-----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, O1Iy2eOALpDCP7xNwSntQKIzAddVLHJVXMWgT1iksqBo6eYSEoQSo41RiCbvSodV XvMoc1XnkPbKNrFAi1+stw== 0000912057-00-015091.txt : 20000331 0000912057-00-015091.hdr.sgml : 20000331 ACCESSION NUMBER: 0000912057-00-015091 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 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: 588035 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 10-K - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------------ FORM 10-K (MARK ONE) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 or TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________ to ____________ Commission File Number: 1-13445 ------------------------------ 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 10,333,450 shares of the Registrant's Common Stock held by nonaffiliates, based upon the closing price of the Registrant's Common Stock as reported by the New York Stock Exchange on March 28, 2000 was approximately $38,750,438. For purposes of this computation, all officers, directors and 10% beneficial owners of the Registrant are deemed to be affiliates. Such determination should not be deemed an admission that such officers, directors or 10% beneficial owners are, in fact, affiliates of the Registrant. As of March 28, 2000, 19,717,347 shares of Common Stock, $.01 par value, were outstanding. DOCUMENTS INCORPORATED BY REFERENCE The Registrant's definitive Proxy Statement pertaining to the 2000 Annual Meeting of Stockholders (the "Proxy Statement") and filed or to be filed not later than 120 days after the end of the fiscal year pursuant to Regulation 14A is incorporated herein by reference into Part III. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- CAPITAL SENIOR LIVING CORPORATION TABLE OF CONTENTS
PAGE NUMBER -------- PART I ITEM 1. BUSINESS....................................................................................1 ITEM 2. PROPERTIES.................................................................................19 ITEM 3. LEGAL PROCEEDINGS..........................................................................19 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........................................20 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS........................................................................20 ITEM 6. SELECTED FINANCIAL DATA....................................................................22 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..................................................................24 ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ................................33 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................................................33 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE...................................................................33 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.........................................33 ITEM 11. EXECUTIVE COMPENSATION.....................................................................34 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.............................34 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K...........................35 SIGNATURES..........................................................................................36 INDEX TO EXHIBITS...................................................................................E-1
PART I ITEM 1. BUSINESS OVERVIEW Capital Senior Living Corporation (together with its subsidiaries, the "Company") is one of the largest developers and operators of senior living communities in the United States in terms of resident capacity. As of December 31, 1999, the Company owned interests in and/or operated 36 communities in 18 states with a capacity of approximately 5,900 residents, including 21 communities in which it owned interests and 15 communities that it managed for third parties pursuant to multi-year management contracts. As of December 31, 1999, the Company was developing 23 new communities, which will have a capacity of approximately 3,200 residents, and was expanding three existing communities to accommodate approximately 300 additional residents. As of December 31, 1999, the Company also operated one home care agency. Approximately 93% of the total revenues for the senior living communities owned and managed by the Company as of December 31, 1999 are derived from private pay sources. During 1999, the communities that the Company operated and in which it owned interests had an average occupancy rate of approximately 94% and its managed communities had an average occupancy rate of approximately 95%. The Company and its predecessors have provided senior living services since 1990. The Company was incorporated in Delaware in October 1996 in anticipation of its initial public offering. Simultaneously with the consummation of its initial public offering, the Company and the Company's founders engaged in a series of transactions (the "Formation Transactions"), which resulted in the Company acquiring certain assets, entities and partnership interests of its founders and entities affiliated with its founders. The primary components of the Formation Transactions were as follows: - The stock of Capital Senior Living, Inc., Capital Senior Management 1, Inc., Capital Senior Management 2, Inc., Capital Senior Development, Inc., and Quality Home Care, Inc. was contributed by the Company's founders in exchange for 7,687,347 shares of the Company's common stock and notes aggregating approximately $18.1 million. The primary assets of these entities consisted of third-party management contracts, development contracts and a home health care agency. The notes were repaid with some of the proceeds of the Company's initial public offering. - The Company purchased substantially all of the assets of Capital Senior Living Communities, L.P. ("CSLC") for the assumption of approximately $71 million in debt (the "LBHI Loan") and $5.8 million in cash. The LBHI Loan was repaid with some of the proceeds of the Company's initial public offering. The primary assets of CSLC were: - four senior living communities - Cottonwood Village in Cottonwood, Arizona; Harrison at Eagle Valley in Indianapolis, Indiana; Towne Centre in Merrillville, Indiana; and Canton Regency in Canton, Ohio; - approximately 56% of the limited partnership interests in HealthCare Properties, L.P. ("HCP"); and - approximately 31% of certain notes (the "NHP Notes") issued by NHP Retirement Housing Partners I Limited Partnership ("NHP"). The primary assets of HCP consisted of: (i) approximately $9.9 million in cash and cash equivalents; (ii) four physical rehabilitation facilities located in Orlando, Florida, Nashville, Tennessee, Lancaster, South Carolina; and Martin, Tennessee; and (iii) four skilled nursing facilities located in Evansville, Indiana, Cambridge, Massachusetts, Fort Worth, Texas, and Austin, Texas. The primary assets of NHP consisted of five senior living communities located in Buffalo, New York, Sacramento, California (two communities), Detroit, Michigan, and Boca Raton, Florida. The Company currently owns approximately 57% of the limited partnership interests of HCP and 33% of the NHP Notes. 1 On September 30, 1998, the Company acquired four of the five senior living communities from NHP for cash consideration of $40.7 million. The purchase price for the properties was determined by independent appraisal. The senior living communities acquired by the Company are The Atrium of Carmichael in Carmichael, California, Crosswoods Oaks in Citrus Height, California, The Heatherwood in Southfield, Michigan, and The Veranda Club in Boca Raton, Florida. The Company has operated these communities under a long-term management contract since 1992 and continues to manage NHP's remaining community, the Amberleigh in Buffalo, New York. On October 28, 1998, the Company acquired two senior living communities from Gramercy Hill Enterprises ("Gramercy"), and Tesson Heights Enterprises ("Tesson"), for aggregate consideration of approximately $34 million. The senior living communities acquired by the Company from Gramercy and Tesson are Gramercy Hill in Lincoln, Nebraska and Tesson Heights, in St. Louis, Missouri. The Company has entered into definitive Amended and Restated Agreements and Plans of Merger with ILM Senior Living, Inc. ("ILM I") and ILM II Senior Living, Inc. ("ILM II") to acquire these companies for a combined cash consideration of approximately $172 million, and the assumption of liabilities. The primary assets of ILM I and ILM II collectively are 13 senior living communities that have been managed by the Company under management agreements since 1996. Under the two merger agreements, both ILM I and ILM II would separately merge with and into the Company's wholly owned direct subsidiary with the aggregate issued and outstanding shares of ILM I and ILM II common stock eligible to receive $172 million in cash. Both mergers have been approved by the boards of directors of each company and each transaction requires the approval of the applicable shareholders of either ILM I or ILM II. The mergers also are subject to certain other customary conditions, including regulatory approvals, and are expected to be completed during the second or third quarter of 2000. Neither merger is dependent upon the occurrence of the other and there can be no assurances that the shareholders of either ILM I or ILM II will approve their respective merger. INDUSTRY BACKGROUND The senior living industry encompasses a broad and diverse range of living accommodations and supportive services that are provided primarily to persons 75 years of age or older. For the elderly who require limited services, independent living residences supplemented at times by home health care, offers a viable option. Most independent living communities typically offer community living together with a basic services package consisting of meals, housekeeping, laundry, 24-hour staffing, transportation, social and recreational activities and health care monitoring. As a senior's need for assistance increases, care in an assisted living residence is often preferable and more cost-effective than home-based care or nursing home care. Typically, assisted living represents a combination of housing and 24- hour a day personal support services designed to aid elderly residents with activities of daily living ("ADLs"), such as ambulation, bathing, dressing, eating, grooming, personal hygiene, and monitoring or assistance with medications. Certain assisted living residences may also provide assistance to residents with low acuity medical needs, or may offer higher levels of personal assistance for incontinent residents or residents with Alzheimer's disease or other cognitive or physical frailties. Generally, assisted living residents require higher levels of care than residents of independent living residences and retirement living centers, but require lower levels of care than patients in skilled nursing facilities. For seniors who need the constant attention of a skilled nurse or medical practitioner, a skilled nursing facility may be required. The senior living industry is highly fragmented and characterized by numerous small operators. Moreover, the scope of senior living services varies substantially from one operator to another. Many smaller senior living providers do not operate purpose-built residences, do not have professional training for staff and provide only limited assistance with ADLs. The Company believes that few senior living operators provide the required comprehensive range of senior living services designed to permit residents to "age in place" within the community as they develop further physical or cognitive frailties. The Company believes that the senior living industry will require large capital infusions over the next 30 years to meet the growing demand for senior living facilities. The National Investment Conference has estimated that gross capital expenditures for the senior living marketplace will grow from $86 billion in 1996 to $126 billion in 2005 and to $490 billion in 2030, in order to accommodate increasing demand. As a result, the Company believes there will continue to be significant growth opportunities in the senior living market for providing services to the elderly. 2 The Company believes that a number of demographic, regulatory, and other trends will contribute to the continued growth in the senior living market, the Company's targeted market for future development and expansion, including the following: CONSUMER PREFERENCE The Company believes that senior living communities are increasingly becoming the setting preferred by prospective residents and their families for the care of the elderly. Senior living offers residents greater independence and allows them to "age in place" in a residential setting, which the Company believes results in a higher quality of life than that experienced in more institutional or clinical settings. The likelihood of living alone increases with age. Most of this increase is due to an aging population in which women outlive men. In 1993, eight out of 10 noninstitutionalized elderly who lived alone were women. According to the United States Bureau of Census, based on 1993 data, for women the likelihood of living alone increases from 32% for 65- to 74-year-olds to 57% for those women aged 85 and older. Men show similar trends with 13% of the 65- to 74-year-olds living alone rising to 29% of the men aged 85 and older living alone. Societal changes, such as increased divorce rates and the growing numbers of persons choosing not to marry, have further increased the number of Americans living alone. This growth in the number of elderly living alone has resulted in an increasing demand for services that historically have been provided by a spouse, other family members or live-in caregivers. DEMOGRAPHICS The primary market for the Company's senior living services is comprised of persons aged 75 and older. This age group is one of the fastest growing segments of the United States population and is expected to more than double by the year 2030. The population of seniors aged 85 and over has increased from approximately 3.1 million in 1990 to over 4.3 million by 2000, an increase of 39%. As the number of persons aged 75 and over continues to grow, the Company believes that there will be corresponding increases in the number of persons who need assistance with ADLs. According to industry analyses, approximately 19% of persons aged 75 to 79, approximately 24% of persons aged 80 to 84 and approximately 45% of persons aged 85 and older need assistance with ADLs. According to the Alzheimer's Association the number of persons afflicted with Alzheimer's disease is expected to grow from the current 4.0 million to 14.0 million by the year 2050. RESTRICTED SUPPLY OF NURSING BEDS The majority of states in the United States have adopted Certificate of Need or similar statutes generally requiring that, prior to the addition of new skilled nursing beds, the addition of new services, or the making of certain capital expenditures, a state agency must determine that a need exists for the new beds or the proposed activities. The Company believes that this Certificate of Need process tends to restrict the supply and availability of licensed nursing facility beds. High construction costs, limitations on government reimbursement for the full costs of construction, and start-up expenses also act to constrain growth in the supply of such facilities. At the same time, nursing facility operators are continuing to focus on improving occupancy and expanding services to subacute patients generally of a younger age and requiring significantly higher levels of nursing care. As a result, the Company believes that there has been a decrease in the number of skilled nursing beds available to patients with lower acuity levels and that this trend should increase the demand for the Company's senior living communities, including particularly the Company's assisted living communities and skilled nursing facilities. COST-CONTAINMENT PRESSURES In response to rapidly rising health care costs, governmental and private pay sources have adopted cost containment measures that have reduced admissions and encouraged reduced lengths of stays in hospitals and other acute care settings. The federal government had previously acted to curtail increases in health care costs under Medicare by limiting acute care hospital reimbursement for specific services to pre-established fixed amounts. Private insurers have begun to limit reimbursement for medical services in general to predetermined charges, and managed care organizations (such as health maintenance organizations) are attempting to limit hospitalization costs by negotiating for discounted rates for hospital and acute care services and by monitoring and reducing hospital use. In response, hospitals are discharging 3 patients earlier and referring elderly patients, who may be too sick or frail to manage their lives without assistance, to nursing homes and assisted living residences where the cost of providing care is typically lower than hospital care. In addition, third-party payors are increasingly becoming involved in determining the appropriate health care settings for their insureds or clients, based primarily on cost and quality of care. Based on industry data, the typical day-rate in an assisted living facility is two thirds of the cost for comparable care in a nursing home. SENIOR AFFLUENCE The average net worth of senior citizens is higher than non-senior citizens, partially as a result of accumulated equity through home ownership. The Company believes that a substantial portion of the senior population thus has significant resources available for their retirement and long-term care needs. The Company's target population is comprised of moderate- to upper-income seniors who have, either directly or indirectly through familial support, the financial resources to pay for senior living communities, including an assisted living alternative to traditional long-term care. REDUCED RELIANCE ON FAMILY CARE Historically, the family has been the primary provider of care for seniors. The Company believes that the increase in the percentage of women in the work force, the reduction of average family size, and the increased mobility in society is reducing the role of the family as the traditional caregiver for aging parents. The Company believes that these factors will make it necessary for many seniors to look outside the family for assistance as they age. OPERATING STRATEGY The Company's operating strategy is to provide high quality, senior living services at an affordable price to its residents while achieving and sustaining a strong, competitive position within its chosen markets, as well as continuing to enhance the performance of its operations. The Company is implementing its operating strategy principally through the following methods. CONTINUE TO PROVIDE BROAD RANGE OF HIGH-QUALITY PERSONALIZED CARE Central to the Company's operating strategy is its focus on providing high-quality care and services that are personalized and tailored to meet the individual needs of each community resident. The Company's residences and services are designed to provide a broad range of care that permits residents to "age in place" as their needs change and as they develop further physical or cognitive frailties. By creating an environment that maximizes resident autonomy and provides individualized service programs, the Company seeks to attract seniors at an earlier stage, before they need the higher level of care provided in a skilled nursing facility. The Company also maintains a comprehensive quality assurance program designed to ensure the satisfaction of its residents and their family members. The Company conducts annual resident satisfaction surveys, which allow residents at each community to express whether they are "very satisfied," "satisfied" or "dissatisfied" with all major areas of a community -- housekeeping, maintenance, activities and transportation, food service, security and management. In 1999 and 1998, the Company achieved a 94% and 95% overall approval rating (satisfied or very satisfied), respectively, from its residents in this polling of its residents' satisfaction. OFFER SERVICES ACROSS A RANGE OF PRICING OPTIONS The Company's range of products and services is continually expanding to meet the evolving needs of its residents. The Company has developed a menu of products and service programs which may be further customized to serve both the moderate and upper income markets of a particular targeted geographic area. By offering a range of pricing options that are customized for each target market, the Company believes that it can develop synergies, economies of scale, and operating efficiencies in its efforts to serve a larger percentage of the elderly population within a particular geographic market. 4 MAINTAIN AND IMPROVE OCCUPANCY RATES The Company continually seeks to maintain and improve occupancy rates by: (i) retaining residents as they "age in place" by extending optional care and service programs; (ii) attracting new residents through the on-site marketing program focus on residents and family members; (iii) selecting sites in underserved markets; (iv) aggressively seeking referrals from professional community outreach sources, including area religious organizations, senior social service programs, civic and business networks, as well as the medical community; and (v) continually refurbishing and renovating its communities. IMPROVE OPERATING EFFICIENCIES The Company seeks to improve operating efficiencies at its communities by continuing to actively monitor and manage operating costs. By having an established national portfolio of communities with regional management in place, the Company believes it has established a platform to achieve operating efficiencies through economies of scale in the purchase of bulk items, such as food, and in the spreading of fixed costs, such as corporate overhead, over a larger revenue base, and to provide more effective management supervision and financial controls. The Company's development strategy includes regional clustering of new communities to achieve further efficiencies. EMPHASIZE EMPLOYEE TRAINING AND RETENTION The Company devotes special attention to the hiring, screening, training, supervising, and retention of its employees and caregivers to ensure that quality standards are achieved. In addition to the normal on-site training, the Company conducts annual national management meetings and encourages sharing of expertise among managers. The Company's commitment to the total quality management concept is emphasized throughout its training program. This commitment to the total quality management concept means identification of the "best practices" in the senior living market and communication of those best practices to our executive directors and their staff. The identification of best practices is realized by a number of means, including: emphasis on regional and executive directors keeping up with professional trade journals; interaction with other professionals and consultants in the senior living industry through seminars, conferences, and consultations; visits to other properties; leadership and participation at national and local trade organization events; and information derived from marketing studies and resident satisfaction surveys. This information is continually processed by regional managers and the executive directors and communicated to the Company's employees as part of their training. The Company's staffing each community with an executive director allows it to hire more professional employees at these positions, while the Company's developed career path helps it to retain the professionals it hires. The Company hires an executive director for each of its communities and provides them with autonomy, responsibility and accountability. The Company believes its commitment to and emphasis on employee training and retention differentiates the Company from many of its competitors. UTILIZE COMPREHENSIVE INFORMATION SYSTEMS The Company employs comprehensive proprietary information systems to manage financial and operating data in connection with the management of its communities. Utilizing the Company's PC-based network, the Company is able to collect and monitor on a regular basis key operating data for its communities. Reports are routinely prepared and distributed to on-site, district and regional managers for use in managing the profitability of the Company's communities. The Company's management information systems provide senior management with the ability to identify emerging trends, monitor and control costs and develop current pricing strategies. The Company believes that its proprietary information systems are scalable to support future growth. SENIOR LIVING SERVICES The Company provides a wide array of senior living services to the elderly at its communities, including independent living, assisted living (with special programs and living units at some of its communities for residents with Alzheimer's and other forms of dementia), skilled nursing, and home care services. By offering a variety of services and encouraging the active participation of the resident and the resident's family and medical consultants, the Company is able to customize its service plan to meet the specific needs and desires of each resident. As a result, the Company believes that it is able to maximize customer satisfaction and avoid the high cost of delivering unnecessary services to residents. 5 The Company's operating philosophy is to provide affordable, quality living communities and services to senior citizens and deliver a continuum of care for its residents as their needs change over time. This continuum of care, which integrates independent living and assisted living and is bridged by home care, sustains residents' autonomy and independence based on their physical and mental abilities. As residents age, in many of the Company's communities, they are able to obtain the additional needed services within the same community, avoiding the disruptive and often traumatic move to a different facility. INDEPENDENT LIVING SERVICES The Company provides independent living services to seniors who do not yet need assistance or support with ADLs, but who prefer the physical and psychological comfort of a residential community that offers health care and other services. As of December 31, 1999, the Company had ownership interests in 14 communities and managed an additional 14 communities which provide independent living services, with an aggregate capacity for 2,360 and 2,140 residents, respectively. Independent living services provided by the Company include daily meals, transportation, social and recreational activities, laundry, housekeeping, 24-hour staffing and health care monitoring. The Company also fosters the wellness of its residents by offering health screenings (such as blood pressure checks), periodic special services (such as influenza inoculations), dietary and similar programs, as well as ongoing exercise and fitness classes. Classes are given by health care professionals to keep residents informed about health and disease management. Subject to applicable government regulation, personal care and medical services are available to independent living residents through either the community staff or through the Company's or independent home care agencies. The Company's independent living residents pay a fee ranging from $1,295 to $3,150 per month, in general, depending on the specific community, program of services, size of the unit, and amenities offered. The Company's contracts with its independent living residents are generally for a term of one year and are typically terminable by the resident upon 30 days' notice. ASSISTED LIVING SERVICES The Company offers a wide range of assisted living care and services 24 hours per day, including personal care services, support services, and supplemental services. As of December 31, 1999, the Company had ownership interests in nine communities, and managed an additional 10 communities that provide assisted living services, with an aggregate capacity for 341 and 412 residents, respectively. The residents of the Company's assisted living residences generally need help with some or all ADLs, but do not require the more acute medical care traditionally given in nursing homes. Upon admission to the Company's assisted living communities, and in consultation with the resident, the resident's family and medical consultants, each resident is assessed to determine his or her health status, including functional abilities, and need for personal care services, and completes a lifestyles assessment to determine the resident's preferences. From these assessments, a care plan is developed for each resident to ensure that all staff members who render care meet the specific needs and preferences of each resident where possible. Each resident's care plan is reviewed periodically to determine when a change in care is needed. The Company has adopted a philosophy of assisted living care that allows a resident to maintain a dignified independent lifestyle. Residents and their families are encouraged to be partners in their care and to take as much responsibility for their well being as possible. The basic types of assisted living services offered by the Company include the following: PERSONAL CARE SERVICES. These services include assistance with ADLs such as ambulation, bathing, dressing, eating, grooming, personal hygiene, and monitoring or assistance with medications. SUPPORT SERVICES. These services include meals, assistance with social and recreational activities, laundry services, general housekeeping, maintenance services, and transportation services. SUPPLEMENTAL SERVICES. These services include extra transportation services, personal maintenance, extra laundry services, non-routine care services, and special care services, such as services for residents with Alzheimer's and other forms of dementia. Certain of these services require an extra charge in addition to the pricing levels described below. 