CAPITAL SENIOR LIVING CORPORATION 14160 Dallas Parkway, Suite 300 Dallas, Texas 75254 972.770.5600 Fax: 972.770.5666 www.capitalsenior.com Capital Senior Living Corporation Dear Fellow Shareholders We are pleased to have produced strong results in 2010 and have laid the ground- work for continued success in 2011 and beyond. By focusing on our core strengths, we generated revenue of $211.9 million in 2010, resulting in $68.6 million of EBITDAR and an EBITDAR margin of 32.4%. CFFO of $19.7 million increased 18.3% from the prior year. We achieved better occupancy, higher average monthly rents and stronger cash flow in 2010. We increased our resident capacity while enhancing our geographic concentration and maximizing our com- petitive strengths within the markets we serve. And most importantly, we enhanced shareholder value through improvement in key operating and financial metrics. Our performance continues to demonstrate the resiliency of our need-driven business and our focus on providing quality housing and care, promoting seniors’ independence and wellness while enriching their daily lives. We ended the year strong with consolidated average occupancy of 85.1% in the fourth quarter of 2010 – a 40 basis point increase from the third quarter of 2010 and a 90 basis point increase from the fourth quarter of 2009. Both move-ins and deposits increased significantly from the compara- ble period of the prior year. Average monthly rents improved 8.0% from the fourth quarter of 2009 to $2756 per occupied unit. This was a 3.9% increase in average monthly rents from the third quarter of 2010. Our disciplined approach to controlling expenses enabled us to report a 260 basis point improvement from the prior year in EBITDAR margin. These accomplishments resulted in CFFO of $19.7 million for the year versus $16.6 million in 2009. We used this cash to further strengthen our balance sheet, reducing debt by $7.5 million while increasing cash available for invest- ment by $2.3 million. During 2010, we completed transactions which added 20 communities to our consolidated portfolio. These communities, that are partially reflected in 2010, are expected to contribute over $50 million of annual revenue, nearly $23 million of EBITDAR and CFFO of over $3 million. We are well-positioned to implement our strategic plan, furthering our position as the industry value leader in providing quality senior housing and additional levels of care, while maximizing our competitive strengths to lower our cost of capital and enhance shareholder value and liquidity. We plan to increase our geographic concentration and maximize our strengths within each of our markets. We plan to increase our levels of care through conver- sions to assisted living or memory care and acquisitions of communities with higher levels of care. We are excited about our opportunity to capitalize on the fragmented nature of the senior living industry with its strong demographic demand and constrained supply to strategically expand our operations. Capital Senior Living has a number of competitive strengths that should enable us to execute our strategy: - We have one of the most experienced on-site, regional and corporate manage- ment teams in the senior living industry. - As one of the country’s largest operators of senior living communities, we benefit from economies of scale and systems that yield operating efficiencies in a highly fragmented industry. - We enjoy strong long-term institutional relationships, both debt and equity. - We operate through a nimble platform and organizational structure with regional operating centers in geographically concentrated markets. - We are proud of our reputation in the industry and our consistently high level of resident satisfaction, which was 95% for 2010. - We operate multiple levels of senior living care. - We have a solid balance sheet with no mortgage loan maturities until the third quarter of 2015. Executing our strategic plan should generate attractive levels of free cash flow and create shareholder value. Our positive performance during one of the most challenging operating environments demonstrates the resiliency of our need- driven business model and operating platform. Our fundamentals are strong, and we are excited about our Company’s we benefit from need-driven prospects as growth and virtually no new supply demand in an improving economy. We thank you for your support. Lawrence A. Cohen Chief Executive Officer 1 Member of the Board’s Compensation Committee 2 Member of the Board’s Audit Committee 3 Member of the Board’s Nominating/Corporate Governance Committee Form 10-K Total Revenue (in $ millions) CFFO Comparison (in $ millions) EBITDAR Margin 32.4% 30.1% 29.8% 19.7 16.6 15.9 200 193.3 192.0 211.9 150 100 50 0 20 15 10 5 0 35 30 25 20 15 10 5 0 08 09 10 08 09 10 08 09 10 Note: Non-GAAP reconciliations provided on Attachment A 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 DAVID W. BEATHARD Vice President, Operations DAVID R. BRICKMAN Vice President, General Counsel and Secretary GLEN H. CAMPBELL Vice President, Development ROB L. GOODPASTER Vice President, National Marketing GLORIA M. HOLLAND Vice President, Finance ROBERT F. HOLLISTER Property Controller JOSEPH G. SOLARI Vice President, Corporate Development 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 2323 Victory Avenue, Suite 2000 AUDITORS Ernst & Young LLP Dallas, Texas 75219 (214) 969-8000 JAMES A. MOORE 1, 3 Independent Chairman of the Board President Moore Diversified Services, Inc. Fort Worth, Texas LAWRENCE A. COHEN Vice Chairman of the Board and Chief Executive Officer Capital Senior Living Corporation New York, New York PHILIP A. BROOKS 3 Senior Vice President CWCapital, LLC Richmond, Virginia CRAIG F. HARTBERG 1, 2 Retired First Vice President Bank One, Texas, N.A. Baton Rouge, Louisiana KEITH N. JOHANNESSEN President and Chief Operating Officer Capital Senior Living Corporation Dallas, Texas JILL M. KRUEGER 2 President and CEO Health Resources Alliance, Inc. Oakbrook, Illinois RONALD A. MALONE 3 Chairman Gentiva Health Services, Inc. Atlanta, Georgia PETER L. MARTIN 1 Managing Director JMP Securities San Francisco, California MICHAEL W. REID 2 Partner Herald Square Properties New York, New York 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 590 Madison Avenue, Suite 2100 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 14160 Dallas Parkway, Suite 300 Dallas, Texas 75254 (972) 770-5600 (972) 770-5666 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 INDIANA REGIONAL OFFICE 182 S. County Rd. 550 East Avon, Indiana 46123 (317) 745-2766 (317) 718-1051 fax A copy of Capital Senior Living Corporation’s 2010 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 25, 2011 at 10:00 am, Central Time The Embassy Suites Dallas 14021 Noel Road Dallas, Texas 75240 (972) 364-3641 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, 2010 or n TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number: 1-13445 Capital Senior Living Corporation (Exact name of registrant as specified in its charter) Delaware (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 Indicate by a check mark if the registrant No ¥ to Section 13 or Section 15(d) of the is not required to file reports pursuant 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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes n 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. ¥ 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 ¥ Non-accelerated filer n (Do not check if a smaller reporting company) Smaller reporting company n 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 26,161,412 shares of the Registrant’s common stock, par value $0.01 per share (“Common Stock”), held by non-affiliates (defined to exclude all of the Registrants executive officers and directors) on December 31, 2010, based upon the closing price of the Registrant’s Common Stock as reported by the New York Stock Exchange on June 30, 2010, was approximately $130.0 million. As of February 28, 2011, the Registrant had 27,151,919 shares of Common Stock outstanding. Portions of the Registrant’s definitive proxy statement pertaining to its 2011 Annual Meeting of Stockholders and filed or to be filed not later than 120 days after the end of the fiscal year pursuant to Regulation 14A are incorporated herein by reference into Part III of this report. DOCUMENTS INCORPORATED BY REFERENCE 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. 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 Risk . . . . . . . . . . . . . . . . . . . . . . . Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Item 9. Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 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 Accounting Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 14. Page Number 2 18 24 24 25 26 29 29 45 46 46 46 47 47 47 47 47 47 PART IV Item 15. Exhibits, Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Index to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Index to Exhibits 48 49 F-1 1 PART I ITEM 1. BUSINESS. Overview 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, 2010, the Company operated 77 senior living communities in 23 states with an aggregate capacity of approximately 11,000 residents, including 32 senior living communities which the Company either owned or in which the Company had an ownership interest and 45 senior living communities that the Company leased. As of December 31, 2010, the Company also operated one home care agency. During 2010, approximately 95% 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 and filings, 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 Seniors Housing Association Seniors Housing Construction Trends Report for 2010, 14% of the senior housing supply in the 100 largest metropolitan areas of the United States are assisted living 2 units, 19% are independent living units, 44% are nursing care beds, 3% are memory care units and 20% relate to age restricted senior apartments. 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 According to the American Seniors Housing Association Seniors Housing Construction Trends Report for 2010, the largest 100 metropolitan areas contain approximately 66% of the total United States population, 62% of the age 65+ population, and 61% of the age 75+ population, based on the most recent population projections from the United States Census Bureau. 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 typically 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 ability of senior citizens to relocate into our communities, or the time at which they choose to do so, 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. 3 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 both 2010 and 2009, the Company achieved 95% overall approval ratings 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 4 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 communities 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 5 communities, 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, 2010, the Company had ownership interests in 30 communities and leased 14 communities that provide independent living services, which include communities that combine assisted living services, with an aggregate capacity for approximately 6,600 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 $1,350 to $4,560 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, 2010, the Company had ownership interests in 11 communities and leased 36 communities that provide assisted living services, which include communities that combine independent living and other services, with an aggregate capacity for approximately 3,700 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 $1,550 to $7,175 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’s contracts with its assisted living 6 residents are generally for a term of one year and are typically terminable by either party, under certain circumstances, upon 30 days notice. 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 The Company’s continuing care retirement communities are senior living rental properties where 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, occupational, speech and medical social services. The Company’s residents receiving skilled nursing services pay fees ranging from $3,630 to $7,500 per month, in general, depending on the specific community and the level of care provided. As of December 31, 2010, the Company had ownership interests in one community and leased one community providing a continuum of care 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, 2010, 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, 2010. Community Owned: 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 Waterford at Edison Lakes . . . . . . . . . . . . . South Bend, IN Resident Capacity(1) Units IL AL CCRC Total Ownership(2) Commencement of Operations(3) 291 — — 357 103 — 62 146 185 — — 158 161 — — 151 166 — — 158 177 — — 165 161 — — 156 134 144 35 — 141 — — 120 144 — — 120 120 141 — — 7 357 165 185 161 166 177 161 169 141 144 141 100% 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 11/00 100% 12/00 Community Units IL AL CCRC Total Ownership(2) Resident Capacity(1) Commencement of Operations(3) Waterford at Fairfield . . . . Fairfield, OH Waterford at Fort Worth . . Fort Worth, TX Waterford at Highland Colony . . . . . . . . . . . . Jackson, MS 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 120 151 120 120 119 119 154 120 136 117 120 137 140 — — 176 — — 143 — — 135 — — 142 — — 142 — — 176 — — 143 — — 109 57 — 136 — — 135 — — 57 — 112 Richland Hills, TX . . . . North Richland Hills, TX 119 139 — — Wellington at Oklahoma City . . . . . . . . . . . . . . Oklahoma City, OK 120 143 — — 140 176 143 135 142 142 176 143 166 136 135 169 139 143 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 11/00 06/00 11/00 04/99 06/01 10/00 09/99 12/00 12/00 03/99 05/00 05/02 100% 01/02 100% 11/00 Leased: Ventas: Amberleigh . . . . . . . . . Buffalo, NY Cottonwood Village . . . Cottonwood, AZ Crown Pointe . . . . . . . . Omaha, NE Georgetowne Place . . . . Fort Wayne, IN Harrison at Eagle Valley4 . . . . . . . . . . . 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 HCN: The Waterford at 3,501 3,443 252 357 4,052 267 163 134 162 387 — — 58 — 131 26 — 139 242 — — 138 — — 124 137 87 — 86 327 — — 358 62 — 126 137 42 — 47 — 65 — 64 131 387 189 165 242 138 173 358 126 173 65 N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A Ames . . . . . . . . . . . . Ames, IA 59 — 122 — 122 N/A The Waterford at Miracle Hills . . . . . . Omaha, NE 64 — 70 — The Waterford at Roxbury Park . . . . . . Omaha, NE 62 — 70 — The Waterford at Van Dorn . . . . . . . . . . . . Lincoln, NE 68 — 84 — The Waterford at Woodbridge . . . . . . . Plattsmouth, NE 40 — 45 — Keepsake Village of Columbus . . . . . . . . . Columbus, IN 42 — 48 — The Hearth at Prestwick . . . . . . . . . Avon, IN 132 — 150 — The Hearth at Windermere . . . . . . . Fishers, IN Spring Lake . . . . . . . . . Paris, TX Pecan Point . . . . . . . . . Sherman, TX Santa Fe Trails . . . . . . . Cleburne, TX Walnut Creek . . . . . . . . Mansfield, TX 126 — 150 — 52 — 70 — 52 — 70 — 52 — 70 — 52 — 70 — 8 70 70 84 45 48 150 150 70 70 70 70 N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A 01/92 03/91 08/00 10/05 03/91 06/06 03/91 08/00 08/00 02/08 02/06 03/06 02/06 02/06 02/06 08/06 08/06 08/06 09/10 09/10 09/10 09/10 Community Units IL AL CCRC Total Ownership(2) Resident Capacity(1) Commencement of Operations(3) . . . . . . . . Weatherford, TX Martin Crest Azalea Trails . . . . . . . . Tyler, TX Hawkins Creek . . . . . . . Longview, TX Magnolia Court . . . . . . Nacogdoches, TX Buffalo Creek . . . . . . . Waxahachie, TX Dogwood Trails . . . . . . Palestine, TX Stonefield . . . . . . . . . . McKinney, TX Heritage Oaks . . . . . . . Conroe, TX HCP: Atrium of Carmichael . . Sacramento, CA Covenant Place of Abilene . . . . . . . . . . Abilene, TX Covenant Place of 52 — 70 — 52 — 70 — 52 — 70 — 52 — 70 — 52 — 70 — 61 — 72 — 74 — 90 — 74 — 90 — 70 70 70 70 70 72 90 90 N/A N/A N/A N/A N/A N/A N/A N/A 152 155 — — 155 N/A 50 — 55 — Burleson . . . . . . . . . Burleson, TX 74 — 80 — 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 50 — 55 — 80 — 85 — 134 — — 112 121 127 — — 72 — 80 — 55 80 55 85 134 127 80 N/A N/A N/A N/A N/A N/A N/A Meadow Lakes . . . . . . . North Richland 120 145 — — 145 N/A 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 Affiliates: SHPII/CSL: Libertyville . . . . . . . . . Libertyville, IL Naperville . . . . . . . . . . Naperville, IL Summit . . . . . . . . . . . . Summit, NJ Trumbull . . . . . . . . . . . Trumbull, CT SHPIII/CSL: Levis Commons . . . . . . Toledo, OH Miami . . . . . . . . . . . . . Miamisburg, OH Richmond Heights . . . . Richmond Heights, OH 72 — 134 184 141 182 — — 73 — 125 — 87 — 153 — 87 — 153 — 80 — 142 — 206 182 125 153 153 142 N/A N/A N/A N/A N/A N/A 4,377 2,195 2,961 358 5,514 208 186 45 — 197 193 45 — 88 — 98 — 42 — 150 136 146 146 141 1,061 152 150 152 984 55 — 90 — 75 — 450 — 1,434 253 231 98 178 207 240 227 5% 5% 5% 5% 10% 10% 10% 09/10 09/10 09/10 09/10 09/10 09/10 09/10 09/10 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 03/01 01/01 11/00 09/00 04/09 08/08 04/09 Total . . . . . . . . . . 8,939 6,622 3,663 715 11,000 (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). Those communities shown as 10% owned consist of the Company’s ownership of 10% of the member interests in SHPIII/CSL (as defined below). 9 (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 was 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 were for an initial term of five years, extended until various dates through February 2011, and contained automatic one year renewals thereafter. The Midwest I Agreements generally provided for a management fee of 5% of gross revenues. On April 16, 2010, Midwest I closed the sale of the Midwest I subsidiaries that owned the five senior housing communities to Health Care REIT, Inc. (“HCN”). Upon closing the sale, the Company leased the five senior housing communities from HCN. For additional information, refer to Note 4, “Facility Lease Transactions”, in the notes to the consolidated financial statements. The Company was 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 were for an initial term of five years, extended until various dates through August 2011, and contained automatic one year renewals thereafter. The Midwest II Agreements generally provided for a management fee of 5% of gross revenues. On April 30, 2010, Midwest II closed the sale of the Midwest II subsidiaries that owned the three senior housing communities to HCN. Upon closing the sale, the Company leased the three senior housing communities from HCN. For additional information, refer to Note 4, “Facility Lease Transactions”, in the notes to the consolidated financial statements. The Company was party to a series of property management agreements with CGI Management, Inc. (the “CGIM Agreements”) currently expiring in August 2011. The CGIM Agreements generally provide for manage- ment fees of 5% to 6% of gross revenues, subject to certain base management fees. The Company managed one community under the CGIM agreements which the Company terminated during the fourth quarter of fiscal 2010. The Company no longer manages any communities under the CGIM Agreements as of December 31, 2010. 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 currently extend until various dates through November 2014. The SHPII/CSL Management Agreements generally provide for management fees of 5% of gross revenue plus reimbursement for costs and expenses related to the communities. On December 22, 2010, the Company announced that SHPII entered into an agreement to sell the SHPII subsidiaries that own the four senior living communities to HCN. As a condition to closing of the sale to HCN, the Company will enter into long term leases of the senior living 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 collectively own and operate three senior living communities. The SHPIII/CSL Management Agreements are for initial terms of ten years from the date the certificate of occupancy was issued and currently extend until various dates through January 2019. The SHPIII/CSL Management Agreements generally provide for management fees of 5% of gross revenue plus reimbursement for costs and expenses related to the communities. Development Agreement Guarantees In 2007, the Company and SHPIII entered into a series of joint venture agreements to develop three senior housing communities located in Ohio. The Company has guaranteed the communities will be completed and 10 operated at budgeted costs approved by the joint venture members. These costs include the hard and soft construction costs and operating costs until each community reaches breakeven. The budgeted costs include contingency reserves for potential cost overruns and other unforeseen costs. The terms of these guarantees generally do not provide for a limitation on the maximum potential future payments. These joint venture communities are currently in lease up and one of the joint ventures had exhausted its lease up reserve under the existing loan commitment. The Company will be required to fund any operating deficits until the joint venture reaches breakeven for three consecutive months. Any amounts funded by the Company under this commitment, up to $0.5 million, may be recoverable from the joint venture in the event of liquidation. As of December 31, 2010, the Company had recognized deficit charges of approximately $0.4 million under these development agreement guarantees. The Company does not currently anticipate funding any deficits in excess of the amounts estimated to be recoverable from the joint ventures. 