $.01 par value

(included as Exhibit A to the Rights Agreement, which is Exhibit 4.1 hereto)

4.3 — Form of Right Certificate (included as Exhibit B to the Rights Agreement, which is Exhibit 4.1 hereto)
4.4 — Form of Summary of Rights (included as Exhibit C to the Rights Agreement, which is Exhibit 4.1

hereto)

4.5 — Specimen of legend to be placed, pursuant to Section 3(c) of the Rights Agreement, on all new
Common Stock certificates issued after March 20, 2000 and prior to the Distribution Date upon
transfer, exchange or new issuance (included in Section 3(c) of the Rights Agreement, which is
Exhibit 4.1 hereto)

4.6 — 1997 Omnibus Stock and Incentive Plan for Capital Senior Living Corporation, as amended
(Incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-8,
filed on December 3, 1999, by the Company with Securities and Exchange Commission.)
4.7 — 2007 Omnibus Stock and Incentive Plan for Capital Senior Living Corporation. (Incorporated by
reference to Exhibit 4.6 to the Company’s Current Report on Form 8-K filed by the Company with the
Securities and Exchange Commission on May 31, 2007.)

4.8 — First Amendment to 2007 Omnibus Stock and Incentive Plan for Capital Senior Living Corporation.
(Incorporated by reference to Exhibit 4.7 to the Company’s Current Report on Form 8-K filed by the
Company with the Securities and Exchange Commission on May 31, 2007.)

10.1 — 1997 Omnibus Stock and Incentive Plan for Capital Senior Living Corporation, as amended
(Incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-8,
filed on December 3, 1999, by the Company with Securities and Exchange Commission.)
10.1.1 — Form of Stock Option Agreement (Incorporated by reference to Exhibit 4.2 to the Company’s
Registration Statement on Form S-8, filed on December 3, 1999, by the Company with Securities
and Exchange Commission.)

10.3 — Employment Agreement, dated as of November 1, 1996, by and between Capital Senior Living
Corporation and Lawrence A. Cohen (Incorporated by reference to Exhibit 10.11 from the Registration
Statement No. 333-33379 on Form S-1 filed by the Company with the Securities and Exchange
Commission.)

Exhibit
Number

Description

10.4 — Employment Agreement, dated as of November 26, 1996, by and between Capital Senior Living, Inc.
and David R. Brickman (Incorporated by reference to Exhibit 10.12 to the Registration Statement
No. 333-33379 on Form S-1 filed by the Company with the Securities and Exchange Commission.)
10.5 — Employment Agreement, dated as of November 26, 1996, by and between Capital Senior Living, Inc.
and Keith N. Johannessen (Incorporated by reference to Exhibit 10.13 from the Registration Statement
No. 333-33379 on Form S-1 filed by the Company with the Securities and Exchange Commission.
10.6 — Employment Agreement, dated as of December 10, 1996, by and between Capital Senior Living, Inc.
and Rob L. Goodpaster (Incorporated by reference to Exhibit 10.50 to the Company’s Annual Report
on Form 10-K for the year ended December 31, 1998, filed by the Company with the Securities and
Exchange Commission.)

10.7 — Agreement of Limited Partnership of Triad Senior Living II, L.P. dated September 23, 1998
(Incorporated by reference to Exhibit 10.57 to the Company’s Annual Report on Form 10-K for
the year ended December 31, 1998, filed by the Company with the Securities and Exchange
Commission.)

10.8 — Agreement of Limited Partnership of Triad Senior Living III, L.P. dated November 10, 1998
(Incorporated by reference to Exhibit 10.58 to the Company’s Annual Report on Form 10-K for
the year ended December 31, 1998, filed by the Company with the Securities and Exchange
Commission.)

10.9 — First Amendment to Amended and Restated Employment Agreement of James A. Stroud, dated
March 22, 1999, by and between James A. Stroud and Capital Senior Living Corporation (Incorporated
by reference to the Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 1999, filed by the Company with the Securities and Exchange
Commission.)

10.10 — Second Amendment to Amended and Restated Employment Agreement of James A. Stroud, dated
May 31, 1999, by and between James A. Stroud and Capital Senior Living Corporation (Incorporated
by reference to the Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 1999, filed by the Company with the Securities and Exchange
Commission.)

