-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JgfrrcWyU806N/u6Fv4s+uYJ1iCt3gcO+RYRdYFZJWNMwoVrXQIXNUYA2YM4tB1a B2CvCADEGdjQSx33GpWdnA== 0000950134-99-002333.txt : 19990402 0000950134-99-002333.hdr.sgml : 19990402 ACCESSION NUMBER: 0000950134-99-002333 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CAPITAL SENIOR LIVING CORP CENTRAL INDEX KEY: 0001043000 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-NURSING & PERSONAL CARE FACILITIES [8050] IRS NUMBER: 752678809 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-13445 FILM NUMBER: 99580285 BUSINESS ADDRESS: STREET 1: 14160 DALLAS PKWY STREET 2: STE 300 CITY: DALLAS STATE: TX ZIP: 75240 BUSINESS PHONE: 9727705600 MAIL ADDRESS: STREET 1: 14160 DALLAS PKWY STREET 2: STE 300 CITY: DALLAS STATE: TX ZIP: 75240 10-K 1 FORM 10-K FOR FISCAL YEAR END DECEMBER 31, 1998 1 =============================================================================== SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------------ FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 or TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________ to ____________ Commission File Number: 1-13445 ------------------------------ 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 ------------------------------ 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 ------------------------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of 10,330,450 shares of the Registrant's Common Stock held by nonaffiliates, based upon the closing price of the Registrant's Common Stock as reported by the New York Stock Exchange on March 29, 1999 was approximately $72,313,150. For purposes of this computation, all officers, directors and 10% beneficial owners of the Registrant are deemed to be affiliates. Such determination should not be deemed an admission that such officers, directors or 10% beneficial owners are, in fact, affiliates of the Registrant. As of March 29, 1999, 19,717,347 shares of Common Stock, $.01 par value, were outstanding. DOCUMENTS INCORPORATED BY REFERENCE The Registrant's definitive Proxy Statement pertaining to the 1999 Annual Meeting of Stockholders (the "Proxy Statement") and filed or to be filed not later than 120 days after the end of the fiscal year pursuant to Regulation 14A is incorporated herein by reference into Part III. =============================================================================== 2 CAPITAL SENIOR LIVING CORPORATION TABLE OF CONTENTS
PAGE NUMBER ------ PART I ITEM 1. BUSINESS..........................................................................................1 ITEM 2. PROPERTIES.......................................................................................20 ITEM 3. LEGAL PROCEEDINGS................................................................................20 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..............................................21 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS............................................................................22 ITEM 6. SELECTED FINANCIAL DATA..........................................................................24 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.....................................................................26 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.......................................36 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA......................................................36 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE..............................................................36 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...............................................36 ITEM 11. EXECUTIVE COMPENSATION...........................................................................36 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.....................................................................................36 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................................................37 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.................................38
3 PART I ITEM 1. BUSINESS GENERAL Capital Senior Living Corporation (together with its subsidiaries, the "Company") is one of the largest developers and operators of senior living communities in the United States in terms of resident capacity. As of December 31, 1998, the Company owned interests in and/or operated 34 communities in 17 states with a capacity of approximately 5,700 residents, including 19 communities in which it owned interests and 15 communities that it managed for third parties pursuant to multi-year management contracts. As of December 31, 1998, the Company was developing 34 new communities which will have a capacity of approximately 5,000 residents and was expanding 10 existing communities to accommodate approximately 600 additional residents. As of December 31, 1998, the Company also operated one home care agency. Approximately 93% of the total revenues and reimbursable expenses for the senior living communities managed by the Company as of December 31, 1998 are derived from private pay sources. During 1998, the communities which the Company operated and in which it owned interests had an average occupancy rate of approximately 95% and its managed communities had an average occupancy rate of approximately 96%. The Company and its predecessors have provided senior living services since 1990. PENDING MERGERS On February 7, 1999, the Company entered into definitive Agreements and Plans of Merger with ILM Senior Living, Inc. and ILM II Senior Living, Inc. for a combined transaction value of approximately $174 million, which includes approximately $4 million of net liabilities. The primary assets of ILM Senior Living, Inc. and ILM II Senior Living, Inc. collectively are 13 senior living communities that have been managed by the Company under management agreements since 1996. Under the two merger agreements, both ILM Senior Living, Inc. and ILM II Senior Living, Inc. would separately merge with and into a wholly owned direct subsidiary of the Company with the aggregate issued and outstanding shares of ILM Senior Living, Inc. and ILM II Senior Living, Inc. common stock eligible to receive 65% of the merger consideration in cash (approximately $110.5 million) and 35% in 8% convertible trust preferred securities (with a liquidation value of approximately $59.5 million). Both mergers have been approved by the boards of directors of each company and each transaction requires the approval of the applicable shareholders of either ILM Senior Living, Inc. or ILM II Senior Living, Inc. The mergers also are subject to certain other customary conditions, including regulatory approvals, and are expected to be completed during the second half of 1999. FORMATION TRANSACTIONS The Company was incorporated in October 1996 in the state of Delaware. On November 5, 1997, the Company closed its initial public offering in which it sold 10,350,000 common shares pursuant to a final prospectus under the Securities Act of 1933, as amended, at $13.50 per share (the "Offering"). Simultaneously with the consummation of the Offering, the Company, the Company's founders Jeffrey L. Beck ("Beck") and James A. Stroud (and his affiliate) ("Stroud"), Lawrence A. Cohen, Vice Chairman and Chief Financial Officer of the Company ("Cohen"), and affiliates of Messrs. Beck and Stroud completed a series of transactions (collectively, the "Formation Transactions") that resulted in the reorganization of the Company (the "Formation"). In the Formation Transactions, 7,687,347 shares were issued to Beck, Stroud and Cohen in the transactions described below, bringing the total issued and outstanding shares of the Company to 19,717,347 shares. Since the Offering, all of the Company's operations are being conducted by the Company or its subsidiaries. As part of the Formation Transactions, Messrs. Beck and Stroud contributed all of the capital stock of Capital Senior Living, Inc., Capital Senior Management 1, Inc., Capital Senior Management 2, Inc., Capital Senior Development, Inc., and, with Mr. Cohen, of Quality Home Care, Inc. (the "Contributed Entities") to the Company in exchange for the issuance of 7,687,347 shares of common stock and the issuance of separate notes to Messrs. Beck, Stroud and Cohen in the aggregate principal amount of $18,076,380 (collectively, the "Formation Note"). The number of shares of common stock issued and the principal amount of the Formation Note were established by the Company in connection with the Formation based on an assessment of the value of the Contributed Entities and the value of the Acquired Assets (as defined below). The Formation 1 4 Note was repaid from net proceeds of the Offering. The primary assets of the Contributed Entities consisted of third-party management contracts, development contracts and a home care agency. Also as part of the Formation Transactions, the Company purchased substantially all of the assets (the "Acquired Assets"), other than working capital items, of Capital Senior Living Communities, L.P., a Delaware limited partnership ("CSLC"), for the assumption of approximately $70.8 million of debt plus cash equal to $5.8 million (the "Asset Acquisition"). The Acquired Assets of CSLC were: (i) four senior living communities located in Cottonwood, Arizona, Indianapolis, Indiana, Merrillville, Indiana and Canton, Ohio; (ii) approximately 56% of the limited partner interests in HealthCare Properties, L.P., a Delaware limited partnership ("HCP"); and (iii) approximately 31% of the aggregate principal amount of certain notes (the "NHP Notes") issued by NHP Retirement Housing Partners I Limited Partnership, a Delaware limited partnership ("NHP") and approximately 3% of the outstanding limited partnership interests of NHP. The primary assets of HCP consisted of: (i) approximately $9.9 million in cash and cash equivalents as of the Offering; (ii) four physical rehabilitation facilities located in Orlando, Florida, Nashville, Tennessee, Lancaster, South Carolina, and Martin, Tennessee; and (iii) four skilled nursing facilities located in Evansville, Indiana, Cambridge, Massachusetts, Fort Worth, Texas, and Austin, Texas. The outstanding principal amount of all of the NHP Notes as of the Offering was $42.7 million. The NHP Notes accrue interest at a rate of 13% per annum, currently pay cash interest at a rate of 7% per annum, are secured by substantially all of the assets of NHP, and mature on December 31, 2001. The primary assets, as of the Offering, of NHP consisted of five senior living communities located in Buffalo, New York, Sacramento, California (two communities), Detroit, Michigan, and Boca Raton, Florida. Messrs. Beck and Stroud control approximately 66% of the limited partnership interests in CSLC. The purchase price paid for the Acquired Assets was determined as follows: (i) CSLC's communities, other than construction in process, were valued based on the appraised value of the communities; (ii) CSLC's investment in HCP was valued based on the appraised value of HCP's communities, adjusted for working capital items and other assets and liabilities that would be settled in cash, multiplied by the percentage of HCP owned by CSLC; (iii) CSLC's investment in the NHP Notes was valued based on discounting the amount of principal and interest payments to be made following the maturity date (December 31, 2001) of the NHP Notes (assuming a six month lag between maturity and full repayment); and (iv) CSLC's investment in the NHP limited partnership interests was valued at its historical cost basis which approximates fair value. The appraised values for the communities were determined by third-party appraisals. CSLC, HCP and NHP are limited partnerships required to file periodic reports under the Securities Exchange Act of 1934, as amended. The general partner of CSLC is Retirement Living Communities, an Indiana limited partnership, which is beneficially owned by Messrs. Beck and Stroud. The general partner of HCP and NHP is Capital Realty Group Senior Housing, Inc. ("Senior Housing"), an entity that was beneficially owned by Messrs. Beck and Stroud until June 10, 1998 when the general partner interest was sold to an unrelated third-party, Retirement Associates, Inc. The debt assumed by the Company in the Asset Acquisition consisted of an approximate $70.8 million mortgage loan pursuant to a $77.0 million commitment made on June 30, 1997 to CSLC by Lehman Brothers Holdings, Inc., an affiliate of Lehman Brothers (the "LBHI Loan"). Of the proceeds from the LBHI Loan, $5.5 million was used to repay outstanding amounts under the CSLC's prior credit facility, $0.8 million was used to fund construction in progress at CSLC's Cottonwood community, approximately $64.5 million was used by CSLC to purchase U.S. Treasury securities and the remaining $6.2 million was available to fund additional expenditures associated with the expansion of the Cottonwood community. The LBHI Loan was incurred by CSLC for the purpose of refinancing the outstanding debt due under CSLC's prior credit facility and to provide construction financing for the expansion of one of CSLC's communities. The U.S. Treasury securities were acquired with proceeds of the LBHI Loan to provide collateral for the borrowings thereunder. The U.S. Treasury securities were sold under a repurchase agreement with Lehman Brothers, with a term equal to their maturity. Upon consummation of the Offering and as a part of the Formation Transactions, the Acquired Assets were acquired by the Company through assumption of the LBHI Loan, the repurchase agreement was canceled and the LBHI Loan was reduced by the Company with net proceeds of the Offering. The U.S. Treasury securities reverted to CSLC for use or disposition as determined by CSLC, and the Company has no interest in such securities. INDUSTRY BACKGROUND The senior living services industry encompasses a broad and diverse range of living accommodations and health care services that are provided primarily to persons 65 years of age or older. For the elderly who require limited services, care in independent living residences supplemented at times by home health care, offers a viable option. Most independent living 2 5 communities typically offer community living together with a basic services package consisting of meals, housekeeping, laundry, security, transportation, social and recreational activities and health care monitoring. As a senior's need for assistance increases, care in an assisted living residence is often preferable and more cost-effective than home-based care or nursing home care. Typically, assisted living represents a combination of housing and 24-hour a day personal support services designed to aid elderly residents with activities of daily living ("ADLs"), such as ambulation, bathing, dressing, eating, grooming, personal hygiene, and monitoring or assistance with medications. Certain assisted living residences may also provide assistance to residents with low acuity medical needs, or may offer higher levels of personal assistance for incontinent residents or residents with Alzheimer's disease or other cognitive or physical frailties. Generally, assisted living residents require higher levels of care than residents of independent living residences and retirement living centers, but require lower levels of care than patients in skilled nursing facilities. For seniors who need the constant attention of a skilled nurse or medical practitioner, a skilled nursing facility may be required. The senior living services industry is highly fragmented and characterized by numerous small operators. Moreover, the scope of senior living services varies substantially from one operator to another. Many smaller senior living providers do not operate purpose-built residences, do not have professional training for staff and provide only limited assistance with ADLs. The Company believes that few senior living operators provide the required comprehensive range of senior living services designed to permit residents to "age in place" within the community as they develop further physical or cognitive frailties. The Company believes that the senior living services industry will require large capital infusions over the next 30 years to meet the growing demand for senior living facilities. The National Investment Conference has estimated that gross capital expenditures for the senior living marketplace will grow from $86 billion in 1996 to $126 billion in 2005 and to $490 billion in 2030, in order to accommodate increasing demand. As a result, the Company believes there will continue to be significant growth opportunities in the senior living market for providing services to the elderly. The Company believes that a number of demographic, regulatory, and other trends will contribute to the continued growth in the senior living market, the Company's targeted market for future development and expansion, including the following: Consumer Preference The Company believes that senior living communities are increasingly becoming the setting preferred by prospective residents and their families for the care of the elderly. Senior living offers residents greater independence and allows them to "age in place" in a residential setting, which the Company believes results in a higher quality of life than that experienced in more institutional or clinical settings. The likelihood of living alone increases with age. Most of this increase is due to an aging population in which women outlive men. In 1993, eight out of ten noninstitutionalized elderly who lived alone were women. According to the United States Bureau of Census, based on 1993 data, for women the likelihood of living alone increases from 32% for 65- to 74-year-olds to 57% for those women aged 85 and older. Men show similar trends with 13% of the 65- to 74-year-olds living alone rising to 29% of the men aged 85 and older living alone. Societal changes, such as increased divorce rates and the growing numbers of persons choosing not to marry, have further increased the number of Americans living alone. This growth in the number of elderly living alone has resulted in an increasing demand for services that historically have been provided by a spouse, other family members or live-in caregivers. Demographics The primary market for the Company's senior living services is comprised of persons aged 75 and older. This age group is one of the fastest growing segments of the United States population and is expected to more than double by the year 2030. The population of seniors aged 85 and over is expected to increase from approximately 3.1 million in 1990 to over 4.3 million by 2000, an increase of 39%. As the number of persons aged 75 and over continues to grow, the Company believes that there will be corresponding increases in the number of persons who need assistance with ADLs. According to industry analyses, approximately 19% of persons aged 75-79, approximately 24% of persons aged 80-84 and approximately 45% of 3 6 persons aged 85 and older need assistance with ADLs. According to the Alzheimer's Association the number of persons afflicted with Alzheimer's disease is expected to grow from the current 4.0 million to 14.0 million by the year 2050. Restricted Supply of Nursing Beds The majority of states in the United States have adopted Certificate of Need or similar statutes generally requiring that, prior to the addition of new skilled nursing beds, the addition of new services, or the making of certain capital expenditures, a state agency must determine that a need exists for the new beds or the proposed activities. The Company believes that this Certificate of Need process tends to restrict the supply and availability of licensed nursing facility beds. High construction costs, limitations on government reimbursement for the full costs of construction, and start-up expenses also act to constrain growth in the supply of such facilities. At the same time, nursing facility operators are continuing to focus on improving occupancy and expanding services to subacute patients generally of a younger age and requiring significantly higher levels of nursing care. As a result, the Company believes that there has been a decrease in the number of skilled nursing beds available to patients with lower acuity levels and that this trend should increase the demand for the Company's senior living communities, including particularly the Company's assisted living communities and skilled nursing facilities. Cost-Containment Pressures In response to rapidly rising health care costs, governmental and private pay sources have adopted cost containment measures that have reduced admissions and encouraged reduced lengths of stays in hospitals and other acute care settings. The federal government had previously acted to curtail increases in health care costs under Medicare by limiting acute care hospital reimbursement for specific services to pre-established fixed amounts. Private insurers have begun to limit reimbursement for medical services in general to predetermined charges, and managed care organizations (such as health maintenance organizations) are attempting to limit hospitalization costs by negotiating for discounted rates for hospital and acute care services and by monitoring and reducing hospital use. In response, hospitals are discharging patients earlier and referring elderly patients, who may be too sick or frail to manage their lives without assistance, to nursing homes and assisted living residences where the cost of providing care is typically lower than hospital care. In addition, third-party payors are increasingly becoming involved in determining the appropriate health care settings for their insureds or clients, based primarily on cost and quality of care. Based on industry data, the typical day-rate in an assisted living facility is two thirds of the cost for comparable care in a nursing home. Senior Affluence The average net worth of senior citizens is higher than non-senior citizens, partially as a result of accumulated equity through home ownership. The Company believes that a substantial portion of the senior population thus has significant resources available for their retirement and long-term care needs. The Company's target population is comprised of moderate- to upper-income seniors who have, either directly or indirectly through familial support, the financial resources to pay for senior living communities, including an assisted living alternative to traditional long-term care. Reduced Reliance on Family Care Historically, the family has been the primary provider of care for seniors. The Company believes that the increase in the percentage of women in the work force, the reduction of average family size, and the increased mobility in society is reducing the role of the family as the traditional caregiver for aging parents. The Company believes that these factors will make it necessary for many seniors to look outside the family for assistance as they age. OPERATING STRATEGY The Company's operating strategy is to provide high quality senior living services at an affordable price to its residents, while achieving and sustaining a strong, competitive position within its chosen markets, as well as to continue to enhance the performance of its operations. The Company is implementing its operating strategy principally through the following methods: 4 7 Continue to Provide Broad Range of High-Quality Personalized Care Central to the Company's operating strategy is its focus on providing high-quality care and services that are personalized and tailored to meet the individual needs of each community resident. The Company's residences and services are designed to provide a broad range of care that permits residents to "age in place" as their needs change and as they develop further physical or cognitive frailties. By creating an environment that maximizes resident autonomy and provides individualized service programs, the Company seeks to attract seniors at an earlier stage, before they need the higher level of care provided in a skilled nursing facility. The Company also maintains a comprehensive quality assurance program designed to ensure the satisfaction of its residents and their family members. The Company conducts annual resident satisfaction surveys. In 1998 and 1997, the Company achieved a 95% and 96% approval rating, respectively, from its residents in a polling of its residents' satisfaction. Offer Services Across a Range of Pricing Options The Company's range of products and services is continually expanding to meet the evolving needs of its residents. The Company has developed a menu of products and service programs which may be further customized to serve both the moderate and upper income markets of a particular targeted geographic area. By offering a range of pricing options that are customized for each target market, the Company believes that it can develop synergies, economies of scale, and operating efficiencies in its efforts to serve a larger percentage of the elderly population within a particular geographic market. Maintain and Improve Occupancy Rates The Company continually seeks to maintain and improve occupancy rates by: (i) retaining residents as they "age in place" by extending optional care and service programs; (ii) attracting new residents through the on-site marketing program focus on residents and family members; and (iii) aggressively seeking referrals from professional community outreach sources, including area religious organizations, senior social service programs, civic and business networks, as well as the medical community. Improve Operating Efficiencies The Company seeks to improve operating efficiencies at its communities by continuing to actively monitor and manage operating costs. By having an established national portfolio of communities with regional management in place, the Company believes it has established a platform to achieve operating efficiencies through economies of scale in the purchase of bulk items, such as food, and in the spreading of fixed costs, such as corporate overhead, over a larger revenue base, and to provide more effective management supervision and financial controls. The Company's development strategy includes regional clustering of new communities to achieve further efficiencies. Emphasize Employee Training and Retention The Company devotes special attention to the hiring, screening, training, supervising, and retention of its employees and caregivers to ensure that quality standards are achieved. In addition to the normal on-site training, the Company conducts annual national management meetings and encourages sharing of expertise among managers. The Company's commitment to the total quality management concept is emphasized throughout its training program. The Company believes its commitment to and emphasis on employee training and retention differentiates the Company from many of its competitors. Utilize Comprehensive Information Systems The Company employs comprehensive proprietary information systems to manage financial and operating data in connection with the management of its communities. Utilizing its computerized systems, the Company is able to collect and monitor on a regular basis key operating data for its communities. Reports are routinely prepared and distributed to on-site, district and regional managers for use in managing the profitability of the communities. The Company's management information systems provide senior management with the ability to identify emerging trends, monitor and control costs and 5 8 develop current pricing strategies. The Company believes that its proprietary information systems are sufficient to support future growth and that the Company will have adequate resources to expand these systems to support the growth envisioned by the Company's business plan. CARE AND SERVICES PROGRAMS The Company provides a wide array of senior living services to the elderly at its communities, including independent living, assisted living (with special programs and living units at some of its communities for residents with Alzheimer's and other forms of dementia), skilled nursing, and home care services. By offering a variety of services and encouraging the active participation of the resident and the resident's family and medical consultants, the Company is able to customize its service plan to meet the specific needs and desires of each resident. As a result, the Company believes that it is able to maximize customer satisfaction and avoid the high cost of delivering unnecessary services to residents. Independent Living Services The Company provides independent living services to seniors who do not yet need assistance or support with ADLs, but who prefer the physical and psychological comfort of a residential community that offers health care and other services. As of December 31, 1998, the Company had ownership interests in 11 communities and managed an additional 14 communities which provide independent living services, with an aggregate capacity for 1,914 and 2,140 residents, respectively. Independent living services provided by the Company include daily meals, transportation, social and recreational activities, laundry, housekeeping, security and health care monitoring. The Company also fosters the wellness of its residents by offering health screenings (such as blood pressure checks), periodic special services (such as influenza inoculations), chronic disease management (such as diabetes with its attendant blood glucose monitoring), dietary and similar programs, as well as ongoing exercise and fitness classes. Classes are given by health care professionals to keep residents informed about health and disease management. Subject to applicable government regulation, personal care and medical services are available to independent living residents through either the community staff or through the Company's or independent home care agencies. The Company's independent living residents pay a fee ranging from $1,250 to $2,400 per month, in general, depending on the specific community, program of services, size of the unit, and amenities offered. The Company's contracts with its independent living residents are generally for a term of one year and are typically terminable by the resident upon 30 days' notice. Assisted Living and Memory Impaired Services The Company offers a wide range of assisted living care and services 24 hours per day, including personal care services, support services, and supplemental services. As of December 31, 1998, the Company had ownership interests in 10 communities, and managed an additional 10 communities which provide assisted living services, with an aggregate capacity for 383 and 412 residents, respectively. The residents of the Company's assisted living residences generally need help with some or all ADLs, but do not require the more acute medical care traditionally given in nursing homes. Upon admission to the Company's assisted living communities, and in consultation with the resident, the resident's family and medical consultants, each resident is assessed to determine his or her health status, including functional abilities, and need for personal care services, and completes a lifestyles assessment to determine the resident's preferences. From these assessments, a care plan is developed for each resident to ensure that all staff members who render care meet the specific needs and preferences of each resident where possible. Each resident's care plan is reviewed periodically to determine when a change in care is needed. The Company has adopted a philosophy of assisted living care that allows a resident to maintain a dignified independent lifestyle. Residents and their families are encouraged to be partners in their care and to take as much responsibility for their well being as possible. The basic types of assisted living services offered by the Company include the following: Personal Care Services. These services include assistance with ADLs such as ambulation, bathing, dressing, eating, grooming, personal hygiene, and monitoring or assistance with medications. 6 9 Support Services. These services include meals, assistance with social and recreational activities, laundry services, general housekeeping, maintenance services, and transportation services. Supplemental Services. These services include extra transportation services, personal maintenance, extra laundry services, non-routine care services, and special care services, such as services for residents with Alzheimer's and other forms of dementia. Certain of these services require an extra charge in addition to the pricing levels described below. In pricing its services, the Company has developed the following three levels or tiers of assisted living care: o Level I typically provides for minimum levels of care and service, for which the Company generally charges a monthly fee per resident ranging from $1,750 to $1,900, depending upon unit size and the project design type. Typically, Level I residents need minimal assistance with ADLs. o Level II provides for relatively higher levels and increased frequency of care, for which the Company generally charges a monthly fee per resident ranging from $1,900 to $2,250, depending upon the unit size and the project design type. Typically, Level II residents require moderate assistance with ADLs and may need additional personal care, support, and supplemental services. o Level III provides for the highest level of care and service, for which the Company generally charges a monthly fee per resident ranging from $2,250 to $2,400, depending upon the unit size and the project design type. Typically, Level III residents are either very frail or impaired and utilize many of the Company's services on a regular basis. The Company maintains programs and special units at some of its assisted living communities for residents with Alzheimer's and other forms of dementia, which provide the attention, care and services needed to help those residents maintain a higher quality of life. Specialized services include assistance with ADLs, behavior management and a lifeskills based activities program, the goal of which is to provide a normalized environment that supports residents' remaining functional abilities. Whenever possible, residents assist with meals, laundry and housekeeping. Special units for residents with Alzheimer's and other forms of dementia are located in a separate area of the community and have their own dining facilities, resident lounge areas, and specially trained staff. The special care areas are designed to allow residents the freedom to ambulate as they wish while keeping them safely contained within a secure area with a minimum of disruption to other residents. Special nutritional programs are used to help ensure caloric intake is maintained in residents. Resident fees for these special units are dependent on the size of the unit, the design type and the level of services provided. Skilled Nursing Services In its skilled nursing facilities, the Company provides traditional long-term care through 24- hour per day skilled nursing care by registered nurses, licensed practical nurses and certified nursing assistants. The Company also offers a comprehensive range of restorative nursing and rehabilitation services in its communities including, but not limited to, physical, occupational, speech and medical social services. As of December 31, 1998, the Company had ownership interests in seven facilities and managed an additional facility which provides nursing services, with an aggregate capacity for 746 and 60 residents, respectively. Home Care As of December 31, 1998, the Company provided private pay home care services to clients at one of its senior living communities through the Company's on-site home care agency and made private pay home care services available to clients at a majority of its senior living communities through third party providers. The Company believes that the provision of private pay home care services is an attractive adjunct to its independent living services because it allows the Company to provide more services to its residents as they age in place and increase the length of stay in the Company's communities. The services and products that the Company provides through its home care agency include: (i) general and specialty nursing services to clients with long-term chronic health conditions, permanent disabilities, terminal illnesses and post-procedural needs; (ii) 7 10 rehabilitative therapy services including physical, occupational and speech therapy through outside contractors; (iii) personal care services and assistance with ADLs; (iv) enhanced hospice care for clients in the final phases of incurable disease; and (v) extensive monitoring and educational services relative to respiratory care, medication administration, medical equipment, and medical supplies. The Company intends to expand its home care service business to additional senior living communities and to develop, acquire or manage home care service businesses at other such communities. In addition, the Company will make available to residents certain customized physician, dentistry, podiatry and other health-related services that may be offered by third-party providers. The Company may elect to provide these services directly or through participation in managed care networks. OPERATING COMMUNITIES The table below sets forth certain information with respect to the independent, senior living, and continuum of care communities owned, leased, and managed by the Company as of December 31, 1998.
RESIDENT CAPACITY (1) --------------------- COMMENCEMENT OCCUPANCY OWNER- OF RATE AT COMMUNITY LOCATION IL AL SN TOTAL SHIP(2) OPERATIONS (3) 12-31-98 ----------- ---------- ---- ---- ---- ----- ------- -------------- --------- OWNED: Amberleigh ............. Buffalo, NY 365 29 -- 394 33% 1/92 95% Atrium of Carmichael ... Sacramento, CA 156 -- -- 156 100% 1/92 97% Cambridge Nursing Home ................. Cambridge, MA -- -- 120 120 57% 7/93 90% Canton Regency ......... Canton, OH 164 34 50 248 100% 3/91 96% Cottonwood Village ..... Cottonwood, AZ 135 47 -- 182 100% 3/91 54%(5) Crosswood Oaks ......... Sacramento, CA 127 -- -- 127 100% 1/92 95% Gramercy Hill .......... Lincoln, NE 101 59 -- 160 100% 10/98 98% Harrison at Eagle Valley Indianapolis, IN 138 -- -- 138 100% 3/91 99%(7) Heatherwood ............ Detroit, MI 188 -- -- 188 100% 1/92 92% Tesson Heights ......... St Louis, MO 140 58 -- 198 100% 10/98 98% Towne Centre ........... Merrillville, IN 165 34 64 263 100% 3/91 96% Veranda Club ........... Boca Raton, FL 235 -- -- 235 100% 1/92 89% ----- --- --- ----- -- Subtotal ............. 1,914 261 234 2,409 94% OWNED AND LEASED TO OTHERS: Cane Creek ............. Martin, TN -- 8 36 44 57% 7/93 100%(4) Cedarbrook ............. Nashville, TN -- 42 -- 42 57% 7/93 100%(4) Crenshaw Creek ......... Lancaster, SC -- 36 -- 36 57% 7/93 100%(4) Hearthstone ............ Austin, TX -- -- 120 120 57% 7/93 100%(4) McCurdy ................ Evansville, IN -- -- 236 236 57% 7/93 100%(4) Sandybrook ............. Orlando, FL -- 36 -- 36 57% 7/93 100%(4) Trinity Hills .......... Fort Worth, TX -- -- 120 120 57% 7/93 100%(4) ----- --- --- ----- Subtotal ............. -- 122 512 634 MANAGED: Buckner Parkway Place .. Houston, TX 243 82 60 385 1/98 89%(5) Buckner Westminster Place ................ Longview, TX 117 -- -- 117 6/96 99%(8) Crown Pointe ........... Omaha, NE 163 -- -- 163 8/96 99%(8) Crown Villa ............ Omaha, NE -- 73 -- 73 8/96 99%(8) Independence Village ... East Lansing, MI 162 -- -- 162 8/96 91%(8) Independence Village ... Peoria, IL 173 -- -- 173 8/96 99%(8) Independence Village ... Raleigh, NC 155 22 -- 177 8/96 93%(8) Independence Village ... Winston-Salem, NC 145 16 -- 161 8/96 94%(8) Overland Park Place .... Kansas City, KS 126 25 -- 151 8/96 99%(8) The Palms .............. Fort Myers, FL 235 20 -- 255 8/96 94%(8) Rio Las Palmas ......... Stockton, CA 142 50 -- 192 8/96 95%(8) Sedgwick Plaza ......... Wichita, KS 117 54 -- 171 8/96 93%(8) Villa at Riverwood ..... St. Louis, MO 140 -- -- 140 8/96 96%(8) Villa Santa Barbara .... Santa Barbara, CA 87 38 -- 125 8/96 99%(8) West Shores ............ Hot Springs, AR 135 32 -- 167 8/96 96%(8) ----- ----- ----- ----- ----- Subtotal/Average ....... 2,140 412 60 2,612 95% ----- ----- ----- ----- ----- Grand Total ............ 4,054 795 806 5,655 95%(6) ===== ===== ===== ===== =====
- ---------- 8 11 (1) Independent living (IL) residences, assisted living (AL) residences (including areas dedicated to residents with Alzheimer's and other forms of dementia) and skilled nursing (SN) beds. (2) In the case of those communities shown as 33% owned by the Company, this represents ownership of approximately 33% of the outstanding NHP Notes which are secured by the properties. In the case of those communities shown as approximately 57% owned, this represents the Company's ownership of approximately 57% of the limited partner interests in HCP. (3) Indicates the date on which the Company acquired each of its owned communities or commenced operating its managed communities. The Company operated certain of its communities pursuant to management agreements prior to acquiring the communities. (4) Represents communities owned by the Company and leased to third parties pursuant to master leases under which the Company receives rent regardless of whether the units are occupied. Does not represent occupancy rate, but rather percentage of property leased pursuant to the master lease. These leases were in place at the time the Company acquired its interest in these communities. (5) The Cottonwood Village and Buckner Parkway Place communities were in their initial lease-up phase at December 31, 1998. At Cottonwood, the expansion, along with renovations to the existing building, resulted in a temporary reduction of occupancy. (6) Excludes communities owned and leased to others. (7) The Company's home care agency is on-site at the Harrison at Eagle Valley Community. (8) Communities managed for ILM I Lease Corporation and ILM II Lease Corporation. THIRD-PARTY MANAGEMENT CONTRACTS The Company is a party to two separate property management agreements (the "ILM Management Agreements") with ILM I Lease Corporation and ILM II Lease Corporation, corporations formed by ILM Senior Living, Inc. and ILM II Senior Living, Inc. (collectively, "ILM") that operate 13 senior living communities. The ILM Management Agreements commenced on July 29, 1996 and will expire on December 31, 1999 and December 31, 2000, respectively, subject to extension under certain circumstances, but not beyond July 29, 2001. Under the terms of the ILM Management Agreements, the Company earns a base management fee equal to 4% of the gross operating revenues of the facilities under management (as defined), and is also eligible to receive an incentive management fee equal to 25% of the amount by which the average monthly net cash flow of the facilities (as defined) for the 12-month period ending on the last day of each calendar month exceeds a specified base amount. The ILM Management Agreements are terminable upon the sale of the related facilities, subject to the Company's rights to offer to purchase the facilities. In the event of a sale, the Company has the right to make the first and last offer with respect to the purchase of the facilities subject to the ILM Management Agreements. The Company earned a total of $980,159 and $969,068, respectively, under the two ILM Management Agreements for the year ended December 31, 1998, which includes the incentive management fee, and $854,948 and $734,755, respectively, for the year ended December 31, 1997. On February 7, 1999, the Company entered into separate agreements and plans of merger with ILM Senior Living, Inc. and ILM II Senior Living, Inc. Upon completion of such mergers, the Company will own the 13 communities currently managed under the ILM Management Agreements and will terminate the ILM Management Agreements. See "Pending Mergers" for a description of these transactions and the conditions which must be satisfied for their completion. The Company is also a party to two separate property management agreements (the "Buckner Agreements") with Buckner Retirement Services, Inc., a not-for-profit corporation that operates two senior living communities. The Buckner Agreements commenced on April 1, 1996 and 1997 and expire on March 31, 2001 and 2002, respectively, except that either party may terminate the agreements for cause under limited circumstances. Under the terms of the Buckner Agreement for Buckner Parkway Place, the Company earns a base management fee of $25,300 per month. Under the terms of the Buckner Westminster Place Agreement, the Company earns a base management fee of $6,050 per month. In the case of the Buckner Westminister Place Agreement, the Company was also entitled, through August 31, 1997, to a marketing lease-up fee of $500 for each unit at the time it was initially occupied. Also, in the case of both of the Buckner Agreements, the Company is also eligible to receive a productivity reward equal to 5% of the Gross Revenues generated during the immediately preceding month that exceed $507,000 and $121,000, respectively. Both agreements have a productivity reward limit of 20% of the base management fee per month. The amounts that exceed the limit are deferred. The productivity reward took the place of the incentive fee during 1997. Pursuant to the terms of the Buckner Agreements, the Company has a right of first refusal with respect to purchasing the communities subject to these agreements. 9 12 GROWTH STRATEGIES The Company believes that the fragmented nature of the senior living services industry and the limited capital resources available to many small, private operators provide an attractive opportunity for the Company to expand its existing base of senior living operations. The Company believes that its current operations throughout the United States serve as the foundation on which the Company can build senior living networks in targeted geographic markets and thereby provide a broad range of high quality care in a cost-efficient manner. The following are the principal elements of the Company's growth strategy: Develop New Senior Living Communities General. The Company intends to continue to expand its operations through the development, construction, marketing and management of new senior living communities in selected markets which provide a quality lifestyle that is affordable to a large segment of seniors. The Company's national presence provides it with extensive research and experience in various markets which serve as the basis for the formulation of its development strategy in the selection of new markets. The Company's development plan calls for the identification of multiple markets in which construction can occur within the Company's targeted time frame and budget. The Company has developed a list of target markets and submarkets based upon local market conditions, the availability of development sites and local construction capabilities, the existence of development barriers to entry, the overall health and growth trends of the local economies, and the presence of a significant elderly population. The Company's senior management has extensive experience in senior living development, having developed in excess of $400.0 million of senior living communities. The Company has an integrated internal development approach pursuant to which the Company's management and other personnel (including designers and architects, market analysts, and construction managers) locate sites for, develop, and open its communities. Personnel who are experienced in site selection conduct extensive market and site-specific feasibility studies prior to the Company's committing significant financial resources to new projects. The Company believes it can expand its operations into new markets and strengthen its presence within its existing markets utilizing its existing residence models, such as the Waterford model, discussed below. Development with Triad. Twenty-seven of the 34 senior living communities referred to in the table below will be Waterford Communities and will be developed pursuant to an arrangement with Triad Senior Living, Inc. and its affiliates, which are unrelated third parties. Triad Senior Living, Inc. and its affiliates have previously owned, developed, operated and sold senior living communities for their own account. The Waterford community model is designed to provide middle income residents with a senior living community having amenities typical of higher-priced communities, through more efficient space design, emphasizing common areas and providing more efficient layouts of the living areas. The Waterford design may be configured in a number of different ways thereby providing the Company with flexibility in adapting to a particular geographic market, neighborhood, site or care need. In addition, the Waterford design has been developed to facilitate the prompt, efficient, cost-effective delivery of senior care and personal services. Site requirements for the various designs range from 4.5 to 6.0 acres. The Waterford design may also provide for specially designed residential units, common areas and dining rooms for residents with Alzheimer's and other forms of dementia. The Company believes that its designs meet the desire of many of its residents to move into a new residence that approximates, as nearly as possible, the comfort of their prior home. The Company also believes that its designs achieve several other objectives, including: (i) lessening the trauma of change for residents and their families; (ii) facilitating resident mobility and caregiver access; (iii) enhancing operating efficiencies; (iv) enhancing the Company's ability to match its products to targeted markets; and (v) differentiating the Company from its competitors. The Company had previously entered into a development agreement to develop the Waterford communities with Tri Point Communities, L.P. ("Tri Point"), a limited partnership owned by the Company's founders (Messrs. Beck and Stroud) and their affiliates. Effective April 1, 1998, Tri Point was reorganized and the interests of Messrs. Beck and Stroud were sold 10 13 at their cost to Triad Senior Living, Inc. and its affiliates. Tri Point was renamed Triad Senior Living I, L.P. ("Triad I"). The new general partner of Triad I, owning 1%, is Triad Senior Living, Inc. Five of the 34 senior living communities referred to in the table below will be Waterford communities developed pursuant to an arrangement with Triad I, a limited partnership owned 19% by the Company and 81% by unrelated third parties, under which Triad I will pay development and management fees to the Company for development and management services and the Company will have options to purchase the partnership interests in Triad I of the non-Company partners and to purchase the communities upon their completion and during the term of the management contracts. Triad I will be responsible for funding and obtaining financing for the construction and lease-up costs. The Company made available to Triad I an unsecured credit facility not to exceed $10 million. These communities will have an aggregate capacity for approximately 756 residents at an aggregate estimated cost of completion and lease-up of approximately $40.0 million to $50.0 million. Three of the 34 senior living communities referred to in the table below will be Waterford communities developed pursuant to an arrangement with Triad Senior Living II, L.P. ("Triad II"), a limited partnership owned 19% by the Company and 81% by unrelated third parties. Triad II will pay development and management fees to the Company for development and management services and the Company will have options to purchase the partnership interests in Triad II of the non-Company partners and to purchase the communities upon their completion during the term of the management contracts. Triad II will be responsible for funding and obtaining financing for the construction and lease-up costs. The Company has made available to Triad II an unsecured credit facility not to exceed $10 million. These communities will have an aggregate capacity for approximately 408 residents at an aggregate estimated cost of completion and lease-up of approximately $25 million to $30 million. Six of the 34 senior living communities referred to in the table below will be Waterford communities developed pursuant to an arrangement with Triad Senior Living III, L.P. ("Triad III"), a limited partnership owned 19% by the Company and 81% by unrelated third parties. Triad III will pay development and management fees to the Company for development and management services and the Company will have options to purchase the partnership interests in Triad III of the nonCompany partners and to purchase the communities upon their completion during the term of the management contracts. Triad III will be responsible for funding and obtaining financing for the construction and lease-up costs. The Company has made available to Triad III, an unsecured credit facility not to exceed $10 million. These communities will have an aggregate capacity for approximately 816 residents at an aggregate estimated cost of completion and lease-up of approximately $50 million to $60 million. Up to six of the 34 senior living communities referred to in the table below will be Waterford communities developed pursuant to an arrangement with Triad Senior Living IV, L.P. ("Triad IV"), a limited partnership owned 19% by the Company and 81% by unrelated third parties. Triad IV will pay development and management fees to the Company for development and management services and the Company will have options to purchase the partnership interests in Triad IV of the non-Company partners and to purchase the communities upon their completion during the term of the management contracts. Triad IV will be responsible for funding and obtaining financing for the construction and lease-up costs. The Company has made available to Triad IV an unsecured credit facility not to exceed $10 million. These communities will have an aggregate capacity for approximately 816 residents at an aggregate estimated cost of completion and lease-up of approximately $50 million to $60 million. Up to seven of the 34 senior living communities referred to in the table below will be Waterford communities developed pursuant to an arrangement with another Triad limited partnership, which has not yet been formed. It is expected that the limited partnership will be owned 19% by a wholly owned subsidiary of the Company and 81% by unrelated third parties. The development agreements between each Triad entity and the Company provide for a development fee of 4%, plus reimbursements for expenses and overhead not to exceed 4%. The Triad entities also enter into management agreements with the Company providing for management fees to the Company in an amount equal to the greater of 5% of gross revenues or $5,000 per month per community, plus overhead reimbursements not to exceed 1% of gross revenues. Under each Triad partnership agreement, the Company has an option to purchase the partnership interests of the non-Company partners for an amount equal to the amount such party paid for its interest, plus noncompounded interest of 12% per annum. The property management agreements also provide the Company with an option to purchase the communities developed by the Triad entities 11 14 upon their completion for an amount equal to the fair market value (based on a third-party appraisal but not less than hard and soft costs and lease-up costs). The Company has made no determination as to whether it will exercise its purchase options. The Company will evaluate the possible exercise of each purchase option based upon the business and financial factors which may exist at the time those options may be exercised. Development through Other Strategic Alliances. The Company has also formed strategic alliances with for-profit (LCOR Incorporated - "LCOR") and not-for-profit organizations (Buckner Retirement Services, Inc. and The Emmaus Calling, Inc.) to develop, market and manage additional communities while reducing the investment of, and associated risks to, the Company. The Company's alliances are with established development companies or not-for-profit owner/operators of senior living communities. Seven of the 34 senior living communities referred to in the table below will be developed through strategic alliances. The for-profit entities generally obtain construction financing and provide construction management experience, existing relationships with local contractors, suppliers, and municipal authorities, knowledge of local and state building codes and building laws, and assistance with site selection for new communities. The not-for-profit organizations generally provide existing relationships with religious organizations, a community reputation of caring for seniors, a tax-exempt status that permits tax-exempt bond financing, and in certain instances, home care services. The Company contributes its operational and industry expertise, and has had, in most cases, leasing and management responsibilities for communities owned by these organizations, as well as has the right of first refusal to acquire the communities in most cases. The Company intends to continue to evaluate opportunities to form similar joint ventures and strategic alliances in the future. As of December 31, 1998, four sites have been purchased for the development and operation of independent and assisted living communities by LCOR. The sites are Trumbull, Connecticut; Libertyville, Illinois; Summit, New Jersey; and Naperville, Illinois. The Management Agreements between LCOR and the Company generally provide for a base management fee of the greater of $15,000 per month or 5% of gross revenues plus an incentive fee equal to 25% of the excess cash flow over budgeted amounts. The terms are for 10 years with a five year renewal at the Company's option. The Company is also entitled to a fee of $50,000 for development consulting services for each development and a monthly marketing fee of approximately $10,000 per month for each community, which generally covers the period prior to the expected opening of the communities, usually six to nine months. The Company has entered into a strategic alliance with Buckner Retirement Services, Inc. ("Buckner") to develop, market and manage senior living communities developed by Buckner. As of December 31, 1998, two sites have been purchased for the development and operation of independent, assisted living and skilled nursing communities. The sites are Beaumont, Texas and Georgetown, Texas. The Management Agreements between Buckner and the Company generally provide for a base management fee plus a productivity reward equal to 5% of the gross revenues generated during the immediately preceding month that exceed a base figure. The productivity reward has a limit of 20% of the base management fee per month. The amounts that exceed the limit are deferred. The terms are for five years. The Company has also entered into a strategic alliance with The Emmaus Calling, Inc. ("Emmaus") to develop, market and manage a senior living community developed by Emmaus. As of December 31, 1998, one site has been purchased for the development and operation of an assisted living community. The site is in Mesquite, Texas. The Management Agreement between Emmaus and the Company provides for a base management fee of $8,000 per month adjusted yearly by the difference between the Consumer Price Index for the year less the Consumer Price Index for the year of completion. The term is for 15 years. As of December 31, 1998, there were 34 communities under development in which the Company had an interest. The table below summarizes information regarding those developments which the Company expects to be completed through 2000.
RESIDENT CAPACITY(1) -------------------- LOCATION OF DEVELOPMENT - ----------------------- SCHEDULED PROJECTS: COMPLETION IL AL SN TOTAL STATUS(2) - --------- ---------- -- -- -- ----- --------- San Antonio I, TX.............. 1st half 1999 136 - - 136 Completed Shreveport, LA................. 1st half 1999 136 - - 136 Completed Beaumont, TX (3)............... 2nd half 1999 124 46 30 200 Construction Fort Worth, TX................. 2nd half 1999 174 - - 174 Construction
12 15 Mesquite, TX................... 2nd half 1999 174 - - 174 Construction San Antonio II, TX............. 2nd half 1999 136 - - 136 Construction Libertyville, IL (4)........... 1st half 2000 140 - - 140 Construction Mesquite, TX (5)............... 1st half 2000 - 105 - 105 Construction Naperville, IL (4)............. 1st half 2000 135 - - 135 Construction Oklahoma City, OK.............. 1st half 2000 136 - - 136 Construction Trumbull, CT (4)............... 1st half 2000 120 30 - 150 Construction Baton Rouge, LA................ 1st half 2000 136 - - 136 Development Columbia, SC .................. 1st half 2000 136 - - 136 Development Crestview Hills, KY............ 1st half 2000 136 - - 136 Development Dayton, OH..................... 1st half 2000 136 - - 136 Development Deer Park, TX.................. 1st half 2000 136 - - 136 Development Fairfield, OH ................. 1st half 2000 136 - - 136 Development Gilbert, AZ.................... 1st half 2000 158 - - 158 Development Greenville, SC................. 1st half 2000 136 - - 136 Development Hilliard, OH................... 1st half 2000 136 - - 136 Development Jackson, MS.................... 1st half 2000 136 - - 136 Development Mansfield, OH ................. 1st half 2000 136 - - 136 Development North Richland Hills, TX ...... 1st half 2000 136 - - 136 Development Pantego, TX ................... 1st half 2000 136 - - 136 Development Plano, TX...................... 1st half 2000 156 - - 156 Development Richardson II, TX.............. 1st half 2000 136 - - 136 Development South Bend, IN ................ 1st half 2000 136 - - 136 Development Springfield, MO................ 1st half 2000 136 - - 136 Development Summit, NJ (4)................. 1st half 2000 - 90 - 90 Development Des Moines, IA................. 2nd half 2000 136 - - 136 Development Georgetown, TX (3)............. 2nd half 2000 270 84 40 394 Development Richardson I, TX .............. 2nd half 2000 176 - - 176 Development Richmond Heights, OH........... 2nd half 2000 164 - - 164 Development Tucson, AZ..................... 2nd half 2000 136 - - 136 Development ----- --- --- ----- Total 4,647 355 70 5,072 ===== === === =====
- ------------------------ (1) Independent living (IL) residences, assisted living (AL) residences (including areas dedicated to residents with Alzheimer's and other forms of dementia) and skilled nursing (SN) beds. (2) "Development" indicates that development activities, such as surveys, preparation of architectural plans, or zoning processes, have commenced (but construction has not commenced). "Construction" indicates that construction activities, such as groundbreaking activities, exterior construction or interior build-out have commenced. "Completed" indicates that construction has been completed and the community is in the lease-up period. (3) Represent communities being developed with Buckner. (4) Represent communities being developed with LCOR. (5) Represent a community being developed with Emmaus. Expand Existing Communities The Company plans to expand certain of its existing communities to include additional independent living and assisted living residences (including special programs and living units for residents with Alzheimer's and other forms of dementia). As of December 31, 1998, the Company had three expansion projects under construction and seven expansion projects under development, representing an aggregate increase in capacity to accommodate an additional 564 residents. Of these ten expansion projects, four are at communities in which the Company owns an interest and manages under multi-year agreements, and six are at communities which the Company manages for third parties. The costs of the expansion of managed communities is borne by the community owner and not by the Company. However, with respect to the four expansion projects in which the Company has an ownership interest, the Company will manage the expansion and have rights to purchase the expansion facilities. The expansion of existing senior living communities allows the Company to create operating efficiencies and capitalize on its local presence, community familiarity and reputation in markets in which the Company operates. 13 16 The table below summarizes information regarding the expansion of certain of the Company's existing senior living communities as of December 31, 1998.
RESIDENT CAPACITY (1) --------------------- SCHEDULED COMMUNITY LOCATION COMPLETION IL AL TOTAL STATUS(2) --------- -------- ---------- -- -- ----- --------- Buckner Westminister Village.............. Longview, TX 2nd half 1999 24 30 54 Construction Canton Regency............................ Canton, OH 2nd half 1999 - 62 62 Construction (3) Towne Centre.............................. Merrillville, IN 2nd half 1999 - 60 60 Construction (3) Crowne Point.............................. Omaha, NE 1st half 2000 72 - 72 Development Crowne Villa.............................. Omaha, NE 1st half 2000 - 24 24 Development Independence Village...................... East Lansing, MI 1st half 2000 - 60 60 Development Independence Village...................... Raleigh, NC 1st half 2000 - 50 50 Development The Heatherwood........................... Southfield, MI 1st half 2000 - 50 50 Development (4) The Palms................................. Ft Myers, FL 1st half 2000 - 52 52 Development The Amberleigh at Woodside Farms.......... Williamsville, NY 2nd half 2000 - 80 80 Development --- ---- ---- Total 96 468 564 == === ===
- ---------- (1) Independent living (IL) residences, assisted living (AL) residences (including areas dedicated to residents with Alzheimer's and other forms of dementia) and skilled nursing (SN) beds. (2) "Development" indicates that development activities, such as surveys, preparation of architectural plans, or zoning processes, have commenced (but construction has not commenced). "Construction" indicates that construction activities, such as groundbreaking activities, exterior construction or interior build-out have commenced. (3) Triad I purchased the land and will develop the expansions on the campus of the Company's existing communities. (4) Triad IV will purchase the land and develop the expansion on the campus of the Company's existing community. Pursue Strategic Acquisitions The Company intends to continue to pursue single or portfolio acquisitions of senior living communities and, to a lesser extent, other assisted living and long-term care communities. Through strategic acquisitions, the Company plans to enter new markets or acquire communities in existing markets as a means to increase market share, augment existing clusters, strengthen its ability to provide a broad range of care, and create operating efficiencies. As the industry continues to consolidate, the Company believes that opportunities will arise to acquire other senior living companies. The Company believes that the current fragmented nature of the senior living industry, combined with the Company's financial resources, national presence, and extensive contacts within the industry, should provide it with the opportunity to evaluate a number of potential acquisition opportunities. In reviewing acquisition opportunities, the Company will consider, among other things, geographic location, competitive climate, reputation and quality of management and communities, and the need for renovation or improvement of the communities. Expand Home Care Services The Company intends to expand its home care services by developing, acquiring, or managing new home care agencies and expanding its range of existing home care services at its communities. The Company currently anticipates that its home care agencies will be based at some of the Company's communities, and revenues will be derived from private pay sources. The Company believes that the expansion of its home care services will enhance its ability to provide a broad range of services, increase its market visibility, and further increase Company profitability, as well as aid in the maintaining of current occupancy levels. As of December 31, 1998, the Company operated one home care agency, and intends to establish additional home care agencies at certain of its communities. Expand Referral Networks The Company intends to continue to develop relationships (which, in certain instances, may involve strategic alliances or joint ventures) with local and regional hospital systems, managed care organizations, and other referral sources to attract new residents to the Company's communities. The Company believes that such arrangements or alliances, which could range from joint marketing arrangements to priority transfer agreements, will enable it to be strategically positioned within the 14 17 Company's markets if, as the Company believes, senior living programs become an integral part of the evolving health care delivery system. OPERATIONS Centralized Management The Company centralizes its corporate and other administrative functions so that the community-based management and staff can focus their efforts on resident care. The Company maintains centralized accounting, finance, human resources, training, and other operational functions at its national corporate office in Dallas, Texas. The Company's corporate office is generally responsible for: (i) establishing Company-wide policies and procedures relating to, among other things, resident care and operations; (ii) performing accounting functions; (iii) developing employee training programs and materials; (iv) coordinating human resources; (v) coordinating marketing functions; and (vi) providing strategic direction. In addition, financing, development, construction and acquisition activities, including feasibility and market studies, and community design, development, and construction management, are conducted by the Company's corporate offices. The Company seeks to control operational expenses for each of its communities through standardized management reporting and centralized controls of capital expenditures, asset replacement tracking, and purchasing for larger and more frequently used supplies. Community expenditures are monitored by regional and district managers who are accountable for the resident satisfaction and financial performance of the communities in their region. Community-Based Management An executive director manages the day-to-day operations at each senior living community, including oversight of the quality of care, delivery of resident services, and monitoring of financial performance, and is responsible for all personnel, including food service, maintenance, activities, security, assisted living, housekeeping, and, where applicable, nursing. In most cases, each community also has department managers who direct the environmental services, nursing or care services, business management functions, dining services, activities, transportation, housekeeping, and marketing functions. The assisted living and skilled nursing components of the senior living communities are managed by licensed professionals, such as a nurse and/or a licensed administrator. These licensed professionals have many of the same operational responsibilities as the Company's executive directors, but their primary responsibility is to oversee resident care. Many of the Company's senior living communities and some of its skilled nursing facilities are part of a campus setting, which includes independent living. This campus arrangement allows for cross-utilization of certain support personnel and services, including administrative functions, which results in greater operational efficiencies and lower costs than free-standing facilities. The Company actively recruits personnel to maintain adequate staffing levels at its existing communities as well as new staff for new or acquired communities prior to opening. The Company has adopted comprehensive recruiting and screening programs for management positions that utilize corporate office team interviews and thorough background and reference checks. The Company offers system-wide training and orientation for all of its employees at the community level through a combination of Company-sponsored seminars and conferences. Quality Assurance Quality assurance programs are coordinated and implemented by the Company's corporate and regional staff. The Company's quality assurance is targeted to achieve maximum resident and resident family member satisfaction with the care and services delivered by the Company. The Company's primary focus in quality control monitoring includes routine in-service training and performance evaluations of care givers and other support employees. Additional quality assurance measures include: Resident and Resident Family Input. On a routine basis the Company provides residents and family members the opportunity to provide valuable input regarding the day-to-day delivery of services. On-site management at each community has 15 18 fostered and encouraged active resident councils and resident committees who meet independently. These resident bodies meet with on-site management on a monthly basis to offer input and suggestions to the quality and delivery of services. Additionally, at each community the Company conducts annual resident satisfaction surveys to further monitor the satisfaction levels of both residents and family members. These surveys are sent directly to the corporate headquarters for tabulation and distribution to on-site staff and residents. For 1998 and 1997, the Company achieved a 95% and 96% approval rating, respectively, from its residents. For any departmental area of service scoring below a 90%, a plan of correction is developed jointly by on-site, regional and corporate staff for immediate implementation. Regular Community Inspections. On a monthly basis a community inspection is conducted by regional and/or corporate staff. Included as part of this inspection is the monitoring of the overall appearance and maintenance of the community interiors and grounds. The inspection also includes monitoring staff professionalism and departmental reviews of maintenance, housekeeping, activities, transportation, marketing, administration and food service as well as health care, if applicable. The monthly inspection also includes the observation of residents in their daily activities and community compliance with government regulations. Independent Service Evaluations. The Company engages the services of outside professional independent consulting firms to evaluate various components of the community operations. These services include "mystery shops," competing community analysis, pricing recommendations and product positioning. This provides management with valuable unbiased product and service information. A plan of action regarding any areas requiring improvement or change is implemented based on information received. At communities where health care is delivered, these consulting service reviews include the on-site handling of medications, record-keeping, and general compliance with all governmental regulations. Marketing Each community is staffed by on-site marketing directors and additional marketing staff depending on the community size. The primary focus of the on-site marketing staff is to create awareness of the Company and its services among prospective residents and family members, professional referral sources and other key decision makers. The marketing efforts incorporate an aggressive marketing plan to include monthly and annual goals for leasing, new lead generation, prospect follow up, community outreach, and resident and family referrals. Additionally, the marketing plan includes a calendar of promotional events and a comprehensive media program. On-site marketing departments perform a competing community assessment twice annually. Corporate and regional marketing directors monitor the on-site marketing departments' effectiveness and productivity on a monthly basis. Routine detailed marketing department audits are performed on an annual basis or more frequently if deemed necessary. Corporate and regional personnel assist in the development of marketing strategies for each community and produce creative media, assist in direct mail programs and necessary marketing collateral materials. Ongoing sales training of on-site marketing staff is implemented by corporate and regional marketing directors. In the case of new development, the corporate and regional staff develop a comprehensive community outreach program that is implemented at the start of construction. A marketing pre-lease program is developed and on-site marketing staff are hired and trained to begin the program implementation six to nine months prior to the community opening. Extensive use of media to include radio, television, print, direct mail and telemarketing is implemented during this pre-lease phase. After the community is opened and sustaining occupancy levels are attained, the on-site marketing staff is more heavily focused on resident and resident family referrals, as well as professional referrals. A maintenance program of print media and direct mail is then implemented. GOVERNMENT REGULATION Changes in existing laws and regulations, adoption of new laws and regulations and new interpretations of existing laws and regulations could have a material effect on the Company's operations. Failure by the Company to comply with applicable regulatory requirements could have a material adverse effect on the Company's business, financial condition, and results of operations. Accordingly, the Company monitors legal and regulatory developments on local and national levels. 16 19 The health care industry is subject to extensive regulation and frequent regulatory change. At this time, no federal laws or regulations specifically regulate assisted or independent living residences. While a number of states have not yet enacted specific assisted living regulations, certain of the Company's assisted living communities are subject to regulation, licensing, Certificate of Need and permitting by state and local health and social service agencies and other regulatory authorities. While such requirements vary from state to state, they typically relate to staffing, physical design, required services, and resident characteristics. The Company believes that such regulation will increase in the future. In addition, health care providers are receiving increased scrutiny under anti-trust laws as integration and consolidation of health care delivery increases and affects competition. The Company's communities are also subject to various zoning restrictions, local building codes, and other ordinances, such as fire safety codes. Failure by the Company to comply with applicable regulatory requirements could have a material adverse effect on the Company's business, financial condition, and results of operations. Regulation of the assisted living industry is evolving. The Company is unable to predict the content of new regulations and their effect on its business. There can be no assurance that the Company's operations will not be adversely affected by regulatory developments. The Company believes that its communities are in substantial compliance with applicable regulatory requirements. However, in the ordinary course of business, one or more of the Company's communities could be cited for deficiencies. In such cases, the appropriate corrective action would be taken. To the Company's knowledge, no material regulatory actions are currently pending with respect to any of the Company's communities. Under the Americans with Disabilities Act of 1990, all places of public accommodation are required to meet certain federal requirements related to access and use by disabled persons. A number of additional federal, state, and local laws exist that also may require modifications to existing and planned properties to permit access to the properties by disabled persons. While the Company believes that its communities are substantially in compliance with present requirements or are exempt therefrom, if required changes involve a greater expenditure than anticipated or must be made on a more accelerated basis than anticipated, additional costs would be incurred by the Company. Further legislation may impose additional burdens or restrictions with respect to access by disabled persons, the costs of compliance with which could be substantial. In addition, the Company is subject to various federal, state and local environmental laws and regulations. Such laws and regulations often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of hazardous or toxic substances. The costs of any required remediation or removal of these substances could be substantial and the liability of an owner or operator as to any property is generally not limited under such laws and regulations and could exceed the property's value and the aggregate assets of the owner or operator. The presence of these substances or failure to remediate such contamination properly may also adversely affect the owner's ability to sell or rent the property, or to borrow using the property as collateral. Under these laws and regulations, an owner, operator or an entity that arranges for the disposal of hazardous or toxic substances, such as asbestos-containing materials, at a disposal site may also be liable for the costs of any required remediation or removal of the hazardous or toxic substances at the disposal site. In connection with the ownership or operation of its properties, the Company could be liable for these costs, as well as certain other costs, including governmental fines and injuries to persons or properties. The Company has completed Phase I environmental audits of the communities in which the Company owns interests, and such surveys have not revealed any material environmental liabilities that exist with respect to these communities. The Company believes that the structure and composition of government, and specifically health care, regulations will continue to change and, as a result, regularly monitors developments in the law. The Company expects to modify its agreements and operations from time to time as the business and regulatory environments change. While the Company believes it will be able to structure all its agreements and operations in accordance with applicable law, there can be no assurance that its arrangements will not be successfully challenged. COMPETITION The senior living services industry is highly competitive, and the Company expects that all segments of the industry will become increasingly competitive in the future. Although there are a number of substantial companies active in the senior living services industry and in the markets in which the Company operates, the industry continues to be very fragmented and characterized by numerous small operators. The Company competes with American Retirement Corporation and Holiday Retirement Corporation in Texas, Sunrise Assisted Living, Inc. in North Carolina and New York, Atria Senior Quarters in New York, and Marriott Senior Living Services in Florida. The Company believes that the primary competitive factors in the 17 20 senior living services industry are: (i) reputation for and commitment to a high quality of service; (ii) quality of support services offered (such as food services); (iii) price of services; (iv) physical appearance and amenities associated with the communities; and (v) location. The Company competes with other companies providing independent living, assisted living, skilled nursing, home health care, and other similar service and care alternatives, some of whom may have greater financial resources than the Company. Because seniors tend to choose senior living communities near their homes, the Company's principal competitors are other senior living and long-term care communities in the same geographic areas as the Company's communities. The Company also competes with other health care businesses with respect to attracting and retaining nurses, technicians, aides, and other high quality professional and non-professional employees and managers. EMPLOYEES As of December 31, 1998, the Company employed approximately 1,800 persons, of which approximately 1,009 were full-time employees (approximately 39 of whom are located at the Company's corporate offices) and 791 are part-time employees. None of the Company's employees is currently represented by a labor union and the Company is not aware of any union organizing activity among its employees. The Company believes that its relationship with its employees is good. EXECUTIVE OFFICERS AND KEY EMPLOYEES The following table sets forth certain information concerning each of the Company's executive officers and key employees as of December 31, 1998:
NAME AGE POSITION(S) WITH THE COMPANY - ---- --- ---------------------------- Jeffrey L. Beck........................ 53 Co-Chairman and Chief Executive Officer James A. Stroud........................ 48 Co-Chairman, Chief Operating Officer, and Secretary Lawrence A. Cohen...................... 45 Vice Chairman and Chief Financial Officer Keith N. Johannessen................... 42 President Rob L. Goodpaster...................... 45 Vice President -- National Marketing David W. Beathard, Sr.................. 51 Vice President -- Operations David G. Suarez........................ 46 Vice President -- Development David R. Brickman...................... 40 Vice President and General Counsel Kathleen L. Granzberg.................. 37 Controller -- Corporate Robert F. Hollister.................... 43 Controller -- Property
JEFFREY L. BECK has served as a director and Chief Executive Officer of the Company and its predecessors since January 1986. He currently serves as Co-Chairman of the Board. Mr. Beck also serves on the boards of various educational, religious and charitable organizations and in varying capacities with several trade associations. Mr. Beck served as Vice Chairman of the American Seniors Housing Association from 1992 to 1994, and as Chairman from 1994 to 1996, and remains a member of its Executive Board, and is a council member of the Urban Land Institute. Mr. Beck is Chairman of the Board of Directors of United Texas Bank of Dallas. Mr. Beck has recently taken a leave of absence to attend to the needs of a seriously ill family member. JAMES A. STROUD has served as a director and Chief Operating Officer of the Company and its predecessors since January 1986. He currently serves as Co-Chairman of the Board and Chairman, Chief Operating Officer and Secretary of the Company. Mr. Stroud also serves on the boards of various educational and charitable organizations, and in varying capacities with several trade organizations, including as a member of the Founder's Council and Board of Directors of the Assisted Living Federation of America, and as President and as a member of the Board of Directors of the National Association For Senior Living Industry Executives. Mr. Stroud also serves as an Advisory Group member to the National Investment Conference. Mr. Stroud was a Founder of the Texas Assisted Living Association and serves as a member of its Board of Directors. Mr. Stroud has earned a Masters in Law, is a licensed attorney and is also a Certified Public Accountant. 18 21 LAWRENCE A. COHEN has served as a director and Vice Chairman and Chief Financial Officer of the Company since November 1996. During Mr. Beck's leave of absence, Mr. Cohen is acting as Chief Executive Officer. From 1991 to 1996, Mr. Cohen served as President, and Chief Executive Officer of Paine Webber Properties Incorporated, which controlled a real estate portfolio having a cost basis of approximately $3.0 billion, including senior living facilities of approximately $110.0 million. Mr. Cohen serves as a member of the Corporate Finance Committee of the NASD Regulation, Inc., and was a founding member of the executive committee of the Board of the American Seniors Housing Association. Mr. Cohen has earned a Masters in Law, is a licensed attorney and is also a Certified Public Accountant. Mr. Cohen has had positions with businesses involved in senior living for 14 years. KEITH N. JOHANNESSEN has served as President of the Company and its predecessors since March 1994, and previously served as Executive Vice-President since May 1993. From 1992 to 1993, Mr. Johannessen served as Senior Manager in the health care practice of Ernst & Young. From 1987 to 1992, Mr. Johannessen was Executive Vice President of Oxford Retirement Services, Inc. Mr. Johannessen has served on the State of the Industry and Model Assisted Living Regulations Committees of the American Seniors Housing Association. Mr. Johannessen has been active in operational aspects of senior housing for 20 years. ROB L. GOODPASTER has served as Vice President - National Marketing of the Company and its predecessors since December 1992. From 1990 to 1992, Mr. Goodpaster was National Director for Marketing for Autumn America, an owner and operator of senior housing facilities. Mr. Goodpaster is a member of the Board of Directors of the National Association For Senior Living Industries. Mr. Goodpaster has been active in the operational, development and marketing aspects of senior housing for 22 years. DAVID W. BEATHARD, SR. has served as Vice President - Operations of the Company and its predecessors since August 1996. From 1992 to 1996, Mr. Beathard owned and operated a consulting firm which provided operational, marketing and feasibility consulting regarding senior housing facilities. Mr. Beathard has been active in the operational, sales and marketing, and construction oversight aspects of senior housing for 24 years. DAVID G. SUAREZ has recently joined the Company as Vice President - Development. From 1996 to 1998, Mr. Suarez served as Project Manager for the Western Group of Columbia/HCA. Prior to that, Mr. Suarez served as Vice President of Development for PDC Facilities, a healthcare design-build developer. Mr. Suarez has been in the healthcare industry in development for 20 years. His architectural and construction management degrees provide experience and expertise in the Company's site selection process, building design and budgeting, and construction methods and material procedures for the Company's senior living communities. DAVID R. BRICKMAN has served as Vice President of the Company and its predecessors since July 1992 and General Counsel of the Company since October 1997. From 1989 to 1992, Mr. Brickman served as in-house counsel with LifeCo Travel Management Company, a corporation which provided travel services to U.S. corporations. Mr. Brickman has earned a Masters of Business Administration and a Masters in Health Administration. Mr. Brickman has either practiced law or performed in-house counsel functions for 12 years. KATHLEEN L. GRANZBERG, a Certified Public Accountant, has served as the Corporate Controller for the Company and its predecessors since December 1991, and as Property Controller since 1987. Ms. Granzberg is a member of the American Institute of Certified Public Accountants and is also a member of the Texas Society of Certified Public Accountants. Ms. Granzberg has announced that she is leaving the Company sometime during the second quarter of 1999. ROBERT F. HOLLISTER, a Certified Public Accountant, has served as Property Controller for the Company and its predecessors since April 1992. From 1985 to 1992, Mr. Hollister was Chief Financial Officer and Controller of Kavanaugh Securities, Inc., a NASD broker dealer. Mr. Hollister is a Certified Financial Planner. Mr. Hollister is a member of the American Institute of Certified Public Accountants and is also a member of the Texas Society of Certified Public Accountants. 19 22 ITEM 2. PROPERTIES The executive and administrative offices of the Company are located at 14160 Dallas Parkway, Suite 300, Dallas, Texas 75240, and consist of approximately 14,000 square feet. The lease on the premises extends through August 31, 2002. The Company also leases an executive office space in New York, New York pursuant to a monthly lease agreement. The Company believes that its corporate office facilities are adequate to meet its requirements through at least fiscal 1999 and that suitable additional space will be available, as needed, to accommodate further physical expansion of corporate operations. As of December 31, 1998, the Company owned, leased and/or managed the senior living communities referred to in Item 1 above. Occupancy rate information as of December 31, 1998, is also presented for each community in Item 1 above. ITEM 3. LEGAL PROCEEDINGS On August 11, 1998, the Company executed a settlement agreement with Angeles Housing Concepts, Inc. ("AHC"), ILM I Lease Corporation and ILM II Lease Corporation (collectively, "ILM Lease") resolving all claims among the parties relating to a lawsuit filed by AHC against the Company alleging interference with AHC's management agreements with ILM Lease (the "Settlement Agreement") and calling for a dismissal with prejudice of this lawsuit. The Settlement Agreement did not involve any payment of damages to AHC or any other party by the Company. On or about October 23, 1998, Robert Lewis filed a putative class action complaint on behalf of certain holders of Assignee Interests in NHP in the Delaware Court of Chancery against NHP, the Company, Capital Senior Living Properties 2-NHPCT, Inc. and Capital Realty Group Senior Housing, Inc. (collectively, the "Defendants"). Mr. Lewis purchased 90 Assignee Interests in February 1993 for $180. The complaint alleges, among other things, that the Defendants breached, or aided and abetted a breach of, the express and implied terms of the NHP Partnership Agreement in connection with the sale of four properties by NHP to Capital Senior Living Properties 2 - NHPCT, Inc. The complaint seeks, among other relief, rescission of the sale of these properties and unspecified damages The Company believes the complaint is without merit and intends to vigorously defend itself in this action. On February 12, 1999 a competitor of the Company, Holiday Retirement Corporation ("Holiday"), as well as Colson & Colson Construction Company and their architects, Curry Brandaw Architects, filed suit against the Company in U.S. District Court in Dallas. The complaint alleges, among other claims, that the Company infringed the copyrighted architectural plans and trade dress of Holiday on at least three of the Company's communities. The communities using this Waterford prototype design are owned by Triad I, in which the Company is a 19% limited partner and provides development services under a third party development agreement. The plaintiffs are additionally seeking a preliminary and permanent injunction to bar further use of their allegedly copyrighted architectural plans and trade dress as well as damages, including punitive damages. The defense of this suit has been turned over to the Company's insurer for handling. The Company vigorously denies the allegations mentioned in the lawsuit and has filed an answer and counterclaim. The Company has pending claims incurred in the normal course of business which, in the opinion of management, based on the advice of legal counsel, will not have a material effect on the financial statements of the Company. The provision of personal and health care services entails an inherent risk of liability. In recent years, participants in the senior living and health care services industry have become subject to an increasing number of lawsuits alleging negligence or related legal theories, many of which involve large claims and result in the incurrence of significant defense costs. The Company currently maintains property, liability and professional medical malpractice insurance policies for the Company's owned and managed communities under a master insurance program in amounts and with such coverages and deductibles that the Company believes are within normal industry standards based upon the nature and risks of the Company's business, and the Company believes that such insurance coverage is adequate. The Company also has an umbrella excess liability protection policy in the amount of $15.0 million per location. There can be no assurance that a claim in excess of the Company's insurance will not arise. A claim against the Company not covered by, or in excess of, the Company's insurance could have a material adverse effect upon the Company. In addition, the Company's insurance policies must be renewed annually. There can be no assurance that the Company will be able to obtain liability insurance in the future or that, if such insurance is available, it will be available on acceptable terms. 20 23 Under various federal, state, and local environmental laws, ordinances, and regulations, a current or previous owner or operator of real estate may be required to investigate and clean up hazardous or toxic substances or petroleum product releases at such property, and may be held liable to a governmental entity or to third parties for property damage and for investigation and clean up costs. The Company is not aware of any environmental liability with respect to any of its owned, leased, or managed communities that it believes would have a material adverse effect on the Company's business, financial condition, or results of operations. The Company believes that its communities are in compliance in all material respects with all federal, state, and local laws, ordinances, and regulations regarding hazardous or toxic substances or petroleum products. The Company has not been notified by any governmental authority, and is not otherwise aware of any material non-compliance, liability, or claim relating to hazardous or toxic substances or petroleum products in connection with any of the communities it currently operates. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of the Company's security holders during the fourth quarter ended December 31, 1998. 21 24 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS (a) The Company's shares of common stock are listed for trading on the New York Stock Exchange ("NYSE") under the symbol "CSU." The following table sets forth, for the periods indicated, the high and low sales prices for the Company's common stock, as reported on the NYSE. At December 31, 1998, there were approximately 3,900 shareholders of record of the Company's common stock.
