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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
or
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
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CAPITAL SENIOR LIVING CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 75-2678809
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
14160 DALLAS PARKWAY, SUITE 300
DALLAS, TEXAS 75240
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code: (972) 770-5600
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Name of each exchange on which registered:
COMMON STOCK, $.01 PAR VALUE NEW YORK STOCK EXCHANGE
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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 [X] No [ ]
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. [ ]
The aggregate market value of 10,330,450 shares of the Registrant's
Common Stock held by nonaffiliates, based upon the closing price of the
Registrant's Common Stock as reported by the New York Stock Exchange on March
29, 1999 was approximately $72,313,150. For purposes of this computation,
all officers, directors and 10% beneficial owners of the Registrant are deemed
to be affiliates. Such determination should not be deemed an admission that such
officers, directors or 10% beneficial owners are, in fact, affiliates of the
Registrant. As of March 29, 1999, 19,717,347 shares of Common Stock, $.01 par
value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant's definitive Proxy Statement pertaining to the 1999
Annual Meeting of Stockholders (the "Proxy Statement") and filed or to be filed
not later than 120 days after the end of the fiscal year pursuant to Regulation
14A is incorporated herein by reference into Part III.
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CAPITAL SENIOR LIVING CORPORATION
TABLE OF CONTENTS
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PAGE
NUMBER
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PART I
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ITEM 1. BUSINESS..........................................................................................1
ITEM 2. PROPERTIES.......................................................................................20
ITEM 3. LEGAL PROCEEDINGS................................................................................20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..............................................21
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS............................................................................22
ITEM 6. SELECTED FINANCIAL DATA..........................................................................24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.....................................................................26
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.......................................36
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA......................................................36
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE..............................................................36
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...............................................36
ITEM 11. EXECUTIVE COMPENSATION...........................................................................36
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.....................................................................................36
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................................................37
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.................................38
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PART I
ITEM 1. BUSINESS
GENERAL
Capital Senior Living Corporation (together with its subsidiaries, the
"Company") is one of the largest developers and operators of senior living
communities in the United States in terms of resident capacity. As of December
31, 1998, the Company owned interests in and/or operated 34 communities in 17
states with a capacity of approximately 5,700 residents, including 19
communities in which it owned interests and 15 communities that it managed for
third parties pursuant to multi-year management contracts. As of December 31,
1998, the Company was developing 34 new communities which will have a capacity
of approximately 5,000 residents and was expanding 10 existing communities to
accommodate approximately 600 additional residents. As of December 31, 1998, the
Company also operated one home care agency. Approximately 93% of the total
revenues and reimbursable expenses for the senior living communities managed by
the Company as of December 31, 1998 are derived from private pay sources. During
1998, the communities which the Company operated and in which it owned interests
had an average occupancy rate of approximately 95% and its managed communities
had an average occupancy rate of approximately 96%. The Company and its
predecessors have provided senior living services since 1990.
PENDING MERGERS
On February 7, 1999, the Company entered into definitive Agreements and
Plans of Merger with ILM Senior Living, Inc. and ILM II Senior Living, Inc. for
a combined transaction value of approximately $174 million, which includes
approximately $4 million of net liabilities. The primary assets of ILM Senior
Living, Inc. and ILM II Senior Living, Inc. collectively are 13 senior living
communities that have been managed by the Company under management agreements
since 1996. Under the two merger agreements, both ILM Senior Living, Inc. and
ILM II Senior Living, Inc. would separately merge with and into a wholly owned
direct subsidiary of the Company with the aggregate issued and outstanding
shares of ILM Senior Living, Inc. and ILM II Senior Living, Inc. common stock
eligible to receive 65% of the merger consideration in cash (approximately
$110.5 million) and 35% in 8% convertible trust preferred securities (with a
liquidation value of approximately $59.5 million). Both mergers have been
approved by the boards of directors of each company and each transaction
requires the approval of the applicable shareholders of either ILM Senior
Living, Inc. or ILM II Senior Living, Inc. The mergers also are subject to
certain other customary conditions, including regulatory approvals, and are
expected to be completed during the second half of 1999.
FORMATION TRANSACTIONS
The Company was incorporated in October 1996 in the state of Delaware.
On November 5, 1997, the Company closed its initial public offering in which it
sold 10,350,000 common shares pursuant to a final prospectus under the
Securities Act of 1933, as amended, at $13.50 per share (the "Offering").
Simultaneously with the consummation of the Offering, the Company, the Company's
founders Jeffrey L. Beck ("Beck") and James A. Stroud (and his affiliate)
("Stroud"), Lawrence A. Cohen, Vice Chairman and Chief Financial Officer of the
Company ("Cohen"), and affiliates of Messrs. Beck and Stroud completed a series
of transactions (collectively, the "Formation Transactions") that resulted in
the reorganization of the Company (the "Formation"). In the Formation
Transactions, 7,687,347 shares were issued to Beck, Stroud and Cohen in the
transactions described below, bringing the total issued and outstanding shares
of the Company to 19,717,347 shares. Since the Offering, all of the Company's
operations are being conducted by the Company or its subsidiaries.
As part of the Formation Transactions, Messrs. Beck and Stroud
contributed all of the capital stock of Capital Senior Living, Inc., Capital
Senior Management 1, Inc., Capital Senior Management 2, Inc., Capital Senior
Development, Inc., and, with Mr. Cohen, of Quality Home Care, Inc. (the
"Contributed Entities") to the Company in exchange for the issuance of 7,687,347
shares of common stock and the issuance of separate notes to Messrs. Beck,
Stroud and Cohen in the aggregate principal amount of $18,076,380 (collectively,
the "Formation Note"). The number of shares of common stock issued and the
principal amount of the Formation Note were established by the Company in
connection with the Formation based on an assessment of the value of the
Contributed Entities and the value of the Acquired Assets (as defined below).
The Formation
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Note was repaid from net proceeds of the Offering. The primary assets of the
Contributed Entities consisted of third-party management contracts, development
contracts and a home care agency.
Also as part of the Formation Transactions, the Company purchased
substantially all of the assets (the "Acquired Assets"), other than working
capital items, of Capital Senior Living Communities, L.P., a Delaware limited
partnership ("CSLC"), for the assumption of approximately $70.8 million of debt
plus cash equal to $5.8 million (the "Asset Acquisition"). The Acquired Assets
of CSLC were: (i) four senior living communities located in Cottonwood, Arizona,
Indianapolis, Indiana, Merrillville, Indiana and Canton, Ohio; (ii)
approximately 56% of the limited partner interests in HealthCare Properties,
L.P., a Delaware limited partnership ("HCP"); and (iii) approximately 31% of the
aggregate principal amount of certain notes (the "NHP Notes") issued by NHP
Retirement Housing Partners I Limited Partnership, a Delaware limited
partnership ("NHP") and approximately 3% of the outstanding limited partnership
interests of NHP. The primary assets of HCP consisted of: (i) approximately $9.9
million in cash and cash equivalents as of the Offering; (ii) four physical
rehabilitation facilities located in Orlando, Florida, Nashville, Tennessee,
Lancaster, South Carolina, and Martin, Tennessee; and (iii) four skilled nursing
facilities located in Evansville, Indiana, Cambridge, Massachusetts, Fort Worth,
Texas, and Austin, Texas. The outstanding principal amount of all of the NHP
Notes as of the Offering was $42.7 million. The NHP Notes accrue interest at a
rate of 13% per annum, currently pay cash interest at a rate of 7% per annum,
are secured by substantially all of the assets of NHP, and mature on December
31, 2001. The primary assets, as of the Offering, of NHP consisted of five
senior living communities located in Buffalo, New York, Sacramento, California
(two communities), Detroit, Michigan, and Boca Raton, Florida. Messrs. Beck and
Stroud control approximately 66% of the limited partnership interests in CSLC.
The purchase price paid for the Acquired Assets was determined as follows: (i)
CSLC's communities, other than construction in process, were valued based on the
appraised value of the communities; (ii) CSLC's investment in HCP was valued
based on the appraised value of HCP's communities, adjusted for working capital
items and other assets and liabilities that would be settled in cash, multiplied
by the percentage of HCP owned by CSLC; (iii) CSLC's investment in the NHP Notes
was valued based on discounting the amount of principal and interest payments to
be made following the maturity date (December 31, 2001) of the NHP Notes
(assuming a six month lag between maturity and full repayment); and (iv) CSLC's
investment in the NHP limited partnership interests was valued at its historical
cost basis which approximates fair value. The appraised values for the
communities were determined by third-party appraisals.
CSLC, HCP and NHP are limited partnerships required to file periodic
reports under the Securities Exchange Act of 1934, as amended. The general
partner of CSLC is Retirement Living Communities, an Indiana limited
partnership, which is beneficially owned by Messrs. Beck and Stroud. The general
partner of HCP and NHP is Capital Realty Group Senior Housing, Inc. ("Senior
Housing"), an entity that was beneficially owned by Messrs. Beck and Stroud
until June 10, 1998 when the general partner interest was sold to an unrelated
third-party, Retirement Associates, Inc.
The debt assumed by the Company in the Asset Acquisition consisted of
an approximate $70.8 million mortgage loan pursuant to a $77.0 million
commitment made on June 30, 1997 to CSLC by Lehman Brothers Holdings, Inc., an
affiliate of Lehman Brothers (the "LBHI Loan"). Of the proceeds from the LBHI
Loan, $5.5 million was used to repay outstanding amounts under the CSLC's prior
credit facility, $0.8 million was used to fund construction in progress at
CSLC's Cottonwood community, approximately $64.5 million was used by CSLC to
purchase U.S. Treasury securities and the remaining $6.2 million was available
to fund additional expenditures associated with the expansion of the Cottonwood
community. The LBHI Loan was incurred by CSLC for the purpose of refinancing the
outstanding debt due under CSLC's prior credit facility and to provide
construction financing for the expansion of one of CSLC's communities. The U.S.
Treasury securities were acquired with proceeds of the LBHI Loan to provide
collateral for the borrowings thereunder. The U.S. Treasury securities were sold
under a repurchase agreement with Lehman Brothers, with a term equal to their
maturity. Upon consummation of the Offering and as a part of the Formation
Transactions, the Acquired Assets were acquired by the Company through
assumption of the LBHI Loan, the repurchase agreement was canceled and the LBHI
Loan was reduced by the Company with net proceeds of the Offering. The U.S.
Treasury securities reverted to CSLC for use or disposition as determined by
CSLC, and the Company has no interest in such securities.
INDUSTRY BACKGROUND
The senior living services industry encompasses a broad and diverse
range of living accommodations and health care services that are provided
primarily to persons 65 years of age or older. For the elderly who require
limited services, care in independent living residences supplemented at times by
home health care, offers a viable option. Most independent living
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communities typically offer community living together with a basic services
package consisting of meals, housekeeping, laundry, security, transportation,
social and recreational activities and health care monitoring.
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 24-hour a day personal support services designed to aid elderly
residents with activities of daily living ("ADLs"), 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.
The senior living services 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
professional training for staff and provide only limited assistance with ADLs.
The Company believes that few senior living operators provide the required
comprehensive range of senior living services designed to permit residents to
"age in place" within the community as they develop further physical or
cognitive frailties.
The Company believes that the senior living services industry will
require large capital infusions over the next 30 years to meet the growing
demand for senior living facilities. The National Investment Conference has
estimated that gross capital expenditures for the senior living marketplace will
grow from $86 billion in 1996 to $126 billion in 2005 and to $490 billion in
2030, in order to accommodate increasing demand. As a result, the Company
believes there will continue to be significant growth opportunities in the
senior living market for providing services to the elderly.
The Company believes that a number of demographic, regulatory, and
other trends will contribute to the continued growth in the senior living
market, the Company's targeted market for future development and expansion,
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 independence 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. In 1993,
eight out of ten noninstitutionalized elderly who lived alone were women.
According to the United States Bureau of Census, based on 1993 data, for women
the likelihood of living alone increases from 32% for 65- to 74-year-olds to 57%
for those women aged 85 and older. Men show similar trends with 13% of the 65-
to 74-year-olds living alone rising to 29% of the men aged 85 and older living
alone. Societal changes, such as increased 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 increasing demand for services that historically have been provided by a
spouse, other family members or live-in caregivers.
Demographics
The primary market for the Company's senior living services is
comprised of persons aged 75 and older. This age group is one of the fastest
growing segments of the United States population and is expected to more than
double by the year 2030. The population of seniors aged 85 and over is expected
to increase from approximately 3.1 million in 1990 to over 4.3 million by 2000,
an increase of 39%. 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. According to industry analyses,
approximately 19% of persons aged 75-79, approximately 24% of persons aged 80-84
and approximately 45% of
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persons aged 85 and older need assistance with ADLs. According to the
Alzheimer's Association the number of persons afflicted with Alzheimer's disease
is expected to grow from the current 4.0 million to 14.0 million by the year
2050.
Restricted Supply of Nursing Beds
The majority of states in the United States have adopted Certificate of
Need 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 Certificate
of Need 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 and skilled nursing facilities.
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.
Senior Affluence
The average net worth of senior citizens is higher than non-senior
citizens, partially as a result of accumulated equity through home ownership.
The Company believes that a substantial portion of the senior population thus
has 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.
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 the 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.
OPERATING STRATEGY
The Company's operating strategy is to provide high quality senior
living services at an affordable price 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 is
implementing its operating strategy principally through the following methods:
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Continue to Provide Broad Range of High-Quality Personalized Care
Central to the Company's operating strategy is its focus on providing
high-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. In 1998 and 1997, the Company achieved a 95% and 96% approval rating,
respectively, from its residents in a polling of its residents' satisfaction.
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 which may be further customized to serve both the
moderate and upper income markets of a particular targeted geographic area. By
offering a range of pricing options that are customized for each target market,
the Company believes that it can develop synergies, economies of scale, and
operating efficiencies in its efforts to serve a larger percentage of the
elderly population within a particular geographic market.
Maintain and 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 program focus on residents and family members; and (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.
Improve Operating Efficiencies
The Company seeks to improve operating efficiencies at its communities
by continuing to actively monitor and manage 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 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 development 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 the normal on-site training,
the Company conducts annual 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. The Company
believes its commitment to and emphasis on employee training and retention
differentiates the Company from many of its competitors.
Utilize Comprehensive Information Systems
The Company employs comprehensive proprietary information systems to
manage financial and operating data in connection with the management of its
communities. Utilizing its computerized systems, the Company is able to collect
and monitor on a regular basis key operating data for its communities. Reports
are routinely prepared and distributed to on-site, district and regional
managers for use in managing the profitability of the communities. The Company's
management information systems provide senior management with the ability to
identify emerging trends, monitor and control costs and
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develop current pricing strategies. The Company believes that its proprietary
information systems are sufficient to support future growth and that the Company
will have adequate resources to expand these systems to support the growth
envisioned by the Company's business plan.
CARE AND SERVICES PROGRAMS
The Company provides a wide array of senior living services to the
elderly at its communities, including independent living, assisted living (with
special programs and living units at some of its communities for residents with
Alzheimer's and other forms of dementia), 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.
Independent Living Services
The Company provides independent living services to seniors who 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, 1998, the Company had ownership interests in
11 communities and managed an additional 14 communities which provide
independent living services, with an aggregate capacity for 1,914 and 2,140
residents, respectively.
Independent living services provided by the Company include daily
meals, transportation, social and recreational activities, laundry,
housekeeping, security and health care monitoring. The Company also fosters the
wellness of its residents by offering health screenings (such as blood pressure
checks), periodic special services (such as influenza inoculations), chronic
disease management (such as diabetes with its attendant blood glucose
monitoring), 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 or independent home care agencies. The Company's independent living
residents pay a fee ranging from $1,250 to $2,400 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 the
resident upon 30 days' notice.
Assisted Living and Memory Impaired Services
The Company offers a wide range of assisted living care and services 24
hours per day, including personal care services, support services, and
supplemental services. As of December 31, 1998, the Company had ownership
interests in 10 communities, and managed an additional 10 communities which
provide assisted living services, with an aggregate capacity for 383 and 412
residents, respectively. 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, and 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 their 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.
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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, non-routine
care services, and special care services, such as services for
residents with Alzheimer's and other forms of dementia. Certain of
these services require an extra charge in addition to the pricing
levels described below.
In pricing its services, the Company has developed the following three
levels or tiers of assisted living care:
o Level I typically provides for minimum levels of care and service, for
which the Company generally charges a monthly fee per resident ranging
from $1,750 to $1,900, depending upon unit size and the project design
type. Typically, Level I residents need minimal assistance with ADLs.
o Level II provides for relatively higher levels and increased frequency
of care, for which the Company generally charges a monthly fee per
resident ranging from $1,900 to $2,250, depending upon the unit size
and the project design type. Typically, Level II residents require
moderate assistance with ADLs and may need additional personal care,
support, and supplemental services.
o Level III provides for the highest level of care and service, for which
the Company generally charges a monthly fee per resident ranging from
$2,250 to $2,400, depending upon the unit size and the project design
type. Typically, Level III residents are either very frail or impaired
and utilize many of the Company's services on a regular basis.
The Company maintains programs and special units at some of its
assisted living communities for residents with Alzheimer's and other 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 a lifeskills based activities
program, 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
Alzheimer's and other 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. Special
nutritional programs are used to help ensure caloric intake is maintained in
residents. Resident fees for these special units are dependent on the size of
the unit, the design type and the level of services provided.
Skilled Nursing Services
In its skilled nursing facilities, 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. 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. As of December 31, 1998, the
Company had ownership interests in seven facilities and managed an additional
facility which provides nursing services, with an aggregate capacity for 746 and
60 residents, respectively.
Home Care
As of December 31, 1998, the Company provided private pay home care
services to clients at one of its senior living communities through the
Company's on-site home care agency and made private pay 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 increase the length of stay in the Company's communities. The
services and products that the Company provides through its home care agency
include: (i) general and specialty nursing services to clients with long-term
chronic health conditions, permanent disabilities, terminal illnesses and
post-procedural needs; (ii)
7
<PAGE> 10
rehabilitative therapy services including physical, occupational and speech
therapy through outside contractors; (iii) personal care services and assistance
with ADLs; (iv) enhanced hospice care for clients in the final phases of
incurable disease; and (v) extensive monitoring and educational services
relative to respiratory care, medication administration, medical equipment, and
medical supplies. The Company intends to expand its home care service business
to additional senior living communities and to develop, acquire or manage home
care service businesses at other such communities. In addition, the Company will
make available to residents certain customized physician, dentistry, podiatry
and other health-related services that may be offered by third-party providers.
The Company may elect to provide these services directly or through
participation in managed care networks.
OPERATING COMMUNITIES
The table below sets forth certain information with respect to the
independent, senior living, and continuum of care communities owned, leased, and
managed by the Company as of December 31, 1998.
<TABLE>
<CAPTION>
RESIDENT CAPACITY (1)
---------------------
COMMENCEMENT OCCUPANCY
OWNER- OF RATE AT
COMMUNITY LOCATION IL AL SN TOTAL SHIP(2) OPERATIONS (3) 12-31-98
----------- ---------- ---- ---- ---- ----- ------- -------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OWNED:
Amberleigh ............. Buffalo, NY 365 29 -- 394 33% 1/92 95%
Atrium of Carmichael ... Sacramento, CA 156 -- -- 156 100% 1/92 97%
Cambridge Nursing
Home ................. Cambridge, MA -- -- 120 120 57% 7/93 90%
Canton Regency ......... Canton, OH 164 34 50 248 100% 3/91 96%
Cottonwood Village ..... Cottonwood, AZ 135 47 -- 182 100% 3/91 54%(5)
Crosswood Oaks ......... Sacramento, CA 127 -- -- 127 100% 1/92 95%
Gramercy Hill .......... Lincoln, NE 101 59 -- 160 100% 10/98 98%
Harrison at Eagle Valley Indianapolis, IN 138 -- -- 138 100% 3/91 99%(7)
Heatherwood ............ Detroit, MI 188 -- -- 188 100% 1/92 92%
Tesson Heights ......... St Louis, MO 140 58 -- 198 100% 10/98 98%
Towne Centre ........... Merrillville, IN 165 34 64 263 100% 3/91 96%
Veranda Club ........... Boca Raton, FL 235 -- -- 235 100% 1/92 89%
----- --- --- ----- --
Subtotal ............. 1,914 261 234 2,409 94%
OWNED AND LEASED TO
OTHERS:
Cane Creek ............. Martin, TN -- 8 36 44 57% 7/93 100%(4)
Cedarbrook ............. Nashville, TN -- 42 -- 42 57% 7/93 100%(4)
Crenshaw Creek ......... Lancaster, SC -- 36 -- 36 57% 7/93 100%(4)
Hearthstone ............ Austin, TX -- -- 120 120 57% 7/93 100%(4)
McCurdy ................ Evansville, IN -- -- 236 236 57% 7/93 100%(4)
Sandybrook ............. Orlando, FL -- 36 -- 36 57% 7/93 100%(4)
Trinity Hills .......... Fort Worth, TX -- -- 120 120 57% 7/93 100%(4)
----- --- --- -----
Subtotal ............. -- 122 512 634
MANAGED:
Buckner Parkway Place .. Houston, TX 243 82 60 385 1/98 89%(5)
Buckner Westminster
Place ................ Longview, TX 117 -- -- 117 6/96 99%(8)
Crown Pointe ........... Omaha, NE 163 -- -- 163 8/96 99%(8)
Crown Villa ............ Omaha, NE -- 73 -- 73 8/96 99%(8)
Independence Village ... East Lansing, MI 162 -- -- 162 8/96 91%(8)
Independence Village ... Peoria, IL 173 -- -- 173 8/96 99%(8)
Independence Village ... Raleigh, NC 155 22 -- 177 8/96 93%(8)
Independence Village ... Winston-Salem, NC 145 16 -- 161 8/96 94%(8)
Overland Park Place .... Kansas City, KS 126 25 -- 151 8/96 99%(8)
The Palms .............. Fort Myers, FL 235 20 -- 255 8/96 94%(8)
Rio Las Palmas ......... Stockton, CA 142 50 -- 192 8/96 95%(8)
Sedgwick Plaza ......... Wichita, KS 117 54 -- 171 8/96 93%(8)
Villa at Riverwood ..... St. Louis, MO 140 -- -- 140 8/96 96%(8)
Villa Santa Barbara .... Santa Barbara, CA 87 38 -- 125 8/96 99%(8)
West Shores ............ Hot Springs, AR 135 32 -- 167 8/96 96%(8)
----- ----- ----- ----- -----
Subtotal/Average ....... 2,140 412 60 2,612 95%
----- ----- ----- ----- -----
Grand Total ............ 4,054 795 806 5,655 95%(6)
===== ===== ===== ===== =====
</TABLE>
- ----------
8
<PAGE> 11
(1) Independent living (IL) residences, assisted living (AL) residences
(including areas dedicated to residents with Alzheimer's and other
forms of dementia) and skilled nursing (SN) beds.
(2) In the case of those communities shown as 33% owned by the Company,
this represents ownership of approximately 33% of the outstanding NHP
Notes which are secured by the properties. In the case of those
communities shown as approximately 57% owned, this represents the
Company's ownership of approximately 57% of the limited partner
interests in HCP.
(3) Indicates the date on which the Company acquired each of its owned
communities or commenced operating its managed communities. The Company
operated certain of its communities pursuant to management agreements
prior to acquiring the communities.
(4) Represents communities owned by the Company and leased to third parties
pursuant to master leases under which the Company receives rent
regardless of whether the units are occupied. Does not represent
occupancy rate, but rather percentage of property leased pursuant to
the master lease. These leases were in place at the time the Company
acquired its interest in these communities.
(5) The Cottonwood Village and Buckner Parkway Place communities were in
their initial lease-up phase at December 31, 1998. At Cottonwood, the
expansion, along with renovations to the existing building, resulted in
a temporary reduction of occupancy.
(6) Excludes communities owned and leased to others.
(7) The Company's home care agency is on-site at the Harrison at Eagle
Valley Community.
(8) Communities managed for ILM I Lease Corporation and ILM II Lease
Corporation.
THIRD-PARTY MANAGEMENT CONTRACTS
The Company is a party to two separate property management agreements
(the "ILM Management Agreements") with ILM I Lease Corporation and ILM II Lease
Corporation, corporations formed by ILM Senior Living, Inc. and ILM II Senior
Living, Inc. (collectively, "ILM") that operate 13 senior living communities.
The ILM Management Agreements commenced on July 29, 1996 and will expire on
December 31, 1999 and December 31, 2000, respectively, subject to extension
under certain circumstances, but not beyond July 29, 2001. Under the terms of
the ILM Management Agreements, the Company earns a base management fee equal to
4% of the gross operating revenues of the facilities under management (as
defined), and is also eligible to receive an incentive management fee equal to
25% of the amount by which the average monthly net cash flow of the facilities
(as defined) for the 12-month period ending on the last day of each calendar
month exceeds a specified base amount. The ILM Management Agreements are
terminable upon the sale of the related facilities, subject to the Company's
rights to offer to purchase the facilities. In the event of a sale, the Company
has the right to make the first and last offer with respect to the purchase of
the facilities subject to the ILM Management Agreements. The Company earned a
total of $980,159 and $969,068, respectively, under the two ILM Management
Agreements for the year ended December 31, 1998, which includes the incentive
management fee, and $854,948 and $734,755, respectively, for the year ended
December 31, 1997.
On February 7, 1999, the Company entered into separate agreements and
plans of merger with ILM Senior Living, Inc. and ILM II Senior Living, Inc. Upon
completion of such mergers, the Company will own the 13 communities currently
managed under the ILM Management Agreements and will terminate the ILM
Management Agreements. See "Pending Mergers" for a description of these
transactions and the conditions which must be satisfied for their completion.
The Company is also a party to two separate property management
agreements (the "Buckner Agreements") with Buckner Retirement Services, Inc., a
not-for-profit corporation that operates two senior living communities. The
Buckner Agreements commenced on April 1, 1996 and 1997 and expire on March 31,
2001 and 2002, respectively, except that either party may terminate the
agreements for cause under limited circumstances. Under the terms of the Buckner
Agreement for Buckner Parkway Place, the Company earns a base management fee of
$25,300 per month. Under the terms of the Buckner Westminster Place Agreement,
the Company earns a base management fee of $6,050 per month. In the case of the
Buckner Westminister Place Agreement, the Company was also entitled, through
August 31, 1997, to a marketing lease-up fee of $500 for each unit at the time
it was initially occupied. Also, in the case of both of the Buckner Agreements,
the Company is also eligible to receive a productivity reward equal to 5% of the
Gross Revenues generated during the immediately preceding month that exceed
$507,000 and $121,000, respectively. Both agreements have a productivity reward
limit of 20% of the base management fee per month. The amounts that exceed the
limit are deferred. The productivity reward took the place of the incentive fee
during 1997. Pursuant to the terms of the Buckner Agreements, the Company has a
right of first refusal with respect to purchasing the communities subject to
these agreements.
9
<PAGE> 12
GROWTH STRATEGIES
The Company believes that the fragmented nature of the senior living
services industry and the limited capital resources available to many small,
private operators provide an attractive opportunity for the Company to expand
its existing base of senior living operations. The Company believes that its
current operations throughout the United States serve as the foundation on which
the Company can build senior living networks in targeted geographic markets and
thereby provide a broad range of high quality care in a cost-efficient manner.
The following are the principal elements of the Company's growth
strategy:
Develop New Senior Living Communities
General. The Company intends to continue to expand its operations
through the development, construction, marketing and management of new senior
living communities in selected markets which provide a quality lifestyle that is
affordable to a large segment of seniors. The Company's national presence
provides it with extensive research and experience in various markets which
serve as the basis for the formulation of its development strategy in the
selection of new markets. The Company's development plan calls for the
identification of multiple markets in which construction can occur within the
Company's targeted time frame and budget. The Company has developed a list of
target markets and submarkets based upon local market conditions, the
availability of development sites and local construction capabilities, the
existence of development barriers to entry, the overall health and growth trends
of the local economies, and the presence of a significant elderly population.
The Company's senior management has extensive experience in senior
living development, having developed in excess of $400.0 million of senior
living communities. The Company has an integrated internal development approach
pursuant to which the Company's management and other personnel (including
designers and architects, market analysts, and construction managers) locate
sites for, develop, and open its communities. Personnel who are experienced in
site selection conduct extensive market and site-specific feasibility studies
prior to the Company's committing significant financial resources to new
projects. The Company believes it can expand its operations into new markets and
strengthen its presence within its existing markets utilizing its existing
residence models, such as the Waterford model, discussed below.
Development with Triad. Twenty-seven of the 34 senior living
communities referred to in the table below will be Waterford Communities and
will be developed pursuant to an arrangement with Triad Senior Living, Inc. and
its affiliates, which are unrelated third parties. Triad Senior Living, Inc. and
its affiliates have previously owned, developed, operated and sold senior living
communities for their own account. The Waterford community model is designed to
provide middle income residents with a senior living community having amenities
typical of higher-priced communities, through more efficient space design,
emphasizing common areas and providing more efficient layouts of the living
areas.
The Waterford design may be configured in a number of different ways
thereby providing the Company with flexibility in adapting to a particular
geographic market, neighborhood, site or care need. In addition, the Waterford
design has been developed to facilitate the prompt, efficient, cost-effective
delivery of senior care and personal services. Site requirements for the various
designs range from 4.5 to 6.0 acres. The Waterford design may also provide for
specially designed residential units, common areas and dining rooms for
residents with Alzheimer's and other forms of dementia.
The Company believes that its designs meet the desire of many of its
residents to move into a new residence that approximates, as nearly as possible,
the comfort of their prior home. The Company also believes that its designs
achieve several other objectives, including: (i) lessening the trauma of change
for residents and their families; (ii) facilitating resident mobility and
caregiver access; (iii) enhancing operating efficiencies; (iv) enhancing the
Company's ability to match its products to targeted markets; and (v)
differentiating the Company from its competitors.
The Company had previously entered into a development agreement to
develop the Waterford communities with Tri Point Communities, L.P. ("Tri
Point"), a limited partnership owned by the Company's founders (Messrs. Beck and
Stroud) and their affiliates. Effective April 1, 1998, Tri Point was reorganized
and the interests of Messrs. Beck and Stroud were sold
10
<PAGE> 13
at their cost to Triad Senior Living, Inc. and its affiliates. Tri Point was
renamed Triad Senior Living I, L.P. ("Triad I"). The new general partner of
Triad I, owning 1%, is Triad Senior Living, Inc.
Five of the 34 senior living communities referred to in the table below
will be Waterford communities developed pursuant to an arrangement with Triad I,
a limited partnership owned 19% by the Company and 81% by unrelated third
parties, under which Triad I will pay development and management fees to the
Company for development and management services and the Company will have
options to purchase the partnership interests in Triad I of the non-Company
partners and to purchase the communities upon their completion and during the
term of the management contracts. Triad I will be responsible for funding and
obtaining financing for the construction and lease-up costs. The Company made
available to Triad I an unsecured credit facility not to exceed $10 million.
These communities will have an aggregate capacity for approximately 756
residents at an aggregate estimated cost of completion and lease-up of
approximately $40.0 million to $50.0 million.
Three of the 34 senior living communities referred to in the table
below will be Waterford communities developed pursuant to an arrangement with
Triad Senior Living II, L.P. ("Triad II"), a limited partnership owned 19% by
the Company and 81% by unrelated third parties. Triad II will pay development
and management fees to the Company for development and management services and
the Company will have options to purchase the partnership interests in Triad II
of the non-Company partners and to purchase the communities upon their
completion during the term of the management contracts. Triad II will be
responsible for funding and obtaining financing for the construction and
lease-up costs. The Company has made available to Triad II an unsecured credit
facility not to exceed $10 million. These communities will have an aggregate
capacity for approximately 408 residents at an aggregate estimated cost of
completion and lease-up of approximately $25 million to $30 million.
Six of the 34 senior living communities referred to in the table below
will be Waterford communities developed pursuant to an arrangement with Triad
Senior Living III, L.P. ("Triad III"), a limited partnership owned 19% by the
Company and 81% by unrelated third parties. Triad III will pay development and
management fees to the Company for development and management services and the
Company will have options to purchase the partnership interests in Triad III of
the nonCompany partners and to purchase the communities upon their completion
during the term of the management contracts. Triad III will be responsible for
funding and obtaining financing for the construction and lease-up costs. The
Company has made available to Triad III, an unsecured credit facility not to
exceed $10 million. These communities will have an aggregate capacity for
approximately 816 residents at an aggregate estimated cost of completion and
lease-up of approximately $50 million to $60 million.
Up to six of the 34 senior living communities referred to in the table
below will be Waterford communities developed pursuant to an arrangement with
Triad Senior Living IV, L.P. ("Triad IV"), a limited partnership owned 19% by
the Company and 81% by unrelated third parties. Triad IV will pay development
and management fees to the Company for development and management services and
the Company will have options to purchase the partnership interests in Triad IV
of the non-Company partners and to purchase the communities upon their
completion during the term of the management contracts. Triad IV will be
responsible for funding and obtaining financing for the construction and
lease-up costs. The Company has made available to Triad IV an unsecured credit
facility not to exceed $10 million. These communities will have an aggregate
capacity for approximately 816 residents at an aggregate estimated cost of
completion and lease-up of approximately $50 million to $60 million.
Up to seven of the 34 senior living communities referred to in the
table below will be Waterford communities developed pursuant to an arrangement
with another Triad limited partnership, which has not yet been formed. It is
expected that the limited partnership will be owned 19% by a wholly owned
subsidiary of the Company and 81% by unrelated third parties.
The development agreements between each Triad entity and the Company
provide for a development fee of 4%, plus reimbursements for expenses and
overhead not to exceed 4%. The Triad entities also enter into management
agreements with the Company providing for management fees to the Company in an
amount equal to the greater of 5% of gross revenues or $5,000 per month per
community, plus overhead reimbursements not to exceed 1% of gross revenues.
Under each Triad partnership agreement, the Company has an option to purchase
the partnership interests of the non-Company partners for an amount equal to the
amount such party paid for its interest, plus noncompounded interest of 12% per
annum. The property management agreements also provide the Company with an
option to purchase the communities developed by the Triad entities
11
<PAGE> 14
upon their completion for an amount equal to the fair market value (based on a
third-party appraisal but not less than hard and soft costs and lease-up costs).
The Company has made no determination as to whether it will exercise its
purchase options. The Company will evaluate the possible exercise of each
purchase option based upon the business and financial factors which may exist at
the time those options may be exercised.
Development through Other Strategic Alliances. The Company has also
formed strategic alliances with for-profit (LCOR Incorporated - "LCOR") and
not-for-profit organizations (Buckner Retirement Services, Inc. and The Emmaus
Calling, Inc.) to develop, market and manage additional communities while
reducing the investment of, and associated risks to, the Company. The Company's
alliances are with established development companies or not-for-profit
owner/operators of senior living communities. Seven of the 34 senior living
communities referred to in the table below will be developed through strategic
alliances. The for-profit entities generally obtain construction financing and
provide construction management experience, existing relationships with local
contractors, suppliers, and municipal authorities, knowledge of local and state
building codes and building laws, and assistance with site selection for new
communities. The not-for-profit organizations generally provide existing
relationships with religious organizations, a community reputation of caring for
seniors, a tax-exempt status that permits tax-exempt bond financing, and in
certain instances, home care services. The Company contributes its operational
and industry expertise, and has had, in most cases, leasing and management
responsibilities for communities owned by these organizations, as well as has
the right of first refusal to acquire the communities in most cases. The Company
intends to continue to evaluate opportunities to form similar joint ventures and
strategic alliances in the future.
As of December 31, 1998, four sites have been purchased for the
development and operation of independent and assisted living communities by
LCOR. The sites are Trumbull, Connecticut; Libertyville, Illinois; Summit, New
Jersey; and Naperville, Illinois. The Management Agreements between LCOR and the
Company generally provide for a base management fee of the greater of $15,000
per month or 5% of gross revenues plus an incentive fee equal to 25% of the
excess cash flow over budgeted amounts. The terms are for 10 years with a five
year renewal at the Company's option. The Company is also entitled to a fee of
$50,000 for development consulting services for each development and a monthly
marketing fee of approximately $10,000 per month for each community, which
generally covers the period prior to the expected opening of the communities,
usually six to nine months.
The Company has entered into a strategic alliance with Buckner
Retirement Services, Inc. ("Buckner") to develop, market and manage senior
living communities developed by Buckner. As of December 31, 1998, two sites have
been purchased for the development and operation of independent, assisted living
and skilled nursing communities. The sites are Beaumont, Texas and Georgetown,
Texas. The Management Agreements between Buckner and the Company generally
provide for a base management fee plus a productivity reward equal to 5% of the
gross revenues generated during the immediately preceding month that exceed a
base figure. The productivity reward has a limit of 20% of the base management
fee per month. The amounts that exceed the limit are deferred. The terms are for
five years.
The Company has also entered into a strategic alliance with The Emmaus
Calling, Inc. ("Emmaus") to develop, market and manage a senior living community
developed by Emmaus. As of December 31, 1998, one site has been purchased for
the development and operation of an assisted living community. The site is in
Mesquite, Texas. The Management Agreement between Emmaus and the Company
provides for a base management fee of $8,000 per month adjusted yearly by the
difference between the Consumer Price Index for the year less the Consumer Price
Index for the year of completion. The term is for 15 years.
As of December 31, 1998, there were 34 communities under development in
which the Company had an interest. The table below summarizes information
regarding those developments which the Company expects to be completed through
2000.
<TABLE>
<CAPTION>
RESIDENT CAPACITY(1)
--------------------
LOCATION OF DEVELOPMENT
- ----------------------- SCHEDULED
PROJECTS: COMPLETION IL AL SN TOTAL STATUS(2)
- --------- ---------- -- -- -- ----- ---------
<S> <C> <C> <C> <C> <C> <C>
San Antonio I, TX.............. 1st half 1999 136 - - 136 Completed
Shreveport, LA................. 1st half 1999 136 - - 136 Completed
Beaumont, TX (3)............... 2nd half 1999 124 46 30 200 Construction
Fort Worth, TX................. 2nd half 1999 174 - - 174 Construction
</TABLE>
12
<PAGE> 15
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Mesquite, TX................... 2nd half 1999 174 - - 174 Construction
San Antonio II, TX............. 2nd half 1999 136 - - 136 Construction
Libertyville, IL (4)........... 1st half 2000 140 - - 140 Construction
Mesquite, TX (5)............... 1st half 2000 - 105 - 105 Construction
Naperville, IL (4)............. 1st half 2000 135 - - 135 Construction
Oklahoma City, OK.............. 1st half 2000 136 - - 136 Construction
Trumbull, CT (4)............... 1st half 2000 120 30 - 150 Construction
Baton Rouge, LA................ 1st half 2000 136 - - 136 Development
Columbia, SC .................. 1st half 2000 136 - - 136 Development
Crestview Hills, KY............ 1st half 2000 136 - - 136 Development
Dayton, OH..................... 1st half 2000 136 - - 136 Development
Deer Park, TX.................. 1st half 2000 136 - - 136 Development
Fairfield, OH ................. 1st half 2000 136 - - 136 Development
Gilbert, AZ.................... 1st half 2000 158 - - 158 Development
Greenville, SC................. 1st half 2000 136 - - 136 Development
Hilliard, OH................... 1st half 2000 136 - - 136 Development
Jackson, MS.................... 1st half 2000 136 - - 136 Development
Mansfield, OH ................. 1st half 2000 136 - - 136 Development
North Richland Hills, TX ...... 1st half 2000 136 - - 136 Development
Pantego, TX ................... 1st half 2000 136 - - 136 Development
Plano, TX...................... 1st half 2000 156 - - 156 Development
Richardson II, TX.............. 1st half 2000 136 - - 136 Development
South Bend, IN ................ 1st half 2000 136 - - 136 Development
Springfield, MO................ 1st half 2000 136 - - 136 Development
Summit, NJ (4)................. 1st half 2000 - 90 - 90 Development
Des Moines, IA................. 2nd half 2000 136 - - 136 Development
Georgetown, TX (3)............. 2nd half 2000 270 84 40 394 Development
Richardson I, TX .............. 2nd half 2000 176 - - 176 Development
Richmond Heights, OH........... 2nd half 2000 164 - - 164 Development
Tucson, AZ..................... 2nd half 2000 136 - - 136 Development
----- --- --- -----
Total 4,647 355 70 5,072
===== === === =====
</TABLE>
- ------------------------
(1) Independent living (IL) residences, assisted living (AL) residences
(including areas dedicated to residents with Alzheimer's and other
forms of dementia) and skilled nursing (SN) beds.
(2) "Development" indicates that development activities, such as surveys,
preparation of architectural plans, or zoning processes, have commenced
(but construction has not commenced). "Construction" indicates that
construction activities, such as groundbreaking activities, exterior
construction or interior build-out have commenced. "Completed"
indicates that construction has been completed and the community is in
the lease-up period.
(3) Represent communities being developed with Buckner.
(4) Represent communities being developed with LCOR.
(5) Represent a community being developed with Emmaus.
Expand Existing Communities
The Company plans to expand certain of its existing communities to
include additional independent living and assisted living residences (including
special programs and living units for residents with Alzheimer's and other forms
of dementia). As of December 31, 1998, the Company had three expansion projects
under construction and seven expansion projects under development, representing
an aggregate increase in capacity to accommodate an additional 564 residents. Of
these ten expansion projects, four are at communities in which the Company owns
an interest and manages under multi-year agreements, and six are at communities
which the Company manages for third parties. The costs of the expansion of
managed communities is borne by the community owner and not by the Company.
However, with respect to the four expansion projects in which the Company has an
ownership interest, the Company will manage the expansion and have rights to
purchase the expansion facilities. The expansion of existing senior living
communities allows the Company to create operating efficiencies and capitalize
on its local presence, community familiarity and reputation in markets in which
the Company operates.
13
<PAGE> 16
The table below summarizes information regarding the expansion of
certain of the Company's existing senior living communities as of December 31,
1998.
<TABLE>
<CAPTION>
RESIDENT CAPACITY (1)
---------------------
SCHEDULED
COMMUNITY LOCATION COMPLETION IL AL TOTAL STATUS(2)
--------- -------- ---------- -- -- ----- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Buckner Westminister Village.............. Longview, TX 2nd half 1999 24 30 54 Construction
Canton Regency............................ Canton, OH 2nd half 1999 - 62 62 Construction (3)
Towne Centre.............................. Merrillville, IN 2nd half 1999 - 60 60 Construction (3)
Crowne Point.............................. Omaha, NE 1st half 2000 72 - 72 Development
Crowne Villa.............................. Omaha, NE 1st half 2000 - 24 24 Development
Independence Village...................... East Lansing, MI 1st half 2000 - 60 60 Development
Independence Village...................... Raleigh, NC 1st half 2000 - 50 50 Development
The Heatherwood........................... Southfield, MI 1st half 2000 - 50 50 Development (4)
The Palms................................. Ft Myers, FL 1st half 2000 - 52 52 Development
The Amberleigh at Woodside Farms.......... Williamsville, NY 2nd half 2000 - 80 80 Development
--- ---- ----
Total 96 468 564
== === ===
</TABLE>
- ----------
(1) Independent living (IL) residences, assisted living (AL) residences
(including areas dedicated to residents with Alzheimer's and other
forms of dementia) and skilled nursing (SN) beds.
(2) "Development" indicates that development activities, such as surveys,
preparation of architectural plans, or zoning processes, have commenced
(but construction has not commenced). "Construction" indicates that
construction activities, such as groundbreaking activities, exterior
construction or interior build-out have commenced.
(3) Triad I purchased the land and will develop the expansions on the
campus of the Company's existing communities.
(4) Triad IV will purchase the land and develop the expansion on the campus
of the Company's existing community.
Pursue Strategic Acquisitions
The Company intends to continue to pursue single or portfolio
acquisitions of senior living communities and, to a lesser extent, other
assisted living and long-term care communities. Through strategic acquisitions,
the Company plans to enter new markets or acquire communities in existing
markets as a means to increase market share, augment existing clusters,
strengthen its ability to provide a broad range of care, and create operating
efficiencies. As the industry continues to consolidate, the Company believes
that opportunities will arise to acquire other senior living companies. The
Company believes that the current fragmented nature of the senior living
industry, combined with the Company's financial resources, national presence,
and extensive contacts within the industry, should provide it with the
opportunity to evaluate a number of potential acquisition opportunities. In
reviewing acquisition opportunities, the Company will consider, among other
things, geographic location, competitive climate, reputation and quality of
management and communities, and the need for renovation or improvement of the
communities.
Expand Home Care Services
The Company intends to expand its home care services by developing,
acquiring, or managing new home care agencies and expanding its range of
existing home care services at its communities. The Company currently
anticipates that its home care agencies will be based at some of the Company's
communities, and revenues will be derived from private pay sources. The Company
believes that the expansion of its home care services will enhance its ability
to provide a broad range of services, increase its market visibility, and
further increase Company profitability, as well as aid in the maintaining of
current occupancy levels. As of December 31, 1998, the Company operated one home
care agency, and intends to establish additional home care agencies at certain
of its communities.
Expand Referral Networks
The Company intends to continue to develop relationships (which, in
certain instances, may involve strategic alliances or joint ventures) with local
and regional hospital systems, managed care organizations, and other referral
sources to attract new residents to the Company's communities. 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
14
<PAGE> 17
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's corporate office is 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 by the
Company's corporate offices.
The Company seeks to control operational expenses for each of its
communities through standardized management reporting and centralized controls
of capital expenditures, asset replacement tracking, and purchasing for larger
and more frequently used supplies. Community expenditures are monitored by
regional and district managers who are accountable for the resident satisfaction
and financial performance of the communities in their region.
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, and is 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 some of its skilled nursing facilities are part of a
campus setting, which includes independent living. This campus arrangement
allows for cross-utilization of certain support personnel and services,
including administrative functions, which results in greater operational
efficiencies and lower costs than free-standing facilities.
The Company actively recruits personnel to maintain adequate staffing
levels at its existing communities as well as 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 care givers and other support employees. Additional
quality assurance measures include:
Resident and Resident Family Input. On a routine basis the Company
provides residents and family members the opportunity to provide valuable input
regarding the day-to-day delivery of services. On-site management at each
community has
15
<PAGE> 18
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 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 family members. These surveys are sent directly to the corporate
headquarters for tabulation and distribution to on-site staff and residents. For
1998 and 1997, the Company achieved a 95% and 96% approval rating, respectively,
from its residents. For any departmental area of service scoring below a 90%, a
plan of correction is developed jointly by on-site, regional and corporate staff
for immediate implementation.
Regular Community Inspections. On a monthly basis a community
inspection is conducted 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 professionalism and departmental reviews of maintenance, housekeeping,
activities, transportation, marketing, administration and food service as well
as health care, if applicable. The monthly inspection also includes the
observation of residents in their daily activities and community compliance with
government regulations.
Independent Service Evaluations. The Company engages the services of
outside professional independent 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
Each community is staffed by on-site marketing directors and additional
marketing staff depending on the community size. 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. The marketing efforts incorporate an aggressive
marketing plan to include monthly 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 twice annually. Corporate and regional
marketing directors monitor the on-site marketing departments' effectiveness and
productivity on a monthly basis. Routine detailed marketing department audits
are performed on an annual basis or more frequently if deemed necessary.
Corporate and regional personnel assist in the development of marketing
strategies for each community and produce creative media, assist in direct mail
programs and necessary marketing collateral materials. Ongoing sales training of
on-site marketing staff is implemented by corporate and regional marketing
directors.
In the case of new development, the corporate and regional staff
develop 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 to include
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 of print media and direct mail 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, and results of operations.
Accordingly, the Company monitors legal and regulatory developments on local and
national levels.
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<PAGE> 19
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,
Certificate of Need and permitting by state and local health 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 communities 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, 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.
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 the
communities in which the Company owns interests, and such surveys have not
revealed any material environmental liabilities that exist with respect to these
communities.
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 services 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 services 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 competes with American Retirement
Corporation and Holiday Retirement Corporation in Texas, Sunrise Assisted
Living, Inc. in North Carolina and New York, Atria Senior Quarters in New York,
and Marriott Senior Living Services in Florida. The Company believes that the
primary competitive factors in the
17
<PAGE> 20
senior living services industry are: (i) reputation for and commitment to a high
quality of service; (ii) quality of support services offered (such as food
services); (iii) price of services; (iv) physical appearance and amenities
associated with the communities; and (v) location. 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 attracting and retaining nurses,
technicians, aides, and other high quality professional and non-professional
employees and managers.
EMPLOYEES
As of December 31, 1998, the Company employed approximately 1,800
persons, of which approximately 1,009 were full-time employees (approximately 39
of whom are located at the Company's corporate offices) and 791 are part-time
employees. None of the Company's employees is currently represented by a labor
union and the Company is not aware of any union organizing activity among its
employees. The Company believes that its relationship with its employees is
good.
EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table sets forth certain information concerning each of
the Company's executive officers and key employees as of December 31, 1998:
<TABLE>
<CAPTION>
NAME AGE POSITION(S) WITH THE COMPANY
- ---- --- ----------------------------
<S> <C> <C>
Jeffrey L. Beck........................ 53 Co-Chairman and Chief Executive Officer
James A. Stroud........................ 48 Co-Chairman, Chief Operating Officer, and
Secretary
Lawrence A. Cohen...................... 45 Vice Chairman and Chief Financial Officer
Keith N. Johannessen................... 42 President
Rob L. Goodpaster...................... 45 Vice President -- National Marketing
David W. Beathard, Sr.................. 51 Vice President -- Operations
David G. Suarez........................ 46 Vice President -- Development
David R. Brickman...................... 40 Vice President and General Counsel
Kathleen L. Granzberg.................. 37 Controller -- Corporate
Robert F. Hollister.................... 43 Controller -- Property
</TABLE>
JEFFREY L. BECK has served as a director and Chief Executive Officer of
the Company and its predecessors since January 1986. He currently serves as
Co-Chairman of the Board. Mr. Beck also serves on the boards of various
educational, religious and charitable organizations and in varying capacities
with several trade associations. Mr. Beck served as Vice Chairman of the
American Seniors Housing Association from 1992 to 1994, and as Chairman from
1994 to 1996, and remains a member of its Executive Board, and is a council
member of the Urban Land Institute. Mr. Beck is Chairman of the Board of
Directors of United Texas Bank of Dallas. Mr. Beck has recently taken a leave of
absence to attend to the needs of a seriously ill family member.
JAMES A. STROUD has served as a director and Chief Operating Officer of
the Company and its predecessors since January 1986. He currently serves as
Co-Chairman of the Board and Chairman, Chief Operating Officer and Secretary of
the Company. Mr. Stroud also serves on the boards of various educational and
charitable organizations, and in varying capacities with several trade
organizations, including as a member of the Founder's Council and Board of
Directors of the Assisted Living Federation of America, and as President and as
a member of the Board of Directors of the National Association For Senior Living
Industry Executives. Mr. Stroud also serves as an Advisory Group member to the
National Investment Conference. Mr. Stroud was a Founder of the Texas Assisted
Living Association and serves as a member of its Board of Directors. Mr. Stroud
has earned a Masters in Law, is a licensed attorney and is also a Certified
Public Accountant.
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<PAGE> 21
LAWRENCE A. COHEN has served as a director and Vice Chairman and Chief
Financial Officer of the Company since November 1996. During Mr. Beck's leave of
absence, Mr. Cohen is acting as Chief Executive Officer. From 1991 to 1996, Mr.
Cohen served as President, and Chief Executive Officer of Paine Webber
Properties Incorporated, which controlled a real estate portfolio having a cost
basis of approximately $3.0 billion, including senior living facilities of
approximately $110.0 million. Mr. Cohen serves as a member of the Corporate
Finance Committee of the NASD Regulation, Inc., and was a founding member of the
executive committee of the Board of the American Seniors Housing Association.
Mr. Cohen has earned a Masters in Law, is a licensed attorney and is also a
Certified Public Accountant. Mr. Cohen has had positions with businesses
involved in senior living for 14 years.
KEITH N. JOHANNESSEN has served as President of the Company and its
predecessors since March 1994, and previously served as Executive Vice-President
since May 1993. From 1992 to 1993, Mr. Johannessen served as Senior Manager in
the health care practice of Ernst & Young. From 1987 to 1992, Mr. Johannessen
was Executive Vice President of Oxford Retirement Services, Inc. Mr. Johannessen
has served on the State of the Industry and Model Assisted Living Regulations
Committees of the American Seniors Housing Association. Mr. Johannessen has been
active in operational aspects of senior housing for 20 years.
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 is a member of the Board
of Directors of the National Association For Senior Living Industries. Mr.
Goodpaster has been active in the operational, development and marketing aspects
of senior housing for 22 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 24 years.
DAVID G. SUAREZ has recently joined the Company as Vice President -
Development. From 1996 to 1998, Mr. Suarez served as Project Manager for the
Western Group of Columbia/HCA. Prior to that, Mr. Suarez served as Vice
President of Development for PDC Facilities, a healthcare design-build
developer. Mr. Suarez has been in the healthcare industry in development for 20
years. His architectural and construction management degrees provide experience
and expertise in the Company's site selection process, building design and
budgeting, and construction methods and material procedures for the Company's
senior living communities.
DAVID R. BRICKMAN has served as Vice President of the Company and its
predecessors since July 1992 and General Counsel of the Company since October
1997. From 1989 to 1992, Mr. Brickman served as in-house counsel with LifeCo
Travel Management Company, a corporation which provided travel services to U.S.
corporations. Mr. Brickman has earned a Masters of Business Administration and a
Masters in Health Administration. Mr. Brickman has either practiced law or
performed in-house counsel functions for 12 years.
KATHLEEN L. GRANZBERG, a Certified Public Accountant, has served as the
Corporate Controller for the Company and its predecessors since December 1991,
and as Property Controller since 1987. Ms. Granzberg is a member of the American
Institute of Certified Public Accountants and is also a member of the Texas
Society of Certified Public Accountants. Ms. Granzberg has announced that she is
leaving the Company sometime during the second quarter of 1999.
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 NASD broker dealer. Mr. Hollister is a Certified
Financial Planner. Mr. Hollister is a member of the American Institute of
Certified Public Accountants and is also a member of the Texas Society of
Certified Public Accountants.
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<PAGE> 22
ITEM 2. PROPERTIES
The executive and administrative offices of the Company are located at
14160 Dallas Parkway, Suite 300, Dallas, Texas 75240, and consist of
approximately 14,000 square feet. The lease on the premises extends through
August 31, 2002. The Company also leases an executive office space in New York,
New York pursuant to a monthly lease agreement. The Company believes that its
corporate office facilities are adequate to meet its requirements through at
least fiscal 1999 and that suitable additional space will be available, as
needed, to accommodate further physical expansion of corporate operations.
As of December 31, 1998, the Company owned, leased and/or managed the
senior living communities referred to in Item 1 above. Occupancy rate
information as of December 31, 1998, is also presented for each community in
Item 1 above.
ITEM 3. LEGAL PROCEEDINGS
On August 11, 1998, the Company executed a settlement agreement with
Angeles Housing Concepts, Inc. ("AHC"), ILM I Lease Corporation and ILM II Lease
Corporation (collectively, "ILM Lease") resolving all claims among the parties
relating to a lawsuit filed by AHC against the Company alleging interference
with AHC's management agreements with ILM Lease (the "Settlement Agreement") and
calling for a dismissal with prejudice of this lawsuit. The Settlement Agreement
did not involve any payment of damages to AHC or any other party by the Company.
On or about October 23, 1998, Robert Lewis filed a putative class
action complaint on behalf of certain holders of Assignee Interests in NHP in
the Delaware Court of Chancery against NHP, the Company, Capital Senior Living
Properties 2-NHPCT, Inc. and Capital Realty Group Senior Housing, Inc.
(collectively, the "Defendants"). Mr. Lewis purchased 90 Assignee Interests in
February 1993 for $180. The complaint alleges, among other things, that the
Defendants breached, or aided and abetted a breach of, the express and implied
terms of the NHP Partnership Agreement in connection with the sale of four
properties by NHP to Capital Senior Living Properties 2 - NHPCT, Inc. The
complaint seeks, among other relief, rescission of the sale of these properties
and unspecified damages The Company believes the complaint is without merit and
intends to vigorously defend itself in this action.
On February 12, 1999 a competitor of the Company, Holiday Retirement
Corporation ("Holiday"), as well as Colson & Colson Construction Company and
their architects, Curry Brandaw Architects, filed suit against the Company in
U.S. District Court in Dallas. The complaint alleges, among other claims, that
the Company infringed the copyrighted architectural plans and trade dress of
Holiday on at least three of the Company's communities. The communities using
this Waterford prototype design are owned by Triad I, in which the Company is a
19% limited partner and provides development services under a third party
development agreement. The plaintiffs are additionally seeking a preliminary and
permanent injunction to bar further use of their allegedly copyrighted
architectural plans and trade dress as well as damages, including punitive
damages. The defense of this suit has been turned over to the Company's insurer
for handling. The Company vigorously denies the allegations mentioned in the
lawsuit and has filed an answer and counterclaim.
The Company has pending claims incurred in the normal course of
business which, in the opinion of management, based on the advice of legal
counsel, will not have a material effect on the financial statements of the
Company.
The provision of personal and health care services entails an inherent
risk of liability. In recent years, participants in the senior living and health
care services 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. The Company
currently maintains property, liability and professional medical malpractice
insurance policies for the Company's owned and managed communities under a
master insurance program in amounts and with such coverages and deductibles that
the Company believes are within normal industry standards based upon the nature
and risks of the Company's business, and the Company believes that such
insurance coverage is adequate. The Company also has an umbrella excess
liability protection policy in the amount of $15.0 million per location. There
can be no assurance that a claim in excess of the Company's insurance will not
arise. A claim against the Company not covered by, or in excess of, the
Company's insurance could have a material adverse effect upon the Company. In
addition, the Company's insurance policies must be renewed annually. There can
be no assurance that the Company will be able to obtain liability insurance in
the future or that, if such insurance is available, it will be available on
acceptable terms.
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<PAGE> 23
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 it believes would have
a material adverse effect on the Company's 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 it currently operates.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the Company's security
holders during the fourth quarter ended December 31, 1998.
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<PAGE> 24
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
(a) 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 December 31, 1998, there
were approximately 3,900 shareholders of record of the Company's common stock.
<TABLE>
<CAPTION>
YEAR HIGH LOW
---- ---- ---
<S> <C> <C>
1997
Fourth Quarter................ $ 17 1/2 $ 9 13/16
1998
First Quarter................. $ 14 $ 8 5/8
Second Quarter................ 15 1/2 11 1/2
Third Quarter................. 12 11/16 5 1/8
Fourth Quarter................ 14 3/4 9 1/2
</TABLE>
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.
(b) Recent Sales of Unregistered Securities. Information with respect
to this Item is set forth above under the caption "Item 1. Business--Formation
Transactions." The issuance therein described of the Company's Common Stock to
Messrs. Jeffrey L. Beck, James A. Stroud (including a trust) and Lawrence A.
Cohen in the Formation Transactions in exchange for the Contributed Entities was
carried out in reliance on the exemption from registration contained in Section
4(2) of the Securities Act of 1933, as amended, pursuant to a binding written
agreement entered into prior to the filing of the Registration Statement filed
in connection with the Offering. In connection with the organization of the
Company, during 1996, the Company issued 1,680,000 shares of its Common Stock to
Messrs. Beck, Stroud (through a trust) and Cohen for $16,800. The shares were
issued in equal amounts of 560,000 shares to each in consideration for a cash
payment by each of $5,600. Such issuances were made in reliance on the exemption
from registration contained in Section 4(2) of the Securities Act of 1933, as
amended.
(c) Use of Proceeds. As described above in "Business," the Company has
completed the Offering. The following information relates to the use of proceeds
of the Offering:
(1) Effective Date of Registration Statement and Commission
File Number: The Company's Registration Statement on Form S-1, File No.
333-33379, relating to the Offering, became effective on October 30, 1997.
(2) Aggregate Gross Proceeds, Expenses and Aggregate Net
Proceeds: The sale of the 10,350,000 shares of Common Stock generated aggregate
gross proceeds of $139,725,000. The aggregate net proceeds to the Company from
the sale of the 10,350,000 shares of Common Stock were approximately
$128,407,000, after deducting underwriting discounts and commissions of
approximately $9,742,000 and expenses of the Offering of approximately
$1,576,000 paid by the Company.
(3) Use of Proceeds: Through December 31, 1998, the Company
had used approximately $1.6 million of the net proceeds of the Offering for
expenses associated with the Offering. In addition, the Company used a portion
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<PAGE> 25
of such net proceeds as follows: (i) approximately $70.8 million of such net
proceeds to repay the indebtedness incurred by the Company to acquire assets
(including construction in progress) in the Formation Transactions; (ii)
approximately $18.1 million to repay the Formation Note; (iii) approximately
$5.8 million to pay the balance of the purchase price to an affiliate related to
the purchase of assets on the Formation Transactions; (iv) approximately $1.2
million of such net proceeds to repay indebtedness to affiliates; (v)
approximately $8,246,000 of such net proceeds to acquire the four senior living
communities from NHP; (vi) approximately $505,000 of such net proceeds to
purchase land in Carmichael, CA; and (vii) approximately $9,636,000, $932,000
and $1,160,000 advanced to Triad, Triad II and Triad IV, respectively. There has
not been a material change in the use of proceeds described in the Company's
prospectus.
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<PAGE> 26
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial data of the Company.