10.11 — Agreement of Limited Partnership of Triad Senior Living IV, L.P. dated December 22, 1998
(Incorporated by reference to Exhibit 10.59 to the Company’s Annual Report on Form 10-K for
the year ended December 31, 1998, filed by the Company with the Securities and Exchange
Commission.)

10.12 — Employment Agreement, dated May 26, 1999, by and between Lawrence A. Cohen and Capital Senior
Living Corporation (Incorporated by reference to the Exhibit 10.4 to the Company’s Quarterly Report
on Form 10-Q for the quarterly period ended September 30, 1999, filed by the Company with the
Securities and Exchange Commission.)

10.13 — Employment Agreement, dated May 25, 1999, by and between Ralph A. Beattie and Capital Senior
Living Corporation (Incorporated by reference to the Exhibit 10.76 to the Company’s Annual Report
on Form 10-K, dated March 30, 2000, filed by the Company with the Securities and Exchange
Commission.)

10.14 — Second Amended and Restated Agreement of Limited Partnership of Triad Senior Living I, L.P.
(Incorporated by reference to the Exhibit 10.78 to the Company’s Annual Report on Form 10-K, dated
March 30, 2000, filed by the Company with the Securities and Exchange Commission.)
10.14.1 — Amendment No. 1 to Second Amended and Restated Agreement of Limited Partnership of Triad
Senior Living I, LP. (Incorporated by reference to the Exhibit 10.10.5 to the Company’s Quarterly
Report on Form 10-Q for the quarterly period ended September 30, 2002, filed by the Company with
the Securities and Exchange Commission.)

10.15 — First Amendment to Triad II Partnership Agreement (Incorporated by reference to Exhibit 10.26 to the
Company’s Current Report on Form 8-K, dated August 15, 2000, filed by the Company with the
Securities and Exchange Commission.)

10.16 — Third Amendment to Amended and Restated Employment Agreement of James A. Stroud, dated
November 8, 2000, by and between James A. Stroud and Capital Senior Living Corporation
(Incorporated by reference to Exhibit 10.96 to the Company’s Annual Report on Form 10-K, dated
March 26, 2002, filed by the Company with the Securities and Exchange Commission.)

Exhibit
Number

Description

10.17 — Support Agreement dated as of September 11, 2002 by and between Capital Senior Living, Inc.,
Triad I, Triad II, Triad III, Triad IV and Triad V. (Incorporated by reference to Exhibit 10.102 to the
Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2002, filed
by the Company with the Securities and Exchange Commission.)

10.18 — Fourth Amendment to Amended and Restated Employment Agreement of James A. Stroud, dated
January 16, 2003 by and between James A. Stroud and Capital Senior Living Corporation
(Incorporated by reference to Exhibit 10.105 to the Company’s Annual Report on Form 10-K,
dated March 26, 2003, filed by the Company with the Securities and Exchange Commission.)

10.19 — Second Amendment to the Employment Agreement of Lawrence A. Cohen, dated January 27, 2003 by
and between Lawrence A. Cohen and Capital Senior Living Corporation (Incorporated by reference to
Exhibit 10.106 to the Company’s Annual Report on Form 10-K, dated March 26, 2003, filed by the
Company with the Securities and Exchange Commission.)

10.20 — First Amendment to the Employment Agreement of Keith N. Johannessen, dated January 17, 2003 by
and between Keith N. Johannessen and Capital Senior Living Corporation (Incorporated by reference
to Exhibit 10.107 to the Company’s Annual Report on Form 10-K, dated March 26, 2003, filed by the
Company with the Securities and Exchange Commission.)

10.21 — First Amendment to the Employment Agreement of Ralph A. Beattie, dated January 21, 2003 by and
between Ralph A. Beattie and Capital Senior Living Corporation (Incorporated by reference to
Exhibit 10.108 to the Company’s Annual Report on Form 10-K, dated March 26, 2003, filed by the
Company with the Securities and Exchange Commission.)