YEAR HIGH LOW ---- ---- --- 1997 Fourth Quarter................ $ 17 1/2 $ 9 13/16 1998 First Quarter................. $ 14 $ 8 5/8 Second Quarter................ 15 1/2 11 1/2 Third Quarter................. 12 11/16 5 1/8 Fourth Quarter................ 14 3/4 9 1/2
It is the policy of the Company's Board of Directors to retain all future earnings to finance the operation and expansion of the Company's business. Accordingly, the Company has not and does not anticipate declaring or paying cash dividends on the common stock in the foreseeable future. The payment of cash dividends in the future will be at the sole discretion of the Company's Board of Directors and will depend on, among other things, the Company's earnings, operations, capital requirements, financial condition, restrictions in then existing financing agreements, and other factors deemed relevant by the Board of Directors. (b) Recent Sales of Unregistered Securities. Information with respect to this Item is set forth above under the caption "Item 1. Business--Formation Transactions." The issuance therein described of the Company's Common Stock to Messrs. Jeffrey L. Beck, James A. Stroud (including a trust) and Lawrence A. Cohen in the Formation Transactions in exchange for the Contributed Entities was carried out in reliance on the exemption from registration contained in Section 4(2) of the Securities Act of 1933, as amended, pursuant to a binding written agreement entered into prior to the filing of the Registration Statement filed in connection with the Offering. In connection with the organization of the Company, during 1996, the Company issued 1,680,000 shares of its Common Stock to Messrs. Beck, Stroud (through a trust) and Cohen for $16,800. The shares were issued in equal amounts of 560,000 shares to each in consideration for a cash payment by each of $5,600. Such issuances were made in reliance on the exemption from registration contained in Section 4(2) of the Securities Act of 1933, as amended. (c) Use of Proceeds. As described above in "Business," the Company has completed the Offering. The following information relates to the use of proceeds of the Offering: (1) Effective Date of Registration Statement and Commission File Number: The Company's Registration Statement on Form S-1, File No. 333-33379, relating to the Offering, became effective on October 30, 1997. (2) Aggregate Gross Proceeds, Expenses and Aggregate Net Proceeds: The sale of the 10,350,000 shares of Common Stock generated aggregate gross proceeds of $139,725,000. The aggregate net proceeds to the Company from the sale of the 10,350,000 shares of Common Stock were approximately $128,407,000, after deducting underwriting discounts and commissions of approximately $9,742,000 and expenses of the Offering of approximately $1,576,000 paid by the Company. (3) Use of Proceeds: Through December 31, 1998, the Company had used approximately $1.6 million of the net proceeds of the Offering for expenses associated with the Offering. In addition, the Company used a portion 22 25 of such net proceeds as follows: (i) approximately $70.8 million of such net proceeds to repay the indebtedness incurred by the Company to acquire assets (including construction in progress) in the Formation Transactions; (ii) approximately $18.1 million to repay the Formation Note; (iii) approximately $5.8 million to pay the balance of the purchase price to an affiliate related to the purchase of assets on the Formation Transactions; (iv) approximately $1.2 million of such net proceeds to repay indebtedness to affiliates; (v) approximately $8,246,000 of such net proceeds to acquire the four senior living communities from NHP; (vi) approximately $505,000 of such net proceeds to purchase land in Carmichael, CA; and (vii) approximately $9,636,000, $932,000 and $1,160,000 advanced to Triad, Triad II and Triad IV, respectively. There has not been a material change in the use of proceeds described in the Company's prospectus. 23 26 ITEM 6. SELECTED FINANCIAL DATA The following table sets forth selected financial data of the Company. The selected financial data for the years ended December 31, 1998, 1997, 1996, 1995 and 1994 are derived from the audited consolidated financial statements of the Company.
YEAR ENDED DECEMBER 31, ---------------------------------------------------------------- 1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Statements of Income Data: Revenues: Resident and health care revenue ................. $ 24,790 $ 21,207 $ 13,692 $ 13,238 $ 12,761 Rental and lease income .... 4,282 4,276 1,101 1,231 1,235 Unaffiliated management services revenue ....... 2,465 1,920 801 -- -- Affiliated management services revenue ....... 1,327 1,378 2,708 2,778 3,113 Unaffiliated development fees ................... 1,234 804 673 -- -- Affiliated development fees 7,473 173 -- -- -- Other ...................... 1,197 952 924 871 800 -------- -------- -------- -------- -------- Total revenues ......... 42,768 30,710 19,899 18,118 17,909 -------- -------- -------- -------- -------- Expenses: Operating expenses ......... 17,067 16,701 10,656 10,287 10,142 General and administrative expenses(1) ............ 6,594 7,085 5,635 4,364 4,595 Depreciation and amortization ........... 2,734 2,118 1,481 1,776 1,707 -------- -------- -------- -------- -------- Total expenses ......... 26,395 25,904 17,772 16,427 16,444 -------- -------- -------- -------- -------- Income from operations ..... 16,373 4,806 2,127 1,691 1,465 Other income (expense): Interest income ........ 4,939 3,186 432 368 122 Interest expense ....... (1,922) (2,022) (221) (278) (261) Gain on sale of properties .......... 422 -- 438 -- -- Equity in earnings on investments .......... -- -- 459 -- -- Other ...................... -- 440 42 -- (16) -------- -------- -------- -------- -------- Income before income taxes and minority ...... interest in consolidated partnerships ........... 19,812 6,410 3,277 1,781 1,310 (Provision) benefit for income taxes(2) ......... (7,476) (793) -- (18) (130) -------- -------- -------- -------- -------- Income before minority interest in consolidated partnerships ............ 12,336 5,617 3,277 1,763 1,180 Minority interest in ....... consolidated partnerships (379) (1,936) (1,224) (760) (634) -------- -------- -------- -------- -------- Net income ................. $ 11,957 $ 3,681 $ 2,053 $ 1,003 $ 546 ======== ======== ======== ======== ======== Net income per share: Basic and Diluted .......... $ 0.61 $ 0.33 ======== ======== Weighted average shares outstanding ...... 19,717 11,150 ======== ======== Pro forma net income data (unaudited)(3): Net income ................. $ 3,681 $ 2,053 Pro forma income taxes ................... (965) (811) -------- -------- Pro forma net income ....... $ 2,716 $ 1,242 ======== ========
24 27
AT DECEMBER 31, ------------------------------------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- ($ IN THOUSANDS) Balance Sheet Data: Cash and cash equivalents $35,827 $48,125 $10,819 $10,017 $8,799 Working capital (8,680)(4) 44,690 9,567 6,784 5,938 Total assets 205,267 117,371 33,203 29,747 29,913 Long-term debt, excluding current portion 32,671 7,575 201 337 177 Equity 104,516 92,560 17,201 14,447 12,495
- ---------- (1) General and administrative expenses include officers' salaries of $670,000, $3,342,000, $3,372,000, $2,976,000 and $3,443,000 for the years ended December 31, 1998, 1997, 1996, 1995 and 1994, respectively. Prior to November 1997, these amounts were primarily composed of salaries and bonuses paid to the founders and were based in part on federal income tax regulations regarding distributions of closely held corporations and S corporations. Effective with the Offering, these federal income tax regulations no longer applied to the Company. Compensation of the founders since October 1, 1997 has been based on the founders' employment agreements. (2) A provision for income taxes was recorded by the Company from inception through February 1, 1995. No provision for income taxes has been recorded from February 1, 1995 through completion of the Formation Transactions as the operating companies included in the historical financial statements, prior to the Offering, were S corporations or partnerships and accordingly were not subject to income taxes during the period. (3) Pro forma income taxes have been calculated based on the assumption that the S corporations and partnerships were subject to income taxes. Pro forma income tax expense has been calculated using statutory federal and state tax rates, estimated at 39.5%. (4) The Company expects to complete a refinancing of its $47,700,000 mortgage loan due October 1, 1999 with long term fixed rate mortgage loans during the second quarter of 1999. However, there can be no assurance that the Company will complete this refinancing as expected. 25 28 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The following discussion and analysis addresses the Company's results of operations on a historical consolidated basis for the years ended December 31, 1998, 1997 and 1996. The following should be read in conjunction with the Company's historical consolidated financial statements and the selected financial data contained elsewhere in this report. On September 15, 1997, the Company increased its authorized common shares from 40,000,000 to 65,000,000 shares and authorized 15,000,000 shares of preferred stock. On November 5, 1997, the Company issued 18,037,347 additional shares of common stock (including 1,350,000 shares issued upon exercise of an option granted underwriters to purchase additional common shares in conjunction with the Offering) bringing its total issued and outstanding shares of common stock to 19,717,347 shares. Of the 18,037,347 shares issued, 7,687,347 shares were issued to Messrs. Beck, Stroud and Cohen in the Formation Transactions described herein and 10,350,000 shares were registered with the Securities and Exchange Commission for trading in public markets. On November 5, 1997, the Company also entered into Formation Transactions (herein so called) with Messrs. Beck and Stroud whereby they contributed all of their owned capital stock of Capital Senior Living, Inc., Capital Senior Management 1, Inc., Capital Senior Management 2, Inc., Capital Senior Development, Inc., and with Mr. Cohen, of Quality Home Care, Inc. (the "Contributed Entities") to the Company in exchange for the issuance of 7,687,347 shares of common stock of the Company and the issuance of separate notes in the aggregate amount of $18,076,380 to Messrs. Beck, Stroud and Cohen, which were subsequently repaid by the Company from the net proceeds received from the sale of the Company's common stock in the Offering. As part of the Formation Transactions, the Company simultaneously purchased substantially all of the operating assets of CSLC (including CSLC's investment in HCP and NHP and excluding CSLC's cash, U.S. Treasury securities purchased under the LBHI Loan agreement and working capital items) for an aggregate purchase price of approximately $76.6 million, comprised of the assumption by the Company of CSLC's outstanding LBHI Loan of approximately $70.8 million and payment of cash of approximately $5.8 million to CSLC. On November 7, 1997, the Company repaid the LBHI Loan from the proceeds received from the Offering. In October 1997, the combined Companies declared and paid dividends of $457,647 to Messrs. Beck, Stroud and Cohen in preparation for the Formation Transactions that transformed the combined companies from closely held corporations and S corporations to non-closely held C corporations for federal income tax purposes. Due to all of the entities involved in the Formation Transactions being under the common control of Messrs. Beck and Stroud, the Company's consolidated financial statements reflect the assets and liabilities at their historical values and the accompanying consolidated statements of income, equity, and cash flows reflect the combined results for the periods indicated through the date of the Offering even though they have historically operated as separate entities. The Formation Transactions have been accounted for at historical cost in a manner similar to a pooling of interests to the extent of the percentage ownership by Messrs. Beck and Stroud of the Company. Acquired assets and liabilities of CSLC have been recorded at fair value to the extent of minority interest. CSLC's assets include investments in HCP and NHP. On September 30, 1998, the Company entered into a mortgage loan agreement with Lehman Brothers Holdings, Inc. ("Lehman Loan"), under which the Company borrowed $47,700,000. The purpose of the Lehman Loan was to provide financing for the acquisition of four NHP senior living communities, as well as for the Tesson Heights Enterprises ("Tesson") senior living community, all of which have been pledged as collateral. Interest costs are based on 30-day LIBOR and were approximately 6.95% at December 31, 1998. The loan agreement matures October 1, 1999, and the Company expects to complete a refinancing of this mortgage loan with long term fixed rate mortgage loans during the second quarter of 1999. However, there can be no assurance that the Company will complete this refinancing as expected. 26 29 On September 30, 1998, the Company acquired four senior living communities from NHP for cash consideration of $40,650,000. The funds for the transaction were provided from working capital of the Company and from the proceeds of the Lehman Loan. The senior living communities acquired by the Company from NHP are The Atrium of Carmichael in Carmichael, California; Crosswoods Oaks in Citrus Heights, California; The Heatherwood in Southfield, Michigan; and The Veranda Club in Boca Raton, Florida. The Company had operated these communities under a long-term management contract since 1992. The purchase price for the properties was determined by independent appraisal. Personnel working at the property sites and certain home office personnel who performed services for NHP have been employees of the Company. NHP (prior to the acquisitions) reimbursed the Company for the salaries, related benefits, and overhead reimbursements of such personnel. Capital Realty Group Brokerage, Inc., a company wholly owned by Messrs. Beck and Stroud, received a brokerage fee of $1,219,500 related to this transaction, which was paid by NHP. The acquisitions were accounted for as a purchase business combination and the Company's operations have included the operations of NHP since September 30, 1998. On October 28, 1998, the Company acquired two senior living communities from Gramercy Hill Enterprises, a Texas limited partnership ("Gramercy"), and Tesson, for aggregate consideration of approximately $34,000,000. The funds for the Tesson transaction were provided from working capital of the Company and from $15,400,000 of proceeds from the Lehman Loan. The funds for the Gramercy transaction were provided from working capital of the Company, the assumption of the $6,334,660 Washington Mortgage Financial Group, Ltd. ("WMFG") promissory note (assigned to Fannie Mae) and from the proceeds of the $1,980,000 WMF Washington Mortgage Corp. ("WMFC") loan described below. On October 28, 1998, the Company entered into a $6,334,660 Assumption and Release Agreement with Fannie Mae and a $1,980,000 multifamily note in favor of WMFC. The purpose of the loans was to provide financing for the Gramercy acquisition. The senior living community acquired from Gramercy has been pledged as collateral under these loans. Interest costs are 7.69% and 7.08%, respectively. The Assumption and Release Agreement and WMFC note mature in January 2008 and January 2010, respectively. The senior living communities acquired by the Company from Gramercy and Tesson are Gramercy Hill in Lincoln, Nebraska and Tesson Heights, in St. Louis, Missouri. The acquisitions were accounted for as purchase business combinations, and the Company's operations have included the operations of Tesson Heights and Gramercy Hill since October 28, 1998. From 1990 through December 31, 1998, the Company acquired interests in 19 communities and entered into an operating lease with respect to one community, which was terminated effective January 31, 1998. Since 1996, the Company expanded its senior living management services by entering into the management service contracts on 15 communities for four independent third-party owners and commenced providing development and construction management services for new residence properties in addition to adding a home care service agency. The Company generates revenue from a variety of sources. For the year ended December 31, 1998, the Company's revenue was derived as follows: 58.0% from the operation of 11 owned communities that were operated by the Company; 10.0% from lease rentals from triple net leases of three skilled nursing facilities and four physical rehabilitation centers; 8.9% from management fees arising from management services provided for four affiliate owned senior living communities from January 1, 1998 through September 30, 1998 and one affiliate owned senior living community from January 1, 1998 through December 31, 1998 and 15 third-party owned senior living communities; and 20.4% from development fees earned for managing the development and construction of new senior living communities for third parties. The Company believes that the factors affecting the financial performance of communities managed under contracts with third parties do not vary substantially from the factors affecting the performance of owned and leased communities, although there are different business risks associated with these activities. The Company's third-party management fees are primarily based on a percentage of gross revenues. As a result, the cash flow and profitability of such contracts to the Company are more dependent on the revenues generated by such 27 30 communities and less dependent on net cash flow than for owned communities. Further, the Company is not responsible for capital investments in managed communities. While the management contracts are generally terminable only for cause, in certain cases the contracts can be terminated upon the sale of a community, subject to the Company's rights to offer to purchase such community. The Company's triple net leases extend through the year 2000 for three of its owned communities and through the year 2001 for four of its owned communities. The payments under these leases are fixed and are not subject to change based upon the operating performance of these communities. Following termination of the lease agreements, the Company may either convert and operate the communities as assisted living and Alzheimer's care facilities, sell the facilities or evaluate other alternatives. The Company's current management contracts expire on various dates between December 1999 and September 2009 and provide for management fees based generally upon rates that vary by contract from 4% of net revenues to 7% of net revenues. In addition, certain of the contracts provide for supplemental incentive fees that vary by contract based upon the financial performance of the managed community. The Company's development fees are generally based upon a percentage of construction cost and are earned over the period commencing with the initial development activities and ending with the opening of the community. As of December 31, 1998, development fees have been earned for services performed for 39 communities under development or expansions for third parties. During 1998, 1997, 1996 and 1995, the Company made various purchases of limited partnership interests in HCP. HCP owns and operates a skilled nursing facility and owns and leases to third-party operators (under triple net leases) three skilled nursing facilities and four physical rehabilitation centers. During 1998, 1997, 1996 and 1995, the Company paid approximately $101,000, $5,605,000, $3,201,000 and $309,000, respectively, for partnership interests in HCP. The Company changed its method of accounting for its investment in HCP from the cost method in 1995 to the equity method in 1996. As a result of additional purchases, the Company's ownership interest in HCP exceeded 50% on June 26, 1997. Accordingly, this partial acquisition has been accounted for by the purchase method of accounting, and the assets, liabilities, minority interest, and the results of operations of HCP have been consolidated in the Company's financial statements since January 1, 1997. The Company acquired, on November 1, 1997, the NHP Notes owned by CSLC in the Formation Transactions for $18,664,128. The NHP Notes bear simple interest at 13% per annum and mature on December 31, 2001. Interest is currently paid quarterly at a rate of 7%, with the remaining 6% interest deferred. Beginning November 1, 1997 through September 30, 1998, the Company has been recording interest income at 10.5% of the purchase price paid, which was determined based on the discounted amount of principal and interest payments to be made following the maturity date (December 31, 2001) of the NHP Notes (using a six-month lag between maturity and full repayment), due to uncertainties regarding the ultimate realization of the accrued interest. On September 30, 1998, the Company purchased four properties from NHP. NHP is in turn redeeming $7,500,000 of the Company's investment in the NHP Notes and is distributing approximately $5,300,000 of deferred interest not previously paid on such notes. From October 1, 1998 through December 31, 1998, the Company reevaluated its investment in the NHP Notes, and is recording additional income, after giving consideration to current payment of interest, partial redemption of the NHP Notes with accrued interest and the estimated residual value in NHP. Also, during 1998 and 1996, the Company paid $344 and $1,364 for 4% and 3%, respectively, ownership of limited partnership interests in NHP. The Company accounts for its investment in NHP on the cost method with respect to the NHP limited partnership interests and as held-to-maturity securities and reported at amortized cost with respect to the NHP Notes. The Company will continue to develop and acquire senior living communities. The development of senior living communities typically involves a substantial commitment of capital over a 12 to 14-month construction period during which time no revenues are generated, followed by a 12-month lease-up period. The Company anticipates that newly opened or expanded communities will operate at a loss during a substantial portion of the lease-up period. The Company's growth strategy may also include the acquisition of senior living communities, home care agencies, and other properties or businesses that are complementary to the Company's operations and growth strategy. 28 31 RESULTS OF OPERATIONS The following tables set forth, for the periods indicated, selected historical consolidated statements of income data in thousands of dollars and expressed as a percentage of total revenues.
YEAR ENDED DECEMBER 31, 1998 1997 1996 ------------------ ------------------ ------------------ $ % $ % $ % -------- ----- -------- ----- -------- ----- Revenues: Resident and health care revenue $ 24,791 58.0% $ 21,207 69.1% $ 13,692 68.8% Rental and lease income 4,281 10.0 4,276 13.9 1,101 5.5 Unaffiliated management services revenue 2,465 5.8 1,920 6.2 801 4.0 Affiliated management services revenue 1,327 3.1 1,378 4.5 2,708 13.6 Unaffiliated development fees 1,234 2.9 804 2.6 673 3.4 Affiliated development fees 7,473 17.5 173 0.6 -- 0.0 Other 1,197 2.7 952 3.1 924 4.7 -------- ----- -------- ----- -------- ----- Total revenues 42,768 100.0 30,710 100.0 19,899 100.0 -------- ----- -------- ----- -------- ----- Expenses: Operating expenses 17,067 39.9 16,701 54.4 10,656 53.6 General and administrative expenses 6,594 15.4 7,085 23.1 5,635 28.3 Depreciation and amortization 2,734 6.4 2,118 6.9 1,481 7.4 -------- ----- -------- ----- -------- ----- Total expenses 26,395 61.7 25,904 84.4 17,772 89.3 -------- ----- -------- ----- -------- ----- Income from operations 16,373 38.3 4,806 15.6 2,127 10.7 Other income (expense): Interest income 4,939 11.5 3,186 10.4 432 2.2 Interest expense (1,922) (4.5) (2,022) (6.5) (221) (1.1) Gain on sale of properties 422 1.0 -- -- 438 2.2 Equity in earnings on investments -- -- -- -- 459 2.3 Other -- -- 440 1.4 42 0.2 -------- ----- -------- ----- -------- ----- Income before income taxes and minority interest in consolidated partnerships 19,812 46.3 6,410 20.9 3,277 16.5 Provision for income taxes (7,476) (17.5) (793) (2.6) -- -- -------- ----- -------- ----- -------- ----- Income before minority interest in consolidated partnerships 12,336 28.8 5,617 18.3 3,277 16.5 Minority interest in consolidated partnerships (379) (0.8) (1,936) (6.3) (1,224) (6.2) -------- ----- -------- ----- -------- ----- Net income $ 11,957 28.0% $ 3,681 12.0% $ 2,053 10.3% ======== ===== ======== ===== ======== =====
YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31, 1997 Revenues. Total revenues were $42,768,000 in 1998 compared to $30,710,000 in 1997, representing an increase of $12,058,000, or 39.3%. Resident and health care revenue increased $3,584,000, of which $4,015,000 is a result of purchasing the four NHP properties, Gramercy Hill and Tesson Heights, along with a decrease of $237,000 relating to the HCP properties. Unaffiliated management services revenue increased $545,000 due to a significant improvement in the performance at the property level resulting in incentive payments and one additional third-party management contract added in the first quarter of 1998. Unaffiliated development fees increased $430,000, of which $894,000 is a result of two additional third party development contracts and the continuation of four projects that earned fees for seven months in 1998 as compared to two months for 1997 and a decrease of $464,000 resulting from one development project completed on December 31, 1997 and three development projects terminated by a third party. Affiliated development fees increased $7,300,000, resulting from fees earned on 29 projects in 1998 compared to one in 1997. Expenses. Total expenses were $26,395,000 in 1998 compared to $25,904,000 in 1997, representing an increase of $491,000, or 1.9%. Operating expenses increased $366,000 due to an increase of $1,954,000 as a result of acquiring six properties in the fourth quarter of 1998, along with a decrease of $1,361,000 related to the termination of Maryland Gardens lease and offset by an overall decrease in operating expenses. General and administrative expenses decreased $491,000 due to a decrease in officers' salaries of $2,670,000 offset by a $325,000 increase due to the acquisition of six properties in the fourth quarter of 1998, a $185,000 increase in development expenses due to the increase in development projects, a $200,000 increase in professional fees that relate to legal fees, a $100,000 increase in license and fee expense, a $320,000 increase in HCP general and administrative expenses, along with an overall increase in general and administrative expenses. Depreciation and amortization increased $616,000 due to an increase of $424,000 as a result of the acquisition of the six properties in the 29 32 fourth quarter of 1998, an $80,000 increase for the expansion of Cottonwood and an increase of $37,000 in the amortization of goodwill for twelve months in 1998 as opposed to two months in 1997. Other income and expenses. Interest and other income increased $1,835,000, primarily as a result of a $1,365,000 increase in income associated with investment of cash reserves, a $1,600,000 increase in NHP Notes interest due to a partial redemption of the notes and payment of accrued interest, a $308,000 increase in interest earned from the Triad, Triad II and Triad IV (as hereinafter defined) unsecured credit facilities, which is offset by a $1,400,000 decrease in interest due to the divestment of an investment from June 1997 through October 1997 by CSLC. Interest expense decreased $100,000 due to a decrease of $1,267,000 of interest related to the Lehman debt incurred in the Formation Transactions and a decrease of $44,000 in HCP interest expense due to refinancing. These decreases are offset by an increase of $1,201,000 in interest expense due to the acquisition of the six properties. A gain of $422,000 was recorded on the sale of two properties in the fourth quarter of 1998. In connection with the sale of its investment in HCP to the Company immediately following completion of the offering, CSLC incurred short swing profits, as defined by the Securities and Exchange Commission, and was, accordingly, required to remit such profits to HCP, which recorded the remittance of $440,000 as other income in 1997. Minority interest. Minority interest in limited partnerships decreased $1,557,000, primarily due to the CSLC minority interest being included in 1997 through October and not included in 1998. Provision for income taxes. Provision for income taxes was approximately $7,476,000 in 1998 compared to $793,000 in 1997. As a result of the Formation Transactions, the Company and its consolidated subsidiaries were converted from S corporations that are taxed at the shareholder level to C corporations that are subject to corporate income taxes. Accordingly, a provision for federal and state taxes was provided on the earnings for 12 months in 1998 compared to two months in 1997. Net Income. As a result of the foregoing factors, net income increased $8,276,000 to $11,957,000 for 1998 from $3,681,000 for 1997. YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED DECEMBER 31, 1996 Revenues. Total revenues were $30,710,000 in 1997 compared to $19,899,000 in 1996, representing an increase of $10,811,000, or 54.3%. The inclusion of HCP revenues in 1997 from January 1, 1997 contributed $8,978,000 of the increase, as HCP was not consolidated in 1996. Resident and health care revenue increased $7,515,000, of which $4,702,000 is a result of the HCP consolidation, $1,157,000 was improvement in CSLC's revenues due to realization of additional reimbursements previously limited under the Medicare program for 1994 and 1992 combined with improved CSLC rental rates and occupancies and $1,543,000 related to the Maryland Gardens facility leased on June 1, 1997. Rental and lease income increased $3,175,000, of which $4,276,000 was due to the HCP consolidation, offset by $1,101,000 due to the sale of CSLC's multi-family properties on November 1, 1996. Unaffiliated management services revenue increased $1,119,000 due to 15 third-party management contracts added in the third and fourth quarter of 1996 and one additional third-party management contract added in the second quarter of 1997. Affiliated management services revenue decreased by $1,330,000, of which $1,177,000 was due to the HCP consolidation. Development fees increased $304,000 and was due to new development contract management revenue for managing the development and construction of new third-party owned senior living communities. Expenses. Total expenses were $25,904,000 in 1997 compared to $17,772,000 in 1996, representing an increase of $8,132,000, or 45.8%. The inclusion of HCP expenses from January 1, 1997 contributed $6,538,000 of the increase. Operating expenses increased $6,045,000 of which $4,251,000 was a result of the HCP consolidation and $1,561,000 due to Maryland Gardens operating expenses. General and administrative expenses increased $1,450,000, which was due to the HCP consolidation of $1,078,000 offset by an overall decrease in general and administrative expenses. Depreciation and amortization increased $637,000, of which $1,209,000 was related to the HCP consolidation, offset by a $572,000 decrease in CSLC's depreciation which was primarily due to the sale of CSLC's multi-family rental properties in November 1996. Other income and expenses. Interest income increased $2,754,000, primarily as a result of CSLC's increase in interest income of $1,116,754 associated with its investment in U.S. Treasury Bills, $1,230,000 as a result of the Company's increase in interest income associated with its increased investment in NHP Notes combined with the commencement of 30 33 accruing a portion of the deferred income on these notes beginning in April 1997, as a result of NHP's improved financial position and performance and increased valuation of the underlying properties, $288,361 associated with income from temporary investment of net proceeds from the Offering for November and December 1997, and the consolidation of HCP of $359,000. Interest expense increased $1,801,000 as a result of higher debt balances including the LBHI Loan borrowings on July 1, 1997 and $679,000 as a result of the HCP consolidation. Income from equity in earnings on investments decreased $459,000 as a result of the HCP consolidation on January 1, 1997. In connection with the sale of its investment in HCP to the Company immediately following completion of the Offering, CSLC incurred short swing profits, as defined by the Securities and Exchange Commission, and was, accordingly, required to remit such profits to HCP which recorded the remittance as other income. A gain of $438,000 was recorded on November 1, 1996, as a result of the sale of multi-family properties with no corresponding gain being realized in 1997. Minority interest. Minority interest in limited partnerships increased $712,000 primarily as a result of the HCP consolidation. Provision for income taxes. Provision for income taxes was approximately $793,000 in 1997 compared to no provision in 1996. As a result of the Formation Transactions, the Company and its consolidated subsidiaries were converted from S corporations that are taxed at the shareholder level to C corporations that are subject to corporate income taxes. Accordingly, a provision for federal and state income taxes is provided on earnings after the Formation Transactions. Net income. As a result of the foregoing factors, net income increased $1,628,000 to $3,681,000 for 1997 from $2,053,000 for 1996. QUARTERLY RESULTS The following table presents certain quarterly financial information for the four quarters ended December 31, 1998 and 1997. This information has been prepared on the same basis as the audited Consolidated Financial Statements of the Company appearing elsewhere in this report and include, in the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary to present fairly the quarterly results when read in conjunction with the audited Consolidated Financial Statements of the Company and the related notes thereto.
1998 Calendar Quarters ---------------------- First Second Third Fourth ----- ------ ----- ------ (in thousands, except per share amounts) Total revenues............................................... $ 8,354 $ 9,234 $10,556 $14,624 Income from operations....................................... 2,330 3,397 4,906 5,740 Net income................................................... 1,926 2,511 3,506 4,014 Net income per share......................................... $ 0.10 $ 0.13 $ 0.18 $ 0.20 Weighted average shares outstanding.......................... 19,717 19,717 19,717 19,717
1997 Calendar Quarters ---------------------- First Second Third Fourth ----- ------ ----- ------ (in thousands, except per share amounts) Total revenues............................................... $7,091 $7,977 $ 7,652 $ 7,990 Income from operations....................................... 1,124 980 959 1,743 Net income................................................... 583 630 797 1,671 Net income per share......................................... $ 0.06 $ 0.07 $ 0.09 $ 0.10 Weighted average shares outstanding.......................... 9,367 9,367 9,367 16,440
LIQUIDITY AND CAPITAL RESOURCES As described in the notes to the accompanying consolidated financial statements, the Company repaid all of its notes payable to affiliates and the mortgage loan payable to Lehman Brothers Holdings, Inc. with proceeds from the Offering in November 1997, leaving only the mortgage property loans of HCP outstanding thereafter. The Company also secured a three year revolving line of credit of $20 million which may be used for acquisition of additional interests in HCP and NHP, expansion of owned communities, acquisition of additional properties and general working capital purposes. 31 34 In addition to approximately $36 million of cash balances on hand as of December 31, 1998, the Company's principal sources of liquidity are expected to be cash flows from operations and amounts available for borrowing under its $20 million revolving line of credit. Subsequent to December 31, 1998, the Company received a commitment to increase its line of credit to $34 million. There can be no assurance, however, that the Company will continue to generate cash flows at or above current levels or that the Company will be able to meet its anticipated need for working capital. The Company derives the benefits and bears the risks attendant to the communities it owns. The cash flows and profitability of owned communities depends on the operating results of such communities and are subject to certain risks of ownership, including the need for capital expenditures, financing and other risks such as those relating to environmental matters. The cash flows and profitability of the Company's owned communities that are leased to third parties depend on the ability of the lessee to make timely lease payments. At December 31, 1998, HCP was operating one of its properties and had leased seven of its owned properties under triple net leases to third parties until year 2000 or 2001. Four of these properties are leased until year 2001 to HealthSouth Rehabilitation Corp. ("HealthSouth"), which provides acute spinal injury intermediate care at these properties. HealthSouth closed one of these facilities in 1994 and closed another facility in February of 1997 due to low occupancy. HealthSouth has continued to make lease payments on a timely basis for all four properties. Should the operators of the leased properties default on payment of their lease obligations prior to termination of the lease agreements, six of the seven lease contracts contain a continuing guarantee of payment and performance by the parent company of the operators, which the Company intends to pursue in the event of default. Following termination of these leases, the Company will either convert and operate the facilities as assisted living and Alzheimer's care facilities, sell the facilities or evaluate other alternatives. HCP's facility lessees are all current in their lease obligations to HCP. The lessee for one property continues to fund a deficit between the required lease payment and operators' cash flow. The cash flows and profitability of the Company's third-party management fees are dependent upon the revenues and profitability of the communities managed. While the management contracts are generally terminable only for cause, in certain cases the contracts can be terminated upon the sale of a community, subject to the Company's rights to offer to purchase such community. The Company plans to continue to develop and acquire senior living communities. The development of senior living communities typically involves a substantial commitment of capital over a 12-month construction period during which time no revenues are generated, followed by a 12- to 14- month lease-up period. Effective April 1, 1998, Tri Point Communities, L.P. ("Tri Point"), a limited partnership owned by the Company's founders (Messrs. Beck and Stroud) and their affiliates was reorganized and the interests of Messrs. Beck and Stroud were sold at their cost to Triad Senior Living, Inc. and its affiliates, which are unrelated third-parties. Tri Point was renamed Triad I. The new general partner of Triad I, owning 1%, is Triad Senior Living, Inc. The limited partners are Blake N. Fail (principal owner of Triad Senior Living, Inc.), owning 80%, and the Company, owning 19%. The development agreements between Triad I and the Company provide for a development fee of 4% to the Company, as well as reimbursement of expenses and overhead not to exceed 4%. Triad I has also entered into management agreements with the Company providing for management fees in an amount equal to the greater of 5% of gross revenues or $5,000 per month per community, plus overhead reimbursement not to exceed 1% of gross revenues. The Company has an option to purchase the partnership interests of Triad Senior Living, Inc. and Blake N. Fail for an amount equal to the amount such party paid for its interest, plus noncompounded interest of 12% per annum. The management agreements also provide the Company with an option to purchase the communities developed by Triad I upon their completion for an amount equal to the fair market value (based on a third-party appraisal but not less than hard and soft costs and lease-up costs). The Company has made no determination as to whether it will exercise its purchase options. The Company will evaluate the possible exercise of each purchase option based upon the business and financial factors that may exist at the time those options may be exercised. Triad I has entered into construction loan facilities aggregating approximately $50,000,000 to fund its development activities and a take-out facility aggregating approximately $50,000,000. During 1998, the Company agreed to loan Triad I up to $10,000,000. The principal is due March 12, 2003. The first draw under this loan facility was made on March 12, 1998. Interest is due quarterly at 8% per annum. This loan may 32 35 be prepaid without penalty. At December 31, 1998, approximately $9,636,000 has been advanced to Triad I under this loan facility. Effective September 24, 1998, the Company and Triad II, a limited partnership, entered into a Development and Turnkey Services Agreement in connection with the development and management of the Company's planned new Waterford communities where Triad II would own and finance the construction of the new communities. Triad II was organized on September 23, 1998. The general partner of Triad II, owning 1%, is Triad Partners II, Inc. The limited partners are Triad Partners II, Inc., owning 80%, and the Company, owning 19%. The Company has an option to purchase the partnership interests of Triad Partners II, Inc. in Triad II for an amount equal to the amount such party paid for its interests, plus noncompounded interest of 12% per annum. The management agreements with Triad II also provide the Company with an option to purchase the communities developed by Triad II upon their completion for an amount equal to the fair market value (based on a third-party appraisal but not less than hard and soft costs and lease-up costs). The Company has made no determination as to whether it will exercise its purchase options. The Company will evaluate the possible exercise of each purchase based upon the business and financial factors which may exist at the time those options may be exercised. Triad II has entered into construction and mini-perm loan facilities aggregating approximately $26,000,000 to fund its development activities. During the third quarter, the Company agreed to loan Triad II up to $7,000,000. On January 15, 1999, the loan amount was amended to up to $10,000,000. The principal is due September 25, 2003. The first draw under this loan facility was made on September 25, 1998. Interest is due quarterly at 10.5% per annum. This loan may be prepaid without penalty. At December 31, 1998, approximately $932,000 has been advanced to Triad II under this loan facility. On September 30, 1998, the Company acquired four senior living communities from NHP for $40,683,281 by entering into the $32,300,000 Lehman Loan, a cash payment of $8,246,007 and assumption of net assets and liabilities of $137,274. The Company has mortgaged the four senior living communities as collateral. The acquisition was accounted for as a purchase. On October 28, 1998, the Company acquired a senior living community from Tesson for $23,051,786. The Company borrowed $15,400,000 pursuant to the existing mortgage loan agreement with Lehman and mortgaged the senior living community as collateral. The Company also acquired a senior living community from Gramercy for $11,036,655. The Company assumed a $6,334,660 note from Fannie Mae, and borrowed an additional $1,980,000 from WMFC on a second lien basis and mortgaged the senior living community as collateral for both loans. The Company paid the remaining purchase prices with a cash payment of $7,376,632 and $2,425,798, respectively, and assumption of liabilities of $275,154 and $296,197, respectively. Effective November 10, 1998, the Company and Triad III, a limited partnership, entered into a Development and Turnkey Services Agreement in connection with the development and management of the Company's planned new Waterford communities where Triad III would own and finance the construction of the new communities. Triad III was organized on November 10, 1998. The general partner of Triad III, owning 1%, is Triad Partners III, Inc. The limited partners are Triad Partners III, Inc., owning 80%, and the Company, owning 19%. The Company has an option to purchase the partnership interests of Triad Partners III, Inc. in Triad III for an amount equal to the amount such party paid for its interests, plus noncompounded interest of 12% per annum. The management agreements with Triad III also provide the Company with an option to purchase the communities developed by Triad III upon their completion for an amount equal to the fair market value (based on a third-party appraisal but not less than hard and soft costs and lease-up costs). The Company has made no determination as to whether it will exercise its purchase options. The Company will evaluate the possible exercise of each purchase based upon the business and financial factors which may exist at the time those options may be exercised. Triad III has entered into construction and mini-perm loan facilities aggregating approximately $51,000,000 to fund its development activities. 33 36 During the fourth quarter, the Company agreed to loan Triad III up to $10,000,000. The principal is due February 8, 2004. Interest is due quarterly at 10.5% per annum. This loan may be prepaid without penalty. At December 31, 1998, no monies have been advanced to Triad III under this loan facility. Effective December 30, 1998, the Company and Triad IV, a limited partnership, entered into a Development and Turnkey Services Agreement in connection with the development and management of the Company's planned new Waterford communities where Triad IV would own and finance the construction of the new communities. Triad IV was organized on December 22, 1998. The general partner of Triad IV, owning 1%, is Triad Partners IV, Inc. The limited partners are Triad Partners IV, Inc., owning 80%, and the Company, owning 19%. The Company has an option to purchase the partnership interests of Triad Partners IV, Inc. in Triad IV for an amount equal to the amount such party paid for its interests, plus noncompounded interest of 12% per annum. The management agreements with Triad IV also provide the Company with an option to purchase the communities developed by Triad IV upon their completion for an amount equal to the fair market value (based on a third-party appraisal but not less than hard and soft costs and lease-up costs). The Company has made no determination as to whether it will exercise its purchase options. The Company will evaluate the possible exercise of each purchase based upon the business and financial factors which may exist at the time those options may be exercised. Triad IV is negotiating commitments for loan facilities aggregating up to $50,000,000 to fund its development activities. During the fourth quarter, the Company agreed to loan Triad IV up to $10,000,000. The principal is due December 30, 2003. The first draw under this loan facility was made on December 30, 1998. Interest is due quarterly at 10.5% per annum. This loan may be prepaid without penalty. At December 31, 1998, approximately $1,160,000 has been advanced to Triad IV under this loan facility. Net cash provided by operating activities, of $6,689,000 for the year ended December 31, 1998, decreased $2,994,000, or 31%, over that of the comparable year ended December 31, 1997, which was composed of increased cash flow created by improved earnings of $7,215,000 (after noncash adjustments) combined with $10,209,000 of cash derived from working capital. Net cash used in investing activities of $25,094,000 for the year ended December 31, 1998 decreased $56,408,000 over that of the comparable year ended December 31, 1997. This decrease was composed of increased capital expenditures of $3,586,000 primarily related to the Cottonwood expansion, the lack of comparable proceeds from sale of properties in 1997 compared to 1998's proceeds of $676,000, a decrease in investments in 1998 in limited partnerships (CSLC, HCP and NHP Notes) of $13,915,000, the $64,203,000 investment by the Company in restricted cash securities from the proceeds obtained from the LBHI Loan and the difference in 1997 for cash paid for the September 1998 purchase of assets acquired from NHP, and the October 1998 purchase of assets acquired from Tesson and Gramercy, offset by the November 1997 purchase of assets from CSLC and offset by HCP's beginning cash balance of $8,995,000 as a result of the consolidation of HCP at January 1, 1997 in the amount of $9,805,000. Net cash provided by financing activities, of $6,106,000 for the year ended December 31, 1998, decreased $103,019,000 over that of the comparable year ended December 31, 1997. This decrease was due to $110,331,000 of net proceeds received by the Company in November 1997 from the Offering. YEAR 2000 ISSUE The Year 2000 Issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's computer programs or hardware that have date- sensitive software or embedded chips may recognize the year 2000 as a date other than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. 34 37 Based on ongoing assessments, the Company has developed a program to modify or replace significant portions of its software and certain hardware, which are generally PC-based systems, so that those systems will properly recognize and utilize dates beyond December 31, 1999. The Company has substantially completed software reprogramming and software and hardware replacement as of December 31, 1998, with 100% completion targeted for September 30, 1999. The Company presently believes that these modifications and replacements of existing software and certain hardware will mitigate the Year 2000 Issue. However, if such modifications and replacements are not completed timely, the Year 2000 Issue could have a material impact on the operations of the Company. The costs of Year 2000 remediation are not expected to be material based on the Company's operations. The Company has assessed its exposure to operating equipment, and such exposure is not significant due to the nature of the Company's business. The Company is not aware of any external agent with a Year 2000 Issue that would materially impact the Company's results of operations, liquidity, or capital resources. However, the Company has no means of determining whether or ensuring that external agents will be Year 2000 ready. The inability of external agents to complete their Year 2000 resolution process in a timely fashion could materially impact the Company. Management of the Company believes it has an effective program in place to resolve the Year 2000 Issue in a timely manner. As noted above, the Company has completed most but not all necessary phases of its Year 2000 program. In the event that the Company does not complete the current program or any additional phases, the Company could incur disruptions to its operations. In addition, disruptions in the economy generally resulting from Year 2000 Issues could also materially adversely affect the Company. The Company could be subject to litigation for computer systems failure. The amount of potential liability and lost revenue cannot be reasonably estimated at this time. The Company currently has no contingency plans in place in the event it does not complete all phases of its Year 2000 program. The Company plans to evaluate the status of completion in mid-1999 and determine whether such a plan is necessary. IMPACT OF INFLATION To date, inflation has not had a significant impact on the Company. Inflation could, however, affect the Company's future revenues and results of operations because of, among other things, the Company's dependence on senior residents, many of whom rely primarily on fixed incomes to pay for the Company's services. As a result, during inflationary periods, the Company may not be able to increase resident service fees to account fully for increased operating expenses. In structuring its fees, the Company attempts to anticipate inflation levels, but there can be no assurance that the Company will be able to anticipate fully or otherwise respond to any future inflationary pressures. FORWARD LOOKING STATEMENTS Certain information contained in this report constitutes "Forward-Looking Statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which can be identified by the use of forward-looking terminology such as "may," "will," "expect," "anticipate," "estimate" or "continue" or the negative thereof or other variations thereon or comparable terminology. The Company cautions readers that forward looking statements, including, without limitation, those relating to the Company's future business prospects, revenues, working capital, liquidity, capital needs, interest costs, and income, are subject to certain risks and uncertainties that could cause actual results to differ materially from those indicated in the forward looking statements, due to several important factors herein identified, among others, and other risks and factors identified from time to time in the Company's reports filed with the Securities and Exchange Commission. 35 38 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's primary market risk exposure is interest rate risk. At December 31, 1998, the Company had $66,674,186 million of variable rate debt tied to LIBOR, consisting of one $18,974,186 revolving credit facility that matures on December 10, 2000 (the "Bank One Facility") and one $47,700,000 credit facility that matures on October 1, 1999 (the "Lehman Facility"). The Company expects to complete a refinancing of the Lehman Facility with long term fixed rate mortgage loans during the second quarter of 1999. However, there can be no assurance that the Company will complete this refinancing as expected. Interest on the Bank One Facility is based on LIBOR plus 1.7%. Interest on the Lehman Facility is based on LIBOR plus 1.875%. At December 31, 1998, the LIBOR rate was 5.08%. An increase in interest rates will increase the amount of interest expense incurred by the Company. Other notes payable of $14,415,847 consist of fixed rate mortgage loans. Notes receivable of $11,728,162 are also fixed rate financial instruments. The Company is also exposed to market risks from fluctuations in interest rates and the effects of those fluctuations on the market values of its cash equivalent short-term investments. The cash equivalent short-term investments consist primarily of overnight investments that are not significantly exposed to interest rate risk, except to the extent that changes in interest rates will ultimately affect the amount of interest income earned on these investments. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements are included under Item 14 of this Annual Report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE The Company had no disagreements on accounting or financial disclosure matters with its independent accountants to report under this Item 9. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information contained under the caption "Election of Directors" in the Proxy Statement is incorporated herein by reference in response to this Item 10. See also Item 1. ITEM 11. EXECUTIVE COMPENSATION Information contained under the captions "Executive Compensation" and "Election of Directors" in the Proxy Statement is incorporated herein by reference in response to this Item 11. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information contained under the caption "Principal Stockholders" in the Proxy Statement is incorporated herein by reference in response to this Item 12. 36 39 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information contained under the caption "Certain Relationships and Related Transactions" in the Proxy Statement is incorporated herein by reference in response to this Item 13. 37 40 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K The following documents are filed as part of this report: (1) Financial Statements: The response to this portion of Item 14 is submitted as a separate section of this report. See Index to Financial Statements at page F-1. (2) Financial Statement Schedules: All schedules have been omitted as the required information is inapplicable or the information is presented in the financial statements or related notes. (3) Exhibits: The exhibits listed on the accompanying index to exhibits at page E-1 are filed as part of this Report. (4) The Company filed the following reports on Form 8-K during the quarterly period ended December 31, 1998: (a) Current Report on Form 8-K, dated September 30, 1998, as subsequently amended. (b) Current Report on Form 8-K, dated October 29, 1998, as subsequently amended. 38 41 INDEX TO FINANCIAL STATEMENTS
PAGE ----- Consolidated Financial Statements of Capital Senior Living Corporation Report of Ernst & Young LLP, Independent Auditors................................................. F-2 Report of KPMG LLP, Independent Auditors.......................................................... F-3 Consolidated Balance Sheets - December 31, 1998 and 1997.......................................... F-4 Consolidated Statements of Income - December 31, 1998, 1997 and 1996.............................. F-5 Consolidated Statements of Shareholders' Equity - December 31, 1998, 1997 and 1996................ F-6 Consolidated Statements of Cash Flows - December 31, 1998, 1997 and 1996.......................... F-7 Notes to Consolidated Financial Statements........................................................ F-8
F-1 42 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Shareholders Capital Senior Living Corporation We have audited the accompanying consolidated balance sheets of Capital Senior Living Corporation as of December 31, 1998 and 1997, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the consolidated financial statements of HealthCare Properties, L.P. and subsidiaries, a 57% owned subsidiary, which statements reflect total assets of $32,758,958 and $32,801,853 as of December 31, 1998 and 1997, respectively, and total revenues of $8,787,575 and $8,977,628 for the years ended December 31, 1998 and 1997, respectively. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to data included for HealthCare Properties, L.P., is based solely on the report of the other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of other auditors, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Capital Senior Living Corporation as of December 31, 1998 and 1997, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. Ernst & Young LLP Dallas, Texas February 5, 1999, except for Notes 20 and 12, as to which the dates are February 7, 1999 and February 12, 1999, respectively F-2 43 INDEPENDENT AUDITORS' REPORT The Partners HealthCare Properties, L.P. We have audited the accompanying consolidated balance sheets of HealthCare Properties, L.P. and subsidiaries (a Delaware limited partnership) as of December 31, 1998 and 1997, and the related consolidated statements of income, partnership equity, and cash flows for each of the years in the two-year period ended December 31, 1998. These consolidated financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of HealthCare Properties, L.P. and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 1998, in conformity with generally accepted accounting principles. KPMG LLP Dallas, Texas February 5, 1999 F-3 44 CAPITAL SENIOR LIVING CORPORATION CONSOLIDATED BALANCE SHEETS ASSETS
DECEMBER 31, ---------------------------------- 1998 1997 ------------ ------------ Current assets: Cash and cash equivalents ....................................... $ 35,827,270 $ 48,125,225 Accounts receivable, net ........................................ 2,955,507 1,966,357 Accounts receivable from affiliates ............................. 7,217,127 26,696 Interest receivable ............................................. 535,857 229,749 Deferred taxes .................................................. 287,040 8,280 Prepaid expenses and other ...................................... 448,790 251,400 ------------ ------------ Total current assets .......................................... 47,271,591 50,607,707 Property and equipment, net ........................................ 118,943,953 41,120,448 Deferred taxes ..................................................... 10,108,715 10,090,997 Deferred interest .................................................. 853,075 173,456 Notes receivable from affiliates ................................... 11,728,162 -- Investments in limited partnerships ................................ 13,337,522 13,741,940 Management contract rights, net .................................... 195,631 243,559 Goodwill, net ...................................................... 1,213,876 1,257,595 Deferred financing charges, net .................................... 530,531 108,435 Other assets ....................................................... 1,083,679 26,773 ------------ ------------ Total assets ................................................ $205,266,735 $117,370,910 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable ................................................ $ 2,780,513 $ 2,566,392 Accrued expenses ................................................ 2,231,895 1,259,410 Current portion of notes payable ................................ 48,419,050 932,664 Customer deposits ............................................... 851,375 277,413 Federal and state income taxes payable .......................... 1,668,602 831,682 Due to affiliates ............................................... -- 50,064 ------------ ------------ Total current liabilities ................................... 55,951,435 5,917,625 Deferred income from affiliates .................................... 792,240 -- Deferred income .................................................... 115,062 231,256 Notes payable, net of current portion .............................. 13,696,797 5,744,767 Line of credit ..................................................... 18,974,186 1,830,130 Minority interest in consolidated partnerships ..................... 11,220,836 11,087,512 Commitments and contingencies Shareholders' Equity: Preferred stock, $.01 par value: Authorized shares - 15,000,000; no shares issued or outstanding -- -- Common stock, $.01 par value: Authorized shares - 65,000,000 Issued and outstanding shares - 19,717,347 in 1998 and 1997 .................................................... 197,173 197,173 Additional paid-in capital ...................................... 91,740,251 91,740,251 Retained earnings ............................................... 12,578,755 622,196 ------------ ------------ Total shareholders' equity .................................. 104,516,179 92,559,620 ------------ ------------ Total liabilities and shareholders' equity .................. $205,266,735 $117,370,910 ============ ============
