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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
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 10,333,450 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
28, 2000 was approximately $38,750,438. 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 28, 2000, 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 2000
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.................................................................................19
ITEM 3. LEGAL PROCEEDINGS..........................................................................19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........................................20
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS........................................................................20
ITEM 6. SELECTED FINANCIAL DATA....................................................................22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS..................................................................24
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ................................33
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................................................33
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE...................................................................33
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.........................................33
ITEM 11. EXECUTIVE COMPENSATION.....................................................................34
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.............................34
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K...........................35
SIGNATURES..........................................................................................36
INDEX TO EXHIBITS...................................................................................E-1
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PART I
ITEM 1. BUSINESS
OVERVIEW
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, 1999, the Company owned interests in and/or operated 36 communities in 18
states with a capacity of approximately 5,900 residents, including 21
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,
1999, the Company was developing 23 new communities, which will have a capacity
of approximately 3,200 residents, and was expanding three existing communities
to accommodate approximately 300 additional residents. As of December 31, 1999,
the Company also operated one home care agency. Approximately 93% of the total
revenues for the senior living communities owned and managed by the Company as
of December 31, 1999 are derived from private pay sources. During 1999, the
communities that the Company operated and in which it owned interests had an
average occupancy rate of approximately 94% and its managed communities had an
average occupancy rate of approximately 95%. The Company and its predecessors
have provided senior living services since 1990.
The Company was incorporated in Delaware in October 1996 in
anticipation of its initial public offering. Simultaneously with the
consummation of its initial public offering, the Company and the Company's
founders engaged in a series of transactions (the "Formation Transactions"),
which resulted in the Company acquiring certain assets, entities and partnership
interests of its founders and entities affiliated with its founders. The primary
components of the Formation Transactions were as follows:
- The stock of Capital Senior Living, Inc., Capital Senior
Management 1, Inc., Capital Senior Management 2, Inc., Capital
Senior Development, Inc., and Quality Home Care, Inc. was
contributed by the Company's founders in exchange for
7,687,347 shares of the Company's common stock and notes
aggregating approximately $18.1 million. The primary assets of
these entities consisted of third-party management contracts,
development contracts and a home health care agency. The notes
were repaid with some of the proceeds of the Company's initial
public offering.
- The Company purchased substantially all of the assets of
Capital Senior Living Communities, L.P. ("CSLC") for the
assumption of approximately $71 million in debt (the "LBHI
Loan") and $5.8 million in cash. The LBHI Loan was repaid with
some of the proceeds of the Company's initial public offering.
The primary assets of CSLC were:
- four senior living communities - Cottonwood Village
in Cottonwood, Arizona; Harrison at Eagle Valley in
Indianapolis, Indiana; Towne Centre in Merrillville,
Indiana; and Canton Regency in Canton, Ohio;
- approximately 56% of the limited partnership
interests in HealthCare Properties, L.P. ("HCP"); and
- approximately 31% of certain notes (the "NHP Notes")
issued by NHP Retirement Housing Partners I Limited
Partnership ("NHP").
The primary assets of HCP consisted of: (i) approximately $9.9 million
in cash and cash equivalents; (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 primary assets of NHP consisted of five senior living communities
located in Buffalo, New York, Sacramento, California (two communities), Detroit,
Michigan, and Boca Raton, Florida. The Company currently owns approximately 57%
of the limited partnership interests of HCP and 33% of the NHP Notes.
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On September 30, 1998, the Company acquired four of the five senior
living communities from NHP for cash consideration of $40.7 million. The
purchase price for the properties was determined by independent appraisal. The
senior living communities acquired by the Company are The Atrium of Carmichael
in Carmichael, California, Crosswoods Oaks in Citrus Height, California, The
Heatherwood in Southfield, Michigan, and The Veranda Club in Boca Raton,
Florida. The Company has operated these communities under a long-term management
contract since 1992 and continues to manage NHP's remaining community, the
Amberleigh in Buffalo, New York.
On October 28, 1998, the Company acquired two senior living communities
from Gramercy Hill Enterprises ("Gramercy"), and Tesson Heights Enterprises
("Tesson"), for aggregate consideration of approximately $34 million. 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 Company has entered into definitive Amended and Restated Agreements
and Plans of Merger with ILM Senior Living, Inc. ("ILM I") and ILM II Senior
Living, Inc. ("ILM II") to acquire these companies for a combined cash
consideration of approximately $172 million, and the assumption of liabilities.
The primary assets of ILM I and ILM II 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 I and ILM II would
separately merge with and into the Company's wholly owned direct subsidiary with
the aggregate issued and outstanding shares of ILM I and ILM II common stock
eligible to receive $172 million in cash. 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 I or ILM II. The mergers also are
subject to certain other customary conditions, including regulatory approvals,
and are expected to be completed during the second or third quarter of 2000.
Neither merger is dependent upon the occurrence of the other and there can be no
assurances that the shareholders of either ILM I or ILM II will approve their
respective merger.
INDUSTRY BACKGROUND
The senior living industry encompasses a broad and diverse range of
living accommodations and supportive services that are provided primarily to
persons 75 years of age or older. For the elderly who require limited services,
independent living residences supplemented at times by home health care, offers
a viable option. Most independent living communities typically offer community
living together with a basic services package consisting of meals, housekeeping,
laundry, 24-hour staffing, 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 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 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.
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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 10 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 has
increased 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 to 79, approximately 24% of persons aged 80
to 84 and approximately 45% of 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
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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
continuing to enhance the performance of its operations. The Company is
implementing its operating strategy principally through the following methods.
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, which allow residents at each community to express whether they are
"very satisfied," "satisfied" or "dissatisfied" with all major areas of a
community -- housekeeping, maintenance, activities and transportation, food
service, security and management. In 1999 and 1998, the Company achieved a 94%
and 95% overall approval rating (satisfied or very satisfied), respectively,
from its residents in this 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.
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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; (iii) selecting sites
in underserved markets; (iv) aggressively seeking referrals from professional
community outreach sources, including area religious organizations, senior
social service programs, civic and business networks, as well as the medical
community; and (v) continually refurbishing and renovating its communities.
IMPROVE OPERATING EFFICIENCIES
The Company seeks to improve operating efficiencies at its communities
by 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. This
commitment to the total quality management concept means identification of the
"best practices" in the senior living market and communication of those best
practices to our executive directors and their staff. The identification of best
practices is realized by a number of means, including: emphasis on regional and
executive directors keeping up with professional trade journals; interaction
with other professionals and consultants in the senior living industry through
seminars, conferences, and consultations; visits to other properties; leadership
and participation at national and local trade organization events; and
information derived from marketing studies and resident satisfaction surveys.
This information is continually processed by regional managers and the executive
directors and communicated to the Company's employees as part of their training.
The Company's staffing each community with an executive director allows it to
hire more professional employees at these positions, while the Company's
developed career path helps it to retain the professionals it hires. The Company
hires an executive director for each of its communities and provides them with
autonomy, responsibility and accountability. 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 the Company's PC-based network, 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 Company's communities. The
Company's management information systems provide senior management with the
ability to identify emerging trends, monitor and control costs and develop
current pricing strategies. The Company believes that its proprietary
information systems are scalable to support future growth.
SENIOR LIVING SERVICES
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.
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The Company's operating philosophy is to provide affordable, quality
living communities and services to senior citizens and deliver a continuum of
care for its residents as their needs change over time. This continuum of care,
which integrates independent living and assisted living and is bridged by home
care, sustains residents' autonomy and independence based on their physical and
mental abilities. As residents age, in many of the Company's communities, they
are able to obtain the additional needed services within the same community,
avoiding the disruptive and often traumatic move to a different facility.
INDEPENDENT LIVING SERVICES
The Company provides independent living services to seniors who 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, 1999, the Company had ownership interests in
14 communities and managed an additional 14 communities which provide
independent living services, with an aggregate capacity for 2,360 and 2,140
residents, respectively.
Independent living services provided by the Company include daily
meals, transportation, social and recreational activities, laundry,
housekeeping, 24-hour staffing 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), 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 $1,295 to $3,150 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 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, 1999, the Company had ownership
interests in nine communities, and managed an additional 10 communities that
provide assisted living services, with an aggregate capacity for 341 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.
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.
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In pricing its services, the Company has developed the following three
levels or tiers of assisted living care:
Level I typically provides for minimum levels of care and service, for
which the Company generally charges a monthly fee per resident ranging
from $1,340 to $3,140 depending upon unit size and the project design
type. Typically, Level I residents need minimal assistance with ADLs.
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 $1,600 to $3,310, 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.
Level III provides for the highest level of care and service, for which
the Company generally charges a monthly fee per resident ranging from
$1,910 to $3,475, 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, 1999, the
Company had ownership interests in seven facilities and managed an additional
facility that provides nursing services, with an aggregate capacity for 746 and
60 residents, respectively.
HOME CARE SERVICES
As of December 31, 1999, 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. 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.
OPERATING COMMUNITIES
The table below sets forth certain information with respect to senior
living communities owned, leased, and managed by the Company as of December 31,
1999. The Company is expanding certain of these communities, primarily to add
assisted living units. See "Growth Strategies -- Expand Existing Communities."
These expansions, along with the availability of private pay home care services,
allow the Company to broaden its continuum of care services to allow residents
to age in place.
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RESIDENT CAPACITY (1)
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OWNER- COMMENCEMENT OF
COMMUNITY LOCATION IL AL SN TOTAL SHIP(2) OPERATIONS (3)
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<S> <C> <C> <C> <C> <C> <C> <C>
OWNED:
Amberleigh............. Buffalo, NY 365 29 -- 394 33% 1/92
Atrium of Carmichael... Sacramento, CA 156 -- -- 156 100% 1/92
Cambridge Nursing
Home................. Cambridge, MA -- -- 120 120 57% 7/93
Canton Regency......... Canton, OH 164 34 50 248 100% 3/91
Cottonwood Village..... Cottonwood, AZ 135 47 -- 182 100% 3/91
Crosswood Oaks......... Sacramento, CA 127 -- -- 127 100% 1/92
Gramercy Hill.......... Lincoln, NE 101 59 -- 160 100% 10/98
Harrison at Eagle Indianapolis, IN 138 -- -- 138 100% 3/91
Valley................. (4)
Heatherwood............ Detroit, MI 188 -- -- 188 100% 1/92
Waterford.............. Mesquite, TX 174 -- -- 174 19% 9/99
Waterford.............. San Antonio, TX 136 -- -- 136 19% 4/99
Waterford.............. Shreveport, LA 136 -- -- 136 19% 3/99
Tesson Heights......... St Louis, MO 140 58 -- 198 100% 10/98
Towne Centre........... Merrillville, IN 165 34 64 263 100% 3/91
Veranda Club........... Boca Raton, FL 235 -- -- 235 100% 1/92
------- ------- ------- -----
Subtotal............. 2,360 261 234 2,855
MANAGED:
BUCKNER COMMUNITIES
Buckner Parkway Place.. Houston, TX 243 82 60 385 1/98
Buckner Westminster
Place................ Longview, TX 117 -- -- 117 4/96
ILM COMMUNITIES(5)
Crown Pointe........... Omaha, NE 163 -- -- 163
Crown Villa............ Omaha, NE -- 73 -- 73 8/96
Independence Village... East Lansing, MI 162 -- -- 162 8/96
Independence Village... Peoria, IL 173 -- -- 173 8/96
Independence Village... Raleigh, NC 155 22 -- 177 8/96
Independence Village... Winston-Salem, NC 145 16 -- 161 8/96
Overland Park Place.... Kansas City, KS 126 25 -- 151 8/96
The Palms.............. Fort Myers, FL 235 20 -- 255 8/96
Rio Las Palmas......... Stockton, CA 142 50 -- 192 8/96
Sedgwick Plaza......... Wichita, KS 117 54 -- 171 8/96
Villa at Riverwood..... St. Louis, MO 140 -- -- 140 8/96
Villa Santa Barbara.... Santa Barbara, CA 87 38 -- 125 8/96
West Shores............ Hot Springs, AR 135 32 -- 167 8/96
--------- --------- ------- -----
Subtotal............. 2,140 412 60 2,612
--------- -------- -------- ------
OWNED AND LEASED TO
OTHERS(6):
Cane Creek(7).......... Martin, TN -- 8 36 44 57% N/A
Crenshaw Creek......... Lancaster, SC -- 36 -- 36 57% N/A
Hearthstone............ Austin, TX -- -- 120 120 57% N/A
McCurdy................ Evansville, IN -- -- 236 236 57% N/A
Sandybrook............. Orlando, FL -- 36 -- 36 57% N/A
Trinity Hills.......... Fort Worth, TX -- -- 120 120 57% N/A
------- ------- --------- -----
Subtotal ............ -- 80 512 634
Grand Total.......... 4,500 753 806 6,059
========= ======== ======= ======
</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) In the case of a community shown as 33% owned, this represents the
Company's ownership of approximately 33% of the outstanding NHP Notes
that are secured by the property. 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.
In the case of those communities shown as approximately 19% owned, this
represents the Company's ownership of approximately 19% of the limited
partnership interests in Triad I.
(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) The Company's home care agency is on-site at the Harrison at Eagle
Valley community.
(5) Communities the Company currently manages but is in the process of
acquiring.
(6) 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. These leases were in
place at the time the Company acquired its interest in these
communities.
(7) This property was sold to a third party on January 11, 2000.
8
<PAGE>
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 I and ILM II (collectively, "ILM") that
operate 13 senior living communities. The ILM Management Agreements commenced on
July 29, 1996. The term of the ILM Management Agreement with ILM I Lease
Corporation is being extended on a month-to-month basis from its original
termination date of December 31, 1999. The ILM Management Agreement with ILM II
Lease Corporation will expire on December 31, 2000, 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 communities 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 communities (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 communities, subject to the Company's rights to
offer to purchase the communities. 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
communities subject to the ILM Management Agreements. The Company earned a total
of $1,202,966 and $790,281, respectively, under the two ILM Management
Agreements for the year ended December 31, 1999, which includes the incentive
management fee, and $980,159 and $969,068, respectively, for the year ended
December 31, 1998.
On October 19, 1999, the Company entered into separate Amended and
Restated Agreements and Plans of Merger with ILM I and ILM II. 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.
The Amended and Restated Agreements and Plans of Merger amended and restated the
definitive Agreements and Plans of Merger the Company entered into with ILM I
and ILM II, on February 7, 1999.
The Company is 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 January 1, 1998 and expire on
March 31, 2001 and December 31, 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 $33,000 per month. Under the terms of the Buckner Westminster
Place Agreement, the Company earns a base management fee of $6,050 per month.
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 $660,000 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. 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.
GROWTH STRATEGIES
The Company believes that the fragmented nature of the senior living
industry and the limited capital resources available to many small, private
operators provide an attractive opportunity for the Company to expand its
existing base of senior living operations. The Company believes that its current
operations throughout the United States serve as the foundation on which the
Company can build senior living networks in targeted geographic markets and
thereby provide a broad range of high quality care in a cost-efficient manner.
The following are the principal elements of the Company's growth
strategy:
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
9
<PAGE>
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. 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 described herein.
TRIAD ENTITIES. The Company is currently developing new senior living
communities pursuant to arrangements with Triad Senior Living, Inc., and its
affiliates, which are unrelated third parties (the "Triad Entities"). Sixteen of
the 23 communities currently under development are Waterford communities that
are being developed through the Triad Entities. 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 Company believes that the Waterford designs meet the desire of many
of the Company's 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:
- lessening the trauma of change for residents and their
families;
- facilitating resident mobility and caregiver access;
- enhancing operating efficiencies;
- enhancing the Company's ability to match its products to
targeted markets; and
- differentiating the Company from its competitors.
The Waterford communities being developed through the Triad Entities
are as set out below:
<TABLE>
<CAPTION>
NUMBER OF ESTIMATED COST
WATERFORD APPROXIMATE OF COMPLETION COMPANY LOAN
ENTITY COMMUNITIES RESIDENT CAPACITY AND LEASE-UP COMMITMENT(2)
-------------- -------------- ------------------- ------------------ ----------------
<S> <C> <C> <C> <C>
Triad I(1) 2 310 $23 - $26 million --
Triad II 3 428 $30 - $35 million $15 million
Triad III 6 816 $65 - $70 million $10 million
Triad IV 2 290 $22 - $24 million $10 million
Triad V 3 408 $33 - $36 million $10 million
</TABLE>
- ---------
(1) Triad I is developing two additional communities which are not
Waterford communities.
(2) The Company has operating deficit loan obligations in management
agreements in addition to the committed amounts shown relating to
unsecured loans from the Company.
The development agreements between each Triad Entity and the Company
generally provide for a development fee of 4% of project costs, plus
reimbursements for expenses and overhead not to exceed 4% of project costs. 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
10
<PAGE>
not to exceed 1% of gross revenues. The Company has the option to purchase the
partnership interests of the other partners in the Triad Entities for an amount
equal to the amount paid for the partnership interest by the other partners,
plus a noncompounded return of 12% per annum, except for Triad I. The property
management agreements also provide the Company with an option to purchase the
communities developed by the Triad Entities, other than 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. In December
1999, Triad I completed a recapitalization in which an affiliate of Lehman
Brothers purchased from a third party 80% of the limited partnership interests
in Triad I for an investment of $12,000,000. Lehman Brothers affiliate's
investment enabled Triad I to repay the Company approximately $9,000,000 in
loans. The Company increased its equity contribution in Triad I to $3,000,000
and continues to own a 19% limited partnership interest in Triad I. The Company
has the option to purchase the Triad I communities for an amount specified in
the partnership agreement. The Company will continue to develop and manage the
communities in Triad I. The Company has made no determination as to whether it
will exercise any of these 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.
The Company recently announced that the capital market and financial
environment has reduced the availability of attractive financing for joint
venture development. Consequently, the Company will develop future communities
in which it has an ownership interest on its balance sheet to capture 100% of
the benefits from lower construction costs and higher appreciation potential.
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, 1999, one site in
Beaumont, Texas has been purchased for the development and operation of
independent living, assisted living and skilled nursing care. The management
agreement between Buckner and the Company generally provides 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 term is for five years
commencing with the certificate of occupancy. The development agreements
generally provide for a development fee of 7% of project costs.
The Company is party to a property management agreement with LCOR
Incorporated ("LCOR") to market and manage four independent living and assisted
living communities being developed by LCOR. The sites covered by the agreement
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 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, 1999, two sites have been purchased for
the development and operation of assisted living communities. The sites are in
Mesquite, Texas and Houston, Texas. The management agreements between Emmaus and
the Company provide 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, 1999, there were 23 communities under development.
Seven communities were being developed for Buckner, Emmaus and LCOR, where the
Company will manage these communities under management agreements and has no
equity interest, and 16 of these communities were being developed with the Triad
Entities where the Company will manage these communities under management
agreements and where the Company has a 10% to 19% limited partner interest in
each of the Triad Entities. The following table summarizes information regarding
those developments that the Company expects to be completed through 2001.
11
<PAGE>
<TABLE>
<CAPTION>
RESIDENT CAPACITY
------------------------------
SCHEDULED
LOCATION OF DEVELOPMENT COMPLETION IL AL SN TOTAL STATUS(1)
- ----------------------- ---------- -- -- -- ----- ---------
<S> <C> <C> <C> <C> <C> <C>
TRIAD I
Fort Worth, TX............. 1st Half 2000 174 - - 174 Construction
San Antonio, TX............ 1st Half 2000 136 - - 136 Construction
---- ---- ---- ----
310 - - 310
---- ---- ---- ----
TRIAD II
Fairfield, OH.............. 2nd Half 2000 136 - - 136 Construction
Oklahoma City, OK.......... 2nd Half 2000 136 - - 136 Construction
Plano, TX.................. 2nd Half 2000 111 45 - 156 Construction
---- --- --- ----
383 45 - 428
---- --- --- ----
TRIAD III
Columbia, SC............... 2nd Half 2000 136 - - 136 Construction
Deer Park, TX.............. 2nd Half 2000 136 - - 136 Construction
Jackson, MS................ 2nd Half 2000 136 - - 136 Construction
Mansfield, OH.............. 2nd Half 2000 136 - - 136 Construction
Pantego, TX................ 2nd Half 2000 136 - - 136 Construction
South Bend, IN............. 2nd Half 2000 136 - - 136 Construction
---- --- --- ----
816 - - 816
---- --- --- ----
TRIAD IV
North Richland Hills, TX 1st Half 2001 136 - - 136 Construction
Richardson, TX............. 1st Half 2001 109 45 0 154 Development
---- --- --- ----
245 45 0 290
---- --- --- ----
TRIAD V
Greenville, SC............. 2nd Half 2001 136 - - 136 Development
Miami, OH.................. 2nd Half 2001 136 - - 136 Development
Springfield, MO............ 1st Half 2001 136 - - 136 Development
---- --- --- ----
408 - - 408
---- --- --- ----
BUCKNER
Beaumont, TX............... 2nd Half 2000 124 46 30 200 Construction
---- --- --- ----
EMMAUS CALLING
Houston, TX................ 2nd Half 2001 - 85 - 85 Development
Mesquite, TX............... 1st Half 2000 - 105 - 105 Construction
----- ---- --- ----
- 190 - 190
----- ---- --- ----
LCOR
Libertyville, IL........... 2nd Half 2000 140 - - 140 Construction
Naperville, IL............. 2nd Half 2000 135 - - 135 Construction
Summit, NJ................. 1st Half 2000 - 90 - 90 Construction
Trumbull, CT............... 1st Half 2000 136 30 - 166 Construction
---- ---- --- ----
411 120 - 531
---- ---- --- ----
Total 2,697 446 30 3,173
===== === == =====
</TABLE>
- ------------------------
(1) "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.
12
<PAGE>
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, 1999, the Company had three expansion projects
under construction, representing an aggregate increase in capacity to
accommodate an additional 176 residents. Of these three expansion projects, two
are at communities in which the Company owns an interest and manages under
multi-year agreements, and one community that the Company manages for a third
party. The costs of the expansion of managed communities is borne by the
community owner and not by the Company. However, with respect to the two
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.
The table below summarizes information regarding the expansion of certain
of our existing senior living communities as of December 31, 1999.
<TABLE>
<CAPTION>
SCHEDULED RESIDENT CAPACITY
COMMUNITY LOCATION COMPLETION IL AL TOTAL STATUS
- --------- -------- ---------- --- --- ----- ------
<S> <C> <C> <C> <C> <C> <C>
TRIAD I
Canton Regency................... Canton, OH 1st half 2000 - 62 62 Construction
Towne Centre..................... Merrilville, IN 1st half 2000 - 60 60 Construction
---- ---- -----
- 122 122
---- ---- ----
BUCKNER
Buckner Westminister Village..... Longview, TX 1st half 2000 24 30 54 Construction
--- --- ----
Total 24 152 176
=== ==== ====
</TABLE>
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 REFERRAL NETWORKS
The Company intends to continue to develop relationships with local and
regional hospital systems, managed care organizations, and other referral
sources to attract new residents to the Company's communities. In certain
circumstances these relationships may involve strategic alliances or joint
ventures. The Company believes that such arrangements or alliances, which could
range from joint marketing arrangements to priority transfer agreements, will
enable it to be strategically positioned within the Company's markets if, as the
Company believes, senior living programs become an integral part of the evolving
health care delivery system.
13
<PAGE>
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.
REGIONAL MANAGEMENT
The Company provides oversight and support to each of its senior living
communities through experienced regional and district managers. A district
manager will oversee the marketing and operations of two to four communities
clustered in a small geographic area. A regional manager will cover a larger
geographic area consisting of five to twelve communities. In most cases, the
district and regional managers will office out of our senior living communities.
Currently there are regional managers based in the Northeast, Southeast,
Midwest, Southwest and West regions.
The executive director at each community reports to a regional or district
manager. The regional and district managers report directly to the President and
Chief Operating Officer of the Company. The district and regional managers make
regular site visits to each of their communities. The site visits involve a
physical plant inspection; quality assurance; staff training; financial and
systems audits; regulatory compliance; and team building.
COMMUNITY-BASED MANAGEMENT
An executive director manages the day-to-day operations at each senior
living community, including oversight of the quality of care, delivery of
resident services, and monitoring of financial performance, 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, that 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 and hires new staff for new or acquired
communities prior to opening. The Company has adopted comprehensive recruiting
and screening programs for management positions that utilize corporate office
team interviews and thorough background and reference checks. The Company offers
system-wide training and orientation for all of its employees at the community
level through a combination of Company-sponsored seminars and conferences.
QUALITY ASSURANCE
14
<PAGE>
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
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
1999 and 1998, the Company achieved a 94% and 95% 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 and health care
services, 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. 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 including radio,
television, print, direct mail and telemarketing is implemented during this
pre-lease phase.
After the community is opened and sustaining occupancy levels are attained,
the on-site marketing staff is more heavily focused on resident and resident
family referrals, as well as professional referrals. A maintenance program of
print media and direct mail is then implemented.
15
<PAGE>
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.
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 care and social
service agencies and other regulatory authorities. While such requirements vary
from state to state, they typically relate to staffing, physical design,
required services, and resident characteristics. The Company believes that such
regulation will increase in the future. In addition, health care providers are
receiving increased scrutiny under anti-trust laws as integration and
consolidation of health care delivery increases and affects competition. The
Company's 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
substantially all 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.
Under various federal, state, and local environmental laws, ordinances, and
regulations, a current or previous owner or operator of real estate may be
required to investigate and clean up hazardous or toxic substances or petroleum
product releases at such property, and may be held liable to a governmental
entity or to third parties for property damage and for investigation and clean
up costs. The Company is not aware of any environmental liability with respect
to any of its owned, leased, or managed communities that the Company believes
would have a material adverse effect on its business,
16
<PAGE>
financial condition, or results of operations. The Company believes that its
communities are in compliance in all material respects with all federal, state,
and local laws, ordinances, and regulations regarding hazardous or toxic
substances or petroleum products. The Company has not been notified by any
governmental authority, and is not otherwise aware of any material
non-compliance, liability, or claim relating to hazardous or toxic substances or
petroleum products in connection with any of the communities the Company
currently operates.
The Company believes that the structure and composition of government and,
specifically, health care regulations will continue to change and, as a result,
regularly monitors developments in the law. The Company expects to modify its
agreements and operations from time to time as the business and regulatory
environments change. While the Company believes it will be able to structure all
its agreements and operations in accordance with applicable law, there can be no
assurance that its arrangements will not be successfully challenged.
COMPETITION
The senior living industry is highly competitive, and the Company expects
that all segments of the industry will become increasingly competitive in the
future. Although there are a number of substantial companies active in the
senior living industry and in the markets in which the Company operates, the
industry continues to be very fragmented and characterized by numerous small
operators. The Company competes with Alterra Healthcare Corporation, American
Retirement Corporation, Brookdale Living Communities, CareMatrix Corp., Holiday
Retirement Corporation, Marriott Senior Living Services, and Sunrise Assisted
Living, Inc. The Company believes that the primary competitive factors in the
senior living 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, 1999, the Company employed approximately 1,861 persons,
of which approximately 1,005 were full-time employees (approximately 47 of whom
are located at the Company's corporate offices) and 856 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, 1999:
<TABLE>
<CAPTION>
NAME AGE POSITION(S) WITH THE COMPANY
- ---- ---- ----------------------------
<S> <C> <C>
James A. Stroud........................ 49 Chairman of the Board and Chairman and Secretary of the
Company
Lawrence A. Cohen...................... 46 Vice Chairman and Chief Executive Officer
Keith N. Johannessen................... 43 President and Chief Operating Officer
Ralph A. Beattie....................... 50 Executive Vice President and Chief Financial Officer
Rob L. Goodpaster...................... 46 Vice President -- National Marketing
David W. Beathard, Sr.................. 52 Vice President -- Operations
David R. Brickman...................... 41 Vice President and General Counsel
David G. Suarez........................ 47 Vice President -- Development
17
<PAGE>
Paul T. Lee............................ 34 Vice President -- Finance
Jerry D. Lee........................... 39 Corporate Controller
Robert F. Hollister.................... 44 Controller -- Property
</TABLE>
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 Chairman
of the Board, Chairman, 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. Mr. Stroud also serves as an Advisory Group member to the National
Investment Conference. Mr. Stroud was the past President and Member of the board
of directors of the National Association for Senior Living Industry Executives.
He also 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. Mr. Stroud has had
positions with businesses involved in senior living for 15 years.
LAWRENCE A. COHEN has served as a director and Vice Chairman since November
1996. He served as Chief Financial Officer from November 1996 to May 1999 and
has served as Chief Executive Officer since May 1999. From 1991 to 1996, Mr.
Cohen served as President and Chief Executive Officer of Paine Webber Properties
Incorporated, which controlled a real estate portfolio having a cost basis of
approximately $3.0 billion, including senior living facilities of approximately
$110.0 million. From 1991 to 1998 Mr. Cohen was President and a member of the
boards of directors of ILM and ILM II. 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 15 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. Mr. Johannessen has served as a director and Chief Operating
Officer since May 1999. From 1992 to 1993, Mr. Johannessen served as Senior
Manager in the health care practice of Ernst & Young. 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 21
years.
RALPH A. BEATTIE joined the Company as Executive Vice President and Chief
Financial Officer in May 1999. From 1997 to 1999, he served as an Executive Vice
President and the Chief Financial Offer of Universal Sports America, Inc., which
was honored as the number one growth company in Dallas for 1998. For the eight
years prior to that he was an Executive Vice President and the Chief Financial
Officer for Haggar Clothing Company, during which time Haggar successfully
completed its initial public offering. Mr. Beattie has earned his Masters of
Business Administration and is both a Certified Management Accountant and a
Certified Financial Planner.
ROB L. GOODPASTER has served as Vice President - National Marketing of the
Company and its predecessors since December 1992. From 1990 to 1992, Mr.
Goodpaster was National Director for Marketing for Autumn America, an owner and
operator of senior housing facilities. Mr. Goodpaster 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 23 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 25 years.
DAVID R. BRICKMAN has served as Vice President and General Counsel of the
Company and its predecessors since July 1992. From 1989 to 1992, Mr. Brickman
served as in-house counsel with LifeCo Travel Management Company, a corporation
that provided travel services to U.S. corporations. Mr. Brickman has 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 13
years.
18
<PAGE>
DAVID G. SUAREZ has served as Vice President - Development since October
1998. 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.
PAUL T. LEE has served as Vice President - Finance since February 1999.
From 1992 to 1998, Mr. Lee served in various management positions of Chief Auto
Parts Inc. which was one of the nation's largest automotive aftermarket retail
chains. From 1995 to 1998, he held the position of Assistant Treasurer. Prior to
joining Chief Auto Parts, Mr. Lee held various positions in the finance
department of Brice Foods, Inc. from 1988 to 1992.
JERRY D. LEE, a Certified Public Accountant, has served as Corporate
Controller since April 1999. Prior to joining the Company, Mr. Lee served as the
Senior Vice President of Finance, from 1997 to 1999, for Universal Sports
America, Inc., which produced sporting events and provided sports marketing
services for collegiate conferences and universities. From 1984 to 1997, Mr. Lee
held various accounting management positions with Haggar Clothing Company. Mr.
Lee is a member of the American Institute of Certified Public Accountants and is
also a member of the Texas Society of Certified Public Accountants.
ROBERT F. HOLLISTER, a Certified Public Accountant, has served as Property
Controller for the Company and its predecessors since April 1992. From 1985 to
1992, Mr. Hollister was Chief Financial Officer and Controller of Kavanaugh
Securities, Inc., a National Association of Securities Dealers broker dealer.
Mr. Hollister is a 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.
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 20,000 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 2000 and that suitable additional space will be available, as
needed, to accommodate further physical expansion of corporate operations.
As of December 31, 1999, the Company owned, leased and/or managed the
senior living communities referred to in Item 1 above.
ITEM 3. LEGAL PROCEEDINGS
On or about October 23, 1998, Robert Lewis filed a putative class action
complaint on behalf of certain holders of assignee interests (the "Assignee
Interests") in NHP Retirement Housing Partners I Limited Partnership ("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
NHP 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
is vigorously defending itself in this action. The Company has filed a Motion to
Dismiss in this case, which is currently pending. The Company is unable to
estimate any liability related to this claim, if any.
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
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<PAGE>
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.
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, 1999.
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, 1999 there were
approximately 3,900 shareholders of record of the Company's common stock.
<TABLE>
<CAPTION>
YEAR HIGH LOW
<S> <C> <C> <C>
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
1999
First Quarter................. $15 $ 6 3/4
Second Quarter................ 11 11/16 6 7/8
Third Quarter................. 11 3/16 7
Fourth Quarter................ 7 7/16 4 3/4
</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,
20
<PAGE>
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--Overview." 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 capital stock of certain 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 a registration statement
filed in connection with the Company's initial public offering.
(c) Use of Proceeds. Not Applicable.
21
<PAGE>
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, 1999, 1998, 1997, 1996
and 1995 are derived from the audited consolidated financial statements of the
Company.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ------------ ------------ ------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Statements of Income Data:
Revenues:
Resident and health
care revenue........... $41,071 $25,988 $22,159 $14,616 $14,109
Rental and lease income 4,304 4,281 4,276 1,101 1,231
Unaffiliated management
services revenue... 2,695 2,465 1,920 801 -
Affiliated management
services revenue... 456 1,327 1,378 2,708 2,778
Unaffiliated
development fees... 1,341 1,234 804 673 -
Affiliated development
fees 14,085 7,473 173 - -
------ --------- ---------- ----------- -------------
Total revenues..... 63,952 42,768 30,710 19,899 18,118
------ -------- --------- -------- ----------
Expenses:
Operating expenses..... 24,470 17,067 16,701 10,656 10,287
General and
administrative
expenses(1)........ 9,212 6,094 7,042 5,613 4,293
Provision for bad debts 15,896 500 43 22 71
Depreciation and
amortization....... 4,671 2,734 2,118 1,481 1,776
----- -------- --------- -------- ---------
Total expenses..... 54,249 26,395 25,904 17,772 16,427
------ ------- -------- ------- --------
Income from operations. 9,703 16,373 4,806 2,127 1,691
Other income (expense):
Interest income........ 5,822 4,939 3,186 432 368
Interest expense....... (7,089) (1,922) (2,022) (221) (278)
Gain on sale of
properties............. 748 422 - 438 -
Equity in earnings on
investments...... - - - 459 -
Other.................. - - 440 42 -
------------- ------------ ---------- ---------- ------------
Income before income
taxes and minority
interest in
consolidated
partnerships....... 9,184 19,812 6,410 3,277 1,781
(Provision) benefit for
income taxes(2)..... (2,992) (7,476) (793) - (18)
------- --------- ---------- ----------- ----------
Income before minority
interest in
consolidated
partnerships........ 6,192 12,336 5,617 3,277 1,763
Minority interest in
consolidated
partnerships........ (1,354) (379) (1,936) (1,224) (760)
------- --------- --------- --------- ----------
Net income.............. $4,838 $11,957 $ 3,681 $ 2,053 $ 1,003
====== ======= ======== ======== ========
Net income per share:
Basic.................. $0.25 $ 0.61 $ 0.33
===== ======== =========
Diluted................ $0.24 $ 0.61 $ 0.33
===== ======== =========
Weighted average shares
outstanding
Basic.................. 19,717 19,717 11,150
====== ====== =========
Diluted................ 19,806 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>
22
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
($ IN THOUSANDS)
Balance Sheet Data:
Cash and cash equivalents.............. $32,988 $35,827 $48,125 $10,819 $10,017
Working capital........................ 46,973 (9,026)(4) 44,690 9,567 6,784
Total assets........................... 221,876 205,267 117,371 33,203 29,747
Long-term debt, excluding current
portion............................. 92,416 32,671 7,575 201 337
Equity................................. 109,549 104,516 92,560 17,201 14,447
</TABLE>
- ----------
(1) General and administrative expenses include officers' salaries of
$914,000, $670,000, $3,342,000, $3,372,000 and $2,976,000 for the years
ended December 31, 1999, 1998, 1997, 1996 and 1995, 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 Company's initial public
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 Company's initial public 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 refinanced $47,700,000 of mortgage loans reflected as short
term debt in fiscal 1998 to long term fixed rate mortgage loans in
fiscal 1999.