6 In pricing its services, the Company has developed the following three levels or tiers of assisted living care: Level I typically provides for minimum levels of care and service, for which the Company generally charges a monthly fee per resident ranging from $1,340 to $3,140 depending upon unit size and the project design type. Typically, Level I residents need minimal assistance with ADLs. Level II provides for relatively higher levels and increased frequency of care, for which the Company generally charges a monthly fee per resident ranging from $1,600 to $3,310, depending upon the unit size and the project design type. Typically, Level II residents require moderate assistance with ADLs and may need additional personal care, support, and supplemental services. Level III provides for the highest level of care and service, for which the Company generally charges a monthly fee per resident ranging from $1,910 to $3,475, depending upon the unit size and the project design type. Typically, Level III residents are either very frail or impaired and utilize many of the Company's services on a regular basis. The Company maintains programs and special units at some of its assisted living communities for residents with Alzheimer's and other forms of dementia, which provide the attention, care and services needed to help those residents maintain a higher quality of life. Specialized services include assistance with ADLs, behavior management and a lifeskills based activities program, the goal of which is to provide a normalized environment that supports residents' remaining functional abilities. Whenever possible, residents assist with meals, laundry and housekeeping. Special units for residents with Alzheimer's and other forms of dementia are located in a separate area of the community and have their own dining facilities, resident lounge areas, and specially trained staff. The special care areas are designed to allow residents the freedom to ambulate as they wish while keeping them safely contained within a secure area with a minimum of disruption to other residents. Special nutritional programs are used to help ensure caloric intake is maintained in residents. Resident fees for these special units are dependent on the size of the unit, the design type and the level of services provided. SKILLED NURSING SERVICES In its skilled nursing facilities, the Company provides traditional long-term care through 24-hour-per-day skilled nursing care by registered nurses, licensed practical nurses and certified nursing assistants. The Company also offers a comprehensive range of restorative nursing and rehabilitation services in its communities including, but not limited to, physical, occupational, speech and medical social services. As of December 31, 1999, the Company had ownership interests in seven facilities and managed an additional facility that provides nursing services, with an aggregate capacity for 746 and 60 residents, respectively. HOME CARE SERVICES As of December 31, 1999, the Company provided private pay, home care services to clients at one of its senior living communities through the Company's on-site, home care agency and made private pay, home care services available to clients at a majority of its senior living communities through third-party providers. The Company believes that the provision of private pay, home care services is an attractive adjunct to its independent living services because it allows the Company to provide more services to its residents as they age in place and increase the length of stay in the Company's communities. In addition, the Company will make available to residents certain customized physician, dentistry, podiatry and other health-related services that may be offered by third-party providers. OPERATING COMMUNITIES The table below sets forth certain information with respect to senior living communities owned, leased, and managed by the Company as of December 31, 1999. The Company is expanding certain of these communities, primarily to add assisted living units. See "Growth Strategies -- Expand Existing Communities." These expansions, along with the availability of private pay home care services, allow the Company to broaden its continuum of care services to allow residents to age in place. 7
RESIDENT CAPACITY (1) -------------------------------- OWNER- COMMENCEMENT OF COMMUNITY LOCATION IL AL SN TOTAL SHIP(2) OPERATIONS (3) ---------------------- -------------- ----- ----- ------ ------ --------- ----------------- OWNED: Amberleigh............. Buffalo, NY 365 29 -- 394 33% 1/92 Atrium of Carmichael... Sacramento, CA 156 -- -- 156 100% 1/92 Cambridge Nursing Home................. Cambridge, MA -- -- 120 120 57% 7/93 Canton Regency......... Canton, OH 164 34 50 248 100% 3/91 Cottonwood Village..... Cottonwood, AZ 135 47 -- 182 100% 3/91 Crosswood Oaks......... Sacramento, CA 127 -- -- 127 100% 1/92 Gramercy Hill.......... Lincoln, NE 101 59 -- 160 100% 10/98 Harrison at Eagle Indianapolis, IN 138 -- -- 138 100% 3/91 Valley................. (4) Heatherwood............ Detroit, MI 188 -- -- 188 100% 1/92 Waterford.............. Mesquite, TX 174 -- -- 174 19% 9/99 Waterford.............. San Antonio, TX 136 -- -- 136 19% 4/99 Waterford.............. Shreveport, LA 136 -- -- 136 19% 3/99 Tesson Heights......... St Louis, MO 140 58 -- 198 100% 10/98 Towne Centre........... Merrillville, IN 165 34 64 263 100% 3/91 Veranda Club........... Boca Raton, FL 235 -- -- 235 100% 1/92 ------- ------- ------- ----- Subtotal............. 2,360 261 234 2,855 MANAGED: BUCKNER COMMUNITIES Buckner Parkway Place.. Houston, TX 243 82 60 385 1/98 Buckner Westminster Place................ Longview, TX 117 -- -- 117 4/96 ILM COMMUNITIES(5) Crown Pointe........... Omaha, NE 163 -- -- 163 Crown Villa............ Omaha, NE -- 73 -- 73 8/96 Independence Village... East Lansing, MI 162 -- -- 162 8/96 Independence Village... Peoria, IL 173 -- -- 173 8/96 Independence Village... Raleigh, NC 155 22 -- 177 8/96 Independence Village... Winston-Salem, NC 145 16 -- 161 8/96 Overland Park Place.... Kansas City, KS 126 25 -- 151 8/96 The Palms.............. Fort Myers, FL 235 20 -- 255 8/96 Rio Las Palmas......... Stockton, CA 142 50 -- 192 8/96 Sedgwick Plaza......... Wichita, KS 117 54 -- 171 8/96 Villa at Riverwood..... St. Louis, MO 140 -- -- 140 8/96 Villa Santa Barbara.... Santa Barbara, CA 87 38 -- 125 8/96 West Shores............ Hot Springs, AR 135 32 -- 167 8/96 --------- --------- ------- ----- Subtotal............. 2,140 412 60 2,612 --------- -------- -------- ------ OWNED AND LEASED TO OTHERS(6): Cane Creek(7).......... Martin, TN -- 8 36 44 57% N/A Crenshaw Creek......... Lancaster, SC -- 36 -- 36 57% N/A Hearthstone............ Austin, TX -- -- 120 120 57% N/A McCurdy................ Evansville, IN -- -- 236 236 57% N/A Sandybrook............. Orlando, FL -- 36 -- 36 57% N/A Trinity Hills.......... Fort Worth, TX -- -- 120 120 57% N/A ------- ------- --------- ----- Subtotal ............ -- 80 512 634 Grand Total.......... 4,500 753 806 6,059 ========= ======== ======= ======
- ---------- (1) Independent living (IL) residences, assisted living (AL) residences (including areas dedicated to residents with Alzheimer's and other forms of dementia) and skilled nursing (SN) beds. (2) In the case of a community shown as 33% owned, this represents the Company's ownership of approximately 33% of the outstanding NHP Notes that are secured by the property. In the case of those communities shown as approximately 57% owned, this represents the Company's ownership of approximately 57% of the limited partner interests in HCP. In the case of those communities shown as approximately 19% owned, this represents the Company's ownership of approximately 19% of the limited partnership interests in Triad I. (3) Indicates the date on which the Company acquired each of its owned communities or commenced operating its managed communities. The Company operated certain of its communities pursuant to management agreements prior to acquiring the communities. (4) The Company's home care agency is on-site at the Harrison at Eagle Valley community. (5) Communities the Company currently manages but is in the process of acquiring. (6) Represents communities owned by the Company and leased to third parties pursuant to master leases under which the Company receives rent regardless of whether the units are occupied. These leases were in place at the time the Company acquired its interest in these communities. (7) This property was sold to a third party on January 11, 2000. 8 THIRD-PARTY MANAGEMENT CONTRACTS The Company is a party to two separate property management agreements (the "ILM Management Agreements") with ILM I Lease Corporation and ILM II Lease Corporation, corporations formed by ILM I and ILM II (collectively, "ILM") that operate 13 senior living communities. The ILM Management Agreements commenced on July 29, 1996. The term of the ILM Management Agreement with ILM I Lease Corporation is being extended on a month-to-month basis from its original termination date of December 31, 1999. The ILM Management Agreement with ILM II Lease Corporation will expire on December 31, 2000, subject to extension under certain circumstances, but not beyond July 29, 2001. Under the terms of the ILM Management Agreements, the Company earns a base management fee equal to 4% of the gross operating revenues of the communities under management (as defined), and is also eligible to receive an incentive management fee equal to 25% of the amount by which the average monthly net cash flow of the communities (as defined) for the 12-month period ending on the last day of each calendar month exceeds a specified base amount. The ILM Management Agreements are terminable upon the sale of the related communities, subject to the Company's rights to offer to purchase the communities. In the event of a sale, the Company has the right to make the first and last offer with respect to the purchase of the communities subject to the ILM Management Agreements. The Company earned a total of $1,202,966 and $790,281, respectively, under the two ILM Management Agreements for the year ended December 31, 1999, which includes the incentive management fee, and $980,159 and $969,068, respectively, for the year ended December 31, 1998. On October 19, 1999, the Company entered into separate Amended and Restated Agreements and Plans of Merger with ILM I and ILM II. Upon completion of such mergers, the Company will own the 13 communities currently managed under the ILM Management Agreements and will terminate the ILM Management Agreements. The Amended and Restated Agreements and Plans of Merger amended and restated the definitive Agreements and Plans of Merger the Company entered into with ILM I and ILM II, on February 7, 1999. The Company is party to two separate property management agreements (the "Buckner Agreements") with Buckner Retirement Services, Inc., a not-for-profit corporation that operates two senior living communities. The Buckner Agreements commenced on April 1, 1996 and January 1, 1998 and expire on March 31, 2001 and December 31, 2002, respectively, except that either party may terminate the agreements for cause under limited circumstances. Under the terms of the Buckner Agreement for Buckner Parkway Place, the Company earns a base management fee of $33,000 per month. Under the terms of the Buckner Westminster Place Agreement, the Company earns a base management fee of $6,050 per month. Also, in the case of both of the Buckner Agreements, the Company is also eligible to receive a productivity reward equal to 5% of the Gross Revenues generated during the immediately preceding month that exceed $660,000 and $121,000, respectively. Both agreements have a productivity reward limit of 20% of the base management fee per month. The amounts that exceed the limit are deferred. Pursuant to the terms of the Buckner Agreements, the Company has a right of first refusal with respect to purchasing the communities subject to these agreements. GROWTH STRATEGIES The Company believes that the fragmented nature of the senior living industry and the limited capital resources available to many small, private operators provide an attractive opportunity for the Company to expand its existing base of senior living operations. The Company believes that its current operations throughout the United States serve as the foundation on which the Company can build senior living networks in targeted geographic markets and thereby provide a broad range of high quality care in a cost-efficient manner. The following are the principal elements of the Company's growth strategy: DEVELOP NEW SENIOR LIVING COMMUNITIES GENERAL. The Company intends to continue to expand its operations through the development, construction, marketing and management of new senior living communities in selected markets which provide a quality lifestyle that is affordable to a large segment of seniors. The Company's national presence provides it with extensive research and experience in various markets which serve as the basis for the formulation of its development strategy in the selection of new markets. The Company's development plan calls for the identification of multiple markets in which construction can occur within the Company's targeted time frame and budget. The Company has developed a list of target markets and 9 submarkets based upon local market conditions, the availability of development sites and local construction capabilities, the existence of development barriers to entry, the overall health and growth trends of the local economies, and the presence of a significant elderly population. The Company's senior management has extensive experience in senior living development. The Company has an integrated internal development approach pursuant to which the Company's management and other personnel (including designers and architects, market analysts, and construction managers) locate sites for, develop, and open its communities. Personnel who are experienced in site selection conduct extensive market and site-specific feasibility studies prior to the Company's committing significant financial resources to new projects. The Company believes it can expand its operations into new markets and strengthen its presence within its existing markets utilizing its existing residence models, such as the Waterford model described herein. TRIAD ENTITIES. The Company is currently developing new senior living communities pursuant to arrangements with Triad Senior Living, Inc., and its affiliates, which are unrelated third parties (the "Triad Entities"). Sixteen of the 23 communities currently under development are Waterford communities that are being developed through the Triad Entities. The Waterford community model is designed to provide middle income residents with a senior living community having amenities typical of higher-priced communities, through more efficient space design, emphasizing common areas and providing more efficient layouts of the living areas. The Waterford design may be configured in a number of different ways thereby providing the Company with flexibility in adapting to a particular geographic market, neighborhood, site or care need. In addition, the Waterford design has been developed to facilitate the prompt, efficient, cost-effective delivery of senior care and personal services. Site requirements for the various designs range from 4.5 to 6.0 acres. The Company believes that the Waterford designs meet the desire of many of the Company's residents to move into a new residence that approximates, as nearly as possible, the comfort of their prior home. The Company also believes that its designs achieve several other objectives, including: - lessening the trauma of change for residents and their families; - facilitating resident mobility and caregiver access; - enhancing operating efficiencies; - enhancing the Company's ability to match its products to targeted markets; and - differentiating the Company from its competitors. The Waterford communities being developed through the Triad Entities are as set out below:
NUMBER OF ESTIMATED COST WATERFORD APPROXIMATE OF COMPLETION COMPANY LOAN ENTITY COMMUNITIES RESIDENT CAPACITY AND LEASE-UP COMMITMENT(2) -------------- -------------- ------------------- ------------------ ---------------- Triad I(1) 2 310 $23 - $26 million -- Triad II 3 428 $30 - $35 million $15 million Triad III 6 816 $65 - $70 million $10 million Triad IV 2 290 $22 - $24 million $10 million Triad V 3 408 $33 - $36 million $10 million
- --------- (1) Triad I is developing two additional communities which are not Waterford communities. (2) The Company has operating deficit loan obligations in management agreements in addition to the committed amounts shown relating to unsecured loans from the Company. The development agreements between each Triad Entity and the Company generally provide for a development fee of 4% of project costs, plus reimbursements for expenses and overhead not to exceed 4% of project costs. The Triad Entities also enter into management agreements with the Company providing for management fees to the Company in an amount equal to the greater of 5% of gross revenues or $5,000 per month per community, plus overhead reimbursements 10 not to exceed 1% of gross revenues. The Company has the option to purchase the partnership interests of the other partners in the Triad Entities for an amount equal to the amount paid for the partnership interest by the other partners, plus a noncompounded return of 12% per annum, except for Triad I. The property management agreements also provide the Company with an option to purchase the communities developed by the Triad Entities, other than Triad I, upon their completion for an amount equal to the fair market value, based on a third-party appraisal but not less than hard and soft costs and lease-up costs. In December 1999, Triad I completed a recapitalization in which an affiliate of Lehman Brothers purchased from a third party 80% of the limited partnership interests in Triad I for an investment of $12,000,000. Lehman Brothers affiliate's investment enabled Triad I to repay the Company approximately $9,000,000 in loans. The Company increased its equity contribution in Triad I to $3,000,000 and continues to own a 19% limited partnership interest in Triad I. The Company has the option to purchase the Triad I communities for an amount specified in the partnership agreement. The Company will continue to develop and manage the communities in Triad I. The Company has made no determination as to whether it will exercise any of these purchase options. The Company will evaluate the possible exercise of each purchase option based upon the business and financial factors which may exist at the time those options may be exercised. The Company recently announced that the capital market and financial environment has reduced the availability of attractive financing for joint venture development. Consequently, the Company will develop future communities in which it has an ownership interest on its balance sheet to capture 100% of the benefits from lower construction costs and higher appreciation potential. The Company has entered into a strategic alliance with Buckner Retirement Services, Inc. ("Buckner") to develop, market and manage senior living communities developed by Buckner. As of December 31, 1999, one site in Beaumont, Texas has been purchased for the development and operation of independent living, assisted living and skilled nursing care. The management agreement between Buckner and the Company generally provides for a base management fee plus a productivity reward equal to 5% of the gross revenues generated during the immediately preceding month that exceed a base figure. The productivity reward has a limit of 20% of the base management fee per month. The amounts that exceed the limit are deferred. The term is for five years commencing with the certificate of occupancy. The development agreements generally provide for a development fee of 7% of project costs. The Company is party to a property management agreement with LCOR Incorporated ("LCOR") to market and manage four independent living and assisted living communities being developed by LCOR. The sites covered by the agreement are: Trumbull, Connecticut; Libertyville, Illinois; Summit, New Jersey; and Naperville, Illinois. The management agreements between LCOR and the Company generally provide for a base management fee of the greater of $15,000 per month or 5% of gross revenues plus an incentive fee equal to 25% of the excess cash flow over budgeted amounts. The terms are for 10 years with a five year renewal at the Company's option. The Company is also entitled to a fee of $50,000 for development consulting services for each development and a monthly marketing fee of approximately $10,000 per month for each community, which generally covers the period prior to the expected opening of the communities, usually six to nine months. The Company has also entered into a strategic alliance with The Emmaus Calling, Inc. ("Emmaus") to develop, market and manage a senior living community developed by Emmaus. As of December 31, 1999, two sites have been purchased for the development and operation of assisted living communities. The sites are in Mesquite, Texas and Houston, Texas. The management agreements between Emmaus and the Company provide for a base management fee of $8,000 per month adjusted yearly by the difference between the Consumer Price Index for the year less the Consumer Price Index for the year of completion. The term is for 15 years. As of December 31, 1999, there were 23 communities under development. Seven communities were being developed for Buckner, Emmaus and LCOR, where the Company will manage these communities under management agreements and has no equity interest, and 16 of these communities were being developed with the Triad Entities where the Company will manage these communities under management agreements and where the Company has a 10% to 19% limited partner interest in each of the Triad Entities. The following table summarizes information regarding those developments that the Company expects to be completed through 2001. 11
RESIDENT CAPACITY ------------------------------ SCHEDULED LOCATION OF DEVELOPMENT COMPLETION IL AL SN TOTAL STATUS(1) - ----------------------- ---------- -- -- -- ----- --------- TRIAD I Fort Worth, TX............. 1st Half 2000 174 - - 174 Construction San Antonio, TX............ 1st Half 2000 136 - - 136 Construction ---- ---- ---- ---- 310 - - 310 ---- ---- ---- ---- TRIAD II Fairfield, OH.............. 2nd Half 2000 136 - - 136 Construction Oklahoma City, OK.......... 2nd Half 2000 136 - - 136 Construction Plano, TX.................. 2nd Half 2000 111 45 - 156 Construction ---- --- --- ---- 383 45 - 428 ---- --- --- ---- TRIAD III Columbia, SC............... 2nd Half 2000 136 - - 136 Construction Deer Park, TX.............. 2nd Half 2000 136 - - 136 Construction Jackson, MS................ 2nd Half 2000 136 - - 136 Construction Mansfield, OH.............. 2nd Half 2000 136 - - 136 Construction Pantego, TX................ 2nd Half 2000 136 - - 136 Construction South Bend, IN............. 2nd Half 2000 136 - - 136 Construction ---- --- --- ---- 816 - - 816 ---- --- --- ---- TRIAD IV North Richland Hills, TX 1st Half 2001 136 - - 136 Construction Richardson, TX............. 1st Half 2001 109 45 0 154 Development ---- --- --- ---- 245 45 0 290 ---- --- --- ---- TRIAD V Greenville, SC............. 2nd Half 2001 136 - - 136 Development Miami, OH.................. 2nd Half 2001 136 - - 136 Development Springfield, MO............ 1st Half 2001 136 - - 136 Development ---- --- --- ---- 408 - - 408 ---- --- --- ---- BUCKNER Beaumont, TX............... 2nd Half 2000 124 46 30 200 Construction ---- --- --- ---- EMMAUS CALLING Houston, TX................ 2nd Half 2001 - 85 - 85 Development Mesquite, TX............... 1st Half 2000 - 105 - 105 Construction ----- ---- --- ---- - 190 - 190 ----- ---- --- ---- LCOR Libertyville, IL........... 2nd Half 2000 140 - - 140 Construction Naperville, IL............. 2nd Half 2000 135 - - 135 Construction Summit, NJ................. 1st Half 2000 - 90 - 90 Construction Trumbull, CT............... 1st Half 2000 136 30 - 166 Construction ---- ---- --- ---- 411 120 - 531 ---- ---- --- ---- Total 2,697 446 30 3,173 ===== === == =====
- ------------------------ (1) "Development" indicates that development activities, such as surveys, preparation of architectural plans, or zoning processes, have commenced, but construction has not commenced. "Construction" indicates that construction activities, such as groundbreaking activities, exterior construction or interior build-out have commenced. 12 EXPAND EXISTING COMMUNITIES The Company plans to expand certain of its existing communities to include additional independent living and assisted living residences (including special programs and living units for residents with Alzheimer's and other forms of dementia). As of December 31, 1999, the Company had three expansion projects under construction, representing an aggregate increase in capacity to accommodate an additional 176 residents. Of these three expansion projects, two are at communities in which the Company owns an interest and manages under multi-year agreements, and one community that the Company manages for a third party. The costs of the expansion of managed communities is borne by the community owner and not by the Company. However, with respect to the two expansion projects in which the Company has an ownership interest, the Company will manage the expansion and have rights to purchase the expansion facilities. The expansion of existing senior living communities allows the Company to create operating efficiencies and capitalize on its local presence, community familiarity and reputation in markets in which the Company operates. The table below summarizes information regarding the expansion of certain of our existing senior living communities as of December 31, 1999.