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 with geographic concentrations 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, including converting existing units to higher levels of care. 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 acquisitions of senior living communities. Through strategic acquisitions, joint venture investments, or facility leases, the Company seeks to 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, geographic 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 com- munities, and the need for renovation or improvement of the communities. 11 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 through a group purchasing program. 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 Eastern, Central Plains, Midwest, Southwest, Texas 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 12 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 both 2010 and 2009, the Company achieved 95% approval ratings 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 13 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. 14 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, and such audits have not revealed any material environmental to these 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. 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 independent 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 15 attracting and retaining nurses, technicians, aides and other high quality professional and non-professional employees and managers. Employees As of December 31, 2010, the Company employed 4,188 persons, of which 2,178 were full-time employees (60 of whom are located at the Company’s corporate offices) and 2,010 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 Other Key Employees of the Registrant The following table sets forth certain information concerning each of the Company’s executive officers and other key employees as of December 31, 2010: Name Age Position(s) with the Company Lawrence A. Cohen . . . . . . . . . . . . . . . 57 Chief Executive Officer and Vice Chairman of the Keith N. Johannessen . . . . . . . . . . . . . . Ralph A. Beattie . . . . . . . . . . . . . . . . . Rob L. Goodpaster . . . . . . . . . . . . . . . . . . . . . . . . . . . . David W. Beathard, Sr. David R. Brickman . . . . . . . . . . . . . . . Joseph G. Solari. . . . . . . . . . . . . . . . . . Gloria Holland . . . . . . . . . . . . . . . . . . . Glen H. Campbell . . . . . . . . . . . . . . . . Robert F. Hollister . . . . . . . . . . . . . . . . Board President and Chief Operating Officer 54 61 Executive Vice President and Chief Financial Officer 57 Vice President — National Marketing 63 Vice President — Operations 52 Vice President, Secretary and General Counsel 46 Vice President — Corporate Development 43 Vice President — Finance 66 Vice President — Development 55 Property Controller Lawrence A. Cohen has served as one of our directors since November 1996 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. Mr. Cohen serves on the boards of various charitable organi- zations and is active in several industry associations. Mr. Cohen was a founding member and is on the executive committee of the Board of Directors of the American Seniors Housing Association, serves on the board of the Assisted Living Federation of America (ALFA), and serves on the Operator Advisory Board of the National Investment Center for the Seniors Housing & Care Industry. Mr. Cohen is a licensed attorney and is also a Certified Public Accountant. He received an LLM from New York University School of Law, a JD from St. John’s University School of Law, and a BBA in Accounting from The George Washington University. Mr. Cohen has had positions with businesses involved in senior living for 26 years. Keith N. Johannessen has been a director since February 2004. Mr. Johannessen currently serves as our President and Chief Operating Officer. He has more than 32 years of operational experience in seniors housing. Mr. Johannessen began his senior housing career in 1978 with Life Care Services Corporation and then joined Oxford Retirement Services, Inc as Executive Vice President. He later served as Senior Manager in the health care practice of Ernst & Young LLP prior to joining the Company in 1993. Mr. Johannessen has served on the State of the Industry and Model Assisted Living Regulations Committees of the American Seniors Housing Association. He holds a BA degree. 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 from Carnegie Mellon University and is both a Certified Management Accountant and a Certified Financial Planner. 16 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 34 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 37 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. He currently serves on the Board of Advisors for the Southern Methodist University Corporate Counsel Symposium. He is also a member of the National Center for Assisted Living In-house Counsel Roundtable Task Force as well as the Long-Term Care Risk Legal Forum. Mr. Brickman has either practiced law or performed in-house counsel functions for 24 years. Joseph G. Solari joined the Company as Vice President — Corporate Development in September 2010. Mr. Solari has more than 15 years of experience originating, structuring, negotiating and executing the acquisition, sale and divestiture of healthcare real estate and real estate operating companies. Prior to joining the Company, from 2007 to 2009, Mr. Solari was Managing Director, Acquisitions for Ventas, Inc., where he was responsible for the firm’s real estate investment activities in the seniors housing and skilled nursing industries. Prior to Ventas, Inc., from 1999 to 2007, Mr. Solari spent eight years in the healthcare investment banking group of Houlihan Lokey, where he was responsible for the origination and execution of merger and acquisition, private placement and financial restructuring engagements for the firm’s healthcare clients, with particular focus on facility-based, healthcare services companies. Mr. Solari earned his Masters in Business Administration degree from Virginia Commonwealth University. Gloria M. Holland has served as Vice President — Finance of the Company 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. 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 36 years. 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 17 Company, these subsidiaries are separately incorporated and maintain their legal existence separate and apart from the parent, Capital Senior Living Corporation. 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, 2010, we had mortgage and other indebtedness totaling approximately $175.7 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, 2010, we leased 45 communities with future lease obligations totaling approximately $409.7 million, with minimum lease obligations of $45.4 million in fiscal 2011. 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. 18 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 prior to their stated dates. 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 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, 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. 19 Our ability to successfully expand existing senior living communities will depend on a number of factors, including, but not limited to, our ability to acquire suitable sites at reasonable prices; our success in obtaining necessary zoning, licensing, and other required governmental permits and authorizations; and our ability to control construction costs and accurately project completion schedules. Additionally, we anticipate that the 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. Termination of resident agreements and resident attrition could affect adversely our revenues and earnings. State regulations governing assisted living facilities require written resident agreements with each resident. Most of these regulations also require that each resident have the right to terminate the resident agreement for any reason on reasonable notice. Consistent with these regulations, the resident agreements signed by us allow residents to terminate their agreement on 30 days’ notice. Thus, we cannot contract with residents to stay for longer periods of time, unlike typical apartment leasing arrangements that involve lease agreements with specified leasing periods of up to a year or longer. If a large number of residents elected to terminate their resident agreements at or around the same time, then our revenues and earnings could be adversely affected. In addition, the advanced age of our average resident means that the resident turnover rate in our senior living facilities may be difficult to predict. We largely rely on private pay residents and circumstances that adversely affect the ability of the elderly to pay for our services could have a material adverse effect on us. Approximately 95% of our total revenues from communities that we operated were attributable to private pay sources and approximately 5% of our revenues from these communities were attributable to reimbursements from Medicare and Medicaid during fiscal 2010. 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, 2010, we managed seven senior living communities for joint ventures in which we have a minority interest pursuant to multi-year management agreements. The management agreements generally have initial terms of five years, subject to certain renewal rights. Under these agreements we provide management services to 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 10% in several joint ventures with affiliates of Prudential and Prudential Investment. We also manage the communities owned by these joint ventures. Under the 20 terms of the joint venture agreements with Prudential and Prudential Investment covering seven 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. The Company, on three joint venture developments with Prudential Investment, has guarantees that the communities will be completed and operated at the budgeted costs approved by the joint venture members. These costs include the hard and soft construction costs and operating costs until each community reaches breakeven. The budgeted costs include contingency reserves for potential costs overruns and other unforeseen costs. The terms of these guarantees generally do not provide for a limitation on the maximum potential future payments. These joint ventures are currently in lease up and one of the joint ventures has exhausted all of its reserves under the existing loan commitment. The Company will be required to fund operating deficits until the joint venture reaches breakeven for three consecutive months. Any amounts funded by the Company under this commitment, up to $0.5 million, may be recoverable from the joint venture in the event of liquidation. As of December 31, 2010, the Company had recognized deficit charges of approximately $0.4 million under these development agreement guarantees. The Company does not currently anticipate funding any deficits in excess of the amounts estimated to be recoverable from the joint ventures. 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 21 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. 22 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. An increasing number of legislative initiatives have been introduced or proposed in recent years that would result in major changes in the health care delivery system on a national or a state level. Among the proposals that have been introduced are price controls on hospitals, insurance market reforms to increase the availability of group health insurance to small businesses, requirements that all businesses offer health insurance coverage to their employees and the creation of government health insurance plans that would cover all citizens and increase payments by beneficiaries. We cannot predict whether any of the above proposals or other proposals will be adopted and, if adopted, no assurances can be given that their implementation will not have a material adverse effect on our business, financial condition or results of operations. 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 23 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 share- holder 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 and our stockholders approved a stockholder rights plan, which may discourage a third party from making an unsolicited proposal to acquire 20% or more of our common stock. Because we do not presently have plans to pay dividends on our common stock, stockholders must look solely to appreciation of our common stock to realize a gain on their investment. It is the policy of our Board of Directors to retain any future earnings to finance the operation and expansion of the Company’s business. Accordingly, the Company has not and does not currently anticipate declaring or paying cash dividends on your common stock in the foreseeable future. The payment of cash dividends in the future will be at the sole discretion of our Board of Directors and will depend on, among other things, the Company’s earnings, operations, capital requirements, financial condition, restrictions in then existing financing agreements and other factors deemed relevant by our Board of Directors. Accordingly, stockholders must look solely to appreciation of our common stock to realize a gain on their investment. This appreciation may not occur. 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 24 least fiscal 2011 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, 2010, 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. 25 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 February 28, 2011, there were approximately 135 stockholders of record of the Company’s common stock. Year 2010 2009 High Low High Low First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $5.49 5.85 Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.61 Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.10 Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4.21 4.34 4.73 5.15 $3.42 4.86 6.49 6.39 $2.10 2.36 3.95 4.26 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. 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 requirements, 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, 2010: 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 . . . . . . . . . . . . . . . 516,334 — Total . . . . . . . . . . . . . . . . . . . 516,334 $4.44 — $4.44 1,810,375 — 1,810,375 26 Performance Graph The following Performance Graph shows the cumulative total return for the five-year period ended Decem- ber 31, 2010, 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 12/05 12/06 12/07 12/08 12/09 12/10 S R A L L O D 250 200 150 100 50 0 * $100 invested on 12/31/05 in stock or index, including reinvestment of dividends. Fiscal year ending December 31. Copyright· 2011 S&P, a division of The McGraw-Hill Companies Inc. All rights reserved. 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 . . . . . . . . . . . 100.00 S & P 500 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.00 Peer Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.00 102.90 115.80 133.37 12/05 12/06 Cumulative Total Returns 12/07 96.03 122.16 98.06 12/08 28.82 76.96 21.71 12/09 48.55 97.33 51.83 12/10 64.80 111.99 62.73 The Company’s Peer Group, which was selected in good faith on an industry basis, consists of Assisted Living Concepts, Inc., 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. 27 (c) Purchases of Equity Securities by the Issuer and Affiliated Purchasers. The following information is provided pursuant to Item 703 of Regulation S-K. The Company did not repurchase any shares of its common stock pursuant to the Company’s share repurchase program (as described below) during the year ended December 31, 2010. The information set forth in the table below reflects shares repurchased by the Company pursuant to this program prior to the year ended December 31, 2010. Period Total Number of Shares Purchased Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs(1) Total at December 31, 2009 . . . . . . . . January 1 — March 31, 2010 . . . . . April 1 — June 30, 2010 . . . . . . . . July 1 — September 30, 2010 . . . . . October 1 — December 31, 2010 . . Total at December 31, 2010 . . . . . . . . 349,800 — — — — 349,800 $2.67 — — — — $2.67 349,800 — — — — 349,800 $9,065,571 — — — — $9,065,571 (1) On January 22, 2009, the Company’s board of directors approved a share repurchase program that authorized the Company to purchase up to $10.0 million of the Company’s common stock. The repurchase program does not obligate the Company to acquire any particular amount of common stock and the share repurchase authorization has no stated expiration date. All shares that have been purchased by the Company under this program were purchased in open-market transactions. 28 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. 2010 At and for the Year Ended December 31, 2008 (In thousands, except per share data) 2007 2009 2006 Statements of Operations Data: Total revenues . . . . . . . . . . . . . . . . . . . . . . . Income from operations(1) . . . . . . . . . . . . . . Net income (loss) . . . . . . . . . . . . . . . . . . . . . Net income (loss) per share: $211,929 18,515 4,254 $191,991 16,612 2,759 $193,274 17,015 3,724 $189,052 20,006 4,360 $159,070 14,068 (2,600) Basic income (loss) per share . . . . . . . . . . Diluted income (loss) per share . . . . . . . . . $ 0.16 0.16 $ 0.10 0.10 $ 0.14 0.14 $ 0.17 0.16 (0.10) (0.10) $ Balance Sheet Data: Cash and cash equivalents . . . . . . . . . . . . . . . Working capital(2) . . . . . . . . . . . . . . . . . . . . Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term debt, excluding current portion . . . Stockholders’ equity . . . . . . . . . . . . . . . . . . . $ 31,248 31,434 382,781 170,026 $163,823 $ 28,972 18,796 380,503 173,822 $158,130 $ 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 Other Data: Communities (at end of period) Owned or leased . . . . . . . . . . . . . . . . . . . . Joint ventures & managed . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 7 77 50 16 66 Resident capacity: Owned or leased . . . . . . . . . . . . . . . . . . . . Joint ventures & managed . . . . . . . . . . . . . 