The selected financial data for the years ended December 31, 1998, 1997, 1996,
1995 and 1994 are derived from the audited consolidated financial statements of
the Company.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Statements of Income Data:
Revenues:
Resident and health care
revenue ................. $ 24,790 $ 21,207 $ 13,692 $ 13,238 $ 12,761
Rental and lease income .... 4,282 4,276 1,101 1,231 1,235
Unaffiliated management
services revenue ....... 2,465 1,920 801 -- --
Affiliated management
services revenue ....... 1,327 1,378 2,708 2,778 3,113
Unaffiliated development
fees ................... 1,234 804 673 -- --
Affiliated development fees 7,473 173 -- -- --
Other ...................... 1,197 952 924 871 800
-------- -------- -------- -------- --------
Total revenues ......... 42,768 30,710 19,899 18,118 17,909
-------- -------- -------- -------- --------
Expenses:
Operating expenses ......... 17,067 16,701 10,656 10,287 10,142
General and administrative
expenses(1) ............ 6,594 7,085 5,635 4,364 4,595
Depreciation and
amortization ........... 2,734 2,118 1,481 1,776 1,707
-------- -------- -------- -------- --------
Total expenses ......... 26,395 25,904 17,772 16,427 16,444
-------- -------- -------- -------- --------
Income from operations ..... 16,373 4,806 2,127 1,691 1,465
Other income (expense):
Interest income ........ 4,939 3,186 432 368 122
Interest expense ....... (1,922) (2,022) (221) (278) (261)
Gain on sale of
properties .......... 422 -- 438 -- --
Equity in earnings on
investments .......... -- -- 459 -- --
Other ...................... -- 440 42 -- (16)
-------- -------- -------- -------- --------
Income before income
taxes and minority ......
interest in consolidated
partnerships ........... 19,812 6,410 3,277 1,781 1,310
(Provision) benefit for
income taxes(2) ......... (7,476) (793) -- (18) (130)
-------- -------- -------- -------- --------
Income before minority
interest in consolidated
partnerships ............ 12,336 5,617 3,277 1,763 1,180
Minority interest in .......
consolidated partnerships (379) (1,936) (1,224) (760) (634)
-------- -------- -------- -------- --------
Net income ................. $ 11,957 $ 3,681 $ 2,053 $ 1,003 $ 546
======== ======== ======== ======== ========
Net income per share:
Basic and Diluted .......... $ 0.61 $ 0.33
======== ========
Weighted average
shares outstanding ...... 19,717 11,150
======== ========
Pro forma net income data
(unaudited)(3):
Net income ................. $ 3,681 $ 2,053
Pro forma income
taxes ................... (965) (811)
-------- --------
Pro forma net income ....... $ 2,716 $ 1,242
======== ========
</TABLE>
24
<PAGE> 27
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents $35,827 $48,125 $10,819 $10,017 $8,799
Working capital (8,680)(4) 44,690 9,567 6,784 5,938
Total assets 205,267 117,371 33,203 29,747 29,913
Long-term debt, excluding current portion 32,671 7,575 201 337 177
Equity 104,516 92,560 17,201 14,447 12,495
</TABLE>
- ----------
(1) General and administrative expenses include officers' salaries of
$670,000, $3,342,000, $3,372,000, $2,976,000 and $3,443,000 for the
years ended December 31, 1998, 1997, 1996, 1995 and 1994, respectively.
Prior to November 1997, these amounts were primarily composed of
salaries and bonuses paid to the founders and were based in part on
federal income tax regulations regarding distributions of closely held
corporations and S corporations. Effective with the Offering, these
federal income tax regulations no longer applied to the Company.
Compensation of the founders since October 1, 1997 has been based on
the founders' employment agreements.
(2) A provision for income taxes was recorded by the Company from inception
through February 1, 1995. No provision for income taxes has been
recorded from February 1, 1995 through completion of the Formation
Transactions as the operating companies included in the historical
financial statements, prior to the Offering, were S corporations or
partnerships and accordingly were not subject to income taxes during
the period.
(3) Pro forma income taxes have been calculated based on the assumption
that the S corporations and partnerships were subject to income taxes.
Pro forma income tax expense has been calculated using statutory
federal and state tax rates, estimated at 39.5%.
(4) The Company expects to complete a refinancing of its $47,700,000
mortgage loan due October 1, 1999 with long term fixed rate mortgage
loans during the second quarter of 1999. However, there can be no
assurance that the Company will complete this refinancing as expected.
25
<PAGE> 28
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The following discussion and analysis addresses the Company's results
of operations on a historical consolidated basis for the years ended December
31, 1998, 1997 and 1996. The following should be read in conjunction with the
Company's historical consolidated financial statements and the selected
financial data contained elsewhere in this report.
On September 15, 1997, the Company increased its authorized common
shares from 40,000,000 to 65,000,000 shares and authorized 15,000,000 shares of
preferred stock. On November 5, 1997, the Company issued 18,037,347 additional
shares of common stock (including 1,350,000 shares issued upon exercise of an
option granted underwriters to purchase additional common shares in conjunction
with the Offering) bringing its total issued and outstanding shares of common
stock to 19,717,347 shares. Of the 18,037,347 shares issued, 7,687,347 shares
were issued to Messrs. Beck, Stroud and Cohen in the Formation Transactions
described herein and 10,350,000 shares were registered with the Securities and
Exchange Commission for trading in public markets.
On November 5, 1997, the Company also entered into Formation
Transactions (herein so called) with Messrs. Beck and Stroud whereby they
contributed all of their owned capital stock of Capital Senior Living, Inc.,
Capital Senior Management 1, Inc., Capital Senior Management 2, Inc., Capital
Senior Development, Inc., and with Mr. Cohen, of Quality Home Care, Inc. (the
"Contributed Entities") to the Company in exchange for the issuance of 7,687,347
shares of common stock of the Company and the issuance of separate notes in the
aggregate amount of $18,076,380 to Messrs. Beck, Stroud and Cohen, which were
subsequently repaid by the Company from the net proceeds received from the sale
of the Company's common stock in the Offering.
As part of the Formation Transactions, the Company simultaneously
purchased substantially all of the operating assets of CSLC (including CSLC's
investment in HCP and NHP and excluding CSLC's cash, U.S. Treasury securities
purchased under the LBHI Loan agreement and working capital items) for an
aggregate purchase price of approximately $76.6 million, comprised of the
assumption by the Company of CSLC's outstanding LBHI Loan of approximately $70.8
million and payment of cash of approximately $5.8 million to CSLC. On November
7, 1997, the Company repaid the LBHI Loan from the proceeds received from the
Offering.
In October 1997, the combined Companies declared and paid dividends of
$457,647 to Messrs. Beck, Stroud and Cohen in preparation for the Formation
Transactions that transformed the combined companies from closely held
corporations and S corporations to non-closely held C corporations for federal
income tax purposes.
Due to all of the entities involved in the Formation Transactions being
under the common control of Messrs. Beck and Stroud, the Company's consolidated
financial statements reflect the assets and liabilities at their historical
values and the accompanying consolidated statements of income, equity, and cash
flows reflect the combined results for the periods indicated through the date of
the Offering even though they have historically operated as separate entities.
The Formation Transactions have been accounted for at historical cost in a
manner similar to a pooling of interests to the extent of the percentage
ownership by Messrs. Beck and Stroud of the Company. Acquired assets and
liabilities of CSLC have been recorded at fair value to the extent of minority
interest. CSLC's assets include investments in HCP and NHP.
On September 30, 1998, the Company entered into a mortgage loan
agreement with Lehman Brothers Holdings, Inc. ("Lehman Loan"), under which the
Company borrowed $47,700,000. The purpose of the Lehman Loan was to provide
financing for the acquisition of four NHP senior living communities, as well as
for the Tesson Heights Enterprises ("Tesson") senior living community, all of
which have been pledged as collateral. Interest costs are based on 30-day LIBOR
and were approximately 6.95% at December 31, 1998. The loan agreement matures
October 1, 1999, and the Company expects to complete a refinancing of this
mortgage loan with long term fixed rate mortgage loans during the second quarter
of 1999. However, there can be no assurance that the Company will complete this
refinancing as expected.
26
<PAGE> 29
On September 30, 1998, the Company acquired four senior living
communities from NHP for cash consideration of $40,650,000. The funds for the
transaction were provided from working capital of the Company and from the
proceeds of the Lehman Loan.
The senior living communities acquired by the Company from NHP are The
Atrium of Carmichael in Carmichael, California; Crosswoods Oaks in Citrus
Heights, California; The Heatherwood in Southfield, Michigan; and The Veranda
Club in Boca Raton, Florida. The Company had operated these communities under a
long-term management contract since 1992. The purchase price for the properties
was determined by independent appraisal. Personnel working at the property sites
and certain home office personnel who performed services for NHP have been
employees of the Company. NHP (prior to the acquisitions) reimbursed the Company
for the salaries, related benefits, and overhead reimbursements of such
personnel. Capital Realty Group Brokerage, Inc., a company wholly owned by
Messrs. Beck and Stroud, received a brokerage fee of $1,219,500 related to this
transaction, which was paid by NHP.
The acquisitions were accounted for as a purchase business combination
and the Company's operations have included the operations of NHP since September
30, 1998.
On October 28, 1998, the Company acquired two senior living communities
from Gramercy Hill Enterprises, a Texas limited partnership ("Gramercy"), and
Tesson, for aggregate consideration of approximately $34,000,000. The funds for
the Tesson transaction were provided from working capital of the Company and
from $15,400,000 of proceeds from the Lehman Loan. The funds for the Gramercy
transaction were provided from working capital of the Company, the assumption of
the $6,334,660 Washington Mortgage Financial Group, Ltd. ("WMFG") promissory
note (assigned to Fannie Mae) and from the proceeds of the $1,980,000 WMF
Washington Mortgage Corp. ("WMFC") loan described below.
On October 28, 1998, the Company entered into a $6,334,660 Assumption
and Release Agreement with Fannie Mae and a $1,980,000 multifamily note in favor
of WMFC. The purpose of the loans was to provide financing for the Gramercy
acquisition. The senior living community acquired from Gramercy has been pledged
as collateral under these loans. Interest costs are 7.69% and 7.08%,
respectively. The Assumption and Release Agreement and WMFC note mature in
January 2008 and January 2010, respectively.
The senior living communities acquired by the Company from Gramercy and
Tesson are Gramercy Hill in Lincoln, Nebraska and Tesson Heights, in St. Louis,
Missouri. The acquisitions were accounted for as purchase business combinations,
and the Company's operations have included the operations of Tesson Heights and
Gramercy Hill since October 28, 1998.
From 1990 through December 31, 1998, the Company acquired interests in
19 communities and entered into an operating lease with respect to one
community, which was terminated effective January 31, 1998. Since 1996, the
Company expanded its senior living management services by entering into the
management service contracts on 15 communities for four independent third-party
owners and commenced providing development and construction management services
for new residence properties in addition to adding a home care service agency.
The Company generates revenue from a variety of sources. For the year
ended December 31, 1998, the Company's revenue was derived as follows: 58.0%
from the operation of 11 owned communities that were operated by the Company;
10.0% from lease rentals from triple net leases of three skilled nursing
facilities and four physical rehabilitation centers; 8.9% from management fees
arising from management services provided for four affiliate owned senior living
communities from January 1, 1998 through September 30, 1998 and one affiliate
owned senior living community from January 1, 1998 through December 31, 1998 and
15 third-party owned senior living communities; and 20.4% from development fees
earned for managing the development and construction of new senior living
communities for third parties.
The Company believes that the factors affecting the financial
performance of communities managed under contracts with third parties do not
vary substantially from the factors affecting the performance of owned and
leased communities, although there are different business risks associated with
these activities.
The Company's third-party management fees are primarily based on a
percentage of gross revenues. As a result, the cash flow and profitability of
such contracts to the Company are more dependent on the revenues generated by
such
27
<PAGE> 30
communities and less dependent on net cash flow than for owned communities.
Further, the Company is not responsible for capital investments in managed
communities. While the management contracts are generally terminable only for
cause, in certain cases the contracts can be terminated upon the sale of a
community, subject to the Company's rights to offer to purchase such community.
The Company's triple net leases extend through the year 2000 for three
of its owned communities and through the year 2001 for four of its owned
communities. The payments under these leases are fixed and are not subject to
change based upon the operating performance of these communities. Following
termination of the lease agreements, the Company may either convert and operate
the communities as assisted living and Alzheimer's care facilities, sell the
facilities or evaluate other alternatives.
The Company's current management contracts expire on various dates
between December 1999 and September 2009 and provide for management fees based
generally upon rates that vary by contract from 4% of net revenues to 7% of net
revenues. In addition, certain of the contracts provide for supplemental
incentive fees that vary by contract based upon the financial performance of the
managed community. The Company's development fees are generally based upon a
percentage of construction cost and are earned over the period commencing with
the initial development activities and ending with the opening of the community.
As of December 31, 1998, development fees have been earned for services
performed for 39 communities under development or expansions for third parties.
During 1998, 1997, 1996 and 1995, the Company made various purchases of
limited partnership interests in HCP. HCP owns and operates a skilled nursing
facility and owns and leases to third-party operators (under triple net leases)
three skilled nursing facilities and four physical rehabilitation centers.
During 1998, 1997, 1996 and 1995, the Company paid approximately $101,000,
$5,605,000, $3,201,000 and $309,000, respectively, for partnership interests in
HCP. The Company changed its method of accounting for its investment in HCP from
the cost method in 1995 to the equity method in 1996. As a result of additional
purchases, the Company's ownership interest in HCP exceeded 50% on June 26,
1997. Accordingly, this partial acquisition has been accounted for by the
purchase method of accounting, and the assets, liabilities, minority interest,
and the results of operations of HCP have been consolidated in the Company's
financial statements since January 1, 1997.
The Company acquired, on November 1, 1997, the NHP Notes owned by CSLC
in the Formation Transactions for $18,664,128. The NHP Notes bear simple
interest at 13% per annum and mature on December 31, 2001. Interest is currently
paid quarterly at a rate of 7%, with the remaining 6% interest deferred.
Beginning November 1, 1997 through September 30, 1998, the Company has been
recording interest income at 10.5% of the purchase price paid, which was
determined based on the discounted amount of principal and interest payments to
be made following the maturity date (December 31, 2001) of the NHP Notes (using
a six-month lag between maturity and full repayment), due to uncertainties
regarding the ultimate realization of the accrued interest. On September 30,
1998, the Company purchased four properties from NHP. NHP is in turn redeeming
$7,500,000 of the Company's investment in the NHP Notes and is distributing
approximately $5,300,000 of deferred interest not previously paid on such notes.
From October 1, 1998 through December 31, 1998, the Company reevaluated its
investment in the NHP Notes, and is recording additional income, after giving
consideration to current payment of interest, partial redemption of the NHP
Notes with accrued interest and the estimated residual value in NHP. Also,
during 1998 and 1996, the Company paid $344 and $1,364 for 4% and 3%,
respectively, ownership of limited partnership interests in NHP. The Company
accounts for its investment in NHP on the cost method with respect to the NHP
limited partnership interests and as held-to-maturity securities and reported at
amortized cost with respect to the NHP Notes.
The Company will continue to develop and acquire senior living
communities. The development of senior living communities typically involves a
substantial commitment of capital over a 12 to 14-month construction period
during which time no revenues are generated, followed by a 12-month lease-up
period. The Company anticipates that newly opened or expanded communities will
operate at a loss during a substantial portion of the lease-up period. The
Company's growth strategy may also include the acquisition of senior living
communities, home care agencies, and other properties or businesses that are
complementary to the Company's operations and growth strategy.
28
<PAGE> 31
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.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997 1996
------------------ ------------------ ------------------
$ % $ % $ %
-------- ----- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Resident and health care revenue $ 24,791 58.0% $ 21,207 69.1% $ 13,692 68.8%
Rental and lease income 4,281 10.0 4,276 13.9 1,101 5.5
Unaffiliated management services revenue 2,465 5.8 1,920 6.2 801 4.0
Affiliated management services revenue 1,327 3.1 1,378 4.5 2,708 13.6
Unaffiliated development fees 1,234 2.9 804 2.6 673 3.4
Affiliated development fees 7,473 17.5 173 0.6 -- 0.0
Other 1,197 2.7 952 3.1 924 4.7
-------- ----- -------- ----- -------- -----
Total revenues 42,768 100.0 30,710 100.0 19,899 100.0
-------- ----- -------- ----- -------- -----
Expenses:
Operating expenses 17,067 39.9 16,701 54.4 10,656 53.6
General and administrative expenses 6,594 15.4 7,085 23.1 5,635 28.3
Depreciation and amortization 2,734 6.4 2,118 6.9 1,481 7.4
-------- ----- -------- ----- -------- -----
Total expenses 26,395 61.7 25,904 84.4 17,772 89.3
-------- ----- -------- ----- -------- -----
Income from operations 16,373 38.3 4,806 15.6 2,127 10.7
Other income (expense):
Interest income 4,939 11.5 3,186 10.4 432 2.2
Interest expense (1,922) (4.5) (2,022) (6.5) (221) (1.1)
Gain on sale of properties 422 1.0 -- -- 438 2.2
Equity in earnings on investments -- -- -- -- 459 2.3
Other -- -- 440 1.4 42 0.2
-------- ----- -------- ----- -------- -----
Income before income taxes and minority
interest in consolidated partnerships 19,812 46.3 6,410 20.9 3,277 16.5
Provision for income taxes (7,476) (17.5) (793) (2.6) -- --
-------- ----- -------- ----- -------- -----
Income before minority interest in
consolidated partnerships 12,336 28.8 5,617 18.3 3,277 16.5
Minority interest in consolidated
partnerships (379) (0.8) (1,936) (6.3) (1,224) (6.2)
-------- ----- -------- ----- -------- -----
Net income $ 11,957 28.0% $ 3,681 12.0% $ 2,053 10.3%
======== ===== ======== ===== ======== =====
</TABLE>
YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31, 1997
Revenues. Total revenues were $42,768,000 in 1998 compared to
$30,710,000 in 1997, representing an increase of $12,058,000, or 39.3%. Resident
and health care revenue increased $3,584,000, of which $4,015,000 is a result of
purchasing the four NHP properties, Gramercy Hill and Tesson Heights, along with
a decrease of $237,000 relating to the HCP properties. Unaffiliated management
services revenue increased $545,000 due to a significant improvement in the
performance at the property level resulting in incentive payments and one
additional third-party management contract added in the first quarter of 1998.
Unaffiliated development fees increased $430,000, of which $894,000 is a result
of two additional third party development contracts and the continuation of four
projects that earned fees for seven months in 1998 as compared to two months for
1997 and a decrease of $464,000 resulting from one development project completed
on December 31, 1997 and three development projects terminated by a third party.
Affiliated development fees increased $7,300,000, resulting from fees earned on
29 projects in 1998 compared to one in 1997.
Expenses. Total expenses were $26,395,000 in 1998 compared to
$25,904,000 in 1997, representing an increase of $491,000, or 1.9%. Operating
expenses increased $366,000 due to an increase of $1,954,000 as a result of
acquiring six properties in the fourth quarter of 1998, along with a decrease of
$1,361,000 related to the termination of Maryland Gardens lease and offset by an
overall decrease in operating expenses. General and administrative expenses
decreased $491,000 due to a decrease in officers' salaries of $2,670,000 offset
by a $325,000 increase due to the acquisition of six properties in the fourth
quarter of 1998, a $185,000 increase in development expenses due to the increase
in development projects, a $200,000 increase in professional fees that relate to
legal fees, a $100,000 increase in license and fee expense, a $320,000 increase
in HCP general and administrative expenses, along with an overall increase in
general and administrative expenses. Depreciation and amortization increased
$616,000 due to an increase of $424,000 as a result of the acquisition of the
six properties in the
29
<PAGE> 32
fourth quarter of 1998, an $80,000 increase for the expansion of Cottonwood and
an increase of $37,000 in the amortization of goodwill for twelve months in 1998
as opposed to two months in 1997.
Other income and expenses. Interest and other income increased
$1,835,000, primarily as a result of a $1,365,000 increase in income associated
with investment of cash reserves, a $1,600,000 increase in NHP Notes interest
due to a partial redemption of the notes and payment of accrued interest, a
$308,000 increase in interest earned from the Triad, Triad II and Triad IV (as
hereinafter defined) unsecured credit facilities, which is offset by a
$1,400,000 decrease in interest due to the divestment of an investment from June
1997 through October 1997 by CSLC. Interest expense decreased $100,000 due to a
decrease of $1,267,000 of interest related to the Lehman debt incurred in the
Formation Transactions and a decrease of $44,000 in HCP interest expense due to
refinancing. These decreases are offset by an increase of $1,201,000 in interest
expense due to the acquisition of the six properties. A gain of $422,000 was
recorded on the sale of two properties in the fourth quarter of 1998. In
connection with the sale of its investment in HCP to the Company immediately
following completion of the offering, CSLC incurred short swing profits, as
defined by the Securities and Exchange Commission, and was, accordingly,
required to remit such profits to HCP, which recorded the remittance of $440,000
as other income in 1997.
Minority interest. Minority interest in limited partnerships decreased
$1,557,000, primarily due to the CSLC minority interest being included in 1997
through October and not included in 1998.
Provision for income taxes. Provision for income taxes was
approximately $7,476,000 in 1998 compared to $793,000 in 1997. As a result of
the Formation Transactions, the Company and its consolidated subsidiaries were
converted from S corporations that are taxed at the shareholder level to C
corporations that are subject to corporate income taxes. Accordingly, a
provision for federal and state taxes was provided on the earnings for 12 months
in 1998 compared to two months in 1997.
Net Income. As a result of the foregoing factors, net income increased
$8,276,000 to $11,957,000 for 1998 from $3,681,000 for 1997.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED DECEMBER 31, 1996
Revenues. Total revenues were $30,710,000 in 1997 compared to
$19,899,000 in 1996, representing an increase of $10,811,000, or 54.3%. The
inclusion of HCP revenues in 1997 from January 1, 1997 contributed $8,978,000 of
the increase, as HCP was not consolidated in 1996. Resident and health care
revenue increased $7,515,000, of which $4,702,000 is a result of the HCP
consolidation, $1,157,000 was improvement in CSLC's revenues due to realization
of additional reimbursements previously limited under the Medicare program for
1994 and 1992 combined with improved CSLC rental rates and occupancies and
$1,543,000 related to the Maryland Gardens facility leased on June 1, 1997.
Rental and lease income increased $3,175,000, of which $4,276,000 was due to the
HCP consolidation, offset by $1,101,000 due to the sale of CSLC's multi-family
properties on November 1, 1996. Unaffiliated management services revenue
increased $1,119,000 due to 15 third-party management contracts added in the
third and fourth quarter of 1996 and one additional third-party management
contract added in the second quarter of 1997. Affiliated management services
revenue decreased by $1,330,000, of which $1,177,000 was due to the HCP
consolidation. Development fees increased $304,000 and was due to new
development contract management revenue for managing the development and
construction of new third-party owned senior living communities.
Expenses. Total expenses were $25,904,000 in 1997 compared to
$17,772,000 in 1996, representing an increase of $8,132,000, or 45.8%. The
inclusion of HCP expenses from January 1, 1997 contributed $6,538,000 of the
increase. Operating expenses increased $6,045,000 of which $4,251,000 was a
result of the HCP consolidation and $1,561,000 due to Maryland Gardens operating
expenses. General and administrative expenses increased $1,450,000, which was
due to the HCP consolidation of $1,078,000 offset by an overall decrease in
general and administrative expenses. Depreciation and amortization increased
$637,000, of which $1,209,000 was related to the HCP consolidation, offset by a
$572,000 decrease in CSLC's depreciation which was primarily due to the sale of
CSLC's multi-family rental properties in November 1996.
Other income and expenses. Interest income increased $2,754,000,
primarily as a result of CSLC's increase in interest income of $1,116,754
associated with its investment in U.S. Treasury Bills, $1,230,000 as a result of
the Company's increase in interest income associated with its increased
investment in NHP Notes combined with the commencement of
30
<PAGE> 33
accruing a portion of the deferred income on these notes beginning in April
1997, as a result of NHP's improved financial position and performance and
increased valuation of the underlying properties, $288,361 associated with
income from temporary investment of net proceeds from the Offering for November
and December 1997, and the consolidation of HCP of $359,000. Interest expense
increased $1,801,000 as a result of higher debt balances including the LBHI Loan
borrowings on July 1, 1997 and $679,000 as a result of the HCP consolidation.
Income from equity in earnings on investments decreased $459,000 as a result of
the HCP consolidation on January 1, 1997. In connection with the sale of its
investment in HCP to the Company immediately following completion of the
Offering, CSLC incurred short swing profits, as defined by the Securities and
Exchange Commission, and was, accordingly, required to remit such profits to HCP
which recorded the remittance as other income. A gain of $438,000 was recorded
on November 1, 1996, as a result of the sale of multi-family properties with no
corresponding gain being realized in 1997.
Minority interest. Minority interest in limited partnerships increased
$712,000 primarily as a result of the HCP consolidation.
Provision for income taxes. Provision for income taxes was
approximately $793,000 in 1997 compared to no provision in 1996. As a result of
the Formation Transactions, the Company and its consolidated subsidiaries were
converted from S corporations that are taxed at the shareholder level to C
corporations that are subject to corporate income taxes. Accordingly, a
provision for federal and state income taxes is provided on earnings after the
Formation Transactions.
Net income. As a result of the foregoing factors, net income increased
$1,628,000 to $3,681,000 for 1997 from $2,053,000 for 1996.
QUARTERLY RESULTS
The following table presents certain quarterly financial information
for the four quarters ended December 31, 1998 and 1997. 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
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.
<TABLE>
<CAPTION>
1998 Calendar Quarters
----------------------
First Second Third Fourth
----- ------ ----- ------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Total revenues............................................... $ 8,354 $ 9,234 $10,556 $14,624
Income from operations....................................... 2,330 3,397 4,906 5,740
Net income................................................... 1,926 2,511 3,506 4,014
Net income per share......................................... $ 0.10 $ 0.13 $ 0.18 $ 0.20
Weighted average shares outstanding.......................... 19,717 19,717 19,717 19,717
</TABLE>
<TABLE>
<CAPTION>
1997 Calendar Quarters
----------------------
First Second Third Fourth
----- ------ ----- ------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Total revenues............................................... $7,091 $7,977 $ 7,652 $ 7,990
Income from operations....................................... 1,124 980 959 1,743
Net income................................................... 583 630 797 1,671
Net income per share......................................... $ 0.06 $ 0.07 $ 0.09 $ 0.10
Weighted average shares outstanding.......................... 9,367 9,367 9,367 16,440
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
As described in the notes to the accompanying consolidated financial
statements, the Company repaid all of its notes payable to affiliates and the
mortgage loan payable to Lehman Brothers Holdings, Inc. with proceeds from the
Offering in November 1997, leaving only the mortgage property loans of HCP
outstanding thereafter. The Company also secured a three year revolving line of
credit of $20 million which may be used for acquisition of additional interests
in HCP and NHP, expansion of owned communities, acquisition of additional
properties and general working capital purposes.
31
<PAGE> 34
In addition to approximately $36 million of cash balances on hand as of
December 31, 1998, the Company's principal sources of liquidity are expected to
be cash flows from operations and amounts available for borrowing under its $20
million revolving line of credit. Subsequent to December 31, 1998, the Company
received a commitment to increase its line of credit to $34 million. There can
be no assurance, however, that the Company will continue to generate cash flows
at or above current levels or that the Company will be able to meet its
anticipated need for working capital.
The Company derives the benefits and bears the risks attendant to the
communities it owns. The cash flows and profitability of owned communities
depends on the operating results of such communities and are subject to certain
risks of ownership, including the need for capital expenditures, financing and
other risks such as those relating to environmental matters.
The cash flows and profitability of the Company's owned communities
that are leased to third parties depend on the ability of the lessee to make
timely lease payments. At December 31, 1998, HCP was operating one of its
properties and had leased seven of its owned properties under triple net leases
to third parties until year 2000 or 2001. Four of these properties are leased
until year 2001 to HealthSouth Rehabilitation Corp. ("HealthSouth"), which
provides acute spinal injury intermediate care at these properties. HealthSouth
closed one of these facilities in 1994 and closed another facility in February
of 1997 due to low occupancy. HealthSouth has continued to make lease payments
on a timely basis for all four properties. Should the operators of the leased
properties default on payment of their lease obligations prior to termination of
the lease agreements, six of the seven lease contracts contain a continuing
guarantee of payment and performance by the parent company of the operators,
which the Company intends to pursue in the event of default. Following
termination of these leases, the Company will either convert and operate the
facilities as assisted living and Alzheimer's care facilities, sell the
facilities or evaluate other alternatives. HCP's facility lessees are all
current in their lease obligations to HCP. The lessee for one property continues
to fund a deficit between the required lease payment and operators' cash flow.
The cash flows and profitability of the Company's third-party
management fees are dependent upon the revenues and profitability of the
communities managed. While the management contracts are generally terminable
only for cause, in certain cases the contracts can be terminated upon the sale
of a community, subject to the Company's rights to offer to purchase such
community.
The Company plans to continue to develop and acquire senior living
communities. The development of senior living communities typically involves a
substantial commitment of capital over a 12-month construction period during
which time no revenues are generated, followed by a 12- to 14- month lease-up
period.
Effective April 1, 1998, Tri Point Communities, L.P. ("Tri Point"), a
limited partnership owned by the Company's founders (Messrs. Beck and Stroud)
and their affiliates was reorganized and the interests of Messrs. Beck and
Stroud were sold at their cost to Triad Senior Living, Inc. and its affiliates,
which are unrelated third-parties. Tri Point was renamed Triad I. The new
general partner of Triad I, owning 1%, is Triad Senior Living, Inc. The limited
partners are Blake N. Fail (principal owner of Triad Senior Living, Inc.),
owning 80%, and the Company, owning 19%. The development agreements between
Triad I and the Company provide for a development fee of 4% to the Company, as
well as reimbursement of expenses and overhead not to exceed 4%. Triad I has
also entered into management agreements with the Company providing for
management fees in an amount equal to the greater of 5% of gross revenues or
$5,000 per month per community, plus overhead reimbursement not to exceed 1% of
gross revenues. The Company has an option to purchase the partnership interests
of Triad Senior Living, Inc. and Blake N. Fail for an amount equal to the amount
such party paid for its interest, plus noncompounded interest of 12% per annum.
The management agreements also provide the Company with an option to purchase
the communities developed by Triad I upon their completion for an amount equal
to the fair market value (based on a third-party appraisal but not less than
hard and soft costs and lease-up costs). The Company has made no determination
as to whether it will exercise its purchase options. The Company will evaluate
the possible exercise of each purchase option based upon the business and
financial factors that may exist at the time those options may be exercised.
Triad I has entered into construction loan facilities aggregating
approximately $50,000,000 to fund its development activities and a take-out
facility aggregating approximately $50,000,000.
During 1998, the Company agreed to loan Triad I up to $10,000,000. The
principal is due March 12, 2003. The first draw under this loan facility was
made on March 12, 1998. Interest is due quarterly at 8% per annum. This loan may
32
<PAGE> 35
be prepaid without penalty. At December 31, 1998, approximately $9,636,000 has
been advanced to Triad I under this loan facility.
Effective September 24, 1998, the Company and Triad II, a limited
partnership, entered into a Development and Turnkey Services Agreement in
connection with the development and management of the Company's planned new
Waterford communities where Triad II would own and finance the construction of
the new communities. Triad II was organized on September 23, 1998. The general
partner of Triad II, owning 1%, is Triad Partners II, Inc. The limited partners
are Triad Partners II, Inc., owning 80%, and the Company, owning 19%.
The Company has an option to purchase the partnership interests of
Triad Partners II, Inc. in Triad II for an amount equal to the amount such party
paid for its interests, plus noncompounded interest of 12% per annum. The
management agreements with Triad II also provide the Company with an option to
purchase the communities developed by Triad II upon their completion for an
amount equal to the fair market value (based on a third-party appraisal but not
less than hard and soft costs and lease-up costs). The Company has made no
determination as to whether it will exercise its purchase options. The Company
will evaluate the possible exercise of each purchase based upon the business and
financial factors which may exist at the time those options may be exercised.
Triad II has entered into construction and mini-perm loan facilities
aggregating approximately $26,000,000 to fund its development activities.
During the third quarter, the Company agreed to loan Triad II up to
$7,000,000. On January 15, 1999, the loan amount was amended to up to
$10,000,000. The principal is due September 25, 2003. The first draw under this
loan facility was made on September 25, 1998. Interest is due quarterly at 10.5%
per annum. This loan may be prepaid without penalty. At December 31, 1998,
approximately $932,000 has been advanced to Triad II under this loan facility.
On September 30, 1998, the Company acquired four senior living
communities from NHP for $40,683,281 by entering into the $32,300,000 Lehman
Loan, a cash payment of $8,246,007 and assumption of net assets and liabilities
of $137,274. The Company has mortgaged the four senior living communities as
collateral. The acquisition was accounted for as a purchase.
On October 28, 1998, the Company acquired a senior living community
from Tesson for $23,051,786. The Company borrowed $15,400,000 pursuant to the
existing mortgage loan agreement with Lehman and mortgaged the senior living
community as collateral. The Company also acquired a senior living community
from Gramercy for $11,036,655. The Company assumed a $6,334,660 note from Fannie
Mae, and borrowed an additional $1,980,000 from WMFC on a second lien basis and
mortgaged the senior living community as collateral for both loans. The Company
paid the remaining purchase prices with a cash payment of $7,376,632 and
$2,425,798, respectively, and assumption of liabilities of $275,154 and
$296,197, respectively.
Effective November 10, 1998, the Company and Triad III, a limited
partnership, entered into a Development and Turnkey Services Agreement in
connection with the development and management of the Company's planned new
Waterford communities where Triad III would own and finance the construction of
the new communities. Triad III was organized on November 10, 1998. The general
partner of Triad III, owning 1%, is Triad Partners III, Inc. The limited
partners are Triad Partners III, Inc., owning 80%, and the Company, owning 19%.
The Company has an option to purchase the partnership interests of
Triad Partners III, Inc. in Triad III for an amount equal to the amount such
party paid for its interests, plus noncompounded interest of 12% per annum. The
management agreements with Triad III also provide the Company with an option to
purchase the communities developed by Triad III upon their completion for an
amount equal to the fair market value (based on a third-party appraisal but not
less than hard and soft costs and lease-up costs). The Company has made no
determination as to whether it will exercise its purchase options. The Company
will evaluate the possible exercise of each purchase based upon the business and
financial factors which may exist at the time those options may be exercised.
Triad III has entered into construction and mini-perm loan facilities
aggregating approximately $51,000,000 to fund its development activities.
33
<PAGE> 36
During the fourth quarter, the Company agreed to loan Triad III up to
$10,000,000. The principal is due February 8, 2004. Interest is due quarterly at
10.5% per annum. This loan may be prepaid without penalty. At December 31, 1998,
no monies have been advanced to Triad III under this loan facility.
Effective December 30, 1998, the Company and Triad IV, a limited
partnership, entered into a Development and Turnkey Services Agreement in
connection with the development and management of the Company's planned new
Waterford communities where Triad IV would own and finance the construction of
the new communities. Triad IV was organized on December 22, 1998. The general
partner of Triad IV, owning 1%, is Triad Partners IV, Inc. The limited partners
are Triad Partners IV, Inc., owning 80%, and the Company, owning 19%.
The Company has an option to purchase the partnership interests of
Triad Partners IV, Inc. in Triad IV for an amount equal to the amount such party
paid for its interests, plus noncompounded interest of 12% per annum. The
management agreements with Triad IV also provide the Company with an option to
purchase the communities developed by Triad IV upon their completion for an
amount equal to the fair market value (based on a third-party appraisal but not
less than hard and soft costs and lease-up costs). The Company has made no
determination as to whether it will exercise its purchase options. The Company
will evaluate the possible exercise of each purchase based upon the business and
financial factors which may exist at the time those options may be exercised.
Triad IV is negotiating commitments for loan facilities aggregating up
to $50,000,000 to fund its development activities.
During the fourth quarter, the Company agreed to loan Triad IV up to
$10,000,000. The principal is due December 30, 2003. The first draw under this
loan facility was made on December 30, 1998. Interest is due quarterly at 10.5%
per annum. This loan may be prepaid without penalty. At December 31, 1998,
approximately $1,160,000 has been advanced to Triad IV under this loan facility.
Net cash provided by operating activities, of $6,689,000 for the year
ended December 31, 1998, decreased $2,994,000, or 31%, over that of the
comparable year ended December 31, 1997, which was composed of increased cash
flow created by improved earnings of $7,215,000 (after noncash adjustments)
combined with $10,209,000 of cash derived from working capital.
Net cash used in investing activities of $25,094,000 for the year ended
December 31, 1998 decreased $56,408,000 over that of the comparable year ended
December 31, 1997. This decrease was composed of increased capital expenditures
of $3,586,000 primarily related to the Cottonwood expansion, the lack of
comparable proceeds from sale of properties in 1997 compared to 1998's proceeds
of $676,000, a decrease in investments in 1998 in limited partnerships (CSLC,
HCP and NHP Notes) of $13,915,000, the $64,203,000 investment by the Company in
restricted cash securities from the proceeds obtained from the LBHI Loan and the
difference in 1997 for cash paid for the September 1998 purchase of assets
acquired from NHP, and the October 1998 purchase of assets acquired from Tesson
and Gramercy, offset by the November 1997 purchase of assets from CSLC and
offset by HCP's beginning cash balance of $8,995,000 as a result of the
consolidation of HCP at January 1, 1997 in the amount of $9,805,000.
Net cash provided by financing activities, of $6,106,000 for the year
ended December 31, 1998, decreased $103,019,000 over that of the comparable year
ended December 31, 1997. This decrease was due to $110,331,000 of net proceeds
received by the Company in November 1997 from the Offering.
YEAR 2000 ISSUE
The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Company's computer programs or hardware that have date- sensitive software or
embedded chips may recognize the year 2000 as a date other than the year 2000.
This could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
34
<PAGE> 37
Based on ongoing assessments, the Company has developed a program to
modify or replace significant portions of its software and certain hardware,
which are generally PC-based systems, so that those systems will properly
recognize and utilize dates beyond December 31, 1999. The Company has
substantially completed software reprogramming and software and hardware
replacement as of December 31, 1998, with 100% completion targeted for September
30, 1999. The Company presently believes that these modifications and
replacements of existing software and certain hardware will mitigate the Year
2000 Issue. However, if such modifications and replacements are not completed
timely, the Year 2000 Issue could have a material impact on the operations of
the Company. The costs of Year 2000 remediation are not expected to be material
based on the Company's operations.
The Company has assessed its exposure to operating equipment, and such
exposure is not significant due to the nature of the Company's business.
The Company is not aware of any external agent with a Year 2000 Issue
that would materially impact the Company's results of operations, liquidity, or
capital resources. However, the Company has no means of determining whether or
ensuring that external agents will be Year 2000 ready. The inability of external
agents to complete their Year 2000 resolution process in a timely fashion could
materially impact the Company.
Management of the Company believes it has an effective program in place
to resolve the Year 2000 Issue in a timely manner. As noted above, the Company
has completed most but not all necessary phases of its Year 2000 program. In the
event that the Company does not complete the current program or any additional
phases, the Company could incur disruptions to its operations. In addition,
disruptions in the economy generally resulting from Year 2000 Issues could also
materially adversely affect the Company. The Company could be subject to
litigation for computer systems failure. The amount of potential liability and
lost revenue cannot be reasonably estimated at this time.
The Company currently has no contingency plans in place in the event it
does not complete all phases of its Year 2000 program. The Company plans to
evaluate the status of completion in mid-1999 and determine whether such a plan
is necessary.
IMPACT OF INFLATION
To date, inflation has not had a significant impact on the Company.
Inflation could, however, 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.
FORWARD LOOKING STATEMENTS
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," "expect," "anticipate," "estimate" or "continue" or the
negative thereof or other variations thereon or comparable terminology. The
Company cautions readers that forward looking statements, including, without
limitation, those relating to the Company's future business prospects, revenues,
working capital, liquidity, capital needs, interest costs, and income, are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those indicated in the forward looking statements, due to
several important factors herein identified, among others, and other risks and
factors identified from time to time in the Company's reports filed with the
Securities and Exchange Commission.
35
<PAGE> 38
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
The Company's primary market risk exposure is interest rate risk. At
December 31, 1998, the Company had $66,674,186 million of variable rate debt
tied to LIBOR, consisting of one $18,974,186 revolving credit facility that
matures on December 10, 2000 (the "Bank One Facility") and one $47,700,000
credit facility that matures on October 1, 1999 (the "Lehman Facility"). The
Company expects to complete a refinancing of the Lehman Facility with long term
fixed rate mortgage loans during the second quarter of 1999. However, there can
be no assurance that the Company will complete this refinancing as expected.
Interest on the Bank One Facility is based on LIBOR plus 1.7%. Interest on the
Lehman Facility is based on LIBOR plus 1.875%. At December 31, 1998, the LIBOR
rate was 5.08%. An increase in interest rates will increase the amount of
interest expense incurred by the Company. Other notes payable of $14,415,847
consist of fixed rate mortgage loans. Notes receivable of $11,728,162 are also
fixed rate financial instruments.
The Company is also exposed to market risks from fluctuations in
interest rates and the effects of those fluctuations on the market values of its
cash equivalent short-term investments. The cash equivalent short-term
investments consist primarily of overnight investments that are not
significantly exposed to interest rate risk, except to the extent that changes
in interest rates will ultimately affect the amount of interest income earned on
these investments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements are included under Item 14 of this Annual
Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
The Company had no disagreements on accounting or financial disclosure
matters with its independent accountants to report under this Item 9.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information contained under the caption "Election of Directors" in the
Proxy Statement is incorporated herein by reference in response to this Item 10.
See also Item 1.
ITEM 11. EXECUTIVE COMPENSATION
Information contained under the captions "Executive Compensation" and
"Election of Directors" in the Proxy Statement is incorporated herein by
reference in response to this Item 11.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Information contained under the caption "Principal Stockholders" in the
Proxy Statement is incorporated herein by reference in response to this Item 12.
36
<PAGE> 39
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information contained under the caption "Certain Relationships and
Related Transactions" in the Proxy Statement is incorporated herein by reference
in response to this Item 13.
37
<PAGE> 40
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
The following documents are filed as part of this report:
(1) Financial Statements:
The response to this portion of Item 14 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.
(4) The Company filed the following reports on Form 8-K during the
quarterly period ended December 31, 1998:
(a) Current Report on Form 8-K, dated September 30, 1998,
as subsequently amended.
(b) Current Report on Form 8-K, dated October 29, 1998,
as subsequently amended.
38
<PAGE> 41
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Consolidated Financial Statements of Capital Senior Living Corporation
Report of Ernst & Young LLP, Independent Auditors................................................. F-2
Report of KPMG LLP, Independent Auditors.......................................................... F-3
Consolidated Balance Sheets - December 31, 1998 and 1997.......................................... F-4
Consolidated Statements of Income - December 31, 1998, 1997 and 1996.............................. F-5
Consolidated Statements of Shareholders' Equity - December 31, 1998, 1997 and 1996................ F-6
Consolidated Statements of Cash Flows - December 31, 1998, 1997 and 1996.......................... F-7
Notes to Consolidated Financial Statements........................................................ F-8
</TABLE>
F-1
<PAGE> 42
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Shareholders
Capital Senior Living Corporation
We have audited the accompanying consolidated balance sheets of Capital
Senior Living Corporation as of December 31, 1998 and 1997, and the related
consolidated statements of income, shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 1998. 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 did not audit the consolidated financial statements of
HealthCare Properties, L.P. and subsidiaries, a 57% owned subsidiary, which
statements reflect total assets of $32,758,958 and $32,801,853 as of December
31, 1998 and 1997, respectively, and total revenues of $8,787,575 and
$8,977,628 for the years ended December 31, 1998 and 1997, respectively. Those
statements were audited by other auditors whose report has been furnished to
us, and our opinion, insofar as it relates to data included for HealthCare
Properties, L.P., is based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 and the report of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Capital Senior Living
Corporation as of December 31, 1998 and 1997, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
Ernst & Young LLP
Dallas, Texas
February 5, 1999,
except for Notes 20 and 12, as to which the dates are
February 7, 1999 and February 12, 1999, respectively
F-2
<PAGE> 43
INDEPENDENT AUDITORS' REPORT
The Partners
HealthCare Properties, L.P.
We have audited the accompanying consolidated balance sheets of HealthCare
Properties, L.P. and subsidiaries (a Delaware limited partnership) as of
December 31, 1998 and 1997, and the related consolidated statements of income,
partnership equity, and cash flows for each of the years in the two-year period
ended December 31, 1998. These consolidated financial statements are the
responsibility of the Partnership's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of HealthCare
Properties, L.P. and subsidiaries as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
two-year period ended December 31, 1998, in conformity with generally accepted
accounting principles.
KPMG LLP
Dallas, Texas
February 5, 1999
F-3
<PAGE> 44
CAPITAL SENIOR LIVING CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents ....................................... $ 35,827,270 $ 48,125,225
Accounts receivable, net ........................................ 2,955,507 1,966,357
Accounts receivable from affiliates ............................. 7,217,127 26,696
Interest receivable ............................................. 535,857 229,749
Deferred taxes .................................................. 287,040 8,280
Prepaid expenses and other ...................................... 448,790 251,400
------------ ------------
Total current assets .......................................... 47,271,591 50,607,707
Property and equipment, net ........................................ 118,943,953 41,120,448
Deferred taxes ..................................................... 10,108,715 10,090,997
Deferred interest .................................................. 853,075 173,456
Notes receivable from affiliates ................................... 11,728,162 --
Investments in limited partnerships ................................ 13,337,522 13,741,940
Management contract rights, net .................................... 195,631 243,559
Goodwill, net ...................................................... 1,213,876 1,257,595
Deferred financing charges, net .................................... 530,531 108,435
Other assets ....................................................... 1,083,679 26,773
------------ ------------
Total assets ................................................ $205,266,735 $117,370,910
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................ $ 2,780,513 $ 2,566,392
Accrued expenses ................................................ 2,231,895 1,259,410
Current portion of notes payable ................................ 48,419,050 932,664
Customer deposits ............................................... 851,375 277,413
Federal and state income taxes payable .......................... 1,668,602 831,682
Due to affiliates ............................................... -- 50,064
------------ ------------
Total current liabilities ................................... 55,951,435 5,917,625
Deferred income from affiliates .................................... 792,240 --
Deferred income .................................................... 115,062 231,256
Notes payable, net of current portion .............................. 13,696,797 5,744,767
Line of credit ..................................................... 18,974,186 1,830,130
Minority interest in consolidated partnerships ..................... 11,220,836 11,087,512
Commitments and contingencies
Shareholders' Equity:
Preferred stock, $.01 par value:
Authorized shares - 15,000,000; no shares issued or outstanding -- --
Common stock, $.01 par value:
Authorized shares - 65,000,000
Issued and outstanding shares - 19,717,347 in 1998
and 1997 .................................................... 197,173 197,173
Additional paid-in capital ...................................... 91,740,251 91,740,251
Retained earnings ............................................... 12,578,755 622,196
------------ ------------
Total shareholders' equity .................................. 104,516,179 92,559,620
------------ ------------
Total liabilities and shareholders' equity .................. $205,266,735 $117,370,910
============ ============
</TABLE>
See accompanying notes.
F-4
<PAGE> 45
CAPITAL SENIOR LIVING CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Resident and health care revenue ......................... $ 24,790,516 $ 21,206,865 $ 13,691,984
Rental and lease income .................................. 4,281,603 4,275,611 1,101,317
Unaffiliated management services revenue ................. 2,464,677 1,919,618 800,961
Affiliated management services revenue ................... 1,327,019 1,378,444 2,708,077
Unaffiliated development fees ............................ 1,234,050 803,767 673,587
Affiliated development fees .............................. 7,472,501 172,927 --
Other .................................................... 1,197,260 952,650 923,700
------------ ------------ ------------
Total revenues ...................................... 42,767,626 30,709,882 19,899,626
Expenses:
Operating expenses ....................................... 17,067,451 16,701,127 10,656,431
General and administrative expenses ...................... 6,593,810 7,084,986 5,634,873
Depreciation and amortization ............................ 2,733,658 2,117,288 1,481,056
------------ ------------ ------------
Total expenses ...................................... 26,394,919 25,903,401 17,772,360
------------ ------------ ------------
Income from operations ..................................... 16,372,707 4,806,481 2,127,266
Other income (expense):
Interest income .......................................... 4,938,989 3,185,815 432,342
Interest expense ......................................... (1,921,897) (2,022,494) (221,521)
Gain on sale of properties ............................... 421,718 -- 437,819
Equity in earnings on investments ........................ -- -- 458,992
Other .................................................... -- 440,007 42,042
------------ ------------ ------------
Income before income taxes and minority interest in
consolidated partnerships ................................ 19,811,517 6,409,809 3,276,940
Provision for income taxes ................................. (7,475,771) (792,524) --
------------ ------------ ------------
Income before minority interest in consolidated partnerships 12,335,746 5,617,285 3,276,940
Minority interest in consolidated partnerships ............. (379,187) (1,936,122) (1,223,997)
------------ ------------ ------------
Net income ................................................. $ 11,956,559 $ 3,681,163 $ 2,052,943
============ ============ ============
Net income per share:
Basic and diluted ........................................ $ 0.61 $ 0.33
============ ============
Weighted average shares outstanding ..................... 19,717,347 11,150,087
============ ============
Pro forma net income (unaudited):
Net income ............................................... $ 3,681,163 $ 2,052,943
Pro forma income taxes ................................... (964,776) (810,912)
------------ ------------
Pro forma net income ....................................... $ 2,716,387 $ 1,242,031
============ ============
</TABLE>
See accompanying notes.
F-5
<PAGE> 46
CAPITAL SENIOR LIVING CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED
PARTNERS' ---------------------------- PAID-IN EARNINGS
CAPITAL SHARES AMOUNT CAPITAL (DEFICIT)
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1996 .................. $ 14,655,669 1,680,000 $ 16,800 $ (13,242) $ (211,849)
Issuance of common stock ................. -- -- -- 16,800 --
Capital contributions .................... -- -- -- 23,000 --
Purchase of Beneficial Unit
Certificates of CSLC ................... 660,403 -- -- -- --
Net income ............................... 1,941,706 -- -- -- 111,237
------------- ------------- ------------- ------------- -------------
Balance at December 31, 1996 ................ 17,257,778 1,680,000 16,800 26,558 (100,612)
Purchase of Beneficial Unit
Certificates of CSLC ................... 374,867 -- -- -- --
Distributions prior to Offering .......... -- -- -- -- (457,647)
Issuance of stock resulting from the
Formation .............................. -- 7,687,347 76,873 (76,873) --
Issuance of stock in Offering, net ....... -- 10,350,000 103,500 110,227,415 --
Equity not retained in Asset Purchase .... (20,133,353) -- -- (18,436,849) --
Net income ............................... 2,500,708 -- -- -- 1,180,455
------------- ------------- ------------- ------------- -------------
Balance at December 31, 1997 ................ -- 19,717,347 197,173 91,740,251 622,196
Net income ............................... -- -- -- -- 11,956,559
------------- ------------- ------------- ------------- -------------
Balance at December 31, 1998 ................ $ -- 19,717,347 $ 197,173 $ 91,740,251 $ 12,578,755
============= ============= ============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
TOTAL
-------------
<S> <C>
Balance at January 1, 1996 .................. $ 14,447,378
Issuance of common stock ................. 16,800
Capital contributions .................... 23,000
Purchase of Beneficial Unit
Certificates of CSLC ................... 660,403
Net income ............................... 2,052,943
-------------
Balance at December 31, 1996 ................ 17,200,524
Purchase of Beneficial Unit
Certificates of CSLC ................... 374,867
Distributions prior to Offering .......... (457,647)
Issuance of stock resulting from the
Formation .............................. --
Issuance of stock in Offering, net ....... 110,330,915
Equity not retained in Asset Purchase .... (38,570,202)
Net income ............................... 3,681,163
-------------
Balance at December 31, 1997 ................ 92,559,620
Net income ............................... 11,956,559
-------------
Balance at December 31, 1998 ................ $ 104,516,179
=============
</TABLE>
See accompanying notes.
F-6
<PAGE> 47
CAPITAL SENIOR LIVING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income ............................................................. $ 11,956,559 $ 3,681,163 $ 2,052,943
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation ......................................................... 2,639,883 1,894,665 1,397,258
Amortization ......................................................... 93,775 222,623 83,798
Amortization of deferred financing charges ........................... 163,708 -- --
Minority interest in consolidated
partnerships ....................................................... 379,187 1,936,122 1,223,997
Deferred interest .................................................... (679,619) (173,456) --
Deferred income from affiliates ...................................... 792,240 -- --
Deferred income ...................................................... (116,194) 231,256 --
Deferred income taxes ................................................ (296,478) (39,158) --
Equity in earnings on investments .................................... -- -- (458,992)
Gain on sale of land ................................................. (421,718) -- (437,819)
Provision for bad debts .............................................. 500,000 43,254 22,312
Changes in operating assets and liabilities, net of acquisitions:
Cash, restricted .................................................. -- 186,416 (2,588)
Accounts receivable ............................................... (1,481,883) (1,556,965) (219,854)
Accounts receivable from affiliates ............................... (7,190,431) 90,955 58,811
Interest receivable ............................................... (306,108) -- --
Prepaid expenses and other ........................................ 4,110 (373,006) 23,359
Other assets ...................................................... (1,059,034) (11,454) (14,940)
Accounts payable .................................................. 361,798 2,698,550 85,328
Accrued expenses .................................................. 525,944 23,529 (5,402)
Federal and state income taxes payable ............................ 836,920 831,682 --
Customer deposits ................................................. 36,812 28,955 32,295
Due to affiliates ................................................. (50,064) (31,392) 61,310
------------- ------------- -------------
Net cash provided by operating activities .............................. 6,689,407 9,683,739 3,901,816
INVESTING ACTIVITIES
Capital expenditures ................................................... (6,027,361) (2,441,106) (851,732)
Cash paid for acquisition of NHP facilities ............................ (40,546,007) -- --
Cash paid for acquisition of Gramercy facility ......................... (4,405,798) -- --
Cash paid for acquisition of Tesson facility ........................... (22,776,633) -- --
Proceeds from sale of land ............................................. 676,036 -- 2,549,352
Advances to affiliates ................................................. (11,728,162) -- --
Cash acquired upon acquisition of HCP .................................. -- 8,995,455 --
Investment in restricted cash equivalents .............................. -- (64,202,763) --
Cash paid for Asset Purchase and cash not retained ..................... -- (8,244,077) --
Investments in limited partnerships .................................... (1,693,934) (15,609,034) (3,401,207)
------------- ------------- -------------
Net cash used in investing activities .................................. (86,501,859) (81,501,525) (1,703,587)
FINANCING ACTIVITIES
Proceeds from notes payable and line of credit ......................... 67,039,026 78,663,883 --
Repayments of notes payable and line of credit ......................... (791,214) (77,363,736) (145,319)
Repayments of notes payable to affiliates .............................. -- (1,166,481) (455,592)
Proceeds from notes payable to affiliates .............................. -- 500,000 470,000
Distributions to minority partners ..................................... -- (224,795) --
Distributions prior to Offering ........................................ -- (457,647) --
Issuance of common stock, net .......................................... -- 110,330,915 16,800
Capital contribution ................................................... -- -- 23,000
Cash received for redemption of NHP limited ............................ 1,997,280 -- --
partnership interest
Repurchase of HCP limited partnership interests by HCP ................. (144,791) -- --
Repurchase of Beneficial Unit Certificates of CSLC ..................... -- (960,752) (1,262,355)
Deferred loan charges paid ............................................. (585,804) (196,888) (42,953)
------------- ------------- -------------
Net cash provided by (used in) financing activities .................... 67,514,497 109,124,499 (1,396,419)
------------- ------------- -------------
(Decrease) increase in cash and cash equivalents ....................... (12,297,955) 37,306,713 801,810
Cash and cash equivalents at beginning of year ......................... 48,125,225 10,818,512 10,016,702
------------- ------------- -------------
Cash and cash equivalents at end of year ............................... $ 35,827,270 $ 48,125,225 $ 10,818,512
============= ============= =============
SUPPLEMENTAL DISCLOSURES
Cash paid during the year for:
Interest ............................................................. $ 1,956,812 $ 2,041,366 $ 188,510
============= ============= =============
Income taxes ......................................................... $ 6,935,330 $ -- $ --
============= ============= =============
</TABLE>
See accompanying notes
F-7
<PAGE> 48
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION, FORMATION AND INITIAL PUBLIC OFFERING
Capital Senior Living Corporation, a Delaware corporation, was incorporated
on October 25, 1996. The accompanying financial statements include the
consolidated financial statements of Capital Senior Living Corporation
("Corporation"); Capital Senior Living Properties, Inc. including HealthCare
Properties, L.P. ("HCP") (as of January 1, 1997); Capital Senior Living, Inc.
("Living"); Quality Home Care, Inc. ("Quality"); Capital Senior Development,
Inc. ("Development"); Capital Senior Management 1, Inc. ("Management 1");
Capital Senior Management 2, Inc. ("Management 2"); Capital Senior Living
Properties 2, Inc. ("Properties 2"), which includes Capital Senior Living
Properties 2-Gramercy, Inc. ("Gramercy") and Capital Senior Living Properties
2-NHPCT, Inc. ("NHPCT") (collectively referred to with Capital Senior Living
Corporation as the "Company"). The accompanying financial statements are
presented on a combined basis prior to November 5, 1997, and include Capital
Senior Living Communities, L.P. ("CSLC") through that date. CSLC included the
accounts of CSLC and HCP. All material intercompany balances and transactions
have been eliminated in consolidation.
The Company is a provider of senior living services. The Company owns,
operates, develops and manages senior living communities throughout the United
States.
The Company completed the registration of its common stock in an initial
public offering ("Offering") on November 5, 1997. Simultaneously with the
closing of the Offering, Corporation acquired Living, Quality, Development,
Management 1, and Management 2 ("Formation") in exchange for 7,687,347 shares of
common stock and a note payable for $18,076,380 ("Formation Note") to Jeffrey L.
Beck and James A. Stroud or a related trust (collectively, the "Stockholders")
and Lawrence A. Cohen, all officers of the Company. Additionally, Corporation
purchased substantially all of the assets, other than working capital items, of
CSLC (the "Asset Purchase") for the assumption of a $70,833,752 note payable and
a cash payment of $5,782,927. The Stockholders owned 46% of the common stock of
the Company after the Offering.
Due to all of these entities being under the common control of the
Stockholders for all periods presented prior to the Offering, these consolidated
financial statements reflect the assets and liabilities at their historical
values and the accompanying consolidated statements of income, equity, and cash
flows reflect the consolidated results for the periods indicated even though
they have historically operated as separate entities prior to the Formation. The
Formation was accounted for at historical cost in a manner similar to a pooling
of interests to the extent of the percentage ownership by the Stockholders. The
Asset Purchase was recorded at fair value to the extent of the minority
interest. A step-up in basis of $9,282,202 was recorded for property and
equipment and $2,692,669 for the investment in NHP Notes. Additionally, a
deferred tax asset of $10,060,119 and goodwill of $1,264,881 was recorded.
Assets that were not acquired from CSLC in the Asset Purchase that were combined
in the financial statements until such date were charged to paid-in capital.
CSLC's assets included investments in HCP and NHP Retirement Housing Partners I,
L.P. ("NHP") which were acquired in the Asset Purchase. NHP owned a portfolio of
five independent senior living communities. On September 30, 1998, the Company
purchased four of the five independent senior living communities from NHP (See
Note 4).
In the accompanying consolidated financial statements, HCP is consolidated
as though the Company had acquired a controlling financial interest in HCP at
January 1, 1997. At December 31, 1998, 1997 and 1996, the Company owned
approximately 57%, 56% and 31% of HCP's limited partner units, respectively.
Preacquisition earnings for 1997 applicable to HCP are included in minority
interest.
HCP is a Delaware limited partnership established for the purpose of
acquiring, leasing and operating existing or newly constructed long-term
healthcare properties. One property is operated by HCP and seven properties are
leased to qualified operators who provide specialized healthcare services.
Capital Realty Group Senior Housing, Inc. ("Housing"), an entity controlled by
the Stockholders until June 10, 1998, is the general partner. On June 10, 1998,
Housing's parent corporation, Capital Realty Group Corporation, sold 100% of its
stock in Housing to an unrelated third party. The Company continues to
consolidate HCP at December 31, 1998, since it still maintains a controlling
financial interest.
F-8
<PAGE> 49
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
HCP and NHP are subject to the reporting obligations of the Securities and
Exchange Commission.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
Investments with original maturities of three months or less are considered
to be cash equivalents. The Company has deposits in banks that exceed Federal
Deposit Insurance Corporation insurance limits. Management believes that credit
risk related to these deposits is minimal.
Long-Lived Assets
Property and equipment are stated at cost and depreciated on a
straight-line basis over the estimated useful lives of the assets. The
estimated useful lives are 30 to 40 years for buildings, 20 years for land
improvements and 5 to 10 years for furniture, equipment and automobiles.
Management contract rights are stated at cost and amortized on a
straight-line basis over their respective contract lives. Accumulated
amortization for management contract rights at December 31, 1998 and 1997, was
$320,532 and $272,604, respectively. Goodwill is the excess purchase price over
the fair value of the assets acquired in the Asset Purchase to the extent of
the minority interest and is amortized over 30 years on a straight-line basis.
Accumulated amortization for goodwill at December 31, 1998 and 1997, was
$51,005 and $7,286, respectively.
At each balance sheet date, the Company reviews the carrying value of its
management contract rights, goodwill, and property and equipment to determine
if facts and circumstances suggest that they may be impaired or that the
amortization or depreciation period may need to be changed. The Company
considers external factors relating to each asset, including contract changes,
local market developments, and other publicly available information. If these
external factors indicate the intangible assets or property and equipment will
not be recoverable, the carrying value of the intangible assets or property and
equipment will be analyzed and adjusted accordingly. During 1996, management
contract rights of $44,755 were written off due to the termination of a certain
contract that has been reflected as additional amortization expense. The
Company does not believe there are any indicators that would require an
adjustment to the carrying value of the management contract rights, goodwill or
property and equipment or their remaining useful lives as of December 31, 1998.
Income Taxes
The Company accounts for income taxes under the liability method. 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.
CSLC and HCP are partnerships and, consequently, are not subject to income
taxes. Taxable income or loss is directly allocated to the individual partners.
Prior to the Formation, Living, Quality, Development, Management 1 and
Management 2 were S corporations and consequently, were not subject to income
taxes. Thus, taxable income or loss is directly allocated to the individual
stockholders. Upon Formation, these corporations converted from S corporations
to C corporations. A deferred tax benefit of $41,085 was recorded in the
consolidated statements of income upon conversion.
F-9
<PAGE> 50
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Revenue Recognition
Resident and healthcare revenue is recognized at estimated net realizable
amounts due from residents in the period to which the rental and other services
are provided.
Revenues from the Medicare and Medicaid programs accounted for 16% and 22%
in 1998 and 1997, respectively, and less than 10% in 1996 of the Company's net
revenues. One community is a provider of services under the Indiana Medicaid
program. Accordingly, the community is entitled to reimbursement under the
foregoing program at established rates that are lower than private pay rates.