23
<PAGE>
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, 1999, 1998, and 1997. 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.
The Company is one of the largest operators and developers of senior
living communities in the United States in terms of resident capacity. 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 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.
The Company completed its initial public offering in November 1997 in
conjunction with a series of transactions that resulted in the Company acquiring
various companies, partnership interests and assets from the Company's founders
and entities affiliated with its founders. These transactions are collectively
called the "Formation Transactions." Because certain of the entities and assets
acquired in the Formation Transactions were subchapter S corporations,
partnership interests or other flow-through entities for tax purposes, and
because certain debt obligations were assumed in the Formation Transactions and
subsequently repaid with some of the proceeds from the Company's initial public
offering, the year-to-year changes in the Company's financial statements are not
directly comparable.
During the years 1990 through 1999, the Company acquired interests in
and continues to own 21 communities and expanded its senior living management
services by entering into management service contracts on 15 communities for
three 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, 1999, the Company's revenue was derived as follows: 64.2%
from the operation of 11 owned communities that were operated by the Company;
6.7% from lease rentals from triple net leases of three skilled nursing
facilities and four physical rehabilitation centers; 4.9% from management fees
arising from management services provided for four affiliate owned senior living
communities and 15 third-party owned senior living communities; and 24.1% 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 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 two of
its owned communities and through the year 2001 for four of its owned
communities (one of which was sold on January 11, 2000). 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,
unless the operators extend their leases, the Company may either convert and
operate the communities as assisted living and Alzheimer's care facilities, sell
the facilities or evaluate other alternatives.
24
<PAGE>
The Company's current management contracts expire on various dates
through 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, 1999, development fees have been earned for services performed for
44 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 three physical rehabilitation centers (two
of which have been sold). During 1999, 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 and was 57% at December 31, 1999. 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. From
November 1, 1997 through September 30, 1998, the Company recorded 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 in turn redeemed $7,500,000 of the
Company's investment in the NHP Notes and distributed 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 began 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. In the fourth quarter of
fiscal 1999, the Company reevaluated the assumptions related to its investment
in the NHP Notes, and as a result reduced the income expected to be earned from
the NHP Notes. This change in estimate resulted in a $1,206,000 reduction in
interest income in the fourth quarter. In addition, future interest income is
expected to decrease by approximately $1,253,842 and $1,687,705 in 2000 and
2001, respectively.
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 an approximate 12-month construction
period during which time no revenues are generated, followed by a 14- to
18-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.
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.
25
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1997
---------------------- ------------------------ ----------------------
$ % $ % $ %
----------- --------- ------------- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Resident and healthcare revenue..... $ 41,071 64.2% $25,988 60.8% $22,159 72.2%
Rental and lease income............. 4,304 6.7% 4,281 10.0% 4,276 13.9%
Unaffiliated management services
revenue........................... 2,695 4.2% 2,465 5.8% 1,920 6.3%
Affiliated management services
revenue........................... 456 0.7% 1,327 3.1% 1,378 4.5%
Unaffiliated development fees....... 1,341 2.1% 1,234 2.9% 804 2.6%
Affiliated development fees......... 14,085 22.0% 7,473 17.5% 173 0.6%
------- ------- -------- ------- -------- -------
Total revenues................... 63,952 100.0% 42,768 100.0% 30,710 100.0%
Expenses:
Operating expenses.................. 24,470 38.3% 17,067 39.9% 16,701 54.4%
General and administrative expenses. 9,212 14.4% 6,094 14.2% 7,042 23.1%
Bad debt expense.................... 15,896 24.9% 500 1.2% 43 0.0%
Depreciation and amortization....... 4,671 7.3% 2,734 6.4% 2,118 6.9%
------- ------- ------- ------- ------- -------
Total expenses.................... 54,249 84.8% 26,395 61.7% 25,904 84.4%
------ ----- ------- ----- ------- ------
Income from operations................ 9,703 15.2% 16,373 38.3% 4,806 15.6%
Other income (expense):
Interest income..................... 5,822 9.1% 4,939 11.5% 3,186 10.4%
Interest expense.................... (7,089) (11.1%) (1,922) (4.5%) (2,022) (6.6%)
Gain on sale of properties.......... 748 1.2% 422 1.0% - 0.0%
Other............................... - 0.0% - 0.0% 440 1.4
------- ------- -------- ------- -------- -------
Income before income taxes and
minority interest in consolidated
partnerships...................... 9,184 14.4% 19,812 46.3% 6,410 20.9%
Provision for income taxes............ (2,992) (4.7%) (7,476) (17.5%) (793) (2.6%)
--------- ------- -------- ---------- -------- -------
Income before minority interest in
consolidated partnerships........... 6,192 9.7% 12,336 28.8% 5,617 18.3%
Minority interest in consolidated
partnerships........................ (1,354) (2.1%) (379) (0.9%) (1,936) (6.3%)
------------ ------ ---------- ------ -------- -----
Net income............................ $ 4,838 7.6% $ 11,957 28.0% $3,681 12.0%
============ ===== ======== ===== ======= ======
</TABLE>
YEAR ENDED DECEMBER 31, 1999 COMPARED TO THE YEAR ENDED DECEMBER 31, 1998
REVENUES. Total revenues were $63,952,000 in 1999 compared to
$42,768,000 in 1998, representing an increase of $21,184,000, or 49.5%. Resident
and health care revenue increased $15,083,000, of which $14,441,000 is related
to owning the six communities purchased in the third and fourth quarters of
fiscal 1998 for the full year in 1999, along with an increase in revenue at the
HCP properties. Affiliated management services revenue decreased $871,000 due to
the Company's acquisition of four NHP properties that the Company managed in
1998. Affiliated development fee revenue increased $6,612,000, reflecting the
addition of 15 new development contracts for managing the development and
construction of new senior living communities owned by joint ventures with third
parties in which the Company owns interests of 10% to 19% (Triad Entities).
EXPENSES. Total expenses were $54,249,000 in 1999 compared to
$26,395,000 in 1998, representing an increase of $27,854,000 or 105.5%. This
increase primarily results from $15,896,000 in bad debt expenses along with
additional expenses related to the acquisition of six communities in 1998. The
bad debt expenses primarily relate to writing off or reserving $10,482,000 in
development fees, $1,598,000 in pursuit cost from affiliates, and $3,927,000 in
notes receivable from joint ventures. These joint ventures were in various
stages of developing 19 Waterford communities and they were unable to secure
financing on attractive terms for completion of these communities. Operating
expenses increased $7,403,000 primarily due to expenses associated with the six
properties acquired in 1998 and an expansion of one of the Company's
communities. General and administrative expenses increased $3,118,000 due to
additional salary expenses, office rent, legal expenses and expenses relating to
the six communities that were acquired.
OTHER INCOME AND EXPENSES. Other income and expense decreased
$3,958,000 to a net expense of $519,000 in 1999 compared to a net income of
$3,439,000 in 1998. Interest income increased $883,000 primarily due to an
increase of $2,023,000 in interest income on loans to the Triad Entities offset
by a decrease of $1,108,000 in interest income from cash balances available for
investing and a $32,000 reduction in interest income relating to the NHP Notes.
In the fourth quarter, the Company changed its estimate relating to the value of
its investment in the NHP Notes resulting in a write down of approximately
$1,206,000. Interest expense increased $5,167,000 due to financing of the
acquisition of the six properties in the fourth
26
<PAGE>
quarter of 1998 along with funding of loans made to the Triad Entities. Gain on
the sale of properties increased $326,000 resulting from the gain on the sale of
one community owned by HCP of $748,288 in 1999 compared to a gain of $422,000 on
the sale of two properties in the fourth quarter of 1998.
PROVISION FOR INCOME TAXES. Provision for income taxes in 1999 was
$2,992,000 or 38.2% of income before taxes, compared to $7,476,000 or 38.5% of
income before taxes in 1998. The effective tax rates for 1999 and 1998 differ
from the statutory tax rates because of state income taxes and permanent tax
differences.
MINORITY INTEREST. Minority interest increased $975,000 primarily due
to the sale of one of the HCP communities and an increase in net income at HCP.
The sale of the one HCP community increased minority interest by approximately
$329,000.
NET INCOME. As a result of the foregoing factors, net income decreased
$7,119,000 to $4,838,000 for 1999, as compared to $11,957,000 for 1998.
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 $190,000 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 a lease on Maryland Gardens 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 $289,000 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 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 Entities 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 in the fourth quarter of 1998. 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 Company's initial public offering, CSLC incurred
short swing profits, as defined by the Securities and Exchange Commission
("SEC"), and was, accordingly, required to remit such profits to HCP, which
recorded the remittance of $440,000 as other income in 1997.
27
<PAGE>
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 $3,681,000 for 1997.
QUARTERLY RESULTS
The following table presents certain quarterly financial information
for the four quarters ended December 31, 1999 and 1998. This information has
been prepared on the same basis as the audited Consolidated Financial Statements
of the Company appearing elsewhere in this report and include, in the opinion of
management, all adjustments (consisting of normal recurring adjustments)
necessary to present fairly the quarterly results when read in conjunction with
the audited Consolidated Financial Statements of the Company and the related
notes thereto.
<TABLE>
<CAPTION>
1999 Calendar Quarters
---------------------------------------------------
First Second Third Fourth
--------- --------- --------- ----------
($ in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Total revenues............................................... $ 15,467 $ 15,957 $ 16,560 $ 15,967
Income from operations....................................... 6,273 6,551 7,017 (10,137)
Net income (loss)............................................ 3,852 3,983 4,386 (7,384)
Net income (loss) per share, basic........................... $ 0.20 $ 0.20 $ 0.22 $ (0.37)
Net income (loss) per share, diluted......................... $ 0.20 $ 0.20 $ 0.22 $ (0.37)
Weighted average shares outstanding, basic................... 19,717 19,717 19,717 19,717
Weighted average shares outstanding, fully diluted........... 19,720 19,917 19,871 19,717
<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, basic.................................. $ 0.10 $ 0.13 $ 0.18 $ 0.20
Net income per share, diluted................................ $ 0.10 $ 0.13 $ 0.18 $ 0.20
Weighted average shares outstanding, basic................... 19,717 19,717 19,717 19,717
Weighted average shares outstanding, fully diluted........... 19,717 19,717 19,717 19,717
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
In addition to approximately $32,988,000 of cash balances on hand as of
December 31, 1999, the Company's principal source of liquidity is expected to be
cash flows from operations. Of the $32,988,000 in cash balances, $13,724,000
relate to cash held by HCP. The Company expects its available cash and cash flow
from operations, to be sufficient to fund its short-term working capital
requirements. The Company's long-term capital requirements, primarily for
acquisitions, development and other corporate initiatives, will be dependent on
its ability to access additional funds through the debt and/or equity markets.
There can be no assurance that the Company will continue to generate cash flows
at or above current levels or that the Company will be able to obtain the
capital necessary to meet the Company's long-term capital requirements.
The Company had net cash provided by operating activities of $3,103,000
in fiscal 1999 compared to $6,689,000 and $9,684,000 in fiscal 1998 and 1997,
respectively. In fiscal 1999, the net cash provided by operating activities was
primarily derived from net income of $4,838,000 along with net noncash charges
of $22,733,000 offset by increases in accounts and interest receivables of
$14,120,000, an increase in other assets of $1,504,000, a reduction in federal
and state income taxes of $7,704,000. In fiscal 1998, the net cash provided by
operating activities was primarily derived from net income of $11,957,000,
noncash charges of $3,054,000 offset by increases in accounts and interest
receivable of
28
<PAGE>
$8,978,000. In fiscal 1997, the net cash provided by operating activities was
primarily derived from net income of $3,681,000, along with noncash charges of
$4,115,000 and increases in accounts payable and income taxes payable of
$2,667,000 and $832,000, respectively, offset by an increase in accounts
receivable of $1,371,000.
The Company had net cash used in investing activities of $16,527,000,
$86,501,859 and $81,502,000 in fiscal 1999, 1998 and 1997, respectively. In
fiscal 1999, the Company's net cash used in investing activities was primarily
the result of advances to Triad Entities of $22,794,000 and capital expenditures
of $1,887,000 offset by the proceeds from the sale of the HCP property of
$2,740,000 and a distribution from a limited partnership of $5,414,000. In
fiscal 1998, the Company's net cash used in investing activities was primarily
from acquisitions of $67,728,000, advances to Triad Entities of $11,728,000,
capital expenditures of $6,027,000 and investments in a limited partnership of
$1,694,000.
The Company had net cash provided by financing activities of
$10,585,000, $67,514,000 and $109,125,000 in fiscal 1999, 1998 and 1997,
respectively. For fiscal 1999 the net cash provided by financing activities was
primarily the result of increases in debt outstanding under the Company's line
of credit and notes payable. For fiscal 1998, the net cash provided by financing
activities was primarily the result of increases in debt used to finance the
Company's acquisitions. For fiscal 1997, the net cash provided by financing
activities was primarily the result of the issuance of common stock.
The Company derives the benefits and bears the risks related 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, 1999, HCP was operating one of its
properties and had leased six of its owned properties under triple net leases to
third parties until year 2000 or 2001. Three of these properties are leased
until year 2001 to HealthSouth Rehabilitation Corp. ("HealthSouth"), which
provides acute spinal injury intermediate care at the properties which are still
operating. HealthSouth closed one of these communities in 1994 and closed
another community in February of 1997 due to low occupancy. HealthSouth has
continued to make lease payments on a timely basis for all four properties.
Effective August 5, 1999, HealthSouth agreed to transfer control of the two
closed communities to HCP. HealthSouth agreed, however, to continue making its
full lease payments to HCP with no reduction in payment. Effective September 20,
1998, the main campus of one of those communities was sold to an independent
third-party buyer for $2,825,000. HCP will explore its options with regard to
the remainder of the community as well as the other community, including the
possibility of a sale of these assets. Should the operators of the leased
properties default on payment of their lease obligations prior to termination of
the lease agreements, five of the six 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, unless the operators extend their leases, the
Company will either convert and operate the communities as assisted living and
Alzheimer's care communities, sell the communities or evaluate other
alternatives. HCP communities' lessees are all current in their lease
obligations to HCP. The lessee for another property (other than HealthSouth)
continues to fund a deficit between the required lease payment and operator's
cash flows. Additionally, on January 11, 2000 the Cane Creek facility in Martin,
Tennessee was sold to HealthSouth Corporation for $2,350,000. HealthSouth
agreed, however, to continue making its full lease payments to HCP with no
reduction in payments.
The cash flows and profitability of the Company's third-party
management fees are dependent upon the revenues and profitability of the
communities the Company manages. While the management contracts are generally
terminable only for cause, in certain cases 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 plans to continue to develop and acquire senior living
communities. The development of senior living communities typically involves a
substantial commitment of capital over an approximate 12-month construction
period during which time no revenues are generated, followed by a 14- to
18-month lease-up period.
The Company has entered into development and management agreements with
the Triad Entities set out below for the development and management of new
senior living communities. The Triad Entities will own and finance the
construction of the new communities. These communities are primarily Waterford
communities. The Company typically
29
<PAGE>
receives a development fee of 4% of project costs, as well as reimbursement of
expenses and overhead not to exceed 4% of project costs. The Company typically
receives 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%. The Company holds a 10% to 19% limited partnership interest in each
of the Triad Entities and has the option to purchase the partnership interests
of the other partners in each Triad Entity for an amount equal to the amount
paid for the partnership interest by the other partners, plus noncompounded
interest of 12% per annum, except Triad I. In addition, each management
agreement entered into with the Triad Entities, except Triad I, provides the
Company with an option to purchase the community developed by the applicable
partnership upon its 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) of the community. In December 1999, Triad I completed a
recapitalization in which an affiliate of Lehman Brothers purchased from third
parties 80% of the limited partnership interest in Triad I for an investment of
$12,000,000. Lehman Brothers affiliate's investment enabled Trial I to repay the
Company approximately $9,000,000 in loans. The Company increased its equity
contribution in Triad I to $3,000,000 and continues to own a 19% limited
partnership interest in Triad I. The Company has the option to purchase the
Triad I communities for an amount specified on the partnership agreement. The
Company will continue to develop and manage the communities in Triad I. The
Company has made no determination as to whether it will exercise any of these
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.
Each Triad Entity finances the development of new communities through a
combination of equity funding, traditional construction loans and permanent
financing with institutional lenders secured by first liens on the communities
and unsecured loans from the Company. The chart below sets forth information
about the financings from institutional lenders and the Company loans. The
Company loans may be prepaid without penalty. The financings from institutional
lenders are secured by first liens on the communities as well as by assignment
to the lenders of the construction contracts and the development and management
agreements with subsidiaries of the Company. Each development and management
agreement assigned to an institutional lender is also guaranteed by the Company
and those guarantees are also assigned to the lenders. In most cases, the
management agreements contain an obligation of the Company to make operating
deficit loans to the Triad Entities if the other financing sources of the Triad
Entities have been fully utilized. These operating deficit loan obligations,
which are guaranteed by the Company, include making loans to fund debt service
obligations to the lenders.
Set forth below is information regarding the Company's loans to the
Triad Entities, as well as information on the construction loan facilities
entered into by each of the Triad Entities.
30
<PAGE>
<TABLE>
<CAPTION>
COMPANY LOANS TO TRIADS(1) CONSTRUCTION LOAN FACILITIES TO TRIADS
--------------------------------------------------- ----------------------------------------
OUTSTANDING
COMMITTED ON INTEREST
ENTITY AMOUNT DEC. 31, 1999 MATURITY RATE AMOUNT TYPE LENDER
- ----------------- ---------- ------------- ------------------ ------ ----------- -------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
($ IN THOUSANDS)
Triad Senior (2) $30 (2) -% $50,000 construction; Bank One
Living I, L.P. $50,000 take-out GMAC
("Triad I")
Triad Senior $15,000 $11,510 September 25, 10.5% $26,800 construction; Key Bank
Living II, L.P. 2003 mini-perm
("Triad II")
Triad Senior $10,000 $9,810 February 8, 2004 10.5% $56,300 construction; Guaranty
Living III, L.P. mini-perm Federal
("Triad III")
Triad Senior $10,000 $5,178 December 30, 2003 10.5% $18,600 construction; Compass
Living IV, L.P. mini-perm Bank
("Triad IV")
Triad Senior $10,000 $3,467 June 30, 12.0% $27,000 construction; Bank of
Living V, L.P. 2004 mini-perm America
("Triad V")
Triad Senior $3,000 $600 October 1, 12.0% - - -
Living VI, L.P. 2004
("Triad VI")
</TABLE>
(1) The Company has operating deficit loan obligations in management
agreements in addition to the committed amounts shown relating to
unsecured loans from the Company.
(2) The amount shown was funded by the Company pursuant to operating
deficit loan obligations.
FINANCING OF THE ILM MERGERS
The Company has entered into definitive Amended and Restated Agreements
and Plans of Merger with ILM and ILM II to acquire these companies for a
combined cash consideration of approximately $172 million, and the assumption of
liabilities. The primary assets of ILM I and ILM II collectively are 13 senior
living communities that have been managed by the Company under management
agreements since 1996. The Company received a term sheet from GMAC to provide
acquisition financing for the purchase of these 13 senior living communities and
to provide interim financing on three senior living communities currently owned
by the Company. The financing is expected to provide up to $180,000,000, subject
to certain terms and conditions.
YEAR 2000 ISSUE
The Year 2000 issue results from the historical use in computer
software programs and operating systems of a two-digit number to represent the
applicable year. Concerns arose as to whether certain software and hardware
would fail to properly function when confronted with dates that contain "00" as
a two-digit year. To address the potential risk of disruption of operations, the
Company developed and implemented a program to replace certain software and
hardware, so that its systems would properly recognize and utilize dates beyond
December 31, 1999. The Company also upgraded its general ledger and reporting
software to avoid compatibility issues with certain of the reporting tools used
in conjunction with the general ledger. The costs to the Company to achieve Year
2000 readiness were approximately $100,000.
To date, the Company has not experienced any material problems relating
to the Year 2000 issue. The Company will continue to monitor and evaluate
internal Year 2000 compliance and the compliance of key suppliers.
31
<PAGE>
IMPACT OF INFLATION
To date, inflation has not had a significant impact on the Company.
However, inflation could affect the Company's future revenues and results of
operations because of, among other things, the Company's dependence on senior
residents, many of whom rely primarily on fixed incomes to pay for the Company's
services. As a result, during inflationary periods, the Company may not be able
to increase resident service fees to account fully for increased operating
expenses. In structuring its fees, the Company attempts to anticipate inflation
levels, but there can be no assurance that the Company will be able to
anticipate fully or otherwise respond to any future inflationary pressures.
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
SEC.
32
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary market risk is exposure to changes in interest
rates on debt instruments. As of December 31, 1999, the Company had $93,615,000
in outstanding debt comprised of various fixed and variable rate debt
instruments of $59,479,000 and $34,136,000, respectively.
Changes in interest rates would affect the fair market value of the
Company's fixed rate debt instruments but would not have an impact on the
Company's earnings or cash flows. Fluctuations in interest rates on the
Company's variable rate debt instruments, which are tied to either the LIBOR or
the prime rate, would affect the Company's earnings and cash flows but would not
affect the fair market value of the variable rate debt. For each percentage
point change in interest rates the Company's annual interest expense would
increase by approximately $341,000 based on the Company's outstanding variable
debt as of December 31, 1999.
The following table summarizes information on the Company's debt
instruments outstanding as of December 31, 1999. The table presents the
principal due and weighted average interest rates for the Company's various debt
instruments by fiscal year. Weighted average variable interest rates are based
on the Company's floating rate as of December 31, 1999.
<TABLE>
<CAPTION>
INTEREST RATE RISK
PRINCIPAL AMOUNT AND AVERAGE INTEREST RATE BY EXPECTED MATURITY DATE
($ IN THOUSANDS)
2000 2001 2002 2003 2004 THEREAFTER TOTAL FAIR VALUE
--------- -------- ---------- ---------- --------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long-term debt:
Fixed rate debt....... $1,063 $1,186 $1,133 $1,153 $1,255 $53,689 $59,479 $59,479
Average interest rate. 8.3% 8.3% 8.3% 8.3% 8.3% 8.3%
Variable rate debt.......... $136 - - - - - $136 $136
Average interest rate....... 6.8% - - - - 0.0%
Line of Credit:
Variable rate debt.... - - $34,000 - - - $34,000 $34,000
Average interest rate. - - 8.2% - - -
Total Debt.................. $93,615 $93,615
</TABLE>
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.
33
<PAGE>
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 and Stock
Ownership of Management" in the Proxy Statement is incorporated herein by
reference in response to this Item 12.
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.
34
<PAGE>
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, 1999:
(a) Current Report on Form 8-K, dated October 19, 1999.
(b) Current Report on Form 8-K, dated October 19, 1999.
35
<PAGE>
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, hereunto duly authorized, on March 29, 2000.
CAPITAL SENIOR LIVING CORPORATION
By: /s/ Lawrence A. Cohen
-------------------------------------------------------
Lawrence A. Cohen
VICE CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated. Each person whose signature to
this report appears below hereby appoints Lawrence A. Cohen and James A. Stroud
and each of them, any one of whom may act without the joinder of the other, as
his or her attorney-in-fact to sign on his behalf, individually and in each
capacity stated below, and to file all amendments to this report, which
amendment or amendments may make such changes in and additions to the report as
any such attorney-in-fact may deem necessary or appropriate.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ James A. Stroud Chairman of the Board and Chairman March 29, 2000
- --------------------------------------- of the Company
James A. Stroud
/s/ Lawrence A. Cohen Vice Chairman of the Board and March 29, 2000
- --------------------------------------- Chief Executive Officer (Principal
Lawrence A. Cohen Executive Officer)
/s/ Keith N. Johannessen President and Chief Operating Officer March 29, 2000
- --------------------------------------- and Director
Keith N. Johannessen
/s/ Ralph A. Beattie Executive Vice President and Chief March 29, 2000
- --------------------------------------- Financial Officer (Principal Financial
Ralph A. Beattie and Accounting Officer)
/s/ Gordon I. Goldstein Director March 29, 2000
- ---------------------------------------
Dr. Gordon I. Goldstein
/s/ James A. Moore Director March 29, 2000
- ---------------------------------------
James A. Moore
/s/ Victor W. Nee Director March 29, 2000
- ---------------------------------------
Dr. Victor W. Nee
</TABLE>
36
<PAGE>
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
(i)3.1.1 - Amendment to Amended and Restated Certificate of Incorporation of the Registrant (Exhibit 3.1)
*3.2 - Amended and Restated Bylaws of the Registrant
(i)3.2.1 - Amendments to Amended and Restated Bylaws of the Registrant (Exhibit 3.2)
*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
+(m)10.6 - 1997 Omnibus Stock and Incentive Plan for Capital Senior Living Corporation, as amended
(Exhibit 4.1)
+(m)10.6.1 - Form of Stock Option Agreement (Exhibit 4.2)
*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
E-1
<PAGE>
+*10.13 - Employment Agreement, dated as of November 26, 1996, by and between Capital Senior Living,
Inc. and Keith N. Johannessen
*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
E-2
<PAGE>
*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)
(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)
</TABLE>
E-3
<PAGE>
<TABLE>
<S> <C>
(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 (Exhibit 10.50)
(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. (Exhibit 10.51)
(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. (Exhibit 10.52)
(f)10.53 - Form of Development and Turnkey Services Agreement by and between Capital Senior
Development, Inc. and applicable Triad entity (Exhibit 10.53)
(f)10.54 - Form of Development Agreement by and between Capital Senior Development, Inc. and
applicable Triad entity (Exhibit 10.54)
(f)10.55 - Form of Management Agreement by and between Capital Senior Living, Inc. and applicable Triad
entity (Exhibit 10.55)
(f)10.56 - Agreement of Limited Partnership of Triad Senior Living I, L.P. dated April 1, 1998 (Exhibit
10.56)
(f)10.57 - Agreement of Limited Partnership of Triad Senior Living II, L.P. dated September 23, 1998
(Exhibit 10.57)
(f)10.58 - Agreement of Limited Partnership of Triad Senior Living III, L.P. dated November 10, 1998
(Exhibit 10.58)
(f)10.59 - Agreement of Limited Partnership of Triad Senior Living IV, L.P. dated December 22, 1998
(Exhibit 10.59)
(g)10.60 - 1999 Amended and Restated Loan Agreement, dated as of April 8, 1999, by and among Capital
Senior Living Properties, Inc., Bank One, Texas, N.A. and the other Lenders signatory
thereto (Exhibit 10.1)
(g)10.61 - Amended and Restated Draw Promissory note, dated March 31, 1999, of Triad Senior Living I,
L.P., in favor of Capital Senior Living Properties, Inc. (Exhibit 10.2)
(g)10.62 - Amended and Restated Draw Promissory Note (Fairfield), dated January 15, 1999, of Triad Senior
Living II, L.P., in favor of Capital Senior Living Properties, Inc. (Exhibit 10.3)
(g)10.63 - Amended and Restated Draw Promissory Note (Baton Rouge), dated January 15, 1999, of Triad
Senior Living II, L.P., in favor of Capital Senior Living Properties, Inc. (Exhibit 10.4)
E-4
<PAGE>
(g)10.64 - Amended and Restated Draw Promissory Note (Oklahoma City), dated January 15, 1999, of Triad
Senior Living II, L.P., in favor of Capital Senior Living Properties, Inc. (Exhibit 10.5)
(h)10.65 - Amended and Restated Draw Promissory Note dated June 30, 1999 of Triad Senior Living I, L.P.
in favor of Capital Senior Living Properties, Inc. (Exhibit 10.1)
(h)10.66 - Amended and Restated Draw Promissory Note (Plano, Texas) dated January 15, 1999 of Triad
Senior Living II, L.P. in favor of Capital Senior Living Properties, Inc. (Exhibit 10.2)
(h)10.67 - Letter Agreement dated July 28, 1999 among the Company and ILM Senior Living, Inc. and ILM
II Senior Living, Inc. (Exhibit 10.3)
(i)10.68 - Draw Promissory Note dated July 1, 1999 of Triad Senior Living V, L.P. in favor of Capital
Senior Living Properties, Inc. (Exhibit 10.1)
+(i)10.69 - First Amendment to Amended and Restated Employment Agreement of James A. Stroud, dated
March 22, 1999, by and between James A. Stroud and Capital Senior Living Corporation (Exhibit 10.2)
+(i)10.70 - Second Amendment to Amended and Restated Employment Agreement of James A. Stroud, dated
May 31, 1999, by and between James A. Stroud and Capital Senior Living Corporation (Exhibit 10.3)
+(i)10.71 - Employment Agreement, dated May 26, 1999, by and between Lawrence A. Cohen and Capital
Senior Living Corporation (Exhibit 10.4)
(j)10.72 - Agreement and Plan of Merger, dated February 7, 1999, by and among Capital Senior Living
Corporation, Capital Senior Living Acquisition, LLC, Capital Senior Living Trust I and ILM
Senior Living, Inc. (Exhibit 1)
(k)10.73 - Agreement and Plan of Merger, dated February 7, 1999, by and among Capital Senior Living
Corporation, Capital Senior Living Acquisition, LLC, Capital Senior Living Trust I and ILM II
Senior Living, Inc. (Exhibit 1)
(l)10.74 - Amended and Restated Agreement and Plan of Merger, dated October 19, 1999, by and among Capital
Senior Living Corporation, Capital Senior Living Acquisition, LLC and ILM Senior Living, Inc.
(Exhibit 1)
(m)10.75 - Amended and Restated Agreement and Plan of Merger, dated October 19, 1999, by and among Capital
Senior Living Corporation, Capital Senior Living Acquisition, LLC and ILM II
Senior Living, Inc. (Exhibit 1)
+(o)10.76 - Employment Agreement, dated May 25, 1999, by and between Ralph A. Beattie and Capital
Senior Living Corporation
+(o)10.77 - Consulting/Severance Agreement, dated May 20, 1999, by and between Jeffrey L. Beck and
Capital Senior Living Corporation
(o)10.78 - Second Amended and Restated Agreement of Limited Partnership of Triad Senior Living I, L.P.
(o)21.1 - Subsidiaries of the Company
(o)23.1 - Consent of Ernst & Young LLP
(o)23.2 - Consent of KPMG LLP
(o)27.1 - Financial Data Schedule
</TABLE>
E-5
<PAGE>
- -----------------------------
* 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 the 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) Incorporated by reference to the exhibit shown in parentheses from the
Company's Annual Report on Form 10-K for the year ended December 31,
1998, filed by the Company with the Securities and Exchange Commission.
(g) Incorporated by reference to the exhibit shown in parentheses from the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 1999, filed by the Company with the Securities and Exchange
Commission.
(h) Incorporated by reference to the exhibit shown in parentheses from the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1999, filed by the Company with the Securities and Exchange
Commission.
(i) 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, 1999, filed by the Company with the Securities and
Exchange Commission.
(j) Incorporated by reference to the exhibit shown in parentheses from the
Company's Current Report on Form 8-K, dated February 7, 1999, filed by
the Company with the Securities and Exchange Commission.
(k) Incorporated by reference to the exhibit shown in parentheses from the
Company's Current Report on Form 8-K, dated February 7, 1999, filed by
the Company with the Securities and Exchange Commission.
(l) Incorporated by reference to the exhibit shown in parentheses from the
Company's Current Report on Form 8-K, dated October 19, 1999, filed by
the Company with the Securities and Exchange Commission.
(m) Incorporated by reference to the exhibit shown in parentheses from the
Company's Current Report on Form 8-K, dated October 19, 1999, filed by
the Company with the Securities and Exchange Commission.
(n) Incorporated by reference to the exhibit shown in parentheses from the
Company's Registration Statement on Form S-8, filed on December 3,
1999, by the Company with Securities and Exchange Commission.
(o) Filed herewith.
E-6
<PAGE>
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, 1999 and 1998.......................................... F-4
Consolidated Statements of Income - December 31, 1999, 1998 and 1997.............................. F-5
Consolidated Statements of Shareholders' Equity - December 31, 1999, 1998 and 1997................ F-6
Consolidated Statements of Cash Flows - December 31, 1999, 1998 and 1997.......................... F-7
Notes to Consolidated Financial Statements........................................................ F-8
</TABLE>
<PAGE>
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, 1999 and 1998, and the related
consolidated statements of income, shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 1999. 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 $32,055,252 and $32,758,958 as of December
31, 1999 and 1998, respectively, and total revenues of $9,499,819, $8,787,575
and $8,977,628 for the years ended December 31, 1999, 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 auditing standards generally
accepted in the United States. 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, 1999 and 1998, and the consolidated results of their operations and
their cash flows for each of the three years in the period ended December 31,
1999, in conformity with generally accepted accounting principles in the United
States.
Ernst & Young LLP
Dallas, Texas
February 4, 2000
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Partners
HealthCare Properties, L.P.
We have audited the consolidated balance sheets of HealthCare Properties,
L.P. and subsidiaries (a Delaware limited partnership) as of December 31,
1999 and 1998, and the related consolidated statements of income, partnership
equity, and cash flows for each of the years in the three-year period ended
December 31, 1999. 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 audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the 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, 1999 and 1998, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1999, in conformity with generally accepted
accounting principles.
/s/ KPMG LLP
Dallas, Texas
February 4, 2000, except
as to the third paragraph of
Note 13 which is as of
March 1, 2000
F-3
<PAGE>
CAPITAL SENIOR LIVING CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
DECEMBER 31,
---------------------------------
1999 1998
-------------- ----------------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................................. $ 32,988,024 $ 35,827,270
Accounts receivable, net.................................................. 3,391,803 2,955,507
Accounts receivable from affiliates....................................... 9,054,970 7,217,127
Interest receivable from affiliates....................................... 834,209 189,482
Federal and state income taxes receivable................................. 6,035,032 -
Deferred taxes............................................................ 909,939 287,040
Prepaid expenses and other................................................ 508,410 448,790
--------------- --------------
Total current assets.................................................... 53,722,387 46,925,216
Property and equipment, net.................................................. 104,723,216 118,943,953
Deferred taxes............................................................... 9,516,051 10,108,715
Notes receivable from affiliates............................................. 30,595,610 11,728,162
Investments in limited partnership .......................................... 9,122,850 14,536,972
Assets held for sale......................................................... 9,549,084 -
Other assets, net............................................................ 4,646,561 3,023,717
--------------- --------------
Total assets.......................................................... $ 221,875,759 $ 205,266,735
=============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................................... $ 2,512,202 $ 2,780,513
Accrued expenses.......................................................... 2,127,374 2,231,895
Current portion of notes payable.......................................... 1,199,299 48,419,050
Customer deposits......................................................... 910,693 851,375
Federal and state income taxes payable.................................... - 1,668,602
----------------- ------------
Total current liabilities............................................. 6,749,568 55,951,435
Deferred income from affiliates ............................................. 1,784,600 792,240
Deferred income.............................................................. - 115,062
Notes payable, net of current portion ....................................... 58,415,956 13,696,797
Line of credit............................................................... 34,000,000 18,974,186
Minority interest in consolidated partnership ............................... 11,376,972 11,220,836
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 1999
and 1998.............................................................. 197,173 197,173
Additional paid-in capital................................................ 91,934,811 91,740,251
Retained earnings ........................................................ 17,416,679 12,578,755
----------------- --------------
Total shareholders' equity............................................ 109,548,663 104,516,179
--------------- --------------
Total liabilities and shareholders' equity............................ $ 221,875,759 $ 205,266,735
=============== =============
</TABLE>
See accompanying notes.