SCHEDULED RESIDENT CAPACITY COMMUNITY LOCATION COMPLETION IL AL TOTAL STATUS - --------- -------- ---------- --- --- ----- ------ TRIAD I Canton Regency................... Canton, OH 1st half 2000 - 62 62 Construction Towne Centre..................... Merrilville, IN 1st half 2000 - 60 60 Construction ---- ---- ----- - 122 122 ---- ---- ---- BUCKNER Buckner Westminister Village..... Longview, TX 1st half 2000 24 30 54 Construction --- --- ---- Total 24 152 176 === ==== ====
PURSUE STRATEGIC ACQUISITIONS The Company intends to continue to pursue single or portfolio acquisitions of senior living communities and, to a lesser extent, other assisted living and long-term care communities. Through strategic acquisitions, the Company plans to enter new markets or acquire communities in existing markets as a means to increase market share, augment existing clusters, strengthen its ability to provide a broad range of care, and create operating efficiencies. As the industry continues to consolidate, the Company believes that opportunities will arise to acquire other senior living companies. The Company believes that the current fragmented nature of the senior living industry, combined with the Company's financial resources, national presence, and extensive contacts within the industry, should provide it with the opportunity to evaluate a number of potential acquisition opportunities. In reviewing acquisition opportunities, the Company will consider, among other things, geographic location, competitive climate, reputation and quality of management and communities, and the need for renovation or improvement of the communities. EXPAND REFERRAL NETWORKS The Company intends to continue to develop relationships with local and regional hospital systems, managed care organizations, and other referral sources to attract new residents to the Company's communities. In certain circumstances these relationships may involve strategic alliances or joint ventures. The Company believes that such arrangements or alliances, which could range from joint marketing arrangements to priority transfer agreements, will enable it to be strategically positioned within the Company's markets if, as the Company believes, senior living programs become an integral part of the evolving health care delivery system. 13 OPERATIONS CENTRALIZED MANAGEMENT The Company centralizes its corporate and other administrative functions so that the community-based management and staff can focus their efforts on resident care. The Company maintains centralized accounting, finance, human resources, training, and other operational functions at its national corporate office in Dallas, Texas. The Company's corporate office is generally responsible for: (i) establishing Company-wide policies and procedures relating to, among other things, resident care and operations; (ii) performing accounting functions; (iii) developing employee training programs and materials; (iv) coordinating human resources; (v) coordinating marketing functions; and (vi) providing strategic direction. In addition, financing, development, construction and acquisition activities, including feasibility and market studies, and community design, development, and construction management, are conducted by the Company's corporate offices. The Company seeks to control operational expenses for each of its communities through standardized management reporting and centralized controls of capital expenditures, asset replacement tracking, and purchasing for larger and more frequently used supplies. Community expenditures are monitored by regional and district managers who are accountable for the resident satisfaction and financial performance of the communities in their region. REGIONAL MANAGEMENT The Company provides oversight and support to each of its senior living communities through experienced regional and district managers. A district manager will oversee the marketing and operations of two to four communities clustered in a small geographic area. A regional manager will cover a larger geographic area consisting of five to twelve communities. In most cases, the district and regional managers will office out of our senior living communities. Currently there are regional managers based in the Northeast, Southeast, Midwest, Southwest and West regions. The executive director at each community reports to a regional or district manager. The regional and district managers report directly to the President and Chief Operating Officer of the Company. The district and regional managers make regular site visits to each of their communities. The site visits involve a physical plant inspection; quality assurance; staff training; financial and systems audits; regulatory compliance; and team building. COMMUNITY-BASED MANAGEMENT An executive director manages the day-to-day operations at each senior living community, including oversight of the quality of care, delivery of resident services, and monitoring of financial performance, and is responsible for all personnel, including food service, maintenance, activities, security, assisted living, housekeeping, and, where applicable, nursing. In most cases, each community also has department managers who direct the environmental services, nursing or care services, business management functions, dining services, activities, transportation, housekeeping, and marketing functions. The assisted living and skilled nursing components of the senior living communities are managed by licensed professionals, such as a nurse and/or a licensed administrator. These licensed professionals have many of the same operational responsibilities as the Company's executive directors, but their primary responsibility is to oversee resident care. Many of the Company's senior living communities and some of its skilled nursing facilities are part of a campus setting, which includes independent living. This campus arrangement allows for cross-utilization of certain support personnel and services, including administrative functions, that results in greater operational efficiencies and lower costs than free-standing facilities. The Company actively recruits personnel to maintain adequate staffing levels at its existing communities and hires new staff for new or acquired communities prior to opening. The Company has adopted comprehensive recruiting and screening programs for management positions that utilize corporate office team interviews and thorough background and reference checks. The Company offers system-wide training and orientation for all of its employees at the community level through a combination of Company-sponsored seminars and conferences. QUALITY ASSURANCE 14 Quality assurance programs are coordinated and implemented by the Company's corporate and regional staff. The Company's quality assurance is targeted to achieve maximum resident and resident family member satisfaction with the care and services delivered by the Company. The Company's primary focus in quality control monitoring includes routine in-service training and performance evaluations of care givers and other support employees. Additional quality assurance measures include: RESIDENT AND RESIDENT FAMILY INPUT. On a routine basis the Company provides residents and family members the opportunity to provide valuable input regarding the day-to-day delivery of services. On-site management at each community has fostered and encouraged active resident councils and resident committees who meet independently. These resident bodies meet with on-site management on a monthly basis to offer input and suggestions to the quality and delivery of services. Additionally, at each community the Company conducts annual resident satisfaction surveys to further monitor the satisfaction levels of both residents and family members. These surveys are sent directly to the corporate headquarters for tabulation and distribution to on-site staff and residents. For 1999 and 1998, the Company achieved a 94% and 95% approval rating, respectively, from its residents. For any departmental area of service scoring below a 90%, a plan of correction is developed jointly by on-site, regional and corporate staff for immediate implementation. REGULAR COMMUNITY INSPECTIONS. On a monthly basis, a community inspection is conducted by regional and/or corporate staff. Included as part of this inspection is the monitoring of the overall appearance and maintenance of the community interiors and grounds. The inspection also includes monitoring staff professionalism and departmental reviews of maintenance, housekeeping, activities, transportation, marketing, administration, and food and health care services, if applicable. The monthly inspection also includes the observation of residents in their daily activities and community compliance with government regulations. INDEPENDENT SERVICE EVALUATIONS. The Company engages the services of outside professional independent consulting firms to evaluate various components of the community operations. These services include "mystery shops," competing community analysis, pricing recommendations and product positioning. This provides management with valuable unbiased product and service information. A plan of action regarding any areas requiring improvement or change is implemented based on information received. At communities where health care is delivered, these consulting service reviews include the on-site handling of medications, record keeping, and general compliance with all governmental regulations. MARKETING Each community is staffed by on-site marketing directors and additional marketing staff depending on the community size. The primary focus of the on-site marketing staff is to create awareness of the Company and its services among prospective residents and family members, professional referral sources and other key decision makers. The marketing efforts incorporate an aggressive marketing plan to include monthly and annual goals for leasing, new lead generation, prospect follow up, community outreach, and resident and family referrals. Additionally, the marketing plan includes a calendar of promotional events and a comprehensive media program. On-site marketing departments perform a competing community assessment twice annually. Corporate and regional marketing directors monitor the on-site marketing departments' effectiveness and productivity on a monthly basis. Routine detailed marketing department audits are performed on an annual basis or more frequently if deemed necessary. Corporate and regional personnel assist in the development of marketing strategies for each community and produce creative media, assist in direct mail programs and necessary marketing collateral. Ongoing sales training of on-site marketing staff is implemented by corporate and regional marketing directors. In the case of new development, the corporate and regional staff develop a comprehensive community outreach program that is implemented at the start of construction. A marketing pre-lease program is developed and on-site marketing staff are hired and trained to begin the program implementation six to nine months prior to the community opening. Extensive use of media including radio, television, print, direct mail and telemarketing is implemented during this pre-lease phase. After the community is opened and sustaining occupancy levels are attained, the on-site marketing staff is more heavily focused on resident and resident family referrals, as well as professional referrals. A maintenance program of print media and direct mail is then implemented. 15 GOVERNMENT REGULATION Changes in existing laws and regulations, adoption of new laws and regulations and new interpretations of existing laws and regulations could have a material effect on the Company's operations. Failure by the Company to comply with applicable regulatory requirements could have a material adverse effect on the Company's business, financial condition, and results of operations. Accordingly, the Company monitors legal and regulatory developments on local and national levels. The health care industry is subject to extensive regulation and frequent regulatory change. At this time, no federal laws or regulations specifically regulate assisted or independent living residences. While a number of states have not yet enacted specific assisted living regulations, certain of the Company's assisted living communities are subject to regulation, licensing, Certificate of Need and permitting by state and local health care and social service agencies and other regulatory authorities. While such requirements vary from state to state, they typically relate to staffing, physical design, required services, and resident characteristics. The Company believes that such regulation will increase in the future. In addition, health care providers are receiving increased scrutiny under anti-trust laws as integration and consolidation of health care delivery increases and affects competition. The Company's communities are also subject to various zoning restrictions, local building codes, and other ordinances, such as fire safety codes. Failure by the Company to comply with applicable regulatory requirements could have a material adverse effect on the Company's business, financial condition, and results of operations. Regulation of the assisted living industry is evolving. The Company is unable to predict the content of new regulations and their effect on its business. There can be no assurance that the Company's operations will not be adversely affected by regulatory developments. The Company believes that its communities are in substantial compliance with applicable regulatory requirements. However, in the ordinary course of business, one or more of the Company's communities could be cited for deficiencies. In such cases, the appropriate corrective action would be taken. To the Company's knowledge, no material regulatory actions are currently pending with respect to any of the Company's communities. Under the Americans with Disabilities Act of 1990, all places of public accommodation are required to meet certain federal requirements related to access and use by disabled persons. A number of additional federal, state, and local laws exist that also may require modifications to existing and planned properties to permit access to the properties by disabled persons. While the Company believes that its communities are substantially in compliance with present requirements or are exempt therefrom, if required changes involve a greater expenditure than anticipated or must be made on a more accelerated basis than anticipated, additional costs would be incurred by the Company. Further legislation may impose additional burdens or restrictions with respect to access by disabled persons, the costs of compliance with which could be substantial. In addition, the Company is subject to various federal, state and local environmental laws and regulations. Such laws and regulations often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of hazardous or toxic substances. The costs of any required remediation or removal of these substances could be substantial and the liability of an owner or operator as to any property is generally not limited under such laws and regulations and could exceed the property's value and the aggregate assets of the owner or operator. The presence of these substances or failure to remediate such contamination properly may also adversely affect the owner's ability to sell or rent the property, or to borrow using the property as collateral. Under these laws and regulations, an owner, operator or an entity that arranges for the disposal of hazardous or toxic substances, such as asbestos-containing materials, at a disposal site may also be liable for the costs of any required remediation or removal of the hazardous or toxic substances at the disposal site. In connection with the ownership or operation of its properties, the Company could be liable for these costs, as well as certain other costs, including governmental fines and injuries to persons or properties. The Company has completed Phase I environmental audits of substantially all of the communities in which the Company owns interests, and such surveys have not revealed any material environmental liabilities that exist with respect to these communities. Under various federal, state, and local environmental laws, ordinances, and regulations, a current or previous owner or operator of real estate may be required to investigate and clean up hazardous or toxic substances or petroleum product releases at such property, and may be held liable to a governmental entity or to third parties for property damage and for investigation and clean up costs. The Company is not aware of any environmental liability with respect to any of its owned, leased, or managed communities that the Company believes would have a material adverse effect on its business, 16 financial condition, or results of operations. The Company believes that its communities are in compliance in all material respects with all federal, state, and local laws, ordinances, and regulations regarding hazardous or toxic substances or petroleum products. The Company has not been notified by any governmental authority, and is not otherwise aware of any material non-compliance, liability, or claim relating to hazardous or toxic substances or petroleum products in connection with any of the communities the Company currently operates. The Company believes that the structure and composition of government and, specifically, health care regulations will continue to change and, as a result, regularly monitors developments in the law. The Company expects to modify its agreements and operations from time to time as the business and regulatory environments change. While the Company believes it will be able to structure all its agreements and operations in accordance with applicable law, there can be no assurance that its arrangements will not be successfully challenged. COMPETITION The senior living industry is highly competitive, and the Company expects that all segments of the industry will become increasingly competitive in the future. Although there are a number of substantial companies active in the senior living industry and in the markets in which the Company operates, the industry continues to be very fragmented and characterized by numerous small operators. The Company competes with Alterra Healthcare Corporation, American Retirement Corporation, Brookdale Living Communities, CareMatrix Corp., Holiday Retirement Corporation, Marriott Senior Living Services, and Sunrise Assisted Living, Inc. The Company believes that the primary competitive factors in the senior living industry are: (i) reputation for and commitment to a high quality of service; (ii) quality of support services offered (such as food services); (iii) price of services; (iv) physical appearance and amenities associated with the communities; and (v) location. The Company competes with other companies providing independent living, assisted living, skilled nursing, home health care, and other similar service and care alternatives, some of whom may have greater financial resources than the Company. Because seniors tend to choose senior living communities near their homes, the Company's principal competitors are other senior living and long-term care communities in the same geographic areas as the Company's communities. The Company also competes with other health care businesses with respect to attracting and retaining nurses, technicians, aides, and other high quality professional and non-professional employees and managers. EMPLOYEES As of December 31, 1999, the Company employed approximately 1,861 persons, of which approximately 1,005 were full-time employees (approximately 47 of whom are located at the Company's corporate offices) and 856 are part-time employees. None of the Company's employees is currently represented by a labor union and the Company is not aware of any union organizing activity among its employees. The Company believes that its relationship with its employees is good. EXECUTIVE OFFICERS AND KEY EMPLOYEES The following table sets forth certain information concerning each of the Company's executive officers and key employees as of December 31, 1999:
NAME AGE POSITION(S) WITH THE COMPANY - ---- ---- ---------------------------- James A. Stroud........................ 49 Chairman of the Board and Chairman and Secretary of the Company Lawrence A. Cohen...................... 46 Vice Chairman and Chief Executive Officer Keith N. Johannessen................... 43 President and Chief Operating Officer Ralph A. Beattie....................... 50 Executive Vice President and Chief Financial Officer Rob L. Goodpaster...................... 46 Vice President -- National Marketing David W. Beathard, Sr.................. 52 Vice President -- Operations David R. Brickman...................... 41 Vice President and General Counsel David G. Suarez........................ 47 Vice President -- Development 17 Paul T. Lee............................ 34 Vice President -- Finance Jerry D. Lee........................... 39 Corporate Controller Robert F. Hollister.................... 44 Controller -- Property
JAMES A. STROUD has served as a director and Chief Operating Officer of the Company and its predecessors since January 1986. He currently serves as Chairman of the Board, Chairman, and Secretary of the Company. Mr. Stroud also serves on the boards of various educational and charitable organizations, and in varying capacities with several trade organizations, including as a member of the Founder's Council and board of directors of the Assisted Living Federation of America. Mr. Stroud also serves as an Advisory Group member to the National Investment Conference. Mr. Stroud was the past President and Member of the board of directors of the National Association for Senior Living Industry Executives. He also was a Founder of the Texas Assisted Living Association and serves as a member of its board of directors. Mr. Stroud has earned a Masters in Law, is a licensed attorney and is also a Certified Public Accountant. Mr. Stroud has had positions with businesses involved in senior living for 15 years. LAWRENCE A. COHEN has served as a director and Vice Chairman since November 1996. He served as Chief Financial Officer from November 1996 to May 1999 and has served as Chief Executive Officer since May 1999. From 1991 to 1996, Mr. Cohen served as President and Chief Executive Officer of Paine Webber Properties Incorporated, which controlled a real estate portfolio having a cost basis of approximately $3.0 billion, including senior living facilities of approximately $110.0 million. From 1991 to 1998 Mr. Cohen was President and a member of the boards of directors of ILM and ILM II. Mr. Cohen serves as a member of the Corporate Finance Committee of the NASD Regulation, Inc., and was a founding member of the executive committee of the Board of the American Seniors Housing Association. Mr. Cohen has earned a Masters in Law, is a licensed attorney and is also a Certified Public Accountant. Mr. Cohen has had positions with businesses involved in senior living for 15 years. KEITH N. JOHANNESSEN has served as President of the Company and its predecessors since March 1994, and previously served as Executive Vice President since May 1993. Mr. Johannessen has served as a director and Chief Operating Officer since May 1999. From 1992 to 1993, Mr. Johannessen served as Senior Manager in the health care practice of Ernst & Young. From 1987 to 1992, Mr. Johannessen was Executive Vice President of Oxford Retirement Services, Inc. Mr. Johannessen has served on the State of the Industry and Model Assisted Living Regulations Committees of the American Seniors Housing Association. Mr. Johannessen has been active in operational aspects of senior housing for 21 years. RALPH A. BEATTIE joined the Company as Executive Vice President and Chief Financial Officer in May 1999. From 1997 to 1999, he served as an Executive Vice President and the Chief Financial Offer of Universal Sports America, Inc., which was honored as the number one growth company in Dallas for 1998. For the eight years prior to that he was an Executive Vice President and the Chief Financial Officer for Haggar Clothing Company, during which time Haggar successfully completed its initial public offering. Mr. Beattie has earned his Masters of Business Administration and is both a Certified Management Accountant and a Certified Financial Planner. ROB L. GOODPASTER has served as Vice President - National Marketing of the Company and its predecessors since December 1992. From 1990 to 1992, Mr. Goodpaster was National Director for Marketing for Autumn America, an owner and operator of senior housing facilities. Mr. Goodpaster is a member of the Board of Directors of the National Association For Senior Living Industries. Mr. Goodpaster has been active in the operational, development and marketing aspects of senior housing for 23 years. DAVID W. BEATHARD, SR. has served as Vice President - Operations of the Company and its predecessors since August 1996. From 1992 to 1996, Mr. Beathard owned and operated a consulting firm which provided operational, marketing, and feasibility consulting regarding senior housing facilities. Mr. Beathard has been active in the operational, sales and marketing, and construction oversight aspects of senior housing for 25 years. DAVID R. BRICKMAN has served as Vice President and General Counsel of the Company and its predecessors since July 1992. From 1989 to 1992, Mr. Brickman served as in-house counsel with LifeCo Travel Management Company, a corporation that provided travel services to U.S. corporations. Mr. Brickman has earned a Masters of Business Administration and a Masters in Health Administration. Mr. Brickman has either practiced law or performed in-house counsel functions for 13 years. 18 DAVID G. SUAREZ has served as Vice President - Development since October 1998. From 1996 to 1998, Mr. Suarez served as Project Manager for the Western Group of Columbia/HCA. Prior to that, Mr. Suarez served as Vice President of Development for PDC Facilities, a healthcare design-build developer. Mr. Suarez has been in the healthcare industry in development for 20 years. His architectural and construction management degrees provide experience and expertise in the Company's site selection process, building design and budgeting, and construction methods and material procedures for the Company's senior living communities. PAUL T. LEE has served as Vice President - Finance since February 1999. From 1992 to 1998, Mr. Lee served in various management positions of Chief Auto Parts Inc. which was one of the nation's largest automotive aftermarket retail chains. From 1995 to 1998, he held the position of Assistant Treasurer. Prior to joining Chief Auto Parts, Mr. Lee held various positions in the finance department of Brice Foods, Inc. from 1988 to 1992. JERRY D. LEE, a Certified Public Accountant, has served as Corporate Controller since April 1999. Prior to joining the Company, Mr. Lee served as the Senior Vice President of Finance, from 1997 to 1999, for Universal Sports America, Inc., which produced sporting events and provided sports marketing services for collegiate conferences and universities. From 1984 to 1997, Mr. Lee held various accounting management positions with Haggar Clothing Company. Mr. Lee is a member of the American Institute of Certified Public Accountants and is also a member of the Texas Society of Certified Public Accountants. ROBERT F. HOLLISTER, a Certified Public Accountant, has served as Property Controller for the Company and its predecessors since April 1992. From 1985 to 1992, Mr. Hollister was Chief Financial Officer and Controller of Kavanaugh Securities, Inc., a National Association of Securities Dealers broker dealer. Mr. Hollister is a Certified Financial Planner. Mr. Hollister is a member of the American Institute of Certified Public Accountants and is also a member of the Texas Society of Certified Public Accountants. ITEM 2. PROPERTIES The executive and administrative offices of the Company are located at 14160 Dallas Parkway, Suite 300, Dallas, Texas 75240, and consist of approximately 20,000 square feet. The lease on the premises extends through August 31, 2002. The Company also leases an executive office space in New York, New York pursuant to a monthly lease agreement. The Company believes that its corporate office facilities are adequate to meet its requirements through at least fiscal 2000 and that suitable additional space will be available, as needed, to accommodate further physical expansion of corporate operations. As of December 31, 1999, the Company owned, leased and/or managed the senior living communities referred to in Item 1 above. ITEM 3. LEGAL PROCEEDINGS On or about October 23, 1998, Robert Lewis filed a putative class action complaint on behalf of certain holders of assignee interests (the "Assignee Interests") in NHP Retirement Housing Partners I Limited Partnership ("NHP") in the Delaware Court of Chancery against NHP, the Company, Capital Senior Living Properties 2-NHPCT, Inc. and Capital Realty Group Senior Housing, Inc. (collectively, the "Defendants"). Mr. Lewis purchased 90 Assignee Interests in NHP in February 1993 for $180. The complaint alleges, among other things, that the Defendants breached, or aided and abetted a breach of, the express and implied terms of the NHP Partnership Agreement in connection with the sale of four properties by NHP to Capital Senior Living Properties 2-NHPCT, Inc. The complaint seeks, among other relief, rescission of the sale of these properties and unspecified damages. The Company believes the complaint is without merit and is vigorously defending itself in this action. The Company has filed a Motion to Dismiss in this case, which is currently pending. The Company is unable to estimate any liability related to this claim, if any. The Company has pending claims incurred in the normal course of business, which, in the opinion of management, based on the advice of legal counsel, will not have a material effect on the financial statements of the Company. The provision of personal and health care services entails an inherent risk of liability. In recent years, participants in the senior living and health care services industry have become subject to an increasing number of lawsuits alleging 19 negligence or related legal theories, many of which involve large claims and result in the incurrence of significant defense costs. The Company currently maintains property, liability and professional medical malpractice insurance policies for the Company's owned and managed communities under a master insurance program in amounts and with such coverages and deductibles that the Company believes are within normal industry standards based upon the nature and risks of the Company's business, and the Company believes that such insurance coverage is adequate. The Company also has an umbrella excess liability protection policy in the amount of $15.0 million per location. There can be no assurance that a claim in excess of the Company's insurance will not arise. A claim against the Company not covered by, or in excess of, the Company's insurance could have a material adverse effect upon the Company. In addition, the Company's insurance policies must be renewed annually. There can be no assurance that the Company will be able to obtain liability insurance in the future or that, if such insurance is available, it will be available on acceptable terms. Under various federal, state, and local environmental laws, ordinances, and regulations, a current or previous owner or operator of real estate may be required to investigate and clean up hazardous or toxic substances or petroleum product releases at such property, and may be held liable to a governmental entity or to third parties for property damage and for investigation and clean up costs. The Company is not aware of any environmental liability with respect to any of its owned, leased, or managed communities that it believes would have a material adverse effect on the Company's business, financial condition, or results of operations. The Company believes that its communities are in compliance in all material respects with all federal, state, and local laws, ordinances, and regulations regarding hazardous or toxic substances or petroleum products. The Company has not been notified by any governmental authority, and is not otherwise aware of any material non-compliance, liability, or claim relating to hazardous or toxic substances or petroleum products in connection with any of the communities it currently operates. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of the Company's security holders during the fourth quarter ended December 31, 1999. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS (a) The Company's shares of common stock are listed for trading on the New York Stock Exchange ("NYSE") under the symbol "CSU." The following table sets forth, for the periods indicated, the high and low sales prices for the Company's common stock, as reported on the NYSE. At December 31, 1999 there were approximately 3,900 shareholders of record of the Company's common stock.