See accompanying notes. F-4 45 CAPITAL SENIOR LIVING CORPORATION CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, ---------------------------------------------------------- 1998 1997 1996 ------------ ------------ ------------ Revenues: Resident and health care revenue ......................... $ 24,790,516 $ 21,206,865 $ 13,691,984 Rental and lease income .................................. 4,281,603 4,275,611 1,101,317 Unaffiliated management services revenue ................. 2,464,677 1,919,618 800,961 Affiliated management services revenue ................... 1,327,019 1,378,444 2,708,077 Unaffiliated development fees ............................ 1,234,050 803,767 673,587 Affiliated development fees .............................. 7,472,501 172,927 -- Other .................................................... 1,197,260 952,650 923,700 ------------ ------------ ------------ Total revenues ...................................... 42,767,626 30,709,882 19,899,626 Expenses: Operating expenses ....................................... 17,067,451 16,701,127 10,656,431 General and administrative expenses ...................... 6,593,810 7,084,986 5,634,873 Depreciation and amortization ............................ 2,733,658 2,117,288 1,481,056 ------------ ------------ ------------ Total expenses ...................................... 26,394,919 25,903,401 17,772,360 ------------ ------------ ------------ Income from operations ..................................... 16,372,707 4,806,481 2,127,266 Other income (expense): Interest income .......................................... 4,938,989 3,185,815 432,342 Interest expense ......................................... (1,921,897) (2,022,494) (221,521) Gain on sale of properties ............................... 421,718 -- 437,819 Equity in earnings on investments ........................ -- -- 458,992 Other .................................................... -- 440,007 42,042 ------------ ------------ ------------ Income before income taxes and minority interest in consolidated partnerships ................................ 19,811,517 6,409,809 3,276,940 Provision for income taxes ................................. (7,475,771) (792,524) -- ------------ ------------ ------------ Income before minority interest in consolidated partnerships 12,335,746 5,617,285 3,276,940 Minority interest in consolidated partnerships ............. (379,187) (1,936,122) (1,223,997) ------------ ------------ ------------ Net income ................................................. $ 11,956,559 $ 3,681,163 $ 2,052,943 ============ ============ ============ Net income per share: Basic and diluted ........................................ $ 0.61 $ 0.33 ============ ============ Weighted average shares outstanding ..................... 19,717,347 11,150,087 ============ ============ Pro forma net income (unaudited): Net income ............................................... $ 3,681,163 $ 2,052,943 Pro forma income taxes ................................... (964,776) (810,912) ------------ ------------ Pro forma net income ....................................... $ 2,716,387 $ 1,242,031 ============ ============
See accompanying notes. F-5 46 CAPITAL SENIOR LIVING CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
COMMON STOCK ADDITIONAL RETAINED PARTNERS' ---------------------------- PAID-IN EARNINGS CAPITAL SHARES AMOUNT CAPITAL (DEFICIT) ------------- ------------- ------------- ------------- ------------- Balance at January 1, 1996 .................. $ 14,655,669 1,680,000 $ 16,800 $ (13,242) $ (211,849) Issuance of common stock ................. -- -- -- 16,800 -- Capital contributions .................... -- -- -- 23,000 -- Purchase of Beneficial Unit Certificates of CSLC ................... 660,403 -- -- -- -- Net income ............................... 1,941,706 -- -- -- 111,237 ------------- ------------- ------------- ------------- ------------- Balance at December 31, 1996 ................ 17,257,778 1,680,000 16,800 26,558 (100,612) Purchase of Beneficial Unit Certificates of CSLC ................... 374,867 -- -- -- -- Distributions prior to Offering .......... -- -- -- -- (457,647) Issuance of stock resulting from the Formation .............................. -- 7,687,347 76,873 (76,873) -- Issuance of stock in Offering, net ....... -- 10,350,000 103,500 110,227,415 -- Equity not retained in Asset Purchase .... (20,133,353) -- -- (18,436,849) -- Net income ............................... 2,500,708 -- -- -- 1,180,455 ------------- ------------- ------------- ------------- ------------- Balance at December 31, 1997 ................ -- 19,717,347 197,173 91,740,251 622,196 Net income ............................... -- -- -- -- 11,956,559 ------------- ------------- ------------- ------------- ------------- Balance at December 31, 1998 ................ $ -- 19,717,347 $ 197,173 $ 91,740,251 $ 12,578,755 ============= ============= ============= ============= =============
TOTAL ------------- Balance at January 1, 1996 .................. $ 14,447,378 Issuance of common stock ................. 16,800 Capital contributions .................... 23,000 Purchase of Beneficial Unit Certificates of CSLC ................... 660,403 Net income ............................... 2,052,943 ------------- Balance at December 31, 1996 ................ 17,200,524 Purchase of Beneficial Unit Certificates of CSLC ................... 374,867 Distributions prior to Offering .......... (457,647) Issuance of stock resulting from the Formation .............................. -- Issuance of stock in Offering, net ....... 110,330,915 Equity not retained in Asset Purchase .... (38,570,202) Net income ............................... 3,681,163 ------------- Balance at December 31, 1997 ................ 92,559,620 Net income ............................... 11,956,559 ------------- Balance at December 31, 1998 ................ $ 104,516,179 =============
See accompanying notes. F-6 47 CAPITAL SENIOR LIVING CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, ----------------------------------------------- 1998 1997 1996 ------------- ------------- ------------- OPERATING ACTIVITIES Net income ............................................................. $ 11,956,559 $ 3,681,163 $ 2,052,943 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation ......................................................... 2,639,883 1,894,665 1,397,258 Amortization ......................................................... 93,775 222,623 83,798 Amortization of deferred financing charges ........................... 163,708 -- -- Minority interest in consolidated partnerships ....................................................... 379,187 1,936,122 1,223,997 Deferred interest .................................................... (679,619) (173,456) -- Deferred income from affiliates ...................................... 792,240 -- -- Deferred income ...................................................... (116,194) 231,256 -- Deferred income taxes ................................................ (296,478) (39,158) -- Equity in earnings on investments .................................... -- -- (458,992) Gain on sale of land ................................................. (421,718) -- (437,819) Provision for bad debts .............................................. 500,000 43,254 22,312 Changes in operating assets and liabilities, net of acquisitions: Cash, restricted .................................................. -- 186,416 (2,588) Accounts receivable ............................................... (1,481,883) (1,556,965) (219,854) Accounts receivable from affiliates ............................... (7,190,431) 90,955 58,811 Interest receivable ............................................... (306,108) -- -- Prepaid expenses and other ........................................ 4,110 (373,006) 23,359 Other assets ...................................................... (1,059,034) (11,454) (14,940) Accounts payable .................................................. 361,798 2,698,550 85,328 Accrued expenses .................................................. 525,944 23,529 (5,402) Federal and state income taxes payable ............................ 836,920 831,682 -- Customer deposits ................................................. 36,812 28,955 32,295 Due to affiliates ................................................. (50,064) (31,392) 61,310 ------------- ------------- ------------- Net cash provided by operating activities .............................. 6,689,407 9,683,739 3,901,816 INVESTING ACTIVITIES Capital expenditures ................................................... (6,027,361) (2,441,106) (851,732) Cash paid for acquisition of NHP facilities ............................ (40,546,007) -- -- Cash paid for acquisition of Gramercy facility ......................... (4,405,798) -- -- Cash paid for acquisition of Tesson facility ........................... (22,776,633) -- -- Proceeds from sale of land ............................................. 676,036 -- 2,549,352 Advances to affiliates ................................................. (11,728,162) -- -- Cash acquired upon acquisition of HCP .................................. -- 8,995,455 -- Investment in restricted cash equivalents .............................. -- (64,202,763) -- Cash paid for Asset Purchase and cash not retained ..................... -- (8,244,077) -- Investments in limited partnerships .................................... (1,693,934) (15,609,034) (3,401,207) ------------- ------------- ------------- Net cash used in investing activities .................................. (86,501,859) (81,501,525) (1,703,587) FINANCING ACTIVITIES Proceeds from notes payable and line of credit ......................... 67,039,026 78,663,883 -- Repayments of notes payable and line of credit ......................... (791,214) (77,363,736) (145,319) Repayments of notes payable to affiliates .............................. -- (1,166,481) (455,592) Proceeds from notes payable to affiliates .............................. -- 500,000 470,000 Distributions to minority partners ..................................... -- (224,795) -- Distributions prior to Offering ........................................ -- (457,647) -- Issuance of common stock, net .......................................... -- 110,330,915 16,800 Capital contribution ................................................... -- -- 23,000 Cash received for redemption of NHP limited ............................ 1,997,280 -- -- partnership interest Repurchase of HCP limited partnership interests by HCP ................. (144,791) -- -- Repurchase of Beneficial Unit Certificates of CSLC ..................... -- (960,752) (1,262,355) Deferred loan charges paid ............................................. (585,804) (196,888) (42,953) ------------- ------------- ------------- Net cash provided by (used in) financing activities .................... 67,514,497 109,124,499 (1,396,419) ------------- ------------- ------------- (Decrease) increase in cash and cash equivalents ....................... (12,297,955) 37,306,713 801,810 Cash and cash equivalents at beginning of year ......................... 48,125,225 10,818,512 10,016,702 ------------- ------------- ------------- Cash and cash equivalents at end of year ............................... $ 35,827,270 $ 48,125,225 $ 10,818,512 ============= ============= ============= SUPPLEMENTAL DISCLOSURES Cash paid during the year for: Interest ............................................................. $ 1,956,812 $ 2,041,366 $ 188,510 ============= ============= ============= Income taxes ......................................................... $ 6,935,330 $ -- $ -- ============= ============= =============
See accompanying notes F-7 48 CAPITAL SENIOR LIVING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION, FORMATION AND INITIAL PUBLIC OFFERING Capital Senior Living Corporation, a Delaware corporation, was incorporated on October 25, 1996. The accompanying financial statements include the consolidated financial statements of Capital Senior Living Corporation ("Corporation"); Capital Senior Living Properties, Inc. including HealthCare Properties, L.P. ("HCP") (as of January 1, 1997); Capital Senior Living, Inc. ("Living"); Quality Home Care, Inc. ("Quality"); Capital Senior Development, Inc. ("Development"); Capital Senior Management 1, Inc. ("Management 1"); Capital Senior Management 2, Inc. ("Management 2"); Capital Senior Living Properties 2, Inc. ("Properties 2"), which includes Capital Senior Living Properties 2-Gramercy, Inc. ("Gramercy") and Capital Senior Living Properties 2-NHPCT, Inc. ("NHPCT") (collectively referred to with Capital Senior Living Corporation as the "Company"). The accompanying financial statements are presented on a combined basis prior to November 5, 1997, and include Capital Senior Living Communities, L.P. ("CSLC") through that date. CSLC included the accounts of CSLC and HCP. All material intercompany balances and transactions have been eliminated in consolidation. The Company is a provider of senior living services. The Company owns, operates, develops and manages senior living communities throughout the United States. The Company completed the registration of its common stock in an initial public offering ("Offering") on November 5, 1997. Simultaneously with the closing of the Offering, Corporation acquired Living, Quality, Development, Management 1, and Management 2 ("Formation") in exchange for 7,687,347 shares of common stock and a note payable for $18,076,380 ("Formation Note") to Jeffrey L. Beck and James A. Stroud or a related trust (collectively, the "Stockholders") and Lawrence A. Cohen, all officers of the Company. Additionally, Corporation purchased substantially all of the assets, other than working capital items, of CSLC (the "Asset Purchase") for the assumption of a $70,833,752 note payable and a cash payment of $5,782,927. The Stockholders owned 46% of the common stock of the Company after the Offering. Due to all of these entities being under the common control of the Stockholders for all periods presented prior to the Offering, these consolidated financial statements reflect the assets and liabilities at their historical values and the accompanying consolidated statements of income, equity, and cash flows reflect the consolidated results for the periods indicated even though they have historically operated as separate entities prior to the Formation. The Formation was accounted for at historical cost in a manner similar to a pooling of interests to the extent of the percentage ownership by the Stockholders. The Asset Purchase was recorded at fair value to the extent of the minority interest. A step-up in basis of $9,282,202 was recorded for property and equipment and $2,692,669 for the investment in NHP Notes. Additionally, a deferred tax asset of $10,060,119 and goodwill of $1,264,881 was recorded. Assets that were not acquired from CSLC in the Asset Purchase that were combined in the financial statements until such date were charged to paid-in capital. CSLC's assets included investments in HCP and NHP Retirement Housing Partners I, L.P. ("NHP") which were acquired in the Asset Purchase. NHP owned a portfolio of five independent senior living communities. On September 30, 1998, the Company purchased four of the five independent senior living communities from NHP (See Note 4). In the accompanying consolidated financial statements, HCP is consolidated as though the Company had acquired a controlling financial interest in HCP at January 1, 1997. At December 31, 1998, 1997 and 1996, the Company owned approximately 57%, 56% and 31% of HCP's limited partner units, respectively. Preacquisition earnings for 1997 applicable to HCP are included in minority interest. HCP is a Delaware limited partnership established for the purpose of acquiring, leasing and operating existing or newly constructed long-term healthcare properties. One property is operated by HCP and seven properties are leased to qualified operators who provide specialized healthcare services. Capital Realty Group Senior Housing, Inc. ("Housing"), an entity controlled by the Stockholders until June 10, 1998, is the general partner. On June 10, 1998, Housing's parent corporation, Capital Realty Group Corporation, sold 100% of its stock in Housing to an unrelated third party. The Company continues to consolidate HCP at December 31, 1998, since it still maintains a controlling financial interest. F-8 49 CAPITAL SENIOR LIVING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) HCP and NHP are subject to the reporting obligations of the Securities and Exchange Commission. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Cash and Cash Equivalents Investments with original maturities of three months or less are considered to be cash equivalents. The Company has deposits in banks that exceed Federal Deposit Insurance Corporation insurance limits. Management believes that credit risk related to these deposits is minimal. Long-Lived Assets Property and equipment are stated at cost and depreciated on a straight-line basis over the estimated useful lives of the assets. The estimated useful lives are 30 to 40 years for buildings, 20 years for land improvements and 5 to 10 years for furniture, equipment and automobiles. Management contract rights are stated at cost and amortized on a straight-line basis over their respective contract lives. Accumulated amortization for management contract rights at December 31, 1998 and 1997, was $320,532 and $272,604, respectively. Goodwill is the excess purchase price over the fair value of the assets acquired in the Asset Purchase to the extent of the minority interest and is amortized over 30 years on a straight-line basis. Accumulated amortization for goodwill at December 31, 1998 and 1997, was $51,005 and $7,286, respectively. At each balance sheet date, the Company reviews the carrying value of its management contract rights, goodwill, and property and equipment to determine if facts and circumstances suggest that they may be impaired or that the amortization or depreciation period may need to be changed. The Company considers external factors relating to each asset, including contract changes, local market developments, and other publicly available information. If these external factors indicate the intangible assets or property and equipment will not be recoverable, the carrying value of the intangible assets or property and equipment will be analyzed and adjusted accordingly. During 1996, management contract rights of $44,755 were written off due to the termination of a certain contract that has been reflected as additional amortization expense. The Company does not believe there are any indicators that would require an adjustment to the carrying value of the management contract rights, goodwill or property and equipment or their remaining useful lives as of December 31, 1998. Income Taxes The Company accounts for income taxes under the liability method. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. CSLC and HCP are partnerships and, consequently, are not subject to income taxes. Taxable income or loss is directly allocated to the individual partners. Prior to the Formation, Living, Quality, Development, Management 1 and Management 2 were S corporations and consequently, were not subject to income taxes. Thus, taxable income or loss is directly allocated to the individual stockholders. Upon Formation, these corporations converted from S corporations to C corporations. A deferred tax benefit of $41,085 was recorded in the consolidated statements of income upon conversion. F-9 50 CAPITAL SENIOR LIVING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Revenue Recognition Resident and healthcare revenue is recognized at estimated net realizable amounts due from residents in the period to which the rental and other services are provided. Revenues from the Medicare and Medicaid programs accounted for 16% and 22% in 1998 and 1997, respectively, and less than 10% in 1996 of the Company's net revenues. One community is a provider of services under the Indiana Medicaid program. Accordingly, the community is entitled to reimbursement under the foregoing program at established rates that are lower than private pay rates. Patient service revenue for Medicaid patients is recorded at the reimbursement rates as the rates are set prospectively by the state upon the filing of an annual cost report. Two communities are providers of services under the Medicare program and are entitled to reimbursement under the foregoing programs in amounts determined based on the filing of an annual cost report prepared in accordance with federal regulations, which reports are subject to audit and retroactive adjustments in future periods. Revenue from the Medicare program is recorded at established rates and adjusted for differences between such rates and estimated amounts reimbursable from the program. Any differences between estimated and actual reimbursements are included in operations in the year of settlement, which have not been material. Under federal regulations, Medicare reimbursements to these facilities are limited to routine cost limits determined on a geographical region. The Company has filed exception reports to request reimbursement in excess of its routine cost limits for the years 1992 through 1997, as of December 31, 1998, and recorded revenue of approximately $43,000 in 1998, as a result of being granted exception requests for 1997 and approximately $346,000 in 1997, as a result of being granted exception requests for 1992 and 1994. There can be no assurance that an exception to a facility's routine cost limits will be granted. CSLC retained cost report exposure for cost years prior to the Offering. Laws and regulations governing the Medicare and Medicaid programs are complex and subject to interpretation. The Company believes that it is in compliance with all applicable laws and regulations and is not aware of any pending or threatened investigations involving allegations of potential wrongdoing. While no such regulatory inquiries have been made, compliance with such laws and regulations can be subject to future government review and interpretation as well as significant regulatory action including fines, penalties, and exclusion from the Medicare and Medicaid programs. Management services revenue, resident and healthcare revenue and development fees are recognized when earned. Management services revenue relates to providing certain management and administrative support services under management contracts, which have terms expiring through 2002. Management services revenue is shown net of reimbursed expenses. The reimbursed expenses from affiliates were $11,031,136, $3,892,526 and $6,477,199, for the years ended December 31, 1998, 1997 and 1996, respectively. Reimbursed expenses from unaffiliated parties were $14,689,953, $8,941,343 and $2,600,529, for the years ended December 31, 1998, 1997 and 1996, respectively. Credit Risk The Company's resident receivables are generally due within 30 days and development fee receivables are due at completion of construction, which is generally one year. The Company does not require collateral. Credit losses have been within management's expectations, and management believes that the allowance for doubtful accounts adequately provides for any expected losses. Advertising Advertising expenses are expensed as incurred. Advertising expenses for the years ended December 31, 1998, 1997 and 1996 were $243,720, $336,738 and $210,028, respectively. F-10 51 CAPITAL SENIOR LIVING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Net Income Per Share Basic net income per share is calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted net income per share considers the dilutive effect of outstanding options calculated using the treasury stock method. Net income per share for periods prior to 1997 are not comparable to subsequent period amounts due to the Company's Formation and Offering in October 1997 and, consequently, are not included. Stock-Based Compensation The Company has elected to follow the intrinsic value method in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related interpretations in accounting for its employee stock options. In accordance with APB 25, since the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. The Company has adopted the disclosure-only provisions for the fair value method of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("FASB 123"). Segment Information Effective January 1, 1998, the Company adopted the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("Statement 131"). Statement 131 superseded FASB Statement No. 14, "Financial Reporting for Segments of a Business Enterprise". Statement 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. Statement 131 also establishes standards for related disclosures about products and services, geographic areas and major customers. The adoption of Statement 131 did not affect results of operations or financial position, but did affect the disclosure of enterprise-wide information. The Company evaluates the performance and allocates resources of its senior living facilities based on current operations and market assessments on a property-by-property basis. The Company does not have a concentration of operations geographically or by product or service as its management functions are integrated at the property level. Affiliated development fees in the accompanying statements of income represents development fees earned from the Triad partnerships. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Reclassifications Certain prior year amounts have been reclassified to conform to 1998 presentation. F-11 52 CAPITAL SENIOR LIVING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. TRANSACTIONS WITH AFFILIATES Effective April 1, 1998, the Company obtained a 19% limited partnership interest in Triad Senior Living I, L.P. ("Triad I") for $330,243 in cash. The Company is accounting for this investment under the equity method of accounting based on the provisions of the Triad I partnership agreement. The Company is developing senior living communities for Triad I. Additionally, the Company loaned money to Triad I pursuant to an unsecured loan facility not to exceed $10,000,000. The principal is due March 12, 2003. The first draw under this loan facility was made on March 12, 1998. Interest is due quarterly at 8% per annum. This loan may be prepaid without penalty. At December 31, 1998, $9,635,799 has been advanced to Triad I under this loan facility. The Company has deferred interest income and development fees from Triad I of $67,253 and $222,550, respectively, as of December 31, 1998. Effective September 23, 1998, the Company obtained a 19% limited partnership interest in Triad Senior Living II, L.P. ("Triad II") for $74,100 in cash. The Company is accounting for this investment under the equity method of accounting based on the provisions of the Triad II partnership agreement. The Company is developing senior living communities for Triad II. Additionally, the Company loaned money to Triad II pursuant to an unsecured loan facility not to exceed $7,000,000, which was increased to $10,000,000 on January 15, 1999. The principal is due September 25, 2003. The first draw under this loan facility was made on September 25, 1998. Interest is due quarterly at 10.5% per annum. This loan may be prepaid without penalty. At December 31, 1998, $932,201 has been advanced to Triad II under this loan facility. The Company has deferred interest income and development fees from Triad II of $3,149 and $94,913 respectively, as of December 31, 1998. Effective November 10, 1998, the Company obtained a 19% limited partnership interest in Triad Senior Living III, L.P. ("Triad III") for $142,500 in cash. The Company is accounting for this investment under the equity method of accounting based on the provisions of the Triad III partnership agreement. The Company is developing senior living communities for Triad III. Additionally, the Company loaned money to Triad III pursuant to an unsecured loan facility not to exceed $10,000,000. The principal is due February 8, 2004. The first draw under this loan facility will be made, subsequent to December 31, 1998, on February 8, 1999. Interest is due quarterly at 10.5% per annum. This loan may be prepaid without penalty. At December 31, 1998, no monies have been advanced to Triad III under this loan facility. The Company has deferred development fees from Triad III of $162,532 as of December 31, 1998. Effective December 22, 1998, the Company obtained a 19% limited partnership interest in Triad Senior Living IV, L.P. ("Triad IV") for $142,500 in cash. The Company is accounting for this investment under the equity method of accounting based on the provisions of the Triad IV partnership agreement. The Company is developing senior living communities for Triad IV. Additionally, the Company loaned money to Triad IV pursuant to an unsecured loan facility not to exceed $10,000,000. The principal is due December 30, 2003. The first draw under this loan facility was made on December 30, 1998. Interest is due quarterly at 10.5% per annum. This loan may be prepaid without penalty. At December 31, 1998, $1,160,162 has been advanced to Triad IV under this loan facility. The Company has deferred interest income and development fees from Triad IV of $129 and $237,558, respectively as of December 31, 1998. The Company has options to purchase properties from the above Triad partnerships at fair value. The Company also can purchase the partnership interests of the non-Company partners for an amount equal to the amount such party paid for its interest, plus noncompounded interest of 12% per annum. The Company provides a guarantee of its subsidiaries' completing of construction guarantee and operating deficit agreement. The Company has no commitments or obligations to acquire any properties or additional partnership interests. Also, the Company has no commitments relating to any of the secured loan facilities of any of the above Triad partnerships. F-12 53 CAPITAL SENIOR LIVING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. ACQUISITIONS On September 30, 1998, the Company acquired four senior living communities from NHP for $40,683,281 by entering into a $32,300,000 mortgage loan agreement with Lehman Brothers Holdings, Inc. ("Lehman"), a cash payment of $8,246,007 and assuming net liabilities of $137,274. The acquisition was accounted for as a purchase. The Company's preliminary purchase price allocation was based on independent valuations from third party valuation firms. On October 28, 1998, the Company acquired a senior living community from Tesson Heights Enterprises, a Texas limited partnership, for $23,051,786, by borrowing $15,400,000 pursuant to the existing mortgage loan agreement with Lehman and $7,376,632 under an existing line of credit and assuming $275,154 of net liabilities. The Company also acquired a senior living community from Gramercy Hill Enterprises, a Texas limited partnership, for $11,036,655, by assuming a $6,334,660 note, along with borrowing $1,980,000 from WMF Washington Mortgage Corp. ("WMF") on a second lien basis and $2,425,798 under an existing line of credit and assuming net liabilities of $296,197. The acquisitions were accounted for as a purchase. The Company's preliminary purchase price allocations were based on independent valuations from third party valuation firms. The results of operations for the above acquisitions are included in the Company's statement of income from the date of acquisition. Pro forma results of operations as if the NHP, Tesson Heights and Gramercy Hill acquisitions had occurred on January 1, 1997 are as follows:
YEAR ENDED DECEMBER 31, ----------------------------------- 1998 1997 ---------------- --------------- Total revenues........................................................ $56,559,920 $47,082,786 Net income............................................................ 11,518,250 946,143 Net income per share.................................................. $ 0.58 $ 0.08 Shares used in computing pro forma net income per share............... 19,717,347 11,150,087
The unaudited pro forma consolidated amounts are presented for informational purposes only and do not necessarily reflect the financial position or results of operations of the Company which would have actually resulted had the acquisitions occurred on January 1, 1997. F-13 54 CAPITAL SENIOR LIVING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. PROPERTY AND EQUIPMENT Property and equipment consists of the following:
DECEMBER 31, --------------------------- 1998 1997 ------------ ------------ Land ................................... $ 10,641,671 $ 2,777,087 Land improvements ...................... 6,400 3,906 Buildings and building improvements .... 119,759,970 47,562,214 Furniture and equipment ................ 4,685,174 2,387,485 Automobiles ............................ 73,890 -- Construction in process ................ 71,611 2,049,574 ------------ ------------ 135,238,716 54,780,266 Less accumulated depreciation .......... 16,294,763 13,659,818 ------------ ------------ Property and equipment, net ............ $118,943,953 $ 41,120,448 ============ ============
On November 24, 1998, the Company sold land on one of its properties for $738,385. This sale resulted in a $415,847 gain and net cash proceeds of $664,984. On December 7, 1998, the Company sold land on another one of its properties for $12,662. This sale resulted in the recognition of a $8,545 gain and net cash proceeds of $11,052. The Company capitalized $348,626 of interest as part of building and building improvements during 1998. 6. ACCRUED EXPENSES Accrued expenses consists of the following:
DECEMBER 31, -------------------------------- 1998 1997 ------------- -------------- Accrued salaries, bonuses and related expenses............................. $ 847,722 $ 432,249 Accrued property taxes..................................................... 538,697 493,796 Other...................................................................... 845,476 333,365 ------------- -------------- $2,231,895 $1,259,410 ============= ==============
7. NOTES PAYABLE AND LINE OF CREDIT Notes payable consists of the following:
DECEMBER 31, ------------------------- 1998 1997 ----------- ----------- Lehman $60 million mortgage loan, bearing interest at prime or LIBOR plus 1.875% (6.95% at December 31, 1998); payable in monthly installments of interest only, maturing on October 1, 1999, secured by the certain properties of NHPCT ...................................................... $47,700,000 $ -- installments of principal and interest of $48,089, maturing on January 2008 secured by a certain property of Gramercy ....... 6,312,032 -- WMF second mortgage loan, bearing interest at 7.08%; payable in monthly installments of principal and interest of $14,095, maturing on January 2010 secured by a certain property of Gramercy ........ 1,975,159 -- HCP mortgage loans, bearing interest ranging from 6.2% to 10.75%; payable in monthly installments of $99,212 including interest, maturing from 2001 to 2012 Secured by certain properties of HCP ...................................... 6,128,656 6,677,431 ----------- ----------- 62,115,847 6,677,431 Less current portion ............................................................ 48,419,050 932,664 ----------- ----------- $13,696,797 $ 5,744,767 =========== ===========
F-14 55 CAPITAL SENIOR LIVING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The aggregate maturities of notes payable at December 31, 1998, are as follows: 1999 $48,419,050 2000 675,909 2001 561,856 2002 414,654 2003 455,512 Thereafter 11,588,866 ----------- $62,115,847 ===========
In connection with obtaining the Lehman and other 1998 mortgage loans, the Company incurred $569,896 in deferred financing charges, which are amortized over the life of the loans using the straight-line method. Accumulated amortization was $123,727 at December 31, 1998. On December 10, 1997, the Company entered into a $20 million revolving line of credit with a bank that expires December 10, 2000. Subsequent to December 31, 1998, the Company received a commitment to increase its line of credit to $34 million. Borrowings under the line of credit are secured by three senior living communities and bear interest at the prime rate or LIBOR plus 1.7% (7.33% and 7.42% at December 31, 1998 and 1997, respectively). The line of credit may be used for acquisition of additional interests in HCP and NHP, acquisition of additional properties, development of expansions to existing properties and general working capital purposes. Amounts outstanding under the line of credit at December 31, 1998 and 1997, were $18,974,186 and $1,830,130, respectively. In connection with obtaining the line of credit, the Company incurred $6,847 and $111,533 in 1998 and 1997, respectively, in deferred financing charges, which are amortized over the life of the line of credit. Accumulated amortization was $41,066 and $3,098 at December 31, 1998 and 1997, respectively. Under the line of credit, the Company must maintain certain levels of tangible net worth and comply with other restrictive covenants. On June 30, 1997, CSLC entered into a $77,000,000 mortgage loan agreement with Lehman Brothers Holdings, Inc., and pledged four senior living communities and its investments in HCP and NHP as collateral. Subsequent to June 30, 1997, $70,800,000 was advanced under this loan agreement; $5,500,000 was used to repay a mortgage loan and $64,500,000 was used to fund the liquidity requirement under the loan agreement through the purchase of three-month U.S. Treasury Securities. The U.S. Treasury Securities were sold under a repurchase agreement with a term equal to their maturity. The repurchase agreement was cancelled and the outstanding debt was assumed and repaid by the Corporation from the proceeds of the Offering. The U.S. Treasury Securities reverted to CSLC for use or disposition as determined by CSLC, and the Company has no interest in such securities. F-15 56 CAPITAL SENIOR LIVING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) HCP leases four of its properties under a master lease. The rentals under the master lease provide additional security for two notes payable used to finance two of the master lease properties. These notes are due December 1, 2001. 8. EQUITY The Company is authorized to issue preferred stock in series and to fix and state the voting powers and such designations, preferences and relative participating, optional or other special rights of the shares of each such series and the qualifications, limitations and restrictions, thereof. Such action may be taken by the Board without stockholder approval. On November 5, 1997, the Company issued 10,350,000 shares of $.01 par value common stock for cash of $110,330,915, net of issuance costs of $11,317,705 and payment of the Formation Note of $18,076,380, in connection with the Offering. Additionally, the Company issued 7,687,347 shares of $.01 par value common stock in connection with the Formation. For financial reporting purposes, the shares issued in connection with the Formation are presented as outstanding as of January 1, 1997. During 1996, the Company issued 1,680,000 shares of $.01 par value common stock for $16,800 in cash. For financial reporting purposes, as the combined entities were under common control, the Company's common stock is presented as outstanding as of January 1, 1996. Common stock reserved for future issuance is 1,565,000 for stock options. The rights, preferences and privileges of holders of common stock are subject to the rights of the holders of Preferred Stock. Purchases of Beneficial Unit Certificates ("BUCs") of CSLC during 1997 and 1996 represent additional purchases by the Stockholders and are accounted for at the book value of the BUCs and as an addition to partners' capital and a reduction in minority interest. CSLC purchased 55,316 BUCs for $960,762 during 1997, at an average cost of $17.37 per unit. CSLC purchased 91,854 BUCs for $1,262,355 during 1996, at an average cost of $13.74 per unit. Net income (loss) of HCP is generally allocated 98% to the limited partners and 2% to the general partner. The net income of HCP from the disposition of a property is allocated: (i) to partners with deficit capital accounts on a pro rata basis; (ii) to limited partners until they have been paid an amount equal to the amount of their adjusted investment (as defined); (iii) to the limited partners until they have been allocated income equal to their 12% Liquidation Preference; and (iv) thereafter, 80% to the limited partners and 20% to the general partner. The net loss of HCP from the disposition of a property is allocated: (i) to partners with positive capital accounts on a pro rata basis and (ii) thereafter, 98% to the limited partners and 2% to the general partner. Distributions of available cash flow are generally distributed 98% to the limited partners and 2% to the general partner, until the limited partners have received an annual preferential distribution, as defined. Thereafter, available cash flow is distributed 90% to the limited partners and 10% to the general partner. During 1998, HCP repurchased $144,791 of its limited partnership interests. HCP made a $224,795 distribution in 1997 to minority partners. 9. STOCK OPTIONS The Company adopted a stock option plan during 1997, providing for the grant of incentive and nonqualified stock options to employees and directors. This plan provides for the grant of options to purchase up to 1,565,000 shares. The option exercise price and vesting provisions of such options are fixed when the option is granted. The options expire ten years from the date of grant and vest from zero to five years. The option exercise price is the fair market value of a share of common stock on the date the option is granted. F-16 57 CAPITAL SENIOR LIVING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) A summary of the Company's stock option activity, and related information for the years ended December 31, 1998 and 1997, is presented below:
WEIGHTED AVERAGE SHARES EXERCISE PRICE --------- -------------- Outstanding at January 1, 1997 -- -- Granted 776,250 $ 13.50 Exercised -- -- Forfeited -- -- Expired -- -- --------- --------- Outstanding at December 31, 1997 776,250 $ 13.50 Granted -- Exercised -- -- Forfeited 76,750 13.50 Expired -- -- --------- --------- Outstanding at December 31, 1998 699,500 $ 13.50 ========= ========= Exercisable at December 31, 1998 258,010 $ 13.50 ========= ========= Exercisable at December 31, 1997 121,500 $ 13.50 ========= =========
The weighted average remaining contractual life of the options at December 31, 1998 and 1997, is approximately 8.8 years and 9.8 years, respectively. Unoptioned shares available for the granting of options at December 31, 1998 and 1997 was 865,500 and 788,750, respectively. The average daily price of the stock during 1998 and 1997 subsequent to the Offering was $11.73 and $13.04, respectively, per share, and therefore, the options are considered anti-dilutive for the calculation of diluted net income per share. Pro forma information regarding net income per share has been determined as if the Company had accounted for its employee stock options under the fair value method of that statement. The fair value for these options was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions: risk free interest rate of 5.7 percent; dividend yield of zero percent; expected lives of seven years; and volatility of 70.1 percent. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting periods. F-17 58 CAPITAL SENIOR LIVING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
-------------- -------------- 1998 1997 -------------- -------------- Net income As reported ..................... $ 11,957,000 $ 3,681,000 Pro forma ....................... 10,848,000 2,787,000 Net income per share As reported ..................... $ 0.61 $ 0.33 Pro forma ....................... 0.55 0.25
10. INCOME TAXES The provision for income taxes consists of the following:
YEAR ENDED DECEMBER 31, --------------------------------------------------- 1998 1997 1996 ----------- ----------- ----------- Current: Federal .............. $ 6,308,319 $ 730,184 $ -- State ................ 1,463,930 101,498 -- Deferred: Federal .............. (240,635) (39,404) -- State ................ (55,843) 246 -- ----------- ----------- ----------- $ 7,475,771 $ 792,524 $ -- =========== =========== ===========
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:
YEAR ENDED DECEMBER 31, ----------------------------------------------------- 1998 1997 1996 ---------------- --------------- -------------- Tax expense at federal statutory rates................ $6,606,992 $1,521,053 -- Tax expense at federal statutory rates on income earned prior to Formation and Asset Purchase ................. -- (831,026) -- State income tax expense.................................. 1,420,503 101,744 -- Conversion of S corporations to C corporation status ..... -- (41,085) -- Other..................................................... (551,724) 41,838 -- ---------- ----------- ----------- $7,475,771 $ 792,524 $ -- ========== =========== ===========
A summary of the Company's deferred tax assets and liabilities, are as follows:
DECEMBER 31, ------------------------------ 1998 1997 ----------- ----------- Deferred tax assets: Tax basis in excess of book basis arising from the Asset Purchase .... $ 9,644,505 $10,060,119 Other ................................................................ 1,113,530 128,000 ----------- ----------- Total deferred tax assets ............................................ 10,758,035 10,188,119 Deferred tax liabilities ................................................ 362,280 88,842 ----------- ----------- Total deferred tax assets, net ....................................... $10,395,755 $10,099,277 =========== ===========
F-18 59 CAPITAL SENIOR LIVING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 11. RELATED PARTY TRANSACTIONS Certain administrative and occupancy costs were incurred by an affiliate on behalf of the Company. Total costs allocated to the Company were $0, $679,423 and $552,586 for the years ended December 31, 1998, 1997 and 1996, respectively. Prior to the Offering, the Company paid premiums to a related party for employee medical coverage. The related party insured the Company for any claims exceeding the premiums paid. Accordingly, no amounts have been accrued at December 31, 1997, for claims incurred prior to the Offering but unpaid. The Company manages properties for a third party, in which an officer of the Company was also a director of the third-party companies until July 1, 1998. Management fees received for the period ended June 30, 1998 and for the years ended December 31, 1997 and 1996 were $987,840, $1,589,703 and $657,260, respectively. Upon sale of the four NHP properties on September 30, 1998, an affiliate received a $1,219,500 brokerage fee. Upon sale of the four CSLC properties in November 1997, an affiliate received a $4,597,080 brokerage fee. In October 1997, HCP paid an affiliate a refinancing fee of $13,245. Upon sale of certain multi-family properties in November 1996, an affiliate received a $79,883 brokerage fee. An officer of the Company is chairman of the board of a bank where the Company holds the majority of its operating cash accounts. 12. CONTINGENCIES On August 11, 1998, the Company executed a settlement agreement with Angeles Housing Concepts, Inc. ("AHC") and ILM I Lease Corporation and ILM II Lease Corporation (collectively, "ILM Lease") resolving all claims among the parties relating to a lawsuit filed by AHC against the Company alleging interference with AHC's management agreements with ILM (the "Settlement Agreement") and calling for a dismissal with prejudice of this lawsuit. The Settlement Agreement did not involve any payment of damages to AHC or any other party by the Company. On or about October 23, 1998, Robert Lewis filed a putative class action complaint on behalf of certain holders of Assignee Interests in NHP in the Delaware Court of Chancery against NHP, the Company, Capital Senior Living Properties 2-NHPCT, Inc. and Capital Realty Group Senior Housing, Inc. (collectively, the "Defendants"). Mr. Lewis purchased 90 Assignee Interests in February 1993 for $180. The complaint alleges, among other things, that the Defendants breached, or aided and abetted a breach of, the express and implied terms of the NHP Partnership Agreement in connection with the sale of four properties by NHP to Capital Senior Living Properties 2-NHPCT, Inc. The complaint seeks, among other relief, rescission of the sale of these properties and unspecified damages. The Company believes the complaint is without merit and intends to vigorously defend itself in this action. On February 12, 1999 a competitor of the Company, Holiday Retirement Corporation ("Holiday"), as well as Colson & Colson Construction Company and their architects, Curry Brandaw Architects, filed suit against the Company in U.S. District Court in Dallas. The complaint alleges, among other claims, that the Company F-19 60 CAPITAL SENIOR LIVING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) infringed the copyrighted architectural plans and trade dress of Holiday on at least three of the Company's communities. The communities using this Waterford prototype design are owned by Triad I, in which the Company is a 19% limited partner and provides development services under a third party development agreement. The plaintiffs are additionally seeking a preliminary and permanent injunction to bar further use of their allegedly copyrighted architectural plans and trade dress as well as damages, including punitive damages. The defense of this suit has been turned over to the Company's insurer for handling. The Company vigorously denies the allegations mentioned in the lawsuit and has filed an answer and counterclaim. The Company has pending claims incurred in the normal course of business that, in the opinion of management, based on the advice of legal counsel, will not have a material effect on the financial statements of the Company. 13. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts and fair values of financial instruments at December 31, 1998 and 1997 are as follows:
1998 1997 ---------------------------------- ----------------------------------- CARRYING CARRYING AMOUNT FAIR VALUE AMOUNT FAIR VALUE --------------- --------------- --------------- --------------- Cash and cash equivalents.................. $35,827,270 $35,827,270 $48,125,225 $48,125,225 Line of credit............................. 18,974,186 18,974,186 1,830,130 1,830,130 Notes payable.............................. 62,115,845 62,115,845 6,677,431 6,611,128
The following methods and assumptions were used in estimating its fair value disclosures for financial instruments: Cash and cash equivalents: The carrying amounts reported in the balance sheet for cash and cash equivalents approximate fair value. Line of credit and notes payable: The fair value of notes payable is estimated using discounted cash flow analysis, based on current incremental borrowing rates for similar types of borrowing arrangements. 14. INVESTMENTS IN LIMITED PARTNERSHIPS The investments in limited partnerships balance consists of the following:
DECEMBER 31, ------------------------------ 1998 1997 ----------- ----------- NHP pension notes ...................... $12,646,471 $13,740,576 NHP limited partnership interests....... 1,708 1,364 Triad I limited partner interest ....... 330,243 -- Triad II limited partner interest ...... 74,100 -- Triad III limited partner interest ..... 142,500 -- Triad IV limited partner interest ...... 142,500 -- ----------- ----------- $13,337,522 $13,741,940 =========== ===========
F-20 61 CAPITAL SENIOR LIVING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) HCP: During 1998, 1997 and 1996, the Company paid $101,072, $5,604,944 and $3,200,686, respectively, for partnership interests in HCP and, as of December 31, 1998 and 1997, the Company owned a 57% and 56% ownership in HCP, respectively. The Company changed its method of accounting for its investment in HCP from the equity method to the consolidation of HCP in its financial statements in 1997. Had HCP been consolidated in 1996, using its weighted average ownership interest of 23%, the results of operations on a pro forma basis for the year ended December 31, 1996 would have been: Revenue....................................................... $ 26,504,461 Income before extraordinary item and minority interest.................................................... 1,166,289 Net income.................................................... 2,118,981
Pro forma net income, assuming a tax rate of 39.5%, is $1,281,984. In the second quarter of 1996, CSLC purchased a 9.36% limited partnership interest in HCP from an affiliate. CSLC paid $1,269,077 to the affiliate, who recognized a gain of $878,592 on the transaction. As a result of this purchase, the Company exceeded a 20% ownership in HCP and changed its method of accounting from the cost method to the equity method. The change resulted in recognizing $3,519,315 of deferred income for the difference between cost and the underlying equity in HCP, which was being amortized over 20 years. At the Offering date, the unamortized deferred income was eliminated as a result of applying the purchase method of accounting for CSLC's acquisition of HCP limited partnership units. At the Offering date, the allocation of purchase price to the assets and liabilities of HCP was based on independent valuation information from third party valuation firms. Summary financial information regarding the results of operations of HCP for fiscal 1996 is as follows: Net revenue.......................................................... $7,560,104 Net income........................................................... 1,637,343
NHP: The Company acquired, on November 1, 1997, the NHP Notes owned by CSLC in the Formation Transactions for $18,664,128. The NHP Notes bear simple interest at 13% per annum and mature on December 31, 2001. Interest is currently paid quarterly at a rate of 7%, with the remaining 6% interest deferred. Beginning November 1, 1997 through September 30, 1998, the Company has been recording interest income at 10.5% of the purchase price paid, which was determined based on the discounted amount of principal and interest payments to be made following the maturity date (December 31, 2001) of the NHP Notes (using a six-month lag between maturity and full repayment), due to uncertainties regarding the ultimate realization of the accrued interest. On September 30, 1998, the Company purchased four properties from NHP. NHP is in turn redeeming $7,500,000 of the Company's investment in the NHP Notes and is distributing approximately $5,300,000 of deferred interest not previously paid on such notes. From October 1, 1998 through December 31, 1998, the Company reevaluated its investment in the NHP Notes, and is recording additional income, after giving consideration to current payment of interest, partial redemption of the NHP Notes with accrued interest and the estimated residual value in NHP. This change in estimate resulted in $579,278 of additional income in 1998 ($0.03 net income per share impact), and is expected to F-21 62 CAPITAL SENIOR LIVING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) increase income by approximately $3,000,000, $2,400,000 and $2,300,000 in 1999, 2000 and 2001 (NHP Notes redemption is December 31, 2001), respectively. During 1998 and 1996, the Company paid $344 and $1,364, respectively, increasing the ownership of limited partnership units in NHP to 3.9% from 3.1%. Subsequent to year-end and through February 5, 1999, the Company disbursed $13,500 for an additional investment in NHP Notes and $378 for an additional investment in NHP units. These purchases bring the Company's ownership of NHP Notes to 33.1% and the ownership of NHP units to 4.8%. The Company classifies its investment in NHP Notes as held to maturity. Summary financial information regarding the financial position and results of operations of NHP as of December 31 and for the years then ended is as follows:
DECEMBER 31, --------------------------------- 1998 1997 ------------ ------------ Cash ............................................. $ 5,821,300 $ 4,495,733 Property and equipment, net ...................... 18,849,354 49,490,473 Other assets ..................................... 592,146 1,599,634 ------------ ------------ Total assets ................................ $ 25,262,800 $ 55,585,840 ============ ============ Pension notes .................................... $ 20,157,826 $ 42,672,000 Interest payable ................................. 13,142,864 23,730,407 Other liabilities ................................ 633,817 1,203,421 Partnership deficit .............................. (8,671,707) (12,019,988) ------------ ------------ Total liabilities and partnership deficit ........ $ 25,262,800 $ 55,585,840 ============ ============
YEAR ENDED DECEMBER 31, ----------------------------------------------------- 1998 1997 1996 ------------ ------------ ------------ Net revenue .................. $ 13,746,088 $ 15,548,138 $ 14,488,099 Net income (loss) ............ 3,409,569 (3,522,917) (3,574,668)
15. ALLOWANCE FOR DOUBTFUL ACCOUNTS The components of the allowance for doubtful accounts are as follows:
DECEMBER 31, ----------------------------------------------- 1998 1997 1996 ---------- ---------- ---------- Balance at beginning of year .......................... $ 301,042 $ 164,822 $ 141,452 Provision for bad debts ............................ 500,000 43,254 22,312 Write-offs and other ............................... -- (17,474) 1,058 Allowances not assumed in Asset Purchase ........... -- (145,602) -- Allowance arising from consolidation of HCP ........ -- 256,042 -- ---------- ---------- ---------- Balance at end of year ................................ $ 801,042 $ 301,042 $ 164,822 ========== ========== ==========
F-22 63 CAPITAL SENIOR LIVING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 16. LEASES The Company leases its corporate headquarters under an operating lease expiring in 2002. Additionally, the senior living communities have entered into various contracts for services for duration of 5 years or less and are on a fee basis as services are rendered. Rent expense under these leases was $266,590 and $188,986 for 1998 and 1997, respectively. Future commitments are as follows: 1999 $ 293,023 2000 296,959 2001 303,207 2002 185,931 ----------- $1,079,120 ===========
HCP leases its property and equipment to tenants under noncancelable operating leases. The lease terms range from 9 to 12 years with options to renew for additional five-year terms and options to purchase the leased property at the current fair market value at the end of the initial lease term. The leases generally provide for contingent rentals based on the performance of the property. Contingent rentals aggregated $310,275 and $271,340 in 1998 and 1997, respectively. Minimum rentals for the next two years for the HCP leases are $3,971,328 per year, subject to change based on changes in interest rates. Minimum rentals are $3,761,262 and $2,858,619 for the years 2000 and 2001. There are no minimum rentals thereafter. Property and improvements less accumulated depreciation attributable to such rentals amounted to $18,329,061 and $19,339,886 at December 31, 1998 and 1997, respectively. Four of HCP's senior living communities are subject to a master lease with a single operator, Rebound, Inc., a subsidiary of HealthSouth Corporation ("HealthSouth"). This master lease, as amended, contains a nine-year renewal option and provides for contingent rentals equal to 4% of the revenue differential, as defined, effective January 30, 1997. As of December 31, 1998 and 1997, no contingent rentals have been accrued on the master lease. Prior to February 28, 1997, HealthSouth closed two of the four communities under the master lease. Despite these closures, HealthSouth has continued making its full lease payments under the terms of the master lease. 17. OFFICERS' SALARIES AND BONUS General and administrative expense includes officers' salaries and bonuses of $670,000, $3,342,360 and $3,371,887 for the years ended December 31, 1998, 1997 and 1996, respectively. Compensation of the Stockholders and Cohen, all officers of the Company, are based on their respective employment agreements since October 1, 1997. 18. PRO FORMA INCOME TAXES (UNAUDITED) The income taxes on earnings of the S corporations and partnerships for fiscal 1996 and for the period from January 1, 1997 through October 31, 1997, are the responsibility of the Stockholders and partners. The pro forma adjustments reflected on the statements of income assume these S corporations and partnerships were subject to income taxes. Pro forma income tax expense has been calculated using statutory federal and state tax rates, estimated at 39.5%. F-23 64 19. PRO FORMA RESULTS OF OPERATIONS (UNAUDITED) Shown below are unaudited pro forma consolidated amounts for the year ended December 31, 1997 and 1996, respectively, representing the results of operations of the Company for such periods after giving effect to the adjustments relating to the Offering and the Formation, as if the transactions had occurred as of January 1, 1996. The unaudited pro forma consolidated amounts are presented for informational purposes only and do not necessarily reflect the financial position or results of operations of the Company which would have actually resulted had the Offering and the Formation occurred as of January 1, 1996, or the future results of operations of the Company.
YEAR ENDED DECEMBER 31, ------------------------------ 1997 1996 ----------- ----------- Total revenues .................................................. $30,709,882 $26,504,461 Net income ...................................................... 4,991,288 3,396,742 Net income per share ............................................ $ 0.25 $ 0.17 Shares used in computing pro forma net income per share ......... 19,717,347 19,717,347
20. SUBSEQUENT EVENT On February 7, 1999, the Company entered into definitive Agreements and Plans of Merger with ILM Senior Living, Inc. and ILM II Senior Living, Inc. for a combined transaction value of approximately $174 million, which includes approximately $4 million of net liabilities. The primary assets of ILM Senior Living, Inc. and ILM II Senior Living, Inc. collectively are 13 senior living communities that have been managed by the Company under management agreements since 1996. Under the two merger agreements, both ILM Senior Living, Inc. and ILM II Senior Living, Inc. would separately merge with and into a wholly owned direct subsidiary of the Company with the aggregate issued and outstanding shares of ILM Senior Living, Inc. and ILM II Senior Living, Inc. common stock eligible to receive 65% of the merger consideration in cash (approximately $110.5 million) and 35% in 8% convertible trust preferred securities (with a liquidation value of approximately $59.5 million). Both mergers have been approved by the boards of directors of each company and each transaction requires the approval of the applicable shareholders of either ILM Senior Living, Inc. or ILM II Senior Living, Inc. The mergers also are subject to certain other customary conditions, including regulatory approvals and are expected to be completed during the second half of 1999. F-24 65 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 29, 1999. CAPITAL SENIOR LIVING CORPORATION By: /s/ LAWRENCE A. COHEN --------------------------------------- Lawrence A. Cohen Vice Chairman of the Board and acting Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Each person whose signature to this report appears below hereby appoints Lawrence A. Cohen and James A. Stroud and each of them, any one of whom may act without the joinder of the other, as his or her attorney-in-fact to sign on his behalf, individually and in each capacity stated below, and to file all amendments to this report, which amendment or amendments may make such changes in and additions to the report as any such attorney-in-fact may deem necessary or appropriate.
Signature Title Date --------- ----- ---- /s/ JEFFREY L. BECK Co-Chairman of the Board March 29, 1999 - ------------------------------------- Jeffrey L. Beck /s/ JAMES A. STROUD Co-Chairman of the Board and March 29, 1999 - ------------------------------------- Chairman, Chief Operating James A. Stroud Officer and Secretary /s/ LAWRENCE A. COHEN Vice Chairman of the Board and March 29, 1999 - ------------------------------------- acting Chief Executive Officer Lawrence A. Cohen and Chief Financial Officer (Principal Executive, Financial and Accounting Officer) /s/ GORDON I. GOLDSTEIN DIRECTOR March 29, 1999 - ------------------------------------- Dr. Gordon I. Goldstein /s/ J. FRANK MILLER, III Director March 29, 1999 - ------------------------------------- J. Frank Miller, III /s/ JAMES A. MOORE Director March 29, 1999 - ------------------------------------- James A. Moore /s/ VICTOR W. NEE Director March 29, 1999 - ------------------------------------- Dr. Victor W. Nee
66 INDEX TO EXHIBITS The following documents are filed as a part of this report. Those exhibits previously filed and incorporated herein by reference are identified below. Exhibits not required for this report have been omitted.