F-4
<PAGE>
CAPITAL SENIOR LIVING CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------- ---------
<S> <C> <C> <C>
Revenues:
Resident and health care revenue............................... $ 41,070,673 $ 25,987,776 $22,159,515
Rental and lease income........................................ 4,303,739 4,281,603 4,275,611
Unaffiliated management services revenue....................... 2,694,887 2,464,677 1,919,618
Affiliated management services revenue......................... 455,636 1,327,019 1,378,444
Unaffiliated development fees.................................. 1,341,102 1,234,050 803,767
Affiliated development fees.................................... 14,085,547 7,472,501 172,927
------------- ------------- -------------
Total revenues............................................ 63,951,584 42,767,626 30,709,882
Expenses:
Operating expenses............................................. 24,469,798 17,067,451 16,701,127
General and administrative expenses............................ 9,212,250 6,093,810 7,041,732
Provision for bad debts....................................... 15,895,566 500,000 43,254
Depreciation and amortization.................................. 4,671,076 2,733,658 2,117,288
------------- ------------- -------------
Total expenses............................................ 54,248,690 26,394,919 25,903,401
------------- ------------- -------------
Income from operations........................................... 9,702,894 16,372,707 4,806,481
Other income (expense):
Interest income................................................ 5,822,277 4,938,989 3,185,815
Interest expense............................................... (7,089,229) (1,921,897) (2,022,494)
Gain on sale of properties..................................... 748,288 421,718 -
Other.......................................................... - - 440,007
------------- ------------- -------------
Income before income taxes and minority interest in
consolidated partnership....................................... 9,184,230 19,811,517 6,409,809
Provision for income taxes....................................... (2,991,723) (7,475,771) (792,524)
------------ ------------- -------------
Income before minority interest in consolidated partnership...... 6,192,507 12,335,746 5,617,285
Minority interest in consolidated partnership.................... (1,354,583) (379,187) (1,936,122)
------------ ------------- -------------
Net income....................................................... $ 4,837,924 $ 11,956,559 $ 3,681,163
============ ============ ============
Net income per share:
Basic.......................................................... $ 0.25 $ 0.61 $ 0.33
============ ============ ============
Diluted....................................................... $ 0.24 $ 0.61 $ 0.33
============ ============ ============
Weighted average shares outstanding - basic................... 19,717,347 19,717,347 11,150,087
============ ============ ============
Weighted average shares outstanding - diluted................. 19,806,341 19,717,347 11,150,087
============ ============ ============
Pro forma net income (unaudited):
Net income..................................................... $ 3,681,163
Pro forma income taxes......................................... (964,776)
-------------
Pro forma net income............................................. $ 2,716,387
============
</TABLE>
See accompanying notes.
F-5
<PAGE>
CAPITAL SENIOR LIVING CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED
PARTNERS' ------------------------ PAID-IN EARNINGS
CAPITAL SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
----------- ---------- ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997............. $17,257,778 1,680,000 $ 16,800 $ 26,558 $ (100,612) $ 17,200,524
Purchase of Beneficial Unit
Certificates of CSLC ............. 374,867 - - - - 374,867
Distributions prior to Offering .... - - - (457,647) (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 - 110,330,915
Equity not retained in Asset Purchase (20,133,353) - - (18,436,849) - (38,570,202)
Net income.......................... 2,500,708 - - - 1,180,455 3,681,163
----------- ----------- ---------- ----------- ------------ -------------
Balance at December 31, 1997........... - 19,717,347 197,173 91,740,251 622,196 92,559,620
Net income.......................... - - - - 11,956,559 11,956,559
----------- ------------ ---------- ----------- ------------ -------------
Balance at December 31, 1998 - 19,717,347 197,173 91,740,251 12,578,755 104,516,179
Non cash compensation............... - - - 194,560 - 194,560
Net income.......................... - - - - 4,837,924 4,837,924
----------- ------------ ---------- ----------- ------------ -------------
Balance at December 31, 1999 $ - 19,717,347 $ 197,173 $91,934,811 $ 17,416,679 $109,548,663
=========== ============ ========== =========== =========== -============
</TABLE>
See accompanying notes.
F-6
<PAGE>
CAPITAL SENIOR LIVING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1999 1998 1997
------------ ------------ -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income............................................ $ 4,837,924 $ 11,956,559 $ 3,681,163
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation..................................... 4,567,172 2,639,883 1,894,665
Amortization..................................... 103,904 93,775 222,623
Amortization of deferred financing charges....... 518,842 163,708 -
Minority interest in consolidated
partnership.................................... 1,354,583 379,187 1,936,122
Deferred interest................................ - (679,619) (173,456)
Deferred income from affiliates.................. 992,360 792,240 -
Deferred income.................................. (115,062) (116,194) 231,256
Deferred income taxes............................ (30,235) (296,478) (39,158)
Gain on sale of property......................... (748,288) (421,718) -
Non cash compensation............................ 194,560 - -
Provision for bad debts.......................... 15,895,566 500,000 43,254
Changes in operating assets and liabilities,
net of acquisitions:
Cash, restricted............................. - - 186,416
Accounts receivable.......................... (1,011,705) (1,481,883) (1,556,965)
Accounts receivable from affiliates.......... (12,463,743) (7,190,431) 90,955
Interest receivable from affiliates.......... (644,727) (306,108) -
Prepaid expenses and other................... (59,620) 4,110 (373,006)
Other assets................................. (1,503,759) (1,059,034) (11,454)
Accounts payable............................. (268,311) 311,734 2,667,158
Accrued expenses............................. (871,927) 525,944 23,529
Federal and state income taxes payable....... (7,703,634) 836,920 831,682
Customer deposits............................. 59,318 36,812 28,955
------------ ------------ ------------
Net cash provided by operating activities............. 3,103,218 6,689,407 9,683,739
INVESTING ACTIVITIES
Capital expenditures.................................. (1,887,448) (6,027,361) (2,441,106)
Cash paid for acquisitions............................ - (67,728,438) -
Proceeds from sale of property........................ 2,740,217 676,036 -
Advances to affiliates................................ (22,794,299) (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)
Proceeds from (investments in) limited partnerships 5,414,122 (1,693,934) (15,609,034)
------------ ----------- -----------
Net cash used in investing activities................. (16,527,408) (86,501,859) (81,501,525)
FINANCING ACTIVITIES
Proceeds from notes payable and line of credit........ 61,506,256 67,039,026 78,663,883
Repayments of notes payable and line of credit........ (48,981,034) (791,214) (77,363,736)
Repayments of notes payable to affiliates............. - - (1,166,481)
Proceeds from notes payable to affiliates............. - - 500,000
Distributions to minority partners.................... (1,198,447) - (224,795)
Distributions prior to Offering....................... - - (457,647)
Issuance of common stock, net......................... - - 110,330,915
Cash received for redemption of NHP limited
partnership interest................................ - 1,997,280 -
Repurchase of HCP limited partnership interests by
HCP................................................. - (144,791) -
Repurchase of Beneficial Unit Certificates of CSLC.... - - (960,752)
Deferred financing charges paid....................... (741,831) (585,804) (196,888)
----------- ----------- -----------
Net cash provided by financing activities............. 10,584,944 67,514,497 109,124,499
----------- ----------- -----------
(Decrease) increase in cash and cash equivalents..... (2,839,246) (12,297,955) 37,306,713
Cash and cash equivalents at beginning of year....... 35,827,270 48,125,225 10,818,512
----------- ----------- -----------
Cash and cash equivalents at end of year............. $32,988,024 $35,827,270 $48,125,225
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES
Cash paid during the year for:
Interest............................................ $ 6,475,989 $ 1,956,812 $ 2,041,366
=========== =========== ===========
Income taxes........................................ $10,275,592 $ 6,935,330 $ -
=========== =========== ===========
</TABLE>
See accompanying notes
F-7
<PAGE>
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
1. ORGANIZATION AND FORMATION
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, Inc. ("Living"); Capital Senior
Development, Inc. ("Development"); Capital Senior Management 1, Inc.
("Management 1"); Capital Senior Management 2, Inc. ("Management 2"); Capital
Senior Living Trust I ("Trust I"); Quality Home Care, Inc. ("Quality"); Capital
Senior Living Properties, Inc. including HealthCare Properties, L.P. ("HCP");
and Capital Senior Living Properties 2, Inc. ("Properties 2"), which includes
Capital Senior Living Properties 2-Gramercy, Inc. ("Gramercy"), Capital Senior
Living Properties 2-NHPCT, Inc. ("NHPCT") and Capital Senior Living Properties 2
- - NHPT, Inc. ("NHPT") (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, the 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 the Company had acquired a controlling financial interest in HCP during 1997.
At December 31, 1999, 1998 and 1997, the Company owned approximately 57%, 57%
and 56% 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 health
care properties. One property is operated by HCP and six 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
F-8
<PAGE>
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
unrelated third party.
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. Cash and cash equivalents, at
December 31, 1999 and 1998, includes the cash and cash equivalents of the HCP
partnership of $13,723,936 and $11,971,405, respectively.
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 of $516,163, included in other assets, 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,
1999 and 1998, was $368,460 and $320,530, respectively. Goodwill of $1,264,881,
included in other assets, 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, 1999 and 1998, was $94,723 and
$51,005, 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. The
carrying value of a long-lived asset is considered impaired when the anticipated
undiscounted cash flows from such asset is separately identifiable and is less
than its carrying value. In that event, a loss is recognized based on the amount
the carrying value exceeds the fair market value, generally based on discounted
cash flows, of the long-lived asset. The Company 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, 1999 and 1998.
ASSETS HELD FOR SALE
During 1999, the Company reclassified four of its properties in HCP to
assets held for sale. Two of the properties had been leased to Rebound Inc., a
subsidiary of HealthSouth Corporation ("HealthSouth"), under a master lease
agreement and both properties were closed prior to February 28, 1997. Effective
August 25, 1999, HealthSouth agreed to transfer control of the two closed
communities to the Company. The assets of one of the two communities, with the
exception of two houses, were sold on September 20, 1999. The Company estimates
the properties held for sale have an aggregate fair value, net of costs of
disposal, of $9,549,084 at December 31, 1999. The amounts the Company will
ultimately realize could differ materially from this estimate.
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.
F-9
<PAGE>
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Prior to the Formation, the predecessor companies 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.
REVENUE RECOGNITION
Resident and health care 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 11%, 16% and
22% in 1999, 1998 and 1997, respectively 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 payment under the foregoing programs in amounts determined based
on established rates that differ from private pay rates. In 1998 and prior
years, payments were based on the filing of an annual cost report prepared in
accordance with federal regulations, which 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 payable 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 through
1998 to these facilities were 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 1997 through
1998, as of December 31, 1999, 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. 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 2009. Management
services revenue is shown net of reimbursed expenses. The reimbursed expenses
from affiliates were $1,655,459, $3,486,163 and $3,892,526, for the years ended
December 31, 1999, 1998 and 1997, respectively. Reimbursed expenses from
unaffiliated parties were $12,539,616, $11,203,790 and $8,941,343, for the years
ended December 31, 1999, 1998 and 1997, respectively.
Affiliated development fees in the accompanying statements of income
represent development fees earned from the Triad Entities (see Note 3).
CREDIT RISK
The Company's resident receivables are generally due within 30 days and
development fee receivables are due through completion of construction, which is
generally one year. The Company does not require collateral. Credit losses, on
resident receivables, have been within management's expectations, and management
believes that the allowance for doubtful accounts adequately provides for any
expected losses.
F-10
<PAGE>
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
ADVERTISING
Advertising is expensed as incurred. Advertising expenses for the years ended
December 31, 1999, 1998 and 1997 were $357,208, $243,720 and $336,738,
respectively.
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.
The following table set forth the computation of basic and diluted net
income per share (in thousands except for per share amounts):
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net income $ 4,838 $ 11,957 $ 3,681
Weighted average shares outstanding - basic 19,717 19,717 11,150
Effect of dilutive securities:
Employee stock options 89 -- --
----------- ----------- -----------
Weighted average shares outstanding - dilutive 19,806 19,717 19,717
=========== =========== ===========
Basic net income per share $ 0.25 $ 0.61 $ 0.33
=========== =========== ===========
Diluted net income per share $ 0.24 $ 0.61 $ 0.33
=========== =========== ===========
</TABLE>
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 and
director 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"). Stock option grants to non-employees are accounted
for in accordance with the fair value method of FASB 123.
SEGMENT INFORMATION
The Company evaluates the performance and allocates resources of its senior
living facilities based on current operations and market assessments on a
property by property basis. The Company does not have a concentration of
operations geographically or by product or service as its management functions
are integrated at the property level.
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 1999
presentation.
F-11
<PAGE>
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. TRANSACTIONS WITH AFFILIATES
The Company has entered into development and management agreements with the
partnerships set out below (the "Triad Entities") for the development and
management of new senior living communities. The Triad Entities own and finance
the construction of new senior living communities. These communities are
primarily Waterford communities. The development of senior living communities
typically involves a substantial commitment of capital over an approximate 12
month construction period, during which time no revenues are generated followed
by a 14 to 18 month lease up period.
The Company is accounting for these investments under the equity method of
accounting based on the provisions of the Triad Entities partnership agreements.
The following table sets forth the percentage ownership the Company has in
each of the Triad Entities, the capital invested, information related to loans
made by the Company to each Triad Entity and information on deferred income
related to each Triad Entity (dollars in thousands):
<TABLE>
<CAPTION>
Notes Receivable Deferred Income
----------------------------------------------- ---------------------
LP
Ownership Capital Committed Balance Interest Development
Interest Investment Amount Dec. 31, Maturity Rate Interest Fees
----------- ---------- ---------- ---------- ----------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ENTITY
Triad Senior
Living I, L.P.
(Triad I)
1999 19.0% $3,000 $ -- $ 30 -- 8.0% $230 $426
1998 19.0 330 9,636 8.0 67 223
Triad Senior
Living II, L.P.
(Triad II)
1999 19.0 74 15,000 11,510 September 10.5 130 197
1998 19.0 74 10,000 932 25, 2003 10.5 3 95
Triad Senior
Living III,
L.P.
(Triad III) 19.0 143 10,000 9,810 February 10.5 111 377
1999 19.0 143 10,000 -- 8, 2004 10.5 -- 163
1998
Triad Senior
Living IV, L.P.
(Triad IV)
1999 19.0 143 10,000 5,178 December 10.5 73 106
1998 19.0 143 10,000 1,160 30, 2003 10.5 -- 238
Triad Senior
Living V, L.P.
(Triad V) June 30,
1999 10.0 -- 10,000 3,467 2004 12.0 17 80
Triad Senior
Living VI, L.P.
(Triad VI) October 1,
1999 5.0 -- 3,000 600 2004 12.0 2 --
</TABLE>
The Company typically receives a development fee of 4% of project costs, as
well as reimbursement of expenses and overhead not to exceed 4% of project
costs. These fees are recorded over the term of the development project on a
basis approximating the percentage of completion method. In addition, when the
properties become
F-12
<PAGE>
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
operational, the Company typically receives management fees in an amount equal
to the greater of 5% of gross revenues or $5,000 per month per community, plus
overhead not to exceed 1% of gross revenue.
The Company has the option to purchase the partnership interests of the
other parties in Triad Entities for an amount equal to the amount paid for the
partnership interest by the other partners, plus a noncompounded return of 12%
per annum except for Triad I. In addition, each Triad Entity except Triad I
provides the Company with an option to purchase the community developed by the
applicable partnership 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) of the community.
In December 1999, Triad I completed a recapitalization in which Lehman
Brothers purchased from third parties 80% of the limited partnership interest in
Triad I for an investment of $12,000,000. The investment enabled Triad I to
repay the Company approximately $9,000,000 in loans. The Company increased its
equity contribution in Triad I to $3,000,000 and continues to own a 19% limited
partnership interest. The Company has the option to purchase the Triad I
communities for an amount specified in the partnership agreement. The Company
will continue to develop and manage the communities in the Triad I partnership.
The Company has made no determination as to whether it will exercise any of
these purchase options.
Each of the Triad Entities finances the development of the new communities
though the combination of equity funding, traditional construction loans and
permanent financing with institutional lenders secured by first liens on the
communities and unsecured loans from the Company. The Company loans may be
prepaid without penalty. The financings from institutional lenders are secured
by first liens on the communities as well as assignment to the lenders of the
construction contracts and the development and management agreements with the
Company. Each development and management agreement assigned to an institutional
lender is also guaranteed by the Company and those guarantees are also assigned
to the lenders. In certain cases, the management agreements contain an
obligation of the Company to fund operating deficits to the Triad Entities if
the other financing sources of the Triad Entities have been fully utilized.
These operating deficit funding obligations are guaranteed by the Company.
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, 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.
F-13
<PAGE>
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 - basic and diluted...................................... $ 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 that would have actually
resulted had the acquisitions occurred on January 1, 1997.
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1999 1998
------------------ -------------
<S> <C> <C>
Land.........................................................................$ 9,173,178 $ 10,641,671
Land improvements............................................................ 107,232 6,400
Buildings and building improvements.......................................... 101,824,613 119,759,970
Furniture and equipment...................................................... 5,047,046 4,685,174
Automobiles.................................................................. 169,361 73,890
Construction in process...................................................... 54,354 71,611
--------------- --------------
116,375,784 135,238,716
Less accumulated depreciation................................................ 11,652,568 16,294,763
--------------- --------------
Property and equipment, net..................................................$ 104,723,216 $ 118,943,953
=============== ==============
</TABLE>
On September 20, 1999, the Company sold one of its properties for
$2,740,000, net of sales commission, which resulted in the recognition of a gain
of $748,248. On December 7, 1998, the Company sold land on one of its properties
for $12,662, which resulted in the recognition of a $8,545 gain and net cash
proceeds of $11,052. 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.
The Company capitalized $0 and $348,626 of interest as part of building and
building improvements during 1999 and 1998, respectively.
6. ACCRUED EXPENSES
Accrued expenses consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1999 1998
------------- --------------
<S> <C> <C>
Accrued salaries, bonuses and related expenses............................. $ 936,469 $ 847,722
Accrued property taxes..................................................... 665,663 538,697
Other...................................................................... 525,242 845,476
------------- --------------
$ 2,127,374 $ 2,231,895
============= ==============
</TABLE>
F-14
<PAGE>
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. NOTES PAYABLE AND LINE OF CREDIT
Notes payable consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1999 1998
--------------- --------------
<S> <C> <C>
WMF mortgage loan, bearing interest at 7.69%, payable in monthly installments
of principal and interest of $48,089, maturing on January 2008 secured by
a certain property of Gramercy with a net book value of $10,819,112 at
December 31, 1999......................................................... $ 6,217,055 $ 6,312,032
WMF second mortgage loans, 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
with a net book value of $10,819,112 at December 31, 1999................. 1,944,885 1,975,159
Lehman mortgage loan, bearing interest at 8.20%, payable in
monthly installments of principal and interest of $360,915,
maturing on September 2009 secured by certain properties of NHPT
with a net book value of $62,378,615 at December 31, 1999................. 45,801,968 -
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 NHPT................ - 47,700,000
A.I. Credit Corp insurance premium financing, bearing interest at 7.09%,
payable in monthly installments of principal and interest of $19,205,
maturing on April 2002.................................................... 478,066 -
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 with a net book value of
$8,431,900 at December 31, 1999........................................... 5,173,281 6,128,656
------------- -------------
59,615,255 62,115,847
Less current portion...................................................... 1,199,299 48,419,050
------------- -------------
$ 58,415,956 $ 13,696,797
============= =============
</TABLE>
The aggregate maturities of notes payable at December 31, 1999, are as
follows:
<TABLE>
<S> <C>
2000 $ 1,199,299
2001 1,185,465
2002 1,132,665
2003 1,153,302
2004 1,255,320
Thereafter 53,689,204
---------------
$ 59,615,255
===============
</TABLE>
In August 1999, the Company repaid $47,700,000 in outstanding short-term
variable rate debt and replaced it with $45,970,000 of long-term fixed rate
loans. The fixed rate loans are non-recourse loans secured by certain properties
owned by the Company. These loans are for 10-year terms, bear interest at 8.2%
with the principal being amortized over a 25-year period. In connection with
obtaining these mortgage loans the Company incurred $574,138 in financing
charges, that were deferred and amortized over the life of the loans using the
straight-line method. Accumulated amortization was $19,138 at December 31, 1999.
F-15
<PAGE>
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
In connection with obtaining the 1998 Lehman and other 1998 mortgage loans,
the Company incurred $576,904 in financing charges, that were deferred and
amortized over the life of the loans using the straight-line method. Accumulated
amortization was $528,985 and $123,727 at December 31, 1999 and 1998,
respectively.
On December 10, 1997, the Company entered into a $20 million revolving line
of credit with a bank, that was to expire December 10, 2000. In April 1999, the
line of credit was amended to increase the availability under the credit
facility to $34 million and extend the maturity date to April 2002. Under the
terms of the line of credit, interest is due monthly and the principle is due at
the end of the term of the credit agreement. Borrowings under the line of credit
are secured by four senior living communities with a net book value of
$32,158,248 at December 31, 1999, and bear interest at the prime rate or LIBOR
plus 1.7% (8.18% and 7.33% at December 31, 1999 and 1998, respectively). The
line of credit may be used for the acquisition of additional properties,
development of expansions to existing properties, acquisition of additional
interests in HCP and NHP and general working capital purposes. Amounts
outstanding under the line of credit at December 31, 1999 and 1998 were
$34,000,000 and $18,974,186, respectively. In connection with obtaining the line
of credit and the subsequent amendment, the Company incurred $160,684, $6,847
and $111,533 in 1999, 1998 and 1997, respectively, in financing charges, that
were deferred and amortized over the life of the line of credit. Accumulated
amortization was $133,497, $41,066 and $3,098 at December 31, 1999, 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.
HCP leased four of its properties under a master lease to HealthSouth (see
Note 17). Prior to February 28, 1997, HealthSouth closed two of the communities.
Effective August 5, 1999, HealthSouth agreed to transfer control of the two
closed communities to HCP. HealthSouth also agreed to continue making its full
lease payments on all four communities. The rentals under the master lease
provide additional security for one note payable used to finance one of the
master lease properties. The note is 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. The rights,
preferences and privileges of holders of common stock are subject to the rights
of the holders of preferred stock.
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.
Purchases of Beneficial Unit Certificates ("BUCs") of CSLC during 1997
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 during 1997, at an average cost
of $17.37 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
F-16
<PAGE>
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 distributions of $1,198,447 and $224,795 to
minority partners in 1999 and 1997, respectively.
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 was amended during the year to increase the number of options available for
grant under the plan from 1,565,000 to 2,000,000 shares and 2,000,000 shares of
common stock are reserved for future issuance. The option exercise price and
vesting provisions of such options are fixed when the option is granted. The
options expire four to 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.
A summary of the Company's stock option activity, and related information
for the years ended December 31, 1999 and 1998 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
Granted 874,500 $7.54
Exercised - -
Forfeited 76,000 $11.62
Expired - -
-------------- --------------------
Outstanding at December 31, 1999 1,498,000 $10.13
============== ====================
Exercisable at December 31, 1999 421,780 $13.42
============== ====================
============== ====================
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, 1999 and 1998, is approximately 8.4 years and 8.8 years, respectively.
Options outstanding, as of December 31, 1999, are exercisable at prices ranging
from $7.06 to $13.50. Unoptioned shares available for the granting of options at
December 31, 1999 and 1998 was 502,000 and 865,500, respectively.
During 1999, the Company recorded compensation expense of $194,560 relating
to 52,500 options held by a former officer of the Company that became vested in
conjunction with his change in employee status. These options are included in
the table above.
F-17
<PAGE>
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The average daily price of the stock during 1999, 1998 and 1997 subsequent
to the Offering was $8.94, $11.73 and $13.04 respectively, per share. For 1998
and 1997 the options were anti-dilutive and therefore were not used in 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. 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 for 1999, 1998 and 1997, respectively: risk free interest rate of
6.5, 5.7 and 5.7 percent; dividend yields of zero percent for all years;
expected lives of seven and one-half years for all years; and volatility factors
of the expected market price of the Company's common stock of 58.4, 70.1 and
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.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1999 1998 1997
---------------- --------------- ---------------
<S> <C> <C> <C>
Net income:
As reported............................................ $ 4,838,000 $ 11,957,000 $ 3,681,000
Pro forma.............................................. 3,428,000 10,848,000 2,787,000
Net income per share - basic:
As reported............................................ $ 0.25 $ 0.61 $ 0.33
Pro forma.............................................. 0.17 0.55 0.25
Net income per share - diluted:
As reported............................................ 0.24 0.61 0.33
Pro forma.............................................. 0.17 0.55 0.25
</TABLE>
10. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1999 1998 1997
---------------- --------------- ---------------
<S> <C> <C> <C>
Current:
Federal................................................ $ 2,523,024 $ 6,308,319 $ 730,184
State.................................................. 498,934 1,463,930 101,498
Deferred:
Federal................................................ (174,264) (240,635) (39,404)
State.................................................. 144,029 (55,843) 246
------------- -------------- ------------
$ 2,991,723 $ 7,475,771 $ 792,524
============= ============== ============
</TABLE>
F-18
<PAGE>
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,
--------------------------------------------------------
1999 1998 1997
---------------- --------------- ----------------
<S> <C> <C> <C>
Tax expense at federal statutory rates................ $ 2,662,080 $ 6,606,992 $1,521,053
State income tax expense, net of federal benefit.......... 325,557 937,532 101,744
Tax expense at federal statutory rates on income earned
prior to Formation and Asset Purchase ................. - - (831,026)
Conversion of S corporations to C corporation status ..... - - (41,085)
Other..................................................... 4,086 (68,753) 41,838
---------------- --------------- ----------------
$ 2,991,723 $ 7,475,771 $ 792,524
================ =============== ================
</TABLE>
A summary of the Company's deferred tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1999 1998
-------------------------------
<S> <C> <C>
Deferred tax assets:
Tax basis in excess of book basis arising from the Asset Purchase................. $ 9,377,655 $ 9,644,505
Other............................................................................. 2,098,825 1,113,530
--------------- ---------------
Total deferred tax assets......................................................... 11,476,480 10,758,035
Deferred tax liabilities............................................................. 1,050,490 362,280
--------------- ---------------
Total deferred tax assets, net.................................................... $10,425,990 $ 10,395,755
=============== ===============
</TABLE>
11. EMPLOYEE BENEFIT PLANS
Effective January 1, 1999, the Company adopted a 401(k) salary deferral plan
(the `Plan'). Contributions to the Plan are in the form of employee salary
deferrals, which are subject to employer matching contributions of up to 2% of
the employee's annual salary. All employees of the Company meeting minimum
service and age requirements are eligible to participate in the Plan. The
Company incurred no administrative expenses related to the Plan in 1999.
Matching contributions of $147,000 were contributed to the Plan in 1999.
12. 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, $0 and
$679,423 for the years ended December 31, 1999, 1998 and 1997, 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 year
ended December 31, 1997 were $987,840 and $1,589,703, 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.
F-19
<PAGE>
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
In October 1997, HCP paid an affiliate a refinancing fee of $13,245.
A former officer and significant shareholder of the Company is chairman of
the board of a bank where the Company holds the majority of its operating cash
accounts.
13. CONTINGENCIES
On or about October 23, 1998, Robert Lewis filed a putative class action
complaint on behalf of certain holders of assignee interests (the "Assignee
Interests") in NHP Retirement Housing Partners I Limited Partnership ("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 ninety Assignee Interests
in NHP 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 those properties
and unspecified damages. The Company believes the complaint is without merit and
is vigorously defending itself in this action. The Company has filed a Motion to
Dismiss in this case, which is currently pending. The Company is unable to
estimate any liability related to this claim, if any.
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.
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and fair values of financial instruments at December 31,
1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
---------------------------------- -----------------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
--------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
Cash and cash equivalents.................. $ 32,988,024 $32,988,024 $35,827,270 $35,827,270
Line of credit............................. 34,000,000 34,000,000 18,974,186 18,974,186
Notes payable.............................. 59,615,255 59,615,255 62,115,845 62,115,845
</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.
F-20
<PAGE>
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
15. INVESTMENTS IN LIMITED PARTNERSHIPS
The investments in limited partnerships balance consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------
1999 1998
---------------- ---------------
<S> <C> <C>
NHP pension notes............................................................. $ 5,761,664 $ 12,646,471
NHP limited partnership interests............................................. 2,086 1,708
Triad I limited partner interest.............................................. 3,000,000 330,243
Triad II limited partner interest............................................. 74,100 74,100
Triad III limited partner interest............................................ 142,500 142,500
Triad IV limited partner interest............................................. 142,500 142,500
Triad V limited partner interest.............................................. - -
Triad VI limited partner interest............................................. - -
------------- ------------
$ 9,122,850 $ 13,337,522
============= ============
</TABLE>
HCP:
During 1999, 1998 and 1997, the Company paid $0, $144,791, and $5,604,944,
respectively, for partnership interests in HCP and as of December 31, 1999 and
1998, the Company had a 57% ownership in HCP.
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. From
November 1, 1997 through September 30, 1998, the Company recorded 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 in turn redeemed $7,500,000 of the
Company's investment in the NHP Notes and distributed approximately $5,300,000
of deferred interest on such notes. From October 1, 1998 through December 31,
1998, the Company began 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. In the fourth quarter of
fiscal 1999, the Company reevaluated the assumptions related to its investment
in the NHP Notes, and as a result is reducing the income expected to be earned
from the NHP Notes. This change in estimate resulted in a $1,206,000 reduction
in interest income in the fourth quarter. In addition, future interest income is
expected to decrease by approximately $1,253,842 and $1,687,705 in 2000 and
2001, respectively (the NHP Notes redemption is December 31, 2001).
During 1999 and 1998, the Company paid $378 and $344, respectively,
increasing the ownership of limited partnership units in NHP to 4.8% from 3.9%.
In addition, the Company invested $13,500 in NHP Notes, during 1999, bring the
Company's ownership of NHP Notes to 33.1%. The Company classifies its investment
in NHP Notes as held to maturity.
F-21
<PAGE>
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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,
--------------------------------------
1999 1998
----------------- -----------------
<S> <C> <C>
Cash.................................................................. $ 5,553,357 $ 5,821,300
Property and equipment, net........................................... 18,392,872 18,849,354
Other assets.......................................................... 387,343 592,146
----------------- -----------------
Total assets..................................................... $24,333,572 $25,262,800
================= =================
Pension notes......................................................... $20,157,826 $20,157,826
Interest payable...................................................... 14,879,063 13,142,864
Other liabilities..................................................... 471,532 633,817
Partnership deficit................................................... (11,174,849) (8,671,707)
----------------- -----------------
Total liabilities and partnership deficit............................. $24,333,572 $25,262,800
================= =================
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1999 1998 1997
--------------- --------------- -----------------
<S> <C> <C> <C>
Net revenue.......................................... $5,322,600 $ 13,746,088 $15,548,138
Net income (loss).................................... (2,474,347) 3,409,569 (3,522,917)
</TABLE>
16. ALLOWANCE FOR DOUBTFUL ACCOUNTS
The components of the allowance for doubtful accounts are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------
1999 1998 1997
--------------- ----------------- ----------------
<S> <C> <C> <C>
Balance at beginning of year......................... $ 801,042 $ 301,042 $ 164,822
Provision for bad debts........................... 15,895,566 500,000 43,254
Write-offs and other.............................. (14,352,728) - (17,474)
Recoveries........................................ 700,000
Allowances not assumed in Asset Purchase.......... - - (145,602)
Allowance arising from consolidation of HCP....... - - 256,042
--------------- --------------- -----------------
Balance at end of year............................... $ 3,043,880 $ 801,042 $ 301,042
=============== =============== =================
</TABLE>
In the fourth quarter of fiscal 1999, the Company wrote off notes receivable
and development fees receivable from Triad Entities that were unable to secure
financing on favorable terms for the development of their senior living
communities. These joint ventures were in various stages of developing 19
Waterford communities. In addition, the Company will be acquiring six sites
currently owned be these joint ventures and will receive the contractual rights
to the remaining thirteen sites that were being developed by these joint
ventures. Recoveries relate to a settlement with the Bankruptcy Trustee for NCA
Cambridge on rental income written off prior to August 1996.
17. 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
F-22
<PAGE>
CAPITAL SENIOR LIVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
a fee basis as services are rendered. Rent expense under these leases was
$297,662, $266,590 and $188,986 for 1999, 1998 and 1997, respectively. Future
commitments are as follows:
<TABLE>
<CAPTION>
<S> <C>
2000 $ 441,217
2001 447,465
2002 284,858
2003 4,695
2004 1,600
---------------
$1,179,835
===============
</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 $332,411, $310,275 and $271,340 in 1999,
1998 and 1997, respectively.
Minimum rentals for the HCP leases are $3,761,262 and $2,858,619 per year in
2000 and 2001, respectively, subject to change based on changes in interest
rates. There are no minimum rentals thereafter. Property and improvements less
accumulated depreciation attributable to such rentals amounted to $15,354,292
and $18,329,061 at December 31, 1999 and 1998, respectively.
Three of HCP's senior living communities are subject to a master lease with
a single operator, 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,
1999 and 1998, no contingent rentals have been accrued on the master lease.
HealthSouth has agreed to continue making its full lease payments on all four
communities.
18. PRO FORMA INCOME TAXES (UNAUDITED)
The income taxes on earnings of the S corporations and partnerships 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%.
19. PRO FORMA RESULTS OF OPERATIONS (UNAUDITED)
Shown below are unaudited pro forma consolidated amounts for the year ended
December 31, 1997 representing the results of operations of the Company for such
period after giving effect to the adjustments relating to the Offering and the
Formation, as if the transactions had occurred as of January 1, 1997. 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, 1997, or the future results of
operations of the Company.
<TABLE>
<S> <C>
Total revenues........................................................ $30,709,882
Net income............................................................ 4,991,288
Net income per share.................................................. $ 0.25
Shares used in computing pro forma net income per share............... 19,717,347
</TABLE>
F-23
<PAGE>
20. PENDING MERGERS
On October 19, 1999, the Company executed Amended and Restated
Agreements of Plans of Merger with each of ILM Senior Living, Inc. and ILM II
Senior Living, Inc. for a combined purchase price of $172 million cash plus
assumed 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
amended merger agreements, both ILM Senior Living, Inc. and ILM II Senior
Living, Inc. will 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 receiving
100% of the merger consideration in cash. The Amended and Restated Agreements
and Plans of Merger amend and restate the Agreements and Plans of Merger dated
February 7, 1999. The outside termination date of the amended merger agreements
was extended to September 30, 2000. Both mergers had been previously approved by
the boards of directors of each company. Each transaction requires the approval
of two-thirds of the applicable shareholders of either ILM Senior Living, Inc.
or ILM II Senior Living, Inc. The mergers are also subject to certain other
customary conditions including regulatory approvals and are expected to be
completed during the first half of 2000. Form 8-K's were filed by the Company on
October 25, 1999 with copies of the Amended and Restated Agreements and Plans of
Merger attached thereto.