10.22 — Second Amendment to the Employment Agreement of David R. Brickman, dated January 27, 2003 by
and between David R. Brickman and Capital Senior Living Corporation (Incorporated by reference to
Exhibit 10.109 to the Company’s Annual Report on Form 10-K, dated March 26, 2003, filed by the
Company with the Securities and Exchange Commission.)

10.23 — Amended and Restated Draw Promissory Note, dated February 1, 2003, of Triad Senior Living I, L.P.
in favor of Capital Senior Living Properties, Inc. (Incorporated by reference to Exhibit 10.110 to the
Company’s Annual Report on Form 10-K, dated March 26, 2003, filed by the Company with the
Securities and Exchange Commission.)

10.23.1 — Amended and Restated Draw Promissory Note (Fairfield), dated February 1, 2003, of Triad Senior
Living II, L.P. in favor of Capital Senior Living Properties, Inc. (Incorporated by reference to
Exhibit 10.111.1 to the Company’s Annual Report on Form 10-K, dated March 26, 2003, filed by
the Company with the Securities and Exchange Commission.)

10.23.2 — Amended and Restated Draw Promissory Note (Oklahoma City), dated February 1, 2003, of Triad
Senior Living II, L.P. in favor of Capital Senior Living Properties, Inc. (Incorporated by reference to
Exhibit 10.111.2 to the Company’s Annual Report on Form 10-K, dated March 26, 2003, filed by the
Company with the Securities and Exchange Commission.)

10.23.3 — Amended and Restated Draw Promissory Note (Plano), dated February 1, 2003, of Triad Senior Living
II, L.P. in favor of Capital Senior Living Properties, Inc. (Incorporated by reference to Exhibit 10.111.3
to the Company’s Annual Report on Form 10-K, dated March 26, 2003, filed by the Company with the
Securities and Exchange Commission.)

10.24 — Amended and Restated Draw Promissory Note, dated February 1, 2003, of Triad Senior Living III, L.P.
in favor of Capital Senior Living Properties, Inc. (Incorporated by reference to Exhibit 10.112 to the
Company’s Annual Report on Form 10-K, dated March 26, 2003, filed by the Company with the
Securities and Exchange Commission.)

10.25 — Amended and Restated Draw Promissory Note, dated February 1, 2003, of Triad Senior Living IV, L.P.
in favor of Capital Senior Living Properties, Inc. (Incorporated by reference to Exhibit 10.113 to the
Company’s Annual Report on Form 10-K, dated March 26, 2003, filed by the Company with the
Securities and Exchange Commission.)

10.26 — Amended and Restated Draw Promissory Note, dated February 1, 2003, of Triad Senior Living V, L.P.
in favor of Capital Senior Living Properties, Inc. (Incorporated by reference to Exhibit 10.114 to the
Company’s Annual Report on Form 10-K, dated March 26, 2003, filed by the Company with the
Securities and Exchange Commission.)

Exhibit
Number

Description

10.28 — Form of Restricted Stock Award Under the 1997 Omnibus Stock and Incentive Plan for Capital Senior
Living Corporation (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on
Form 8-K, dated February 10, 2005, filed by the Company with the Securities and Exchange
Commission.)

10.29 — Master Lease Agreement, dated June 30, 2005, between Ventas Amberleigh, LLC and Capital Senior
Management 2, Inc. (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on
Form 8-K/A, dated June 30, 2005, filed by the Company with the Securities and Exchange Commission
on July 11, 2005.)

10.30 — Schedule identifying substantially identical agreements to Exhibit 10.63 (Incorporated by reference to
Exhibit 10.2 to the Company’s Current Report on Form 8-K/A, dated June 30, 2005, filed by the
Company with the Securities and Exchange Commission on July 11, 2005.)

10.31 — Loan Agreement, dated July 18, 2005, by Capital Senior Living Peoria, LLC and GMAC Commercial
Mortgage Bank (Incorporated by reference to the Exhibit 10.1 to the Company’s Current Report on
Form 8-K, dated July 18, 2005, filed by the Company with the Securities and Exchange Commission.)
10.32 — Schedule identifying substantially identical agreements to Exhibit 10.65 (Incorporated by reference to
the Exhibit 10.2 to the Company’s Current Report on Form 8-K, dated July 18, 2005, filed by the
Company with the Securities and Exchange Commission.)