9,566 1,434 7,950 2,234 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,000 10,184 50 14 64 7,701 1,750 9,451 49 15 64 7,636 1,908 9,544 48 16 64 7,551 1,993 9,544 (1) Income from operations for fiscal 2007 and 2006 was revised to reduce facility lease costs to include amortization of deferred gains on sales of assets of $3,243 and $2,401, respectively, which had no impact on net income. (2) 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 29 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, 2010, 2009, and 2008, 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, 2010, the Company operated 77 senior living communities in 23 states with an aggregate capacity of approximately 11,000 residents, including 32 senior living communities which the Company either owned or in which the Company had an ownership interest, and 45 senior living communities that the Company leased. As of December 31, 2010, the Company also operated one home care agency. Significant Financial and Operational Highlights 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. The Company primarily derives its revenue by providing senior living and healthcare services to the elderly and operating senior living communities under joint venture arrangements. Despite challenging economic con- ditions, when comparing fiscal 2010 to fiscal 2009 the Company was able to increase total revenues approximately $19.9 million, or 10.4%, of which approximately 92.9% of these revenues consisted of senior living and healthcare services compared to 89.2% in fiscal 2009. In April 2010, the Company and GE Healthcare sold its respective ownership interests in Midwest I and II to HCN in sale/leaseback transactions of eight senior living communities owned by subsidiaries of Midwest I and II. Upon closing the sales, the Company leased the senior housing communities from HCN. As a result of these sale/ leaseback transactions, the Company received cash proceeds of approximately $4.5 million, net of closing costs, resulting in gains to the Company of approximately $1.2 million, which have been deferred and are being recognized in the Company’s statement of income as a reduction in facility lease expense over the initial 15-year lease term. In September 2010, the Company acquired the leasehold interests in 12 communities and certain related personal property from Signature Assisted Living of Texas, LLC (the “Signature Transaction”). Simultaneously with closing the Signature Transaction, the Company executed a Master Lease Agreement with affiliates of HCN for the 12 communities (the “Master Lease Agreement”). The Master Lease Agreement has a term of fifteen years with one 15-year renewal option beyond the initial lease term. The initial lease rate is 8.5% and is subject to certain conditional escalation clauses. The Master Lease Agreement is a “triple net” lease pursuant to which the Company pays all expenses of the properties except principal and interest on any mortgage debt of the properties. The Master 30 Lease Agreement contains customary representations and warranties as well as affirmative and negative covenants and the lease payments are guaranteed by other subsidiaries of the Company. During 2010, the Company was able to decrease general and administrative expenses 2.9% when compared to fiscal 2009. These reductions were primarily the result of the Company’s ability to leverage resources and identify areas where overhead could be reduced without compromising superior levels of service and care to our residents. During 2010, the Company extinguished $7.5 million of its outstanding debt obligations, which included a pay-off settlement with a Lehman securitized trust for a promissory note of one of the Company’s wholly owned subsidiaries. The securitized promissory note carried an outstanding principal balance of $4.6 million which was collateralized with the assets of the subsidiary and was nonrecourse to the Company. The pay-off settlement was for $3.7 million, excluding amounts reserved and escrowed, with no further obligation to the Company’s subsidiary and resulted in a gain to the Company of approximately $0.7 million. These principal reductions further reduced the Company’s exposure to the volatility in the credit markets and enabled the Company to reduce interest expense by approximately $0.6 million, or 4.9%, during fiscal 2010 when compared to fiscal 2009. The senior living industry continues to be negatively impacted by unfavorable conditions in the housing, credit and financial markets and the overall economy, generally resulting in lower than anticipated occupancy rates. Throughout fiscal 2010, in response to these conditions, the Company has continued to focus on maintaining an emphasis on occupancy increases, improvement in rental rates, expense management and growth in net operating income per unit, conversions of existing units to higher levels of care, and other opportunities to enhance cash flow and shareholder value. Joint Venture Transactions and Management Contracts As of December 31, 2010, the Company managed 7 communities owned by joint ventures in which the Company has a minority interest. For communities owned by joint ventures, the Company typically receives a management fee of 5% of gross revenues. The Company believes that the factors affecting the financial performance of communities managed under contracts with third parties do not vary substantially from the factors affecting the performance of owned and leased communities, although there are different business risks associated with these activities. The Company’s third-party and joint venture management fees are primarily based on a percentage of gross revenues. As a result, the cash flow and profitability of such contracts to the Company are more dependent on the revenues generated by such communities and less dependent on net cash flow than for owned or leased commu- nities. Further, the Company is not responsible for capital investments in managed communities. The management contracts are generally terminable only for cause or upon the sale of a community, subject to the Company’s right to offer to purchase such community. At December 31, 2010, the Company did not manage any communities in which it did not have an ownership interest. 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 was owned approximately 89% by GE Healthcare and 11% by the Company. The Company contributed $2.7 million for its interest in Midwest I. The five communities currently comprise 293 assisted living units with a combined capacity of 391 residents. The Company accounted for its investment in Midwest I under the equity method of accounting. The Company was party to a series of property management agreements (the “Midwest I Agreements”) to manage the five communities acquired by Midwest I. The Midwest I Agreements were for an initial term of five years, extended until various dates through February 2011, and contained automatic one year renewals thereafter. The Midwest I Agreements generally provided for a management fee of 5% of gross revenues. On April 16, 2010, Midwest I closed the sale of the Midwest I subsidiaries that owned the five senior housing communities to HCN. Upon closing the sale, the Company leased the five senior housing communities from HCN. For additional information, refer to Note 4, “Facility Lease Transactions,” in the notes to the consolidated financial statements. 31 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 was owned approximately 85% by GE Healthcare and 15% by the Company. The Company contributed $1.6 million for its interest in Midwest II. The three communities currently comprise 300 assisted living and memory care units with a combined capacity of 348 residents. The Company accounted for its investment in Midwest II under the equity method of accounting. The Company was party to a series of property management agreements (the “Midwest II Agreements”) to manage the three communities acquired by Midwest II. The Midwest II Agreements were for an initial term of five years, extended until various dates through August 2011, and contained automatic one year renewals thereafter. The Midwest II Agreements generally provided for a management fee of 5% of gross revenues. On April 30, 2010, Midwest II closed the sale of the Midwest II subsidiaries that owned the three senior housing communities to HCN. Upon closing the sale, the Company leased the three senior housing communities from HCN. For additional information, refer to Note 4, “Facility Lease Transactions,” in the notes to the consolidated financial statements. SHPII/CSL Transactions In November 2004, the Company formed SHPII/CSL with SHPII. SHPII/CSL is owned 95% by SHPII and 5% by the Company. In November 2004, SHPII/CSL acquired the Spring Meadows Communities which currently comprise 628 units with a combined capacity of 758 residents. The Company 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. The Company is party to a series of property management agreements (the “SHPII/CSL Management Agreements”) with SHPII/CSL, which collectively own and operate the Spring Meadows Communities. The SHPII/CSL Management Agreements currently extend until various dates through November 2014. The SHPII/ CSL Management Agreements generally provide for management fees of 5% of gross revenue plus reimbursement for costs and expenses related to the communities. On December 22, 2010, the Company announced that SHPII/ CSL entered into an agreement to sell the Spring Meadows Communities to HCN. As a condition to closing of the sale to HCN, the Company will enter into long term leases of the communities with HCN. SHP III Transactions In May 2007, the Company and SHPIII formed SHPIII/CSL Miami, LLC (“SHPIII/CSL Miami”) to develop a senior housing community in Miamisburg, Ohio. Under the joint venture and related agreements, the Company earns development and management fees and may receive incentive distributions. The senior housing community currently consists of 101 independent living units and 45 assisted living units and opened in August 2008. The Company 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. In November 2007, the Company and SHPIII formed SHPIII/CSL Richmond Heights, LLC (“SHPIII/CSL Richmond Heights”) to develop a senior housing community in Richmond Heights, Ohio. Under the joint venture and related agreements, the Company earns development and management fees and may receive incentive distributions. The senior housing community currently consists of 96 independent living units and 45 assisted living units and opened in April 2009. The Company contributed $0.8 million to SHPIII/CSL Richmond Heights for its 10% interest. The Company accounts for its investment in SHPIII/CSL Richmond Heights under the equity method of accounting. In December 2007, the Company and SHPIII formed SHPIII/CSL Levis Commons, LLC (“SHPIII/CSL Levis Commons”) to develop a senior housing community near Toledo, Ohio. Under the joint venture and related agreements, the Company earns development and management fees and may receive incentive distributions. The senior housing community currently consists of 101 independent living units and 45 assisted living units and opened in April 2009. The Company contributed $0.8 million to SHPIII/CSL Levis Commons for its 10% interest. The Company accounts for its investment in SHPIII/CSL Levis Commons under the equity method of accounting. 32 The Company is party to a series of property management agreements (the “SHPIII/CSL Management Agreements”) with SHPIII/CSL Miami, SHPIII/CSL Richmond Heights, and SHPIII/CSL Levis Commons (collectively “SHPIII/CSL”), which joint ventures are owned 90% by Senior Housing Partners III, L.P. (“SHPIII”), a fund managed by Prudential Investment and 10% by the Company, which collectively own and operate SHPIII/ CSL. The SHPIII/CSL Management Agreements are for initial terms of ten years from the date the certificate of occupancy was issued and currently extend until various dates through January 2019. The SHPIII/CSL Manage- ment Agreements generally provide for management fees of 5% of gross revenue plus reimbursement for costs and expenses related to the communities. CGIM Transaction The Company was party to a series of property management agreements with CGIM (the “CGIM Agree- ments”) expiring in August 2011. The CGIM Agreements generally provided for management fees of 5% to 6% of gross revenues, subject to certain base management fees. The Company managed one community under the CGIM agreements which the Company terminated during the fourth quarter of fiscal 2010. The Company no longer manages any communities under the CGIM Agreements as of December 31, 2010. Lease Transactions The Company currently leases 45 senior living communities from certain real estate investment trusts (“REITs”). The lease terms are generally for 10-15 years with renewal options for 5-15 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, 2010, 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 probable 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 income. The Company accounts for each of the Ventas Lease Agreements as operating leases. As of December 31, 2010, 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 probable or incurred. The initial terms on the HCP Lease Agreements expire on various dates through October 2018. 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 income. The Company accounts for each of the HCP Lease Agreements as operating leases. As of December 31, 2010, the Company leased 20 senior living facilities (collectively the “HCN Lease Agreements”), from HCN. The HCN Lease Agreements each have an initial term of 15 years, with one 15 year renewal extension available at the Company’s option. The initial lease rate under the HCN Lease Agreements range from 8.25% to 8.5% and are subject to certain conditional escalation clauses, which will be recognized when probable or incurred. The initial terms on the HCN Lease Agreements expire on various dates through September 2025. The Company incurred $1.2 million in lease acquisition costs related to the HCN Lease Agreements. These deferred lease acquisition costs are being amortized over the initial 15-year lease terms and are included in facility lease expense in the Company’s statement of income. The Company accounts for each of the HCN Lease Agreements as operating leases. 33 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 HCP . . . . . . . May 31, 2006 HCP . . . . . . . December 1, 2006 HCP . . . . . . . December 14, 2006 HCP . . . . . . . April 11, 2007 HCN . . . . . . . April 16, 2010 HCN . . . . . . . May 1, 2010 6 1 1 1 1 3 6 4 1 1 5 3 $ 84.6 19.5 29.0 19.1 5.0 54.0 43.0 51.0 18.0 8.0 48.5 36.0 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) (4) (Two ten-year renewals) 10 years (Two ten-year renewals) (4) (Two ten-year renewals) (4) (Two ten-year renewals) (4) (Two ten-year renewals) 15 years (One 15-year renewal) 15 years (One 15-year renewal) 15 years (One 15-year renewal) 8% 8% 8% 8% 7.75% 8% 8% 8% 7.75% 7.25% 8.25% 8.25% 8.50% $ 1.3 $ 4.6 0.2 0.1 0.4 0.2 0.2 0.2 0.7 0.3 0.1 0.6 0.2 0.4 — 14.3 — — 12.8 0.6 — — — 0.8 0.4 2.0 HCN . . . . . . . September 10, 2010 12 104.6 Subtotal. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated amortization through December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated deferred gain recognized through December 31, 2010 . . . . . . . . . . . . . . . . . . . . 4.9 (1.8) — 35.5 — (16.4) Net lease acquisition costs / deferred gains / lease concessions as of December 31, 2010 . . . . . . $ 3.1 $ 19.1 (1) Initial lease rates are measured against agreed upon fair market values and 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 $32.9 million and lease concessions of $2.6 million are being recognized in the Company’s statement of income as a reduction in facility lease expense over the leases’ initial term. Lease concessions of $0.6 million relate to the HCP transaction on May 31, 2006, and $2.0 million relate to the Signature Transaction on September 10, 2010. (4) Initial lease term expires on October 31, 2018. Facility lease expense in the Company’s statement of income includes rent expense plus amortization expense relating to leasehold acquisition costs offset by the amortization of deferred gains and lease incentives. On September 10, 2010, in conjunction with the Signature Transaction, a non-cancelable lease that expires in 2013 for ten 12-passenger Ford Minibuses used to transport residents of the communities was transferred from Signature to the Company. The lease is classified as a capital lease because it contains a bargain purchase option which resulted in the Company recording a Capital Lease Obligation for $0.2 million. There are various financial covenants and other restrictions in our lease agreements. Under the terms of certain lease agreements, the Company was required to pay additional cash collateral of approximately $1.1 million and 34 $1.2 million during the fiscal years ended December 31, 2010 and 2009, respectively. Once the Company reaches certain performance targets, the additional cash collateral paid is returnable to the Company. At December 31, 2010, the Company was not in compliance with a certain lease covenant which was cured by the Company through a lease modification amendment agreed to by the Company and landlord on March 11, 2011. There were no other lease covenant violations at December 31, 2010. The Company was in compliance with all of its lease covenants at December 31, 2009. Debt Transactions On September 10, 2010, in conjunction with the Signature Transaction, the Company obtained certain insurance policies and entered into a finance agreement totaling $0.3 million. The finance agreement has a fixed interest rate of 3.30% with principal being repaid over a 7-month term. On September 10, 2010, the Company issued standby letters of credit, totaling $2.2 million, for the benefit of HCN on certain leases between HCN and the Company. On May 31, 2010, the Company renewed certain insurance policies and entered into a finance agreement totaling $3.7 million. The finance agreement has a fixed interest rate of 3.30% with principal being repaid over a 12-month term. On April 16, 2010, the Company issued standby letters of credit, totaling $1.7 million, for the benefit of HCN on certain leases between HCN and the Company. On April 15, 2010, the Company negotiated a pay-off settlement with a Lehman securitized trust for a promissory note of one of the Company’s wholly owned subsidiaries that matured on September 1, 2009. The securitized promissory note carried an outstanding principal balance of $4.6 million which was collateralized with the assets of the subsidiary and was nonrecourse to the Company. The pay-off settlement was for $3.7 million, excluding amounts reserved and escrowed, with no further obligation to the Company’s subsidiary and resulted in a gain to the Company of approximately $0.7 million. On October 31, 2009, the Company renewed certain insurance policies and entered into a finance agreement totaling $0.5 million. The finance agreement has a fixed interest rate of 3.66% with principal being repaid over a 10-month term. On May 31, 2009, the Company renewed certain insurance policies and entered into a finance agreement totaling $1.6 million. The finance agreement has a fixed interest rate of 3.66% with principal being repaid over a 10-month term. The senior housing communities owned by the Company and encumbered by mortgage debt are provided as collateral under their respective loan agreements. At December 31, 2010 and 2009, these communities carried a total net book value of $212.7 million and $224.9 million, respectively, with total mortgage loans outstanding of $174.0 million and $182.3 million, respectively. The Company must maintain certain levels of tangible net worth and comply with other restrictive covenants under the terms of certain promissory notes. The Company was in compliance with all of its debt covenants at December 31, 2010 and 2009. Recent Events On December 22, 2010, the Company announced that SHPII/CSL entered into an agreement to sell the Spring Meadows Communities to HCN. As a condition to closing of the sale to HCN, the Company will enter into long term leases of the communities. The Company currently manages the Spring Meadows Communities in the SHPII/ CSL joint venture under long-term management agreements. 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 35 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 5% of the Company’s revenue in fiscal 2010 and 6% of the Company’s revenue in each of fiscal 2009 and 2008. Seventeen of the Company’s 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 prospec- tively by the state upon the filing of an annual cost report. Two of the Company’s 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. Management services revenue is recognized when earned. Management services revenue relates to providing certain management and administrative support services under management contracts, which currently have terms expiring through 2018. Substantially all community fees received from residents are non-refundable and are recorded initially by the Company as deferred revenue. The deferred amounts are amortized over the respective residents’ initial lease term which is consistent with the contractual obligation associated with the estimated stay of the resident. 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 was 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. 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. Development Agreement Guarantees In 2007, the Company and SHPIII entered into a series of joint venture agreements to develop three senior housing communities located in Ohio. The Company has guaranteed the communities will be completed and operated at budgeted costs approved by the joint venture members. These costs include the hard and soft construction costs and operating costs until each community reaches breakeven. The budgeted costs include contingency reserves for potential cost overruns and other unforeseen costs. The terms of these guarantees generally do not provide for a limitation on the maximum potential future payments. These joint venture communities are 36 currently in lease up and one of the joint ventures had exhausted its lease up reserve under the existing loan commitment. The Company will be required to fund any operating deficits until the joint venture reaches breakeven for three consecutive months. Any amounts funded by the Company under this commitment, up to $0.5 million, may be recoverable from the joint venture in the event of liquidation. As of December 31, 2010, the Company had recognized deficit charges of approximately $0.4 million under these development agreement guarantees. The Company does not currently anticipate funding any deficits in excess of the amounts estimated to be recoverable from the joint ventures. Assets Held for Sale Assets are classified as held for sale when the Company has committed to selling the asset and believes that it will be disposed of within one year. The Company determines the fair value, net of costs of disposal, of an asset on the date the asset is categorized as held for sale, and the asset is recorded at the lower of its fair value, net of cost of disposal, or carrying value on that date. The Company periodically reevaluates assets held for sale to determine if the assets are still recorded at the lower of fair value, net of cost of disposal, or carrying value. The Company has one parcel of land classified as held for sale at December 31, 2010. 