During 1999, the Company received management and incentive fees of
$1,202,966 and $790,281 from ILM Senior Living, Inc. and ILM II Senior Living,
Inc., respectively. ILM Senior Living, Inc. and ILM II Senior Living, Inc. are
subject to the reporting requirements of the Securities and Exchange Commission.
F-24
<PAGE>
EXHIBIT 10.76
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into on
the 25th day of May, 1999, by and between Capital Senior Living Corporation,
a Delaware corporation ("CSL" or "the Company"), and Ralph A. Beattie, an
individual residing in the State of Texas ("Employee"). The term of this
Agreement shall be deemed to have commenced as of June 1, 1999 ("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 report to the Chief Executive Officer of CSL
and 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 three (3) year period ending on May 24, 2002, however, the term of
this Agreement shall automatically be extended for a two (2) 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.
<PAGE>
4. SALARY AND BENEFITS. During the term of this Agreement:
A) CSL shall pay to Employee a base salary at an annual
rate of One Hundred Eighty Thousand Dollars
($180,000) per annum, paid in approximately equal
installments no less frequently than semi-monthly. An
annual bonus of thirty- three and one-third percent
(33-1/3%) of Employee's base salary shall be paid in
quarterly installments, subject to increase by the
Compensation Committee and subject to meeting
performance standards that the Company's reported
quarterly earnings per share is not less than the
First Call consensus earnings per share for that
quarter. The Compensation Committee will use its
reasonable discretion to determine the amount of the
quarterly bonus to be paid if the reported quarterly
earnings per share are lower than the First Call
consensus earnings per share. 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 in an amount of Four (4) weeks per year 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
2
<PAGE>
common stock of the Company. The number of options to be offered to Employee
shall be determined by the Board of Directors of CSL.
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
3
<PAGE>
and Procedures Manual his base salary and
annual bonus paid during the term of this
Agreement in the past twelve (12) months for
the balance of the term of this Agreement
(not including any future extensions), but
not less than two (2) years (base salary
plus annual bonus paid during the term of
this Agreement in the past twelve (12)
months for three (3) years if termination
due to a Fundamental Change) 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 and
annual bonus paid during the term of this
Agreement in the past twelve (12) months 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
4
<PAGE>
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.
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.
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 business, or
5
<PAGE>
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 or representations, oral or written,
6
<PAGE>
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.
7
<PAGE>
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 CORPORATION
a Delaware corporation
Address:
14160 Dallas Parkway, #300
Dallas, TX 75240 By: /s/ James A. Stroud
----------------------------------------
James A. Stroud, Chairman of the Company
EMPLOYEE
Address:
3624 Haynie Avenue
Dallas, TX 75205 /s/ Ralph A. Beattie
----------------------------------------
8
<PAGE>
Exhibit 10.77
CONSULTING/SEVERANCE AGREEMENT
THIS CONSULTING/SEVERANCE AGREEMENT ("Agreement") is made and
entered into as of the 20th day of May, 1999, by and between Capital Senior
Living Corporation, a Delaware corporation ("CSLC"), and Jeffrey L. Beck, an
individual ("Beck").
WHEREAS, Beck is a founder of CSLC and his leadership and commitment
has been instrumental in the success of CSLC, and he has prior to the date
hereof been the Chief Executive Officer, a director and Co-Chairman of CSLC;
WHEREAS, Beck now desires for personal reasons to retire from his
positions with CSLC and its subsidiaries, and he and CSLC have determined to
terminate that certain Amended and Restated Employment Agreement, dated
October 8, 1997, by and between Beck and CSLC;
WHEREAS, CSLC considers Beck's knowledge of CSLC, its business and
the senior living industry and his relationships with and knowledge of others
engaged in the senior living business to be of great strategic value to CSLC;
and
WHEREAS, CSLC therefore desires to retain Beck as a strategic
consultant, and Beck is willing to agree to those arrangements;
NOW, THEREFORE, in consideration of the premises and covenants
considered in this Agreement, the parties hereto agree as follows:
AGREEMENTS
1. BECK'S OBLIGATIONS. During the term of this Agreement, Beck
shall consult in an advisory capacity to the Board of Directors of CSLC (the
"Board"). As consultant, Beck shall provide to the Board strategic advice and
recommendations affecting the general welfare and business of CSLC and, as an
"elder statesman" of the senior living industry, act as a goodwill ambassador
for CSLC. Beck shall provide such services at the Board's request, upon
reasonable notice, at such time or times and for such duration as shall be
mutually agreed upon in any instance. It is expressly agreed that neither the
Board's failure to request such services nor any failure or refusal by Beck
to agree to any particular time or times and duration shall constitute a
breach of this Agreement, whether such failures or refusals be in a
particular instance or series of instances, the Board reposing great trust in
Beck to determine whether or not advisory services or the timing thereof are
appropriate in any particular instance or series of instances. It is also
expressly agreed that neither CSLC nor the Board has any right under this
Agreement to require Beck to report to or spend any time at CSLC's offices or
other facilities or that he attend any particular Board meetings. In the
event Beck becomes disabled during the term of this Agreement and as a result
is unable to perform the services provided for in this Section 1, the
payments and other benefits provided for in this Agreement shall nonetheless
continue and all other terms and conditions of this Agreement shall remain in
full force and effect. In the event of a Fundamental Change (as defined in
Section 15(b)
<PAGE>
of this Agreement) during the term of this Agreement, Beck shall have no
further obligation to provide services under this Section 1, CSLC shall have
no further obligation to provide the benefits under Section 6, this Agreement
shall immediately and automatically without further action by any person
become solely a severance agreement and the payments and benefits to Beck
provided for in this Agreement shall continue and all other terms and
conditions of this Agreement shall remain in full force and effect.
2. CONFIDENTIALITY. Beck hereby acknowledges his understanding
that as a result of his prior employment by CSLC and the consultancy provided
for in this Agreement, he has had and may have access to, and possession of,
valuable and important confidential or proprietary data, documents and
information concerning CSLC, its operations and its future plans. Beck hereby
agrees that he will not, either during the term of this Agreement, or at any
time after the term of this Agreement with CSLC, divulge or communicate to
any person or entity, or use to the detriment of CSLC 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, Beck shall surrender
to CSLC 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 CSLC
or any of its business, including all copies thereof, that Beck has in his
possession, whether or not such material was created or compiled by Beck, but
excluding, however, personal memorabilia belonging to Beck and notes taken by
him as a member of the Board of Directors ("Excluded Items"). With the
exception of the Excluded Items, Beck acknowledges that all such material is
solely the property of CSLC, and that Beck has no right, title or interest in
or to such materials. Notwithstanding anything to the contrary set forth in
this Section 2, the provisions of this Section 2 shall not apply to
information which: (i) is or becomes generally available to the public other
than as a result of disclosure by Beck, or (ii) is already known to Beck as
of the date of this Agreement from sources other than CSLC, or (iii) is
required to be disclosed by law or by regulatory or judicial process.
3. NON-COMPETITION; NON-SOLICITATION. Beck hereby agrees that
during the term of this Agreement and for a period of one (1) year after any
termination for any reason whatsoever of this Agreement, he will not and will
cause his Affiliates not to, directly or indirectly, acquire, develop or
operate senior living facilities anywhere in the United States. CSLC hereby
acknowledges and agrees that (i) Beck's or Beck's Affiliates' 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, and
(ii) Beck's services to Capital Senior Living Communities, LP and direct or
indirect interests therein shall not constitute a violation of this Section
3. During the term of this Agreement and following the termination for any
reason of this Agreement, Beck shall not for himself or any third party,
directly or indirectly employ, solicit for employment, or recommend for
employment any person employed by CSLC or its affiliated companies during the
period of such person's employment and for a period of two (2) years
thereafter without CSLC's consent.
The parties hereto have carefully considered the necessity for
protection of the goodwill and business of CSLC and the scope of such
protection. Beck acknowledges that the restrictions, prohibitions and other
provisions of this Section 3 are reasonable, fair and equitable in scope,
terms
2
<PAGE>
and duration, are necessary and essential to protect the legitimate business
interests and goodwill of CSLC, are a material inducement to CSLC to enter
into the transactions contemplated by this Agreement and that adequate
consideration has been and will be received under this Agreement by Beck for
such restrictions, prohibitions and other provisions.
4. WORK PRODUCT. Beck acknowledges that all innovations,
improvements, developments, methods, designs, analyses, reports and all
similar or related information which relates to CSLC's or any of its
subsidiaries' or affiliates' actual or anticipated business, or existing or
future products or services and which were conceived, developed or made by
Beck while employed by CSLC or during the term of this Agreement ("Work
Product") belong to CSLC or such subsidiary or affiliate. Beck will perform
all actions requested by the Board of Directors of CSLC to establish and to
confirm such ownership (including, without limitation, assignments, consents,
powers of attorney and other instruments).
5. COMPENSATION. CSLC shall pay to Beck consulting
compensation of $100,000 per year during the term of this Agreement, paid in
approximately equal installments no less frequently than twice a month. CSLC
shall not withhold or deduct from such compensation any amounts, Beck being
an independent contractor under this Agreement. CSLC shall also reimburse
Beck's reasonable and necessary business expenses incurred in providing
services to CSLC under this Agreement upon his presentation to CSLC of
itemized bills, vouchers or accountings.
6. OTHER BENEFITS. During the term of this Agreement and for
one year thereafter, CSLC, at CSLC's option, either shall continue to provide
health benefits made generally available by CSLC to its senior executives to
Beck and his dependents or shall reimburse Beck for the cost of obtaining
substantially equivalent benefits. During the term of this Agreement, CSLC
shall provide for Beck office facilities and furnishings identified on
Schedule A attached to this Agreement or substantially equivalent office
facilities. During the term of this Agreement, CSLC shall employ Rosemary
Papa for three days a week and shall assign Ms. Papa, as her sole and
exclusive duty, to provide administrative support to Beck; provided that
during the six months commencing with the execution and delivery of this
Agreement, Ms Papa will also be required to assist CSLC's management with
respect to insurance matters for CSLC and its affiliates. During such
assignment, Ms. Papa shall continue to be employed by CSLC with a benefits
package no less favorable than the one she now has, her compensation shall be
not less than 60% of the compensation she now receives, and she shall be
entitled to receive raises and additional benefits, including grants of stock
options, no less favorable than 60% of the higher of those provided to the
secretaries or administrative or executive assistants of the Chief Executive
Officer and the Chief Operating Officer of CSLC.
7. TERM OF AGREEMENT. Subject to the survival provisions of
Section 14 of this Agreement, the term of this Agreement shall be for a three
(3) year period commencing on the date of this Agreement. Beck may terminate
this Agreement at any time by written notice to CSLC, but any termination by
Beck shall not affect those parts of this Agreement the survival of which is
provided for in Section 14 of this Agreement. CSLC may terminate this
Agreement at any time by written notice to Beck, but any termination by CSLC
shall terminate only the rights of CSLC to consulting services under Section
1 of this Agreement and the obligations of Beck to provide such
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consulting services and shall not otherwise affect those parts of this
Agreement the survival of which is provided for in Section 14 of this
Agreement.
8. STOCK OPTIONS. All options for CSLC common stock granted by
CSLC to Beck and not exercised prior to the date of this Agreement, whether
or not presently vested and notwithstanding any other term thereof, shall
become fully vested upon the execution of this Agreement and shall be
exercisable at any time during the term of this Agreement and for one (1)
year after the expiration of the three-year term of this Agreement
(notwithstanding an earlier termination of this Agreement, if any).
9. REGISTRATION RIGHTS. Beck shall have the following
registration rights.
(a) For purposes of this Section 9, the term "Registrable
Securities shall mean any shares of CSLC common stock ("Common Stock")
beneficially owned by Beck (directly or indirectly) plus all shares of
Common Stock that Beck may acquire pursuant to the exercise of stock
options.
(b) If CSLC at any time proposes to register any of its
securities under the Securities Act for sale to the public, whether for
its own account or for the account of other security holders or both
(except with respect to registration statements on Forms S-4 or S-8 or
another form not available for registering the Registrable Securities
for sale to the public), each such time it will give written notice to
Beck of its intention so to do. Upon the written request of Beck,
received by the Company within 30 days after the giving of any such
notice by CSLC, CSLC will cause the Registrable Securities as to which
registration shall have been so requested to be included in the
securities to be covered by the registration statement proposed to be
filed by CSLC, all to the extent requisite to permit the sale or other
disposition by Beck (in accordance with its written request) of such
Registrable Securities so registered; provided, however, that if the
managing underwriter of CSLC's offering delivers in good faith a
written opinion to Beck that either because of (i) the kind of
securities which Beck or CSLC intends to include in the offering or
(ii) the size of the offering which Beck or CSLC intend to make, the
success of the offering or the market for CSLC's Common Stock would be
materially and adversely affected by the inclusion of the Registrable
Securities requested to be included (A) in the event that the size of
the offering is the basis for the managing underwriter's opinion, the
amount of the securities to be offered for the account of Beck and each
other person registering securities of CSLC pursuant to similar
incidental registration rights shall be reduced pro rata to the extent
necessary to reduce the total amount of securities to be included in
such offering to the amount reasonably recommended by such managing
underwriter; and (B) in the event that the combination of securities to
be offered is the basis of such managing underwriter's opinion (1) the
Registrable Securities and other securities to be included in such
offering shall be reduced as described in clause (A) above or, (2) if
the actions described in Clause (A) would, in the reasonable judgment
of the managing underwriter, be insufficient to substantially eliminate
the material and adverse effect that inclusion of the Registrable
Securities requested to be included would have on such offering, such
Registrable Securities will be excluded from such offering.
Notwithstanding the foregoing provisions, CSLC may withdraw any
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registration statement referred to in this Section 9(b) without thereby
incurring any liability to Beck.
(c) If and whenever CSLC is required by Section 9(b) to
effect a piggy back registration, CSLC shall as expeditiously as
possible:
(i) prepare and file with the Securities and
Exchange Commission ("Commission") a registration statement
(which, in the case of an underwritten public offering shall
be on Form S-1, Form S-2, Form S-3, any successor forms
thereto, or other form of general applicability satisfactory
to the managing underwriter selected as therein provided) with
respect to such securities and use its best efforts to cause
such registration statement to become and remain effective for
the period of the distribution contemplated thereby (as
determined hereinafter); provided, however, that CSLC may
postpone the filing, effectiveness, supplementing or amending
of the registration statement for up to 90 days if, in the
good faith opinion of CSLC's Board of Directors, the
registration or sale of Registrable Securities would adversely
affect a material financing, acquisition, disposition of
assets or stock, merger or other comparable transaction or
would require CSLC to make public disclosure of information
the public disclosure of which would have a material adverse
effect upon CSLC. During any time that CSLC defers amending or
supplementing the registration statement, the holders of
Registrable Securities shall discontinue disposing of
Registrable Securities;
(ii) subject to the proviso in subsection (i),
prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus
used in connection therewith as may be necessary to keep such
registration statement effective for the period of
distribution and comply with the provisions of the Securities
Act with respect to the disposition of all Registrable
Securities covered by such registration statement in
accordance with the intended method of disposition set forth
in such registration statement for such period;
(iii) furnish to Beck and to each underwriter such
number of copies of the registration statement and the
prospectus included therein (including each preliminary
prospectus) as such persons reasonably may request in order to
facilitate the public sale or other disposition of the
Registrable Securities covered by such registration statement;
(iv) use its best efforts to register or qualify
the Registrable Securities covered by such registration
statement under the securities or "blue sky" laws of such
jurisdictions as Beck or, in the case of an underwritten
public offering, the managing underwriter reasonably shall
request, PROVIDED HOWEVER, that CSLC shall not for any such
purpose be required to qualify generally to transact business
as a foreign corporation in any jurisdiction where it is not
so qualified or to consent to general service of process in
any such jurisdiction;
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(v) use its best efforts to list or qualify for
quotation the Registrable Securities covered by such
registration statement with any securities exchange or
inter-dealer quotation system on which the Common Stock is
then listed or quoted;
(vi) notify Beck at any time when a prospectus
relating to Registrable Securities is required to be delivered
under the Securities Act or the happening of any event as a
result of which the prospectus included in such registration
statement contains an untrue statement of a material fact or
omits any fact necessary to make the statements therein not
misleading, and, at the request of Beck, CSLC will prepare a
supplement or amendment to such prospectus so that, as
thereafter delivered to the purchasers of such Registrable
Securities, such prospectus will not contain an untrue
statement of a material fact or omit to state any fact
necessary to make the statements therein not misleading,
provided that the 180-day period described below will be
tolled from the time a prospectus contains such a statement or
omission until a prospectus correcting such statement or
omission has been delivered to Beck and may be delivered to
the purchasers of such Registrable Securities in compliance
with the Securities Act;
(vii) notify Beck immediately, and confirm the
notice in writing, (1) when the registration statement becomes
effective, (2) of the issuance by the Commission of any stop
order or of the initiation, or the threatening, of any
proceedings for that purpose, (3) of the receipt by CSLC of
any notification with respect to the suspension of
qualification of the Registrable Securities for sale in any
jurisdiction or of the initiation, or the threatening, of any
proceedings for that purpose, and (4) of the receipt of any
comments, or requests for additional information, from the
Commission or any state regulatory authority. If the
Commission or any state regulatory authority shall enter such
a stop order or order suspending qualification at any time,
CSLC will promptly use its best reasonable efforts to obtain
the lifting of such order; and
(viii) otherwise use its best efforts to comply
with all applicable rules and regulations of the Commission,
and make available to its security holders as soon as
reasonably practicable, but not later than 15 months after the
effective date of the registration statement, a statement
covering a period of at least 12 months beginning after the
effective date of the registration statement, which earnings
statement shall satisfy the provisions of Section 11(a) of the
Securities Act.
For purposes hereof, the period of distribution of Registrable
Securities in a firm commitment underwritten public offering shall be deemed to
extend until each underwriter has completed the distribution of all securities
purchased by it, and the period of distribution of Registrable Securities in any
other registration shall be deemed to extend until the earlier of the sale of
all Registrable Securities covered thereby or 180 days after the effective date
thereof.
In connection with each registration hereunder, Beck will furnish to
CSLC in writing such information with respect to Beck as reasonably shall be
necessary in order to assure compliance with federal and applicable state
securities laws.
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In connection with each registration pursuant to this Section 9
covering an underwritten public offering, CSLC and Beck agree to use their best
efforts to select a managing underwriter (and any co-managers) and to enter into
a written agreement with the managing underwriter in such form and containing
such provisions as are customary in the securities business for such an
arrangement between such underwriter and companies of CSLC's size and investment
stature.
(d) All expenses incurred by CSLC in complying with this
Section 9, including, without limitation, all registration and filing
fees, printing expenses, fees and disbursements of counsel and
independent public accountants for CSLC, fees and expenses (including
counsel fees) incurred in connection with complying with state
securities or "blue sky" laws, fees of the National Association of
Securities Dealers, Inc., transfer taxes, fees of transfer agents and
registrars, costs of insurance, and fees and disbursements of one
counsel for Beck but excluding any Selling Expenses, are called
"Registration Expenses." All underwriting discounts and selling
commissions applicable to the sale of Registrable Securities are called
"Selling Expenses."
(i) CSLC shall pay all Registration Expenses
attributable to the shares of Registrable Securities included
in the registration in connection with each registration
statement under this Section 9.
(ii) All Selling Expenses in connection with each
such registration statement applicable to Registrable
Securities sold by Beck shall be borne by Beck.
(e) Subject to applicable law, CSLC will indemnify each
underwriter, Beck and each person controlling any of them, against all
claims, losses, damages and liabilities, including legal and other
expenses reasonably incurred, arising out of any untrue statement of a
material fact contained in the registration statement, or any omission
to state a material fact required to be stated in the registration
statement or necessary to make the statements not misleading, or
arising out of any violation by CSLC of the Securities Act, any state
securities or "blue-sky" laws or any applicable rule or regulation.
This indemnification will not apply to any claims, losses, damages or
liabilities to the extent that they may have been caused by an untrue
statement or omission based upon information furnished in writing to
CSLC by such underwriter, Beck or controlling person, respectively,
expressly for use in the registration statement. With respect to such
untrue statement or omission in the information furnished in writing to
CSLC by Beck, he will indemnify the underwriters, CSLC, its directors
and officers, and each person controlling any of them against any
losses, claims, damages, expenses or liabilities to which any of them
may become subject as a result of such untrue statement or omission.
(f) The registration rights of Beck under this Agreement
may be transferred to any trust, family partnership or other family
entity formed by Beck to hold shares of Common Stock and to any member
of his family.
(g) In the event of any merger, consolidation or share
exchange pursuant to which CSLC is not the surviving or resulting
corporation, CSLC's obligations under this Section 9 shall be assumed
by such surviving or resulting corporation.
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(h) The registration obligations of CSLC under this
Section 9 shall terminate on the date when CSLC delivers to Beck a
written opinion of a law firm with recognized securities law expertise,
reasonably acceptable to Beck, addressed to Beck that he is permitted
to sell all Registrable Securities to the public without registration
under applicable law, other than pursuant to Rule 144 or any similar
rule.
10. INDEMNIFICATION BY CSLC. CSLC shall and hereby does indemnify
Beck to the extent and in accordance with the terms of ATTACHMENT I to this
Agreement.
11. TERMINATION OF AMENDED AND RESTATED EMPLOYMENT AGREEMENT. Beck
and CSLC hereby agree that the Amended and Restated Employment Agreement, dated
October 8, 1997, between Beck and CSLC shall be, subject to Section 12 below,
upon execution and delivery of this Agreement, cancelled and of no further force
and effect. Beck hereby resigns each and every directorship and officer position
held on or prior to the date hereof with CSLC and any subsidiary or affiliate of
CSLC.
12. NO EFFECT ON EMPLOYMENT COMPENSATION. Nothing in this
Agreement shall be construed to affect in any way employment compensation
amounts paid or payable to Beck by CSLC, whether or not determined on or prior
to the date of this Agreement, with respect to his employment by CSLC prior to
the date hereof. The parties hereto agree that no bonus payments are payable to
Beck with respect to his employment by CSLC prior to the date hereof.
13. MUTUAL RELEASE. CSLC and Beck have, simultaneously with the
execution and delivery of this Agreement, executed and delivered the mutual
release attached hereto as Attachment II. CSLC represents and warrants to Beck
that the release, attached as Attachment II hereto, this Agreement and the
Indemnity, attached as Attachment I hereto, have each been approved in good
faith by the Board of Directors of CSLC at a meeting, duly called and held in
accordance with CSLC's Restated Certificate of Incorporation, its Bylaws and
Delaware General Corporation Law, under the procedures provided in Delaware
General Corporation Law Section 144(a)(1) with respect to transactions between a
corporation and one or more of its directors or officers having a direct or
indirect financial interest in the transaction.
14. SURVIVAL OF CERTAIN PROVISIONS. Sections 1 (last two sentences
only), 2, 3 (to the extent provided therein), 6, 8, 9 and 10 (including
ATTACHMENT I to this Agreement), 13, this Section 14, and Sections 16 through 22
of this Agreement shall survive the expiration or termination of this Agreement.
15. CERTAIN TERMS DEFINED. For purposes of this Agreement, the
following defined terms have the meaning set forth below:
(a) "Affiliate" with regard to Beck means any person
controlled by or under common control with him. "Affiliate" with regard
to CSLC means any person controlled by or under common control with
CSLC. For purposes of these definitions, "Control" when used with
respect to any person means the power to direct the management and
policies of such person, whether through the ownership of voting
securities, by contract or otherwise.
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(b) "Fundamental Change" means any of the following: (i)
a merger, consolidation, statutory share exchange or sale, lease,
exchange or other transfer (in one transaction or a series of related
transactions) of all or substantially all of the assets of CSLC that
requires the consent or vote of the holders of the Common Stock, other
than a consolidation, merger or share exchange of CSLC in which the
holders of the Common Stock immediately prior to such transaction have
the same proportionate ownership or control of Common Stock of the
surviving corporation immediately after such transaction; (ii) the
stockholders of CSLC approve any plan or proposal for the liquidation
or dissolution of CSLC; (iii) the cessation of control (by virtue of
their not constituting a majority of directors) of the Board of
Directors of CSLC by the individuals (the "Continuing Directors") who
(x) at the date of this Agreement were directors or (y) become
directors after the date of this Agreement and whose election or
nomination for election by CSLC's stockholders was approved by a vote
of at least two-thirds of the directors then in office who were
directors at the date of this Agreement or whose election or nomination
for election was previously so approved; (iv) the acquisition of
beneficial ownership (within the meaning of Rule 13d-3 under the
Securities Exchange Act of 1934) of an aggregate of 20% or more of the
voting power of CSLC's outstanding voting securities by any person or
group (as such term is used in Rule 13d-5 under the Securities Exchange
Act of 1934) who beneficially owned less than 15% of the voting power
of CSLC's outstanding voting securities on the date of this Agreement,
or the acquisition of beneficial ownership of an additional 5% of the
voting power of CSLC's outstanding voting securities by any person or
group who beneficially owned at least 15% of the voting power of CSLC's
outstanding voting securities on the date of this Agreement; PROVIDED,
HOWEVER, that notwithstanding the foregoing, an acquisition shall not
constitute a Fundamental Change hereunder if the acquiror is (x) a
trustee or other fiduciary holding securities under any employee
benefit plan of CSLC and acting in such capacity, (y) a wholly-owned
subsidiary of CSLC or a corporation owned, directly or indirectly, by
the stockholders of CSLC in the same proportions as their ownership of
voting securities of CSLC or (z) any other person whose acquisition of
shares of voting securities is approved in advance by a majority of the
Continuing Directors; or (v) in a Title 11 bankruptcy proceeding, the
appointment of a trustee or the conversion of a case involving CSLC to
a case under Chapter 7.
16. EQUITABLE REMEDY. In the event of a breach by Beck of the
provisions of Sections 2 or 3 of this Agreement, CSLC shall, in addition to any
other available remedies, be entitled to an injunction restraining Beck from
violating the terms of the applicable Section and Beck and CSLC agree that said
injunction is appropriate and proper relief for such violation.
17. BECK'S LEGAL FEES AND EXPENSES. It is the intent of CSLC that
Beck not be required to incur legal fees and the related expenses associated
with the interpretation, enforcement or defense of his rights under this
Agreement by litigation or otherwise because the cost and expense thereof would
substantially detract from the benefits intended to be extended to Beck
hereunder. Accordingly, if it should appear to Beck that CSLC has failed to
comply with any of its obligations under this Agreement or in the event that
CSLC or any other person takes or threatens to take any action to declare this
Agreement void or unenforceable, or institutes any litigation or other action or
proceeding designed to deny, or to recover from, Beck the benefits provided or
intended to be provided to Beck hereunder, CSLC irrevocably authorizes Beck from
time to time to retain counsel
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of Beck's choice, at the reasonable expense of CSLC as hereafter provided, to
advise and represent Beck in connection with any such interpretation,
enforcement or defense, including without limitation the initiation or
defense of any litigation or other legal action, whether by or against CSLC
or any director, officer, stockholder or other person affiliated with CSLC,
in any jurisdiction. CSLC will advance and be solely financially responsible
for any and all reasonable attorneys' and related fees and reasonable
expenses incurred by Beck in connection with any of the foregoing; provided
that, if Beck is not successful on the merits or otherwise, Beck shall
reimburse CSLC for any advances and payments for his attorneys and related
fees and expenses under this Section 17.
18. 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 such party's address set forth
adjacent to such 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.
19. 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 possible without considering the void, invalid or unenforceable
provision. In construing this Agreement, no meaning or effect shall be given to
the captions of the paragraphs in this Agreement, which are inserted for
convenience of reference only.
20. CHOICE OF LAW. 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.
21. INTEGRATION; AMENDMENTS. This is an integrated Agreement. This
Agreement (including Attachment I hereto) 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 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.
22. SUCCESSORS AND BINDING AGREEMENT:
(a) CSLC will require any successor (whether direct or
indirect, by purchase, merger, consolidation, reorganization or
otherwise) to all or substantially all of the business or assets of
CSLC, by agreement in form and substance reasonably satisfactory to
Beck, expressly to assume and agree to perform this Agreement in the
same manner and to the same extent CSLC would be required to perform if
no such succession had taken place. This
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Agreement will be binding upon and inure to the benefit of CSLC and
any successor to CSLC, including without limitation any persons
acquiring directly or indirectly all or substantially all of the
business or assets of CSLC whether by purchase, merger, consolidation,
reorganization or otherwise, but will not otherwise be assignable,
transferable or delegable by CSLC.
(b) This Agreement will inure to the benefit of and be
enforceable by Beck's personal or legal representatives, executors,
administrators, successors, heirs, distributees, legatees and permitted
assignees.
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 CORPORATION
a Delaware corporation
Address:
14160 Dallas Parkway, #300
Dallas, TX 75240 By: /s/ David R. Brickman
---------------------------------
Its: Vice President
---------------------------------
JEFFREY L. BECK
Address:
6211 Raintree Court
Dallas, TX 75240 /s/ Jeffrey L. Beck
----------------------------------------
Jeffrey L. Beck
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ATTACHMENT I
INDEMNITY
1. CAPITAL SENIOR LIVING CORPORATION (the "Corporation") will
indemnify JEFFREY L. BECK ("Indemnitee") in accordance with the following terms.
2. DEFINITIONS. As used in this Indemnity:
(a) The term "Proceeding" shall include any threatened,
pending or completed investigation, claim, action, suit or proceeding, whether
of a civil, criminal, administrative or investigative nature (including without
limitation any action, suit or proceeding by or in the right of the Corporation
or Other Entity to procure a judgment in its favor), in which Indemnitee may be
or may have been or may be threatened to be made or to become involved in any
manner (including without limitation as a party or a witness) by reason of the
fact that Indemnitee has advised the Corporation (as an officer, director or
consultant of the Corporation) with respect to any matter, is alleged to have
advised Other Entities with respect to any matter in which the Corporation was
involved or related or by reason of anything actually or allegedly done or not
done by Indemnitee in any of such capacities, and whether such advice, action or
inaction occurred in the past or occurs after the date hereof. It is expressly
agreed that "Proceeding" shall include any claim, action, suit or proceeding
arising out of or related to the Corporation's business relationships with and
proposed mergers with ILM Senior Living, Inc. and ILM II Senior Living, Inc., in
connection with which the Corporation's Board of Directors in considering this
Agreement has determined Indemnitee's actions and advice were in good faith and
in the best interests of the Corporation. It is also expressly agreed that
"Proceeding" shall include any claim, action, suit or proceeding arising out of
allegations that Indemnitee's affiliates have engaged in transactions with the
Corporation in which Indemnitee had a financial or conflicting interest.
(b) The term "Expenses" includes, without limitation,
reasonable attorneys' fees and disbursements and all other reasonable costs,
expenses and obligations actually and reasonably incurred by Indemnitee in
connection with (i) investigating, defending, being a witness in or otherwise
participating in, or preparing to defend, be a witness in or participate in, any
Proceeding, or (ii) establishing a right to indemnification under Paragraph 6 of
this Indemnity, but shall not include the amount of any judgments, fines or
penalties entered or assessed against Indemnitee or any amounts paid or payable
in settlement by Indemnitee.
(c) The term "Other Entity" includes, without limitation,
any subsidiary or affiliate of the Corporation and any entity with which
Indemnitee has served or is serving as an officer or director or otherwise in
the general interest of the Corporation's business. It is expressly agreed that
Indemnitee's (i) service with Capital Realty Group Senior Housing, Inc., a Texas
corporation, and with its subsidiaries and partnerships in which it is a general
partner, (ii) service with Capital Senior Living Communities, LP, and its
general partner, Retirement Living Communities, L.P. and (iii) service with
Tri-Point Communities, L.P. were all undertaken by the Indemnitee for the
benefit of the Corporation, and all such entities and their affiliates are
hereby agreed to be Other Entities within the meaning of this definition.
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3. SCOPE OF INDEMNIFICATION. Subject to Paragraph 7 of this
Indemnity, the Corporation shall indemnify Indemnitee in accordance with the
provisions of this Paragraph 3 if Indemnitee is or was or is threatened to be
made or to become involved in any manner, including without limitation as a
party or witness, in any Proceeding (including a Proceeding by or in the right
of the Corporation or Other Entity to procure a judgment in its favor) against
any and all Expenses and any and all judgments, fines and penalties entered or
assessed against Indemnitee, and any and all amounts reasonably paid or payable
in settlement by Indemnitee, in connection with such Proceeding, but only if
Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to
be in or not opposed to the Corporation's best interests and without gross
negligence. THIS INDEMNITY EXPRESSLY INDEMNIFIES INDEMNITEE AGAINST HIS OWN
NEGLIGENCE. The termination of any Proceeding by judgment, order of court,
settlement or conviction, or upon a plea of nolo contendere or its equivalent,
shall not, of itself, create a presumption for purposes of any provision of this
Indemnity that Indemnitee did not act in good faith and in a manner Indemnitee
reasonably believed to be in or not opposed to the Corporation's best interests,
or with gross negligence.
4. INDEMNIFICATION OF EXPENSES OF SUCCESSFUL PARTY; NO ADVERSE
PRESUMPTION. Notwithstanding any other provisions of this Indemnity, to the
extent that Indemnitee has been successful on the merits or otherwise, in
defense of any Proceeding or in defense of any claim, issue or matter therein,
including the dismissal of an action without prejudice, Indemnitee shall be
indemnified against all Expenses incurred in connection therewith.
5. ADVANCES OF EXPENSES. The Expenses incurred by Indemnitee
pursuant to Paragraph 3 in any Proceeding shall be paid by the Corporation in
advance, promptly upon the written request of the Indemnitee, if Indemnitee
shall undertake to repay such amount to the extent that it is ultimately
determined that Indemnitee is not entitled to indemnification. No security for
the performance of any such undertaking shall be required and any such
undertaking shall be accepted by the Corporation without regard to the financial
capacity of Indemnitee to perform his obligations thereunder.
6. RIGHT OF INDEMNITEE TO INDEMNIFICATION UPON APPLICATION:
PROCEDURE UPON APPLICATION. Without limiting the obligation of the Corporation
to promptly make payments in respect of Expenses in accordance with Paragraph 5,
any indemnification under Paragraph 3 shall be made no later than 45 days after
receipt by the Corporation of the written request of Indemnitee, unless a
determination is made within said 45-day period by (1) the Board of Directors of
the Corporation by a majority vote of a quorum consisting of Directors who are
not and were not parties to the relevant Proceeding, or (2) independent legal
counsel in a written opinion (which counsel shall be appointed if such a quorum
is not obtainable) that the Indemnitee has not met the relevant standards for
indemnification set forth in Paragraph 3.
The right to indemnification or advances as provided by this Indemnity
shall be enforceable by Indemnitee in any court of competent jurisdiction. The
burden of proving that indemnification is not appropriate shall be on the
Corporation. Indemnitee's Expenses reasonably incurred in connection with
successfully establishing his or her right to indemnification, in whole or in
part, in any such proceeding shall also be indemnified by the Corporation.