YEAR HIGH LOW 1998 First Quarter................. $ 14 $ 8 5/8 Second Quarter................ 15 1/2 11 1/2 Third Quarter................. 12 11/16 5 1/8 Fourth Quarter................ 14 3/4 9 1/2 1999 First Quarter................. $15 $ 6 3/4 Second Quarter................ 11 11/16 6 7/8 Third Quarter................. 11 3/16 7 Fourth Quarter................ 7 7/16 4 3/4
It is the policy of the Company's Board of Directors to retain all future earnings to finance the operation and expansion of the Company's business. Accordingly, the Company has not and does not anticipate declaring or paying cash dividends on the Common Stock in the foreseeable future. The payment of cash dividends in the future will be at the sole discretion of the Company's Board of Directors and will depend on, among other things, the Company's earnings, 20 operations, capital requirements, financial condition, restrictions in then existing financing agreements, and other factors deemed relevant by the Board of Directors. (b) Recent Sales of Unregistered Securities. Information with respect to this Item is set forth above under the caption "Item 1. Business--Overview." The issuance therein described of the Company's Common Stock to Messrs. Jeffrey L. Beck, James A. Stroud (including a trust) and Lawrence A. Cohen in the Formation Transactions in exchange for the capital stock of certain contributed entities was carried out in reliance on the exemption from registration contained in Section 4(2) of the Securities Act of 1933, as amended, pursuant to a binding written agreement entered into prior to the filing of a registration statement filed in connection with the Company's initial public offering. (c) Use of Proceeds. Not Applicable. 21 ITEM 6. SELECTED FINANCIAL DATA The following table sets forth selected financial data of the Company. The selected financial data for the years ended December 31, 1999, 1998, 1997, 1996 and 1995 are derived from the audited consolidated financial statements of the Company.
YEAR ENDED DECEMBER 31, ----------------------------------------------------------------------------- 1999 1998 1997 1996 1995 ----------- ------------ ------------ ------------ ----------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Statements of Income Data: Revenues: Resident and health care revenue........... $41,071 $25,988 $22,159 $14,616 $14,109 Rental and lease income 4,304 4,281 4,276 1,101 1,231 Unaffiliated management services revenue... 2,695 2,465 1,920 801 - Affiliated management services revenue... 456 1,327 1,378 2,708 2,778 Unaffiliated development fees... 1,341 1,234 804 673 - Affiliated development fees 14,085 7,473 173 - - ------ --------- ---------- ----------- ------------- Total revenues..... 63,952 42,768 30,710 19,899 18,118 ------ -------- --------- -------- ---------- Expenses: Operating expenses..... 24,470 17,067 16,701 10,656 10,287 General and administrative expenses(1)........ 9,212 6,094 7,042 5,613 4,293 Provision for bad debts 15,896 500 43 22 71 Depreciation and amortization....... 4,671 2,734 2,118 1,481 1,776 ----- -------- --------- -------- --------- Total expenses..... 54,249 26,395 25,904 17,772 16,427 ------ ------- -------- ------- -------- Income from operations. 9,703 16,373 4,806 2,127 1,691 Other income (expense): Interest income........ 5,822 4,939 3,186 432 368 Interest expense....... (7,089) (1,922) (2,022) (221) (278) Gain on sale of properties............. 748 422 - 438 - Equity in earnings on investments...... - - - 459 - Other.................. - - 440 42 - ------------- ------------ ---------- ---------- ------------ Income before income taxes and minority interest in consolidated partnerships....... 9,184 19,812 6,410 3,277 1,781 (Provision) benefit for income taxes(2)..... (2,992) (7,476) (793) - (18) ------- --------- ---------- ----------- ---------- Income before minority interest in consolidated partnerships........ 6,192 12,336 5,617 3,277 1,763 Minority interest in consolidated partnerships........ (1,354) (379) (1,936) (1,224) (760) ------- --------- --------- --------- ---------- Net income.............. $4,838 $11,957 $ 3,681 $ 2,053 $ 1,003 ====== ======= ======== ======== ======== Net income per share: Basic.................. $0.25 $ 0.61 $ 0.33 ===== ======== ========= Diluted................ $0.24 $ 0.61 $ 0.33 ===== ======== ========= Weighted average shares outstanding Basic.................. 19,717 19,717 11,150 ====== ====== ========= Diluted................ 19,806 19,717 11,150 ====== ====== ========= Pro forma net income data (unaudited)(3): Net income.............. $ 3,681 $ 2,053 Pro forma income taxes............... (965) (811) ---------- --------- Pro forma net income.... $ 2,716 $ 1,242 ========== =========
22
YEAR ENDED DECEMBER 31, -------------------------------------------------------------------------- 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- ($ IN THOUSANDS) Balance Sheet Data: Cash and cash equivalents.............. $32,988 $35,827 $48,125 $10,819 $10,017 Working capital........................ 46,973 (9,026)(4) 44,690 9,567 6,784 Total assets........................... 221,876 205,267 117,371 33,203 29,747 Long-term debt, excluding current portion............................. 92,416 32,671 7,575 201 337 Equity................................. 109,549 104,516 92,560 17,201 14,447
- ---------- (1) General and administrative expenses include officers' salaries of $914,000, $670,000, $3,342,000, $3,372,000 and $2,976,000 for the years ended December 31, 1999, 1998, 1997, 1996 and 1995, respectively. Prior to November 1997, these amounts were primarily composed of salaries and bonuses paid to the founders and were based in part on federal income tax regulations regarding distributions of closely held corporations and S corporations. Effective with the Company's initial public offering, these federal income tax regulations no longer applied to the Company. Compensation of the founders since October 1, 1997 has been based on the founders' employment agreements. (2) A provision for income taxes was recorded by the Company from inception through February 1, 1995. No provision for income taxes has been recorded from February 1, 1995 through completion of the Formation Transactions as the operating companies included in the historical financial statements, prior to the Company's initial public offering, were S corporations or partnerships and accordingly were not subject to income taxes during the period. (3) Pro forma income taxes have been calculated based on the assumption that the S corporations and partnerships were subject to income taxes. Pro forma income tax expense has been calculated using statutory federal and state tax rates, estimated at 39.5%. (4) The Company refinanced $47,700,000 of mortgage loans reflected as short term debt in fiscal 1998 to long term fixed rate mortgage loans in fiscal 1999. 23 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The following discussion and analysis addresses the Company's results of operations on a historical consolidated basis for the years ended December 31, 1999, 1998, and 1997. The following should be read in conjunction with the Company's historical consolidated financial statements and the selected financial data contained elsewhere in this report. The Company is one of the largest operators and developers of senior living communities in the United States in terms of resident capacity. The Company's operating strategy is to provide high quality senior living services at an affordable price to its residents, while achieving and sustaining a strong, competitive position within its chosen markets, as well as to continue to enhance the performance of its operations. The Company provides a wide array of senior living services to the elderly at its communities, including independent living, assisted living (with special programs and living units at some of its communities for residents with Alzheimer's and other forms of dementia), skilled nursing, and home care services. The Company completed its initial public offering in November 1997 in conjunction with a series of transactions that resulted in the Company acquiring various companies, partnership interests and assets from the Company's founders and entities affiliated with its founders. These transactions are collectively called the "Formation Transactions." Because certain of the entities and assets acquired in the Formation Transactions were subchapter S corporations, partnership interests or other flow-through entities for tax purposes, and because certain debt obligations were assumed in the Formation Transactions and subsequently repaid with some of the proceeds from the Company's initial public offering, the year-to-year changes in the Company's financial statements are not directly comparable. During the years 1990 through 1999, the Company acquired interests in and continues to own 21 communities and expanded its senior living management services by entering into management service contracts on 15 communities for three independent third-party owners and commenced providing development and construction management services for new residence properties in addition to adding a home care service agency. The Company generates revenue from a variety of sources. For the year ended December 31, 1999, the Company's revenue was derived as follows: 64.2% from the operation of 11 owned communities that were operated by the Company; 6.7% from lease rentals from triple net leases of three skilled nursing facilities and four physical rehabilitation centers; 4.9% from management fees arising from management services provided for four affiliate owned senior living communities and 15 third-party owned senior living communities; and 24.1% from development fees earned for managing the development and construction of new senior living communities for third parties. The Company believes that the factors affecting the financial performance of communities managed under contracts with third parties do not vary substantially from the factors affecting the performance of owned and leased communities, although there are different business risks associated with these activities. The Company's third-party management fees are primarily based on a percentage of gross revenues. As a result, the cash flow and profitability of such contracts to the Company are more dependent on the revenues generated by such communities and less dependent on net cash flow than for owned communities. Further, the Company is not responsible for capital investments in managed communities. While the management contracts are generally terminable only for cause, in certain cases the contracts can be terminated upon the sale of a community, subject to the Company's rights to offer to purchase such community. The Company's triple net leases extend through the year 2000 for two of its owned communities and through the year 2001 for four of its owned communities (one of which was sold on January 11, 2000). The payments under these leases are fixed and are not subject to change based upon the operating performance of these communities. Following termination of the lease agreements, unless the operators extend their leases, the Company may either convert and operate the communities as assisted living and Alzheimer's care facilities, sell the facilities or evaluate other alternatives. 24 The Company's current management contracts expire on various dates through September 2009 and provide for management fees based generally upon rates that vary by contract from 4% of net revenues to 7% of net revenues. In addition, certain of the contracts provide for supplemental incentive fees that vary by contract based upon the financial performance of the managed community. The Company's development fees are generally based upon a percentage of construction cost and are earned over the period commencing with the initial development activities and ending with the opening of the community. As of December 31, 1999, development fees have been earned for services performed for 44 communities under development or expansions for third parties. During 1998, 1997, 1996, and 1995, the Company made various purchases of limited partnership interests in HCP. HCP owns and operates a skilled nursing facility and owns and leases to third-party operators (under triple net leases) three skilled nursing facilities and three physical rehabilitation centers (two of which have been sold). During 1999, 1998, 1997, 1996, and 1995, the Company paid approximately $101,000, $5,605,000, $3,201,000, and $309,000, respectively, for partnership interests in HCP. The Company changed its method of accounting for its investment in HCP from the cost method in 1995 to the equity method in 1996. As a result of additional purchases, the Company's ownership interest in HCP exceeded 50% on June 26, 1997 and was 57% at December 31, 1999. Accordingly, this partial acquisition has been accounted for by the purchase method of accounting, and the assets, liabilities, minority interest, and the results of operations of HCP have been consolidated in the Company's financial statements since January 1, 1997. The Company acquired, on November 1, 1997, the NHP Notes owned by CSLC in the Formation Transactions for $18,664,128. The NHP Notes bear simple interest at 13% per annum and mature on December 31, 2001. Interest is currently paid quarterly at a rate of 7%, with the remaining 6% interest deferred. From November 1, 1997 through September 30, 1998, the Company recorded interest income at 10.5% of the purchase price paid, which was determined based on the discounted amount of principal and interest payments to be made following the maturity date (December 31, 2001) of the NHP Notes (using a six-month lag between maturity and full repayment), due to uncertainties regarding the ultimate realization of the accrued interest. On September 30, 1998, the Company purchased four properties from NHP. NHP in turn redeemed $7,500,000 of the Company's investment in the NHP Notes and distributed approximately $5,300,000 of deferred interest not previously paid on such notes. From October 1, 1998 through December 31, 1998, the Company reevaluated its investment in the NHP Notes and began recording additional income after giving consideration to current payment of interest, partial redemption of the NHP Notes with accrued interest and the estimated residual value in NHP. This change in estimate resulted in $579,278 of additional income in 1998. In the fourth quarter of fiscal 1999, the Company reevaluated the assumptions related to its investment in the NHP Notes, and as a result reduced the income expected to be earned from the NHP Notes. This change in estimate resulted in a $1,206,000 reduction in interest income in the fourth quarter. In addition, future interest income is expected to decrease by approximately $1,253,842 and $1,687,705 in 2000 and 2001, respectively. The Company will continue to develop and acquire senior living communities. The development of senior living communities typically involves a substantial commitment of capital over an approximate 12-month construction period during which time no revenues are generated, followed by a 14- to 18-month lease-up period. The Company anticipates that newly opened or expanded communities will operate at a loss during a substantial portion of the lease-up period. The Company's growth strategy may also include the acquisition of senior living communities, home care agencies, and other properties or businesses that are complementary to the Company's operations and growth strategy. RESULTS OF OPERATIONS The following tables set forth, for the periods indicated, selected historical consolidated statements of income data in thousands of dollars and expressed as a percentage of total revenues. 25
YEAR ENDED ----------------------------------------------------------------------- DECEMBER 31, DECEMBER 31, DECEMBER 31, 1999 1998 1997 ---------------------- ------------------------ ---------------------- $ % $ % $ % ----------- --------- ------------- ---------- ------------ --------- Revenues: Resident and healthcare revenue..... $ 41,071 64.2% $25,988 60.8% $22,159 72.2% Rental and lease income............. 4,304 6.7% 4,281 10.0% 4,276 13.9% Unaffiliated management services revenue........................... 2,695 4.2% 2,465 5.8% 1,920 6.3% Affiliated management services revenue........................... 456 0.7% 1,327 3.1% 1,378 4.5% Unaffiliated development fees....... 1,341 2.1% 1,234 2.9% 804 2.6% Affiliated development fees......... 14,085 22.0% 7,473 17.5% 173 0.6% ------- ------- -------- ------- -------- ------- Total revenues................... 63,952 100.0% 42,768 100.0% 30,710 100.0% Expenses: Operating expenses.................. 24,470 38.3% 17,067 39.9% 16,701 54.4% General and administrative expenses. 9,212 14.4% 6,094 14.2% 7,042 23.1% Bad debt expense.................... 15,896 24.9% 500 1.2% 43 0.0% Depreciation and amortization....... 4,671 7.3% 2,734 6.4% 2,118 6.9% ------- ------- ------- ------- ------- ------- Total expenses.................... 54,249 84.8% 26,395 61.7% 25,904 84.4% ------ ----- ------- ----- ------- ------ Income from operations................ 9,703 15.2% 16,373 38.3% 4,806 15.6% Other income (expense): Interest income..................... 5,822 9.1% 4,939 11.5% 3,186 10.4% Interest expense.................... (7,089) (11.1%) (1,922) (4.5%) (2,022) (6.6%) Gain on sale of properties.......... 748 1.2% 422 1.0% - 0.0% Other............................... - 0.0% - 0.0% 440 1.4 ------- ------- -------- ------- -------- ------- Income before income taxes and minority interest in consolidated partnerships...................... 9,184 14.4% 19,812 46.3% 6,410 20.9% Provision for income taxes............ (2,992) (4.7%) (7,476) (17.5%) (793) (2.6%) --------- ------- -------- ---------- -------- ------- Income before minority interest in consolidated partnerships........... 6,192 9.7% 12,336 28.8% 5,617 18.3% Minority interest in consolidated partnerships........................ (1,354) (2.1%) (379) (0.9%) (1,936) (6.3%) ------------ ------ ---------- ------ -------- ----- Net income............................ $ 4,838 7.6% $ 11,957 28.0% $3,681 12.0% ============ ===== ======== ===== ======= ======
YEAR ENDED DECEMBER 31, 1999 COMPARED TO THE YEAR ENDED DECEMBER 31, 1998 REVENUES. Total revenues were $63,952,000 in 1999 compared to $42,768,000 in 1998, representing an increase of $21,184,000, or 49.5%. Resident and health care revenue increased $15,083,000, of which $14,441,000 is related to owning the six communities purchased in the third and fourth quarters of fiscal 1998 for the full year in 1999, along with an increase in revenue at the HCP properties. Affiliated management services revenue decreased $871,000 due to the Company's acquisition of four NHP properties that the Company managed in 1998. Affiliated development fee revenue increased $6,612,000, reflecting the addition of 15 new development contracts for managing the development and construction of new senior living communities owned by joint ventures with third parties in which the Company owns interests of 10% to 19% (Triad Entities). EXPENSES. Total expenses were $54,249,000 in 1999 compared to $26,395,000 in 1998, representing an increase of $27,854,000 or 105.5%. This increase primarily results from $15,896,000 in bad debt expenses along with additional expenses related to the acquisition of six communities in 1998. The bad debt expenses primarily relate to writing off or reserving $10,482,000 in development fees, $1,598,000 in pursuit cost from affiliates, and $3,927,000 in notes receivable from joint ventures. These joint ventures were in various stages of developing 19 Waterford communities and they were unable to secure financing on attractive terms for completion of these communities. Operating expenses increased $7,403,000 primarily due to expenses associated with the six properties acquired in 1998 and an expansion of one of the Company's communities. General and administrative expenses increased $3,118,000 due to additional salary expenses, office rent, legal expenses and expenses relating to the six communities that were acquired. OTHER INCOME AND EXPENSES. Other income and expense decreased $3,958,000 to a net expense of $519,000 in 1999 compared to a net income of $3,439,000 in 1998. Interest income increased $883,000 primarily due to an increase of $2,023,000 in interest income on loans to the Triad Entities offset by a decrease of $1,108,000 in interest income from cash balances available for investing and a $32,000 reduction in interest income relating to the NHP Notes. In the fourth quarter, the Company changed its estimate relating to the value of its investment in the NHP Notes resulting in a write down of approximately $1,206,000. Interest expense increased $5,167,000 due to financing of the acquisition of the six properties in the fourth 26 quarter of 1998 along with funding of loans made to the Triad Entities. Gain on the sale of properties increased $326,000 resulting from the gain on the sale of one community owned by HCP of $748,288 in 1999 compared to a gain of $422,000 on the sale of two properties in the fourth quarter of 1998. PROVISION FOR INCOME TAXES. Provision for income taxes in 1999 was $2,992,000 or 38.2% of income before taxes, compared to $7,476,000 or 38.5% of income before taxes in 1998. The effective tax rates for 1999 and 1998 differ from the statutory tax rates because of state income taxes and permanent tax differences. MINORITY INTEREST. Minority interest increased $975,000 primarily due to the sale of one of the HCP communities and an increase in net income at HCP. The sale of the one HCP community increased minority interest by approximately $329,000. NET INCOME. As a result of the foregoing factors, net income decreased $7,119,000 to $4,838,000 for 1999, as compared to $11,957,000 for 1998. YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31, 1997 REVENUES. Total revenues were $42,768,000 in 1998 compared to $30,710,000 in 1997, representing an increase of $12,058,000, or 39.3%. Resident and health care revenue increased $3,584,000, of which $4,015,000 is a result of purchasing the four NHP properties, Gramercy Hill and Tesson Heights, along with a decrease of $190,000 relating to the HCP properties. Unaffiliated management services revenue increased $545,000 due to a significant improvement in the performance at the property level resulting in incentive payments and one additional third-party management contract added in the first quarter of 1998. Unaffiliated development fees increased $430,000, of which $894,000 is a result of two additional third-party development contracts and the continuation of four projects that earned fees for seven months in 1998 as compared to two months for 1997 and a decrease of $464,000 resulting from one development project completed on December 31, 1997 and three development projects terminated by a third party. Affiliated development fees increased $7,300,000, resulting from fees earned on 29 projects in 1998 compared to one in 1997. EXPENSES. Total expenses were $26,395,000 in 1998 compared to $25,904,000 in 1997, representing an increase of $491,000, or 1.9%. Operating expenses increased $366,000 due to an increase of $1,954,000 as a result of acquiring six properties in the fourth quarter of 1998, along with a decrease of $1,361,000 related to the termination of a lease on Maryland Gardens and offset by an overall decrease in operating expenses. General and administrative expenses decreased $491,000 due to a decrease in officers' salaries of $2,670,000 offset by a $325,000 increase due to the acquisition of six properties in the fourth quarter of 1998, a $185,000 increase in development expenses due to the increase in development projects, a $200,000 increase in professional fees that relate to legal fees, a $100,000 increase in license and fee expense, a $289,000 increase in HCP general and administrative expenses, along with an overall increase in general and administrative expenses. Depreciation and amortization increased $616,000 due to an increase of $424,000 as a result of the acquisition of the six properties in the fourth quarter of 1998, an $80,000 increase for the expansion of Cottonwood and an increase of $37,000 in the amortization of goodwill for twelve months in 1998 as opposed to two months in 1997. OTHER INCOME AND EXPENSES. Interest and other income increased $1,835,000, primarily as a result of a $1,365,000 increase in income associated with investment of cash reserves, a $1,600,000 increase in NHP Notes interest due to a partial redemption of the notes and payment of accrued interest, a $308,000 increase in interest earned from the Triad Entities unsecured credit facilities, which is offset by a $1,400,000 decrease in interest due to the divestment of an investment from June 1997 through October 1997 by CSLC. Interest expense decreased $100,000 due to a decrease of $1,267,000 of interest related to the Lehman debt incurred in the Formation Transactions and a decrease of $44,000 in HCP interest expense due to refinancing. These decreases are offset by an increase of $1,201,000 in interest expense due to the acquisition of the six properties in the fourth quarter of 1998. A gain of $422,000 was recorded on the sale of two properties in the fourth quarter of 1998. In connection with the sale of its investment in HCP to the Company immediately following completion of the Company's initial public offering, CSLC incurred short swing profits, as defined by the Securities and Exchange Commission ("SEC"), and was, accordingly, required to remit such profits to HCP, which recorded the remittance of $440,000 as other income in 1997. 27 MINORITY INTEREST. Minority interest in limited partnerships decreased $1,557,000, primarily due to the CSLC minority interest being included in 1997 through October and not included in 1998. PROVISION FOR INCOME TAXES. Provision for income taxes was approximately $7,476,000 in 1998 compared to $793,000 in 1997. As a result of the Formation Transactions, the Company and its consolidated subsidiaries were converted from S corporations that are taxed at the shareholder level to C corporations that are subject to corporate income taxes. Accordingly, a provision for federal and state taxes was provided on the earnings for 12 months in 1998 compared to two months in 1997. NET INCOME. As a result of the foregoing factors, net income increased $8,276,000 to $11,957,000 for 1998 from $3,681,000 for 1997. QUARTERLY RESULTS The following table presents certain quarterly financial information for the four quarters ended December 31, 1999 and 1998. This information has been prepared on the same basis as the audited Consolidated Financial Statements of the Company appearing elsewhere in this report and include, in the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary to present fairly the quarterly results when read in conjunction with the audited Consolidated Financial Statements of the Company and the related notes thereto.