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 each lease agreement. This determination of classification is complex and requires significant judgment relating to certain information including the estimated fair value and remaining economic life of the community, the Company’s cost of funds, minimum lease payments and other lease terms. As of December 31, 2010, the Company leased 45 communities and classified each of the leases as an operating lease. The Company incurs lease acquisition costs and amortizes these costs over the term of the lease agreement. Certain leases entered into by the Company qualified as sale/leaseback transactions and as such any related gains have been deferred and are being amortized over the lease term. Facility lease expense in the Company’s statement of income includes rent expense plus amortization expense relating to leasehold acquisition costs offset by the amortization of deferred gains and lease incentives. 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, 2010 and 2009. 37 Income Taxes At December 31, 2010, the Company had recorded on its consolidated balance sheet deferred tax assets of approximately $4.8 million. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Management regularly evaluates the future realization of deferred tax assets and provides a valuation allowance, if considered necessary, based on such evaluation. 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. However, the benefits of the net deferred tax assets might not be realized if actual results differ from expectations. The Company believes based upon this analysis that the realization of the net deferred tax assets is reasonably assured and therefore has not provided for a valuation allowance. The Company evaluates uncertain tax positions through consideration of accounting and reporting guidance on thresholds, measurement, derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition that is intended to provide better financial-statement comparability among different companies. The Company is required to recognize a tax benefit in its financial statements for an uncertain tax position only if 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. 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 2006. Recently Issued Accounting Guidance In August 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Updates (“ASU”) 2010-24, “Health Care Entities (Topic 954): Presentation of Insurance Claims and Related Insurance Recoveries,” which clarifies that a health care entity generally remains liable for payment of claims and retains the risk of loss for that claim even if an insurance entity is paying for the defense of the claim and ultimately pays for some or all of the award or settlement. It was concluded that gross presentation of the claim reflects that the health care entity remains obligated for the claim and that the entity is exposed to credit risk from the insurer until the claim has been resolved. The guidance provided in this ASU is effective for the fiscal years, and interim periods within those years, beginning after December 15, 2010. The adoption of this standard is not expected to have a significant impact on the Company’s financial condition, results of operations or cash flows. FASB Accounting Standards Codification (“ASC”) 810-10 (formerly FASB Statement No. 167, “Amendments to FASB Interpretation No. 46(R)) requires an enterprise to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a variable interest entity. This analysis identifies the primary beneficiary of a variable interest entity as the enterprise that has both the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and the obligation to absorb losses of the entity that could potentially be significant to the variable interest entity or the right to receive benefits from the entity that could potentially be significant to the variable interest entity. This guidance also requires ongoing reassessments of whether an enterprise is the primary beneficiary of a variable interest entity and was effective for the Company on January 1, 2010. The adoption did not have an impact on the Company’s financial condition, results of operations, or cash flows. 38 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. Year Ended December 31, 2010 2009 2008 $ % $ % $ % Revenues: Resident and healthcare revenue . . . . . . . . . $196,936 Unaffiliated management services revenue . . . . . . . . . . . . . . . . . . . . . . . . . Affiliated management services revenue . . . Community reimbursement income . . . . . . . 60 2,044 12,889 92.9% $171,194 89.2% $172,025 89.0% 0.0 1.0 6.1 72 2,698 18,027 0.0 1.4 9.4 194 4,882 16,173 0.1 2.5 8.4 Total revenues . . . . . . . . . . . . . . . . . . . . 211,929 100.0 191,991 100.0 193,274 100.0 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 . . . . . . 119,614 11,535 34,253 174 919 14,030 12,889 Total expenses . . . . . . . . . . . . . . . . . . . . 193,414 Income from operations . . . . . . . . . . . . . . . . . Other income (expense): Interest income . . . . . . . . . . . . . . . . . . . . . Interest expense . . . . . . . . . . . . . . . . . . . . . Gain on settlement of debt . . . . . . . . . . . . . Gain on sale of properties. . . . . . . . . . . . . . Write-down of assets held for sale . . . . . . . Write-off of deferred loan costs . . . . . . . . . Other income . . . . . . . . . . . . . . . . . . . . . . . Income before income taxes . . . . . . . . . . . . . . Provision for income taxes . . . . . . . . . . . . . . . 18,515 48 (11,242) 684 — — — (330) 7,675 (3,421) 56.4 5.5 16.2 0.1 0.4 6.6 6.1 91.3 8.7 0.0 (5.3) 0.3 — — — (0.1) 3.6 (1.6) 104,790 11,883 25,872 344 1,201 13,262 18,027 175,379 16,612 67 (11,819) — — — — 107 4,967 (2,208) 54.6 6.2 13.4 0.2 0.6 6.9 9.4 91.3 8.7 0.0 (6.2) — — — — 0.1 2.6 (1.2) 107,315 13,654 25,057 556 1,036 12,468 16,173 176,259 17,015 422 (12,217) — 681 (134) — 270 6,037 (2,313) 55.5 7.1 13.0 0.3 0.5 6.5 8.4 91.2 8.8 0.2 (6.3) — 0.4 (0.1) — 0.1 3.1 (1.2) Net income . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,254 2.0% $ 2,759 1.4% $ 3,724 1.9% Year Ended December 31, 2010 Compared to the Year Ended December 31, 2009 Revenues Total revenues were $211.9 million for the year ended December 31, 2010, compared to $192.0 million for the year ended December 31, 2009, representing an increase of approximately $19.9 million, or 10.4%. This increase in revenue is primarily the result of a $25.7 million increase in resident and healthcare revenue offset by a decrease in affiliated management services revenue of $0.7 million and a $5.1 million decrease in community reimbursement revenue. 39 (cid:129) The increase in resident and healthcare revenue primarily results from an increase of $15.5 million from the consolidation of eight communities previously owned by Midwest I and Midwest II that were sold to HCN and leased back by the Company in April 2010, an increase of $9.3 million from the addition of the leasehold interests in 12 communities from Signature in September 2010, and an increase in occupancy of 0.3% which was partially offset by a decrease in average rental rates of 0.5% at the Company’s other consolidated communities. (cid:129) The decrease in affiliated management services revenue of $0.7 million primarily results from the sale of the eight communities owned by Midwest I and Midwest II to HCN and leased back by the Company in April 2010. (cid:129) Community reimbursement revenue is comprised of reimbursable expenses from non-consolidated com- munities that the Company operates under long-term management agreements. The decrease in community reimbursement revenue of $5.1 million primarily results from the sale of the eight communities owned by Midwest I and Midwest II to HCN and leased back by the Company in April 2010. Expenses Total expenses were $193.4 million in fiscal 2010 compared to $175.4 million in fiscal 2009, representing an increase of $18.0 million, or 10.3%. This increase is primarily the result of a $14.8 million increase in operating expenses, a $8.4 million increase in facility lease expense, and a $0.8 million increase in depreciation and amortization expense offset by a $0.3 million decrease in general and administrative expenses, a $0.3 million decrease in stock-based compensation, a $0.2 million decrease in the provision for bad debts, and a decrease in community reimbursement expense of $5.1 million. (cid:129) The increase in operating expenses primarily results from an increase of $8.9 million from the consolidation of eight communities previously owned by Midwest I and Midwest II that were sold to HCN and leased back by the Company in April 2010, an increase of $5.0 million from the addition of the leasehold interests in 12 communities from Signature in September 2010, and an increase in operating costs at the Company’s other consolidated communities of $0.9 million primarily due to an increase in labor and benefit costs of $0.6 million and utilities of $0.3 million. (cid:129) The increase in facility lease expense primarily results from an increase of $4.8 million from the consolidation of eight communities previously owned by Midwest I and Midwest II that were sold to HCN and leased back by the Company in April 2010, $2.7 million from the addition of the leasehold interests in 12 communities from Signature in September 2010, and $0.9 million for contingent annual rental rate escalations for certain existing leases. (cid:129) Depreciation and amortization expense increased $0.8 million primarily as a result of an increase in depreciable assets at the Company’s consolidated communities. (cid:129) General and administrative expenses decreased $0.3 million primarily due to a decrease in employee benefit claims paid, which resulted in lower health insurance costs to the Company. (cid:129) Stock-based compensation decreased $0.3 million due to a decrease in the number of unvested restricted shares outstanding. (cid:129) The provision for bad debts decreased $0.2 million due to better collection results of resident accounts receivable during fiscal 2010. (cid:129) Community reimbursement expense represents payroll and administrative costs paid by the Company for the benefit of non-consolidated communities and joint ventures. The decrease in community reimbursement expense of $5.1 million primarily results from the sale of the eight communities owned by Midwest I and Midwest II to HCN and leased back by the Company in April 2010. 40 Other income and expense (cid:129) Interest income results from interest earned on investment of cash balances and escrowed funds. Interest income decreased primarily due to lower interest rates in fiscal 2010 when compared to fiscal 2009. (cid:129) Interest expense decreased $0.6 million to $11.2 million in fiscal 2010 compared to $11.8 million in fiscal 2009. This decrease in interest expense primarily results from lower debt outstanding combined with a slightly lower average interest rate during fiscal 2010 compared to fiscal 2009. (cid:129) Gain on settlement of debt represents the recognition of the gain associated with the pay-off settlement of the promissory note with the Lehman securitized trust in April 2010. (cid:129) Other (expense) income in fiscal 2010 and 2009 relates to the Company’s equity in the net losses of unconsolidated affiliates, which represents the Company’s share of the net losses on its investments in joint ventures. Provision for income taxes Provision for income taxes for fiscal 2010 was $3.4 million, or 44.6% of income before taxes, compared to a provision for income taxes of $2.2 million, or 44.5% of income before taxes, for fiscal 2009. The effective tax rates for fiscal 2010 and 2009 differ from the statutory tax rates due to state income taxes and permanent tax differences. The Company is impacted by the Texas Margin Tax (“TMT”) and Michigan Business Tax (“MBT”), which effectively impose taxes on modified gross revenues for communities within the States of Texas and Michigan, respectively. As of December 31, 2010, the Company consolidated 29 Texas communities and two Michigan communities and the TMT and MBT increased the overall provision for income taxes. Management regularly evaluates the future realization of deferred tax assets and provides a valuation allowance, if considered necessary, based on such evaluation. 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 As a result of the foregoing factors, the Company reported net income of $4.3 million for the fiscal year ended December 31, 2010 compared to net income of $2.8 million for the fiscal year ended December 31, 2009. Year Ended December 31, 2009 Compared to the Year Ended December 31, 2008 Revenues Total revenues were $192.0 million for the year ended December 31, 2009, compared to $193.3 million for the year ended December 31, 2008, representing a decrease of approximately $1.3, million or 0.7%. This decrease in revenue was primarily the result of a $0.8 million decrease in resident and healthcare revenue, a $2.2 million decrease in affiliated management services revenue, and a $0.1 million decrease in unaffiliated management services revenue offset by an increase in community reimbursement revenue of $1.8 million. (cid:129) Resident and healthcare revenue decreased $0.8 million, or 0.5%, primarily due to a decrease in average occupancy of 1.4% partially offset by an increase in average revenue collected of 2.2% at the Company’s consolidated communities. (cid:129) The decrease in affiliated management services revenue of $2.2 million, or 44.7%, primarily resulted from the Company no longer earning development and marketing fees from three joint venture communities that were under development during fiscal 2008. (cid:129) The decrease in unaffiliated management services revenue of $0.1 million primarily resulted from the management of one community owned by a third party during fiscal 2009 compared to two communities owned by third parties during fiscal 2008. 41 (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 $175.4 million for the year ended December 31, 2009, compared to $176.3 million for the year ended December 31, 2008, representing a decrease of $0.9 million, or 0.5%. This decrease was primarily the result of a $2.5 million decrease in operating expenses, a $1.8 million decrease in general and administrative expenses, and a $0.2 million decrease in bad debt expense, offset by a $1.9 million increase in community reimbursement expense, a $0.8 million increase in depreciation and amortization expense, a $0.8 million increase in facility lease expense, and a $0.1 million increase in stock-based compensation. (cid:129) Operating expenses decreased $2.5 million, or 2.4%, primarily due to a reduction of $2.1 million in independent living expenses, a reduction of $0.3 million in assisted living expenses, and a reduction of $0.3 million in insurance expense offset by an increase in healthcare expenses of $0.1 million. Decreases in independent living expenses primarily consisted of a decrease in labor and benefit costs of $0.7 million, a decrease in food costs of $0.5 million, a decrease in utilities costs of $0.2 million, and a net decrease of $0.7 million in other general independent living operating costs. Assisted living expenses decreased primarily due to a decrease in employee benefit costs. Insurance expense decreased due to an improved claims history which allowed for lower negotiated premium renewals during fiscal 2009. Healthcare expenses increased due to a net increase in other general healthcare operating costs. (cid:129) General and administrative expenses decreased $1.8 million, or 13%, primarily due to the write-off of accumulated due diligence costs of $0.6 million during fiscal 2008 related to a potential acquisition that the Company terminated and a reduction in corporate compensation of $1.2 million due to the reduction of corporate employees. (cid:129) Depreciation and amortization expense increased $0.8 million primarily as a result of an increase in depreciable assets at the Company’s consolidated communities and leasehold improvements. (cid:129) Facility lease costs increased $0.8 million primarily due to contingent annual rental rate escalations for existing leases. (cid:129) Stock-based compensation increased $0.1 million during fiscal 2009 compared to fiscal 2008 primarily due to the award of additional restricted shares of common stock to certain employees of 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 reflects interest earned on the investment of cash balances and interest earned on escrowed funds. Interest income decreased $0.4 million primarily due to lower interest rates in fiscal 2009 compared to fiscal 2008. (cid:129) Interest expense decreased $0.4 million to $11.8 million in fiscal 2009 compared to $12.2 million in fiscal 2008. This decrease in interest expense primarily resulted from less debt outstanding during fiscal 2009 compared to fiscal 2008. (cid:129) Gain on sale of assets in fiscal 2008 represented gains associated with the sale of two parcels of land of $0.7 million and the amortization of a deferred gain on the sale of the Richmond Heights land in fiscal 2007 to a joint venture in which the Company has an equity interest, offset by a $0.1 million impairment adjustment on a parcel of land, located in Fort Wayne, Indiana, which is classified as held for sale. (cid:129) Other income (expense) in fiscal 2009 and 2008 relates to the Company’s equity in the earnings/losses of unconsolidated affiliates, which represents the Company’s share of the earnings or losses on its investments in joint ventures. 42 Provision for income taxes Provision for income taxes for fiscal 2009 was $2.2 million, or 44.5% of income before taxes, compared to a provision for income taxes of $2.3 million, or 38.3% of income before taxes, for fiscal 2008. The effective tax rates for fiscal 2009 and 2008 differ from the statutory tax rates due to state income taxes and permanent tax differences. The Company is significantly impacted by the TMT and MBT, which effectively impose taxes on modified gross revenues for communities within the States of Texas and Michigan. The Company consolidated 17 Texas communities and two Michigan communities in fiscal 2009 and the TMT and MBT increased the overall provision for income taxes. Management regularly evaluates the future realization of deferred tax assets and provides a valuation allowance, if considered necessary, based on such evaluation. 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. However, the benefits of the net deferred tax assets might not be realized if actual results differ from expectations. The Company believes, based upon this analysis, that the realization of net deferred tax assets is reasonably assured and therefore has not provided for a valuation allowance. Net income As a result of the foregoing factors, the Company reported net income of $2.8 million for the fiscal year ended December 31, 2009, compared to net income of $3.7 million for the fiscal year ended December 31, 2008. Quarterly Results The following table presents certain unaudited quarterly financial information for each of the four quarters ended December 31, 2010 and 2009, 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. 2010 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 . . . . $47,908 4,066 725 $ 0.03 $ 0.03 26,540 26,638 $50,513 4,714 1,458 $ 0.05 $ 0.05 26,575 26,670 $53,600 3,760 481 $ 0.02 $ 0.02 26,607 26,703 $59,908 5,975 1,590 $ 0.06 $ 0.06 26,624 26,732 2009 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 . . . . $47,975 4,286 820 $ 0.03 $ 0.03 26,346 26,395 $47,205 3,759 429 $ 0.02 $ 0.02 26,187 26,272 $48,114 4,219 750 $ 0.03 $ 0.03 26,222 26,351 $48,697 4,348 760 $ 0.03 $ 0.03 26,275 26,395 43 Liquidity and Capital Resources The impact of the current economic environment could result in decreases in the fair value of assets, slowing of transactions, and tightening liquidity and credit markets. These impacts could make securing debt for acquisitions or refinancings for the Company, its joint ventures, or buyers of the Company’s properties more difficult or on terms not acceptable to the Company. Additionally, the Company may be more susceptible to being negatively impacted by operating or performance deficits based on the exposure associated with certain development guarantees or lease coverage requirements. In addition to approximately $31.2 million of unrestricted cash balances on hand as of December 31, 2010, the Company’s principal sources of liquidity are expected to be cash flows from operations, cash flows from SHPIII/ CSL Miami, SHPIII/CSL Richmond Heights, SHPIII/CSL Levis Commons, SHPII/CSL, debt refinancings, and/or proceeds from the sale of assets. The Company expects its available cash and cash flows from operations,cash flows from SHPIII/CSL Miami, SHPIII/CSL Richmond Heights, SHPIII/CSL Levis Commons, and SHPII/CSL, and proceeds from the sale of assets to be sufficient to fund its short-term working capital requirements. 