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7. INDEMNIFICATION HEREUNDER NOT EXCLUSIVE; CONSTRUCTION. The
indemnification provided by this Indemnity shall not be deemed exclusive of any
other rights to which Indemnitee may be entitled under the General Corporation
Law of the State of Delaware, the Amended and Restated Certificate of
Incorporation and/or Bylaws of the Corporation, any other indemnity, any vote of
stockholders or disinterested Directors, or otherwise, either as to action in
his official capacity on, prior or after the date hereof or as to action in any
other capacity. The corporation hereby agrees and acknowledges that it will
continue to honor its indemnification obligations to Indemnitee set forth in its
Amended and Restated Certificate of Incorporation and/or Bylaws with respect to
any existing or future lawsuit against the Corporation and any other actions
pursuant to which Indemnitee would be entitled to indemnification.
8. PARTIAL INDEMNIFICATION. In the event that Indemnitee is
entitled under any provision of this Indemnity to indemnification by the
Corporation for a portion but less than the entire amount of any Expenses,
judgments, fines, penalties and/or amounts paid or payable in settlement, the
Corporation shall fully indemnify Indemnitee in accordance with the applicable
provisions of this Indemnity for such portion of such Expenses, judgments,
fines, penalties and/or amounts paid in settlement.
9. SUBROGATION. In the event that the Corporation provides any
indemnification or makes any payment to Indemnitee in respect of any matter in
respect of which indemnification or the advancement of expenses is provided for
herein, the Corporation shall be subrogated to the extent of such
indemnification or other payment to all of the related rights of recovery of
Indemnitee against other persons or entities. Indemnitee shall execute all
papers reasonably required and shall do everything that may be reasonably
necessary to secure such rights and enable the Corporation effectively to bring
suit to enforce such rights (with all of Indemnitee's reasonable costs and
expenses, including attorneys' fees and disbursements, to be reimbursed by or,
at the option of Indemnitee, advanced by the Corporation).
10. NO DUPLICATION OF PAYMENTS. The Corporation shall not be
obligated under this Indemnity to provide any indemnification or make any
payment to which Indemnitee is otherwise entitled hereunder to the extent, but
only to the extent, that such indemnification or payment hereunder would be
duplicative of any amount actually received by Indemnitee pursuant to any
insurance policy, the General Corporation Law of the State of Delaware, the
Amended and Restated Certificate of Incorporation and/or the Bylaws of the
Corporation or otherwise. With respect to the Corporation's indemnity
obligations concerning Other Entities, the Corporation shall have no obligation
hereunder until and unless Beck has first sought all available insurance
coverage benefitting such Other Entities and indemnity available from such Other
Entities and such insurance coverage and indemnity has been exhausted or has
been denied.
11. SAVING CLAUSE. If any provision of this Indemnity or the
application of any provision hereof to any circumstance is held illegal, invalid
or otherwise unenforceable, the remainder of this Indemnity and the application
of such provision to any other circumstance shall not be affected, and the
provision so held to be illegal, invalid or otherwise unenforceable shall be
reformed to the extent (but only to the extent) necessary to make it legal,
valid and enforceable.
3
<PAGE>
12. NOTICE. Indemnitee shall give to the Corporation notice in
writing as soon as practicable of any claim made against him or her for which
indemnification will or could be sought under this Indemnity, provided, however,
that any failure to give such notice to the Corporation will relieve the
Corporation from its obligations hereunder only if, and to the extent that, such
failure results in the forfeiture of substantial rights and defenses. Notice to
the Corporation shall be directed to the Corporation (to the attention of the
Chief Executive Officer, with a copy to the General Counsel) at its principal
executive office or such other address as the Corporation shall designate in
writing to Indemnitee. Notice shall be deemed received when hand delivered or
dispatched by electronic facsimile transmission (with receipt thereof orally
confirmed), or three calendar days after having been mailed by United States
registered or certified mail, return receipt requested, postage prepaid, or one
business day after having been sent for next-day delivery by a nationally
recognized overnight courier. In addition, Indemnitee shall give the Corporation
such information and cooperation as it may reasonably require and shall be
within Indemnitee's power. The Corporation shall give prompt notice to
Indemnitee of any potential claims against Indemnitee of which the Corporation
becomes aware.
13. APPLICABLE LAW. This Indemnity shall be governed by and
construed in accordance with the laws of the State of Delaware, without giving
effect to the principles of conflicts of law thereof.
14. SUCCESSORS. This Indemnity shall be binding upon the
Corporation and its successors, including without limitation any person
acquiring directly or indirectly all or substantially all of the business or
assets of the Corporation whether by purchase, merger, consolidation,
reorganization or otherwise (and such successor will thereafter be deemed the
"Corporation" for purposes of this Indemnity), but will not otherwise be
assignable, transferable or delegable by the Corporation. The Corporation shall
require any successor (whether direct or indirect, by purchase, merger,
consolidation, reorganization or otherwise) to all or substantially all of the
business or assets of the Corporation, to assume and agree in writing to perform
this Indemnity, expressly for the benefit of Indemnitee, in the same manner and
to the same extent the Corporation would be required to perform if no such
succession had taken place.
Dated: May 20, 1999 CAPITAL SENIOR LIVING CORPORATION
By: /s/ David R. Brickman
-------------------------------
Title: Vice President
-------------------------------
4
<PAGE>
EXHIBIT 10.78
- --------------------------------------------------------------------------------
TITLE
SECOND AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP
- --------------------------------------------------------------------------------
NAME OF PARTNERSHIP
TRIAD SENIOR LIVING I, L.P.
- --------------------------------------------------------------------------------
PURPOSE
ACQUIRE, DEVELOP, OWN AND OPERATE SEVEN SENIOR LIVING AND
ASSISTED LIVING FACILITIES
- --------------------------------------------------------------------------------
PARTNERS
General Partner: TRIAD SENIOR LIVING, INC.
Limited Partners: CAPITAL SENIOR LIVING PROPERTIES, INC.
LB TRIAD INC.
- --------------------------------------------------------------------------------
DATE
AS OF DECEMBER 30, 1999
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE I - ADDITIONAL DEFINITIONS.......................................................... 2
ARTICLE II - FORMATION; CONTINUATION; NAME AND OFFICE; PURPOSE.............................. 8
Section 2.1. Formation; Continuation................................................ 8
Section 2.2. Name, Registered Agent and Registered Office........................... 8
Section 2.3. Purpose................................................................ 8
ARTICLE III - TERM.......................................................................... 8
ARTICLE IV - INTERESTS OF THE GENERAL PARTNER AND LIMITED PARTNERS.......................... 8
Section 4.1. General Partner........................................................ 9
Section 4.2. Limited Partners....................................................... 9
ARTICLE V - CAPITAL CONTRIBUTIONS........................................................... 9
Section 5.1. Capital Contribution of the General Partner............................ 9
Section 5.2. Capital Contribution of the Limited Partners........................... 9
Section 5.3. Additional Capital Contributions....................................... 9
Section 5.4. Return or Withdrawal of Capital Contributions; Distributions........... 11
Section 5.5. Capital Accounts....................................................... 11
ARTICLE VI - LIMITED PARTNERS............................................................... 11
Section 6.1. Powers: Actions........................................................ 11
Section 6.2. Limitation of Liability................................................ 11
ARTICLE VII - GENERAL PARTNER............................................................... 12
Section 7.1. Powers; Actions........................................................ 12
Section 7.2. Restrictions on the General Partner.................................... 12
Section 7.3. Duties and Obligations of the General Partner.......................... 15
Section 7.4. Change of TSL's Interest from General to Limited Partner............... 16
Section 7.5. Annual Business Plan................................................... 17
Section 7.6. Option to Provide Financing to Partnership............................. 17
Section 7.7. Other Activities....................................................... 18
Section 7.8. Tax Matters Partner.................................................... 18
Section 7.9. Liability; Indemnification............................................. 18
Section 7.10. Fees to and Reimbursement of the General Partner....................... 19
ARTICLE VIII - ALLOCATIONS; DISTRIBUTIONS................................................... 19
Section 8.1. Allocations of Income and Loss......................................... 19
Section 8.2. Distributions of Net Cash Flow and Net Capital Transaction Proceeds.... 19
Section 8.3. Withholding Taxes with Respect to Partners............................. 20
<PAGE>
ARTICLE IX - ASSIGNABILITY OF GENERAL PARTNER'S AND LIMITED
PARTNER'S INTERESTS; BUY-SELL OPTION; PURCHASE OPTION.................................. 21
Section 9.1. General................................................................ 21
Section 9.2. Permitted Transfers.................................................... 21
Section 9.3. Effect of Assignment; Documents........................................ 22
Section 9.4. Substitute Partner..................................................... 22
Section 9.5. Further Requirements................................................... 22
Section 9.6. Buy-Sell Provisions.................................................... 22
Section 9.7. Sale of Properties After Second Anniversary............................ 25
Section 9.8. CSL Purchase Option: TSL Partnership Interests......................... 26
Section 9.9. CSL Purchase Option: LB Partnership Interests.......................... 26
Section 9.10. Closing Documentation.................................................. 27
Section 9.11. Sale of Partnership Interests By LB.................................... 27
Section 9.12. Withdrawal of a Partner................................................ 28
Section 9.13. Death, Legal Incompetency, Bankruptcy or Dissolution of
Limited Partner...................................................... 28
ARTICLE X - DURATION, DISSOLUTION, TERMINATION, WINDING UP, REMOVAL OF
GENERAL PARTNER AND RESIGNATION OF GENERAL PARTNER..................................... 28
Section 10.1. Dissolution and Termination............................................ 28
Section 10.2. Continuation of Business............................................... 29
Section 10.3. Winding Up of the Partnership.......................................... 29
Section 10.4. Sale or Liquidation.................................................... 29
ARTICLE XI - REPRESENTATIONS, WARRANTIES AND COVENANTS...................................... 30
Section 11.1. Ownership of TSL....................................................... 30
Section 11.2. Ownership of CSL....................................................... 30
Section 11.3. Confidentiality........................................................ 30
Section 11.4. Limitation of LB Liability............................................. 30
Section 11.5. Limitation of CSL Liability............................................ 31
Section 11.6. Limitation of TSL Liability............................................ 31
Section 11.7. Representations of TSL Regarding Partnership and Related Matters....... 31
Section 11.8. Representations of CSL Regarding Partnership and Related Matters....... 32
Section 11.9. LB Losses From Breach of Representation................................ 32
Section 11.10. Notice of Loss......................................................... 34
Section 11.11. Right to Defend........................................................ 35
Section 11.12. Cooperation............................................................ 35
ARTICLE XII - ACCOUNTS AND RECORDS: ACCOUNTANTS............................................. 35
Section 12.1. Accounting Methods: Fiscal Year........................................ 35
Section 12.2. Records and Books of Account........................................... 36
Section 12.3. Annual Examination and Tax Returns..................................... 36
Section 12.4. Bank Accounts.......................................................... 36
Section 12.5. Reports to Partners.................................................... 37
<PAGE>
ARTICLE XIII - GENERAL PROVISIONS........................................................... 37
Section 13.1. Recipient of Distributions and Payments................................ 37
Section 13.2. Communications......................................................... 37
Section 13.3. Entire Agreement; Applicable Law; Effect............................... 38
Section 13.4. Modification; Waiver or Termination.................................... 38
Section 13.5. Counterparts........................................................... 38
Section 13.6. Separability........................................................... 38
Section 13.7. Article and Section Headings........................................... 38
Section 13.8. Word Meanings.......................................................... 39
Section 13.9. Exhibits............................................................... 39
Section 13.10. Further Actions........................................................ 39
Section 13.11. Prohibition Against Partition.......................................... 39
Section 13.12. Agreements with Affiliates and the GMAC Loan........................... 39
Section 13.13. Non-Compete of General Partner......................................... 40
Section 13.14. Litigation Without Termination......................................... 40
Section 13.15. Attorneys' Fees........................................................ 40
Section 13.16. Cumulative Remedies.................................................... 41
EXHIBIT A - PROPERTY DESCRIPTIONS........................................................... A-1
EXHIBIT B - CAPITAL CONTRIBUTIONS........................................................... B-1
EXHIBIT C - CERTAIN TAX AND ACCOUNTING MATTERS.............................................. C-1
EXHIBIT D - ADJUSTMENTS IN LOAN AND CAPITAL................................................. D-1
EXHIBIT E - AGREED VALUE OF EACH PROPERTY................................................... E-1
EXHIBIT F - REPRESENTATIONS AND WARRANTIES OF TSL REGARDING
PARTNERSHIP AND RELATED MATTERS.................................................... F-1
EXHIBIT G - REPRESENTATIONS AND WARRANTIES OF CSL REGARDING
PARTNERSHIP AND RELATED MATTERS.................................................... G-1
EXHIBIT H - FORM OF MONTHLY REPORTING....................................................... H-1
</TABLE>
<PAGE>
SECOND AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP
OF
TRIAD SENIOR LIVING I, L.P.
(FORMERLY KNOWN AS TRI POINT COMMUNITIES, L.P.)
THIS SECOND AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP is
dated effective as of December 30, 1999. The parties are TRIAD SENIOR LIVING,
INC., a Texas corporation ("TSL" or "General Partner") as the sole General
Partner, and CAPITAL SENIOR LIVING PROPERTIES, INC., a Texas corporation
("CSL") and LB TRIAD INC., a Delaware corporation ("LB"), as the Limited
Partners (CSL and LB are collectively referred to as the "Limited Partners"),
and BLAKE N. FAIL ("Fail" or "Withdrawing Limited Partner") as the Withdrawing
Limited Partner.
WHEREAS, Capital Retirement Group, Inc., a Texas corporation ("CRG"),
Jeffrey L. Beck ("Beck") and JAS Trust ("JAS") formed Tri Point Communities,
L.P. pursuant to the Certificate of Limited Partnership filed with the
Secretary of State of Texas on November 6, 1997 and that certain Limited
Partnership Agreement dated as of November 6, 1997 ("Original Agreement");
WHEREAS, CRG transferred all its partnership interest in the
Partnership to TSL and CRG withdrew from the Partnership pursuant to the terms
of that Amended and Restated Agreement of Limited Partnership dated April 1,
1998 ("First Restated Agreement");
WHEREAS, Beck and JAS transferred all their partnership interests in
the Partnership to Fail, and Beck and JAS withdrew from the Partnership
pursuant to the terms of the First Restated Agreement;
WHEREAS, pursuant to the terms of the First Restated Agreement, the
Partnership changed its name to "Triad Senior Living I, L.P.";
WHEREAS, Fail wishes to withdraw from the Partnership as a limited
partner and LB desires to be admitted as a limited partner of the Partnership
in Fail's place;
WHEREAS, the Withdrawing Limited Partner, TSL, LB, and CSL desire to
effect such withdrawal and admission, all as more fully set forth herein; and
WHEREAS, TSL, LB and CSL desire to continue the existence of the
Partnership, recapitalize the Partnership and to amend and restate the terms
and provisions of the Original Agreement, as amended by the First Restated
Agreement.
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>
ARTICLE I
ADDITIONAL DEFINITIONS
As used herein, the following terms shall have the following meanings:
"ACCOUNTANT" means Lane, Gorman, Trubitt, L.L.P. or any other
independent firm of certified public accountants as may be engaged by the
General Partner for the Partnership with the approval of LB.
"AFFILIATE" means (a) a General Partner; (b) a Limited Partner; (c) a
member of the immediate family of the Withdrawing Limited Partner or of a
partner, shareholder or member 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, limited liability company 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, limited liability company 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, limited liability company or other
business entity referred to in the preceding clauses (a), (b), (c), (f) or (g).
"AGENCIES" shall mean federal, state municipal or other governmental
department, commission, board, bureau, agency or instrumentality, domestic or
foreign.
"AGREEMENT" or "THIS AGREEMENT" means this Second Amended and
Restated Agreement of Limited Partnership, as amended from time to time
pursuant to its terms.
"ANNUAL BUSINESS PLAN" means the strategic business and operating
plan adopted by TSL, LB and CSL and setting forth (a) the program (including a
timetable) for developing and constructing each Property, (b) progress and
status reports on construction not yet completed, (c) a marketing and leasing
plan for each Property, (d) the plan for operating each Property after it has
been completed, (e) in reasonable detail, the plan for initial services and
staffing to provide such services for each Property and any proposal for
materially changing such services or staffing, (f) any proposal for
refinancing or other capital transactions and (g) operating, capital
expenditure and other relevant budgets for each Property.
"ACQUISITION DATE" shall mean the date the Partnership acquired any
Property.
"BOT LOAN" means those certain loans from Lender to the Partnership
in the original aggregate principal amount of up to $50,000,000.00.
-2-
<PAGE>
"BUSINESS DAY" means Monday through Friday of each week, except that
a legal holiday recognized as such by the Government of the United States or
the States of New York or Texas shall not be regarded as a Business Day.
"CAPITAL CONTRIBUTION ACCOUNT" means a memorandum account, which
shall be maintained by the Partnership with respect to each Partner for
accounting purposes only, determined as follows: (a) the initial balance as of
the date of this Agreement of each Partner's Capital Contribution Account
shall be as set forth in EXHIBIT B; (b) the balance of such account shall be
increased as of the date of each contribution made by such Partner under
ARTICLE V hereof by the amount of such contribution; and (c) the balance of
such account shall be decreased (but not below zero) as of each date that a
distribution is made to such Partner pursuant to SECTION 8.2 (b), (d), (f) or
(i) as appropriate to such Partner by the amount of such distribution.
"CAPITAL CONTRIBUTIONS" means the gross amount of contributions
actually made to the capital of the Partnership by one or more Partners 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 has been or may be further amended and filed from time to time.
"CERTIFICATE OF OCCUPANCY" means the certificate of occupancy which
has been issued for any building at a Property.
"CODE" means the Internal Revenue Code of 1986, as amended.
"CSL" means Capital Senior Living Properties, Inc., a Texas
corporation.
"CSL GUARANTY" means the Subsidiary Guaranty dated the date of this
Agreement, made by Capital Senior Living Corporation, an Affiliate of CSL, for
the benefit of the Partnership.
"DEVELOPMENT AGREEMENT" means the development agreements between the
Partnership and Capital Senior Development, Inc. relating to the Properties,
as such agreements may be amended from time to time.
"ENCUMBRANCES" shall mean any and all options, pledges, mortgages,
security interests, liens, charges, adverse claims, burdens and encumbrances
whatsoever.
"15% PREFERRED RETURN" means at any date, for each Partner, an amount
computed like interest equal to a cumulative annual return of 15%, compounded
monthly, on the average daily balance of the Partner's Capital Contribution
Account except as adjusted under Section 8.2(a) and (e).
"FISCAL YEAR" means the fiscal year of the Partnership as set forth
in Section 12.1 hereof.
-3-
<PAGE>
"GAAP" means generally accepted accounting principles, consistently
applied
"GENERAL PARTNER" means TSL, 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.
"GMAC LOAN" means those certain loans from Standby Lender to the
Partnership in the original aggregate principal amount of $50,000,000 which
will be used, in part, to replace the BOT Loan.
"GOVERNMENTAL AUTHORITY" shall mean the United States of America, the
state, county, city and other political subdivision in which each of the
Properties is located, and any agency, authority, court, department,
commission, board or instrumentality of any of them.
"GOVERNMENTAL REQUIREMENTS" shall mean all laws, ordinances,
statutes, codes, rules, regulations, orders and decrees of the United States,
the state, the county, the city, or any other political subdivision in which
any Property is located, and any other political subdivision, agency or
instrumentality exercising jurisdiction over the Partnership or any Property.
"GROSS RECEIPTS" mean all revenues received by the Partnership from
the operations of its business attributable to a particular period as
determined in accordance with the accrual method of accounting under GAAP, but
not including Capital Contributions and any loans from Partners and third
parties.
"HAZARDOUS MATERIALS" shall mean (i) any "HAZARDOUS WASTE" as defined
by the Resource Conservation and Recovery Act of 1976 (42 U.S.C. Section 6901
ET SEQ.), as amended from time to time, and regulations promulgated thereunder
("RCRA"); (ii) any "hazardous substance" as defined by the Comprehensive
Environmental Response, Compensation and Liability Act of 1980 (42 U.S.C.
Section 9601, ET SEQ.), as amended from time to time, and regulations
promulgated thereunder ("CERCLA") (including petroleum-based products as
described therein); (iii) other petroleum and petroleum-based products; (iv)
asbestos in any quantity or form which would subject it to regulation under
any applicable Hazardous Materials Law, (v) polychlorinated biphenyls; (vi)
any substance, the presence of which in or on the Property is prohibited by
any Hazardous Materials Law; (vii) any "extremely hazardous substance" or
"hazardous chemical" as those terms are defined in the Emergency Planning and
Community Right-to-Know Act (42 U.S.C. Section 11001 ET SEQ.) as amended from
time to time, and regulations promulgated thereunder ("EPCRA"); (viii) any
"chemical substance" as that term is defined in the Toxic Substance Control
Act (15 U.S.C. Section 2601) as amended from time to time, and regulations
promulgated thereunder ("TSCA"), (ix) any hazardous substance identified under
the law of any State in which a Property is located; and (x) any other
substance which, by any Hazardous Materials Law, requires special handling in
its collection, storage, treatment, management or disposal, but excluding,
cleaning, office supplies and other similar products used in connection with
the routine conduct of business and for routine maintenance or repair of any
Property, provided such products are stored and used in compliance with
Hazardous Materials Laws.
-4-
<PAGE>
"HAZARDOUS MATERIALS CONTAMINATION" shall mean the presence of
Hazardous Materials at the Improvements, facilities, soil, groundwater, air or
other elements on or of any Property, or the presence of Hazardous Materials
at the buildings, facilities, soil, groundwater, air or other elements on or
of any other property as a result of Hazardous Materials at any time emanating
from any Property.
"HAZARDOUS MATERIALS LAWS" shall mean all Governmental Requirements,
including, without limitation, RCRA and CERCLA, relating to the handling,
storage, existence of or otherwise regulating any Hazardous Materials relating
to the removal or remediation of Hazardous Materials.
"HAZARDOUS SUBSTANCE ACTIVITY" shall mean any actual, proposed, or
threatened use, storage, holding, existence, location, or release, in each
case in violation of Hazardous Materials Laws including, without limitation,
any spilling, leaking (not to include oil, transmission, or other fluid leaks
from automobiles), leaching, pumping, pouring, emitting, emptying, dumping,
disposing into the environment, and the continuing migration into or through
soil, surface water, groundwater or any body of water, discharge, deposit,
placement, generation, processing, construction, treatment, abatement,
removal, disposal, disposition, handling, or transportation of any Hazardous
Materials from, under, in, into, or on any Property, including, without
limitation, the movement or migration of any Hazardous Materials from
surrounding property, surface water, groundwater or any body of water under,
in, into, or onto any Property and any residual Hazardous Materials
Contamination in, on, or under any Property.
"INTERNAL RATE OF RETURN" or "IRR" means, the discount rate,
compounded monthly, expressed as a percentage based on a year of 365 or 366
days, as the actual case may be, at which the net present value, as of the
date LB makes each Capital Contribution to the Partnership pursuant to this
Agreement, of all future distributions pursuant to Article VIII of this
Agreement equals the amount of each such Capital Contribution. LB shall be
deemed to have received a twenty-five percent (25%) IRR, compounded monthly,
with respect to a segment of Capital Contribution it made to the Partnership
upon its receipt of a cumulative amount of distributions pursuant to Article
VIII that causes (i) the net present value of the aggregate of all
distributions pursuant to Article VIII to LB with respect to the Capital
Contributions, discounted at an annual rate of twenty-five percent (25%),
compounded monthly, from the date of each such distribution back to the date
of such Capital Contributions reduced by (ii) the amount of such Capital
Contributions, to equal zero.
"LB" means LB Triad Inc., a Delaware corporation.
"LEASES" shall mean the interest of the Partnership in leases and
rental agreements with tenants occupying space situated at any Property in the
Improvements or otherwise having rights with regard to use of any Property and
all security deposits or like payments, if any, paid by tenants or other
security provided in connection therewith.
"LENDER" means Bank One, Texas, N.A., a national banking association,
as Agent for the Lenders (as defined therein) under the Master Loan Agreement
dated December 23, 1997 among the Partnership, Bank One Texas, N.A. and the
Lenders, as the same may be modified, amended or restated from time to time.
-5-
<PAGE>
"LIMITED PARTNERS" mean LB and CSL, and any additional or substitute
Limited Partner(s) as may be designated as such in accordance with the
provisions of this Agreement.
"LOAN DOCUMENTS" mean all documents evidencing, securing or otherwise
entered into in connection with the BOT Loan or the GMAC 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 agreements between the
Partnership and Capital Senior Living, Inc. relating to the Properties, as
such agreements may be amended from time to time.
"NET CAPITAL TRANSACTION PROCEEDS" mean the proceeds from (a) any
financing or refinancing of the Properties or any part thereof (but not
including the BOT Loan or the GMAC Loan), and (b) any sale or disposition not
in the ordinary course, taking or loss (including, but not limited to, the
proceeds from any eminent domain proceeding or conveyance in lieu thereof or
from title insurance or casualty insurance, other than rental income
insurance) of the Properties or any part thereof that in accordance with GAAP
are considered capital in nature, less payment of all costs and other expenses
related thereto, any amounts expended to repair or replace any part of the
Properties taken or destroyed, any reserves required by the Loan Documents or
approved by the Partners as a Major Decision pursuant to Section 7 and any
loans, debts or other obligations of the Partnership.
"NET CASH FLOW" means the amount, if any, by which Gross Receipts
plus cash reserves of the Partnership from the previous period that the
General Partner, with the approval of the Limited Partners as a Major Decision
pursuant to Section 7.2, determines are no longer required exceed Operating
Expenses for such particular period, to the extent the General Partner
determines, with the reasonable approval of LB and CSL, 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 the determination of Net Capital Transaction Proceeds
"OPERATING DEFICITS GUARANTY" means collectively, the Subsidiary
Guaranties dated as of December 30, 1999 made by Capital Senior Living
Corporation for the benefit of the Partnership to pay and perform fully and
promptly when due all of the covenants, agreements and other obligations
undertaken by Capital Senior Living, Inc. pursuant to Section VII of the
Property Management Agreements, as such Guaranty may be amended or restated
from time to time in accordance with its terms.
"OPERATING EXPENSES" means all expenditures of any kind or nature
incurred by the Partnership attributable to a particular period (including,
without limitation, principal, interest and other amounts payable with respect
to the BOT Loan and the GMAC Loan), as determined in accordance with the
accrual method of accounting in accordance with GAAP.
"PARTNER" or "PARTNERS" means the General Partner or the Limited
Partners, or any of them.
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<PAGE>
"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.
"PARTNERSHIP PROPERTY" means the Properties, and all other property
of whatever kind of nature owned by the Partnership from time to time.
"PERCENTAGE INTERESTS" mean 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.
"PERMITTED ENCUMBRANCES" shall mean any mortgage, lien, security
interest, claim or encumbrance under or in connection with the BOT Loan or the
GMAC Loan.
"PERSON" means an individual, firm, corporation or other legal entity
"PERSONAL PROPERTY LEASES" shall mean the interest of the Partnership
in all leases covering furniture, fixtures and equipment located in or on or
about and used in connection with any Property or the operations thereon.
"PROPERTIES" mean those certain tracts of land which the Partners
have agreed in writing to acquire. Upon such written approval, the General
Partner shall attach the legal description for a Property hereto as EXHIBIT A.
"PROPERTY MANAGEMENT AGREEMENT" means collectively, the separate
amended and restated Management Agreements dated as of December 30, 1999
between the Partnership and Capital Senior Living, Inc., relating to the
Properties as each may be amended or restated in accordance with its terms.
"RENT ROLL" shall have the meaning set forth in paragraph 23 of
Exhibit F.
"RENTS" shall mean all of the rents, royalties, bonuses, issues,
profits, revenue, income, and other benefits derived from the Properties or
arising from the use or enjoyment of any portion thereof or from any lease or
agreement pertaining thereto and liquidated damages following default under
such leases, and all proceeds payable under any policy of insurance covering
loss of rents resulting from untenantability caused by damage to any part of
the Properties, together with any and all rights that the Partnership may have
against any tenant under such leases or any subtenants or occupants of any
part 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.
"SERVICE CONTRACTS" shall mean the interest of the Partnership in all
(i) brokerage contracts, (ii) maintenance, repair, service and pest control
contracts (including but not limited to janitorial, elevator and landscaping
agreements), and (iii) other contracts pursuant to which services or goods are
provided to the Properties, not to include any management agreement affecting
any Property.
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"SERVICER" means Hatfield Philips, Inc., a Georgia corporation having
an address at 285 Peachtree Center Avenue, Marquis Two Tower, Suite 2300,
Atlanta, GA 30303, Attention James Philips.
"STANDBY LENDER" means GMAC Commercial Mortgage Association, a
California corporation.
"TSL" means Triad Senior Living, Inc., a Texas corporation.
ARTICLE II
FORMATION; CONTINUATION; NAME AND OFFICE; PURPOSE
Section 2.1. FORMATION; CONTINUATION
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, with the approval of the Limited
Partners as a Major Decision pursuant to Section 7.2, 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, ownership, operation, and sale of the
Properties, and such other activities as are incidental thereto, including
without limitation, entering into the BOT Loan and the GMAC Loan and the
performance of the Partnership's obligations under the Loan Documents.
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ARTICLE III
TERM
The term of the Partnership commenced 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 TSL, 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 LB and CSL, 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 and in Section 2.2(d)
of Exhibit C hereof.
Section 5.2. CAPITAL CONTRIBUTION OF THE LIMITED PARTNERS
The Limited Partners have contributed or will contribute or be
deemed to have contributed on the date of this Agreement 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 Section 5.3. The amount contributed by LB to the capital of
the Partnership shall be used by the Partnership to (i) repay $10,053,369.02
of the loan ("CSL Loan") made by CSL to the Partnership in the original
principal amount of $15,000,000 as shown in EXHIBIT D; (ii) redeem the
limited partner interest of the Withdrawing Limited Partner as shown on
EXHIBIT D; and (iii) pay
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certain expenses of the Partnership with respect to transactions contemplated
by this Agreement as shown in EXHIBIT D. The remaining balance and accrued
interest on the CSL Loan (which, when added to CSL's current Capital
Contribution shown in EXHIBIT D, equals $3,000,000) shall be treated as
having been repaid by the Partnership to CSL and then immediately contributed
by CSL to the capital of the Partnership, which shall increase its Capital
Contribution Account. Immediately after the transactions set forth in this
Section 5.2, the Partners agree that their respective Capital Accounts and
Capital Contribution Accounts shall be as set forth on EXHIBIT D.
Section 5.3. ADDITIONAL CAPITAL CONTRIBUTIONS
(a) If Net Cash Flow is not sufficient to pay Operating
Expenses or to avoid or cure a default under the Loan Documents or other
obligations of the Partnership and the Partnership has been unable to borrow
funds sufficient to pay such Operating Expenses (such Operating Expenses are
referred to as "Required Expenses"), CSL shall, on its own initiative or at
the request of any Limited Partner, cause its Affiliate, Capital Senior
Living, Inc., to contribute to the Partnership in accordance with the terms
of Article VII of the Property Management Agreement an amount equal to the
Required Expenses, which amount shall be treated as a Capital Contribution by
CSL. If Capital Senior Living, Inc. fails to fund the Required Expenses in
accordance with Article VII of the Property Management Agreement, then CSL
shall, on its own initiative or at the request of any Limited Partner, cause
its Affiliate, Capital Senior Living Corporation, to contribute to the
Partnership an amount equal to the Required Expenses in accordance with the
Operating Deficits Guaranty, which amount shall be treated as a Capital
Contribution by CSL. If Capital Senior Living Corporation fails to fund the
Required Expenses in accordance with the Operating Deficits Guaranty, then
LB, on its own behalf or on behalf of the Partnership, shall have the right
to commence any action, suit or proceeding against Capital Senior Living,
Inc. and/or Capital Senior Living Corporation in order to be entitled to
specific performance and all other available legal and equitable remedies
against Capital Senior Living, Inc. and/or Capital Senior Living Corporation,
including (without limitation) recovery of all losses, costs and expenses. If
LB commences an action or proceeding against Capital Senior Living, Inc.
and/or Capital Senior Living Corporation, LB shall have the right to sell the
Properties pursuant to the terms of Section 9.7 at any time. Any amounts
expended by LB in commencing any suit or proceeding against Capital Senior
Living, Inc. and/or Capital Senior Living Corporation for breach of Article
VII of the Property Management Agreement or the Operating Deficits Guaranty,
as the case may be, shall be added to the Capital Account and the Capital
Contribution Account of LB.
(b) If Capital Senior Living, Inc. and/or Capital Senior Living
Corporation shall fail for any reason to fund any amount described in
subsection (a), the General Partner or any Limited Partner shall have the
right to request that the Partners contribute additional capital to the
Partnership to pay Required Expenses. If the General Partner or any Limited
Partner exercises this right, it may request that the General Partner
contribute 1%, CSL contribute 19% and LB contribute 80% of the amount of
additional capital required within ten (10) days (or such shorter time as may
be appropriate under the circumstances, but in no event less than three (3)
Business Days) after the date of receipt of notice of the request for such
additional capital. Each Partner may, but shall not be obligated to make any
such additional capital contributions. Any amounts contributed to the capital
of the Partnership pursuant to this subsection (b) by any Partner shall be
added to the Capital Account and the Capital Contribution Account of that
Partner.
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(c) FAILURE TO MAKE ADDITIONAL CAPITAL CONTRIBUTIONS. If any
Partner (a "Non-Contributing Partner") does not make any additional capital
contribution within the time specified, then the other Partners (each of
which is hereinafter referred to as a "Contributing Partner"), provided the
Contributing Partner is ready to contribute the funds requested pursuant to
subsection (b), may by written notice to each Non-Contributing Partner elect
to make capital contributions to the Partnership on behalf of itself and the
Non-Contributing Partner for the entire amount requested pursuant to Section
5.3(b). If a Contributing Partner makes such additional capital contributions
pursuant to this subsection (c), then the Contributing Partner shall receive
distributions with respect to such additional capital contributions as
described in Section 8.2. In no event shall any Partner's Percentage Interest
be increased or decreased as a result of capital contributions made pursuant
to this subsection (c).
(d) Except as may be agreed herein or hereafter agreed
voluntarily by all of the Partners (and not pursuant to Section 5.3(a), (b)
or (c)), no Partner shall be required to make any additional Capital
Contributions to the Partnership.
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.
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, in each case except to the extent expressly authorized or stated
in this Agreement or approved as a Major Decision pursuant to Section 7.2.
Section 6.2. LIMITATION OF LIABILITY
(a) 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
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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 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.
(b) The Partners confirm and agree that (i) the voting and
other rights and powers given to each Limited Partner in this Agreement were
a material inducement to each Limited Partner's entering into this Agreement
and (ii) the existence or exercise of such rights and powers by a Limited
Partner shall not, to the fullest extent stated in Section 3.03(b) of the
Texas Revised Limited Partnership Act, constitute participation by that
Limited Partner in the control of the business of the Partnership or result
in that Limited Partner being liable or responsible as a general partner for
the debts or obligations of the Partnership.
ARTICLE VII
GENERAL PARTNER
Section 7.1. POWERS; ACTIONS
The General Partner shall manage and control the business and
affairs of the Partnership, but only in accordance with the Annual Business
Plan and the other Major Decisions adopted in accordance with Section 7.2 and
subject to Section 7.3 and all other terms and conditions of this Agreement.