Patient service revenue for Medicaid patients is recorded at the reimbursement
rates as the rates are set prospectively by the state upon the filing of an
annual cost report. Two communities are providers of services under the Medicare
program and are entitled to reimbursement under the foregoing programs in
amounts determined based on the filing of an annual cost report prepared in
accordance with federal regulations, which reports are subject to audit and
retroactive adjustments in future periods. Revenue from the Medicare program is
recorded at established rates and adjusted for differences between such rates
and estimated amounts reimbursable from the program. Any differences between
estimated and actual reimbursements are included in operations in the year of
settlement, which have not been material. Under federal regulations, Medicare
reimbursements to these facilities are limited to routine cost limits determined
on a geographical region. The Company has filed exception reports to request
reimbursement in excess of its routine cost limits for the years 1992 through
1997, as of December 31, 1998, and recorded revenue of approximately $43,000 in
1998, as a result of being granted exception requests for 1997 and approximately
$346,000 in 1997, as a result of being granted exception requests for 1992 and
1994. There can be no assurance that an exception to a facility's routine cost
limits will be granted. CSLC retained cost report exposure for cost years prior
to the Offering.
Laws and regulations governing the Medicare and Medicaid programs are
complex and subject to interpretation. 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, resident and healthcare revenue and development
fees are recognized when earned. Management services revenue relates to
providing certain management and administrative support services under
management contracts, which have terms expiring through 2002. Management
services revenue is shown net of reimbursed expenses. The reimbursed expenses
from affiliates were $11,031,136, $3,892,526 and $6,477,199, for the years ended
December 31, 1998, 1997 and 1996, respectively. Reimbursed expenses from
unaffiliated parties were $14,689,953, $8,941,343 and $2,600,529, for the years
ended December 31, 1998, 1997 and 1996, respectively.
Credit Risk
The Company's resident receivables are generally due within 30 days and
development fee receivables are due at completion of construction, which is
generally one year. The Company does not require collateral. Credit losses have
been within management's expectations, and management believes that the
allowance for doubtful accounts adequately provides for any expected losses.
Advertising
Advertising expenses are expensed as incurred. Advertising expenses for the
years ended December 31, 1998, 1997 and 1996 were $243,720, $336,738 and
$210,028, respectively.
F-10
<PAGE> 51
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Net Income Per Share
Basic net income per share is calculated by dividing net income by the
weighted average number of common shares outstanding during the period. Diluted
net income per share considers the dilutive effect of outstanding options
calculated using the treasury stock method.
Net income per share for periods prior to 1997 are not comparable to
subsequent period amounts due to the Company's Formation and Offering in October
1997 and, consequently, are not included.
Stock-Based Compensation
The Company has elected to follow the intrinsic value method in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25") and related interpretations in accounting for its employee stock
options. In accordance with APB 25, since the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized. The Company has adopted
the disclosure-only provisions for the fair value method of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("FASB 123").
Segment Information
Effective January 1, 1998, the Company adopted the Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information"
("Statement 131"). Statement 131 superseded FASB Statement No. 14, "Financial
Reporting for Segments of a Business Enterprise". Statement 131 establishes
standards for the way that public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports. Statement 131 also establishes standards for related
disclosures about products and services, geographic areas and major customers.
The adoption of Statement 131 did not affect results of operations or financial
position, but did affect the disclosure of enterprise-wide 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.
Affiliated development fees in the accompanying statements of income
represents development fees earned from the Triad partnerships.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Reclassifications
Certain prior year amounts have been reclassified to conform to 1998
presentation.
F-11
<PAGE> 52
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES
Effective April 1, 1998, the Company obtained a 19% limited partnership
interest in Triad Senior Living I, L.P. ("Triad I") for $330,243 in cash. The
Company is accounting for this investment under the equity method of accounting
based on the provisions of the Triad I partnership agreement. The Company is
developing senior living communities for Triad I. Additionally, the Company
loaned money to Triad I pursuant to an unsecured loan facility not to exceed
$10,000,000. The principal is due March 12, 2003. The first draw under this loan
facility was made on March 12, 1998. Interest is due quarterly at 8% per annum.
This loan may be prepaid without penalty. At December 31, 1998, $9,635,799 has
been advanced to Triad I under this loan facility. The Company has deferred
interest income and development fees from Triad I of $67,253 and $222,550,
respectively, as of December 31, 1998.
Effective September 23, 1998, the Company obtained a 19% limited partnership
interest in Triad Senior Living II, L.P. ("Triad II") for $74,100 in cash. The
Company is accounting for this investment under the equity method of accounting
based on the provisions of the Triad II partnership agreement. The Company is
developing senior living communities for Triad II. Additionally, the Company
loaned money to Triad II pursuant to an unsecured loan facility not to exceed
$7,000,000, which was increased to $10,000,000 on January 15, 1999. The
principal is due September 25, 2003. The first draw under this loan facility was
made on September 25, 1998. Interest is due quarterly at 10.5% per annum. This
loan may be prepaid without penalty. At December 31, 1998, $932,201 has been
advanced to Triad II under this loan facility. The Company has deferred interest
income and development fees from Triad II of $3,149 and $94,913 respectively, as
of December 31, 1998.
Effective November 10, 1998, the Company obtained a 19% limited partnership
interest in Triad Senior Living III, L.P. ("Triad III") for $142,500 in cash.
The Company is accounting for this investment under the equity method of
accounting based on the provisions of the Triad III partnership agreement. The
Company is developing senior living communities for Triad III. Additionally, the
Company loaned money to Triad III pursuant to an unsecured loan facility not to
exceed $10,000,000. The principal is due February 8, 2004. The first draw under
this loan facility will be made, subsequent to December 31, 1998, on February 8,
1999. Interest is due quarterly at 10.5% per annum. This loan may be prepaid
without penalty. At December 31, 1998, no monies have been advanced to Triad III
under this loan facility. The Company has deferred development fees from Triad
III of $162,532 as of December 31, 1998.
Effective December 22, 1998, the Company obtained a 19% limited partnership
interest in Triad Senior Living IV, L.P. ("Triad IV") for $142,500 in cash. The
Company is accounting for this investment under the equity method of accounting
based on the provisions of the Triad IV partnership agreement. The Company is
developing senior living communities for Triad IV. Additionally, the Company
loaned money to Triad IV pursuant to an unsecured loan facility not to exceed
$10,000,000. The principal is due December 30, 2003. The first draw under this
loan facility was made on December 30, 1998. Interest is due quarterly at 10.5%
per annum. This loan may be prepaid without penalty. At December 31, 1998,
$1,160,162 has been advanced to Triad IV under this loan facility. The Company
has deferred interest income and development fees from Triad IV of $129 and
$237,558, respectively as of December 31, 1998.
The Company has options to purchase properties from the above Triad
partnerships at fair value. The Company also can purchase the partnership
interests of the non-Company partners for an amount equal to the amount such
party paid for its interest, plus noncompounded interest of 12% per annum. The
Company provides a guarantee of its subsidiaries' completing of construction
guarantee and operating deficit agreement. The Company has no commitments or
obligations to acquire any properties or additional partnership interests. Also,
the Company has no commitments relating to any of the secured loan facilities of
any of the above Triad partnerships.
F-12
<PAGE> 53
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. ACQUISITIONS
On September 30, 1998, the Company acquired four senior living communities
from NHP for $40,683,281 by entering into a $32,300,000 mortgage loan agreement
with Lehman Brothers Holdings, Inc. ("Lehman"), a cash payment of $8,246,007 and
assuming net liabilities of $137,274. The acquisition was accounted for as a
purchase. The Company's preliminary purchase price allocation was based on
independent valuations from third party valuation firms.
On October 28, 1998, the Company acquired a senior living community from
Tesson Heights Enterprises, a Texas limited partnership, for $23,051,786, by
borrowing $15,400,000 pursuant to the existing mortgage loan agreement with
Lehman and $7,376,632 under an existing line of credit and assuming $275,154 of
net liabilities. The Company also acquired a senior living community from
Gramercy Hill Enterprises, a Texas limited partnership, for $11,036,655, by
assuming a $6,334,660 note, along with borrowing $1,980,000 from WMF Washington
Mortgage Corp. ("WMF") on a second lien basis and $2,425,798 under an existing
line of credit and assuming net liabilities of $296,197. The acquisitions were
accounted for as a purchase. The Company's preliminary purchase price
allocations were based on independent valuations from third party valuation
firms.
The results of operations for the above acquisitions are included in the
Company's statement of income from the date of acquisition.
Pro forma results of operations as if the NHP, Tesson Heights and Gramercy
Hill acquisitions had occurred on January 1, 1997 are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1998 1997
---------------- ---------------
<S> <C> <C>
Total revenues........................................................ $56,559,920 $47,082,786
Net income............................................................ 11,518,250 946,143
Net income per share.................................................. $ 0.58 $ 0.08
Shares used in computing pro forma net income per share............... 19,717,347 11,150,087
</TABLE>
The unaudited pro forma consolidated amounts are presented for informational
purposes only and do not necessarily reflect the financial position or results
of operations of the Company which would have actually resulted had the
acquisitions occurred on January 1, 1997.
F-13
<PAGE> 54
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1998 1997
------------ ------------
<S> <C> <C>
Land ................................... $ 10,641,671 $ 2,777,087
Land improvements ...................... 6,400 3,906
Buildings and building improvements .... 119,759,970 47,562,214
Furniture and equipment ................ 4,685,174 2,387,485
Automobiles ............................ 73,890 --
Construction in process ................ 71,611 2,049,574
------------ ------------
135,238,716 54,780,266
Less accumulated depreciation .......... 16,294,763 13,659,818
------------ ------------
Property and equipment, net ............ $118,943,953 $ 41,120,448
============ ============
</TABLE>
On November 24, 1998, the Company sold land on one of its properties for
$738,385. This sale resulted in a $415,847 gain and net cash proceeds of
$664,984. On December 7, 1998, the Company sold land on another one of its
properties for $12,662. This sale resulted in the recognition of a $8,545 gain
and net cash proceeds of $11,052.
The Company capitalized $348,626 of interest as part of building and
building improvements during 1998.
6. ACCRUED EXPENSES
Accrued expenses consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1998 1997
------------- --------------
<S> <C> <C>
Accrued salaries, bonuses and related expenses............................. $ 847,722 $ 432,249
Accrued property taxes..................................................... 538,697 493,796
Other...................................................................... 845,476 333,365
------------- --------------
$2,231,895 $1,259,410
============= ==============
</TABLE>
7. NOTES PAYABLE AND LINE OF CREDIT
Notes payable consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1997
----------- -----------
<S> <C> <C>
Lehman $60 million mortgage loan, bearing interest at prime or LIBOR plus
1.875% (6.95% at December 31, 1998); payable in monthly installments of
interest only, maturing on October 1, 1999, secured by the certain
properties of NHPCT ...................................................... $47,700,000 $ --
installments of principal and interest of $48,089,
maturing on January 2008 secured by a certain property of Gramercy ....... 6,312,032 --
WMF second mortgage loan, bearing interest at 7.08%; payable
in monthly installments of principal and interest of $14,095,
maturing on January 2010 secured by a certain property of Gramercy ........ 1,975,159 --
HCP mortgage loans, bearing interest ranging from
6.2% to 10.75%; payable in monthly installments of $99,212 including
interest, maturing from 2001 to 2012
Secured by certain properties of HCP ...................................... 6,128,656 6,677,431
----------- -----------
62,115,847 6,677,431
Less current portion ............................................................ 48,419,050 932,664
----------- -----------
$13,696,797 $ 5,744,767
=========== ===========
</TABLE>
F-14
<PAGE> 55
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The aggregate maturities of notes payable at December 31, 1998, are as
follows:
<TABLE>
<S> <C>
1999 $48,419,050
2000 675,909
2001 561,856
2002 414,654
2003 455,512
Thereafter 11,588,866
-----------
$62,115,847
===========
</TABLE>
In connection with obtaining the Lehman and other 1998 mortgage loans, the
Company incurred $569,896 in deferred financing charges, which are amortized
over the life of the loans using the straight-line method. Accumulated
amortization was $123,727 at December 31, 1998.
On December 10, 1997, the Company entered into a $20 million revolving line
of credit with a bank that expires December 10, 2000. Subsequent to December 31,
1998, the Company received a commitment to increase its line of credit to $34
million. Borrowings under the line of credit are secured by three senior living
communities and bear interest at the prime rate or LIBOR plus 1.7% (7.33% and
7.42% at December 31, 1998 and 1997, respectively). The line of credit may be
used for acquisition of additional interests in HCP and NHP, acquisition of
additional properties, development of expansions to existing properties and
general working capital purposes. Amounts outstanding under the line of credit
at December 31, 1998 and 1997, were $18,974,186 and $1,830,130, respectively. In
connection with obtaining the line of credit, the Company incurred $6,847 and
$111,533 in 1998 and 1997, respectively, in deferred financing charges, which
are amortized over the life of the line of credit. Accumulated amortization was
$41,066 and $3,098 at December 31, 1998 and 1997, respectively.
Under the line of credit, the Company must maintain certain levels of
tangible net worth and comply with other restrictive covenants.
On June 30, 1997, CSLC entered into a $77,000,000 mortgage loan agreement
with Lehman Brothers Holdings, Inc., and pledged four senior living communities
and its investments in HCP and NHP as collateral. Subsequent to June 30, 1997,
$70,800,000 was advanced under this loan agreement; $5,500,000 was used to repay
a mortgage loan and $64,500,000 was used to fund the liquidity requirement under
the loan agreement through the purchase of three-month U.S. Treasury Securities.
The U.S. Treasury Securities were sold under a repurchase agreement with a term
equal to their maturity. The repurchase agreement was cancelled and the
outstanding debt was assumed and repaid by the Corporation from the proceeds of
the Offering. The U.S. Treasury Securities reverted to CSLC for use or
disposition as determined by CSLC, and the Company has no interest in such
securities.
F-15
<PAGE> 56
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
HCP leases four of its properties under a master lease. The rentals under
the master lease provide additional security for two notes payable used to
finance two of the master lease properties. These notes are due December 1,
2001.
8. EQUITY
The Company is authorized to issue preferred stock in series and to fix and
state the voting powers and such designations, preferences and relative
participating, optional or other special rights of the shares of each such
series and the qualifications, limitations and restrictions, thereof. Such
action may be taken by the Board without stockholder approval.
On November 5, 1997, the Company issued 10,350,000 shares of $.01 par value
common stock for cash of $110,330,915, net of issuance costs of $11,317,705 and
payment of the Formation Note of $18,076,380, in connection with the Offering.
Additionally, the Company issued 7,687,347 shares of $.01 par value common stock
in connection with the Formation. For financial reporting purposes, the shares
issued in connection with the Formation are presented as outstanding as of
January 1, 1997.
During 1996, the Company issued 1,680,000 shares of $.01 par value common
stock for $16,800 in cash. For financial reporting purposes, as the combined
entities were under common control, the Company's common stock is presented as
outstanding as of January 1, 1996.
Common stock reserved for future issuance is 1,565,000 for stock options.
The rights, preferences and privileges of holders of common stock are subject to
the rights of the holders of Preferred Stock.
Purchases of Beneficial Unit Certificates ("BUCs") of CSLC during 1997 and
1996 represent additional purchases by the Stockholders and are accounted for at
the book value of the BUCs and as an addition to partners' capital and a
reduction in minority interest. CSLC purchased 55,316 BUCs for $960,762 during
1997, at an average cost of $17.37 per unit. CSLC purchased 91,854 BUCs for
$1,262,355 during 1996, at an average cost of $13.74 per unit.
Net income (loss) of HCP is generally allocated 98% to the limited partners
and 2% to the general partner. The net income of HCP from the disposition of a
property is allocated: (i) to partners with deficit capital accounts on a pro
rata basis; (ii) to limited partners until they have been paid an amount equal
to the amount of their adjusted investment (as defined); (iii) to the limited
partners until they have been allocated income equal to their 12% Liquidation
Preference; and (iv) thereafter, 80% to the limited partners and 20% to the
general partner. The net loss of HCP from the disposition of a property is
allocated: (i) to partners with positive capital accounts on a pro rata basis
and (ii) thereafter, 98% to the limited partners and 2% to the general partner.
Distributions of available cash flow are generally distributed 98% to the
limited partners and 2% to the general partner, until the limited partners have
received an annual preferential distribution, as defined. Thereafter, available
cash flow is distributed 90% to the limited partners and 10% to the general
partner. During 1998, HCP repurchased $144,791 of its limited partnership
interests. HCP made a $224,795 distribution in 1997 to minority partners.
9. STOCK OPTIONS
The Company adopted a stock option plan during 1997, providing for the grant
of incentive and nonqualified stock options to employees and directors. This
plan provides for the grant of options to purchase up to 1,565,000 shares. The
option exercise price and vesting provisions of such options are fixed when the
option is granted. The options expire ten years from the date of grant and vest
from zero to five years. The option exercise price is the fair market value of a
share of common stock on the date the option is granted.
F-16
<PAGE> 57
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A summary of the Company's stock option activity, and related information
for the years ended December 31, 1998 and 1997, is presented below:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
--------- --------------
<S> <C> <C>
Outstanding at January 1, 1997 -- --
Granted 776,250 $ 13.50
Exercised -- --
Forfeited -- --
Expired -- --
--------- ---------
Outstanding at December 31, 1997 776,250 $ 13.50
Granted --
Exercised -- --
Forfeited 76,750 13.50
Expired -- --
--------- ---------
Outstanding at December 31, 1998 699,500 $ 13.50
========= =========
Exercisable at December 31, 1998 258,010 $ 13.50
========= =========
Exercisable at December 31, 1997 121,500 $ 13.50
========= =========
</TABLE>
The weighted average remaining contractual life of the options at December
31, 1998 and 1997, is approximately 8.8 years and 9.8 years, respectively.
Unoptioned shares available for the granting of options at December 31, 1998 and
1997 was 865,500 and 788,750, respectively.
The average daily price of the stock during 1998 and 1997 subsequent to the
Offering was $11.73 and $13.04, respectively, per share, and therefore, the
options are considered anti-dilutive for the calculation of diluted net income
per share.
Pro forma information regarding net income per share has been determined as
if the Company had accounted for its employee stock options under the fair value
method of that statement. The fair value for these options was estimated at the
date of grant using the Black-Scholes option pricing model with the following
weighted average assumptions: risk free interest rate of 5.7 percent; dividend
yield of zero percent; expected lives of seven years; and volatility of 70.1
percent. The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options. For purposes of
pro forma disclosures, the estimated fair value of the options is amortized to
expense over the options' vesting periods.
F-17
<PAGE> 58
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
-------------- --------------
1998 1997
-------------- --------------
<S> <C> <C>
Net income
As reported ..................... $ 11,957,000 $ 3,681,000
Pro forma ....................... 10,848,000 2,787,000
Net income per share
As reported ..................... $ 0.61 $ 0.33
Pro forma ....................... 0.55 0.25
</TABLE>
10. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Current:
Federal .............. $ 6,308,319 $ 730,184 $ --
State ................ 1,463,930 101,498 --
Deferred:
Federal .............. (240,635) (39,404) --
State ................ (55,843) 246 --
----------- ----------- -----------
$ 7,475,771 $ 792,524 $ --
=========== =========== ===========
</TABLE>
The provision for income taxes differed from the amounts computed by
applying the U.S. federal income tax rate to income before provision for income
taxes as a result of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1998 1997 1996
---------------- --------------- --------------
<S> <C> <C> <C>
Tax expense at federal statutory rates................ $6,606,992 $1,521,053 --
Tax expense at federal statutory rates on income earned
prior to Formation and Asset Purchase ................. -- (831,026) --
State income tax expense.................................. 1,420,503 101,744 --
Conversion of S corporations to C corporation status ..... -- (41,085) --
Other..................................................... (551,724) 41,838 --
---------- ----------- -----------
$7,475,771 $ 792,524 $ --
========== =========== ===========
</TABLE>
A summary of the Company's deferred tax assets and liabilities, are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1998 1997
----------- -----------
<S> <C> <C>
Deferred tax assets:
Tax basis in excess of book basis arising from the Asset Purchase .... $ 9,644,505 $10,060,119
Other ................................................................ 1,113,530 128,000
----------- -----------
Total deferred tax assets ............................................ 10,758,035 10,188,119
Deferred tax liabilities ................................................ 362,280 88,842
----------- -----------
Total deferred tax assets, net ....................................... $10,395,755 $10,099,277
=========== ===========
</TABLE>
F-18
<PAGE> 59
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. RELATED PARTY TRANSACTIONS
Certain administrative and occupancy costs were incurred by an affiliate on
behalf of the Company. Total costs allocated to the Company were $0, $679,423
and $552,586 for the years ended December 31, 1998, 1997 and 1996, respectively.
Prior to the Offering, the Company paid premiums to a related party for
employee medical coverage. The related party insured the Company for any claims
exceeding the premiums paid. Accordingly, no amounts have been accrued at
December 31, 1997, for claims incurred prior to the Offering but unpaid.
The Company manages properties for a third party, in which an officer of the
Company was also a director of the third-party companies until July 1, 1998.
Management fees received for the period ended June 30, 1998 and for the years
ended December 31, 1997 and 1996 were $987,840, $1,589,703 and $657,260,
respectively.
Upon sale of the four NHP properties on September 30, 1998, an affiliate
received a $1,219,500 brokerage fee.
Upon sale of the four CSLC properties in November 1997, an affiliate
received a $4,597,080 brokerage fee.
In October 1997, HCP paid an affiliate a refinancing fee of $13,245.
Upon sale of certain multi-family properties in November 1996, an affiliate
received a $79,883 brokerage fee.
An officer of the Company is chairman of the board of a bank where the
Company holds the majority of its operating cash accounts.
12. CONTINGENCIES
On August 11, 1998, the Company executed a settlement agreement with Angeles
Housing Concepts, Inc. ("AHC") and ILM I Lease Corporation and ILM II Lease
Corporation (collectively, "ILM Lease") resolving all claims among the parties
relating to a lawsuit filed by AHC against the Company alleging interference
with AHC's management agreements with ILM (the "Settlement Agreement") and
calling for a dismissal with prejudice of this lawsuit. The Settlement Agreement
did not involve any payment of damages to AHC or any other party by the Company.
On or about October 23, 1998, Robert Lewis filed a putative class action
complaint on behalf of certain holders of Assignee Interests in NHP in the
Delaware Court of Chancery against NHP, the Company, Capital Senior Living
Properties 2-NHPCT, Inc. and Capital Realty Group Senior Housing, Inc.
(collectively, the "Defendants"). Mr. Lewis purchased 90 Assignee Interests in
February 1993 for $180. The complaint alleges, among other things, that the
Defendants breached, or aided and abetted a breach of, the express and implied
terms of the NHP Partnership Agreement in connection with the sale of four
properties by NHP to Capital Senior Living Properties 2-NHPCT, Inc. The
complaint seeks, among other relief, rescission of the sale of these properties
and unspecified damages. The Company believes the complaint is without merit and
intends to vigorously defend itself in this action.
On February 12, 1999 a competitor of the Company, Holiday Retirement
Corporation ("Holiday"), as well as Colson & Colson Construction Company and
their architects, Curry Brandaw Architects, filed suit against the Company in
U.S. District Court in Dallas. The complaint alleges, among other claims, that
the Company
F-19
<PAGE> 60
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
infringed the copyrighted architectural plans and trade dress of Holiday on at
least three of the Company's communities. The communities using this Waterford
prototype design are owned by Triad I, in which the Company is a 19% limited
partner and provides development services under a third party development
agreement. The plaintiffs are additionally seeking a preliminary and permanent
injunction to bar further use of their allegedly copyrighted architectural plans
and trade dress as well as damages, including punitive damages. The defense of
this suit has been turned over to the Company's insurer for handling. The
Company vigorously denies the allegations mentioned in the lawsuit and has filed
an answer and counterclaim.
The Company has pending claims incurred in the normal course of business
that, in the opinion of management, based on the advice of legal counsel, will
not have a material effect on the financial statements of the Company.
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and fair values of financial instruments at December 31,
1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
---------------------------------- -----------------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Cash and cash equivalents.................. $35,827,270 $35,827,270 $48,125,225 $48,125,225
Line of credit............................. 18,974,186 18,974,186 1,830,130 1,830,130
Notes payable.............................. 62,115,845 62,115,845 6,677,431 6,611,128
</TABLE>
The following methods and assumptions were used in estimating its fair value
disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the balance
sheet for cash and cash equivalents approximate fair value.
Line of credit and 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.
14. INVESTMENTS IN LIMITED PARTNERSHIPS
The investments in limited partnerships balance consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1998 1997
----------- -----------
<S> <C> <C>
NHP pension notes ...................... $12,646,471 $13,740,576
NHP limited partnership interests....... 1,708 1,364
Triad I limited partner interest ....... 330,243 --
Triad II limited partner interest ...... 74,100 --
Triad III limited partner interest ..... 142,500 --
Triad IV limited partner interest ...... 142,500 --
----------- -----------
$13,337,522 $13,741,940
=========== ===========
</TABLE>
F-20
<PAGE> 61
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
HCP:
During 1998, 1997 and 1996, the Company paid $101,072, $5,604,944 and
$3,200,686, respectively, for partnership interests in HCP and, as of December
31, 1998 and 1997, the Company owned a 57% and 56% ownership in HCP,
respectively.
The Company changed its method of accounting for its investment in HCP from
the equity method to the consolidation of HCP in its financial statements in
1997. Had HCP been consolidated in 1996, using its weighted average ownership
interest of 23%, the results of operations on a pro forma basis for the year
ended December 31, 1996 would have been:
<TABLE>
<S> <C>
Revenue....................................................... $ 26,504,461
Income before extraordinary item and minority
interest.................................................... 1,166,289
Net income.................................................... 2,118,981
</TABLE>
Pro forma net income, assuming a tax rate of 39.5%, is $1,281,984.
In the second quarter of 1996, CSLC purchased a 9.36% limited partnership
interest in HCP from an affiliate. CSLC paid $1,269,077 to the affiliate, who
recognized a gain of $878,592 on the transaction. As a result of this purchase,
the Company exceeded a 20% ownership in HCP and changed its method of accounting
from the cost method to the equity method. The change resulted in recognizing
$3,519,315 of deferred income for the difference between cost and the underlying
equity in HCP, which was being amortized over 20 years. At the Offering date,
the unamortized deferred income was eliminated as a result of applying the
purchase method of accounting for CSLC's acquisition of HCP limited partnership
units. At the Offering date, the allocation of purchase price to the assets and
liabilities of HCP was based on independent valuation information from third
party valuation firms.
Summary financial information regarding the results of operations of HCP
for fiscal 1996 is as follows:
<TABLE>
<S> <C>
Net revenue.......................................................... $7,560,104
Net income........................................................... 1,637,343
</TABLE>
NHP:
The Company acquired, on November 1, 1997, the NHP Notes owned by CSLC in
the Formation Transactions for $18,664,128. The NHP Notes bear simple interest
at 13% per annum and mature on December 31, 2001. Interest is currently paid
quarterly at a rate of 7%, with the remaining 6% interest deferred. Beginning
November 1, 1997 through September 30, 1998, the Company has been recording
interest income at 10.5% of the purchase price paid, which was determined based
on the discounted amount of principal and interest payments to be made following
the maturity date (December 31, 2001) of the NHP Notes (using a six-month lag
between maturity and full repayment), due to uncertainties regarding the
ultimate realization of the accrued interest. On September 30, 1998, the Company
purchased four properties from NHP. NHP is in turn redeeming $7,500,000 of the
Company's investment in the NHP Notes and is distributing approximately
$5,300,000 of deferred interest not previously paid on such notes. From October
1, 1998 through December 31, 1998, the Company reevaluated its investment in the
NHP Notes, and is recording additional income, after giving consideration to
current payment of interest, partial redemption of the NHP Notes with accrued
interest and the estimated residual value in NHP. This change in estimate
resulted in $579,278 of additional income in 1998 ($0.03 net income per share
impact), and is expected to
F-21
<PAGE> 62
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
increase income by approximately $3,000,000, $2,400,000 and $2,300,000 in 1999,
2000 and 2001 (NHP Notes redemption is December 31, 2001), respectively.
During 1998 and 1996, the Company paid $344 and $1,364, respectively,
increasing the ownership of limited partnership units in NHP to 3.9% from 3.1%.
Subsequent to year-end and through February 5, 1999, the Company disbursed
$13,500 for an additional investment in NHP Notes and $378 for an additional
investment in NHP units. These purchases bring the Company's ownership of NHP
Notes to 33.1% and the ownership of NHP units to 4.8%. The Company classifies
its investment in NHP Notes as held to maturity.
Summary financial information regarding the financial position and results
of operations of NHP as of December 31 and for the years then ended is as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Cash ............................................. $ 5,821,300 $ 4,495,733
Property and equipment, net ...................... 18,849,354 49,490,473
Other assets ..................................... 592,146 1,599,634
------------ ------------
Total assets ................................ $ 25,262,800 $ 55,585,840
============ ============
Pension notes .................................... $ 20,157,826 $ 42,672,000
Interest payable ................................. 13,142,864 23,730,407
Other liabilities ................................ 633,817 1,203,421
Partnership deficit .............................. (8,671,707) (12,019,988)
------------ ------------
Total liabilities and partnership deficit ........ $ 25,262,800 $ 55,585,840
============ ============
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Net revenue .................. $ 13,746,088 $ 15,548,138 $ 14,488,099
Net income (loss) ............ 3,409,569 (3,522,917) (3,574,668)
</TABLE>
15. ALLOWANCE FOR DOUBTFUL ACCOUNTS
The components of the allowance for doubtful accounts are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Balance at beginning of year .......................... $ 301,042 $ 164,822 $ 141,452
Provision for bad debts ............................ 500,000 43,254 22,312
Write-offs and other ............................... -- (17,474) 1,058
Allowances not assumed in Asset Purchase ........... -- (145,602) --
Allowance arising from consolidation of HCP ........ -- 256,042 --
---------- ---------- ----------
Balance at end of year ................................ $ 801,042 $ 301,042 $ 164,822
========== ========== ==========
</TABLE>
F-22
<PAGE> 63
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. LEASES
The Company leases its corporate headquarters under an operating lease
expiring in 2002. Additionally, the senior living communities have entered into
various contracts for services for duration of 5 years or less and are on a fee
basis as services are rendered. Rent expense under these leases was $266,590
and $188,986 for 1998 and 1997, respectively. Future commitments are as
follows:
<TABLE>
<S> <C>
1999 $ 293,023
2000 296,959
2001 303,207
2002 185,931
-----------
$1,079,120
===========
</TABLE>
HCP leases its property and equipment to tenants under noncancelable
operating leases. The lease terms range from 9 to 12 years with options to renew
for additional five-year terms and options to purchase the leased property at
the current fair market value at the end of the initial lease term. The leases
generally provide for contingent rentals based on the performance of the
property. Contingent rentals aggregated $310,275 and $271,340 in 1998 and 1997,
respectively.
Minimum rentals for the next two years for the HCP leases are $3,971,328 per
year, subject to change based on changes in interest rates. Minimum rentals are
$3,761,262 and $2,858,619 for the years 2000 and 2001. There are no minimum
rentals thereafter. Property and improvements less accumulated depreciation
attributable to such rentals amounted to $18,329,061 and $19,339,886 at December
31, 1998 and 1997, respectively.
Four of HCP's senior living communities are subject to a master lease with a
single operator, Rebound, Inc., a subsidiary of HealthSouth Corporation
("HealthSouth"). This master lease, as amended, contains a nine-year renewal
option and provides for contingent rentals equal to 4% of the revenue
differential, as defined, effective January 30, 1997. As of December 31, 1998
and 1997, no contingent rentals have been accrued on the master lease. Prior to
February 28, 1997, HealthSouth closed two of the four communities under the
master lease. Despite these closures, HealthSouth has continued making its full
lease payments under the terms of the master lease.
17. OFFICERS' SALARIES AND BONUS
General and administrative expense includes officers' salaries and bonuses
of $670,000, $3,342,360 and $3,371,887 for the years ended December 31, 1998,
1997 and 1996, respectively. Compensation of the Stockholders and Cohen, all
officers of the Company, are based on their respective employment agreements
since October 1, 1997.
18. PRO FORMA INCOME TAXES (UNAUDITED)
The income taxes on earnings of the S corporations and partnerships for
fiscal 1996 and for the period from January 1, 1997 through October 31, 1997,
are the responsibility of the Stockholders and partners. The pro forma
adjustments reflected on the statements of income assume these S corporations
and partnerships were subject to income taxes. Pro forma income tax expense has
been calculated using statutory federal and state tax rates, estimated at 39.5%.
F-23
<PAGE> 64
19. PRO FORMA RESULTS OF OPERATIONS (UNAUDITED)
Shown below are unaudited pro forma consolidated amounts for the year
ended December 31, 1997 and 1996, respectively, representing the results of
operations of the Company for such periods after giving effect to the
adjustments relating to the Offering and the Formation, as if the transactions
had occurred as of January 1, 1996. The unaudited pro forma consolidated
amounts are presented for informational purposes only and do not necessarily
reflect the financial position or results of operations of the Company which
would have actually resulted had the Offering and the Formation occurred as of
January 1, 1996, or the future results of operations of the Company.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1996
----------- -----------
<S> <C> <C>
Total revenues .................................................. $30,709,882 $26,504,461
Net income ...................................................... 4,991,288 3,396,742
Net income per share ............................................ $ 0.25 $ 0.17
Shares used in computing pro forma net income per share ......... 19,717,347 19,717,347
</TABLE>
20. SUBSEQUENT EVENT
On February 7, 1999, the Company entered into definitive Agreements and
Plans of Merger with ILM Senior Living, Inc. and ILM II Senior Living, Inc. for
a combined transaction value of approximately $174 million, which includes
approximately $4 million of net liabilities. The primary assets of ILM Senior
Living, Inc. and ILM II Senior Living, Inc. collectively are 13 senior living
communities that have been managed by the Company under management agreements
since 1996. Under the two merger agreements, both ILM Senior Living, Inc. and
ILM II Senior Living, Inc. would separately merge with and into a wholly owned
direct subsidiary of the Company with the aggregate issued and outstanding
shares of ILM Senior Living, Inc. and ILM II Senior Living, Inc. common stock
eligible to receive 65% of the merger consideration in cash (approximately
$110.5 million) and 35% in 8% convertible trust preferred securities (with a
liquidation value of approximately $59.5 million). Both mergers have been
approved by the boards of directors of each company and each transaction
requires the approval of the applicable shareholders of either ILM Senior
Living, Inc. or ILM II Senior Living, Inc. The mergers also are subject to
certain other customary conditions, including regulatory approvals and are
expected to be completed during the second half of 1999.
F-24
<PAGE> 65
SIGNATURES
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, on March 29, 1999.
CAPITAL SENIOR LIVING CORPORATION
By: /s/ LAWRENCE A. COHEN
---------------------------------------
Lawrence A. Cohen
Vice Chairman of the Board and
acting Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated. Each person whose signature to
this report appears below hereby appoints Lawrence A. Cohen and James A. Stroud
and each of them, any one of whom may act without the joinder of the other, as
his or her attorney-in-fact to sign on his behalf, individually and in each
capacity stated below, and to file all amendments to this report, which
amendment or amendments may make such changes in and additions to the report as
any such attorney-in-fact may deem necessary or appropriate.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ JEFFREY L. BECK Co-Chairman of the Board March 29, 1999
- -------------------------------------
Jeffrey L. Beck
/s/ JAMES A. STROUD Co-Chairman of the Board and March 29, 1999
- ------------------------------------- Chairman, Chief Operating
James A. Stroud Officer and Secretary
/s/ LAWRENCE A. COHEN Vice Chairman of the Board and March 29, 1999
- ------------------------------------- acting Chief Executive Officer
Lawrence A. Cohen and Chief Financial Officer
(Principal Executive, Financial
and Accounting Officer)
/s/ GORDON I. GOLDSTEIN DIRECTOR March 29, 1999
- -------------------------------------
Dr. Gordon I. Goldstein
/s/ J. FRANK MILLER, III Director March 29, 1999
- -------------------------------------
J. Frank Miller, III
/s/ JAMES A. MOORE Director March 29, 1999
- -------------------------------------
James A. Moore
/s/ VICTOR W. NEE Director March 29, 1999
- -------------------------------------
Dr. Victor W. Nee
</TABLE>
<PAGE> 66
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.
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
*3.1 -- Amended and Restated Certificate of Incorporation of the
Registrant
*3.2 -- Amended and Restated Bylaws of the Registrant
*10.1 -- Asset Purchase Agreement, dated as of July 8, 1997, by and
between Capital Senior Living Communities, L.P. and Capital
Senior Living Corporation
*10.2 -- Contribution Agreement, dated as of August 1, 1997, by and
among Capital Senior Living Corporation, Jeffrey L. Beck, James
A. Stroud, Senior Living Trust, and Lawrence A. Cohen
*10.3 -- Stock Purchase and Stockholders' Agreement, dated as of
November 1, 1996, by and among Capital Senior Living Corporation,
Jeffrey L. Beck, Senior Living Trust, and Lawrence Cohen
*10.4 -- Amended and Restated Exchange Agreement, dated as of June 30,
1997, by and between Lawrence A. Cohen and Jeffrey L. Beck
*10.5 -- Amended and Restated Exchange Agreement, dated as of June 30,
1997, by and among Lawrence A. Cohen and James A. Stroud
+*10.6 -- 1997 Omnibus Stock and Incentive Plan
*10.7 -- Senior Living Agreement, by and between Capital Senior Living,
Inc. and New World Development (China) Limited
*10.8 -- Amended and Restated Loan Agreement, dated as of June 30,
1997, by and between Lehman Brothers Holdings Inc., d/b/a/ Lehman
Capital, A Division of Lehman Brothers Holdings Inc., and Capital
Senior Living Communities, L.P.
+*10.9 -- Amended and Restated Employment Agreement, dated as of May 7,
1997, by and between Capital Senior Living, Inc. and Jeffrey L.
Beck
+*10.10 -- Amended and Restated Employment Agreement, dated as of May 7,
1997, by and between Capital Senior Living, Inc. and James A.
Stroud
+*10.11 -- Employment Agreement, dated as of November 1, 1996, by and
between Capital Senior Living Corporation and Lawrence A. Cohen
+*10.12 -- Employment Agreement, dated as of November 26, 1996, by and
between Capital Senior Living, Inc. and David R. Brickman
+*10.13 -- Employment Agreement, dated as of November 26, 1996, by and
between Capital Senior Living, Inc. and Keith N. Johannessen
</TABLE>
E-1
<PAGE> 67
<TABLE>
<S> <C>
*10.14 -- Engagement Letter, dated as of June 30, 1997, by and between
Lehman Brothers Holdings Inc. D/B/A Lehman Capital, A Division of
Lehman Brothers Holdings Inc. and Capital Senior Living
Corporation
*10.15 -- Lease Agreement, dated as of June 1, 1997, by and between G&L
Gardens, LLC, as lessor, and Capital Senior Management 1, Inc.,
as lessee
*10.16 -- Pre-Opening Consulting Agreement, dated as of June 16, 1997,
by and between The Emmaus Calling, Inc., as owner, and Capital
Senior Management 1, Inc., as consultant
*10.17 -- Management Agreement, dated as of February 1, 1995, by and
between Capital Senior Living Communities, L.P., as owner, and
Capital Senior Living, Inc., as manager, regarding Canton Regency
Retirement Community, in Canton, Ohio
*10.18 -- Management Agreement, dated as of February 1, 1995, by and
between Capital Senior Living Communities, L.P., as owner, and
Capital Senior Living, Inc., as manager, regarding Cottonwood
Village, in Cottonwood, Arizona
*10.19 -- Management Agreement, dated as of February 1, 1995, by and
between Capital Senior Living Communities, L.P., as owner, and
Capital Senior Living, Inc., as manager, regarding The Harrison
At Eagle Valley, in Indianapolis, Indiana
*10.20 -- Management Agreement, dated as of February 1, 1995, by and
between Capital Senior Living Communities, L.P., as owner and
Capital Senior Living, Inc., as manager, regarding Towne Centre,
in Merrillville, Indiana
*10.21 -- Management Agreement, dated as of August 1, 1996, by and
between Capital Senior Living, Inc., as manager, and Cambridge
Nursing Home Limited Liability Company, as lessee
*10.22 -- Management Agreement, dated as of April 1, 1996, by and
between Buckner Retirement Services, Inc. and Capital Senior
Management 1, Inc.
*10.23 -- Management Agreement, dated as of May 23, 1997, by and between
The Emmaus Calling, Inc., as owner, and Capital Senior Management
1, Inc., as manager
*10.24 -- Property Management Agreement, dated as of February 1, 1995,
by and between NHP Retirement Housing Partners I Limited
Partnership, as owner, and Capital Senior Living, Inc., as agent
*10.25 -- Management Agreement, dated as of April 1, 1997, by and
between Buckner Retirement Services, Inc. and Capital Senior
Management 1, Inc.
*10.26 -- Management Agreement, dated as of November 30, 1992, by and
between Capital Realty Group Senior Housing, Inc. d/b/a Capital
Senior Living, Inc., as manager, and Jacques- Miller Healthcare
Properties, L.P., as owner
*10.27 -- Management Agreement, dated as of July 29, 1996, by and
between ILM I Lease Corporation, as owner, and Capital Senior
Management 2, Inc., as manager, and Capital Senior Living, Inc.,
as guarantor
*10.28 -- Management Agreement, dated as of July 29, 1996, by and
between ILM II Lease Corporation, as owner, and Capital Senior
Management 2, Inc., as manager, and Capital Senior Living, Inc.,
as guarantor
</TABLE>
E-2
<PAGE> 68
<TABLE>
<S> <C>
*10.29 -- Development Agreement, by and between Capital Senior
Development, Inc., as developer, and Tri Point Communities, L.P.,
as owner
*10.30 -- Development and Turnkey Services Agreement, dated as of
September 1, 1997, by and between Capital Senior Development
Corporation and Tri-Point Communities, L.P.
*10.31 -- Management Agreement, by and between Tri Point Communities,
L.P., as owner, and Capital Senior Living, Inc.
(a)10.32 -- Amended and Restated Loan Agreement, dated as of December 10,
1997, by and between Bank One, Texas, N.A. and Capital Senior
Living Properties, Inc.
(a)10.33 -- Alliance Agreement, dated as of December 10, 1997, by and
between LCOR Incorporated and Capital Senior Living Corporation
(a)10.34 -- Development Agreement, dated as of December 10, 1997, by and
between Capital Senior Development, Inc. and Tri Point
Communities, L.P., regarding senior living community in San
Antonio, Texas
(a)10.35 -- Development Agreement, dated as of February 3, 1998, by and
between Capital Senior Development, Inc. and Tri Point
Communities, L.P., regarding senior living community in
Shreveport, Louisiana
(a)10.36 -- Management Agreement, dated as of December 23, 1997, by and
between Tri Point Communities, L.P. and Capital Senior Living,
Inc., regarding senior living community in San Antonio, Texas
(a)10.37 -- Management Agreement, dated as of February 3, 1998, by and
between Tri Point Communities, L.P. and Capital Senior Living,
Inc., regarding senior living community in Shreveport, Louisiana
(b)10.38 -- Draw Promissory Note, dated April 1, 1998, of Triad Senior
Living I, L.P. in favor of Capital Senior Living Properties, Inc.
(c)10.39 -- Draw Promissory Note, dated September 24, 1998, of Triad
Senior Living II, L.P., in favor of Capital Senior Living
Properties, Inc. (Exhibit 10.1)
(d)10.40 -- Asset Purchase Agreement, dated as of July 24, 1998, by and
between Capital Senior Living Properties, Inc. and NHP Retirement
Housing Partners I Limited Partnership (Exhibit 2.1)
(d)10.41 -- Assignment and Amendment to Asset Purchase Agreement,
effective as of September 29, 1998, by and among NHP Retirement
Housing Partners I Limited Partnership, Capital Senior Living
Properties, Inc., and Capital Senior Living Properties 2 - NHPCT,
Inc. (Exhibit 2.2)
(d)10.42 -- Loan Agreement, dated as of September 30, 1998, by and between
Capital Senior Living Properties 2 - NHPCT, Inc. and Lehman
Brothers Holdings Inc. d/b/a Lehman Capital, a division of Lehman
Brothers Holdings Inc. (Exhibit 2.3)
(e)10.43 -- Asset Purchase Agreement, dated as of July 28, 1998, by and
between Capital Senior Living Properties, Inc. and Gramercy Hill
Enterprises (Exhibit 2.1)
(e)10.44 -- Asset Purchase Agreement, dated as of July 28, 1998, by and
between Capital Senior Living Properties, Inc. and Tesson Heights
Enterprises (Exhibit 2.2)
</TABLE>
E-3
<PAGE> 69
<TABLE>
<S> <C>
(e)10.45 -- Assumption and Release Agreement, effective as of October 28,
1998, among Gramercy Hill Enterprises, Andrew C. Jacobs, Capital
Senior Living Properties 2-Gramercy, Inc., Capital Senior Living
Corporation and Fannie Mae (Exhibit 2.4)
(e)10.46 -- Multifamily Note, dated December 4, 1997, of Gramercy Hill
Enterprises in favor of Washington Mortgage Financial Group, Ltd.
(Exhibit 2.5)
(e)10.47 -- Multifamily Deed of Trust, dated December 4, 1997, among
Gramercy Hill Enterprises, Ticor Title Insurance Company and
Washington Mortgage Financial Group, Inc. (Exhibit 2.6)
(e)10.48 -- Multifamily Note, dated October 28, 1998, of Capital Senior
Living Properties 2- Gramercy, Inc. in favor of WMF Washington
Mortgage Corp. (Exhibit 2.7)
(e)10.49 -- Multifamily Deed of Trust, Assignment of Rents and Security
Agreement, dated October 28, 1998, among Capital Senior Living
Properties 2-Gramercy, Inc., Chicago Title Insurance Company and
WMF Washington Mortgage Corp. (Exhibit 2.8)
+(f)10.50 -- Employment Agreement, dated as of December 10, 1996, by and
between Capital Senior Living, Inc. and Rob L. Goodpaster
(f)10.51 -- Draw Promissory Note dated November 1, 1998 of Triad Senior
Living III, L.P., in favor of Capital Senior Living Properties,
Inc.
(f)10.52 -- Draw Promissory Note dated December 30, 1998 of Triad Senior
Living IV, L.P., in favor of Capital Senior Living Properties,
Inc.
(f)10.53 -- Form of Development and Turnkey Services Agreement by and
between Capital Senior Development, Inc. and applicable Triad
entity
(f)10.54 -- Form of Development Agreement by and between Capital Senior
Development, Inc. and applicable Triad entity
(f)10.55 -- Form of Management Agreement by and between Capital Senior
Living, Inc. and applicable Triad entity
(f)10.56 -- Agreement of Limited Partnership of Triad Senior Living I,
L.P. dated April 1, 1998
(f)10.57 -- Agreement of Limited Partnership of Triad Senior Living II,
L.P. dated September 23, 1998
(f)10.58 -- Agreement of Limited Partnership of Triad Senior Living III,
L.P. dated November 10, 1998
(f)10.59 -- Agreement of Limited Partnership of Triad Senior Living IV,
L.P. dated December 22, 1998
(f)21.1 -- Subsidiaries of the Company
(f)27.1 -- Financial Data Schedule
</TABLE>
E-4
<PAGE> 70
- -----------------------------
* Incorporated by reference to exhibit of corresponding number included
in Registration Statement No. 333-33379 on Form S-1 filed by the
Company with the Securities and Exchange Commission.
+ Compensation plan, benefit plan or employment contract or arrangement.
(a) Incorporated by reference to exhibit of corresponding number from the
Company's Annual Report on Form 10-K for the year ended December 31,
1997, filed by the Company with the Securities and Exchange Commission.
(b) Incorporated by reference to exhibit of corresponding number from the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 1998, filed by the Company with the Securities and Exchange
Commission.
(c) Incorporated by reference to the exhibit shown in parentheses from the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1998, filed by the Company with the Securities and
Exchange Commission.
(d) Incorporated by reference to the exhibit shown in parentheses from the
Company's Current Report on Form 8-K, dated September 30, 1998, filed
by the Company with the Securities and Exchange Commission.
(e) Incorporated by reference to the exhibit shown in parentheses from the
Company's Current Report on Form 8-K, dated October 29, 1998, filed by
the Company with the Securities and Exchange Commission.
(f) Filed herewith.
E-5
<PAGE> 1
EXHIBIT 10.50
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into on
the 10th day of December, 1996, by and between Capital Senior Living, Inc. a
Texas corporation ("CSL" or "the Company"), and Rob L. Goodpaster, an
individual residing in the State of Texas ("Employee"). The term of this
Agreement shall be deemed to have commenced as of December 1, 1996
("Employment Commencement Date").
1. APPOINTMENT, TITLE AND DUTIES. CSL hereby employs Employee to serve
in the position as assigned to him by the Board of Directors. In such capacity,
Employee shall have such powers, duties and responsibilities as are customarily
assigned to said position and as may be otherwise assigned to him. In addition
Employee shall have such other duties and responsibilities as may reasonably be
assigned to him by the Board of Directors, including serving with the consent
or at the request of CSL on the board of directors or as an officer of entities
affiliated with CSL (collectively, the "Affiliates") of affiliated
corporations.
2. TERM OF AGREEMENT. The initial term of this Agreement shall be for
a two (2) year period ending on November 30, 1998, however, the term of this
Agreement shall automatically be extended for a one (1) year term on a
consecutive basis. This Agreement shall terminate upon the earlier of: (i) the
date of the voluntary resignation of Employee, (ii) the date of Employee's
death or determination of Employee's disability (as defined in Paragraph 6
below), (iii) the date of notice by CSL to Employee that this Agreement is
being terminated by CSL whether "for cause" (as defined in Paragraph 6 below)
or without cause, or (iv) upon the date a notice of intent to resign for "good
reason" (as defined in Paragraph 6 below) is delivered to the Company by
Employee.
3. ACCEPTANCE OF POSITION. Employee hereby accepts the position
assigned by the Board of Directors and agrees that during the term of this
Agreement he will faithfully perform his duties and will devote substantially
all of his business time to the business and affairs of CSL and will not
engage, for his own account or for the account of any other person or entity,
in any other business or enterprise except with the express written approval of
the Board of Directors of CSL. Employee may, at his sole discretion, (i) serve
as a director on the boards of directors of other entities, businesses and
enterprises he currently serves on, and (ii) make personal, passive
investments. Employee agrees to perform his duties faithfully, diligently and
to the best of his ability, to use his best efforts to advance the best
interests of the Company at all times, and to abide by all moral, ethical and
lawful policies, guidelines, procedures, instructions and orders given to him
by the Company from time to time.
-1-
<PAGE> 2
4. SALARY AND BENEFITS. During the term of this Agreement:
A) CSL shall pay to Employee a base salary described in the
Employee's payroll action form, paid in approximately equal
installments no less frequently than semi-monthly. Employee
shall receive a performance and compensation review on
Employee's anniversary hire date. Employee shall be
eligible for an annual bonus, if available, as determined
by the Compensation Committee of the Board of Directors of
CSL or, if there is no Compensation Committee, the Board of
Directors. The Company shall deduct from Employee's
compensation and bonus, if any, all applicable local,
state, Federal or foreign taxes, including, but not limited
to, income tax, withholding tax, social security tax and
pension contributions (if any).
B) Employee shall participate in all health, retirement,
Company-paid insurance, sick leave, disability, expense
reimbursement and other benefit programs, if any, which CSL
makes available, in its sole discretion, to its senior
executives; however, nothing herein shall be construed to
obligate the Company to establish or maintain any employee
benefit program. The Company may purchase and maintain in
force a death and disability insurance policy in an amount
at all times equal to not less than an amount equal to
Employee's annual base salary multiplied by two (2). The
Company would be the beneficiary of said policy and would
use said policy for the purposes described in Paragraph
7(A)(i), below. Reimbursement of Employee's reasonable and
necessary business expenses incurred in the pursuit of the
business of the Company or any of its affiliates shall be
made to Employee upon his presentation to the Company of
itemized bills, vouchers or accountings prepared in
conformance with applicable regulations of the Internal
Revenue Service and the policies and guidelines of the
Company.
C) Employee shall be entitled to reasonable vacation time
described in the Employee's payroll action form and
pursuant to the Company's Corporate Policies and Procedures
Manual, provided that not more than two (2) weeks of such
vacation time may be taken consecutively without prior
notice to, and the consent of, the Compensation Committee
of the Board of Directors of CSL or, if there is no
Compensation Committee, the Board of Directors.
5. STOCK OPTIONS. Pursuant to the terms of CSL's 1997 Stock Option
Plan, if adopted, Employee shall be entitled to receive a certain number of
options, if available, to purchase the common stock of the Company. The number
of options to be offered to Employee shall be determined by the Board of
Directors of CSL.
-2-
<PAGE> 3
6. CERTAIN TERMS DEFINED. For purposes of this Agreement:
A) Employee shall be deemed to be disabled if a physical or
mental condition shall occur and persist which, in the
written opinion of two (2) licensed physicians, has
rendered Employee unable to perform his assigned duties for
CSL for a period of ninety (90) consecutive calendar days
or more, and which condition, in the opinion of such
physicians, is likely to continue for an indefinite period
of time, rendering Employee unable to return to his duties
for CSL. One (1) of the two (2) physicians shall be
selected in good faith by the Board of Directors of CSL,
and the other of the two (2) physicians shall be selected
in good faith by Employee. In the event that the two (2)
physicians selected do not agree as to whether Employee is
disabled, as described above, then said two (2) physicians
shall mutually agree upon a third (3rd) physician whose
written opinion as to Employee's condition shall be
conclusive upon CSL and Employee for purposes of this
Agreement.
B) A termination of Employee's employment by CSL shall be
deemed to be "for cause" if it is based upon (i) Employee
is charged with and then convicted of any misdemeanor or
any felony involving personal dishonesty, (ii) disloyalty
by Employee to the Company, including but not limited to
embezzlement, or (iii) Employee's failure or refusal to
perform his duties in accordance with this Agreement based
on a standard of reasonableness.
C) A resignation by Employee shall not be deemed to be
voluntary, and shall be deemed to be a resignation for
"good reason" if it is based upon (i) a material diminution
in Employee's base salary which is not part of an overall
diminution for all executive officers of the Company, or
(ii) a material breach by CSL of the Company's obligations
to Employee under this Agreement or under the Company's
Stock Option Plan, if adopted.
7. CERTAIN BENEFITS AND OBLIGATIONS UPON TERMINATION.
A) In the event that Employee's employment terminates (i)
because of death or disability, (ii) because CSL has
terminated Employee other than "for cause" (as described
above), including a Fundamental Change and if Employee has
been continuously employed by CSL for at least one year
prior to the Fundamental Change as described below, or
(iii) because Employee has voluntarily resigned for "good
reason" as described above, then,
i) CSL shall pay Employee in accordance with its
Corporate Policies and Procedures Manual his base
salary for the balance
-3-
<PAGE> 4
of the term of this Agreement (not including any future
extensions), but not less than one (1) year from the
date of the notice of termination, and Employee shall
retain all his Company stock options that are vested;
provided, however, the benefits described in this
Paragraph 7(A)(i) shall terminate at such time as
Employee materially breaches the provisions of
Paragraphs 7(D), 8, 9, or 10 hereof. A Fundamental
Change shall be defined as a merger, consolidation or
any sale of all or substantially all of the assets of
the Company that requires the consent or vote of the
holders of common stock where the Company is not the
survivor or in control;
ii) All accrued but unpaid or unused vacation, sick pay and
expense reimbursement shall be calculated in accordance
with CSL's Corporate Policies and Procedures Manual.
B) In the event that Employee's employment terminates for any
other cause other than those set forth in Paragraph 7(A),
(which can include voluntary resignation without good reason or
termination by CSL "for cause"), then,
i) CSL shall pay Employee his base salary up to and
through the date of termination;
ii) All accrued but unpaid or unused vacation, sick pay and
expense reimbursement shall be calculated in accordance
with CSL's Corporate Policies and Procedures Manual.
C) In the event that Employee's employment terminates by reason of
his death, all benefits provided in this Paragraph 7 shall be
paid to Employee's estate or as his executor or personal
representative shall direct, but payment may be deferred until
Employee's executor or personal representative has been
appointed and qualified pursuant to the law in effect in
Employee's jurisdiction of residence at the time of his death;
D) Following the termination for any reason of Employee's
employment, Employee shall not for himself or any third party,
directly or indirectly (i) divert or attempt to divert from the
Company or its Affiliates any business of any kind in which it
is or has been engaged, including, without limitation, the
solicitation of, interference with, or entering into any
contract with any of its past or then existing customers, and
(ii) employ, solicit for employment, or recommend for
employment any person employed by the Company or its Affiliates
during the period of such person's employment and for a period
of two (2) years thereafter.
-4-
<PAGE> 5
8. CONFIDENTIALITY. Employee hereby acknowledges his understanding
that as a result of his employment by CSL, he will have access to, and
possession of, valuable and important confidential or proprietary data,
documents and information concerning CSL or its Affiliates, its operations and
its future plans. Employee hereby agrees that he will not, either during the
term of his employment with CSL, or at any time before or after the term of his
employment with CSL, divulge or communicate to any person or entity, or direct
any employee or agent of CSL or its Affiliates or of his to divulge or
communicate to any person or entity, or use to the detriment of CSL or its
Affiliates or for the benefit of any other person or entity, or make or remove
any copies of, such confidential information or proprietary data or
information, whether or not marked or otherwise identified as confidential or
secret. Upon any termination of this Agreement for any reason whatsoever,
Employee shall surrender to CSL or its Affiliates any and all materials,
including but not limited to drawings, manuals, reports, documents, lists,
photographs, maps, surveys, plans, specifications, accountings and any and all
other materials relating to the Company or any of its business, including all
copies thereof, that Employee has in his possession, whether or not such
material was created or compiled by Employee, but excluding, however, personal
memorabilia belonging to Employee and notes taken by him as a member of the
Board of Directors. With the exception of such excluded items, materials, etc.,
Employee acknowledges that all such material is solely the property of CSL or
its Affiliates, and that Employee has no right, title or interest in or to such
materials. Notwithstanding anything to the contrary set forth in this Paragraph
8, the Provisions of this Paragraph 8 shall not apply to information which: (i)
is or becomes generally available to the public other than as a result of
disclosure by Employee, or (ii) is already known to Employee as of the date of
this Agreement from sources other than CSL or its Affiliates, or (iii) is
required to be disclosed by law or by regulatory or judicial process.
9. NON-COMPETITION. Employee hereby agrees that for a period of one
(1) year after any termination for any reason whatsoever of this Agreement and
after the last payment to Employee provided for hereunder, he will not,
directly or indirectly, commence doing business, in any manner whatsoever,
which is in competition with all or any portion of the business of CSL or its
Affiliates in any state in which CSL or its Affiliates then operate, own, asset
manage, or is in the process of developing more than two (2) facilities. CSL
hereby acknowledges and agrees that Employee's ownership of a class of
securities listed on a stock exchange or traded on the over-the-counter market
that represents five percent (5%) or less of the number of shares of such class
of securities then issued and outstanding shall not constitute a violation of
this Paragraph 9. Notwithstanding anything to the contrary set forth in this
Paragraph 9, if Employee is terminated from employment by CSL "for cause" as
defined in Paragraph 6(B), Employee shall not be in violation of this Paragraph
9 if Employee accepts and works within the one (1) year period at a position as
an on-site Executive Director or Marketing Director at a nursing or retirement
facility for a salary equal to or less than a comparable position at a
comparable facility in the area.
10. WORK PRODUCT. The Employee agrees that all innovations,
improvements, developments, methods, designs, analyses, reports and all similar
or related information which relates to the Company's or any of its
subsidiaries' or Affiliates' actual or anticipated
-5-
<PAGE> 6
business, or existing or future products or services and which are conceived,
developed or made by the Employee while employed by the Company or its
Affiliates ("Work Product") belong to the Company or such subsidiary or
Affiliate. The Employee will promptly disclose such Work Product to the Board
and perform all actions reasonably requested by the Board (whether during or
after the employment period) to establish and to confirm such ownership
(including, without limitation, assignments, consents, powers of attorney and
other instruments).
11. LEGAL ACTION. In the event that any action or proceeding is
brought to enforce the terms and provisions of this Agreement, the prevailing
party shall be entitled to recover reasonable attorneys' fees and costs. In the
event of a breach or threatened breach by Employee of the provisions of
Paragraph 7(D), 8, 9, or 10, Employee and the Company agree that the Company,
shall, in addition to any other available remedies, be entitled to an
injunction restraining Employee from violating the terms of the applicable
Paragraph and that said injunction is appropriate and proper relief for such
violation.
12. NOTICES. All notices and other communications provided to either
party hereto under this Agreement shall be in writing and delivered by hand
delivery, overnight courier service or certified mail, return receipt
requested, to the party being notified at said party's address set forth
adjacent to said party's signature on this Agreement, or at such other address
as may be designated by a party in a notice to the other party given in
accordance with this Agreement. Notices given by hand delivery or overnight
courier service shall be deemed received on the date of delivery shown on the
courier's delivery receipt or log. Notices given by certified mail shall be
deemed received three (3) days after deposit in the U.S. Mail.
13. CONSTRUCTION. In construing this Agreement, if any portion of this
Agreement shall be found to be invalid or unenforceable, the remaining terms
and provisions of this Agreement shall be given effect to the maximum extent
permitted without considering the void, invalid or unenforceable provision. In
construing this Agreement, the singular shall include the plural, the masculine
shall include the feminine and neuter genders, as appropriate, and no meaning
or effect shall be given to the captions of the paragraphs in this Agreement,
which are inserted for convenience of reference only.
14. CHOICE OF LAW; SURVIVAL. This Agreement shall be governed and
construed in accordance with the internal laws of the State of Texas without
resort to choice of law principles. The provisions of Paragraphs 7(A), (B),
(C), (D), 8, 9, and 10 shall survive the termination of this Agreement for any
reason whatsoever.
15. INTEGRATION; AMENDMENTS. This is an integrated Agreement. This
Agreement constitutes and is intended as a final expression and a complete and
exclusive statement of the understanding and agreement of the parties hereto
with respect to the subject matter of this Agreement. All negotiations,
discussions and writings between the parties hereto relating to the subject
matter of this Agreement are merged into this Agreement, and there are no
rights conferred, nor promises, agreements, conditions, undertakings,
warranties
-6-
<PAGE> 7
or representations, oral or written, expressed or implied, between the
undersigned parties as to such matters other than as specifically set forth
herein. No amendment or modification of or addendum to, this Agreement shall be
valid unless the same shall be in writing and signed by the parties hereto. No
waiver of any of the provisions of this Agreement shall be valid unless in
writing and signed by the party against whom it is sought to be enforced.