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, reorganizations and other transactions. There can be no assurance that the Company will continue to generate cash flows at or above current levels or that the Company will be able to obtain the capital necessary to meet the Company’s short and long-term capital requirements. In summary, the Company’s cash flows were as follows (in thousands): Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . . . . $15,550 (5,282) (7,992) $19,635 (7,304) (9,239) Year Ended December 31, 2009 2010 2008 $15,012 (7,372) (5,119) Net increase in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . $ 2,276 $ 3,092 $ 2,521 Operating Activities The Company had net cash provided by operating activities of $15.6 million, $19.6 million, and $15.0 million in fiscal 2010, 2009, and 2008, respectively. The net cash provided by operating activities for fiscal 2010 primarily results from net income of $4.3 million, net non-cash charges of $17.4 million, and an increase in accrued expenses of $3.8 million offset by an increase in accounts receivable of $1.1 million, an increase in property tax and insurance deposits of $2.6 million, an increase in prepaid expenses and other assets of $3.6 million, an increase in accounts payable of $0.1 million, and an increase in federal and state income taxes receivable of $2.5 million. The net cash provided by operating activities for fiscal 2009 primarily resulted from net income of $2.8 million, net non-cash charges of $15.9 million, a decrease in accounts receivable of $0.8 million, a decrease in prepaid expenses and other assets of $1.9 million, and a decrease in federal and state income taxes receivable of $0.6 million offset by an increase in other assets of $0.8 million, a decrease in accounts payable and accrued expenses of $1.3 million, and a decrease in customer deposits of $0.3 million. The net cash provided by operating activities for fiscal 2008 primarily resulted 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 expenses 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. Investing Activities The Company had net cash used in investing activities of $5.3 million, $7.3 million, and $7.4 million in fiscal 2010, 2009, and 2008, respectively. The net cash used in investing activities for fiscal 2010 primarily results from 44 capital expenditures of $8.5 million and $2.0 million for intangible assets acquired in connection with the Signature Transaction offset by distributions from joint ventures of $5.2 million. In fiscal 2009, net cash used in investing activities primarily resulted from capital expenditures of $8.0 million offset by net investments in joint ventures of $0.7 million. In fiscal 2008, net cash used in investing activities primarily resulted 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. Financing Activities The Company had net cash used in financing activities of $8.0 million, $9.2 million, and $5.1 million in fiscal 2010, 2009, and 2008, respectively. The net cash used in financing activities for fiscal 2010 primarily results from net repayments of notes payable of $6.5 million and additions to restricted cash of $4.2 million offset by $2.0 million in lease incentives from the Signature Transaction, an increase in capital lease obligations of $0.2 million, and proceeds and excess tax benefits from the issuance of common stock of $0.5 million. The net cash used in financing activities for fiscal 2009 primarily resulted from net repayments of notes payable of $6.4 million, additions to restricted cash of $2.2 million, and purchases of treasury stock of $0.9 million offset by proceeds and excess tax benefits from the issuance of common stock of $0.3 million. For fiscal 2008, the net cash used in financing activities primarily resulted from net repayments of notes payable of $5.3 million offset by proceeds from the issuance of common stock of $0.2 million. Disclosures About Contractual Obligations The following table provides the amounts due under specified contractual obligations for the periods indicated as of December 31, 2010 (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 and capital leases . . . . . . . . . . . . . . $16,189 46,395 $ 28,936 91,931 $143,257 87,354 $ 37,218 186,336 $225,600 412,016 Total contractual cash obligations . . . . . . . . . . $62,584 $120,867 $230,611 $223,554 $637,616 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, 45 senior living communities and certain automobiles and 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, 2010, the Company had $175.7 million in outstanding debt comprised solely of fixed rate debt instruments. In addition, as of December 31, 2010, the Company had $409.7 million in future facility lease obligations with contingent rent increases on certain leases based on changes in the consumer price index or certain operational performance measures. Changes in interest rates would affect the fair market value of the Company’s fixed rate debt instruments but would not have an impact on the Company’s earnings or cash flows. Increase in the consumer price index could have 45 an effect on future facility lease expense if the leased community exceeds the contingent rent escalation thresholds set forth in each of the Company’s lease agreements. The following table summarizes information on the Company’s debt instruments outstanding as of Decem- ber 31, 2010. The table presents the principal due and weighted average interest rates by expected maturity date for the Company’s debt instruments by fiscal year. Principal Amount and Average Interest Rate by Expected Maturity Date at December 31, 2010 ($ in thousands): Long-term debt: Fixed rate debt . . . . . . . . . Average interest rate . . . . . . . 2011 2012 2013 2014 2015 Thereafter Total Fair Value $5,645 $4,156 $4,446 $4,725 $122,261 $34,438 $175,671 $170,466 6.0% 6.0% 6.0% 6.0% 5.9% 5.9% ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The consolidated financial statements of the Company are included under Item 15 of this Annual Report on Form 10-K. 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, 2010 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. 46 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, 2010. 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, 2010, 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, 2010, 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 LLP report is on page F-27 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 ACCOUNTING FEES AND SERVICES.* * Information required by Items 10, 11, 12, 13 and 14 is or will be set forth in the definitive proxy statement relating to the 2011 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 Form 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. 47 PART IV ITEM 15. EXHIBITS, 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. 48 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, thereunto duly authorized. SIGNATURES CAPITAL SENIOR LIVING CORPORATION By: /s/ LAWRENCE A. COHEN Lawrence A. Cohen Vice Chairman of the Board and Chief Executive Officer Date: March 14, 2011 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 Keith N. Johannessen 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/ KEITH N. JOHANNESSEN Keith N. Johannessen /s/ RALPH A. BEATTIE Ralph A. Beattie JAMES A. MOORE /s/ James A. Moore /s/ PHILIP A. BROOKS Philip A. Brooks /s/ CRAIG F. HARTBERG Craig F. Hartberg JILL M. KRUEGER /s/ Jill M. Krueger /s/ RONALD A. MALONE Ronald A. Malone /s/ PETER L. MARTIN Peter L. Martin /s/ MICHAEL W. REID Michael W. Reid Chief Executive Officer and Vice Chairman of the Board (Principal Executive Officer) March 14, 2011 President and Chief Operating Officer and Director March 14, 2011 Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) March 14, 2011 Chairman of the Board March 14, 2011 Director Director Director Director Director Director 49 March 14, 2011 March 14, 2011 March 14, 2011 March 14, 2011 March 14, 2011 March 14, 2011 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, 2010 and 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Statements of Income — For the years ended December 31, 2010, 2009 and 2008. . . . . . . Consolidated Statements of Stockholders’ Equity — For the years ended December 31, 2010, 2009 and 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Statements of Cash Flows — For the years ended December 31, 2010, 2009 and 2008 . . . 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-27 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, 2010 and 2009, and the related consolidated statements of income, shareholders’ equity, and cash flows for the each of the three years in the period ended December 31, 2010. 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, 2010 and 2009, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2010, 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, 2010, 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 14, 2011, expressed an unqualified opinion thereon. Dallas, Texas March 14, 2011 /s/ Ernst & Young LLP F-2 CAPITAL SENIOR LIVING CORPORATION CONSOLIDATED BALANCE SHEETS December 31, 2010 2009 (In thousands, except per share data) Current assets: ASSETS Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 31,248 6,334 Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,777 Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 911 Accounts receivable from affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,962 Federal and state income taxes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,290 Deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Assets held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 354 11,059 Property tax and insurance deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,896 Prepaid expenses and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63,831 Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 295,095 Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,478 Deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,224 Investments in joint ventures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,153 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets, net $ 28,972 2,167 3,340 424 1,493 1,208 354 8,632 4,010 50,600 300,678 7,781 6,536 14,908 Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $382,781 $380,503 Current liabilities: LIABILITIES AND SHAREHOLDERS’ EQUITY Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Accrued expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Current portion of notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Current portion of deferred income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Current portion of capital lease obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Customer deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,951 16,125 5,645 7,242 135 1,299 Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capital lease obligations, net of current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Notes payable, net of current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commitments and contingencies Shareholders’ equity: 32,397 14,493 83 1,959 170,026 $ 2,037 12,287 9,347 6,838 — 1,295 31,804 16,747 — — 173,822 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 27,083 and 26,945 in 2010 and 2009, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Treasury stock, at cost — 350 shares in 2010 and 2009 . . . . . . . . . . . . . . . . . . . . . . 274 133,014 31,469 (934) 273 131,576 27,215 (934) Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163,823 Total liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $382,781 158,130 $380,503 See accompanying notes to consolidated financial statements. F-3 CAPITAL SENIOR LIVING CORPORATION CONSOLIDATED STATEMENTS OF INCOME Year Ended December 31, 2009 (In thousands, except per share data) 2008 2010 Revenues: Resident and health care revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unaffiliated management services revenue . . . . . . . . . . . . . . . . . . . . . . Affiliated management services revenue . . . . . . . . . . . . . . . . . . . . . . . . Community reimbursement revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . $196,936 60 2,044 12,889 $171,194 72 2,698 18,027 $172,025 194 4,882 16,173 Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 211,929 191,991 193,274 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . 119,614 11,535 34,253 174 919 14,030 12,889 104,790 11,883 25,872 344 1,201 13,262 18,027 107,315 13,654 25,057 556 1,036 12,468 16,173 Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 193,414 175,379 176,259 Income from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other income (expense): Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gain on settlement of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gain on sale of properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Write-down of assets held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other income (expense). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income before provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,515 16,612 17,015 48 (11,242) 684 — — (330) 7,675 (3,421) 67 (11,819) — — — 107 4,967 (2,208) 422 (12,217) — 681 (134) 270 6,037 (2,313) Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,254 $ 2,759 $ 3,724 Per share data: Basic income per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted income per share. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ 0.16 0.16 $ $ 0.10 0.10 $ $ 0.14 0.14 Weighted average shares outstanding — basic . . . . . . . . . . . . . . . . . . . 26,587 Weighted average shares outstanding — diluted . . . . . . . . . . . . . . . . . . 26,687 26,257 26,356 26,377 26,620 See accompanying notes to consolidated financial statements. F-4 CAPITAL SENIOR LIVING CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY Common Stock Shares Amount Additional Paid-In Capital Retained Earnings Treasury Stock Total Balance at January 1, 2008 . . . . . . . . . . . . 26,596 38 45 — — — Exercise of stock options . . . . . . . . . . . . Restricted stock awards . . . . . . . . . . . . . Stock-based compensation . . . . . . . . . . . Excess tax benefits . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . Balance at December 31, 2008 . . . . . . . . . 26,679 59 557 — — (350) — Exercise of stock options . . . . . . . . . . . . Restricted stock awards . . . . . . . . . . . . . Stock-based compensation . . . . . . . . . . . Excess tax benefits . . . . . . . . . . . . . . . . Treasury stock . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . Balance at December 31, 2009 . . . . . . . . . 26,945 100 38 — — — Exercise of stock options . . . . . . . . . . . . Restricted stock awards . . . . . . . . . . . . . Stock-based compensation . . . . . . . . . . . Excess tax benefits . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . $266 1 — — — 267 — 6 — — — — 273 1 — — — — (In thousands) $129,159 258 — 1,036 (27) — $20,732 — — — — 3,724 $ — $150,157 258 1 1,036 (27) 3,724 — — — — — 130,426 254 — 1,201 (305) — — 131,576 358 — 919 161 — 24,456 — — — — — 2,759 27,215 — — — — 4,254 — — — — — (934) — (934) — — — — — 155,149 254 6 1,201 (305) (934) 2,759 158,130 359 — 919 161 4,254 Balance at December 31, 2010 . . . . . . . . . 27,083 $274 $133,014 $31,469 $(934) $163,823 See accompanying notes to consolidated financial statements. F-5 CAPITAL SENIOR LIVING CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS 2010 Year Ended December 31, 2009 (In thousands) 2008 Operating Activities Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,254 Adjustments to reconcile net income to net cash provided by operating activities: $ 2,759 $ 3,724 Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization of deferred financing charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization of deferred lease costs and lease intangibles . . . . . . . . . . . . . . . . . . . . . Amortization of debt discount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity in the (earnings) losses of unconsolidated joint ventures . . . . . . . . . . . . . . . . . Gain on settlement of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gain on sale of properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for bad debts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Write-down of assets held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stock compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Changes in operating assets and liabilities: 14,030 — 330 1,005 — (3,034) 4,221 331 (684) — 174 — 919 (611) (487) (2,584) (931) (2,670) (86) 3,838 (2,469) 4 15,550 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 operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investing Activities Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Intangible assets acquired in Signature Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from sale of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Distributions from (Investments in) joint ventures . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financing Activities 3,591 Proceeds from notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (10,154) Repayments of notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000 Lease incentive from Signature Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 240 Increase in capital lease obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (22) Cash payments for capital lease obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,167) Increase in restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 359 Cash proceeds from the issuance of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . 161 Excess tax benefits on stock options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — Purchases of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7,992) Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,276 Increase in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash and cash equivalents at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,972 Cash and cash equivalents at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 31,248 (8,447) (2,000) — 5,165 (5,282) 13,251 11 335 371 — (2,645) 3,125 (107) — — 344 — 1,201 125 728 — 1,920 (794) 117 (1,374) 566 (298) 19,635 (8,049) — 1 744 (7,304) 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 (8,065) — 1,397 (704) (7,372) 1,926 (8,324) — — — (2,167) 223 37 (934) (9,239) 3,092 25,880 $28,972 4,645 (10,023) — — — — 232 27 — (5,119) 2,521 23,359 $ 25,880 Supplemental Disclosures Cash paid during the year for: Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,949 $11,464 $ 11,668 Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,328 $ 530 $ 2,179 See accompanying notes to consolidated financial statements. F-6 CAPITAL SENIOR LIVING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2010 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, 2010, the Company operated 77 senior living communities in 23 states with an aggregate capacity of approximately 11,000 residents, including 32 senior living communities which the Company either owned or in which the Company had an ownership interest and 45 senior living communities that the Company leased. As of December 31, 2010, the Company also operated one home care agency. The accompanying consolidated financial statements include the financial statements of Capital Senior Living Corporation and its wholly owned subsidiaries. All material intercompany balances and transactions have been eliminated in consolidation. The Company accounts for significant investments in unconsolidated companies, in which the Company has significant influence, using the equity method of accounting. 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. Restricted cash consists of deposits required by certain lenders as collateral pursuant to letters of credit. The deposit must remain so long as the letter of credit is outstanding which is subject to renewal annually. 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, 2010 and 2009. 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 values 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, 2010. The parcel of land was written down to its fair value, less costs to sell, to $0.4 million during fiscal 2008. The Company F-7 CAPITAL SENIOR LIVING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) currently estimates that this parcel of land has an aggregate fair value, net of costs of disposal, that exceeds its carrying value of $0.4 million at December 31, 2010. 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 was the general partner in two partnerships and owns member interests in four other joint ventures. The Company has not consolidated these joint venture interests because the Company has concluded that the limited partners or the other members of each joint venture has substantive kick-out rights or substantive participating rights. Under the equity method of accounting, the Company records its investments in joint ventures at cost and adjusts such investments for its share of earnings and losses of the joint ventures. Development Agreement Guarantees The Company, on three joint venture developments, has guarantees that the communities will be completed and operated at the budgeted costs approved by the joint venture members. These costs include the hard and soft construction costs and operating costs until each community reaches breakeven. The budgeted costs include contingency reserves for potential costs overruns and other unforeseen costs. The terms of these guarantees generally do not provide for a limitation on the maximum potential future payments. These joint venture communities are currently in lease up and one of the joint ventures had exhausted its lease up reserve under the existing loan commitment. The Company will be required to fund any operating deficits until the joint venture reaches breakeven for three consecutive months. Any amounts funded by the Company under this commitment, up to $0.5 million, may be recoverable from the joint venture in the event of liquidation. As of December 31, 2010, the Company had recognized deficit charges of approximately $0.4 million under these development agreement guarantees. The Company does not currently anticipate funding any deficits in excess of the amounts estimated to be recoverable from the joint ventures. Income Taxes At December 31, 2010, the Company had recorded on its consolidated balance sheet net deferred tax assets of $4.8 million. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Management regularly evaluates the future realization of deferred tax assets and provides a valuation allowance, if considered necessary, based on such evaluation. As part of that evaluation, management has evaluated 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 evaluates uncertain tax positions through consideration of accounting and reporting guidance on criteria, measurement, derecognition, classification, interest and penalties, accounting in interim periods, disclo- sure, and transition that is intended to provide better financial-statement comparability among different companies. The Company is required to recognize a tax benefit in its financial statements for an uncertain tax position only if 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. 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 2006. Revenue Recognition Resident and health care revenue is recognized at estimated net realizable amounts, based on historical experiences, due from residents in the period in which the rental and other services are provided. F-8 CAPITAL SENIOR LIVING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Revenues from the Medicare and Medicaid programs accounted for approximately 5% of the Company’s revenue in fiscal 2010 and 6% of the Company’s revenue in each of fiscal 2009 and 2008. Seventeen of the Company’s 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 prospec- tively by the state upon the filing of an annual cost report. Two of the Company’s 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. 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. 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 2018. Substantially all community fees received from residents are non-refundable and are recorded initially by the Company as deferred revenue. The deferred amounts are amortized over the respective residents’ initial lease term which is consistent with the contractual obligation associated with the estimated stay of the resident. Community reimbursement revenue is comprised of reimbursable expenses from non-consolidated commu- nities that the Company operates under long-term management agreements. Lease Accounting The Company determines whether to account for its leases as 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 Decem- ber 31, 2010, the Company leased 45 communities and classified each of the leases as an operating lease. The Company incurs lease acquisition costs and amortizes these costs over the term of the lease agreement. Certain leases entered into by the Company qualified as sale/leaseback transactions and as such any related gains have been deferred and are being amortized over the lease term. Facility lease expense in the Company’s statement of income includes rent expense plus amortization expense relating to leasehold acquisition costs offset by the amortization of deferred gains and lease incentives. Credit Risk The Company’s resident receivables are generally due within 30 days. Credit losses on resident receivables have historically been within management’s estimates, and management believes that the allowance for doubtful accounts adequately provides for expected losses. F-9 CAPITAL SENIOR LIVING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Advertising Advertising is expensed as incurred. Advertising expenses for the years ended December 31, 2010, 2009, and 2008 were $6.5 million, $5.6 million, and $5.9 million, respectively. Net Income Per Share Basic net income per common share is computed by dividing net income remaining after allocation to unvested restricted shares by the weighted average number of common shares outstanding for the period. Except when the effect would be anti-dilutive, the calculation of diluted net income per common share includes the net impact of unvested restricted shares and shares that could be issued under outstanding stock options. The following table sets forth the computation of basic and diluted net income per share (in thousands, except for per share amounts): Year Ended December 31, 2009 2008 2010 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income allocated to unvested restricted shares . . . . . . . . . . . . . $ 4,254 (73) $ 2,759 (67) $ 3,724 (36) Undistributed net income allocated to common shares. . . . . . . . . . . $ 4,181 $ 2,692 $ 3,688 Weighted average shares outstanding — basic . . . . . . . . . . . . . . . . . Effects of dilutive securities: 26,587 26,257 26,377 Employee equity compensation plans . . . . . . . . . . . . . . . . . . . . . 100 99 243 Weighted average shares outstanding — diluted . . . . . . . . . . . . . . . 26,687 26,356 26,620 Basic income per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.16 $ 0.10 $ 0.14 Diluted income per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.16 $ 0.10 $ 0.14 Awards of unvested restricted stock representing approximately 0.5 million, 0.6 million, and 0.3 million shares were outstanding for the fiscal years ended December 31, 2010, 2009, and 2008, respectively, and were included in the computation of allocable net income. Awards of unvested restricted stock representing approximately 48 incremental shares were not removed from the effects of dilutive securities in the computation of diluted weighted average shares outstanding for the fiscal year ended December 31, 2008, as the effects did not materially impact previously reported diluted income per share. Treasury Stock The Company accounts for treasury stock under the cost method and includes treasury stock as a component of stockholders’ equity. Stock-Based Compensation The Company recognizes compensation expense for share-based payment awards to employees, including grants of employee stock options and awards of restricted stock, in the statement of income based on their fair values. On May 8, 2007, the Company’s stockholders approved the 2007 Omnibus Stock and Incentive Plan for Capital Senior Living Corporation (the “2007 Plan”) which provides for, among other things, the grant of restricted stock awards and stock options to purchase shares of the 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 1.8 million shares of F-10 CAPITAL SENIOR LIVING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) 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 0.8 million shares of common stock for future issuance upon the exercise of outstanding stock options pursuant to the 1997 Plan. Recently Issued Accounting Guidance In August 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Updates (“ASU”) 2010-24, “Health Care Entities (Topic 954): Presentation of Insurance Claims and Related Insurance Recoveries,” which clarifies that a health care entity generally remains liable for payment of claims and retains the risk of loss for that claim even if an insurance entity is paying for the defense of the claim and ultimately pays for some or all of the award or settlement. It was concluded that gross presentation of the claim reflects that the health care entity remains obligated for the claim and that the entity is exposed to credit risk from the insurer until the claim has been resolved. The guidance provided in this ASU is effective for the fiscal years, and interim periods within those years, beginning after December 15, 2010. The adoption of this standard is not expected to have a significant impact on the Company’s financial condition, results of operations or cash flows. FASB Accounting Standards Codification (“ASC”) 810-10 (formerly FASB Statement No. 167, “Amendments to FASB Interpretation No. 46(R)) requires an enterprise to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a variable interest entity. This analysis identifies the primary beneficiary of a variable interest entity as the enterprise that has both the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and the obligation to absorb losses of the entity that could potentially be significant to the variable interest entity or the right to receive benefits from the entity that could potentially be significant to the variable interest entity. This guidance also requires ongoing reassessments of whether an enterprise is the primary beneficiary of a variable interest entity and was effective for the Company on January 1, 2010. The adoption did not have an impact on the Company’s financial condition, results of operations, or cash flows. 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. The Company has determined that all of its operating units meet the criteria in ASC 280 to be aggregated into one reporting segment. As such, the Company operates in one segment. 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-11 CAPITAL SENIOR LIVING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) 3. Transactions with Affiliates 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 was owned approximately 89% by GE Healthcare and 11% by the Company. The Company contributed $2.7 million for its interest in Midwest I. The five communities currently comprise 293 assisted living units with a combined capacity of 391 residents. The Company accounted for its investment in Midwest I under the equity method of accounting. The Company was party to a series of property management agreements (the “Midwest I Agreements”) to manage the five communities acquired by Midwest I. The Midwest I Agreements were for an initial term of five years, extended until various dates through February 2011, and contained automatic one year renewals thereafter. The Midwest I Agreements generally provided for a management fee of 5% of gross revenues. On April 16, 2010, Midwest I closed the sale of the Midwest I subsidiaries that owned the five senior housing communities to Health Care REIT, Inc. (“HCN”). Upon closing the sale, the Company leased the five senior housing communities from HCN. For additional information, refer to Note 4, “Facility Lease Transactions”. 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 was owned approximately 85% by GE Healthcare and 15% by the Company. The Company contributed $1.6 million for its interest in Midwest II. The three communities currently comprise 300 assisted living and memory care units with a combined capacity of 348 residents. The Company accounted for its investment in Midwest II under the equity method of accounting. The Company was party to a series of property management agreements (the “Midwest II Agreements”) to manage the three communities acquired by Midwest II. The Midwest II Agreements were for an initial term of five years, extended until various dates through August 2011, and contained automatic one year renewals thereafter. The Midwest II Agreements generally provided for a management fee of 5% of gross revenues. On April 30, 2010, Midwest II closed the sale of the Midwest II subsidiaries that owned the three senior housing communities to HCN. Upon closing the sale, the Company leased the three senior housing communities from HCN. For additional information, refer to Note 4, “Facility Lease Transactions”. SHPII/CSL Transactions In November 2004, the Company formed SHPII/CSL with SHPII. SHPII/CSL is owned 95% by SHPII and 5% by the Company. In November 2004, SHPII/CSL acquired the Spring Meadows Communities which currently comprise 628 units with a combined capacity of 758 residents. The Company 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. The Company is party to a series of property management agreements (the “SHPII/CSL Management Agreements”) with SHPII/CSL, which collectively own and operate the Spring Meadows Communities. The SHPII/CSL Management Agreements currently extend until various dates through November 2014. The SHPII/ CSL Management Agreements generally provide for management fees of 5% of gross revenue plus reimbursement for costs and expenses related to the communities. On December 22, 2010, the Company announced that SHPII/ CSL entered into an agreement to sell the Spring Meadows Communities to HCN. As a condition to closing of the sale to HCN, the Company will enter into long term leases of the communities with HCN. F-12 CAPITAL SENIOR LIVING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) SHP III Transactions In May 2007, the Company and SHPIII formed SHPIII/CSL Miami to develop a senior housing community in Miamisburg, Ohio. Under the joint venture and related agreements, the Company earns development and management fees and may receive incentive distributions. The senior housing community currently consists of 101 independent living units and 45 assisted living units and opened in August 2008. The Company 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. In November 2007, the Company and SHPIII formed SHPIII/CSL Richmond Heights to develop a senior housing community in Richmond Heights, Ohio. Under the joint venture and related agreements, the Company earns development and management fees and may receive incentive distributions. The senior housing community currently consists of 96 independent living units and 45 assisted living units and opened in April 2009. The Company contributed $0.8 million to SHPIII/CSL Richmond Heights for its 10% interest. The Company accounts for its investment in SHPIII/CSL Richmond Heights under the equity method of accounting. In December 2007, the Company and SHPIII formed SHPIII/CSL Levis Commons to develop a senior housing community near Toledo, Ohio. Under the joint venture and related agreements, the Company earns development and management fees and may receive incentive distributions. The senior housing community currently consists of 101 independent living units and 45 assisted living units and opened in April 2009. The Company contributed $0.8 million to SHPIII/CSL Levis Commons for its 10% interest. The Company accounts for its investment in SHPIII/CSL Levis Commons under the equity method of accounting. The Company is party to a series of property management agreements (the “SHPIII/CSL Management Agreements”) with SHPIII/CSL Miami, SHPIII/CSL Richmond Heights, and SHPIII/CSL Levis Commons (collectively “SHPIII/CSL”), which joint ventures are owned 90% by Senior Housing Partners III, L.P. (“SHPIII”), a fund managed by Prudential Investment Management, Inc. and 10% by the Company, which collectively own and operate SHPIII/CSL. The SHPIII/CSL Management Agreements are for initial terms of ten years from the date the certificate of occupancy was issued and currently extend until various dates through January 2019. The SHPIII/CSL Management Agreements generally provide for management fees of 5% of gross revenue plus reimbursement for costs and expenses related to the communities. CGIM Transaction The Company was party to a series of property management agreements with CGIM (the “CGIM Agree- ments”) expiring in August 2011. The CGIM Agreements generally provided for management fees of 5% to 6% of gross revenues, subject to certain base management fees. The Company managed one community under the CGIM agreements which the Company terminated during the fourth quarter of fiscal 2010. The Company no longer manages any communities under the CGIM Agreements as of December 31, 2010. 4. Facility Lease Transactions The Company currently leases 45 senior living communities from certain REITs. The lease terms are generally for 10-15 years with renewal options for 5-15 years at the Company’s option. F-13 CAPITAL SENIOR LIVING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Under these lease agreements the Company is responsible for all operating costs, maintenance and repairs, insurance and property taxes. The following table summarizes each of the Company’s lease agreements (dollars in millions): Landlord Date of Lease Number of Communities Value of Transaction Term Ventas . . . September 30, 2005 Ventas . . . October 18, 2005 Ventas . . . March 31,2006 Ventas . . . June 8, 2006 Ventas . . . January 31, 2008 HCP . . . . May 1, 2006 HCP . . . . May 31, 2006 HCP . . . . December 1, 2006 HCP . . . . December 14, 2006 HCP . . . . April 11, 2007 HCN . . . . April 16, 2010 HCN . . . . May 1, 2010 6 1 1 1 1 3 6 4 1 1 5 3 $ 84.6 19.5 29.0 19.1 5.0 54.0 43.0 51.0 18.0 8.0 48.5 36.0 HCN . . . . September 10, 2010 12 104.6 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) (4) (Two ten-year renewals) 10 years (Two ten-year renewals) (4) (Two ten-year renewals) (4) (Two ten-year renewals) (4) (Two ten-year renewals) 15 years (One 15-year renewal) 15 years (One 15-year renewal) 15 years (One 15-year renewal) Initial Lease Rate(1) Lease Acquisition Costs(2) Deferred Gains / Lease Concessions(3) 8% $ 1.3 $ 4.6 8% 0.2 — 8% 0.1 14.3 8% 0.4 7.75% 0.2 8% 0.2 8% 0.2 8% 0.7 7.75% 0.3 7.25% 0.1 8.25% 0.6 8.25% 0.2 8.50% 0.4 — — 12.8 0.6 — — — 0.8 0.4 2.0 Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated amortization through December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated deferred gain recognized through December 31, 2010 . . . . . . . . . . . . . . . . 4.9 (1.8) — 35.5 — (16.4) Net lease acquisition costs / deferred gains / lease concessions as of December 31, 2010 . . . $ 3.1 $ 19.1 (1) Initial lease rates are measured against agreed upon fair market values and 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 $32.9 million and lease concessions of $2.6 million are being recognized in the Company’s statement of income as a reduction in facility lease expense over the leases’ initial term. Lease concessions of $0.6 million relate to the HCP transaction on May 31, 2006, and $2.0 million relate to the Signature Transaction on September 10, 2010. (4) Initial lease term expires on October 31, 2018. F-14 CAPITAL SENIOR LIVING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Facility lease expense in the Company’s statement of income includes rent expense plus amortization expense relating to leasehold acquisition costs offset by the amortization of deferred gains and lease incentives. Signature On September 10, 2010, the Company executed an asset purchase agreement with Signature Assisted Living of Texas, LLC (“Signature”) to acquire its leasehold interests in 12 senior housing communities owned by HCN. Simultaneously with closing, the Company executed a Master Lease Agreement with HCN for the 12 communities (the “Master Lease Agreement”). The Master Lease Agreement has an initial term of 15 years with one 15-year renewal extension available at the Company’s option. The initial lease rate is 8.5% and is subject to certain conditional escalation clauses. The Company has accounted for this lease as an operating lease. The Company recorded a lease incentive from HCN equal to the value of the intangible assets acquired from Signature. The current estimate of the intangible assets acquired and the corresponding lease incentive is $2.0 million and is subject to final valuation adjustments. The intangible assets have been recorded within other assets, net, and will be amortized over their respective useful lives. The lease incentive has been recorded within other long-term liabilities and will be amortized over the initial lease term as a reduction in facility lease expense. Additionally, the Company incurred $0.6 million in lease transaction costs, of which $0.4 million have been deferred and are being amortized as a reduction in facility lease expense over the initial 15-year lease term. From September 10, 2010 through December 31, 2010, the 12 communities acquired from Signature generated $9.3 million of revenue and $1.1 million of earnings before income taxes. Had the Signature Transaction occurred on January 1, 2010, unaudited pro forma revenue and earnings of the Company for the year ended December 31, 2010 would have been $230.4 million and $7.6 million, respectively. Had the Signature Transaction occurred on January 1, 2009, unaudited pro forma revenue and earnings of the Company for the year ended December 31, 2009 would have been $214.6 million and $5.8 million, respectively. Midwest I On April 16, 2010, the Company and GE Healthcare sold its respective ownership interests in Midwest I to HCN in a sale/leaseback transaction of five senior living communities owned by subsidiaries of Midwest I. Upon closing the sale, the Company leased the five senior housing communities from HCN. This lease was effective April 16, 2010, and has an initial term of 15 years, with one 15 year renewal extension available at the Company’s option. The initial lease rate is 8.25% and is subject to certain conditional escalation clauses. The Company incurred $0.6 million in lease acquisition costs which have been