10.33 — Master Lease Agreement, dated October 18, 2005, between Ventas Georgetowne, LLC and Capital
Senior Management 2, Inc. (Incorporated by reference to Exhibit 10.1 to the Company’s Current
Report on Form 8-K, dated October 18, 2005, filed by the Company with the Securities and Exchange
Commission.)

10.34 — Contract of Acquisition, dated as of March 7, 2006, between Health Care Property Investors, Inc. and
Capital Senior Living Properties 2 — Crosswood Oaks, Inc., Capital Senior Living Properties 2 —
Tesson Heights, Inc. and Capital Senior Living Properties 2 — Veranda Club, Inc. (Incorporated by
reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, dated March 7, 2006, filed by
the Company with the Securities and Exchange Commission.)

10.35 — Contract of Acquisition, dated as of March 7, 2006, between Texas HCP Holding, L.P. and Capital
Senior Living Acquisition, LLC (Incorporated by reference to Exhibit 10.2 to the Company’s Current
Report on Form 8-K, dated March 7, 2006, filed by the Company with the Securities and Exchange
Commission.)

10.36 — Agreement of Purchase and Sale of Real Property, dated March 10, 2006, by and between Covenant
Place of Abilene, Inc. and Capital Senior Living Acquisition, LLC (Incorporated by reference to
Exhibit 10.3 to the Company’s Current Report on Form 8-K, dated March 7, 2006, filed by the
Company with the Securities and Exchange Commission.)

10.37 — Schedule identifying substantially identical agreements to Exhibit 10.70 (Incorporated by reference to
Exhibit 10.4 to the Company’s Current Report on Form 8-K, dated March 7, 2006, filed by the
Company with the Securities and Exchange Commission.)

10.38 — Master Lease Agreement, dated May 31, 2006, between subsidiaries of the Company and HCP
(Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, dated
May 31, 2006, filed by the Company with the Securities and Exchange Commission.)
10.39 — Lease, dated May 31, 2006, between subsidiaries of the Company and HCP regarding the Crosswood
Oaks Facility in Citrus Heights, California (Incorporated by reference to Exhibit 10.2 to the Company’s
Current Report on Form 8-K, dated May 31, 2006, filed by the Company with the Securities and
Exchange Commission.)

10.40 — Schedule identifying substantially identical agreements to Exhibit 10.73 (Incorporated by reference to
Exhibit 10.3 to the Company’s Current Report on Form 8-K, dated May 31, 2006, filed by the Company
with the Securities and Exchange Commission.)

10.41 — Multifamily Note, dated June 9, 2006, executed by Triad Senior Living II, L.P. in favor of Capmark.
(Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, dated
June 9, 2006, filed by the Company with the Securities and Exchange Commission.)

10.42 — Schedule identifying substantially identical agreements to Exhibit 10.75 (Incorporated by reference to
Exhibit 10.2 to the Company’s Current Report on Form 8-K, dated June 9, 2006, filed by the Company
with the Securities and Exchange Commission.)

Exhibit
Number

Description

10.43 — Multifamily Deed of Trust, Assignment of Rents and Security Agreement and Fixture Filing, dated
June 9, 2006, by Triad Senior Living II, L.P. to Ed Stout, as trustee, for the benefit of Capmark.
(Incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K, dated
June 9, 2006, filed by the Company with the Securities and Exchange Commission.)

10.45 — Loan Agreement, dated June 20, 2006, by and between Triad Senior Living III, L.P. and Capmark
Bank. (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, dated
June 20, 2006, filed by the Company with the Securities and Exchange Commission.)
10.46 — 2007 Omnibus Stock and Incentive Plan for Capital Senior Living Corporation (Incorporated by
reference to Exhibit 4.6 to the Registration Statement on Form S-8, dated May 31, 2007, filed by the
Company with the Securities and Exchange Commission.)

10.47 — First Amendment to 2007 Omnibus Stock and Incentive Plan for Capital Senior Living Corporation
(Incorporated by reference to Exhibit 4.7 to the Registration Statement on Form S-8, dated May 31,
2007, filed by the Company with the Securities and Exchange Commission.)