16. BINDING EFFECT. This Agreement is binding upon and shall inure to
the benefit of the parties hereto and their respective heirs, personal
representatives, successors and assigns; PROVIDED, HOWEVER, that Employee shall
not be entitled to assign his interest in this Agreement (except for an
assignment by operation of law to his estate), or any portion hereof, or any
rights hereunder, to any party. Any attempted assignment by Employee in
violation of this Paragraph 16 shall be null, void, ab initio and of no effect
of any kind or nature whatsoever.
IN WITNESS WHEREOF, the parties have executed this Agreement on the
date set forth above to be effective as of the date specified in the preamble
of this Agreement.
CAPITAL SENIOR LIVING, INC.
a Texas corporation
Address:
14160 Dallas Parkway, #300
Dallas, TX 75240 By: /s/ KEITH N. JOHANNESSEN
---------------------------------------
Keith N. Johannessen, President
EMPLOYEE
Address:
101 Quorum Drive
Trophy Club, TX 76262 /s/ ROB L. GOODPASTER
------------------------------------------
Rob L. Goodpaster
-7-
<PAGE> 1
EXHIBIT 10.51
DRAW PROMISSORY NOTE
Amount: $10,000,000.00 November 1, 1998
FOR VALUE RECEIVED, the undersigned, promises to pay to Capital Senior
Living Properties, Inc., a Texas corporation, the sum draw down up to Ten
Million and No/100 Dollars ($10,000,000.00), the principal due five (5) years
from the date of the first draw down and interest due quarterly at the rate of
ten and one-half percent (10.5%) per annum, both principal and interest payable
at office of 14160 Dallas Parkway, Suite 300, Dallas, Texas 75240.
The accrued interest on this note is payable quarterly after the first
draw down.
All past due principal and interest shall bear interest from maturity
at the rate of twelve percent (12%) per annum.
This note may be prepaid without penalty.
Failure to pay any installment of principal and interest, or any other
part thereof, when due shall, at the election of the holder and without notice,
mature the whole note and it shall at once become due and payable.
It is hereby specifically agreed that if this note is placed in the
hands of an attorney for collection, or if collected by suit or through the
Probate Court or any other legal proceedings, the undersigned agrees to pay
reasonable attorneys' fees.
All makers, endorsers, sureties and guarantors hereby waive presentment
for payment of this note, notice of nonpayment, protest, notice of protest,
diligence, or any notice of, or defense on account of, any extension,
extensions, renewal, renewals, or change in any manner of or in this note, or in
any of its terms, provisions or covenants, or of any delay, indulgence or other
act of any holder of the aforesaid note.
TRIAD SENIOR LIVING III, L.P.,
a Texas limited partnership
By: Triad Partners III, Inc.,
Its General Partner
By: /s/ BLAKE N. FAIL
------------------------------------
Title: President
---------------------------------
<PAGE> 1
EXHIBIT 10.52
DRAW PROMISSORY NOTE
Amount: $10,000,000.00 December 30, 1998
FOR VALUE RECEIVED, the undersigned, promises to pay to Capital Senior
Living Properties, Inc., a Texas corporation, the sum draw down up to Ten
Million and No/100 Dollars ($10,000,000.00), the principal due five (5) years
from the date of the first draw down and interest due quarterly at the rate of
ten and one-half percent (10.5%) per annum, both principal and interest payable
at office of 14160 Dallas Parkway, Suite 300, Dallas, Texas 75240.
The accrued interest on this note is payable quarterly after the first
draw down.
All past due principal and interest shall bear interest from maturity
at the rate of twelve percent (12%) per annum.
This note may be prepaid without penalty.
Failure to pay any installment of principal and interest, or any other
part thereof, when due shall, at the election of the holder and without notice,
mature the whole note and it shall at once become due and payable.
It is hereby specifically agreed that if this note is placed in the
hands of an attorney for collection, or if collected by suit or through the
Probate Court or any other legal proceedings, the undersigned agrees to pay
reasonable attorneys' fees.
All makers, endorsers, sureties and guarantors hereby waive presentment
for payment of this note, notice of nonpayment, protest, notice of protest,
diligence, or any notice of, or defense on account of, any extension,
extensions, renewal, renewals, or change in any manner of or in this note, or in
any of its terms, provisions or covenants, or of any delay, indulgence or other
act of any holder of the aforesaid note.
TRIAD SENIOR LIVING IV, L.P.,
a Texas limited partnership
By: Triad Partners IV, Inc.,
Its General Partner
By: /s/ BLAKE N. FAIL
--------------------------------------
Title: President
-----------------------------------
<PAGE> 1
EXHIBIT 10.53
FORM OF DEVELOPMENT AND TURNKEY SERVICES AGREEMENT
This Development and Turnkey Services Agreement (this "Agreement") is
entered into by and between Capital Senior Development, Inc., a Texas
corporation ("Capital"), and Triad Senior Living ___, L.P., a Texas limited
partnership ("Triad"), this ___ day of _________, 199_.
RECITALS:
WHEREAS, Triad has been established to own and/or operate assisted
living facilities, independent living facilities, skilled nursing facilities
and other related medical facilities (each a "Facility" and collectively the
"Facilities"); and
WHEREAS, Triad desires to have Capital and/or its affiliate develop,
construct, market and manage the Facilities; and
WHEREAS, Capital and its related entities have expertise in
coordinating the development and construction of assisted living facilities,
independent living facilities, skilled nursing facilities and other related
medical facilities;
NOW THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, and in consideration of the
undertakings of each of the parties to the other, the parties hereto agree as
follows:
1. Engagement. Triad hereby retains Capital and Capital hereby agrees
to provide the Services as set forth in Section (2) below.
2. Capital's Duties. Capital's duties under this Agreement shall be
divided into three (3) phases, a development phase, construction phase, and a
post-construction phase (collectively, the "Services"), and shall be as follows:
I. Development Phase
(a) Filing of Applications for Permits, Consents and Approvals.
Coordination, advice, recommendations and consultations with respect to the
filing of all necessary documents required by any applicable federal, state or
local government under applicable law in order obtain any required permit,
approval, consent or certificate ("Permit"), including, without limitation, any
applicable certificate of need for any Facility, including, without limitation,
the preparation and filing by or on behalf of Triad of application forms,
notices of intent to file and other legal notices.
(b) Prosecution of Permit Applications and Appeals. Prosecution of
Permit applications, preparation of responses to appropriate governmental
agencies comments with respect to completeness review as to Permit applications,
preparation of responses to taxpayer groups and others with respect to such
applications, including attendance at public hearings and meetings with
community groups and health planning organizations. Capital shall appeal with
all due diligence, on behalf of Triad, any denials of Permit applications or
challenges to the granting thereof which
<PAGE> 2
Triad elects to contest. The cost of such appeals shall be included in the
Contract Price (as defined herein) of each Facility.
(c) Site Selection. Capital shall assist Triad in locating an
appropriate site for each Facility ("Site"). Triad shall be responsible for
providing or obtaining commitments for financing the construction, including
the furnishing of financial statements, providing an appraisal of the Site and
the Facility and for executing applications, notes, mortgages, assumption
agreements and other documents reasonably necessary to effectuate such
financing. Subject to Triad's prior approval, Capital shall order a Phase I
Environmental Report to determine the presence or absence of hazardous waste or
materials on any such Site. Capital shall coordinate the title examination to
determine that the Site is not subject to any easements, encumbrances,
restrictions or agreements which adversely affect the ability of Capital to
develop and construct the Facility or the ability of Triad to operate the
intended Facility thereon. To date, Capital has identified and Triad has
approved for development each of the Sites identified on Exhibit A attached
hereto.
(d) Zoning Approvals. Capital shall use its best efforts in obtaining
all applicable governmental permits and approvals for the construction of each
Facility, including, without limitation, coordination, advice, recommendations
and consultations with respect to the filing of all necessary documents to
obtain zoning and inland/wetlands approvals ("Zoning Approvals"); Capital shall
prepare all applications for and prosecute the same for all Zoning Approvals
required for any Facility. All filing, notice and reasonable legal fees in
connection therewith shall be included in the Contract Price. Capital shall not
have the right to retain legal counsel without the prior approval of Triad
which shall not be unreasonably withheld, delayed or conditioned.
(e) Triad Representative. Triad shall appoint a representative to
communicate with Capital with respect to each Facility (the "Triad
Representative"). Capital shall, on a periodic basis not less frequently than
bi-weekly (or more frequently as reasonably requested by Triad) communicate in
person or by telephone (at Triad's option) with the Triad Representative to
report with respect to the progress and status of each Facility and to obtain
the opinions, views and direction of the Triad Representative with respect to
the completion of each Facility.
(f) Decision Making. Nothing herein shall be construed as imposing any
obligation on Triad to proceed with the construction of the Facilities whether
or not the Zoning Approvals for the applicable Facilities are granted, it being
understood and agreed that Triad shall have a period of thirty (30) days after
written notice from Capital to Triad of the issuance of a final, non-appealable
Zoning Approvals (the "Election Deadline") in which to make such determination
as to such Facility.
(g) Development Agreement. Triad shall enter into a development
agreement in the form attached hereto as Exhibit B (the "Development Agreement"
and collectively "Development Agreements") with Capital with respect to the
applicable Facility subsequent to entering into an agreement of sale relating
to such Facility.
2
<PAGE> 3
II. Construction Phase
Upon the execution of a Development Agreement for a Facility, the
parties' rights and obligations shall be as described in each Development
Agreement which shall include, without limitation, the following:
(a) Plans and Specifications. All of the Facilities shall be
constructed by Capital pursuant to plans and specifications approved by Triad
in all material respects.
(b) Contract Price. The contract price for the construction and
furnishing (subject to an allowance set forth below) of the subject Facility
under the applicable Development Agreement (herein the "Contract Price") shall
be an amount equal to the costs incurred by Capital in the development and
construction of such Facility plus a developer fee equal to four percent (4%)
of the costs incurred. The Contract Price shall also include reimbursement to
Capital for all overhead and expenses incurred in performing the services under
the applicable Development Agreement, but not to exceed four percent (4%) of
the costs incurred in constructing and furnishing the subject Facility.
(c) FF&E. The Contract Price for each Facility will include an
allowance ("FF&E Allowance") for furniture, fixtures & equipment ("FF&E") equal
to the amount of the allowance therefor as agreed upon by Capital and Triad in
the applicable Development Agreement. Triad will make selections in a timely
fashion and all items will be ordered by Capital. Any amounts expended for FF&E
above the FF&E Allowance therefor will be an increase adjustment to the
Contract Price, the cost of which will be passed through to Triad at Capital's
actual cost without any developer fee. Capital will endeavor to obtain the
lowest possible cost for such items. Prior to incurring any costs in excess of
the FF&E Allowance, Capital shall use its reasonable best efforts to notify
Triad in writing of the estimated amount of such excess. Capital will, upon
request, provide Triad with documentation of the costs incurred by Capital for
which reimbursement is sought.
(d) Unusual Site Conditions. The costs by Capital in remedying unusual
site conditions will be an increase adjustment to the Contract Price for each
Facility to the extent that such costs exceed an agreed upon allowance therefor
as a result of unusual site conditions not identifiable by Capital after the
exercise of reasonable diligence at the time the Site was acquired. At such
time as Capital becomes aware of any such unusual site conditions, Capital
shall promptly notify Triad of the same and of the amount by which the
estimated cost to correct said site conditions shall exceed such allowance.
Capital will endeavor to obtain the lowest possible cost in remedying such
unusual site conditions and will charge Triad for Capital's actual cost
incurred except that an unusual site condition which should have been
identified by Capital in exercising reasonable diligence at the time such
Facility was acquired will be at Capital's cost.
(e) Financing. Triad will arrange for the provision of construction
and permanent financing for each of the Facilities by executing all
applications, notes, mortgages, assumption agreements and other documents
reasonably necessary to effectuate such financing. Capital shall not have any
obligation to guaranty the payment or performance obligations of Triad under
the terms of such financing.
3
<PAGE> 4
(f) Occupancy Development Program. Capital will prepare and recommend
to Triad, for its approval, an occupancy development program for the Facility
and budget for the cost of such program which shall include the planning and
arranging for the creative services, production, type, mix, copy, placement and
purchase of the material and media as necessary to implement said occupancy
development program.
III. Post-Construction Phase
Each Facility unless otherwise agreed upon by Triad and Capital prior
to the execution of the Development Agreement, shall be managed by Capital or
an affiliate of Capital pursuant to the terms of a Management Agreement (a copy
of which shall be attached to the Development Agreement as an exhibit thereto)
in form and substance mutually agreeable to the parties ("Management
Agreement"). Triad shall retain primary responsibility for establishing all
policies and objectives for the Facility and planning for its short-range and
long.-range goals. In the event of the termination of the Management Agreement,
Triad may either elect to manage the Facility itself or may select such
management firm as it desires.
The parties' rights and obligations shall be as described in each
Management Agreement which shall include, without limitation, the following:
(a) Capital shall provide consultant and management services and take
such steps as it deems necessary, all subject to and in accordance with the
policies and guidelines established by Triad to prepare the Facility for
occupancy and operation.
(b) Capital shall recruit and train, at Triad's expense a competent
executive director acceptable to the Triad for the supervision of the
administrative functions of each Facility. Such executive director shall be
qualified to meet the requirements established by all federal, state and/or
local administrative bodies or agencies having jurisdiction over each Facility.
(c) Capital shall assist Triad in the licensing, equipping and
staffing phases of each Facility. The staff of each Facility shall be employees
of Capital.
(d) Capital shall furnish and install operating procedures, systems
and controls developed by it for the purposes of providing effective management
techniques and functions for the benefit of the Residents of each Facility.
(e) Capital shall prepare for review and approval by Triad each
initial operating budget and annual operating budgets for each Facility for
each year of the term of the Management Agreement. Following the initial
occupancy of each Facility, Capital will report to Triad at least once each
month on the financial status of each Facility during the previous month.
(f) Capital shall receive a monthly management fee under the
Management Agreement equal to five percent (5%) of Gross Revenues generated
during the immediately proceeding month provided that the monthly management
fee shall not be less than Five Thousand Dollars ($5,000.00), and a marketing
lease-up fee of Five Hundred Dollars ($500.00) for each unit leased at the time
the unit is initially occupied.
4
<PAGE> 5
3. Independent Contractor. Capital shall act as an independent
contractor for purposes of performing all of the above services.
4. Costs and Expenses. Triad shall be responsible for all costs and
expenses incurred by Capital in the performance of its obligations hereunder,
including but not limited to, the payment of all compensation and benefits to
employees of Capital and any normal and customary transportation or incidental
business related expenses incurred by employees of Capital. In the event a
final, non-appealable Permit is not granted or final and a Facility is not
constructed or in the event Triad elects not to proceed with a project after
the granting thereof in accordance with the terms contained hereinabove, to the
extent not previously or directly paid by Triad, Triad will reimburse Capital
for all reasonable and documented out-of-pocket expenses incurred by it, if
any, in connection with the provision of the foregoing services.
5. Independent Agreements. The agreements with respect to each
Facility as set forth herein are independent of the agreements with respect to
any other Facilities since there is no guaranty that a suitable Site or other
condition precedent will be met with respect to any particular Facility.
6. Indemnity. Capital agrees at all times to indemnify and defend
Triad affiliates, and its respective employees, officers, directors, servants
and agents (collectively, the "Triad Parties") and hold and save the Triad
Parties harmless of and from and against any and all liabilities and
indebtedness, obligations, losses, damages, costs and expenses (including
reasonable attorneys' fees) suffered or incurred by the Triad Parties by reason
of any claim or demand brought by anyone or any action or proceeding instituted
or judgment rendered against the Triad Parties arising out of or resulting in
any manner from Capital's breach or failure to perform Capital's material
obligations, responsibilities or duties as required by this Agreement,
Capital's failure to be appropriately licensed to perform the services required
of it hereunder, or any negligent willful act or omission of Capital or any of
its subcontractors, agents or employees.
Triad agrees at all times to indemnify and defend Capital and its
affiliates and their respective employees, officers, directors, servants and
agents (collectively, the "Capital Parties") and hold and save the Capital
Parties harmless of and from and against any and all liabilities and
indebtedness, obligations, losses, damages, costs and expenses (including
reasonable attorneys' fees) suffered or incurred by the Capital Parties, by
reason of any claim or demand brought by anyone or any action or proceeding
instituted or judgment rendered against the Capital Parties arising out of or
resulting in any manner from Triad's breach or failure to perform, Triad's
material obligations, responsibilities or duties as required by this Agreement,
or any negligent willful act or omission of Triad or any of its subcontractors,
agents or employees.
7. Termination. Triad and Capital shall not be required to proceed
with the execution and delivery of any additional Development Agreements for
additional Facilities in the event of a material default by the other party
with respect to one or more Facilities then under construction which is not
cured within any applicable cure period provided for in the applicable
Development Agreement. In the event of the termination of any Development
Agreement, any amounts due on account of services performed prior to the
effective date of termination which have not been previously paid will be paid
(pro rata through the effective date of termination) promptly following
5
<PAGE> 6
termination less any damages sustained by the non-breaching party as a result
of the breach. Any such termination shall not affect the rights of the parties
under this Agreement which relate to events prior to such termination,
including without limitation, rights under this Section 7.
8. Notices. All notices which may be given to any of the parties
hereunder shall be in writing and shall be either sent by telecopy transmission
to a telecopy machine located in the office of Triad or Capital, as the case
may be, or hand delivered or sent by registered or certified mail, return
receipt requested, or by Federal Express or similar nationally recognized
overnight delivery servicer providing a receipt, and postage prepaid as
follows:
To Capital:
Capital Senior Living Properties, Inc.
14160 Dallas Parkway
Suite 300
Dallas, Texas 75240
Attention: David Suarez, Vice President of Development
With a copy to:
Capital Senior Living Properties, Inc.
14160 Dallas Parkway
Suite 300
Dallas, Texas 75240
Attention: David R. Brickman, Vice President and General Counsel
To Triad:
Triad Senior Living __, L.P.
4312 Mockingbird Lane
Dallas, Texas 75205
Attention: Blake N. Fail, President
Such addresses may be changed from time to time by notice from Triad
or Capital to the others.
The effective date of any such notice shall be the date of actual
receipt at Triad's address or Capital's address, as applicable, if hand
delivered, sent by overnight delivery or sent by facsimile transmission or
registered mail, or three (3) days after such notice is properly deposited for
mailing if sent by United States mail.
6
<PAGE> 7
9. General Provisions:
(a) Gender, Number. Whenever the context requires, the use herein of
(i) the neuter general includes the masculine and feminine genders; and (ii)
the singular number includes the plural number.
(b) Entire Agreement. This Agreement and any document executed
pursuant hereto contains the entire agreement between the parties relating to
the transactions contemplated hereby and all prior or contemporaneous
agreements, understandings, representations and statements, oral or written,
are merged into and superseded by this Agreement.
(c) Modifications. No modifications, waiver or discharge of this
Agreement will be valid unless it is in writing and signed by the parties
hereto.
(d) Attorneys' Fees and Costs. If either party commences an action for
the interpretation, reformation, enforcement or rescission of this Agreement,
the prevailing party will be entitled to recover from the other party
reasonable attorneys' fees and court and other costs incurred, including
without limitation, its costs and fees on appeal.
(e) Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all of which
together will constitute one instrument.
(f) Applicable Laws. This Agreement shall be construed and enforceable
in accordance with the laws of the Texas.
(g) Time of Essence. Time is strictly of the essence with respect to
each and every term, condition, obligation and provision herein.
(h) Further Instruments. Each party hereto shall from time to time
execute and deliver such further instruments as the other party or its counsel
may reasonably request to effectuate the intent of this Agreement.
(i) Joint Effort. The preparation of this Agreement has been a joint
effort of the parties, and the resulting document shall not be construed more
severely against one of the parties than the other.
(j) Captions. The captions of this Agreement are for convenience and
reference only and in no way define, describe, extend or limit the scope or
intent of this Agreement or the intent of any provision hereof.
(k) Severability. The invalidity or unenforceability of one or more of
the phrases, sentences, provisions, clauses, sections or Articles contained in
this Agreement shall not affect the validity or enforceability of the remaining
portions, so long as the material purposes of this Agreement can be determined
and effectuated.
7
<PAGE> 8
(l) Exhibits. The Exhibits attached to this Agreement are hereby
incorporated by reference and made a part of this Agreement.
(m) Successors. Subject to the limitations on assignment set forth in
Section 9(o), this Agreement shall be binding upon the parties hereto, their
respective successors and assigns.
(n) Brokers. Each of Triad and Capital represent and warrant to the
other that no broker or finder has acted on its behalf in connection with this
Agreement, or the transactions contemplated hereby or referred to herein. Each
of Triad and Capital agrees to indemnify and hold the other harmless from any
claim or demand for commission or other compensation by any broker, finder or
similar agent claiming to have been employed by or on behalf of such party.
(o) Assignment. Triad shall have no right to assign its rights or
delegate its obligations under this Agreement to another entity or person
without the prior written consent of Capital except that this Agreement, or
this Agreement as it relates to a specific Facility, may be assigned by Triad,
in whole or in part, to an affiliate of Triad without the consent of Capital,
provided that Triad shall remain primarily liable for payment and performance
of all obligations under this Agreement after the assignment. Capital shall
have no right to assign its rights or delegate its obligations under this
Agreement to another entity or person without the prior written consent of
Triad, except that this Agreement may be assigned by Capital, in whole or in
part, to an affiliate of Capital without the consent of Triad, provided that
Capital shall remain primarily liable after such assignment. Each of Triad and
Capital shall promptly provide the other with notice of an assignment permitted
by the terms hereof without the consent of the other party. The term
"affiliate" shall mean any entity which is controlled by, under common control
with, or which controls, Triad or Capital, as the case may be.
(p) Cooperation. Both parties agree that they shall cooperate with
each other in allowing Capital to perform its duties under this Agreement,
including, without limitation, Triad providing prompt responses to all
inquiries made by Capital in connection with all aspects of the work for each
Facility, including, without limitation, the selection of the FF&E for each
Facility and all background documentation (including without limitation
financials, census data and corporate documents) needed to complete, file and
prosecute the Permit applications and Zoning Approvals and will sign all
applications as necessary.
(q) Development Agreement to Control. In the event that any of the
terms or conditions set forth herein are inconsistent with or contrary to any
of those set forth in an applicable Development Agreement for a Facility, then
the terms and conditions set forth in such Development Agreement shall control.
8
<PAGE> 9
EXECUTED as an instrument under seal effective as of the date first
set forth above.
CAPITAL SENIOR DEVELOPMENT, INC.
By:
--------------------------------------
Keith N. Johannessen, President
TRIAD SENIOR LIVING ___, L.P.
By: Triad Partners __, Inc.
Its general partner
By:
--------------------------------
Blake N. Fail, President
9
<PAGE> 10
EXHIBIT A
SITES
10
<PAGE> 11
EXHIBIT B
FORM OF DEVELOPMENT AGREEMENT
11
<PAGE> 1
EXHIBIT 10.54
FORM OF DEVELOPMENT AGREEMENT
THIS DEVELOPMENT AGREEMENT ("Agreement") is made effective the ____ day of____,
____, by and between Triad Senior Living ____, L.P., a Delaware Limited
Partnership (the "Owner") and Capital Senior Development, Inc., a Texas
corporation ("Capital Senior").
A. WHEREAS Capital Senior is a firm specializing in the planning and
development, arranging for financing, occupancy development, arranging for
design and construction, and operation of retirement communities; and
B. WHEREAS the Owner desires to develop and construct an expansion of
the existing retirement community in (the "Facility") to be located on a
parcel of land described on Exhibit "A" (the "Land") (the Facility and the Land
are collectively referred to herein as the "Project"); and
C. WHEREAS the Owner understands the concept and plan of Capital
Senior for the development and operation of retirement communities; and
D. WHEREAS the Owner believes that utilizing such concept and plan of
Capital Senior will enable it to economically provide the Project to its
residents; and
E. WHEREAS the Owner wishes to engage Capital Senior as developers in
connection with the Project, and Capital Senior is willing to serve in such
capacity.
NOW THEREFORE, the parties do hereby agree as follows:
I. SERVICES TO BE PERFORMED BY CAPITAL SENIOR
1.1 For the consideration herein stipulated, Capital Senior will direct the
Project for the Owner, as stated below. Capital Senior will expedite and
coordinate planning and development, arrange for financing, supervise initial
occupancy development, arrange for design and construction services, and handle
certain bookkeeping functions, all as hereinafter set forth.
1.2 The scope of the Project will be essentially the development, construction
and occupancy of assisted living units, and related common areas, pursuant to
the budgets approved by the Owner.
1
<PAGE> 2
II. PLANNING AND DEVELOPMENT
2.1 Capital Senior will coordinate, prepare, and recommend to the Owner, for
its approval, a basic plan for the Project, including: a site plan, mix, size
and shape of living units, and types of common areas.
2.2 Capital Senior will recommend to the Owner, for its approval, the initial
rates for the monthly service fees to residents in connection with the Project.
2.3 Capital Senior will prepare, for Owner's approval, projections of capital
cost in form similar to that attached hereto as Exhibit "B" (the "Capital Cost
Budget"), as well as operating expenses and cash flow projections.
2.4 Capital Senior will prepare, for Owner's approval, the form of residency
agreement (the "Residency Agreement") to be executed by the residents. The
Residency Agreement describes the program of services to be offered to the
resident by the Owner. The Owner shall provide, at Owner's cost, legal counsel
acceptable to Capital Senior, to determine the legality, effect and
enforceability of the Residency Agreement. During the term of this Agreement,
the Owner agrees not to change the terms of the Residency Agreement except with
the consent of Capital Senior.
2.5 To the extent that unforeseen circumstances require changes from time to
time in the basic plan, fee schedules, financial projections or the form of the
Residency Agreement, Capital Senior will recommend said changes to the Owner.
2.6 Capital Senior will determine municipal, state and federal requirements
affecting the planning for the Project. Capital Senior will prepare or cause to
be prepared the documents to obtain approval of governmental authorities having
jurisdiction over the Project, and no such documents shall be submitted by the
Owner without prior approval of Capital Senior.
2.7 Capital Senior will prepare for the Owner a schedule of all Project
activities and will update the schedule from time to time as may be necessary
due to changing circumstances.
III. ARRANGEMENT FOR PERMANENT AND INTERIM FINANCING
3.1. Capital Senior will, if requested by the Owner, prepare loan application
documents required by the Owner for the project, including brochures,
feasibility reports, financial projections, information regarding the community
need for the Project and other material necessary to make application for
permanent and interim financing for the Owner.
3.2. Capital Senior will, on behalf of the Owner, present the loan application
to interested lenders and negotiate the terms of any interim land acquisition
and construction financing and permanent financing required by the Owner for
the project. Capital Senior will, if it is successful in negotiating such
financing, recommend to the Owner for its approval and acceptance the interim
and permanent financing so obtained on the Owner's behalf.
2
<PAGE> 3
3.3. The Owner will not unilaterally negotiate for, or attempt to
obtain on its own, construction financing or permanent financing. Capital
Senior agrees to solicit any lending sources recommended by the Owner upon its
written request.
IV. [INTENTIONALLY OMITTED]
V. ARRANGEMENTS FOR DESIGN AND CONSTRUCTION MANAGEMENT SERVICES
5.1 Capital Senior will furnish the Owner its expertise and knowledge
in arranging for design and construction management services in connection with
the design and construction phases of the development of the Project.
5.2 Capital Senior will recommend an architect to the Owner to perform
and coordinate all engineering design and inspection services for the Project.
The Owner will enter into a contract with the architect. Without assuming any
design or engineering liabilities of the architect, Capital Senior, on behalf
of the Owner, shall oversee the activities of Owner's architect. At appropriate
times, as the architect proceeds with the design, Capital Senior will require
the architect to submit the plans and specifications directly to the Owner for
the Owner's approval.
5.3 Capital Senior will recommend a general contractor to the Owner to
perform all general contractor services for the Project. The Owner will enter
into the contract with the selected general contractor. Without assuming any
liabilities of the general contractor, Capital Senior, on behalf of the Owner,
shall oversee the activities of the Owner's general contractor. At appropriate
times, Capital Senior will submit to the Owner a statement of probable
construction costs based on square footage, volume, and other unit costs. As
the architect proceeds to refine and complete the plans and specifications,
Capital Senior shall keep the Owner informed of any adjustments to previous
statements of probable Project construction costs, indicated by changes in
scope, changes in costs of labor or materials, changes in local requirements,
or changes in Project needs.
5.4 Capital Senior will recommend an interior designer to perform and
coordinate all interior design services for the Project. The Owner will enter
into a contract with the interior designer. Without assuming any interior
design liabilities of the interior designer, Capital Senior, on behalf of the
Owner, shall oversee the activities of the Owner's interior designer. At
appropriate times, as the interior designer proceeds with the design, Capital
Senior will require the interior designer to submit plans and color boards to
the Owner for the Owner's approval.
5.5 Except to the extent to be obtained by the architect or the Owner,
Capital Senior shall file the required documents with and use its best efforts
to secure the approval of governmental authorities having jurisdiction over the
design of the Project.
5.6 Capital Senior does not assume any design or engineering or any
other liabilities of the architect nor any liabilities of the general
contractor and interior designer, and the Owner agrees to look solely to the
architect, to the general contractor, and to the interior designer for such
liabilities, respectively.
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VI. BOOKKEEPING FUNCTIONS
6.1 Unless this Agreement is sooner terminated under Article IX, from
the date of this Agreement and until initial occupancy of the Project, Capital
Senior shall perform all bookkeeping services for the Project contemplated by
this Agreement. Such services do not include the preparation of tax returns or
other filings required of the Owner.
6.2 The Owner shall open an account in the Owner's name at a bank, the
location of which shall be mutually agreed upon by the Owner and Capital
Senior. Capital Senior shall prepare and present to Owner requests for payments
supported by appropriate invoices on a monthly basis. Owner shall authorize
payment of such requests upon receipt and cause the expenses related to the
Project to be paid when they become due. All employees of Capital Senior and
the Owner engaged in handling the Owner's funds shall be bonded in accordance
with the standard practices of Capital Senior.
VII. OWNER RESPONSIBILITIES
7.1 Capital Senior shall not perform or have the responsibility for
the performance of legal services in connection with the activities arising
hereunder. The Owner shall retain the services of legal counsel acceptable to
Capital Senior, at Owner's cost, to perform legal services relating to the
Project. While the legal counsel retained by the Owner shall be directly
responsible to the Owner, he or she shall be directed to cooperate with and
assist Capital Senior.
7.2 Capital Senior shall not perform or have the responsibility for
the performance of accounting services in connection with the activities
arising hereunder, except as otherwise provided under Article VI above. At
Owner's discretion, the Owner may retain the services of a nationally
recognized certified public accounting firm acceptable to Capital Senior, at
Owner's cost, to perform annual audits, to prepare tax returns, to prepare any
other reports required for state or federal bureaus which require certification
and/or licensure, and to perform other necessary accounting services relating
to the Project.
7.3 The Owner shall designate, when requested by Capital Senior,
representatives authorized to act on its behalf. The Owner shall examine
documents submitted by Capital Senior and render decisions pertaining thereto
promptly to avoid delay.
7.4 The Owner agrees that it will fulfill in a timely manner all of
the terms of the loans obtained for the Project with its approval. The Owner
also agrees that it will fulfill in a timely manner all of the terms of the
architect contract and construction contract for the Project.
7.5 The Owner shall pay all costs of the Project, including but not
limited to legal and accounting fees, all forms of taxes, licenses, closing
costs, marketing costs, occupancy development costs (initial and re-occupancy),
design costs, construction costs, the cost of all furnishings, subsurface soil
tests and analyses, site surveys prepared by a registered surveyor, and other
costs as described on the capital cost budget for the Project, as updated from
time to time.
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7.6 The Owner shall have the responsibility of approving applications
for occupancy and in connection therewith shall be responsible for assuring
compliance with all non-discrimination and other laws relating to such
decisions.
7.7 The Owner agrees to apply for and maintain, at its expense, with
reputable and financially sound insurance firms, policies of insurance to
insure itself and Capital Senior against public liability (including
contractual liability insurance as applicable to Owner's obligations under
paragraph 10.7), and such other policies in amounts as necessary and proper for
the type of activities required of Capital Senior hereunder and the type of
activities in which the Owner is engaged. The Owner may obtain any additional
insurance coverage that it deems advisable. The Owner agrees to include Capital
Senior and any lender as named insureds on any such policies as may be
requested by Capital Senior from time to time, and to provide Capital Senior
with complete copies of such policies and certificates of insurance which
evidence such coverage. Such policies shall be endorsed to provide that such
insurance is primary to any insurance purchased directly by Capital Senior, and
is not excess or contributing insurance.
7.8 The Owner shall cooperate with Capital Senior in every respect and
shall furnish Capital Senior all information required by Capital Senior for the
performance of its services and shall permit Capital Senior to examine and copy
any data in possession and control of the Owner affecting the development of
the Project and shall in every way cooperate to enable Capital Senior to
perform its services satisfactorily.
VIII. COMPENSATION
8.1 In consideration of the performance of the planning, development,
arranging for financing, initial occupancy development, arranging for design
and construction, bookkeeping services and other services as contemplated in
Articles II, III, IV, V and VI in connection with the initial development and
other services of the Project, the Owner agrees to pay Capital Senior a
Development Fee equal to four percent (4%) of all line items on the Capital
Cost Budget (Exhibit B) excluding project contingency. In addition, Owner
agrees to pay Capital Senior an overhead reimbursement fee equal to four (4%)
percent of all items on the capital cost budget.
The Development Fee will be paid as follows:
8.1.1 Thirty-five percent (35%) of the estimated total
Development Fee as stated in the Capital Cost Budget shall be paid on
a monthly basis commencing on the date of this Agreement and amortized
over a period of six (6) months with the total amount due and payable
prior to commencement of construction.
8.1.2 Sixty Five percent (65%) of the estimated total
Development Fee shall be paid monthly during construction payable with
said fee amortized over ten (10) months with the total amount (if
completed sooner than ten (10) months) due and payable upon completion
of construction. Progress construction is a condition precedent to
Capital Senior's right to receipt of such fee.
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8.2 In addition to the above, Capital Senior will invoice Owner on a
monthly basis for all reimbursable costs accrued under this Agreement on behalf
of the Project, and Owner shall authorize payment within 15 days of receipt of
said invoices.
IX. TERMINATION
9.1 Unless terminated sooner as hereinafter provided, this Agreement
shall continue until the earlier of sixty (60) months or ninety percent
occupancy of all phases of this Project.
9.2 Notwithstanding the foregoing, this Agreement may be terminated by
Owner for Cause as defined in Sections 9.2.1 through 9.2.3, or by Capital
Senior for Cause as defined in Section 9.2.4 as hereinafter provided:
9.2.1 In the even of material breach by Capital Senior of a
material term hereof, which breach is not cured within sixty (60) days
after written notice by Owner and such failure is the result of
Capital Senior's willful misconduct, gross negligence, or unlawful
act;
9.2.2 In the event that a petition in bankruptcy is filed by
Capital Senior or its permitted assignee, or in the event Capital
Senior or its permitted assignee makes an assignment for the benefit
of creditors or takes advantage of an insolvency act, by notice to
Capital Senior or assignee;
9.2.3 In the event that (i) Capital Senior's or any permitted
assignee's corporate existence is dissolved and the duties under this
Agreement are not assumed by Capital or an affiliate of Capital Senior
(ii) Capital Senior or any permitted assignee ceases to do business
for any reason, by notice to Capital Senior or such assignee, and the
duties under this Agreement are not assumed by Capital Senior or
Capital Senior's Affiliate.
9.2.4 This Agreement may be terminated by Capital Senior in
the event that Capital Senior fails to receive reimbursement of
reimbursable expenses or any compensation due Capital Senior pursuant
to the terms of this Agreement, or any other compensation due Capital
Senior, and such failure continues for a period of thirty (30) days
after Capital Senior's written notice thereof to Owner.
9.2.5 No termination of this Agreement shall affect any
obligation owing by either party hereto to the other which accrued
prior to the effective date of such termination.
9.3 If either party elects to terminate this Agreement as a result of
the occurrence of an event specified in paragraph 9.2, it shall give written
notice to the other party and such termination shall be effective thirty (30)
days after the mailing thereof and the applicable cure periods, if any, unless
the grounds for termination have been remedied prior to such effective date of
termination. If this Agreement is so terminated for Cause, as provided in
Sections 9.2.1
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to 9.2.3, Capital Senior shall be entitled to an amount equal to its earned
compensation and shall be entitled to reimbursement for all advances made
payable immediately, and neither party shall have any further obligations to
the other. However, if Capital Senior terminates this Agreement for Cause, as
provided in Section 9.2.4, or this Agreement is terminated without Cause by
Owner, in addition to the amount of earned compensation and reimbursement for
all advances made to the date of termination, Capital Senior shall be entitled
to unearned compensation it would have been entitled to receive had this
Agreement not been terminated, including the compensation provided in Section
8.1.
X. GENERAL
10.1 So long as the Agreement is in force, Capital Senior agrees that
the Owner may represent to the public that the planning and development is
being done by Capital Senior, and the Owner agrees that the Capital Senior name
will be identified, in an appropriate way, as the Owner's development company,
on the construction marquee and related materials.
10.2 Except as stated in this Section 10.2, the ownership of trade
names, trademarks, ideas, documents, forms, occupancy development material and
other materials created by Capital Senior either prior to this Agreement or as
a result of this Agreement is to be considered proprietary and will remain the
property of Capital Senior whether the proposed Project is constructed or not.
They are not to be used by the Owner except in connection with the Project.
Upon the expiration of this Agreement, all materials created by Capital Senior
for the Project, in accordance with this Agreement, shall belong to Capital
Senior and all rights of the Owner therein shall automatically cease and
terminate. Notwithstanding the above, the name selected for this Project shall
become property of the Owner.
10.3 In order to carry out the intent and spirit of this Agreement,
the Owner and Capital Senior will do all acts or things necessary, including
the execution of other agreements, documents and instruments.
10.4 Whenever in this Agreement or otherwise in order to carry out its
spirit and intent, the consent, approval, or agreement of the Owner or Capital
Senior is required, it is agreed that it will not be unreasonably withheld.
Measure of reasonableness shall include the degree to which the recommendations
are consistent with other projects planned by Capital Senior, the degree to
which the recommendations will result in a financially sound Project, and the
degree to which the recommendations are consistent with earlier recommendations
previously approved.
10.5 Once its approval is granted at each phase of the planning and
development, financing, occupancy development, design, construction and
operation, the Owner shall not subsequently alter or change the plan, budget or
program without the written consent of Capital Senior.
10.6 This Agreement sets forth the entire agreement between Capital
Senior and the Owner. Any change or modification of this Agreement must be in
writing and signed by all parties hereto.
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10.7 The Owner will indemnify and hold harmless Capital Senior from
any and all liability arising incident to the Owner's performance of its duties
under this Agreement. Capital will indemnify and hold harmless the Owner from
any and all liabilities arising incident to Capital's performance of its duties
under this Agreement. The Owner shall also indemnify and hold Capital Senior
harmless against any and all losses, costs or expenses incurred by Capital
Senior by reason of, arising out of or in any way related to noncompliance by
the Facility with all applicable state, federal and local laws, ordinances,
rules and regulations relating to the physical condition of the property of the
Facility, provided Capital Senior shall promptly notify the Owner of Capital's
knowledge of any such noncompliance.
10.8 This Agreement and its interpretation, validity and performance
shall be governed by the laws of the State of Texas.
10.9 This Agreement shall be binding upon and shall inure to the
benefit of the parties hereto, their successors and assigns. Notwithstanding
the foregoing, neither party may assign this Agreement or any rights hereunder
without the consent of the other.
10.10 Any dispute, claim or controversy of any kind between the
parties arising out of this Agreement or involving the interpretation or
application of any provision of this Agreement shall be submitted to
arbitration in Dallas, Texas, in accordance with the commercial arbitration
rules of the American Arbitration Association; provided, that each party shall
be required to submit its proposed resolution of such dispute, claim or
controversy to the arbitrator and the arbitrator shall be required to render a
decision adopting in full one or the other of such proposed resolutions, and no
compromises or alternative resolutions shall be allowed or considered by the
arbitrator. The parties jointly shall agree on an arbitrator. If the parties
are unable to agree in good faith within a reasonable time on the selection of
an arbitrator, either party may request appointment of an arbitrator by the
American Arbitration Association. The arbitration decision shall be final and
binding on both parties unless the arbitration is fraudulent or so grossly
erroneous as to necessarily imply bad faith. General costs of arbitration are
to be shared by both parties equally, provided that the arbitrator may choose
to award general costs of arbitration against the losing party if he or she
determines that the final position urged by the losing party was not
reasonable.
10.11 Any sums due but unpaid hereunder shall bear interest at a rate
equal to 1% per annum plus the reference rate as announced from time to time
and charged by national banks to its most credit worthy customers (generally
referred to as prime rate of interest), from the due date until paid.
10.12 The Owner agrees to pay any sales tax or similar charges which
may be imposed on any payments required to be made by the Owner hereunder.
10.13 No provision of this Agreement shall be disclosed by the Owner
to any person, firm or corporation without the prior written approval of
Capital Senior, except that Owner may disclose any provision hereof without the
consent of Capital Senior to the extent necessary to comply with any statute,
governmental rule or regulation or court order to which Owner may be subject.
No provision of this Agreement shall be disclosed by Capital Senior to any
person, firm
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or corporation without the prior written approval of the Owner to the
extent necessary to comply with any statute, governmental rule or regulation or
court order to which Capital Senior may be subject.
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IN WITNESS WHEREOF, the parties hereto have duly executed and
delivered this Agreement effective on the day and year first above written, on
this _____ day of __________, _____.
TRIAD SENIOR LIVING __, L.P. CAPITAL SENIOR DEVELOPMENT, INC.
BY ITS GENERAL PARTNER
TRIAD SENIOR LIVING, INC.
By: By:
-------------------------- --------------------------
Name Name
-------------------------- --------------------------
Title Title
cc: James Stroud - Capital Senior Living
David R. Brickman, Esq. - Capital Senior Living
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EXHIBIT 10.55
FORM OF MANAGEMENT AGREEMENT
THIS MANAGEMENT AGREEMENT (the "Agreement") entered into effective as
of the ____ day of , ______ by and between Tried Senior Living__, L.P.
("Owner"), a limited partnership organized under the laws of the State of
California, and CAPITAL SENIOR LIVING, INC. ("Capital"), a corporation organized
under the laws of the State of Texas.
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants, conditions and agreements hereinafter set forth, the parties hereby
agree as follows:
PREAMBLE
OWNER by this Agreement is engaging Capital to provide management
services relating to the operation of a senior living community to be located
in on the land identified in Exhibit A.
This Agreement is founded on the following assumptions:
Owner retains primary responsibility to:
a. Establish the policies of the Facility and to plan for its
short-range and long-range goals.
b. Review and evaluate the performance of Capital in carrying out the
established policies and in attaining the goals established by
Owner.
c. Annually review and approve the budget.
d. Annually review the policies and goals which have been established.
Capital assumes primary responsibility to:
a. Implement the policies established by Owner.
b. Supervise the day-to-day management of the Facility, including all
resident activities.
c. Provide to Owner full, timely and accurate information as to past
operations.
d. Provide to Owner projections and recommendations relating to the
future operations of the Facility.
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The parties therefore agree as follows:
I. RESPONSIBILITIES OF CAPITAL
A. RECOMMENDED POLICIES. Capital shall recommend policies and goals
to be established by Owner and shall evaluate such policies and
goals on an ongoing basis.
B. MANAGEMENT DUTIES. Capital shall supervise the operation of the
Facility, provide management services, install operating
procedures and oversee day-to-day operations, all subject to and
in accordance with the budgets approved by and policies
established by Owner.
C. MARKETING DUTIES. Capital shall manage and supervise the marketing
program. Capital shall establish and periodically review the
residency agreement and if required, recommend changes thereof.
D. EMPLOYEES. All Facility-based Employees, including the
administrative employees, shall be employees of Capital. Capital
shall have sole authority over Facility-based Employees and
Non-Facility-based Employees who are directly responsible for the
Facility and all matters pertaining thereto and shall be
responsible for all actions and omissions of such employees. All
costs of hiring, equipping and providing the services of
Facility-based Employees, including, but not limited to,
compensation, health insurance, employer liability insurance,
payroll taxes, bonding, workers compensation insurance, benefits
and vacations shall be an expense of Owner.
E. OPERATING PROCEDURES. Capital shall develop, install and maintain
operating procedures, systems and controls.
F. FACILITY EXPANSION. Capital shall make recommendations regarding
remodeling or expansion of the Facility.
G. BUDGETS. Capital shall prepare for review and approval by Owner,
such approval not to be unreasonably withheld, annual operating
budgets for revenue, expense and cash flow of the Facility and a
capital expenditures budget. Budgets shall be prepared in advance
of each fiscal year. Cash flow projections shall accompany each
operating budget. Any changes to the budgets must be approved by
Owner, such approval not to be unreasonably withheld.
H. FINANCIAL CONTROLS. Capital shall establish and maintain a system
of financial controls for the Facility.
I. MONTHLY FINANCIAL STATEMENTS. Capital shall provide to Owner, on a
monthly basis, financial statements and related financial reports.
Such statements and
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reports shall be provided by the 20th day after the end of the
month. These reports shall be in the form attached as Exhibit "B."
J. MARKETING REPORTS. Capital shall, on a weekly and monthly basis,
provide sales and occupancy reports to Owner, as well as the
results of the annual resident satisfaction survey.
K. LEGAL COUNSEL. Capital, at Facility expense, shall coordinate with
Owner the utilization of legal counsel relating to Facility
operations.
L. RENTAL COLLECTIONS AND DISBURSEMENTS. Capital shall collect the
revenues from the residents and, on behalf of Owner, deposit all
such funds in a residential depository account at a FDIC insured
bank approved by Owner. The style of the account shall be in the
name of the Facility with designated representatives from Owner
and Capital being the only parties authorized to draw from said
account.
On an as needed basis, Capital shall transfer the funds from the
above stated account into an Operating Expense Account in the name
of the Facility. The account shall be in a FDIC insured bank
approved by Owner. The style of the account shall be in the name
of the Facility with designated representatives from Owner and
Capital being the only parties authorized to draw from said
account. Capital shall pay out of such Operating Expense Account
all operating expenses for which payment has been approved in
accordance with the budget or approved by Owner (including
Capital's Management Fee and any other sums due to Capital from
Owner), and all other sums properly payable pursuant to any of the
provisions of this Agreement. These funds shall not be co-mingled
with funds from any other projects and/or facilities managed
and/or operated by Capital.
M. ACCOUNTING SYSTEMS AND SOFTWARE. Capital shall provide to Owner,
during the term of this Agreement, appropriate on-site accounting
systems and software, which shall include complete accounting,
bookkeeping and record keeping services for the Facility,
specifically including, but not limited to, resident billings,
accounts payable, accounts receivable, general ledger and
inventory records and maintain demographic information on the
residents. Acquisition of software for Facility based operations,
software maintenance and update charges will be budgeted expenses
of the Facility. Payroll processing may be delegated to a third
party, the cost of which will be the responsibility of the
Facility.
II. OWNER'S RESPONSIBILITIES
A. POLICIES. Owner shall establish the policies for the Facility.
B. GOALS. Owner shall establish the short range and long range goals
of the Facility.
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C. BUDGETS. Owner shall review and approve, such approval not to be
unreasonably withheld, budgets for the operation of the Facility.
D. CAPITAL'S PERFORMANCE. Owner shall review and evaluate the
performance of Capital in carrying out the policies for the
Facility.
E. LEGAL COUNSEL. Owner shall obtain legal counsel to perform all
necessary legal services relating to Owner's ownership of the
Facility.
F. AUDITS. Owner, at its discretion, may engage certified public
accountants to perform annual audits of the Facility as well as
prepare any other reports required for federal or state regulatory
agencies which require licensure and/or certification. Every
quarter, upon receipt of reasonable notice to Capital, all
financial records pertaining to the Facility will be open for
inspection and review by Owner's representatives. All labor and
expense associated with such review shall be borne by Owner.
G. DIRECTIVES. In order to assure proper coordination, Owner shall
issue any directions concerning the operations of the Facility
only through the President or Vice President of Capital.
H. OPERATING REPORTS. During the term of this Agreement, Owner shall,
within fourteen (14) days of issuance, furnish to Capital copies
of any and all Facility-related reports, including the annual
audit (if any).
I. CHANGE OF RESIDENCY AGREEMENT. Owner shall not change the
Residency Agreement without consulting with and seeking approval
of Capital unless required to do so to comply with any applicable
law or regulation.
J. DECISIONS. Owner shall examine documents submitted by Capital and
render decisions pertaining thereto promptly to avoid unreasonable
delay.
K. UNIFORM ACCOUNTS. Facility shall use the uniform chart of accounts
recommended by Capital.
L. FURNISHING INFORMATION. Owner agrees at its expense to install and
maintain a computer terminal at the Facility compatible with the
mainframe computer currently in use by Capital and to transmit
data to Capital via telephone lines.
M. RIGHT OF FIRST REFUSAL.
1. hereby grants to Capital a right of first refusal in the
event that decides to sell the Facility during the initial
term of this Agreement. shall furnish Capital with a written
copy of the terms and conditions of the proposed sale, which
terms and conditions shall be certified by as bona fide and
Capital shall have forty-five (45) days from the date of
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receipt of such written copy within which to notify
whether Capital desires to exercise its rights of first
refusal to purchase the Facility on the same terms and
conditions. If Capital fails to notify of its desire to
exercise its right of first refusal within such forty-five
(45) day period, Capital shall be deemed to have not
exercised its right of first refusal hereunder.
2. If Capital exercises its right of first refusal, Capital
shall have an additional sixty (60) days following expiration
of the forty-five (45) day notice period within which to
obtain financing to purchase the Facility. Capital shall
notify whether it has obtained financing to purchase the
Facility within such sixty (60) day period. If Capital fails
to notify of its having obtained financing within such
sixty (60) day period, Capital shall be deemed not to have
obtained the requisite financing.
3. If Capital gives timely notice of the exercise of its
right of first refusal and having obtained the requisite
financing to purchase the Facility, the closing on the sale
to Capital shall take place within thirty (30) days after the
expiration of the sixty (60) day period on materially the
same terms and conditions as set forth in the bona fide
offer; provided, however, that Capital shall furnish
with a non-refundable deposit equal to five percent (5%) of
the purchase price, to be credited with interest earned
thereon against the purchase price at the closing in order to
extend the closing for such thirty (30) day period.
4. If Capital fails to give timely notice of the exercise of
its rights of first refusal or having obtained the requisite
financing to purchase the Facility, shall be free to
close on the sale to the proposed purchaser, with the closing
to take place within one hundred eighty (180) days after the
failure of Capital to give timely notice, but only on
materially the same terms and conditions as set forth in the
bona fide offer. If such closing to the proposed purchaser
does not occur within such one hundred eighty (180) day
period or if the terms and conditions of the proposed sale
are not materially the same as set forth in the bona fide
offer, the Facility may not be sold without Capital once gain
offered the right to exercise its right of first refusal
hereunder.
5. Any sale, sub-lease or assignment with respect to the
Facility, other than to Capital, shall be expressly subject
to the terms and provisions of this Agreement and shall not
relieve of its liability or obligations hereunder and
shall cause any purchaser, assignee or sub-lessee to
deliver to Capital written acknowledgement of its agreement
to perform hereunder including the payment of the management
fee described herein. may at any time, without the consent of
Capital, subject its interest in the Facility or any part
thereof to the lien of one or more deeds of trust, mortgages
or other security instruments, so long as the mortgage and/or
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successor in interest confirms its consent to be bound by the
terms of this Agreement within ten (10) days following
Capital's demand therefor; provided, however, that so long as
has no right to terminate this Agreement because of the
default of Capital hereunder; in the event of any
foreclosure of other proceeding under any such deed or trust,
mortgage or other security instruments to enforce the lien or
security interest thereby created, this Agreement shall
continue in full force and effect notwithstanding such
foreclosure or other proceedings.
III. INSURANCE
A. Capital shall maintain, in full force and effect, at the
Facility's expense, the following insurance protecting Owner and
Capital and their officers and employees:
1. Employee's fidelity insurance
2. Workers compensation and employers liability insurance
3. Professional liability insurance
4. Comprehensive general public liability insurance and
overlying umbrella liability coverage against loss or
liability for damages for personal injury or death occurring
on, in or about the Facility.
Such policy or policies shall be written by a responsible
insurance company or companies satisfactory to Owner and in
kind and amounts satisfactory to Owner. Certificates of
insurance showing compliance with the foregoing requirements
shall be furnished by Capital to Owner. Certificates shall
state that the policy or policies will not be canceled or
altered without at least 30 days prior written notice to
Owner.
B. Owner shall procure and maintain, in full force and effect, at
Owner's expense the following insurance protecting Owner and
Capital and their officers and employees:
1. Property Insurance for loss or damage by fire and other
perils insurable under the broad form of extended coverage
insurance available in the area where the Facility is
located, and improvements, and contents thereof, constituting
all or any portion of the Facility.
2. Insurance for automobiles owned or hired by Owner and used in
connection with the Facility.
Such policy or policies shall be written by a responsible
insurance company or companies satisfactory to Capital in
kind and amounts
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satisfactory to Capital. Certificates of insurance showing
compliance with the foregoing requirements shall be furnished
by Owner to Capital. Certificates shall state that the policy
or policies will not be canceled or altered without at lease
thirty (30) days prior written notice to Capital.
IV. TERM AND TERMINATION OF THIS AGREEMENT.
A. TERM AND TERMINATION WITHOUT CAUSE. This Agreement shall commence
on the date set forth on the first page hereof. Payment under
Section V herein shall commence on the date of the first resident
move-in. The term of this Agreement shall continue for a period of
ten (10) years from the date of the first resident move-in (the
"Initial Term") and continue for the Initial Term unless
terminated by law or otherwise according to its terms. Capital
shall have the option to extend the term of this Agreement for an
additional five (5) year renewal option on the same terms and
conditions as herein provided (the "Extended Term").
B. If Owner terminates the Agreement prior to the expiration of
the Initial Term without cause or if Capital terminates this
Agreement during the Initial Term for cause as provided in
Paragraph IV. B. below, severance compensation in an amount equal
to the then-current monthly management fee times the number of
months remaining in the Initial Term shall be paid to Capital upon
the effective date of termination. Any such termination shall be
effective upon the expiration of the ninety (90) day period
following the giving of the notice or on such later date as may be
specified in the notice.
C. TERMINATION FOR CAUSE.
1. This Agreement may be terminated by Owner for cause for the
following reasons:
a. In the event of material breach by Capital of a material
term hereof, which breach is not cured within sixty (60)
days after notice by Owner.
b. In the event that a petition in bankruptcy is filed
by Capital or its permitted assignee, or in the event
Capital or its permitted assignee makes an assignment
for the benefit of creditors or takes advantage of an
insolvency act, by notice to Capital or assignee.
c. In the event that (i) Capital's or any permitted
assignee's corporate existence is dissolved and the
duties under this Agreement are not assumed by Capital
or an affiliate of Capital (ii), Capital or any
permitted assignee ceases to do business for any reason,
by notice to Capital or such assignee and the duties
under this Agreement are not assumed by Capital or
Capital's Affiliate.
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2. This Agreement may be terminated for cause by Capital in the
event that Capital fails to receive reimbursement of
reimbursable expenses or any compensation due Capital
pursuant to the terms of this Agreement or any other
compensation due Capital, and such failure continues for a
period of sixty (60) days after Capital's written notice
thereof to Owner; provided however, that this Agreement shall
not be so terminated if Owner pays Capital all such expenses
and compensation then due and payable on or before the
expiration of said sixty (60) day period.
Capital shall have the right to terminate this Agreement if
Capital fails to receive reimbursements or compensation as a
result of a subordination agreement by Capital in favor of a
lender of Owner, but such termination shall not be considered
for cause and shall not entitle Capital to the severance
compensation provided for in Section IV.B. hereof.
3. No termination of this Agreement shall affect any
obligation owing by either party hereto to the other which
accrued prior to the effective date of such termination.
D. COVENANTS SURVIVING TERMINATION. The termination of this Agreement
shall not terminate the right of Owner or Capital to
indemnification relating to events occurring during the term of
this Agreement under Article VI. K. and to protection of Owner's
or Capital's property rights under Article VI.B.
V. COMPENSATION
A. OPERATIONS MANAGEMENT FEES. Owner shall pay to Capital a fee in
the amount set forth below, payable by the fifteenth day of each
month. Payment shall commence on the date of the first resident
move-in. The amount to be paid monthly shall be 5% of Gross
Revenues generated during the immediately proceeding month
provided that the monthly management fee shall not be less than
[85% of stabilized gross revenue] ("Monthly Management Fee").
"Gross Revenues" shall be as defined in Section V.B. The Monthly
Management Fee for the Facility shall be payable monthly in
arrears following calculations thereof upon submission of a
monthly statement for such Facility from Capital. It is agreed
between Owner and Capital that if the Gross Revenues of the
Facility are insufficient to pay all disbursements, including the
Monthly Management Fee or any portion thereof, then Owner shall
remain responsible for such disbursements. It is further agreed
between Owner and Capital that in no event will any disbursement
be made to Owner from any Facility Account until all accrued and
unpaid fees to Capital and repayments, if any, to Capital for
Capital's advancement of funds to cover any insufficiencies in
such Facility's Rental or Payroll Account have been paid in full.
B. INCENTIVE MANAGEMENT FEE. In addition to the Monthly Management
Fee stated above, as additional compensation for the services to
be rendered by Capital
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during the Term, Capital shall be paid a fee (the "Incentive
Management Fee") based upon performance standards which shall be
mutually agreed upon by Owner and Capital. Unless otherwise
mutually agreed upon by Owner and Capital, the Incentive
Management Fee shall equal 25% of the amount, if any, by which Net
Cash Flow for any annual or shorter period during the Term ending
December 31 of any year or for the last period in the Term ending
on the last day of the Term exceeds the agreed upon performance
standards.
For purposes of this Section V.B., "Net Cash Flow" shall mean, for
any period for which such sum is being computed, the excess of (a)
Gross Revenues for the Facility during such period over (b)
Operating Expenses for the Facility during such period. "Gross
Revenues" shall mean and refer, for any period for which such
Gross Revenues are being determined, the sum of the total gross
revenues of the Facility from operations received during such
period, including all receipts from (i) rent of units at the
Facility, (ii) rent or business interruption insurance, if any,
(iii) revenue of the Facility for or on account of any and all
goods provided and services rendered or activities during such
period, (iv) reimbursements of expenses paid by the Facility which
are to be borne by others, (v) deposits in the event of forfeiture
thereof to the Facility and (vi) other revenues and receipts
realized by the Facility from operations and customarily included
in Net Cash Flow; Gross Revenues shall not include (i) security
deposits received from residents and, if applicable, interest
accrued thereon for the benefit of the residents until such
deposits or interest are applied for rental payments; (ii)
proceeds from the sale or dispositions of all or any part of such
Facility; (iii) insurance proceeds received by Owner as a result
of any insured loss (except proceeds for rent loss insurance) and
proceeds from any condemnation action; (iv) capital contributions
made by any partner of Owner; (v) loans by Owner or its partners;
(vi) proceeds from capital, financing and any other transactions
not in the ordinary course of operation of such Facility and (vii)
advance rentals paid (until such time as they are earned).
"Operating Expenses" shall mean, for any period for which such
Operating Expenses are being determined, the sum of the total
gross expenditures of the Facility for operations during such
period, including (A) all cash operating expenses (including the
Monthly Management Fee, any Incentive Management Fee, all
commissions and other fees, expenses and allowances paid to
Capital), (B) any other expenditures of the Facility which are not
treated as capital expenditures under generally accepted
accounting practices, and (C) real estate taxes, personal property
taxes and sales taxes; provided however, that Operating Expenses
shall not include any payments or expenditures to the extent the
sources or funds used for such payments or expenditures are not
included in Gross Revenues.
C. CERTAIN EXPENSES. In accordance with the Annual Budgets, the
Facility will reimburse Capital for all overhead and expenses
incurred by Capital in performing these services under this
Agreement, to include, but not be limited to, insurance, salaries
of Facility and non-Facility employees, office supplies, the cost
of reasonable transportation, lodging and meal expenses for
non-Facility-based
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employees of Capital or its outside consultants when traveling in
connection with the performance of the services being performed
pursuant to this Agreement, telephone expenses, copying and
mailing and express shipments. Relocation, education, professional
memberships and licensing expenses of the Facility-based
administrative employees shall also be an expense of the Facility.
VI. MISCELLANEOUS
A. INSURANCE-SUBROGATION. No indemnity shall be paid to the other
party under this Agreement where the claim, damage, liability,
loss or expense incurred was required to be insured against by
such other party. Any insurance policies obtained by the parties
pursuant to this Agreement shall contain provisions or have the
effect of waiving any right of subrogation by the insurer of one
party against the other party or its insurer.
B. STATUS OF PARTIES. It is expressly understood and agreed that
Capital shall act as an independent contractor in the performance
of this Agreement. No provision hereof shall be deemed or
construed to create a partnership or a joint venture between Owner
with respect to the Facility or otherwise.
C. ADDITIONAL ACTION. In order to carry out the intent and spirit of
this Agreement, Owner and Capital will do all acts and things
necessary including the execution of other agreements.
D. ENTIRE AGREEMENT. This Agreement sets forth the entire Agreement
between Capital and Owner. Any change or modification of this
Agreement must be in writing and signed by all parties hereto.
E. BINDING EFFECT. This Agreement shall be binding upon and shall
inure to the benefit of the parties hereto, their successors and
assigns.
F. ASSIGNMENT, ETC. Except for an assignment by Capital to an
affiliate, Capital shall not, without Owner's prior written
approval (which approval shall not be unreasonably withheld),
assign any of its rights or obligations under this Agreement.
G. GOVERNING LAW. This Agreement, its interpretation, validity and
performance shall be governed by the laws of the State of Texas.
H. NON-COMPETE. Without the prior written consent of Capital, for a
period of three years following termination of this Agreement,
Owner will not employ or engage any Capital employee assigned to
or employed by the Facility at any time during the last twelve
(12) months of the term of this Agreement. This Section shall not
apply to any lender of Owner which takes over control of the
Facility.
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I. CONDITIONS BEYOND CONTROL OF PARTIES. Neither party shall be held
liable for failure to comply with any of the terms of this
Agreement when such failure has been caused solely by fire, labor
dispute, strike, war, insurrection, government restrictions, force
majeure, or act of God beyond the control and without fault on the
part of the party involved, provided such party uses due diligence
to remedy such default. Circumstances are likely to arise from
time to time which may require that budgets be exceeded, and
Capital shall not be liable for budget overruns.