Subject to the foregoing, the General Partner shall have full power to (i)
manage the day-to-day operations of 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, development, construction, financing, refinancing, ownership,
operation and sale of the Properties; (iii) acquire, sell, lease, transfer,
assign, convey, mortgage, refinance, or otherwise dispose of or deal with all
or any part of the Properties 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
Properties, provided in all such cases such services are deemed by the
General Partner to be advisable and the compensation therefor is reasonable.
The General Partner shall cause the Partnership to comply with all
requirements of the BOT Loan and the GMAC Loan.
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
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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 proceeding for the Partnership may be commenced.
(ii) The Partnership and the General Partner are
prohibited from creating, incurring or assuming any
indebtedness other than the BOT Loan, the GMAC 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 Properties 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 (i) 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 or
(ii) until and unless such act has already been authorized in the Annual
Business Plan then in effect . 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) engagement by the Partnership in any
business other than as set forth in SECTION 2.3 above;
(iv) approval of each Annual Business Plan and
budget;
(v) approval of the terms and conditions of any
management, construction development or any similar agreement
relating to the Properties and of any material amendment or
modification to, or material waiver under, any such agreement
(the current Management Agreements and Development Agreements
are hereby approved);
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(vi) approval of any contract between the
Partnership and a Partner or any Affiliate of a Partner, and
approval of any amendment or modification to, or waiver of a
provision of, any such contract (the current Management
Agreements and Development Agreements are hereby approved);
(vii) except as contemplated by Sections 10.1 and
13.12, approval of the sale, financing, restructuring,
refinancing or disposition of all or substantially all of the
Partnership Property, the merger or consolidation of the
Partnership with any other entity or the liquidation or
dissolution of the Partnership;
(viii) acquisition of any additional real property
in addition to the Properties;
(ix) approval of forms of agreements for leasing
or rental of the Properties to tenants (the current forms of
which are hereby approved);
(x) acquisition of shares of capital stock of or
other equity interest in any corporation or other legal
entity;
(xi) formation by the Partnership of any
corporation, partnership, limited liability company or other
legal entity;
(xii) other than the creation of trade
receivables, making any loan, extending credit or acting as
guarantor or surety to, for or on behalf of any other Person;
(xiii) approval of the hiring or setting the
compensation for attorneys, consultants, contractors, board of
managers or other agents of the Partnership;
(xiv) changing the Accountants designated herein
or retaining or discharging accounting, financial or auditing
specialists to assist the Accountants;
(xv) commencing, settling, compromising or taking
any other material action with respect to any litigation or
legal proceeding of any type by, against or involving the
Partnership excluding routine property management matters;
(xvi) creation of any lien, security interest or
material encumbrance on the Properties not contemplated by the
BOT Loan or the GMAC Loan;
(xvii) issuance or sale of additional partnership
interests or admission of a new partner or member in this
Partnership other than in accordance with Article IX of this
Agreement or the appointment of an additional General Partner;
(xviii) filing any petition in bankruptcy or
reorganization or instituting any other type of bankruptcy,
reorganization or insolvency proceeding with respect to the
Partnership, consenting to the institution of involuntary
bankruptcy, reorganization
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or insolvency proceedings with respect to the Partnership,
the admission in writing by the Partnership of its inability
to pay its debts generally as they become due or the making
by the Partnership of a general assignment for the benefit
of its creditors;
(xix) taking any material action that is
inconsistent with the Annual Business Plan then in effect or
expending any funds in a manner that is inconsistent with any
budget set forth in the Annual Business Plan; PROVIDED,
HOWEVER, that the General Partner may, on behalf of the
Partnership: (A) expend funds for a budget category in excess
of the total expenditures budgeted for that budget category,
so long as such excess expenditures for any Fiscal Year do not
exceed 10% of that budget category; (B) in addition to the
expenditures in clause A above, apply amounts in any budget
category that the General Partner reasonably determines are
not required to be spent for that category to reduce or
eliminate a cost overrun in another budget category; and (C)
expend funds for matters which are non-discretionary (such as
real estate taxes, utilities and insurance premiums) even if
such amounts exceed any amounts budgeted for them;
(xx) except to the extent authorized by policies
or guidelines previously approved by TSL, LB and CSL, opening
or changing the terms of each bank account in the name of or
on behalf of the Partnership, or designating any Person to
withdraw funds from or sign checks drawn on any such account;
(xxi) approval of any action described in this
Agreement that refers to action by "TSL, LB and CSL" or "all
of TSL, LB and CSL" or contains language comparable to those
phrases;
(xxii) approval of any amendment, modification,
change or restatement of this Agreement or any act in
contravention of this Agreement;
(xxiii) approval of any capital expenditures in
excess of $50,000 on any Property that has already been
developed; and
(xxiv) with respect to any action or issue not
specifically described in this or another Section of this
Agreement, making any decision or taking any action that a
Partner exercising commercially reasonable judgment and acting
in good faith determines will or is reasonably expected
materially and adversely to affect the Partnership, any
Partner or the business or operations of the Partnership.
(c) Any Partner may request approval of a Major Decision by
written notice to the other Partners stating in reasonable detail the Major
Decisions to be made and including any supporting data necessary for a proper
understanding of the Major Decision to be made. Whenever TSL or CSL requests
approval of Major Decision, its request shall be communicated to both Karen
E. Blakely and David Chan (or such other individuals as designed by LB from
time to time) at their office by the best available means. Whenever a Partner
requests approval of a Major Decision, the other Partners shall notify the
requesting Partner of their approval or disapproval within a commercially
reasonable time (but not to exceed 10 Business Days) after the request is
made. If a Partner fails to
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respond to a request for approval of a Major Decision within the 10-Business
Day period described above, that Partner shall be deemed to have approved the
Major Decision so requested. If a Partner reasonably requests additional
information in order to respond to a request for a Major Decision, the
10-Business Day period for response shall run from the date that it receives
all the additional information requested. The requesting Partner shall
promptly provide to each other Partner such information as the other Partners
may reasonably request to assist them in making their decision.
Section 7.3. DUTIES AND OBLIGATIONS OF THE GENERAL PARTNER
(a) The General Partner shall manage and control the
Partnership, its business and affairs as stated in Section 7.1. 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.
(b) REMOVAL OF TSL AS GENERAL PARTNER. LB shall have the right
to remove TSL as General Partner of the Partnership for cause (as defined
below) by delivering to TSL a written notification of removal and stating the
cause for that action. The grounds for removal for cause shall mean one or
more of the following:
(i) any material failure by TSL to exercise
reasonable care in the discharge of its duties and obligations
as General Partner which is not cured at TSL's sole expense
(which shall not be deemed to be a capital contribution by TSL
to the Partnership) within 30 days after delivery of written
notice of such failure by LB to TSL;
(ii) any fraud, gross negligence or willful
misconduct in the performance by TSL of its obligations or
covenants under this Agreement or under any provision of
applicable law that LB determines in its reasonable discretion
is materially detrimental to the Partnership;
(iii) any material breach of the Partnership's
obligations to any lender that results from the willful
misconduct or material breach by TSL as described in
subsection (i) above and causes an event of default beyond
applicable grace periods under any loan documentation; or
(iv) any material breach by TSL or Fail of any
representation, warranty or covenant contained in Article XI
of this Agreement that LB determines in its reasonable
discretion is materially detrimental to the Partnership.
(c) LB shall have the right to remove TSL as General Partner of
the Partnership without cause at any time after the second anniversary of the
date of this Agreement by delivering to TSL a written notification of removal.
(d) LB or its designee (as reasonably approved by CSL) shall
act as General Partner on behalf of the Partnership after LB has removed TSL
as General Partner. If LB declines or fails for any reason to remove TSL as
the General Partner for one or more of the reasons stated above even
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though it has the right to do so, such failure to act at that time shall not
prevent or preclude LB from removing TSL as General Partner at a future time
for the same or a different reason.
Section 7.4. CHANGE OF TSL'S INTEREST FROM GENERAL TO LIMITED PARTNER
(a) If (1) a Bankruptcy Proceeding (as defined in subsection
(b)) has been commenced, (2) all or part of the Partnership interest in TSL
is transferred or otherwise disposed of in violation of Article IX or XI
hereof, or (3) TSL has been removed as the General Partner of the Partnership
pursuant to Section 7.3(b) or (c), the interest of TSL as General Partner of
the Partnership shall be automatically and immediately changed into a Limited
Partner interest. If Fail has died or is no longer actively involved in the
business and management of TSL for any reason, the interest of TSL as General
Partner of the Partnership shall, at the election of LB or CSL to be
effective upon written notice to TSL, be automatically and without further
action changed into a Limited Partner Interest.
(b) DEFINITIONS. For purposes of this Section:
(i) A "Bankruptcy Proceeding" means (1) the
filing by TSL of a petition for its bankruptcy or
reorganization under the U.S. Bankruptcy Code or comparable
state law, (2) the commencement against TSL with or without
its consent or approval of any proceeding seeking its
bankruptcy, liquidation or reorganization, appointment
of a receiver or trustee of its assets, or comparable relief,
that in each case is not stayed or dismissed within 120 days,
(3) the entry by a court of competent jurisdiction of a final
and unappealable order granting relief of the type described
in clause (1) or (2) above, (4) the admission in writing by
TSL of its inability to pay its debts generally as they become
due and (5) the making by TSL of a general assignment for the
benefit of its creditors.
(ii) Mr. Fail shall be deemed to be "no longer
actively involved in the business or management of TSL" if (1)
he has been discharged for any reason from employment by TSL,
(2) he has not devoted such time to the operations and
business affairs of the Partnership and the Properties as LB
reasonably determines is necessary because of illness or
physical disability, and such failure continues for more than
forty-five (45) days after written notice has been given to
him by either LB or CSL, or (3) he has died or become legally
incompetent or permanently disabled.
Section 7.5. ANNUAL BUSINESS PLAN
Promptly after the execution and delivery of this Agreement (but in
no event later than December 31, 1999), the General Partner shall prepare, in
cooperation with the Property Manager and submit to the Limited Partners for
approval as a Major Decision, pursuant to Section 7.2, an Annual Business
Plan and related budgets for the Properties for Fiscal Year 2000. At least 15
days prior to the commencement of each Fiscal Year beginning with Fiscal Year
2001, the Partnership shall adopt an Annual Business Plan, including an
operating budget and a capital budget, for the next Fiscal Year. Each such
Annual Business Plan and related budgets must be approved in writing as a
Major Decision as provided in Section 7.2. If the Partners fail for any
reason to approve a new
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Annual Business Plan, the existing Annual Business Plan shall remain in
effect for an additional sixty (60) days.
Section 7.6. OPTION TO PROVIDE FINANCING TO PARTNERSHIP
Whenever the Partnership proposes to obtain financing or refinancing
of any type (whether senior or junior debt or equity, but other than the GMAC
Loan) for any purpose, the Partnership shall give written notice to LB
describing the type, amount and material terms of the financing to be
obtained and copies of any term sheet, offer or other written material
delivered to or by the proposed lender. LB shall thereafter have the right
(but not the obligation) to cause one of its Affiliates to commit to provide
such financing on terms no less favorable to the Partnership than those that
are offered to the Partnership by another lender or investor as determined by
CSL and TSL (such determination to be made by TSL and CSL acting reasonably)
and the Partnership will accept such financing from the Affiliate of LB. LB
shall respond within fifteen (15) days to the written notice from the
Partnership described above. If LB elects not to provide such financing or
does not respond within fifteen (15) days, it shall be deemed to have waived
its right to do so. If LB elects to provide such financing, LB shall cause
one of its Affiliates to commit to provide such financing (subject to
standard mortgage loan documentation, including, without limitation, title,
survey, environmental, legal opinions and customary capital markets lending
requirements reasonably acceptable to LB or its Affiliate) by the date on
which the Partnership is required to submit its application, which commitment
letter shall contain all material terms of the proposed loan, or comparable
documentation to the lender. If the lender modifies the terms of its proposed
loan in any material respect, LB shall again have the right described in this
paragraph until the date that the Partnership is required to give to the
lender its response to the modification.
Section 7.7. OTHER ACTIVITIES
The General Partner shall devote a sufficient amount of time to
manage the Partnership. The Partners and Affiliates of the Partners may have
other business interests and may engage in other activities in addition to
those relating to the Partnership, including the making or management of
other investments. Without limitation on the generality of the foregoing,
each Partner recognizes that the Partners and Affiliates of all Partners each
have an interest in investing in, owning, operating, transferring, leasing
and otherwise using real property and interests therein for profit, and
engaging in any and all activities related or incidental thereto and that
each will make other investments consistent with such interests and the
requirements of any agreement to which they or their Affiliates are a party.
Except to the extent stated in this Agreement or in another agreement to
which a Partner is a party or by which it is bound: (1) neither the
Partnership nor any Partner shall have any right by virtue of this Agreement
or the relationship created hereby in or to any other ventures or activities
in which any Partner or its Affiliates are involved or to the income or
proceeds derived therefrom; (2) the pursuit of other ventures and activities
by the Partners or Affiliates of any Partner, even if competitive with the
business of the Partnership, is hereby consented to by all other Partners and
shall not be deemed wrongful or improper under this Agreement; and (3) no
Partner or its Affiliate shall be obligated to present any particular
investment opportunity to the Partnership, even if such opportunity is of a
character which, if presented to the Partnership, could be taken by the
Partnership, and each Partner and each Affiliate shall have the right to take
for its own account, or to recommend to others, any such particular
investment opportunity.
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Section 7.8. TAX MATTERS PARTNER
See Section 4.4 of EXHIBIT C attached hereto.
Section 7.9. 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 as described in Section
7.3(b)(ii). 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. The indemnity
and save harmless provided for in the foregoing sentence shall be satisfied out
of Partnership assets only and no Partner shall have any personal liability on
account thereof.
Section 7.10. FEES TO AND REIMBURSEMENT OF THE GENERAL PARTNER
The Limited Partners acknowledge that the General Partner or its
Affiliates will continue to receive $5,833 per month as an asset management fee.
LB shall have the right to terminate payment of that fee if TSL has been removed
as the General Partner of the Partnership or at any time after the second
anniversary of the date of this Agreement; provided, however, that if payment of
that fee has been terminated and TSL has not been removed as General Partner,
TSL shall have the right at any time thereafter to convert its interest in the
Partnership to a Limited Partner interest effective immediately upon
notification of such conversion of the other Partners. The General Partner and
its Affiliates shall also be entitled to receive reimbursement of their expenses
to the extent payment thereof is authorized in the Annual Business Plan, 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. DISTRIBUTIONS OF NET CASH FLOW AND NET CAPITAL TRANSACTION
PROCEEDS
Distributions of Net Cash Flow shall be made once each calendar quarter
and at such other times as is approved as a Major Decision pursuant to Section
7.2. Distributions of Net Capital Transaction Proceeds shall be made promptly
following the Partnership's receipt thereof. All such distributions shall be
made in the following order of priority, subject to the provisions of Section
11.9:
(a) First, to LB until there shall have been distributed to LB an
amount equal to the 15% Preferred Return calculated solely with respect to any
additional capital contributed pursuant to Section 5.3(b) or (c) hereof.
(b) Second, to LB until LB shall have received an amount equal to
the then existing balance in its Capital Contribution Account calculated solely
with respect to any additional capital contributed pursuant to Section 5.3(b) or
(c).
(c) Third, to LB, until there shall have been distributed to LB an
amount equal to the unpaid and accrued 15% Preferred Return on the remaining
amount (as reduced by Section 8.2(a)) in its Capital Contribution Account.
(d) Fourth, to LB, until it shall have received an amount equal to
the then remaining balance (as reduced by Section 8.2(b)) in its Capital
Contribution Account.
(e) Fifth, to TSL and CSL, PARI PASSU, until there shall have been
distributed to each of them an amount equal to the 15% Preferred Return
calculated solely with respect to additional capital contributed pursuant to
Section 5.3.
(f) Sixth, to TSL and CSL, PARI PASSU, until each of them shall
have received an amount equal to the then existing balance in its Capital
Contribution Account calculated solely with respect to additional capital
contributed pursuant to Section 5.3.
(g) Seventh, to LB in an amount equal to the greater of (i)
$3,000,000 (this amount to be reduced to $2,000,000 if the distributions under
this subsection (g) are distributed to LB within one year of the date of this
Agreement) or (ii) the amount that would give LB an Internal Rate of Return of
25% on its capital contributions (such calculation to take into account all
prior distributions to LB under this Section 8.2).
(h) Eighth, to TSL and CSL, PARI PASSU, until there shall have
been distributed to TSL and CSL, determined on a pro rata basis in accordance
with their respective Capital Contribution Accounts, an amount equal to the
unpaid and accrued 15% Preferred Return on the remaining amounts in their
respective Capital Contribution Accounts.
(i) Ninth, to TSL and CSL, PARI PASSU, until there shall have been
distributed to TSL and CSL amounts, determined on a pro rata basis in accordance
with their respective Capital Contribution Accounts, equal to the then remaining
balances in their respective Capital Contribution Accounts.
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(j) Tenth, if LB has not received in full all distributions
described in clauses (a) through (g) above on or before the second anniversary
of the date of this Agreement, 80% to LB, 19% to CSL and 1% to TSL, PARI PASSU.
If LB has received such amounts in full on or before the second anniversary of
the date hereof, 99% to CSL and 1% to TSL, PARI PASSU.
Section 8.3. WITHHOLDING TAXES WITH RESPECT TO PARTNERS
The Partnership shall comply with any withholding requirements under
federal, state and local law and shall remit any amounts withheld to, and file
required forms with, the applicable jurisdictions. All amounts withheld from
Partnership revenues or distributions by or for the Partnership pursuant to the
Code or any provision of any federal, state or local law, and any taxes, fees or
assessments levied upon the Partnership, shall be treated for purposes of this
Article VIII as having been distributed to those Partners who received tax
credits with respect to the withheld amounts, or whose identity or status caused
the withholding obligations, taxes, fees or assessments to be incurred. If the
amount withheld exceeded the affected Partner's actual share of cash available
for distribution, such Partner shall reimburse the Partnership for such
withholding. Each Partner agrees to furnish the Partnership with such
representations and forms as the General Partner shall reasonably request to
assist it in determining the extent of, and in fulfilling, the Partnership's
withholding obligations, if any. As soon as practicable after becoming aware
that any withholding requirement may apply to a Partner, the General Partner
shall advise such Partner of such requirement and the anticipated effect
thereof. Such Partner shall pay or reimburse to the Partnership all identifiable
costs or expenses of the Partnership caused by or resulting from withholding
taxes with respect to such Partner.
ARTICLE IX
ASSIGNABILITY OF GENERAL PARTNER'S AND LIMITED
PARTNER'S INTERESTS; BUY-SELL OPTION; PURCHASE OPTION
Section 9.1. GENERAL
(a) LB may at any time sell, assign, transfer, pledge, encumber or
hypothecate all or any part of its partnership interest to either any Affiliate
of LB, or a real estate investment trust controlled by LB or a securitization
pool controlled by LB. At any time after the second anniversary of the date
hereof, LB may sell, assign, transfer, pledge, encumber or hypothecate all or
any part of its partnership interests to any Person after complying with Section
9.11. Except as permitted in this Article, neither TSL nor CSL may, directly or
indirectly, sell, assign, transfer, pledge, encumber or hypothecate all or any
part of their partnership interest (including, but not limited to, their
interests in the capital or profits of the Partnership) without the prior
written consent of LB, which shall not be unreasonably withheld, delayed or
conditioned. Each sale, assignment, transfer, pledge, encumbrance or
hypothecation of a partnership interest shall at all times be subject to the
terms and conditions of the BOT Loan and the GMAC Loan.
(b) No sale, assignment, transfer, pledge, encumbrance,
hypothecation or issuance in violation of the provisions hereof shall be valid
or effective for any purpose, and no consent to one such transaction shall apply
to any other.
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(c) Upon the transfer of its entire partnership interest in the
Partnership and the admission of such Partner's transferee(s) as a substitute
Partner pursuant to Section 9.4, a Partner shall be deemed to have withdrawn
from the Partnership.
Section 9.2. PERMITTED TRANSFERS
(a) Notwithstanding the provisions of Section 9.1, but subject to
the limitations set forth in Sections 9.4 and 9.5, either TSL or CSL shall be
entitled, without the consent of the other Partners, to transfer all or any
portion of their interests in the Partnership to any Permitted Affiliate (as
hereinafter defined); provided, however, that no such transfer shall be
effective without the consent of LB required in Section 9.1(a) if it is part of
a series of transactions designed to effect a direct or indirect transfer to a
person or entity not described in this sentence.
(b) Any Partner may transfer all or any part of its partnership
interest to another Partner without the consent or approval of any other
Partner.
(c) "Permitted Affiliate" means, with respect to a Partner, (1)
any person directly or indirectly owning, controlling or holding with power to
vote 100% of the outstanding securities of or equity or beneficial interests in
such Partner as of the date hereof, (2) any person 100% of whose outstanding
securities or equity or beneficial interests are directly or indirectly owned,
controlled or held with power to vote by such Partner as of the date hereof, (3)
any person 100% of whose out standing securities or equity or other beneficial
interests are directly or indirectly owned, controlled or held with power to
vote by a Person or Persons directly or indirectly owning, controlling or
holding with power to vote 100% of the outstanding securities or equity or other
beneficial interests of such Partner with whom affiliate status is being tested,
or (4) with respect to TSL, the spouse, parents or children of Fail or trusts
established solely for the benefit of one or more of those Persons so long as
Fail at all times owns directly, indirectly or beneficially more than fifty
percent (50%) of the profit and other economic interests in TSL and has the sole
and exclusive power to direct the management and policies of TSL, whether by
ownership of Partnership or other equity interests, by proxy, by contract or
otherwise.
Section 9.3. EFFECT OF ASSIGNMENT; DOCUMENTS
In the event of any sale, assignment or transfer permitted hereunder,
the Partnership shall not be dissolved or wound up, but shall continue. No such
sale, assignment or transfer shall relieve the assignor from any of its
obligations under this Agreement accruing prior to such sale, assignment or
transfer. Notwithstanding the foregoing, as a condition to any sale, transfer or
assignment by a Partner, the transferee or assignee must execute a joinder to
this Agreement and agree to be bound by all of its terms and provisions.
Section 9.4. SUBSTITUTE PARTNER
The transferee of a partnership interest may be admitted to the
Partnership as a substitute Partner only if such transfer is made in compliance
with Sections 9.1, 9.2, 9.3 and 9.5. Unless a transferee of a partnership
interest is admitted as a substitute Partner under this Section 9.4, it shall
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have none of the powers of a Partner hereunder and shall have only such rights
of an assignee under the Revised Act as are consistent with the other terms and
provisions of this Agreement.
Section 9.5. FURTHER REQUIREMENTS
In addition to the other requirements of Sections 9.1, 9.2, 9.3 and
9.4, and unless waived or modified in whole or in part by the other Partners as
a Major Decision pursuant to Section 7.2, no transfer of all or any portion of a
partnership interest may be made unless the transferring Partner and the
transferee deliver an opinion of counsel reasonably acceptable to the
non-transferring Partners, that (a) the transfer will not cause the Partnership
to be treated as an association taxable as a corporation for Federal income tax
purposes, (b) the transfer will not cause the partnership to be treated as a
"publicly traded partnership" within the meaning of Section 7704 of the Code and
(c) the transfer will not violate the Securities Act of 1933, as amended, or any
other applicable Federal or state securities laws, rules or regulations.
Section 9.6. BUY-SELL PROVISIONS
If (i) LB has the right at any time to remove TSL as General Partner of
the Partnership for cause as a result of its fraud, gross negligence or willful
misconduct under the circumstances described in Section 7.3(b)(ii) of this
Agreement, whether or not LB has exercised that right, (ii) LB has the right on
behalf of the Partnership at any time to terminate one or more of the Management
Agreements for cause as a result of the fraud, gross negligence or willful
misconduct of Capital Senior Living, Inc. that constitutes a material breach by
it under Section IV (C)(1)(a) of any Management Agreement, whether or not LB has
exercised that right, (iii) LB determines that TSL or CSL has breached a
material representation in Article XI of this Agreement or (iv) LB has not
received in full all distributions described in Sections 8.2(a) through (g)
of this Agreement on or before December 30, 2001, LB shall be permitted (but
not obligated) to notify the other Partners of its intent to invoke the
procedures described in subsections A through D below. If (y) TSL has at any
time been removed as General Partner of the Partnership pursuant to Section
7.3(b) of this Agreement or (z) LB, TSL and CSL have been deadlocked for more
than thirty (30) days ending after December 30, 2000 over approval of a Major
Decision in accordance with Section 7.2, any Partner shall be permitted (but
not obligated) to notify the other Partners of its intent to invoke the
procedures described in subsections A through D below.
A. The Partner giving notice (the "Buy-Sell Notice")
shall specify a price (the "Offer Price") for the Properties and all
other assets of the Partnership, and indicate a willingness to be, at
the option of the other Partners, either the buyer or the seller. The
Buy-Sell Notice must be delivered with the words "Confidential/Urgent"
clearly visible from the exterior of the container in which the
Buy-Sell Notice is contained and must alert the other Partners to the
10-day limit for response as described below. Delivery of the Buy-Sell
Notice shall be in accordance with the notice provisions of this
Agreement.
B. The Partners receiving the Buy-Sell Notice shall have
ten (10) days from the receipt of the Buy-Sell Notice to elect by
written notice given to the Partner who gave the Buy-Sell Notice to be
either the seller or the buyer. If both Partners who receive the
Buy-Sell Notice elect to be buyer, they shall each be entitled to
purchase PRO RATA in accordance
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with their Percentage Interests the partnership interests held by
the Partner who gave the Buy Sell Notice. If one or both Partners
receiving the Buy-Sell Notice elect to be the buyer, their notice
shall constitute their legally binding obligation to complete the
purchase described in Section 9.6C and shall not be effective with
respect to each such Partner unless it also, within such 10-day
period, delivers in escrow to the attorneys for the Partner who gave
the Buy-Sell Notice cash in an amount equal to ten (10%) percent of
the amount it would be obligated to pay under Section 9.6C (the
"Deposit"). In the event both Partners receiving the Buy-Sell Notice
fail to respond, or elect to be the buying Partner but fail to
deliver the Deposit, within such 10-day period, then the Partner who
gave the Buy-Sell Notice shall be the buyer. That buyer shall then
deliver in escrow, within five (5) days of the end of such 30-day
period, to the attorneys for the other Partner cash in an amount
equal to the Deposit and such delivery of the Deposit shall
constitute its legally binding obligation to complete the purchase
described in Section 9.6C. If that buyer fails to pay the Deposit,
then the rights of the Partners under this Section shall be as they
were prior to the delivery of the Buy-Sell Notice.
C. Within ninety (90) days after the Buy-Sell Notice has
been given:
(1) If TSL and CSL are the sellers, LB shall pay
to TSL and CSL, in full payment for their interests in
Partnership, the amount TSL and CSL would have received as a
Partner of the Partnership if the Properties of the
Partnership had been sold for an amount equal to the Offer
Price on the date of such payment, and the proceeds of such
sale (net of liabilities, obligations and expenses that would
have been paid out of such proceeds, including without
limitation any amounts due to a Partner or its Affiliates, if
such sale had actually occurred) were distributed in the order
of priority described in Section 8.2 of this Agreement. TSL
and CSL shall thereupon cease to be Partners of the
Partnership.
(2) If LB and CSL are the sellers, TSL shall pay
to LB and CSL in full payment for their interests in
Partnership, the amount LB and CSL would have received as
Partners of the Partnership if the Properties of the
Partnership had been sold for an amount equal to the Offer
Price on the date of such payment, and the proceeds of such
sale (net of liabilities, obligations and expenses that would
have been paid out of such proceeds, including, without
limitation, any amounts due to a Partner or its Affiliates, if
such sale had actually occurred) were distributed in the order
of priority described in Section 8.2 of this Agreement. LB and
CSL shall thereupon cease to be Partners of the Partnership.
(3) If LB and TSL are the sellers, CSL shall pay
to LB and TSL in full payment for their interests in
Partnership, the amount LB and TSL would have received as
Partners of the Partnership if the Properties of the
Partnership had been sold for an amount equal to the Offer
Price on the date of such payment, and the proceeds of such
sale (net of liabilities, obligations and expenses that would
have been paid out of such proceeds, including, without
limitation, any amounts due to a Partner or its Affiliates, if
such sale had actually occurred) were distributed in the order
of priority described in Section 8.2 of this Agreement. LB and
TSL shall thereupon cease to be Partners of the Partnership.
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D. If the buyer fails to complete the transaction within
ninety (90) days after the Buy-Sell Notice was given as described above
for a reason other than default by the seller, the attorneys holding
the Deposit in escrow shall deliver to the sellers on a pro rata basis
in accordance with the purchase price each was to receive the full
amount of the Deposit and all interest earned thereon and sellers shall
(1) have the right (but not the obligation), to be exercised and
completed within one hundred fifty (150) days after the Buy-Sell Notice
was given, (x) to be the buyer on a pro rata basis as described above
at an Offer Price equal to at least ninety (90%) percent of that stated
in the Buy-Sell Notice, and/or (2) be entitled to specific performance
and all other available legal and equitable remedies against the buyer,
including (without limitation) recovery of all losses, costs and
expenses.
E. If none of the Partners has completed the exercise of
purchase rights within the time periods specified in this section, the
rights of the Partners shall be as they were before the Buy-Sell Notice
was given, subject to any rights that the non-defaulting Partners may
have hereunder, at law or at equity.
F. Notwithstanding the foregoing, upon receipt of a
Buy-Sell Notice from TSL or CSL, LB may, in lieu of electing to be
either the Seller or Buyer, offer the Properties for sale on behalf of
the Partnership in accordance with the procedures described in Sections
9.7.
G. Notwithstanding anything to the contrary stated in
this Section, in no event shall the amount to be paid to LB as seller
under this Section be less than the amounts that would be distributed
to LB pursuant to Section 8.2(a) through (e).
Section 9.7. SALE OF PROPERTIES AFTER SECOND ANNIVERSARY
At any time after December 30, 2001, LB may invoke the procedures
described in Paragraphs A through D below for any reason in its sole and
absolute discretion.
A. LB shall deliver a notice ("Sale Notice") to TSL and
CSL stating that it intends to cause one or more of the Properties to
be sold on behalf of the Partnership. The Sale Notice must contain a
proposed sale price for each such Property that LB has elected to sell
(the "Sale Price"). The Sale Notice must be delivered with the words
"Confiden tial/Urgent" clearly visible from the exterior of the
envelope in which the Sale Notice is contained and must alert TSL and
CSL to the 10-Business Day limit for response described in Paragraph B
below.
B. CSL shall have 10 Business Days from the receipt of
the Sale Notice to elect by written notice given to LB to purchase all
or part of LB's partnership interests in the Partnership at a purchase
price equal to the amount LB would have received as a Partner of the
Partnership if the Property or Properties of the Partnership had been
sold for an amount equal to the Sale Price on the date of such payment,
and the proceeds of such sale (net of liabilities, obligations and
expenses that would have been paid out of such proceeds, including,
without limitation, any amounts due to a Partner or its Affiliates, if
such sale had actually occurred) were distributed in the order of
priority described in Section 8.2 of this Agreement. If less than all
the Properties are to be sold, LB's partnership interests subject
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to sale under this Section shall be equal to the percentage obtained by
multiplying LB's partnership interest by a fraction, the numerator of
which shall be the agreed value of each Property to be sold set forth
in SCHEDULE E to this Agreement and the denominator of which shall be
the aggregate of the agreed value of all Properties stated in SCHEDULE
E. If CSL makes this election, its notice shall constitute its legally
binding obligation to complete such purchase and shall not be effective
unless it also delivers to the Partnership cash in an amount equal to
ten percent (10%) of the amount to be paid to LB pursuant to this
Section ("Deposit") which shall be held by the Partnership in an
interest-bearing, segregated account.
C. If CSL elects to purchase the partnership interests
of LB as described in Paragraph B, CSL shall within ninety (90) days
after the Sale Notice was given pay to LB the amount described in
Paragraph B. CSL shall thereafter be entitled to the same priority in
distributions pursuant to Section 8.2 as LB had with respect to the
partnership interests of LB sold under this Section.
D. If CSL fails to respond within such 10-Business Day
period, fails to pay the Deposit or notifies LB that it does not wish
to exercise the right described in Paragraph B above, then LB, in its
sole and absolute discretion, shall be entitled to offer the Properties
for sale on behalf of the Partnership at the price set forth in the
Sale Notice and on other terms no less favorable to the Partnership
than those terms stated in the Sale Notice. Such offer may be made
directly by LB or through investment bankers or real estate brokers for
a commission and on other terms that are "market" as reasonably
determined by LB. LB shall use commercially reasonable efforts to keep
TSL and CSL informed regarding the progress of the sale of the
Properties.
E. If CSL elects to purchase the LB partnership
interest, but fails for any reason to complete the transaction within
90 days after the Sale Notice was given as described above, LB (i)
shall retain the full amount of the Deposit as its sole and exclusive
remedy and (ii) shall have the right to sell the Properties being sold
within a period of 180 days after the Sale Notice was given at a Sale
Price equal to at least 90% of that stated in the Sale Notice and on
other terms no less favorable to the Partnership than those terms
stated in the Sale Notice.
F. LB shall thereafter have the right to complete the
sale of the Properties being sold on the terms no less favorable to
those described in the Sales Notice and to execute and deliver on
behalf of the Partnership all documentation and to take all other
actions that LB shall reasonably determine are necessary to complete
the sale of the Properties. If LB receives a bona fide offer to
purchase the Properties ("Property Offer"), LB shall, before completing
the sale of the Properties, deliver the Property Offer to CSL. CSL
shall then have the right to purchase the Properties on the same terms
and conditions as are set forth in the Property Offer. If CSL makes
this election, CSL shall both notify LB of its election and complete
the purchase of the Properties within 10 days (not Business Days) after
its receipt from LB of the Property Offer. If the Properties are not
sold within 180 days, then the rights of CSL shall be as they were
before the Sale Notice was given under this Section.
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G. If the Properties are sold under this Section, LB
shall be entitled to all distributions payable to LB as described in
Section 8.2(a), (b), (c) and (d) before any distributions are made to
CSL and TSL under Section 8.2(e) and (f).
Section 9.8. CSL PURCHASE OPTION: TSL PARTNERSHIP INTERESTS
At any time, CSL shall have the right, but not the obligation, to
purchase all, but not less than all, of the interests owned by TSL for an amount
equal to the amount of money that TSL paid for its 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.
Section 9.9. CSL PURCHASE OPTION: LB PARTNERSHIP INTERESTS
At any time, CSL shall have the right, but not the obligation to
purchase, all, but not less than all, of the partnership interests of LB for an
amount equal to the sum of (i) an amount equal to the balance in LB's Capital
Contributions Account, (ii) LB's accrued but unpaid 15% Preferred Return on its
Capital Contributions Account, (iii) the greater of (x) $3,000,000 and (y) an
amount that would give to LB a 25% Internal Rate of Return on its Capital
Contributions taking into account all prior distributions made to LB pursuant to
Section 8.2(a) through (d), and (iv) if such purchase is completed after the
second anniversary hereof, the amount that LB would have received pursuant to
Section 8.2 if all Properties had been sold at their fair market value as of the
end of the month prior to the payment hereunder, taking into account all amounts
set forth in (i), (ii) and (iii) above. In the event CSL completes the
purchase of LB's partnership interest pursuant to this Section 9.9 prior to
the first anniversary of the date hereof, the $3,000,000 amount above shall
be reduced to $2,000,000.