Exhibit Number Description ------ ----------- *3.1 -- Amended and Restated Certificate of Incorporation of the Registrant *3.2 -- Amended and Restated Bylaws of the Registrant *10.1 -- Asset Purchase Agreement, dated as of July 8, 1997, by and between Capital Senior Living Communities, L.P. and Capital Senior Living Corporation *10.2 -- Contribution Agreement, dated as of August 1, 1997, by and among Capital Senior Living Corporation, Jeffrey L. Beck, James A. Stroud, Senior Living Trust, and Lawrence A. Cohen *10.3 -- Stock Purchase and Stockholders' Agreement, dated as of November 1, 1996, by and among Capital Senior Living Corporation, Jeffrey L. Beck, Senior Living Trust, and Lawrence Cohen *10.4 -- Amended and Restated Exchange Agreement, dated as of June 30, 1997, by and between Lawrence A. Cohen and Jeffrey L. Beck *10.5 -- Amended and Restated Exchange Agreement, dated as of June 30, 1997, by and among Lawrence A. Cohen and James A. Stroud +*10.6 -- 1997 Omnibus Stock and Incentive Plan *10.7 -- Senior Living Agreement, by and between Capital Senior Living, Inc. and New World Development (China) Limited *10.8 -- Amended and Restated Loan Agreement, dated as of June 30, 1997, by and between Lehman Brothers Holdings Inc., d/b/a/ Lehman Capital, A Division of Lehman Brothers Holdings Inc., and Capital Senior Living Communities, L.P. +*10.9 -- Amended and Restated Employment Agreement, dated as of May 7, 1997, by and between Capital Senior Living, Inc. and Jeffrey L. Beck +*10.10 -- Amended and Restated Employment Agreement, dated as of May 7, 1997, by and between Capital Senior Living, Inc. and James A. Stroud +*10.11 -- Employment Agreement, dated as of November 1, 1996, by and between Capital Senior Living Corporation and Lawrence A. Cohen +*10.12 -- Employment Agreement, dated as of November 26, 1996, by and between Capital Senior Living, Inc. and David R. Brickman +*10.13 -- Employment Agreement, dated as of November 26, 1996, by and between Capital Senior Living, Inc. and Keith N. Johannessen
E-1 67 *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 68 *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-3 69 (e)10.45 -- Assumption and Release Agreement, effective as of October 28, 1998, among Gramercy Hill Enterprises, Andrew C. Jacobs, Capital Senior Living Properties 2-Gramercy, Inc., Capital Senior Living Corporation and Fannie Mae (Exhibit 2.4) (e)10.46 -- Multifamily Note, dated December 4, 1997, of Gramercy Hill Enterprises in favor of Washington Mortgage Financial Group, Ltd. (Exhibit 2.5) (e)10.47 -- Multifamily Deed of Trust, dated December 4, 1997, among Gramercy Hill Enterprises, Ticor Title Insurance Company and Washington Mortgage Financial Group, Inc. (Exhibit 2.6) (e)10.48 -- Multifamily Note, dated October 28, 1998, of Capital Senior Living Properties 2- Gramercy, Inc. in favor of WMF Washington Mortgage Corp. (Exhibit 2.7) (e)10.49 -- Multifamily Deed of Trust, Assignment of Rents and Security Agreement, dated October 28, 1998, among Capital Senior Living Properties 2-Gramercy, Inc., Chicago Title Insurance Company and WMF Washington Mortgage Corp. (Exhibit 2.8) +(f)10.50 -- Employment Agreement, dated as of December 10, 1996, by and between Capital Senior Living, Inc. and Rob L. Goodpaster (f)10.51 -- Draw Promissory Note dated November 1, 1998 of Triad Senior Living III, L.P., in favor of Capital Senior Living Properties, Inc. (f)10.52 -- Draw Promissory Note dated December 30, 1998 of Triad Senior Living IV, L.P., in favor of Capital Senior Living Properties, Inc. (f)10.53 -- Form of Development and Turnkey Services Agreement by and between Capital Senior Development, Inc. and applicable Triad entity (f)10.54 -- Form of Development Agreement by and between Capital Senior Development, Inc. and applicable Triad entity (f)10.55 -- Form of Management Agreement by and between Capital Senior Living, Inc. and applicable Triad entity (f)10.56 -- Agreement of Limited Partnership of Triad Senior Living I, L.P. dated April 1, 1998 (f)10.57 -- Agreement of Limited Partnership of Triad Senior Living II, L.P. dated September 23, 1998 (f)10.58 -- Agreement of Limited Partnership of Triad Senior Living III, L.P. dated November 10, 1998 (f)10.59 -- Agreement of Limited Partnership of Triad Senior Living IV, L.P. dated December 22, 1998 (f)21.1 -- Subsidiaries of the Company (f)27.1 -- Financial Data Schedule
E-4 70 - ----------------------------- * Incorporated by reference to exhibit of corresponding number included in Registration Statement No. 333-33379 on Form S-1 filed by the Company with the Securities and Exchange Commission. + Compensation plan, benefit plan or employment contract or arrangement. (a) Incorporated by reference to exhibit of corresponding number from the Company's Annual Report on Form 10-K for the year ended December 31, 1997, filed by the Company with the Securities and Exchange Commission. (b) Incorporated by reference to exhibit of corresponding number from the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1998, filed by the Company with the Securities and Exchange Commission. (c) Incorporated by reference to the exhibit shown in parentheses from the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1998, filed by the Company with the Securities and Exchange Commission. (d) Incorporated by reference to the exhibit shown in parentheses from the Company's Current Report on Form 8-K, dated September 30, 1998, filed by the Company with the Securities and Exchange Commission. (e) Incorporated by reference to the exhibit shown in parentheses from the Company's Current Report on Form 8-K, dated October 29, 1998, filed by the Company with the Securities and Exchange Commission. (f) Filed herewith. E-5 EX-10.50 2 EMPLOYMENT AGREEMENT-12/10/96-ROB L GOODPASTER 1 EXHIBIT 10.50 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into on the 10th day of December, 1996, by and between Capital Senior Living, Inc. a Texas corporation ("CSL" or "the Company"), and Rob L. Goodpaster, an individual residing in the State of Texas ("Employee"). The term of this Agreement shall be deemed to have commenced as of December 1, 1996 ("Employment Commencement Date"). 1. APPOINTMENT, TITLE AND DUTIES. CSL hereby employs Employee to serve in the position as assigned to him by the Board of Directors. In such capacity, Employee shall have such powers, duties and responsibilities as are customarily assigned to said position and as may be otherwise assigned to him. In addition Employee shall have such other duties and responsibilities as may reasonably be assigned to him by the Board of Directors, including serving with the consent or at the request of CSL on the board of directors or as an officer of entities affiliated with CSL (collectively, the "Affiliates") of affiliated corporations. 2. TERM OF AGREEMENT. The initial term of this Agreement shall be for a two (2) year period ending on November 30, 1998, however, the term of this Agreement shall automatically be extended for a one (1) year term on a consecutive basis. This Agreement shall terminate upon the earlier of: (i) the date of the voluntary resignation of Employee, (ii) the date of Employee's death or determination of Employee's disability (as defined in Paragraph 6 below), (iii) the date of notice by CSL to Employee that this Agreement is being terminated by CSL whether "for cause" (as defined in Paragraph 6 below) or without cause, or (iv) upon the date a notice of intent to resign for "good reason" (as defined in Paragraph 6 below) is delivered to the Company by Employee. 3. ACCEPTANCE OF POSITION. Employee hereby accepts the position assigned by the Board of Directors and agrees that during the term of this Agreement he will faithfully perform his duties and will devote substantially all of his business time to the business and affairs of CSL and will not engage, for his own account or for the account of any other person or entity, in any other business or enterprise except with the express written approval of the Board of Directors of CSL. Employee may, at his sole discretion, (i) serve as a director on the boards of directors of other entities, businesses and enterprises he currently serves on, and (ii) make personal, passive investments. Employee agrees to perform his duties faithfully, diligently and to the best of his ability, to use his best efforts to advance the best interests of the Company at all times, and to abide by all moral, ethical and lawful policies, guidelines, procedures, instructions and orders given to him by the Company from time to time. -1- 2 4. SALARY AND BENEFITS. During the term of this Agreement: A) CSL shall pay to Employee a base salary described in the Employee's payroll action form, paid in approximately equal installments no less frequently than semi-monthly. Employee shall receive a performance and compensation review on Employee's anniversary hire date. Employee shall be eligible for an annual bonus, if available, as determined by the Compensation Committee of the Board of Directors of CSL or, if there is no Compensation Committee, the Board of Directors. The Company shall deduct from Employee's compensation and bonus, if any, all applicable local, state, Federal or foreign taxes, including, but not limited to, income tax, withholding tax, social security tax and pension contributions (if any). B) Employee shall participate in all health, retirement, Company-paid insurance, sick leave, disability, expense reimbursement and other benefit programs, if any, which CSL makes available, in its sole discretion, to its senior executives; however, nothing herein shall be construed to obligate the Company to establish or maintain any employee benefit program. The Company may purchase and maintain in force a death and disability insurance policy in an amount at all times equal to not less than an amount equal to Employee's annual base salary multiplied by two (2). The Company would be the beneficiary of said policy and would use said policy for the purposes described in Paragraph 7(A)(i), below. Reimbursement of Employee's reasonable and necessary business expenses incurred in the pursuit of the business of the Company or any of its affiliates shall be made to Employee upon his presentation to the Company of itemized bills, vouchers or accountings prepared in conformance with applicable regulations of the Internal Revenue Service and the policies and guidelines of the Company. C) Employee shall be entitled to reasonable vacation time described in the Employee's payroll action form and pursuant to the Company's Corporate Policies and Procedures Manual, provided that not more than two (2) weeks of such vacation time may be taken consecutively without prior notice to, and the consent of, the Compensation Committee of the Board of Directors of CSL or, if there is no Compensation Committee, the Board of Directors. 5. STOCK OPTIONS. Pursuant to the terms of CSL's 1997 Stock Option Plan, if adopted, Employee shall be entitled to receive a certain number of options, if available, to purchase the common stock of the Company. The number of options to be offered to Employee shall be determined by the Board of Directors of CSL. -2- 3 6. CERTAIN TERMS DEFINED. For purposes of this Agreement: A) Employee shall be deemed to be disabled if a physical or mental condition shall occur and persist which, in the written opinion of two (2) licensed physicians, has rendered Employee unable to perform his assigned duties for CSL for a period of ninety (90) consecutive calendar days or more, and which condition, in the opinion of such physicians, is likely to continue for an indefinite period of time, rendering Employee unable to return to his duties for CSL. One (1) of the two (2) physicians shall be selected in good faith by the Board of Directors of CSL, and the other of the two (2) physicians shall be selected in good faith by Employee. In the event that the two (2) physicians selected do not agree as to whether Employee is disabled, as described above, then said two (2) physicians shall mutually agree upon a third (3rd) physician whose written opinion as to Employee's condition shall be conclusive upon CSL and Employee for purposes of this Agreement. B) A termination of Employee's employment by CSL shall be deemed to be "for cause" if it is based upon (i) Employee is charged with and then convicted of any misdemeanor or any felony involving personal dishonesty, (ii) disloyalty by Employee to the Company, including but not limited to embezzlement, or (iii) Employee's failure or refusal to perform his duties in accordance with this Agreement based on a standard of reasonableness. C) A resignation by Employee shall not be deemed to be voluntary, and shall be deemed to be a resignation for "good reason" if it is based upon (i) a material diminution in Employee's base salary which is not part of an overall diminution for all executive officers of the Company, or (ii) a material breach by CSL of the Company's obligations to Employee under this Agreement or under the Company's Stock Option Plan, if adopted. 7. CERTAIN BENEFITS AND OBLIGATIONS UPON TERMINATION. A) In the event that Employee's employment terminates (i) because of death or disability, (ii) because CSL has terminated Employee other than "for cause" (as described above), including a Fundamental Change and if Employee has been continuously employed by CSL for at least one year prior to the Fundamental Change as described below, or (iii) because Employee has voluntarily resigned for "good reason" as described above, then, i) CSL shall pay Employee in accordance with its Corporate Policies and Procedures Manual his base salary for the balance -3- 4 of the term of this Agreement (not including any future extensions), but not less than one (1) year from the date of the notice of termination, and Employee shall retain all his Company stock options that are vested; provided, however, the benefits described in this Paragraph 7(A)(i) shall terminate at such time as Employee materially breaches the provisions of Paragraphs 7(D), 8, 9, or 10 hereof. A Fundamental Change shall be defined as a merger, consolidation or any sale of all or substantially all of the assets of the Company that requires the consent or vote of the holders of common stock where the Company is not the survivor or in control; ii) All accrued but unpaid or unused vacation, sick pay and expense reimbursement shall be calculated in accordance with CSL's Corporate Policies and Procedures Manual. B) In the event that Employee's employment terminates for any other cause other than those set forth in Paragraph 7(A), (which can include voluntary resignation without good reason or termination by CSL "for cause"), then, i) CSL shall pay Employee his base salary up to and through the date of termination; ii) All accrued but unpaid or unused vacation, sick pay and expense reimbursement shall be calculated in accordance with CSL's Corporate Policies and Procedures Manual. C) In the event that Employee's employment terminates by reason of his death, all benefits provided in this Paragraph 7 shall be paid to Employee's estate or as his executor or personal representative shall direct, but payment may be deferred until Employee's executor or personal representative has been appointed and qualified pursuant to the law in effect in Employee's jurisdiction of residence at the time of his death; D) Following the termination for any reason of Employee's employment, Employee shall not for himself or any third party, directly or indirectly (i) divert or attempt to divert from the Company or its Affiliates any business of any kind in which it is or has been engaged, including, without limitation, the solicitation of, interference with, or entering into any contract with any of its past or then existing customers, and (ii) employ, solicit for employment, or recommend for employment any person employed by the Company or its Affiliates during the period of such person's employment and for a period of two (2) years thereafter. -4- 5 8. CONFIDENTIALITY. Employee hereby acknowledges his understanding that as a result of his employment by CSL, he will have access to, and possession of, valuable and important confidential or proprietary data, documents and information concerning CSL or its Affiliates, its operations and its future plans. Employee hereby agrees that he will not, either during the term of his employment with CSL, or at any time before or after the term of his employment with CSL, divulge or communicate to any person or entity, or direct any employee or agent of CSL or its Affiliates or of his to divulge or communicate to any person or entity, or use to the detriment of CSL or its Affiliates or for the benefit of any other person or entity, or make or remove any copies of, such confidential information or proprietary data or information, whether or not marked or otherwise identified as confidential or secret. Upon any termination of this Agreement for any reason whatsoever, Employee shall surrender to CSL or its Affiliates any and all materials, including but not limited to drawings, manuals, reports, documents, lists, photographs, maps, surveys, plans, specifications, accountings and any and all other materials relating to the Company or any of its business, including all copies thereof, that Employee has in his possession, whether or not such material was created or compiled by Employee, but excluding, however, personal memorabilia belonging to Employee and notes taken by him as a member of the Board of Directors. With the exception of such excluded items, materials, etc., Employee acknowledges that all such material is solely the property of CSL or its Affiliates, and that Employee has no right, title or interest in or to such materials. Notwithstanding anything to the contrary set forth in this Paragraph 8, the Provisions of this Paragraph 8 shall not apply to information which: (i) is or becomes generally available to the public other than as a result of disclosure by Employee, or (ii) is already known to Employee as of the date of this Agreement from sources other than CSL or its Affiliates, or (iii) is required to be disclosed by law or by regulatory or judicial process. 9. NON-COMPETITION. Employee hereby agrees that for a period of one (1) year after any termination for any reason whatsoever of this Agreement and after the last payment to Employee provided for hereunder, he will not, directly or indirectly, commence doing business, in any manner whatsoever, which is in competition with all or any portion of the business of CSL or its Affiliates in any state in which CSL or its Affiliates then operate, own, asset manage, or is in the process of developing more than two (2) facilities. CSL hereby acknowledges and agrees that Employee's ownership of a class of securities listed on a stock exchange or traded on the over-the-counter market that represents five percent (5%) or less of the number of shares of such class of securities then issued and outstanding shall not constitute a violation of this Paragraph 9. Notwithstanding anything to the contrary set forth in this Paragraph 9, if Employee is terminated from employment by CSL "for cause" as defined in Paragraph 6(B), Employee shall not be in violation of this Paragraph 9 if Employee accepts and works within the one (1) year period at a position as an on-site Executive Director or Marketing Director at a nursing or retirement facility for a salary equal to or less than a comparable position at a comparable facility in the area. 10. WORK PRODUCT. The Employee agrees that all innovations, improvements, developments, methods, designs, analyses, reports and all similar or related information which relates to the Company's or any of its subsidiaries' or Affiliates' actual or anticipated -5- 6 business, or existing or future products or services and which are conceived, developed or made by the Employee while employed by the Company or its Affiliates ("Work Product") belong to the Company or such subsidiary or Affiliate. The Employee will promptly disclose such Work Product to the Board and perform all actions reasonably requested by the Board (whether during or after the employment period) to establish and to confirm such ownership (including, without limitation, assignments, consents, powers of attorney and other instruments). 11. LEGAL ACTION. In the event that any action or proceeding is brought to enforce the terms and provisions of this Agreement, the prevailing party shall be entitled to recover reasonable attorneys' fees and costs. In the event of a breach or threatened breach by Employee of the provisions of Paragraph 7(D), 8, 9, or 10, Employee and the Company agree that the Company, shall, in addition to any other available remedies, be entitled to an injunction restraining Employee from violating the terms of the applicable Paragraph and that said injunction is appropriate and proper relief for such violation. 12. NOTICES. All notices and other communications provided to either party hereto under this Agreement shall be in writing and delivered by hand delivery, overnight courier service or certified mail, return receipt requested, to the party being notified at said party's address set forth adjacent to said party's signature on this Agreement, or at such other address as may be designated by a party in a notice to the other party given in accordance with this Agreement. Notices given by hand delivery or overnight courier service shall be deemed received on the date of delivery shown on the courier's delivery receipt or log. Notices given by certified mail shall be deemed received three (3) days after deposit in the U.S. Mail. 13. CONSTRUCTION. In construing this Agreement, if any portion of this Agreement shall be found to be invalid or unenforceable, the remaining terms and provisions of this Agreement shall be given effect to the maximum extent permitted without considering the void, invalid or unenforceable provision. In construing this Agreement, the singular shall include the plural, the masculine shall include the feminine and neuter genders, as appropriate, and no meaning or effect shall be given to the captions of the paragraphs in this Agreement, which are inserted for convenience of reference only. 14. CHOICE OF LAW; SURVIVAL. This Agreement shall be governed and construed in accordance with the internal laws of the State of Texas without resort to choice of law principles. The provisions of Paragraphs 7(A), (B), (C), (D), 8, 9, and 10 shall survive the termination of this Agreement for any reason whatsoever. 15. INTEGRATION; AMENDMENTS. This is an integrated Agreement. This Agreement constitutes and is intended as a final expression and a complete and exclusive statement of the understanding and agreement of the parties hereto with respect to the subject matter of this Agreement. All negotiations, discussions and writings between the parties hereto relating to the subject matter of this Agreement are merged into this Agreement, and there are no rights conferred, nor promises, agreements, conditions, undertakings, warranties -6- 7 or representations, oral or written, expressed or implied, between the undersigned parties as to such matters other than as specifically set forth herein. No amendment or modification of or addendum to, this Agreement shall be valid unless the same shall be in writing and signed by the parties hereto. No waiver of any of the provisions of this Agreement shall be valid unless in writing and signed by the party against whom it is sought to be enforced. 16. BINDING EFFECT. This Agreement is binding upon and shall inure to the benefit of the parties hereto and their respective heirs, personal representatives, successors and assigns; PROVIDED, HOWEVER, that Employee shall not be entitled to assign his interest in this Agreement (except for an assignment by operation of law to his estate), or any portion hereof, or any rights hereunder, to any party. Any attempted assignment by Employee in violation of this Paragraph 16 shall be null, void, ab initio and of no effect of any kind or nature whatsoever. IN WITNESS WHEREOF, the parties have executed this Agreement on the date set forth above to be effective as of the date specified in the preamble of this Agreement. CAPITAL SENIOR LIVING, INC. a Texas corporation Address: 14160 Dallas Parkway, #300 Dallas, TX 75240 By: /s/ KEITH N. JOHANNESSEN --------------------------------------- Keith N. Johannessen, President EMPLOYEE Address: 101 Quorum Drive Trophy Club, TX 76262 /s/ ROB L. GOODPASTER ------------------------------------------ Rob L. Goodpaster -7- EX-10.51 3 DRAW PROMISSORY NOTE-11/1/98-TRIAD SR LIVING III 1 EXHIBIT 10.51 DRAW PROMISSORY NOTE Amount: $10,000,000.00 November 1, 1998 FOR VALUE RECEIVED, the undersigned, promises to pay to Capital Senior Living Properties, Inc., a Texas corporation, the sum draw down up to Ten Million and No/100 Dollars ($10,000,000.00), the principal due five (5) years from the date of the first draw down and interest due quarterly at the rate of ten and one-half percent (10.5%) per annum, both principal and interest payable at office of 14160 Dallas Parkway, Suite 300, Dallas, Texas 75240. The accrued interest on this note is payable quarterly after the first draw down. All past due principal and interest shall bear interest from maturity at the rate of twelve percent (12%) per annum. This note may be prepaid without penalty. Failure to pay any installment of principal and interest, or any other part thereof, when due shall, at the election of the holder and without notice, mature the whole note and it shall at once become due and payable. It is hereby specifically agreed that if this note is placed in the hands of an attorney for collection, or if collected by suit or through the Probate Court or any other legal proceedings, the undersigned agrees to pay reasonable attorneys' fees. All makers, endorsers, sureties and guarantors hereby waive presentment for payment of this note, notice of nonpayment, protest, notice of protest, diligence, or any notice of, or defense on account of, any extension, extensions, renewal, renewals, or change in any manner of or in this note, or in any of its terms, provisions or covenants, or of any delay, indulgence or other act of any holder of the aforesaid note. TRIAD SENIOR LIVING III, L.P., a Texas limited partnership By: Triad Partners III, Inc., Its General Partner By: /s/ BLAKE N. FAIL ------------------------------------ Title: President --------------------------------- EX-10.52 4 DRAW PROMISSORY NOTE-12/30/98-TRIAD SR LIVING IV 1 EXHIBIT 10.52 DRAW PROMISSORY NOTE Amount: $10,000,000.00 December 30, 1998 FOR VALUE RECEIVED, the undersigned, promises to pay to Capital Senior Living Properties, Inc., a Texas corporation, the sum draw down up to Ten Million and No/100 Dollars ($10,000,000.00), the principal due five (5) years from the date of the first draw down and interest due quarterly at the rate of ten and one-half percent (10.5%) per annum, both principal and interest payable at office of 14160 Dallas Parkway, Suite 300, Dallas, Texas 75240. The accrued interest on this note is payable quarterly after the first draw down. All past due principal and interest shall bear interest from maturity at the rate of twelve percent (12%) per annum. This note may be prepaid without penalty. Failure to pay any installment of principal and interest, or any other part thereof, when due shall, at the election of the holder and without notice, mature the whole note and it shall at once become due and payable. It is hereby specifically agreed that if this note is placed in the hands of an attorney for collection, or if collected by suit or through the Probate Court or any other legal proceedings, the undersigned agrees to pay reasonable attorneys' fees. All makers, endorsers, sureties and guarantors hereby waive presentment for payment of this note, notice of nonpayment, protest, notice of protest, diligence, or any notice of, or defense on account of, any extension, extensions, renewal, renewals, or change in any manner of or in this note, or in any of its terms, provisions or covenants, or of any delay, indulgence or other act of any holder of the aforesaid note. TRIAD SENIOR LIVING IV, L.P., a Texas limited partnership By: Triad Partners IV, Inc., Its General Partner By: /s/ BLAKE N. FAIL -------------------------------------- Title: President ----------------------------------- EX-10.53 5 FORM OF DEVELOPMENT AND TURNKEY SERVICES AGREEMENT 1 EXHIBIT 10.53 FORM OF DEVELOPMENT AND TURNKEY SERVICES AGREEMENT This Development and Turnkey Services Agreement (this "Agreement") is entered into by and between Capital Senior Development, Inc., a Texas corporation ("Capital"), and Triad Senior Living ___, L.P., a Texas limited partnership ("Triad"), this ___ day of _________, 199_. RECITALS: WHEREAS, Triad has been established to own and/or operate assisted living facilities, independent living facilities, skilled nursing facilities and other related medical facilities (each a "Facility" and collectively the "Facilities"); and WHEREAS, Triad desires to have Capital and/or its affiliate develop, construct, market and manage the Facilities; and WHEREAS, Capital and its related entities have expertise in coordinating the development and construction of assisted living facilities, independent living facilities, skilled nursing facilities and other related medical facilities; NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and in consideration of the undertakings of each of the parties to the other, the parties hereto agree as follows: 1. Engagement. Triad hereby retains Capital and Capital hereby agrees to provide the Services as set forth in Section (2) below. 2. Capital's Duties. Capital's duties under this Agreement shall be divided into three (3) phases, a development phase, construction phase, and a post-construction phase (collectively, the "Services"), and shall be as follows: I. Development Phase (a) Filing of Applications for Permits, Consents and Approvals. Coordination, advice, recommendations and consultations with respect to the filing of all necessary documents required by any applicable federal, state or local government under applicable law in order obtain any required permit, approval, consent or certificate ("Permit"), including, without limitation, any applicable certificate of need for any Facility, including, without limitation, the preparation and filing by or on behalf of Triad of application forms, notices of intent to file and other legal notices. (b) Prosecution of Permit Applications and Appeals. Prosecution of Permit applications, preparation of responses to appropriate governmental agencies comments with respect to completeness review as to Permit applications, preparation of responses to taxpayer groups and others with respect to such applications, including attendance at public hearings and meetings with community groups and health planning organizations. Capital shall appeal with all due diligence, on behalf of Triad, any denials of Permit applications or challenges to the granting thereof which 2 Triad elects to contest. The cost of such appeals shall be included in the Contract Price (as defined herein) of each Facility. (c) Site Selection. Capital shall assist Triad in locating an appropriate site for each Facility ("Site"). Triad shall be responsible for providing or obtaining commitments for financing the construction, including the furnishing of financial statements, providing an appraisal of the Site and the Facility and for executing applications, notes, mortgages, assumption agreements and other documents reasonably necessary to effectuate such financing. Subject to Triad's prior approval, Capital shall order a Phase I Environmental Report to determine the presence or absence of hazardous waste or materials on any such Site. Capital shall coordinate the title examination to determine that the Site is not subject to any easements, encumbrances, restrictions or agreements which adversely affect the ability of Capital to develop and construct the Facility or the ability of Triad to operate the intended Facility thereon. To date, Capital has identified and Triad has approved for development each of the Sites identified on Exhibit A attached hereto. (d) Zoning Approvals. Capital shall use its best efforts in obtaining all applicable governmental permits and approvals for the construction of each Facility, including, without limitation, coordination, advice, recommendations and consultations with respect to the filing of all necessary documents to obtain zoning and inland/wetlands approvals ("Zoning Approvals"); Capital shall prepare all applications for and prosecute the same for all Zoning Approvals required for any Facility. All filing, notice and reasonable legal fees in connection therewith shall be included in the Contract Price. Capital shall not have the right to retain legal counsel without the prior approval of Triad which shall not be unreasonably withheld, delayed or conditioned. (e) Triad Representative. Triad shall appoint a representative to communicate with Capital with respect to each Facility (the "Triad Representative"). Capital shall, on a periodic basis not less frequently than bi-weekly (or more frequently as reasonably requested by Triad) communicate in person or by telephone (at Triad's option) with the Triad Representative to report with respect to the progress and status of each Facility and to obtain the opinions, views and direction of the Triad Representative with respect to the completion of each Facility. (f) Decision Making. Nothing herein shall be construed as imposing any obligation on Triad to proceed with the construction of the Facilities whether or not the Zoning Approvals for the applicable Facilities are granted, it being understood and agreed that Triad shall have a period of thirty (30) days after written notice from Capital to Triad of the issuance of a final, non-appealable Zoning Approvals (the "Election Deadline") in which to make such determination as to such Facility. (g) Development Agreement. Triad shall enter into a development agreement in the form attached hereto as Exhibit B (the "Development Agreement" and collectively "Development Agreements") with Capital with respect to the applicable Facility subsequent to entering into an agreement of sale relating to such Facility. 2 3 II. Construction Phase Upon the execution of a Development Agreement for a Facility, the parties' rights and obligations shall be as described in each Development Agreement which shall include, without limitation, the following: (a) Plans and Specifications. All of the Facilities shall be constructed by Capital pursuant to plans and specifications approved by Triad in all material respects. (b) Contract Price. The contract price for the construction and furnishing (subject to an allowance set forth below) of the subject Facility under the applicable Development Agreement (herein the "Contract Price") shall be an amount equal to the costs incurred by Capital in the development and construction of such Facility plus a developer fee equal to four percent (4%) of the costs incurred. The Contract Price shall also include reimbursement to Capital for all overhead and expenses incurred in performing the services under the applicable Development Agreement, but not to exceed four percent (4%) of the costs incurred in constructing and furnishing the subject Facility. (c) FF&E. The Contract Price for each Facility will include an allowance ("FF&E Allowance") for furniture, fixtures & equipment ("FF&E") equal to the amount of the allowance therefor as agreed upon by Capital and Triad in the applicable Development Agreement. Triad will make selections in a timely fashion and all items will be ordered by Capital. Any amounts expended for FF&E above the FF&E Allowance therefor will be an increase adjustment to the Contract Price, the cost of which will be passed through to Triad at Capital's actual cost without any developer fee. Capital will endeavor to obtain the lowest possible cost for such items. Prior to incurring any costs in excess of the FF&E Allowance, Capital shall use its reasonable best efforts to notify Triad in writing of the estimated amount of such excess. Capital will, upon request, provide Triad with documentation of the costs incurred by Capital for which reimbursement is sought. (d) Unusual Site Conditions. The costs by Capital in remedying unusual site conditions will be an increase adjustment to the Contract Price for each Facility to the extent that such costs exceed an agreed upon allowance therefor as a result of unusual site conditions not identifiable by Capital after the exercise of reasonable diligence at the time the Site was acquired. At such time as Capital becomes aware of any such unusual site conditions, Capital shall promptly notify Triad of the same and of the amount by which the estimated cost to correct said site conditions shall exceed such allowance. Capital will endeavor to obtain the lowest possible cost in remedying such unusual site conditions and will charge Triad for Capital's actual cost incurred except that an unusual site condition which should have been identified by Capital in exercising reasonable diligence at the time such Facility was acquired will be at Capital's cost. (e) Financing. Triad will arrange for the provision of construction and permanent financing for each of the Facilities by executing all applications, notes, mortgages, assumption agreements and other documents reasonably necessary to effectuate such financing. Capital shall not have any obligation to guaranty the payment or performance obligations of Triad under the terms of such financing. 3 4 (f) Occupancy Development Program. Capital will prepare and recommend to Triad, for its approval, an occupancy development program for the Facility and budget for the cost of such program which shall include the planning and arranging for the creative services, production, type, mix, copy, placement and purchase of the material and media as necessary to implement said occupancy development program. III. Post-Construction Phase Each Facility unless otherwise agreed upon by Triad and Capital prior to the execution of the Development Agreement, shall be managed by Capital or an affiliate of Capital pursuant to the terms of a Management Agreement (a copy of which shall be attached to the Development Agreement as an exhibit thereto) in form and substance mutually agreeable to the parties ("Management Agreement"). Triad shall retain primary responsibility for establishing all policies and objectives for the Facility and planning for its short-range and long.-range goals. In the event of the termination of the Management Agreement, Triad may either elect to manage the Facility itself or may select such management firm as it desires. The parties' rights and obligations shall be as described in each Management Agreement which shall include, without limitation, the following: (a) Capital shall provide consultant and management services and take such steps as it deems necessary, all subject to and in accordance with the policies and guidelines established by Triad to prepare the Facility for occupancy and operation. (b) Capital shall recruit and train, at Triad's expense a competent executive director acceptable to the Triad for the supervision of the administrative functions of each Facility. Such executive director shall be qualified to meet the requirements established by all federal, state and/or local administrative bodies or agencies having jurisdiction over each Facility. (c) Capital shall assist Triad in the licensing, equipping and staffing phases of each Facility. The staff of each Facility shall be employees of Capital. (d) Capital shall furnish and install operating procedures, systems and controls developed by it for the purposes of providing effective management techniques and functions for the benefit of the Residents of each Facility. (e) Capital shall prepare for review and approval by Triad each initial operating budget and annual operating budgets for each Facility for each year of the term of the Management Agreement. Following the initial occupancy of each Facility, Capital will report to Triad at least once each month on the financial status of each Facility during the previous month. (f) Capital shall receive a monthly management fee under the Management Agreement equal to five percent (5%) of Gross Revenues generated during the immediately proceeding month provided that the monthly management fee shall not be less than Five Thousand Dollars ($5,000.00), and a marketing lease-up fee of Five Hundred Dollars ($500.00) for each unit leased at the time the unit is initially occupied. 4 5 3. Independent Contractor. Capital shall act as an independent contractor for purposes of performing all of the above services. 4. Costs and Expenses. Triad shall be responsible for all costs and expenses incurred by Capital in the performance of its obligations hereunder, including but not limited to, the payment of all compensation and benefits to employees of Capital and any normal and customary transportation or incidental business related expenses incurred by employees of Capital. In the event a final, non-appealable Permit is not granted or final and a Facility is not constructed or in the event Triad elects not to proceed with a project after the granting thereof in accordance with the terms contained hereinabove, to the extent not previously or directly paid by Triad, Triad will reimburse Capital for all reasonable and documented out-of-pocket expenses incurred by it, if any, in connection with the provision of the foregoing services. 5. Independent Agreements. The agreements with respect to each Facility as set forth herein are independent of the agreements with respect to any other Facilities since there is no guaranty that a suitable Site or other condition precedent will be met with respect to any particular Facility. 6. Indemnity. Capital agrees at all times to indemnify and defend Triad affiliates, and its respective employees, officers, directors, servants and agents (collectively, the "Triad Parties") and hold and save the Triad Parties harmless of and from and against any and all liabilities and indebtedness, obligations, losses, damages, costs and expenses (including reasonable attorneys' fees) suffered or incurred by the Triad Parties by reason of any claim or demand brought by anyone or any action or proceeding instituted or judgment rendered against the Triad Parties arising out of or resulting in any manner from Capital's breach or failure to perform Capital's material obligations, responsibilities or duties as required by this Agreement, Capital's failure to be appropriately licensed to perform the services required of it hereunder, or any negligent willful act or omission of Capital or any of its subcontractors, agents or employees. Triad agrees at all times to indemnify and defend Capital and its affiliates and their respective employees, officers, directors, servants and agents (collectively, the "Capital Parties") and hold and save the Capital Parties harmless of and from and against any and all liabilities and indebtedness, obligations, losses, damages, costs and expenses (including reasonable attorneys' fees) suffered or incurred by the Capital Parties, by reason of any claim or demand brought by anyone or any action or proceeding instituted or judgment rendered against the Capital Parties arising out of or resulting in any manner from Triad's breach or failure to perform, Triad's material obligations, responsibilities or duties as required by this Agreement, or any negligent willful act or omission of Triad or any of its subcontractors, agents or employees. 7. Termination. Triad and Capital shall not be required to proceed with the execution and delivery of any additional Development Agreements for additional Facilities in the event of a material default by the other party with respect to one or more Facilities then under construction which is not cured within any applicable cure period provided for in the applicable Development Agreement. In the event of the termination of any Development Agreement, any amounts due on account of services performed prior to the effective date of termination which have not been previously paid will be paid (pro rata through the effective date of termination) promptly following 5 6 termination less any damages sustained by the non-breaching party as a result of the breach. Any such termination shall not affect the rights of the parties under this Agreement which relate to events prior to such termination, including without limitation, rights under this Section 7. 8. Notices. All notices which may be given to any of the parties hereunder shall be in writing and shall be either sent by telecopy transmission to a telecopy machine located in the office of Triad or Capital, as the case may be, or hand delivered or sent by registered or certified mail, return receipt requested, or by Federal Express or similar nationally recognized overnight delivery servicer providing a receipt, and postage prepaid as follows: To Capital: Capital Senior Living Properties, Inc. 14160 Dallas Parkway Suite 300 Dallas, Texas 75240 Attention: David Suarez, Vice President of Development With a copy to: Capital Senior Living Properties, Inc. 14160 Dallas Parkway Suite 300 Dallas, Texas 75240 Attention: David R. Brickman, Vice President and General Counsel To Triad: Triad Senior Living __, L.P. 4312 Mockingbird Lane Dallas, Texas 75205 Attention: Blake N. Fail, President Such addresses may be changed from time to time by notice from Triad or Capital to the others. The effective date of any such notice shall be the date of actual receipt at Triad's address or Capital's address, as applicable, if hand delivered, sent by overnight delivery or sent by facsimile transmission or registered mail, or three (3) days after such notice is properly deposited for mailing if sent by United States mail. 6 7 9. General Provisions: (a) Gender, Number. Whenever the context requires, the use herein of (i) the neuter general includes the masculine and feminine genders; and (ii) the singular number includes the plural number. (b) Entire Agreement. This Agreement and any document executed pursuant hereto contains the entire agreement between the parties relating to the transactions contemplated hereby and all prior or contemporaneous agreements, understandings, representations and statements, oral or written, are merged into and superseded by this Agreement. (c) Modifications. No modifications, waiver or discharge of this Agreement will be valid unless it is in writing and signed by the parties hereto. (d) Attorneys' Fees and Costs. If either party commences an action for the interpretation, reformation, enforcement or rescission of this Agreement, the prevailing party will be entitled to recover from the other party reasonable attorneys' fees and court and other costs incurred, including without limitation, its costs and fees on appeal. (e) Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but all of which together will constitute one instrument. (f) Applicable Laws. This Agreement shall be construed and enforceable in accordance with the laws of the Texas. (g) Time of Essence. Time is strictly of the essence with respect to each and every term, condition, obligation and provision herein. (h) Further Instruments. Each party hereto shall from time to time execute and deliver such further instruments as the other party or its counsel may reasonably request to effectuate the intent of this Agreement. (i) Joint Effort. The preparation of this Agreement has been a joint effort of the parties, and the resulting document shall not be construed more severely against one of the parties than the other. (j) Captions. The captions of this Agreement are for convenience and reference only and in no way define, describe, extend or limit the scope or intent of this Agreement or the intent of any provision hereof. (k) Severability. The invalidity or unenforceability of one or more of the phrases, sentences, provisions, clauses, sections or Articles contained in this Agreement shall not affect the validity or enforceability of the remaining portions, so long as the material purposes of this Agreement can be determined and effectuated. 7 8 (l) Exhibits. The Exhibits attached to this Agreement are hereby incorporated by reference and made a part of this Agreement. (m) Successors. Subject to the limitations on assignment set forth in Section 9(o), this Agreement shall be binding upon the parties hereto, their respective successors and assigns. (n) Brokers. Each of Triad and Capital represent and warrant to the other that no broker or finder has acted on its behalf in connection with this Agreement, or the transactions contemplated hereby or referred to herein. Each of Triad and Capital agrees to indemnify and hold the other harmless from any claim or demand for commission or other compensation by any broker, finder or similar agent claiming to have been employed by or on behalf of such party. (o) Assignment. Triad shall have no right to assign its rights or delegate its obligations under this Agreement to another entity or person without the prior written consent of Capital except that this Agreement, or this Agreement as it relates to a specific Facility, may be assigned by Triad, in whole or in part, to an affiliate of Triad without the consent of Capital, provided that Triad shall remain primarily liable for payment and performance of all obligations under this Agreement after the assignment. Capital shall have no right to assign its rights or delegate its obligations under this Agreement to another entity or person without the prior written consent of Triad, except that this Agreement may be assigned by Capital, in whole or in part, to an affiliate of Capital without the consent of Triad, provided that Capital shall remain primarily liable after such assignment. Each of Triad and Capital shall promptly provide the other with notice of an assignment permitted by the terms hereof without the consent of the other party. The term "affiliate" shall mean any entity which is controlled by, under common control with, or which controls, Triad or Capital, as the case may be. (p) Cooperation. Both parties agree that they shall cooperate with each other in allowing Capital to perform its duties under this Agreement, including, without limitation, Triad providing prompt responses to all inquiries made by Capital in connection with all aspects of the work for each Facility, including, without limitation, the selection of the FF&E for each Facility and all background documentation (including without limitation financials, census data and corporate documents) needed to complete, file and prosecute the Permit applications and Zoning Approvals and will sign all applications as necessary. (q) Development Agreement to Control. In the event that any of the terms or conditions set forth herein are inconsistent with or contrary to any of those set forth in an applicable Development Agreement for a Facility, then the terms and conditions set forth in such Development Agreement shall control. 8 9 EXECUTED as an instrument under seal effective as of the date first set forth above. CAPITAL SENIOR DEVELOPMENT, INC. By: -------------------------------------- Keith N. Johannessen, President TRIAD SENIOR LIVING ___, L.P. By: Triad Partners __, Inc. Its general partner By: -------------------------------- Blake N. Fail, President 9 10 EXHIBIT A SITES 10 11 EXHIBIT B FORM OF DEVELOPMENT AGREEMENT 11 EX-10.54 6 FORM OF DEVELOPMENT AGREEMENT-TRIAD ENTITY 1 EXHIBIT 10.54 FORM OF DEVELOPMENT AGREEMENT THIS DEVELOPMENT AGREEMENT ("Agreement") is made effective the ____ day of____, ____, by and between Triad Senior Living ____, L.P., a Delaware Limited Partnership (the "Owner") and Capital Senior Development, Inc., a Texas corporation ("Capital Senior"). A. WHEREAS Capital Senior is a firm specializing in the planning and development, arranging for financing, occupancy development, arranging for design and construction, and operation of retirement communities; and B. WHEREAS the Owner desires to develop and construct an expansion of the existing retirement community in (the "Facility") to be located on a parcel of land described on Exhibit "A" (the "Land") (the Facility and the Land are collectively referred to herein as the "Project"); and C. WHEREAS the Owner understands the concept and plan of Capital Senior for the development and operation of retirement communities; and D. WHEREAS the Owner believes that utilizing such concept and plan of Capital Senior will enable it to economically provide the Project to its residents; and E. WHEREAS the Owner wishes to engage Capital Senior as developers in connection with the Project, and Capital Senior is willing to serve in such capacity. NOW THEREFORE, the parties do hereby agree as follows: I. SERVICES TO BE PERFORMED BY CAPITAL SENIOR 1.1 For the consideration herein stipulated, Capital Senior will direct the Project for the Owner, as stated below. Capital Senior will expedite and coordinate planning and development, arrange for financing, supervise initial occupancy development, arrange for design and construction services, and handle certain bookkeeping functions, all as hereinafter set forth. 1.2 The scope of the Project will be essentially the development, construction and occupancy of assisted living units, and related common areas, pursuant to the budgets approved by the Owner. 1 2 II. PLANNING AND DEVELOPMENT 2.1 Capital Senior will coordinate, prepare, and recommend to the Owner, for its approval, a basic plan for the Project, including: a site plan, mix, size and shape of living units, and types of common areas. 2.2 Capital Senior will recommend to the Owner, for its approval, the initial rates for the monthly service fees to residents in connection with the Project. 2.3 Capital Senior will prepare, for Owner's approval, projections of capital cost in form similar to that attached hereto as Exhibit "B" (the "Capital Cost Budget"), as well as operating expenses and cash flow projections. 2.4 Capital Senior will prepare, for Owner's approval, the form of residency agreement (the "Residency Agreement") to be executed by the residents. The Residency Agreement describes the program of services to be offered to the resident by the Owner. The Owner shall provide, at Owner's cost, legal counsel acceptable to Capital Senior, to determine the legality, effect and enforceability of the Residency Agreement. During the term of this Agreement, the Owner agrees not to change the terms of the Residency Agreement except with the consent of Capital Senior. 2.5 To the extent that unforeseen circumstances require changes from time to time in the basic plan, fee schedules, financial projections or the form of the Residency Agreement, Capital Senior will recommend said changes to the Owner. 2.6 Capital Senior will determine municipal, state and federal requirements affecting the planning for the Project. Capital Senior will prepare or cause to be prepared the documents to obtain approval of governmental authorities having jurisdiction over the Project, and no such documents shall be submitted by the Owner without prior approval of Capital Senior. 2.7 Capital Senior will prepare for the Owner a schedule of all Project activities and will update the schedule from time to time as may be necessary due to changing circumstances. III. ARRANGEMENT FOR PERMANENT AND INTERIM FINANCING 3.1. Capital Senior will, if requested by the Owner, prepare loan application documents required by the Owner for the project, including brochures, feasibility reports, financial projections, information regarding the community need for the Project and other material necessary to make application for permanent and interim financing for the Owner. 3.2. Capital Senior will, on behalf of the Owner, present the loan application to interested lenders and negotiate the terms of any interim land acquisition and construction financing and permanent financing required by the Owner for the project. Capital Senior will, if it is successful in negotiating such financing, recommend to the Owner for its approval and acceptance the interim and permanent financing so obtained on the Owner's behalf. 2 3 3.3. The Owner will not unilaterally negotiate for, or attempt to obtain on its own, construction financing or permanent financing. Capital Senior agrees to solicit any lending sources recommended by the Owner upon its written request. IV. [INTENTIONALLY OMITTED] V. ARRANGEMENTS FOR DESIGN AND CONSTRUCTION MANAGEMENT SERVICES 5.1 Capital Senior will furnish the Owner its expertise and knowledge in arranging for design and construction management services in connection with the design and construction phases of the development of the Project. 5.2 Capital Senior will recommend an architect to the Owner to perform and coordinate all engineering design and inspection services for the Project. The Owner will enter into a contract with the architect. Without assuming any design or engineering liabilities of the architect, Capital Senior, on behalf of the Owner, shall oversee the activities of Owner's architect. At appropriate times, as the architect proceeds with the design, Capital Senior will require the architect to submit the plans and specifications directly to the Owner for the Owner's approval. 5.3 Capital Senior will recommend a general contractor to the Owner to perform all general contractor services for the Project. The Owner will enter into the contract with the selected general contractor. Without assuming any liabilities of the general contractor, Capital Senior, on behalf of the Owner, shall oversee the activities of the Owner's general contractor. At appropriate times, Capital Senior will submit to the Owner a statement of probable construction costs based on square footage, volume, and other unit costs. As the architect proceeds to refine and complete the plans and specifications, Capital Senior shall keep the Owner informed of any adjustments to previous statements of probable Project construction costs, indicated by changes in scope, changes in costs of labor or materials, changes in local requirements, or changes in Project needs. 5.4 Capital Senior will recommend an interior designer to perform and coordinate all interior design services for the Project. The Owner will enter into a contract with the interior designer. Without assuming any interior design liabilities of the interior designer, Capital Senior, on behalf of the Owner, shall oversee the activities of the Owner's interior designer. At appropriate times, as the interior designer proceeds with the design, Capital Senior will require the interior designer to submit plans and color boards to the Owner for the Owner's approval. 5.5 Except to the extent to be obtained by the architect or the Owner, Capital Senior shall file the required documents with and use its best efforts to secure the approval of governmental authorities having jurisdiction over the design of the Project. 5.6 Capital Senior does not assume any design or engineering or any other liabilities of the architect nor any liabilities of the general contractor and interior designer, and the Owner agrees to look solely to the architect, to the general contractor, and to the interior designer for such liabilities, respectively. 3 4 VI. BOOKKEEPING FUNCTIONS 6.1 Unless this Agreement is sooner terminated under Article IX, from the date of this Agreement and until initial occupancy of the Project, Capital Senior shall perform all bookkeeping services for the Project contemplated by this Agreement. Such services do not include the preparation of tax returns or other filings required of the Owner. 6.2 The Owner shall open an account in the Owner's name at a bank, the location of which shall be mutually agreed upon by the Owner and Capital Senior. Capital Senior shall prepare and present to Owner requests for payments supported by appropriate invoices on a monthly basis. Owner shall authorize payment of such requests upon receipt and cause the expenses related to the Project to be paid when they become due. All employees of Capital Senior and the Owner engaged in handling the Owner's funds shall be bonded in accordance with the standard practices of Capital Senior. VII. OWNER RESPONSIBILITIES 7.1 Capital Senior shall not perform or have the responsibility for the performance of legal services in connection with the activities arising hereunder. The Owner shall retain the services of legal counsel acceptable to Capital Senior, at Owner's cost, to perform legal services relating to the Project. While the legal counsel retained by the Owner shall be directly responsible to the Owner, he or she shall be directed to cooperate with and assist Capital Senior. 7.2 Capital Senior shall not perform or have the responsibility for the performance of accounting services in connection with the activities arising hereunder, except as otherwise provided under Article VI above. At Owner's discretion, the Owner may retain the services of a nationally recognized certified public accounting firm acceptable to Capital Senior, at Owner's cost, to perform annual audits, to prepare tax returns, to prepare any other reports required for state or federal bureaus which require certification and/or licensure, and to perform other necessary accounting services relating to the Project. 7.3 The Owner shall designate, when requested by Capital Senior, representatives authorized to act on its behalf. The Owner shall examine documents submitted by Capital Senior and render decisions pertaining thereto promptly to avoid delay. 7.4 The Owner agrees that it will fulfill in a timely manner all of the terms of the loans obtained for the Project with its approval. The Owner also agrees that it will fulfill in a timely manner all of the terms of the architect contract and construction contract for the Project. 7.5 The Owner shall pay all costs of the Project, including but not limited to legal and accounting fees, all forms of taxes, licenses, closing costs, marketing costs, occupancy development costs (initial and re-occupancy), design costs, construction costs, the cost of all furnishings, subsurface soil tests and analyses, site surveys prepared by a registered surveyor, and other costs as described on the capital cost budget for the Project, as updated from time to time. 4 5 7.6 The Owner shall have the responsibility of approving applications for occupancy and in connection therewith shall be responsible for assuring compliance with all non-discrimination and other laws relating to such decisions. 7.7 The Owner agrees to apply for and maintain, at its expense, with reputable and financially sound insurance firms, policies of insurance to insure itself and Capital Senior against public liability (including contractual liability insurance as applicable to Owner's obligations under paragraph 10.7), and such other policies in amounts as necessary and proper for the type of activities required of Capital Senior hereunder and the type of activities in which the Owner is engaged. The Owner may obtain any additional insurance coverage that it deems advisable. The Owner agrees to include Capital Senior and any lender as named insureds on any such policies as may be requested by Capital Senior from time to time, and to provide Capital Senior with complete copies of such policies and certificates of insurance which evidence such coverage. Such policies shall be endorsed to provide that such insurance is primary to any insurance purchased directly by Capital Senior, and is not excess or contributing insurance. 7.8 The Owner shall cooperate with Capital Senior in every respect and shall furnish Capital Senior all information required by Capital Senior for the performance of its services and shall permit Capital Senior to examine and copy any data in possession and control of the Owner affecting the development of the Project and shall in every way cooperate to enable Capital Senior to perform its services satisfactorily. VIII. COMPENSATION 8.1 In consideration of the performance of the planning, development, arranging for financing, initial occupancy development, arranging for design and construction, bookkeeping services and other services as contemplated in Articles II, III, IV, V and VI in connection with the initial development and other services of the Project, the Owner agrees to pay Capital Senior a Development Fee equal to four percent (4%) of all line items on the Capital Cost Budget (Exhibit B) excluding project contingency. In addition, Owner agrees to pay Capital Senior an overhead reimbursement fee equal to four (4%) percent of all items on the capital cost budget. The Development Fee will be paid as follows: 8.1.1 Thirty-five percent (35%) of the estimated total Development Fee as stated in the Capital Cost Budget shall be paid on a monthly basis commencing on the date of this Agreement and amortized over a period of six (6) months with the total amount due and payable prior to commencement of construction. 8.1.2 Sixty Five percent (65%) of the estimated total Development Fee shall be paid monthly during construction payable with said fee amortized over ten (10) months with the total amount (if completed sooner than ten (10) months) due and payable upon completion of construction. Progress construction is a condition precedent to Capital Senior's right to receipt of such fee. 5 6 8.2 In addition to the above, Capital Senior will invoice Owner on a monthly basis for all reimbursable costs accrued under this Agreement on behalf of the Project, and Owner shall authorize payment within 15 days of receipt of said invoices. IX. TERMINATION 9.1 Unless terminated sooner as hereinafter provided, this Agreement shall continue until the earlier of sixty (60) months or ninety percent occupancy of all phases of this Project. 9.2 Notwithstanding the foregoing, this Agreement may be terminated by Owner for Cause as defined in Sections 9.2.1 through 9.2.3, or by Capital Senior for Cause as defined in Section 9.2.4 as hereinafter provided: 9.2.1 In the even of material breach by Capital Senior of a material term hereof, which breach is not cured within sixty (60) days after written notice by Owner and such failure is the result of Capital Senior's willful misconduct, gross negligence, or unlawful act; 9.2.2 In the event that a petition in bankruptcy is filed by Capital Senior or its permitted assignee, or in the event Capital Senior or its permitted assignee makes an assignment for the benefit of creditors or takes advantage of an insolvency act, by notice to Capital Senior or assignee; 9.2.3 In the event that (i) Capital Senior's or any permitted assignee's corporate existence is dissolved and the duties under this Agreement are not assumed by Capital or an affiliate of Capital Senior (ii) Capital Senior or any permitted assignee ceases to do business for any reason, by notice to Capital Senior or such assignee, and the duties under this Agreement are not assumed by Capital Senior or Capital Senior's Affiliate. 9.2.4 This Agreement may be terminated by Capital Senior in the event that Capital Senior fails to receive reimbursement of reimbursable expenses or any compensation due Capital Senior pursuant to the terms of this Agreement, or any other compensation due Capital Senior, and such failure continues for a period of thirty (30) days after Capital Senior's written notice thereof to Owner. 9.2.5 No termination of this Agreement shall affect any obligation owing by either party hereto to the other which accrued prior to the effective date of such termination. 9.3 If either party elects to terminate this Agreement as a result of the occurrence of an event specified in paragraph 9.2, it shall give written notice to the other party and such termination shall be effective thirty (30) days after the mailing thereof and the applicable cure periods, if any, unless the grounds for termination have been remedied prior to such effective date of termination. If this Agreement is so terminated for Cause, as provided in Sections 9.2.1 6 7 to 9.2.3, Capital Senior shall be entitled to an amount equal to its earned compensation and shall be entitled to reimbursement for all advances made payable immediately, and neither party shall have any further obligations to the other. However, if Capital Senior terminates this Agreement for Cause, as provided in Section 9.2.4, or this Agreement is terminated without Cause by Owner, in addition to the amount of earned compensation and reimbursement for all advances made to the date of termination, Capital Senior shall be entitled to unearned compensation it would have been entitled to receive had this Agreement not been terminated, including the compensation provided in Section 8.1. X. GENERAL 10.1 So long as the Agreement is in force, Capital Senior agrees that the Owner may represent to the public that the planning and development is being done by Capital Senior, and the Owner agrees that the Capital Senior name will be identified, in an appropriate way, as the Owner's development company, on the construction marquee and related materials. 10.2 Except as stated in this Section 10.2, the ownership of trade names, trademarks, ideas, documents, forms, occupancy development material and other materials created by Capital Senior either prior to this Agreement or as a result of this Agreement is to be considered proprietary and will remain the property of Capital Senior whether the proposed Project is constructed or not. They are not to be used by the Owner except in connection with the Project. Upon the expiration of this Agreement, all materials created by Capital Senior for the Project, in accordance with this Agreement, shall belong to Capital Senior and all rights of the Owner therein shall automatically cease and terminate. Notwithstanding the above, the name selected for this Project shall become property of the Owner. 10.3 In order to carry out the intent and spirit of this Agreement, the Owner and Capital Senior will do all acts or things necessary, including the execution of other agreements, documents and instruments. 10.4 Whenever in this Agreement or otherwise in order to carry out its spirit and intent, the consent, approval, or agreement of the Owner or Capital Senior is required, it is agreed that it will not be unreasonably withheld. Measure of reasonableness shall include the degree to which the recommendations are consistent with other projects planned by Capital Senior, the degree to which the recommendations will result in a financially sound Project, and the degree to which the recommendations are consistent with earlier recommendations previously approved. 10.5 Once its approval is granted at each phase of the planning and development, financing, occupancy development, design, construction and operation, the Owner shall not subsequently alter or change the plan, budget or program without the written consent of Capital Senior. 10.6 This Agreement sets forth the entire agreement between Capital Senior and the Owner. Any change or modification of this Agreement must be in writing and signed by all parties hereto. 7 8 10.7 The Owner will indemnify and hold harmless Capital Senior from any and all liability arising incident to the Owner's performance of its duties under this Agreement. Capital will indemnify and hold harmless the Owner from any and all liabilities arising incident to Capital's performance of its duties under this Agreement. The Owner shall also indemnify and hold Capital Senior harmless against any and all losses, costs or expenses incurred by Capital Senior by reason of, arising out of or in any way related to noncompliance by the Facility with all applicable state, federal and local laws, ordinances, rules and regulations relating to the physical condition of the property of the Facility, provided Capital Senior shall promptly notify the Owner of Capital's knowledge of any such noncompliance. 10.8 This Agreement and its interpretation, validity and performance shall be governed by the laws of the State of Texas. 10.9 This Agreement shall be binding upon and shall inure to the benefit of the parties hereto, their successors and assigns. Notwithstanding the foregoing, neither party may assign this Agreement or any rights hereunder without the consent of the other. 10.10 Any dispute, claim or controversy of any kind between the parties arising out of this Agreement or involving the interpretation or application of any provision of this Agreement shall be submitted to arbitration in Dallas, Texas, in accordance with the commercial arbitration rules of the American Arbitration Association; provided, that each party shall be required to submit its proposed resolution of such dispute, claim or controversy to the arbitrator and the arbitrator shall be required to render a decision adopting in full one or the other of such proposed resolutions, and no compromises or alternative resolutions shall be allowed or considered by the arbitrator. The parties jointly shall agree on an arbitrator. If the parties are unable to agree in good faith within a reasonable time on the selection of an arbitrator, either party may request appointment of an arbitrator by the American Arbitration Association. The arbitration decision shall be final and binding on both parties unless the arbitration is fraudulent or so grossly erroneous as to necessarily imply bad faith. General costs of arbitration are to be shared by both parties equally, provided that the arbitrator may choose to award general costs of arbitration against the losing party if he or she determines that the final position urged by the losing party was not reasonable. 10.11 Any sums due but unpaid hereunder shall bear interest at a rate equal to 1% per annum plus the reference rate as announced from time to time and charged by national banks to its most credit worthy customers (generally referred to as prime rate of interest), from the due date until paid. 10.12 The Owner agrees to pay any sales tax or similar charges which may be imposed on any payments required to be made by the Owner hereunder. 10.13 No provision of this Agreement shall be disclosed by the Owner to any person, firm or corporation without the prior written approval of Capital Senior, except that Owner may disclose any provision hereof without the consent of Capital Senior to the extent necessary to comply with any statute, governmental rule or regulation or court order to which Owner may be subject. No provision of this Agreement shall be disclosed by Capital Senior to any person, firm 8 9 or corporation without the prior written approval of the Owner to the extent necessary to comply with any statute, governmental rule or regulation or court order to which Capital Senior may be subject. 9 10 IN WITNESS WHEREOF, the parties hereto have duly executed and delivered this Agreement effective on the day and year first above written, on this _____ day of __________, _____. TRIAD SENIOR LIVING __, L.P. CAPITAL SENIOR DEVELOPMENT, INC. BY ITS GENERAL PARTNER TRIAD SENIOR LIVING, INC. By: By: -------------------------- -------------------------- Name Name -------------------------- -------------------------- Title Title cc: James Stroud - Capital Senior Living David R. Brickman, Esq. - Capital Senior Living 10 EX-10.55 7 FORM OF MANAGEMENT AGREEMENT-TRIAD ENTITY 1 EXHIBIT 10.55 FORM OF MANAGEMENT AGREEMENT THIS MANAGEMENT AGREEMENT (the "Agreement") entered into effective as of the ____ day of , ______ by and between Tried Senior Living__, L.P. ("Owner"), a limited partnership organized under the laws of the State of California, and CAPITAL SENIOR LIVING, INC. ("Capital"), a corporation organized under the laws of the State of Texas. NOW, THEREFORE, in consideration of the foregoing and of the mutual covenants, conditions and agreements hereinafter set forth, the parties hereby agree as follows: PREAMBLE OWNER by this Agreement is engaging Capital to provide management services relating to the operation of a senior living community to be located in on the land identified in Exhibit A. This Agreement is founded on the following assumptions: Owner retains primary responsibility to: a. Establish the policies of the Facility and to plan for its short-range and long-range goals. b. Review and evaluate the performance of Capital in carrying out the established policies and in attaining the goals established by Owner. c. Annually review and approve the budget. d. Annually review the policies and goals which have been established. Capital assumes primary responsibility to: a. Implement the policies established by Owner. b. Supervise the day-to-day management of the Facility, including all resident activities. c. Provide to Owner full, timely and accurate information as to past operations. d. Provide to Owner projections and recommendations relating to the future operations of the Facility. 2 The parties therefore agree as follows: I. RESPONSIBILITIES OF CAPITAL A. RECOMMENDED POLICIES. Capital shall recommend policies and goals to be established by Owner and shall evaluate such policies and goals on an ongoing basis. B. MANAGEMENT DUTIES. Capital shall supervise the operation of the Facility, provide management services, install operating procedures and oversee day-to-day operations, all subject to and in accordance with the budgets approved by and policies established by Owner. C. MARKETING DUTIES. Capital shall manage and supervise the marketing program. Capital shall establish and periodically review the residency agreement and if required, recommend changes thereof. D. EMPLOYEES. All Facility-based Employees, including the administrative employees, shall be employees of Capital. Capital shall have sole authority over Facility-based Employees and Non-Facility-based Employees who are directly responsible for the Facility and all matters pertaining thereto and shall be responsible for all actions and omissions of such employees. All costs of hiring, equipping and providing the services of Facility-based Employees, including, but not limited to, compensation, health insurance, employer liability insurance, payroll taxes, bonding, workers compensation insurance, benefits and vacations shall be an expense of Owner. E. OPERATING PROCEDURES. Capital shall develop, install and maintain operating procedures, systems and controls. F. FACILITY EXPANSION. Capital shall make recommendations regarding remodeling or expansion of the Facility. G. BUDGETS. Capital shall prepare for review and approval by Owner, such approval not to be unreasonably withheld, annual operating budgets for revenue, expense and cash flow of the Facility and a capital expenditures budget. Budgets shall be prepared in advance of each fiscal year. Cash flow projections shall accompany each operating budget. Any changes to the budgets must be approved by Owner, such approval not to be unreasonably withheld. H. FINANCIAL CONTROLS. Capital shall establish and maintain a system of financial controls for the Facility. I. MONTHLY FINANCIAL STATEMENTS. Capital shall provide to Owner, on a monthly basis, financial statements and related financial reports. Such statements and 2 3 reports shall be provided by the 20th day after the end of the month. These reports shall be in the form attached as Exhibit "B." J. MARKETING REPORTS. Capital shall, on a weekly and monthly basis, provide sales and occupancy reports to Owner, as well as the results of the annual resident satisfaction survey. K. LEGAL COUNSEL. Capital, at Facility expense, shall coordinate with Owner the utilization of legal counsel relating to Facility operations. L. RENTAL COLLECTIONS AND DISBURSEMENTS. Capital shall collect the revenues from the residents and, on behalf of Owner, deposit all such funds in a residential depository account at a FDIC insured bank approved by Owner. The style of the account shall be in the name of the Facility with designated representatives from Owner and Capital being the only parties authorized to draw from said account. On an as needed basis, Capital shall transfer the funds from the above stated account into an Operating Expense Account in the name of the Facility. The account shall be in a FDIC insured bank approved by Owner. The style of the account shall be in the name of the Facility with designated representatives from Owner and Capital being the only parties authorized to draw from said account. Capital shall pay out of such Operating Expense Account all operating expenses for which payment has been approved in accordance with the budget or approved by Owner (including Capital's Management Fee and any other sums due to Capital from Owner), and all other sums properly payable pursuant to any of the provisions of this Agreement. These funds shall not be co-mingled with funds from any other projects and/or facilities managed and/or operated by Capital. M. ACCOUNTING SYSTEMS AND SOFTWARE. Capital shall provide to Owner, during the term of this Agreement, appropriate on-site accounting systems and software, which shall include complete accounting, bookkeeping and record keeping services for the Facility, specifically including, but not limited to, resident billings, accounts payable, accounts receivable, general ledger and inventory records and maintain demographic information on the residents. Acquisition of software for Facility based operations, software maintenance and update charges will be budgeted expenses of the Facility. Payroll processing may be delegated to a third party, the cost of which will be the responsibility of the Facility. II. OWNER'S RESPONSIBILITIES A. POLICIES. Owner shall establish the policies for the Facility. B. GOALS. Owner shall establish the short range and long range goals of the Facility. 