J. INDEMNIFICATION. Owner will indemnify and hold harmless Capital
from any and all liability arising incident to Owner's performance
of its duties under this Agreement. Capital will indemnify and
hold harmless Owner from any and all liabilities arising incident
to Capital's performance of its duties under this Agreement.
Owner shall also indemnify and hold Capital harmless against any
and all losses, costs or expenses incurred by Capital by reason
of, arising out of or in any way related to noncompliance by the
Facility with all applicable state, federal and local laws,
ordinances, rules and regulations relating to the physical
condition of the property of the Facility, provided Capital shall
promptly notify Owner of Capital's knowledge of any such
noncompliance.
K. ARBITRATION. In the event of any dispute, claim or controversy of
any kind between the parties, concerning this Agreement or the
termination of this Agreement, the matter shall be submitted to
arbitration in accordance with rules of the American Arbitration
Association. The parties jointly shall agree on an arbitrator. If
the parties are unable to agree, in good faith within a reasonable
time, on the selection of an arbitrator, either party may request
appointment of an arbitrator chosen by the American Arbitration
Association who shall be the Selected Arbitrator. Such arbitrator
shall be limited in his decision to a choice between the final
position as requested by each party. Said arbitration shall be
held in Dallas/Ft. Worth, Texas or such other place as is mutually
agreeable. The arbitration decision shall be final and binding on
both parties unless the arbitration is fraudulent or so grossly
erroneous as to necessarily imply bad faith. Costs of arbitration
are to be shared by both parties equally, provided that the
arbitrator may choose to award the costs of arbitration against
the losing party if the arbitrator determined that the final
position urged by the losing party was not reasonable.
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TRIAD SENIOR LIVING _, L.P. CAPITAL SENIOR LIVING, INC.
By: Triad Senior Living, Inc.
Its General Partner
By: By:
------------------------------- ------------------------------
Name: Name:
------------------------------ ----------------------------
Title: Title:
----------------------------- ----------------------------
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<PAGE> 1
EXHIBIT 10.56
AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP
OF
TRIAD SENIOR LIVING I, L.P.
(FORMERLY KNOWN AS TRI POINT COMMUNITIES, L.P.)
THIS AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP is
dated effective as of April 1, 1998, by and between Capital Retirement Group,
Inc., a Texas corporation (the "Withdrawing General Partner"), Triad Senior
Living, Inc., a Texas corporation (the "General Partner"), Jeffrey L. Beck
("Beck"), JAS Trust ("JAS" and, together with Beck, the "Withdrawing Limited
Partners"), Blake N. Fail ("Fail") and Capital Senior Living Properties, Inc., a
Texas corporation ("Capital Senior Living" and, together with Fail, the "Limited
Partners").
WHEREAS, the Withdrawing General Partner and the Withdrawing Limited
Partners entered into that certain Agreement of Limited Partnership of Tri Point
Communities, L.P. (the "Partnership"), dated November 6, 1997 (the "Original
Agreement"); and
WHEREAS, the General Partner desires to purchase the Withdrawing
General Partner's interest in the Partnership and the Withdrawing General
Partner desires to withdraw from the Partnership; and
WHEREAS, Fail desires to purchase the Withdrawing Limited Partners'
interests in the Partnership and the Withdrawing Limited Partners desire to
withdraw from the Partnership; and
WHEREAS, Capital Senior Living desires to make a capital contribution
to the Partnership in exchange for the issuance of a limited partner interest in
the Partnership; and
WHEREAS, the Withdrawing General Partner, the Withdrawing Limited
Partners, the General Partner and the Limited Partners desire to effect such
transfers and issuances, all as more fully set forth herein; and
WHEREAS, the General Partner and the Limited Partners desire to
continue the existence of the Partnership and to amend and restate the terms and
provisions of the Original Agreement, including changing the name of the
Partnership to "Triad Senior Living I, L.P.";
NOW THEREFORE, in consideration of the foregoing and of the mutual
covenants, conditions and agreements hereinafter set forth, the parties hereby
agree as follows:
<PAGE> 2
ARTICLE I
ADDITIONAL DEFINITIONS
As used herein, the following terms shall have the following meanings:
"Accountant" - means any independent firm of certified public
accountants as may be engaged by the General Partner for the Partnership.
"Affiliate" - means (a) a General Partner; (b) a Limited Partner; (c) a
member of the immediate family of a partner, shareholder, of a General Partner
or a Limited Partner; (d) a legal representative of any Person, referred to in
the preceding clauses (a) through (c); (e) a trustee for the benefit of any
Person referred to in the preceding clauses (a) through (c); (f) a corporation,
joint venture, partnership or other business entity which is controlled by such
person or entity and/or any one or more of the Persons referred to in the
preceding clauses (a) through (c); (g) a corporation, joint venture, partnership
or other business entity which controls or is under common control with such
person or entity, and/or with a person or entity referred to in the preceding
clauses (a) through (c); or (h) the partners, officers, directors and key
employees of such entity and/or any corporation, joint venture, partnership or
other business entity referred to in the preceding clauses (a), (b), (c), (f) or
(g).
"Agreement" or "this Agreement" - means this Agreement of Limited
Partnership, as amended from time to time.
"Capital Contributions" - means the gross amount of contributions
actually made to the capital of the Partnership by a Partner or all the
Partners, as the case may be. Loans to the Partnership by any Partner shall not
be considered a Capital Contribution.
"Certificate" - means the Certificate of Limited Partnership of this
Partnership filed with the Secretary of State of the State of Texas, as such
Certificate may be further amended and filed from time to time.
"Certificate of Occupancy" - means that certain certificate of
occupancy which has been issued for any building at a Property.
"Code" - means the Internal Revenue Code of 1986, as amended.
"Development Agreement" - means the development agreement between the
Partnership and Capital Senior Development, Inc. relating to the Properties, as
such agreement may be amended from time to time.
"Fiscal Year" - means the fiscal year of the Partnership as set forth
in Section 11.1 hereof.
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"General Partner" - means Triad Senior Living, Inc., and any additional
or successor General Partner(s) designated in any case as such in accordance
with the provisions of this Agreement, and, from time to time, holding such
position in accordance with such provisions.
"Gross Receipts" - means all revenues received by the Partnership from
the operations of its business attributable to a particular period as determined
in accordance with the cash receipts and disbursements method of accounting, and
including, without limitation, any loans from Partners and third parties, and
other amounts paid by Partners and third parties to the Partnership, but not
including capital contributions.
"Limited Partners" - means Blake N. Fail and Capital Senior Living
Properties, Inc., and any additional or substitute Limited Partner(s) as may be
designated as such in accordance with the provisions of this Agreement.
"Lenders" - means Bank One, Texas, N.A. and the other Lenders (as such
term is defined therein) under the Master Loan Agreement dated December 23, 1997
by and among Tri Point Communities, L.P., Bank One, Texas, N.A., as Agent for
the Lenders, and the Lenders named therein, as the same may be modified, amended
or restated from time to time, GMAC Commercial Mortgage Corporation or their
successors and/or assigns.
"Loan" - means those certain loans from Lenders to the Partnership in
the original aggregate principal amount of $50,000,000.00 each.
"Loan Documents" - means all documents evidencing, securing or
otherwise entered into in connection with the Loan, including, without
limitation, Note, Deed of Trust, Security Agreement, Assignment of Rents and
Financing Statement, Assignment of Leases and Rents, and UCC-1 Financing
Statement.
"Management Agreement" means the management agreement between the
Partnership and Capital Senior Living, Inc. relating to the Properties, as such
agreement may be amended from time to time.
"Net Cash Flow" - means the amount, if any, by which Gross Receipts
plus cash reserves of the Partnership from the previous period exceed Operating
Expenses for such particular period, to the extent the General Partner
determines, in its sole discretion, that cash is not otherwise required for
Partnership purposes, including the setting up or continuing of a reasonable
working capital reserve for the Partnership. "Net Cash Flow" shall not include
or reflect any proceeds received or expenses incurred in connection with the
sale or other disposition of all or substantially all of the assets of the
Partnership or the termination and liquidation of the Partnership.
"Operating Expenses" - means all cash expenditures of any kind or
nature incurred by the Partnership attributable to a particular period, as
determined in accordance with the cash receipts and disbursements method of
accounting.
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"Partner" or "Partners" - means the General Partner or the Limited
Partners, or any of them.
"Partnership" - means the limited partnership evidenced by this
Agreement, as said limited partnership may from time to time be constituted,
amended and, if necessary, reconstituted, including any successor limited
partnership.
"Percentage Interests" - means the percentage set forth opposite the
name of such Partner under the column "Interest" in Exhibit B attached hereto
and made a part hereof for all purposes.
"Person" - means an individual, firm, corporation or other legal
entity.
"Properties" - means those certain tracts of land which have been
agreed to in writing by all of the Partners. Upon such written approval, the
General Partner shall attach the legal description for a Property hereto as
Exhibit A.
"Revised Act" - means the Texas Revised Limited Partnership Act, as
adopted and from time to time amended by the State of Texas.
ARTICLE II
FORMATION NAME AND OFFICE; PURPOSE
Section 2.1 Formation
The Partnership commenced on November 6, 1997 as a Texas limited
partnership effective upon the filing of the Certificate with the Secretary of
State of the State of Texas pursuant to the provisions of the Revised Act, and
shall continue for the purpose and upon the terms and conditions herein set
forth.
Section 2.2 Name, Registered Agent and Registered Office
The name of the Partnership shall be Triad Senior Living I, L.P. or
such other name as the General Partner shall hereafter designate by notice to
the Limited Partners and by amendment to the Certificate properly filed with the
Secretary of State of the State of Texas. The principal place of business in
Texas where books and records of the Partnership will be kept and made available
shall be 14332 Regency Place, Dallas, Texas 75240, or such other place as the
General Partner may from time to time designate in a notice to the Limited
Partners and by amendment to the Certificate. The registered office of the
Partnership and the registered Agent shall be as set forth in the Certificate,
or such other registered Agent and registered office as the General Partner may
from time to time designate in a notice to the Limited Partners and by amendment
to the Certificate.
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Section 2.3 Purpose
The purpose of the Partnership shall be strictly limited to activities
relating to the acquisition, ownership, operation, and sale of the Properties,
and such other activities as are incidental thereto, including without
limitation, entering into the Loan and the performance of the Partnership's
obligations under the Loan Documents.
ARTICLE III
TERM
The term of the Partnership shall commence upon the filing of the
Certificate with the Secretary of State of the State of Texas, and shall
continue until December 31, 2050, on which date the Partnership shall terminate,
unless sooner dissolved upon the occurrence of any of the events of dissolution
or termination, as described in Article X.
ARTICLE IV
INTERESTS OF THE GENERAL PARTNER AND LIMITED PARTNERS
Section 4.1 General Partner
The General Partner is Triad Senior Living, Inc., and it shall have a
1% interest in the Partnership. Except as provided in Article IX of this
Agreement, no other Person shall become a General Partner in the Partnership.
The address of the General Partner is set forth on Exhibit B.
Section 4.2 Limited Partners
The Limited Partners are Blake N. Fail and Capital Senior Living
Properties, Inc., which shall have the interests in the Partnership as shown on
Exhibit B. Except as provided in Article IX of this Agreement, no other Person
shall become a Limited Partner or substitute Limited Partner in the Partnership.
The address of the Limited Partners are set forth on Exhibit B.
ARTICLE V
CAPITAL CONTRIBUTIONS
Section 5.1 Capital Contribution of the General Partner
The General Partner has contributed to the Partnership the amount set
forth on Exhibit B. The General Partner shall not be obligated to pay any
Partnership expenses or make any capital contributions to the Partnership except
as provided in this Section 5.1 and Section 5.3.
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<PAGE> 6
Section 5.2 Capital Contribution of the Limited Partners
The Limited Partners have contributed or will contribute to the
Partnership the amounts set forth on Exhibit B. The Limited Partners shall not
be obligated to make any other capital contributions to the Partnership except
as provided in this Section 5.2 and Section 5.3.
Section 5.3 Additional Capital Contributions
The Partners may, but are not required to, make their pro rata share
(based on Percentage Interests) of any additional capital contributions to the
Partnership. In the event that any Partner does not make such additional capital
contribution, the Partnership shall return the amounts contributed by the
Limited Partners for such additional capital contributions. The additional
capital contributions shall be due only upon the written notice from the General
Partner to the Partners.
The General Partner shall contribute to the capital of the Partnership
in the amount required and at the time specified in Section 2.2(d) of Exhibit C
attached hereto.
Section 5.4 Return or Withdrawal of Capital Contributions; Distributions
Except as otherwise expressly provided in this Agreement, none of the
Partners shall be entitled to demand a refund or return of any Capital
Contribution or to withdraw any part of its capital account or to receive any
distribution from the Partnership.
Section 5.5 Capital Accounts
A capital account shall be established and maintained for each Partner
as set forth in Exhibit C attached hereto.
Section 5.6 Loans by the Partners.
If the General Partner determines that the Partnership needs additional
capital, it may request that the Partners make loans to the Partnership. Then
each Partner shall have the option, but not the obligation, to loan to the
Partnership some or all of the aggregate amount of the requested loan. Any loans
made by the Partners shall not be considered to be contributions to the capital
of the Partnership.
ARTICLE VI
LIMITED PARTNERS
Section 6.1 Powers: Actions
The Limited Partners shall neither participate in the management or
control of the Partnership's business nor shall they transact any business for
the Partnership, nor shall they have the power to sign for or bind the
Partnership, said powers being vested solely and exclusively in the General
Partner.
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Section 6.2 Limitation of Liability
Anything to the contrary herein expressed or implied notwithstanding,
the Limited Partners shall not be personally liable for any of the debts of the
Partnership or any of the losses thereof in excess of their respective shares of
Partnership assets, capital contributions which they have made or are obligated
to make to the Partnership, and their share of the Partnership's income and
gains; provided, however, that to the extent required by applicable law, if a
Limited Partner receives a distribution at a time when it knew that, after
giving effect to the distribution, all liabilities of the Partnership, other
than liabilities to the Partners with respect to the partnership interests and
liabilities for which the recourse of creditors is limited to specific
Partnership assets, exceed the fair value of the Partnership's assets (except
that the fair value of property that is subject to a liability for which there
is recourse of creditors is limited shall be included in the Partnership's
assets only to the extent that the fair value of that property exceeds that
liability), then the Limited Partner receiving such distribution shall be liable
for the return of such distribution.
ARTICLE VII
GENERAL PARTNER
Section 7.1 Powers; Actions
The General Partner shall manage and control the business and affairs
of the Partnership. Without limiting the generality of the foregoing, the
General Partner shall have full power to (i) manage the Partnership; (ii)
execute such documents as it may deem advisable for Partnership purposes,
including, without limitation, the Loan Documents and all documents necessary
for the acquisition, financing, refinancing, ownership, operation and sale of
the Property; (iii) acquire, sell, lease, transfer, assign, convey, mortgage,
refinance, or otherwise dispose of or deal with all or any part of the Property
on such terms as it deems reasonable; (iv) establish and maintain, to the extent
Partnership funds are available, reasonable reserves for anticipated and
unanticipated expenses relating to the activities of the Partnership; (v)
perform or cause to be performed the Partnership's obligations, and exercise or
cause to be exercised all of the Partnership's rights, under any agreement to
which the Partnership or any nominee of the Partnership is a party; and (vi) on
behalf of the Partnership, employ, engage, retain or deal with any Person,
including any Affiliate, to perform services in connection with the ownership
and operation of the Property, provided in all such cases such services are
deemed by the General Partner to be advisable and the compensation therefor is
reasonable.
Section 7.2 Restrictions on the General Partner
(a) Notwithstanding the foregoing in Section 7.1 or any other
provision of this Agreement, the Partnership shall be subject to the
following restrictions and the General Partner shall have no authority
to take and shall not take any action on behalf of the Partnership in
violation of any of the following restrictions:
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<PAGE> 8
(i) No bankruptcy or insolvency filing or similar proceeding
for the Partnership may be commenced, and no bankruptcy or
insolvency filing or similar proceeding may be commenced as to
the General Partner on its own behalf or as General Partner on
behalf of the Partnership.
(ii) The Partnership and the General Partner are prohibited
from creating, incurring or assuming any indebtedness other
than the Loan and any subordinate financing permitted under
the Loan Documents.
(iii) The Partnership and the General Partner are prohibited
from liquidating or dissolving or consenting to the
liquidation or dissolution, in whole or in part, of either the
Partnership or the General Partner.
(iv) The Partnership and the General Partner may not
consolidate, merge, or enter into any form of combination with
or into any other entity or convey, transfer or lease its
assets substantially as an entirety to any entity, except for
a transfer of the Property to the manager pursuant to the
purchase option in the Management Agreement or permit any
entity to consolidate, merge or enter into any form of
combination with or into the Partnership or the General
Partner, as the case may be, or convey, transfer or lease its
assets substantially as an entirety to the Partnership or the
General Partner, as the case may be.
(b) Notwithstanding anything in this Agreement to the
contrary, the General Partner shall not have the right or the power to
make any commitment or engage in any undertaking on behalf of the
Partnership in respect of a Major Decision (as hereinafter defined)
unless and until such Major Decision has been approved in writing by
all of the Limited Partners. The term "Major Decision," as used in this
Agreement, means any decisions with respect to the following matters:
(i) All financing and refinancing decisions pertaining to
indebtedness owing, directly or indirectly, to and/or by the
Partnership.
(ii) Any amendment, modification, change or restatement of
this Agreement.
(iii) Any capital expenditures in excess of $50,000 on any
Property that has already been developed.
(iv) The assignment of any interests in the Partnership except
as expressly provided by the terms of this Agreement.
(v) Any amendment, modification or change to the Management
Agreement or the Development Agreement.
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<PAGE> 9
(vi) The engagement by the Partnership in any business other
than as set forth in Section 2.3 above.
(vii) The transaction of business with Affiliates of Partners
except as set forth herein.
(viii) The execution of any guarantees, indemnities, sureties
or similar commitments on behalf of the Partnership.
(ix) Any decision to cause the Partnership to loan funds to
any person, and the terms on which any such loan is made.
(x) Any act in contravention of this Agreement.
(xi) The addition of a tract of land to the defined term
"Properties" or a change in the use of the Property.
(xii) The admission of any new Partners to the Partnership
(except as otherwise allowed herein) or the appointment of any
additional General Partner.
(xiii) Any other act which the Revised Act specifically
requires to be approved by all the Partners.
Section 7.3 Duties and Obligations of the General Partner
The General Partner shall manage and control the Partnership, its
business and affairs. During the continuance of the Partnership, the General
Partner shall diligently and faithfully devote such time to the management of
the business of the Partnership as it deems reasonably necessary.
Section 7.4 Tax Matters Partner. See Section 4.4 of Exhibit C attached
hereto.
Section 7.5 Liability; Indemnification
The General Partner and its Affiliates shall not be liable to the
Partnership or the Limited Partners for any act or omission performed or omitted
by it pursuant to the authority granted to it by this Agreement, other than for
fraud, willful malfeasance or gross negligence. The Partnership shall and hereby
does indemnify and save harmless the General Partner, the Limited Partners and
their Affiliates to the greatest extent permitted by the Revised Act from any
loss, damage, claim or liability, including but not limited to, reasonable
attorney's fees and expenses, incurred by them by reason of any act performed by
the General Partner, the Limited Partners or their Affiliates on behalf of the
Partnership, including, without limitation, their activities in winding up and
liquidating the Partnership, or in furtherance of the Partnership's interests,
except that the General Partner and its Affiliates shall not be indemnified for
actions by the General Partner or its Affiliates which constitute a breach of
any of their obligations under this Agreement, fraud, willful malfeasance or
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<PAGE> 10
gross negligence, provided, however, that the indemnity and save harmless
provided for in this sentence shall be satisfied out of Partnership assets only
and no Partner shall have any personal liability on account thereof.
Section 7.6 Fees to and Reimbursement of the General Partner
The Limited Partners acknowledge that the General Partner or its
Affiliates will receive $5,833 per month beginning April 1, 1998 as an asset
management fee. The General Partner and its Affiliates shall also be entitled to
receive reimbursement of their expenses, but shall not be entitled to receive
any other fees. The General Partner and its Affiliates shall receive
reimbursement for all reasonable expenses advanced by the General Partner and
its Affiliates on behalf of the Partnership and all expenses incurred during the
operation of the Partnership.
ARTICLE VIII
ALLOCATIONS; DISTRIBUTIONS
Section 8.1 Allocations of Income and Loss
All items of income or loss of the Partnership shall be allocated to
the Partners in accordance with the provisions of Exhibit C attached hereto,
which are hereby incorporated by reference for all purposes of this Agreement.
Section 8.2 Partnership Distributions of Cash
During the term hereof, periodically, but not less frequently than
annually, Net Cash Flow of the Partnership shall be distributed to the Partners
in accordance with their Percentage Interests.
ARTICLE IX
ASSIGNABILITY OF GENERAL PARTNER'S
AND LIMITED PARTNER'S INTERESTS; PURCHASE OPTION
Section 9.1 Restrictions on Transfers
Except as provided in Section 9.5 hereof, a Partner may not sell,
assign, transfer, encumber, or dispose of, by operation of law or otherwise, any
interest in the Partnership or in the property or assets of the Partnership
without the prior written consent of the other Partners, which in the other
Partners' absolute discretion may be withheld. Additionally, any such
disposition must comply with the provisions hereinafter stated in this Article
IX.
Section 9.2 Assignment of a Limited Partner's Interest
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<PAGE> 11
(a) Except as otherwise provided in this Agreement, an
assignee of the whole or any portion of a Partner's interest in the
Partnership shall not have the right to become a Partner in place of
its assignor unless (i) its assignor shall have designated such
intention in the instrument of assignment; (ii) the written consent of
the other Partners to such substitution shall have been obtained, which
consent, in the other Partners' absolute discretion, may be withheld;
(iii) the assignment instrument shall have been in form and substance
satisfactory to the other Partner; (iv) the assignor and assignee named
therein shall have executed and acknowledged such other instrument or
instruments as the other Partners may deem necessary or desirable to
effectuate such admission; and (v) the assignee shall have accepted,
adopted and approved in writing all of the terms and provisions of this
Agreement, as the same may have been amended.
(b) In any event, the Partnership and the other Partners shall
be entitled to treat an assignor of a Partner's interest as the
absolute owner thereof in all respects, and shall incur no liability
for distributions made in good faith to such assignor, until such time
as the foregoing requirements have been satisfied.
(c) The Partnership shall, upon satisfaction of the foregoing
requirements, thereafter pay all further distributions or profits or
other compensation by way of income or return of capital on account of
the interest so assigned to the assignee. In the absence of notice to
the other Partners and approval thereof in writing by them of the
assignment of a Partner's interest, whether by operation of law or
otherwise, any payment to an assigning Partner, or to his assigns,
executors, administrators, or legal representative, shall acquit the
Partnership of liability to the extent of such payment as to any other
person, whether claiming as a remote or immediate assignee of the
Partner, or by reason of its death, legal disability, bankruptcy,
insolvency, or otherwise.
(d) All costs (including, without limitation, legal and other
professional fees) incurred by the Partnership, the other Partners, and
the assigning Partner relating to any transfer contemplated by this
Article IX, shall be charged to, and shall be the sole expense of, the
assigning Partner.
Section 9.3 Withdrawal of a Partner
Except as otherwise specifically permitted by this Agreement, no
Partner shall be entitled to withdraw or retire from the Partnership.
Section 9.4 Death, Legal Incompetency, Bankruptcy or Dissolution of
Limited Partner
The death, legal incompetency, bankruptcy, dissolution or other
disability of a Limited Partner shall not dissolve or terminate the Partnership.
Upon the death, legal incompetency, bankruptcy, dissolution or other disability
of a Limited Partner, the estate, personal representative, trustee, guardian or
other successor in interest of such Limited Partner shall have all the rights
and obligations and be liable for all the liabilities of the Limited Partner in
the Partnership to the extent
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<PAGE> 12
of such Limited Partner's interest therein, subject to the terms and conditions
of this Agreement, and, with the prior written consent of the General Partner
which may be withheld at its sole discretion, may be substituted for such
Limited Partner.
Section 9.5 Purchase Option of Capital Senior Living Properties, Inc.
At any time, Capital Senior Living shall have the right, but not the
obligation, to purchase all, but not less than all, of the interests owned by
the General Partner and Fail for an amount equal to the amount of money that
each such Partner paid for their respective interests in the Partnership, plus
non-compounding interest of 12% per annum from the date such amounts were paid
to the date the option described herein is exercised. The Partners, by executing
this Agreement, hereby agree that the future value of such interests is
speculative and that the formula set forth above is the Partners' best estimate
of the fair market value of such interests as of the date of the exercise of
such option.
ARTICLE X
DURATION, DISSOLUTION, TERMINATION,
WINDING UP, REMOVAL OF THE GENERAL
PARTNER AND RESIGNATION OF THE GENERAL PARTNER
Section 10.1 Dissolution and Termination
Subject to the provisions of Section 7.2(c) hereof, the Partnership
shall be dissolved only upon the occurrence of any of the following events:
(a) The expiration of the fixed term of the Partnership;
(b) The withdrawal or removal of the General Partner, the
assignment by the General Partner of all its interest in the
Partnership, or any other event that causes the General Partner to
cease to be a general partner under the Revised Act, provided that any
such event shall not constitute a event of dissolution if the
Partnership is continued pursuant to Section 10.2;
(c) The sale or other disposition of all or substantially all
of the assets of the Partnership and the collection of the proceeds
therefrom; and
(d) The mutual consent of the Partners.
Section 10.2 Continuation of Business
The Partners hereby agree that notwithstanding any provision of the
Revised Act, the Partnership shall not dissolve prior to the occurrence of any
event set forth in Section 10.1 above. Upon the occurrence of any event set
forth in Section 10.1 above, the Partnership shall not be
12
<PAGE> 13
dissolved or required to be wound up if (i) at the time of such event there is a
remaining General Partner and that General Partner carries on the business of
the Partnership or (ii) within ninety (90) days after such event all remaining
Partners agree in writing to continue the business of the Partnership and to the
appointment, effective as of the date of such event, of one or more additional
General Partners.
Section 10.3 Winding Up of the Partnership
Upon dissolution of the Partnership as provided in Section 10.1, the
Partnership shall be wound up, and the General Partner (or if there is no
General Partner, a substitute General Partner elected by the Limited Partner)
will take full account of the Partnership's assets and liabilities, the assets
will be liquidated as promptly as is consistent with obtaining the fair market
value thereof, and the proceeds therefrom, to the extent sufficient therefor,
will be applied and distributed in accordance with the provisions of Section
10.4. Notwithstanding the foregoing, the General Partner, with the consent of
the Limited Partners, may determine not to sell all or any portion of the assets
of the Partnership, in which event there shall be distributed to each of the
Partners its interest in the remaining assets of the Partnership.
Section 10.4 Sale or Liquidation
In the case of a sale or other disposition of all or substantially all
of the assets of the Partnership or termination and liquidation of the
Partnership, the net proceeds of such sale or liquidation, shall be applied and
distributed, after crediting or charging the Partners' capital accounts pursuant
to Article VIII and as cash is received by the Partnership in the following
order of priority on or before the end of the taxable year in which the
Partnership liquidates (or, if later, within 90 days after the date of such
liquidation):
(a) To the payment of the debts and liabilities of the
Partnership (other than debts of the Partnership to the Partners) and
the expenses of sale and liquidation.
(b) To the setting up of any reserves which the General
Partner determines are reasonably necessary for any contingent or
unforeseen liabilities or obligations of the Partnership or of the
Partners arising out of, or in connection with, the Partnership. Such
reserves may be held by the General Partner for the purpose of
disbursing such reserves in payment of any of the aforementioned
contingencies, and at the expiration of such period as the General
Partner may deem advisable, to distribute the balance thereafter
remaining as provided herein.
(c) To the Partners in repayment of debts of the Partnership
to the Partners.
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<PAGE> 14
(d) To the Partners in proportion to and to the extent of the
remaining amounts of their respective positive capital accounts, as
such accounts have heretofore been adjusted pursuant to this Agreement.
(e) The remaining assets, if any, shall be distributed to the
Partners in accordance with their Percentage Interests.
Should assets other than cash be distributed, the amount by which the
fair market value of the assets, if any, to be distributed exceeds or is less
than the basis of such assets shall, to the extent not otherwise recognized by
the Partnership, be taken into account in computing gain or loss of the
Partnership for purposes of crediting or charging the capital accounts of, and
distributing proceeds to, the Partners.
Section 10.5 Removal and Replacement of the General Partner
The General Partner may be removed by either Limited Partner without
further action for "cause," which means (i) any petition shall be filed by the
General Partner, or any petition shall be filed against the General Partner and
not vacated within 30 days, under any section or chapter of the present or
future federal Bankruptcy Code or under any similar state or federal law, (ii)
upon final judicial determination that the General Partner (1) was grossly
negligent in its failure to perform its obligations under this Agreement, or (2)
committed a fraud upon the Partners or upon the Partnership, or (3) committed a
felony in connection with the management of the Partnership or its business, or
(4) was in material breach of its obligations under this Agreement, or (iii)
transfer of the General Partner's interest in the Partnership or withdrawal from
the Partnership without approval of the Limited Partners. In the event of
removal or resignation of the General Partner, it shall be deemed to have
surrendered to the Partnership its entire interest in the Partnership and shall
be entitled to no compensation therefor.
ARTICLE XI
ACCOUNTS AND RECORDS: ACCOUNTANTS
Section 11.1 Accounting Methods: Fiscal Year
The books of account of the Partnership shall be kept on the accrual
method of accounting. The fiscal year of the Partnership shall end on December
31 of each year except upon termination.
Section 11.2 Records and Books of Account
(a) The General Partner shall maintain, or cause to be
maintain complete and accurate records and books of account of all
transactions of the Partnership wherein shall be entered all
transactions, matters and things relating to the Partnership's business
as are usually entered into books of account kept by persons engaged in
a business of a like
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<PAGE> 15
character, all on the method of accounting determined in accordance
with Section 11.1, consistently applied.
(b) All of such records and books of account together with all
other documents and files of the Partnership, including but not limited
to copies of all documents prepared by the General Partner and all
correspondence, shall, at all times, be kept at the main office of the
Partnership or such other place as may be designated by the General
Partner and to which the Partners shall have reasonable access as
hereinafter provided, and all such records, books of account, documents
and files shall be the exclusive property of the Partnership. In the
event of the termination of the Partnership interest of the General
Partner, all such records, books of account, documents and files shall
remain in the exclusive possession of the Partnership. At any time and
from time to time while the Partnership continues and until its
complete liquidation (but only during reasonable business hours), each
Partner may, at its own expense and upon reasonable prior written
notice to the General Partner, fully examine, inspect, make copies and
audit the Partnership's books, records, accounts and assets, including
but not limited to bank balances and physical inspection of the
Property or an audit to be made by any competent accountant or other
professional employed by it at its expense.
Section 11.3 Annual Examination and Tax Returns
(a) The books of the Partnership shall be brought to date
annually each year by the General Partner or the Accountants. The
General Partner or the Accountants shall determine and prepare for such
fiscal year, using the method of accounting determined in accordance
with Section 11.1, consistently applied, such financial statements as
are required by the Loan.
(b) The General Partner or the Accountants shall also prepare
all tax returns which the Partnership is required to file and the same
shall be filed by the General Partner within the time prescribed by law
for the filing of each such return.
(c) At the election of the General Partner, the Accountants
shall perform an audit in accordance with generally accepted auditing
standards. The financial statements and audit report shall be delivered
to each Partner in the Partnership.
Section 11.4 Bank Accounts
The cash Capital Contributions of the Partners and other funds of the
Partnership shall be deposited in a bank account or accounts which shall be
separately owned by the Partnership and maintained by the General Partner.
Withdrawals shall be made only in the regular course of partnership business on
the signature of the General Partner or its designee. All funds not needed in
the operation of the business may be deposited, to the extent permitted by
applicable law, in interest bearing accounts or invested in short-term U.S.
Government obligations, U.S. Government guaranteed obligations, bank
certificates of deposit or other liquid high-grade investments, maturing, in any
event, within one year.
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<PAGE> 16
Section 11.5 Reports to Limited Partners
As soon as reasonably practicable but no later than thirty (30) days
after the end of each month, the General Partner shall cause to be prepared and
furnished to the Limited Partners income statements and balance sheets for such
month. As soon as reasonably practicable but no later than seventy-five (75)
days after the end of each fiscal year, the General Partner shall cause to be
prepared and furnished to the Limited Partners the following: (i) all necessary
tax reporting information required by the Limited Partners for preparation of
their respective income tax return and (ii) all information necessary for such
Limited Partner to comply with all reporting requirements imposed by the
securities laws of the United States or any state thereof. Upon the reasonable
request of the Limited Partners for further information with respect to any
matter with respect to the Partnership, the General Partner shall furnish such
information within ten (10) days after such request.
ARTICLE XIII
GENERAL PROVISIONS
Section 12.1 Recipient of Distributions and Payments
All distributions and payments of cash or property to be made pursuant
to the provisions of this Agreement shall be made directly to the parties who
are entitled thereto at their respective addresses indicated on Exhibit B or
elsewhere in this Agreement or at such other address as shall have been set
forth in a notice sent pursuant to the provisions of Section 12.2.
Section 12.2 Communications
Except as otherwise expressly provided in this Agreement, any offer,
acceptance, election, approval, consent, objection, certification, request
waiver, notice or other document required or permitted to be made or given
pursuant to any provisions of this Agreement shall be deemed duly made or given,
as the case may be, if in writing, signed by or on behalf of the person making
or giving the same, and shall be deemed completed when either personally
delivered (with receipt acknowledged by the recipient) or three days after
deposited through the U.S. mail, registered or certified, first class, postage
prepaid, addressed to the person or persons to whom such offer, acceptance,
election, approval, consent, certification, request, waiver or notice is to be
made or given at their respective addresses indicated on Exhibit B and, in the
case of the Partnership, at the office of the Partnership specified in Section
2.2 of this Agreement, or, in any case, at such other address as shall have been
set forth in a notice sent pursuant to the provisions of this Section 12.2.
Section 12.3 Entire Agreement; Applicable Law; Effect
This Agreement contains the entire agreement by and among the parties
and supersedes any prior understandings and agreements among them respecting the
subject hereof. THIS AGREEMENT SHALL BE CONSTRUED, ENFORCED AND GOVERNED IN
CONFORMITY WITH THE LAWS OF THE STATE OF TEXAS, and within the County of Dallas,
State of Texas,
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<PAGE> 17
without giving effect to principles of conflicts of law, and whether in state or
federal courts. This Agreement shall be binding upon the parties hereto, their
successors, heirs, devisees, permitted assigns, legal representatives, executors
and administrators but shall not be deemed for the benefit of creditors or any
other Persons.
Section 12.4 Modification; Waiver or Termination
Except as otherwise expressly provided in this Agreement, no
modification, waiver, or termination of this Agreement, or any part hereof,
shall be effective unless made in writing signed by the party or parties to be
bound thereby, and no failure to pursue or elect any remedy shall constitute a
waiver of any default under or breach of any provision of this Agreement, nor
shall any waiver of any default under or breach of any provision of this
Agreement be deemed to be a waiver of any other subsequent or similar or
different default under or breach of such or any other provision or of any
election or remedies available in connection therewith. Receipt by any party of
any money or other consideration due under this Agreement, with or without
knowledge of any breach or default, shall not constitute a waiver of such breach
or default of any provision of this Agreement.
Section 12.5 Counterparts
This Agreement may be executed in one or more counterparts and,
notwithstanding that all of the parties did not execute the same counterpart,
each of such counterparts shall, for all purposes, be deemed to be an original,
and all of such counterparts shall constitute one and the same instrument
binding on all of the parties hereto.
Section 12.6 Separability
Each provision of this Agreement shall be considered separable and (a)
if for any reason any provision or provisions herein are determined to be
invalid and contrary to any existing or future law, such invalidity shall not
impair the operation of or affect those portions of this Agreement which are
valid, and (b) if for any reason any provision or provisions of this Agreement
would subject the Limited Partners to any personal liability for the obligations
of the Partnership under the laws of the State of Texas or any other laws, as
the same may now or hereafter exist, such provision or provisions shall be
deemed void and of no effect.
Section 12.7 Article and Section Headings
Article and Section titles or captions contained in this Agreement are
inserted only as a matter of convenience and for reference, and shall not be
construed in any way to define, limit, extend or describe the scope of any of
the provisions hereof.
Section 12.8 Word Meanings
The words such as "herein," "hereinafter," "hereof," and "hereunder"
refer to this Agreement as a whole and not merely to a subdivision in which such
words appear unless the context otherwise
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<PAGE> 18
requires. The singular shall include the plural and the masculine gender shall
include the feminine and neuter, and vice versa, unless the context otherwise
requires.
Section 12.9 Exhibits
All exhibits annexed hereto and any documents or instruments delivered
simultaneously herewith are expressly made a part of this Agreement, as fully as
though completely set forth herein, and all references to this Agreement herein
or in any of such writings or elsewhere shall be deemed to refer to and include
all such writings.
Section 12.10 Further Actions
Each of the Partners shall hereafter execute and deliver such further
instruments and do such further acts and things as may be required or useful to
carry out the intent and purpose of this Agreement and as are not inconsistent
with the revisions hereof.
Section 12.11 Prohibition Re Partition
Each of the parties hereto does hereby permanently waive and relinquish
any and all rights it may have to cause the assets of the Partnership to be
partitioned, it being the intention of the parties to prohibit any parties
hereto from bringing a suit for partition against the other parties hereto.
Section 12.12 Agreements with Capital Affiliates and the Loan
The Partnership hereby ratifies and agrees to be bound by agreements
that the Partnership has entered into with Affiliates of Capital Senior Living,
including, the Management Agreement, the Development Agreement and that certain
Development and Turnkey Services Agreement by and between the Partnership and
Capital Senior Development, Inc. In addition, the Partnership hereby ratifies
and agrees to be bound by the Loan and the Loan Documents.
Section 12.13 Noncompete of General Partner
The General Partner agrees that as long as the General Partner is the
general partner of the Partnership and for one (1) year after the General
Partner is no longer the general partner of the Partnership neither the General
Partner nor its Affiliates will acquire, own, develop, complete the development
of, or manage any senior living facility providing the same level of services as
any senior living facility owned or leased by the Partnership within a seven and
one-half mile radius of a senior living facility owned or leased by the
Partnership.
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<PAGE> 19
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
GENERAL PARTNER:
Triad Senior Living, Inc.,
a Texas corporation
By:/s/ BLAKE N. FAIL
-----------------------------------------
Name: Blake N. Fail
---------------------------------------
Title: President
--------------------------------------
LIMITED PARTNERS:
Capital Senior Living Properties, Inc.
a Texas corporation
By: /s/ DAVID R. BRICKMAN
-----------------------------------------
Name: David R. Brickman
---------------------------------------
Title: Vice President
--------------------------------------
--------------------------------------------
Blake N. Fail
WITHDRAWING GENERAL PARTNER:
Capital Retirement Group, Inc.,
a Texas corporation
By: /s/ JAMES A. STROUD
-----------------------------------------
Name: James A. Stroud
---------------------------------------
Title: Chief Operating Officer
--------------------------------------
WITHDRAWING LIMITED PARTNERS:
JAS Trust
By: /s/ JAMES A. STROUD
-----------------------------------------
Name: James A. Stroud
---------------------------------------
Title: Chief Operating Officer
--------------------------------------
/s/ JEFFREY L. BECK
--------------------------------------------
Jeffrey L. Beck
19
<PAGE> 20
EXHIBIT "A"
Property Description
<PAGE> 21
EXHIBIT "B"
<TABLE>
<CAPTION>
Capital Contribution Interest
-------------------- --------
<S> <C> <C>
General Partner
Triad Senior Living, Inc. $ 1.00 1%
14332 Regency Place
Dallas, Texas 75240
Limited Partners
Blake N. Fail $ 1,320,976.00 80%
14332 Regency Place
Dallas, Texas 75240
Capital Senior Living Properties, Inc. $ 330,243.00 19%
14160 Dallas Parkway
Suite 300
Dallas, Texas 75240
</TABLE>
<PAGE> 22
EXHIBIT "C"
Allocation Provisions
<PAGE> 1
EXHIBIT 10.57
AGREEMENT OF LIMITED PARTNERSHIP
OF
TRIAD SENIOR LIVING II, L.P.
THIS AGREEMENT OF LIMITED PARTNERSHIP is dated effective as of
September 23, 1998, by and among Triad Partners II, Inc., a Texas corporation
("TP II"), as general partner (the "General Partner") and as a limited partner
and Capital Senior Living Properties, Inc., a Texas corporation ("Capital
Senior Living" and, together with TP II, the "Limited Partners").
WHEREAS, the parties hereto desire to form a limited partnership under
the Texas Revised Limited Partnership Act.
NOW THEREFORE, in consideration of the mutual covenants, conditions
and agreements hereinafter set forth, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
the parties hereby agree as follows:
ARTICLE I
ADDITIONAL DEFINITIONS
As used herein, the following terms shall have the following meanings:
"Accountant" - means any independent firm of certified public
accountants as may be engaged by the General Partner for the Partnership.
"Affiliate" - means (a) a General Partner; (b) a Limited Partner; (c)
a partner or shareholder of a General Partner or a Limited Partner or a member
of the immediate family of a partner or shareholder; (d) a legal representative
of any Person, referred to in the preceding clauses (a) through (c); (e) a
trustee for the benefit of any Person referred to in the preceding clauses (a)
through (c); (f) a corporation, joint venture, partnership or other business
entity which is controlled by such person or entity and/or any one or more of
the Persons referred to in the preceding clauses (a) through (c); (g) a
corporation, joint venture, partnership or other business entity which controls
or is under common control with such person or entity, and/or with a person or
entity referred to in the preceding clauses (a) through (c); or (h) the
partners, officers, directors and key employees of such entity and/or any
corporation, joint venture, partnership or other business entity referred to in
the preceding clauses (a), (b), (c), (f) or (g).
"Agreement" or "this Agreement" - means this Agreement of Limited
Partnership, as amended from time to time.
<PAGE> 2
"Capital Contributions" - means the gross amount of contributions
actually made to the capital of the Partnership by a Partner or all the
Partners, as the case may be. Loans to the Partnership by any Partner shall not
be considered a Capital Contribution.
"Certificate" - means the Certificate of Limited Partnership of this
Partnership filed with the Secretary of State of the State of Texas, as such
Certificate may be further amended and filed from time to time.
"Certificate of Occupancy" - means that certain certificate of
occupancy which has been issued for any building at a Property.
"Code" - means the Internal Revenue Code of 1986, as amended.
"Development Agreement" - means any development agreement between the
Partnership and Capital Senior Development, Inc. relating to a Property, as
such agreement may be amended from time to time.
"Fiscal Year" - means the fiscal year of the Partnership as set forth
in Section 11.1 hereof.
"General Partner" - means Triad Partners II, Inc. and any additional
or successor General Partner(s) designated in any case as such in accordance
with the provisions of this Agreement, and, from time to time, holding such
position in accordance with such provisions.
"Gross Receipts" - means all revenues received by the Partnership from
the operations of its business attributable to a particular period as
determined in accordance with the cash receipts and disbursements method of
accounting, and including, without limitation, any loans from Partners and
third parties, and other amounts paid by Partners and third parties to the
Partnership, but not including capital contributions.
"Limited Partners" - means Triad Partners II, Inc. and Capital Senior
Living Properties, Inc., and any additional or substitute Limited Partner(s) as
may be designated as such in accordance with the provisions of this Agreement.
"Lenders" - means Key Corporate Capital, Inc., Daiwa Finance Corp. or
any other lender approved by the Partners, or their successors and/or assigns.
"Loan" - means collectively those certain loans from Lenders to the
Partnership approved by the Partners.
"Loan Documents" - means all documents evidencing, securing or
otherwise entered into in connection with the Loan, including, without
limitation, any Note, Deed of Trust, Security Agreement, Assignment of Rents
and Financing Statement, Assignment of Leases and Rents, and UCC-1 Financing
Statement.
2
<PAGE> 3
"Management Agreement" means any management agreement between the
Partnership and Capital Senior Living, Inc. relating to a Property, as such
agreement may be amended from time to time.
"Net Cash Flow" - means the amount, if any, by which Gross Receipts
plus cash reserves of the Partnership from the previous period exceed Operating
Expenses for such particular period, to the extent the General Partner
determines, in its sole discretion, that cash is not otherwise required for
Partnership purposes, including the setting up or continuing of a reasonable
working capital reserve for the Partnership. "Net Cash Flow" shall not include
or reflect any proceeds received or expenses incurred in connection with the
sale or other disposition of all or substantially all of the assets of the
Partnership or the termination and liquidation of the Partnership.
"Operating Expenses" - means all cash expenditures of any kind or
nature incurred by the Partnership attributable to a particular period, as
determined in accordance with the cash receipts and disbursements method of
accounting.
"Partners"- means the General Partner and the Limited Partners.
"Partner" - means any of the Partners.
"Partnership" - means the limited partnership evidenced by this
Agreement, as said limited partnership may from time to time be constituted,
amended and, if necessary, reconstituted, including any successor limited
partnership.
"Percentage Interests" - means the percentage set forth opposite the
name of such Partner under the column "Interest" in Exhibit B attached hereto
and made a part hereof for all purposes.
"Person" - means an individual, firm, corporation or other legal
entity.
"Properties" - means those certain tracts of land which have been
agreed to in writing by all of the Partners. Upon such written approval, the
General Partner shall attach the legal description for each Property hereto as
Exhibit A. "Property" - means any one of the Properties.
"Revised Act" - means the Texas Revised Limited Partnership Act, as
adopted and from time to time amended by the State of Texas.
ARTICLE II
FORMATION; NAME AND OFFICE; PURPOSE
Section 2.1 Formation
The General Partner and the Limited Partners hereby organize, create
and form the Partnership as a Texas limited partnership under the Revised Act.
The Partnership will commence effective upon the filing of the Certificate with
the Secretary of State of the State of Texas pursuant
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<PAGE> 4
to the provisions of the Revised Act. The Partnership is formed for the purpose
and upon the terms and conditions herein set forth. The Partners hereby agree
and obligate themselves to execute, acknowledge, file, record and/or publish,
as necessary, such amendments to the Certificate and such other certificates
and documents and to take all other necessary actions required by law to
perfect and maintain the Partnership as a limited partnership under the Revised
Act and in all other jurisdictions in which the Partnership may elect to
conduct business.
Section 2.2 Name, Registered Agent and Registered Office
The name of the Partnership shall be Triad Senior Living II, L.P. or
such other name as the General Partner shall hereafter designate by notice to
the Limited Partners and by amendment to the Certificate properly filed with
the Secretary of State of the State of Texas. The principal place of business
in Texas where books and records of the Partnership will be kept and made
available shall be 4312 Mockingbird Lane, Dallas, Texas 75205, or such other
place as the General Partner may from time to time designate in a notice to the
Limited Partners and by amendment to the Certificate. The registered office of
the Partnership and the registered Agent shall be as set forth in the
Certificate, or such other registered Agent and registered office as the
General Partner may from time to time designate in a notice to the Limited
Partners and by amendment to the Certificate.
Section 2.3 Purpose
The purpose of the Partnership shall be strictly limited to activities
relating to the acquisition, development, ownership, operation, and sale of the
Properties, and such other activities as are incidental thereto, including
without limitation, entering into the Loan and the performance of the
Partnership's obligations under the Loan Documents.
ARTICLE III
TERM
The term of the Partnership shall commence upon the filing of the
Certificate with the Secretary of State of the State of Texas, and shall
continue until December 31, 2050, on which date the Partnership shall
terminate, unless sooner dissolved upon the occurrence of any of the events of
dissolution or termination, as described in Article X.
ARTICLE IV
INTERESTS OF THE GENERAL PARTNER AND LIMITED PARTNERS
Section 4.1 General Partner
The General Partner is Triad Partners II, Inc., and it shall have a 1%
interest in the Partnership. Except as provided in Article IX of this
Agreement, no other Person shall become a General Partner in the Partnership.
The address of the General Partner is set forth on Exhibit B.
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Section 4.2 Limited Partners
The Limited Partners are TP II and Capital Senior Living Properties,
Inc., which shall have the interests in the Partnership as shown on Exhibit B.
Except as provided in Article IX of this Agreement, no other Person shall
become a Limited Partner or substitute Limited Partner in the Partnership. The
addresses of the Limited Partners are set forth on Exhibit B.
ARTICLE V
CAPITAL CONTRIBUTIONS
Section 5.1 Capital Contribution of the General Partner
The General Partner has contributed to the Partnership the amount set
forth on Exhibit B. The General Partner shall not be obligated to pay any
Partnership expenses or make any capital contributions to the Partnership
except as provided in this Section 5.1 and Section 5.3.
Section 5.2 Capital Contribution of the Limited Partners
The Limited Partners have contributed or will contribute to the
Partnership the amounts set forth on Exhibit B. The Limited Partners shall not
be obligated to make any other capital contributions to the Partnership except
as provided in this Section 5.2 and Section 5.3.
Section 5.3 Additional Capital Contributions
The Partners may, but are not required to, make their pro rata share
(based on Percentage Interests) of any additional capital contributions to the
Partnership. In the event that any Partner does not make such additional
capital contribution, the Partnership shall return the amounts contributed by
the other Partners for such additional capital contributions. The additional
capital contributions shall be due only upon the written notice from the
General Partner to the Partners.
TP II shall contribute to the capital of the Partnership in the amount
required and at the time specified in Section 2.2(d) of Exhibit C attached
hereto.
Section 5.4 Return or Withdrawal of Capital Contributions; Distributions
Except as otherwise expressly provided in this Agreement, none of the
Partners shall be entitled to demand a refund or return of any Capital
Contribution or to withdraw any part of its capital account or to receive any
distribution from the Partnership.
Section 5.5 Capital Accounts
A capital account shall be established and maintained for each Partner
as set forth in Exhibit C attached hereto.
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Section 5.6 Loans by the Partners.
If the General Partner determines that the Partnership needs
additional capital, it may request that the Partners make loans to the
Partnership. Then each Partner shall have the option, but not the obligation,
to loan to the Partnership some or all of the aggregate amount of the requested
loan. Any loans made by the Partners shall not be considered to be
contributions to the capital of the Partnership.
ARTICLE VI
LIMITED PARTNERS
Section 6.1 Powers: Actions
The Limited Partners shall neither participate in the management or
control of the Partnership's business nor shall they transact any business for
the Partnership, nor shall they have the power to sign for or bind the
Partnership, said powers being vested solely and exclusively in the General
Partner.
Section 6.2 Limitation of Liability
Anything to the contrary herein expressed or implied notwithstanding,
the Limited Partners shall not be personally liable for any of the debts of the
Partnership or any of the losses thereof in excess of their respective shares
of Partnership assets, capital contributions which they have made or are
obligated to make to the Partnership, and their share of the Partnership's
income and gains; provided, however, that to the extent required by applicable
law, if a Limited Partner receives a distribution at a time when it knew that,
after giving effect to the distribution, all liabilities of the Partnership,
other than liabilities to the Partners with respect to the partnership
interests and liabilities for which the recourse of creditors is limited to
specific Partnership assets, exceed the fair value of the Partnership's assets
(except that the fair value of property that is subject to a liability for
which there is recourse of creditors is limited shall be included in the
Partnership's assets only to the extent that the fair value of that property
exceeds that liability), then the Limited Partner receiving such distribution
shall be liable for the return of such distribution.
ARTICLE VII
GENERAL PARTNER
Section 7.1 Powers; Actions
The General Partner shall manage and control the business and affairs
of the Partnership. Without limiting the generality of the foregoing, the
General Partner shall have full power to (i) manage the Partnership; (ii)
execute such documents as it may deem advisable for Partnership purposes,
including, without limitation, the Loan Documents and all documents necessary
for the
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acquisition, financing, refinancing, development, ownership, operation and sale
of any Property; (iii) acquire, sell, lease, transfer, assign, convey,
mortgage, refinance, or otherwise dispose of or deal with all or any part of
any Property on such terms as it deems reasonable; (iv) establish and maintain,
to the extent Partnership funds are available, reasonable reserves for
anticipated and unanticipated expenses relating to the activities of the
Partnership; (v) perform or cause to be performed the Partnership's
obligations, and exercise or cause to be exercised all of the Partnership's
rights, under any agreement to which the Partnership or any nominee of the
Partnership is a party; and (vi) on behalf of the Partnership, employ, engage,
retain or deal with any Person, including any Affiliate, to perform services in
connection with the ownership and operation of the Property, provided in all
such cases such services are deemed by the General Partner to be advisable and
the compensation therefor is reasonable.
Section 7.2 Restrictions on the General Partner
(a) Notwithstanding the foregoing in Section 7.1 or any other
provision of this Agreement, the Partnership shall be subject to the
following restrictions and the General Partner shall have no authority
to take and shall not take any action on behalf of the Partnership in
violation of any of the following restrictions:
(i) No bankruptcy or insolvency filing or similar
proceedings for the Partnership may be commenced, and no
bankruptcy or insolvency filing or similar proceeding may be
commenced as to the General Partner on its own behalf or as
General Partner on behalf of the Partnership.
(ii) The Partnership and the General Partner are
prohibited from creating, incurring or assuming any
indebtedness other than the Loan and any subordinate
financing permitted in the Loan Documents.
(iii) The Partnership and the General Partner are
prohibited from liquidating or dissolving or consenting to
the liquidation or dissolution, in whole or in part, of
either the Partnership or the General Partner.
(b) Notwithstanding anything in this Agreement to the
contrary, the General Partner shall not have the right or the power to
make any commitment or engage in any undertaking on behalf of the
Partnership in respect of a Major Decision (as hereinafter defined)
unless and until such Major Decision has been approved in writing by
all of the Limited Partners. The term "Major Decision," as used in
this Agreement, means any decisions with respect to the following
matters:
(i) All financing and refinancing decisions
pertaining to indebtedness owing, directly or indirectly, to
and/or by the Partnership.
(ii) Any amendment, modification, change or
restatement of this Agreement.
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(iii) Any capital expenditures in excess of $50,000
on any Property that has already been developed.
(iv) The assignment of any interests in the
Partnership except as expressly provided by the terms of this
Agreement.
(v) Any amendment, modification or change to any
Management Agreement or any Development Agreement.
(vi) The engagement by the Partnership in any
business other than as set forth in Section 2.3 above.
(vii) The transaction of business with Affiliates of
Partners except as set forth herein.
(viii) The execution of any guarantees, indemnities,
sureties or similar commitments on behalf of the Partnership.
(ix) Any decision to cause the Partnership to loan
funds to any person, and the terms on which any such loan is
made.
(x) Any act in contravention of this Agreement.
(xi) The addition of a tract of land to the defined
term "Properties" or a change in the use of a Property.
(xii) The admission of any new Partners to the
Partnership (except as otherwise allowed herein) or the
appointment of any additional General Partner.
(xiii) Any other act which the Revised Act
specifically requires to be approved by all the Partners.
(xiv) The merger, consolidation or any other form of
combination of the Partnership with or into any other entity.
(xv) The conveyance, transfer or lease of the
Partnership's assets substantially as an entirety to any
entity, except for the transfer of the Properties (or a
Property) to the manager pursuant to any purchase option in
any Management Agreement.
(xvi) The acquisition or lease of any substantial
assets by the Partnership.
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Section 7.3 Duties and Obligations of the General Partner
The General Partner shall manage and control the Partnership, its
business and affairs. During the continuance of the Partnership, the General
Partner shall diligently and faithfully devote such time to the management of
the business of the Partnership as it deems reasonably necessary.
Section 7.4 Tax Matters Partner. See Section 4.4 of Exhibit C attached hereto.
Section 7.5 Liability; Indemnification
The General Partner and its Affiliates shall not be liable to the
Partnership or the Limited Partners for any act or omission performed or
omitted by it pursuant to the authority granted to it by this Agreement, other
than for fraud, willful malfeasance or gross negligence. The Partnership shall
and hereby does indemnify and save harmless the General Partner, the Limited
Partners and their Affiliates to the greatest extent permitted by the Revised
Act from any loss, damage, claim or liability, including but not limited to,
reasonable attorney's fees and expenses, incurred by them by reason of any act
performed by the General Partner, the Limited Partners or their Affiliates on
behalf of the Partnership, including, without limitation, their activities in
winding up and liquidating the Partnership, or in furtherance of the
Partnership's interests, except that the General Partner and its Affiliates
shall not be indemnified for actions by the General Partner or its Affiliates
which constitute a breach of any of their obligations under this Agreement,
fraud, willful malfeasance or gross negligence, provided, however, that the
indemnity and save harmless provided for in this sentence shall be satisfied
out of Partnership assets only and no Partner shall have any personal liability
on account thereof.
Section 7.6 Fees to and Reimbursement of the General Partner
The Limited Partners acknowledge that the General Partner or its
Affiliates will receive $3,000 per month beginning October 1, 1998 as an asset
management fee. The General Partner and its Affiliates shall also be entitled
to receive reimbursement of their expenses, but shall not be entitled to
receive any other fees. The General Partner and its Affiliates shall receive
reimbursement for all reasonable expenses advanced by the General Partner and
its Affiliates on behalf of the Partnership and all expenses incurred during
the operation of the Partnership.
ARTICLE VIII
ALLOCATIONS; DISTRIBUTIONS
Section 8.1 Allocations of Income and Loss
All items of income or loss of the Partnership shall be allocated to
the Partners in accordance with the provisions of Exhibit C attached hereto,
which are hereby incorporated by reference for all purposes of this Agreement.
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Section 8.2 Partnership Distributions of Cash
During the term hereof, periodically, but not less frequently than
annually, Net Cash Flow of the Partnership shall be distributed to the Partners
in accordance with their Percentage Interests.
ARTICLE IX
ASSIGNABILITY OF GENERAL PARTNER'S
AND LIMITED PARTNER'S INTERESTS; PURCHASE OPTION
Section 9.1 Restrictions on Transfers
Except as provided in Section 9.5 hereof, a Partner may not sell,
assign, transfer, encumber, or dispose of, by operation of law or otherwise,
any interest in the Partnership or in the property or assets of the Partnership
without the prior written consent of the other Partners, which in the other
Partners' absolute discretion may be withheld. Additionally, any such
disposition must comply with the provisions hereinafter stated in this Article
IX.
Section 9.2 Assignment of a Limited Partner's Interest
(a) Except as otherwise provided in this Agreement, an
assignee of the whole or any portion of a Partner's interest in the
Partnership shall not have the right to become a Partner in place of
its assignor unless (i) its assignor shall have designated such
intention in the instrument of assignment; (ii) the written consent of
the other Partners to such substitution shall have been obtained,
which consent, in the other Partners' absolute discretion, may be
withheld; (iii) the assignment instrument shall have been in form and
substance satisfactory to the other Partner; (iv) the assignor and
assignee named therein shall have executed and acknowledged such other
instrument or instruments as the other Partners may deem necessary or
desirable to effectuate such admission; and (v) the assignee shall
have accepted, adopted and approved in writing all of the terms and
provisions of this Agreement, as the same may have been amended.
(b) In any event, the Partnership and the other Partners
shall be entitled to treat an assignor of a Partner's interest as the
absolute owner thereof in all respects, and shall incur no liability
for distributions made in good faith to such assignor, until such time
as the foregoing requirements have been satisfied.
(c) The Partnership shall, upon satisfaction of the foregoing
requirements, thereafter pay all further distributions or profits or
other compensation by way of income or return of capital on account of
the interest so assigned to the assignee. In the absence of notice to
the other Partners and approval thereof in writing by them of the
assignment of a Partner's interest, whether by operation of law or
otherwise, any payment to an assigning Partner, or to his assigns,
executors, administrators, or legal representative, shall acquit the
Partnership of liability to the extent of such payment as to any other
person, whether
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claiming as a remote or immediate assignee of the Partner, or by
reason of its death, legal disability, bankruptcy, insolvency, or
otherwise.
(d) All costs (including, without limitation, legal and other
professional fees) incurred by the Partnership, the other Partners,
and the assigning Partner relating to any transfer contemplated by
this Article IX, shall be charged to, and shall be the sole expense
of, the assigning Partner.
Section 9.3 Withdrawal of a Partner
Except as otherwise specifically permitted by this Agreement, no
Partner shall be entitled to withdraw or retire from the Partnership.
Section 9.4 Death, Legal Incompetency, Bankruptcy or Dissolution of Limited
Partner
The death, legal incompetency, bankruptcy, dissolution or other
disability of a Limited Partner shall not dissolve or terminate the
Partnership. Upon the death, legal incompetency, bankruptcy, dissolution or
other disability of a Limited Partner, the estate, personal representative,
trustee, guardian or other successor in interest of such Limited Partner shall
have all the rights and obligations and be liable for all the liabilities of
the Limited Partner in the Partnership to the extent of such Limited Partner's
interest therein, subject to the terms and conditions of this Agreement, and,
with the prior written consent of the General Partner which may be withheld at
its sole discretion, may be substituted for such Limited Partner.
Section 9.5 Purchase Option of Capital Senior Living Properties, Inc.
At any time, Capital Senior Living shall have the right, but not the
obligation, to purchase all, but not less than all, of the interests owned by
the General Partner and TP II as limited partner for an amount equal to the
amount of money that each such Partner paid for their respective interests in
the Partnership, plus non-compounding interest of 12% per annum from the date
such amounts were paid to the date the option described herein is exercised.
The Partners, by executing this Agreement, hereby agree that the future value
of such interests is speculative and that the formula set forth above is the
Partners' best estimate of the fair market value of such interests as of the
date of the exercise of such option.
ARTICLE X
DURATION, DISSOLUTION, TERMINATION,
WINDING UP, REMOVAL OF THE GENERAL
PARTNER AND RESIGNATION OF THE GENERAL PARTNER
Section 10.1 Dissolution and Termination
Subject to the provisions of Section 7.2(a) hereof, the Partnership
shall be dissolved only upon the occurrence of any of the following events:
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(a) The expiration of the fixed term of the Partnership;
(b) The withdrawal or removal of the General Partner, the
assignment by the General Partner of all its interest in the
Partnership, or any other event that causes the General Partner to
cease to be a general partner under the Revised Act, provided that any
such event shall not constitute a event of dissolution if the
Partnership is continued pursuant to Section 10.2;
(c) The sale or other disposition of all or substantially all
of the assets of the Partnership and the collection of the proceeds
therefrom; and
(d) The mutual consent of the Partners.