Section 9.10. CLOSING DOCUMENTATION
At the closing of any transaction described in Section 9.6, 9.7, 9.8 or
9.9, the seller(s) shall execute and deliver to the buyer(s) such instruments
and documents in form and substance reasonably satisfactory to the buyer(s) as
may be necessary or appropriate to transfer the Properties or partnership
interests of the seller(s) to the buyer(s) (or the designee of any buyer(s)),
free and clear of all liens, security interests, claims and encumbrances, other
than Permitted Encumbrances, against receipt by the seller(s), in immediately
available funds, of the consideration determined in accordance with Section 9.6,
9.7, 9.8 or 9.9, as the case may be.
Section 9.11. SALE OF PARTNERSHIP INTERESTS BY LB
(a) If LB wishes at any time for any reason to sell or otherwise
dispose of all or part of its partnership interest in this Partnership, it shall
give notice ("Sale Notice") to CSL and shall specify the price and other
material terms and conditions ("Sale Price") that it is seeking for sale of such
partnership interest. The Sale Notice must be delivered with the words
"Confidential/Urgent" clearly visible from the exterior of the container in
which the Sale Notice is contained and must alert
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CSL to the 10-day limit for response described below. Delivery of the Sale
Notice shall be in accordance with the notice provisions of this Agreement.
(b) CSL shall have ten (10) Business Days from the receipt of the
Sale Notice to elect by written notice given to LB to purchase at the Sale Price
the partnership interests of LB being sold. If CSL elects to purchase the
partnership interest of LB being sold, its notice shall constitute its legally
binding obligation to complete the purchase described in subsection (c) and
shall not be effective unless it also delivers to LB cash in an amount equal to
ten percent (10%) of the amount it would be obligated to pay under subsection
(c) below ("CSL Deposit"). If CSL (i) fails to respond to the Sale Notice within
such 10-Business Day period, (ii) fails to pay the CSL Deposit or (iii) notifies
LB that it does not wish to purchase such partnership interests of LB, then LB
shall be entitled to sell or otherwise dispose of such partnership interests in
this Partnership at a price and on other material terms and conditions no less
favorable to LB than the Sale Price stated in the Sale Notice for a period of
one hundred twenty (120) days after the Sale Notice was given to CSL.
(c) If CSL elects to purchase the partnership interests of LB, CSL
shall within ninety (90) days after the Sale Notice was given pay to LB the Sale
Price stated in the Sale Notice. CSL shall thereafter be entitled to the same
priority in distributions pursuant to Section 8.2 as LB had with respect to the
partnership interests of LB sold under this Section.
(d) If CSL elects to purchase such partnership interests of LB,
but fails for any reason other than a default by LB to complete the transaction
within ninety (90) days after the Sale Notice was given as described above, LB
(i) shall retain the full amount of the CSL Deposit, (ii) shall have the right
to sell such partnership interests within a period of two hundred ten (210) days
after the Sale Notice was given at a Sale Price equal to at least ninety percent
(90%) of that stated in the Sale Notice and on other terms no less favorable to
LB than those of the Sales Price stated in the Sale Notice and (iii) shall be
entitled to and all available legal remedies against CSL, including (without
limitation) recovery of all losses, costs and expenses. LB shall not,
however, be entitled to any consequential damages or any equitable remedies,
which are hereby waived.
Section 9.12. 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 9.13. 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, if applicable, 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.
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ARTICLE X
DURATION, DISSOLUTION, TERMINATION,
WINDING UP, REMOVAL OF GENERAL
PARTNER AND RESIGNATION OF GENERAL PARTNER
Section 10.1. DISSOLUTION AND TERMINATION
Subject to the provisions of Section 7.2(a)(iii) 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 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 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 other 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
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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 LB 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 LB
for the purpose of disbursing such reserves in payment of any of the
aforementioned contingencies, and at the expiration of such period as
LB may deem advisable, to distribute the balance thereafter remaining
as provided herein.
(c) To the Partners, in accordance with the provisions of
Section 8.2.
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 Book Basis (as defined in Exhibit C) of such assets shall, to the
extent not otherwise recognized by the Partnership, be taken into account as
provided in Exhibit C for purposes of crediting or charging the Capital Accounts
of, and distributing proceeds to, the Partners.
ARTICLE XI
REPRESENTATIONS, WARRANTIES AND COVENANTS
Section 11.1. OWNERSHIP OF TSL
Blake N. Fail ("Fail") represents and warrants to LB that, as of the
date of this Agreement, he and Permitted Affiliates own of record and
beneficially all of the outstanding equity interests in TSL. Fail agrees that,
unless LB has given its prior written consent (which shall not be unreasonably
withheld, delayed or conditioned), no Person other than a Permitted Affiliate
will, directly or indirectly, (i) own any equity interest in TSL, (ii) be
admitted as a stockholder of TSL, (iii) be granted any option or other
contractual right to acquire any equity interest in TSL, (iv) be granted the
right to vote or take other action with respect to the equity interest in TSL or
(v) hold or be granted any mortgage, lien, pledge, security interest or other
encumbrance on the equity interest in TSL.
Section 11.2. OWNERSHIP OF CSL
CSL represents and warrants to LB that, as of the date of this
Agreement, Capital Senior Living Corporation owns of record and beneficially all
of the outstanding equity interests in CSL, directly or indirectly. CSL agrees
that, unless LB has given its prior written consent (which shall
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not be unreasonably withheld, delayed or conditioned), no Person other than a
Permitted Affiliate will, directly or indirectly, (i) own any equity interest
in CSL, (ii) be admitted as a stockholder of CSL, (iii) be granted any option
or other contractual right to acquire any equity interest in CSL, (iv) be
granted the right to vote or take other action with respect to the equity
interest in CSL or (v) hold or be granted any mortgage, lien, pledge,
security interest or other encumbrance on the equity interest in CSL.
Section 11.3. CONFIDENTIALITY
The Partners shall not disclose the terms of this Agreement without the
consent of TSL, LB and CSL except (i) to their attorneys, accountants and other
advisors, (ii) to the extent required by law (including, without limitation, in
any required filing with the Securities and Exchange Commission), (iii) to
prospective assignees of partnership interests who agree to maintain the
confidentiality of the provisions of this Agreement, (iv) to prospective lenders
to the Partnership, (v) in connection with any transfer permitted herein by LB
of its partnership interest in the Partnership to a liquidating trust,
securitization pool or real estate investment trust as provided for in Section
9.1(a) or (vi) to prospective lenders to or investors in TSL or CSL.
Section 11.4. LIMITATION OF LB LIABILITY
Each of TSL, CSL and Fail, for themselves and on behalf of their
respective Affiliates (collectively, "TSL and CSL Claiming Parties"), hereby
agrees that if the TSL and CSL Claiming Parties, together or individually, make
any claim of any nature whatsoever, whether legal or equitable, including
(without limitation) claims based on federal or state law, against LB or its
Affiliates arising out of or relating to (1) this Agreement, (2) the formation
or operation of the Partnership, (3) any loans made to the Partnership, (4)
the negotiations and representations of the parties preceding or following
the execution of this Agreement, (5) any alleged breach of this Agreement or
(6) the proposed transactions described in this Agreement, then the following
limitations on the liability of LB and its Affiliates, and on the relief
available to the TSL and CSL Claiming Parties, shall apply: (a) under no
circumstances shall the TSL and CSL Claiming Parties be entitled to any form
of equitable relief (including injunctive relief) except to the extent
expressly stated in this Agreement, lost profits or consequential, special or
punitive damages and (b) any judgment against LB and its Affiliates shall be
enforceable against them only to the extent of the capital contributions of
LB to the Partnership.
Section 11.5. LIMITATION OF CSL LIABILITY
Each of TSL, LB and Fail, for themselves and on behalf of their
respective Affiliates (collectively, "TSL and LB Claiming Parties"), hereby
agrees that if the TSL and LB Claiming Parties, together or individually, make
any claim of any nature whatsoever, whether legal or equitable, including
(without limitation) claims based on federal or state law, against CSL or its
Affiliates arising out of or relating to (1) this Agreement, (2) the formation
or operation of the Partnership, (3) any loans made to the Partnership, (4) the
negotiations and representations of the parties preceding or following the
execution of this Agreement, (5) any alleged breach of this Agreement or (6) the
proposed transactions described in this Agreement, then the following
limitations on the liability of CSL and its Affiliates, and on the relief
available to the TSL and LB
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Claiming Parties, shall apply: (a) under no circumstances shall the TSL and
LB Claiming Parties be entitled to any form of equitable relief (including
injunctive relief) except to the extent expressly stated in this Agreement,
lost profits or consequential, special or punitive damages and (b) any
judgment against CSL and its Affiliates shall be enforceable against them
only to the extent of an amount equivalent to the capital contributions of LB
(and not CSL) to the Partnership.
Section 11.6. LIMITATION OF TSL LIABILITY
Each of CSL and LB, for themselves and on behalf of their respective
Affiliates (collectively, "CSL and LB Claiming Parties"), hereby agrees that if
the CSL and LB Claiming Parties, together or individually, make any claim of any
nature whatsoever, whether legal or equitable, including (without limitation)
claims based on federal or state law, against TSL or its Affiliates arising out
of or relating to (1) this Agreement, (2) the formation or operation of the
Partnership, (3) any loans made to the Partnership, (4) the negotiations and
representations of the parties preceding or following the execution of this
Agreement, (5) any alleged breach of this Agreement or (6) the proposed
transactions described in this Agreement, then the following limitations on the
liability of TSL and its Affiliates, and on the relief available to the CSL and
LB Claiming Parties, shall apply: (a) under no circumstances shall the CSL and
LB Claiming Parties be entitled to any form of equitable relief (including
injunctive relief) except to the extent expressly stated in this Agreement, lost
profits or consequential, special or punitive damages and (b) any judgment
against TSL and its Affiliates shall be enforceable against them only to the
extent of an amount equivalent to the capital contributions of LB (and not TSL)
to the Partnership.
Section 11.7. REPRESENTATIONS OF TSL REGARDING PARTNERSHIP AND RELATED MATTERS
In partial consideration of LB's agreement to become a Limited Partner
and to make the capital contributions described in Section 5.2, TSL makes to LB
the representations and warranties set forth in Exhibit F attached to this
Agreement.
Section 11.8. REPRESENTATIONS OF CSL REGARDING PARTNERSHIP AND RELATED MATTERS
In partial consideration of LB's agreement to become a Limited Partner
and to make the capital contributions described in Section 5.2, CSL makes to LB
the representations and warranties set forth in Exhibit G attached to this
Agreement.
Section 11.9. LB LOSSES FROM BREACH OF REPRESENTATION
(a) INDEMNIFICATION BY TSL. TSL agrees to indemnify and hold
harmless LB and its Related Parties (collectively, the "LB INDEMNIFIED PARTIES")
from, against, for and in respect of any and all damages (including, without
limitation, amounts paid in settlement with the consent of TSL), losses,
obligations, liabilities, claims, causes of action, deficiencies, costs and
expenses, including, without limitation, reasonable attorneys' fees and other
costs and expenses incident to any suit, action, investigation, claim or
proceeding and within the reasonable contemplation of the parties (collectively,
"LOSSES") suffered, sustained, incurred or required to be paid by any of LB
Indemnified Parties by reason of (i) any representation or warranty made by TSL
in this Agreement being untrue or incorrect in any material respect as of the
time made; (ii) any failure by TSL to observe or
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perform, in any material respect, their covenants and agreements set forth in
this Agreement in any material respect; or (iii) any failure by TSL or the
Partnership to satisfy and discharge any other liability or material
obligation of TSL or the Partnership accrued, incurred or outstanding on the
date of this Agreement and not expressly assumed by LB pursuant to this
Agreement. TSL further agrees that, in the event any Losses occur in
connection with (a) matters insured against under the terms of the Owner's
Title Policies (as defined in paragraph 32 of Exhibit F) and/or (b) any
matters relating to title to the Properties arising from the respective dates
of the Owner's Title Policies, whether disclosed or undisclosed in any of the
Updated Reports (as defined in paragraph 32 of Exhibit F), through and
including the date hereof, and (c) the failure or delay in obtaining all
proper zoning approvals from the appropriate governmental authorities,
including but not limited to the City of Fort Worth, necessary for full
zoning compliance of the facility located at Granbury Station, Fort Worth,
Texas, then TSL (y) will be liable for any and all such Losses and (z) shall
not look to LB or any LB Indemnified Party on the ground that LB as a Limited
Partner of the Partnership had knowledge of any matter in connection with
such Losses by reason of notice imputed to LB through its Partner TSL by
operation of law, it being the specific understanding and agreement of the
parties and the intent of this Section that neither LB nor any LB Indemnified
Party shall ever be liable to any third party, the Partnership or its
Partners, directly or indirectly, for any Loss that occurs in connection with
(aa) matters insured against under the terms of the Owner's Title Policies
and/or (bb) any matters relating to title to the Properties arising from the
respective dates of the Owner's Title Policies, whether disclosed or
undisclosed in any of the Updated Reports, through and including the date
hereof and/or (cc) the failure or delay in obtaining all proper zoning
approvals from the appropriate governmental authorities, including but not
limited to the City of Fort Worth, necessary for full zoning compliance of
the facility located at Granbury Station, Fort Worth, Texas. Notwithstanding
any provision in this Agreement to the contrary, (a) the amount of any
distribution otherwise payable to TSL pursuant to Section 8.2 shall secure
and be used to pay and satisfy in full any obligation or liability that TSL
has to LB under this Section, (b) the partnership interest of TSL in the
Partnership and any interest that TSL has in any asset of the Partnership
shall secure and be used to pay and satisfy in full any obligation or
liability that TSL has to LB under this Section and (c) LB shall have all
rights and benefits of a secured party under the Uniform Commercial Code with
respect to the distributions, partnership interest and assets referred to in
clauses (a) and (b) above.
(b) INDEMNIFICATION BY CSL. CSL agrees to indemnify, save and hold
harmless the LB Indemnified Parties from, against, for and in respect of any and
all Losses (including, without limitation, amounts paid in settlement with the
consent of CSL) suffered, sustained, incurred or required to be paid by any of
the LB Indemnified Parties by reason of (i) any representation or warranty made
by CSL in this Agreement being untrue or incorrect in any material respect as of
the time made; (ii) any failure by CSL to observe or perform, in any material
respect, its covenants and agreements set forth in this Agreement; or (iii) any
failure by CSL or the Partnership to satisfy and discharge any other liability
or material obligation of CSL or the Partnership accrued, incurred or
outstanding on the date of this Agreement and not expressly assumed by LB
pursuant to the Assignment. CSL further agrees that, in the event any Losses
occur in connection with (a) matters insured against under the terms of the
Owner's Title Policies (as defined in paragraph 8 of Exhibit G) and/or (b) any
matters relating to title to the Properties arising from the respective dates of
the Owner's Title Policies, whether disclosed or undisclosed in any of the
Updated Reports and/or (c) the failure or delay in obtaining all proper zoning
approvals from the appropriate governmental authorities, including but not
limited to the City of Fort Worth, necessary for full zoning compliance
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of the facility located at Granbury Station, Fort Worth, Texas, through and
including the date hereof, then CSL (y) will be liable for any and all such
Losses and (z) shall not look to LB or any LB Indemnified Party on the ground
that LB as a Limited Partner of the Partnership had knowledge of any matter
in connection with such Losses by reason of notice imputed to LB through its
Partner TSL by operation of law, it being the specific understanding and
agreement of the parties and the intent of this Section that neither LB nor
any LB Indemnified Party shall ever be liable to any third party, the
Partnership or its Partners, directly or indirectly, for any Loss that occurs
in connection with (aa) matters insured against under the terms of the
Owner's Title Policies and/or (bb) any matters relating to title to the
Properties arising from the respective dates of the Owner's Title Policies,
whether disclosed or undisclosed in any of the Updated Reports, through and
including the date hereof and/or (cc) the failure or delay in obtaining all
proper zoning approvals from the appropriate governmental authorities,
including but not limited to the City of Fort Worth, necessary for full
zoning compliance of the facility located at Granbury Station, Fort Worth,
Texas. Notwithstanding any provision in this Agreement to the contrary, (a)
the amount of any distribution otherwise payable to CSL pursuant to Section
8.2 shall secure and be used to pay and satisfy in full any obligation or
liability that CSL has to LB under this Section, (b) the partnership interest
of CSL in the Partnership and any interest that CSL has in any asset of the
Partnership shall secure and be used to pay and satisfy in full any
obligation or liability that CSL has to LB under this Section and (c) LB
shall have all rights and benefits of a secured party under the Uniform
Commercial Code with respect to the distributions, partnership interest and
assets referred to in clauses (a) and (b) above.
(c) LIMITATIONS ON INDEMNIFICATION. If prior to Closing LB shall
have been notified in writing by TSL or CSL, or LB shall have obtained actual
knowledge, of any failure of a warranty or representation made by TSL or CSL
herein or pursuant hereto to be true and correct when made and LB consummates
the transactions contemplated hereby, then LB shall also be deemed to have
waived any indemnification hereunder with respect to such failure. In no
event shall TSL or CSL be liable to the LB Indemnified Parties for (i) any
consequential, exemplary or punitive damages or (ii) amounts that exceed the
total amount of capital contributed by LB to the Partnership or (iii) amounts
that are less than $100,000 in the aggregate. The right of the LB Indemnified
Parties to seek indemnification for Losses suffered as a result of any matter
described in subsection (a) or (b) above shall expire thirty-six (36) months
following the date of this Agreement, except for any specific claim asserted
prior to such date, which claim shall survive such thirty-six (36) month
period. In addition, the amount of any Losses for which a LB Indemnified
Party is to be indemnified by TSL or CSL pursuant to this Section shall be
reduced by any amount actually recovered by such LB Indemnified Party from an
insurer or other party in respect of such Losses (a "THIRD PARTY
REIMBURSEMENT") to the extent such Third Party Reimbursement was not taken
into account in assessing the amount of Losses suffered or incurred by such
Indemnified Party. If, after receipt by any LB Indemnified Party of any
indemnification payment under this Section from TSL or CSL, such LB
Indemnified Party who received a Third Party Reimbursement in respect of the
same Losses for which indemnification was made (and such Third Party
Reimbursement was not taken into account in assessing the amount of Losses
suffered or incurred by such LB Indemnified Party), then such LB Indemnified
Party shall turn over promptly all of such Third Party Reimbursement to TSL
or CSL, as applicable. In no event shall (i) an Indemnified Party be
indemnified against its own willful misconduct or gross negligence or (ii) LB
or any other LB Indemnified Party be required to assert any claims against or
otherwise seek recovery of any amount from any insurer or other party in
respect of any Losses; provided, however, if LB elects not to pursue such
claim, LB shall assign
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such claim (to the extent assignable) to TSL or CSL, as applicable, who may
pursue such claims at its sole cost and expense.
Section 11.10. NOTICE OF LOSS
Notwithstanding anything herein contained, an indemnifying party
("INDEMNIFYING PARTY") shall not have any liability under the indemnity
provisions of this Agreement with respect to any fact or occurrence known by any
indemnified party ("INDEMNIFIED PARTY") with respect to a particular matter
unless a notice setting forth in reasonable detail the breach which is asserted
has been given to the Indemnifying Party and, in addition, if such matter arises
out of a suit, action, investigation or proceeding, such notice is given
promptly after the Indemnified Party shall have been given notice of the
commencement of a suit, action, investigation or proceeding. A failure to give,
or delay in giving, any such notice hereunder shall not affect the rights of an
Indemnified Party to indemnification hereunder except to the extent the
Indemnifying Party is materially prejudiced as a result of such failure or
delay. SECTIONS 11.9 AND 11.10 HEREOF ARE INTENDED TO INDEMNIFY THE INDEMNIFIED
PARTIES AGAINST THE RESULTS OF THEIR OWN NEGLIGENCE. AN INDEMNIFIED PARTY'S
FAILURE TO INVESTIGATE, OR A LACK OF DUE DILIGENCE OCCURRING FOR ANY REASON
WHATSOEVER, SHALL NOT (I) CONSTITUTE NEGLIGENCE, GROSS NEGLIGENCE OR WILFUL
MISCONDUCT FOR PURPOSES OF THIS AGREEMENT (INCLUDING, WITHOUT LIMITATION, THIS
SECTION), (II) CONSTITUTE A DEFENSE TO ANY ACTION OR PROCEEDING BROUGHT BY THE
INDEMNIFIED PARTY TO ENFORCE HIS OR ITS RIGHTS UNDER THIS ARTICLE 11, (III)
EXCUSE PERFORMANCE BY THE INDEMNIFYING PARTY OF ITS OBLIGATIONS UNDER THIS
ARTICLE 11, OR (IV)ENTITLE THE INDEMNIFY ING PARTY TO ANY RIGHT OF SET OFF OR
COUNTERCLAIM AGAINST AMOUNTS OWED UNDER THIS ARTICLE 11.
Section 11.11. RIGHT TO DEFEND
Upon receipt of notice of any suit, action, investigation, claim or
proceeding for which indemnification might be claimed by an Indemnified Party,
the Indemnifying Party shall be entitled promptly to defend, contest or
otherwise protect against such suit, action, investigation, claim or proceeding
at its own cost and expense. The Indemnified Party shall have the right, but not
the obligation, to participate at its own expense in a defense thereof by
counsel of its own choosing, but the Indemnifying Party shall be entitled to
control the defense unless the Indemnified Party has relieved the Indemnifying
Party from liability with respect to the particular matter or the Indemnifying
Party fails to assume defense of the matter. In the event the Indemnifying Party
shall fail to defend, contest or otherwise protect in a timely manner against
any such suit, action, investigation, claim or proceeding, the Indemnified Party
shall have the right, but not the obligation, to defend, contest or otherwise
protect against the same and make any compromise or settlement thereof and
recover the entire cost thereof from the Indemnifying Party including reasonable
attorneys' fees, disbursements and all amounts paid as a result of such suit,
action, investigation, claim or proceeding or the compromise or settlement
thereof. However, if the Indemnifying Party undertakes the defense of such
matters, the Indemnified Party shall not be entitled to recover from the
Indemnifying Party any legal or other expenses subsequently incurred by the
Indemnified Party
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in connection with the defense thereof other than the reasonable costs of
investigation undertaken by the Indemnified Party with the prior written
consent of the Indemnifying Party.
Section 11.12. COOPERATION
Each of the parties hereto and each of their affiliates, successors and
assigns shall cooperate with each other in the defense of any suit, action,
investigation, proceeding or claim by a third party, and, during normal business
hours, shall afford each other access to their books and records and employees
relating to such suit, action, investigation, proceeding or claim and shall
furnish each other all such further information that they have the right and
power to furnish as may be reasonably necessary to defend such suit, action,
investigation, proceeding or claim.
ARTICLE XII
ACCOUNTS AND RECORDS: ACCOUNTANTS
Section 12.1. ACCOUNTING METHODS: FISCAL YEAR
The books of account of the Partnership shall be kept on the accrual
method of accounting in accordance with GAAP. The fiscal year of the Partnership
shall end on December 31 of each year except upon termination.
Section 12.2. 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 character, all on the
method of accounting determined in accordance with Section 12.1, 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, including agents or
representatives of the Partner may, at its own expense and upon reasonable prior
written notice to the General Partner, fully examine, inspect, make copies of
the Partnership's books, records, accounts and assets, including but not limited
to bank balances and physical inspection of the Properties.
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LB, at its sole and absolute discretion, may retain Ernst & Young
LLP, at LB's expense, to review and approve all annual financial statements,
tax returns and other financial and tax data specified by LB.
Section 12.3. 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 GAAP,
such financial statements as are required by the BOT Loan or the GMAC 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 and LB or CSL, 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 12.4. 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 12.5. REPORTS TO 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 in a format attached as EXHIBIT H. The General Partner shall also
cause the Partnership to send to each Partner and the Servicer, promptly after
they are sent to the Lender all financial, operating and other reports and
data required to be submitted to the Lender pursuant to the Loan Documents. 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 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.
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ARTICLE XIII
GENERAL PROVISIONS
Section 13.1. 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
13.2.
Section 13.2. 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 acknowl edged 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 13.2.
Section 13.3. 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, 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 13.4. 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
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<PAGE>
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 13.5. 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 13.6. 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 13.7. 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 13.8. 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.
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Section 13.9. 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 13.10. 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 13.11. PROHIBITION AGAINST 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 13.12. AGREEMENTS WITH AFFILIATES AND THE GMAC LOAN
(a) DEVELOPMENT AGREEMENTS. The Partnership hereby ratifies and
agrees that the Properties shall be developed by Capital Senior Development,
Inc. ("Developer") pursuant to the existing Development Agreements with the
Partnership containing terms and conditions that have been approved by the
Partners. The Partnership also ratifies and agrees to the terms and conditions
in the Development and Turnkey Services Agreement by and between the
Partnership and Capital Senior Development, Inc. At its sole and absolute
discretion, LB, on its own behalf or on behalf of the Partnership, may
terminate and replace the Developer for cause, as defined in the relevant
Development Agreement.
(b) ASSET MANAGEMENT AND LEASING AGREEMENT. The Partnership hereby
ratifies and agrees that the Properties shall be managed and leased by Capital
Senior Living, Inc. ("Property Manager") pursuant to the existing Management
Agreements with the Partnership containing terms and conditions that have been
approved by the Partners. At its sole and absolute discretion, LB, on its own
behalf or on behalf of the Partnership, may terminate and replace a Property
Manager (i) at any time for cause as defined in each Management Agreement and
(ii) without cause in LB's sole and absolute discretion at any time after the
second anniversary of the date of this Agreement.
(c) GMAC LOAN. The Partners hereby ratify and agree that the
Partnership will borrow from the Standby Lender, the GMAC Loan of not more
than $50,000,000 pursuant to the Loan Documents for the purpose of refinancing
the cost of acquiring, developing and operating the Properties. The Partners
acknowledge and agree that the Partnership has previously executed a
commitment letter for each of the Properties (collectively, "Commitment
Letters") with the Standby Lender relating to the GMAC Loan secured by the
Properties. The Partners hereby ratify and approve the Commitment Letters and
agree that the General Partner shall have authority on behalf of the
Partnership to enter into, execute, deliver and perform the Loan Documents
with respect to
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the GMAC Loan. The terms, conditions and provisions of the Loan Documents, as
set forth in the Commitment Letters, are hereby approved as a Major Decision
under Section 7.2. TSL shall use its good faith efforts to cause the
Partnership to comply with all covenants or requirements of the Loan Documents
to the extent that the Partnership has the financial and other resources
available to do so. The Partners acknowledge and agree that LB shall have no
responsibility for providing any guaranties or other agreements in connection
with the GMAC Loan or other financing obtained by the Partnership.
Section 13.13. NON-COMPETE OF GENERAL PARTNER
TSL agrees that as long as it is the general partner of the
Partnership and for one (1) year after TSL is no longer the general partner of
the Partnership, neither TSL nor its Affiliates will acquire, own, develop,
complete the development of, or manage any senior living facility providing
the same or comparable 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.
Section 13.14. LITIGATION WITHOUT TERMINATION
Each Partner shall be entitled to maintain, on its own behalf or on
behalf of the Partnership, any action or proceeding against any other Partner
or the Partnership (including, without limitation, any action for damages,
specific performance or declaratory relief) for or by reason of the breach by
such party of this Agreement or any other agreement entered into in connection
with this Agreement, notwithstanding the fact that any or all of the parties
to such proceeding may then be Partners in the Partnership, and without
dissolving the Partnership as a limited partnership.
Section 13.15. ATTORNEYS' FEES
If the Partnership or any Partner obtains a judgment against any
other Partner by reason of breach of this Agreement or failure to comply with
the provisions hereof, reasonable attorneys' fees as fixed by the court shall
be included in such judgment.
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Section 13.16. CUMULATIVE REMEDIES
No remedy conferred upon the Partnership or any Partner pursuant to
this Agreement is intended to be exclusive of any other remedy herein or by
law provided or permitted, but each shall be cumulative and shall be in
addition to every other remedy given hereunder or now or hereafter existing at
law, in equity or by statute (subject, however, to the limitations expressly
herein set forth).
[REMAINDER OF PAGE LEFT BLANK]
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SIGNATURE PAGE TO SECOND AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP OF TRIAD SENIOR LIVING I, L.P.
GENERAL PARTNER:
Triad Senior Living, Inc.,
a Texas corporation
By: /s/ Blake N. Fail
----------------------------------------
Name: Blake N. Fail
----------------------------------------
Title: President
----------------------------------------
LIMITED PARTNERS:
LB Triad Inc.,
a Delaware corporation
By: /s/ Christopher S. McKenna
----------------------------------------
Name: Christopher S. McKenna
----------------------------------------
Title: Authorized Signatory
----------------------------------------
Capital Senior Living Properties, Inc.
a Texas corporation
By: /s/ David R. Brickman
----------------------------------------
Name: David R. Brickman
----------------------------------------
Title: Vice President
----------------------------------------
WITHDRAWING LIMITED PARTNER:
/s/ Blake N. Fail
-----------------------------------------------
Blake N. Fail
The undersigned is signing this Agreement solely for the purpose of
signifying his agreement to comply with the provisions of Article XI of this
Agreement.
/s/ Blake N. Fail
-----------------------------------------------
Blake N. Fail
<PAGE>
EXHIBIT A
PROPERTY DESCRIPTIONS
[SEE ATTACHED]
A-1
<PAGE>
EXHIBIT B
<TABLE>
<CAPTION>
CAPITAL CONTRIBUTIONS
REGULAR CONDITIONS STATED
PERCENTAGE IN SECTION 8.2(j)
CAPITAL CONTRIBUTIONS INTEREST HAVE BEEN SATISFIED
--------------------- ---------- -------------------
<S> <C> <C> <C>
GENERAL PARTNER
Triad Senior Living, Inc. $1.00 1% 1%
4312 Mockingbird Lane
Dallas, Texas 75205
Attention: Blake N. Fail
LIMITED PARTNERS
LB Triad Inc. $12,000,000 80% 0%
3 World Financial Center
New York, New York 10285
Attention: Karen E. Blakely
Capital Senior Living Properties, Inc. $3,000,000 19% 99%
14160 Dallas Parkway
Suite 300
Dallas, Texas 75240
Attention: David R. Brickman, Esq.
</TABLE>
B-1
<PAGE>
EXHIBIT C
CERTAIN TAX AND ACCOUNTING MATTERS
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 I, 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.
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(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 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.
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(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.
(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).
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(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.
(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.
(dd) "TERMINATING CAPITAL TRANSACTION" means any transaction not
in the ordinary course of business, and that in accordance with GAAP is
capital in nature and is entered into in connection with or will result in the
dissolution, winding up and termination of the Partnership.
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
C-4
<PAGE>
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.
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
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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. Notwithstanding any other provision of
this Agreement to the contrary, upon liquidation of a Partner's partnership
interest (whether or not in connection with a liquidation of the Partnership),
no Partner shall have any liability to restore any deficit in its Capital
Account except for, upon the liquidation of TSL's interest in the Partnership,
if TSL has a deficit balance in its 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,
TSL 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 TSL during the term of the
Partnership (determined without taking into account any amounts paid to any
party pursuant to Section 7.10 of the Agreement). In addition, no allocation
to any Partner of any loss, whether attributable to depreciation or otherwise,
shall create any asset of or obligation to the Partnership, even if such
allocation reduces a Partner's Capital Account or creates or increases a
deficit in such Partner's Capital Account; it is also the intent of the
Partners that no Partner shall be obligated to pay any such amount to or for
the account of the Partnership or any creditor of the Partnership.
(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.
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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 assets 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
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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 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.
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(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: To LB until the cumulative amount allocated under
this Section 3.1(g)(ii) for the current and prior years is equal to
the sum of the cumulative Adjusted Net Loss allocated to LB for all
prior years under Section 3.1(h)(viii); and then
(iii) THIRD: To LB until the aggregate amount allocated under
this Section 3.1(g)(iii) is equal to the sum of (A) the cumulative
15% Preferred Return distributable under Section 8.2(a) and (c) plus
(B) the cumulative Adjusted Net Loss allocated for all prior years
under Section 3.1(h)(vii); and then
(iv) FOURTH: To TSL and CSL, in proportion to and to the extent
of the excess, if any of their respective sum of (A) the cumulative
Adjusted Net Loss allocated to the Partner under Section 3.1(h)(vi)
for all prior years over (B) the cumulative Adjusted Net Income
allocated to the Partner under this Section 3.1(g)(iv) for the
current and all prior years; and then
(v) FIFTH: To TSL and CSL, in proportion to and to the extent
of the excess, if any, of (1) their respective sum of (A) the
cumulative 15% Preferred Return distributable to the Partner under
Section 8.2(e) plus (B) the cumulative Adjusted Net Loss allocated to
the Partner under Section 3.1(h)(v) for all prior years over (2) the
cumulative Adjusted Net Income allocated to the Partner under this
Section 3.1(g)(vi) for the current and all prior years; and then
(vi) SIXTH: To LB until the cumulative amount allocated under
this Section 3.1(h)(vi) is equal to the sum of (A) the cumulative
amount distributable to LB under Section 8.2(g) plus (B) the
cumulative Adjusted Net Loss allocated to LB under Section 3.1(h)(iv)
for the prior years; and then
(vii) SEVENTH: To TSL and CSL, in proportion to and to the extent
of the excess, if any of their respective sum of (A) the cumulative
Adjusted Net Loss allocated to the Partner under Section 3.1(h)(iii)
for all prior years over (B) the cumulative Adjusted Net Income
allocated to the Partner under this Section 3.1(g)(vii) for all
current and all prior years; and then
(viii) EIGHTH: To TSL and CSL, in proportion to and to the
extent of the excess, if any, of (1) their respective sum of (A) the
cumulative 15% Preferred Return distributable to the Partner under
Section 8.2(h) plus (B) the cumulative Adjusted Net Loss allocated to
the Partner under Section 3.1(h)(ii) for all prior years over (2) the
cumulative Adjusted Net
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Income allocated to the Partner under this Section 3.1(g)(viii) for
the current and all prior years; and then
(ix) NINTH: To the Partners in proportion to their respective
Percentage Interests.
For purposes of the allocation pursuant to this subsection, Percentage
Interests shall be determined as if cash distributions equal to all
allocations of net income have actually been made.