1999 Calendar Quarters --------------------------------------------------- First Second Third Fourth --------- --------- --------- ---------- ($ in thousands, except per share amounts) Total revenues............................................... $ 15,467 $ 15,957 $ 16,560 $ 15,967 Income from operations....................................... 6,273 6,551 7,017 (10,137) Net income (loss)............................................ 3,852 3,983 4,386 (7,384) Net income (loss) per share, basic........................... $ 0.20 $ 0.20 $ 0.22 $ (0.37) Net income (loss) per share, diluted......................... $ 0.20 $ 0.20 $ 0.22 $ (0.37) Weighted average shares outstanding, basic................... 19,717 19,717 19,717 19,717 Weighted average shares outstanding, fully diluted........... 19,720 19,917 19,871 19,717 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, basic.................................. $ 0.10 $ 0.13 $ 0.18 $ 0.20 Net income per share, diluted................................ $ 0.10 $ 0.13 $ 0.18 $ 0.20 Weighted average shares outstanding, basic................... 19,717 19,717 19,717 19,717 Weighted average shares outstanding, fully diluted........... 19,717 19,717 19,717 19,717
LIQUIDITY AND CAPITAL RESOURCES In addition to approximately $32,988,000 of cash balances on hand as of December 31, 1999, the Company's principal source of liquidity is expected to be cash flows from operations. Of the $32,988,000 in cash balances, $13,724,000 relate to cash held by HCP. The Company expects its available cash and cash flow from operations, to be sufficient to fund its short-term working capital requirements. The Company's long-term capital requirements, primarily for acquisitions, development and other corporate initiatives, will be dependent on its ability to access additional funds through the debt and/or equity markets. There can be no assurance that the Company will continue to generate cash flows at or above current levels or that the Company will be able to obtain the capital necessary to meet the Company's long-term capital requirements. The Company had net cash provided by operating activities of $3,103,000 in fiscal 1999 compared to $6,689,000 and $9,684,000 in fiscal 1998 and 1997, respectively. In fiscal 1999, the net cash provided by operating activities was primarily derived from net income of $4,838,000 along with net noncash charges of $22,733,000 offset by increases in accounts and interest receivables of $14,120,000, an increase in other assets of $1,504,000, a reduction in federal and state income taxes of $7,704,000. In fiscal 1998, the net cash provided by operating activities was primarily derived from net income of $11,957,000, noncash charges of $3,054,000 offset by increases in accounts and interest receivable of 28 $8,978,000. In fiscal 1997, the net cash provided by operating activities was primarily derived from net income of $3,681,000, along with noncash charges of $4,115,000 and increases in accounts payable and income taxes payable of $2,667,000 and $832,000, respectively, offset by an increase in accounts receivable of $1,371,000. The Company had net cash used in investing activities of $16,527,000, $86,501,859 and $81,502,000 in fiscal 1999, 1998 and 1997, respectively. In fiscal 1999, the Company's net cash used in investing activities was primarily the result of advances to Triad Entities of $22,794,000 and capital expenditures of $1,887,000 offset by the proceeds from the sale of the HCP property of $2,740,000 and a distribution from a limited partnership of $5,414,000. In fiscal 1998, the Company's net cash used in investing activities was primarily from acquisitions of $67,728,000, advances to Triad Entities of $11,728,000, capital expenditures of $6,027,000 and investments in a limited partnership of $1,694,000. The Company had net cash provided by financing activities of $10,585,000, $67,514,000 and $109,125,000 in fiscal 1999, 1998 and 1997, respectively. For fiscal 1999 the net cash provided by financing activities was primarily the result of increases in debt outstanding under the Company's line of credit and notes payable. For fiscal 1998, the net cash provided by financing activities was primarily the result of increases in debt used to finance the Company's acquisitions. For fiscal 1997, the net cash provided by financing activities was primarily the result of the issuance of common stock. The Company derives the benefits and bears the risks related to the communities it owns. The cash flows and profitability of owned communities depends on the operating results of such communities and are subject to certain risks of ownership, including the need for capital expenditures, financing and other risks such as those relating to environmental matters. The cash flows and profitability of the Company's owned communities that are leased to third parties depend on the ability of the lessee to make timely lease payments. At December 31, 1999, HCP was operating one of its properties and had leased six of its owned properties under triple net leases to third parties until year 2000 or 2001. Three of these properties are leased until year 2001 to HealthSouth Rehabilitation Corp. ("HealthSouth"), which provides acute spinal injury intermediate care at the properties which are still operating. HealthSouth closed one of these communities in 1994 and closed another community in February of 1997 due to low occupancy. HealthSouth has continued to make lease payments on a timely basis for all four properties. Effective August 5, 1999, HealthSouth agreed to transfer control of the two closed communities to HCP. HealthSouth agreed, however, to continue making its full lease payments to HCP with no reduction in payment. Effective September 20, 1998, the main campus of one of those communities was sold to an independent third-party buyer for $2,825,000. HCP will explore its options with regard to the remainder of the community as well as the other community, including the possibility of a sale of these assets. Should the operators of the leased properties default on payment of their lease obligations prior to termination of the lease agreements, five of the six lease contracts contain a continuing guarantee of payment and performance by the parent company of the operators, which the Company intends to pursue in the event of default. Following termination of these leases, unless the operators extend their leases, the Company will either convert and operate the communities as assisted living and Alzheimer's care communities, sell the communities or evaluate other alternatives. HCP communities' lessees are all current in their lease obligations to HCP. The lessee for another property (other than HealthSouth) continues to fund a deficit between the required lease payment and operator's cash flows. Additionally, on January 11, 2000 the Cane Creek facility in Martin, Tennessee was sold to HealthSouth Corporation for $2,350,000. HealthSouth agreed, however, to continue making its full lease payments to HCP with no reduction in payments. The cash flows and profitability of the Company's third-party management fees are dependent upon the revenues and profitability of the communities the Company manages. While the management contracts are generally terminable only for cause, in certain cases contracts can be terminated upon the sale of a community, subject to the Company's rights to offer to purchase such community. The Company's plans to continue to develop and acquire senior living communities. The development of senior living communities typically involves a substantial commitment of capital over an approximate 12-month construction period during which time no revenues are generated, followed by a 14- to 18-month lease-up period. The Company has entered into development and management agreements with the Triad Entities set out below for the development and management of new senior living communities. The Triad Entities will own and finance the construction of the new communities. These communities are primarily Waterford communities. The Company typically 29 receives a development fee of 4% of project costs, as well as reimbursement of expenses and overhead not to exceed 4% of project costs. The Company typically receives management fees in an amount equal to the greater of 5% of gross revenues or $5,000 per month per community, plus overhead reimbursement not to exceed 1%. The Company holds a 10% to 19% limited partnership interest in each of the Triad Entities and has the option to purchase the partnership interests of the other partners in each Triad Entity for an amount equal to the amount paid for the partnership interest by the other partners, plus noncompounded interest of 12% per annum, except Triad I. In addition, each management agreement entered into with the Triad Entities, except Triad I, provides the Company with an option to purchase the community developed by the applicable partnership upon its completion for an amount equal to the fair market value (based on a third-party appraisal but not less than hard and soft costs and lease-up costs) of the community. In December 1999, Triad I completed a recapitalization in which an affiliate of Lehman Brothers purchased from third parties 80% of the limited partnership interest in Triad I for an investment of $12,000,000. Lehman Brothers affiliate's investment enabled Trial I to repay the Company approximately $9,000,000 in loans. The Company increased its equity contribution in Triad I to $3,000,000 and continues to own a 19% limited partnership interest in Triad I. The Company has the option to purchase the Triad I communities for an amount specified on the partnership agreement. The Company will continue to develop and manage the communities in Triad I. The Company has made no determination as to whether it will exercise any of these purchase options. The Company will evaluate the possible exercise of each purchase option based upon the business and financial factors which may exist at the time those options may be exercised. Each Triad Entity finances the development of new communities through a combination of equity funding, traditional construction loans and permanent financing with institutional lenders secured by first liens on the communities and unsecured loans from the Company. The chart below sets forth information about the financings from institutional lenders and the Company loans. The Company loans may be prepaid without penalty. The financings from institutional lenders are secured by first liens on the communities as well as by assignment to the lenders of the construction contracts and the development and management agreements with subsidiaries of the Company. Each development and management agreement assigned to an institutional lender is also guaranteed by the Company and those guarantees are also assigned to the lenders. In most cases, the management agreements contain an obligation of the Company to make operating deficit loans to the Triad Entities if the other financing sources of the Triad Entities have been fully utilized. These operating deficit loan obligations, which are guaranteed by the Company, include making loans to fund debt service obligations to the lenders. Set forth below is information regarding the Company's loans to the Triad Entities, as well as information on the construction loan facilities entered into by each of the Triad Entities. 30
COMPANY LOANS TO TRIADS(1) CONSTRUCTION LOAN FACILITIES TO TRIADS --------------------------------------------------- ---------------------------------------- OUTSTANDING COMMITTED ON INTEREST ENTITY AMOUNT DEC. 31, 1999 MATURITY RATE AMOUNT TYPE LENDER - ----------------- ---------- ------------- ------------------ ------ ----------- -------------- --------- ($ IN THOUSANDS) Triad Senior (2) $30 (2) -% $50,000 construction; Bank One Living I, L.P. $50,000 take-out GMAC ("Triad I") Triad Senior $15,000 $11,510 September 25, 10.5% $26,800 construction; Key Bank Living II, L.P. 2003 mini-perm ("Triad II") Triad Senior $10,000 $9,810 February 8, 2004 10.5% $56,300 construction; Guaranty Living III, L.P. mini-perm Federal ("Triad III") Triad Senior $10,000 $5,178 December 30, 2003 10.5% $18,600 construction; Compass Living IV, L.P. mini-perm Bank ("Triad IV") Triad Senior $10,000 $3,467 June 30, 12.0% $27,000 construction; Bank of Living V, L.P. 2004 mini-perm America ("Triad V") Triad Senior $3,000 $600 October 1, 12.0% - - - Living VI, L.P. 2004 ("Triad VI")
(1) The Company has operating deficit loan obligations in management agreements in addition to the committed amounts shown relating to unsecured loans from the Company. (2) The amount shown was funded by the Company pursuant to operating deficit loan obligations. FINANCING OF THE ILM MERGERS The Company has entered into definitive Amended and Restated Agreements and Plans of Merger with ILM and ILM II to acquire these companies for a combined cash consideration of approximately $172 million, and the assumption of liabilities. The primary assets of ILM I and ILM II collectively are 13 senior living communities that have been managed by the Company under management agreements since 1996. The Company received a term sheet from GMAC to provide acquisition financing for the purchase of these 13 senior living communities and to provide interim financing on three senior living communities currently owned by the Company. The financing is expected to provide up to $180,000,000, subject to certain terms and conditions. YEAR 2000 ISSUE The Year 2000 issue results from the historical use in computer software programs and operating systems of a two-digit number to represent the applicable year. Concerns arose as to whether certain software and hardware would fail to properly function when confronted with dates that contain "00" as a two-digit year. To address the potential risk of disruption of operations, the Company developed and implemented a program to replace certain software and hardware, so that its systems would properly recognize and utilize dates beyond December 31, 1999. The Company also upgraded its general ledger and reporting software to avoid compatibility issues with certain of the reporting tools used in conjunction with the general ledger. The costs to the Company to achieve Year 2000 readiness were approximately $100,000. To date, the Company has not experienced any material problems relating to the Year 2000 issue. The Company will continue to monitor and evaluate internal Year 2000 compliance and the compliance of key suppliers. 31 IMPACT OF INFLATION To date, inflation has not had a significant impact on the Company. However, inflation could affect the Company's future revenues and results of operations because of, among other things, the Company's dependence on senior residents, many of whom rely primarily on fixed incomes to pay for the Company's services. As a result, during inflationary periods, the Company may not be able to increase resident service fees to account fully for increased operating expenses. In structuring its fees, the Company attempts to anticipate inflation levels, but there can be no assurance that the Company will be able to anticipate fully or otherwise respond to any future inflationary pressures. FORWARD-LOOKING STATEMENTS Certain information contained in this report constitutes "Forward-Looking Statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which can be identified by the use of forward-looking terminology such as "may," "will," "expect," "anticipate," "estimate" or "continue" or the negative thereof or other variations thereon or comparable terminology. The Company cautions readers that forward-looking statements, including, without limitation, those relating to the Company's future business prospects, revenues, working capital, liquidity, capital needs, interest costs, and income, are subject to certain risks and uncertainties that could cause actual results to differ materially from those indicated in the forward-looking statements, due to several important factors herein identified, among others, and other risks and factors identified from time to time in the Company's reports filed with the SEC. 32 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's primary market risk is exposure to changes in interest rates on debt instruments. As of December 31, 1999, the Company had $93,615,000 in outstanding debt comprised of various fixed and variable rate debt instruments of $59,479,000 and $34,136,000, respectively. Changes in interest rates would affect the fair market value of the Company's fixed rate debt instruments but would not have an impact on the Company's earnings or cash flows. Fluctuations in interest rates on the Company's variable rate debt instruments, which are tied to either the LIBOR or the prime rate, would affect the Company's earnings and cash flows but would not affect the fair market value of the variable rate debt. For each percentage point change in interest rates the Company's annual interest expense would increase by approximately $341,000 based on the Company's outstanding variable debt as of December 31, 1999. The following table summarizes information on the Company's debt instruments outstanding as of December 31, 1999. The table presents the principal due and weighted average interest rates for the Company's various debt instruments by fiscal year. Weighted average variable interest rates are based on the Company's floating rate as of December 31, 1999.
INTEREST RATE RISK PRINCIPAL AMOUNT AND AVERAGE INTEREST RATE BY EXPECTED MATURITY DATE ($ IN THOUSANDS) 2000 2001 2002 2003 2004 THEREAFTER TOTAL FAIR VALUE --------- -------- ---------- ---------- --------- ------------ ---------- ------------ Long-term debt: Fixed rate debt....... $1,063 $1,186 $1,133 $1,153 $1,255 $53,689 $59,479 $59,479 Average interest rate. 8.3% 8.3% 8.3% 8.3% 8.3% 8.3% Variable rate debt.......... $136 - - - - - $136 $136 Average interest rate....... 6.8% - - - - 0.0% Line of Credit: Variable rate debt.... - - $34,000 - - - $34,000 $34,000 Average interest rate. - - 8.2% - - - Total Debt.................. $93,615 $93,615
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements are included under Item 14 of this Annual Report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE The Company had no disagreements on accounting or financial disclosure matters with its independent accountants to report under this Item 9. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information contained under the caption "Election of Directors" in the Proxy Statement is incorporated herein by reference in response to this Item 10. See also Item 1. 33 ITEM 11. EXECUTIVE COMPENSATION Information contained under the captions "Executive Compensation" and "Election of Directors" in the Proxy Statement is incorporated herein by reference in response to this Item 11. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information contained under the caption "Principal Stockholders and Stock Ownership of Management" in the Proxy Statement is incorporated herein by reference in response to this Item 12. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information contained under the caption "Certain Relationships and Related Transactions" in the Proxy Statement is incorporated herein by reference in response to this Item 13. 34 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K The following documents are filed as part of this report: (1) Financial Statements: The response to this portion of Item 14 is submitted as a separate section of this report. See Index to Financial Statements at page F-1. (2) Financial Statement Schedules: All schedules have been omitted as the required information is inapplicable or the information is presented in the financial statements or related notes. (3) Exhibits: The exhibits listed on the accompanying index to exhibits at page E-1 are filed as part of this Report. (4) The Company filed the following reports on Form 8-K during the quarterly period ended December 31, 1999: (a) Current Report on Form 8-K, dated October 19, 1999. (b) Current Report on Form 8-K, dated October 19, 1999. 35 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized, on March 29, 2000. CAPITAL SENIOR LIVING CORPORATION By: /s/ Lawrence A. Cohen ------------------------------------------------------- Lawrence A. Cohen VICE CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Each person whose signature to this report appears below hereby appoints Lawrence A. Cohen and James A. Stroud and each of them, any one of whom may act without the joinder of the other, as his or her attorney-in-fact to sign on his behalf, individually and in each capacity stated below, and to file all amendments to this report, which amendment or amendments may make such changes in and additions to the report as any such attorney-in-fact may deem necessary or appropriate.