Section 10.2 Continuation of Business
The Partners hereby agree that notwithstanding any provision of the
Revised Act, the Partnership shall not dissolve prior to the occurrence of any
event set forth in Section 10.1 above. Upon the occurrence of any event set
forth in Section 10.1 above, the Partnership shall not be dissolved or required
to be wound up if (i) at the time of such event there is a remaining General
Partner and that General Partner carries on the business of the Partnership or
(ii) within ninety (90) days after such event all remaining Partners agree in
writing to continue the business of the Partnership and to the appointment,
effective as of the date of such event, of one or more additional General
Partners.
Section 10.3 Winding Up of the Partnership
Upon dissolution of the Partnership as provided in Section 10.1, the
Partnership shall be wound up, and the General Partner (or if there is no
General Partner, a substitute General Partner elected by the Limited Partners)
will take full account of the Partnership's assets and liabilities, the assets
will be liquidated as promptly as is consistent with obtaining the fair market
value thereof, and the proceeds therefrom, to the extent sufficient therefor,
will be applied and distributed in accordance with the provisions of Section
10.4. Notwithstanding the foregoing, the General Partner, with the consent of
the Limited Partners, may determine not to sell all or any portion of the
assets of the Partnership, in which event there shall be distributed to each of
the Partners its interest in the remaining assets of the Partnership.
Section 10.4 Sale or Liquidation
In the case of a sale or other disposition of all or substantially all
of the assets of the Partnership or termination and liquidation of the
Partnership, the net proceeds of such sale or liquidation, shall be applied and
distributed, after crediting or charging the Partners' capital accounts
pursuant to Article VIII and as cash is received by the Partnership, in the
following order of priority on or before the end of the taxable year in which
the Partnership liquidates (or, if later, within 90 days after the date of such
liquidation):
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(a) To the payment of the debts and liabilities of the
Partnership (other than debts of the Partnership to the Partners) and
the expenses of sale and liquidation.
(b) To the setting up of any reserves which the General
Partner determines are reasonably necessary for any contingent or
unforeseen liabilities or obligations of the Partnership or of the
Partners arising out of, or in connection with, the Partnership. Such
reserves may be held by the General Partner for the purpose of
disbursing such reserves in payment of any of the aforementioned
contingencies, and at the expiration of such period as the General
Partner may deem advisable, to distribute the balance thereafter
remaining as provided herein.
(c) To the Partners in repayment of debts of the Partnership
to the Partners.
(d) To the Partners in proportion to and to the extent of the
remaining amounts of their respective positive capital accounts, as
such accounts have heretofore been adjusted pursuant to this
Agreement.
(e) The remaining assets, if any, shall be distributed to the
Partners in accordance with their Percentage Interests.
Should assets other than cash be distributed, the amount by which the
fair market value of the assets, if any, to be distributed exceeds or is less
than the basis of such assets shall, to the extent not otherwise recognized by
the Partnership, be taken into account in computing gain or loss of the
Partnership for purposes of crediting or charging the capital accounts of, and
distributing proceeds to, the Partners.
Section 10.5 Removal and Replacement of the General Partner
The General Partner may be removed by either Limited Partner without
further action for "cause," which means (i) any petition shall be filed by the
General Partner, or any petition shall be filed against the General Partner and
not vacated within 30 days, under any section or chapter of the present or
future federal Bankruptcy Code or under any similar state or federal law, (ii)
upon final judicial determination that the General Partner (1) was grossly
negligent in its failure to perform its obligations under this Agreement, or
(2) committed a fraud upon the Partners or upon the Partnership, or (3)
committed a felony in connection with the management of the Partnership or its
business, or (4) was in material breach of its obligations under this
Agreement, or (iii) transfer of the General Partner's interest in the
Partnership or withdrawal from the Partnership without approval of the Limited
Partners. In the event of removal or resignation of the General Partner, it
shall be deemed to have surrendered to the Partnership its entire general
partner interest in the Partnership and shall be entitled to no compensation
therefor.
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ARTICLE XI
ACCOUNTS AND RECORDS: ACCOUNTANTS
Section 11.1 Accounting Methods: Fiscal Year
The books of account of the Partnership shall be kept on the accrual
method of accounting. The fiscal year of the Partnership shall end on December
31 of each year except upon termination.
Section 11.2 Records and Books of Account
(a) The General Partner shall maintain, or cause to be
maintained complete and accurate records and books of account of all
transactions of the Partnership wherein shall be entered all
transactions, matters and things relating to the Partnership's
business as are usually entered into books of account kept by persons
engaged in a business of a like character, all on the method of
accounting determined in accordance with Section 11.1, consistently
applied.
(b) All of such records and books of account together with
all other documents and files of the Partnership, including but not
limited to copies of all documents prepared by the General Partner and
all correspondence, shall, at all times, be kept at the main office of
the Partnership or such other place as may be designated by the
General Partner and to which the Partners shall have reasonable access
as hereinafter provided, and all such records, books of account,
documents and files shall be the exclusive property of the
Partnership. In the event of the termination of the Partnership
interest of the General Partner, all such records, books of account,
documents and files shall remain in the exclusive possession of the
Partnership. At any time and from time to time while the Partnership
continues and until its complete liquidation (but only during
reasonable business hours), each Partner may, at its own expense and
upon reasonable prior written notice to the General Partner, fully
examine, inspect, make copies and audit the Partnership's books,
records, accounts and assets, including but not limited to bank
balances and physical inspection of the Properties or an audit to be
made by any competent accountant or other professional employed by it
at its expense.
Section 11.3 Annual Examination and Tax Returns
(a) The books of the Partnership shall be brought up to date
annually each year by the General Partner or the Accountants. The
General Partner or the Accountants shall determine and prepare for
such fiscal year, using the method of accounting determined in
accordance with Section 11.1, consistently applied, such financial
statements as are required by the Loan Documents.
(b) The General Partner or the Accountants shall also prepare
all tax returns which the Partnership is required to file and the same
shall be filed by the General Partner within the time prescribed by
law for the filing of each such return.
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(c) At the election of the General Partner, the Accountants
shall perform an audit in accordance with generally accepted auditing
standards. The financial statements and audit report shall be
delivered to each Partner in the Partnership.
Section 11.4 Bank Accounts
The cash Capital Contributions of the Partners and other funds of the
Partnership shall be deposited in a bank account or accounts which shall be
separately owned by the Partnership and maintained by the General Partner.
Withdrawals shall be made only in the regular course of Partnership business on
the signature of the General Partner or its designee. All funds not needed in
the operation of the business may be deposited, to the extent permitted by
applicable law, in interest bearing accounts or invested in short-term U.S.
Government obligations, U.S. Government guaranteed obligations, bank
certificates of deposit or other liquid high-grade investments, maturing, in
any event, within one year.
Section 11.5 Reports to Limited Partners
As soon as reasonably practicable but no later than thirty (30) days
after the end of each month, the General Partner shall cause to be prepared and
furnished to the Limited Partners income statements and balance sheets for such
month. As soon as reasonably practicable but no later than seventy-five (75)
days after the end of each fiscal year, the General Partner shall cause to be
prepared and furnished to the Limited Partners the following: (i) all necessary
tax reporting information required by the Limited Partners for preparation of
their respective income tax return and (ii) all information necessary for such
Limited Partners to comply with all reporting requirements imposed by the
securities laws of the United States or any state thereof. Upon the reasonable
request of the Limited Partners for further information with respect to any
matter with respect to the Partnership, the General Partner shall furnish such
information within ten (10) days after such request.
ARTICLE XIII
GENERAL PROVISIONS
Section 12.1 Recipient of Distributions and Payments
All distributions and payments of cash or property to be made pursuant
to the provisions of this Agreement shall be made directly to the parties who
are entitled thereto at their respective addresses indicated on Exhibit B or
elsewhere in this Agreement or at such other address as shall have been set
forth in a notice sent pursuant to the provisions of Section 12.2.
Section 12.2 Communications
Except as otherwise expressly provided in this Agreement, any offer,
acceptance, election, approval, consent, objection, certification, request
waiver, notice or other document required or permitted to be made or given
pursuant to any provisions of this Agreement shall be deemed duly made or
given, as the case may be, if in writing, signed by or on behalf of the person
making or
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giving the same, and shall be deemed completed when either personally delivered
(with receipt acknowledged by the recipient) or three days after deposited
through the U.S. mail, registered or certified, first class, postage prepaid,
addressed to the person or persons to whom such offer, acceptance, election,
approval, consent, certification, request, waiver or notice is to be made or
given at their respective addresses indicated on Exhibit B and, in the case of
the Partnership, at the office of the Partnership specified in Section 2.2 of
this Agreement, or, in any case, at such other address as shall have been set
forth in a notice sent pursuant to the provisions of this Section 12.2.
Section 12.3 Entire Agreement; Applicable Law; Effect
This Agreement contains the entire agreement by and among the parties
and supersedes any prior understandings and agreements among them respecting
the subject hereof. THIS AGREEMENT SHALL BE CONSTRUED, ENFORCED AND GOVERNED IN
CONFORMITY WITH THE LAWS OF THE STATE OF TEXAS, without giving effect to
principles of conflicts of law, and whether in state or federal courts. This
Agreement shall be binding upon the parties hereto, their successors, heirs,
devisees, permitted assigns, legal representatives, executors and
administrators but shall not be deemed for the benefit of creditors or any
other Persons.
Section 12.4 Modification; Waiver or Termination
Except as otherwise expressly provided in this Agreement, no
modification, waiver, or termination of this Agreement, or any part hereof,
shall be effective unless made in writing signed by the party or parties to be
bound thereby, and no failure to pursue or elect any remedy shall constitute a
waiver of any default under or breach of any provision of this Agreement, nor
shall any waiver of any default under or breach of any provision of this
Agreement be deemed to be a waiver of any other subsequent or similar or
different default under or breach of such or any other provision or of any
election or remedies available in connection therewith. Receipt by any party of
any money or other consideration due under this Agreement, with or without
knowledge of any breach or default, shall not constitute a waiver of such
breach or default of any provision of this Agreement.
Section 12.5 Counterparts
This Agreement may be executed in one or more counterparts and,
notwithstanding that all of the parties did not execute the same counterpart,
each of such counterparts shall, for all purposes, be deemed to be an original,
and all of such counterparts shall constitute one and the same instrument
binding on all of the parties hereto.
Section 12.6 Separability
Each provision of this Agreement shall be considered separable and (a)
if for any reason any provision or provisions herein are determined to be
invalid and contrary to any existing or future law, such invalidity shall not
impair the operation of or affect those portions of this Agreement which are
valid, and (b) if for any reason any provision or provisions of this Agreement
would subject the Limited Partners to any personal liability for the
obligations of the Partnership under the laws of the
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State of Texas or any other laws, as the same may now or hereafter exist, such
provision or provisions shall be deemed void and of no effect.
Section 12.7 Article and Section Headings
Article and Section titles or captions contained in this Agreement are
inserted only as a matter of convenience and for reference, and shall not be
construed in any way to define, limit, extend or describe the scope of any of
the provisions hereof.
Section 12.8 Word Meanings
The words such as "herein," "hereinafter," "hereof," and "hereunder"
refer to this Agreement as a whole and not merely to a subdivision in which
such words appear unless the context otherwise requires. The singular shall
include the plural and the masculine gender shall include the feminine and
neuter, and vice versa, unless the context otherwise requires.
Section 12.9 Exhibits
All exhibits annexed hereto and any documents or instruments delivered
simultaneously herewith are expressly made a part of this Agreement, as fully
as though completely set forth herein, and all references to this Agreement
herein or in any of such writings or elsewhere shall be deemed to refer to and
include all such writings.
Section 12.10 Further Actions
Each of the Partners shall hereafter execute and deliver such further
instruments and do such further acts and things as may be required or useful to
carry out the intent and purpose of this Agreement and as are not inconsistent
with the revisions hereof.
Section 12.11 Prohibition Re Partition
Each of the parties hereto does hereby permanently waive and
relinquish any and all rights it may have to cause the assets of the
Partnership to be partitioned, it being the intention of the parties to
prohibit any parties hereto from bringing a suit for partition against the
other parties hereto.
Section 12.12 Agreements with Capital Affiliates and the Loan
The Partnership hereby ratifies and agrees to be bound by any
agreements that the Partnership has entered into with Affiliates of Capital
Senior Living, including, the Management Agreement, the Development Agreement
and that certain Development and Turnkey Services Agreement by and between the
Partnership and Capital Senior Development, Inc.
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Section 12.13 Noncompete of General Partner
The General Partner agrees that as long as the General Partner is the
general partner of the Partnership and for one (1) year after the General
Partner is no longer the general partner of the Partnership neither the General
Partner nor its Affiliates will acquire, own, develop, complete the development
of, or manage any senior living facility providing the same level of services
as any senior living facility owned or leased by the Partnership within a seven
and one-half mile radius of a senior living facility owned or leased by the
Partnership.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
GENERAL PARTNER:
Triad Partners II, Inc., a Texas corporation
By: /s/ BLAKE N. FAIL
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Name: Blake N. Fail
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Title: President
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LIMITED PARTNERS:
Triad Partners II, Inc., a Texas corporation
By: /s/ BLAKE N. FAIL
------------------------------------------
Name: Blake N. Fail
----------------------------------------
Title: President
---------------------------------------
Capital Senior Living Properties, Inc.,
a Texas corporation
By: /s/ DAVID R. BRICKMAN
------------------------------------------
Name: David R. Brickman
----------------------------------------
Title: Vice President
---------------------------------------
18
<PAGE> 19
EXHIBIT "A"
Property Description
<PAGE> 20
EXHIBIT "B"
<TABLE>
<CAPTION>
Capital Contribution Interest
-------------------- --------
<S> <C> <C>
General Partner
Triad Partners II, Inc. $1.00 1%
4312 Mockingbird Lane
Dallas, Texas 75205
Limited Partners
Triad Partners II, Inc. $312,000 80%
4312 Mockingbird Lane
Dallas, Texas 75205
Capital Senior Living Properties, Inc. $ 74,100 19%
14160 Dallas Parkway
Suite 300
Dallas, Texas 75240
</TABLE>
<PAGE> 21
EXHIBIT "C"
Allocation Provisions
<PAGE> 22
EXHIBIT C
TO
AGREEMENT OF LIMITED PARTNERSHIP
OF
TRIAD SENIOR LIVING II, L.P.
ARTICLE I
DEFINITIONS
Section 1.1 Definitions. All capitalized terms used herein shall have
the meanings assigned to them in the Agreement of Limited Partnership of Triad
Senior Living II, L.P. Notwithstanding the foregoing, the following definitions
shall be applicable to the following terms as used in this Exhibit C of the
Agreement:
(a) "Adjusted Net Income or Loss" of the Partnership derived for any
Fiscal Year (or portion thereof) shall mean the excess or deficit, as the case
may be, of (i) the Gross Income of the Partnership for such period (not
including the amount of Gross Income (if any) allocated during such Fiscal Year
pursuant to Sections 3.1(a), 3.1(b), 3.1(c), 3.1(d), and 3.1(p) hereof for such
period), over (ii) the Deductible Expenses of the Partnership for such period
(not including the amount of Deductible Expenses (if any) allocated pursuant to
Sections 3.1(e), 3.1(f) and 3.1(p)) hereof for such period) with the following
modifications:
(i) Any Partnership income that is exempt from federal income
tax, and that is not otherwise taken into account in computing
Adjusted Net Income or Loss of the Partnership pursuant to this
Section 1.1(a), shall be treated as additional Gross Income and added
to the amount otherwise calculated as Adjusted Net Income or Loss
under this Section 1.1(a).
(ii) Any expenditures of the Partnership that are described
in section 705(a)(2)(B) of the Code (relating to expenditures of the
Partnership that are not deductible for federal income tax purposes in
computing taxable income and not properly chargeable to capital), or
treated as so described pursuant to section 1.704-1(b)(2)(iv)(i) of
the Regulations, and that are not otherwise taken into account in
computing Adjusted Net Income or Loss of the Partnership pursuant to
this Section 1.1(a), shall be treated as additional Deductible
Expenses and subtracted from the amount otherwise calculated as
Adjusted Net Income or Loss under this Section 1.1(a).
(b) "Adjusted Property" shall mean any Partnership asset that has a
Book Basis different from its adjusted tax basis. Any asset that is contributed
to the Partnership by a Partner shall be an "Adjusted Property" if its Agreed
Value is not equal to the Partnership's initial tax basis in such asset. In
addition, once the Book Basis of a Partnership asset is adjusted pursuant to
Section 2.4 hereof, such asset shall thereafter be an "Adjusted Property."
(c) "Agreed Value" of any asset contributed by a Partner to the
Partnership shall mean the fair market value thereof (determined without regard
to section 7701(g) of the Code) as of the date of such contribution and as
reasonably determined by the General Partner.
(d) "Book Basis" of any asset of the Partnership shall be determined
in accordance with the rules of Section 2.4.
(e) "Book Depreciation" in respect of any Partnership asset for any
Fiscal Year shall mean the product of (i) the depreciation, cost recovery or
other amortization deduction allowable to the Partnership
<PAGE> 23
for federal income tax purposes in respect of such asset for such Fiscal year,
multiplied by (ii) a fraction, the numerator of which is the Book Basis of such
asset as of the beginning of such Fiscal Year (or the date of acquisition if
the asset is acquired during such Fiscal Year) and the denominator of which is
the adjusted tax basis of such asset as of the beginning of such Fiscal Year
(or the date of acquisition if the asset is acquired during such Fiscal Year).
If the denominator of the fraction described in clause (ii) above is zero,
"Book Depreciation" in respect of such asset shall be determined under any
reasonable method selected by the General Partner.
(f) "Book Gain or Loss" realized by the Partnership in respect of any
asset of the Partnership in connection with the disposition of such asset shall
mean the excess (or deficit) of (i) the amount realized by the Partnership in
connection with such disposition (as determined under section 1001 of the Code)
over (ii) the then Book Basis of such asset. If the Book Basis is adjusted
pursuant to Section 2.4, any increase or decrease in Book Basis of the assets
as a result of the adjustment shall be treated as Book Gain or Book Loss, as
the case may be, and shall be allocated among the Partners pursuant to Section
3.1 of this Exhibit "C."
(g) "Capital Account" shall have the meaning assigned such term in
Section 2.1 hereof.
(h) "Deductible Expenses" of the Partnership for any Fiscal Year (or
portion thereof) shall mean all items, as calculated for book purposes, which
are allowable as deductions to the Partnership during such period under federal
income tax accounting principles (including Book Depreciation).
(i) "Fiscal Year" shall mean the fiscal year of the Partnership
adopted under Section 8.1 of the Agreement.
(j) "Gross Income" of the Partnership for any Fiscal Year (or portion
thereof) shall mean the gross income of the Partnership derived from all
sources (other than from capital contributions and loans to the Partnership and
other than Book Gain or Loss from a Terminating Capital Transaction) during
such period, as calculated for book purposes in accordance with federal income
tax accounting principles.
(k) "IRS" shall mean the United States Internal Revenue Service.
(l) "Liquidation" of a Partner's interest in the Partnership shall
mean and shall be deemed to occur upon the earlier of (i) the date upon which
the Partnership is terminated under section 708(b)(1) of the Code; (ii) the
date upon which the Partnership ceases to be a going concern (even though it
may continue in existence for the limited purpose of winding up its affairs,
paying its debts and distributing any remaining Partnership assets to the
Partners); or (iii) the date upon which there is a liquidation of the Partner's
interest in the Partnership (but the Partnership is not terminated) under
section 1.761-1(d) of the Regulations.
(m) "Modified 752 Share of Recourse Debt" of any Partner shall mean,
as of any date, the amount (if any) of economic risk that such Partner is
treated, as of such date, as bearing with respect to Recourse Debt under
section 1.752-2 of the Regulations (assuming the Partnership constructively
liquidates on such date within the meaning of section 1.752-2(b) of the
Regulations except that, for purposes of such section 1.752-2(b), all of the
assets of the Partnership shall be deemed thereunder to be transferred in fully
taxable exchanges for an aggregate amount of cash consideration equal to their
respective Book Bases and such consideration shall be deemed thereunder to be
used, in the appropriate order of priority, in full or partial satisfaction of
the liabilities of the Partnership).
(n) "Nonrecourse Deductions" of the Partnership shall have the meaning
ascribed to such term in section 1.704-2(b)(1) of the Regulations.
<PAGE> 24
(o) "Nonrecourse Liability" of the Partnership shall have the meaning
ascribed to such term in section 1.704-2(b)(3) of the Regulations.
(p) "Nonrecourse Minimum Gain" of the Partnership shall mean the
amount of "minimum gain" of the Partnership that is attributable to Nonrecourse
Liabilities (as determined under section 1.704- 2(b)(2) of the Regulations). A
Partner's share of such "Nonrecourse Minimum Gain" shall be calculated in
accordance with the provisions of section 1.704-2(g) of the Regulations.
(q) "Operations" shall mean all revenue producing activities of the
Partnership other than activities relating to a Capital Transaction that occur
in connection with the dissolution of the Partnership.
(r) "Partner Minimum Gain" of the Partnership shall mean the amount of
"minimum gain" of the Partnership that is attributable to Partner Nonrecourse
Debt (as determined under section 1.704-2(i)(2) of the Regulations). A
Partner's share of such "Partner Minimum Gain" shall be calculated in
accordance with the provisions of section 1.704-2(i)(5) of the Regulations.
(s) "Partner Nonrecourse Debt" of the Partnership shall have the
meaning ascribed to such term in section 1.704-2(b)(4) of the Regulations.
(t) "Partner Nonrecourse Deductions" of the Partnership shall have the
meaning ascribed to such term in section 1.704-2(i)(2) of the Regulations.
(u) "Recourse Debt" of the Partnership shall mean any liability (or
portion thereof) of the Partnership that is neither a Nonrecourse Liability nor
a Partner Nonrecourse Debt.
(v) "Regulations" shall mean the regulations promulgated by the United
States Department of the Treasury pursuant to and in respect of provisions of
the Code. All references herein to sections of the Regulations shall include
any corresponding provision or provisions of succeeding, similar, substitute
proposed or final Regulations.
(w) "Related Person" shall mean, as to any Partner, any person who is
related to such Partner (within the meaning of section 1.752-4(b) of the
Regulations).
(x) "Revaluation Event" shall mean any of the following occurrences:
(a) the contribution of money or other property (other than a de minimis
amount) by a new or existing Partner to the Partnership as consideration for
the issuance of an additional interest in the Partnership and/or increase in
Interests; (b) the distribution of money or other property (other than a de
minimis amount) by the Partnership to a retiring or continuing Partner as
consideration for an interest in the Partnership and/or decrease in Interests;
or (c) the liquidation of the Partnership within the meaning of section
1.704-1(b)(2)(ii)(g) of the Regulations.
(y) "Section 704 Capital Account" shall have the meaning assigned to
such term in Section 2.3 hereof.
(z) "Tax Depreciation" for any Fiscal Year shall mean the amount of
depreciation, cost recovery or other amortization deductions allowable to the
Partnership for federal income tax purposes for such Fiscal Year.
(aa) "Tax Item" with respect to any asset shall mean any item of
income, gain, loss or deduction (including depreciation, cost recovery or
amortization) in respect of such asset, as computed for federal income tax
purposes.
<PAGE> 25
(bb) "Tax Matters Partner" shall have the meaning ascribed to such
term in Section 4.4(a) hereof.
(cc) "Taxable Gain or Loss" shall mean gain or loss recognized by the
Partnership on the sale, exchange or other disposition of any asset of the
Partnership as computed for federal income tax purposes.
ARTICLE II
CAPITAL ACCOUNTS
AND
SECTION 704 CAPITAL ACCOUNTS
Section 2.1 Capital Accounts. A separate "Capital Account" (herein so
called) shall be maintained for each Partner in accordance with the capital
accounting rules of section 1.704-1(b)(2)(iv) of the Regulations. Each Partner
shall have only one Capital Account, regardless of the number or classes of
interests in the Partnership owned by such Partner and regardless of the time
or manner in which such interests were acquired by such Partner. Pursuant to
the basic rules of section 1.704-1(b)(2)(iv) of the Regulations, the balance of
each Partner's Capital Account:
(a) shall be increased by the amount of money contributed by such
Partner (or such Partner's predecessor in interest) to the Partnership
(including but not limited to such Partner's Capital Contributions described in
Article V of the Agreement) and decreased by the amount of money distributed to
such Partner (or such Partner's predecessor in interest);
(b) shall be increased by the fair market value (determined without
regard to section 7701(g) of the Code) of each property contributed by such
Partner (or such Partner's predecessor in interest) to the Partnership (net of
liabilities secured by such property that the Partnership is considered to
assume or take subject to under section 752 of the Code), and decreased by the
fair market value (determined without regard to section 7701(g) of the Code) of
each property distributed to such Partner (or such Partner's predecessor in
interest) by the Partnership (net of liabilities secured by such property that
such Partner is considered to assume or take subject to under section 752 of
the Code);
(c) shall be increased by the amount of Adjusted Net Income or item of
income or gain or Book Gain allocated to such Partner (or such Partner's
predecessor in interest) pursuant to Section 3.1 hereof;
(d) shall be decreased by the amount of Adjusted Net Loss or item of
loss or deduction or Book Loss allocated to such Partner (or such Partner's
predecessor in interest) pursuant to Section 3.1 hereof; and
(e) shall be otherwise adjusted in accordance with the other capital
account maintenance rules of section 1.704-1(b)(2)(iv) of the Regulations.
The foregoing provisions of this Section 2.1 and the other provisions of this
Exhibit C relating to the maintenance of Capital Accounts are intended to
comply with section 1.704-1(b) of the Regulations, and shall be interpreted and
applied in a manner consistent with such Regulations. The Partners shall also
make any appropriate modification if unanticipated events might otherwise cause
this Exhibit C and the Agreement not to comply with such Regulations. If any
Interest is transferred pursuant to the terms of the Agreement, the transferee
shall succeed to the Capital Account of the transferor to the extent the
Capital Account is attributable to the transferred Interest.
<PAGE> 26
Section 2.2 Additional Provisions Regarding Capital Accounts.
(a) If a Partner pays any indebtedness of the Partnership, such
payment shall be treated as a contribution by that Partner to the capital of
the Partnership and the Capital Account of such Partner shall be increased by
the amount so paid by such Partner.
(b) Except as specifically provided in the Agreement, no Partner may
contribute capital to, or withdraw capital from, the Partnership.
(c) A loan by a Partner to the Partnership shall not be considered a
contribution of money to the capital of the Partnership, and the balance of
such Partner's Capital Account shall not be increased by the amount so loaned.
No repayment of principal or interest on any such loan, or reimbursement made a
Partner with respect to advances or other payments made by a such Partner on
behalf of the Partnership or payments of fees to a Partner or Related Person to
such Partner which are made by the Partnership shall be considered a return of
capital or in any manner affect the balance of such Partner's Capital Account.
(d) No Partner with a deficit balance in its Capital Account shall
have any obligation to the Partnership, any other Partner, or any third party
to restore said deficit balance; provided, however, that upon the liquidation
of TP II's interest in the Partnership, if TP II has a deficit balance in his
Capital Account following such liquidation, as determined after taking into
account all adjustments to the Capital Accounts for the taxable year during
which such liquidation occurs, TP II shall be required to immediately
contribute cash to the Partnership in an amount equal to the lesser of (i) such
deficit capital account balance or (ii) the amount of actual cash distributions
to TP II during the term of the Partnership (determined without taking into
account any amounts paid to any party pursuant to Section 7.6 of the
Agreement).
(e) No interest will be paid on any capital contributed to the
Partnership or the balance in any Partner's Capital Account.
Section 2.3 Section 704 Capital Accounts. A "Section 704 Capital
Account" (herein so called) shall be determined and maintained for each Partner
throughout the term of the Agreement. The balance of a Partner's Section 704
Capital Account shall be equal to such Partner's Capital Account balance (as
determined after giving effect to all adjustment attributable to allocations of
Partnership income, gain, loss, deduction and credits and contributions and
distributions of money and property effected prior to such determination),
modified as follows:
(a) decreased by the amount (if any) of cash that reasonably is
expected to be distributed to such Partner, but only to the extent that the
amount thereof exceeds any offsetting increase in such Partner's Section 704
Capital Account that reasonably is expected to occur during (or prior to) the
Fiscal Year during which such distribution reasonably is expected to be made
(as determined under section 1.704- 1(b)(ii)(d) of the Regulations);
(b) decreased by the amount (if any) of loss and deduction that
reasonably is expected to be allocated to such Partner pursuant to section
704(e)(2) or 706(d) of the Code or section 1.704-1(b)(2)(ii) of the Regulations
(as determined under section 1.704-1(b)(2)(ii)(d) of the Regulations);
(c) increased by the amount (if any) of such Partner's share of the
Nonrecourse Minimum Gain of the Partnership; and
(d) increased by the amount (if any) of such Partner's share of the
Partner Minimum Gain of the Partnership.
<PAGE> 27
Section 2.4 Adjustment of Book Basis. Book Basis with respect to any
asset of the Partnership is the asset's adjusted tax basis for federal income
tax purposes, except as follows:
(a) The initial Book Basis of any asset contributed to the Partnership
by a Partner shall be the fair market value of the asset as of the date of
contribution as agreed upon by the contributing Partner and the Partnership.
(b) The Book Basis of each asset shall be its respective fair market
value as reasonably determined by the General Partner, as of a Revaluation
Event.
(c) The Book Basis of each asset distributed to any Partner will be
the fair market value of the asset as reasonably determined by the General
Partner as of the date of determination.
(d) The Book Basis of each asset will be increased or decreased to
reflect any adjustment to the adjusted tax basis of the asset under section
734(b) or 743(b) of the Code, but only to the extent that the adjustment is
taken into account in determining Capital Account balances under section
1.704-1(b)(2)(iv)(m) of the Regulations, provided that the Book Basis will not
be adjusted hereunder to the extent that an adjustment under Section 2.4(b) is
necessary or appropriate in connection with a transaction that would otherwise
result in an adjustment under this Section 2.4(d).
Book Basis will be adjusted by Book Depreciation, and Book Gain or Book Loss on
a disposition of any asset shall be determined by reference to such asset's
Book Basis as adjusted herein.
ARTICLE III
ALLOCATIONS OF PROFIT AND LOSS
Section 3.1 Allocation of Items of Profit and Loss. Subject to the
provisions of ARTICLE IV hereof, the Partnership's Gross Income, items of loss
or deduction and Adjusted Net Income or Loss and Book Gain or Loss for each
Fiscal Year shall be allocated to the Partners as follows and in the following
order of priority (after giving effect to all Capital Account adjustments
attributable to contributions and distributions of money and property, but
prior to distributions of money and property made pursuant to Section 10.4 of
the Agreement):
(a) Pursuant to section 1.704-2(f) of the Regulations (relating to
minimum gain chargebacks), if there is a net decrease in Nonrecourse Minimum
Gain of the Partnership for such Fiscal Year (or if there was a net decrease in
Nonrecourse Minimum Gain for a prior Fiscal Year and the Partnership did not
have sufficient amounts of income during prior Fiscal Years to allocate to the
Partners under this Section 3.1(a)), then Gross Income shall be allocated,
before any other allocation is made pursuant to the succeeding provisions of
this Section 3.1 for such Fiscal Year, to each Partner in an amount equal to
such Partner's share of the net decrease in such minimum gain (as determined
under section 1.704-2(g) of the Regulations).
(b) Pursuant to section 1.704-2(i)(4) of the Regulations (relating to
minimum gain chargebacks) if there is a net decrease in Partner Minimum Gain of
the Partnership for such Fiscal Year (or if there was a net decrease in Partner
Minimum Gain for a prior Fiscal Year and the Partnership did not have
sufficient amounts of income during prior Fiscal Years to allocate to the
Partners under this Section 3.1(b)), then Gross Income shall be allocated,
before any other allocation is made pursuant to the succeeding provisions of
this Section 3.1 for such Fiscal Year, to each Partner with a share of such
minimum gain as of the first
<PAGE> 28
day of such Fiscal Year in an amount equal to such Partner's share of the net
decrease in such Partner Minimum Gain (as determined under section
1.704-2(i)(5) of the Regulations).
(c) A Partner who unexpectedly receives any adjustment, allocation or
distribution described in section 1.704-1(b)(2)(ii)(d)(4), (5) or (6) of the
Regulations will be specially allocated items of income or gain (after the
allocations required by Section 3.1(a) and Section 3.1(b) hereof but before any
other allocations required by this Section 3.1) in an amount and in the manner
sufficient to eliminate any deficit balance in his Section 704 Capital Account
(for this purpose, a Partner's Section 704 Capital Account shall be increased
by the amount (if any) that such Partner is treated as being obligated to
contribute subsequently to the capital of the Partnership (as determined under
section 1.704-1(b)(2)(ii)(c) of the Regulations) and, without duplication of
any amount previously described in this sentence, shall be increased by the
amount (if any) of such Partner's Modified 752 Share of Recourse Debt) as
quickly as possible; provided, however, that an allocation shall be made
pursuant to this Section 3.1(c) only if and to the extent that such Partner
would have a deficit balance in his Section 704 Capital Account after all
allocations in this Section 3.1 have been tentatively made as if this Section
3.1(c) were not in this Exhibit. This Section 3.1(c) is intended to satisfy the
provisions of Section 1.704-1(b)(2)(ii)(d) of the Regulations and shall be
interpreted consistently therewith.
(d) Except as required by Section 3.1(a), Section 3.1(b) and Section
3.1(c), each Partner who has a deficit balance in its Capital Account (for this
purpose, a Partner's Capital Account shall be increased by (A) the amount (if
any) that a Partner is obligated to contribute subsequently to the capital of
the Partnership under the Agreement or this Exhibit (including Section 2.2(d)
of this Exhibit) or is treated as being obligated to contribute subsequently to
the capital of the Partnership (as determined under section
1.704-1(b)(2)(ii)(c) of the Regulations); (B) the amount (if any) of such
Partner's share of the Nonrecourse Minimum Gain of the Partnership; and (C) the
amount (if any) of such Partner's share of the Partner Minimum Gain of the
Partnership) at the end of the taxable year will be specially allocated items
of income or gain in the amount of the deficit as quickly as possible;
provided, however, that an allocation shall be made pursuant to this Section
3.1(d) only if and to the extent that such Partner would have a deficit balance
in its Capital Account after all allocations in this Section 3.1 have been
tentatively made as if this Section 3.1(d) were not in this Exhibit and Section
3.1(d) shall be applied before Section 3.1(c).
(e) All Partner Nonrecourse Deductions attributable to a Partner
Nonrecourse Debt shall be allocated to the Partner that is treated (under
section 1.704-2(b)(4) of the Regulations) as bearing the economic risk of loss
for such debt.
(f) All Nonrecourse Deductions of the Partnership shall be allocated
to the Partners, pro rata in accordance with their respective Percentage
Interests.
(g) Any Adjusted Net Income realized by the Partnership for such year
shall be allocated among the Partners as follows and in the following order of
priority:
(i) First: Adjusted Net Income shall be allocated to the
General Partner until the aggregate Adjusted Net Income allocated
under this Section 3.1(g)(i) for the current and prior years equals
the aggregate amount of Adjusted Net Loss allocated to the General
Partner under Section 3.1(h)(ii) for the current and prior years; and
then
(ii) Second: Adjusted Net Income shall be allocated to the
Partners in the same proportion that cumulative Adjusted Net Loss has
been allocated to the Partners under Section 3.1(h)(i) for the current
year and prior years until each Partner has been allocated cumulative
Adjusted Net Income under this Section 3.1(g)(ii) for the current and
prior years equal to the
<PAGE> 29
cumulative Adjusted Net Loss allocated to the Partner under Section
3.1(h)(i) for the current and prior years; and then
(iii) Third: All remaining Adjusted Net Income shall be
allocated among the Partners in proportion to their respective
Percentage Interests.
(h) Any Adjusted Net Loss realized by the Partnership for such year
shall be allocated among the Partners as follows and in the following order of
priority:
(i) First: Adjusted Net Loss shall be to the Partners in
proportion to their respective Percentage Interests until each
Partner's positive Section 704 Capital Account balance is reduced to
zero.
(ii) Second: All remaining Adjusted Net Loss shall be
allocated to the General Partner.
(i) Notwithstanding any other provision of the Agreement or this
Exhibit, from the date that construction commences with respect to a Property
(the "Subject Property") to the date 18 months following the date that the
Partnership receives a Certificate of Occupancy for the Subject Property, all
Adjusted Net Loss from the Subject Property shall be allocated under this
Section 3.1(i) to TP II. The provisions of this Section 3.1(i) shall be applied
to each Property of the Partnership on a property by property basis.
(j) [Intentionally deleted]
(k) Book Gain derived from a Terminating Capital Transaction shall be
allocated among the Partners as follows in the following order of priority
(after giving effect to all adjustments attributable to allocations made
pursuant to the preceding provisions of this Section 3.1 for such year):
(i) First: Book Gain shall be allocated among the Partners
having deficit Capital Account balances to the least extent necessary
to cause their deficit Capital Account balances to be in the same
proportion to one another as are their respective Percentage
Interests.
(ii) Second: Book Gain shall be allocated among those
Partners having deficit Capital Account balances in accordance with
their respective Percentage Interests, to the least extent necessary
to cause their Capital Account balances to equal zero.
(iii) Third: Book Gain shall be allocated to the Partners to
the least extent necessary so as to cause their positive Capital
Account balances to be in the same proportion to one another as are
their respective Percentage Interests.
(iv) Fourth: Book Gain shall be allocated among the Partners
in proportion to their respective Percentage Interests.
(l) Book Loss derived from a Terminating Capital Transactions shall be
allocated among the Partners as follows in the following order of priority
(after giving effect to all adjustments attributable to allocations made
pursuant to the preceding provisions of this Section 3.1 for such year):
(i) First: Book Loss shall be allocated among the Partners to
the least extent necessary so as to cause the positive balances of
their respective Capital Accounts to be in the same proportion to one
another as their respective Percentage Interests and then to all
Partners in
<PAGE> 30
proportion to their respective Percentage Interests until each
Partner's positive Capital Account balance is reduced to zero.
(ii) Second: All remaining Book Loss shall be allocated to
the General Partner.
(m) For purposes of determining the nature (as ordinary or capital) of
any Partnership profit allocated among the Partners for Federal income tax
purposes pursuant to this Section 3.1, the portion of such profit required to
be recognized as ordinary income pursuant to sections 1245 and/or 1250 of the
Code shall be deemed to be allocated among the Partners in accordance with
sections 1.1245-1(e)(2) and 1.1250-1(f) of the Regulations.
(n) The Partners agree that their Percentage Interests represent their
respective interest in Partnership profits for purposes of allocating excess
nonrecourse liabilities (as defined in section 1.752-3(a)(3) of the
Regulations) pursuant to section 1.752-3(a)(3) of the Regulations.
(o) Notwithstanding any other provision herein to the contrary, no
allocation of Adjusted Net Income, Adjusted Net Loss, Book Gain or Book Loss,
or items of income, gain, loss and deduction will be made to a Partner if the
allocation would not have "economic effect" under section 1.704-1(b)(2)(ii) of
the Regulations or otherwise would not be in accordance with the Partners'
interests in the Partnership within the meaning of section 1.704-1(b)(3) or
section 1.704-2(b)(1) of the Regulations. The General Partner will have the
authority to reallocate any item in accordance this Section 3.1(o); provided,
however, that (a) no such change shall have a material adverse effect upon the
amount of cash or other property distributable to any Partner, (b) each Partner
shall have 30 days prior notice of such proposed modification and (c) if such
proposed modification would be material, the Partnership shall have received an
opinion of tax counsel to the Partnership that such modification is necessary
to comply with section 704(b) of the Code.
(p) The allocations set forth in Sections 3.1(a)-(f) (the "Regulatory
Allocations") are intended to comply with certain requirements of the
Regulations. It is the intent of the Partners that, to the extent possible, all
Regulatory Allocations shall be offset either with other Regulatory Allocations
or with special allocations of other items of Partnership income, gain, loss,
or deduction pursuant to this Section 3.1(p). Therefore, notwithstanding any
other provision of this Article III (other than the Regulatory Allocations),
the General Partner shall make such offsetting special allocations of
Partnership income, gain, loss, or deduction in whatever manner it determine(s)
appropriate so that after such offsetting allocations are made, each Partner's
Capital Account balance is, to the extent possible, equal to the Capital
Account balance such Partner would have had if the Regulatory Allocations were
not part of the Agreement and all Partnership items were allocated pursuant to
Sections 3.1(g)-(l) hereof.
Section 3.2 Allocation of Tax Items.
(a) Except as otherwise provided in the succeeding provisions of this
Section 3.2, each Tax Item shall be allocated to the Partners in the same
manner as each correlative item of income, gain, loss or deduction, as
calculated for book purposes, is allocated pursuant to the provisions of
Section 3.1 hereof.
(b) The Partners hereby acknowledge that all Tax Items in respect of
Adjusted Property are required to be allocated to the Partners in the same
manner as under section 704(c) of the Code (as specified in sections
1.704-1(b)(2)(iv)(f), 1.704-1(b)(2)(iv)(g) and 1.704-3 of the Regulations), and
that the principles of section 704(c) of the Code require that such Tax Items
must be shared among the Partners so as to take account of the variation
between the adjusted tax basis and Book Basis of each such Adjusted Property.
Thus, notwithstanding anything in Sections 3.1 or 3.2(a) hereof to the
contrary, the Partners' distributive shares of Tax Items in respect of each
Adjusted Property shall be separately determined and
<PAGE> 31
allocated to the Partners following any permissible method under 1.704-3 of the
Regulations reasonably selected by the General Partner, and the Capital Account
balances of the Partners shall be adjusted solely for allocations of book items
in respect of such assets and shall not be adjusted for their distributive
shares of any corresponding Tax Items.
ARTICLE IV
SPECIAL RULES
Section 4.1 Allocation of Profit and Loss and Distributions in Respect
of Interests Transferred.
(a) If any interest in the Partnership is transferred, or is increased
or decreased by reason of the admission of a new Partner or otherwise, during
any Fiscal Year, each item of Adjusted Net Income or Loss, and other income and
deductions and Book Gain and Book Loss of the Partnership for such Fiscal Year
shall be divided and allocated between the Partners in question by taking
account of their varying interests in the Partnership during such Fiscal Year
on a daily, monthly, or other basis, as determined by the General Partner using
any permissible method under section 706 of the Code and the Regulations
thereunder.
(b) Distributions of Partnership assets in respect of an interest in
the Partnership shall be made only to the persons or entities who, according to
the books and records of the Partnership, are the holders of record of the
interests in the Partnership in respect of which such distributions are made on
the actual date of distribution. Neither the Partnership nor any Partner shall
incur any liability for making distributions in accordance with the provisions
of the preceding sentence, whether or not the Partnership or any Partner has
knowledge or notice of any transfer or purported transfer of ownership of any
interest in the Partnership.
(c) Notwithstanding any provision above to the contrary, Book Gain or
Loss of the Partnership realized in connection with a sale or other disposition
of any substantial part of the assets of the Partnership shall be allocated
solely to the parties owning interests in the Partnership as of the date such
sale or other disposition occurs.
Section 4.2 Tax Returns. The General Partner shall cause to be
prepared for each taxable year of the Partnership the federal, state and local
income tax returns and information returns, if any, which the Partnership is
required to file. Such returns shall be prepared and submitted to the Partners
for examination no later than ten (10) days prior to the required filing date
(including any extension thereof), together with such additional forms and
information as may be required by the Partners in order for the Partners to
file returns reflecting the Partnership's operations.
Section 4.3 Tax Elections. The Partnership shall make the following
elections on the appropriate tax returns:
(a) to the extent permitted by the Code, to adopt the calendar year as
the Partnership's fiscal year;
(b) to the extent permitted by the Code, to adopt the cash method of
accounting and to keep the Partnership's books and records on the income-tax
method;
(c) if a distribution of Partnership property as described in section
734 of the Code occurs or if a transfer of Interest as described in section 743
of the Code occurs, on written request of any Partner, to elect, pursuant to
section 754 of the Code, to adjust the basis of Partnership properties;
<PAGE> 32
(d) to elect to amortize the organizational expenses of the
Partnership ratably over a period of sixty (60) months as permitted by section
709(b) of the Code; and
(e) any other election the General Partner may deem appropriate and in
the best interests of the Partners.
Neither the Partnership nor any Partner may make an election for the
Partnership to be excluded from the application of the provisions of subchapter
K of chapter 1 of subtitle A of the Code or any similar provisions of
applicable state law. The Partnership intends to be classified as a partnership
for federal income tax purposes under section 301.7701-3 of the Regulations.
Neither the Partnership nor any Partner may make an election under section
301.7701-3(c) of the Regulations to treat the Partnership as an association
taxable as a corporation.
Section 4.4 Tax Matters Partner.
(a) The General Partner is hereby designated the "Tax Matters Partner"
as that term is defined in section 6231(a)(7) of the Code.
(b) The Tax Matters Partner shall use its best efforts to comply with
the responsibilities outlined in sections 6222 through 6232 of the Code and in
doing so shall incur no liability to the other Partners. Notwithstanding the
Tax Matters Partner's obligation to use its best efforts in the fulfillment of
its responsibilities, the Tax Matters Partner shall not be required to incur
any expenses for the preparation for or pursuance of administrative or judicial
proceedings unless the Partners agree on a method for sharing such expenses.
(c) No Partner shall file, pursuant to section 6227 of the Code, a
request for an administrative adjustment of items for any Partnership taxable
year without first notifying the other Partners. If the other Partners agree
with the requested adjustment, then the Tax Matters Partner shall file the
request for administrative adjustment on behalf of the Partner. If unanimous
consent is not obtained within thirty (30) calendar days from such notice, or
within the period required to timely file the request for administrative
adjustment, if shorter, any Partner, including the Tax Matters Partner, may
file a request for administrative adjustment on its own behalf.
(d) Any Partner intending to file a petition under sections 6226,
6228, or other section of the Code with respect to any item or other matter
involving the Partnership shall notify the other Partners of such intention and
the nature of the contemplated proceeding. In the case where the Tax Matters
Partner is the Partner intending to file such petition on behalf of the
Partnership, such notice shall be given within a reasonable period of time to
allow the other Partners to participate in the choosing of the forum in which
such petition will be filed. If the Partners do not agree on the appropriate
forum, then the appropriate forum shall be decided by vote of a majority in
interest of the Partners. If such a majority cannot agree, then the Tax Matters
Partner shall choose the forum. If any Partner intends to seek review of any
court decision rendered as a result of a proceeding instituted under the
preceding provisions of this Section 4.4(d), then such Partner shall notify the
other Partners of such intended action.
(e) The provisions of this Section 4.4 shall survive the termination
of the Partnership or the termination of any Partners's interest in the
Partnership and shall remain binding on the Partners for a period of time
necessary to resolve with the IRS or the United States Treasury Department the
income taxation of the Partnership.
Section 4.5 Inconsistent Treatment of Partnership Items. If any
Partner intends to file a notice of inconsistent treatment under section
6222(b) of the Code, then such Partner shall give reasonable notice
<PAGE> 33
under the circumstances to the other Partners of such intent and the manner in
which the Partner's intended treatment of an item is (or may be) inconsistent
with the treatment of that item by the other Partners.
<PAGE> 1
EXHIBIT 10.58
AGREEMENT OF LIMITED PARTNERSHIP
OF
TRIAD SENIOR LIVING III, L.P.
THIS AGREEMENT OF LIMITED PARTNERSHIP is dated effective as of November
10, 1998, by and among Triad Partners III, Inc., a Texas corporation ("TP III"),
as general partner (the "General Partner") and as a limited partner and Capital
Senior Living Properties, Inc., a Texas corporation ("Capital Senior Living"
and, together with TP III, the "Limited Partners").
WHEREAS, the parties hereto desire to form a limited partnership under
the Texas Revised Limited Partnership Act.
NOW THEREFORE, in consideration of the mutual covenants, conditions and
agreements hereinafter set forth, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereby
agree as follows:
ARTICLE I
ADDITIONAL DEFINITIONS
As used herein, the following terms shall have the following meanings:
"Accountant" - means any independent firm of certified public
accountants as may be engaged by the General Partner for the Partnership.
"Affiliate" - means (a) a General Partner; (b) a Limited Partner; (c) a
partner or shareholder of a General Partner or a Limited Partner or a member of
the immediate family of a partner or shareholder; (d) a legal representative of
any Person, referred to in the preceding clauses (a) through (c); (e) a trustee
for the benefit of any Person referred to in the preceding clauses (a) through
(c); (f) a corporation, joint venture, partnership or other business entity
which is controlled by such person or entity and/or any one or more of the
Persons referred to in the preceding clauses (a) through (c); (g) a corporation,
joint venture, partnership or other business entity which controls or is under
common control with such person or entity, and/or with a person or entity
referred to in the preceding clauses (a) through (c); or (h) the partners,
officers, directors and key employees of such entity and/or any corporation,
joint venture, partnership or other business entity referred to in the preceding
clauses (a), (b), (c), (f) or (g).
"Agreement" or "this Agreement" - means this Agreement of Limited
Partnership, as amended from time to time.
<PAGE> 2
"Capital Contributions" - means the gross amount of contributions
actually made to the capital of the Partnership by a Partner or all the
Partners, as the case may be. Loans to the Partnership by any Partner shall not
be considered a Capital Contribution.
"Certificate" - means the Certificate of Limited Partnership of this
Partnership filed with the Secretary of State of the State of Texas, as such
Certificate may be further amended and filed from time to time.
"Certificate of Occupancy" - means that certain certificate of
occupancy which has been issued for any building at a Property.
"Code" - means the Internal Revenue Code of 1986, as amended.
"Development Agreement" - means any development agreement between the
Partnership and Capital Senior Development, Inc. relating to a Property, as such
agreement may be amended from time to time.
"Fiscal Year" - means the fiscal year of the Partnership as set forth
in Section 11.1 hereof.
"General Partner" - means Triad Partners III, Inc. and any additional
or successor General Partner(s) designated in any case as such in accordance
with the provisions of this Agreement, and, from time to time, holding such
position in accordance with such provisions.
"Gross Receipts" - means all revenues received by the Partnership from
the operations of its business attributable to a particular period as determined
in accordance with the cash receipts and disbursements method of accounting, and
including, without limitation, any loans from Partners and third parties, and
other amounts paid by Partners and third parties to the Partnership, but not
including capital contributions.
"Limited Partners" - means Triad Partners III, Inc. and Capital Senior
Living Properties, Inc., and any additional or substitute Limited Partner(s) as
may be designated as such in accordance with the provisions of this Agreement.
"Lenders" - means Key Corporate Capital, Inc., Daiwa Finance Corp. or
any other lender approved by the Partners, or their successors and/or assigns.
"Loan" - means collectively those certain loans from Lenders to the
Partnership approved by the Partners.
"Loan Documents" - means all documents evidencing, securing or
otherwise entered into in connection with the Loan, including, without
limitation, any Note, Deed of Trust, Security Agreement, Assignment of Rents and
Financing Statement, Assignment of Leases and Rents, and UCC-1 Financing
Statement.
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<PAGE> 3
"Management Agreement" means any management agreement between the
Partnership and Capital Senior Living, Inc. relating to a Property, as such
agreement may be amended from time to time.
"Net Cash Flow" - means the amount, if any, by which Gross Receipts
plus cash reserves of the Partnership from the previous period exceed Operating
Expenses for such particular period, to the extent the General Partner
determines, in its sole discretion, that cash is not otherwise required for
Partnership purposes, including the setting up or continuing of a reasonable
working capital reserve for the Partnership. "Net Cash Flow" shall not include
or reflect any proceeds received or expenses incurred in connection with the
sale or other disposition of all or substantially all of the assets of the
Partnership or the termination and liquidation of the Partnership.
"Operating Expenses" - means all cash expenditures of any kind or
nature incurred by the Partnership attributable to a particular period, as
determined in accordance with the cash receipts and disbursements method of
accounting.
"Partners"- means the General Partner and the Limited Partners.
"Partner" - means any of the Partners.
"Partnership" - means the limited partnership evidenced by this
Agreement, as said limited partnership may from time to time be constituted,
amended and, if necessary, reconstituted, including any successor limited
partnership.
"Percentage Interests" - means the percentage set forth opposite the
name of such Partner under the column "Interest" in Exhibit B attached hereto
and made a part hereof for all purposes.
"Person" - means an individual, firm, corporation or other legal
entity.
"Properties" - means those certain tracts of land which have been
agreed to in writing by all of the Partners. Upon such written approval, the
General Partner shall attach the legal description for each Property hereto as
Exhibit A. "Property" - means any one of the Properties.
"Revised Act" - means the Texas Revised Limited Partnership Act, as
adopted and from time to time amended by the State of Texas.
ARTICLE II
FORMATION; NAME AND OFFICE; PURPOSE
Section 2.1 Formation
The General Partner and the Limited Partners hereby organize, create
and form the Partnership as a Texas limited partnership under the Revised Act.
The Partnership will commence effective upon the filing of the Certificate with
the Secretary of State of the State of Texas pursuant
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<PAGE> 4
to the provisions of the Revised Act. The Partnership is formed for the purpose
and upon the terms and conditions herein set forth. The Partners hereby agree
and obligate themselves to execute, acknowledge, file, record and/or publish, as
necessary, such amendments to the Certificate and such other certificates and
documents and to take all other necessary actions required by law to perfect and
maintain the Partnership as a limited partnership under the Revised Act and in
all other jurisdictions in which the Partnership may elect to conduct business.
Section 2.2 Name, Registered Agent and Registered Office
The name of the Partnership shall be Triad Senior Living III, L.P. or
such other name as the General Partner shall hereafter designate by notice to
the Limited Partners and by amendment to the Certificate properly filed with the
Secretary of State of the State of Texas. The principal place of business in
Texas where books and records of the Partnership will be kept and made available
shall be 4312 Mockingbird Lane, Dallas, Texas 75205, or such other place as the
General Partner may from time to time designate in a notice to the Limited
Partners and by amendment to the Certificate. The registered office of the
Partnership and the registered Agent shall be as set forth in the Certificate,
or such other registered Agent and registered office as the General Partner may
from time to time designate in a notice to the Limited Partners and by amendment
to the Certificate.
Section 2.3 Purpose
The purpose of the Partnership shall be strictly limited to activities
relating to the acquisition, development, ownership, operation, and sale of the
Properties, and such other activities as are incidental thereto, including
without limitation, entering into the Loan and the performance of the
Partnership's obligations under the Loan Documents.
ARTICLE III
TERM
The term of the Partnership shall commence upon the filing of the
Certificate with the Secretary of State of the State of Texas, and shall
continue until December 31, 2050, on which date the Partnership shall terminate,
unless sooner dissolved upon the occurrence of any of the events of dissolution
or termination, as described in Article X.
ARTICLE IV
INTERESTS OF THE GENERAL PARTNER AND LIMITED PARTNERS
Section 4.1 General Partner
The General Partner is Triad Partners III, Inc., and it shall have a 1%
interest in the Partnership. Except as provided in Article IX of this Agreement,
no other Person shall become a General Partner in the Partnership. The address
of the General Partner is set forth on Exhibit B.
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<PAGE> 5
Section 4.2 Limited Partners
The Limited Partners are TP III and Capital Senior Living Properties,
Inc., which shall have the interests in the Partnership as shown on Exhibit B.
Except as provided in Article IX of this Agreement, no other Person shall become
a Limited Partner or substitute Limited Partner in the Partnership. The
addresses of the Limited Partners are set forth on Exhibit B.
ARTICLE V
CAPITAL CONTRIBUTIONS
Section 5.1 Capital Contribution of the General Partner
The General Partner has contributed to the Partnership the amount set
forth on Exhibit B. The General Partner shall not be obligated to pay any
Partnership expenses or make any capital contributions to the Partnership except
as provided in this Section 5.1 and Section 5.3.
Section 5.2 Capital Contribution of the Limited Partners
The Limited Partners have contributed or will contribute to the
Partnership the amounts set forth on Exhibit B. The Limited Partners shall not
be obligated to make any other capital contributions to the Partnership except
as provided in this Section 5.2 and Section 5.3.
Section 5.3 Additional Capital Contributions
The Partners may, but are not required to, make their pro rata share
(based on Percentage Interests) of any additional capital contributions to the
Partnership. In the event that any Partner does not make such additional capital
contribution, the Partnership shall return the amounts contributed by the other
Partners for such additional capital contributions. The additional capital
contributions shall be due only upon the written notice from the General Partner
to the Partners.
TP III shall contribute to the capital of the Partnership in the amount
required and at the time specified in Section 2.2(d) of Exhibit C attached
hereto.
Section 5.4 Return or Withdrawal of Capital Contributions; Distributions
Except as otherwise expressly provided in this Agreement, none of the
Partners shall be entitled to demand a refund or return of any Capital
Contribution or to withdraw any part of its capital account or to receive any
distribution from the Partnership.
Section 5.5 Capital Accounts
A capital account shall be established and maintained for each Partner
as set forth in Exhibit C attached hereto.
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<PAGE> 6
Section 5.6 Loans by the Partners .
If the General Partner determines that the Partnership needs additional
capital, it may request that the Partners make loans to the Partnership. Then
each Partner shall have the option, but not the obligation, to loan to the
Partnership some or all of the aggregate amount of the requested loan. Any loans
made by the Partners shall not be considered to be contributions to the capital
of the Partnership.
ARTICLE VI
LIMITED PARTNERS
Section 6.1 Powers: Actions
The Limited Partners shall neither participate in the management or
control of the Partnership's business nor shall they transact any business for
the Partnership, nor shall they have the power to sign for or bind the
Partnership, said powers being vested solely and exclusively in the General
Partner.
Section 6.2 Limitation of Liability
Anything to the contrary herein expressed or implied notwithstanding,
the Limited Partners shall not be personally liable for any of the debts of the
Partnership or any of the losses thereof in excess of their respective shares of
Partnership assets, capital contributions which they have made or are obligated
to make to the Partnership, and their share of the Partnership's income and
gains; provided, however, that to the extent required by applicable law, if a
Limited Partner receives a distribution at a time when it knew that, after
giving effect to the distribution, all liabilities of the Partnership, other
than liabilities to the Partners with respect to the partnership interests and
liabilities for which the recourse of creditors is limited to specific
Partnership assets, exceed the fair value of the Partnership's assets (except
that the fair value of property that is subject to a liability for which there
is recourse of creditors is limited shall be included in the Partnership's
assets only to the extent that the fair value of that property exceeds that
liability), then the Limited Partner receiving such distribution shall be liable
for the return of such distribution.
ARTICLE VII
GENERAL PARTNER
Section 7.1 Powers; Actions
The General Partner shall manage and control the business and affairs
of the Partnership. Without limiting the generality of the foregoing, the
General Partner shall have full power to (i) manage the Partnership; (ii)
execute such documents as it may deem advisable for Partnership purposes,
including, without limitation, the Loan Documents and all documents necessary
for the
6
<PAGE> 7
acquisition, financing, refinancing, development, ownership, operation and sale
of any Property; (iii) acquire, sell, lease, transfer, assign, convey, mortgage,
refinance, or otherwise dispose of or deal with all or any part of any Property
on such terms as it deems reasonable; (iv) establish and maintain, to the extent
Partnership funds are available, reasonable reserves for anticipated and
unanticipated expenses relating to the activities of the Partnership; (v)
perform or cause to be performed the Partnership's obligations, and exercise or
cause to be exercised all of the Partnership's rights, under any agreement to
which the Partnership or any nominee of the Partnership is a party; and (vi) on
behalf of the Partnership, employ, engage, retain or deal with any Person,
including any Affiliate, to perform services in connection with the ownership
and operation of the Property, provided in all such cases such services are
deemed by the General Partner to be advisable and the compensation therefor is
reasonable.
Section 7.2 Restrictions on the General Partner
(a) Notwithstanding the foregoing in Section 7.1 or any other
provision of this Agreement, the Partnership shall be subject to the
following restrictions and the General Partner shall have no authority
to take and shall not take any action on behalf of the Partnership in
violation of any of the following restrictions:
(i) No bankruptcy or insolvency filing or similar
proceedings for the Partnership may be commenced, and no
bankruptcy or insolvency filing or similar proceeding may be
commenced as to the General Partner on its own behalf or as
General Partner on behalf of the Partnership.
(ii) The Partnership and the General Partner are
prohibited from creating, incurring or assuming any
indebtedness other than the Loan and any subordinate financing
permitted in the Loan Documents.
(iii) The Partnership and the General Partner are
prohibited from liquidating or dissolving or consenting to the
liquidation or dissolution, in whole or in part, of either the
Partnership or the General Partner.
(b) Notwithstanding anything in this Agreement to the
contrary, the General Partner shall not have the right or the power to
make any commitment or engage in any undertaking on behalf of the
Partnership in respect of a Major Decision (as hereinafter defined)
unless and until such Major Decision has been approved in writing by
all of the Limited Partners. The term "Major Decision," as used in this
Agreement, means any decisions with respect to the following matters:
(i) All financing and refinancing decisions
pertaining to indebtedness owing, directly or indirectly, to
and/or by the Partnership.
(ii) Any amendment, modification, change or
restatement of this Agreement.
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<PAGE> 8
(iii) Any capital expenditures in excess of $50,000
on any Property that has already been developed.
(iv) The assignment of any interests in the
Partnership except as expressly provided by the terms of this
Agreement.
(v) Any amendment, modification or change to any
Management Agreement or any Development Agreement.
(vi) The engagement by the Partnership in any
business other than as set forth in Section 2.3 above.
(vii) The transaction of business with Affiliates of
Partners except as set forth herein.
(viii) The execution of any guarantees, indemnities,
sureties or similar commitments on behalf of the Partnership.
(ix) Any decision to cause the Partnership to loan
funds to any person, and the terms on which any such loan is
made.
(x) Any act in contravention of this Agreement.
(xi) The addition of a tract of land to the defined
term "Properties" or a change in the use of a Property.
(xii) The admission of any new Partners to the
Partnership (except as otherwise allowed herein) or the
appointment of any additional General Partner.
(xiii) Any other act which the Revised Act
specifically requires to be approved by all the Partners.
(xiv) The merger, consolidation or any other form of
combination of the Partnership with or into any other entity.
(xv) The conveyance, transfer or lease of the
Partnership's assets substantially as an entirety to any
entity, except for the transfer of the Properties (or a
Property) to the manager pursuant to any purchase option in
any Management Agreement.
(xvi) The acquisition or lease of any substantial
assets by the Partnership.
8
<PAGE> 9
Section 7.3 Duties and Obligations of the General Partner
The General Partner shall manage and control the Partnership, its
business and affairs. During the continuance of the Partnership, the General
Partner shall diligently and faithfully devote such time to the management of
the business of the Partnership as it deems reasonably necessary.
Section 7.4 Tax Matters Partner. See Section 4.4 of Exhibit C attached
hereto.