deferred and are being amortized in the Company’s statement of income over the initial 15 year lease term. The Company has accounted for this lease as an operating lease. As a result of this sale/leaseback transaction, the Company received cash proceeds of approximately $3.2 million, net of closing costs, resulting in a gain to the Company of approximately $0.8 million which has been deferred and is being recognized in the Company’s statement of income as a reduction in facility lease expense over the initial 15 year lease term. Midwest II On April 30, 2010, the Company and GE Healthcare sold its respective ownership interests in Midwest II to HCN in a sale/leaseback transaction of three senior living communities owned by subsidiaries of Midwest II. Upon closing the sale, the Company leased the three senior housing communities from HCN. This lease was effective May 1, 2010, and has an initial term of 15 years, with one 15 year renewal extension available at the Company’s option. The initial lease rate is 8.25% and is subject to certain conditional escalation clauses. The Company incurred $0.2 million in lease acquisition costs which have been deferred and are being amortized in the Company’s statement of income over the initial 15 year lease term. The Company has accounted for this lease as an operating lease. As a result of this sale/leaseback transaction, the Company received cash proceeds of approximately $1.3 million, net of closing costs, resulting in a gain to the Company of approximately $0.4 million which has been F-15 CAPITAL SENIOR LIVING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) deferred and is being recognized in the Company’s statement of income as a reduction in facility lease expense over the initial 15 year lease term. 5. Property and Equipment Property and equipment consists of the following (in thousands): Asset Lives 2010 2009 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 1,315 332,413 15,670 1,671 20,344 180 389,380 94,285 $ 17,787 1,203 329,451 15,126 971 16,227 182 380,947 80,269 Property and equipment, net . . . . . . . . . . . . . . . . . . . . . $295,095 $300,678 (1) Leasehold improvements are amortized over the shorter of the useful life of the asset or the remaining lease term. (2) Construction in progress at December 31, 2009, includes $0.1 million of capitalized computer software development costs. Furniture and equipment includes $2.3 million and $2.2 million of capitalized computer software development costs at December 31, 2010 and 2009, respectively, of which $1.2 million and $0.8 million has been amortized and is included as a component of accumulated depreciation and amortization at December 31, 2010 and 2009, respectively. Automobiles include $0.3 million of assets under capital lease at December 31, 2010, of which $12,000 has been amortized and is included as a component of accumulated depreciation and amortization at December 31, 2010. F-16 CAPITAL SENIOR LIVING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) 6. Other Assets Other assets consist of the following (in thousands): Deferred loan costs, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred lease costs, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Security and other deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,796 3,201 11,773 1,383 $ 2,126 2,587 10,195 — Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $18,153 $14,908 December 31, 2010 2009 7. Accrued Expenses Accrued expenses consist of the following (in thousands): December 31, 2010 2009 Accrued salaries, bonuses and related expenses . . . . . . . . . . . . . . . . . . . . . . . . Accrued property taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued health claims and workers comp . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued professional fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,368 7,470 913 1,258 740 1,376 $ 3,282 5,167 958 1,342 559 979 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $16,125 $12,287 8. Notes Payable Notes payable consists of the following (in thousands): Lender Average Monthly Payment Net Book Value Of Collateral(1) Interest Rate Maturity Date Freddie Mac . . . . . . . . . . . . $ 728 239 Capmark . . . . . . . . . . . . . . 178 Fannie Mae . . . . . . . . . . . . 60 Freddie Mac . . . . . . . . . . . . — Lehman . . . . . . . . . . . . . . . 344 Insurance Financing . . . . . . — Insurance Financing . . . . . . — Insurance Financing . . . . . . $129,516 42,664 32,858 7,656 — — — — 6.29% 5.46 5.91 5.75 8.20 3.30 3.66 3.66 July 2015 August 2015 May 2017 March 2017 September 2009 May 2011 March 2010 July 2010 Notes Payable December 31, 2010 2009 $101,270 34,787 28,692 9,216 — 1,706 — — $103,475 35,707 29,098 9,390 4,643 — 491 365 $1,549 6.01%(2) 175,671 183,169 Less current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,645 9,347 Notes payable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $170,026 $173,822 (1) 24 of the facilities owned by the Company are encumbered by mortgage debt and are provided as collateral under their respective loan agreements. F-17 CAPITAL SENIOR LIVING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) (2) Weighted average interest rate on current debt outstanding. The aggregate scheduled maturities of notes payable at December 31, 2010, are as follows (in thousands): 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,645 4,156 4,446 4,725 122,261 34,438 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $175,671 On September 10, 2010, in conjunction with the Signature Transaction, the Company obtained certain insurance policies and entered into a finance agreement totaling $0.3 million. The finance agreement has a fixed interest rate of 3.30% with principal being repaid over a 7-month term. On September 10, 2010, the Company issued standby letters of credit, totaling $2.2 million, for the benefit of HCN on certain leases between HCN and the Company. On May 31, 2010, the Company renewed certain insurance policies and entered into a finance agreement totaling $3.7 million. The finance agreement has a fixed interest rate of 3.30% with principal being repaid over a 12-month term. On April 16, 2010, the Company issued standby letters of credit, totaling $1.7 million, for the benefit of HCN on certain leases between HCN and the Company. On April 15, 2010, the Company negotiated a pay-off settlement with a Lehman securitized trust for a promissory note of one of the Company’s wholly owned subsidiaries that matured on September 1, 2009. The securitized promissory note carried an outstanding principal balance of $4.6 million which was collateralized with the assets of the subsidiary and was nonrecourse to the Company. The pay-off settlement was for $3.7 million, excluding amounts reserved and escrowed, with no further obligation to the Company’s subsidiary and resulted in a gain to the Company of approximately $0.7 million. On October 31, 2009, the Company renewed certain insurance policies and entered into a finance agreement totaling $0.5 million. The finance agreement has a fixed interest rate of 3.66% with principal being repaid over a 10-month term. On May 31, 2009, the Company renewed certain insurance policies and entered into a finance agreement totaling $1.6 million. The finance agreement has a fixed interest rate of 3.66% with principal being repaid over a 10-month term. The senior housing communities owned by the Company and encumbered by mortgage debt are provided as collateral under their respective loan agreements. At December 31, 2010 and 2009, these communities carried a total net book value of $212.7 million and $224.9 million, respectively, with total mortgage loans outstanding of $174.0 million and $182.3 million, respectively. 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, 2010 and 2009, the Company had gross deferred loan costs of $3.3 million. Accumulated amortization was $1.5 million and $1.2 million at December 31, 2010 and 2009, respectively. Amortization expense is expected to be $0.3 million in each of fiscal 2011, 2012, 2013, 2014, and 2015. F-18 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 certain promissory notes. The Company was in compliance with all of its debt covenants at December 31, 2010 and 2009. 9. Equity Preferred Stock The Company is authorized to issue preferred stock in series and to fix and state the voting powers and such designations, preferences and relative participating, optional or other special rights of the shares of each such series and the qualifications, limitations and restrictions thereof. Such action may be taken by the Board without stockholder approval. The rights, preferences and privileges of holders of common stock are subject to the rights of the holders of preferred stock. No preferred stock was outstanding as of December 31, 2010 and 2009. Share Repurchases On January 22, 2009, the Company’s board of directors approved a share repurchase program that authorized the Company to purchase up to $10.0 million of the Company’s common stock. Purchases may be made from time to time using a variety of methods, which may include open market purchases, privately negotiated transactions or block trades, or by any combination of such methods, in accordance with applicable insider trading and other securities laws and regulations. The size, scope and timing of any purchases will be based on business, market and other conditions and factors, including price, regulatory and contractual requirements or consents, and capital availability. The repurchase program does not obligate the Company to acquire any particular amount of common stock and the share repurchase authorization has no stated expiration date. Shares of stock repurchased under the program will be held as treasury shares. Pursuant to this authorization, during fiscal 2009, the Company purchased 349,800 shares at an average cost of $2.67 per share for a total cost to the Company of approximately $0.9 million. All such purchases were made in open market transactions. The Company did not purchase any shares of its common stock pursuant to the Company’s share repurchase program during fiscal 2010. 10. Stock-Based Compensation 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, 2010, 2009, and 2008 is presented below: December 31, 2010 Shares . . . . . . . . . . . . . . . . . . . . Weighted average price . . . . . . . December 31, 2009 Shares . . . . . . . . . . . . . . . . . . . . Weighted average price . . . . . . . December 31, 2008 Shares . . . . . . . . . . . . . . . . . . . . Weighted average price . . . . . . . Outstanding at Beginning of Year 642,120 4.34 $ 895,334 4.83 $ 937,334 4.87 $ Granted Exercised Forfeited Outstanding End of Year Options Exercisable 99,752 3.58 $ 26,034 5.21 $ 516,334 4.44 $ 516,334 4.44 $ 59,245 3.67 $ 193,969 6.81 $ 642,120 4.34 $ 642,120 4.34 $ 38,000 6.06 $ 4,000 3.69 $ 895,334 4.83 $ 895,334 4.83 $ — $— — $— — $— F-19 CAPITAL SENIOR LIVING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) The options outstanding and the options exercisable at December 31, 2010, 2009, and 2008, had an intrinsic value of $1.2 million, $0.9 million, and $250,000, respectively. The fair value of the 5,000 shares that vested in fiscal 2008 was $29,000. All stock options had fully vested as of December 31, 2008. The following table summarizes information relating to the Company’s options outstanding and options exercisable as of December 31, 2010. Number Outstanding at End of Year Options Outstanding Weighted Average Remaining Contractual Life (Years) Options Exercisable Weighted Average Exercise Price Number Exercisable at End of Year Weighted Average Exercise Price Range of Exercise Prices $1.80 to $1.80 . . . . . . . $2.00 to $3.70 . . . . . . . $3.75 to $3.75 . . . . . . . $4.14 to $4.14 . . . . . . . $4.50 to $4.50 . . . . . . . $4.85 to $4.85 . . . . . . . $5.90 to $5.90 . . . . . . . $6.30 to $6.30 . . . . . . . $6.63 to $6.63 . . . . . . . $10.97 to $10.97 . . . . . 206,024 17,000 2,000 1,600 3,000 6,000 6,000 259,710 6,000 9,000 $1.80 to $10.97 . . . . . . 516,334 Restricted Stock 0.72 1.88 1.24 1.08 3.58 3.38 4.36 2.92 3.08 5.35 2.06 $ 1.80 $ 3.20 $ 3.75 $ 4.14 $ 4.50 $ 4.85 $ 5.90 $ 6.30 $ 6.63 $10.97 $ 4.44 206,024 17,000 2,000 1,600 3,000 6,000 6,000 259,710 6,000 9,000 516,334 $ 1.80 $ 3.20 $ 3.75 $ 4.14 $ 4.50 $ 4.85 $ 5.90 $ 6.30 $ 6.63 $10.97 $ 4.44 The Company may also grant restricted stock awards to employees, officers, and directors in order to attract, retain, and provide incentives for such individuals and to more closely align stockholder and employee interests. Restricted stock awards generally vest over a period of three to four years but such awards are considered outstanding at the time of grant, since the holders thereof are entitled to dividends and voting rights. A summary of the Company’s restricted common stock awards activity and related information for the year ended December 31, 2010, is presented below: Outstanding at Beginning of Year Issued Vested Forfeited Outstanding End of Year December 31, 2010 Shares. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . December 31, 2009 Shares. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . December 31, 2008 Shares. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 649,207 59,000 236,742 21,572 449,893 251,632 561,625 159,050 5,000 649,207 256,858 66,000 50,586 20,640 251,632 The restricted stock outstanding at December 31, 2010 and 2009, had an intrinsic value of $3.0 million and $3.3 million, respectively. During fiscal 2010, the Company awarded 59,000 shares of restricted common stock to certain employees and directors of the Company. The average market value of the common stock on the date of grant was $5.03. These awards of restricted shares vest over a three to four-year period and had an intrinsic value of $0.3 million on the date of issue. F-20 CAPITAL SENIOR LIVING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Stock Based Compensation The Company uses the Black-Scholes option pricing model to estimate the grant date fair value of its stock options. The Black-Scholes model requires the input of certain assumptions including expected volatility, expected dividend yield, expected life of the option and the risk free interest rate. The expected volatility used by the Company is based primarily on an analysis of historical prices of the 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. The Company recognizes compensation expense of a restricted stock award over its vesting period based on the fair value of the award on the grant date, net of estimated forfeitures. The Company has total stock-based compensation expense, net of estimated forfeitures, of $1.0 million not recognized as of December 31, 2010, and expects this expense to be recognized over approximately a three to four- year period. 11. Income Taxes The provision (benefit) for income taxes consists of the following (in thousands): Year Ended December 31, 2009 2010 2008 Current: Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(1,184) 383 $(1,125) 477 $ 109 498 Deferred: Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,327 895 2,263 593 1,502 204 $ 3,421 $ 2,208 $2,313 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, 2009 2008 2010 Tax provision at federal statutory rates . . . . . . . . . . . . . . . . . . . . . . . . . $2,610 844 State income tax expense, net of federal effects . . . . . . . . . . . . . . . . . . (40) Federal and state income tax return true up . . . . . . . . . . . . . . . . . . . . . — State effective rate changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,689 706 (196) — 9 $2,053 463 (222) 5 14 $3,421 $2,208 $2,313 F-21 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, 2010 2009 Deferred tax assets: Deferred gain on sale/leaseback transaction . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net operating loss carryforward (expiring up to 2028) . . . . . . . . . . . . . . . . . Compensation costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment in partnerships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,636 — 1,776 1,488 2,604 1,241 $ 8,092 1,830 1,621 1,750 2,644 1,179 Total deferred tax assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,745 17,116 Deferred tax liabilities: Triad partnership interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,768 209 9,977 8,127 — 8,127 Total deferred tax assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,768 $ 8,989 Current deferred tax assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term deferred tax assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,290 3,478 $ 1,208 7,781 Total deferred tax assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,768 $ 8,989 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. However, the benefits of the net deferred tax assets might not be realized if actual results differ from expectations. The Company believes, based upon this analysis, that the realization of net deferred tax assets is reasonably assured and therefore has not provided for a valuation allowance As of December 31, 2010, the Company has federal and state net operating loss carryforwards of $1.9 million and $27.9 million, respectively, and related deferred tax assets of $0.6 million and $1.1 million, respectively. The Company is generally no longer subject to federal and state tax audits for years before 2006. 12. 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 were contributed to the Plan annually in fiscal 2010, 2009, and 2008. The Company incurred administrative expenses related to the Plan of $13,750, $13,100, and $12,400 in fiscal 2010, 2009, and 2008, respectively. F-22 CAPITAL SENIOR LIVING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) 13. Contingencies The Company has claims incurred in the normal course of its business. Most of these claims are believed by management to be covered by insurance, subject to normal reservations of rights by the insurance companies and possibly subject to certain exclusions in the applicable insurance policies. Whether or not covered by insurance, these claims, in the opinion of management, based on advice of legal counsel, should not have a material effect on the consolidated financial statements of the Company if determined adversely to the Company. 14. Fair Value of Financial Instruments The carrying amounts and fair values of financial instruments at December 31, 2010 and 2009 are as follows (in thousands): 2010 2009 Cash and cash equivalents . . . . . . . . . . . . . . . . . . . $ 31,248 6,334 Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . 175,671 Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . Carrying Amount Fair Value $ 31,248 6,334 170,466 Carrying Amount $ 28,972 2,167 183,169 Fair Value $ 28,972 2,167 170,393 The following methods and assumptions were used in estimating its fair value disclosures for financial instruments: Cash and cash equivalents and Restricted cash: The carrying amounts reported in the balance sheet for cash and cash equivalents and restricted cash equal fair value. Notes payable: The fair value of notes payable is estimated using discounted cash flow analysis, based on current incremental borrowing rates for similar types of borrowing arrangements. The estimated fair value of these assets and liabilities could be affected by market changes and this effect could be material. 15. Investments in Joint Ventures The Company’s investments in joint ventures consist of the following (in thousands): December 31, 2010 2009 Midwest I partner interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $2,506 — 1,116 Midwest II partner interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,141 SHPII/CSL member interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 486 SHPIII/CSL Miami member interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 646 SHPIII/CSL Richmond Heights member interest . . . . . . . . . . . . . . . . . . . . . . . . . 641 SHPIII/CSL Levis Commons member interest . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,122 36 536 530 $2,224 $6,536 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 was owned approximately 89% by GE Healthcare and 11% by the Company. The Company contributed $2.7 million for its interests in Midwest I. The five communities currently comprise 293 assisted living units with a capacity of 391 residents. Effective 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 managed the five acquired communities under long-term management agreements with Midwest I. The Company accounted for its investment in Midwest I under the equity method of accounting and F-23 CAPITAL SENIOR LIVING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) the Company recognized earnings in the equity of Midwest I of $0.1 million in fiscal 2010 and $0.2 million in both fiscal 2009 and 2008. In addition, the Company earned management fees of $0.2 million in fiscal 2010 and $0.5 million in each of fiscal 2009 and 2008 on the Midwest I communities. On April 16, 2010, Midwest I closed the sale of the Midwest I subsidiaries that owned the five senior housing communities to HCN. Upon closing the sale, the Company leased the five senior housing communities from HCN. For additional information, refer to Note 4, “Facility Lease Transactions.” 