3 4 C. BUDGETS. Owner shall review and approve, such approval not to be unreasonably withheld, budgets for the operation of the Facility. D. CAPITAL'S PERFORMANCE. Owner shall review and evaluate the performance of Capital in carrying out the policies for the Facility. E. LEGAL COUNSEL. Owner shall obtain legal counsel to perform all necessary legal services relating to Owner's ownership of the Facility. F. AUDITS. Owner, at its discretion, may engage certified public accountants to perform annual audits of the Facility as well as prepare any other reports required for federal or state regulatory agencies which require licensure and/or certification. Every quarter, upon receipt of reasonable notice to Capital, all financial records pertaining to the Facility will be open for inspection and review by Owner's representatives. All labor and expense associated with such review shall be borne by Owner. G. DIRECTIVES. In order to assure proper coordination, Owner shall issue any directions concerning the operations of the Facility only through the President or Vice President of Capital. H. OPERATING REPORTS. During the term of this Agreement, Owner shall, within fourteen (14) days of issuance, furnish to Capital copies of any and all Facility-related reports, including the annual audit (if any). I. CHANGE OF RESIDENCY AGREEMENT. Owner shall not change the Residency Agreement without consulting with and seeking approval of Capital unless required to do so to comply with any applicable law or regulation. J. DECISIONS. Owner shall examine documents submitted by Capital and render decisions pertaining thereto promptly to avoid unreasonable delay. K. UNIFORM ACCOUNTS. Facility shall use the uniform chart of accounts recommended by Capital. L. FURNISHING INFORMATION. Owner agrees at its expense to install and maintain a computer terminal at the Facility compatible with the mainframe computer currently in use by Capital and to transmit data to Capital via telephone lines. M. RIGHT OF FIRST REFUSAL. 1. hereby grants to Capital a right of first refusal in the event that decides to sell the Facility during the initial term of this Agreement. shall furnish Capital with a written copy of the terms and conditions of the proposed sale, which terms and conditions shall be certified by as bona fide and Capital shall have forty-five (45) days from the date of 4 5 receipt of such written copy within which to notify whether Capital desires to exercise its rights of first refusal to purchase the Facility on the same terms and conditions. If Capital fails to notify of its desire to exercise its right of first refusal within such forty-five (45) day period, Capital shall be deemed to have not exercised its right of first refusal hereunder. 2. If Capital exercises its right of first refusal, Capital shall have an additional sixty (60) days following expiration of the forty-five (45) day notice period within which to obtain financing to purchase the Facility. Capital shall notify whether it has obtained financing to purchase the Facility within such sixty (60) day period. If Capital fails to notify of its having obtained financing within such sixty (60) day period, Capital shall be deemed not to have obtained the requisite financing. 3. If Capital gives timely notice of the exercise of its right of first refusal and having obtained the requisite financing to purchase the Facility, the closing on the sale to Capital shall take place within thirty (30) days after the expiration of the sixty (60) day period on materially the same terms and conditions as set forth in the bona fide offer; provided, however, that Capital shall furnish with a non-refundable deposit equal to five percent (5%) of the purchase price, to be credited with interest earned thereon against the purchase price at the closing in order to extend the closing for such thirty (30) day period. 4. If Capital fails to give timely notice of the exercise of its rights of first refusal or having obtained the requisite financing to purchase the Facility, shall be free to close on the sale to the proposed purchaser, with the closing to take place within one hundred eighty (180) days after the failure of Capital to give timely notice, but only on materially the same terms and conditions as set forth in the bona fide offer. If such closing to the proposed purchaser does not occur within such one hundred eighty (180) day period or if the terms and conditions of the proposed sale are not materially the same as set forth in the bona fide offer, the Facility may not be sold without Capital once gain offered the right to exercise its right of first refusal hereunder. 5. Any sale, sub-lease or assignment with respect to the Facility, other than to Capital, shall be expressly subject to the terms and provisions of this Agreement and shall not relieve of its liability or obligations hereunder and shall cause any purchaser, assignee or sub-lessee to deliver to Capital written acknowledgement of its agreement to perform hereunder including the payment of the management fee described herein. may at any time, without the consent of Capital, subject its interest in the Facility or any part thereof to the lien of one or more deeds of trust, mortgages or other security instruments, so long as the mortgage and/or 5 6 successor in interest confirms its consent to be bound by the terms of this Agreement within ten (10) days following Capital's demand therefor; provided, however, that so long as has no right to terminate this Agreement because of the default of Capital hereunder; in the event of any foreclosure of other proceeding under any such deed or trust, mortgage or other security instruments to enforce the lien or security interest thereby created, this Agreement shall continue in full force and effect notwithstanding such foreclosure or other proceedings. III. INSURANCE A. Capital shall maintain, in full force and effect, at the Facility's expense, the following insurance protecting Owner and Capital and their officers and employees: 1. Employee's fidelity insurance 2. Workers compensation and employers liability insurance 3. Professional liability insurance 4. Comprehensive general public liability insurance and overlying umbrella liability coverage against loss or liability for damages for personal injury or death occurring on, in or about the Facility. Such policy or policies shall be written by a responsible insurance company or companies satisfactory to Owner and in kind and amounts satisfactory to Owner. Certificates of insurance showing compliance with the foregoing requirements shall be furnished by Capital to Owner. Certificates shall state that the policy or policies will not be canceled or altered without at least 30 days prior written notice to Owner. B. Owner shall procure and maintain, in full force and effect, at Owner's expense the following insurance protecting Owner and Capital and their officers and employees: 1. Property Insurance for loss or damage by fire and other perils insurable under the broad form of extended coverage insurance available in the area where the Facility is located, and improvements, and contents thereof, constituting all or any portion of the Facility. 2. Insurance for automobiles owned or hired by Owner and used in connection with the Facility. Such policy or policies shall be written by a responsible insurance company or companies satisfactory to Capital in kind and amounts 6 7 satisfactory to Capital. Certificates of insurance showing compliance with the foregoing requirements shall be furnished by Owner to Capital. Certificates shall state that the policy or policies will not be canceled or altered without at lease thirty (30) days prior written notice to Capital. IV. TERM AND TERMINATION OF THIS AGREEMENT. A. TERM AND TERMINATION WITHOUT CAUSE. This Agreement shall commence on the date set forth on the first page hereof. Payment under Section V herein shall commence on the date of the first resident move-in. The term of this Agreement shall continue for a period of ten (10) years from the date of the first resident move-in (the "Initial Term") and continue for the Initial Term unless terminated by law or otherwise according to its terms. Capital shall have the option to extend the term of this Agreement for an additional five (5) year renewal option on the same terms and conditions as herein provided (the "Extended Term"). B. If Owner terminates the Agreement prior to the expiration of the Initial Term without cause or if Capital terminates this Agreement during the Initial Term for cause as provided in Paragraph IV. B. below, severance compensation in an amount equal to the then-current monthly management fee times the number of months remaining in the Initial Term shall be paid to Capital upon the effective date of termination. Any such termination shall be effective upon the expiration of the ninety (90) day period following the giving of the notice or on such later date as may be specified in the notice. C. TERMINATION FOR CAUSE. 1. This Agreement may be terminated by Owner for cause for the following reasons: a. In the event of material breach by Capital of a material term hereof, which breach is not cured within sixty (60) days after notice by Owner. b. In the event that a petition in bankruptcy is filed by Capital or its permitted assignee, or in the event Capital or its permitted assignee makes an assignment for the benefit of creditors or takes advantage of an insolvency act, by notice to Capital or assignee. c. In the event that (i) Capital's or any permitted assignee's corporate existence is dissolved and the duties under this Agreement are not assumed by Capital or an affiliate of Capital (ii), Capital or any permitted assignee ceases to do business for any reason, by notice to Capital or such assignee and the duties under this Agreement are not assumed by Capital or Capital's Affiliate. 7 8 2. This Agreement may be terminated for cause by Capital in the event that Capital fails to receive reimbursement of reimbursable expenses or any compensation due Capital pursuant to the terms of this Agreement or any other compensation due Capital, and such failure continues for a period of sixty (60) days after Capital's written notice thereof to Owner; provided however, that this Agreement shall not be so terminated if Owner pays Capital all such expenses and compensation then due and payable on or before the expiration of said sixty (60) day period. Capital shall have the right to terminate this Agreement if Capital fails to receive reimbursements or compensation as a result of a subordination agreement by Capital in favor of a lender of Owner, but such termination shall not be considered for cause and shall not entitle Capital to the severance compensation provided for in Section IV.B. hereof. 3. No termination of this Agreement shall affect any obligation owing by either party hereto to the other which accrued prior to the effective date of such termination. D. COVENANTS SURVIVING TERMINATION. The termination of this Agreement shall not terminate the right of Owner or Capital to indemnification relating to events occurring during the term of this Agreement under Article VI. K. and to protection of Owner's or Capital's property rights under Article VI.B. V. COMPENSATION A. OPERATIONS MANAGEMENT FEES. Owner shall pay to Capital a fee in the amount set forth below, payable by the fifteenth day of each month. Payment shall commence on the date of the first resident move-in. The amount to be paid monthly shall be 5% of Gross Revenues generated during the immediately proceeding month provided that the monthly management fee shall not be less than [85% of stabilized gross revenue] ("Monthly Management Fee"). "Gross Revenues" shall be as defined in Section V.B. The Monthly Management Fee for the Facility shall be payable monthly in arrears following calculations thereof upon submission of a monthly statement for such Facility from Capital. It is agreed between Owner and Capital that if the Gross Revenues of the Facility are insufficient to pay all disbursements, including the Monthly Management Fee or any portion thereof, then Owner shall remain responsible for such disbursements. It is further agreed between Owner and Capital that in no event will any disbursement be made to Owner from any Facility Account until all accrued and unpaid fees to Capital and repayments, if any, to Capital for Capital's advancement of funds to cover any insufficiencies in such Facility's Rental or Payroll Account have been paid in full. B. INCENTIVE MANAGEMENT FEE. In addition to the Monthly Management Fee stated above, as additional compensation for the services to be rendered by Capital 8 9 during the Term, Capital shall be paid a fee (the "Incentive Management Fee") based upon performance standards which shall be mutually agreed upon by Owner and Capital. Unless otherwise mutually agreed upon by Owner and Capital, the Incentive Management Fee shall equal 25% of the amount, if any, by which Net Cash Flow for any annual or shorter period during the Term ending December 31 of any year or for the last period in the Term ending on the last day of the Term exceeds the agreed upon performance standards. For purposes of this Section V.B., "Net Cash Flow" shall mean, for any period for which such sum is being computed, the excess of (a) Gross Revenues for the Facility during such period over (b) Operating Expenses for the Facility during such period. "Gross Revenues" shall mean and refer, for any period for which such Gross Revenues are being determined, the sum of the total gross revenues of the Facility from operations received during such period, including all receipts from (i) rent of units at the Facility, (ii) rent or business interruption insurance, if any, (iii) revenue of the Facility for or on account of any and all goods provided and services rendered or activities during such period, (iv) reimbursements of expenses paid by the Facility which are to be borne by others, (v) deposits in the event of forfeiture thereof to the Facility and (vi) other revenues and receipts realized by the Facility from operations and customarily included in Net Cash Flow; Gross Revenues shall not include (i) security deposits received from residents and, if applicable, interest accrued thereon for the benefit of the residents until such deposits or interest are applied for rental payments; (ii) proceeds from the sale or dispositions of all or any part of such Facility; (iii) insurance proceeds received by Owner as a result of any insured loss (except proceeds for rent loss insurance) and proceeds from any condemnation action; (iv) capital contributions made by any partner of Owner; (v) loans by Owner or its partners; (vi) proceeds from capital, financing and any other transactions not in the ordinary course of operation of such Facility and (vii) advance rentals paid (until such time as they are earned). "Operating Expenses" shall mean, for any period for which such Operating Expenses are being determined, the sum of the total gross expenditures of the Facility for operations during such period, including (A) all cash operating expenses (including the Monthly Management Fee, any Incentive Management Fee, all commissions and other fees, expenses and allowances paid to Capital), (B) any other expenditures of the Facility which are not treated as capital expenditures under generally accepted accounting practices, and (C) real estate taxes, personal property taxes and sales taxes; provided however, that Operating Expenses shall not include any payments or expenditures to the extent the sources or funds used for such payments or expenditures are not included in Gross Revenues. C. CERTAIN EXPENSES. In accordance with the Annual Budgets, the Facility will reimburse Capital for all overhead and expenses incurred by Capital in performing these services under this Agreement, to include, but not be limited to, insurance, salaries of Facility and non-Facility employees, office supplies, the cost of reasonable transportation, lodging and meal expenses for non-Facility-based 9 10 employees of Capital or its outside consultants when traveling in connection with the performance of the services being performed pursuant to this Agreement, telephone expenses, copying and mailing and express shipments. Relocation, education, professional memberships and licensing expenses of the Facility-based administrative employees shall also be an expense of the Facility. VI. MISCELLANEOUS A. INSURANCE-SUBROGATION. No indemnity shall be paid to the other party under this Agreement where the claim, damage, liability, loss or expense incurred was required to be insured against by such other party. Any insurance policies obtained by the parties pursuant to this Agreement shall contain provisions or have the effect of waiving any right of subrogation by the insurer of one party against the other party or its insurer. B. STATUS OF PARTIES. It is expressly understood and agreed that Capital shall act as an independent contractor in the performance of this Agreement. No provision hereof shall be deemed or construed to create a partnership or a joint venture between Owner with respect to the Facility or otherwise. C. ADDITIONAL ACTION. In order to carry out the intent and spirit of this Agreement, Owner and Capital will do all acts and things necessary including the execution of other agreements. D. ENTIRE AGREEMENT. This Agreement sets forth the entire Agreement between Capital and Owner. Any change or modification of this Agreement must be in writing and signed by all parties hereto. E. BINDING EFFECT. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto, their successors and assigns. F. ASSIGNMENT, ETC. Except for an assignment by Capital to an affiliate, Capital shall not, without Owner's prior written approval (which approval shall not be unreasonably withheld), assign any of its rights or obligations under this Agreement. G. GOVERNING LAW. This Agreement, its interpretation, validity and performance shall be governed by the laws of the State of Texas. H. NON-COMPETE. Without the prior written consent of Capital, for a period of three years following termination of this Agreement, Owner will not employ or engage any Capital employee assigned to or employed by the Facility at any time during the last twelve (12) months of the term of this Agreement. This Section shall not apply to any lender of Owner which takes over control of the Facility. 10 11 I. CONDITIONS BEYOND CONTROL OF PARTIES. Neither party shall be held liable for failure to comply with any of the terms of this Agreement when such failure has been caused solely by fire, labor dispute, strike, war, insurrection, government restrictions, force majeure, or act of God beyond the control and without fault on the part of the party involved, provided such party uses due diligence to remedy such default. Circumstances are likely to arise from time to time which may require that budgets be exceeded, and Capital shall not be liable for budget overruns. J. INDEMNIFICATION. Owner will indemnify and hold harmless Capital from any and all liability arising incident to Owner's performance of its duties under this Agreement. Capital will indemnify and hold harmless Owner from any and all liabilities arising incident to Capital's performance of its duties under this Agreement. Owner shall also indemnify and hold Capital harmless against any and all losses, costs or expenses incurred by Capital by reason of, arising out of or in any way related to noncompliance by the Facility with all applicable state, federal and local laws, ordinances, rules and regulations relating to the physical condition of the property of the Facility, provided Capital shall promptly notify Owner of Capital's knowledge of any such noncompliance. K. ARBITRATION. In the event of any dispute, claim or controversy of any kind between the parties, concerning this Agreement or the termination of this Agreement, the matter shall be submitted to arbitration in accordance with rules of the American Arbitration Association. The parties jointly shall agree on an arbitrator. If the parties are unable to agree, in good faith within a reasonable time, on the selection of an arbitrator, either party may request appointment of an arbitrator chosen by the American Arbitration Association who shall be the Selected Arbitrator. Such arbitrator shall be limited in his decision to a choice between the final position as requested by each party. Said arbitration shall be held in Dallas/Ft. Worth, Texas or such other place as is mutually agreeable. The arbitration decision shall be final and binding on both parties unless the arbitration is fraudulent or so grossly erroneous as to necessarily imply bad faith. Costs of arbitration are to be shared by both parties equally, provided that the arbitrator may choose to award the costs of arbitration against the losing party if the arbitrator determined that the final position urged by the losing party was not reasonable. 11 12 TRIAD SENIOR LIVING _, L.P. CAPITAL SENIOR LIVING, INC. By: Triad Senior Living, Inc. Its General Partner By: By: ------------------------------- ------------------------------ Name: Name: ------------------------------ ---------------------------- Title: Title: ----------------------------- ---------------------------- 12 EX-10.56 8 AGREEMENT OF LP OF TRIAD SR LIVING I-4/1/98 1 EXHIBIT 10.56 AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF TRIAD SENIOR LIVING I, L.P. (FORMERLY KNOWN AS TRI POINT COMMUNITIES, L.P.) THIS AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP is dated effective as of April 1, 1998, by and between Capital Retirement Group, Inc., a Texas corporation (the "Withdrawing General Partner"), Triad Senior Living, Inc., a Texas corporation (the "General Partner"), Jeffrey L. Beck ("Beck"), JAS Trust ("JAS" and, together with Beck, the "Withdrawing Limited Partners"), Blake N. Fail ("Fail") and Capital Senior Living Properties, Inc., a Texas corporation ("Capital Senior Living" and, together with Fail, the "Limited Partners"). WHEREAS, the Withdrawing General Partner and the Withdrawing Limited Partners entered into that certain Agreement of Limited Partnership of Tri Point Communities, L.P. (the "Partnership"), dated November 6, 1997 (the "Original Agreement"); and WHEREAS, the General Partner desires to purchase the Withdrawing General Partner's interest in the Partnership and the Withdrawing General Partner desires to withdraw from the Partnership; and WHEREAS, Fail desires to purchase the Withdrawing Limited Partners' interests in the Partnership and the Withdrawing Limited Partners desire to withdraw from the Partnership; and WHEREAS, Capital Senior Living desires to make a capital contribution to the Partnership in exchange for the issuance of a limited partner interest in the Partnership; and WHEREAS, the Withdrawing General Partner, the Withdrawing Limited Partners, the General Partner and the Limited Partners desire to effect such transfers and issuances, all as more fully set forth herein; and WHEREAS, the General Partner and the Limited Partners desire to continue the existence of the Partnership and to amend and restate the terms and provisions of the Original Agreement, including changing the name of the Partnership to "Triad Senior Living I, L.P."; NOW THEREFORE, in consideration of the foregoing and of the mutual covenants, conditions and agreements hereinafter set forth, the parties hereby agree as follows: 2 ARTICLE I ADDITIONAL DEFINITIONS As used herein, the following terms shall have the following meanings: "Accountant" - means any independent firm of certified public accountants as may be engaged by the General Partner for the Partnership. "Affiliate" - means (a) a General Partner; (b) a Limited Partner; (c) a member of the immediate family of a partner, shareholder, of a General Partner or a Limited Partner; (d) a legal representative of any Person, referred to in the preceding clauses (a) through (c); (e) a trustee for the benefit of any Person referred to in the preceding clauses (a) through (c); (f) a corporation, joint venture, partnership or other business entity which is controlled by such person or entity and/or any one or more of the Persons referred to in the preceding clauses (a) through (c); (g) a corporation, joint venture, partnership or other business entity which controls or is under common control with such person or entity, and/or with a person or entity referred to in the preceding clauses (a) through (c); or (h) the partners, officers, directors and key employees of such entity and/or any corporation, joint venture, partnership or other business entity referred to in the preceding clauses (a), (b), (c), (f) or (g). "Agreement" or "this Agreement" - means this Agreement of Limited Partnership, as amended from time to time. "Capital Contributions" - means the gross amount of contributions actually made to the capital of the Partnership by a Partner or all the Partners, as the case may be. Loans to the Partnership by any Partner shall not be considered a Capital Contribution. "Certificate" - means the Certificate of Limited Partnership of this Partnership filed with the Secretary of State of the State of Texas, as such Certificate may be further amended and filed from time to time. "Certificate of Occupancy" - means that certain certificate of occupancy which has been issued for any building at a Property. "Code" - means the Internal Revenue Code of 1986, as amended. "Development Agreement" - means the development agreement between the Partnership and Capital Senior Development, Inc. relating to the Properties, as such agreement may be amended from time to time. "Fiscal Year" - means the fiscal year of the Partnership as set forth in Section 11.1 hereof. 2 3 "General Partner" - means Triad Senior Living, Inc., and any additional or successor General Partner(s) designated in any case as such in accordance with the provisions of this Agreement, and, from time to time, holding such position in accordance with such provisions. "Gross Receipts" - means all revenues received by the Partnership from the operations of its business attributable to a particular period as determined in accordance with the cash receipts and disbursements method of accounting, and including, without limitation, any loans from Partners and third parties, and other amounts paid by Partners and third parties to the Partnership, but not including capital contributions. "Limited Partners" - means Blake N. Fail and Capital Senior Living Properties, Inc., and any additional or substitute Limited Partner(s) as may be designated as such in accordance with the provisions of this Agreement. "Lenders" - means Bank One, Texas, N.A. and the other Lenders (as such term is defined therein) under the Master Loan Agreement dated December 23, 1997 by and among Tri Point Communities, L.P., Bank One, Texas, N.A., as Agent for the Lenders, and the Lenders named therein, as the same may be modified, amended or restated from time to time, GMAC Commercial Mortgage Corporation or their successors and/or assigns. "Loan" - means those certain loans from Lenders to the Partnership in the original aggregate principal amount of $50,000,000.00 each. "Loan Documents" - means all documents evidencing, securing or otherwise entered into in connection with the Loan, including, without limitation, Note, Deed of Trust, Security Agreement, Assignment of Rents and Financing Statement, Assignment of Leases and Rents, and UCC-1 Financing Statement. "Management Agreement" means the management agreement between the Partnership and Capital Senior Living, Inc. relating to the Properties, as such agreement may be amended from time to time. "Net Cash Flow" - means the amount, if any, by which Gross Receipts plus cash reserves of the Partnership from the previous period exceed Operating Expenses for such particular period, to the extent the General Partner determines, in its sole discretion, that cash is not otherwise required for Partnership purposes, including the setting up or continuing of a reasonable working capital reserve for the Partnership. "Net Cash Flow" shall not include or reflect any proceeds received or expenses incurred in connection with the sale or other disposition of all or substantially all of the assets of the Partnership or the termination and liquidation of the Partnership. "Operating Expenses" - means all cash expenditures of any kind or nature incurred by the Partnership attributable to a particular period, as determined in accordance with the cash receipts and disbursements method of accounting. 3 4 "Partner" or "Partners" - means the General Partner or the Limited Partners, or any of them. "Partnership" - means the limited partnership evidenced by this Agreement, as said limited partnership may from time to time be constituted, amended and, if necessary, reconstituted, including any successor limited partnership. "Percentage Interests" - means the percentage set forth opposite the name of such Partner under the column "Interest" in Exhibit B attached hereto and made a part hereof for all purposes. "Person" - means an individual, firm, corporation or other legal entity. "Properties" - means those certain tracts of land which have been agreed to in writing by all of the Partners. Upon such written approval, the General Partner shall attach the legal description for a Property hereto as Exhibit A. "Revised Act" - means the Texas Revised Limited Partnership Act, as adopted and from time to time amended by the State of Texas. ARTICLE II FORMATION NAME AND OFFICE; PURPOSE Section 2.1 Formation The Partnership commenced on November 6, 1997 as a Texas limited partnership effective upon the filing of the Certificate with the Secretary of State of the State of Texas pursuant to the provisions of the Revised Act, and shall continue for the purpose and upon the terms and conditions herein set forth. Section 2.2 Name, Registered Agent and Registered Office The name of the Partnership shall be Triad Senior Living I, L.P. or such other name as the General Partner shall hereafter designate by notice to the Limited Partners and by amendment to the Certificate properly filed with the Secretary of State of the State of Texas. The principal place of business in Texas where books and records of the Partnership will be kept and made available shall be 14332 Regency Place, Dallas, Texas 75240, or such other place as the General Partner may from time to time designate in a notice to the Limited Partners and by amendment to the Certificate. The registered office of the Partnership and the registered Agent shall be as set forth in the Certificate, or such other registered Agent and registered office as the General Partner may from time to time designate in a notice to the Limited Partners and by amendment to the Certificate. 4 5 Section 2.3 Purpose The purpose of the Partnership shall be strictly limited to activities relating to the acquisition, ownership, operation, and sale of the Properties, and such other activities as are incidental thereto, including without limitation, entering into the Loan and the performance of the Partnership's obligations under the Loan Documents. ARTICLE III TERM The term of the Partnership shall commence upon the filing of the Certificate with the Secretary of State of the State of Texas, and shall continue until December 31, 2050, on which date the Partnership shall terminate, unless sooner dissolved upon the occurrence of any of the events of dissolution or termination, as described in Article X. ARTICLE IV INTERESTS OF THE GENERAL PARTNER AND LIMITED PARTNERS Section 4.1 General Partner The General Partner is Triad Senior Living, Inc., and it shall have a 1% interest in the Partnership. Except as provided in Article IX of this Agreement, no other Person shall become a General Partner in the Partnership. The address of the General Partner is set forth on Exhibit B. Section 4.2 Limited Partners The Limited Partners are Blake N. Fail and Capital Senior Living Properties, Inc., which shall have the interests in the Partnership as shown on Exhibit B. Except as provided in Article IX of this Agreement, no other Person shall become a Limited Partner or substitute Limited Partner in the Partnership. The address of the Limited Partners are set forth on Exhibit B. ARTICLE V CAPITAL CONTRIBUTIONS Section 5.1 Capital Contribution of the General Partner The General Partner has contributed to the Partnership the amount set forth on Exhibit B. The General Partner shall not be obligated to pay any Partnership expenses or make any capital contributions to the Partnership except as provided in this Section 5.1 and Section 5.3. 5 6 Section 5.2 Capital Contribution of the Limited Partners The Limited Partners have contributed or will contribute to the Partnership the amounts set forth on Exhibit B. The Limited Partners shall not be obligated to make any other capital contributions to the Partnership except as provided in this Section 5.2 and Section 5.3. Section 5.3 Additional Capital Contributions The Partners may, but are not required to, make their pro rata share (based on Percentage Interests) of any additional capital contributions to the Partnership. In the event that any Partner does not make such additional capital contribution, the Partnership shall return the amounts contributed by the Limited Partners for such additional capital contributions. The additional capital contributions shall be due only upon the written notice from the General Partner to the Partners. The General Partner shall contribute to the capital of the Partnership in the amount required and at the time specified in Section 2.2(d) of Exhibit C attached hereto. Section 5.4 Return or Withdrawal of Capital Contributions; Distributions Except as otherwise expressly provided in this Agreement, none of the Partners shall be entitled to demand a refund or return of any Capital Contribution or to withdraw any part of its capital account or to receive any distribution from the Partnership. Section 5.5 Capital Accounts A capital account shall be established and maintained for each Partner as set forth in Exhibit C attached hereto. Section 5.6 Loans by the Partners. If the General Partner determines that the Partnership needs additional capital, it may request that the Partners make loans to the Partnership. Then each Partner shall have the option, but not the obligation, to loan to the Partnership some or all of the aggregate amount of the requested loan. Any loans made by the Partners shall not be considered to be contributions to the capital of the Partnership. ARTICLE VI LIMITED PARTNERS Section 6.1 Powers: Actions The Limited Partners shall neither participate in the management or control of the Partnership's business nor shall they transact any business for the Partnership, nor shall they have the power to sign for or bind the Partnership, said powers being vested solely and exclusively in the General Partner. 6 7 Section 6.2 Limitation of Liability Anything to the contrary herein expressed or implied notwithstanding, the Limited Partners shall not be personally liable for any of the debts of the Partnership or any of the losses thereof in excess of their respective shares of Partnership assets, capital contributions which they have made or are obligated to make to the Partnership, and their share of the Partnership's income and gains; provided, however, that to the extent required by applicable law, if a Limited Partner receives a distribution at a time when it knew that, after giving effect to the distribution, all liabilities of the Partnership, other than liabilities to the Partners with respect to the partnership interests and liabilities for which the recourse of creditors is limited to specific Partnership assets, exceed the fair value of the Partnership's assets (except that the fair value of property that is subject to a liability for which there is recourse of creditors is limited shall be included in the Partnership's assets only to the extent that the fair value of that property exceeds that liability), then the Limited Partner receiving such distribution shall be liable for the return of such distribution. ARTICLE VII GENERAL PARTNER Section 7.1 Powers; Actions The General Partner shall manage and control the business and affairs of the Partnership. Without limiting the generality of the foregoing, the General Partner shall have full power to (i) manage the Partnership; (ii) execute such documents as it may deem advisable for Partnership purposes, including, without limitation, the Loan Documents and all documents necessary for the acquisition, financing, refinancing, ownership, operation and sale of the Property; (iii) acquire, sell, lease, transfer, assign, convey, mortgage, refinance, or otherwise dispose of or deal with all or any part of the Property on such terms as it deems reasonable; (iv) establish and maintain, to the extent Partnership funds are available, reasonable reserves for anticipated and unanticipated expenses relating to the activities of the Partnership; (v) perform or cause to be performed the Partnership's obligations, and exercise or cause to be exercised all of the Partnership's rights, under any agreement to which the Partnership or any nominee of the Partnership is a party; and (vi) on behalf of the Partnership, employ, engage, retain or deal with any Person, including any Affiliate, to perform services in connection with the ownership and operation of the Property, provided in all such cases such services are deemed by the General Partner to be advisable and the compensation therefor is reasonable. Section 7.2 Restrictions on the General Partner (a) Notwithstanding the foregoing in Section 7.1 or any other provision of this Agreement, the Partnership shall be subject to the following restrictions and the General Partner shall have no authority to take and shall not take any action on behalf of the Partnership in violation of any of the following restrictions: 7 8 (i) No bankruptcy or insolvency filing or similar proceeding for the Partnership may be commenced, and no bankruptcy or insolvency filing or similar proceeding may be commenced as to the General Partner on its own behalf or as General Partner on behalf of the Partnership. (ii) The Partnership and the General Partner are prohibited from creating, incurring or assuming any indebtedness other than the Loan and any subordinate financing permitted under the Loan Documents. (iii) The Partnership and the General Partner are prohibited from liquidating or dissolving or consenting to the liquidation or dissolution, in whole or in part, of either the Partnership or the General Partner. (iv) The Partnership and the General Partner may not consolidate, merge, or enter into any form of combination with or into any other entity or convey, transfer or lease its assets substantially as an entirety to any entity, except for a transfer of the Property to the manager pursuant to the purchase option in the Management Agreement or permit any entity to consolidate, merge or enter into any form of combination with or into the Partnership or the General Partner, as the case may be, or convey, transfer or lease its assets substantially as an entirety to the Partnership or the General Partner, as the case may be. (b) Notwithstanding anything in this Agreement to the contrary, the General Partner shall not have the right or the power to make any commitment or engage in any undertaking on behalf of the Partnership in respect of a Major Decision (as hereinafter defined) unless and until such Major Decision has been approved in writing by all of the Limited Partners. The term "Major Decision," as used in this Agreement, means any decisions with respect to the following matters: (i) All financing and refinancing decisions pertaining to indebtedness owing, directly or indirectly, to and/or by the Partnership. (ii) Any amendment, modification, change or restatement of this Agreement. (iii) Any capital expenditures in excess of $50,000 on any Property that has already been developed. (iv) The assignment of any interests in the Partnership except as expressly provided by the terms of this Agreement. (v) Any amendment, modification or change to the Management Agreement or the Development Agreement. 8 9 (vi) The engagement by the Partnership in any business other than as set forth in Section 2.3 above. (vii) The transaction of business with Affiliates of Partners except as set forth herein. (viii) The execution of any guarantees, indemnities, sureties or similar commitments on behalf of the Partnership. (ix) Any decision to cause the Partnership to loan funds to any person, and the terms on which any such loan is made. (x) Any act in contravention of this Agreement. (xi) The addition of a tract of land to the defined term "Properties" or a change in the use of the Property. (xii) The admission of any new Partners to the Partnership (except as otherwise allowed herein) or the appointment of any additional General Partner. (xiii) Any other act which the Revised Act specifically requires to be approved by all the Partners. Section 7.3 Duties and Obligations of the General Partner The General Partner shall manage and control the Partnership, its business and affairs. During the continuance of the Partnership, the General Partner shall diligently and faithfully devote such time to the management of the business of the Partnership as it deems reasonably necessary. Section 7.4 Tax Matters Partner. See Section 4.4 of Exhibit C attached hereto. Section 7.5 Liability; Indemnification The General Partner and its Affiliates shall not be liable to the Partnership or the Limited Partners for any act or omission performed or omitted by it pursuant to the authority granted to it by this Agreement, other than for fraud, willful malfeasance or gross negligence. The Partnership shall and hereby does indemnify and save harmless the General Partner, the Limited Partners and their Affiliates to the greatest extent permitted by the Revised Act from any loss, damage, claim or liability, including but not limited to, reasonable attorney's fees and expenses, incurred by them by reason of any act performed by the General Partner, the Limited Partners or their Affiliates on behalf of the Partnership, including, without limitation, their activities in winding up and liquidating the Partnership, or in furtherance of the Partnership's interests, except that the General Partner and its Affiliates shall not be indemnified for actions by the General Partner or its Affiliates which constitute a breach of any of their obligations under this Agreement, fraud, willful malfeasance or 9 10 gross negligence, provided, however, that the indemnity and save harmless provided for in this sentence shall be satisfied out of Partnership assets only and no Partner shall have any personal liability on account thereof. Section 7.6 Fees to and Reimbursement of the General Partner The Limited Partners acknowledge that the General Partner or its Affiliates will receive $5,833 per month beginning April 1, 1998 as an asset management fee. The General Partner and its Affiliates shall also be entitled to receive reimbursement of their expenses, but shall not be entitled to receive any other fees. The General Partner and its Affiliates shall receive reimbursement for all reasonable expenses advanced by the General Partner and its Affiliates on behalf of the Partnership and all expenses incurred during the operation of the Partnership. ARTICLE VIII ALLOCATIONS; DISTRIBUTIONS Section 8.1 Allocations of Income and Loss All items of income or loss of the Partnership shall be allocated to the Partners in accordance with the provisions of Exhibit C attached hereto, which are hereby incorporated by reference for all purposes of this Agreement. Section 8.2 Partnership Distributions of Cash During the term hereof, periodically, but not less frequently than annually, Net Cash Flow of the Partnership shall be distributed to the Partners in accordance with their Percentage Interests. ARTICLE IX ASSIGNABILITY OF GENERAL PARTNER'S AND LIMITED PARTNER'S INTERESTS; PURCHASE OPTION Section 9.1 Restrictions on Transfers Except as provided in Section 9.5 hereof, a Partner may not sell, assign, transfer, encumber, or dispose of, by operation of law or otherwise, any interest in the Partnership or in the property or assets of the Partnership without the prior written consent of the other Partners, which in the other Partners' absolute discretion may be withheld. Additionally, any such disposition must comply with the provisions hereinafter stated in this Article IX. Section 9.2 Assignment of a Limited Partner's Interest 10 11 (a) Except as otherwise provided in this Agreement, an assignee of the whole or any portion of a Partner's interest in the Partnership shall not have the right to become a Partner in place of its assignor unless (i) its assignor shall have designated such intention in the instrument of assignment; (ii) the written consent of the other Partners to such substitution shall have been obtained, which consent, in the other Partners' absolute discretion, may be withheld; (iii) the assignment instrument shall have been in form and substance satisfactory to the other Partner; (iv) the assignor and assignee named therein shall have executed and acknowledged such other instrument or instruments as the other Partners may deem necessary or desirable to effectuate such admission; and (v) the assignee shall have accepted, adopted and approved in writing all of the terms and provisions of this Agreement, as the same may have been amended. (b) In any event, the Partnership and the other Partners shall be entitled to treat an assignor of a Partner's interest as the absolute owner thereof in all respects, and shall incur no liability for distributions made in good faith to such assignor, until such time as the foregoing requirements have been satisfied. (c) The Partnership shall, upon satisfaction of the foregoing requirements, thereafter pay all further distributions or profits or other compensation by way of income or return of capital on account of the interest so assigned to the assignee. In the absence of notice to the other Partners and approval thereof in writing by them of the assignment of a Partner's interest, whether by operation of law or otherwise, any payment to an assigning Partner, or to his assigns, executors, administrators, or legal representative, shall acquit the Partnership of liability to the extent of such payment as to any other person, whether claiming as a remote or immediate assignee of the Partner, or by reason of its death, legal disability, bankruptcy, insolvency, or otherwise. (d) All costs (including, without limitation, legal and other professional fees) incurred by the Partnership, the other Partners, and the assigning Partner relating to any transfer contemplated by this Article IX, shall be charged to, and shall be the sole expense of, the assigning Partner. Section 9.3 Withdrawal of a Partner Except as otherwise specifically permitted by this Agreement, no Partner shall be entitled to withdraw or retire from the Partnership. Section 9.4 Death, Legal Incompetency, Bankruptcy or Dissolution of Limited Partner The death, legal incompetency, bankruptcy, dissolution or other disability of a Limited Partner shall not dissolve or terminate the Partnership. Upon the death, legal incompetency, bankruptcy, dissolution or other disability of a Limited Partner, the estate, personal representative, trustee, guardian or other successor in interest of such Limited Partner shall have all the rights and obligations and be liable for all the liabilities of the Limited Partner in the Partnership to the extent 11 12 of such Limited Partner's interest therein, subject to the terms and conditions of this Agreement, and, with the prior written consent of the General Partner which may be withheld at its sole discretion, may be substituted for such Limited Partner. Section 9.5 Purchase Option of Capital Senior Living Properties, Inc. At any time, Capital Senior Living shall have the right, but not the obligation, to purchase all, but not less than all, of the interests owned by the General Partner and Fail for an amount equal to the amount of money that each such Partner paid for their respective interests in the Partnership, plus non-compounding interest of 12% per annum from the date such amounts were paid to the date the option described herein is exercised. The Partners, by executing this Agreement, hereby agree that the future value of such interests is speculative and that the formula set forth above is the Partners' best estimate of the fair market value of such interests as of the date of the exercise of such option. ARTICLE X DURATION, DISSOLUTION, TERMINATION, WINDING UP, REMOVAL OF THE GENERAL PARTNER AND RESIGNATION OF THE GENERAL PARTNER Section 10.1 Dissolution and Termination Subject to the provisions of Section 7.2(c) hereof, the Partnership shall be dissolved only upon the occurrence of any of the following events: (a) The expiration of the fixed term of the Partnership; (b) The withdrawal or removal of the General Partner, the assignment by the General Partner of all its interest in the Partnership, or any other event that causes the General Partner to cease to be a general partner under the Revised Act, provided that any such event shall not constitute a event of dissolution if the Partnership is continued pursuant to Section 10.2; (c) The sale or other disposition of all or substantially all of the assets of the Partnership and the collection of the proceeds therefrom; and (d) The mutual consent of the Partners. Section 10.2 Continuation of Business The Partners hereby agree that notwithstanding any provision of the Revised Act, the Partnership shall not dissolve prior to the occurrence of any event set forth in Section 10.1 above. Upon the occurrence of any event set forth in Section 10.1 above, the Partnership shall not be 12 13 dissolved or required to be wound up if (i) at the time of such event there is a remaining General Partner and that General Partner carries on the business of the Partnership or (ii) within ninety (90) days after such event all remaining Partners agree in writing to continue the business of the Partnership and to the appointment, effective as of the date of such event, of one or more additional General Partners. Section 10.3 Winding Up of the Partnership Upon dissolution of the Partnership as provided in Section 10.1, the Partnership shall be wound up, and the General Partner (or if there is no General Partner, a substitute General Partner elected by the Limited Partner) will take full account of the Partnership's assets and liabilities, the assets will be liquidated as promptly as is consistent with obtaining the fair market value thereof, and the proceeds therefrom, to the extent sufficient therefor, will be applied and distributed in accordance with the provisions of Section 10.4. Notwithstanding the foregoing, the General Partner, with the consent of the Limited Partners, may determine not to sell all or any portion of the assets of the Partnership, in which event there shall be distributed to each of the Partners its interest in the remaining assets of the Partnership. Section 10.4 Sale or Liquidation In the case of a sale or other disposition of all or substantially all of the assets of the Partnership or termination and liquidation of the Partnership, the net proceeds of such sale or liquidation, shall be applied and distributed, after crediting or charging the Partners' capital accounts pursuant to Article VIII and as cash is received by the Partnership in the following order of priority on or before the end of the taxable year in which the Partnership liquidates (or, if later, within 90 days after the date of such liquidation): (a) To the payment of the debts and liabilities of the Partnership (other than debts of the Partnership to the Partners) and the expenses of sale and liquidation. (b) To the setting up of any reserves which the General Partner determines are reasonably necessary for any contingent or unforeseen liabilities or obligations of the Partnership or of the Partners arising out of, or in connection with, the Partnership. Such reserves may be held by the General Partner for the purpose of disbursing such reserves in payment of any of the aforementioned contingencies, and at the expiration of such period as the General Partner may deem advisable, to distribute the balance thereafter remaining as provided herein. (c) To the Partners in repayment of debts of the Partnership to the Partners. 13 14 (d) To the Partners in proportion to and to the extent of the remaining amounts of their respective positive capital accounts, as such accounts have heretofore been adjusted pursuant to this Agreement. (e) The remaining assets, if any, shall be distributed to the Partners in accordance with their Percentage Interests. Should assets other than cash be distributed, the amount by which the fair market value of the assets, if any, to be distributed exceeds or is less than the basis of such assets shall, to the extent not otherwise recognized by the Partnership, be taken into account in computing gain or loss of the Partnership for purposes of crediting or charging the capital accounts of, and distributing proceeds to, the Partners. Section 10.5 Removal and Replacement of the General Partner The General Partner may be removed by either Limited Partner without further action for "cause," which means (i) any petition shall be filed by the General Partner, or any petition shall be filed against the General Partner and not vacated within 30 days, under any section or chapter of the present or future federal Bankruptcy Code or under any similar state or federal law, (ii) upon final judicial determination that the General Partner (1) was grossly negligent in its failure to perform its obligations under this Agreement, or (2) committed a fraud upon the Partners or upon the Partnership, or (3) committed a felony in connection with the management of the Partnership or its business, or (4) was in material breach of its obligations under this Agreement, or (iii) transfer of the General Partner's interest in the Partnership or withdrawal from the Partnership without approval of the Limited Partners. In the event of removal or resignation of the General Partner, it shall be deemed to have surrendered to the Partnership its entire interest in the Partnership and shall be entitled to no compensation therefor. ARTICLE XI ACCOUNTS AND RECORDS: ACCOUNTANTS Section 11.1 Accounting Methods: Fiscal Year The books of account of the Partnership shall be kept on the accrual method of accounting. The fiscal year of the Partnership shall end on December 31 of each year except upon termination. Section 11.2 Records and Books of Account (a) The General Partner shall maintain, or cause to be maintain complete and accurate records and books of account of all transactions of the Partnership wherein shall be entered all transactions, matters and things relating to the Partnership's business as are usually entered into books of account kept by persons engaged in a business of a like 14 15 character, all on the method of accounting determined in accordance with Section 11.1, consistently applied. (b) All of such records and books of account together with all other documents and files of the Partnership, including but not limited to copies of all documents prepared by the General Partner and all correspondence, shall, at all times, be kept at the main office of the Partnership or such other place as may be designated by the General Partner and to which the Partners shall have reasonable access as hereinafter provided, and all such records, books of account, documents and files shall be the exclusive property of the Partnership. In the event of the termination of the Partnership interest of the General Partner, all such records, books of account, documents and files shall remain in the exclusive possession of the Partnership. At any time and from time to time while the Partnership continues and until its complete liquidation (but only during reasonable business hours), each Partner may, at its own expense and upon reasonable prior written notice to the General Partner, fully examine, inspect, make copies and audit the Partnership's books, records, accounts and assets, including but not limited to bank balances and physical inspection of the Property or an audit to be made by any competent accountant or other professional employed by it at its expense. Section 11.3 Annual Examination and Tax Returns (a) The books of the Partnership shall be brought to date annually each year by the General Partner or the Accountants. The General Partner or the Accountants shall determine and prepare for such fiscal year, using the method of accounting determined in accordance with Section 11.1, consistently applied, such financial statements as are required by the Loan. (b) The General Partner or the Accountants shall also prepare all tax returns which the Partnership is required to file and the same shall be filed by the General Partner within the time prescribed by law for the filing of each such return. (c) At the election of the General Partner, the Accountants shall perform an audit in accordance with generally accepted auditing standards. The financial statements and audit report shall be delivered to each Partner in the Partnership. Section 11.4 Bank Accounts The cash Capital Contributions of the Partners and other funds of the Partnership shall be deposited in a bank account or accounts which shall be separately owned by the Partnership and maintained by the General Partner. Withdrawals shall be made only in the regular course of partnership business on the signature of the General Partner or its designee. All funds not needed in the operation of the business may be deposited, to the extent permitted by applicable law, in interest bearing accounts or invested in short-term U.S. Government obligations, U.S. Government guaranteed obligations, bank certificates of deposit or other liquid high-grade investments, maturing, in any event, within one year. 15 16 Section 11.5 Reports to Limited Partners As soon as reasonably practicable but no later than thirty (30) days after the end of each month, the General Partner shall cause to be prepared and furnished to the Limited Partners income statements and balance sheets for such month. As soon as reasonably practicable but no later than seventy-five (75) days after the end of each fiscal year, the General Partner shall cause to be prepared and furnished to the Limited Partners the following: (i) all necessary tax reporting information required by the Limited Partners for preparation of their respective income tax return and (ii) all information necessary for such Limited Partner to comply with all reporting requirements imposed by the securities laws of the United States or any state thereof. Upon the reasonable request of the Limited Partners for further information with respect to any matter with respect to the Partnership, the General Partner shall furnish such information within ten (10) days after such request. ARTICLE XIII GENERAL PROVISIONS Section 12.1 Recipient of Distributions and Payments All distributions and payments of cash or property to be made pursuant to the provisions of this Agreement shall be made directly to the parties who are entitled thereto at their respective addresses indicated on Exhibit B or elsewhere in this Agreement or at such other address as shall have been set forth in a notice sent pursuant to the provisions of Section 12.2. Section 12.2 Communications Except as otherwise expressly provided in this Agreement, any offer, acceptance, election, approval, consent, objection, certification, request waiver, notice or other document required or permitted to be made or given pursuant to any provisions of this Agreement shall be deemed duly made or given, as the case may be, if in writing, signed by or on behalf of the person making or giving the same, and shall be deemed completed when either personally delivered (with receipt acknowledged by the recipient) or three days after deposited through the U.S. mail, registered or certified, first class, postage prepaid, addressed to the person or persons to whom such offer, acceptance, election, approval, consent, certification, request, waiver or notice is to be made or given at their respective addresses indicated on Exhibit B and, in the case of the Partnership, at the office of the Partnership specified in Section 2.2 of this Agreement, or, in any case, at such other address as shall have been set forth in a notice sent pursuant to the provisions of this Section 12.2. Section 12.3 Entire Agreement; Applicable Law; Effect This Agreement contains the entire agreement by and among the parties and supersedes any prior understandings and agreements among them respecting the subject hereof. THIS AGREEMENT SHALL BE CONSTRUED, ENFORCED AND GOVERNED IN CONFORMITY WITH THE LAWS OF THE STATE OF TEXAS, and within the County of Dallas, State of Texas, 16 17 without giving effect to principles of conflicts of law, and whether in state or federal courts. This Agreement shall be binding upon the parties hereto, their successors, heirs, devisees, permitted assigns, legal representatives, executors and administrators but shall not be deemed for the benefit of creditors or any other Persons. Section 12.4 Modification; Waiver or Termination Except as otherwise expressly provided in this Agreement, no modification, waiver, or termination of this Agreement, or any part hereof, shall be effective unless made in writing signed by the party or parties to be bound thereby, and no failure to pursue or elect any remedy shall constitute a waiver of any default under or breach of any provision of this Agreement, nor shall any waiver of any default under or breach of any provision of this Agreement be deemed to be a waiver of any other subsequent or similar or different default under or breach of such or any other provision or of any election or remedies available in connection therewith. Receipt by any party of any money or other consideration due under this Agreement, with or without knowledge of any breach or default, shall not constitute a waiver of such breach or default of any provision of this Agreement. Section 12.5 Counterparts This Agreement may be executed in one or more counterparts and, notwithstanding that all of the parties did not execute the same counterpart, each of such counterparts shall, for all purposes, be deemed to be an original, and all of such counterparts shall constitute one and the same instrument binding on all of the parties hereto. Section 12.6 Separability Each provision of this Agreement shall be considered separable and (a) if for any reason any provision or provisions herein are determined to be invalid and contrary to any existing or future law, such invalidity shall not impair the operation of or affect those portions of this Agreement which are valid, and (b) if for any reason any provision or provisions of this Agreement would subject the Limited Partners to any personal liability for the obligations of the Partnership under the laws of the State of Texas or any other laws, as the same may now or hereafter exist, such provision or provisions shall be deemed void and of no effect. Section 12.7 Article and Section Headings Article and Section titles or captions contained in this Agreement are inserted only as a matter of convenience and for reference, and shall not be construed in any way to define, limit, extend or describe the scope of any of the provisions hereof. Section 12.8 Word Meanings The words such as "herein," "hereinafter," "hereof," and "hereunder" refer to this Agreement as a whole and not merely to a subdivision in which such words appear unless the context otherwise 17 18 requires. The singular shall include the plural and the masculine gender shall include the feminine and neuter, and vice versa, unless the context otherwise requires. Section 12.9 Exhibits All exhibits annexed hereto and any documents or instruments delivered simultaneously herewith are expressly made a part of this Agreement, as fully as though completely set forth herein, and all references to this Agreement herein or in any of such writings or elsewhere shall be deemed to refer to and include all such writings. Section 12.10 Further Actions Each of the Partners shall hereafter execute and deliver such further instruments and do such further acts and things as may be required or useful to carry out the intent and purpose of this Agreement and as are not inconsistent with the revisions hereof. Section 12.11 Prohibition Re Partition Each of the parties hereto does hereby permanently waive and relinquish any and all rights it may have to cause the assets of the Partnership to be partitioned, it being the intention of the parties to prohibit any parties hereto from bringing a suit for partition against the other parties hereto. Section 12.12 Agreements with Capital Affiliates and the Loan The Partnership hereby ratifies and agrees to be bound by agreements that the Partnership has entered into with Affiliates of Capital Senior Living, including, the Management Agreement, the Development Agreement and that certain Development and Turnkey Services Agreement by and between the Partnership and Capital Senior Development, Inc. In addition, the Partnership hereby ratifies and agrees to be bound by the Loan and the Loan Documents. Section 12.13 Noncompete of General Partner The General Partner agrees that as long as the General Partner is the general partner of the Partnership and for one (1) year after the General Partner is no longer the general partner of the Partnership neither the General Partner nor its Affiliates will acquire, own, develop, complete the development of, or manage any senior living facility providing the same level of services as any senior living facility owned or leased by the Partnership within a seven and one-half mile radius of a senior living facility owned or leased by the Partnership. 18 19 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. GENERAL PARTNER: Triad Senior Living, Inc., a Texas corporation By:/s/ BLAKE N. FAIL ----------------------------------------- Name: Blake N. Fail --------------------------------------- Title: President -------------------------------------- LIMITED PARTNERS: Capital Senior Living Properties, Inc. a Texas corporation By: /s/ DAVID R. BRICKMAN ----------------------------------------- Name: David R. Brickman --------------------------------------- Title: Vice President -------------------------------------- -------------------------------------------- Blake N. Fail WITHDRAWING GENERAL PARTNER: Capital Retirement Group, Inc., a Texas corporation By: /s/ JAMES A. STROUD ----------------------------------------- Name: James A. Stroud --------------------------------------- Title: Chief Operating Officer -------------------------------------- WITHDRAWING LIMITED PARTNERS: JAS Trust By: /s/ JAMES A. STROUD ----------------------------------------- Name: James A. Stroud --------------------------------------- Title: Chief Operating Officer -------------------------------------- /s/ JEFFREY L. BECK -------------------------------------------- Jeffrey L. Beck 19 20 EXHIBIT "A" Property Description 21 EXHIBIT "B"
Capital Contribution Interest -------------------- -------- General Partner Triad Senior Living, Inc. $ 1.00 1% 14332 Regency Place Dallas, Texas 75240 Limited Partners Blake N. Fail $ 1,320,976.00 80% 14332 Regency Place Dallas, Texas 75240 Capital Senior Living Properties, Inc. $ 330,243.00 19% 14160 Dallas Parkway Suite 300 Dallas, Texas 75240