Section 7.5 Liability; Indemnification
The General Partner and its Affiliates shall not be liable to the
Partnership or the Limited Partners for any act or omission performed or omitted
by it pursuant to the authority granted to it by this Agreement, other than for
fraud, willful malfeasance or gross negligence. The Partnership shall and hereby
does indemnify and save harmless the General Partner, the Limited Partners and
their Affiliates to the greatest extent permitted by the Revised Act from any
loss, damage, claim or liability, including but not limited to, reasonable
attorney's fees and expenses, incurred by them by reason of any act performed by
the General Partner, the Limited Partners or their Affiliates on behalf of the
Partnership, including, without limitation, their activities in winding up and
liquidating the Partnership, or in furtherance of the Partnership's interests,
except that the General Partner and its Affiliates shall not be indemnified for
actions by the General Partner or its Affiliates which constitute a breach of
any of their obligations under this Agreement, fraud, willful malfeasance or
gross negligence, provided, however, that the indemnity and save harmless
provided for in this sentence shall be satisfied out of Partnership assets only
and no Partner shall have any personal liability on account thereof.
Section 7.6 Fees to and Reimbursement of the General Partner
The Limited Partners acknowledge that the General Partner or its
Affiliates will receive $1,000 per month beginning December 1, 1998 as an asset
management fee. The General Partner and its Affiliates shall also be entitled to
receive reimbursement of their expenses, but shall not be entitled to receive
any other fees. The General Partner and its Affiliates shall receive
reimbursement for all reasonable expenses advanced by the General Partner and
its Affiliates on behalf of the Partnership and all expenses incurred during the
operation of the Partnership.
ARTICLE VIII
ALLOCATIONS; DISTRIBUTIONS
Section 8.1 Allocations of Income and Loss
All items of income or loss of the Partnership shall be allocated to
the Partners in accordance with the provisions of Exhibit C attached hereto,
which are hereby incorporated by reference for all purposes of this Agreement.
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<PAGE> 10
Section 8.2 Partnership Distributions of Cash
During the term hereof, periodically, but not less frequently than
annually, Net Cash Flow of the Partnership shall be distributed to the Partners
in accordance with their Percentage Interests.
ARTICLE IX
ASSIGNABILITY OF GENERAL PARTNER'S
AND LIMITED PARTNER'S INTERESTS; PURCHASE OPTION
Section 9.1 Restrictions on Transfers
Except as provided in Section 9.5 hereof, a Partner may not sell,
assign, transfer, encumber, or dispose of, by operation of law or otherwise, any
interest in the Partnership or in the property or assets of the Partnership
without the prior written consent of the other Partners, which in the other
Partners' absolute discretion may be withheld. Additionally, any such
disposition must comply with the provisions hereinafter stated in this Article
IX.
Section 9.2 Assignment of a Limited Partner's Interest
(a) Except as otherwise provided in this Agreement, an
assignee of the whole or any portion of a Partner's interest in the
Partnership shall not have the right to become a Partner in place of
its assignor unless (i) its assignor shall have designated such
intention in the instrument of assignment; (ii) the written consent of
the other Partners to such substitution shall have been obtained, which
consent, in the other Partners' absolute discretion, may be withheld;
(iii) the assignment instrument shall have been in form and substance
satisfactory to the other Partner; (iv) the assignor and assignee named
therein shall have executed and acknowledged such other instrument or
instruments as the other Partners may deem necessary or desirable to
effectuate such admission; and (v) the assignee shall have accepted,
adopted and approved in writing all of the terms and provisions of this
Agreement, as the same may have been amended.
(b) In any event, the Partnership and the other Partners shall
be entitled to treat an assignor of a Partner's interest as the
absolute owner thereof in all respects, and shall incur no liability
for distributions made in good faith to such assignor, until such time
as the foregoing requirements have been satisfied.
(c) The Partnership shall, upon satisfaction of the foregoing
requirements, thereafter pay all further distributions or profits or
other compensation by way of income or return of capital on account of
the interest so assigned to the assignee. In the absence of notice to
the other Partners and approval thereof in writing by them of the
assignment of a Partner's interest, whether by operation of law or
otherwise, any payment to an assigning Partner, or to his assigns,
executors, administrators, or legal representative, shall acquit the
Partnership of liability to the extent of such payment as to any other
person, whether
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claiming as a remote or immediate assignee of the Partner, or by reason
of its death, legal disability, bankruptcy, insolvency, or otherwise.
(d) All costs (including, without limitation, legal and other
professional fees) incurred by the Partnership, the other Partners, and
the assigning Partner relating to any transfer contemplated by this
Article IX, shall be charged to, and shall be the sole expense of, the
assigning Partner.
Section 9.3 Withdrawal of a Partner
Except as otherwise specifically permitted by this Agreement, no
Partner shall be entitled to withdraw or retire from the Partnership.
Section 9.4 Death, Legal Incompetency, Bankruptcy or Dissolution of
Limited Partner
The death, legal incompetency, bankruptcy, dissolution or other
disability of a Limited Partner shall not dissolve or terminate the Partnership.
Upon the death, legal incompetency, bankruptcy, dissolution or other disability
of a Limited Partner, the estate, personal representative, trustee, guardian or
other successor in interest of such Limited Partner shall have all the rights
and obligations and be liable for all the liabilities of the Limited Partner in
the Partnership to the extent of such Limited Partner's interest therein,
subject to the terms and conditions of this Agreement, and, with the prior
written consent of the General Partner which may be withheld at its sole
discretion, may be substituted for such Limited Partner.
Section 9.5 Purchase Option of Capital Senior Living Properties, Inc.
At any time, Capital Senior Living shall have the right, but not the
obligation, to purchase all, but not less than all, of the interests owned by
the General Partner and TP III as limited partner for an amount equal to the
amount of money that each such Partner paid for their respective interests in
the Partnership, plus non-compounding interest of 12% per annum from the date
such amounts were paid to the date the option described herein is exercised. The
Partners, by executing this Agreement, hereby agree that the future value of
such interests is speculative and that the formula set forth above is the
Partners' best estimate of the fair market value of such interests as of the
date of the exercise of such option.
ARTICLE X
DURATION, DISSOLUTION, TERMINATION,
WINDING UP, REMOVAL OF THE GENERAL
PARTNER AND RESIGNATION OF THE GENERAL PARTNER
Section 10.1 Dissolution and Termination
Subject to the provisions of Section 7.2(a) hereof, the Partnership
shall be dissolved only upon the occurrence of any of the following events:
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(a) The expiration of the fixed term of the Partnership;
(b) The withdrawal or removal of the General Partner, the
assignment by the General Partner of all its interest in the
Partnership, or any other event that causes the General Partner to
cease to be a general partner under the Revised Act, provided that any
such event shall not constitute a event of dissolution if the
Partnership is continued pursuant to Section 10.2;
(c) The sale or other disposition of all or substantially all
of the assets of the Partnership and the collection of the proceeds
therefrom; and
(d) The mutual consent of the Partners.
Section 10.2 Continuation of Business
The Partners hereby agree that notwithstanding any provision of the
Revised Act, the Partnership shall not dissolve prior to the occurrence of any
event set forth in Section 10.1 above. Upon the occurrence of any event set
forth in Section 10.1 above, the Partnership shall not be dissolved or required
to be wound up if (i) at the time of such event there is a remaining General
Partner and that General Partner carries on the business of the Partnership or
(ii) within ninety (90) days after such event all remaining Partners agree in
writing to continue the business of the Partnership and to the appointment,
effective as of the date of such event, of one or more additional General
Partners.
Section 10.3 Winding Up of the Partnership
Upon dissolution of the Partnership as provided in Section 10.1, the
Partnership shall be wound up, and the General Partner (or if there is no
General Partner, a substitute General Partner elected by the Limited Partners)
will take full account of the Partnership's assets and liabilities, the assets
will be liquidated as promptly as is consistent with obtaining the fair market
value thereof, and the proceeds therefrom, to the extent sufficient therefor,
will be applied and distributed in accordance with the provisions of Section
10.4. Notwithstanding the foregoing, the General Partner, with the consent of
the Limited Partners, may determine not to sell all or any portion of the assets
of the Partnership, in which event there shall be distributed to each of the
Partners its interest in the remaining assets of the Partnership.
Section 10.4 Sale or Liquidation
In the case of a sale or other disposition of all or substantially all
of the assets of the Partnership or termination and liquidation of the
Partnership, the net proceeds of such sale or liquidation, shall be applied and
distributed, after crediting or charging the Partners' capital accounts pursuant
to Article VIII and as cash is received by the Partnership, in the following
order of priority on or before the end of the taxable year in which the
Partnership liquidates (or, if later, within 90 days after the date of such
liquidation):
12
<PAGE> 13
(a) To the payment of the debts and liabilities of the
Partnership (other than debts of the Partnership to the Partners) and
the expenses of sale and liquidation.
(b) To the setting up of any reserves which the General
Partner determines are reasonably necessary for any contingent or
unforeseen liabilities or obligations of the Partnership or of the
Partners arising out of, or in connection with, the Partnership. Such
reserves may be held by the General Partner for the purpose of
disbursing such reserves in payment of any of the aforementioned
contingencies, and at the expiration of such period as the General
Partner may deem advisable, to distribute the balance thereafter
remaining as provided herein.
(c) To the Partners in repayment of debts of the Partnership
to the Partners.
(d) To the Partners in proportion to and to the extent of the
remaining amounts of their respective positive capital accounts, as
such accounts have heretofore been adjusted pursuant to this Agreement.
(e) The remaining assets, if any, shall be distributed to the
Partners in accordance with their Percentage Interests.
Should assets other than cash be distributed, the amount by which the
fair market value of the assets, if any, to be distributed exceeds or is less
than the basis of such assets shall, to the extent not otherwise recognized by
the Partnership, be taken into account in computing gain or loss of the
Partnership for purposes of crediting or charging the capital accounts of, and
distributing proceeds to, the Partners.
Section 10.5 Removal and Replacement of the General Partner
The General Partner may be removed by either Limited Partner without
further action for "cause," which means (i) any petition shall be filed by the
General Partner, or any petition shall be filed against the General Partner and
not vacated within 30 days, under any section or chapter of the present or
future federal Bankruptcy Code or under any similar state or federal law, (ii)
upon final judicial determination that the General Partner (1) was grossly
negligent in its failure to perform its obligations under this Agreement, or (2)
committed a fraud upon the Partners or upon the Partnership, or (3) committed a
felony in connection with the management of the Partnership or its business, or
(4) was in material breach of its obligations under this Agreement, or (iii)
transfer of the General Partner's interest in the Partnership or withdrawal from
the Partnership without approval of the Limited Partners. In the event of
removal or resignation of the General Partner, it shall be deemed to have
surrendered to the Partnership its entire general partner interest in the
Partnership and shall be entitled to no compensation therefor.
13
<PAGE> 14
ARTICLE XI
ACCOUNTS AND RECORDS: ACCOUNTANTS
Section 11.1 Accounting Methods: Fiscal Year
The books of account of the Partnership shall be kept on the accrual
method of accounting. The fiscal year of the Partnership shall end on December
31 of each year except upon termination.
Section 11.2 Records and Books of Account
(a) The General Partner shall maintain, or cause to be
maintained complete and accurate records and books of account of all
transactions of the Partnership wherein shall be entered all
transactions, matters and things relating to the Partnership's business
as are usually entered into books of account kept by persons engaged in
a business of a like character, all on the method of accounting
determined in accordance with Section 11.1, consistently applied.
(b) All of such records and books of account together with all
other documents and files of the Partnership, including but not limited
to copies of all documents prepared by the General Partner and all
correspondence, shall, at all times, be kept at the main office of the
Partnership or such other place as may be designated by the General
Partner and to which the Partners shall have reasonable access as
hereinafter provided, and all such records, books of account, documents
and files shall be the exclusive property of the Partnership. In the
event of the termination of the Partnership interest of the General
Partner, all such records, books of account, documents and files shall
remain in the exclusive possession of the Partnership. At any time and
from time to time while the Partnership continues and until its
complete liquidation (but only during reasonable business hours), each
Partner may, at its own expense and upon reasonable prior written
notice to the General Partner, fully examine, inspect, make copies and
audit the Partnership's books, records, accounts and assets, including
but not limited to bank balances and physical inspection of the
Properties or an audit to be made by any competent accountant or other
professional employed by it at its expense.
Section 11.3 Annual Examination and Tax Returns
(a) The books of the Partnership shall be brought up to date
annually each year by the General Partner or the Accountants. The
General Partner or the Accountants shall determine and prepare for such
fiscal year, using the method of accounting determined in accordance
with Section 11.1, consistently applied, such financial statements as
are required by the Loan Documents.
(b) The General Partner or the Accountants shall also prepare
all tax returns which the Partnership is required to file and the same
shall be filed by the General Partner within the time prescribed by law
for the filing of each such return.
14
<PAGE> 15
(c) At the election of the General Partner, the Accountants
shall perform an audit in accordance with generally accepted auditing
standards. The financial statements and audit report shall be delivered
to each Partner in the Partnership.
Section 11.4 Bank Accounts
The cash Capital Contributions of the Partners and other funds of the
Partnership shall be deposited in a bank account or accounts which shall be
separately owned by the Partnership and maintained by the General Partner.
Withdrawals shall be made only in the regular course of Partnership business on
the signature of the General Partner or its designee. All funds not needed in
the operation of the business may be deposited, to the extent permitted by
applicable law, in interest bearing accounts or invested in short-term U.S.
Government obligations, U.S. Government guaranteed obligations, bank
certificates of deposit or other liquid high-grade investments, maturing, in any
event, within one year.
Section 11.5 Reports to Limited Partners
As soon as reasonably practicable but no later than thirty (30) days
after the end of each month, the General Partner shall cause to be prepared and
furnished to the Limited Partners income statements and balance sheets for such
month. As soon as reasonably practicable but no later than seventy-five (75)
days after the end of each fiscal year, the General Partner shall cause to be
prepared and furnished to the Limited Partners the following: (i) all necessary
tax reporting information required by the Limited Partners for preparation of
their respective income tax return and (ii) all information necessary for such
Limited Partners to comply with all reporting requirements imposed by the
securities laws of the United States or any state thereof. Upon the reasonable
request of the Limited Partners for further information with respect to any
matter with respect to the Partnership, the General Partner shall furnish such
information within ten (10) days after such request.
ARTICLE XIII
GENERAL PROVISIONS
Section 12.1 Recipient of Distributions and Payments
All distributions and payments of cash or property to be made pursuant
to the provisions of this Agreement shall be made directly to the parties who
are entitled thereto at their respective addresses indicated on Exhibit B or
elsewhere in this Agreement or at such other address as shall have been set
forth in a notice sent pursuant to the provisions of Section 12.2.
Section 12.2 Communications
Except as otherwise expressly provided in this Agreement, any offer,
acceptance, election, approval, consent, objection, certification, request
waiver, notice or other document required or permitted to be made or given
pursuant to any provisions of this Agreement shall be deemed duly made or given,
as the case may be, if in writing, signed by or on behalf of the person making
or
15
<PAGE> 16
giving the same, and shall be deemed completed when either personally delivered
(with receipt acknowledged by the recipient) or three days after deposited
through the U.S. mail, registered or certified, first class, postage prepaid,
addressed to the person or persons to whom such offer, acceptance, election,
approval, consent, certification, request, waiver or notice is to be made or
given at their respective addresses indicated on Exhibit B and, in the case of
the Partnership, at the office of the Partnership specified in Section 2.2 of
this Agreement, or, in any case, at such other address as shall have been set
forth in a notice sent pursuant to the provisions of this Section 12.2.
Section 12.3 Entire Agreement; Applicable Law; Effect
This Agreement contains the entire agreement by and among the parties
and supersedes any prior understandings and agreements among them respecting the
subject hereof. THIS AGREEMENT SHALL BE CONSTRUED, ENFORCED AND GOVERNED IN
CONFORMITY WITH THE LAWS OF THE STATE OF TEXAS, without giving effect to
principles of conflicts of law, and whether in state or federal courts. This
Agreement shall be binding upon the parties hereto, their successors, heirs,
devisees, permitted assigns, legal representatives, executors and administrators
but shall not be deemed for the benefit of creditors or any other Persons.
Section 12.4 Modification; Waiver or Termination
Except as otherwise expressly provided in this Agreement, no
modification, waiver, or termination of this Agreement, or any part hereof,
shall be effective unless made in writing signed by the party or parties to be
bound thereby, and no failure to pursue or elect any remedy shall constitute a
waiver of any default under or breach of any provision of this Agreement, nor
shall any waiver of any default under or breach of any provision of this
Agreement be deemed to be a waiver of any other subsequent or similar or
different default under or breach of such or any other provision or of any
election or remedies available in connection therewith. Receipt by any party of
any money or other consideration due under this Agreement, with or without
knowledge of any breach or default, shall not constitute a waiver of such breach
or default of any provision of this Agreement.
Section 12.5 Counterparts
This Agreement may be executed in one or more counterparts and,
notwithstanding that all of the parties did not execute the same counterpart,
each of such counterparts shall, for all purposes, be deemed to be an original,
and all of such counterparts shall constitute one and the same instrument
binding on all of the parties hereto.
Section 12.6 Separability
Each provision of this Agreement shall be considered separable and (a)
if for any reason any provision or provisions herein are determined to be
invalid and contrary to any existing or future law, such invalidity shall not
impair the operation of or affect those portions of this Agreement which are
valid, and (b) if for any reason any provision or provisions of this Agreement
would subject the Limited Partners to any personal liability for the obligations
of the Partnership under the laws of the
16
<PAGE> 17
State of Texas or any other laws, as the same may now or hereafter exist, such
provision or provisions shall be deemed void and of no effect.
Section 12.7 Article and Section Headings
Article and Section titles or captions contained in this Agreement are
inserted only as a matter of convenience and for reference, and shall not be
construed in any way to define, limit, extend or describe the scope of any of
the provisions hereof.
Section 12.8 Word Meanings
The words such as "herein," "hereinafter," "hereof," and "hereunder"
refer to this Agreement as a whole and not merely to a subdivision in which such
words appear unless the context otherwise requires. The singular shall include
the plural and the masculine gender shall include the feminine and neuter, and
vice versa, unless the context otherwise requires.
Section 12.9 Exhibits
All exhibits annexed hereto and any documents or instruments delivered
simultaneously herewith are expressly made a part of this Agreement, as fully as
though completely set forth herein, and all references to this Agreement herein
or in any of such writings or elsewhere shall be deemed to refer to and include
all such writings.
Section 12.10 Further Actions
Each of the Partners shall hereafter execute and deliver such further
instruments and do such further acts and things as may be required or useful to
carry out the intent and purpose of this Agreement and as are not inconsistent
with the revisions hereof.
Section 12.11 Prohibition Re Partition
Each of the parties hereto does hereby permanently waive and relinquish
any and all rights it may have to cause the assets of the Partnership to be
partitioned, it being the intention of the parties to prohibit any parties
hereto from bringing a suit for partition against the other parties hereto.
Section 12.12 Agreements with Capital Affiliates and the Loan
The Partnership hereby ratifies and agrees to be bound by any
agreements that the Partnership has entered into with Affiliates of Capital
Senior Living, including, the Management Agreement, the Development Agreement
and that certain Development and Turnkey Services Agreement by and between the
Partnership and Capital Senior Development, Inc.
17
<PAGE> 18
Section 12.13 Noncompete of General Partner
The General Partner agrees that as long as the General Partner is the
general partner of the Partnership and for one (1) year after the General
Partner is no longer the general partner of the Partnership neither the General
Partner nor its Affiliates will acquire, own, develop, complete the development
of, or manage any senior living facility providing the same level of services as
any senior living facility owned or leased by the Partnership within a seven and
one-half mile radius of a senior living facility owned or leased by the
Partnership.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
GENERAL PARTNER:
Triad Partners II, Inc., a Texas corporation
By: /s/ BLAKE N. FAIL
------------------------------------------
Name: Blake N. Fail
----------------------------------------
Title: President
---------------------------------------
LIMITED PARTNERS:
Triad Partners II, Inc., a Texas corporation
By: /s/ BLAKE N. FAIL
------------------------------------------
Name: Blake N. Fail
----------------------------------------
Title: President
---------------------------------------
Capital Senior Living Properties, Inc.,
a Texas corporation
By: /s/ DAVID R. BRICKMAN
------------------------------------------
Name: David R. Brickman
----------------------------------------
Title: Vice President
---------------------------------------
18
<PAGE> 19
EXHIBIT "A"
Property Description
<PAGE> 20
EXHIBIT "B"
<TABLE>
<CAPTION>
Capital Contribution Interest
-------------------- --------
<S> <C> <C>
General Partner
- ---------------
Triad Partners III, Inc. $1.00 1%
4312 Mockingbird Lane
Dallas, Texas 75205
Limited Partners
- ----------------
Triad Partners III, Inc. $600,000 80%
4312 Mockingbird Lane
Dallas, Texas 75205
Capital Senior Living Properties, Inc. $142,500 19%
14160 Dallas Parkway
Suite 300
Dallas, Texas 75240
</TABLE>
<PAGE> 21
EXHIBIT "C"
Allocation Provisions
<PAGE> 22
EXHIBIT C
TO
AGREEMENT OF LIMITED PARTNERSHIP
OF
TRIAD SENIOR LIVING III, L.P.
ARTICLE I
DEFINITIONS
Section 1.1 Definitions. All capitalized terms used herein shall have
the meanings assigned o them in the Agreement of Limited Partnership of Triad
Senior Living III, L.P. Notwithstanding the foregoing, the following definitions
shall be applicable to the following terms as used in this Exhibit C of the
Agreement:
(a) "Adjusted Net Income or Loss" of the Partnership derived for any
Fiscal Year (or portion thereof) shall mean the excess or deficit, as the case
may be, of (i) the Gross Income of the Partnership for such period (not
including the amount of Gross Income (if any) allocated during such Fiscal Year
pursuant to Sections 3.1(a), 3.1(b), 3.1(c), 3.1(d), and 3.1(p) hereof for such
period), over (ii) the Deductible Expenses of the Partnership for such period
(not including the amount of Deductible Expenses (if any) allocated pursuant to
Sections 3.1(e), 3.1(f) and 3.1(p)) hereof for such period) with the following
modifications:
(i) Any Partnership income that is exempt from federal income
tax, and that is not otherwise taken into account in computing Adjusted
Net Income or Loss of the Partnership pursuant to this Section 1.1(a),
shall be treated as additional Gross Income and added to the amount
otherwise calculated as Adjusted Net Income or Loss under this Section
1.1(a).
(ii) Any expenditures of the Partnership that are described in
section 705(a)(2)(B) of the Code (relating to expenditures of the
Partnership that are not deductible for federal income tax purposes in
computing taxable income and not properly chargeable to capital), or
treated as so described pursuant to section 1.704-1(b)(2)(iv)(i) of the
Regulations, and that are not otherwise taken into account in computing
Adjusted Net Income or Loss of the Partnership pursuant to this Section
1.1(a), shall be treated as additional Deductible Expenses and
subtracted from the amount otherwise calculated as Adjusted Net Income
or Loss under this Section 1.1(a).
(b) "Adjusted Property" shall mean any Partnership asset that has a
Book Basis different from its adjusted tax basis. Any asset that is contributed
to the Partnership by a Partner shall be an "Adjusted Property" if its Agreed
Value is not equal to the Partnership's initial tax basis in such asset. In
addition, once the Book Basis of a Partnership asset is adjusted pursuant to
Section 2.4 hereof, such asset shall thereafter be an "Adjusted Property."
(c) "Agreed Value" of any asset contributed by a Partner to the
Partnership shall mean the fair market value thereof (determined without regard
to section 7701(g) of the Code) as of the date of such contribution and as
reasonably determined by the General Partner.
(d) "Book Basis" of any asset of the Partnership shall be determined in
accordance with the rules of Section 2.4.
(e) "Book Depreciation" in respect of any Partnership asset for any
Fiscal Year shall mean the product of (i) the depreciation, cost recovery or
other amortization deduction allowable to the Partnership
<PAGE> 23
for federal income tax purposes in respect of such asset for such Fiscal year,
multiplied by (ii) a fraction, the numerator of which is the Book Basis of such
asset as of the beginning of such Fiscal Year (or the date of acquisition if the
asset is acquired during such Fiscal Year) and the denominator of which is the
adjusted tax basis of such asset as of the beginning of such Fiscal Year (or the
date of acquisition if the asset is acquired during such Fiscal Year). If the
denominator of the fraction described in clause (ii) above is zero, "Book
Depreciation" in respect of such asset shall be determined under any reasonable
method selected by the General Partner.
(f) "Book Gain or Loss" realized by the Partnership in respect of any
asset of the Partnership in connection with the disposition of such asset shall
mean the excess (or deficit) of (i) the amount realized by the Partnership in
connection with such disposition (as determined under section 1001 of the Code)
over (ii) the then Book Basis of such asset. If the Book Basis is adjusted
pursuant to Section 2.4, any increase or decrease in Book Basis of the assets as
a result of the adjustment shall be treated as Book Gain or Book Loss, as the
case may be, and shall be allocated among the Partners pursuant to Section 3.1
of this Exhibit "C."
(g) "Capital Account" shall have the meaning assigned such term in
Section 2.1 hereof.
(h) "Deductible Expenses" of the Partnership for any Fiscal Year (or
portion thereof) shall mean all items, as calculated for book purposes, which
are allowable as deductions to the Partnership during such period under federal
income tax accounting principles (including Book Depreciation).
(i) "Fiscal Year" shall mean the fiscal year of the Partnership adopted
under Section 8.1 of the Agreement.
(j) "Gross Income" of the Partnership for any Fiscal Year (or portion
thereof) shall mean the gross income of the Partnership derived from all sources
(other than from capital contributions and loans to the Partnership and other
than Book Gain or Loss from a Terminating Capital Transaction) during such
period, as calculated for book purposes in accordance with federal income tax
accounting principles.
(k) "IRS" shall mean the United States Internal Revenue Service.
(l) "Liquidation" of a Partner's interest in the Partnership shall mean
and shall be deemed to occur upon the earlier of (i) the date upon which the
Partnership is terminated under section 708(b)(1) of the Code; (ii) the date
upon which the Partnership ceases to be a going concern (even though it may
continue in existence for the limited purpose of winding up its affairs, paying
its debts and distributing any remaining Partnership assets to the Partners); or
(iii) the date upon which there is a liquidation of the Partner's interest in
the Partnership (but the Partnership is not terminated) under section 1.761-1(d)
of the Regulations.
(m) "Modified 752 Share of Recourse Debt" of any Partner shall mean, as
of any date, the amount (if any) of economic risk that such Partner is treated,
as of such date, as bearing with respect to Recourse Debt under section 1.752-2
of the Regulations (assuming the Partnership constructively liquidates on such
date within the meaning of section 1.752-2(b) of the Regulations except that,
for purposes of such section 1.752-2(b), all of the assets of the Partnership
shall be deemed thereunder to be transferred in fully taxable exchanges for an
aggregate amount of cash consideration equal to their respective Book Bases and
such consideration shall be deemed thereunder to be used, in the appropriate
order of priority, in full or partial satisfaction of the liabilities of the
Partnership).
(n) "Nonrecourse Deductions" of the Partnership shall have the meaning
ascribed to such term in section 1.704-2(b)(1) of the Regulations.
<PAGE> 24
(o) "Nonrecourse Liability" of the Partnership shall have the meaning
ascribed to such term in section 1.704-2(b)(3) of the Regulations.
(p) "Nonrecourse Minimum Gain" of the Partnership shall mean the amount
of "minimum gain" of the Partnership that is attributable to Nonrecourse
Liabilities (as determined under section 1.704- 2(b)(2) of the Regulations). A
Partner's share of such "Nonrecourse Minimum Gain" shall be calculated in
accordance with the provisions of section 1.704-2(g) of the Regulations.
(q) "Operations" shall mean all revenue producing activities of the
Partnership other than activities relating to a Capital Transaction that occur
in connection with the dissolution of the Partnership.
(r) "Partner Minimum Gain" of the Partnership shall mean the amount of
"minimum gain" of the Partnership that is attributable to Partner Nonrecourse
Debt (as determined under section 1.704-2(i)(2) of the Regulations). A Partner's
share of such "Partner Minimum Gain" shall be calculated in accordance with the
provisions of section 1.704-2(i)(5) of the Regulations.
(s) "Partner Nonrecourse Debt" of the Partnership shall have the
meaning ascribed to such term in section 1.704-2(b)(4) of the Regulations.
(t) "Partner Nonrecourse Deductions" of the Partnership shall have the
meaning ascribed to such term in section 1.704-2(i)(2) of the Regulations.
(u) "Recourse Debt" of the Partnership shall mean any liability (or
portion thereof) of the Partnership that is neither a Nonrecourse Liability nor
a Partner Nonrecourse Debt.
(v) "Regulations" shall mean the regulations promulgated by the United
States Department of the Treasury pursuant to and in respect of provisions of
the Code. All references herein to sections of the Regulations shall include any
corresponding provision or provisions of succeeding, similar, substitute
proposed or final Regulations.
(w) "Related Person" shall mean, as to any Partner, any person who is
related to such Partner (within the meaning of section 1.752-4(b) of the
Regulations).
(x) "Revaluation Event" shall mean any of the following occurrences:
(a) the contribution of money or other property (other than a de minimis amount)
by a new or existing Partner to the Partnership as consideration for the
issuance of an additional interest in the Partnership and/or increase in
Interests; (b) the distribution of money or other property (other than a de
minimis amount) by the Partnership to a retiring or continuing Partner as
consideration for an interest in the Partnership and/or decrease in Interests;
or (c) the liquidation of the Partnership within the meaning of section
1.704-1(b)(2)(ii)(g) of the Regulations.
(y) "Section 704 Capital Account" shall have the meaning assigned to
such term in Section 2.3 hereof.
(z) "Tax Depreciation" for any Fiscal Year shall mean the amount of
depreciation, cost recovery or other amortization deductions allowable to the
Partnership for federal income tax purposes for such Fiscal Year.
(aa) "Tax Item" with respect to any asset shall mean any item of
income, gain, loss or deduction (including depreciation, cost recovery or
amortization) in respect of such asset, as computed for federal income tax
purposes.
<PAGE> 25
(bb) "Tax Matters Partner" shall have the meaning ascribed to such term
in Section 4.4(a) hereof.
(cc) "Taxable Gain or Loss" shall mean gain or loss recognized by the
Partnership on the sale, exchange or other disposition of any asset of the
Partnership as computed for federal income tax purposes.
ARTICLE II
CAPITAL ACCOUNTS
AND
SECTION 704 CAPITAL ACCOUNTS
Section 2.1 Capital Accounts. A separate "Capital Account" (herein so
called) shall be maintained for each Partner in accordance with the capital
accounting rules of section 1.704-1(b)(2)(iv) of the Regulations. Each Partner
shall have only one Capital Account, regardless of the number or classes of
interests in the Partnership owned by such Partner and regardless of the time or
manner in which such interests were acquired by such Partner. Pursuant to the
basic rules of section 1.704-1(b)(2)(iv) of the Regulations, the balance of each
Partner's Capital Account:
(a) shall be increased by the amount of money contributed by such
Partner (or such Partner's predecessor in interest) to the Partnership
(including but not limited to such Partner's Capital Contributions described in
Article V of the Agreement) and decreased by the amount of money distributed to
such Partner (or such Partner's predecessor in interest);
(b) shall be increased by the fair market value (determined without
regard to section 7701(g) of the Code) of each property contributed by such
Partner (or such Partner's predecessor in interest) to the Partnership (net of
liabilities secured by such property that the Partnership is considered to
assume or take subject to under section 752 of the Code), and decreased by the
fair market value (determined without regard to section 7701(g) of the Code) of
each property distributed to such Partner (or such Partner's predecessor in
interest) by the Partnership (net of liabilities secured by such property that
such Partner is considered to assume or take subject to under section 752 of the
Code);
(c) shall be increased by the amount of Adjusted Net Income or item of
income or gain or Book Gain allocated to such Partner (or such Partner's
predecessor in interest) pursuant to Section 3.1 hereof;
(d) shall be decreased by the amount of Adjusted Net Loss or item of
loss or deduction or Book Loss allocated to such Partner (or such Partner's
predecessor in interest) pursuant to Section 3.1 hereof; and
(e) shall be otherwise adjusted in accordance with the other capital
account maintenance rules of section 1.704-1(b)(2)(iv) of the Regulations.
The foregoing provisions of this Section 2.1 and the other provisions of this
Exhibit C relating to the maintenance of Capital Accounts are intended to comply
with section 1.704-1(b) of the Regulations, and shall be interpreted and applied
in a manner consistent with such Regulations. The Partners shall also make any
appropriate modification if unanticipated events might otherwise cause this
Exhibit C and the Agreement not to comply with such Regulations. If any Interest
is transferred pursuant to the terms of the Agreement, the transferee shall
succeed to the Capital Account of the transferor to the extent the Capital
Account is attributable to the transferred Interest.
<PAGE> 26
Section 2.2 Additional Provisions Regarding Capital Accounts.
(a) If a Partner pays any indebtedness of the Partnership, such payment
shall be treated as a contribution by that Partner to the capital of the
Partnership and the Capital Account of such Partner shall be increased by the
amount so paid by such Partner.
(b) Except as specifically provided in the Agreement, no Partner may
contribute capital to, or withdraw capital from, the Partnership.
(c) A loan by a Partner to the Partnership shall not be considered a
contribution of money to the capital of the Partnership, and the balance of such
Partner's Capital Account shall not be increased by the amount so loaned. No
repayment of principal or interest on any such loan, or reimbursement made a
Partner with respect to advances or other payments made by a such Partner on
behalf of the Partnership or payments of fees to a Partner or Related Person to
such Partner which are made by the Partnership shall be considered a return of
capital or in any manner affect the balance of such Partner's Capital Account.
(d) No Partner with a deficit balance in its Capital Account shall have
any obligation to the Partnership, any other Partner, or any third party to
restore said deficit balance; provided, however, that upon the liquidation of TP
III's interest in the Partnership, if TP III has a deficit balance in his
Capital Account following such liquidation, as determined after taking into
account all adjustments to the Capital Accounts for the taxable year during
which such liquidation occurs, TP III shall be required to immediately
contribute cash to the Partnership in an amount equal to the lesser of (i) such
deficit capital account balance or (ii) the amount of actual cash distributions
to TP III during the term of the Partnership (determined without taking into
account any amounts paid to any party pursuant to Section 7.6 of the Agreement).
(e) No interest will be paid on any capital contributed to the
Partnership or the balance in any Partner's Capital Account.
Section 2.3 Section 704 Capital Accounts. A "Section 704 Capital
Account" (herein so called) shall be determined and maintained for each Partner
throughout the term of the Agreement. The balance of a Partner's Section 704
Capital Account shall be equal to such Partner's Capital Account balance (as
determined after giving effect to all adjustment attributable to allocations of
Partnership income, gain, loss, deduction and credits and contributions and
distributions of money and property effected prior to such determination),
modified as follows:
(a) decreased by the amount (if any) of cash that reasonably is
expected to be distributed to such Partner, but only to the extent that the
amount thereof exceeds any offsetting increase in such Partner's Section 704
Capital Account that reasonably is expected to occur during (or prior to) the
Fiscal Year during which such distribution reasonably is expected to be made (as
determined under section 1.704- 1(b)(ii)(d) of the Regulations);
(b) decreased by the amount (if any) of loss and deduction that
reasonably is expected to be allocated to such Partner pursuant to section
704(e)(2) or 706(d) of the Code or section 1.704-1(b)(2)(ii) of the Regulations
(as determined under section 1.704-1(b)(2)(ii)(d) of the Regulations);
(c) increased by the amount (if any) of such Partner's share of the
Nonrecourse Minimum Gain of the Partnership; and
(d) increased by the amount (if any) of such Partner's share of the
Partner Minimum Gain of the Partnership.
<PAGE> 27
Section 2.4 Adjustment of Book Basis. Book Basis with respect to any
asset of the Partnership is the asset's adjusted tax basis for federal income
tax purposes, except as follows:
(a) The initial Book Basis of any asset contributed to the Partnership
by a Partner shall be the fair market value of the asset as of the date of
contribution as agreed upon by the contributing Partner and the Partnership.
(b) The Book Basis of each asset shall be its respective fair market
value as reasonably determined by the General Partner, as of a Revaluation
Event.
(c) The Book Basis of each asset distributed to any Partner will be the
fair market value of the asset as reasonably determined by the General Partner
as of the date of determination.
(d) The Book Basis of each asset will be increased or decreased to
reflect any adjustment to the adjusted tax basis of the asset under section
734(b) or 743(b) of the Code, but only to the extent that the adjustment is
taken into account in determining Capital Account balances under section
1.704-1(b)(2)(iv)(m) of the Regulations, provided that the Book Basis will not
be adjusted hereunder to the extent that an adjustment under Section 2.4(b) is
necessary or appropriate in connection with a transaction that would otherwise
result in an adjustment under this Section 2.4(d).
Book Basis will be adjusted by Book Depreciation, and Book Gain or Book Loss on
a disposition of any asset shall be determined by reference to such asset's Book
Basis as adjusted herein.
ARTICLE III
ALLOCATIONS OF PROFIT AND LOSS
Section 3.1 Allocation of Items of Profit and Loss. Subject to the
provisions of ARTICLE IV hereof, the Partnership's Gross Income, items of loss
or deduction and Adjusted Net Income or Loss and Book Gain or Loss for each
Fiscal Year shall be allocated to the Partners as follows and in the following
order of priority (after giving effect to all Capital Account adjustments
attributable to contributions and distributions of money and property, but prior
to distributions of money and property made pursuant to Section 10.4 of the
Agreement):
(a) Pursuant to section 1.704-2(f) of the Regulations (relating to
minimum gain chargebacks), if there is a net decrease in Nonrecourse Minimum
Gain of the Partnership for such Fiscal Year (or if there was a net decrease in
Nonrecourse Minimum Gain for a prior Fiscal Year and the Partnership did not
have sufficient amounts of income during prior Fiscal Years to allocate to the
Partners under this Section 3.1(a)), then Gross Income shall be allocated,
before any other allocation is made pursuant to the succeeding provisions of
this Section 3.1 for such Fiscal Year, to each Partner in an amount equal to
such Partner's share of the net decrease in such minimum gain (as determined
under section 1.704-2(g) of the Regulations).
(b) Pursuant to section 1.704-2(i)(4) of the Regulations (relating to
minimum gain chargebacks) if there is a net decrease in Partner Minimum Gain of
the Partnership for such Fiscal Year (or if there was a net decrease in Partner
Minimum Gain for a prior Fiscal Year and the Partnership did not have sufficient
amounts of income during prior Fiscal Years to allocate to the Partners under
this Section 3.1(b)), then Gross Income shall be allocated, before any other
allocation is made pursuant to the succeeding provisions of this Section 3.1 for
such Fiscal Year, to each Partner with a share of such minimum gain as of the
first
<PAGE> 28
day of such Fiscal Year in an amount equal to such Partner's share of the net
decrease in such Partner Minimum Gain (as determined under section 1.704-2(i)(5)
of the Regulations).
(c) A Partner who unexpectedly receives any adjustment, allocation or
distribution described in section 1.704-1(b)(2)(ii)(d)(4), (5) or (6) of the
Regulations will be specially allocated items of income or gain (after the
allocations required by Section 3.1(a) and Section 3.1(b) hereof but before any
other allocations required by this Section 3.1) in an amount and in the manner
sufficient to eliminate any deficit balance in his Section 704 Capital Account
(for this purpose, a Partner's Section 704 Capital Account shall be increased by
the amount (if any) that such Partner is treated as being obligated to
contribute subsequently to the capital of the Partnership (as determined under
section 1.704-1(b)(2)(ii)(c) of the Regulations) and, without duplication of any
amount previously described in this sentence, shall be increased by the amount
(if any) of such Partner's Modified 752 Share of Recourse Debt) as quickly as
possible; provided, however, that an allocation shall be made pursuant to this
Section 3.1(c) only if and to the extent that such Partner would have a deficit
balance in his Section 704 Capital Account after all allocations in this Section
3.1 have been tentatively made as if this Section 3.1(c) were not in this
Exhibit. This Section 3.1(c) is intended to satisfy the provisions of Section
1.704-1(b)(2)(ii)(d) of the Regulations and shall be interpreted consistently
therewith.
(d) Except as required by Section 3.1(a), Section 3.1(b) and Section
3.1(c), each Partner who has a deficit balance in its Capital Account (for this
purpose, a Partner's Capital Account shall be increased by (A) the amount (if
any) that a Partner is obligated to contribute subsequently to the capital of
the Partnership under the Agreement or this Exhibit (including Section 2.2(d) of
this Exhibit) or is treated as being obligated to contribute subsequently to the
capital of the Partnership (as determined under section 1.704-1(b)(2)(ii)(c) of
the Regulations); (B) the amount (if any) of such Partner's share of the
Nonrecourse Minimum Gain of the Partnership; and (C) the amount (if any) of such
Partner's share of the Partner Minimum Gain of the Partnership) at the end of
the taxable year will be specially allocated items of income or gain in the
amount of the deficit as quickly as possible; provided, however, that an
allocation shall be made pursuant to this Section 3.1(d) only if and to the
extent that such Partner would have a deficit balance in its Capital Account
after all allocations in this Section 3.1 have been tentatively made as if this
Section 3.1(d) were not in this Exhibit and Section 3.1(d) shall be applied
before Section 3.1(c).
(e) All Partner Nonrecourse Deductions attributable to a Partner
Nonrecourse Debt shall be allocated to the Partner that is treated (under
section 1.704-2(b)(4) of the Regulations) as bearing the economic risk of loss
for such debt.
(f) All Nonrecourse Deductions of the Partnership shall be allocated to
the Partners, pro rata in accordance with their respective Percentage Interests.
(g) Any Adjusted Net Income realized by the Partnership for such year
shall be allocated among the Partners as follows and in the following order of
priority:
(i) First: Adjusted Net Income shall be allocated to the
General Partner until the aggregate Adjusted Net Income allocated under
this Section 3.1(g)(i) for the current and prior years equals the
aggregate amount of Adjusted Net Loss allocated to the General Partner
under Section 3.1(h)(ii) for the current and prior years; and then
(ii) Second: Adjusted Net Income shall be allocated to the
Partners in the same proportion that cumulative Adjusted Net Loss has
been allocated to the Partners under Section 3.1(h)(i) for the current
year and prior years until each Partner has been allocated cumulative
Adjusted Net Income under this Section 3.1(g)(ii) for the current and
prior years equal to the
<PAGE> 29
cumulative Adjusted Net Loss allocated to the Partner under Section
3.1(h)(i) for the current and prior years; and then
(iii) Third: All remaining Adjusted Net Income shall be
allocated among the Partners in proportion to their respective
Percentage Interests.
(h) Any Adjusted Net Loss realized by the Partnership for such year
shall be allocated among the Partners as follows and in the following order of
priority:
(i) First: Adjusted Net Loss shall be to the Partners in
proportion to their respective Percentage Interests until each
Partner's positive Section 704 Capital Account balance is reduced to
zero.
(ii) Second: All remaining Adjusted Net Loss shall be
allocated to the General Partner.
(i) Notwithstanding any other provision of the Agreement or this
Exhibit, from the date that construction commences with respect to a Property
(the "Subject Property") to the date 18 months following the date that the
Partnership receives a Certificate of Occupancy for the Subject Property, all
Adjusted Net Loss from the Subject Property shall be allocated under this
Section 3.1(i) to TP III. The provisions of this Section 3.1(i) shall be applied
to each Property of the Partnership on a property by property basis.
(j) [Intentionally deleted]
(k) Book Gain derived from a Terminating Capital Transaction shall be
allocated among the Partners as follows in the following order of priority
(after giving effect to all adjustments attributable to allocations made
pursuant to the preceding provisions of this Section 3.1 for such year):
(i) First: Book Gain shall be allocated among the Partners
having deficit Capital Account balances to the least extent necessary
to cause their deficit Capital Account balances to be in the same
proportion to one another as are their respective Percentage Interests.
(ii) Second: Book Gain shall be allocated among those Partners
having deficit Capital Account balances in accordance with their
respective Percentage Interests, to the least extent necessary to cause
their Capital Account balances to equal zero.
(iii) Third: Book Gain shall be allocated to the Partners to
the least extent necessary so as to cause their positive Capital
Account balances to be in the same proportion to one another as are
their respective Percentage Interests.
(iv) Fourth: Book Gain shall be allocated among the Partners
in proportion to their respective Percentage Interests.
(l) Book Loss derived from a Terminating Capital Transactions shall be
allocated among the Partners as follows in the following order of priority
(after giving effect to all adjustments attributable to allocations made
pursuant to the preceding provisions of this Section 3.1 for such year):
(i) First: Book Loss shall be allocated among the Partners to
the least extent necessary so as to cause the positive balances of
their respective Capital Accounts to be in the same proportion to one
another as their respective Percentage Interests and then to all
Partners in
<PAGE> 30
proportion to their respective Percentage Interests until each
Partner's positive Capital Account balance is reduced to zero.
(ii) Second: All remaining Book Loss shall be allocated to the
General Partner.
(m) For purposes of determining the nature (as ordinary or capital) of
any Partnership profit allocated among the Partners for Federal income tax
purposes pursuant to this Section 3.1, the portion of such profit required to be
recognized as ordinary income pursuant to sections 1245 and/or 1250 of the Code
shall be deemed to be allocated among the Partners in accordance with sections
1.1245-1(e)(2) and 1.1250-1(f) of the Regulations.
(n) The Partners agree that their Percentage Interests represent their
respective interest in Partnership profits for purposes of allocating excess
nonrecourse liabilities (as defined in section 1.752-3(a)(3) of the Regulations)
pursuant to section 1.752-3(a)(3) of the Regulations.
(o) Notwithstanding any other provision herein to the contrary, no
allocation of Adjusted Net Income, Adjusted Net Loss, Book Gain or Book Loss, or
items of income, gain, loss and deduction will be made to a Partner if the
allocation would not have "economic effect" under section 1.704-1(b)(2)(ii) of
the Regulations or otherwise would not be in accordance with the Partners'
interests in the Partnership within the meaning of section 1.704-1(b)(3) or
section 1.704-2(b)(1) of the Regulations. The General Partner will have the
authority to reallocate any item in accordance this Section 3.1(o); provided,
however, that (a) no such change shall have a material adverse effect upon the
amount of cash or other property distributable to any Partner, (b) each Partner
shall have 30 days prior notice of such proposed modification and (c) if such
proposed modification would be material, the Partnership shall have received an
opinion of tax counsel to the Partnership that such modification is necessary to
comply with section 704(b) of the Code.
(p) The allocations set forth in Sections 3.1(a)-(f) (the "Regulatory
Allocations") are intended to comply with certain requirements of the
Regulations. It is the intent of the Partners that, to the extent possible, all
Regulatory Allocations shall be offset either with other Regulatory Allocations
or with special allocations of other items of Partnership income, gain, loss, or
deduction pursuant to this Section 3.1(p). Therefore, notwithstanding any other
provision of this Article III (other than the Regulatory Allocations), the
General Partner shall make such offsetting special allocations of Partnership
income, gain, loss, or deduction in whatever manner it determine(s) appropriate
so that after such offsetting allocations are made, each Partner's Capital
Account balance is, to the extent possible, equal to the Capital Account balance
such Partner would have had if the Regulatory Allocations were not part of the
Agreement and all Partnership items were allocated pursuant to Sections
3.1(g)-(l) hereof.
Section 3.2 Allocation of Tax Items.
(a) Except as otherwise provided in the succeeding provisions of this
Section 3.2, each Tax Item shall be allocated to the Partners in the same manner
as each correlative item of income, gain, loss or deduction, as calculated for
book purposes, is allocated pursuant to the provisions of Section 3.1 hereof.
(b) The Partners hereby acknowledge that all Tax Items in respect of
Adjusted Property are required to be allocated to the Partners in the same
manner as under section 704(c) of the Code (as specified in sections
1.704-1(b)(2)(iv)(f), 1.704-1(b)(2)(iv)(g) and 1.704-3 of the Regulations), and
that the principles of section 704(c) of the Code require that such Tax Items
must be shared among the Partners so as to take account of the variation between
the adjusted tax basis and Book Basis of each such Adjusted Property. Thus,
notwithstanding anything in Sections 3.1 or 3.2(a) hereof to the contrary, the
Partners' distributive shares of Tax Items in respect of each Adjusted Property
shall be separately determined and
<PAGE> 31
allocated to the Partners following any permissible method under 1.704-3 of the
Regulations reasonably selected by the General Partner, and the Capital Account
balances of the Partners shall be adjusted solely for allocations of book items
in respect of such assets and shall not be adjusted for their distributive
shares of any corresponding Tax Items.
ARTICLE IV
SPECIAL RULES
Section 4.1 Allocation of Profit and Loss and Distributions in Respect
of Interests Transferred.
(a) If any interest in the Partnership is transferred, or is increased
or decreased by reason of the admission of a new Partner or otherwise, during
any Fiscal Year, each item of Adjusted Net Income or Loss, and other income and
deductions and Book Gain and Book Loss of the Partnership for such Fiscal Year
shall be divided and allocated between the Partners in question by taking
account of their varying interests in the Partnership during such Fiscal Year on
a daily, monthly, or other basis, as determined by the General Partner using any
permissible method under section 706 of the Code and the Regulations thereunder.
(b) Distributions of Partnership assets in respect of an interest in
the Partnership shall be made only to the persons or entities who, according to
the books and records of the Partnership, are the holders of record of the
interests in the Partnership in respect of which such distributions are made on
the actual date of distribution. Neither the Partnership nor any Partner shall
incur any liability for making distributions in accordance with the provisions
of the preceding sentence, whether or not the Partnership or any Partner has
knowledge or notice of any transfer or purported transfer of ownership of any
interest in the Partnership.
(c) Notwithstanding any provision above to the contrary, Book Gain or
Loss of the Partnership realized in connection with a sale or other disposition
of any substantial part of the assets of the Partnership shall be allocated
solely to the parties owning interests in the Partnership as of the date such
sale or other disposition occurs.
Section 4.2 Tax Returns. The General Partner shall cause to be prepared
for each taxable year of the Partnership the federal, state and local income tax
returns and information returns, if any, which the Partnership is required to
file. Such returns shall be prepared and submitted to the Partners for
examination no later than ten (10) days prior to the required filing date
(including any extension thereof), together with such additional forms and
information as may be required by the Partners in order for the Partners to file
returns reflecting the Partnership's operations.
Section 4.3 Tax Elections. The Partnership shall make the following
elections on the appropriate tax returns:
(a) to the extent permitted by the Code, to adopt the calendar year as
the Partnership's fiscal year;
(b) to the extent permitted by the Code, to adopt the cash method of
accounting and to keep the Partnership's books and records on the income-tax
method;
(c) if a distribution of Partnership property as described in section
734 of the Code occurs or if a transfer of Interest as described in section 743
of the Code occurs, on written request of any Partner, to elect, pursuant to
section 754 of the Code, to adjust the basis of Partnership properties;
<PAGE> 32
(d) to elect to amortize the organizational expenses of the Partnership
ratably over a period of sixty (60) months as permitted by section 709(b) of the
Code; and
(e) any other election the General Partner may deem appropriate and in
the best interests of the Partners.
Neither the Partnership nor any Partner may make an election for the Partnership
to be excluded from the application of the provisions of subchapter K of chapter
1 of subtitle A of the Code or any similar provisions of applicable state law.
The Partnership intends to be classified as a partnership for federal income tax
purposes under section 301.7701-3 of the Regulations. Neither the Partnership
nor any Partner may make an election under section 301.7701-3(c) of the
Regulations to treat the Partnership as an association taxable as a corporation.
Section 4.4 Tax Matters Partner.
(a) The General Partner is hereby designated the "Tax Matters Partner"
as that term is defined in section 6231(a)(7) of the Code.
(b) The Tax Matters Partner shall use its best efforts to comply with
the responsibilities outlined in sections 6222 through 6232 of the Code and in
doing so shall incur no liability to the other Partners. Notwithstanding the Tax
Matters Partner's obligation to use its best efforts in the fulfillment of its
responsibilities, the Tax Matters Partner shall not be required to incur any
expenses for the preparation for or pursuance of administrative or judicial
proceedings unless the Partners agree on a method for sharing such expenses.
(c) No Partner shall file, pursuant to section 6227 of the Code, a
request for an administrative adjustment of items for any Partnership taxable
year without first notifying the other Partners. If the other Partners agree
with the requested adjustment, then the Tax Matters Partner shall file the
request for administrative adjustment on behalf of the Partner. If unanimous
consent is not obtained within thirty (30) calendar days from such notice, or
within the period required to timely file the request for administrative
adjustment, if shorter, any Partner, including the Tax Matters Partner, may file
a request for administrative adjustment on its own behalf.
(d) Any Partner intending to file a petition under sections 6226, 6228,
or other section of the Code with respect to any item or other matter involving
the Partnership shall notify the other Partners of such intention and the nature
of the contemplated proceeding. In the case where the Tax Matters Partner is the
Partner intending to file such petition on behalf of the Partnership, such
notice shall be given within a reasonable period of time to allow the other
Partners to participate in the choosing of the forum in which such petition will
be filed. If the Partners do not agree on the appropriate forum, then the
appropriate forum shall be decided by vote of a majority in interest of the
Partners. If such a majority cannot agree, then the Tax Matters Partner shall
choose the forum. If any Partner intends to seek review of any court decision
rendered as a result of a proceeding instituted under the preceding provisions
of this Section 4.4(d), then such Partner shall notify the other Partners of
such intended action.
(e) The provisions of this Section 4.4 shall survive the termination of
the Partnership or the termination of any Partners's interest in the Partnership
and shall remain binding on the Partners for a period of time necessary to
resolve with the IRS or the United States Treasury Department the income
taxation of the Partnership.
Section 4.5 Inconsistent Treatment of Partnership Items. If any Partner
intends to file a notice of inconsistent treatment under section 6222(b) of the
Code, then such Partner shall give reasonable notice under the circumstances to
the other Partners of such intent and the manner in which the Partner's intended
treatment of an item is (or may be) inconsistent with the treatment of that item
by the other Partners.
<PAGE> 1
EXHIBIT 10.59
AGREEMENT OF LIMITED PARTNERSHIP
OF
TRIAD SENIOR LIVING IV, L.P.
THIS AGREEMENT OF LIMITED PARTNERSHIP is dated effective as of December
22, 1998, by and among Triad Partners IV, Inc., a Texas corporation ("TP IV"),
as general partner (the "General Partner") and as a limited partner and Capital
Senior Living Properties, Inc., a Texas corporation ("Capital Senior Living"
and, together with TP IV, the "Limited Partners").
WHEREAS, the parties hereto desire to form a limited partnership under
the Texas Revised Limited Partnership Act.
NOW THEREFORE, in consideration of the mutual covenants, conditions and
agreements hereinafter set forth, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereby
agree as follows:
ARTICLE I
ADDITIONAL DEFINITIONS
As used herein, the following terms shall have the following meanings:
"Accountant" - means any independent firm of certified public
accountants as may be engaged by the General Partner for the Partnership.
"Affiliate" - means (a) a General Partner; (b) a Limited Partner; (c) a
partner or shareholder of a General Partner or a Limited Partner or a member of
the immediate family of a partner or shareholder; (d) a legal representative of
any Person, referred to in the preceding clauses (a) through (c); (e) a trustee
for the benefit of any Person referred to in the preceding clauses (a) through
(c); (f) a corporation, joint venture, partnership or other business entity
which is controlled by such person or entity and/or any one or more of the
Persons referred to in the preceding clauses (a) through (c); (g) a corporation,
joint venture, partnership or other business entity which controls or is under
common control with such person or entity, and/or with a person or entity
referred to in the preceding clauses (a) through (c); or (h) the partners,
officers, directors and key employees of such entity and/or any corporation,
joint venture, partnership or other business entity referred to in the preceding
clauses (a), (b), (c), (f) or (g).
"Agreement" or "this Agreement" - means this Agreement of Limited
Partnership, as amended from time to time.
<PAGE> 2
"Capital Contributions" - means the gross amount of contributions
actually made to the capital of the Partnership by a Partner or all the
Partners, as the case may be. Loans to the Partnership by any Partner shall not
be considered a Capital Contribution.
"Certificate" - means the Certificate of Limited Partnership of this
Partnership filed with the Secretary of State of the State of Texas, as such
Certificate may be further amended and filed from time to time.
"Certificate of Occupancy" - means that certain certificate of
occupancy which has been issued for any building at a Property.
"Code" - means the Internal Revenue Code of 1986, as amended.
"Development Agreement" - means any development agreement between the
Partnership and Capital Senior Development, Inc. relating to a Property, as such
agreement may be amended from time to time.
"Fiscal Year" - means the fiscal year of the Partnership as set forth
in Section 11.1 hereof.
"General Partner" - means Triad Partners IV, Inc. and any additional or
successor General Partner(s) designated in any case as such in accordance with
the provisions of this Agreement, and, from time to time, holding such position
in accordance with such provisions.
"Gross Receipts" - means all revenues received by the Partnership from
the operations of its business attributable to a particular period as determined
in accordance with the cash receipts and disbursements method of accounting, and
including, without limitation, any loans from Partners and third parties, and
other amounts paid by Partners and third parties to the Partnership, but not
including capital contributions.
"Limited Partners" - means Triad Partners IV, Inc. and Capital Senior
Living Properties, Inc., and any additional or substitute Limited Partner(s) as
may be designated as such in accordance with the provisions of this Agreement.
"Lenders" - means such lender or lenders approved by the Partners, or
their successors and/or assigns.
"Loan" - means collectively those certain loans from Lenders to the
Partnership approved by the Partners.
"Loan Documents" - means all documents evidencing, securing or
otherwise entered into in connection with the Loan, including, without
limitation, any Note, Deed of Trust, Security Agreement, Assignment of Rents and
Financing Statement, Assignment of Leases and Rents, and UCC-1 Financing
Statement.
2
<PAGE> 3
"Management Agreement" means any management agreement between the
Partnership and Capital Senior Living, Inc. relating to a Property, as such
agreement may be amended from time to time.
"Net Cash Flow" - means the amount, if any, by which Gross Receipts
plus cash reserves of the Partnership from the previous period exceed Operating
Expenses for such particular period, to the extent the General Partner
determines, in its sole discretion, that cash is not otherwise required for
Partnership purposes, including the setting up or continuing of a reasonable
working capital reserve for the Partnership. "Net Cash Flow" shall not include
or reflect any proceeds received or expenses incurred in connection with the
sale or other disposition of all or substantially all of the assets of the
Partnership or the termination and liquidation of the Partnership.
"Operating Expenses" - means all cash expenditures of any kind or
nature incurred by the Partnership attributable to a particular period, as
determined in accordance with the cash receipts and disbursements method of
accounting.
"Partners"- means the General Partner and the Limited Partners.
"Partner" - means any of the Partners.
"Partnership" - means the limited partnership evidenced by this
Agreement, as said limited partnership may from time to time be constituted,
amended and, if necessary, reconstituted, including any successor limited
partnership.
"Percentage Interests" - means the percentage set forth opposite the
name of such Partner under the column "Interest" in Exhibit B attached hereto
and made a part hereof for all purposes.
"Person" - means an individual, firm, corporation or other legal
entity.
"Properties" - means those certain tracts of land which have been
agreed to in writing by all of the Partners. Upon such written approval, the
General Partner shall attach the legal description for each Property hereto as
Exhibit A. "Property" - means any one of the Properties.
"Revised Act" - means the Texas Revised Limited Partnership Act, as
adopted and from time to time amended by the State of Texas.
ARTICLE II
FORMATION; NAME AND OFFICE; PURPOSE
Section 2.1 Formation
The General Partner and the Limited Partners hereby organize, create
and form the Partnership as a Texas limited partnership under the Revised Act.
The Partnership will commence effective upon the filing of the Certificate with
the Secretary of State of the State of Texas pursuant
3
<PAGE> 4
to the provisions of the Revised Act. The Partnership is formed for the purpose
and upon the terms and conditions herein set forth. The Partners hereby agree
and obligate themselves to execute, acknowledge, file, record and/or publish, as
necessary, such amendments to the Certificate and such other certificates and
documents and to take all other necessary actions required by law to perfect and
maintain the Partnership as a limited partnership under the Revised Act and in
all other jurisdictions in which the Partnership may elect to conduct business.
Section 2.2 Name, Registered Agent and Registered Office
The name of the Partnership shall be Triad Senior Living IV, L.P. or
such other name as the General Partner shall hereafter designate by notice to
the Limited Partners and by amendment to the Certificate properly filed with the
Secretary of State of the State of Texas. The principal place of business in
Texas where books and records of the Partnership will be kept and made available
shall be 4312 Mockingbird Lane, Dallas, Texas 75205, or such other place as the
General Partner may from time to time designate in a notice to the Limited
Partners and by amendment to the Certificate. The registered office of the
Partnership and the registered Agent shall be as set forth in the Certificate,
or such other registered Agent and registered office as the General Partner may
from time to time designate in a notice to the Limited Partners and by amendment
to the Certificate.
Section 2.3 Purpose
The purpose of the Partnership shall be strictly limited to activities
relating to the acquisition, development, ownership, operation, and sale of the
Properties, and such other activities as are incidental thereto, including
without limitation, entering into the Loan and the performance of the
Partnership's obligations under the Loan Documents.
ARTICLE III
TERM
The term of the Partnership shall commence upon the filing of the
Certificate with the Secretary of State of the State of Texas, and shall
continue until December 31, 2050, on which date the Partnership shall terminate,
unless sooner dissolved upon the occurrence of any of the events of dissolution
or termination, as described in Article X.
ARTICLE IV
INTERESTS OF THE GENERAL PARTNER AND LIMITED PARTNERS
Section 4.1 General Partner
The General Partner is Triad Partners IV, Inc., and it shall have a 1%
interest in the Partnership. Except as provided in Article IX of this Agreement,
no other Person shall become a General Partner in the Partnership. The address
of the General Partner is set forth on Exhibit B.
4
<PAGE> 5
Section 4.2 Limited Partners
The Limited Partners are TP IV and Capital Senior Living Properties,
Inc., which shall have the interests in the Partnership as shown on Exhibit B.
Except as provided in Article IX of this Agreement, no other Person shall become
a Limited Partner or substitute Limited Partner in the Partnership. The
addresses of the Limited Partners are set forth on Exhibit B.
ARTICLE V
CAPITAL CONTRIBUTIONS
Section 5.1 Capital Contribution of the General Partner
The General Partner has contributed to the Partnership the amount set
forth on Exhibit B. The General Partner shall not be obligated to pay any
Partnership expenses or make any capital contributions to the Partnership except
as provided in this Section 5.1 and Section 5.3.