Signature Title Date /s/ James A. Stroud Chairman of the Board and Chairman March 29, 2000 - --------------------------------------- of the Company James A. Stroud /s/ Lawrence A. Cohen Vice Chairman of the Board and March 29, 2000 - --------------------------------------- Chief Executive Officer (Principal Lawrence A. Cohen Executive Officer) /s/ Keith N. Johannessen President and Chief Operating Officer March 29, 2000 - --------------------------------------- and Director Keith N. Johannessen /s/ Ralph A. Beattie Executive Vice President and Chief March 29, 2000 - --------------------------------------- Financial Officer (Principal Financial Ralph A. Beattie and Accounting Officer) /s/ Gordon I. Goldstein Director March 29, 2000 - --------------------------------------- Dr. Gordon I. Goldstein /s/ James A. Moore Director March 29, 2000 - --------------------------------------- James A. Moore /s/ Victor W. Nee Director March 29, 2000 - --------------------------------------- Dr. Victor W. Nee
36 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 (i)3.1.1 - Amendment to Amended and Restated Certificate of Incorporation of the Registrant (Exhibit 3.1) *3.2 - Amended and Restated Bylaws of the Registrant (i)3.2.1 - Amendments to Amended and Restated Bylaws of the Registrant (Exhibit 3.2) *10.1 - Asset Purchase Agreement, dated as of July 8, 1997, by and between Capital Senior Living Communities, L.P. and Capital Senior Living Corporation *10.2 - Contribution Agreement, dated as of August 1, 1997, by and among Capital Senior Living Corporation, Jeffrey L. Beck, James A. Stroud, Senior Living Trust, and Lawrence A. Cohen *10.3 - Stock Purchase and Stockholders' Agreement, dated as of November 1, 1996, by and among Capital Senior Living Corporation, Jeffrey L. Beck, Senior Living Trust, and Lawrence Cohen *10.4 - Amended and Restated Exchange Agreement, dated as of June 30, 1997, by and between Lawrence A. Cohen and Jeffrey L. Beck *10.5 - Amended and Restated Exchange Agreement, dated as of June 30, 1997, by and among Lawrence A. Cohen and James A. Stroud +(m)10.6 - 1997 Omnibus Stock and Incentive Plan for Capital Senior Living Corporation, as amended (Exhibit 4.1) +(m)10.6.1 - Form of Stock Option Agreement (Exhibit 4.2) *10.7 - Senior Living Agreement, by and between Capital Senior Living, Inc. and New World Development (China) Limited *10.8 - Amended and Restated Loan Agreement, dated as of June 30, 1997, by and between Lehman Brothers Holdings Inc., d/b/a/ Lehman Capital, A Division of Lehman Brothers Holdings Inc., and Capital Senior Living Communities, L.P. +*10.9 - Amended and Restated Employment Agreement, dated as of May 7, 1997, by and between Capital Senior Living, Inc. and Jeffrey L. Beck +*10.10 - Amended and Restated Employment Agreement, dated as of May 7, 1997, by and between Capital Senior Living, Inc. and James A. Stroud +*10.11 - Employment Agreement, dated as of November 1, 1996, by and between Capital Senior Living Corporation and Lawrence A. Cohen +*10.12 - Employment Agreement, dated as of November 26, 1996, by and between Capital Senior Living, Inc. and David R. Brickman E-1 +*10.13 - Employment Agreement, dated as of November 26, 1996, by and between Capital Senior Living, Inc. and Keith N. Johannessen *10.14 - Engagement Letter, dated as of June 30, 1997, by and between Lehman Brothers Holdings Inc. D/B/A Lehman Capital, A Division of Lehman Brothers Holdings Inc. and Capital Senior Living Corporation *10.15 - Lease Agreement, dated as of June 1, 1997, by and between G&L Gardens, LLC, as lessor, and Capital Senior Management 1, Inc., as lessee *10.16 - Pre-Opening Consulting Agreement, dated as of June 16, 1997, by and between The Emmaus Calling, Inc., as owner, and Capital Senior Management 1, Inc., as consultant *10.17 - Management Agreement, dated as of February 1, 1995, by and between Capital Senior Living Communities, L.P., as owner, and Capital Senior Living, Inc., as manager, regarding Canton Regency Retirement Community, in Canton, Ohio *10.18 - Management Agreement, dated as of February 1, 1995, by and between Capital Senior Living Communities, L.P., as owner, and Capital Senior Living, Inc., as manager, regarding Cottonwood Village, in Cottonwood, Arizona *10.19 - Management Agreement, dated as of February 1, 1995, by and between Capital Senior Living Communities, L.P., as owner, and Capital Senior Living, Inc., as manager, regarding The Harrison At Eagle Valley, in Indianapolis, Indiana *10.20 - Management Agreement, dated as of February 1, 1995, by and between Capital Senior Living Communities, L.P., as owner and Capital Senior Living, Inc., as manager, regarding Towne Centre, in Merrillville, Indiana *10.21 - Management Agreement, dated as of August 1, 1996, by and between Capital Senior Living, Inc., as manager, and Cambridge Nursing Home Limited Liability Company, as lessee *10.22 - Management Agreement, dated as of April 1, 1996, by and between Buckner Retirement Services, Inc. and Capital Senior Management 1, Inc. *10.23 - Management Agreement, dated as of May 23, 1997, by and between The Emmaus Calling, Inc., as owner, and Capital Senior Management 1, Inc., as manager *10.24 - Property Management Agreement, dated as of February 1, 1995, by and between NHP Retirement Housing Partners I Limited Partnership, as owner, and Capital Senior Living, Inc., as agent *10.25 - Management Agreement, dated as of April 1, 1997, by and between Buckner Retirement Services, Inc. and Capital Senior Management 1, Inc. *10.26 - Management Agreement, dated as of November 30, 1992, by and between Capital Realty Group Senior Housing, Inc. d/b/a Capital Senior Living, Inc., as manager, and Jacques-Miller Healthcare Properties, L.P., as owner *10.27 - Management Agreement, dated as of July 29, 1996, by and between ILM I Lease Corporation, as owner, and Capital Senior Management 2, Inc., as manager, and Capital Senior Living, Inc., as guarantor *10.28 - Management Agreement, dated as of July 29, 1996, by and between ILM II Lease Corporation, as owner, and Capital Senior Management 2, Inc., as manager, and Capital Senior Living, Inc., as guarantor E-2 *10.29 - Development Agreement, by and between Capital Senior Development, Inc., as developer, and Tri Point Communities, L.P., as owner *10.30 - Development and Turnkey Services Agreement, dated as of September 1, 1997, by and between Capital Senior Development Corporation and Tri-Point Communities, L.P. *10.31 - Management Agreement, by and between Tri Point Communities, L.P., as owner, and Capital Senior Living, Inc. (a)10.32 - Amended and Restated Loan Agreement, dated as of December 10, 1997, by and between Bank One, Texas, N.A. and Capital Senior Living Properties, Inc. (a)10.33 - Alliance Agreement, dated as of December 10, 1997, by and between LCOR Incorporated and Capital Senior Living Corporation (a)10.34 - Development Agreement, dated as of December 10, 1997, by and between Capital Senior Development, Inc. and Tri Point Communities, L.P., regarding senior living community in San Antonio, Texas (a)10.35 - Development Agreement, dated as of February 3, 1998, by and between Capital Senior Development, Inc. and Tri Point Communities, L.P., regarding senior living community in Shreveport, Louisiana (a)10.36 - Management Agreement, dated as of December 23, 1997, by and between Tri Point Communities, L.P. and Capital Senior Living, Inc., regarding senior living community in San Antonio, Texas (a)10.37 - Management Agreement, dated as of February 3, 1998, by and between Tri Point Communities, L.P. and Capital Senior Living, Inc., regarding senior living community in Shreveport, Louisiana (b)10.38 - Draw Promissory Note, dated April 1, 1998, of Triad Senior Living I, L.P. in favor of Capital Senior Living Properties, Inc. (c)10.39 - Draw Promissory Note, dated September 24, 1998, of Triad Senior Living II, L.P., in favor of Capital Senior Living Properties, Inc. (Exhibit 10.1) (d)10.40 - Asset Purchase Agreement, dated as of July 24, 1998, by and between Capital Senior Living Properties, Inc. and NHP Retirement Housing Partners I Limited Partnership (Exhibit 2.1) (d)10.41 - Assignment and Amendment to Asset Purchase Agreement, effective as of September 29, 1998, by and among NHP Retirement Housing Partners I Limited Partnership, Capital Senior Living Properties, Inc., and Capital Senior Living Properties 2 - NHPCT, Inc. (Exhibit 2.2) (d)10.42 - Loan Agreement, dated as of September 30, 1998, by and between Capital Senior Living Properties 2 -NHPCT, Inc. and Lehman Brothers Holdings Inc. d/b/a Lehman Capital, a division of Lehman Brothers Holdings Inc. (Exhibit 2.3) (e)10.43 - Asset Purchase Agreement, dated as of July 28, 1998, by and between Capital Senior Living Properties, Inc. and Gramercy Hill Enterprises (Exhibit 2.1) (e)10.44 - Asset Purchase Agreement, dated as of July 28, 1998, by and between Capital Senior Living Properties, Inc. and Tesson Heights Enterprises (Exhibit 2.2) (e)10.45 - Assumption and Release Agreement, effective as of October 28, 1998, among Gramercy Hill Enterprises, Andrew C. Jacobs, Capital Senior Living Properties 2-Gramercy, Inc., Capital Senior Living Corporation and Fannie Mae (Exhibit 2.4)
E-3 (e)10.46 - Multifamily Note, dated December 4, 1997, of Gramercy Hill Enterprises in favor of Washington Mortgage Financial Group, Ltd. (Exhibit 2.5) (e)10.47 - Multifamily Deed of Trust, dated December 4, 1997, among Gramercy Hill Enterprises, Ticor Title Insurance Company and Washington Mortgage Financial Group, Inc. (Exhibit 2.6) (e)10.48 - Multifamily Note, dated October 28, 1998, of Capital Senior Living Properties 2-Gramercy, Inc. in favor of WMF Washington Mortgage Corp. (Exhibit 2.7) (e)10.49 - Multifamily Deed of Trust, Assignment of Rents and Security Agreement, dated October 28, 1998, among Capital Senior Living Properties 2-Gramercy, Inc., Chicago Title Insurance Company and WMF Washington Mortgage Corp. (Exhibit 2.8) +(f)10.50 - Employment Agreement, dated as of December 10, 1996, by and between Capital Senior Living, Inc. and Rob L. Goodpaster (Exhibit 10.50) (f)10.51 - Draw Promissory Note dated November 1, 1998 of Triad Senior Living III, L.P., in favor of Capital Senior Living Properties, Inc. (Exhibit 10.51) (f)10.52 - Draw Promissory Note dated December 30, 1998 of Triad Senior Living IV, L.P., in favor of Capital Senior Living Properties, Inc. (Exhibit 10.52) (f)10.53 - Form of Development and Turnkey Services Agreement by and between Capital Senior Development, Inc. and applicable Triad entity (Exhibit 10.53) (f)10.54 - Form of Development Agreement by and between Capital Senior Development, Inc. and applicable Triad entity (Exhibit 10.54) (f)10.55 - Form of Management Agreement by and between Capital Senior Living, Inc. and applicable Triad entity (Exhibit 10.55) (f)10.56 - Agreement of Limited Partnership of Triad Senior Living I, L.P. dated April 1, 1998 (Exhibit 10.56) (f)10.57 - Agreement of Limited Partnership of Triad Senior Living II, L.P. dated September 23, 1998 (Exhibit 10.57) (f)10.58 - Agreement of Limited Partnership of Triad Senior Living III, L.P. dated November 10, 1998 (Exhibit 10.58) (f)10.59 - Agreement of Limited Partnership of Triad Senior Living IV, L.P. dated December 22, 1998 (Exhibit 10.59) (g)10.60 - 1999 Amended and Restated Loan Agreement, dated as of April 8, 1999, by and among Capital Senior Living Properties, Inc., Bank One, Texas, N.A. and the other Lenders signatory thereto (Exhibit 10.1) (g)10.61 - Amended and Restated Draw Promissory note, dated March 31, 1999, of Triad Senior Living I, L.P., in favor of Capital Senior Living Properties, Inc. (Exhibit 10.2) (g)10.62 - Amended and Restated Draw Promissory Note (Fairfield), dated January 15, 1999, of Triad Senior Living II, L.P., in favor of Capital Senior Living Properties, Inc. (Exhibit 10.3) (g)10.63 - Amended and Restated Draw Promissory Note (Baton Rouge), dated January 15, 1999, of Triad Senior Living II, L.P., in favor of Capital Senior Living Properties, Inc. (Exhibit 10.4) E-4 (g)10.64 - Amended and Restated Draw Promissory Note (Oklahoma City), dated January 15, 1999, of Triad Senior Living II, L.P., in favor of Capital Senior Living Properties, Inc. (Exhibit 10.5) (h)10.65 - Amended and Restated Draw Promissory Note dated June 30, 1999 of Triad Senior Living I, L.P. in favor of Capital Senior Living Properties, Inc. (Exhibit 10.1) (h)10.66 - Amended and Restated Draw Promissory Note (Plano, Texas) dated January 15, 1999 of Triad Senior Living II, L.P. in favor of Capital Senior Living Properties, Inc. (Exhibit 10.2) (h)10.67 - Letter Agreement dated July 28, 1999 among the Company and ILM Senior Living, Inc. and ILM II Senior Living, Inc. (Exhibit 10.3) (i)10.68 - Draw Promissory Note dated July 1, 1999 of Triad Senior Living V, L.P. in favor of Capital Senior Living Properties, Inc. (Exhibit 10.1) +(i)10.69 - First Amendment to Amended and Restated Employment Agreement of James A. Stroud, dated March 22, 1999, by and between James A. Stroud and Capital Senior Living Corporation (Exhibit 10.2) +(i)10.70 - Second Amendment to Amended and Restated Employment Agreement of James A. Stroud, dated May 31, 1999, by and between James A. Stroud and Capital Senior Living Corporation (Exhibit 10.3) +(i)10.71 - Employment Agreement, dated May 26, 1999, by and between Lawrence A. Cohen and Capital Senior Living Corporation (Exhibit 10.4) (j)10.72 - Agreement and Plan of Merger, dated February 7, 1999, by and among Capital Senior Living Corporation, Capital Senior Living Acquisition, LLC, Capital Senior Living Trust I and ILM Senior Living, Inc. (Exhibit 1) (k)10.73 - Agreement and Plan of Merger, dated February 7, 1999, by and among Capital Senior Living Corporation, Capital Senior Living Acquisition, LLC, Capital Senior Living Trust I and ILM II Senior Living, Inc. (Exhibit 1) (l)10.74 - Amended and Restated Agreement and Plan of Merger, dated October 19, 1999, by and among Capital Senior Living Corporation, Capital Senior Living Acquisition, LLC and ILM Senior Living, Inc. (Exhibit 1) (m)10.75 - Amended and Restated Agreement and Plan of Merger, dated October 19, 1999, by and among Capital Senior Living Corporation, Capital Senior Living Acquisition, LLC and ILM II Senior Living, Inc. (Exhibit 1) +(o)10.76 - Employment Agreement, dated May 25, 1999, by and between Ralph A. Beattie and Capital Senior Living Corporation +(o)10.77 - Consulting/Severance Agreement, dated May 20, 1999, by and between Jeffrey L. Beck and Capital Senior Living Corporation (o)10.78 - Second Amended and Restated Agreement of Limited Partnership of Triad Senior Living I, L.P. (o)21.1 - Subsidiaries of the Company (o)23.1 - Consent of Ernst & Young LLP (o)23.2 - Consent of KPMG LLP (o)27.1 - Financial Data Schedule
E-5 - ----------------------------- * Incorporated by reference to exhibit of corresponding number included in Registration Statement No. 333- 33379 on Form S-1 filed by the Company with the Securities and Exchange Commission. + Compensation plan, benefit plan or employment contract or arrangement. (a) Incorporated by reference to exhibit of corresponding number from the Company's Annual Report on Form 10-K for the year ended December 31, 1997, filed by the Company with the Securities and Exchange Commission. (b) Incorporated by reference to the exhibit of corresponding number from the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1998, filed by the Company with the Securities and Exchange Commission. (c) Incorporated by reference to the exhibit shown in parentheses from the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1998, filed by the Company with the Securities and Exchange Commission. (d) Incorporated by reference to the exhibit shown in parentheses from the Company's Current Report on Form 8-K, dated September 30, 1998, filed by the Company with the Securities and Exchange Commission. (e) Incorporated by reference to the exhibit shown in parentheses from the Company's Current Report on Form 8-K, dated October 29, 1998, filed by the Company with the Securities and Exchange Commission. (f) Incorporated by reference to the exhibit shown in parentheses from the Company's Annual Report on Form 10-K for the year ended December 31, 1998, filed by the Company with the Securities and Exchange Commission. (g) Incorporated by reference to the exhibit shown in parentheses from the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1999, filed by the Company with the Securities and Exchange Commission. (h) Incorporated by reference to the exhibit shown in parentheses from the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999, filed by the Company with the Securities and Exchange Commission. (i) Incorporated by reference to the exhibit shown in parentheses from the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1999, filed by the Company with the Securities and Exchange Commission. (j) Incorporated by reference to the exhibit shown in parentheses from the Company's Current Report on Form 8-K, dated February 7, 1999, filed by the Company with the Securities and Exchange Commission. (k) Incorporated by reference to the exhibit shown in parentheses from the Company's Current Report on Form 8-K, dated February 7, 1999, filed by the Company with the Securities and Exchange Commission. (l) Incorporated by reference to the exhibit shown in parentheses from the Company's Current Report on Form 8-K, dated October 19, 1999, filed by the Company with the Securities and Exchange Commission. (m) Incorporated by reference to the exhibit shown in parentheses from the Company's Current Report on Form 8-K, dated October 19, 1999, filed by the Company with the Securities and Exchange Commission. (n) Incorporated by reference to the exhibit shown in parentheses from the Company's Registration Statement on Form S-8, filed on December 3, 1999, by the Company with Securities and Exchange Commission. (o) Filed herewith. E-6 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, 1999 and 1998.......................................... F-4 Consolidated Statements of Income - December 31, 1999, 1998 and 1997.............................. F-5 Consolidated Statements of Shareholders' Equity - December 31, 1999, 1998 and 1997................ F-6 Consolidated Statements of Cash Flows - December 31, 1999, 1998 and 1997.......................... F-7 Notes to Consolidated Financial Statements........................................................ F-8
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Shareholders Capital Senior Living Corporation We have audited the accompanying consolidated balance sheets of Capital Senior Living Corporation as of December 31, 1999 and 1998, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the consolidated financial statements of HealthCare Properties, L.P. and subsidiaries, a 57% owned subsidiary, which statements reflect total assets of $32,055,252 and $32,758,958 as of December 31, 1999 and 1998, respectively, and total revenues of $9,499,819, $8,787,575 and $8,977,628 for the years ended December 31, 1999, 1998 and 1997, respectively. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to data included for HealthCare Properties, L.P., is based solely on the report of the other auditors. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of other auditors, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Capital Senior Living Corporation as of December 31, 1999 and 1998, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with generally accepted accounting principles in the United States. Ernst & Young LLP Dallas, Texas February 4, 2000 F-2 INDEPENDENT AUDITORS' REPORT The Partners HealthCare Properties, L.P. We have audited the consolidated balance sheets of HealthCare Properties, L.P. and subsidiaries (a Delaware limited partnership) as of December 31, 1999 and 1998, and the related consolidated statements of income, partnership equity, and cash flows for each of the years in the three-year period ended December 31, 1999. These consolidated financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of HealthCare Properties, L.P. and subsidiaries as of December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1999, in conformity with generally accepted accounting principles. /s/ KPMG LLP Dallas, Texas February 4, 2000, except as to the third paragraph of Note 13 which is as of March 1, 2000 F-3 CAPITAL SENIOR LIVING CORPORATION CONSOLIDATED BALANCE SHEETS
ASSETS DECEMBER 31, --------------------------------- 1999 1998 -------------- ---------------- Current assets: Cash and cash equivalents................................................. $ 32,988,024 $ 35,827,270 Accounts receivable, net.................................................. 3,391,803 2,955,507 Accounts receivable from affiliates....................................... 9,054,970 7,217,127 Interest receivable from affiliates....................................... 834,209 189,482 Federal and state income taxes receivable................................. 6,035,032 - Deferred taxes............................................................ 909,939 287,040 Prepaid expenses and other................................................ 508,410 448,790 --------------- -------------- Total current assets.................................................... 53,722,387 46,925,216 Property and equipment, net.................................................. 104,723,216 118,943,953 Deferred taxes............................................................... 9,516,051 10,108,715 Notes receivable from affiliates............................................. 30,595,610 11,728,162 Investments in limited partnership .......................................... 9,122,850 14,536,972 Assets held for sale......................................................... 9,549,084 - Other assets, net............................................................ 4,646,561 3,023,717 --------------- -------------- Total assets.......................................................... $ 221,875,759 $ 205,266,735 =============== ============= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable.......................................................... $ 2,512,202 $ 2,780,513 Accrued expenses.......................................................... 2,127,374 2,231,895 Current portion of notes payable.......................................... 1,199,299 48,419,050 Customer deposits......................................................... 910,693 851,375 Federal and state income taxes payable.................................... - 1,668,602 ----------------- ------------ Total current liabilities............................................. 6,749,568 55,951,435 Deferred income from affiliates ............................................. 1,784,600 792,240 Deferred income.............................................................. - 115,062 Notes payable, net of current portion ....................................... 58,415,956 13,696,797 Line of credit............................................................... 34,000,000 18,974,186 Minority interest in consolidated partnership ............................... 11,376,972 11,220,836 Commitments and contingencies Shareholders' equity: Preferred stock, $.01 par value: Authorized shares - 15,000,000; no shares issued or outstanding......... - - Common stock, $.01 par value: Authorized shares - 65,000,000 Issued and outstanding shares - 19,717,347 in 1999 and 1998.............................................................. 197,173 197,173 Additional paid-in capital................................................ 91,934,811 91,740,251 Retained earnings ........................................................ 17,416,679 12,578,755 ----------------- -------------- Total shareholders' equity............................................ 109,548,663 104,516,179 --------------- -------------- Total liabilities and shareholders' equity............................ $ 221,875,759 $ 205,266,735 =============== =============
See accompanying notes. F-4 CAPITAL SENIOR LIVING CORPORATION CONSOLIDATED STATEMENTS OF INCOME YEAR ENDED DECEMBER 31,
1999 1998 1997 ------------- ------------- --------- Revenues: Resident and health care revenue............................... $ 41,070,673 $ 25,987,776 $22,159,515 Rental and lease income........................................ 4,303,739 4,281,603 4,275,611 Unaffiliated management services revenue....................... 2,694,887 2,464,677 1,919,618 Affiliated management services revenue......................... 455,636 1,327,019 1,378,444 Unaffiliated development fees.................................. 1,341,102 1,234,050 803,767 Affiliated development fees.................................... 14,085,547 7,472,501 172,927 ------------- ------------- ------------- Total revenues............................................ 63,951,584 42,767,626 30,709,882 Expenses: Operating expenses............................................. 24,469,798 17,067,451 16,701,127 General and administrative expenses............................ 9,212,250 6,093,810 7,041,732 Provision for bad debts....................................... 15,895,566 500,000 43,254 Depreciation and amortization.................................. 4,671,076 2,733,658 2,117,288 ------------- ------------- ------------- Total expenses............................................ 54,248,690 26,394,919 25,903,401 ------------- ------------- ------------- Income from operations........................................... 9,702,894 16,372,707 4,806,481 Other income (expense): Interest income................................................ 5,822,277 4,938,989 3,185,815 Interest expense............................................... (7,089,229) (1,921,897) (2,022,494) Gain on sale of properties..................................... 748,288 421,718 - Other.......................................................... - - 440,007 ------------- ------------- ------------- Income before income taxes and minority interest in consolidated partnership....................................... 9,184,230 19,811,517 6,409,809 Provision for income taxes....................................... (2,991,723) (7,475,771) (792,524) ------------ ------------- ------------- Income before minority interest in consolidated partnership...... 6,192,507 12,335,746 5,617,285 Minority interest in consolidated partnership.................... (1,354,583) (379,187) (1,936,122) ------------ ------------- ------------- Net income....................................................... $ 4,837,924 $ 11,956,559 $ 3,681,163 ============ ============ ============ Net income per share: Basic.......................................................... $ 0.25 $ 0.61 $ 0.33 ============ ============ ============ Diluted....................................................... $ 0.24 $ 0.61 $ 0.33 ============ ============ ============ Weighted average shares outstanding - basic................... 19,717,347 19,717,347 11,150,087 ============ ============ ============ Weighted average shares outstanding - diluted................. 19,806,341 19,717,347 11,150,087 ============ ============ ============ Pro forma net income (unaudited): Net income..................................................... $ 3,681,163 Pro forma income taxes......................................... (964,776) ------------- Pro forma net income............................................. $ 2,716,387 ============
See accompanying notes. F-5 CAPITAL SENIOR LIVING CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
COMMON STOCK ADDITIONAL RETAINED PARTNERS' ------------------------ PAID-IN EARNINGS CAPITAL SHARES AMOUNT CAPITAL (DEFICIT) TOTAL ----------- ---------- ----------- ----------- ------------ ------------- Balance at January 1, 1997............. $17,257,778 1,680,000 $ 16,800 $ 26,558 $ (100,612) $ 17,200,524 Purchase of Beneficial Unit Certificates of CSLC ............. 374,867 - - - - 374,867 Distributions prior to Offering .... - - - (457,647) (457,647) Issuance of stock resulting from the Formation......................... - 7,687,347 76,873 (76,873) - - Issuance of stock in Offering, net.. - 10,350,000 103,500 110,227,415 - 110,330,915 Equity not retained in Asset Purchase (20,133,353) - - (18,436,849) - (38,570,202) Net income.......................... 2,500,708 - - - 1,180,455 3,681,163 ----------- ----------- ---------- ----------- ------------ ------------- Balance at December 31, 1997........... - 19,717,347 197,173 91,740,251 622,196 92,559,620 Net income.......................... - - - - 11,956,559 11,956,559 ----------- ------------ ---------- ----------- ------------ ------------- Balance at December 31, 1998 - 19,717,347 197,173 91,740,251 12,578,755 104,516,179 Non cash compensation............... - - - 194,560 - 194,560 Net income.......................... - - - - 4,837,924 4,837,924 ----------- ------------ ---------- ----------- ------------ ------------- Balance at December 31, 1999 $ - 19,717,347 $ 197,173 $91,934,811 $ 17,416,679 $109,548,663 =========== ============ ========== =========== =========== -============