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 was owned approximately 85% by GE Healthcare and 15% by the Company. The Company contributed $1.6 million for its interest in Midwest II. The three communities currently comprise 300 assisted living units with a capacity of 348 residents. On August 11, 2006, Midwest II acquired the three senior living communities. The Company managed the three acquired communities under long-term management agreements with Midwest II. The Company accounted for its investment in Midwest II under the equity method of accounting and the Company recognized earnings (losses) in the equity of Midwest II of $16,000, $0.1 million, and ($0.1) million in fiscal 2010, 2009, and 2008, respectively. In addition, the Company earned management fees of $0.2 million, $0.6 million, and $0.5 million in fiscal 2010, 2009, and 2008, respectively, on the Midwest II communities. On April 30, 2010, Midwest II closed the sale of the Midwest II subsidiaries that owned the three senior housing communities to HCN. Upon closing the sale, the Company leased the three senior housing communities from HCN. For additional information, refer to Note 4, “Facility Lease Transactions.” 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 currently comprise 628 units with a combined capacity of 758 residents. The Company 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 each of fiscal 2010, 2009, and 2008. In addition, the Company earned $1.2 million in management fees on the SHP II/CSL communities in each of fiscal 2010, 2009, and 2008. On December 22, 2010, the Company announced that SHPII/CSL entered into an agreement to sell the Spring Meadows Communities to HCN. As a condition to closing of the sale to HCN, the Company will enter into long term leases of the communities with HCN. 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 earns development and management fees and may receive incentive distributions. The senior housing community currently consists of 101 independent living units and 45 assisted living units with a capacity of 196 residents and opened in August 2008. The Company contributed $0.8 million to SHPIII/CSL Miami for its 10% interest. The Company accounts for its investment in SHPIII/CSL Miami under the equity method of accounting and the Company recognized losses in the equity of SHPIII/CSL Miami of ($0.4) million, ($0.2) million and ($0.1) million in fiscal 2010, 2009, and 2008, respectively. The Company earned $0.2 million in development fees from SHPIII/ CSL Miami in fiscal 2008. 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. The Company earned $0.2 million in management fees on the community in each of fiscal 2010 and 2009. 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 earns development and management fees and may receive incentive distributions. The senior housing community currently consists of 96 independent living units and 45 assisted living units with a capacity of 197 residents and opened in April 2009. The Company contributed $0.8 million to SHPIII/CSL Richmond Heights for its 10% interest. The Company accounts for its investment in SHPIII/CSL Richmond Heights under the equity method of accounting and the Company recognized a loss in the equity of SHPIII/CSL Richmond F-24 CAPITAL SENIOR LIVING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Heights of ($0.1) million in each of fiscal 2010 and 2009. The Company earned $1.0 million in development fees from SHPIII/CSL Richmond Heights in fiscal 2008. In addition, the Company earned $12,500 and $0.1 million in pre-marketing fees on the community in fiscal 2009 and 2008, respectively. The Company earned $0.2 million and $0.1 million in management fees on the community in fiscal 2010 and 2009, respectively. 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 earns development and management fees and may receive incentive distributions. The senior housing community currently consists of 101 independent living units and 45 assisted living units with a capacity of 197 residents and opened in April 2009. The Company has contributed $0.8 million to SHPIII/CSL Levis Commons for its 10% interest. The Company accounts for its investment in SHPIII/CSL Levis Commons under the equity method of accounting and the Company recognized a loss in the equity of SHPIII/CSL Levis Commons of ($0.1) million and ($0.2) million in fiscal 2010 and 2009, respectively. The Company earned $1.1 million in development fees from SHPIII/CSL Levis Commons in fiscal 2008. In addition, the Company earned $12,500 and $0.1 million in pre-marketing fees on the community in fiscal 2009 and 2008, respectively. The Company earned $0.2 million and $0.1 million in management fees on the community in fiscal 2010 and 2009, respectively. 16. Allowance for Doubtful Accounts The components of the allowance for doubtful accounts are as follows (in thousands): Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,573 173 Provision for bad debts, net of recoveries . . . . . . . . . . . . . . . . . . . . . . . (139) Write-offs and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,541 344 (312) December 31, 2009 2010 2008 $1,043 556 (58) Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,607 $1,573 $1,541 17. Leases The Company currently leases 45 senior living communities with certain REIT. The lease terms are generally for 10-15 years with renewal options for 5-15 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, 2010, 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 probable 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 income. The Company accounts for each of the Ventas Lease Agreements as operating leases. As of December 31, 2010, 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 probable or incurred. The initial terms on the HCP Lease Agreements expire on various dates through October 2018. The Company incurred $1.5 million in lease acquisition costs related to the HCP Lease Agreements. These deferred lease acquisition costs are being amortized F-25 CAPITAL SENIOR LIVING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) over the initial 10 year lease terms and are included in facility lease expense in the Company’s statement of income. The Company accounts for each of the HCP Lease Agreements as operating leases. As of December 31, 2010, the Company leased 20 senior living facilities from HCN. The HCN Lease Agreements each have an initial term of 15 years, with one 15 year renewal extension available at the Company’s option. The initial lease rate under the HCN Lease Agreements range from 8.25% to 8.5% and are subject to certain conditional escalation clauses, which will be recognized when probable or incurred. The initial terms on the HCN Lease Agreements expire on various dates through September 2025. The Company incurred $1.2 million in lease acquisition costs related to the HCN Lease Agreements. These deferred lease acquisition costs are being amortized over the initial 15 year lease terms and are included in facility lease expense in the Company’s statement of income. The Company accounts for each of the HCN Lease Agreements as operating leases. At December 31, 2010 and 2009, the Company had gross deferred lease costs of $4.9 million and $3.9 million, respectively. Accumulated amortization at December 31, 2010 and 2009 was $1.8 million and $1.3 million, respectively. Amortization expense is expected to be approximately $0.4 million in each of the next five fiscal years. The Company leases its corporate headquarters in Dallas, Texas, and an office in New York City and has 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. On September 10, 2010, in conjunction with the Signature Transaction, a non-cancelable lease that expires in 2013 for ten 12-passenger Ford Minibuses used to transport residents of the communities was transferred from Signature to the Company. The lease is classified as a capital lease because it contains a bargain purchase option which resulted in the Company recording a Capital Lease Obligation for $0.2 million. The Company incurred $37.5 million, $29.7 million and $28.8 million in lease expense during fiscal 2010, 2009, and 2008, respectively. Future minimum lease commitments as of December 31, 2010, are as follows (in thousands): 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 46,395 46,188 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,743 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,437 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41,917 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 186,336 Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $412,016 There are various financial covenants and other restrictions in our lease agreements. Under the terms of certain lease agreements, the Company was required to pay additional cash collateral of approximately $1.1 million and $1.2 million during the fiscal years ended December 31, 2010 and 2009, respectively. Once the Company reaches certain performance targets, the additional cash collateral paid is returnable to the Company. At December 31, 2010, the Company was not in compliance with a certain lease covenant which was cured by the Company through a lease modification amendment agreed to by the Company and landlord on March 11, 2011. There were no other lease covenant violations at December 31, 2010. The Company was in compliance with all of its lease covenants at December 31, 2009. F-26 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, 2010, 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, 2010, 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, 2010 and 2009, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2010, and our report dated March 14, 2011, expressed an unqualified opinion thereon. Dallas, Texas March 14, 2011 /s/ Ernst & Young LLP F-27 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 2.1 3.1 Description — Asset Purchase Agreement, dated as of June 25, 2010, between Capital Senior Living Acquisition, L.L.C. and Signature Assisted Living of Texas, LLC. (Incorporated by reference to exhibit 2.1 to the Company’s Current Report on Form 8-K, dated June 28, 2010, filed by the Company with the Securities and Exchange Commission.) — 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.) — 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 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 4.2 4.3 4.4 4.5 4.6 4.7 — 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.) — 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.) — 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.) — Rights Agreement, dated as of February 25, 2010, by and between Capital Senior Living Corporation and Mellon Investor Services LLC, including all exhibits thereto (Incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K on February 25, 2010). — Form of Certificate of Designation of Series A Junior Participating Preferred Stock, par value $0.01 per share (Incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K on February 25, 2010). — Form of Right Certificate (included as Exhibit B to the Rights Agreement, which is Exhibit 4.4 hereto). — Form of Summary of Rights (included as Exhibit C to the Rights Agreement, which is Exhibit 4.4 hereto). 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.) 10.56 — Fourth Amendment to the Employment Agreement of Lawrence A. Cohen. (Incorporated by reference to exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 20, 2010.) 10.57 — Second Amendment to the Employment Agreement of Keith N. Johannessen. (Incorporated by reference to exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 20, 2010.) 10.58 — Second Amendment to the Employment Agreement of Ralph A. Beattie. (Incorporated by reference to exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 20, 2010.) Exhibit Number Description 10.59 — Master Lease Agreement, dated as of September 10, 2010, between Capital Texas S, LLC and the Landlord parties thereto. (Incorporated by reference to exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 16, 2010.) 10.60 — Note, dated as of September 10, 2010, by Capital Texas S, LLC in favor of Health Care REIT, Inc. (Incorporated by reference to exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 16, 2010.) *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 Ralph A. Beattie pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. * Filed herewith. ATTACHMENT A CAPITAL SENIOR LIVING CORPORATION NON-GAAP RECONCILIATIONS (In thousands) Year Ended December 31, 2009 2008 2010 Adjusted EBITDAR Net income from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation and amortization expense . . . . . . . . . . . . . . . . . . . . . . . . Stock-based compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . Facility lease expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for bad debts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Casualty losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Transaction costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unusual legal/proxy costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Real estate tax settlements/adjustments . . . . . . . . . . . . . . . . . . . . . . . . Retirement and separation costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred revenue adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 17,015 12,468 1,036 25,057 556 181 578 205 240 624 260 $ 16,612 13,262 1,201 25,872 344 — — — — — — $ 18,515 14,030 919 34,253 174 260 451 — — — — Adjusted EBITDAR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 58,220 $ 57,291 $ 68,602 Adjusted EBITDAR Margin Adjusted EBITDAR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 58,220 193,274 $ 57,291 191,991 $ 68,602 211,929 Adjusted EBITDAR margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30.1% 29.8% 32.4% Adjusted CFFO Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . Changes in operating assets and liabilities . . . . . . . . . . . . . . . . . . . . . . Recurring capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Casualty losses, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Transaction costs, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unusual legal/proxy costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 15,012 2,432 (2,020) — 357 126 $ 19,635 (990) (2,020) — — — $ 15,550 5,996 (2,331) 164 284 — Adjusted CFFO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 15,907 $ 16,625 $ 19,663 Dear Fellow Shareholders We are pleased to have produced strong results in 2010 and have laid the ground- work for continued success in 2011 and beyond. By focusing on our core We are well-positioned to implement our - We are proud of our reputation in the strategic plan, furthering our position as industry and our consistently high level the industry value leader in providing quality of resident satisfaction, which was 95% senior housing and additional levels of for 2010. strengths, we generated revenue of $211.9 care, while maximizing our competitive million in 2010, resulting in $68.6 million strengths to lower our cost of capital and of EBITDAR and an EBITDAR margin of enhance shareholder value and liquidity. 32.4%. CFFO of $19.7 million increased 18.3% from the prior year. We plan to increase our geographic concentration and maximize our strengths We achieved better occupancy, higher within each of our markets. We plan to average monthly rents and stronger cash increase our levels of care through conver- flow in 2010. We increased our resident sions to assisted living or memory care and capacity while enhancing our geographic acquisitions of communities with higher concentration and maximizing our com- levels of care. We are excited about our petitive strengths within the markets we opportunity to capitalize on the fragmented serve. And most importantly, we enhanced nature of the senior living industry with shareholder value through improvement its strong demographic demand and in key operating and financial metrics. constrained supply to strategically expand Our performance continues to demonstrate our operations. the resiliency of our need-driven business Capital Senior Living has a number of and our focus on providing quality housing competitive strengths that should enable and care, promoting seniors’ independence us to execute our strategy: and wellness while enriching their daily lives. - We have one of the most experienced on-site, regional and corporate manage- We ended the year strong with consolidated ment teams in the senior living industry. - We operate multiple levels of senior living care. - We have a solid balance sheet with no mortgage loan maturities until the third quarter of 2015. Executing our strategic plan should generate attractive levels of free cash flow and create shareholder value. Our positive performance during one of the most challenging operating environments demonstrates the resiliency of our need- driven business model and operating platform. Our fundamentals are strong, and we are excited about our Company’s prospects over the next few years as we benefit from need-driven demand growth and virtually no new supply in an improving economy. We thank you for your support. - As one of the country’s largest operators of senior living communities, we benefit from economies of scale and systems that yield operating efficiencies in a highly fragmented industry. - We enjoy strong long-term institutional relationships, both debt and equity. - We operate through a nimble platform and organizational structure with regional operating centers in geographically quarter of 2010. Our disciplined approach concentrated markets. Lawrence A. Cohen Chief Executive Officer average occupancy of 85.1% in the fourth quarter of 2010 – a 40 basis point increase from the third quarter of 2010 and a 90 basis point increase from the fourth quarter of 2009. Both move-ins and deposits increased significantly from the compara- ble period of the prior year. Average monthly rents improved 8.0% from the fourth quarter of 2009 to $2756 per occupied unit. This was a 3.9% increase in average monthly rents from the third to controlling expenses enabled us to report a 260 basis point improvement from the prior year in EBITDAR margin. These accomplishments resulted in CFFO of $19.7 million for the year versus $16.6 million in 2009. We used this cash to further strengthen our balance sheet, reducing debt by $7.5 million while increasing cash available for invest- ment by $2.3 million. During 2010, we completed transactions which added 20 communities to our consolidated portfolio. These communities, that are partially reflected in 2010, are expected to contribute over $50 million of annual revenue, nearly $23 million of EBITDAR and CFFO of over $3 million. Total Revenue (in $ millions) CFFO Comparison (in $ millions) 19.7 200 193.3 192.0 211.9 16.6 15.9 EBITDAR Margin 32.4% 30.1% 29.8% 20 15 10 5 0 150 100 50 0 35 30 25 20 15 10 5 0 08 09 10 08 09 10 08 09 10 Note: Non-GAAP reconciliations provided on Attachment A 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 DAVID W. BEATHARD Vice President, Operations DAVID R. BRICKMAN Vice President, General Counsel and Secretary GLEN H. CAMPBELL Vice President, Development ROB L. GOODPASTER Vice President, National Marketing GLORIA M. HOLLAND Vice President, Finance ROBERT F. HOLLISTER Property Controller JOSEPH G. SOLARI Vice President, Corporate Development 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 2323 Victory Avenue, Suite 2000 Dallas, Texas 75219 (214) 969-8000 JAMES A. MOORE 1, 3 Independent Chairman of the Board President Moore Diversified Services, Inc. Fort Worth, Texas LAWRENCE A. COHEN Vice Chairman of the Board and Chief Executive Officer Capital Senior Living Corporation New York, New York PHILIP A. BROOKS 3 Senior Vice President CWCapital, LLC Richmond, Virginia CRAIG F. HARTBERG 1, 2 Retired First Vice President Bank One, Texas, N.A. Baton Rouge, Louisiana KEITH N. JOHANNESSEN President and Chief Operating Officer Capital Senior Living Corporation Dallas, Texas JILL M. KRUEGER 2 President and CEO Health Resources Alliance, Inc. Oakbrook, Illinois RONALD A. MALONE 3 Chairman Gentiva Health Services, Inc. Atlanta, Georgia PETER L. MARTIN 1 Managing Director JMP Securities San Francisco, California MICHAEL W. REID 2 Partner Herald Square Properties New York, New York 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 14160 Dallas Parkway, Suite 300 Dallas, Texas 75254 (972) 770-5600 (972) 770-5666 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 INDIANA REGIONAL OFFICE 182 S. County Rd. 550 East Avon, Indiana 46123 (317) 745-2766 (317) 718-1051 fax 1 Member of the Board’s Compensation Committee 2 Member of the Board’s Audit Committee 3 Member of the Board’s Nominating/Corporate Governance Committee Form 10-K 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 590 Madison Avenue, Suite 2100 New York, New York 10022 (212) 551-1770 (212) 551-1774 fax A copy of Capital Senior Living Corporation’s 2010 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 25, 2011 at 10:00 am, Central Time The Embassy Suites Dallas 14021 Noel Road Dallas, Texas 75240 (972) 364-3641 CAPITAL SENIOR LIVING CORPORATION 14160 Dallas Parkway, Suite 300 Dallas, Texas 75254 972.770.5600 Fax: 972.770.5666 www.capitalsenior.com Capital Senior Living Corporation