Section 5.2 Capital Contribution of the Limited Partners
The Limited Partners have contributed or will contribute to the
Partnership the amounts set forth on Exhibit B. The Limited Partners shall not
be obligated to make any other capital contributions to the Partnership except
as provided in this Section 5.2 and Section 5.3.
Section 5.3 Additional Capital Contributions
The Partners may, but are not required to, make their pro rata share
(based on Percentage Interests) of any additional capital contributions to the
Partnership. In the event that any Partner does not make such additional capital
contribution, the Partnership shall return the amounts contributed by the other
Partners for such additional capital contributions. The additional capital
contributions shall be due only upon the written notice from the General Partner
to the Partners.
TP IV shall contribute to the capital of the Partnership in the amount
required and at the time specified in Section 2.2(d) of Exhibit C attached
hereto.
Section 5.4 Return or Withdrawal of Capital Contributions; Distributions
Except as otherwise expressly provided in this Agreement, none of the
Partners shall be entitled to demand a refund or return of any Capital
Contribution or to withdraw any part of its capital account or to receive any
distribution from the Partnership.
Section 5.5 Capital Accounts
A capital account shall be established and maintained for each Partner
as set forth in Exhibit C attached hereto.
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Section 5.6 Loans by the Partners.
If the General Partner determines that the Partnership needs additional
capital, it may request that the Partners make loans to the Partnership. Then
each Partner shall have the option, but not the obligation, to loan to the
Partnership some or all of the aggregate amount of the requested loan. Any loans
made by the Partners shall not be considered to be contributions to the capital
of the Partnership.
ARTICLE VI
LIMITED PARTNERS
Section 6.1 Powers: Actions
The Limited Partners shall neither participate in the management or
control of the Partnership's business nor shall they transact any business for
the Partnership, nor shall they have the power to sign for or bind the
Partnership, said powers being vested solely and exclusively in the General
Partner.
Section 6.2 Limitation of Liability
Anything to the contrary herein expressed or implied notwithstanding,
the Limited Partners shall not be personally liable for any of the debts of the
Partnership or any of the losses thereof in excess of their respective shares of
Partnership assets, capital contributions which they have made or are obligated
to make to the Partnership, and their share of the Partnership's income and
gains; provided, however, that to the extent required by applicable law, if a
Limited Partner receives a distribution at a time when it knew that, after
giving effect to the distribution, all liabilities of the Partnership, other
than liabilities to the Partners with respect to the partnership interests and
liabilities for which the recourse of creditors is limited to specific
Partnership assets, exceed the fair value of the Partnership's assets (except
that the fair value of property that is subject to a liability for which there
is recourse of creditors is limited shall be included in the Partnership's
assets only to the extent that the fair value of that property exceeds that
liability), then the Limited Partner receiving such distribution shall be liable
for the return of such distribution.
ARTICLE VII
GENERAL PARTNER
Section 7.1 Powers; Actions
The General Partner shall manage and control the business and affairs
of the Partnership. Without limiting the generality of the foregoing, the
General Partner shall have full power to (i) manage the Partnership; (ii)
execute such documents as it may deem advisable for Partnership purposes,
including, without limitation, the Loan Documents and all documents necessary
for the
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acquisition, financing, refinancing, development, ownership, operation and sale
of any Property; (iii) acquire, sell, lease, transfer, assign, convey, mortgage,
refinance, or otherwise dispose of or deal with all or any part of any Property
on such terms as it deems reasonable; (iv) establish and maintain, to the extent
Partnership funds are available, reasonable reserves for anticipated and
unanticipated expenses relating to the activities of the Partnership; (v)
perform or cause to be performed the Partnership's obligations, and exercise or
cause to be exercised all of the Partnership's rights, under any agreement to
which the Partnership or any nominee of the Partnership is a party; and (vi) on
behalf of the Partnership, employ, engage, retain or deal with any Person,
including any Affiliate, to perform services in connection with the ownership
and operation of the Property, provided in all such cases such services are
deemed by the General Partner to be advisable and the compensation therefor is
reasonable.
Section 7.2 Restrictions on the General Partner
(a) Notwithstanding the foregoing in Section 7.1 or any other
provision of this Agreement, the Partnership shall be subject to the
following restrictions and the General Partner shall have no authority
to take and shall not take any action on behalf of the Partnership in
violation of any of the following restrictions:
(i) No bankruptcy or insolvency filing or similar
proceedings for the Partnership may be commenced, and no
bankruptcy or insolvency filing or similar proceeding may be
commenced as to the General Partner on its own behalf or as
General Partner on behalf of the Partnership.
(ii) The Partnership and the General Partner are
prohibited from creating, incurring or assuming any
indebtedness other than the Loan and any subordinate financing
permitted in the Loan Documents.
(iii) The Partnership and the General Partner are
prohibited from liquidating or dissolving or consenting to the
liquidation or dissolution, in whole or in part, of either the
Partnership or the General Partner.
(b) Notwithstanding anything in this Agreement to the
contrary, the General Partner shall not have the right or the power to
make any commitment or engage in any undertaking on behalf of the
Partnership in respect of a Major Decision (as hereinafter defined)
unless and until such Major Decision has been approved in writing by
all of the Limited Partners. The term "Major Decision," as used in this
Agreement, means any decisions with respect to the following matters:
(i) All financing and refinancing decisions
pertaining to indebtedness owing, directly or indirectly, to
and/or by the Partnership.
(ii) Any amendment, modification, change or
restatement of this Agreement.
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(iii) Any capital expenditures in excess of $50,000
on any Property that has already been developed.
(iv) The assignment of any interests in the
Partnership except as expressly provided by the terms of this
Agreement.
(v) Any amendment, modification or change to any
Management Agreement or any Development Agreement.
(vi) The engagement by the Partnership in any
business other than as set forth in Section 2.3 above.
(vii) The transaction of business with Affiliates of
Partners except as set forth herein.
(viii) The execution of any guarantees, indemnities,
sureties or similar commitments on behalf of the Partnership.
(ix) Any decision to cause the Partnership to loan
funds to any person, and the terms on which any such loan is
made.
(x) Any act in contravention of this Agreement.
(xi) The addition of a tract of land to the defined
term "Properties" or a change in the use of a Property.
(xii) The admission of any new Partners to the
Partnership (except as otherwise allowed herein) or the
appointment of any additional General Partner.
(xiii) Any other act which the Revised Act
specifically requires to be approved by all the Partners.
(xiv) The merger, consolidation or any other form of
combination of the Partnership with or into any other entity.
(xv) The conveyance, transfer or lease of the
Partnership's assets substantially as an entirety to any
entity, except for the transfer of the Properties (or a
Property) to the manager pursuant to any purchase option in
any Management Agreement.
(xvi) The acquisition or lease of any substantial
assets by the Partnership.
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Section 7.3 Duties and Obligations of the General Partner
The General Partner shall manage and control the Partnership, its
business and affairs. During the continuance of the Partnership, the General
Partner shall diligently and faithfully devote such time to the management of
the business of the Partnership as it deems reasonably necessary.
Section 7.4 Tax Matters Partner. See Section 4.4 of Exhibit C attached
hereto.
Section 7.5 Liability; Indemnification
The General Partner and its Affiliates shall not be liable to the
Partnership or the Limited Partners for any act or omission performed or omitted
by it pursuant to the authority granted to it by this Agreement, other than for
fraud, willful malfeasance or gross negligence. The Partnership shall and hereby
does indemnify and save harmless the General Partner, the Limited Partners and
their Affiliates to the greatest extent permitted by the Revised Act from any
loss, damage, claim or liability, including but not limited to, reasonable
attorney's fees and expenses, incurred by them by reason of any act performed by
the General Partner, the Limited Partners or their Affiliates on behalf of the
Partnership, including, without limitation, their activities in winding up and
liquidating the Partnership, or in furtherance of the Partnership's interests,
except that the General Partner and its Affiliates shall not be indemnified for
actions by the General Partner or its Affiliates which constitute a breach of
any of their obligations under this Agreement, fraud, willful malfeasance or
gross negligence, provided, however, that the indemnity and save harmless
provided for in this sentence shall be satisfied out of Partnership assets only
and no Partner shall have any personal liability on account thereof.
Section 7.6 Fees to and Reimbursement of the General Partner
The Limited Partners acknowledge that the General Partner or its
Affiliates will receive $1,000 per month beginning December 1, 1998 as an asset
management fee. The General Partner and its Affiliates shall also be entitled to
receive reimbursement of their expenses, but shall not be entitled to receive
any other fees. The General Partner and its Affiliates shall receive
reimbursement for all reasonable expenses advanced by the General Partner and
its Affiliates on behalf of the Partnership and all expenses incurred during the
operation of the Partnership.
ARTICLE VIII
ALLOCATIONS; DISTRIBUTIONS
Section 8.1 Allocations of Income and Loss
All items of income or loss of the Partnership shall be allocated to
the Partners in accordance with the provisions of Exhibit C attached hereto,
which are hereby incorporated by reference for all purposes of this Agreement.
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Section 8.2 Partnership Distributions of Cash
During the term hereof, periodically, but not less frequently than
annually, Net Cash Flow of the Partnership shall be distributed to the Partners
in accordance with their Percentage Interests.
ARTICLE IX
ASSIGNABILITY OF GENERAL PARTNER'S
AND LIMITED PARTNER'S INTERESTS; PURCHASE OPTION
Section 9.1 Restrictions on Transfers
Except as provided in Section 9.5 hereof, a Partner may not sell,
assign, transfer, encumber, or dispose of, by operation of law or otherwise, any
interest in the Partnership or in the property or assets of the Partnership
without the prior written consent of the other Partners, which in the other
Partners' absolute discretion may be withheld. Additionally, any such
disposition must comply with the provisions hereinafter stated in this Article
IX.
Section 9.2 Assignment of a Limited Partner's Interest
(a) Except as otherwise provided in this Agreement, an
assignee of the whole or any portion of a Partner's interest in the
Partnership shall not have the right to become a Partner in place of
its assignor unless (i) its assignor shall have designated such
intention in the instrument of assignment; (ii) the written consent of
the other Partners to such substitution shall have been obtained, which
consent, in the other Partners' absolute discretion, may be withheld;
(iii) the assignment instrument shall have been in form and substance
satisfactory to the other Partner; (iv) the assignor and assignee named
therein shall have executed and acknowledged such other instrument or
instruments as the other Partners may deem necessary or desirable to
effectuate such admission; and (v) the assignee shall have accepted,
adopted and approved in writing all of the terms and provisions of this
Agreement, as the same may have been amended.
(b) In any event, the Partnership and the other Partners shall
be entitled to treat an assignor of a Partner's interest as the
absolute owner thereof in all respects, and shall incur no liability
for distributions made in good faith to such assignor, until such time
as the foregoing requirements have been satisfied.
(c) The Partnership shall, upon satisfaction of the foregoing
requirements, thereafter pay all further distributions or profits or
other compensation by way of income or return of capital on account of
the interest so assigned to the assignee. In the absence of notice to
the other Partners and approval thereof in writing by them of the
assignment of a Partner's interest, whether by operation of law or
otherwise, any payment to an assigning Partner, or to his assigns,
executors, administrators, or legal representative, shall acquit the
Partnership of liability to the extent of such payment as to any other
person, whether
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claiming as a remote or immediate assignee of the Partner, or by reason
of its death, legal disability, bankruptcy, insolvency, or otherwise.
(d) All costs (including, without limitation, legal and other
professional fees) incurred by the Partnership, the other Partners, and
the assigning Partner relating to any transfer contemplated by this
Article IX, shall be charged to, and shall be the sole expense of, the
assigning Partner.
Section 9.3 Withdrawal of a Partner
Except as otherwise specifically permitted by this Agreement, no
Partner shall be entitled to withdraw or retire from the Partnership.
Section 9.4 Death, Legal Incompetency, Bankruptcy or Dissolution of
Limited Partner
The death, legal incompetency, bankruptcy, dissolution or other
disability of a Limited Partner shall not dissolve or terminate the Partnership.
Upon the death, legal incompetency, bankruptcy, dissolution or other disability
of a Limited Partner, the estate, personal representative, trustee, guardian or
other successor in interest of such Limited Partner shall have all the rights
and obligations and be liable for all the liabilities of the Limited Partner in
the Partnership to the extent of such Limited Partner's interest therein,
subject to the terms and conditions of this Agreement, and, with the prior
written consent of the General Partner which may be withheld at its sole
discretion, may be substituted for such Limited Partner.
Section 9.5 Purchase Option of Capital Senior Living Properties, Inc.
At any time, Capital Senior Living shall have the right, but not the
obligation, to purchase all, but not less than all, of the interests owned by
the General Partner and TP IV as limited partner for an amount equal to the
amount of money that each such Partner paid for their respective interests in
the Partnership, plus non-compounding interest of 12% per annum from the date
such amounts were paid to the date the option described herein is exercised. The
Partners, by executing this Agreement, hereby agree that the future value of
such interests is speculative and that the formula set forth above is the
Partners' best estimate of the fair market value of such interests as of the
date of the exercise of such option.
ARTICLE X
DURATION, DISSOLUTION, TERMINATION,
WINDING UP, REMOVAL OF THE GENERAL
PARTNER AND RESIGNATION OF THE GENERAL PARTNER
Section 10.1 Dissolution and Termination
Subject to the provisions of Section 7.2(a) hereof, the Partnership
shall be dissolved only upon the occurrence of any of the following events:
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(a) The expiration of the fixed term of the Partnership;
(b) The withdrawal or removal of the General Partner, the
assignment by the General Partner of all its interest in the
Partnership, or any other event that causes the General Partner to
cease to be a general partner under the Revised Act, provided that any
such event shall not constitute a event of dissolution if the
Partnership is continued pursuant to Section 10.2;
(c) The sale or other disposition of all or substantially all
of the assets of the Partnership and the collection of the proceeds
therefrom; and
(d) The mutual consent of the Partners.
Section 10.2 Continuation of Business
The Partners hereby agree that notwithstanding any provision of the
Revised Act, the Partnership shall not dissolve prior to the occurrence of any
event set forth in Section 10.1 above. Upon the occurrence of any event set
forth in Section 10.1 above, the Partnership shall not be dissolved or required
to be wound up if (i) at the time of such event there is a remaining General
Partner and that General Partner carries on the business of the Partnership or
(ii) within ninety (90) days after such event all remaining Partners agree in
writing to continue the business of the Partnership and to the appointment,
effective as of the date of such event, of one or more additional General
Partners.
Section 10.3 Winding Up of the Partnership
Upon dissolution of the Partnership as provided in Section 10.1, the
Partnership shall be wound up, and the General Partner (or if there is no
General Partner, a substitute General Partner elected by the Limited Partners)
will take full account of the Partnership's assets and liabilities, the assets
will be liquidated as promptly as is consistent with obtaining the fair market
value thereof, and the proceeds therefrom, to the extent sufficient therefor,
will be applied and distributed in accordance with the provisions of Section
10.4. Notwithstanding the foregoing, the General Partner, with the consent of
the Limited Partners, may determine not to sell all or any portion of the assets
of the Partnership, in which event there shall be distributed to each of the
Partners its interest in the remaining assets of the Partnership.
Section 10.4 Sale or Liquidation
In the case of a sale or other disposition of all or substantially all
of the assets of the Partnership or termination and liquidation of the
Partnership, the net proceeds of such sale or liquidation, shall be applied and
distributed, after crediting or charging the Partners' capital accounts pursuant
to Article VIII and as cash is received by the Partnership, in the following
order of priority on or before the end of the taxable year in which the
Partnership liquidates (or, if later, within 90 days after the date of such
liquidation):
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(a) To the payment of the debts and liabilities of the
Partnership (other than debts of the Partnership to the Partners) and
the expenses of sale and liquidation.
(b) To the setting up of any reserves which the General
Partner determines are reasonably necessary for any contingent or
unforeseen liabilities or obligations of the Partnership or of the
Partners arising out of, or in connection with, the Partnership. Such
reserves may be held by the General Partner for the purpose of
disbursing such reserves in payment of any of the aforementioned
contingencies, and at the expiration of such period as the General
Partner may deem advisable, to distribute the balance thereafter
remaining as provided herein.
(c) To the Partners in repayment of debts of the Partnership
to the Partners.
(d) To the Partners in proportion to and to the extent of the
remaining amounts of their respective positive capital accounts, as
such accounts have heretofore been adjusted pursuant to this Agreement.
(e) The remaining assets, if any, shall be distributed to the
Partners in accordance with their Percentage Interests.
Should assets other than cash be distributed, the amount by which the
fair market value of the assets, if any, to be distributed exceeds or is less
than the basis of such assets shall, to the extent not otherwise recognized by
the Partnership, be taken into account in computing gain or loss of the
Partnership for purposes of crediting or charging the capital accounts of, and
distributing proceeds to, the Partners.
Section 10.5 Removal and Replacement of the General Partner
The General Partner may be removed by either Limited Partner without
further action for "cause," which means (i) any petition shall be filed by the
General Partner, or any petition shall be filed against the General Partner and
not vacated within 30 days, under any section or chapter of the present or
future federal Bankruptcy Code or under any similar state or federal law, (ii)
upon final judicial determination that the General Partner (1) was grossly
negligent in its failure to perform its obligations under this Agreement, or (2)
committed a fraud upon the Partners or upon the Partnership, or (3) committed a
felony in connection with the management of the Partnership or its business, or
(4) was in material breach of its obligations under this Agreement, or (iii)
transfer of the General Partner's interest in the Partnership or withdrawal from
the Partnership without approval of the Limited Partners. In the event of
removal or resignation of the General Partner, it shall be deemed to have
surrendered to the Partnership its entire general partner interest in the
Partnership and shall be entitled to no compensation therefor.
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ARTICLE XI
ACCOUNTS AND RECORDS: ACCOUNTANTS
Section 11.1 Accounting Methods: Fiscal Year
The books of account of the Partnership shall be kept on the accrual
method of accounting. The fiscal year of the Partnership shall end on December
31 of each year except upon termination.
Section 11.2 Records and Books of Account
(a) The General Partner shall maintain, or cause to be
maintained complete and accurate records and books of account of all
transactions of the Partnership wherein shall be entered all
transactions, matters and things relating to the Partnership's business
as are usually entered into books of account kept by persons engaged in
a business of a like character, all on the method of accounting
determined in accordance with Section 11.1, consistently applied.
(b) All of such records and books of account together with all
other documents and files of the Partnership, including but not limited
to copies of all documents prepared by the General Partner and all
correspondence, shall, at all times, be kept at the main office of the
Partnership or such other place as may be designated by the General
Partner and to which the Partners shall have reasonable access as
hereinafter provided, and all such records, books of account, documents
and files shall be the exclusive property of the Partnership. In the
event of the termination of the Partnership interest of the General
Partner, all such records, books of account, documents and files shall
remain in the exclusive possession of the Partnership. At any time and
from time to time while the Partnership continues and until its
complete liquidation (but only during reasonable business hours), each
Partner may, at its own expense and upon reasonable prior written
notice to the General Partner, fully examine, inspect, make copies and
audit the Partnership's books, records, accounts and assets, including
but not limited to bank balances and physical inspection of the
Properties or an audit to be made by any competent accountant or other
professional employed by it at its expense.
Section 11.3 Annual Examination and Tax Returns
(a) The books of the Partnership shall be brought up to date
annually each year by the General Partner or the Accountants. The
General Partner or the Accountants shall determine and prepare for such
fiscal year, using the method of accounting determined in accordance
with Section 11.1, consistently applied, such financial statements as
are required by the Loan Documents.
(b) The General Partner or the Accountants shall also prepare
all tax returns which the Partnership is required to file and the same
shall be filed by the General Partner within the time prescribed by law
for the filing of each such return.
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(c) At the election of the General Partner, the Accountants
shall perform an audit in accordance with generally accepted auditing
standards. The financial statements and audit report shall be delivered
to each Partner in the Partnership.
Section 11.4 Bank Accounts
The cash Capital Contributions of the Partners and other funds of the
Partnership shall be deposited in a bank account or accounts which shall be
separately owned by the Partnership and maintained by the General Partner.
Withdrawals shall be made only in the regular course of Partnership business on
the signature of the General Partner or its designee. All funds not needed in
the operation of the business may be deposited, to the extent permitted by
applicable law, in interest bearing accounts or invested in short-term U.S.
Government obligations, U.S. Government guaranteed obligations, bank
certificates of deposit or other liquid high-grade investments, maturing, in any
event, within one year.
Section 11.5 Reports to Limited Partners
As soon as reasonably practicable but no later than thirty (30) days
after the end of each month, the General Partner shall cause to be prepared and
furnished to the Limited Partners income statements and balance sheets for such
month. As soon as reasonably practicable but no later than seventy-five (75)
days after the end of each fiscal year, the General Partner shall cause to be
prepared and furnished to the Limited Partners the following: (i) all necessary
tax reporting information required by the Limited Partners for preparation of
their respective income tax return and (ii) all information necessary for such
Limited Partners to comply with all reporting requirements imposed by the
securities laws of the United States or any state thereof. Upon the reasonable
request of the Limited Partners for further information with respect to any
matter with respect to the Partnership, the General Partner shall furnish such
information within ten (10) days after such request.
ARTICLE XIII
GENERAL PROVISIONS
Section 12.1 Recipient of Distributions and Payments
All distributions and payments of cash or property to be made pursuant
to the provisions of this Agreement shall be made directly to the parties who
are entitled thereto at their respective addresses indicated on Exhibit B or
elsewhere in this Agreement or at such other address as shall have been set
forth in a notice sent pursuant to the provisions of Section 12.2.
Section 12.2 Communications
Except as otherwise expressly provided in this Agreement, any offer,
acceptance, election, approval, consent, objection, certification, request
waiver, notice or other document required or permitted to be made or given
pursuant to any provisions of this Agreement shall be deemed duly made or given,
as the case may be, if in writing, signed by or on behalf of the person making
or
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giving the same, and shall be deemed completed when either personally delivered
(with receipt acknowledged by the recipient) or three days after deposited
through the U.S. mail, registered or certified, first class, postage prepaid,
addressed to the person or persons to whom such offer, acceptance, election,
approval, consent, certification, request, waiver or notice is to be made or
given at their respective addresses indicated on Exhibit B and, in the case of
the Partnership, at the office of the Partnership specified in Section 2.2 of
this Agreement, or, in any case, at such other address as shall have been set
forth in a notice sent pursuant to the provisions of this Section 12.2.
Section 12.3 Entire Agreement; Applicable Law; Effect
This Agreement contains the entire agreement by and among the parties
and supersedes any prior understandings and agreements among them respecting the
subject hereof. THIS AGREEMENT SHALL BE CONSTRUED, ENFORCED AND GOVERNED IN
CONFORMITY WITH THE LAWS OF THE STATE OF TEXAS, without giving effect to
principles of conflicts of law, and whether in state or federal courts. This
Agreement shall be binding upon the parties hereto, their successors, heirs,
devisees, permitted assigns, legal representatives, executors and administrators
but shall not be deemed for the benefit of creditors or any other Persons.
Section 12.4 Modification; Waiver or Termination
Except as otherwise expressly provided in this Agreement, no
modification, waiver, or termination of this Agreement, or any part hereof,
shall be effective unless made in writing signed by the party or parties to be
bound thereby, and no failure to pursue or elect any remedy shall constitute a
waiver of any default under or breach of any provision of this Agreement, nor
shall any waiver of any default under or breach of any provision of this
Agreement be deemed to be a waiver of any other subsequent or similar or
different default under or breach of such or any other provision or of any
election or remedies available in connection therewith. Receipt by any party of
any money or other consideration due under this Agreement, with or without
knowledge of any breach or default, shall not constitute a waiver of such breach
or default of any provision of this Agreement.
Section 12.5 Counterparts
This Agreement may be executed in one or more counterparts and,
notwithstanding that all of the parties did not execute the same counterpart,
each of such counterparts shall, for all purposes, be deemed to be an original,
and all of such counterparts shall constitute one and the same instrument
binding on all of the parties hereto.
Section 12.6 Separability
Each provision of this Agreement shall be considered separable and (a)
if for any reason any provision or provisions herein are determined to be
invalid and contrary to any existing or future law, such invalidity shall not
impair the operation of or affect those portions of this Agreement which are
valid, and (b) if for any reason any provision or provisions of this Agreement
would subject the Limited Partners to any personal liability for the obligations
of the Partnership under the laws of the
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State of Texas or any other laws, as the same may now or hereafter exist, such
provision or provisions shall be deemed void and of no effect.
Section 12.7 Article and Section Headings
Article and Section titles or captions contained in this Agreement are
inserted only as a matter of convenience and for reference, and shall not be
construed in any way to define, limit, extend or describe the scope of any of
the provisions hereof.
Section 12.8 Word Meanings
The words such as "herein," "hereinafter," "hereof," and "hereunder"
refer to this Agreement as a whole and not merely to a subdivision in which such
words appear unless the context otherwise requires. The singular shall include
the plural and the masculine gender shall include the feminine and neuter, and
vice versa, unless the context otherwise requires.
Section 12.9 Exhibits
All exhibits annexed hereto and any documents or instruments delivered
simultaneously herewith are expressly made a part of this Agreement, as fully as
though completely set forth herein, and all references to this Agreement herein
or in any of such writings or elsewhere shall be deemed to refer to and include
all such writings.
Section 12.10 Further Actions
Each of the Partners shall hereafter execute and deliver such further
instruments and do such further acts and things as may be required or useful to
carry out the intent and purpose of this Agreement and as are not inconsistent
with the revisions hereof.
Section 12.11 Prohibition Re Partition
Each of the parties hereto does hereby permanently waive and relinquish
any and all rights it may have to cause the assets of the Partnership to be
partitioned, it being the intention of the parties to prohibit any parties
hereto from bringing a suit for partition against the other parties hereto.
Section 12.12 Agreements with Capital Affiliates and the Loan
The Partnership hereby ratifies and agrees to be bound by any
agreements that the Partnership has entered into with Affiliates of Capital
Senior Living, including, the Management Agreement, the Development Agreement
and that certain Development and Turnkey Services Agreement by and between the
Partnership and Capital Senior Development, Inc.
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Section 12.13 Noncompete of General Partner
The General Partner agrees that as long as the General Partner is the
general partner of the Partnership and for one (1) year after the General
Partner is no longer the general partner of the Partnership neither the General
Partner nor its Affiliates will acquire, own, develop, complete the development
of, or manage any senior living facility providing the same level of services as
any senior living facility owned or leased by the Partnership within a seven and
one-half mile radius of a senior living facility owned or leased by the
Partnership.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
GENERAL PARTNER:
Triad Partners IV, Inc.,
a Texas corporation
By: /s/ BLAKE N. FAIL
------------------------------------------
Name: Blake N. Fail
----------------------------------------
Title: President
---------------------------------------
LIMITED PARTNERS:
Triad Partners IV, Inc.,
a Texas corporation
By: /s/ BLAKE N. FAIL
------------------------------------------
Name: Blake N. Fail
----------------------------------------
Title: President
---------------------------------------
Capital Senior Living Properties, Inc.,
a Texas corporation
By: /s/ DAVID R. BRICKMAN
------------------------------------------
Name: David R. Brickman
----------------------------------------
Title: Vice President
---------------------------------------
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EXHIBIT "A"
Property Description
<PAGE> 20
EXHIBIT "B"
<TABLE>
<CAPTION>
Capital Contribution Interest
-------------------- --------
<S> <C> <C>
General Partner
Triad Partners IV, Inc. $ 1.00 1%
4312 Mockingbird Lane
Dallas, Texas 75205
Limited Partners
Triad Partners IV, Inc. $600,000 80%
4312 Mockingbird Lane
Dallas, Texas 75205
Capital Senior Living Properties, Inc. $142,500 19%
14160 Dallas Parkway
Suite 300
Dallas, Texas 75240
</TABLE>
<PAGE> 21
EXHIBIT "C"
Allocation Provisions
<PAGE> 22
EXHIBIT C
TO
AGREEMENT OF LIMITED PARTNERSHIP
OF
TRIAD SENIOR LIVING IV, L.P.
ARTICLE I
DEFINITIONS
Section 1.1 Definitions. All capitalized terms used herein shall have
the meanings assigned to them in the Agreement of Limited Partnership of Triad
Senior Living IV, L.P. Notwithstanding the foregoing, the following definitions
shall be applicable to the following terms as used in this Exhibit C of the
Agreement:
(a) "Adjusted Net Income or Loss" of the Partnership derived for any
Fiscal Year (or portion thereof) shall mean the excess or deficit, as the case
may be, of (i) the Gross Income of the Partnership for such period (not
including the amount of Gross Income (if any) allocated during such Fiscal Year
pursuant to Sections 3.1(a), 3.1(b), 3.1(c), 3.1(d), and 3.1(p) hereof for such
period), over (ii) the Deductible Expenses of the Partnership for such period
(not including the amount of Deductible Expenses (if any) allocated pursuant to
Sections 3.1(e), 3.1(f) and 3.1(p)) hereof for such period) with the following
modifications:
(i) Any Partnership income that is exempt from federal income
tax, and that is not otherwise taken into account in computing Adjusted
Net Income or Loss of the Partnership pursuant to this Section 1.1(a),
shall be treated as additional Gross Income and added to the amount
otherwise calculated as Adjusted Net Income or Loss under this Section
1.1(a).
(ii) Any expenditures of the Partnership that are described in
section 705(a)(2)(B) of the Code (relating to expenditures of the
Partnership that are not deductible for federal income tax purposes in
computing taxable income and not properly chargeable to capital), or
treated as so described pursuant to section 1.704-1(b)(2)(iv)(i) of the
Regulations, and that are not otherwise taken into account in computing
Adjusted Net Income or Loss of the Partnership pursuant to this Section
1.1(a), shall be treated as additional Deductible Expenses and
subtracted from the amount otherwise calculated as Adjusted Net Income
or Loss under this Section 1.1(a).
(b) "Adjusted Property" shall mean any Partnership asset that has a
Book Basis different from its adjusted tax basis. Any asset that is contributed
to the Partnership by a Partner shall be an "Adjusted Property" if its Agreed
Value is not equal to the Partnership's initial tax basis in such asset. In
addition, once the Book Basis of a Partnership asset is adjusted pursuant to
Section 2.4 hereof, such asset shall thereafter be an "Adjusted Property."
(c) "Agreed Value" of any asset contributed by a Partner to the
Partnership shall mean the fair market value thereof (determined without regard
to section 7701(g) of the Code) as of the date of such contribution and as
reasonably determined by the General Partner.
(d) "Book Basis" of any asset of the Partnership shall be determined in
accordance with the rules of Section 2.4.
(e) "Book Depreciation" in respect of any Partnership asset for any
Fiscal Year shall mean the product of (i) the depreciation, cost recovery or
other amortization deduction allowable to the Partnership
<PAGE> 23
for federal income tax purposes in respect of such asset for such Fiscal year,
multiplied by (ii) a fraction, the numerator of which is the Book Basis of such
asset as of the beginning of such Fiscal Year (or the date of acquisition if the
asset is acquired during such Fiscal Year) and the denominator of which is the
adjusted tax basis of such asset as of the beginning of such Fiscal Year (or the
date of acquisition if the asset is acquired during such Fiscal Year). If the
denominator of the fraction described in clause (ii) above is zero, "Book
Depreciation" in respect of such asset shall be determined under any reasonable
method selected by the General Partner.
(f) "Book Gain or Loss" realized by the Partnership in respect of any
asset of the Partnership in connection with the disposition of such asset shall
mean the excess (or deficit) of (i) the amount realized by the Partnership in
connection with such disposition (as determined under section 1001 of the Code)
over (ii) the then Book Basis of such asset. If the Book Basis is adjusted
pursuant to Section 2.4, any increase or decrease in Book Basis of the assets as
a result of the adjustment shall be treated as Book Gain or Book Loss, as the
case may be, and shall be allocated among the Partners pursuant to Section 3.1
of this Exhibit "C."
(g) "Capital Account" shall have the meaning assigned such term in
Section 2.1 hereof.
(h) "Deductible Expenses" of the Partnership for any Fiscal Year (or
portion thereof) shall mean all items, as calculated for book purposes, which
are allowable as deductions to the Partnership during such period under federal
income tax accounting principles (including Book Depreciation).
(i) "Fiscal Year" shall mean the fiscal year of the Partnership adopted
under Section 8.1 of the Agreement.
(j) "Gross Income" of the Partnership for any Fiscal Year (or portion
thereof) shall mean the gross income of the Partnership derived from all sources
(other than from capital contributions and loans to the Partnership and other
than Book Gain or Loss from a Terminating Capital Transaction) during such
period, as calculated for book purposes in accordance with federal income tax
accounting principles.
(k) "IRS" shall mean the United States Internal Revenue Service.
(l) "Liquidation" of a Partner's interest in the Partnership shall mean
and shall be deemed to occur upon the earlier of (i) the date upon which the
Partnership is terminated under section 708(b)(1) of the Code; (ii) the date
upon which the Partnership ceases to be a going concern (even though it may
continue in existence for the limited purpose of winding up its affairs, paying
its debts and distributing any remaining Partnership assets to the Partners); or
(iii) the date upon which there is a liquidation of the Partner's interest in
the Partnership (but the Partnership is not terminated) under section 1.761-1(d)
of the Regulations.
(m) "Modified 752 Share of Recourse Debt" of any Partner shall mean, as
of any date, the amount (if any) of economic risk that such Partner is treated,
as of such date, as bearing with respect to Recourse Debt under section 1.752-2
of the Regulations (assuming the Partnership constructively liquidates on such
date within the meaning of section 1.752-2(b) of the Regulations except that,
for purposes of such section 1.752-2(b), all of the assets of the Partnership
shall be deemed thereunder to be transferred in fully taxable exchanges for an
aggregate amount of cash consideration equal to their respective Book Bases and
such consideration shall be deemed thereunder to be used, in the appropriate
order of priority, in full or partial satisfaction of the liabilities of the
Partnership).
(n) "Nonrecourse Deductions" of the Partnership shall have the meaning
ascribed to such term in section 1.704-2(b)(1) of the Regulations.
<PAGE> 24
(o) "Nonrecourse Liability" of the Partnership shall have the meaning
ascribed to such term in section 1.704-2(b)(3) of the Regulations.
(p) "Nonrecourse Minimum Gain" of the Partnership shall mean the amount
of "minimum gain" of the Partnership that is attributable to Nonrecourse
Liabilities (as determined under section 1.704- 2(b)(2) of the Regulations). A
Partner's share of such "Nonrecourse Minimum Gain" shall be calculated in
accordance with the provisions of section 1.704-2(g) of the Regulations.
(q) "Operations" shall mean all revenue producing activities of the
Partnership other than activities relating to a Capital Transaction that occur
in connection with the dissolution of the Partnership.
(r) "Partner Minimum Gain" of the Partnership shall mean the amount of
"minimum gain" of the Partnership that is attributable to Partner Nonrecourse
Debt (as determined under section 1.704-2(i)(2) of the Regulations). A Partner's
share of such "Partner Minimum Gain" shall be calculated in accordance with the
provisions of section 1.704-2(i)(5) of the Regulations.
(s) "Partner Nonrecourse Debt" of the Partnership shall have the
meaning ascribed to such term in section 1.704-2(b)(4) of the Regulations.
(t) "Partner Nonrecourse Deductions" of the Partnership shall have the
meaning ascribed to such term in section 1.704-2(i)(2) of the Regulations.
(u) "Recourse Debt" of the Partnership shall mean any liability (or
portion thereof) of the Partnership that is neither a Nonrecourse Liability nor
a Partner Nonrecourse Debt.
(v) "Regulations" shall mean the regulations promulgated by the United
States Department of the Treasury pursuant to and in respect of provisions of
the Code. All references herein to sections of the Regulations shall include any
corresponding provision or provisions of succeeding, similar, substitute
proposed or final Regulations.
(w) "Related Person" shall mean, as to any Partner, any person who is
related to such Partner (within the meaning of section 1.752-4(b) of the
Regulations).
(x) "Revaluation Event" shall mean any of the following occurrences:
(a) the contribution of money or other property (other than a de minimis amount)
by a new or existing Partner to the Partnership as consideration for the
issuance of an additional interest in the Partnership and/or increase in
Interests; (b) the distribution of money or other property (other than a de
minimis amount) by the Partnership to a retiring or continuing Partner as
consideration for an interest in the Partnership and/or decrease in Interests;
or (c) the liquidation of the Partnership within the meaning of section
1.704-1(b)(2)(ii)(g) of the Regulations.
(y) "Section 704 Capital Account" shall have the meaning assigned to
such term in Section 2.3 hereof.
(z) "Tax Depreciation" for any Fiscal Year shall mean the amount of
depreciation, cost recovery or other amortization deductions allowable to the
Partnership for federal income tax purposes for such Fiscal Year.
(aa) "Tax Item" with respect to any asset shall mean any item of
income, gain, loss or deduction (including depreciation, cost recovery or
amortization) in respect of such asset, as computed for federal income tax
purposes.
<PAGE> 25
(bb) "Tax Matters Partner" shall have the meaning ascribed to such term
in Section 4.4(a) hereof.
(cc) "Taxable Gain or Loss" shall mean gain or loss recognized by the
Partnership on the sale, exchange or other disposition of any asset of the
Partnership as computed for federal income tax purposes.
ARTICLE II
CAPITAL ACCOUNTS
AND
SECTION 704 CAPITAL ACCOUNTS
Section 2.1 Capital Accounts. A separate "Capital Account" (herein so
called) shall be maintained for each Partner in accordance with the capital
accounting rules of section 1.704-1(b)(2)(iv) of the Regulations. Each Partner
shall have only one Capital Account, regardless of the number or classes of
interests in the Partnership owned by such Partner and regardless of the time or
manner in which such interests were acquired by such Partner. Pursuant to the
basic rules of section 1.704-1(b)(2)(iv) of the Regulations, the balance of each
Partner's Capital Account:
(a) shall be increased by the amount of money contributed by such
Partner (or such Partner's predecessor in interest) to the Partnership
(including but not limited to such Partner's Capital Contributions described in
Article V of the Agreement) and decreased by the amount of money distributed to
such Partner (or such Partner's predecessor in interest);
(b) shall be increased by the fair market value (determined without
regard to section 7701(g) of the Code) of each property contributed by such
Partner (or such Partner's predecessor in interest) to the Partnership (net of
liabilities secured by such property that the Partnership is considered to
assume or take subject to under section 752 of the Code), and decreased by the
fair market value (determined without regard to section 7701(g) of the Code) of
each property distributed to such Partner (or such Partner's predecessor in
interest) by the Partnership (net of liabilities secured by such property that
such Partner is considered to assume or take subject to under section 752 of the
Code);
(c) shall be increased by the amount of Adjusted Net Income or item of
income or gain or Book Gain allocated to such Partner (or such Partner's
predecessor in interest) pursuant to Section 3.1 hereof;
(d) shall be decreased by the amount of Adjusted Net Loss or item of
loss or deduction or Book Loss allocated to such Partner (or such Partner's
predecessor in interest) pursuant to Section 3.1 hereof; and
(e) shall be otherwise adjusted in accordance with the other capital
account maintenance rules of section 1.704-1(b)(2)(iv) of the Regulations.
The foregoing provisions of this Section 2.1 and the other provisions of this
Exhibit C relating to the maintenance of Capital Accounts are intended to comply
with section 1.704-1(b) of the Regulations, and shall be interpreted and applied
in a manner consistent with such Regulations. The Partners shall also make any
appropriate modification if unanticipated events might otherwise cause this
Exhibit C and the Agreement not to comply with such Regulations. If any Interest
is transferred pursuant to the terms of the Agreement, the transferee shall
succeed to the Capital Account of the transferor to the extent the Capital
Account is attributable to the transferred Interest.
<PAGE> 26
Section 2.2 Additional Provisions Regarding Capital Accounts.
(a) If a Partner pays any indebtedness of the Partnership, such payment
shall be treated as a contribution by that Partner to the capital of the
Partnership and the Capital Account of such Partner shall be increased by the
amount so paid by such Partner.
(b) Except as specifically provided in the Agreement, no Partner may
contribute capital to, or withdraw capital from, the Partnership.
(c) A loan by a Partner to the Partnership shall not be considered a
contribution of money to the capital of the Partnership, and the balance of such
Partner's Capital Account shall not be increased by the amount so loaned. No
repayment of principal or interest on any such loan, or reimbursement made a
Partner with respect to advances or other payments made by a such Partner on
behalf of the Partnership or payments of fees to a Partner or Related Person to
such Partner which are made by the Partnership shall be considered a return of
capital or in any manner affect the balance of such Partner's Capital Account.
(d) No Partner with a deficit balance in its Capital Account shall have
any obligation to the Partnership, any other Partner, or any third party to
restore said deficit balance; provided, however, that upon the liquidation of TP
IV's interest in the Partnership, if TP IV has a deficit balance in his Capital
Account following such liquidation, as determined after taking into account all
adjustments to the Capital Accounts for the taxable year during which such
liquidation occurs, TP IV shall be required to immediately contribute cash to
the Partnership in an amount equal to the lesser of (i) such deficit capital
account balance or (ii) the amount of actual cash distributions to TP IV during
the term of the Partnership (determined without taking into account any amounts
paid to any party pursuant to Section 7.6 of the Agreement).
(e) No interest will be paid on any capital contributed to the
Partnership or the balance in any Partner's Capital Account.
Section 2.3 Section 704 Capital Accounts. A "Section 704 Capital
Account" (herein so called) shall be determined and maintained for each Partner
throughout the term of the Agreement. The balance of a Partner's Section 704
Capital Account shall be equal to such Partner's Capital Account balance (as
determined after giving effect to all adjustment attributable to allocations of
Partnership income, gain, loss, deduction and credits and contributions and
distributions of money and property effected prior to such determination),
modified as follows:
(a) decreased by the amount (if any) of cash that reasonably is
expected to be distributed to such Partner, but only to the extent that the
amount thereof exceeds any offsetting increase in such Partner's Section 704
Capital Account that reasonably is expected to occur during (or prior to) the
Fiscal Year during which such distribution reasonably is expected to be made (as
determined under section 1.704- 1(b)(ii)(d) of the Regulations);
(b) decreased by the amount (if any) of loss and deduction that
reasonably is expected to be allocated to such Partner pursuant to section
704(e)(2) or 706(d) of the Code or section 1.704-1(b)(2)(ii) of the Regulations
(as determined under section 1.704-1(b)(2)(ii)(d) of the Regulations);
(c) increased by the amount (if any) of such Partner's share of the
Nonrecourse Minimum Gain of the Partnership; and
(d) increased by the amount (if any) of such Partner's share of the
Partner Minimum Gain of the Partnership.
<PAGE> 27
Section 2.4 Adjustment of Book Basis. Book Basis with respect to any
asset of the Partnership is the asset's adjusted tax basis for federal income
tax purposes, except as follows:
(a) The initial Book Basis of any asset contributed to the Partnership
by a Partner shall be the fair market value of the asset as of the date of
contribution as agreed upon by the contributing Partner and the Partnership.
(b) The Book Basis of each asset shall be its respective fair market
value as reasonably determined by the General Partner, as of a Revaluation
Event.
(c) The Book Basis of each asset distributed to any Partner will be the
fair market value of the asset as reasonably determined by the General Partner
as of the date of determination.
(d) The Book Basis of each asset will be increased or decreased to
reflect any adjustment to the adjusted tax basis of the asset under section
734(b) or 743(b) of the Code, but only to the extent that the adjustment is
taken into account in determining Capital Account balances under section
1.704-1(b)(2)(iv)(m) of the Regulations, provided that the Book Basis will not
be adjusted hereunder to the extent that an adjustment under Section 2.4(b) is
necessary or appropriate in connection with a transaction that would otherwise
result in an adjustment under this Section 2.4(d).
Book Basis will be adjusted by Book Depreciation, and Book Gain or Book Loss on
a disposition of any asset shall be determined by reference to such asset's Book
Basis as adjusted herein.
ARTICLE III
ALLOCATIONS OF PROFIT AND LOSS
Section 3.1 Allocation of Items of Profit and Loss. Subject to the
provisions of ARTICLE IV hereof, the Partnership's Gross Income, items of loss
or deduction and Adjusted Net Income or Loss and Book Gain or Loss for each
Fiscal Year shall be allocated to the Partners as follows and in the following
order of priority (after giving effect to all Capital Account adjustments
attributable to contributions and distributions of money and property, but prior
to distributions of money and property made pursuant to Section 10.4 of the
Agreement):
(a) Pursuant to section 1.704-2(f) of the Regulations (relating to
minimum gain chargebacks), if there is a net decrease in Nonrecourse Minimum
Gain of the Partnership for such Fiscal Year (or if there was a net decrease in
Nonrecourse Minimum Gain for a prior Fiscal Year and the Partnership did not
have sufficient amounts of income during prior Fiscal Years to allocate to the
Partners under this Section 3.1(a)), then Gross Income shall be allocated,
before any other allocation is made pursuant to the succeeding provisions of
this Section 3.1 for such Fiscal Year, to each Partner in an amount equal to
such Partner's share of the net decrease in such minimum gain (as determined
under section 1.704-2(g) of the Regulations).
(b) Pursuant to section 1.704-2(i)(4) of the Regulations (relating to
minimum gain chargebacks) if there is a net decrease in Partner Minimum Gain of
the Partnership for such Fiscal Year (or if there was a net decrease in Partner
Minimum Gain for a prior Fiscal Year and the Partnership did not have sufficient
amounts of income during prior Fiscal Years to allocate to the Partners under
this Section 3.1(b)), then Gross Income shall be allocated, before any other
allocation is made pursuant to the succeeding provisions of this Section 3.1 for
such Fiscal Year, to each Partner with a share of such minimum gain as of the
first
<PAGE> 28
day of such Fiscal Year in an amount equal to such Partner's share of the net
decrease in such Partner Minimum Gain (as determined under section 1.704-2(i)(5)
of the Regulations).
(c) A Partner who unexpectedly receives any adjustment, allocation or
distribution described in section 1.704-1(b)(2)(ii)(d)(4), (5) or (6) of the
Regulations will be specially allocated items of income or gain (after the
allocations required by Section 3.1(a) and Section 3.1(b) hereof but before any
other allocations required by this Section 3.1) in an amount and in the manner
sufficient to eliminate any deficit balance in his Section 704 Capital Account
(for this purpose, a Partner's Section 704 Capital Account shall be increased by
the amount (if any) that such Partner is treated as being obligated to
contribute subsequently to the capital of the Partnership (as determined under
section 1.704-1(b)(2)(ii)(c) of the Regulations) and, without duplication of any
amount previously described in this sentence, shall be increased by the amount
(if any) of such Partner's Modified 752 Share of Recourse Debt) as quickly as
possible; provided, however, that an allocation shall be made pursuant to this
Section 3.1(c) only if and to the extent that such Partner would have a deficit
balance in his Section 704 Capital Account after all allocations in this Section
3.1 have been tentatively made as if this Section 3.1(c) were not in this
Exhibit. This Section 3.1(c) is intended to satisfy the provisions of Section
1.704-1(b)(2)(ii)(d) of the Regulations and shall be interpreted consistently
therewith.
(d) Except as required by Section 3.1(a), Section 3.1(b) and Section
3.1(c), each Partner who has a deficit balance in its Capital Account (for this
purpose, a Partner's Capital Account shall be increased by (A) the amount (if
any) that a Partner is obligated to contribute subsequently to the capital of
the Partnership under the Agreement or this Exhibit (including Section 2.2(d) of
this Exhibit) or is treated as being obligated to contribute subsequently to the
capital of the Partnership (as determined under section 1.704-1(b)(2)(ii)(c) of
the Regulations); (B) the amount (if any) of such Partner's share of the
Nonrecourse Minimum Gain of the Partnership; and (C) the amount (if any) of such
Partner's share of the Partner Minimum Gain of the Partnership) at the end of
the taxable year will be specially allocated items of income or gain in the
amount of the deficit as quickly as possible; provided, however, that an
allocation shall be made pursuant to this Section 3.1(d) only if and to the
extent that such Partner would have a deficit balance in its Capital Account
after all allocations in this Section 3.1 have been tentatively made as if this
Section 3.1(d) were not in this Exhibit and Section 3.1(d) shall be applied
before Section 3.1(c).
(e) All Partner Nonrecourse Deductions attributable to a Partner
Nonrecourse Debt shall be allocated to the Partner that is treated (under
section 1.704-2(b)(4) of the Regulations) as bearing the economic risk of loss
for such debt.
(f) All Nonrecourse Deductions of the Partnership shall be allocated to
the Partners, pro rata in accordance with their respective Percentage Interests.
(g) Any Adjusted Net Income realized by the Partnership for such year
shall be allocated among the Partners as follows and in the following order of
priority:
(i) First: Adjusted Net Income shall be allocated to the
General Partner until the aggregate Adjusted Net Income allocated under
this Section 3.1(g)(i) for the current and prior years equals the
aggregate amount of Adjusted Net Loss allocated to the General Partner
under Section 3.1(h)(ii) for the current and prior years; and then
(ii) Second: Adjusted Net Income shall be allocated to the
Partners in the same proportion that cumulative Adjusted Net Loss has
been allocated to the Partners under Section 3.1(h)(i) for the current
year and prior years until each Partner has been allocated cumulative
Adjusted Net Income under this Section 3.1(g)(ii) for the current and
prior years equal to the
<PAGE> 29
cumulative Adjusted Net Loss allocated to the Partner under Section
3.1(h)(i) for the current and prior years; and then
(iii) Third: All remaining Adjusted Net Income shall be
allocated among the Partners in proportion to their respective
Percentage Interests.
(h) Any Adjusted Net Loss realized by the Partnership for such year
shall be allocated among the Partners as follows and in the following order of
priority:
(i) First: Adjusted Net Loss shall be to the Partners in
proportion to their respective Percentage Interests until each
Partner's positive Section 704 Capital Account balance is reduced to
zero.
(ii) Second: All remaining Adjusted Net Loss shall be
allocated to the General Partner.
(i) Notwithstanding any other provision of the Agreement or this
Exhibit, from the date that construction commences with respect to a Property
(the "Subject Property") to the date 18 months following the date that the
Partnership receives a Certificate of Occupancy for the Subject Property, all
Adjusted Net Loss from the Subject Property shall be allocated under this
Section 3.1(i) to TP IV. The provisions of this Section 3.1(i) shall be applied
to each Property of the Partnership on a property by property basis.
(j) [Intentionally deleted]
(k) Book Gain derived from a Terminating Capital Transaction shall be
allocated among the Partners as follows in the following order of priority
(after giving effect to all adjustments attributable to allocations made
pursuant to the preceding provisions of this Section 3.1 for such year):
(i) First: Book Gain shall be allocated among the Partners
having deficit Capital Account balances to the least extent necessary
to cause their deficit Capital Account balances to be in the same
proportion to one another as are their respective Percentage Interests.
(ii) Second: Book Gain shall be allocated among those Partners
having deficit Capital Account balances in accordance with their
respective Percentage Interests, to the least extent necessary to cause
their Capital Account balances to equal zero.
(iii) Third: Book Gain shall be allocated to the Partners to
the least extent necessary so as to cause their positive Capital
Account balances to be in the same proportion to one another as are
their respective Percentage Interests.
(iv) Fourth: Book Gain shall be allocated among the Partners
in proportion to their respective Percentage Interests.
(l) Book Loss derived from a Terminating Capital Transactions shall be
allocated among the Partners as follows in the following order of priority
(after giving effect to all adjustments attributable to allocations made
pursuant to the preceding provisions of this Section 3.1 for such year):
(i) First: Book Loss shall be allocated among the Partners to
the least extent necessary so as to cause the positive balances of
their respective Capital Accounts to be in the same proportion to one
another as their respective Percentage Interests and then to all
Partners in
<PAGE> 30
proportion to their respective Percentage Interests until each
Partner's positive Capital Account balance is reduced to zero.
(ii) Second: All remaining Book Loss shall be allocated to the
General Partner.
(m) For purposes of determining the nature (as ordinary or capital) of
any Partnership profit allocated among the Partners for Federal income tax
purposes pursuant to this Section 3.1, the portion of such profit required to be
recognized as ordinary income pursuant to sections 1245 and/or 1250 of the Code
shall be deemed to be allocated among the Partners in accordance with sections
1.1245-1(e)(2) and 1.1250-1(f) of the Regulations.
(n) The Partners agree that their Percentage Interests represent their
respective interest in Partnership profits for purposes of allocating excess
nonrecourse liabilities (as defined in section 1.752-3(a)(3) of the Regulations)
pursuant to section 1.752-3(a)(3) of the Regulations.
(o) Notwithstanding any other provision herein to the contrary, no
allocation of Adjusted Net Income, Adjusted Net Loss, Book Gain or Book Loss, or
items of income, gain, loss and deduction will be made to a Partner if the
allocation would not have "economic effect" under section 1.704-1(b)(2)(ii) of
the Regulations or otherwise would not be in accordance with the Partners'
interests in the Partnership within the meaning of section 1.704-1(b)(3) or
section 1.704-2(b)(1) of the Regulations. The General Partner will have the
authority to reallocate any item in accordance this Section 3.1(o); provided,
however, that (a) no such change shall have a material adverse effect upon the
amount of cash or other property distributable to any Partner, (b) each Partner
shall have 30 days prior notice of such proposed modification and (c) if such
proposed modification would be material, the Partnership shall have received an
opinion of tax counsel to the Partnership that such modification is necessary to
comply with section 704(b) of the Code.
(p) The allocations set forth in Sections 3.1(a)-(f) (the "Regulatory
Allocations") are intended to comply with certain requirements of the
Regulations. It is the intent of the Partners that, to the extent possible, all
Regulatory Allocations shall be offset either with other Regulatory Allocations
or with special allocations of other items of Partnership income, gain, loss, or
deduction pursuant to this Section 3.1(p). Therefore, notwithstanding any other
provision of this Article III (other than the Regulatory Allocations), the
General Partner shall make such offsetting special allocations of Partnership
income, gain, loss, or deduction in whatever manner it determine(s) appropriate
so that after such offsetting allocations are made, each Partner's Capital
Account balance is, to the extent possible, equal to the Capital Account balance
such Partner would have had if the Regulatory Allocations were not part of the
Agreement and all Partnership items were allocated pursuant to Sections
3.1(g)-(l) hereof.
Section 3.2 Allocation of Tax Items.
(a) Except as otherwise provided in the succeeding provisions of this
Section 3.2, each Tax Item shall be allocated to the Partners in the same manner
as each correlative item of income, gain, loss or deduction, as calculated for
book purposes, is allocated pursuant to the provisions of Section 3.1 hereof.
(b) The Partners hereby acknowledge that all Tax Items in respect of
Adjusted Property are required to be allocated to the Partners in the same
manner as under section 704(c) of the Code (as specified in sections
1.704-1(b)(2)(iv)(f), 1.704-1(b)(2)(iv)(g) and 1.704-3 of the Regulations), and
that the principles of section 704(c) of the Code require that such Tax Items
must be shared among the Partners so as to take account of the variation between
the adjusted tax basis and Book Basis of each such Adjusted Property. Thus,
notwithstanding anything in Sections 3.1 or 3.2(a) hereof to the contrary, the
Partners' distributive shares of Tax Items in respect of each Adjusted Property
shall be separately determined and
<PAGE> 31
allocated to the Partners following any permissible method under 1.704-3 of the
Regulations reasonably selected by the General Partner, and the Capital Account
balances of the Partners shall be adjusted solely for allocations of book items
in respect of such assets and shall not be adjusted for their distributive
shares of any corresponding Tax Items.
ARTICLE IV
SPECIAL RULES
Section 4.1 Allocation of Profit and Loss and Distributions in Respect
of Interests Transferred.
(a) If any interest in the Partnership is transferred, or is increased
or decreased by reason of the admission of a new Partner or otherwise, during
any Fiscal Year, each item of Adjusted Net Income or Loss, and other income and
deductions and Book Gain and Book Loss of the Partnership for such Fiscal Year
shall be divided and allocated between the Partners in question by taking
account of their varying interests in the Partnership during such Fiscal Year on
a daily, monthly, or other basis, as determined by the General Partner using any
permissible method under section 706 of the Code and the Regulations thereunder.
(b) Distributions of Partnership assets in respect of an interest in
the Partnership shall be made only to the persons or entities who, according to
the books and records of the Partnership, are the holders of record of the
interests in the Partnership in respect of which such distributions are made on
the actual date of distribution. Neither the Partnership nor any Partner shall
incur any liability for making distributions in accordance with the provisions
of the preceding sentence, whether or not the Partnership or any Partner has
knowledge or notice of any transfer or purported transfer of ownership of any
interest in the Partnership.
(c) Notwithstanding any provision above to the contrary, Book Gain or
Loss of the Partnership realized in connection with a sale or other disposition
of any substantial part of the assets of the Partnership shall be allocated
solely to the parties owning interests in the Partnership as of the date such
sale or other disposition occurs.
Section 4.2 Tax Returns. The General Partner shall cause to be prepared
for each taxable year of the Partnership the federal, state and local income tax
returns and information returns, if any, which the Partnership is required to
file. Such returns shall be prepared and submitted to the Partners for
examination no later than ten (10) days prior to the required filing date
(including any extension thereof), together with such additional forms and
information as may be required by the Partners in order for the Partners to file
returns reflecting the Partnership's operations.
Section 4.3 Tax Elections. The Partnership shall make the following
elections on the appropriate tax returns:
(a) to the extent permitted by the Code, to adopt the calendar year as
the Partnership's fiscal year;
(b) to the extent permitted by the Code, to adopt the cash method of
accounting and to keep the Partnership's books and records on the income-tax
method;
(c) if a distribution of Partnership property as described in section
734 of the Code occurs or if a transfer of Interest as described in section 743
of the Code occurs, on written request of any Partner, to elect, pursuant to
section 754 of the Code, to adjust the basis of Partnership properties;
<PAGE> 32
(d) to elect to amortize the organizational expenses of the Partnership
ratably over a period of sixty (60) months as permitted by section 709(b) of the
Code; and
(e) any other election the General Partner may deem appropriate and in
the best interests of the Partners.
Neither the Partnership nor any Partner may make an election for the Partnership
to be excluded from the application of the provisions of subchapter K of chapter
1 of subtitle A of the Code or any similar provisions of applicable state law.
The Partnership intends to be classified as a partnership for federal income tax
purposes under section 301.7701-3 of the Regulations. Neither the Partnership
nor any Partner may make an election under section 301.7701-3(c) of the
Regulations to treat the Partnership as an association taxable as a corporation.
Section 4.4 Tax Matters Partner.
(a) The General Partner is hereby designated the "Tax Matters Partner"
as that term is defined in section 6231(a)(7) of the Code.
(b) The Tax Matters Partner shall use its best efforts to comply with
the responsibilities outlined in sections 6222 through 6232 of the Code and in
doing so shall incur no liability to the other Partners. Notwithstanding the Tax
Matters Partner's obligation to use its best efforts in the fulfillment of its
responsibilities, the Tax Matters Partner shall not be required to incur any
expenses for the preparation for or pursuance of administrative or judicial
proceedings unless the Partners agree on a method for sharing such expenses.
(c) No Partner shall file, pursuant to section 6227 of the Code, a
request for an administrative adjustment of items for any Partnership taxable
year without first notifying the other Partners. If the other Partners agree
with the requested adjustment, then the Tax Matters Partner shall file the
request for administrative adjustment on behalf of the Partner. If unanimous
consent is not obtained within thirty (30) calendar days from such notice, or
within the period required to timely file the request for administrative
adjustment, if shorter, any Partner, including the Tax Matters Partner, may file
a request for administrative adjustment on its own behalf.
(d) Any Partner intending to file a petition under sections 6226, 6228,
or other section of the Code with respect to any item or other matter involving
the Partnership shall notify the other Partners of such intention and the nature
of the contemplated proceeding. In the case where the Tax Matters Partner is the
Partner intending to file such petition on behalf of the Partnership, such
notice shall be given within a reasonable period of time to allow the other
Partners to participate in the choosing of the forum in which such petition will
be filed. If the Partners do not agree on the appropriate forum, then the
appropriate forum shall be decided by vote of a majority in interest of the
Partners. If such a majority cannot agree, then the Tax Matters Partner shall
choose the forum. If any Partner intends to seek review of any court decision
rendered as a result of a proceeding instituted under the preceding provisions
of this Section 4.4(d), then such Partner shall notify the other Partners of
such intended action.
(e) The provisions of this Section 4.4 shall survive the termination of
the Partnership or the termination of any Partners's interest in the Partnership
and shall remain binding on the Partners for a period of time necessary to
resolve with the IRS or the United States Treasury Department the income
taxation of the Partnership.
Section 4.5 Inconsistent Treatment of Partnership Items. If any Partner
intends to file a notice of inconsistent treatment under section 6222(b) of the
Code, then such Partner shall give reasonable notice
<PAGE> 33
under the circumstances to the other Partners of such intent and the manner in
which the Partner's intended treatment of an item is (or may be) inconsistent
with the treatment of that item by the other Partners.
<PAGE> 1
EXHIBIT 21.1 - SUBSIDIARIES
<TABLE>
<CAPTION>
Jurisdiction of Percentage
Name Organization Ownership
---- ------------ ---------
<S> <C> <C>
Capital Senior Living Properties, Inc. Texas 100%
Capital Senior Development, Inc. Texas 100%
Capital Senior Living, Inc. Texas 100%
Capital Senior Management 1, Inc. Texas 100%
Capital Senior Management 2, Inc. Texas 100%
Quality Home Care, Inc. Indiana 100%
Capital Senior Living Properties 2, Inc. Texas 100%
Capital Senior Living Properties 2 - NHPCT, Inc. Delaware 100%
Capital Senior Living Properties 2 - Gramercy, Inc. Delaware 100%
HealthCare Properties, L.P. Delaware 56%
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 35,827,270
<SECURITIES> 13,337,522
<RECEIVABLES> 10,973,676
<ALLOWANCES> (801,042)
<INVENTORY> 0
<CURRENT-ASSETS> 47,271,591
<PP&E> 135,238,716
<DEPRECIATION> (16,294,763)
<TOTAL-ASSETS> 205,266,735
<CURRENT-LIABILITIES> 55,951,435
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 104,516,179
<TOTAL-LIABILITY-AND-EQUITY> 205,266,735
<SALES> 0
<TOTAL-REVENUES> 48,128,333
<CGS> 0
<TOTAL-COSTS> 26,394,919
<OTHER-EXPENSES> 379,187
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,921,897
<INCOME-PRETAX> 19,432,330
<INCOME-TAX> 7,475,771
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,956,559
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