See accompanying notes. F-6 CAPITAL SENIOR LIVING CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, ----------------------------------------- 1999 1998 1997 ------------ ------------ ----------- OPERATING ACTIVITIES Net income............................................ $ 4,837,924 $ 11,956,559 $ 3,681,163 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation..................................... 4,567,172 2,639,883 1,894,665 Amortization..................................... 103,904 93,775 222,623 Amortization of deferred financing charges....... 518,842 163,708 - Minority interest in consolidated partnership.................................... 1,354,583 379,187 1,936,122 Deferred interest................................ - (679,619) (173,456) Deferred income from affiliates.................. 992,360 792,240 - Deferred income.................................. (115,062) (116,194) 231,256 Deferred income taxes............................ (30,235) (296,478) (39,158) Gain on sale of property......................... (748,288) (421,718) - Non cash compensation............................ 194,560 - - Provision for bad debts.......................... 15,895,566 500,000 43,254 Changes in operating assets and liabilities, net of acquisitions: Cash, restricted............................. - - 186,416 Accounts receivable.......................... (1,011,705) (1,481,883) (1,556,965) Accounts receivable from affiliates.......... (12,463,743) (7,190,431) 90,955 Interest receivable from affiliates.......... (644,727) (306,108) - Prepaid expenses and other................... (59,620) 4,110 (373,006) Other assets................................. (1,503,759) (1,059,034) (11,454) Accounts payable............................. (268,311) 311,734 2,667,158 Accrued expenses............................. (871,927) 525,944 23,529 Federal and state income taxes payable....... (7,703,634) 836,920 831,682 Customer deposits............................. 59,318 36,812 28,955 ------------ ------------ ------------ Net cash provided by operating activities............. 3,103,218 6,689,407 9,683,739 INVESTING ACTIVITIES Capital expenditures.................................. (1,887,448) (6,027,361) (2,441,106) Cash paid for acquisitions............................ - (67,728,438) - Proceeds from sale of property........................ 2,740,217 676,036 - Advances to affiliates................................ (22,794,299) (11,728,162) - Cash acquired upon acquisition of HCP................. - - 8,995,455 Investment in restricted cash equivalents............. - - (64,202,763) Cash paid for Asset Purchase and cash not retained - - (8,244,077) Proceeds from (investments in) limited partnerships 5,414,122 (1,693,934) (15,609,034) ------------ ----------- ----------- Net cash used in investing activities................. (16,527,408) (86,501,859) (81,501,525) FINANCING ACTIVITIES Proceeds from notes payable and line of credit........ 61,506,256 67,039,026 78,663,883 Repayments of notes payable and line of credit........ (48,981,034) (791,214) (77,363,736) Repayments of notes payable to affiliates............. - - (1,166,481) Proceeds from notes payable to affiliates............. - - 500,000 Distributions to minority partners.................... (1,198,447) - (224,795) Distributions prior to Offering....................... - - (457,647) Issuance of common stock, net......................... - - 110,330,915 Cash received for redemption of NHP limited partnership interest................................ - 1,997,280 - Repurchase of HCP limited partnership interests by HCP................................................. - (144,791) - Repurchase of Beneficial Unit Certificates of CSLC.... - - (960,752) Deferred financing charges paid....................... (741,831) (585,804) (196,888) ----------- ----------- ----------- Net cash provided by financing activities............. 10,584,944 67,514,497 109,124,499 ----------- ----------- ----------- (Decrease) increase in cash and cash equivalents..... (2,839,246) (12,297,955) 37,306,713 Cash and cash equivalents at beginning of year....... 35,827,270 48,125,225 10,818,512 ----------- ----------- ----------- Cash and cash equivalents at end of year............. $32,988,024 $35,827,270 $48,125,225 =========== =========== =========== SUPPLEMENTAL DISCLOSURES Cash paid during the year for: Interest............................................ $ 6,475,989 $ 1,956,812 $ 2,041,366 =========== =========== =========== Income taxes........................................ $10,275,592 $ 6,935,330 $ - =========== =========== ===========
See accompanying notes F-7 CAPITAL SENIOR LIVING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999 1. ORGANIZATION AND FORMATION Capital Senior Living Corporation, a Delaware corporation, was incorporated on October 25, 1996. The accompanying financial statements include the consolidated financial statements of Capital Senior Living Corporation ("Corporation"); Capital Senior Living, Inc. ("Living"); Capital Senior Development, Inc. ("Development"); Capital Senior Management 1, Inc. ("Management 1"); Capital Senior Management 2, Inc. ("Management 2"); Capital Senior Living Trust I ("Trust I"); Quality Home Care, Inc. ("Quality"); Capital Senior Living Properties, Inc. including HealthCare Properties, L.P. ("HCP"); and Capital Senior Living Properties 2, Inc. ("Properties 2"), which includes Capital Senior Living Properties 2-Gramercy, Inc. ("Gramercy"), Capital Senior Living Properties 2-NHPCT, Inc. ("NHPCT") and Capital Senior Living Properties 2 - - NHPT, Inc. ("NHPT") (collectively referred to with Capital Senior Living Corporation as the "Company"). The accompanying financial statements are presented on a combined basis prior to November 5, 1997, and include Capital Senior Living Communities, L.P. ("CSLC") through that date. CSLC included the accounts of CSLC and HCP. All material intercompany balances and transactions have been eliminated in consolidation. The Company is a provider of senior living services. The Company owns, operates, develops and manages senior living communities throughout the United States. The Company completed the registration of its common stock in an initial public offering ("Offering") on November 5, 1997. Simultaneously with the closing of the Offering, the Corporation acquired Living, Quality, Development, Management 1, and Management 2 ("Formation") in exchange for 7,687,347 shares of common stock and a note payable for $18,076,380 ("Formation Note") to Jeffrey L. Beck and James A. Stroud or a related trust (collectively, the "Stockholders") and Lawrence A. Cohen, all officers of the Company. Additionally, Corporation purchased substantially all of the assets, other than working capital items, of CSLC (the "Asset Purchase") for the assumption of a $70,833,752 note payable and a cash payment of $5,782,927. The Stockholders owned 46% of the common stock of the Company after the Offering. Due to all of these entities being under the common control of the Stockholders for all periods presented prior to the Offering, these consolidated financial statements reflect the assets and liabilities at their historical values and the accompanying consolidated statements of income, equity, and cash flows reflect the consolidated results for the periods indicated even though they have historically operated as separate entities prior to the Formation. The Formation was accounted for at historical cost in a manner similar to a pooling of interests to the extent of the percentage ownership by the Stockholders. The Asset Purchase was recorded at fair value to the extent of the minority interest. A step-up in basis of $9,282,202 was recorded for property and equipment and $2,692,669 for the investment in NHP Notes. Additionally, a deferred tax asset of $10,060,119 and goodwill of $1,264,881 was recorded. Assets that were not acquired from CSLC in the Asset Purchase that were combined in the financial statements until such date were charged to paid-in capital. CSLC's assets included investments in HCP and NHP Retirement Housing Partners I, L.P. ("NHP") which were acquired in the Asset Purchase. NHP owned a portfolio of five independent senior living communities. On September 30, 1998, the Company purchased four of the five independent senior living communities from NHP (See Note 4). In the accompanying consolidated financial statements, HCP is consolidated as the Company had acquired a controlling financial interest in HCP during 1997. At December 31, 1999, 1998 and 1997, the Company owned approximately 57%, 57% and 56% of HCP's limited partner units, respectively. Preacquisition earnings for 1997 applicable to HCP are included in minority interest. HCP is a Delaware limited partnership established for the purpose of acquiring, leasing and operating existing or newly constructed long-term health care properties. One property is operated by HCP and six properties are leased to qualified operators who provide specialized healthcare services. Capital Realty Group Senior Housing, Inc. ("Housing"), an entity controlled by the Stockholders until June 10, 1998, is the general partner. On June 10, 1998, Housing's parent corporation, Capital Realty Group Corporation, sold 100% of its stock in Housing to an F-8 CAPITAL SENIOR LIVING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) unrelated third party. HCP and NHP are subject to the reporting obligations of the Securities and Exchange Commission. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CASH AND CASH EQUIVALENTS Investments with original maturities of three months or less are considered to be cash equivalents. The Company has deposits in banks that exceed Federal Deposit Insurance Corporation insurance limits. Management believes that credit risk related to these deposits is minimal. Cash and cash equivalents, at December 31, 1999 and 1998, includes the cash and cash equivalents of the HCP partnership of $13,723,936 and $11,971,405, respectively. LONG-LIVED ASSETS Property and equipment are stated at cost and depreciated on a straight-line basis over the estimated useful lives of the assets. The estimated useful lives are 30 to 40 years for buildings, 20 years for land improvements and 5 to 10 years for furniture, equipment and automobiles. Management contract rights of $516,163, included in other assets, are stated at cost and amortized on a straight-line basis over their respective contract lives. Accumulated amortization for management contract rights at December 31, 1999 and 1998, was $368,460 and $320,530, respectively. Goodwill of $1,264,881, included in other assets, is the excess purchase price over the fair value of the assets acquired in the Asset Purchase to the extent of the minority interest and is amortized over 30 years on a straight-line basis. Accumulated amortization for goodwill at December 31, 1999 and 1998, was $94,723 and $51,005, respectively. At each balance sheet date, the Company reviews the carrying value of its management contract rights, goodwill, and property and equipment to determine if facts and circumstances suggest that they may be impaired or that the amortization or depreciation period may need to be changed. The Company considers external factors relating to each asset, including contract changes, local market developments, and other publicly available information. The carrying value of a long-lived asset is considered impaired when the anticipated undiscounted cash flows from such asset is separately identifiable and is less than its carrying value. In that event, a loss is recognized based on the amount the carrying value exceeds the fair market value, generally based on discounted cash flows, of the long-lived asset. The Company does not believe there are any indicators that would require an adjustment to the carrying value of the management contract rights, goodwill or property and equipment or their remaining useful lives as of December 31, 1999 and 1998. ASSETS HELD FOR SALE During 1999, the Company reclassified four of its properties in HCP to assets held for sale. Two of the properties had been leased to Rebound Inc., a subsidiary of HealthSouth Corporation ("HealthSouth"), under a master lease agreement and both properties were closed prior to February 28, 1997. Effective August 25, 1999, HealthSouth agreed to transfer control of the two closed communities to the Company. The assets of one of the two communities, with the exception of two houses, were sold on September 20, 1999. The Company estimates the properties held for sale have an aggregate fair value, net of costs of disposal, of $9,549,084 at December 31, 1999. The amounts the Company will ultimately realize could differ materially from this estimate. INCOME TAXES The Company accounts for income taxes under the liability method. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. F-9 CAPITAL SENIOR LIVING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Prior to the Formation, the predecessor companies were S corporations and consequently, were not subject to income taxes. Thus, taxable income or loss is directly allocated to the individual stockholders. Upon Formation, these corporations converted from S corporations to C corporations. A deferred tax benefit of $41,085 was recorded in the consolidated statements of income upon conversion. REVENUE RECOGNITION Resident and health care revenue is recognized at estimated net realizable amounts due from residents in the period to which the rental and other services are provided. Revenues from the Medicare and Medicaid programs accounted for 11%, 16% and 22% in 1999, 1998 and 1997, respectively of the Company's net revenues. One community is a provider of services under the Indiana Medicaid program. Accordingly, the community is entitled to reimbursement under the foregoing program at established rates that are lower than private pay rates. Patient service revenue for Medicaid patients is recorded at the reimbursement rates as the rates are set prospectively by the state upon the filing of an annual cost report. Two communities are providers of services under the Medicare program and are entitled to payment under the foregoing programs in amounts determined based on established rates that differ from private pay rates. In 1998 and prior years, payments were based on the filing of an annual cost report prepared in accordance with federal regulations, which are subject to audit and retroactive adjustments in future periods. Revenue from the Medicare program is recorded at established rates and adjusted for differences between such rates and estimated amounts payable from the program. Any differences between estimated and actual reimbursements are included in operations in the year of settlement, which have not been material. Under federal regulations, Medicare reimbursements through 1998 to these facilities were limited to routine cost limits determined on a geographical region. The Company has filed exception reports to request reimbursement in excess of its routine cost limits for the years 1997 through 1998, as of December 31, 1999, and recorded revenue of approximately $43,000 in 1998, as a result of being granted exception requests for 1997 and approximately $346,000 in 1997, as a result of being granted exception requests for 1992 and 1994. CSLC retained cost report exposure for cost years prior to the Offering. Laws and regulations governing the Medicare and Medicaid programs are complex and subject to interpretation. The Company believes that it is in compliance with all applicable laws and regulations and is not aware of any pending or threatened investigations involving allegations of potential wrongdoing. While no such regulatory inquiries have been made, compliance with such laws and regulations can be subject to future government review and interpretation as well as significant regulatory action including fines, penalties, and exclusion from the Medicare and Medicaid programs. Management services revenue, resident and healthcare revenue and development fees are recognized when earned. Management services revenue relates to providing certain management and administrative support services under management contracts, which have terms expiring through 2009. Management services revenue is shown net of reimbursed expenses. The reimbursed expenses from affiliates were $1,655,459, $3,486,163 and $3,892,526, for the years ended December 31, 1999, 1998 and 1997, respectively. Reimbursed expenses from unaffiliated parties were $12,539,616, $11,203,790 and $8,941,343, for the years ended December 31, 1999, 1998 and 1997, respectively. Affiliated development fees in the accompanying statements of income represent development fees earned from the Triad Entities (see Note 3). CREDIT RISK The Company's resident receivables are generally due within 30 days and development fee receivables are due through completion of construction, which is generally one year. The Company does not require collateral. Credit losses, on resident receivables, have been within management's expectations, and management believes that the allowance for doubtful accounts adequately provides for any expected losses. F-10 CAPITAL SENIOR LIVING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) ADVERTISING Advertising is expensed as incurred. Advertising expenses for the years ended December 31, 1999, 1998 and 1997 were $357,208, $243,720 and $336,738, respectively. NET INCOME PER SHARE Basic net income per share is calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted net income per share considers the dilutive effect of outstanding options calculated using the treasury stock method. The following table set forth the computation of basic and diluted net income per share (in thousands except for per share amounts):
1999 1998 1997 ----------- ----------- ----------- Net income $ 4,838 $ 11,957 $ 3,681 Weighted average shares outstanding - basic 19,717 19,717 11,150 Effect of dilutive securities: Employee stock options 89 -- -- ----------- ----------- ----------- Weighted average shares outstanding - dilutive 19,806 19,717 19,717 =========== =========== =========== Basic net income per share $ 0.25 $ 0.61 $ 0.33 =========== =========== =========== Diluted net income per share $ 0.24 $ 0.61 $ 0.33 =========== =========== ===========
STOCK-BASED COMPENSATION The Company has elected to follow the intrinsic value method in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related interpretations in accounting for its employee and director stock options. In accordance with APB 25, since the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. The Company has adopted the disclosure-only provisions for the fair value method of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("FASB 123"). Stock option grants to non-employees are accounted for in accordance with the fair value method of FASB 123. SEGMENT INFORMATION The Company evaluates the performance and allocates resources of its senior living facilities based on current operations and market assessments on a property by property basis. The Company does not have a concentration of operations geographically or by product or service as its management functions are integrated at the property level. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. RECLASSIFICATIONS Certain prior year amounts have been reclassified to conform to 1999 presentation. F-11 CAPITAL SENIOR LIVING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 3. TRANSACTIONS WITH AFFILIATES The Company has entered into development and management agreements with the partnerships set out below (the "Triad Entities") for the development and management of new senior living communities. The Triad Entities own and finance the construction of new senior living communities. These communities are primarily Waterford communities. The development of senior living communities typically involves a substantial commitment of capital over an approximate 12 month construction period, during which time no revenues are generated followed by a 14 to 18 month lease up period. The Company is accounting for these investments under the equity method of accounting based on the provisions of the Triad Entities partnership agreements. The following table sets forth the percentage ownership the Company has in each of the Triad Entities, the capital invested, information related to loans made by the Company to each Triad Entity and information on deferred income related to each Triad Entity (dollars in thousands):
Notes Receivable Deferred Income ----------------------------------------------- --------------------- LP Ownership Capital Committed Balance Interest Development Interest Investment Amount Dec. 31, Maturity Rate Interest Fees ----------- ---------- ---------- ---------- ----------- ---------- --------- ----------- ENTITY Triad Senior Living I, L.P. (Triad I) 1999 19.0% $3,000 $ -- $ 30 -- 8.0% $230 $426 1998 19.0 330 9,636 8.0 67 223 Triad Senior Living II, L.P. (Triad II) 1999 19.0 74 15,000 11,510 September 10.5 130 197 1998 19.0 74 10,000 932 25, 2003 10.5 3 95 Triad Senior Living III, L.P. (Triad III) 19.0 143 10,000 9,810 February 10.5 111 377 1999 19.0 143 10,000 -- 8, 2004 10.5 -- 163 1998 Triad Senior Living IV, L.P. (Triad IV) 1999 19.0 143 10,000 5,178 December 10.5 73 106 1998 19.0 143 10,000 1,160 30, 2003 10.5 -- 238 Triad Senior Living V, L.P. (Triad V) June 30, 1999 10.0 -- 10,000 3,467 2004 12.0 17 80 Triad Senior Living VI, L.P. (Triad VI) October 1, 1999 5.0 -- 3,000 600 2004 12.0 2 --
The Company typically receives a development fee of 4% of project costs, as well as reimbursement of expenses and overhead not to exceed 4% of project costs. These fees are recorded over the term of the development project on a basis approximating the percentage of completion method. In addition, when the properties become F-12 CAPITAL SENIOR LIVING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) operational, the Company typically receives management fees in an amount equal to the greater of 5% of gross revenues or $5,000 per month per community, plus overhead not to exceed 1% of gross revenue. The Company has the option to purchase the partnership interests of the other parties in Triad Entities for an amount equal to the amount paid for the partnership interest by the other partners, plus a noncompounded return of 12% per annum except for Triad I. In addition, each Triad Entity except Triad I provides the Company with an option to purchase the community developed by the applicable partnership upon their completion for an amount equal to the fair market value (based on a third-party appraisal but not less than hard and soft costs and lease-up costs) of the community. In December 1999, Triad I completed a recapitalization in which Lehman Brothers purchased from third parties 80% of the limited partnership interest in Triad I for an investment of $12,000,000. The investment enabled Triad I to repay the Company approximately $9,000,000 in loans. The Company increased its equity contribution in Triad I to $3,000,000 and continues to own a 19% limited partnership interest. The Company has the option to purchase the Triad I communities for an amount specified in the partnership agreement. The Company will continue to develop and manage the communities in the Triad I partnership. The Company has made no determination as to whether it will exercise any of these purchase options. Each of the Triad Entities finances the development of the new communities though the combination of equity funding, traditional construction loans and permanent financing with institutional lenders secured by first liens on the communities and unsecured loans from the Company. The Company loans may be prepaid without penalty. The financings from institutional lenders are secured by first liens on the communities as well as assignment to the lenders of the construction contracts and the development and management agreements with the Company. Each development and management agreement assigned to an institutional lender is also guaranteed by the Company and those guarantees are also assigned to the lenders. In certain cases, the management agreements contain an obligation of the Company to fund operating deficits to the Triad Entities if the other financing sources of the Triad Entities have been fully utilized. These operating deficit funding obligations are guaranteed by the Company. 4. ACQUISITIONS On September 30, 1998, the Company acquired four senior living communities from NHP for $40,683,281 by entering into a $32,300,000 mortgage loan agreement with Lehman Brothers Holdings, Inc. ("Lehman"), a cash payment of $8,246,007 and assuming net liabilities of $137,274. The acquisition was accounted for as a purchase. The Company's preliminary purchase price allocation was based on independent valuations from third party valuation firms. On October 28, 1998, the Company acquired a senior living community from Tesson Heights Enterprises, a Texas limited partnership, for $23,051,786 by borrowing $15,400,000 pursuant to the existing mortgage loan agreement with Lehman and $7,376,632 under an existing line of credit and assuming $275,154 of net liabilities. The Company also acquired a senior living community from Gramercy Hill Enterprises, a Texas limited partnership, for $11,036,655 by assuming a $6,334,660 note, borrowing $1,980,000 from WMF Washington Mortgage Corp. ("WMF") on a second lien basis and $2,425,798 under an existing line of credit and assuming net liabilities of $296,197. The acquisitions were accounted for as a purchase. The Company's preliminary purchase price allocations were based on independent valuations from third-party valuation firms. The results of operations for the above acquisitions are included in the Company's statement of income from the date of acquisition. F-13 CAPITAL SENIOR LIVING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Pro forma results of operations as if the NHP, Tesson Heights and Gramercy Hill acquisitions had occurred on January 1, 1997 are as follows:
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 - basic and diluted...................................... $ 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 that would have actually resulted had the acquisitions occurred on January 1, 1997. 5. PROPERTY AND EQUIPMENT Property and equipment consists of the following:
DECEMBER 31, -------------------------------- 1999 1998 ------------------ ------------- Land.........................................................................$ 9,173,178 $ 10,641,671 Land improvements............................................................ 107,232 6,400 Buildings and building improvements.......................................... 101,824,613 119,759,970 Furniture and equipment...................................................... 5,047,046 4,685,174 Automobiles.................................................................. 169,361 73,890 Construction in process...................................................... 54,354 71,611 --------------- -------------- 116,375,784 135,238,716 Less accumulated depreciation................................................ 11,652,568 16,294,763 --------------- -------------- Property and equipment, net..................................................$ 104,723,216 $ 118,943,953 =============== ==============
On September 20, 1999, the Company sold one of its properties for $2,740,000, net of sales commission, which resulted in the recognition of a gain of $748,248. On December 7, 1998, the Company sold land on one of its properties for $12,662, which resulted in the recognition of a $8,545 gain and net cash proceeds of $11,052. On November 24, 1998, the Company sold land on one of its properties for $738,385. This sale resulted in a $415,847 gain and net cash proceeds of $664,984. The Company capitalized $0 and $348,626 of interest as part of building and building improvements during 1999 and 1998, respectively. 6. ACCRUED EXPENSES Accrued expenses consists of the following:
DECEMBER 31, -------------------------------- 1999 1998 ------------- -------------- Accrued salaries, bonuses and related expenses............................. $ 936,469 $ 847,722 Accrued property taxes..................................................... 665,663 538,697 Other...................................................................... 525,242 845,476 ------------- -------------- $ 2,127,374 $ 2,231,895 ============= ==============