22 EXHIBIT "C" Allocation Provisions EX-10.57 9 AGREEMENT OF LP OF TRIAD SR LIVING II-9/23/98 1 EXHIBIT 10.57 AGREEMENT OF LIMITED PARTNERSHIP OF TRIAD SENIOR LIVING II, L.P. THIS AGREEMENT OF LIMITED PARTNERSHIP is dated effective as of September 23, 1998, by and among Triad Partners II, Inc., a Texas corporation ("TP II"), as general partner (the "General Partner") and as a limited partner and Capital Senior Living Properties, Inc., a Texas corporation ("Capital Senior Living" and, together with TP II, the "Limited Partners"). WHEREAS, the parties hereto desire to form a limited partnership under the Texas Revised Limited Partnership Act. NOW THEREFORE, in consideration of the mutual covenants, conditions and agreements hereinafter set forth, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: ARTICLE I ADDITIONAL DEFINITIONS As used herein, the following terms shall have the following meanings: "Accountant" - means any independent firm of certified public accountants as may be engaged by the General Partner for the Partnership. "Affiliate" - means (a) a General Partner; (b) a Limited Partner; (c) a partner or shareholder of a General Partner or a Limited Partner or a member of the immediate family of a partner or shareholder; (d) a legal representative of any Person, referred to in the preceding clauses (a) through (c); (e) a trustee for the benefit of any Person referred to in the preceding clauses (a) through (c); (f) a corporation, joint venture, partnership or other business entity which is controlled by such person or entity and/or any one or more of the Persons referred to in the preceding clauses (a) through (c); (g) a corporation, joint venture, partnership or other business entity which controls or is under common control with such person or entity, and/or with a person or entity referred to in the preceding clauses (a) through (c); or (h) the partners, officers, directors and key employees of such entity and/or any corporation, joint venture, partnership or other business entity referred to in the preceding clauses (a), (b), (c), (f) or (g). "Agreement" or "this Agreement" - means this Agreement of Limited Partnership, as amended from time to time. 2 "Capital Contributions" - means the gross amount of contributions actually made to the capital of the Partnership by a Partner or all the Partners, as the case may be. Loans to the Partnership by any Partner shall not be considered a Capital Contribution. "Certificate" - means the Certificate of Limited Partnership of this Partnership filed with the Secretary of State of the State of Texas, as such Certificate may be further amended and filed from time to time. "Certificate of Occupancy" - means that certain certificate of occupancy which has been issued for any building at a Property. "Code" - means the Internal Revenue Code of 1986, as amended. "Development Agreement" - means any development agreement between the Partnership and Capital Senior Development, Inc. relating to a Property, as such agreement may be amended from time to time. "Fiscal Year" - means the fiscal year of the Partnership as set forth in Section 11.1 hereof. "General Partner" - means Triad Partners II, Inc. and any additional or successor General Partner(s) designated in any case as such in accordance with the provisions of this Agreement, and, from time to time, holding such position in accordance with such provisions. "Gross Receipts" - means all revenues received by the Partnership from the operations of its business attributable to a particular period as determined in accordance with the cash receipts and disbursements method of accounting, and including, without limitation, any loans from Partners and third parties, and other amounts paid by Partners and third parties to the Partnership, but not including capital contributions. "Limited Partners" - means Triad Partners II, Inc. and Capital Senior Living Properties, Inc., and any additional or substitute Limited Partner(s) as may be designated as such in accordance with the provisions of this Agreement. "Lenders" - means Key Corporate Capital, Inc., Daiwa Finance Corp. or any other lender approved by the Partners, or their successors and/or assigns. "Loan" - means collectively those certain loans from Lenders to the Partnership approved by the Partners. "Loan Documents" - means all documents evidencing, securing or otherwise entered into in connection with the Loan, including, without limitation, any Note, Deed of Trust, Security Agreement, Assignment of Rents and Financing Statement, Assignment of Leases and Rents, and UCC-1 Financing Statement. 2 3 "Management Agreement" means any management agreement between the Partnership and Capital Senior Living, Inc. relating to a Property, as such agreement may be amended from time to time. "Net Cash Flow" - means the amount, if any, by which Gross Receipts plus cash reserves of the Partnership from the previous period exceed Operating Expenses for such particular period, to the extent the General Partner determines, in its sole discretion, that cash is not otherwise required for Partnership purposes, including the setting up or continuing of a reasonable working capital reserve for the Partnership. "Net Cash Flow" shall not include or reflect any proceeds received or expenses incurred in connection with the sale or other disposition of all or substantially all of the assets of the Partnership or the termination and liquidation of the Partnership. "Operating Expenses" - means all cash expenditures of any kind or nature incurred by the Partnership attributable to a particular period, as determined in accordance with the cash receipts and disbursements method of accounting. "Partners"- means the General Partner and the Limited Partners. "Partner" - means any of the Partners. "Partnership" - means the limited partnership evidenced by this Agreement, as said limited partnership may from time to time be constituted, amended and, if necessary, reconstituted, including any successor limited partnership. "Percentage Interests" - means the percentage set forth opposite the name of such Partner under the column "Interest" in Exhibit B attached hereto and made a part hereof for all purposes. "Person" - means an individual, firm, corporation or other legal entity. "Properties" - means those certain tracts of land which have been agreed to in writing by all of the Partners. Upon such written approval, the General Partner shall attach the legal description for each Property hereto as Exhibit A. "Property" - means any one of the Properties. "Revised Act" - means the Texas Revised Limited Partnership Act, as adopted and from time to time amended by the State of Texas. ARTICLE II FORMATION; NAME AND OFFICE; PURPOSE Section 2.1 Formation The General Partner and the Limited Partners hereby organize, create and form the Partnership as a Texas limited partnership under the Revised Act. The Partnership will commence effective upon the filing of the Certificate with the Secretary of State of the State of Texas pursuant 3 4 to the provisions of the Revised Act. The Partnership is formed for the purpose and upon the terms and conditions herein set forth. The Partners hereby agree and obligate themselves to execute, acknowledge, file, record and/or publish, as necessary, such amendments to the Certificate and such other certificates and documents and to take all other necessary actions required by law to perfect and maintain the Partnership as a limited partnership under the Revised Act and in all other jurisdictions in which the Partnership may elect to conduct business. Section 2.2 Name, Registered Agent and Registered Office The name of the Partnership shall be Triad Senior Living II, L.P. or such other name as the General Partner shall hereafter designate by notice to the Limited Partners and by amendment to the Certificate properly filed with the Secretary of State of the State of Texas. The principal place of business in Texas where books and records of the Partnership will be kept and made available shall be 4312 Mockingbird Lane, Dallas, Texas 75205, or such other place as the General Partner may from time to time designate in a notice to the Limited Partners and by amendment to the Certificate. The registered office of the Partnership and the registered Agent shall be as set forth in the Certificate, or such other registered Agent and registered office as the General Partner may from time to time designate in a notice to the Limited Partners and by amendment to the Certificate. Section 2.3 Purpose The purpose of the Partnership shall be strictly limited to activities relating to the acquisition, development, ownership, operation, and sale of the Properties, and such other activities as are incidental thereto, including without limitation, entering into the Loan and the performance of the Partnership's obligations under the Loan Documents. ARTICLE III TERM The term of the Partnership shall commence upon the filing of the Certificate with the Secretary of State of the State of Texas, and shall continue until December 31, 2050, on which date the Partnership shall terminate, unless sooner dissolved upon the occurrence of any of the events of dissolution or termination, as described in Article X. ARTICLE IV INTERESTS OF THE GENERAL PARTNER AND LIMITED PARTNERS Section 4.1 General Partner The General Partner is Triad Partners II, Inc., and it shall have a 1% interest in the Partnership. Except as provided in Article IX of this Agreement, no other Person shall become a General Partner in the Partnership. The address of the General Partner is set forth on Exhibit B. 4 5 Section 4.2 Limited Partners The Limited Partners are TP II and Capital Senior Living Properties, Inc., which shall have the interests in the Partnership as shown on Exhibit B. Except as provided in Article IX of this Agreement, no other Person shall become a Limited Partner or substitute Limited Partner in the Partnership. The addresses of the Limited Partners are set forth on Exhibit B. ARTICLE V CAPITAL CONTRIBUTIONS Section 5.1 Capital Contribution of the General Partner The General Partner has contributed to the Partnership the amount set forth on Exhibit B. The General Partner shall not be obligated to pay any Partnership expenses or make any capital contributions to the Partnership except as provided in this Section 5.1 and Section 5.3. Section 5.2 Capital Contribution of the Limited Partners The Limited Partners have contributed or will contribute to the Partnership the amounts set forth on Exhibit B. The Limited Partners shall not be obligated to make any other capital contributions to the Partnership except as provided in this Section 5.2 and Section 5.3. Section 5.3 Additional Capital Contributions The Partners may, but are not required to, make their pro rata share (based on Percentage Interests) of any additional capital contributions to the Partnership. In the event that any Partner does not make such additional capital contribution, the Partnership shall return the amounts contributed by the other Partners for such additional capital contributions. The additional capital contributions shall be due only upon the written notice from the General Partner to the Partners. TP II shall contribute to the capital of the Partnership in the amount required and at the time specified in Section 2.2(d) of Exhibit C attached hereto. Section 5.4 Return or Withdrawal of Capital Contributions; Distributions Except as otherwise expressly provided in this Agreement, none of the Partners shall be entitled to demand a refund or return of any Capital Contribution or to withdraw any part of its capital account or to receive any distribution from the Partnership. Section 5.5 Capital Accounts A capital account shall be established and maintained for each Partner as set forth in Exhibit C attached hereto. 5 6 Section 5.6 Loans by the Partners. If the General Partner determines that the Partnership needs additional capital, it may request that the Partners make loans to the Partnership. Then each Partner shall have the option, but not the obligation, to loan to the Partnership some or all of the aggregate amount of the requested loan. Any loans made by the Partners shall not be considered to be contributions to the capital of the Partnership. ARTICLE VI LIMITED PARTNERS Section 6.1 Powers: Actions The Limited Partners shall neither participate in the management or control of the Partnership's business nor shall they transact any business for the Partnership, nor shall they have the power to sign for or bind the Partnership, said powers being vested solely and exclusively in the General Partner. Section 6.2 Limitation of Liability Anything to the contrary herein expressed or implied notwithstanding, the Limited Partners shall not be personally liable for any of the debts of the Partnership or any of the losses thereof in excess of their respective shares of Partnership assets, capital contributions which they have made or are obligated to make to the Partnership, and their share of the Partnership's income and gains; provided, however, that to the extent required by applicable law, if a Limited Partner receives a distribution at a time when it knew that, after giving effect to the distribution, all liabilities of the Partnership, other than liabilities to the Partners with respect to the partnership interests and liabilities for which the recourse of creditors is limited to specific Partnership assets, exceed the fair value of the Partnership's assets (except that the fair value of property that is subject to a liability for which there is recourse of creditors is limited shall be included in the Partnership's assets only to the extent that the fair value of that property exceeds that liability), then the Limited Partner receiving such distribution shall be liable for the return of such distribution. ARTICLE VII GENERAL PARTNER Section 7.1 Powers; Actions The General Partner shall manage and control the business and affairs of the Partnership. Without limiting the generality of the foregoing, the General Partner shall have full power to (i) manage the Partnership; (ii) execute such documents as it may deem advisable for Partnership purposes, including, without limitation, the Loan Documents and all documents necessary for the 6 7 acquisition, financing, refinancing, development, ownership, operation and sale of any Property; (iii) acquire, sell, lease, transfer, assign, convey, mortgage, refinance, or otherwise dispose of or deal with all or any part of any Property on such terms as it deems reasonable; (iv) establish and maintain, to the extent Partnership funds are available, reasonable reserves for anticipated and unanticipated expenses relating to the activities of the Partnership; (v) perform or cause to be performed the Partnership's obligations, and exercise or cause to be exercised all of the Partnership's rights, under any agreement to which the Partnership or any nominee of the Partnership is a party; and (vi) on behalf of the Partnership, employ, engage, retain or deal with any Person, including any Affiliate, to perform services in connection with the ownership and operation of the Property, provided in all such cases such services are deemed by the General Partner to be advisable and the compensation therefor is reasonable. Section 7.2 Restrictions on the General Partner (a) Notwithstanding the foregoing in Section 7.1 or any other provision of this Agreement, the Partnership shall be subject to the following restrictions and the General Partner shall have no authority to take and shall not take any action on behalf of the Partnership in violation of any of the following restrictions: (i) No bankruptcy or insolvency filing or similar proceedings for the Partnership may be commenced, and no bankruptcy or insolvency filing or similar proceeding may be commenced as to the General Partner on its own behalf or as General Partner on behalf of the Partnership. (ii) The Partnership and the General Partner are prohibited from creating, incurring or assuming any indebtedness other than the Loan and any subordinate financing permitted in the Loan Documents. (iii) The Partnership and the General Partner are prohibited from liquidating or dissolving or consenting to the liquidation or dissolution, in whole or in part, of either the Partnership or the General Partner. (b) Notwithstanding anything in this Agreement to the contrary, the General Partner shall not have the right or the power to make any commitment or engage in any undertaking on behalf of the Partnership in respect of a Major Decision (as hereinafter defined) unless and until such Major Decision has been approved in writing by all of the Limited Partners. The term "Major Decision," as used in this Agreement, means any decisions with respect to the following matters: (i) All financing and refinancing decisions pertaining to indebtedness owing, directly or indirectly, to and/or by the Partnership. (ii) Any amendment, modification, change or restatement of this Agreement. 7 8 (iii) Any capital expenditures in excess of $50,000 on any Property that has already been developed. (iv) The assignment of any interests in the Partnership except as expressly provided by the terms of this Agreement. (v) Any amendment, modification or change to any Management Agreement or any Development Agreement. (vi) The engagement by the Partnership in any business other than as set forth in Section 2.3 above. (vii) The transaction of business with Affiliates of Partners except as set forth herein. (viii) The execution of any guarantees, indemnities, sureties or similar commitments on behalf of the Partnership. (ix) Any decision to cause the Partnership to loan funds to any person, and the terms on which any such loan is made. (x) Any act in contravention of this Agreement. (xi) The addition of a tract of land to the defined term "Properties" or a change in the use of a Property. (xii) The admission of any new Partners to the Partnership (except as otherwise allowed herein) or the appointment of any additional General Partner. (xiii) Any other act which the Revised Act specifically requires to be approved by all the Partners. (xiv) The merger, consolidation or any other form of combination of the Partnership with or into any other entity. (xv) The conveyance, transfer or lease of the Partnership's assets substantially as an entirety to any entity, except for the transfer of the Properties (or a Property) to the manager pursuant to any purchase option in any Management Agreement. (xvi) The acquisition or lease of any substantial assets by the Partnership. 8 9 Section 7.3 Duties and Obligations of the General Partner The General Partner shall manage and control the Partnership, its business and affairs. During the continuance of the Partnership, the General Partner shall diligently and faithfully devote such time to the management of the business of the Partnership as it deems reasonably necessary. Section 7.4 Tax Matters Partner. See Section 4.4 of Exhibit C attached hereto. Section 7.5 Liability; Indemnification The General Partner and its Affiliates shall not be liable to the Partnership or the Limited Partners for any act or omission performed or omitted by it pursuant to the authority granted to it by this Agreement, other than for fraud, willful malfeasance or gross negligence. The Partnership shall and hereby does indemnify and save harmless the General Partner, the Limited Partners and their Affiliates to the greatest extent permitted by the Revised Act from any loss, damage, claim or liability, including but not limited to, reasonable attorney's fees and expenses, incurred by them by reason of any act performed by the General Partner, the Limited Partners or their Affiliates on behalf of the Partnership, including, without limitation, their activities in winding up and liquidating the Partnership, or in furtherance of the Partnership's interests, except that the General Partner and its Affiliates shall not be indemnified for actions by the General Partner or its Affiliates which constitute a breach of any of their obligations under this Agreement, fraud, willful malfeasance or gross negligence, provided, however, that the indemnity and save harmless provided for in this sentence shall be satisfied out of Partnership assets only and no Partner shall have any personal liability on account thereof. Section 7.6 Fees to and Reimbursement of the General Partner The Limited Partners acknowledge that the General Partner or its Affiliates will receive $3,000 per month beginning October 1, 1998 as an asset management fee. The General Partner and its Affiliates shall also be entitled to receive reimbursement of their expenses, but shall not be entitled to receive any other fees. The General Partner and its Affiliates shall receive reimbursement for all reasonable expenses advanced by the General Partner and its Affiliates on behalf of the Partnership and all expenses incurred during the operation of the Partnership. ARTICLE VIII ALLOCATIONS; DISTRIBUTIONS Section 8.1 Allocations of Income and Loss All items of income or loss of the Partnership shall be allocated to the Partners in accordance with the provisions of Exhibit C attached hereto, which are hereby incorporated by reference for all purposes of this Agreement. 9 10 Section 8.2 Partnership Distributions of Cash During the term hereof, periodically, but not less frequently than annually, Net Cash Flow of the Partnership shall be distributed to the Partners in accordance with their Percentage Interests. ARTICLE IX ASSIGNABILITY OF GENERAL PARTNER'S AND LIMITED PARTNER'S INTERESTS; PURCHASE OPTION Section 9.1 Restrictions on Transfers Except as provided in Section 9.5 hereof, a Partner may not sell, assign, transfer, encumber, or dispose of, by operation of law or otherwise, any interest in the Partnership or in the property or assets of the Partnership without the prior written consent of the other Partners, which in the other Partners' absolute discretion may be withheld. Additionally, any such disposition must comply with the provisions hereinafter stated in this Article IX. Section 9.2 Assignment of a Limited Partner's Interest (a) Except as otherwise provided in this Agreement, an assignee of the whole or any portion of a Partner's interest in the Partnership shall not have the right to become a Partner in place of its assignor unless (i) its assignor shall have designated such intention in the instrument of assignment; (ii) the written consent of the other Partners to such substitution shall have been obtained, which consent, in the other Partners' absolute discretion, may be withheld; (iii) the assignment instrument shall have been in form and substance satisfactory to the other Partner; (iv) the assignor and assignee named therein shall have executed and acknowledged such other instrument or instruments as the other Partners may deem necessary or desirable to effectuate such admission; and (v) the assignee shall have accepted, adopted and approved in writing all of the terms and provisions of this Agreement, as the same may have been amended. (b) In any event, the Partnership and the other Partners shall be entitled to treat an assignor of a Partner's interest as the absolute owner thereof in all respects, and shall incur no liability for distributions made in good faith to such assignor, until such time as the foregoing requirements have been satisfied. (c) The Partnership shall, upon satisfaction of the foregoing requirements, thereafter pay all further distributions or profits or other compensation by way of income or return of capital on account of the interest so assigned to the assignee. In the absence of notice to the other Partners and approval thereof in writing by them of the assignment of a Partner's interest, whether by operation of law or otherwise, any payment to an assigning Partner, or to his assigns, executors, administrators, or legal representative, shall acquit the Partnership of liability to the extent of such payment as to any other person, whether 10 11 claiming as a remote or immediate assignee of the Partner, or by reason of its death, legal disability, bankruptcy, insolvency, or otherwise. (d) All costs (including, without limitation, legal and other professional fees) incurred by the Partnership, the other Partners, and the assigning Partner relating to any transfer contemplated by this Article IX, shall be charged to, and shall be the sole expense of, the assigning Partner. Section 9.3 Withdrawal of a Partner Except as otherwise specifically permitted by this Agreement, no Partner shall be entitled to withdraw or retire from the Partnership. Section 9.4 Death, Legal Incompetency, Bankruptcy or Dissolution of Limited Partner The death, legal incompetency, bankruptcy, dissolution or other disability of a Limited Partner shall not dissolve or terminate the Partnership. Upon the death, legal incompetency, bankruptcy, dissolution or other disability of a Limited Partner, the estate, personal representative, trustee, guardian or other successor in interest of such Limited Partner shall have all the rights and obligations and be liable for all the liabilities of the Limited Partner in the Partnership to the extent of such Limited Partner's interest therein, subject to the terms and conditions of this Agreement, and, with the prior written consent of the General Partner which may be withheld at its sole discretion, may be substituted for such Limited Partner. Section 9.5 Purchase Option of Capital Senior Living Properties, Inc. At any time, Capital Senior Living shall have the right, but not the obligation, to purchase all, but not less than all, of the interests owned by the General Partner and TP II as limited partner for an amount equal to the amount of money that each such Partner paid for their respective interests in the Partnership, plus non-compounding interest of 12% per annum from the date such amounts were paid to the date the option described herein is exercised. The Partners, by executing this Agreement, hereby agree that the future value of such interests is speculative and that the formula set forth above is the Partners' best estimate of the fair market value of such interests as of the date of the exercise of such option. ARTICLE X DURATION, DISSOLUTION, TERMINATION, WINDING UP, REMOVAL OF THE GENERAL PARTNER AND RESIGNATION OF THE GENERAL PARTNER Section 10.1 Dissolution and Termination Subject to the provisions of Section 7.2(a) hereof, the Partnership shall be dissolved only upon the occurrence of any of the following events: 11 12 (a) The expiration of the fixed term of the Partnership; (b) The withdrawal or removal of the General Partner, the assignment by the General Partner of all its interest in the Partnership, or any other event that causes the General Partner to cease to be a general partner under the Revised Act, provided that any such event shall not constitute a event of dissolution if the Partnership is continued pursuant to Section 10.2; (c) The sale or other disposition of all or substantially all of the assets of the Partnership and the collection of the proceeds therefrom; and (d) The mutual consent of the Partners. Section 10.2 Continuation of Business The Partners hereby agree that notwithstanding any provision of the Revised Act, the Partnership shall not dissolve prior to the occurrence of any event set forth in Section 10.1 above. Upon the occurrence of any event set forth in Section 10.1 above, the Partnership shall not be dissolved or required to be wound up if (i) at the time of such event there is a remaining General Partner and that General Partner carries on the business of the Partnership or (ii) within ninety (90) days after such event all remaining Partners agree in writing to continue the business of the Partnership and to the appointment, effective as of the date of such event, of one or more additional General Partners. Section 10.3 Winding Up of the Partnership Upon dissolution of the Partnership as provided in Section 10.1, the Partnership shall be wound up, and the General Partner (or if there is no General Partner, a substitute General Partner elected by the Limited Partners) will take full account of the Partnership's assets and liabilities, the assets will be liquidated as promptly as is consistent with obtaining the fair market value thereof, and the proceeds therefrom, to the extent sufficient therefor, will be applied and distributed in accordance with the provisions of Section 10.4. Notwithstanding the foregoing, the General Partner, with the consent of the Limited Partners, may determine not to sell all or any portion of the assets of the Partnership, in which event there shall be distributed to each of the Partners its interest in the remaining assets of the Partnership. Section 10.4 Sale or Liquidation In the case of a sale or other disposition of all or substantially all of the assets of the Partnership or termination and liquidation of the Partnership, the net proceeds of such sale or liquidation, shall be applied and distributed, after crediting or charging the Partners' capital accounts pursuant to Article VIII and as cash is received by the Partnership, in the following order of priority on or before the end of the taxable year in which the Partnership liquidates (or, if later, within 90 days after the date of such liquidation): 12 13 (a) To the payment of the debts and liabilities of the Partnership (other than debts of the Partnership to the Partners) and the expenses of sale and liquidation. (b) To the setting up of any reserves which the General Partner determines are reasonably necessary for any contingent or unforeseen liabilities or obligations of the Partnership or of the Partners arising out of, or in connection with, the Partnership. Such reserves may be held by the General Partner for the purpose of disbursing such reserves in payment of any of the aforementioned contingencies, and at the expiration of such period as the General Partner may deem advisable, to distribute the balance thereafter remaining as provided herein. (c) To the Partners in repayment of debts of the Partnership to the Partners. (d) To the Partners in proportion to and to the extent of the remaining amounts of their respective positive capital accounts, as such accounts have heretofore been adjusted pursuant to this Agreement. (e) The remaining assets, if any, shall be distributed to the Partners in accordance with their Percentage Interests. Should assets other than cash be distributed, the amount by which the fair market value of the assets, if any, to be distributed exceeds or is less than the basis of such assets shall, to the extent not otherwise recognized by the Partnership, be taken into account in computing gain or loss of the Partnership for purposes of crediting or charging the capital accounts of, and distributing proceeds to, the Partners. Section 10.5 Removal and Replacement of the General Partner The General Partner may be removed by either Limited Partner without further action for "cause," which means (i) any petition shall be filed by the General Partner, or any petition shall be filed against the General Partner and not vacated within 30 days, under any section or chapter of the present or future federal Bankruptcy Code or under any similar state or federal law, (ii) upon final judicial determination that the General Partner (1) was grossly negligent in its failure to perform its obligations under this Agreement, or (2) committed a fraud upon the Partners or upon the Partnership, or (3) committed a felony in connection with the management of the Partnership or its business, or (4) was in material breach of its obligations under this Agreement, or (iii) transfer of the General Partner's interest in the Partnership or withdrawal from the Partnership without approval of the Limited Partners. In the event of removal or resignation of the General Partner, it shall be deemed to have surrendered to the Partnership its entire general partner interest in the Partnership and shall be entitled to no compensation therefor. 13 14 ARTICLE XI ACCOUNTS AND RECORDS: ACCOUNTANTS Section 11.1 Accounting Methods: Fiscal Year The books of account of the Partnership shall be kept on the accrual method of accounting. The fiscal year of the Partnership shall end on December 31 of each year except upon termination. Section 11.2 Records and Books of Account (a) The General Partner shall maintain, or cause to be maintained complete and accurate records and books of account of all transactions of the Partnership wherein shall be entered all transactions, matters and things relating to the Partnership's business as are usually entered into books of account kept by persons engaged in a business of a like character, all on the method of accounting determined in accordance with Section 11.1, consistently applied. (b) All of such records and books of account together with all other documents and files of the Partnership, including but not limited to copies of all documents prepared by the General Partner and all correspondence, shall, at all times, be kept at the main office of the Partnership or such other place as may be designated by the General Partner and to which the Partners shall have reasonable access as hereinafter provided, and all such records, books of account, documents and files shall be the exclusive property of the Partnership. In the event of the termination of the Partnership interest of the General Partner, all such records, books of account, documents and files shall remain in the exclusive possession of the Partnership. At any time and from time to time while the Partnership continues and until its complete liquidation (but only during reasonable business hours), each Partner may, at its own expense and upon reasonable prior written notice to the General Partner, fully examine, inspect, make copies and audit the Partnership's books, records, accounts and assets, including but not limited to bank balances and physical inspection of the Properties or an audit to be made by any competent accountant or other professional employed by it at its expense. Section 11.3 Annual Examination and Tax Returns (a) The books of the Partnership shall be brought up to date annually each year by the General Partner or the Accountants. The General Partner or the Accountants shall determine and prepare for such fiscal year, using the method of accounting determined in accordance with Section 11.1, consistently applied, such financial statements as are required by the Loan Documents. (b) The General Partner or the Accountants shall also prepare all tax returns which the Partnership is required to file and the same shall be filed by the General Partner within the time prescribed by law for the filing of each such return. 14 15 (c) At the election of the General Partner, the Accountants shall perform an audit in accordance with generally accepted auditing standards. The financial statements and audit report shall be delivered to each Partner in the Partnership. Section 11.4 Bank Accounts The cash Capital Contributions of the Partners and other funds of the Partnership shall be deposited in a bank account or accounts which shall be separately owned by the Partnership and maintained by the General Partner. Withdrawals shall be made only in the regular course of Partnership business on the signature of the General Partner or its designee. All funds not needed in the operation of the business may be deposited, to the extent permitted by applicable law, in interest bearing accounts or invested in short-term U.S. Government obligations, U.S. Government guaranteed obligations, bank certificates of deposit or other liquid high-grade investments, maturing, in any event, within one year. Section 11.5 Reports to Limited Partners As soon as reasonably practicable but no later than thirty (30) days after the end of each month, the General Partner shall cause to be prepared and furnished to the Limited Partners income statements and balance sheets for such month. As soon as reasonably practicable but no later than seventy-five (75) days after the end of each fiscal year, the General Partner shall cause to be prepared and furnished to the Limited Partners the following: (i) all necessary tax reporting information required by the Limited Partners for preparation of their respective income tax return and (ii) all information necessary for such Limited Partners to comply with all reporting requirements imposed by the securities laws of the United States or any state thereof. Upon the reasonable request of the Limited Partners for further information with respect to any matter with respect to the Partnership, the General Partner shall furnish such information within ten (10) days after such request. ARTICLE XIII GENERAL PROVISIONS Section 12.1 Recipient of Distributions and Payments All distributions and payments of cash or property to be made pursuant to the provisions of this Agreement shall be made directly to the parties who are entitled thereto at their respective addresses indicated on Exhibit B or elsewhere in this Agreement or at such other address as shall have been set forth in a notice sent pursuant to the provisions of Section 12.2. Section 12.2 Communications Except as otherwise expressly provided in this Agreement, any offer, acceptance, election, approval, consent, objection, certification, request waiver, notice or other document required or permitted to be made or given pursuant to any provisions of this Agreement shall be deemed duly made or given, as the case may be, if in writing, signed by or on behalf of the person making or 15 16 giving the same, and shall be deemed completed when either personally delivered (with receipt acknowledged by the recipient) or three days after deposited through the U.S. mail, registered or certified, first class, postage prepaid, addressed to the person or persons to whom such offer, acceptance, election, approval, consent, certification, request, waiver or notice is to be made or given at their respective addresses indicated on Exhibit B and, in the case of the Partnership, at the office of the Partnership specified in Section 2.2 of this Agreement, or, in any case, at such other address as shall have been set forth in a notice sent pursuant to the provisions of this Section 12.2. Section 12.3 Entire Agreement; Applicable Law; Effect This Agreement contains the entire agreement by and among the parties and supersedes any prior understandings and agreements among them respecting the subject hereof. THIS AGREEMENT SHALL BE CONSTRUED, ENFORCED AND GOVERNED IN CONFORMITY WITH THE LAWS OF THE STATE OF TEXAS, without giving effect to principles of conflicts of law, and whether in state or federal courts. This Agreement shall be binding upon the parties hereto, their successors, heirs, devisees, permitted assigns, legal representatives, executors and administrators but shall not be deemed for the benefit of creditors or any other Persons. Section 12.4 Modification; Waiver or Termination Except as otherwise expressly provided in this Agreement, no modification, waiver, or termination of this Agreement, or any part hereof, shall be effective unless made in writing signed by the party or parties to be bound thereby, and no failure to pursue or elect any remedy shall constitute a waiver of any default under or breach of any provision of this Agreement, nor shall any waiver of any default under or breach of any provision of this Agreement be deemed to be a waiver of any other subsequent or similar or different default under or breach of such or any other provision or of any election or remedies available in connection therewith. Receipt by any party of any money or other consideration due under this Agreement, with or without knowledge of any breach or default, shall not constitute a waiver of such breach or default of any provision of this Agreement. Section 12.5 Counterparts This Agreement may be executed in one or more counterparts and, notwithstanding that all of the parties did not execute the same counterpart, each of such counterparts shall, for all purposes, be deemed to be an original, and all of such counterparts shall constitute one and the same instrument binding on all of the parties hereto. Section 12.6 Separability Each provision of this Agreement shall be considered separable and (a) if for any reason any provision or provisions herein are determined to be invalid and contrary to any existing or future law, such invalidity shall not impair the operation of or affect those portions of this Agreement which are valid, and (b) if for any reason any provision or provisions of this Agreement would subject the Limited Partners to any personal liability for the obligations of the Partnership under the laws of the 16 17 State of Texas or any other laws, as the same may now or hereafter exist, such provision or provisions shall be deemed void and of no effect. Section 12.7 Article and Section Headings Article and Section titles or captions contained in this Agreement are inserted only as a matter of convenience and for reference, and shall not be construed in any way to define, limit, extend or describe the scope of any of the provisions hereof. Section 12.8 Word Meanings The words such as "herein," "hereinafter," "hereof," and "hereunder" refer to this Agreement as a whole and not merely to a subdivision in which such words appear unless the context otherwise requires. The singular shall include the plural and the masculine gender shall include the feminine and neuter, and vice versa, unless the context otherwise requires. Section 12.9 Exhibits All exhibits annexed hereto and any documents or instruments delivered simultaneously herewith are expressly made a part of this Agreement, as fully as though completely set forth herein, and all references to this Agreement herein or in any of such writings or elsewhere shall be deemed to refer to and include all such writings. Section 12.10 Further Actions Each of the Partners shall hereafter execute and deliver such further instruments and do such further acts and things as may be required or useful to carry out the intent and purpose of this Agreement and as are not inconsistent with the revisions hereof. Section 12.11 Prohibition Re Partition Each of the parties hereto does hereby permanently waive and relinquish any and all rights it may have to cause the assets of the Partnership to be partitioned, it being the intention of the parties to prohibit any parties hereto from bringing a suit for partition against the other parties hereto. Section 12.12 Agreements with Capital Affiliates and the Loan The Partnership hereby ratifies and agrees to be bound by any agreements that the Partnership has entered into with Affiliates of Capital Senior Living, including, the Management Agreement, the Development Agreement and that certain Development and Turnkey Services Agreement by and between the Partnership and Capital Senior Development, Inc. 17 18 Section 12.13 Noncompete of General Partner The General Partner agrees that as long as the General Partner is the general partner of the Partnership and for one (1) year after the General Partner is no longer the general partner of the Partnership neither the General Partner nor its Affiliates will acquire, own, develop, complete the development of, or manage any senior living facility providing the same level of services as any senior living facility owned or leased by the Partnership within a seven and one-half mile radius of a senior living facility owned or leased by the Partnership. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. GENERAL PARTNER: Triad Partners II, Inc., a Texas corporation By: /s/ BLAKE N. FAIL ------------------------------------------ Name: Blake N. Fail ---------------------------------------- Title: President --------------------------------------- LIMITED PARTNERS: Triad Partners II, Inc., a Texas corporation By: /s/ BLAKE N. FAIL ------------------------------------------ Name: Blake N. Fail ---------------------------------------- Title: President --------------------------------------- Capital Senior Living Properties, Inc., a Texas corporation By: /s/ DAVID R. BRICKMAN ------------------------------------------ Name: David R. Brickman ---------------------------------------- Title: Vice President --------------------------------------- 18 19 EXHIBIT "A" Property Description 20 EXHIBIT "B"
Capital Contribution Interest -------------------- -------- General Partner Triad Partners II, Inc. $1.00 1% 4312 Mockingbird Lane Dallas, Texas 75205 Limited Partners Triad Partners II, Inc. $312,000 80% 4312 Mockingbird Lane Dallas, Texas 75205 Capital Senior Living Properties, Inc. $ 74,100 19% 14160 Dallas Parkway Suite 300 Dallas, Texas 75240
21 EXHIBIT "C" Allocation Provisions 22 EXHIBIT C TO AGREEMENT OF LIMITED PARTNERSHIP OF TRIAD SENIOR LIVING II, L.P. ARTICLE I DEFINITIONS Section 1.1 Definitions. All capitalized terms used herein shall have the meanings assigned to them in the Agreement of Limited Partnership of Triad Senior Living II, L.P. Notwithstanding the foregoing, the following definitions shall be applicable to the following terms as used in this Exhibit C of the Agreement: (a) "Adjusted Net Income or Loss" of the Partnership derived for any Fiscal Year (or portion thereof) shall mean the excess or deficit, as the case may be, of (i) the Gross Income of the Partnership for such period (not including the amount of Gross Income (if any) allocated during such Fiscal Year pursuant to Sections 3.1(a), 3.1(b), 3.1(c), 3.1(d), and 3.1(p) hereof for such period), over (ii) the Deductible Expenses of the Partnership for such period (not including the amount of Deductible Expenses (if any) allocated pursuant to Sections 3.1(e), 3.1(f) and 3.1(p)) hereof for such period) with the following modifications: (i) Any Partnership income that is exempt from federal income tax, and that is not otherwise taken into account in computing Adjusted Net Income or Loss of the Partnership pursuant to this Section 1.1(a), shall be treated as additional Gross Income and added to the amount otherwise calculated as Adjusted Net Income or Loss under this Section 1.1(a). (ii) Any expenditures of the Partnership that are described in section 705(a)(2)(B) of the Code (relating to expenditures of the Partnership that are not deductible for federal income tax purposes in computing taxable income and not properly chargeable to capital), or treated as so described pursuant to section 1.704-1(b)(2)(iv)(i) of the Regulations, and that are not otherwise taken into account in computing Adjusted Net Income or Loss of the Partnership pursuant to this Section 1.1(a), shall be treated as additional Deductible Expenses and subtracted from the amount otherwise calculated as Adjusted Net Income or Loss under this Section 1.1(a). (b) "Adjusted Property" shall mean any Partnership asset that has a Book Basis different from its adjusted tax basis. Any asset that is contributed to the Partnership by a Partner shall be an "Adjusted Property" if its Agreed Value is not equal to the Partnership's initial tax basis in such asset. In addition, once the Book Basis of a Partnership asset is adjusted pursuant to Section 2.4 hereof, such asset shall thereafter be an "Adjusted Property." (c) "Agreed Value" of any asset contributed by a Partner to the Partnership shall mean the fair market value thereof (determined without regard to section 7701(g) of the Code) as of the date of such contribution and as reasonably determined by the General Partner. (d) "Book Basis" of any asset of the Partnership shall be determined in accordance with the rules of Section 2.4. (e) "Book Depreciation" in respect of any Partnership asset for any Fiscal Year shall mean the product of (i) the depreciation, cost recovery or other amortization deduction allowable to the Partnership 23 for federal income tax purposes in respect of such asset for such Fiscal year, multiplied by (ii) a fraction, the numerator of which is the Book Basis of such asset as of the beginning of such Fiscal Year (or the date of acquisition if the asset is acquired during such Fiscal Year) and the denominator of which is the adjusted tax basis of such asset as of the beginning of such Fiscal Year (or the date of acquisition if the asset is acquired during such Fiscal Year). If the denominator of the fraction described in clause (ii) above is zero, "Book Depreciation" in respect of such asset shall be determined under any reasonable method selected by the General Partner. (f) "Book Gain or Loss" realized by the Partnership in respect of any asset of the Partnership in connection with the disposition of such asset shall mean the excess (or deficit) of (i) the amount realized by the Partnership in connection with such disposition (as determined under section 1001 of the Code) over (ii) the then Book Basis of such asset. If the Book Basis is adjusted pursuant to Section 2.4, any increase or decrease in Book Basis of the assets as a result of the adjustment shall be treated as Book Gain or Book Loss, as the case may be, and shall be allocated among the Partners pursuant to Section 3.1 of this Exhibit "C." (g) "Capital Account" shall have the meaning assigned such term in Section 2.1 hereof. (h) "Deductible Expenses" of the Partnership for any Fiscal Year (or portion thereof) shall mean all items, as calculated for book purposes, which are allowable as deductions to the Partnership during such period under federal income tax accounting principles (including Book Depreciation). (i) "Fiscal Year" shall mean the fiscal year of the Partnership adopted under Section 8.1 of the Agreement. (j) "Gross Income" of the Partnership for any Fiscal Year (or portion thereof) shall mean the gross income of the Partnership derived from all sources (other than from capital contributions and loans to the Partnership and other than Book Gain or Loss from a Terminating Capital Transaction) during such period, as calculated for book purposes in accordance with federal income tax accounting principles. (k) "IRS" shall mean the United States Internal Revenue Service. (l) "Liquidation" of a Partner's interest in the Partnership shall mean and shall be deemed to occur upon the earlier of (i) the date upon which the Partnership is terminated under section 708(b)(1) of the Code; (ii) the date upon which the Partnership ceases to be a going concern (even though it may continue in existence for the limited purpose of winding up its affairs, paying its debts and distributing any remaining Partnership assets to the Partners); or (iii) the date upon which there is a liquidation of the Partner's interest in the Partnership (but the Partnership is not terminated) under section 1.761-1(d) of the Regulations. (m) "Modified 752 Share of Recourse Debt" of any Partner shall mean, as of any date, the amount (if any) of economic risk that such Partner is treated, as of such date, as bearing with respect to Recourse Debt under section 1.752-2 of the Regulations (assuming the Partnership constructively liquidates on such date within the meaning of section 1.752-2(b) of the Regulations except that, for purposes of such section 1.752-2(b), all of the assets of the Partnership shall be deemed thereunder to be transferred in fully taxable exchanges for an aggregate amount of cash consideration equal to their respective Book Bases and such consideration shall be deemed thereunder to be used, in the appropriate order of priority, in full or partial satisfaction of the liabilities of the Partnership). (n) "Nonrecourse Deductions" of the Partnership shall have the meaning ascribed to such term in section 1.704-2(b)(1) of the Regulations. 24 (o) "Nonrecourse Liability" of the Partnership shall have the meaning ascribed to such term in section 1.704-2(b)(3) of the Regulations. (p) "Nonrecourse Minimum Gain" of the Partnership shall mean the amount of "minimum gain" of the Partnership that is attributable to Nonrecourse Liabilities (as determined under section 1.704- 2(b)(2) of the Regulations). A Partner's share of such "Nonrecourse Minimum Gain" shall be calculated in accordance with the provisions of section 1.704-2(g) of the Regulations. (q) "Operations" shall mean all revenue producing activities of the Partnership other than activities relating to a Capital Transaction that occur in connection with the dissolution of the Partnership. (r) "Partner Minimum Gain" of the Partnership shall mean the amount of "minimum gain" of the Partnership that is attributable to Partner Nonrecourse Debt (as determined under section 1.704-2(i)(2) of the Regulations). A Partner's share of such "Partner Minimum Gain" shall be calculated in accordance with the provisions of section 1.704-2(i)(5) of the Regulations. (s) "Partner Nonrecourse Debt" of the Partnership shall have the meaning ascribed to such term in section 1.704-2(b)(4) of the Regulations. (t) "Partner Nonrecourse Deductions" of the Partnership shall have the meaning ascribed to such term in section 1.704-2(i)(2) of the Regulations. (u) "Recourse Debt" of the Partnership shall mean any liability (or portion thereof) of the Partnership that is neither a Nonrecourse Liability nor a Partner Nonrecourse Debt. (v) "Regulations" shall mean the regulations promulgated by the United States Department of the Treasury pursuant to and in respect of provisions of the Code. All references herein to sections of the Regulations shall include any corresponding provision or provisions of succeeding, similar, substitute proposed or final Regulations. (w) "Related Person" shall mean, as to any Partner, any person who is related to such Partner (within the meaning of section 1.752-4(b) of the Regulations). (x) "Revaluation Event" shall mean any of the following occurrences: (a) the contribution of money or other property (other than a de minimis amount) by a new or existing Partner to the Partnership as consideration for the issuance of an additional interest in the Partnership and/or increase in Interests; (b) the distribution of money or other property (other than a de minimis amount) by the Partnership to a retiring or continuing Partner as consideration for an interest in the Partnership and/or decrease in Interests; or (c) the liquidation of the Partnership within the meaning of section 1.704-1(b)(2)(ii)(g) of the Regulations. (y) "Section 704 Capital Account" shall have the meaning assigned to such term in Section 2.3 hereof. (z) "Tax Depreciation" for any Fiscal Year shall mean the amount of depreciation, cost recovery or other amortization deductions allowable to the Partnership for federal income tax purposes for such Fiscal Year. (aa) "Tax Item" with respect to any asset shall mean any item of income, gain, loss or deduction (including depreciation, cost recovery or amortization) in respect of such asset, as computed for federal income tax purposes. 25 (bb) "Tax Matters Partner" shall have the meaning ascribed to such term in Section 4.4(a) hereof. (cc) "Taxable Gain or Loss" shall mean gain or loss recognized by the Partnership on the sale, exchange or other disposition of any asset of the Partnership as computed for federal income tax purposes. ARTICLE II CAPITAL ACCOUNTS AND SECTION 704 CAPITAL ACCOUNTS Section 2.1 Capital Accounts. A separate "Capital Account" (herein so called) shall be maintained for each Partner in accordance with the capital accounting rules of section 1.704-1(b)(2)(iv) of the Regulations. Each Partner shall have only one Capital Account, regardless of the number or classes of interests in the Partnership owned by such Partner and regardless of the time or manner in which such interests were acquired by such Partner. Pursuant to the basic rules of section 1.704-1(b)(2)(iv) of the Regulations, the balance of each Partner's Capital Account: (a) shall be increased by the amount of money contributed by such Partner (or such Partner's predecessor in interest) to the Partnership (including but not limited to such Partner's Capital Contributions described in Article V of the Agreement) and decreased by the amount of money distributed to such Partner (or such Partner's predecessor in interest); (b) shall be increased by the fair market value (determined without regard to section 7701(g) of the Code) of each property contributed by such Partner (or such Partner's predecessor in interest) to the Partnership (net of liabilities secured by such property that the Partnership is considered to assume or take subject to under section 752 of the Code), and decreased by the fair market value (determined without regard to section 7701(g) of the Code) of each property distributed to such Partner (or such Partner's predecessor in interest) by the Partnership (net of liabilities secured by such property that such Partner is considered to assume or take subject to under section 752 of the Code); (c) shall be increased by the amount of Adjusted Net Income or item of income or gain or Book Gain allocated to such Partner (or such Partner's predecessor in interest) pursuant to Section 3.1 hereof; (d) shall be decreased by the amount of Adjusted Net Loss or item of loss or deduction or Book Loss allocated to such Partner (or such Partner's predecessor in interest) pursuant to Section 3.1 hereof; and (e) shall be otherwise adjusted in accordance with the other capital account maintenance rules of section 1.704-1(b)(2)(iv) of the Regulations. The foregoing provisions of this Section 2.1 and the other provisions of this Exhibit C relating to the maintenance of Capital Accounts are intended to comply with section 1.704-1(b) of the Regulations, and shall be interpreted and applied in a manner consistent with such Regulations. The Partners shall also make any appropriate modification if unanticipated events might otherwise cause this Exhibit C and the Agreement not to comply with such Regulations. If any Interest is transferred pursuant to the terms of the Agreement, the transferee shall succeed to the Capital Account of the transferor to the extent the Capital Account is attributable to the transferred Interest. 26 Section 2.2 Additional Provisions Regarding Capital Accounts. (a) If a Partner pays any indebtedness of the Partnership, such payment shall be treated as a contribution by that Partner to the capital of the Partnership and the Capital Account of such Partner shall be increased by the amount so paid by such Partner. (b) Except as specifically provided in the Agreement, no Partner may contribute capital to, or withdraw capital from, the Partnership. (c) A loan by a Partner to the Partnership shall not be considered a contribution of money to the capital of the Partnership, and the balance of such Partner's Capital Account shall not be increased by the amount so loaned. No repayment of principal or interest on any such loan, or reimbursement made a Partner with respect to advances or other payments made by a such Partner on behalf of the Partnership or payments of fees to a Partner or Related Person to such Partner which are made by the Partnership shall be considered a return of capital or in any manner affect the balance of such Partner's Capital Account. (d) No Partner with a deficit balance in its Capital Account shall have any obligation to the Partnership, any other Partner, or any third party to restore said deficit balance; provided, however, that upon the liquidation of TP II's interest in the Partnership, if TP II has a deficit balance in his Capital Account following such liquidation, as determined after taking into account all adjustments to the Capital Accounts for the taxable year during which such liquidation occurs, TP II shall be required to immediately contribute cash to the Partnership in an amount equal to the lesser of (i) such deficit capital account balance or (ii) the amount of actual cash distributions to TP II during the term of the Partnership (determined without taking into account any amounts paid to any party pursuant to Section 7.6 of the Agreement). (e) No interest will be paid on any capital contributed to the Partnership or the balance in any Partner's Capital Account. Section 2.3 Section 704 Capital Accounts. A "Section 704 Capital Account" (herein so called) shall be determined and maintained for each Partner throughout the term of the Agreement. The balance of a Partner's Section 704 Capital Account shall be equal to such Partner's Capital Account balance (as determined after giving effect to all adjustment attributable to allocations of Partnership income, gain, loss, deduction and credits and contributions and distributions of money and property effected prior to such determination), modified as follows: (a) decreased by the amount (if any) of cash that reasonably is expected to be distributed to such Partner, but only to the extent that the amount thereof exceeds any offsetting increase in such Partner's Section 704 Capital Account that reasonably is expected to occur during (or prior to) the Fiscal Year during which such distribution reasonably is expected to be made (as determined under section 1.704- 1(b)(ii)(d) of the Regulations); (b) decreased by the amount (if any) of loss and deduction that reasonably is expected to be allocated to such Partner pursuant to section 704(e)(2) or 706(d) of the Code or section 1.704-1(b)(2)(ii) of the Regulations (as determined under section 1.704-1(b)(2)(ii)(d) of the Regulations); (c) increased by the amount (if any) of such Partner's share of the Nonrecourse Minimum Gain of the Partnership; and (d) increased by the amount (if any) of such Partner's share of the Partner Minimum Gain of the Partnership. 27 Section 2.4 Adjustment of Book Basis. Book Basis with respect to any asset of the Partnership is the asset's adjusted tax basis for federal income tax purposes, except as follows: (a) The initial Book Basis of any asset contributed to the Partnership by a Partner shall be the fair market value of the asset as of the date of contribution as agreed upon by the contributing Partner and the Partnership. (b) The Book Basis of each asset shall be its respective fair market value as reasonably determined by the General Partner, as of a Revaluation Event. (c) The Book Basis of each asset distributed to any Partner will be the fair market value of the asset as reasonably determined by the General Partner as of the date of determination. (d) The Book Basis of each asset will be increased or decreased to reflect any adjustment to the adjusted tax basis of the asset under section 734(b) or 743(b) of the Code, but only to the extent that the adjustment is taken into account in determining Capital Account balances under section 1.704-1(b)(2)(iv)(m) of the Regulations, provided that the Book Basis will not be adjusted hereunder to the extent that an adjustment under Section 2.4(b) is necessary or appropriate in connection with a transaction that would otherwise result in an adjustment under this Section 2.4(d). Book Basis will be adjusted by Book Depreciation, and Book Gain or Book Loss on a disposition of any asset shall be determined by reference to such asset's Book Basis as adjusted herein. ARTICLE III ALLOCATIONS OF PROFIT AND LOSS Section 3.1 Allocation of Items of Profit and Loss. Subject to the provisions of ARTICLE IV hereof, the Partnership's Gross Income, items of loss or deduction and Adjusted Net Income or Loss and Book Gain or Loss for each Fiscal Year shall be allocated to the Partners as follows and in the following order of priority (after giving effect to all Capital Account adjustments attributable to contributions and distributions of money and property, but prior to distributions of money and property made pursuant to Section 10.4 of the Agreement): (a) Pursuant to section 1.704-2(f) of the Regulations (relating to minimum gain chargebacks), if there is a net decrease in Nonrecourse Minimum Gain of the Partnership for such Fiscal Year (or if there was a net decrease in Nonrecourse Minimum Gain for a prior Fiscal Year and the Partnership did not have sufficient amounts of income during prior Fiscal Years to allocate to the Partners under this Section 3.1(a)), then Gross Income shall be allocated, before any other allocation is made pursuant to the succeeding provisions of this Section 3.1 for such Fiscal Year, to each Partner in an amount equal to such Partner's share of the net decrease in such minimum gain (as determined under section 1.704-2(g) of the Regulations). (b) Pursuant to section 1.704-2(i)(4) of the Regulations (relating to minimum gain chargebacks) if there is a net decrease in Partner Minimum Gain of the Partnership for such Fiscal Year (or if there was a net decrease in Partner Minimum Gain for a prior Fiscal Year and the Partnership did not have sufficient amounts of income during prior Fiscal Years to allocate to the Partners under this Section 3.1(b)), then Gross Income shall be allocated, before any other allocation is made pursuant to the succeeding provisions of this Section 3.1 for such Fiscal Year, to each Partner with a share of such minimum gain as of the first 28 day of such Fiscal Year in an amount equal to such Partner's share of the net decrease in such Partner Minimum Gain (as determined under section 1.704-2(i)(5) of the Regulations). (c) A Partner who unexpectedly receives any adjustment, allocation or distribution described in section 1.704-1(b)(2)(ii)(d)(4), (5) or (6) of the Regulations will be specially allocated items of income or gain (after the allocations required by Section 3.1(a) and Section 3.1(b) hereof but before any other allocations required by this Section 3.1) in an amount and in the manner sufficient to eliminate any deficit balance in his Section 704 Capital Account (for this purpose, a Partner's Section 704 Capital Account shall be increased by the amount (if any) that such Partner is treated as being obligated to contribute subsequently to the capital of the Partnership (as determined under section 1.704-1(b)(2)(ii)(c) of the Regulations) and, without duplication of any amount previously described in this sentence, shall be increased by the amount (if any) of such Partner's Modified 752 Share of Recourse Debt) as quickly as possible; provided, however, that an allocation shall be made pursuant to this Section 3.1(c) only if and to the extent that such Partner would have a deficit balance in his Section 704 Capital Account after all allocations in this Section 3.1 have been tentatively made as if this Section 3.1(c) were not in this Exhibit. This Section 3.1(c) is intended to satisfy the provisions of Section 1.704-1(b)(2)(ii)(d) of the Regulations and shall be interpreted consistently therewith. (d) Except as required by Section 3.1(a), Section 3.1(b) and Section 3.1(c), each Partner who has a deficit balance in its Capital Account (for this purpose, a Partner's Capital Account shall be increased by (A) the amount (if any) that a Partner is obligated to contribute subsequently to the capital of the Partnership under the Agreement or this Exhibit (including Section 2.2(d) of this Exhibit) or is treated as being obligated to contribute subsequently to the capital of the Partnership (as determined under section 1.704-1(b)(2)(ii)(c) of the Regulations); (B) the amount (if any) of such Partner's share of the Nonrecourse Minimum Gain of the Partnership; and (C) the amount (if any) of such Partner's share of the Partner Minimum Gain of the Partnership) at the end of the taxable year will be specially allocated items of income or gain in the amount of the deficit as quickly as possible; provided, however, that an allocation shall be made pursuant to this Section 3.1(d) only if and to the extent that such Partner would have a deficit balance in its Capital Account after all allocations in this Section 3.1 have been tentatively made as if this Section 3.1(d) were not in this Exhibit and Section 3.1(d) shall be applied before Section 3.1(c). (e) All Partner Nonrecourse Deductions attributable to a Partner Nonrecourse Debt shall be allocated to the Partner that is treated (under section 1.704-2(b)(4) of the Regulations) as bearing the economic risk of loss for such debt. (f) All Nonrecourse Deductions of the Partnership shall be allocated to the Partners, pro rata in accordance with their respective Percentage Interests. (g) Any Adjusted Net Income realized by the Partnership for such year shall be allocated among the Partners as follows and in the following order of priority: (i) First: Adjusted Net Income shall be allocated to the General Partner until the aggregate Adjusted Net Income allocated under this Section 3.1(g)(i) for the current and prior years equals the aggregate amount of Adjusted Net Loss allocated to the General Partner under Section 3.1(h)(ii) for the current and prior years; and then (ii) Second: Adjusted Net Income shall be allocated to the Partners in the same proportion that cumulative Adjusted Net Loss has been allocated to the Partners under Section 3.1(h)(i) for the current year and prior years until each Partner has been allocated cumulative Adjusted Net Income under this Section 3.1(g)(ii) for the current and prior years equal to the 29 cumulative Adjusted Net Loss allocated to the Partner under Section 3.1(h)(i) for the current and prior years; and then (iii) Third: All remaining Adjusted Net Income shall be allocated among the Partners in proportion to their respective Percentage Interests. (h) Any Adjusted Net Loss realized by the Partnership for such year shall be allocated among the Partners as follows and in the following order of priority: (i) First: Adjusted Net Loss shall be to the Partners in proportion to their respective Percentage Interests until each Partner's positive Section 704 Capital Account balance is reduced to zero. (ii) Second: All remaining Adjusted Net Loss shall be allocated to the General Partner. (i) Notwithstanding any other provision of the Agreement or this Exhibit, from the date that construction commences with respect to a Property (the "Subject Property") to the date 18 months following the date that the Partnership receives a Certificate of Occupancy for the Subject Property, all Adjusted Net Loss from the Subject Property shall be allocated under this Section 3.1(i) to TP II. The provisions of this Section 3.1(i) shall be applied to each Property of the Partnership on a property by property basis. (j) [Intentionally deleted] (k) Book Gain derived from a Terminating Capital Transaction shall be allocated among the Partners as follows in the following order of priority (after giving effect to all adjustments attributable to allocations made pursuant to the preceding provisions of this Section 3.1 for such year): (i) First: Book Gain shall be allocated among the Partners having deficit Capital Account balances to the least extent necessary to cause their deficit Capital Account balances to be in the same proportion to one another as are their respective Percentage Interests. (ii) Second: Book Gain shall be allocated among those Partners having deficit Capital Account balances in accordance with their respective Percentage Interests, to the least extent necessary to cause their Capital Account balances to equal zero. (iii) Third: Book Gain shall be allocated to the Partners to the least extent necessary so as to cause their positive Capital Account balances to be in the same proportion to one another as are their respective Percentage Interests. (iv) Fourth: Book Gain shall be allocated among the Partners in proportion to their respective Percentage Interests. (l) Book Loss derived from a Terminating Capital Transactions shall be allocated among the Partners as follows in the following order of priority (after giving effect to all adjustments attributable to allocations made pursuant to the preceding provisions of this Section 3.1 for such year): (i) First: Book Loss shall be allocated among the Partners to the least extent necessary so as to cause the positive balances of their respective Capital Accounts to be in the same proportion to one another as their respective Percentage Interests and then to all Partners in 30 proportion to their respective Percentage Interests until each Partner's positive Capital Account balance is reduced to zero. (ii) Second: All remaining Book Loss shall be allocated to the General Partner. (m) For purposes of determining the nature (as ordinary or capital) of any Partnership profit allocated among the Partners for Federal income tax purposes pursuant to this Section 3.1, the portion of such profit required to be recognized as ordinary income pursuant to sections 1245 and/or 1250 of the Code shall be deemed to be allocated among the Partners in accordance with sections 1.1245-1(e)(2) and 1.1250-1(f) of the Regulations. (n) The Partners agree that their Percentage Interests represent their respective interest in Partnership profits for purposes of allocating excess nonrecourse liabilities (as defined in section 1.752-3(a)(3) of the Regulations) pursuant to section 1.752-3(a)(3) of the Regulations. (o) Notwithstanding any other provision herein to the contrary, no allocation of Adjusted Net Income, Adjusted Net Loss, Book Gain or Book Loss, or items of income, gain, loss and deduction will be made to a Partner if the allocation would not have "economic effect" under section 1.704-1(b)(2)(ii) of the Regulations or otherwise would not be in accordance with the Partners' interests in the Partnership within the meaning of section 1.704-1(b)(3) or section 1.704-2(b)(1) of the Regulations. The General Partner will have the authority to reallocate any item in accordance this Section 3.1(o); provided, however, that (a) no such change shall have a material adverse effect upon the amount of cash or other property distributable to any Partner, (b) each Partner shall have 30 days prior notice of such proposed modification and (c) if such proposed modification would be material, the Partnership shall have received an opinion of tax counsel to the Partnership that such modification is necessary to comply with section 704(b) of the Code. (p) The allocations set forth in Sections 3.1(a)-(f) (the "Regulatory Allocations") are intended to comply with certain requirements of the Regulations. It is the intent of the Partners that, to the extent possible, all Regulatory Allocations shall be offset either with other Regulatory Allocations or with special allocations of other items of Partnership income, gain, loss, or deduction pursuant to this Section 3.1(p). Therefore, notwithstanding any other provision of this Article III (other than the Regulatory Allocations), the General Partner shall make such offsetting special allocations of Partnership income, gain, loss, or deduction in whatever manner it determine(s) appropriate so that after such offsetting allocations are made, each Partner's Capital Account balance is, to the extent possible, equal to the Capital Account balance such Partner would have had if the Regulatory Allocations were not part of the Agreement and all Partnership items were allocated pursuant to Sections 3.1(g)-(l) hereof. Section 3.2 Allocation of Tax Items. (a) Except as otherwise provided in the succeeding provisions of this Section 3.2, each Tax Item shall be allocated to the Partners in the same manner as each correlative item of income, gain, loss or deduction, as calculated for book purposes, is allocated pursuant to the provisions of Section 3.1 hereof. (b) The Partners hereby acknowledge that all Tax Items in respect of Adjusted Property are required to be allocated to the Partners in the same manner as under section 704(c) of the Code (as specified in sections 1.704-1(b)(2)(iv)(f), 1.704-1(b)(2)(iv)(g) and 1.704-3 of the Regulations), and that the principles of section 704(c) of the Code require that such Tax Items must be shared among the Partners so as to take account of the variation between the adjusted tax basis and Book Basis of each such Adjusted Property. Thus, notwithstanding anything in Sections 3.1 or 3.2(a) hereof to the contrary, the Partners' distributive shares of Tax Items in respect of each Adjusted Property shall be separately determined and 31 allocated to the Partners following any permissible method under 1.704-3 of the Regulations reasonably selected by the General Partner, and the Capital Account balances of the Partners shall be adjusted solely for allocations of book items in respect of such assets and shall not be adjusted for their distributive shares of any corresponding Tax Items. ARTICLE IV SPECIAL RULES Section 4.1 Allocation of Profit and Loss and Distributions in Respect of Interests Transferred. (a) If any interest in the Partnership is transferred, or is increased or decreased by reason of the admission of a new Partner or otherwise, during any Fiscal Year, each item of Adjusted Net Income or Loss, and other income and deductions and Book Gain and Book Loss of the Partnership for such Fiscal Year shall be divided and allocated between the Partners in question by taking account of their varying interests in the Partnership during such Fiscal Year on a daily, monthly, or other basis, as determined by the General Partner using any permissible method under section 706 of the Code and the Regulations thereunder. (b) Distributions of Partnership assets in respect of an interest in the Partnership shall be made only to the persons or entities who, according to the books and records of the Partnership, are the holders of record of the interests in the Partnership in respect of which such distributions are made on the actual date of distribution. Neither the Partnership nor any Partner shall incur any liability for making distributions in accordance with the provisions of the preceding sentence, whether or not the Partnership or any Partner has knowledge or notice of any transfer or purported transfer of ownership of any interest in the Partnership. (c) Notwithstanding any provision above to the contrary, Book Gain or Loss of the Partnership realized in connection with a sale or other disposition of any substantial part of the assets of the Partnership shall be allocated solely to the parties owning interests in the Partnership as of the date such sale or other disposition occurs. Section 4.2 Tax Returns. The General Partner shall cause to be prepared for each taxable year of the Partnership the federal, state and local income tax returns and information returns, if any, which the Partnership is required to file. Such returns shall be prepared and submitted to the Partners for examination no later than ten (10) days prior to the required filing date (including any extension thereof), together with such additional forms and information as may be required by the Partners in order for the Partners to file returns reflecting the Partnership's operations. Section 4.3 Tax Elections. The Partnership shall make the following elections on the appropriate tax returns: (a) to the extent permitted by the Code, to adopt the calendar year as the Partnership's fiscal year; (b) to the extent permitted by the Code, to adopt the cash method of accounting and to keep the Partnership's books and records on the income-tax method; (c) if a distribution of Partnership property as described in section 734 of the Code occurs or if a transfer of Interest as described in section 743 of the Code occurs, on written request of any Partner, to elect, pursuant to section 754 of the Code, to adjust the basis of Partnership properties; 32 (d) to elect to amortize the organizational expenses of the Partnership ratably over a period of sixty (60) months as permitted by section 709(b) of the Code; and (e) any other election the General Partner may deem appropriate and in the best interests of the Partners. Neither the Partnership nor any Partner may make an election for the Partnership to be excluded from the application of the provisions of subchapter K of chapter 1 of subtitle A of the Code or any similar provisions of applicable state law. The Partnership intends to be classified as a partnership for federal income tax purposes under section 301.7701-3 of the Regulations. Neither the Partnership nor any Partner may make an election under section 301.7701-3(c) of the Regulations to treat the Partnership as an association taxable as a corporation. Section 4.4 Tax Matters Partner. (a) The General Partner is hereby designated the "Tax Matters Partner" as that term is defined in section 6231(a)(7) of the Code. (b) The Tax Matters Partner shall use its best efforts to comply with the responsibilities outlined in sections 6222 through 6232 of the Code and in doing so shall incur no liability to the other Partners. Notwithstanding the Tax Matters Partner's obligation to use its best efforts in the fulfillment of its responsibilities, the Tax Matters Partner shall not be required to incur any expenses for the preparation for or pursuance of administrative or judicial proceedings unless the Partners agree on a method for sharing such expenses. (c) No Partner shall file, pursuant to section 6227 of the Code, a request for an administrative adjustment of items for any Partnership taxable year without first notifying the other Partners. If the other Partners agree with the requested adjustment, then the Tax Matters Partner shall file the request for administrative adjustment on behalf of the Partner. If unanimous consent is not obtained within thirty (30) calendar days from such notice, or within the period required to timely file the request for administrative adjustment, if shorter, any Partner, including the Tax Matters Partner, may file a request for administrative adjustment on its own behalf. (d) Any Partner intending to file a petition under sections 6226, 6228, or other section of the Code with respect to any item or other matter involving the Partnership shall notify the other Partners of such intention and the nature of the contemplated proceeding. In the case where the Tax Matters Partner is the Partner intending to file such petition on behalf of the Partnership, such notice shall be given within a reasonable period of time to allow the other Partners to participate in the choosing of the forum in which such petition will be filed. If the Partners do not agree on the appropriate forum, then the appropriate forum shall be decided by vote of a majority in interest of the Partners. If such a majority cannot agree, then the Tax Matters Partner shall choose the forum. If any Partner intends to seek review of any court decision rendered as a result of a proceeding instituted under the preceding provisions of this Section 4.4(d), then such Partner shall notify the other Partners of such intended action. (e) The provisions of this Section 4.4 shall survive the termination of the Partnership or the termination of any Partners's interest in the Partnership and shall remain binding on the Partners for a period of time necessary to resolve with the IRS or the United States Treasury Department the income taxation of the Partnership. Section 4.5 Inconsistent Treatment of Partnership Items. If any Partner intends to file a notice of inconsistent treatment under section 6222(b) of the Code, then such Partner shall give reasonable notice 33 under the circumstances to the other Partners of such intent and the manner in which the Partner's intended treatment of an item is (or may be) inconsistent with the treatment of that item by the other Partners. EX-10.58 10 AGREEMENT OF LP OF TRIAD SR LIVING III-11/10/98 1 EXHIBIT 10.58 AGREEMENT OF LIMITED PARTNERSHIP OF TRIAD SENIOR LIVING III, L.P. THIS AGREEMENT OF LIMITED PARTNERSHIP is dated effective as of November 10, 1998, by and among Triad Partners III, Inc., a Texas corporation ("TP III"), as general partner (the "General Partner") and as a limited partner and Capital Senior Living Properties, Inc., a Texas corporation ("Capital Senior Living" and, together with TP III, the "Limited Partners"). WHEREAS, the parties hereto desire to form a limited partnership under the Texas Revised Limited Partnership Act. NOW THEREFORE, in consideration of the mutual covenants, conditions and agreements hereinafter set forth, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: ARTICLE I ADDITIONAL DEFINITIONS As used herein, the following terms shall have the following meanings: "Accountant" - means any independent firm of certified public accountants as may be engaged by the General Partner for the Partnership. "Affiliate" - means (a) a General Partner; (b) a Limited Partner; (c) a partner or shareholder of a General Partner or a Limited Partner or a member of the immediate family of a partner or shareholder; (d) a legal representative of any Person, referred to in the preceding clauses (a) through (c); (e) a trustee for the benefit of any Person referred to in the preceding clauses (a) through (c); (f) a corporation, joint venture, partnership or other business entity which is controlled by such person or entity and/or any one or more of the Persons referred to in the preceding clauses (a) through (c); (g) a corporation, joint venture, partnership or other business entity which controls or is under common control with such person or entity, and/or with a person or entity referred to in the preceding clauses (a) through (c); or (h) the partners, officers, directors and key employees of such entity and/or any corporation, joint venture, partnership or other business entity referred to in the preceding clauses (a), (b), (c), (f) or (g). "Agreement" or "this Agreement" - means this Agreement of Limited Partnership, as amended from time to time. 2 "Capital Contributions" - means the gross amount of contributions actually made to the capital of the Partnership by a Partner or all the Partners, as the case may be. Loans to the Partnership by any Partner shall not be considered a Capital Contribution. "Certificate" - means the Certificate of Limited Partnership of this Partnership filed with the Secretary of State of the State of Texas, as such Certificate may be further amended and filed from time to time. "Certificate of Occupancy" - means that certain certificate of occupancy which has been issued for any building at a Property. "Code" - means the Internal Revenue Code of 1986, as amended. "Development Agreement" - means any development agreement between the Partnership and Capital Senior Development, Inc. relating to a Property, as such agreement may be amended from time to time. "Fiscal Year" - means the fiscal year of the Partnership as set forth in Section 11.1 hereof. "General Partner" - means Triad Partners III, Inc. and any additional or successor General Partner(s) designated in any case as such in accordance with the provisions of this Agreement, and, from time to time, holding such position in accordance with such provisions. "Gross Receipts" - means all revenues received by the Partnership from the operations of its business attributable to a particular period as determined in accordance with the cash receipts and disbursements method of accounting, and including, without limitation, any loans from Partners and third parties, and other amounts paid by Partners and third parties to the Partnership, but not including capital contributions. "Limited Partners" - means Triad Partners III, Inc. and Capital Senior Living Properties, Inc., and any additional or substitute Limited Partner(s) as may be designated as such in accordance with the provisions of this Agreement. "Lenders" - means Key Corporate Capital, Inc., Daiwa Finance Corp. or any other lender approved by the Partners, or their successors and/or assigns. "Loan" - means collectively those certain loans from Lenders to the Partnership approved by the Partners. "Loan Documents" - means all documents evidencing, securing or otherwise entered into in connection with the Loan, including, without limitation, any Note, Deed of Trust, Security Agreement, Assignment of Rents and Financing Statement, Assignment of Leases and Rents, and UCC-1 Financing Statement. 