(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 to the Partners, in proportion to
and to the extent of the excess, if any, of (1) the cumulative
Adjusted Net Income allocated to each Partner pursuant to Section
3.1(g)(ix) for all prior years, over (2) the cumulative Adjusted Net
Loss allocated to such Partner pursuant to this Section 3.1(h)(i) for
the current and all prior years; and then
(ii) SECOND: Adjusted Net Loss to TSL and CSL, in proportion to
and to the extent of the excess, if any, of (1) the cumulative
Adjusted Net Income allocated to each such Partner pursuant to
Section 3.1(g)(viii) for all prior years, over (2) the cumulative
Adjusted Net Loss allocated to such Partner pursuant to this Section
3.1(h)(ii) for the current and all prior years; and then
(iii) THIRD: Adjusted Net Loss to TSL and CSL, in proportion to
and to the extent of their respective positive Section 704 Capital
Account balances (reduced by any amount distributable under Section
8.2(e) and (f); and then
(iv) FOURTH: Adjusted Net Loss to LB in an amount equal to the
excess, if any, of the cumulative Adjusted Net Income allocated to LB
pursuant to Section 3.1(g)(vi) for all prior years over the
cumulative Adjusted Net Loss allocated to LB pursuant to this Section
3.1(h)(iv) for the current and all prior years; and then
(v) FIFTH: Adjusted Net Loss to TSL and CSL, in proportion to
and to the extent of the excess, if any, of (1) the cumulative
Adjusted Net Income allocated to each such Partner pursuant to
Section 3.1(g)(v) for all prior years, over (2) the cumulative
Adjusted Net Loss allocated to such Partner pursuant to this Section
3.1(h)(v) for all prior years; and then
(vi) SIXTH: Adjusted Net Loss to TSL and CSL in proportion to
and to the extent of their respective positive Section 704 Capital
Account balances until their respective positive Capital Account
balances are reduced to zero; and then
(vii) SEVENTH: Adjusted Net Loss to LB to the extent of the
excess, if any, of (1) the cumulative Adjusted Net Income allocated to
LB pursuant to Section 3.1(g)(iii) for all prior years, over (2) the
cumulative Adjusted Net Loss allocated to such Partner pursuant to
this Section 3.1(h)(vii) for all prior years; and then
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(viii) EIGHTH: Adjusted Net Loss to LB until its positive
Capital Account balance is reduced to zero; and then
(ix) NINTH: Adjusted Net Loss to the General Partner.
For purposes of the allocation pursuant to this subsection, Percentage
Interests shall be determined as if cash distributions equal to all
allocations of net income have actually been made.
(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 earlier of (i) the date 18 months following
the date that the Partnership receives a Certificate of Occupancy for the
Subject Property or (ii) the date which is two years after the date of this
Agreement, if LB is still a Limited Partner, all Adjusted Net Loss from the
Subject Property shall be allocated under this SECTION3.1(i) to TSL. If LB is
a Limited Partner after the second anniversary of the date of the Agreement,
then notwithstanding any other provision of the Agreement or this Exhibit, all
Adjusted Net Losses from the Subject Property shall be allocated under this
SECTION 3.1(i) to LB. The provisions of this SECTION 3.1(i) shall be applied
to each Property of the Partnership on a property-by-property basis.
(j) Book Gain 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 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: After all allocations under Section 3.1(k)(i)
through (ii) but before any distributions under Section 8.2 as a
result of Section 10.4, Book Gain shall be allocated to LB until LB's
positive Capital Account balance is equal to the sum of amounts
distributable to LB under Section 8.2(a), (b), (c) and (d); and then
(iv) FOURTH: After all allocations under Section 3.1(k)(i)
through (iii) but before any distributions under Section 8.2 as a
result of Section 10.4, Book Gain shall be allocated to CSL and TSL
until each of TSL's and CSL's positive Capital Account balance is
equal to the sum of the amounts distributable under Section 8.2(e)
and (f); provided, however, that if there is not sufficient Book Gain
to allocate to cause each such Partner's positive Capital Account
balance to equal the sum of the amounts distributable under Section
8.2(e) and (f), then Book Gain shall be allocated among TSL and CSL
(to the extent possible and as necessary) so as to cause their
respective positive Capital Account balances to be in the same
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ratio to one another as their respective amounts distributable under
Section 8.2(e) and (f); and then
(v) FIFTH: After all allocations under Section 3.1(k)(i)
through (iv) but before any distributions under Section 8.2 as a
result of Section 10.4, Book Gain shall be allocated to LB until LB's
positive Capital Account balance is equal to the sum of the amounts
distributable to LB under Section 8.2(a) through (d) plus (g); and
then
(vi) SIXTH: After all allocations under Section 3.1(k)(i)
through (v) but before any distributions under Section 8.2 as a
result of Section 10.4, Book Gain shall be allocated to CSL and TSL
until each of TSL's and CSL's positive Capital Account balance is
equal to the sum of the amounts distributable to TSL and CSL under
Section 8.2(e) and (f) plus (h) and (i); provided, however, that if
there is not sufficient Book Gain to allocate to cause each such
Partner's positive Capital Account balance to equal the sum of the
amounts distributable under Section 8.2(e) and (f) plus (h) and (i),
then Book Gain shall be allocated among TSL and CSL (to the extent
possible and as necessary) so as to cause so much of their respective
positive Capital Account balances in excess of their amount
distributable under Section 8.2(e) and (f) to be in the same ratio to
one another as their respective amounts distributable under Section
8.2(h) and (i); and then
(vii) SEVENTH: To the Partners in their sharing ratios as set
forth in Section 8.2(j).
(k) 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: Before any distributions under Section 8.2 as a
result of Section 10.4, Net Loss shall be allocated in the least
amount necessary and to the extent possible so that the Partners'
excess balances (as hereinafter defined) are as closely as possible in
the same ratio to one another as their sharing ratios as set forth in
Section 8.2(j), and then to all Partners in proportion to their excess
balances until the excess balances are zero. LB's excess balance is
defined as the amount, if any, by which its positive Capital Account
balance exceeds the sum of the amounts distributable under Section
8.2(a) through (d) and (g). TSL's and CSL's respective excess balance
is defined as the amount, if any, by which its positive Capital
Account balance exceeds the sum of the amounts distributable to such
Partner under Section 8.2(e), (f), (h) and (i); and then
(ii) SECOND: Before any distributions under Section 8.2 as a
result of Section 10.4 and after the allocations under Section
3.1(k)(i), Net Losses shall be allocated to TSL and CSL until their
respective positive Capital Account balance is equal to the amounts
distributable under Section 8.2(e) and (f); provided, however, that if
there is not sufficient Book Loss to allocate to cause each such
Partner's positive Capital Account balance to equal the sum of the
amounts distributable under Section 8.2(e) and (f), then Book Loss
shall be allocated among the Partners (to the extent possible and as
necessary) so as to cause so much of their respective positive Capital
Account balances in excess of the amount distributable
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under Section 8.2(e) and (f) to be in the same ratio to one another as
their respective amounts distributable under Section 8.2(h) and (i);
and then
(iii) THIRD: Before any distributions under Section 8.2 as a
result of Section 10.4 and after the allocations under Section
3.1(k)(i) through (ii), Net Losses shall be allocated to LB until its
positive Capital Account balance is equal to the amounts distributable
to it under Section 8.2(a) through (d); and then
(iv) FOURTH: Before any distributions under Section 8.2 as a
result of Section 10.4 and after the allocations under Section
3.1(k)(i) through (iii), Net Losses shall be allocated to TSL and CSL
until their respective positive Capital Account balance is equal to
zero; provided, however, that if there is not sufficient Book Loss to
allocate to cause each such Partner's positive Capital Account balance
to equal zero, then Book Loss shall be allocated among the Partners
(to the extent possible and as necessary) so as to cause their
respective positive Capital Account balances to be in the same ratio
to one another as their respective amounts distributable under
Section 8.2(e) and (f); and them
(v) FIFTH: Before any distributions under Section 8.2 as a
result of Section 10.4 and after the allocations under Section
3.1(k)(i) through (iv), Net Losses shall be allocated to LB until its
positive Capital Account balance is reduced to zero; and then
(vi) SIXTH: Before any distributions under Section 8.2 as a
result of Section 10.4 and after the allocations under Section
3.1(k)(i) through (v), Net Losses shall be allocated to the General
Partner.
(l) 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.
(m) 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.
(n) 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.
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(o) 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 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.
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(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 accrual 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;
(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 with the prior written
consent of LB 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.
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Section 4.4. TAX MATTERS PARTNER.
(a) TSL 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. The Tax
Matters Partner shall give written notice to each other Partner of all
correspon dence and other communications with tax authorities, including the
commencement of any audit and the nature and amount of any audit adjustments,
and shall not agree or settle the amount of any audit adjustment without the
prior written consent of each Limited Partner. 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.
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EXHIBIT D
ADJUSTMENTS IN LOAN AND CAPITAL
D-1
<PAGE>
EXHIBIT E
AGREED VALUE OF EACH PROPERTY
E-1
<PAGE>
EXHIBIT F
REPRESENTATIONS AND WARRANTIES OF TSL REGARDING
PARTNERSHIP AND RELATED MATTERS
1. EXISTENCE; AUTHORITY. The Partnership is a duly
organized and validly existing limited partnership under the laws of the State
of Texas and has all requisite partnership power and authority to own and
lease its properties and to carry on its business as it is currently being
operated and in the places where the Properties owned by the Partnership are
owned or leased and such business is conducted.
2. NO DEFAULT. Neither the entry into, nor the
performance of, nor the compliance with this Agreement, has resulted or will
result in any violation of, or invalidate, cancel or make inoperative, or
constitute a default under, result in the creation of an Encumbrance or other
charge upon any Property or create any rights of termination, cancellation or
acceleration in any person under, any charter, bylaw, partnership or joint
venture agreement, trust agreement, mortgage, deed of trust, contract,
indenture, credit agreement, franchise, permit, judgment, injunction, decree,
order, ordinance, statute, rule, regulation, easement, restriction, or other
charge, right, or interest applicable to TSL, the Partnership or any Property.
3. LITIGATION. There is no pending or, to the
knowledge of TSL, threatened litigation or administrative proceedings to which
TSL and/or the Partnership is a party and which could (i) adversely affect
title to any Property or any part thereof or the ability of any of the parties
hereto to perform any of its obligations hereunder or the ability of the
Partnership to conduct the business or operations presently conducted by the
Partnership or the use of any Property by the Partnership in the manner
currently being used by the Partnership; (ii) result in a material adverse
change in the business, operations, assets or results of operations of the
Partnership; or (iii) otherwise affect any Property in any material respect.
The Partnership is not subject to any continuing court or Agency order, writ,
injunction or decree applicable to any Property or the business operations of
the Partnership, and the Partnership is not in default with respect to any
order, writ, injunction or decree of any court or Agency with respect to any
Property or its operations.
4. ZONING. TSL has not received any written notice of
a violation by any Property of any applicable zoning ordinances, rules and
regulations, deed restrictions, restrictive covenants, building codes or any
other land use controls to which the Property is subject.
5. NO BROKERS OR COMMISSIONS. Other than as disclosed
on SCHEDULE F-5, TSL has not dealt with any broker, arranger, consultant,
agent or finder to whom any commissions or other fees are still owing and
there are no commissions or other fees payable to any such party in connection
with the transactions contemplated hereunder. Other than as disclosed on
SCHEDULE F-5 and except for finders fees or referral fees payable in the
ordinary course of operations of the Properties there are no commissions
payable to any party in connection with any purchase or lease of any of the
Properties, or otherwise relating to the Properties and there are no
agreements to pay such commissions with respect to any future transaction.
F-1
<PAGE>
6. TRUE AND CORRECT COPIES. All copies of all
certificates and permits, and all other contracts or documents delivered or
made available by TSL to LB in connection with the transactions contemplated
hereby, the Partnership or any Property are true, correct and, to the extent
they purport to be complete, complete copies.
7. FINANCIAL INFORMATION. To the knowledge of TSL, all
financial statements and other financial information concerning the
Properties, the Partnership or TSL delivered to LB as listed in SCHEDULE F-7
fairly and accurately reflect the information purported to be represented
thereby. There exists no material liabilities or obligations affecting the
Properties or the Partnership or the operation thereof which are not disclosed
in the balance sheets attached hereto as SCHEDULE F-7, except for such
liabilities and obligations that are adequately covered by insurance or with
respect to which adequate reserves have been made.
8. EMPLOYMENT ARRANGEMENTS. The Partnership has no
employees. There exists no union contracts, collective bargaining agreements,
employment contracts, employee benefit plans or arrangements, or similar
contracts or agreements, oral or written, pertaining to the Partnership or the
Properties or any person employed in connection with the operation of the
Properties and under which the Partnership will be obligated.
9. NO UNTRUE STATEMENT. No document or certificate
prepared by or under the supervision of TSL or to the knowledge of TSL, no
document or certificate furnished or to be furnished by TSL pursuant hereto
and relating to the Partnership or the Properties contains or will contain, as
of the date furnished, any untrue statement of material facts or omits or will
omit, as of the date furnished, to state material facts necessary to make the
statements or facts contained therein not misleading.
10. BANKRUPTCY. There is not pending or, to the
knowledge of TSL threatened against any TSL or the Partnership a petition in
bankruptcy, whether voluntary or otherwise, any assignment for the benefit of
creditors, any petition seeking reorganization or arrangement under the
Federal bankruptcy laws of the United States or of any state thereof, or any
other action brought under the aforesaid bankruptcy laws.
11. FINANCIAL CONDITION. There has been no material
adverse change in the financial condition of the Partnership since the date of
the financial statements of the Partnership described on SCHEDULE F-7.
12. GOVERNMENTAL ACTION. TSL has not received any
written notice of any change in, nor to the knowledge of TSL, is any change
contemplated in, any Governmental Requirements applicable to any Property or
the Partnership; and TSL has not and to the knowledge of TSL, the Partnership
has not received any written notice of any judicial or administrative action
applicable to any Property or any action by adjacent landowners affecting any
Property, or any natural or artificial conditions upon any Property (or any
significant adverse fact or condition relating to any Property or its present
use); which in any such case has not been disclosed in writing to LB and which
would prevent or limit, impede or materially render more costly the use of
such Property as it is presently being used.
F-2
<PAGE>
13. CONDITION OF PROPERTY. To the knowledge of TSL,
each Property is undamaged by fire or other hazards not covered by insurance,
except that the Thousand Oaks Property under construction in San Antonio,
Texas, recently burned and the loss was not fully insured.
14. DEFECTS; VIOLATIONS; CONDEMNATION PROCEEDINGS. TSL
has not, and to the knowledge of TSL, the Partnership has not received, with
respect to any Property, any notice from any insurance company agency or any
other party of, nor, to the knowledge of TSL are there any facts or
circumstances which give rise to, (i) any condition, defect, or inadequacy
affecting such Property that, if not corrected, would result in termination of
insurance coverage or increase its cost, (ii) any violation of any restrictive
covenant or deed restriction affecting such Property (iii) any pending or
threatened condemnation proceedings, or (iv) any proceedings that could or
would cause the change, redemption, or other modification of the zoning
classification or other legal requirements, applicable to such Property or any
part thereof. To the knowledge of TSL, there does not exist any court order or
any restriction or restrictive covenant (recorded or otherwise) or other
private or public limitation which might adversely affect the use of any
Property as it is presently being used except as set forth in the Owners'
Policies. TSL has disclosed to LB that there are restrictive covenants that
limit the use of certain Properties other than as independent living
facilities.
15. MECHANIC'S LIENS. As of the date of this Agreement,
there are no mechanics' or materialmen's or other statutory liens against any
of the Properties that are not adequately reserved for by the Partnership. TSL
has disclosed to LB that certain Properties are still under construction and
could be subjected to such liens in the future.
16. UTILITIES. To the knowledge of TSL, all water,
sewer, electric, natural gas, telephone, drainage facilities and all other
utilities required for the use of each Property are installed to such
Property, are connected with valid permits, comply in all material respects
with all Governmental Requirements and are adequate to service such Property
for its current use. To the knowledge of TSL, all utilities lines servicing
each Property (other than internal lines located within such Property) are (i)
located either within the boundaries of such Property or within lands
dedicated to the public use, or within recorded easements for such purpose and
(ii) are serviced and maintained by the appropriate public or quasi-public
entity. All bonds, deposits, and initial charges for such utilities have been
paid in full.
17. STREETS AND HIGHWAYS. TSL has not, and to the
knowledge of TSL, the Partnership has not received any notice of (a) any
existing and, except as set forth in SCHEDULE F-17, there are no proposed
plans to widen, modify or realign any street adjoining any Property or (b) any
pending or threatened governmental proceeding, or any other fact or condition
which would limit or result in the termination of any Property's access to and
from public roads.
18. PERMITS AND DEPOSITS. To the knowledge of TSL, all
permit, deposit or initial charges have been paid in full.
19. WASTE DISPOSAL. All garbage, trash or other solid
waste from or relating to each Property is being collected on a regular basis
and, to the knowledge of TSL, is being properly disposed of in accordance with
all applicable Governmental Requirements. All drains have been
F-3
<PAGE>
properly connected to the municipal storm or sanitary sewer lines with the
approval of each municipality or the state highway department, as applicable.
20. NO NUISANCE. There is no public or private nuisance
condition created by TSL or the Partnership currently existing on any
Property, and, to the knowledge of TSL, no other public or private nuisance
condition currently exists on any Property.
21. COMPLIANCE WITH GOVERNMENTAL REQUIREMENTS. All
buildings, improvements, utilities and fixtures (including all streets, curbs,
sidewalks, sewers and other utilities) forming a part of the Properties and
existing on the date of this Agreement have been installed in compliance in
all material respects with all Governmental Requirements (other than those
pertaining to parking). Permanent certificates of occupancy, all licenses,
permits, authorizations and approvals required by all Governmental Authorities
having jurisdiction over the Properties which are completed, and the requisite
certificates of the local board of fire underwriters (or other body exercising
similar functions) have been issued for the buildings and improvements and
have been paid for and all of the foregoing are in full force and effect, or
if not issued, such failure will not have a material adverse effect on the
Properties which are completed.
22. PARKING. To the knowledge of TSL, the parking
available on each of the Properties is in accordance with all current
Governmental Requirements, or TSL or the Partnership shall have obtained all
necessary variances or other relief from such Governmental Requirements.
23. RENTS AND LEASES. The Rent Rolls for each Property
currently occupied, which have been initialed by TSL and delivered to LB
pursuant hereto (the "RENT ROLL"), contain a complete and correct list of all
Leases setting forth with respect to each of the Leases (i) the type and size
of unit covered thereby, (ii) the date thereof, (iii) the term thereof, (iv)
the rents and other charges payable thereunder, (v) any rents or other charges
in arrears or prepaid thereunder and the period for which such rents and other
charges are in arrears or have been prepaid, (vi) the amount of the security
deposit thereunder, (vii) the utilities which are furnished as part of the
rent, (viii) any brokerage fees or finder's fees payable thereunder and (ix)
any material amendments thereto. Except as disclosed in the Rent Roll, (A)
there are no other lease or rental agreements for the occupancy of any of the
units in the Improvements, (B) no tenant is entitled to any free rent or
similar concession other than in the ordinary course of business, (C) no
tenant has prepaid rent for more than one (1) month in advance, (D) no
material number of tenants are entitled to a refund of any rent or other sums
heretofore paid by such tenants (except for security deposits) or to assert
any such refund or claim therefor as an offset or defense against the payment
of rent hereafter coming due, (E) there are no Leases with an initial term in
excess of one (1) year or less than six (6) months, (F) to the knowledge of
TSL, all leased premises are actually occupied by the tenant under the lease
agreement covering such leased premise, and (G) there are not more than three
(3) units in the Improvements being leased to any one (1) person or entity. No
brokerage or leasing commission or other compensation will be due or payable
with respect to any of the leases at the Closing or thereafter, except for
finders fees or referral fees payable in the ordinary course of operations of
the Property. The Leases are in full force and effect and no material number
of defaults or breaches on the part of the landlord exists thereunder and to
the knowledge of TSL, there are no material number of defaults by the tenant
thereunder. The Partnership has good title to the Leases and Rents for each of
the
F-4
<PAGE>
Properties and no other person or entity has any right, title or interest
therein, except the rights of the existing lienholders.
24. OBLIGATIONS TO TENANTS UNDER LEASES. Except as
reflected in the Rent Rolls or in the ordinary course of ongoing activities,
there are no unperformed obligations to provide any tenant under any Lease
with any painting, repair, alteration, carpeting, appliance or any other
equipment or work of any kind, under any Lease or under any other oral or
written agreement whatsoever that would excuse such tenant from accepting its
premises under the terms of its Lease.
25. ENFORCEABILITY OF LEASES. Each of the Leases is in
full force and effect in accordance with its terms, provisions and conditions
and to the knowledge of TSL, constitutes the legal, valid, binding and
enforceable obligation of the tenant thereunder. To the knowledge of TSL, no
tenant is in material default thereunder, except as shown on the Rent Roll. To
the knowledge of TSL, no material number of tenants under the Leases has any
pending litigation, offsets or counterclaims against the Partnership which, if
successfully asserted, would reduce the rent payable thereunder or result in
the cancellation or termination thereof.
26. AGREEMENTS TO ACQUIRE OR POSSESS THE PROPERTY. No
person, firm, corporation or other entity except the Property Manager has any
right or option to acquire any Property, or any part thereof, from the
Partnership. Except as reflected within the Permitted Encumbrances, the
Partnership has not entered into any agreement with any person, firm,
corporation or entity granting the right to possess all or any portion of any
Property, other than tenants in possession pursuant to the Leases described in
the Rent Roll.
27. UNFULFILLED BINDING COMMITMENTS. TSL has no
knowledge of any commitments made by the Partnership or TSL to any
Governmental Authority, utility company, school board, church or other
religious body, or any homeowners or homeowners' association, or any other
organization, group or individual, relating to any Property which would impose
an obligation upon the Partnership or its successors or assigns to make any
contribution or dedications of money or land or to construct, install or
maintain any improvements of a public or private nature on or off such
Property. To the knowledge of TSL, no Governmental Authority has imposed any
requirement that any developer of any Property pay directly or indirectly any
fees or contributions relating to a specific Property or incur any expenses or
obligations in connection with any development of such Property or any part
thereof. The provisions of this SECTION shall not apply to any regular or
nondiscriminatory local real estate or school taxes assessed against any
Property.
28. SERVICE CONTRACTS, LEASES, ETC. TSL has provided LB
with complete and correct copies of all Service Contracts, Leases and Personal
Property Leases, in each case that involve payments by or to the Partnership
of more than $50,000 per year or that have a term of more than 12 months at
the time of the determination. There are no other contracts other than the
Service Contracts, the Leases, the Personal Property Leases and the Permitted
Encumbrances affecting the Properties or the operation thereof.
29. ENVIRONMENTAL REPRESENTATIONS AND WARRANTIES.
F-5
<PAGE>
No Hazardous Materials have been released into the
environment, or deposited, discharged, placed or disposed of at, on, from or
under any Property by the Partnership, TSL, or, to the knowledge of TSL, by
any other party in violation of Hazardous Materials Laws, and to the knowledge
of TSL, there has occurred no such release, deposit, discharge, placement or
disposal in violation of Hazardous Materials Laws. Since the Partnership
acquired any Property, no portion of the Property has been used for the
disposal, storage, treatment, processing or other handling of Hazardous
Materials and no Hazardous Materials have been placed or located on any
Property by TSL, the Partnership or to the knowledge of TSL by any other
party. To the knowledge of TSL, prior to its acquisition by the Partnership,
no part of any Property has ever been used for the disposal, storage,
treatment, processing, manufacturing or other handling of Hazardous Materials.
No Hazardous Materials Contamination or Hazardous Substance Activity has
occurred on any Property since its acquisition by the Partnership, or to the
knowledge of TSL, prior to its acquisition by the Partnership.
To the knowledge of TSL, (i) no property adjoining any
Property has been used for the disposal, storage, treatment, processing,
manufacturing or other handling of Hazardous Materials, and (ii) no property
adjoining any Property is affected by Hazardous Materials Contamination.
No asbestos or asbestos-containing materials have been
placed on or in any Property by the Partnership or TSL or to the knowledge of
TSL, by any other party and to the knowledge of TSL, no asbestos or
asbestos-containing materials are present on or in any Property.
No polychlorinated biphenyls have been placed on any
Property by the Partnership or TSL and to the knowledge of TSL, no
polychlorinated biphenyls are present on any Property.
No underground storage tanks have been placed on or under
any Property by the Partnership or TSL, and to the knowledge of TSL, no
underground storage tanks are present on or under any Property.
TSL has not, and to the knowledge of TSL, the Partnership
has not received any written notice of any administrative order or notice,
consent order and agreement, litigation or settlement with respect to
Hazardous Materials or Hazardous Materials Contamination or Hazardous
Substance Activity with respect to any Property, nor to the knowledge of TSL,
is any such action proposed or threatened with respect to any Property. TSL
has not, and to the knowledge of TSL, the Partnership has not received any
written notice nor does TSL have any knowledge of any such action regarding
any property adjacent to any Property. To the knowledge of TSL, no
investigation with respect to the Hazardous Materials or Hazardous Materials
Contamination is proposed, threatened or anticipated with respect to any
Property. Neither the Partnership nor TSL has violated any Governmental
Requirement relating to Hazardous Materials with respect to any Property and
TSL has not, and to the knowledge of TSL, the Partnership has not received any
written notice that any other party has violated any Governmental Requirements
relating to Hazardous Materials with respect to any Property. To the knowledge
of TSL, no condition occurred on any Property prior to its Acquisition Date
which is or was in violation of any applicable Governmental Requirements
relating to Hazardous Materials. Neither the Partnership nor TSL has received
any communication from or on behalf of any Governmental Authority or any other
person or entity indicating that any applicable Governmental Requirements
relating to Hazardous Materials have been or may have been
F-6
<PAGE>
violated with respect to any Property. To the knowledge of TSL, none of the
Properties is anticipated or threatened to be placed on any federal or state
"Superfund" or "Superlien" list. Neither the Partnership nor TSL has received
any notice of any third party claims regarding damage to property or persons
resulting from any Hazardous Materials Contamination or Hazardous Substance
Activity affecting any Property.
TSL has not, and to the knowledge of TSL, the Partnership
has not received any written notice from any tenants regarding the existence
of Hazardous Materials on any Property. TSL has not, and to the knowledge of
TSL, the Partnership has not received any written notice of a threat of
release of Hazardous Materials from or into any Property.
To the knowledge of TSL, the Partnership has obtained all
governmental approvals required by any applicable Hazardous Materials Laws for
the operation of the Properties owned by the Partnership.
TSL has not and to the knowledge of TSL, the Partnership has
not received any notice that either the Partnership or TSL (i) has any
liability for response or corrective action, natural resource damage, or other
liability pursuant to CERCLA, RCRA or any other Hazardous Materials Laws, and
(ii) is currently subject to or is currently required to give any notice of
any environmental claim or release of Hazardous Materials involving the
Partnership or its Properties.
To the knowledge of TSL, none of the Properties is subject
to any restriction on the ownership, occupancy, use or transferability of the
Property in connection with any (i) Hazardous Materials Laws or (ii) release,
threatened release, treatment, management, storage, handling, recycling or
disposal of a Hazardous Material.
Notwithstanding anything to the contrary contained in this
paragraph F-29, each of the representations and warranties contained in this
paragraph F-29 is qualified and limited by, and expressly made subject to the
information contained in the environmental reports (the "ENVIRONMENTAL
REPORTS") listed in SCHEDULE F-29 attached hereto. LB represents and warrants
to TSL that SCHEDULE F-29 lists all of the environmental reports received from
consultants engaged by LB in connection with its due diligence investigation
of the Properties and TSL warrants and represents to LB that SCHEDULE F-29
lists all of the environmental reports provided by TSL to LB for LB's review
and information.
30. DUE ORGANIZATION AND QUALIFICATION OF TSL. TSL is a
corporation duly organized and validly existing under the laws of the State of
Texas.
31. POWER AND AUTHORITY. The execution, delivery and
performance of this Agreement and all other agreements by and among TSL and
other parties contemplated hereby that have been executed and delivered on or
before the date of this Agreement ("TSL Transaction Documents"), and the
consummation by TSL of the transactions contemplated hereby and thereby, have
been duly authorized and no further action or approval will be required in
order to permit TSL to perform such obligations and consummate the
transactions contemplated hereby and thereby. This Agreement constitutes, and
all other TSL Transaction Documents, when executed and delivered in accordance
with the terms thereof, will constitute the legal, valid and binding
obligations of TSL,
F-7
<PAGE>
enforceable in accordance with their terms. TSL has full power, authority and
legal right to enter into this Agreement and all other TSL Transaction
Documents, to perform its obligations hereunder and thereunder, and to
consummate the transactions contemplated hereby and thereby. The execution,
delivery and performance of this Agreement and all other TSL Transaction
Documents, and the consummation of the transactions contemplated hereby and
thereby in accordance with the terms hereof and thereof will not (i) violate
any order, writ, injunction or decree to which TSL is a party or by which any
of the Properties is bound or affected or (ii) result in the violation of any
provisions of law applicable to Fail or the Partnership.
32. TITLE. TSL has delivered to LB full and complete
copies of (i) all existing policies of title insurance issued in the name of
the Partnership for each Property, including all riders, schedules supplements
and endorsements thereto describing all Encumbrances on each Property and all
exceptions, limitations and qualifications with respect to such title
insurance (individually "Owner's Title Policy" and collectively "Owner's Title
Policies") and (ii) a current "date down" title report for each Property
showing the Partnership as the sole owner of such Property and specifically
identifying all Encumbrances against such Property that have been recorded in
the appropriate jurisdiction for each Property since the date of the
applicable Owner's Title Policy through and including the date hereof (the
"Updated Reports").
F-8
<PAGE>
EXHIBIT G
REPRESENTATIONS AND WARRANTIES OF CSL REGARDING
PARTNERSHIP AND RELATED MATTERS
1. DUE ORGANIZATION AND QUALIFICATION OF CSL. CSL is a
corporation duly organized, validly existing and in good standing under the
laws of the State of Texas.
2. POWER AND AUTHORITY OF CSL. The execution,
delivery and performance of this Agreement and all other agreements by and
among CSL and other parties contemplated hereby that have been executed and
delivered on or before the date of this Agreement ("CSL Transaction
Documents"), and the consummation by CSL of the transactions contemplated
hereby and thereby, have been duly authorized by all requisite corporate
action and no further action or approval will be required in order to permit
CSL to perform such obligations and consummate the transactions contemplated
hereby and thereby. This Agreement constitutes, and all other CSL Transaction
Documents, when executed and delivered in accordance with the terms thereof,
will constitute the legal and valid and binding obligations of CSL,
enforceable in accordance with their terms. CSL has full power, authority and
legal right to enter into this Agreement and all CSL Transaction Documents and
to consummate the transactions contemplated hereby and thereby.
3. NO CONFLICT OR DEFAULT. The execution, delivery and
performance of this Agreement and all other CSL Transaction Documents and the
consummation of the transactions contemplated hereby and thereby in accordance
with the terms hereof and thereof will not (i) conflict with the Certificate
of Incorporation or Bylaws of CSL, (ii) violate any order, writ, injunction or
decree to which CSL is a party, (iii) constitute a default under any mortgage,
lien, lease, indenture, agreement or instrument to which CSL is a party or
(iv) result in the violation of any provisions of any Governmental
Requirements applicable to CSL .
4. NO LITIGATION. There is no action, suit, proceeding
or investigation pending or, to the best of the knowledge of CSL, threatened
against CSL or the Partnership which questions the validity of this Agreement
or any action taken or to be taken pursuant hereto or which might have an
adverse effect upon the Partnership. CSL is not in default with respect to any
judgment, order, writ, injunction or decree of any court or Agency which might
have an adverse effect upon Partnership Interest or the ability of CSL to
consummate the transactions contemplated hereunder.
5. BREACH OF REPRESENTATIONS AND WARRANTIES. CSL (1)
has no knowledge that any representation or warranty contained in Article 2 is
not true and correct in any material respect or (ii) has received any written
notice, the receipt of which would cause a representation in Exhibit F not to
be true and correct if such notice had been received by a TSL Party.
6. NO BROKERS OR COMMISSIONS. Other than as disclosed
on SCHEDULE G-6, CSL has not dealt with any broker, arranger, consultant,
agent or finder, and there are no commissions or other fees payable to any
party with whom TSL has dealt, in each case in connection with the
transactions contemplated hereunder.
G-1
<PAGE>
7. LIMITATION OF REPRESENTATIONS BY CSL. LB
acknowledges and agrees that, with the exception of the representations and
warranties set forth in this Agreement and the documents delivered by CSL at
Closing, (a) the Limited Partnership Interest is being acquired by LB on a
basis that is without representation or warranty by CSL, including any
representation or warranty relating to the Properties, and (b) it has not
relied upon any representations, warranties or other statements, whether
express or implied, made by CSL or any of its agents, employees or other
representatives.
8. CSL (or TSL or the Partnership) has delivered to LB
full and complete copies of (i) all existing policies of title insurance
issued in the name of the Partnership for each Property, including all riders,
schedules supplements and endorsements thereto describing all Encumbrances on
each Property and all exceptions, limitations and qualifications with respect
to such title insurance (individually "Owner's Title Policy" and collectively
"Owner's Title Policies") and (ii) a current "date down" title report for each
Property showing the Partnership as the sole owner of such Property and
specifically identifying all Encumbrances against such Property that have been
recorded in the appropriate jurisdiction for each Property since the date of
the applicable Owner's Title Policy through and including the date hereof (the
"Updated Reports").
G-2
<PAGE>
EXHIBIT H
FORM OF MONTHLY REPORTING
H-1
<PAGE>
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 - Veranda Club, Inc. Delaware 100%
Capital Senior Living Properties 2 - Gramercy, Inc. Delaware 100%
HealthCare Properties, L.P. Delaware 57%
Capital Senior Living Properties 2, Inc. - NHPT Delaware 100%
Capital Senior Living Properties 2, Inc.- Crosswood Oaks, Inc. Delaware 100%
Capital Senior Living Properties 2, Inc.- Atrium of Carmichael, Inc. Delaware 100%
Capital Senior Living Properties 2, Inc.- Heatherwood, Inc. Delaware 100%
Capital Senior Living Properties 2, Inc.- Tesson Heights, Inc. Delaware 100%
Capital Senior Living Acquisition, LLC Delaware 100%
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8) pertaining to the 1997 Omnibus Stock and Incentive Plan for Capital Senior
Living Corporation of Capital Senior Living Corporation of our report dated
February 4, 2000, with respect to the consolidated financial statements of
Capital Senior Living Corporation included in its Annual Report, for the year
ended December 31, 1999, filed with the Securities and Exchange Commission.
Ernst & Young LLP
Dallas, Texas
March 23, 2000
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
The Partners
HealthCare Properties, L.P.
We consent to incorporation by reference in the registration statement for
the 1997 Omnibus Stock and Incentive Plan for Capital Senior Living
Corporation, as amended, on Form S-8 of our report dated February 4, 2000,
except as to the third paragraph of note 13 which is as of March 1, 2000,
relating to the consolidated balance sheets of HealthCare Properties, L.P.
and subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of income, partnership equity, and cash flows for
each of the years in the three-year period ended December 31, 1999, which
report appears in the December 31, 1999 annual report on Form 10-K of Capital
Senior Living Corporation.
/s/ KPMG LLP
Dallas, Texas
March 29, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 32,988,024
<SECURITIES> 9,122,850
<RECEIVABLES> 15,490,653
<ALLOWANCES> (3,043,880)
<INVENTORY> 0
<CURRENT-ASSETS> 53,722,387
<PP&E> 116,375,784
<DEPRECIATION> (11,652,568)
<TOTAL-ASSETS> 221,875,759
<CURRENT-LIABILITIES> 6,749,568
<BONDS> 0
0
0
<COMMON> 197,173
<OTHER-SE> 109,351,490
<TOTAL-LIABILITY-AND-EQUITY> 221,875,759
<SALES> 0
<TOTAL-REVENUES> 70,522,149
<CGS> 0
<TOTAL-COSTS> 54,248,690
<OTHER-EXPENSES> 1,354,583
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,089,229
<INCOME-PRETAX> 7,829,647
<INCOME-TAX> 2,991,723
<INCOME-CONTINUING> 4,837,924
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,837,924
<EPS-BASIC> 0.25
<EPS-DILUTED> 0.24
</TABLE>