10.48 — Multifamily Note dated May 3, 2007 executed by Triad Senior Living III, L.P. in favor of Capmark
Bank (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, dated
March 3, 2007, filed by the Company with the Securities and Exchange Commission.)
10.49 — Schedule identifying substantially identical agreements to Exhibit 10.3 (Incorporated by reference to
Exhibit 10.2 to the Company’s Current Report on Form 8-K, dated March 3, 2007, filed by the
Company with the Securities and Exchange Commission.)

10.50 — Multifamily Deed of Trust, Assignment of Rents and Security Agreement and Fixture Filing dated
May 3, 2007 by Triad Senior Living III, L.P. in favor of Chicago Title Insurance Company, as trustee
for the benefit of Capmark Bank. (Incorporated by reference to Exhibit 10.3 to the Company’s Current
Report on Form 8-K, dated March 3, 2007, filed by the Company with the Securities and Exchange
Commission.)

10.51 — Schedule identifying substantially identical agreements to Exhibit 10.5. (Incorporated by reference to
Exhibit 10.4 to the Company’s Current Report on Form 8-K, dated March 3, 2007, filed by the
Company with the Securities and Exchange Commission.)

10.52 — Asset Purchase Agreement, dated December 21, 2007, by and among the sellers identified therein,
Capital Senior Living Acquisition, LLC and Hearthstone Senior Services, L.P. (Incorporated by
reference to the Exhibit 2.1 to the Company’s Current Report on Form 8-K, dated December 28, 2007,
filed by the Company with the Securities and Exchange Commission.)

10.53 — Settlement Agreement, dated March 19, 2008, by and among Capital Senior Living Corporation, West
Creek Capital LLC, Harvey Hanerfeld and Roger Feldman. (Incorporated by reference to the
Exhibit 10.1 to the Company’s Current Report on Form 8-K filed by the Company with the
Securities and Exchange Commission on March 26, 2008.)

10.54 — Settlement Agreement, dated March 19, 2008, by and among Capital Senior Living Corporation,
Boston Avenue Capital, LLC, York town Avenue Capital, LLC, Stephen J. Heyman, and James F.
Adelson (Incorporated by reference to the Exhibit 10.1 to the Company’s Current Report on Form 8-K
filed by the Company with the Securities and Exchange Commission on March 26, 2008.).

10.55 — Severance Agreement, dated December 12, 2008, by and among Capital Senior Living Corporation and
James A. Stroud. (Incorporated by reference to the Exhibit 10.1 to the Company’s Current Report on
Form 8-K filed by the Company with the Securities and Exchange Commission on December 16,
2008.)

*21.1 — Subsidiaries of the Company
*23.1 — Consent of Ernst & Young LLP
*31.1 — Certification of Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a)
*31.2 — Certification of Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a)
*32.1 — Certification of Lawrence A. Cohen pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
*32.2 — Certification of Lawrence A. Cohen pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

* Filed herewith.

Company Management

Board of Directors

LAWRENCE A. COHEN
Chief Executive Officer

KEITH N. JOHANNESSEN
President and Chief Operating Officer

RALPH A. BEATTIE
Executive Vice President
and Chief Financial Officer

ROB L. GOODPASTER
Vice President, National Marketing

DAVID W. BEATHARD
Vice President, Operations

GLEN H. CAMPBELL
Vice President, Development

DAVID R. BRICKMAN
Vice President, General Counsel
and Secretary

GLORIA M. HOLLAND
Vice President, Finance

ROBERT F. HOLLISTER
Property Controller

Shareholder Information

STOCK EXCHANGE LISTING
Capital Senior Living Corporation
Common Stock is listed on the New
York Stock Exchange and trades
under the symbol CSU.