2 3 "Management Agreement" means any management agreement between the Partnership and Capital Senior Living, Inc. relating to a Property, as such agreement may be amended from time to time. "Net Cash Flow" - means the amount, if any, by which Gross Receipts plus cash reserves of the Partnership from the previous period exceed Operating Expenses for such particular period, to the extent the General Partner determines, in its sole discretion, that cash is not otherwise required for Partnership purposes, including the setting up or continuing of a reasonable working capital reserve for the Partnership. "Net Cash Flow" shall not include or reflect any proceeds received or expenses incurred in connection with the sale or other disposition of all or substantially all of the assets of the Partnership or the termination and liquidation of the Partnership. "Operating Expenses" - means all cash expenditures of any kind or nature incurred by the Partnership attributable to a particular period, as determined in accordance with the cash receipts and disbursements method of accounting. "Partners"- means the General Partner and the Limited Partners. "Partner" - means any of the Partners. "Partnership" - means the limited partnership evidenced by this Agreement, as said limited partnership may from time to time be constituted, amended and, if necessary, reconstituted, including any successor limited partnership. "Percentage Interests" - means the percentage set forth opposite the name of such Partner under the column "Interest" in Exhibit B attached hereto and made a part hereof for all purposes. "Person" - means an individual, firm, corporation or other legal entity. "Properties" - means those certain tracts of land which have been agreed to in writing by all of the Partners. Upon such written approval, the General Partner shall attach the legal description for each Property hereto as Exhibit A. "Property" - means any one of the Properties. "Revised Act" - means the Texas Revised Limited Partnership Act, as adopted and from time to time amended by the State of Texas. ARTICLE II FORMATION; NAME AND OFFICE; PURPOSE Section 2.1 Formation The General Partner and the Limited Partners hereby organize, create and form the Partnership as a Texas limited partnership under the Revised Act. The Partnership will commence effective upon the filing of the Certificate with the Secretary of State of the State of Texas pursuant 3 4 to the provisions of the Revised Act. The Partnership is formed for the purpose and upon the terms and conditions herein set forth. The Partners hereby agree and obligate themselves to execute, acknowledge, file, record and/or publish, as necessary, such amendments to the Certificate and such other certificates and documents and to take all other necessary actions required by law to perfect and maintain the Partnership as a limited partnership under the Revised Act and in all other jurisdictions in which the Partnership may elect to conduct business. Section 2.2 Name, Registered Agent and Registered Office The name of the Partnership shall be Triad Senior Living III, L.P. or such other name as the General Partner shall hereafter designate by notice to the Limited Partners and by amendment to the Certificate properly filed with the Secretary of State of the State of Texas. The principal place of business in Texas where books and records of the Partnership will be kept and made available shall be 4312 Mockingbird Lane, Dallas, Texas 75205, or such other place as the General Partner may from time to time designate in a notice to the Limited Partners and by amendment to the Certificate. The registered office of the Partnership and the registered Agent shall be as set forth in the Certificate, or such other registered Agent and registered office as the General Partner may from time to time designate in a notice to the Limited Partners and by amendment to the Certificate. Section 2.3 Purpose The purpose of the Partnership shall be strictly limited to activities relating to the acquisition, development, ownership, operation, and sale of the Properties, and such other activities as are incidental thereto, including without limitation, entering into the Loan and the performance of the Partnership's obligations under the Loan Documents. ARTICLE III TERM The term of the Partnership shall commence upon the filing of the Certificate with the Secretary of State of the State of Texas, and shall continue until December 31, 2050, on which date the Partnership shall terminate, unless sooner dissolved upon the occurrence of any of the events of dissolution or termination, as described in Article X. ARTICLE IV INTERESTS OF THE GENERAL PARTNER AND LIMITED PARTNERS Section 4.1 General Partner The General Partner is Triad Partners III, Inc., and it shall have a 1% interest in the Partnership. Except as provided in Article IX of this Agreement, no other Person shall become a General Partner in the Partnership. The address of the General Partner is set forth on Exhibit B. 4 5 Section 4.2 Limited Partners The Limited Partners are TP III and Capital Senior Living Properties, Inc., which shall have the interests in the Partnership as shown on Exhibit B. Except as provided in Article IX of this Agreement, no other Person shall become a Limited Partner or substitute Limited Partner in the Partnership. The addresses of the Limited Partners are set forth on Exhibit B. ARTICLE V CAPITAL CONTRIBUTIONS Section 5.1 Capital Contribution of the General Partner The General Partner has contributed to the Partnership the amount set forth on Exhibit B. The General Partner shall not be obligated to pay any Partnership expenses or make any capital contributions to the Partnership except as provided in this Section 5.1 and Section 5.3. Section 5.2 Capital Contribution of the Limited Partners The Limited Partners have contributed or will contribute to the Partnership the amounts set forth on Exhibit B. The Limited Partners shall not be obligated to make any other capital contributions to the Partnership except as provided in this Section 5.2 and Section 5.3. Section 5.3 Additional Capital Contributions The Partners may, but are not required to, make their pro rata share (based on Percentage Interests) of any additional capital contributions to the Partnership. In the event that any Partner does not make such additional capital contribution, the Partnership shall return the amounts contributed by the other Partners for such additional capital contributions. The additional capital contributions shall be due only upon the written notice from the General Partner to the Partners. TP III shall contribute to the capital of the Partnership in the amount required and at the time specified in Section 2.2(d) of Exhibit C attached hereto. Section 5.4 Return or Withdrawal of Capital Contributions; Distributions Except as otherwise expressly provided in this Agreement, none of the Partners shall be entitled to demand a refund or return of any Capital Contribution or to withdraw any part of its capital account or to receive any distribution from the Partnership. Section 5.5 Capital Accounts A capital account shall be established and maintained for each Partner as set forth in Exhibit C attached hereto. 5 6 Section 5.6 Loans by the Partners . If the General Partner determines that the Partnership needs additional capital, it may request that the Partners make loans to the Partnership. Then each Partner shall have the option, but not the obligation, to loan to the Partnership some or all of the aggregate amount of the requested loan. Any loans made by the Partners shall not be considered to be contributions to the capital of the Partnership. ARTICLE VI LIMITED PARTNERS Section 6.1 Powers: Actions The Limited Partners shall neither participate in the management or control of the Partnership's business nor shall they transact any business for the Partnership, nor shall they have the power to sign for or bind the Partnership, said powers being vested solely and exclusively in the General Partner. Section 6.2 Limitation of Liability Anything to the contrary herein expressed or implied notwithstanding, the Limited Partners shall not be personally liable for any of the debts of the Partnership or any of the losses thereof in excess of their respective shares of Partnership assets, capital contributions which they have made or are obligated to make to the Partnership, and their share of the Partnership's income and gains; provided, however, that to the extent required by applicable law, if a Limited Partner receives a distribution at a time when it knew that, after giving effect to the distribution, all liabilities of the Partnership, other than liabilities to the Partners with respect to the partnership interests and liabilities for which the recourse of creditors is limited to specific Partnership assets, exceed the fair value of the Partnership's assets (except that the fair value of property that is subject to a liability for which there is recourse of creditors is limited shall be included in the Partnership's assets only to the extent that the fair value of that property exceeds that liability), then the Limited Partner receiving such distribution shall be liable for the return of such distribution. ARTICLE VII GENERAL PARTNER Section 7.1 Powers; Actions The General Partner shall manage and control the business and affairs of the Partnership. Without limiting the generality of the foregoing, the General Partner shall have full power to (i) manage the Partnership; (ii) execute such documents as it may deem advisable for Partnership purposes, including, without limitation, the Loan Documents and all documents necessary for the 6 7 acquisition, financing, refinancing, development, ownership, operation and sale of any Property; (iii) acquire, sell, lease, transfer, assign, convey, mortgage, refinance, or otherwise dispose of or deal with all or any part of any Property on such terms as it deems reasonable; (iv) establish and maintain, to the extent Partnership funds are available, reasonable reserves for anticipated and unanticipated expenses relating to the activities of the Partnership; (v) perform or cause to be performed the Partnership's obligations, and exercise or cause to be exercised all of the Partnership's rights, under any agreement to which the Partnership or any nominee of the Partnership is a party; and (vi) on behalf of the Partnership, employ, engage, retain or deal with any Person, including any Affiliate, to perform services in connection with the ownership and operation of the Property, provided in all such cases such services are deemed by the General Partner to be advisable and the compensation therefor is reasonable. Section 7.2 Restrictions on the General Partner (a) Notwithstanding the foregoing in Section 7.1 or any other provision of this Agreement, the Partnership shall be subject to the following restrictions and the General Partner shall have no authority to take and shall not take any action on behalf of the Partnership in violation of any of the following restrictions: (i) No bankruptcy or insolvency filing or similar proceedings for the Partnership may be commenced, and no bankruptcy or insolvency filing or similar proceeding may be commenced as to the General Partner on its own behalf or as General Partner on behalf of the Partnership. (ii) The Partnership and the General Partner are prohibited from creating, incurring or assuming any indebtedness other than the Loan and any subordinate financing permitted in the Loan Documents. (iii) The Partnership and the General Partner are prohibited from liquidating or dissolving or consenting to the liquidation or dissolution, in whole or in part, of either the Partnership or the General Partner. (b) Notwithstanding anything in this Agreement to the contrary, the General Partner shall not have the right or the power to make any commitment or engage in any undertaking on behalf of the Partnership in respect of a Major Decision (as hereinafter defined) unless and until such Major Decision has been approved in writing by all of the Limited Partners. The term "Major Decision," as used in this Agreement, means any decisions with respect to the following matters: (i) All financing and refinancing decisions pertaining to indebtedness owing, directly or indirectly, to and/or by the Partnership. (ii) Any amendment, modification, change or restatement of this Agreement. 7 8 (iii) Any capital expenditures in excess of $50,000 on any Property that has already been developed. (iv) The assignment of any interests in the Partnership except as expressly provided by the terms of this Agreement. (v) Any amendment, modification or change to any Management Agreement or any Development Agreement. (vi) The engagement by the Partnership in any business other than as set forth in Section 2.3 above. (vii) The transaction of business with Affiliates of Partners except as set forth herein. (viii) The execution of any guarantees, indemnities, sureties or similar commitments on behalf of the Partnership. (ix) Any decision to cause the Partnership to loan funds to any person, and the terms on which any such loan is made. (x) Any act in contravention of this Agreement. (xi) The addition of a tract of land to the defined term "Properties" or a change in the use of a Property. (xii) The admission of any new Partners to the Partnership (except as otherwise allowed herein) or the appointment of any additional General Partner. (xiii) Any other act which the Revised Act specifically requires to be approved by all the Partners. (xiv) The merger, consolidation or any other form of combination of the Partnership with or into any other entity. (xv) The conveyance, transfer or lease of the Partnership's assets substantially as an entirety to any entity, except for the transfer of the Properties (or a Property) to the manager pursuant to any purchase option in any Management Agreement. (xvi) The acquisition or lease of any substantial assets by the Partnership. 8 9 Section 7.3 Duties and Obligations of the General Partner The General Partner shall manage and control the Partnership, its business and affairs. During the continuance of the Partnership, the General Partner shall diligently and faithfully devote such time to the management of the business of the Partnership as it deems reasonably necessary. Section 7.4 Tax Matters Partner. See Section 4.4 of Exhibit C attached hereto. Section 7.5 Liability; Indemnification The General Partner and its Affiliates shall not be liable to the Partnership or the Limited Partners for any act or omission performed or omitted by it pursuant to the authority granted to it by this Agreement, other than for fraud, willful malfeasance or gross negligence. The Partnership shall and hereby does indemnify and save harmless the General Partner, the Limited Partners and their Affiliates to the greatest extent permitted by the Revised Act from any loss, damage, claim or liability, including but not limited to, reasonable attorney's fees and expenses, incurred by them by reason of any act performed by the General Partner, the Limited Partners or their Affiliates on behalf of the Partnership, including, without limitation, their activities in winding up and liquidating the Partnership, or in furtherance of the Partnership's interests, except that the General Partner and its Affiliates shall not be indemnified for actions by the General Partner or its Affiliates which constitute a breach of any of their obligations under this Agreement, fraud, willful malfeasance or gross negligence, provided, however, that the indemnity and save harmless provided for in this sentence shall be satisfied out of Partnership assets only and no Partner shall have any personal liability on account thereof. Section 7.6 Fees to and Reimbursement of the General Partner The Limited Partners acknowledge that the General Partner or its Affiliates will receive $1,000 per month beginning December 1, 1998 as an asset management fee. The General Partner and its Affiliates shall also be entitled to receive reimbursement of their expenses, but shall not be entitled to receive any other fees. The General Partner and its Affiliates shall receive reimbursement for all reasonable expenses advanced by the General Partner and its Affiliates on behalf of the Partnership and all expenses incurred during the operation of the Partnership. ARTICLE VIII ALLOCATIONS; DISTRIBUTIONS Section 8.1 Allocations of Income and Loss All items of income or loss of the Partnership shall be allocated to the Partners in accordance with the provisions of Exhibit C attached hereto, which are hereby incorporated by reference for all purposes of this Agreement. 9 10 Section 8.2 Partnership Distributions of Cash During the term hereof, periodically, but not less frequently than annually, Net Cash Flow of the Partnership shall be distributed to the Partners in accordance with their Percentage Interests. ARTICLE IX ASSIGNABILITY OF GENERAL PARTNER'S AND LIMITED PARTNER'S INTERESTS; PURCHASE OPTION Section 9.1 Restrictions on Transfers Except as provided in Section 9.5 hereof, a Partner may not sell, assign, transfer, encumber, or dispose of, by operation of law or otherwise, any interest in the Partnership or in the property or assets of the Partnership without the prior written consent of the other Partners, which in the other Partners' absolute discretion may be withheld. Additionally, any such disposition must comply with the provisions hereinafter stated in this Article IX. Section 9.2 Assignment of a Limited Partner's Interest (a) Except as otherwise provided in this Agreement, an assignee of the whole or any portion of a Partner's interest in the Partnership shall not have the right to become a Partner in place of its assignor unless (i) its assignor shall have designated such intention in the instrument of assignment; (ii) the written consent of the other Partners to such substitution shall have been obtained, which consent, in the other Partners' absolute discretion, may be withheld; (iii) the assignment instrument shall have been in form and substance satisfactory to the other Partner; (iv) the assignor and assignee named therein shall have executed and acknowledged such other instrument or instruments as the other Partners may deem necessary or desirable to effectuate such admission; and (v) the assignee shall have accepted, adopted and approved in writing all of the terms and provisions of this Agreement, as the same may have been amended. (b) In any event, the Partnership and the other Partners shall be entitled to treat an assignor of a Partner's interest as the absolute owner thereof in all respects, and shall incur no liability for distributions made in good faith to such assignor, until such time as the foregoing requirements have been satisfied. (c) The Partnership shall, upon satisfaction of the foregoing requirements, thereafter pay all further distributions or profits or other compensation by way of income or return of capital on account of the interest so assigned to the assignee. In the absence of notice to the other Partners and approval thereof in writing by them of the assignment of a Partner's interest, whether by operation of law or otherwise, any payment to an assigning Partner, or to his assigns, executors, administrators, or legal representative, shall acquit the Partnership of liability to the extent of such payment as to any other person, whether 10 11 claiming as a remote or immediate assignee of the Partner, or by reason of its death, legal disability, bankruptcy, insolvency, or otherwise. (d) All costs (including, without limitation, legal and other professional fees) incurred by the Partnership, the other Partners, and the assigning Partner relating to any transfer contemplated by this Article IX, shall be charged to, and shall be the sole expense of, the assigning Partner. Section 9.3 Withdrawal of a Partner Except as otherwise specifically permitted by this Agreement, no Partner shall be entitled to withdraw or retire from the Partnership. Section 9.4 Death, Legal Incompetency, Bankruptcy or Dissolution of Limited Partner The death, legal incompetency, bankruptcy, dissolution or other disability of a Limited Partner shall not dissolve or terminate the Partnership. Upon the death, legal incompetency, bankruptcy, dissolution or other disability of a Limited Partner, the estate, personal representative, trustee, guardian or other successor in interest of such Limited Partner shall have all the rights and obligations and be liable for all the liabilities of the Limited Partner in the Partnership to the extent of such Limited Partner's interest therein, subject to the terms and conditions of this Agreement, and, with the prior written consent of the General Partner which may be withheld at its sole discretion, may be substituted for such Limited Partner. Section 9.5 Purchase Option of Capital Senior Living Properties, Inc. At any time, Capital Senior Living shall have the right, but not the obligation, to purchase all, but not less than all, of the interests owned by the General Partner and TP III as limited partner for an amount equal to the amount of money that each such Partner paid for their respective interests in the Partnership, plus non-compounding interest of 12% per annum from the date such amounts were paid to the date the option described herein is exercised. The Partners, by executing this Agreement, hereby agree that the future value of such interests is speculative and that the formula set forth above is the Partners' best estimate of the fair market value of such interests as of the date of the exercise of such option. ARTICLE X DURATION, DISSOLUTION, TERMINATION, WINDING UP, REMOVAL OF THE GENERAL PARTNER AND RESIGNATION OF THE GENERAL PARTNER Section 10.1 Dissolution and Termination Subject to the provisions of Section 7.2(a) hereof, the Partnership shall be dissolved only upon the occurrence of any of the following events: 11 12 (a) The expiration of the fixed term of the Partnership; (b) The withdrawal or removal of the General Partner, the assignment by the General Partner of all its interest in the Partnership, or any other event that causes the General Partner to cease to be a general partner under the Revised Act, provided that any such event shall not constitute a event of dissolution if the Partnership is continued pursuant to Section 10.2; (c) The sale or other disposition of all or substantially all of the assets of the Partnership and the collection of the proceeds therefrom; and (d) The mutual consent of the Partners. Section 10.2 Continuation of Business The Partners hereby agree that notwithstanding any provision of the Revised Act, the Partnership shall not dissolve prior to the occurrence of any event set forth in Section 10.1 above. Upon the occurrence of any event set forth in Section 10.1 above, the Partnership shall not be dissolved or required to be wound up if (i) at the time of such event there is a remaining General Partner and that General Partner carries on the business of the Partnership or (ii) within ninety (90) days after such event all remaining Partners agree in writing to continue the business of the Partnership and to the appointment, effective as of the date of such event, of one or more additional General Partners. Section 10.3 Winding Up of the Partnership Upon dissolution of the Partnership as provided in Section 10.1, the Partnership shall be wound up, and the General Partner (or if there is no General Partner, a substitute General Partner elected by the Limited Partners) will take full account of the Partnership's assets and liabilities, the assets will be liquidated as promptly as is consistent with obtaining the fair market value thereof, and the proceeds therefrom, to the extent sufficient therefor, will be applied and distributed in accordance with the provisions of Section 10.4. Notwithstanding the foregoing, the General Partner, with the consent of the Limited Partners, may determine not to sell all or any portion of the assets of the Partnership, in which event there shall be distributed to each of the Partners its interest in the remaining assets of the Partnership. Section 10.4 Sale or Liquidation In the case of a sale or other disposition of all or substantially all of the assets of the Partnership or termination and liquidation of the Partnership, the net proceeds of such sale or liquidation, shall be applied and distributed, after crediting or charging the Partners' capital accounts pursuant to Article VIII and as cash is received by the Partnership, in the following order of priority on or before the end of the taxable year in which the Partnership liquidates (or, if later, within 90 days after the date of such liquidation): 12 13 (a) To the payment of the debts and liabilities of the Partnership (other than debts of the Partnership to the Partners) and the expenses of sale and liquidation. (b) To the setting up of any reserves which the General Partner determines are reasonably necessary for any contingent or unforeseen liabilities or obligations of the Partnership or of the Partners arising out of, or in connection with, the Partnership. Such reserves may be held by the General Partner for the purpose of disbursing such reserves in payment of any of the aforementioned contingencies, and at the expiration of such period as the General Partner may deem advisable, to distribute the balance thereafter remaining as provided herein. (c) To the Partners in repayment of debts of the Partnership to the Partners. (d) To the Partners in proportion to and to the extent of the remaining amounts of their respective positive capital accounts, as such accounts have heretofore been adjusted pursuant to this Agreement. (e) The remaining assets, if any, shall be distributed to the Partners in accordance with their Percentage Interests. Should assets other than cash be distributed, the amount by which the fair market value of the assets, if any, to be distributed exceeds or is less than the basis of such assets shall, to the extent not otherwise recognized by the Partnership, be taken into account in computing gain or loss of the Partnership for purposes of crediting or charging the capital accounts of, and distributing proceeds to, the Partners. Section 10.5 Removal and Replacement of the General Partner The General Partner may be removed by either Limited Partner without further action for "cause," which means (i) any petition shall be filed by the General Partner, or any petition shall be filed against the General Partner and not vacated within 30 days, under any section or chapter of the present or future federal Bankruptcy Code or under any similar state or federal law, (ii) upon final judicial determination that the General Partner (1) was grossly negligent in its failure to perform its obligations under this Agreement, or (2) committed a fraud upon the Partners or upon the Partnership, or (3) committed a felony in connection with the management of the Partnership or its business, or (4) was in material breach of its obligations under this Agreement, or (iii) transfer of the General Partner's interest in the Partnership or withdrawal from the Partnership without approval of the Limited Partners. In the event of removal or resignation of the General Partner, it shall be deemed to have surrendered to the Partnership its entire general partner interest in the Partnership and shall be entitled to no compensation therefor. 13 14 ARTICLE XI ACCOUNTS AND RECORDS: ACCOUNTANTS Section 11.1 Accounting Methods: Fiscal Year The books of account of the Partnership shall be kept on the accrual method of accounting. The fiscal year of the Partnership shall end on December 31 of each year except upon termination. Section 11.2 Records and Books of Account (a) The General Partner shall maintain, or cause to be maintained complete and accurate records and books of account of all transactions of the Partnership wherein shall be entered all transactions, matters and things relating to the Partnership's business as are usually entered into books of account kept by persons engaged in a business of a like character, all on the method of accounting determined in accordance with Section 11.1, consistently applied. (b) All of such records and books of account together with all other documents and files of the Partnership, including but not limited to copies of all documents prepared by the General Partner and all correspondence, shall, at all times, be kept at the main office of the Partnership or such other place as may be designated by the General Partner and to which the Partners shall have reasonable access as hereinafter provided, and all such records, books of account, documents and files shall be the exclusive property of the Partnership. In the event of the termination of the Partnership interest of the General Partner, all such records, books of account, documents and files shall remain in the exclusive possession of the Partnership. At any time and from time to time while the Partnership continues and until its complete liquidation (but only during reasonable business hours), each Partner may, at its own expense and upon reasonable prior written notice to the General Partner, fully examine, inspect, make copies and audit the Partnership's books, records, accounts and assets, including but not limited to bank balances and physical inspection of the Properties or an audit to be made by any competent accountant or other professional employed by it at its expense. Section 11.3 Annual Examination and Tax Returns (a) The books of the Partnership shall be brought up to date annually each year by the General Partner or the Accountants. The General Partner or the Accountants shall determine and prepare for such fiscal year, using the method of accounting determined in accordance with Section 11.1, consistently applied, such financial statements as are required by the Loan Documents. (b) The General Partner or the Accountants shall also prepare all tax returns which the Partnership is required to file and the same shall be filed by the General Partner within the time prescribed by law for the filing of each such return. 14 15 (c) At the election of the General Partner, the Accountants shall perform an audit in accordance with generally accepted auditing standards. The financial statements and audit report shall be delivered to each Partner in the Partnership. Section 11.4 Bank Accounts The cash Capital Contributions of the Partners and other funds of the Partnership shall be deposited in a bank account or accounts which shall be separately owned by the Partnership and maintained by the General Partner. Withdrawals shall be made only in the regular course of Partnership business on the signature of the General Partner or its designee. All funds not needed in the operation of the business may be deposited, to the extent permitted by applicable law, in interest bearing accounts or invested in short-term U.S. Government obligations, U.S. Government guaranteed obligations, bank certificates of deposit or other liquid high-grade investments, maturing, in any event, within one year. Section 11.5 Reports to Limited Partners As soon as reasonably practicable but no later than thirty (30) days after the end of each month, the General Partner shall cause to be prepared and furnished to the Limited Partners income statements and balance sheets for such month. As soon as reasonably practicable but no later than seventy-five (75) days after the end of each fiscal year, the General Partner shall cause to be prepared and furnished to the Limited Partners the following: (i) all necessary tax reporting information required by the Limited Partners for preparation of their respective income tax return and (ii) all information necessary for such Limited Partners to comply with all reporting requirements imposed by the securities laws of the United States or any state thereof. Upon the reasonable request of the Limited Partners for further information with respect to any matter with respect to the Partnership, the General Partner shall furnish such information within ten (10) days after such request. ARTICLE XIII GENERAL PROVISIONS Section 12.1 Recipient of Distributions and Payments All distributions and payments of cash or property to be made pursuant to the provisions of this Agreement shall be made directly to the parties who are entitled thereto at their respective addresses indicated on Exhibit B or elsewhere in this Agreement or at such other address as shall have been set forth in a notice sent pursuant to the provisions of Section 12.2. Section 12.2 Communications Except as otherwise expressly provided in this Agreement, any offer, acceptance, election, approval, consent, objection, certification, request waiver, notice or other document required or permitted to be made or given pursuant to any provisions of this Agreement shall be deemed duly made or given, as the case may be, if in writing, signed by or on behalf of the person making or 15 16 giving the same, and shall be deemed completed when either personally delivered (with receipt acknowledged by the recipient) or three days after deposited through the U.S. mail, registered or certified, first class, postage prepaid, addressed to the person or persons to whom such offer, acceptance, election, approval, consent, certification, request, waiver or notice is to be made or given at their respective addresses indicated on Exhibit B and, in the case of the Partnership, at the office of the Partnership specified in Section 2.2 of this Agreement, or, in any case, at such other address as shall have been set forth in a notice sent pursuant to the provisions of this Section 12.2. Section 12.3 Entire Agreement; Applicable Law; Effect This Agreement contains the entire agreement by and among the parties and supersedes any prior understandings and agreements among them respecting the subject hereof. THIS AGREEMENT SHALL BE CONSTRUED, ENFORCED AND GOVERNED IN CONFORMITY WITH THE LAWS OF THE STATE OF TEXAS, without giving effect to principles of conflicts of law, and whether in state or federal courts. This Agreement shall be binding upon the parties hereto, their successors, heirs, devisees, permitted assigns, legal representatives, executors and administrators but shall not be deemed for the benefit of creditors or any other Persons. Section 12.4 Modification; Waiver or Termination Except as otherwise expressly provided in this Agreement, no modification, waiver, or termination of this Agreement, or any part hereof, shall be effective unless made in writing signed by the party or parties to be bound thereby, and no failure to pursue or elect any remedy shall constitute a waiver of any default under or breach of any provision of this Agreement, nor shall any waiver of any default under or breach of any provision of this Agreement be deemed to be a waiver of any other subsequent or similar or different default under or breach of such or any other provision or of any election or remedies available in connection therewith. Receipt by any party of any money or other consideration due under this Agreement, with or without knowledge of any breach or default, shall not constitute a waiver of such breach or default of any provision of this Agreement. Section 12.5 Counterparts This Agreement may be executed in one or more counterparts and, notwithstanding that all of the parties did not execute the same counterpart, each of such counterparts shall, for all purposes, be deemed to be an original, and all of such counterparts shall constitute one and the same instrument binding on all of the parties hereto. Section 12.6 Separability Each provision of this Agreement shall be considered separable and (a) if for any reason any provision or provisions herein are determined to be invalid and contrary to any existing or future law, such invalidity shall not impair the operation of or affect those portions of this Agreement which are valid, and (b) if for any reason any provision or provisions of this Agreement would subject the Limited Partners to any personal liability for the obligations of the Partnership under the laws of the 16 17 State of Texas or any other laws, as the same may now or hereafter exist, such provision or provisions shall be deemed void and of no effect. Section 12.7 Article and Section Headings Article and Section titles or captions contained in this Agreement are inserted only as a matter of convenience and for reference, and shall not be construed in any way to define, limit, extend or describe the scope of any of the provisions hereof. Section 12.8 Word Meanings The words such as "herein," "hereinafter," "hereof," and "hereunder" refer to this Agreement as a whole and not merely to a subdivision in which such words appear unless the context otherwise requires. The singular shall include the plural and the masculine gender shall include the feminine and neuter, and vice versa, unless the context otherwise requires. Section 12.9 Exhibits All exhibits annexed hereto and any documents or instruments delivered simultaneously herewith are expressly made a part of this Agreement, as fully as though completely set forth herein, and all references to this Agreement herein or in any of such writings or elsewhere shall be deemed to refer to and include all such writings. Section 12.10 Further Actions Each of the Partners shall hereafter execute and deliver such further instruments and do such further acts and things as may be required or useful to carry out the intent and purpose of this Agreement and as are not inconsistent with the revisions hereof. Section 12.11 Prohibition Re Partition Each of the parties hereto does hereby permanently waive and relinquish any and all rights it may have to cause the assets of the Partnership to be partitioned, it being the intention of the parties to prohibit any parties hereto from bringing a suit for partition against the other parties hereto. Section 12.12 Agreements with Capital Affiliates and the Loan The Partnership hereby ratifies and agrees to be bound by any agreements that the Partnership has entered into with Affiliates of Capital Senior Living, including, the Management Agreement, the Development Agreement and that certain Development and Turnkey Services Agreement by and between the Partnership and Capital Senior Development, Inc. 17 18 Section 12.13 Noncompete of General Partner The General Partner agrees that as long as the General Partner is the general partner of the Partnership and for one (1) year after the General Partner is no longer the general partner of the Partnership neither the General Partner nor its Affiliates will acquire, own, develop, complete the development of, or manage any senior living facility providing the same level of services as any senior living facility owned or leased by the Partnership within a seven and one-half mile radius of a senior living facility owned or leased by the Partnership. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. GENERAL PARTNER: Triad Partners II, Inc., a Texas corporation By: /s/ BLAKE N. FAIL ------------------------------------------ Name: Blake N. Fail ---------------------------------------- Title: President --------------------------------------- LIMITED PARTNERS: Triad Partners II, Inc., a Texas corporation By: /s/ BLAKE N. FAIL ------------------------------------------ Name: Blake N. Fail ---------------------------------------- Title: President --------------------------------------- Capital Senior Living Properties, Inc., a Texas corporation By: /s/ DAVID R. BRICKMAN ------------------------------------------ Name: David R. Brickman ---------------------------------------- Title: Vice President --------------------------------------- 18 19 EXHIBIT "A" Property Description 20 EXHIBIT "B"
Capital Contribution Interest -------------------- -------- General Partner - --------------- Triad Partners III, Inc. $1.00 1% 4312 Mockingbird Lane Dallas, Texas 75205 Limited Partners - ---------------- Triad Partners III, Inc. $600,000 80% 4312 Mockingbird Lane Dallas, Texas 75205 Capital Senior Living Properties, Inc. $142,500 19% 14160 Dallas Parkway Suite 300 Dallas, Texas 75240
21 EXHIBIT "C" Allocation Provisions 22 EXHIBIT C TO AGREEMENT OF LIMITED PARTNERSHIP OF TRIAD SENIOR LIVING III, L.P. ARTICLE I DEFINITIONS Section 1.1 Definitions. All capitalized terms used herein shall have the meanings assigned o them in the Agreement of Limited Partnership of Triad Senior Living III, L.P. Notwithstanding the foregoing, the following definitions shall be applicable to the following terms as used in this Exhibit C of the Agreement: (a) "Adjusted Net Income or Loss" of the Partnership derived for any Fiscal Year (or portion thereof) shall mean the excess or deficit, as the case may be, of (i) the Gross Income of the Partnership for such period (not including the amount of Gross Income (if any) allocated during such Fiscal Year pursuant to Sections 3.1(a), 3.1(b), 3.1(c), 3.1(d), and 3.1(p) hereof for such period), over (ii) the Deductible Expenses of the Partnership for such period (not including the amount of Deductible Expenses (if any) allocated pursuant to Sections 3.1(e), 3.1(f) and 3.1(p)) hereof for such period) with the following modifications: (i) Any Partnership income that is exempt from federal income tax, and that is not otherwise taken into account in computing Adjusted Net Income or Loss of the Partnership pursuant to this Section 1.1(a), shall be treated as additional Gross Income and added to the amount otherwise calculated as Adjusted Net Income or Loss under this Section 1.1(a). (ii) Any expenditures of the Partnership that are described in section 705(a)(2)(B) of the Code (relating to expenditures of the Partnership that are not deductible for federal income tax purposes in computing taxable income and not properly chargeable to capital), or treated as so described pursuant to section 1.704-1(b)(2)(iv)(i) of the Regulations, and that are not otherwise taken into account in computing Adjusted Net Income or Loss of the Partnership pursuant to this Section 1.1(a), shall be treated as additional Deductible Expenses and subtracted from the amount otherwise calculated as Adjusted Net Income or Loss under this Section 1.1(a). (b) "Adjusted Property" shall mean any Partnership asset that has a Book Basis different from its adjusted tax basis. Any asset that is contributed to the Partnership by a Partner shall be an "Adjusted Property" if its Agreed Value is not equal to the Partnership's initial tax basis in such asset. In addition, once the Book Basis of a Partnership asset is adjusted pursuant to Section 2.4 hereof, such asset shall thereafter be an "Adjusted Property." (c) "Agreed Value" of any asset contributed by a Partner to the Partnership shall mean the fair market value thereof (determined without regard to section 7701(g) of the Code) as of the date of such contribution and as reasonably determined by the General Partner. (d) "Book Basis" of any asset of the Partnership shall be determined in accordance with the rules of Section 2.4. (e) "Book Depreciation" in respect of any Partnership asset for any Fiscal Year shall mean the product of (i) the depreciation, cost recovery or other amortization deduction allowable to the Partnership 23 for federal income tax purposes in respect of such asset for such Fiscal year, multiplied by (ii) a fraction, the numerator of which is the Book Basis of such asset as of the beginning of such Fiscal Year (or the date of acquisition if the asset is acquired during such Fiscal Year) and the denominator of which is the adjusted tax basis of such asset as of the beginning of such Fiscal Year (or the date of acquisition if the asset is acquired during such Fiscal Year). If the denominator of the fraction described in clause (ii) above is zero, "Book Depreciation" in respect of such asset shall be determined under any reasonable method selected by the General Partner. (f) "Book Gain or Loss" realized by the Partnership in respect of any asset of the Partnership in connection with the disposition of such asset shall mean the excess (or deficit) of (i) the amount realized by the Partnership in connection with such disposition (as determined under section 1001 of the Code) over (ii) the then Book Basis of such asset. If the Book Basis is adjusted pursuant to Section 2.4, any increase or decrease in Book Basis of the assets as a result of the adjustment shall be treated as Book Gain or Book Loss, as the case may be, and shall be allocated among the Partners pursuant to Section 3.1 of this Exhibit "C." (g) "Capital Account" shall have the meaning assigned such term in Section 2.1 hereof. (h) "Deductible Expenses" of the Partnership for any Fiscal Year (or portion thereof) shall mean all items, as calculated for book purposes, which are allowable as deductions to the Partnership during such period under federal income tax accounting principles (including Book Depreciation). (i) "Fiscal Year" shall mean the fiscal year of the Partnership adopted under Section 8.1 of the Agreement. (j) "Gross Income" of the Partnership for any Fiscal Year (or portion thereof) shall mean the gross income of the Partnership derived from all sources (other than from capital contributions and loans to the Partnership and other than Book Gain or Loss from a Terminating Capital Transaction) during such period, as calculated for book purposes in accordance with federal income tax accounting principles. (k) "IRS" shall mean the United States Internal Revenue Service. (l) "Liquidation" of a Partner's interest in the Partnership shall mean and shall be deemed to occur upon the earlier of (i) the date upon which the Partnership is terminated under section 708(b)(1) of the Code; (ii) the date upon which the Partnership ceases to be a going concern (even though it may continue in existence for the limited purpose of winding up its affairs, paying its debts and distributing any remaining Partnership assets to the Partners); or (iii) the date upon which there is a liquidation of the Partner's interest in the Partnership (but the Partnership is not terminated) under section 1.761-1(d) of the Regulations. (m) "Modified 752 Share of Recourse Debt" of any Partner shall mean, as of any date, the amount (if any) of economic risk that such Partner is treated, as of such date, as bearing with respect to Recourse Debt under section 1.752-2 of the Regulations (assuming the Partnership constructively liquidates on such date within the meaning of section 1.752-2(b) of the Regulations except that, for purposes of such section 1.752-2(b), all of the assets of the Partnership shall be deemed thereunder to be transferred in fully taxable exchanges for an aggregate amount of cash consideration equal to their respective Book Bases and such consideration shall be deemed thereunder to be used, in the appropriate order of priority, in full or partial satisfaction of the liabilities of the Partnership). (n) "Nonrecourse Deductions" of the Partnership shall have the meaning ascribed to such term in section 1.704-2(b)(1) of the Regulations. 24 (o) "Nonrecourse Liability" of the Partnership shall have the meaning ascribed to such term in section 1.704-2(b)(3) of the Regulations. (p) "Nonrecourse Minimum Gain" of the Partnership shall mean the amount of "minimum gain" of the Partnership that is attributable to Nonrecourse Liabilities (as determined under section 1.704- 2(b)(2) of the Regulations). A Partner's share of such "Nonrecourse Minimum Gain" shall be calculated in accordance with the provisions of section 1.704-2(g) of the Regulations. (q) "Operations" shall mean all revenue producing activities of the Partnership other than activities relating to a Capital Transaction that occur in connection with the dissolution of the Partnership. (r) "Partner Minimum Gain" of the Partnership shall mean the amount of "minimum gain" of the Partnership that is attributable to Partner Nonrecourse Debt (as determined under section 1.704-2(i)(2) of the Regulations). A Partner's share of such "Partner Minimum Gain" shall be calculated in accordance with the provisions of section 1.704-2(i)(5) of the Regulations. (s) "Partner Nonrecourse Debt" of the Partnership shall have the meaning ascribed to such term in section 1.704-2(b)(4) of the Regulations. (t) "Partner Nonrecourse Deductions" of the Partnership shall have the meaning ascribed to such term in section 1.704-2(i)(2) of the Regulations. (u) "Recourse Debt" of the Partnership shall mean any liability (or portion thereof) of the Partnership that is neither a Nonrecourse Liability nor a Partner Nonrecourse Debt. (v) "Regulations" shall mean the regulations promulgated by the United States Department of the Treasury pursuant to and in respect of provisions of the Code. All references herein to sections of the Regulations shall include any corresponding provision or provisions of succeeding, similar, substitute proposed or final Regulations. (w) "Related Person" shall mean, as to any Partner, any person who is related to such Partner (within the meaning of section 1.752-4(b) of the Regulations). (x) "Revaluation Event" shall mean any of the following occurrences: (a) the contribution of money or other property (other than a de minimis amount) by a new or existing Partner to the Partnership as consideration for the issuance of an additional interest in the Partnership and/or increase in Interests; (b) the distribution of money or other property (other than a de minimis amount) by the Partnership to a retiring or continuing Partner as consideration for an interest in the Partnership and/or decrease in Interests; or (c) the liquidation of the Partnership within the meaning of section 1.704-1(b)(2)(ii)(g) of the Regulations. (y) "Section 704 Capital Account" shall have the meaning assigned to such term in Section 2.3 hereof. (z) "Tax Depreciation" for any Fiscal Year shall mean the amount of depreciation, cost recovery or other amortization deductions allowable to the Partnership for federal income tax purposes for such Fiscal Year. (aa) "Tax Item" with respect to any asset shall mean any item of income, gain, loss or deduction (including depreciation, cost recovery or amortization) in respect of such asset, as computed for federal income tax purposes. 25 (bb) "Tax Matters Partner" shall have the meaning ascribed to such term in Section 4.4(a) hereof. (cc) "Taxable Gain or Loss" shall mean gain or loss recognized by the Partnership on the sale, exchange or other disposition of any asset of the Partnership as computed for federal income tax purposes. ARTICLE II CAPITAL ACCOUNTS AND SECTION 704 CAPITAL ACCOUNTS Section 2.1 Capital Accounts. A separate "Capital Account" (herein so called) shall be maintained for each Partner in accordance with the capital accounting rules of section 1.704-1(b)(2)(iv) of the Regulations. Each Partner shall have only one Capital Account, regardless of the number or classes of interests in the Partnership owned by such Partner and regardless of the time or manner in which such interests were acquired by such Partner. Pursuant to the basic rules of section 1.704-1(b)(2)(iv) of the Regulations, the balance of each Partner's Capital Account: (a) shall be increased by the amount of money contributed by such Partner (or such Partner's predecessor in interest) to the Partnership (including but not limited to such Partner's Capital Contributions described in Article V of the Agreement) and decreased by the amount of money distributed to such Partner (or such Partner's predecessor in interest); (b) shall be increased by the fair market value (determined without regard to section 7701(g) of the Code) of each property contributed by such Partner (or such Partner's predecessor in interest) to the Partnership (net of liabilities secured by such property that the Partnership is considered to assume or take subject to under section 752 of the Code), and decreased by the fair market value (determined without regard to section 7701(g) of the Code) of each property distributed to such Partner (or such Partner's predecessor in interest) by the Partnership (net of liabilities secured by such property that such Partner is considered to assume or take subject to under section 752 of the Code); (c) shall be increased by the amount of Adjusted Net Income or item of income or gain or Book Gain allocated to such Partner (or such Partner's predecessor in interest) pursuant to Section 3.1 hereof; (d) shall be decreased by the amount of Adjusted Net Loss or item of loss or deduction or Book Loss allocated to such Partner (or such Partner's predecessor in interest) pursuant to Section 3.1 hereof; and (e) shall be otherwise adjusted in accordance with the other capital account maintenance rules of section 1.704-1(b)(2)(iv) of the Regulations. The foregoing provisions of this Section 2.1 and the other provisions of this Exhibit C relating to the maintenance of Capital Accounts are intended to comply with section 1.704-1(b) of the Regulations, and shall be interpreted and applied in a manner consistent with such Regulations. The Partners shall also make any appropriate modification if unanticipated events might otherwise cause this Exhibit C and the Agreement not to comply with such Regulations. If any Interest is transferred pursuant to the terms of the Agreement, the transferee shall succeed to the Capital Account of the transferor to the extent the Capital Account is attributable to the transferred Interest. 26 Section 2.2 Additional Provisions Regarding Capital Accounts. (a) If a Partner pays any indebtedness of the Partnership, such payment shall be treated as a contribution by that Partner to the capital of the Partnership and the Capital Account of such Partner shall be increased by the amount so paid by such Partner. (b) Except as specifically provided in the Agreement, no Partner may contribute capital to, or withdraw capital from, the Partnership. (c) A loan by a Partner to the Partnership shall not be considered a contribution of money to the capital of the Partnership, and the balance of such Partner's Capital Account shall not be increased by the amount so loaned. No repayment of principal or interest on any such loan, or reimbursement made a Partner with respect to advances or other payments made by a such Partner on behalf of the Partnership or payments of fees to a Partner or Related Person to such Partner which are made by the Partnership shall be considered a return of capital or in any manner affect the balance of such Partner's Capital Account. (d) No Partner with a deficit balance in its Capital Account shall have any obligation to the Partnership, any other Partner, or any third party to restore said deficit balance; provided, however, that upon the liquidation of TP III's interest in the Partnership, if TP III has a deficit balance in his Capital Account following such liquidation, as determined after taking into account all adjustments to the Capital Accounts for the taxable year during which such liquidation occurs, TP III shall be required to immediately contribute cash to the Partnership in an amount equal to the lesser of (i) such deficit capital account balance or (ii) the amount of actual cash distributions to TP III during the term of the Partnership (determined without taking into account any amounts paid to any party pursuant to Section 7.6 of the Agreement). (e) No interest will be paid on any capital contributed to the Partnership or the balance in any Partner's Capital Account. Section 2.3 Section 704 Capital Accounts. A "Section 704 Capital Account" (herein so called) shall be determined and maintained for each Partner throughout the term of the Agreement. The balance of a Partner's Section 704 Capital Account shall be equal to such Partner's Capital Account balance (as determined after giving effect to all adjustment attributable to allocations of Partnership income, gain, loss, deduction and credits and contributions and distributions of money and property effected prior to such determination), modified as follows: (a) decreased by the amount (if any) of cash that reasonably is expected to be distributed to such Partner, but only to the extent that the amount thereof exceeds any offsetting increase in such Partner's Section 704 Capital Account that reasonably is expected to occur during (or prior to) the Fiscal Year during which such distribution reasonably is expected to be made (as determined under section 1.704- 1(b)(ii)(d) of the Regulations); (b) decreased by the amount (if any) of loss and deduction that reasonably is expected to be allocated to such Partner pursuant to section 704(e)(2) or 706(d) of the Code or section 1.704-1(b)(2)(ii) of the Regulations (as determined under section 1.704-1(b)(2)(ii)(d) of the Regulations); (c) increased by the amount (if any) of such Partner's share of the Nonrecourse Minimum Gain of the Partnership; and (d) increased by the amount (if any) of such Partner's share of the Partner Minimum Gain of the Partnership. 27 Section 2.4 Adjustment of Book Basis. Book Basis with respect to any asset of the Partnership is the asset's adjusted tax basis for federal income tax purposes, except as follows: (a) The initial Book Basis of any asset contributed to the Partnership by a Partner shall be the fair market value of the asset as of the date of contribution as agreed upon by the contributing Partner and the Partnership. (b) The Book Basis of each asset shall be its respective fair market value as reasonably determined by the General Partner, as of a Revaluation Event. (c) The Book Basis of each asset distributed to any Partner will be the fair market value of the asset as reasonably determined by the General Partner as of the date of determination. (d) The Book Basis of each asset will be increased or decreased to reflect any adjustment to the adjusted tax basis of the asset under section 734(b) or 743(b) of the Code, but only to the extent that the adjustment is taken into account in determining Capital Account balances under section 1.704-1(b)(2)(iv)(m) of the Regulations, provided that the Book Basis will not be adjusted hereunder to the extent that an adjustment under Section 2.4(b) is necessary or appropriate in connection with a transaction that would otherwise result in an adjustment under this Section 2.4(d). Book Basis will be adjusted by Book Depreciation, and Book Gain or Book Loss on a disposition of any asset shall be determined by reference to such asset's Book Basis as adjusted herein. ARTICLE III ALLOCATIONS OF PROFIT AND LOSS Section 3.1 Allocation of Items of Profit and Loss. Subject to the provisions of ARTICLE IV hereof, the Partnership's Gross Income, items of loss or deduction and Adjusted Net Income or Loss and Book Gain or Loss for each Fiscal Year shall be allocated to the Partners as follows and in the following order of priority (after giving effect to all Capital Account adjustments attributable to contributions and distributions of money and property, but prior to distributions of money and property made pursuant to Section 10.4 of the Agreement): (a) Pursuant to section 1.704-2(f) of the Regulations (relating to minimum gain chargebacks), if there is a net decrease in Nonrecourse Minimum Gain of the Partnership for such Fiscal Year (or if there was a net decrease in Nonrecourse Minimum Gain for a prior Fiscal Year and the Partnership did not have sufficient amounts of income during prior Fiscal Years to allocate to the Partners under this Section 3.1(a)), then Gross Income shall be allocated, before any other allocation is made pursuant to the succeeding provisions of this Section 3.1 for such Fiscal Year, to each Partner in an amount equal to such Partner's share of the net decrease in such minimum gain (as determined under section 1.704-2(g) of the Regulations). (b) Pursuant to section 1.704-2(i)(4) of the Regulations (relating to minimum gain chargebacks) if there is a net decrease in Partner Minimum Gain of the Partnership for such Fiscal Year (or if there was a net decrease in Partner Minimum Gain for a prior Fiscal Year and the Partnership did not have sufficient amounts of income during prior Fiscal Years to allocate to the Partners under this Section 3.1(b)), then Gross Income shall be allocated, before any other allocation is made pursuant to the succeeding provisions of this Section 3.1 for such Fiscal Year, to each Partner with a share of such minimum gain as of the first 28 day of such Fiscal Year in an amount equal to such Partner's share of the net decrease in such Partner Minimum Gain (as determined under section 1.704-2(i)(5) of the Regulations). (c) A Partner who unexpectedly receives any adjustment, allocation or distribution described in section 1.704-1(b)(2)(ii)(d)(4), (5) or (6) of the Regulations will be specially allocated items of income or gain (after the allocations required by Section 3.1(a) and Section 3.1(b) hereof but before any other allocations required by this Section 3.1) in an amount and in the manner sufficient to eliminate any deficit balance in his Section 704 Capital Account (for this purpose, a Partner's Section 704 Capital Account shall be increased by the amount (if any) that such Partner is treated as being obligated to contribute subsequently to the capital of the Partnership (as determined under section 1.704-1(b)(2)(ii)(c) of the Regulations) and, without duplication of any amount previously described in this sentence, shall be increased by the amount (if any) of such Partner's Modified 752 Share of Recourse Debt) as quickly as possible; provided, however, that an allocation shall be made pursuant to this Section 3.1(c) only if and to the extent that such Partner would have a deficit balance in his Section 704 Capital Account after all allocations in this Section 3.1 have been tentatively made as if this Section 3.1(c) were not in this Exhibit. This Section 3.1(c) is intended to satisfy the provisions of Section 1.704-1(b)(2)(ii)(d) of the Regulations and shall be interpreted consistently therewith. (d) Except as required by Section 3.1(a), Section 3.1(b) and Section 3.1(c), each Partner who has a deficit balance in its Capital Account (for this purpose, a Partner's Capital Account shall be increased by (A) the amount (if any) that a Partner is obligated to contribute subsequently to the capital of the Partnership under the Agreement or this Exhibit (including Section 2.2(d) of this Exhibit) or is treated as being obligated to contribute subsequently to the capital of the Partnership (as determined under section 1.704-1(b)(2)(ii)(c) of the Regulations); (B) the amount (if any) of such Partner's share of the Nonrecourse Minimum Gain of the Partnership; and (C) the amount (if any) of such Partner's share of the Partner Minimum Gain of the Partnership) at the end of the taxable year will be specially allocated items of income or gain in the amount of the deficit as quickly as possible; provided, however, that an allocation shall be made pursuant to this Section 3.1(d) only if and to the extent that such Partner would have a deficit balance in its Capital Account after all allocations in this Section 3.1 have been tentatively made as if this Section 3.1(d) were not in this Exhibit and Section 3.1(d) shall be applied before Section 3.1(c). (e) All Partner Nonrecourse Deductions attributable to a Partner Nonrecourse Debt shall be allocated to the Partner that is treated (under section 1.704-2(b)(4) of the Regulations) as bearing the economic risk of loss for such debt. (f) All Nonrecourse Deductions of the Partnership shall be allocated to the Partners, pro rata in accordance with their respective Percentage Interests. (g) Any Adjusted Net Income realized by the Partnership for such year shall be allocated among the Partners as follows and in the following order of priority: (i) First: Adjusted Net Income shall be allocated to the General Partner until the aggregate Adjusted Net Income allocated under this Section 3.1(g)(i) for the current and prior years equals the aggregate amount of Adjusted Net Loss allocated to the General Partner under Section 3.1(h)(ii) for the current and prior years; and then (ii) Second: Adjusted Net Income shall be allocated to the Partners in the same proportion that cumulative Adjusted Net Loss has been allocated to the Partners under Section 3.1(h)(i) for the current year and prior years until each Partner has been allocated cumulative Adjusted Net Income under this Section 3.1(g)(ii) for the current and prior years equal to the 29 cumulative Adjusted Net Loss allocated to the Partner under Section 3.1(h)(i) for the current and prior years; and then (iii) Third: All remaining Adjusted Net Income shall be allocated among the Partners in proportion to their respective Percentage Interests. (h) Any Adjusted Net Loss realized by the Partnership for such year shall be allocated among the Partners as follows and in the following order of priority: (i) First: Adjusted Net Loss shall be to the Partners in proportion to their respective Percentage Interests until each Partner's positive Section 704 Capital Account balance is reduced to zero. (ii) Second: All remaining Adjusted Net Loss shall be allocated to the General Partner. (i) Notwithstanding any other provision of the Agreement or this Exhibit, from the date that construction commences with respect to a Property (the "Subject Property") to the date 18 months following the date that the Partnership receives a Certificate of Occupancy for the Subject Property, all Adjusted Net Loss from the Subject Property shall be allocated under this Section 3.1(i) to TP III. The provisions of this Section 3.1(i) shall be applied to each Property of the Partnership on a property by property basis. (j) [Intentionally deleted] (k) Book Gain derived from a Terminating Capital Transaction shall be allocated among the Partners as follows in the following order of priority (after giving effect to all adjustments attributable to allocations made pursuant to the preceding provisions of this Section 3.1 for such year): (i) First: Book Gain shall be allocated among the Partners having deficit Capital Account balances to the least extent necessary to cause their deficit Capital Account balances to be in the same proportion to one another as are their respective Percentage Interests. (ii) Second: Book Gain shall be allocated among those Partners having deficit Capital Account balances in accordance with their respective Percentage Interests, to the least extent necessary to cause their Capital Account balances to equal zero. (iii) Third: Book Gain shall be allocated to the Partners to the least extent necessary so as to cause their positive Capital Account balances to be in the same proportion to one another as are their respective Percentage Interests. (iv) Fourth: Book Gain shall be allocated among the Partners in proportion to their respective Percentage Interests. (l) Book Loss derived from a Terminating Capital Transactions shall be allocated among the Partners as follows in the following order of priority (after giving effect to all adjustments attributable to allocations made pursuant to the preceding provisions of this Section 3.1 for such year): (i) First: Book Loss shall be allocated among the Partners to the least extent necessary so as to cause the positive balances of their respective Capital Accounts to be in the same proportion to one another as their respective Percentage Interests and then to all Partners in 30 proportion to their respective Percentage Interests until each Partner's positive Capital Account balance is reduced to zero. (ii) Second: All remaining Book Loss shall be allocated to the General Partner. (m) For purposes of determining the nature (as ordinary or capital) of any Partnership profit allocated among the Partners for Federal income tax purposes pursuant to this Section 3.1, the portion of such profit required to be recognized as ordinary income pursuant to sections 1245 and/or 1250 of the Code shall be deemed to be allocated among the Partners in accordance with sections 1.1245-1(e)(2) and 1.1250-1(f) of the Regulations. (n) The Partners agree that their Percentage Interests represent their respective interest in Partnership profits for purposes of allocating excess nonrecourse liabilities (as defined in section 1.752-3(a)(3) of the Regulations) pursuant to section 1.752-3(a)(3) of the Regulations. (o) Notwithstanding any other provision herein to the contrary, no allocation of Adjusted Net Income, Adjusted Net Loss, Book Gain or Book Loss, or items of income, gain, loss and deduction will be made to a Partner if the allocation would not have "economic effect" under section 1.704-1(b)(2)(ii) of the Regulations or otherwise would not be in accordance with the Partners' interests in the Partnership within the meaning of section 1.704-1(b)(3) or section 1.704-2(b)(1) of the Regulations. The General Partner will have the authority to reallocate any item in accordance this Section 3.1(o); provided, however, that (a) no such change shall have a material adverse effect upon the amount of cash or other property distributable to any Partner, (b) each Partner shall have 30 days prior notice of such proposed modification and (c) if such proposed modification would be material, the Partnership shall have received an opinion of tax counsel to the Partnership that such modification is necessary to comply with section 704(b) of the Code. (p) The allocations set forth in Sections 3.1(a)-(f) (the "Regulatory Allocations") are intended to comply with certain requirements of the Regulations. It is the intent of the Partners that, to the extent possible, all Regulatory Allocations shall be offset either with other Regulatory Allocations or with special allocations of other items of Partnership income, gain, loss, or deduction pursuant to this Section 3.1(p). Therefore, notwithstanding any other provision of this Article III (other than the Regulatory Allocations), the General Partner shall make such offsetting special allocations of Partnership income, gain, loss, or deduction in whatever manner it determine(s) appropriate so that after such offsetting allocations are made, each Partner's Capital Account balance is, to the extent possible, equal to the Capital Account balance such Partner would have had if the Regulatory Allocations were not part of the Agreement and all Partnership items were allocated pursuant to Sections 3.1(g)-(l) hereof. Section 3.2 Allocation of Tax Items. (a) Except as otherwise provided in the succeeding provisions of this Section 3.2, each Tax Item shall be allocated to the Partners in the same manner as each correlative item of income, gain, loss or deduction, as calculated for book purposes, is allocated pursuant to the provisions of Section 3.1 hereof. (b) The Partners hereby acknowledge that all Tax Items in respect of Adjusted Property are required to be allocated to the Partners in the same manner as under section 704(c) of the Code (as specified in sections 1.704-1(b)(2)(iv)(f), 1.704-1(b)(2)(iv)(g) and 1.704-3 of the Regulations), and that the principles of section 704(c) of the Code require that such Tax Items must be shared among the Partners so as to take account of the variation between the adjusted tax basis and Book Basis of each such Adjusted Property. Thus, notwithstanding anything in Sections 3.1 or 3.2(a) hereof to the contrary, the Partners' distributive shares of Tax Items in respect of each Adjusted Property shall be separately determined and 31 allocated to the Partners following any permissible method under 1.704-3 of the Regulations reasonably selected by the General Partner, and the Capital Account balances of the Partners shall be adjusted solely for allocations of book items in respect of such assets and shall not be adjusted for their distributive shares of any corresponding Tax Items. ARTICLE IV SPECIAL RULES Section 4.1 Allocation of Profit and Loss and Distributions in Respect of Interests Transferred. (a) If any interest in the Partnership is transferred, or is increased or decreased by reason of the admission of a new Partner or otherwise, during any Fiscal Year, each item of Adjusted Net Income or Loss, and other income and deductions and Book Gain and Book Loss of the Partnership for such Fiscal Year shall be divided and allocated between the Partners in question by taking account of their varying interests in the Partnership during such Fiscal Year on a daily, monthly, or other basis, as determined by the General Partner using any permissible method under section 706 of the Code and the Regulations thereunder. (b) Distributions of Partnership assets in respect of an interest in the Partnership shall be made only to the persons or entities who, according to the books and records of the Partnership, are the holders of record of the interests in the Partnership in respect of which such distributions are made on the actual date of distribution. Neither the Partnership nor any Partner shall incur any liability for making distributions in accordance with the provisions of the preceding sentence, whether or not the Partnership or any Partner has knowledge or notice of any transfer or purported transfer of ownership of any interest in the Partnership. (c) Notwithstanding any provision above to the contrary, Book Gain or Loss of the Partnership realized in connection with a sale or other disposition of any substantial part of the assets of the Partnership shall be allocated solely to the parties owning interests in the Partnership as of the date such sale or other disposition occurs. Section 4.2 Tax Returns. The General Partner shall cause to be prepared for each taxable year of the Partnership the federal, state and local income tax returns and information returns, if any, which the Partnership is required to file. Such returns shall be prepared and submitted to the Partners for examination no later than ten (10) days prior to the required filing date (including any extension thereof), together with such additional forms and information as may be required by the Partners in order for the Partners to file returns reflecting the Partnership's operations. Section 4.3 Tax Elections. The Partnership shall make the following elections on the appropriate tax returns: (a) to the extent permitted by the Code, to adopt the calendar year as the Partnership's fiscal year; (b) to the extent permitted by the Code, to adopt the cash method of accounting and to keep the Partnership's books and records on the income-tax method; (c) if a distribution of Partnership property as described in section 734 of the Code occurs or if a transfer of Interest as described in section 743 of the Code occurs, on written request of any Partner, to elect, pursuant to section 754 of the Code, to adjust the basis of Partnership properties; 32 (d) to elect to amortize the organizational expenses of the Partnership ratably over a period of sixty (60) months as permitted by section 709(b) of the Code; and (e) any other election the General Partner may deem appropriate and in the best interests of the Partners. Neither the Partnership nor any Partner may make an election for the Partnership to be excluded from the application of the provisions of subchapter K of chapter 1 of subtitle A of the Code or any similar provisions of applicable state law. The Partnership intends to be classified as a partnership for federal income tax purposes under section 301.7701-3 of the Regulations. Neither the Partnership nor any Partner may make an election under section 301.7701-3(c) of the Regulations to treat the Partnership as an association taxable as a corporation. Section 4.4 Tax Matters Partner. (a) The General Partner is hereby designated the "Tax Matters Partner" as that term is defined in section 6231(a)(7) of the Code. (b) The Tax Matters Partner shall use its best efforts to comply with the responsibilities outlined in sections 6222 through 6232 of the Code and in doing so shall incur no liability to the other Partners. Notwithstanding the Tax Matters Partner's obligation to use its best efforts in the fulfillment of its responsibilities, the Tax Matters Partner shall not be required to incur any expenses for the preparation for or pursuance of administrative or judicial proceedings unless the Partners agree on a method for sharing such expenses. (c) No Partner shall file, pursuant to section 6227 of the Code, a request for an administrative adjustment of items for any Partnership taxable year without first notifying the other Partners. If the other Partners agree with the requested adjustment, then the Tax Matters Partner shall file the request for administrative adjustment on behalf of the Partner. If unanimous consent is not obtained within thirty (30) calendar days from such notice, or within the period required to timely file the request for administrative adjustment, if shorter, any Partner, including the Tax Matters Partner, may file a request for administrative adjustment on its own behalf. (d) Any Partner intending to file a petition under sections 6226, 6228, or other section of the Code with respect to any item or other matter involving the Partnership shall notify the other Partners of such intention and the nature of the contemplated proceeding. In the case where the Tax Matters Partner is the Partner intending to file such petition on behalf of the Partnership, such notice shall be given within a reasonable period of time to allow the other Partners to participate in the choosing of the forum in which such petition will be filed. If the Partners do not agree on the appropriate forum, then the appropriate forum shall be decided by vote of a majority in interest of the Partners. If such a majority cannot agree, then the Tax Matters Partner shall choose the forum. If any Partner intends to seek review of any court decision rendered as a result of a proceeding instituted under the preceding provisions of this Section 4.4(d), then such Partner shall notify the other Partners of such intended action. (e) The provisions of this Section 4.4 shall survive the termination of the Partnership or the termination of any Partners's interest in the Partnership and shall remain binding on the Partners for a period of time necessary to resolve with the IRS or the United States Treasury Department the income taxation of the Partnership. Section 4.5 Inconsistent Treatment of Partnership Items. If any Partner intends to file a notice of inconsistent treatment under section 6222(b) of the Code, then such Partner shall give reasonable notice under the circumstances to the other Partners of such intent and the manner in which the Partner's intended treatment of an item is (or may be) inconsistent with the treatment of that item by the other Partners. EX-10.59 11 AGREEMENT OF LP OF TRIAD SR LIVING IV-12/22/98 1 EXHIBIT 10.59 AGREEMENT OF LIMITED PARTNERSHIP OF TRIAD SENIOR LIVING IV, L.P. THIS AGREEMENT OF LIMITED PARTNERSHIP is dated effective as of December 22, 1998, by and among Triad Partners IV, Inc., a Texas corporation ("TP IV"), as general partner (the "General Partner") and as a limited partner and Capital Senior Living Properties, Inc., a Texas corporation ("Capital Senior Living" and, together with TP IV, the "Limited Partners"). WHEREAS, the parties hereto desire to form a limited partnership under the Texas Revised Limited Partnership Act. NOW THEREFORE, in consideration of the mutual covenants, conditions and agreements hereinafter set forth, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: ARTICLE I ADDITIONAL DEFINITIONS As used herein, the following terms shall have the following meanings: "Accountant" - means any independent firm of certified public accountants as may be engaged by the General Partner for the Partnership. "Affiliate" - means (a) a General Partner; (b) a Limited Partner; (c) a partner or shareholder of a General Partner or a Limited Partner or a member of the immediate family of a partner or shareholder; (d) a legal representative of any Person, referred to in the preceding clauses (a) through (c); (e) a trustee for the benefit of any Person referred to in the preceding clauses (a) through (c); (f) a corporation, joint venture, partnership or other business entity which is controlled by such person or entity and/or any one or more of the Persons referred to in the preceding clauses (a) through (c); (g) a corporation, joint venture, partnership or other business entity which controls or is under common control with such person or entity, and/or with a person or entity referred to in the preceding clauses (a) through (c); or (h) the partners, officers, directors and key employees of such entity and/or any corporation, joint venture, partnership or other business entity referred to in the preceding clauses (a), (b), (c), (f) or (g). "Agreement" or "this Agreement" - means this Agreement of Limited Partnership, as amended from time to time. 2 "Capital Contributions" - means the gross amount of contributions actually made to the capital of the Partnership by a Partner or all the Partners, as the case may be. Loans to the Partnership by any Partner shall not be considered a Capital Contribution. "Certificate" - means the Certificate of Limited Partnership of this Partnership filed with the Secretary of State of the State of Texas, as such Certificate may be further amended and filed from time to time. "Certificate of Occupancy" - means that certain certificate of occupancy which has been issued for any building at a Property. "Code" - means the Internal Revenue Code of 1986, as amended. "Development Agreement" - means any development agreement between the Partnership and Capital Senior Development, Inc. relating to a Property, as such agreement may be amended from time to time. "Fiscal Year" - means the fiscal year of the Partnership as set forth in Section 11.1 hereof. "General Partner" - means Triad Partners IV, Inc. and any additional or successor General Partner(s) designated in any case as such in accordance with the provisions of this Agreement, and, from time to time, holding such position in accordance with such provisions. "Gross Receipts" - means all revenues received by the Partnership from the operations of its business attributable to a particular period as determined in accordance with the cash receipts and disbursements method of accounting, and including, without limitation, any loans from Partners and third parties, and other amounts paid by Partners and third parties to the Partnership, but not including capital contributions. "Limited Partners" - means Triad Partners IV, Inc. and Capital Senior Living Properties, Inc., and any additional or substitute Limited Partner(s) as may be designated as such in accordance with the provisions of this Agreement. "Lenders" - means such lender or lenders approved by the Partners, or their successors and/or assigns. "Loan" - means collectively those certain loans from Lenders to the Partnership approved by the Partners. "Loan Documents" - means all documents evidencing, securing or otherwise entered into in connection with the Loan, including, without limitation, any Note, Deed of Trust, Security Agreement, Assignment of Rents and Financing Statement, Assignment of Leases and Rents, and UCC-1 Financing Statement. 2 3 "Management Agreement" means any management agreement between the Partnership and Capital Senior Living, Inc. relating to a Property, as such agreement may be amended from time to time. "Net Cash Flow" - means the amount, if any, by which Gross Receipts plus cash reserves of the Partnership from the previous period exceed Operating Expenses for such particular period, to the extent the General Partner determines, in its sole discretion, that cash is not otherwise required for Partnership purposes, including the setting up or continuing of a reasonable working capital reserve for the Partnership. "Net Cash Flow" shall not include or reflect any proceeds received or expenses incurred in connection with the sale or other disposition of all or substantially all of the assets of the Partnership or the termination and liquidation of the Partnership. "Operating Expenses" - means all cash expenditures of any kind or nature incurred by the Partnership attributable to a particular period, as determined in accordance with the cash receipts and disbursements method of accounting. "Partners"- means the General Partner and the Limited Partners. "Partner" - means any of the Partners. "Partnership" - means the limited partnership evidenced by this Agreement, as said limited partnership may from time to time be constituted, amended and, if necessary, reconstituted, including any successor limited partnership. "Percentage Interests" - means the percentage set forth opposite the name of such Partner under the column "Interest" in Exhibit B attached hereto and made a part hereof for all purposes. "Person" - means an individual, firm, corporation or other legal entity. "Properties" - means those certain tracts of land which have been agreed to in writing by all of the Partners. Upon such written approval, the General Partner shall attach the legal description for each Property hereto as Exhibit A. "Property" - means any one of the Properties. "Revised Act" - means the Texas Revised Limited Partnership Act, as adopted and from time to time amended by the State of Texas. ARTICLE II FORMATION; NAME AND OFFICE; PURPOSE Section 2.1 Formation The General Partner and the Limited Partners hereby organize, create and form the Partnership as a Texas limited partnership under the Revised Act. The Partnership will commence effective upon the filing of the Certificate with the Secretary of State of the State of Texas pursuant 3 4 to the provisions of the Revised Act. The Partnership is formed for the purpose and upon the terms and conditions herein set forth. The Partners hereby agree and obligate themselves to execute, acknowledge, file, record and/or publish, as necessary, such amendments to the Certificate and such other certificates and documents and to take all other necessary actions required by law to perfect and maintain the Partnership as a limited partnership under the Revised Act and in all other jurisdictions in which the Partnership may elect to conduct business. Section 2.2 Name, Registered Agent and Registered Office The name of the Partnership shall be Triad Senior Living IV, L.P. or such other name as the General Partner shall hereafter designate by notice to the Limited Partners and by amendment to the Certificate properly filed with the Secretary of State of the State of Texas. The principal place of business in Texas where books and records of the Partnership will be kept and made available shall be 4312 Mockingbird Lane, Dallas, Texas 75205, or such other place as the General Partner may from time to time designate in a notice to the Limited Partners and by amendment to the Certificate. The registered office of the Partnership and the registered Agent shall be as set forth in the Certificate, or such other registered Agent and registered office as the General Partner may from time to time designate in a notice to the Limited Partners and by amendment to the Certificate. Section 2.3 Purpose The purpose of the Partnership shall be strictly limited to activities relating to the acquisition, development, ownership, operation, and sale of the Properties, and such other activities as are incidental thereto, including without limitation, entering into the Loan and the performance of the Partnership's obligations under the Loan Documents. ARTICLE III TERM The term of the Partnership shall commence upon the filing of the Certificate with the Secretary of State of the State of Texas, and shall continue until December 31, 2050, on which date the Partnership shall terminate, unless sooner dissolved upon the occurrence of any of the events of dissolution or termination, as described in Article X. ARTICLE IV INTERESTS OF THE GENERAL PARTNER AND LIMITED PARTNERS Section 4.1 General Partner The General Partner is Triad Partners IV, Inc., and it shall have a 1% interest in the Partnership. Except as provided in Article IX of this Agreement, no other Person shall become a General Partner in the Partnership. The address of the General Partner is set forth on Exhibit B. 4 5 Section 4.2 Limited Partners The Limited Partners are TP IV and Capital Senior Living Properties, Inc., which shall have the interests in the Partnership as shown on Exhibit B. Except as provided in Article IX of this Agreement, no other Person shall become a Limited Partner or substitute Limited Partner in the Partnership. The addresses of the Limited Partners are set forth on Exhibit B. ARTICLE V CAPITAL CONTRIBUTIONS Section 5.1 Capital Contribution of the General Partner The General Partner has contributed to the Partnership the amount set forth on Exhibit B. The General Partner shall not be obligated to pay any Partnership expenses or make any capital contributions to the Partnership except as provided in this Section 5.1 and Section 5.3. Section 5.2 Capital Contribution of the Limited Partners The Limited Partners have contributed or will contribute to the Partnership the amounts set forth on Exhibit B. The Limited Partners shall not be obligated to make any other capital contributions to the Partnership except as provided in this Section 5.2 and Section 5.3. Section 5.3 Additional Capital Contributions The Partners may, but are not required to, make their pro rata share (based on Percentage Interests) of any additional capital contributions to the Partnership. In the event that any Partner does not make such additional capital contribution, the Partnership shall return the amounts contributed by the other Partners for such additional capital contributions. The additional capital contributions shall be due only upon the written notice from the General Partner to the Partners. TP IV shall contribute to the capital of the Partnership in the amount required and at the time specified in Section 2.2(d) of Exhibit C attached hereto. Section 5.4 Return or Withdrawal of Capital Contributions; Distributions Except as otherwise expressly provided in this Agreement, none of the Partners shall be entitled to demand a refund or return of any Capital Contribution or to withdraw any part of its capital account or to receive any distribution from the Partnership. Section 5.5 Capital Accounts A capital account shall be established and maintained for each Partner as set forth in Exhibit C attached hereto. 5 6 Section 5.6 Loans by the Partners. If the General Partner determines that the Partnership needs additional capital, it may request that the Partners make loans to the Partnership. Then each Partner shall have the option, but not the obligation, to loan to the Partnership some or all of the aggregate amount of the requested loan. Any loans made by the Partners shall not be considered to be contributions to the capital of the Partnership. ARTICLE VI LIMITED PARTNERS Section 6.1 Powers: Actions The Limited Partners shall neither participate in the management or control of the Partnership's business nor shall they transact any business for the Partnership, nor shall they have the power to sign for or bind the Partnership, said powers being vested solely and exclusively in the General Partner. Section 6.2 Limitation of Liability Anything to the contrary herein expressed or implied notwithstanding, the Limited Partners shall not be personally liable for any of the debts of the Partnership or any of the losses thereof in excess of their respective shares of Partnership assets, capital contributions which they have made or are obligated to make to the Partnership, and their share of the Partnership's income and gains; provided, however, that to the extent required by applicable law, if a Limited Partner receives a distribution at a time when it knew that, after giving effect to the distribution, all liabilities of the Partnership, other than liabilities to the Partners with respect to the partnership interests and liabilities for which the recourse of creditors is limited to specific Partnership assets, exceed the fair value of the Partnership's assets (except that the fair value of property that is subject to a liability for which there is recourse of creditors is limited shall be included in the Partnership's assets only to the extent that the fair value of that property exceeds that liability), then the Limited Partner receiving such distribution shall be liable for the return of such distribution. ARTICLE VII GENERAL PARTNER Section 7.1 Powers; Actions The General Partner shall manage and control the business and affairs of the Partnership. Without limiting the generality of the foregoing, the General Partner shall have full power to (i) manage the Partnership; (ii) execute such documents as it may deem advisable for Partnership purposes, including, without limitation, the Loan Documents and all documents necessary for the 6 7 acquisition, financing, refinancing, development, ownership, operation and sale of any Property; (iii) acquire, sell, lease, transfer, assign, convey, mortgage, refinance, or otherwise dispose of or deal with all or any part of any Property on such terms as it deems reasonable; (iv) establish and maintain, to the extent Partnership funds are available, reasonable reserves for anticipated and unanticipated expenses relating to the activities of the Partnership; (v) perform or cause to be performed the Partnership's obligations, and exercise or cause to be exercised all of the Partnership's rights, under any agreement to which the Partnership or any nominee of the Partnership is a party; and (vi) on behalf of the Partnership, employ, engage, retain or deal with any Person, including any Affiliate, to perform services in connection with the ownership and operation of the Property, provided in all such cases such services are deemed by the General Partner to be advisable and the compensation therefor is reasonable. Section 7.2 Restrictions on the General Partner (a) Notwithstanding the foregoing in Section 7.1 or any other provision of this Agreement, the Partnership shall be subject to the following restrictions and the General Partner shall have no authority to take and shall not take any action on behalf of the Partnership in violation of any of the following restrictions: (i) No bankruptcy or insolvency filing or similar proceedings for the Partnership may be commenced, and no bankruptcy or insolvency filing or similar proceeding may be commenced as to the General Partner on its own behalf or as General Partner on behalf of the Partnership. (ii) The Partnership and the General Partner are prohibited from creating, incurring or assuming any indebtedness other than the Loan and any subordinate financing permitted in the Loan Documents. (iii) The Partnership and the General Partner are prohibited from liquidating or dissolving or consenting to the liquidation or dissolution, in whole or in part, of either the Partnership or the General Partner. (b) Notwithstanding anything in this Agreement to the contrary, the General Partner shall not have the right or the power to make any commitment or engage in any undertaking on behalf of the Partnership in respect of a Major Decision (as hereinafter defined) unless and until such Major Decision has been approved in writing by all of the Limited Partners. The term "Major Decision," as used in this Agreement, means any decisions with respect to the following matters: (i) All financing and refinancing decisions pertaining to indebtedness owing, directly or indirectly, to and/or by the Partnership. (ii) Any amendment, modification, change or restatement of this Agreement. 7 8 (iii) Any capital expenditures in excess of $50,000 on any Property that has already been developed. (iv) The assignment of any interests in the Partnership except as expressly provided by the terms of this Agreement. (v) Any amendment, modification or change to any Management Agreement or any Development Agreement. (vi) The engagement by the Partnership in any business other than as set forth in Section 2.3 above. (vii) The transaction of business with Affiliates of Partners except as set forth herein. (viii) The execution of any guarantees, indemnities, sureties or similar commitments on behalf of the Partnership. (ix) Any decision to cause the Partnership to loan funds to any person, and the terms on which any such loan is made. (x) Any act in contravention of this Agreement. (xi) The addition of a tract of land to the defined term "Properties" or a change in the use of a Property. (xii) The admission of any new Partners to the Partnership (except as otherwise allowed herein) or the appointment of any additional General Partner. (xiii) Any other act which the Revised Act specifically requires to be approved by all the Partners. (xiv) The merger, consolidation or any other form of combination of the Partnership with or into any other entity. (xv) The conveyance, transfer or lease of the Partnership's assets substantially as an entirety to any entity, except for the transfer of the Properties (or a Property) to the manager pursuant to any purchase option in any Management Agreement. (xvi) The acquisition or lease of any substantial assets by the Partnership. 8 9 Section 7.3 Duties and Obligations of the General Partner The General Partner shall manage and control the Partnership, its business and affairs. During the continuance of the Partnership, the General Partner shall diligently and faithfully devote such time to the management of the business of the Partnership as it deems reasonably necessary. Section 7.4 Tax Matters Partner. See Section 4.4 of Exhibit C attached hereto. Section 7.5 Liability; Indemnification The General Partner and its Affiliates shall not be liable to the Partnership or the Limited Partners for any act or omission performed or omitted by it pursuant to the authority granted to it by this Agreement, other than for fraud, willful malfeasance or gross negligence. The Partnership shall and hereby does indemnify and save harmless the General Partner, the Limited Partners and their Affiliates to the greatest extent permitted by the Revised Act from any loss, damage, claim or liability, including but not limited to, reasonable attorney's fees and expenses, incurred by them by reason of any act performed by the General Partner, the Limited Partners or their Affiliates on behalf of the Partnership, including, without limitation, their activities in winding up and liquidating the Partnership, or in furtherance of the Partnership's interests, except that the General Partner and its Affiliates shall not be indemnified for actions by the General Partner or its Affiliates which constitute a breach of any of their obligations under this Agreement, fraud, willful malfeasance or gross negligence, provided, however, that the indemnity and save harmless provided for in this sentence shall be satisfied out of Partnership assets only and no Partner shall have any personal liability on account thereof. Section 7.6 Fees to and Reimbursement of the General Partner The Limited Partners acknowledge that the General Partner or its Affiliates will receive $1,000 per month beginning December 1, 1998 as an asset management fee. The General Partner and its Affiliates shall also be entitled to receive reimbursement of their expenses, but shall not be entitled to receive any other fees. The General Partner and its Affiliates shall receive reimbursement for all reasonable expenses advanced by the General Partner and its Affiliates on behalf of the Partnership and all expenses incurred during the operation of the Partnership. ARTICLE VIII ALLOCATIONS; DISTRIBUTIONS Section 8.1 Allocations of Income and Loss All items of income or loss of the Partnership shall be allocated to the Partners in accordance with the provisions of Exhibit C attached hereto, which are hereby incorporated by reference for all purposes of this Agreement. 9 10 Section 8.2 Partnership Distributions of Cash During the term hereof, periodically, but not less frequently than annually, Net Cash Flow of the Partnership shall be distributed to the Partners in accordance with their Percentage Interests. ARTICLE IX ASSIGNABILITY OF GENERAL PARTNER'S AND LIMITED PARTNER'S INTERESTS; PURCHASE OPTION Section 9.1 Restrictions on Transfers Except as provided in Section 9.5 hereof, a Partner may not sell, assign, transfer, encumber, or dispose of, by operation of law or otherwise, any interest in the Partnership or in the property or assets of the Partnership without the prior written consent of the other Partners, which in the other Partners' absolute discretion may be withheld. Additionally, any such disposition must comply with the provisions hereinafter stated in this Article IX. Section 9.2 Assignment of a Limited Partner's Interest (a) Except as otherwise provided in this Agreement, an assignee of the whole or any portion of a Partner's interest in the Partnership shall not have the right to become a Partner in place of its assignor unless (i) its assignor shall have designated such intention in the instrument of assignment; (ii) the written consent of the other Partners to such substitution shall have been obtained, which consent, in the other Partners' absolute discretion, may be withheld; (iii) the assignment instrument shall have been in form and substance satisfactory to the other Partner; (iv) the assignor and assignee named therein shall have executed and acknowledged such other instrument or instruments as the other Partners may deem necessary or desirable to effectuate such admission; and (v) the assignee shall have accepted, adopted and approved in writing all of the terms and provisions of this Agreement, as the same may have been amended. (b) In any event, the Partnership and the other Partners shall be entitled to treat an assignor of a Partner's interest as the absolute owner thereof in all respects, and shall incur no liability for distributions made in good faith to such assignor, until such time as the foregoing requirements have been satisfied. (c) The Partnership shall, upon satisfaction of the foregoing requirements, thereafter pay all further distributions or profits or other compensation by way of income or return of capital on account of the interest so assigned to the assignee. In the absence of notice to the other Partners and approval thereof in writing by them of the assignment of a Partner's interest, whether by operation of law or otherwise, any payment to an assigning Partner, or to his assigns, executors, administrators, or legal representative, shall acquit the Partnership of liability to the extent of such payment as to any other person, whether 10 11 claiming as a remote or immediate assignee of the Partner, or by reason of its death, legal disability, bankruptcy, insolvency, or otherwise. (d) All costs (including, without limitation, legal and other professional fees) incurred by the Partnership, the other Partners, and the assigning Partner relating to any transfer contemplated by this Article IX, shall be charged to, and shall be the sole expense of, the assigning Partner. Section 9.3 Withdrawal of a Partner Except as otherwise specifically permitted by this Agreement, no Partner shall be entitled to withdraw or retire from the Partnership. Section 9.4 Death, Legal Incompetency, Bankruptcy or Dissolution of Limited Partner The death, legal incompetency, bankruptcy, dissolution or other disability of a Limited Partner shall not dissolve or terminate the Partnership. Upon the death, legal incompetency, bankruptcy, dissolution or other disability of a Limited Partner, the estate, personal representative, trustee, guardian or other successor in interest of such Limited Partner shall have all the rights and obligations and be liable for all the liabilities of the Limited Partner in the Partnership to the extent of such Limited Partner's interest therein, subject to the terms and conditions of this Agreement, and, with the prior written consent of the General Partner which may be withheld at its sole discretion, may be substituted for such Limited Partner. Section 9.5 Purchase Option of Capital Senior Living Properties, Inc. At any time, Capital Senior Living shall have the right, but not the obligation, to purchase all, but not less than all, of the interests owned by the General Partner and TP IV as limited partner for an amount equal to the amount of money that each such Partner paid for their respective interests in the Partnership, plus non-compounding interest of 12% per annum from the date such amounts were paid to the date the option described herein is exercised. The Partners, by executing this Agreement, hereby agree that the future value of such interests is speculative and that the formula set forth above is the Partners' best estimate of the fair market value of such interests as of the date of the exercise of such option. ARTICLE X DURATION, DISSOLUTION, TERMINATION, WINDING UP, REMOVAL OF THE GENERAL PARTNER AND RESIGNATION OF THE GENERAL PARTNER Section 10.1 Dissolution and Termination Subject to the provisions of Section 7.2(a) hereof, the Partnership shall be dissolved only upon the occurrence of any of the following events: 11 12 (a) The expiration of the fixed term of the Partnership; (b) The withdrawal or removal of the General Partner, the assignment by the General Partner of all its interest in the Partnership, or any other event that causes the General Partner to cease to be a general partner under the Revised Act, provided that any such event shall not constitute a event of dissolution if the Partnership is continued pursuant to Section 10.2; (c) The sale or other disposition of all or substantially all of the assets of the Partnership and the collection of the proceeds therefrom; and (d) The mutual consent of the Partners. Section 10.2 Continuation of Business The Partners hereby agree that notwithstanding any provision of the Revised Act, the Partnership shall not dissolve prior to the occurrence of any event set forth in Section 10.1 above. Upon the occurrence of any event set forth in Section 10.1 above, the Partnership shall not be dissolved or required to be wound up if (i) at the time of such event there is a remaining General Partner and that General Partner carries on the business of the Partnership or (ii) within ninety (90) days after such event all remaining Partners agree in writing to continue the business of the Partnership and to the appointment, effective as of the date of such event, of one or more additional General Partners. Section 10.3 Winding Up of the Partnership Upon dissolution of the Partnership as provided in Section 10.1, the Partnership shall be wound up, and the General Partner (or if there is no General Partner, a substitute General Partner elected by the Limited Partners) will take full account of the Partnership's assets and liabilities, the assets will be liquidated as promptly as is consistent with obtaining the fair market value thereof, and the proceeds therefrom, to the extent sufficient therefor, will be applied and distributed in accordance with the provisions of Section 10.4. Notwithstanding the foregoing, the General Partner, with the consent of the Limited Partners, may determine not to sell all or any portion of the assets of the Partnership, in which event there shall be distributed to each of the Partners its interest in the remaining assets of the Partnership. Section 10.4 Sale or Liquidation In the case of a sale or other disposition of all or substantially all of the assets of the Partnership or termination and liquidation of the Partnership, the net proceeds of such sale or liquidation, shall be applied and distributed, after crediting or charging the Partners' capital accounts pursuant to Article VIII and as cash is received by the Partnership, in the following order of priority on or before the end of the taxable year in which the Partnership liquidates (or, if later, within 90 days after the date of such liquidation): 12 13 (a) To the payment of the debts and liabilities of the Partnership (other than debts of the Partnership to the Partners) and the expenses of sale and liquidation. (b) To the setting up of any reserves which the General Partner determines are reasonably necessary for any contingent or unforeseen liabilities or obligations of the Partnership or of the Partners arising out of, or in connection with, the Partnership. Such reserves may be held by the General Partner for the purpose of disbursing such reserves in payment of any of the aforementioned contingencies, and at the expiration of such period as the General Partner may deem advisable, to distribute the balance thereafter remaining as provided herein. (c) To the Partners in repayment of debts of the Partnership to the Partners. (d) To the Partners in proportion to and to the extent of the remaining amounts of their respective positive capital accounts, as such accounts have heretofore been adjusted pursuant to this Agreement. (e) The remaining assets, if any, shall be distributed to the Partners in accordance with their Percentage Interests. Should assets other than cash be distributed, the amount by which the fair market value of the assets, if any, to be distributed exceeds or is less than the basis of such assets shall, to the extent not otherwise recognized by the Partnership, be taken into account in computing gain or loss of the Partnership for purposes of crediting or charging the capital accounts of, and distributing proceeds to, the Partners. Section 10.5 Removal and Replacement of the General Partner The General Partner may be removed by either Limited Partner without further action for "cause," which means (i) any petition shall be filed by the General Partner, or any petition shall be filed against the General Partner and not vacated within 30 days, under any section or chapter of the present or future federal Bankruptcy Code or under any similar state or federal law, (ii) upon final judicial determination that the General Partner (1) was grossly negligent in its failure to perform its obligations under this Agreement, or (2) committed a fraud upon the Partners or upon the Partnership, or (3) committed a felony in connection with the management of the Partnership or its business, or (4) was in material breach of its obligations under this Agreement, or (iii) transfer of the General Partner's interest in the Partnership or withdrawal from the Partnership without approval of the Limited Partners. In the event of removal or resignation of the General Partner, it shall be deemed to have surrendered to the Partnership its entire general partner interest in the Partnership and shall be entitled to no compensation therefor. 13 14 ARTICLE XI ACCOUNTS AND RECORDS: ACCOUNTANTS Section 11.1 Accounting Methods: Fiscal Year The books of account of the Partnership shall be kept on the accrual method of accounting. The fiscal year of the Partnership shall end on December 31 of each year except upon termination. Section 11.2 Records and Books of Account (a) The General Partner shall maintain, or cause to be maintained complete and accurate records and books of account of all transactions of the Partnership wherein shall be entered all transactions, matters and things relating to the Partnership's business as are usually entered into books of account kept by persons engaged in a business of a like character, all on the method of accounting determined in accordance with Section 11.1, consistently applied. (b) All of such records and books of account together with all other documents and files of the Partnership, including but not limited to copies of all documents prepared by the General Partner and all correspondence, shall, at all times, be kept at the main office of the Partnership or such other place as may be designated by the General Partner and to which the Partners shall have reasonable access as hereinafter provided, and all such records, books of account, documents and files shall be the exclusive property of the Partnership. In the event of the termination of the Partnership interest of the General Partner, all such records, books of account, documents and files shall remain in the exclusive possession of the Partnership. At any time and from time to time while the Partnership continues and until its complete liquidation (but only during reasonable business hours), each Partner may, at its own expense and upon reasonable prior written notice to the General Partner, fully examine, inspect, make copies and audit the Partnership's books, records, accounts and assets, including but not limited to bank balances and physical inspection of the Properties or an audit to be made by any competent accountant or other professional employed by it at its expense. Section 11.3 Annual Examination and Tax Returns (a) The books of the Partnership shall be brought up to date annually each year by the General Partner or the Accountants. The General Partner or the Accountants shall determine and prepare for such fiscal year, using the method of accounting determined in accordance with Section 11.1, consistently applied, such financial statements as are required by the Loan Documents. (b) The General Partner or the Accountants shall also prepare all tax returns which the Partnership is required to file and the same shall be filed by the General Partner within the time prescribed by law for the filing of each such return. 14 15 (c) At the election of the General Partner, the Accountants shall perform an audit in accordance with generally accepted auditing standards. The financial statements and audit report shall be delivered to each Partner in the Partnership. Section 11.4 Bank Accounts The cash Capital Contributions of the Partners and other funds of the Partnership shall be deposited in a bank account or accounts which shall be separately owned by the Partnership and maintained by the General Partner. Withdrawals shall be made only in the regular course of Partnership business on the signature of the General Partner or its designee. All funds not needed in the operation of the business may be deposited, to the extent permitted by applicable law, in interest bearing accounts or invested in short-term U.S. Government obligations, U.S. Government guaranteed obligations, bank certificates of deposit or other liquid high-grade investments, maturing, in any event, within one year. Section 11.5 Reports to Limited Partners As soon as reasonably practicable but no later than thirty (30) days after the end of each month, the General Partner shall cause to be prepared and furnished to the Limited Partners income statements and balance sheets for such month. As soon as reasonably practicable but no later than seventy-five (75) days after the end of each fiscal year, the General Partner shall cause to be prepared and furnished to the Limited Partners the following: (i) all necessary tax reporting information required by the Limited Partners for preparation of their respective income tax return and (ii) all information necessary for such Limited Partners to comply with all reporting requirements imposed by the securities laws of the United States or any state thereof. Upon the reasonable request of the Limited Partners for further information with respect to any matter with respect to the Partnership, the General Partner shall furnish such information within ten (10) days after such request. ARTICLE XIII GENERAL PROVISIONS Section 12.1 Recipient of Distributions and Payments All distributions and payments of cash or property to be made pursuant to the provisions of this Agreement shall be made directly to the parties who are entitled thereto at their respective addresses indicated on Exhibit B or elsewhere in this Agreement or at such other address as shall have been set forth in a notice sent pursuant to the provisions of Section 12.2. Section 12.2 Communications Except as otherwise expressly provided in this Agreement, any offer, acceptance, election, approval, consent, objection, certification, request waiver, notice or other document required or permitted to be made or given pursuant to any provisions of this Agreement shall be deemed duly made or given, as the case may be, if in writing, signed by or on behalf of the person making or 15 16 giving the same, and shall be deemed completed when either personally delivered (with receipt acknowledged by the recipient) or three days after deposited through the U.S. mail, registered or certified, first class, postage prepaid, addressed to the person or persons to whom such offer, acceptance, election, approval, consent, certification, request, waiver or notice is to be made or given at their respective addresses indicated on Exhibit B and, in the case of the Partnership, at the office of the Partnership specified in Section 2.2 of this Agreement, or, in any case, at such other address as shall have been set forth in a notice sent pursuant to the provisions of this Section 12.2. Section 12.3 Entire Agreement; Applicable Law; Effect This Agreement contains the entire agreement by and among the parties and supersedes any prior understandings and agreements among them respecting the subject hereof. THIS AGREEMENT SHALL BE CONSTRUED, ENFORCED AND GOVERNED IN CONFORMITY WITH THE LAWS OF THE STATE OF TEXAS, without giving effect to principles of conflicts of law, and whether in state or federal courts. This Agreement shall be binding upon the parties hereto, their successors, heirs, devisees, permitted assigns, legal representatives, executors and administrators but shall not be deemed for the benefit of creditors or any other Persons. Section 12.4 Modification; Waiver or Termination Except as otherwise expressly provided in this Agreement, no modification, waiver, or termination of this Agreement, or any part hereof, shall be effective unless made in writing signed by the party or parties to be bound thereby, and no failure to pursue or elect any remedy shall constitute a waiver of any default under or breach of any provision of this Agreement, nor shall any waiver of any default under or breach of any provision of this Agreement be deemed to be a waiver of any other subsequent or similar or different default under or breach of such or any other provision or of any election or remedies available in connection therewith. Receipt by any party of any money or other consideration due under this Agreement, with or without knowledge of any breach or default, shall not constitute a waiver of such breach or default of any provision of this Agreement. Section 12.5 Counterparts This Agreement may be executed in one or more counterparts and, notwithstanding that all of the parties did not execute the same counterpart, each of such counterparts shall, for all purposes, be deemed to be an original, and all of such counterparts shall constitute one and the same instrument binding on all of the parties hereto. Section 12.6 Separability Each provision of this Agreement shall be considered separable and (a) if for any reason any provision or provisions herein are determined to be invalid and contrary to any existing or future law, such invalidity shall not impair the operation of or affect those portions of this Agreement which are valid, and (b) if for any reason any provision or provisions of this Agreement would subject the Limited Partners to any personal liability for the obligations of the Partnership under the laws of the 16 17 State of Texas or any other laws, as the same may now or hereafter exist, such provision or provisions shall be deemed void and of no effect. Section 12.7 Article and Section Headings Article and Section titles or captions contained in this Agreement are inserted only as a matter of convenience and for reference, and shall not be construed in any way to define, limit, extend or describe the scope of any of the provisions hereof. Section 12.8 Word Meanings The words such as "herein," "hereinafter," "hereof," and "hereunder" refer to this Agreement as a whole and not merely to a subdivision in which such words appear unless the context otherwise requires. The singular shall include the plural and the masculine gender shall include the feminine and neuter, and vice versa, unless the context otherwise requires. Section 12.9 Exhibits All exhibits annexed hereto and any documents or instruments delivered simultaneously herewith are expressly made a part of this Agreement, as fully as though completely set forth herein, and all references to this Agreement herein or in any of such writings or elsewhere shall be deemed to refer to and include all such writings. Section 12.10 Further Actions Each of the Partners shall hereafter execute and deliver such further instruments and do such further acts and things as may be required or useful to carry out the intent and purpose of this Agreement and as are not inconsistent with the revisions hereof. Section 12.11 Prohibition Re Partition Each of the parties hereto does hereby permanently waive and relinquish any and all rights it may have to cause the assets of the Partnership to be partitioned, it being the intention of the parties to prohibit any parties hereto from bringing a suit for partition against the other parties hereto. Section 12.12 Agreements with Capital Affiliates and the Loan The Partnership hereby ratifies and agrees to be bound by any agreements that the Partnership has entered into with Affiliates of Capital Senior Living, including, the Management Agreement, the Development Agreement and that certain Development and Turnkey Services Agreement by and between the Partnership and Capital Senior Development, Inc. 17 18 Section 12.13 Noncompete of General Partner The General Partner agrees that as long as the General Partner is the general partner of the Partnership and for one (1) year after the General Partner is no longer the general partner of the Partnership neither the General Partner nor its Affiliates will acquire, own, develop, complete the development of, or manage any senior living facility providing the same level of services as any senior living facility owned or leased by the Partnership within a seven and one-half mile radius of a senior living facility owned or leased by the Partnership. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. GENERAL PARTNER: Triad Partners IV, Inc., a Texas corporation By: /s/ BLAKE N. FAIL ------------------------------------------ Name: Blake N. Fail ---------------------------------------- Title: President --------------------------------------- LIMITED PARTNERS: Triad Partners IV, Inc., a Texas corporation By: /s/ BLAKE N. FAIL ------------------------------------------ Name: Blake N. Fail ---------------------------------------- Title: President --------------------------------------- Capital Senior Living Properties, Inc., a Texas corporation By: /s/ DAVID R. BRICKMAN ------------------------------------------ Name: David R. Brickman ---------------------------------------- Title: Vice President --------------------------------------- 18 19 EXHIBIT "A" Property Description 20 EXHIBIT "B"
Capital Contribution Interest -------------------- -------- General Partner Triad Partners IV, Inc. $ 1.00 1% 4312 Mockingbird Lane Dallas, Texas 75205 Limited Partners Triad Partners IV, Inc. $600,000 80% 4312 Mockingbird Lane Dallas, Texas 75205 Capital Senior Living Properties, Inc. $142,500 19% 14160 Dallas Parkway Suite 300 Dallas, Texas 75240
21 EXHIBIT "C" Allocation Provisions 22 EXHIBIT C TO AGREEMENT OF LIMITED PARTNERSHIP OF TRIAD SENIOR LIVING IV, L.P. ARTICLE I DEFINITIONS Section 1.1 Definitions. All capitalized terms used herein shall have the meanings assigned to them in the Agreement of Limited Partnership of Triad Senior Living IV, L.P. Notwithstanding the foregoing, the following definitions shall be applicable to the following terms as used in this Exhibit C of the Agreement: (a) "Adjusted Net Income or Loss" of the Partnership derived for any Fiscal Year (or portion thereof) shall mean the excess or deficit, as the case may be, of (i) the Gross Income of the Partnership for such period (not including the amount of Gross Income (if any) allocated during such Fiscal Year pursuant to Sections 3.1(a), 3.1(b), 3.1(c), 3.1(d), and 3.1(p) hereof for such period), over (ii) the Deductible Expenses of the Partnership for such period (not including the amount of Deductible Expenses (if any) allocated pursuant to Sections 3.1(e), 3.1(f) and 3.1(p)) hereof for such period) with the following modifications: (i) Any Partnership income that is exempt from federal income tax, and that is not otherwise taken into account in computing Adjusted Net Income or Loss of the Partnership pursuant to this Section 1.1(a), shall be treated as additional Gross Income and added to the amount otherwise calculated as Adjusted Net Income or Loss under this Section 1.1(a). (ii) Any expenditures of the Partnership that are described in section 705(a)(2)(B) of the Code (relating to expenditures of the Partnership that are not deductible for federal income tax purposes in computing taxable income and not properly chargeable to capital), or treated as so described pursuant to section 1.704-1(b)(2)(iv)(i) of the Regulations, and that are not otherwise taken into account in computing Adjusted Net Income or Loss of the Partnership pursuant to this Section 1.1(a), shall be treated as additional Deductible Expenses and subtracted from the amount otherwise calculated as Adjusted Net Income or Loss under this Section 1.1(a). (b) "Adjusted Property" shall mean any Partnership asset that has a Book Basis different from its adjusted tax basis. Any asset that is contributed to the Partnership by a Partner shall be an "Adjusted Property" if its Agreed Value is not equal to the Partnership's initial tax basis in such asset. In addition, once the Book Basis of a Partnership asset is adjusted pursuant to Section 2.4 hereof, such asset shall thereafter be an "Adjusted Property." (c) "Agreed Value" of any asset contributed by a Partner to the Partnership shall mean the fair market value thereof (determined without regard to section 7701(g) of the Code) as of the date of such contribution and as reasonably determined by the General Partner. (d) "Book Basis" of any asset of the Partnership shall be determined in accordance with the rules of Section 2.4. (e) "Book Depreciation" in respect of any Partnership asset for any Fiscal Year shall mean the product of (i) the depreciation, cost recovery or other amortization deduction allowable to the Partnership 23 for federal income tax purposes in respect of such asset for such Fiscal year, multiplied by (ii) a fraction, the numerator of which is the Book Basis of such asset as of the beginning of such Fiscal Year (or the date of acquisition if the asset is acquired during such Fiscal Year) and the denominator of which is the adjusted tax basis of such asset as of the beginning of such Fiscal Year (or the date of acquisition if the asset is acquired during such Fiscal Year). If the denominator of the fraction described in clause (ii) above is zero, "Book Depreciation" in respect of such asset shall be determined under any reasonable method selected by the General Partner. (f) "Book Gain or Loss" realized by the Partnership in respect of any asset of the Partnership in connection with the disposition of such asset shall mean the excess (or deficit) of (i) the amount realized by the Partnership in connection with such disposition (as determined under section 1001 of the Code) over (ii) the then Book Basis of such asset. If the Book Basis is adjusted pursuant to Section 2.4, any increase or decrease in Book Basis of the assets as a result of the adjustment shall be treated as Book Gain or Book Loss, as the case may be, and shall be allocated among the Partners pursuant to Section 3.1 of this Exhibit "C." (g) "Capital Account" shall have the meaning assigned such term in Section 2.1 hereof. (h) "Deductible Expenses" of the Partnership for any Fiscal Year (or portion thereof) shall mean all items, as calculated for book purposes, which are allowable as deductions to the Partnership during such period under federal income tax accounting principles (including Book Depreciation). (i) "Fiscal Year" shall mean the fiscal year of the Partnership adopted under Section 8.1 of the Agreement. (j) "Gross Income" of the Partnership for any Fiscal Year (or portion thereof) shall mean the gross income of the Partnership derived from all sources (other than from capital contributions and loans to the Partnership and other than Book Gain or Loss from a Terminating Capital Transaction) during such period, as calculated for book purposes in accordance with federal income tax accounting principles. (k) "IRS" shall mean the United States Internal Revenue Service. (l) "Liquidation" of a Partner's interest in the Partnership shall mean and shall be deemed to occur upon the earlier of (i) the date upon which the Partnership is terminated under section 708(b)(1) of the Code; (ii) the date upon which the Partnership ceases to be a going concern (even though it may continue in existence for the limited purpose of winding up its affairs, paying its debts and distributing any remaining Partnership assets to the Partners); or (iii) the date upon which there is a liquidation of the Partner's interest in the Partnership (but the Partnership is not terminated) under section 1.761-1(d) of the Regulations. (m) "Modified 752 Share of Recourse Debt" of any Partner shall mean, as of any date, the amount (if any) of economic risk that such Partner is treated, as of such date, as bearing with respect to Recourse Debt under section 1.752-2 of the Regulations (assuming the Partnership constructively liquidates on such date within the meaning of section 1.752-2(b) of the Regulations except that, for purposes of such section 1.752-2(b), all of the assets of the Partnership shall be deemed thereunder to be transferred in fully taxable exchanges for an aggregate amount of cash consideration equal to their respective Book Bases and such consideration shall be deemed thereunder to be used, in the appropriate order of priority, in full or partial satisfaction of the liabilities of the Partnership). (n) "Nonrecourse Deductions" of the Partnership shall have the meaning ascribed to such term in section 1.704-2(b)(1) of the Regulations. 24 (o) "Nonrecourse Liability" of the Partnership shall have the meaning ascribed to such term in section 1.704-2(b)(3) of the Regulations. (p) "Nonrecourse Minimum Gain" of the Partnership shall mean the amount of "minimum gain" of the Partnership that is attributable to Nonrecourse Liabilities (as determined under section 1.704- 2(b)(2) of the Regulations). A Partner's share of such "Nonrecourse Minimum Gain" shall be calculated in accordance with the provisions of section 1.704-2(g) of the Regulations. (q) "Operations" shall mean all revenue producing activities of the Partnership other than activities relating to a Capital Transaction that occur in connection with the dissolution of the Partnership. (r) "Partner Minimum Gain" of the Partnership shall mean the amount of "minimum gain" of the Partnership that is attributable to Partner Nonrecourse Debt (as determined under section 1.704-2(i)(2) of the Regulations). A Partner's share of such "Partner Minimum Gain" shall be calculated in accordance with the provisions of section 1.704-2(i)(5) of the Regulations. (s) "Partner Nonrecourse Debt" of the Partnership shall have the meaning ascribed to such term in section 1.704-2(b)(4) of the Regulations. (t) "Partner Nonrecourse Deductions" of the Partnership shall have the meaning ascribed to such term in section 1.704-2(i)(2) of the Regulations. (u) "Recourse Debt" of the Partnership shall mean any liability (or portion thereof) of the Partnership that is neither a Nonrecourse Liability nor a Partner Nonrecourse Debt. (v) "Regulations" shall mean the regulations promulgated by the United States Department of the Treasury pursuant to and in respect of provisions of the Code. All references herein to sections of the Regulations shall include any corresponding provision or provisions of succeeding, similar, substitute proposed or final Regulations. (w) "Related Person" shall mean, as to any Partner, any person who is related to such Partner (within the meaning of section 1.752-4(b) of the Regulations). (x) "Revaluation Event" shall mean any of the following occurrences: (a) the contribution of money or other property (other than a de minimis amount) by a new or existing Partner to the Partnership as consideration for the issuance of an additional interest in the Partnership and/or increase in Interests; (b) the distribution of money or other property (other than a de minimis amount) by the Partnership to a retiring or continuing Partner as consideration for an interest in the Partnership and/or decrease in Interests; or (c) the liquidation of the Partnership within the meaning of section 1.704-1(b)(2)(ii)(g) of the Regulations. (y) "Section 704 Capital Account" shall have the meaning assigned to such term in Section 2.3 hereof. (z) "Tax Depreciation" for any Fiscal Year shall mean the amount of depreciation, cost recovery or other amortization deductions allowable to the Partnership for federal income tax purposes for such Fiscal Year. (aa) "Tax Item" with respect to any asset shall mean any item of income, gain, loss or deduction (including depreciation, cost recovery or amortization) in respect of such asset, as computed for federal income tax purposes. 25 (bb) "Tax Matters Partner" shall have the meaning ascribed to such term in Section 4.4(a) hereof. (cc) "Taxable Gain or Loss" shall mean gain or loss recognized by the Partnership on the sale, exchange or other disposition of any asset of the Partnership as computed for federal income tax purposes. ARTICLE II CAPITAL ACCOUNTS AND SECTION 704 CAPITAL ACCOUNTS Section 2.1 Capital Accounts. A separate "Capital Account" (herein so called) shall be maintained for each Partner in accordance with the capital accounting rules of section 1.704-1(b)(2)(iv) of the Regulations. Each Partner shall have only one Capital Account, regardless of the number or classes of interests in the Partnership owned by such Partner and regardless of the time or manner in which such interests were acquired by such Partner. Pursuant to the basic rules of section 1.704-1(b)(2)(iv) of the Regulations, the balance of each Partner's Capital Account: (a) shall be increased by the amount of money contributed by such Partner (or such Partner's predecessor in interest) to the Partnership (including but not limited to such Partner's Capital Contributions described in Article V of the Agreement) and decreased by the amount of money distributed to such Partner (or such Partner's predecessor in interest); (b) shall be increased by the fair market value (determined without regard to section 7701(g) of the Code) of each property contributed by such Partner (or such Partner's predecessor in interest) to the Partnership (net of liabilities secured by such property that the Partnership is considered to assume or take subject to under section 752 of the Code), and decreased by the fair market value (determined without regard to section 7701(g) of the Code) of each property distributed to such Partner (or such Partner's predecessor in interest) by the Partnership (net of liabilities secured by such property that such Partner is considered to assume or take subject to under section 752 of the Code); (c) shall be increased by the amount of Adjusted Net Income or item of income or gain or Book Gain allocated to such Partner (or such Partner's predecessor in interest) pursuant to Section 3.1 hereof; (d) shall be decreased by the amount of Adjusted Net Loss or item of loss or deduction or Book Loss allocated to such Partner (or such Partner's predecessor in interest) pursuant to Section 3.1 hereof; and (e) shall be otherwise adjusted in accordance with the other capital account maintenance rules of section 1.704-1(b)(2)(iv) of the Regulations. The foregoing provisions of this Section 2.1 and the other provisions of this Exhibit C relating to the maintenance of Capital Accounts are intended to comply with section 1.704-1(b) of the Regulations, and shall be interpreted and applied in a manner consistent with such Regulations. The Partners shall also make any appropriate modification if unanticipated events might otherwise cause this Exhibit C and the Agreement not to comply with such Regulations. If any Interest is transferred pursuant to the terms of the Agreement, the transferee shall succeed to the Capital Account of the transferor to the extent the Capital Account is attributable to the transferred Interest. 26 Section 2.2 Additional Provisions Regarding Capital Accounts. (a) If a Partner pays any indebtedness of the Partnership, such payment shall be treated as a contribution by that Partner to the capital of the Partnership and the Capital Account of such Partner shall be increased by the amount so paid by such Partner. (b) Except as specifically provided in the Agreement, no Partner may contribute capital to, or withdraw capital from, the Partnership. (c) A loan by a Partner to the Partnership shall not be considered a contribution of money to the capital of the Partnership, and the balance of such Partner's Capital Account shall not be increased by the amount so loaned. No repayment of principal or interest on any such loan, or reimbursement made a Partner with respect to advances or other payments made by a such Partner on behalf of the Partnership or payments of fees to a Partner or Related Person to such Partner which are made by the Partnership shall be considered a return of capital or in any manner affect the balance of such Partner's Capital Account. (d) No Partner with a deficit balance in its Capital Account shall have any obligation to the Partnership, any other Partner, or any third party to restore said deficit balance; provided, however, that upon the liquidation of TP IV's interest in the Partnership, if TP IV has a deficit balance in his Capital Account following such liquidation, as determined after taking into account all adjustments to the Capital Accounts for the taxable year during which such liquidation occurs, TP IV shall be required to immediately contribute cash to the Partnership in an amount equal to the lesser of (i) such deficit capital account balance or (ii) the amount of actual cash distributions to TP IV during the term of the Partnership (determined without taking into account any amounts paid to any party pursuant to Section 7.6 of the Agreement). (e) No interest will be paid on any capital contributed to the Partnership or the balance in any Partner's Capital Account. Section 2.3 Section 704 Capital Accounts. A "Section 704 Capital Account" (herein so called) shall be determined and maintained for each Partner throughout the term of the Agreement. The balance of a Partner's Section 704 Capital Account shall be equal to such Partner's Capital Account balance (as determined after giving effect to all adjustment attributable to allocations of Partnership income, gain, loss, deduction and credits and contributions and distributions of money and property effected prior to such determination), modified as follows: (a) decreased by the amount (if any) of cash that reasonably is expected to be distributed to such Partner, but only to the extent that the amount thereof exceeds any offsetting increase in such Partner's Section 704 Capital Account that reasonably is expected to occur during (or prior to) the Fiscal Year during which such distribution reasonably is expected to be made (as determined under section 1.704- 1(b)(ii)(d) of the Regulations); (b) decreased by the amount (if any) of loss and deduction that reasonably is expected to be allocated to such Partner pursuant to section 704(e)(2) or 706(d) of the Code or section 1.704-1(b)(2)(ii) of the Regulations (as determined under section 1.704-1(b)(2)(ii)(d) of the Regulations); (c) increased by the amount (if any) of such Partner's share of the Nonrecourse Minimum Gain of the Partnership; and (d) increased by the amount (if any) of such Partner's share of the Partner Minimum Gain of the Partnership. 27 Section 2.4 Adjustment of Book Basis. Book Basis with respect to any asset of the Partnership is the asset's adjusted tax basis for federal income tax purposes, except as follows: (a) The initial Book Basis of any asset contributed to the Partnership by a Partner shall be the fair market value of the asset as of the date of contribution as agreed upon by the contributing Partner and the Partnership. (b) The Book Basis of each asset shall be its respective fair market value as reasonably determined by the General Partner, as of a Revaluation Event. (c) The Book Basis of each asset distributed to any Partner will be the fair market value of the asset as reasonably determined by the General Partner as of the date of determination. (d) The Book Basis of each asset will be increased or decreased to reflect any adjustment to the adjusted tax basis of the asset under section 734(b) or 743(b) of the Code, but only to the extent that the adjustment is taken into account in determining Capital Account balances under section 1.704-1(b)(2)(iv)(m) of the Regulations, provided that the Book Basis will not be adjusted hereunder to the extent that an adjustment under Section 2.4(b) is necessary or appropriate in connection with a transaction that would otherwise result in an adjustment under this Section 2.4(d). Book Basis will be adjusted by Book Depreciation, and Book Gain or Book Loss on a disposition of any asset shall be determined by reference to such asset's Book Basis as adjusted herein. ARTICLE III ALLOCATIONS OF PROFIT AND LOSS Section 3.1 Allocation of Items of Profit and Loss. Subject to the provisions of ARTICLE IV hereof, the Partnership's Gross Income, items of loss or deduction and Adjusted Net Income or Loss and Book Gain or Loss for each Fiscal Year shall be allocated to the Partners as follows and in the following order of priority (after giving effect to all Capital Account adjustments attributable to contributions and distributions of money and property, but prior to distributions of money and property made pursuant to Section 10.4 of the Agreement): (a) Pursuant to section 1.704-2(f) of the Regulations (relating to minimum gain chargebacks), if there is a net decrease in Nonrecourse Minimum Gain of the Partnership for such Fiscal Year (or if there was a net decrease in Nonrecourse Minimum Gain for a prior Fiscal Year and the Partnership did not have sufficient amounts of income during prior Fiscal Years to allocate to the Partners under this Section 3.1(a)), then Gross Income shall be allocated, before any other allocation is made pursuant to the succeeding provisions of this Section 3.1 for such Fiscal Year, to each Partner in an amount equal to such Partner's share of the net decrease in such minimum gain (as determined under section 1.704-2(g) of the Regulations). (b) Pursuant to section 1.704-2(i)(4) of the Regulations (relating to minimum gain chargebacks) if there is a net decrease in Partner Minimum Gain of the Partnership for such Fiscal Year (or if there was a net decrease in Partner Minimum Gain for a prior Fiscal Year and the Partnership did not have sufficient amounts of income during prior Fiscal Years to allocate to the Partners under this Section 3.1(b)), then Gross Income shall be allocated, before any other allocation is made pursuant to the succeeding provisions of this Section 3.1 for such Fiscal Year, to each Partner with a share of such minimum gain as of the first 28 day of such Fiscal Year in an amount equal to such Partner's share of the net decrease in such Partner Minimum Gain (as determined under section 1.704-2(i)(5) of the Regulations). (c) A Partner who unexpectedly receives any adjustment, allocation or distribution described in section 1.704-1(b)(2)(ii)(d)(4), (5) or (6) of the Regulations will be specially allocated items of income or gain (after the allocations required by Section 3.1(a) and Section 3.1(b) hereof but before any other allocations required by this Section 3.1) in an amount and in the manner sufficient to eliminate any deficit balance in his Section 704 Capital Account (for this purpose, a Partner's Section 704 Capital Account shall be increased by the amount (if any) that such Partner is treated as being obligated to contribute subsequently to the capital of the Partnership (as determined under section 1.704-1(b)(2)(ii)(c) of the Regulations) and, without duplication of any amount previously described in this sentence, shall be increased by the amount (if any) of such Partner's Modified 752 Share of Recourse Debt) as quickly as possible; provided, however, that an allocation shall be made pursuant to this Section 3.1(c) only if and to the extent that such Partner would have a deficit balance in his Section 704 Capital Account after all allocations in this Section 3.1 have been tentatively made as if this Section 3.1(c) were not in this Exhibit. This Section 3.1(c) is intended to satisfy the provisions of Section 1.704-1(b)(2)(ii)(d) of the Regulations and shall be interpreted consistently therewith. (d) Except as required by Section 3.1(a), Section 3.1(b) and Section 3.1(c), each Partner who has a deficit balance in its Capital Account (for this purpose, a Partner's Capital Account shall be increased by (A) the amount (if any) that a Partner is obligated to contribute subsequently to the capital of the Partnership under the Agreement or this Exhibit (including Section 2.2(d) of this Exhibit) or is treated as being obligated to contribute subsequently to the capital of the Partnership (as determined under section 1.704-1(b)(2)(ii)(c) of the Regulations); (B) the amount (if any) of such Partner's share of the Nonrecourse Minimum Gain of the Partnership; and (C) the amount (if any) of such Partner's share of the Partner Minimum Gain of the Partnership) at the end of the taxable year will be specially allocated items of income or gain in the amount of the deficit as quickly as possible; provided, however, that an allocation shall be made pursuant to this Section 3.1(d) only if and to the extent that such Partner would have a deficit balance in its Capital Account after all allocations in this Section 3.1 have been tentatively made as if this Section 3.1(d) were not in this Exhibit and Section 3.1(d) shall be applied before Section 3.1(c). (e) All Partner Nonrecourse Deductions attributable to a Partner Nonrecourse Debt shall be allocated to the Partner that is treated (under section 1.704-2(b)(4) of the Regulations) as bearing the economic risk of loss for such debt. (f) All Nonrecourse Deductions of the Partnership shall be allocated to the Partners, pro rata in accordance with their respective Percentage Interests. (g) Any Adjusted Net Income realized by the Partnership for such year shall be allocated among the Partners as follows and in the following order of priority: (i) First: Adjusted Net Income shall be allocated to the General Partner until the aggregate Adjusted Net Income allocated under this Section 3.1(g)(i) for the current and prior years equals the aggregate amount of Adjusted Net Loss allocated to the General Partner under Section 3.1(h)(ii) for the current and prior years; and then (ii) Second: Adjusted Net Income shall be allocated to the Partners in the same proportion that cumulative Adjusted Net Loss has been allocated to the Partners under Section 3.1(h)(i) for the current year and prior years until each Partner has been allocated cumulative Adjusted Net Income under this Section 3.1(g)(ii) for the current and prior years equal to the 29 cumulative Adjusted Net Loss allocated to the Partner under Section 3.1(h)(i) for the current and prior years; and then (iii) Third: All remaining Adjusted Net Income shall be allocated among the Partners in proportion to their respective Percentage Interests. (h) Any Adjusted Net Loss realized by the Partnership for such year shall be allocated among the Partners as follows and in the following order of priority: (i) First: Adjusted Net Loss shall be to the Partners in proportion to their respective Percentage Interests until each Partner's positive Section 704 Capital Account balance is reduced to zero. (ii) Second: All remaining Adjusted Net Loss shall be allocated to the General Partner. (i) Notwithstanding any other provision of the Agreement or this Exhibit, from the date that construction commences with respect to a Property (the "Subject Property") to the date 18 months following the date that the Partnership receives a Certificate of Occupancy for the Subject Property, all Adjusted Net Loss from the Subject Property shall be allocated under this Section 3.1(i) to TP IV. The provisions of this Section 3.1(i) shall be applied to each Property of the Partnership on a property by property basis. (j) [Intentionally deleted] (k) Book Gain derived from a Terminating Capital Transaction shall be allocated among the Partners as follows in the following order of priority (after giving effect to all adjustments attributable to allocations made pursuant to the preceding provisions of this Section 3.1 for such year): (i) First: Book Gain shall be allocated among the Partners having deficit Capital Account balances to the least extent necessary to cause their deficit Capital Account balances to be in the same proportion to one another as are their respective Percentage Interests. (ii) Second: Book Gain shall be allocated among those Partners having deficit Capital Account balances in accordance with their respective Percentage Interests, to the least extent necessary to cause their Capital Account balances to equal zero. (iii) Third: Book Gain shall be allocated to the Partners to the least extent necessary so as to cause their positive Capital Account balances to be in the same proportion to one another as are their respective Percentage Interests. (iv) Fourth: Book Gain shall be allocated among the Partners in proportion to their respective Percentage Interests. (l) Book Loss derived from a Terminating Capital Transactions shall be allocated among the Partners as follows in the following order of priority (after giving effect to all adjustments attributable to allocations made pursuant to the preceding provisions of this Section 3.1 for such year): (i) First: Book Loss shall be allocated among the Partners to the least extent necessary so as to cause the positive balances of their respective Capital Accounts to be in the same proportion to one another as their respective Percentage Interests and then to all Partners in 30 proportion to their respective Percentage Interests until each Partner's positive Capital Account balance is reduced to zero. (ii) Second: All remaining Book Loss shall be allocated to the General Partner. (m) For purposes of determining the nature (as ordinary or capital) of any Partnership profit allocated among the Partners for Federal income tax purposes pursuant to this Section 3.1, the portion of such profit required to be recognized as ordinary income pursuant to sections 1245 and/or 1250 of the Code shall be deemed to be allocated among the Partners in accordance with sections 1.1245-1(e)(2) and 1.1250-1(f) of the Regulations. (n) The Partners agree that their Percentage Interests represent their respective interest in Partnership profits for purposes of allocating excess nonrecourse liabilities (as defined in section 1.752-3(a)(3) of the Regulations) pursuant to section 1.752-3(a)(3) of the Regulations. (o) Notwithstanding any other provision herein to the contrary, no allocation of Adjusted Net Income, Adjusted Net Loss, Book Gain or Book Loss, or items of income, gain, loss and deduction will be made to a Partner if the allocation would not have "economic effect" under section 1.704-1(b)(2)(ii) of the Regulations or otherwise would not be in accordance with the Partners' interests in the Partnership within the meaning of section 1.704-1(b)(3) or section 1.704-2(b)(1) of the Regulations. The General Partner will have the authority to reallocate any item in accordance this Section 3.1(o); provided, however, that (a) no such change shall have a material adverse effect upon the amount of cash or other property distributable to any Partner, (b) each Partner shall have 30 days prior notice of such proposed modification and (c) if such proposed modification would be material, the Partnership shall have received an opinion of tax counsel to the Partnership that such modification is necessary to comply with section 704(b) of the Code. (p) The allocations set forth in Sections 3.1(a)-(f) (the "Regulatory Allocations") are intended to comply with certain requirements of the Regulations. It is the intent of the Partners that, to the extent possible, all Regulatory Allocations shall be offset either with other Regulatory Allocations or with special allocations of other items of Partnership income, gain, loss, or deduction pursuant to this Section 3.1(p). Therefore, notwithstanding any other provision of this Article III (other than the Regulatory Allocations), the General Partner shall make such offsetting special allocations of Partnership income, gain, loss, or deduction in whatever manner it determine(s) appropriate so that after such offsetting allocations are made, each Partner's Capital Account balance is, to the extent possible, equal to the Capital Account balance such Partner would have had if the Regulatory Allocations were not part of the Agreement and all Partnership items were allocated pursuant to Sections 3.1(g)-(l) hereof. Section 3.2 Allocation of Tax Items. (a) Except as otherwise provided in the succeeding provisions of this Section 3.2, each Tax Item shall be allocated to the Partners in the same manner as each correlative item of income, gain, loss or deduction, as calculated for book purposes, is allocated pursuant to the provisions of Section 3.1 hereof. (b) The Partners hereby acknowledge that all Tax Items in respect of Adjusted Property are required to be allocated to the Partners in the same manner as under section 704(c) of the Code (as specified in sections 1.704-1(b)(2)(iv)(f), 1.704-1(b)(2)(iv)(g) and 1.704-3 of the Regulations), and that the principles of section 704(c) of the Code require that such Tax Items must be shared among the Partners so as to take account of the variation between the adjusted tax basis and Book Basis of each such Adjusted Property. Thus, notwithstanding anything in Sections 3.1 or 3.2(a) hereof to the contrary, the Partners' distributive shares of Tax Items in respect of each Adjusted Property shall be separately determined and 31 allocated to the Partners following any permissible method under 1.704-3 of the Regulations reasonably selected by the General Partner, and the Capital Account balances of the Partners shall be adjusted solely for allocations of book items in respect of such assets and shall not be adjusted for their distributive shares of any corresponding Tax Items. ARTICLE IV SPECIAL RULES Section 4.1 Allocation of Profit and Loss and Distributions in Respect of Interests Transferred. (a) If any interest in the Partnership is transferred, or is increased or decreased by reason of the admission of a new Partner or otherwise, during any Fiscal Year, each item of Adjusted Net Income or Loss, and other income and deductions and Book Gain and Book Loss of the Partnership for such Fiscal Year shall be divided and allocated between the Partners in question by taking account of their varying interests in the Partnership during such Fiscal Year on a daily, monthly, or other basis, as determined by the General Partner using any permissible method under section 706 of the Code and the Regulations thereunder. (b) Distributions of Partnership assets in respect of an interest in the Partnership shall be made only to the persons or entities who, according to the books and records of the Partnership, are the holders of record of the interests in the Partnership in respect of which such distributions are made on the actual date of distribution. Neither the Partnership nor any Partner shall incur any liability for making distributions in accordance with the provisions of the preceding sentence, whether or not the Partnership or any Partner has knowledge or notice of any transfer or purported transfer of ownership of any interest in the Partnership. (c) Notwithstanding any provision above to the contrary, Book Gain or Loss of the Partnership realized in connection with a sale or other disposition of any substantial part of the assets of the Partnership shall be allocated solely to the parties owning interests in the Partnership as of the date such sale or other disposition occurs. Section 4.2 Tax Returns. The General Partner shall cause to be prepared for each taxable year of the Partnership the federal, state and local income tax returns and information returns, if any, which the Partnership is required to file. Such returns shall be prepared and submitted to the Partners for examination no later than ten (10) days prior to the required filing date (including any extension thereof), together with such additional forms and information as may be required by the Partners in order for the Partners to file returns reflecting the Partnership's operations. Section 4.3 Tax Elections. The Partnership shall make the following elections on the appropriate tax returns: (a) to the extent permitted by the Code, to adopt the calendar year as the Partnership's fiscal year; (b) to the extent permitted by the Code, to adopt the cash method of accounting and to keep the Partnership's books and records on the income-tax method; (c) if a distribution of Partnership property as described in section 734 of the Code occurs or if a transfer of Interest as described in section 743 of the Code occurs, on written request of any Partner, to elect, pursuant to section 754 of the Code, to adjust the basis of Partnership properties; 32 (d) to elect to amortize the organizational expenses of the Partnership ratably over a period of sixty (60) months as permitted by section 709(b) of the Code; and (e) any other election the General Partner may deem appropriate and in the best interests of the Partners. Neither the Partnership nor any Partner may make an election for the Partnership to be excluded from the application of the provisions of subchapter K of chapter 1 of subtitle A of the Code or any similar provisions of applicable state law. The Partnership intends to be classified as a partnership for federal income tax purposes under section 301.7701-3 of the Regulations. Neither the Partnership nor any Partner may make an election under section 301.7701-3(c) of the Regulations to treat the Partnership as an association taxable as a corporation. Section 4.4 Tax Matters Partner. (a) The General Partner is hereby designated the "Tax Matters Partner" as that term is defined in section 6231(a)(7) of the Code. (b) The Tax Matters Partner shall use its best efforts to comply with the responsibilities outlined in sections 6222 through 6232 of the Code and in doing so shall incur no liability to the other Partners. Notwithstanding the Tax Matters Partner's obligation to use its best efforts in the fulfillment of its responsibilities, the Tax Matters Partner shall not be required to incur any expenses for the preparation for or pursuance of administrative or judicial proceedings unless the Partners agree on a method for sharing such expenses. (c) No Partner shall file, pursuant to section 6227 of the Code, a request for an administrative adjustment of items for any Partnership taxable year without first notifying the other Partners. If the other Partners agree with the requested adjustment, then the Tax Matters Partner shall file the request for administrative adjustment on behalf of the Partner. If unanimous consent is not obtained within thirty (30) calendar days from such notice, or within the period required to timely file the request for administrative adjustment, if shorter, any Partner, including the Tax Matters Partner, may file a request for administrative adjustment on its own behalf. (d) Any Partner intending to file a petition under sections 6226, 6228, or other section of the Code with respect to any item or other matter involving the Partnership shall notify the other Partners of such intention and the nature of the contemplated proceeding. In the case where the Tax Matters Partner is the Partner intending to file such petition on behalf of the Partnership, such notice shall be given within a reasonable period of time to allow the other Partners to participate in the choosing of the forum in which such petition will be filed. If the Partners do not agree on the appropriate forum, then the appropriate forum shall be decided by vote of a majority in interest of the Partners. If such a majority cannot agree, then the Tax Matters Partner shall choose the forum. If any Partner intends to seek review of any court decision rendered as a result of a proceeding instituted under the preceding provisions of this Section 4.4(d), then such Partner shall notify the other Partners of such intended action. (e) The provisions of this Section 4.4 shall survive the termination of the Partnership or the termination of any Partners's interest in the Partnership and shall remain binding on the Partners for a period of time necessary to resolve with the IRS or the United States Treasury Department the income taxation of the Partnership. Section 4.5 Inconsistent Treatment of Partnership Items. If any Partner intends to file a notice of inconsistent treatment under section 6222(b) of the Code, then such Partner shall give reasonable notice 33 under the circumstances to the other Partners of such intent and the manner in which the Partner's intended treatment of an item is (or may be) inconsistent with the treatment of that item by the other Partners. EX-21.1 12 SUBSIDIARIES OF THE COMPANY 1 EXHIBIT 21.1 - SUBSIDIARIES
Jurisdiction of Percentage Name Organization Ownership ---- ------------ --------- Capital Senior Living Properties, Inc. Texas 100% Capital Senior Development, Inc. Texas 100% Capital Senior Living, Inc. Texas 100% Capital Senior Management 1, Inc. Texas 100% Capital Senior Management 2, Inc. Texas 100% Quality Home Care, Inc. Indiana 100% Capital Senior Living Properties 2, Inc. Texas 100% Capital Senior Living Properties 2 - NHPCT, Inc. Delaware 100% Capital Senior Living Properties 2 - Gramercy, Inc. Delaware 100% HealthCare Properties, L.P. Delaware 56%
EX-27.1 13 FINANCIAL DATA SCHEDULE
5 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 35,827,270 13,337,522 10,973,676 (801,042) 0 47,271,591 135,238,716 (16,294,763) 205,266,735 55,951,435 0 0 0 0 104,516,179 205,266,735 0 48,128,333 0 26,394,919 379,187 0 1,921,897 19,432,330 7,475,771 0 0 0 0 11,956,559 0 0
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