TRANSFER AGENT AND REGISTRAR
BNY Mellon Shareowner Services
P.O. Box 358015
Pittsburgh, Pennsylvania 15252-8015
or
480 Washington Boulevard
Jersey City, New Jersey 07310-1900
(800) 635-9270
TDD for hearing impaired: (800) 231-5469
Foreign shareowners: (201) 680-6578
TDD foreign shareowners: (201) 680-6610
www.bnymellon.com/shareowner/isd

AUDITORS
Ernst & Young LLP
2100 Ross Avenue, Suite 1500
Dallas, Texas 75201
(214) 969-8000

JAMES A. STROUD
Chairman of the Board
Capital Senior Living Corporation
Dallas, Texas

LAWRENCE A. COHEN
Vice Chairman of the Board
and Chief Executive Officer
Capital Senior Living Corporation
New York, New York

KEITH N. JOHANNESSEN
President and Chief Operating Officer
Capital Senior Living Corporation
Dallas, Texas

HARVEY I. HANERFELD 3
Co-owner and Managing Member
West Creek Capital
Washington, D.C.

CRAIG F. HARTBERG 1, 2
Retired First Vice President
Bank One, Texas, N.A.
Baton Rouge, Louisiana

JILL M. KRUEGER 2
President and CEO
Health Resources Alliance, Inc.
Oakbrook, Illinois

PETER L. MARTIN 1
Managing Director
JMP Securities
San Francisco, CA

JAMES A. MOORE 1, 2, 3
President
Moore Diversified Services, Inc.
Fort Worth, Texas

VICTOR W. NEE, PH.D. 3
Professor Emeritus
Department of Aerospace & Mechanical
Engineering
University of Notre Dame
Scottsdale, Arizona

1 Member of the Board’s Compensation Committee
2 Member of the Board’s Audit Committee
3 Member of the Board’s Nominating Committee

Corporate Information

CORPORATE HEADQUARTERS
14160 Dallas Parkway, Suite 300
Dallas, Texas 75254
(972) 770-5600
(972) 770-5666 fax
main@capitalsenior.com

NEW YORK OFFICE
300 Park Avenue, Suite 1700
New York, New York 10022
(212) 551-1770
(212) 551-1774 fax

CORPORATE WEB SITE
www.capitalsenior.com

Regional Information

EASTERN REGIONAL OFFICE
186 Old Stagecoach Road
Ridgefield, Connecticut 06877
(203) 894-9406
(203) 894-9407 fax

CENTRAL PLAINS REGIONAL OFFICE
11909 Miracle Hills Drive
Omaha, Nebraska 68154
(402) 554-9629
(866) 731-0053 fax

WESTERN REGIONAL OFFICE
5757 Cypress Avenue
Carmichael, California 95608
(916) 480-0634
(916) 486-4375 fax

MIDWESTERN REGIONAL OFFICE
2650 Hemford Falls Court, #200
St. Louis, Missouri 63129
(314) 846-8517
(314) 846-5495 fax

SOUTHWESTERN AND TEXAS
REGIONAL OFFICES
14160 Dallas Parkway, Suite 300
Dallas, Texas 75254
(972) 770-5600
(972) 770-5666 fax

DALLAS REGIONAL OFFICE
2222 Walter Smith Road
Azle, Texas 76020
(817) 237-2496
(817) 237-3496 fax

Form 10-K

A copy of Capital Senior Living
Corporation’s 2008 annual report to the
SEC on Form 10-K is included herein
and is available without charge upon
written request to the Investor Relations
Department at corporate headquarters.
It can also be found on the Company’s
web site, www.capitalsenior.com.

Annual Shareholders Meeting

May 14, 2009 at 10:00 am, Central Time
14160 Dallas Parkway, Suite 300
Dallas, Texas 75254
(972) 770-5600

C A P I T A L S E N I O R L I V I N G
C A P I T A L S E N I O R L I V I N G
C A P I T A L S E N I O R L I V I N G

C O R P O R A T I O N
C O R P O R A T I O N
C O R P O R A T I O N

14160 Dallas Parkway, Suite 300
14160 Dallas Parkway, Suite 300
14160 Dallas Parkway, Suite 300

Dallas, Texas 75254
Dallas, Texas 75254
Dallas, Texas 75254

972.770.5600 Fax: 972.770.5666
972.770.5600 Fax: 972.770.5666
972.770.5600 Fax: 972.770.5666

www.capitalsenior.com
www.capitalsenior.com
www.capitalsenior.com