F-14 CAPITAL SENIOR LIVING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 7. NOTES PAYABLE AND LINE OF CREDIT Notes payable consists of the following:
DECEMBER 31, --------------------------------- 1999 1998 --------------- -------------- WMF mortgage loan, bearing interest at 7.69%, payable in monthly installments of principal and interest of $48,089, maturing on January 2008 secured by a certain property of Gramercy with a net book value of $10,819,112 at December 31, 1999......................................................... $ 6,217,055 $ 6,312,032 WMF second mortgage loans, bearing interest at 7.08%, payable in monthly installments of principal and interest of $14,095, maturing on January 2010 secured by a certain property of Gramercy with a net book value of $10,819,112 at December 31, 1999................. 1,944,885 1,975,159 Lehman mortgage loan, bearing interest at 8.20%, payable in monthly installments of principal and interest of $360,915, maturing on September 2009 secured by certain properties of NHPT with a net book value of $62,378,615 at December 31, 1999................. 45,801,968 - Lehman $60 million mortgage loan, bearing interest at prime or LIBOR plus 1.875% (6.95% at December 31, 1998), payable in monthly installments of interest only, maturing on October 1, 1999, secured by the certain properties of NHPT................ - 47,700,000 A.I. Credit Corp insurance premium financing, bearing interest at 7.09%, payable in monthly installments of principal and interest of $19,205, maturing on April 2002.................................................... 478,066 - HCP mortgage loans, bearing interest ranging from 6.2% to 10.75%, payable in monthly installments of $99,212 including interest, maturing from 2001 to 2012 secured by certain properties of HCP with a net book value of $8,431,900 at December 31, 1999........................................... 5,173,281 6,128,656 ------------- ------------- 59,615,255 62,115,847 Less current portion...................................................... 1,199,299 48,419,050 ------------- ------------- $ 58,415,956 $ 13,696,797 ============= =============
The aggregate maturities of notes payable at December 31, 1999, are as follows: 2000 $ 1,199,299 2001 1,185,465 2002 1,132,665 2003 1,153,302 2004 1,255,320 Thereafter 53,689,204 --------------- $ 59,615,255 ===============
In August 1999, the Company repaid $47,700,000 in outstanding short-term variable rate debt and replaced it with $45,970,000 of long-term fixed rate loans. The fixed rate loans are non-recourse loans secured by certain properties owned by the Company. These loans are for 10-year terms, bear interest at 8.2% with the principal being amortized over a 25-year period. In connection with obtaining these mortgage loans the Company incurred $574,138 in financing charges, that were deferred and amortized over the life of the loans using the straight-line method. Accumulated amortization was $19,138 at December 31, 1999. F-15 CAPITAL SENIOR LIVING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) In connection with obtaining the 1998 Lehman and other 1998 mortgage loans, the Company incurred $576,904 in financing charges, that were deferred and amortized over the life of the loans using the straight-line method. Accumulated amortization was $528,985 and $123,727 at December 31, 1999 and 1998, respectively. On December 10, 1997, the Company entered into a $20 million revolving line of credit with a bank, that was to expire December 10, 2000. In April 1999, the line of credit was amended to increase the availability under the credit facility to $34 million and extend the maturity date to April 2002. Under the terms of the line of credit, interest is due monthly and the principle is due at the end of the term of the credit agreement. Borrowings under the line of credit are secured by four senior living communities with a net book value of $32,158,248 at December 31, 1999, and bear interest at the prime rate or LIBOR plus 1.7% (8.18% and 7.33% at December 31, 1999 and 1998, respectively). The line of credit may be used for the acquisition of additional properties, development of expansions to existing properties, acquisition of additional interests in HCP and NHP and general working capital purposes. Amounts outstanding under the line of credit at December 31, 1999 and 1998 were $34,000,000 and $18,974,186, respectively. In connection with obtaining the line of credit and the subsequent amendment, the Company incurred $160,684, $6,847 and $111,533 in 1999, 1998 and 1997, respectively, in financing charges, that were deferred and amortized over the life of the line of credit. Accumulated amortization was $133,497, $41,066 and $3,098 at December 31, 1999, 1998 and 1997, respectively. Under the line of credit, the Company must maintain certain levels of tangible net worth and comply with other restrictive covenants. HCP leased four of its properties under a master lease to HealthSouth (see Note 17). Prior to February 28, 1997, HealthSouth closed two of the communities. Effective August 5, 1999, HealthSouth agreed to transfer control of the two closed communities to HCP. HealthSouth also agreed to continue making its full lease payments on all four communities. The rentals under the master lease provide additional security for one note payable used to finance one of the master lease properties. The note is due December 1, 2001. 8. EQUITY The Company is authorized to issue preferred stock in series and to fix and state the voting powers and such designations, preferences and relative participating, optional or other special rights of the shares of each such series and the qualifications, limitations and restrictions, thereof. Such action may be taken by the Board without stockholder approval. The rights, preferences and privileges of holders of common stock are subject to the rights of the holders of preferred stock. On November 5, 1997, the Company issued 10,350,000 shares of $.01 par value common stock for cash of $110,330,915, net of issuance costs of $11,317,705 and payment of the Formation Note of $18,076,380, in connection with the Offering. Additionally, the Company issued 7,687,347 shares of $.01 par value common stock in connection with the Formation. For financial reporting purposes, the shares issued in connection with the Formation are presented as outstanding as of January 1, 1997. Purchases of Beneficial Unit Certificates ("BUCs") of CSLC during 1997 represent additional purchases by the Stockholders and are accounted for at the book value of the BUCs and as an addition to partners' capital and a reduction in minority interest. CSLC purchased 55,316 BUCs during 1997, at an average cost of $17.37 per unit. Net income (loss) of HCP is generally allocated 98% to the limited partners and 2% to the general partner. The net income of HCP from the disposition of a property is allocated: (i) to partners with deficit capital accounts on a pro rata basis; (ii) to limited partners until they have been paid an amount equal to the amount of their adjusted investment (as defined); (iii) to the limited partners until they have been allocated income equal to their 12% Liquidation Preference; and (iv) thereafter, 80% to the limited partners and 20% to the general partner. The net loss of HCP from the disposition of a property is allocated: (i) to partners with positive capital accounts on a F-16 CAPITAL SENIOR LIVING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) pro rata basis and (ii) thereafter, 98% to the limited partners and 2% to the general partner. Distributions of available cash flow are generally distributed 98% to the limited partners and 2% to the general partner, until the limited partners have received an annual preferential distribution, as defined. Thereafter, available cash flow is distributed 90% to the limited partners and 10% to the general partner. During 1998, HCP repurchased $144,791 of its limited partnership interests. HCP made distributions of $1,198,447 and $224,795 to minority partners in 1999 and 1997, respectively. 9. STOCK OPTIONS The Company adopted a stock option plan during 1997, providing for the grant of incentive and nonqualified stock options to employees and directors. This plan was amended during the year to increase the number of options available for grant under the plan from 1,565,000 to 2,000,000 shares and 2,000,000 shares of common stock are reserved for future issuance. The option exercise price and vesting provisions of such options are fixed when the option is granted. The options expire four to ten years from the date of grant and vest from zero to five years. The option exercise price is the fair market value of a share of common stock on the date the option is granted. A summary of the Company's stock option activity, and related information for the years ended December 31, 1999 and 1998 is presented below:
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 Granted 874,500 $7.54 Exercised - - Forfeited 76,000 $11.62 Expired - - -------------- -------------------- Outstanding at December 31, 1999 1,498,000 $10.13 ============== ==================== Exercisable at December 31, 1999 421,780 $13.42 ============== ==================== ============== ==================== Exercisable at December 31, 1998 258,010 $13.50 ============== ==================== ============== ==================== Exercisable at December 31, 1997 121,500 $13.50 ============== ====================
The weighted average remaining contractual life of the options at December 31, 1999 and 1998, is approximately 8.4 years and 8.8 years, respectively. Options outstanding, as of December 31, 1999, are exercisable at prices ranging from $7.06 to $13.50. Unoptioned shares available for the granting of options at December 31, 1999 and 1998 was 502,000 and 865,500, respectively. During 1999, the Company recorded compensation expense of $194,560 relating to 52,500 options held by a former officer of the Company that became vested in conjunction with his change in employee status. These options are included in the table above. F-17 CAPITAL SENIOR LIVING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) The average daily price of the stock during 1999, 1998 and 1997 subsequent to the Offering was $8.94, $11.73 and $13.04 respectively, per share. For 1998 and 1997 the options were anti-dilutive and therefore were not used in the calculation of diluted net income per share. Pro forma information regarding net income per share has been determined as if the Company had accounted for its employee stock options under the fair value method. The fair value for these options was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions for 1999, 1998 and 1997, respectively: risk free interest rate of 6.5, 5.7 and 5.7 percent; dividend yields of zero percent for all years; expected lives of seven and one-half years for all years; and volatility factors of the expected market price of the Company's common stock of 58.4, 70.1 and 70.1 percent. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting periods.
YEAR ENDED DECEMBER 31, ------------------------------------------------------ 1999 1998 1997 ---------------- --------------- --------------- Net income: As reported............................................ $ 4,838,000 $ 11,957,000 $ 3,681,000 Pro forma.............................................. 3,428,000 10,848,000 2,787,000 Net income per share - basic: As reported............................................ $ 0.25 $ 0.61 $ 0.33 Pro forma.............................................. 0.17 0.55 0.25 Net income per share - diluted: As reported............................................ 0.24 0.61 0.33 Pro forma.............................................. 0.17 0.55 0.25
10. INCOME TAXES The provision for income taxes consists of the following:
YEAR ENDED DECEMBER 31, ------------------------------------------------------ 1999 1998 1997 ---------------- --------------- --------------- Current: Federal................................................ $ 2,523,024 $ 6,308,319 $ 730,184 State.................................................. 498,934 1,463,930 101,498 Deferred: Federal................................................ (174,264) (240,635) (39,404) State.................................................. 144,029 (55,843) 246 ------------- -------------- ------------ $ 2,991,723 $ 7,475,771 $ 792,524 ============= ============== ============
F-18 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, -------------------------------------------------------- 1999 1998 1997 ---------------- --------------- ---------------- Tax expense at federal statutory rates................ $ 2,662,080 $ 6,606,992 $1,521,053 State income tax expense, net of federal benefit.......... 325,557 937,532 101,744 Tax expense at federal statutory rates on income earned prior to Formation and Asset Purchase ................. - - (831,026) Conversion of S corporations to C corporation status ..... - - (41,085) Other..................................................... 4,086 (68,753) 41,838 ---------------- --------------- ---------------- $ 2,991,723 $ 7,475,771 $ 792,524 ================ =============== ================
A summary of the Company's deferred tax assets and liabilities are as follows:
DECEMBER 31, ------------------------------- 1999 1998 ------------------------------- Deferred tax assets: Tax basis in excess of book basis arising from the Asset Purchase................. $ 9,377,655 $ 9,644,505 Other............................................................................. 2,098,825 1,113,530 --------------- --------------- Total deferred tax assets......................................................... 11,476,480 10,758,035 Deferred tax liabilities............................................................. 1,050,490 362,280 --------------- --------------- Total deferred tax assets, net.................................................... $10,425,990 $ 10,395,755 =============== ===============
11. EMPLOYEE BENEFIT PLANS Effective January 1, 1999, the Company adopted a 401(k) salary deferral plan (the `Plan'). Contributions to the Plan are in the form of employee salary deferrals, which are subject to employer matching contributions of up to 2% of the employee's annual salary. All employees of the Company meeting minimum service and age requirements are eligible to participate in the Plan. The Company incurred no administrative expenses related to the Plan in 1999. Matching contributions of $147,000 were contributed to the Plan in 1999. 12. RELATED PARTY TRANSACTIONS Certain administrative and occupancy costs were incurred by an affiliate on behalf of the Company. Total costs allocated to the Company were $0, $0 and $679,423 for the years ended December 31, 1999, 1998 and 1997, respectively. Prior to the Offering, the Company paid premiums to a related party for employee medical coverage. The related party insured the Company for any claims exceeding the premiums paid. Accordingly, no amounts have been accrued at December 31, 1997, for claims incurred prior to the Offering but unpaid. The Company manages properties for a third party, in which an officer of the Company was also a director of the third-party companies until July 1, 1998. Management fees received for the period ended June 30, 1998 and for the year ended December 31, 1997 were $987,840 and $1,589,703, respectively. Upon sale of the four NHP properties on September 30, 1998, an affiliate received a $1,219,500 brokerage fee. Upon sale of the four CSLC properties in November 1997, an affiliate received a $4,597,080 brokerage fee. F-19 CAPITAL SENIOR LIVING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) In October 1997, HCP paid an affiliate a refinancing fee of $13,245. A former officer and significant shareholder of the Company is chairman of the board of a bank where the Company holds the majority of its operating cash accounts. 13. CONTINGENCIES On or about October 23, 1998, Robert Lewis filed a putative class action complaint on behalf of certain holders of assignee interests (the "Assignee Interests") in NHP Retirement Housing Partners I Limited Partnership ("NHP") in the Delaware Court of Chancery against NHP, the Company, Capital Senior Living Properties 2-NHPCT, Inc. and Capital Realty Group Senior Housing, Inc. (collectively, the "Defendants"). Mr. Lewis purchased ninety Assignee Interests in NHP in February 1993 for $180. The complaint alleges, among other things, that the Defendants breached, or aided and abetted a breach of, the express and implied terms of the NHP Partnership Agreement in connection with the sale of four properties by NHP to Capital Senior Living Properties 2-NHPCT, Inc. The complaint seeks, among other relief, rescission of the sale of those properties and unspecified damages. The Company believes the complaint is without merit and is vigorously defending itself in this action. The Company has filed a Motion to Dismiss in this case, which is currently pending. The Company is unable to estimate any liability related to this claim, if any. The Company has pending claims incurred in the normal course of business, that, in the opinion of management, based on the advice of legal counsel, will not have a material effect on the financial statements of the Company. 14. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts and fair values of financial instruments at December 31, 1999 and 1998 are as follows:
1999 1998 ---------------------------------- ----------------------------------- CARRYING CARRYING AMOUNT FAIR VALUE AMOUNT FAIR VALUE --------------- ---------------- --------------- --------------- Cash and cash equivalents.................. $ 32,988,024 $32,988,024 $35,827,270 $35,827,270 Line of credit............................. 34,000,000 34,000,000 18,974,186 18,974,186 Notes payable.............................. 59,615,255 59,615,255 62,115,845 62,115,845
The following methods and assumptions were used in estimating its fair value disclosures for financial instruments: Cash and cash equivalents: The carrying amounts reported in the balance sheet for cash and cash equivalents approximate fair value. Line of credit and notes payable: The fair value of notes payable is estimated using discounted cash flow analysis, based on current incremental borrowing rates for similar types of borrowing arrangements. F-20 CAPITAL SENIOR LIVING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 15. INVESTMENTS IN LIMITED PARTNERSHIPS The investments in limited partnerships balance consists of the following:
DECEMBER 31, ------------------------------------- 1999 1998 ---------------- --------------- NHP pension notes............................................................. $ 5,761,664 $ 12,646,471 NHP limited partnership interests............................................. 2,086 1,708 Triad I limited partner interest.............................................. 3,000,000 330,243 Triad II limited partner interest............................................. 74,100 74,100 Triad III limited partner interest............................................ 142,500 142,500 Triad IV limited partner interest............................................. 142,500 142,500 Triad V limited partner interest.............................................. - - Triad VI limited partner interest............................................. - - ------------- ------------ $ 9,122,850 $ 13,337,522 ============= ============
HCP: During 1999, 1998 and 1997, the Company paid $0, $144,791, and $5,604,944, respectively, for partnership interests in HCP and as of December 31, 1999 and 1998, the Company had a 57% ownership in HCP. NHP: The Company acquired, on November 1, 1997, the NHP Notes owned by CSLC in the Formation Transactions for $18,664,128. The NHP Notes bear simple interest at 13% per annum and mature on December 31, 2001. Interest is currently paid quarterly at a rate of 7%, with the remaining 6% interest deferred. From November 1, 1997 through September 30, 1998, the Company recorded interest income at 10.5% of the purchase price paid, which was determined based on the discounted amount of principal and interest payments to be made following the maturity date (December 31, 2001) of the NHP Notes (using a six-month lag between maturity and full repayment), due to uncertainties regarding the ultimate realization of the accrued interest. On September 30, 1998, the Company purchased four properties from NHP. NHP in turn redeemed $7,500,000 of the Company's investment in the NHP Notes and distributed approximately $5,300,000 of deferred interest on such notes. From October 1, 1998 through December 31, 1998, the Company began recording additional income, after giving consideration to current payment of interest, partial redemption of the NHP Notes with accrued interest and the estimated residual value in NHP. This change in estimate resulted in $579,278 of additional income in 1998. In the fourth quarter of fiscal 1999, the Company reevaluated the assumptions related to its investment in the NHP Notes, and as a result is reducing the income expected to be earned from the NHP Notes. This change in estimate resulted in a $1,206,000 reduction in interest income in the fourth quarter. In addition, future interest income is expected to decrease by approximately $1,253,842 and $1,687,705 in 2000 and 2001, respectively (the NHP Notes redemption is December 31, 2001). During 1999 and 1998, the Company paid $378 and $344, respectively, increasing the ownership of limited partnership units in NHP to 4.8% from 3.9%. In addition, the Company invested $13,500 in NHP Notes, during 1999, bring the Company's ownership of NHP Notes to 33.1%. The Company classifies its investment in NHP Notes as held to maturity. F-21 CAPITAL SENIOR LIVING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Summary financial information regarding the financial position and results of operations of NHP as of December 31 and for the years then ended is as follows:
DECEMBER 31, -------------------------------------- 1999 1998 ----------------- ----------------- Cash.................................................................. $ 5,553,357 $ 5,821,300 Property and equipment, net........................................... 18,392,872 18,849,354 Other assets.......................................................... 387,343 592,146 ----------------- ----------------- Total assets..................................................... $24,333,572 $25,262,800 ================= ================= Pension notes......................................................... $20,157,826 $20,157,826 Interest payable...................................................... 14,879,063 13,142,864 Other liabilities..................................................... 471,532 633,817 Partnership deficit................................................... (11,174,849) (8,671,707) ----------------- ----------------- Total liabilities and partnership deficit............................. $24,333,572 $25,262,800 ================= =================
YEAR ENDED DECEMBER 31, -------------------------------------------------------- 1999 1998 1997 --------------- --------------- ----------------- Net revenue.......................................... $5,322,600 $ 13,746,088 $15,548,138 Net income (loss).................................... (2,474,347) 3,409,569 (3,522,917)
16. ALLOWANCE FOR DOUBTFUL ACCOUNTS The components of the allowance for doubtful accounts are as follows:
DECEMBER 31, -------------------------------------------------------- 1999 1998 1997 --------------- ----------------- ---------------- Balance at beginning of year......................... $ 801,042 $ 301,042 $ 164,822 Provision for bad debts........................... 15,895,566 500,000 43,254 Write-offs and other.............................. (14,352,728) - (17,474) Recoveries........................................ 700,000 Allowances not assumed in Asset Purchase.......... - - (145,602) Allowance arising from consolidation of HCP....... - - 256,042 --------------- --------------- ----------------- Balance at end of year............................... $ 3,043,880 $ 801,042 $ 301,042 =============== =============== =================
In the fourth quarter of fiscal 1999, the Company wrote off notes receivable and development fees receivable from Triad Entities that were unable to secure financing on favorable terms for the development of their senior living communities. These joint ventures were in various stages of developing 19 Waterford communities. In addition, the Company will be acquiring six sites currently owned be these joint ventures and will receive the contractual rights to the remaining thirteen sites that were being developed by these joint ventures. Recoveries relate to a settlement with the Bankruptcy Trustee for NCA Cambridge on rental income written off prior to August 1996. 17. LEASES The Company leases its corporate headquarters under an operating lease expiring in 2002. Additionally, the senior living communities have entered into various contracts for services for duration of 5 years or less and are on F-22 CAPITAL SENIOR LIVING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) a fee basis as services are rendered. Rent expense under these leases was $297,662, $266,590 and $188,986 for 1999, 1998 and 1997, respectively. Future commitments are as follows:
2000 $ 441,217 2001 447,465 2002 284,858 2003 4,695 2004 1,600 --------------- $1,179,835 ===============
HCP leases its property and equipment to tenants under noncancelable operating leases. The lease terms range from 9 to 12 years with options to renew for additional five-year terms and options to purchase the leased property at the current fair market value at the end of the initial lease term. The leases generally provide for contingent rentals based on the performance of the property. Contingent rentals aggregated $332,411, $310,275 and $271,340 in 1999, 1998 and 1997, respectively. Minimum rentals for the HCP leases are $3,761,262 and $2,858,619 per year in 2000 and 2001, respectively, subject to change based on changes in interest rates. There are no minimum rentals thereafter. Property and improvements less accumulated depreciation attributable to such rentals amounted to $15,354,292 and $18,329,061 at December 31, 1999 and 1998, respectively. Three of HCP's senior living communities are subject to a master lease with a single operator, HealthSouth. This master lease, as amended, contains a nine-year renewal option and provides for contingent rentals equal to 4% of the revenue differential, as defined, effective January 30, 1997. As of December 31, 1999 and 1998, no contingent rentals have been accrued on the master lease. HealthSouth has agreed to continue making its full lease payments on all four communities. 18. PRO FORMA INCOME TAXES (UNAUDITED) The income taxes on earnings of the S corporations and partnerships for the period from January 1, 1997 through October 31, 1997 are the responsibility of the Stockholders and partners. The pro forma adjustments reflected on the statements of income assume these S corporations and partnerships were subject to income taxes. Pro forma income tax expense has been calculated using statutory federal and state tax rates, estimated at 39.5%. 19. PRO FORMA RESULTS OF OPERATIONS (UNAUDITED) Shown below are unaudited pro forma consolidated amounts for the year ended December 31, 1997 representing the results of operations of the Company for such period after giving effect to the adjustments relating to the Offering and the Formation, as if the transactions had occurred as of January 1, 1997. The unaudited pro forma consolidated amounts are presented for informational purposes only and do not necessarily reflect the financial position or results of operations of the Company which would have actually resulted had the Offering and the Formation occurred as of January 1, 1997, or the future results of operations of the Company. Total revenues........................................................ $30,709,882 Net income............................................................ 4,991,288 Net income per share.................................................. $ 0.25 Shares used in computing pro forma net income per share............... 19,717,347
F-23 20. PENDING MERGERS On October 19, 1999, the Company executed Amended and Restated Agreements of Plans of Merger with each of ILM Senior Living, Inc. and ILM II Senior Living, Inc. for a combined purchase price of $172 million cash plus assumed liabilities. The primary assets of ILM Senior Living, Inc. and ILM II Senior Living, Inc. collectively are 13 senior living communities that have been managed by the Company under Management Agreements since 1996. Under the two amended merger agreements, both ILM Senior Living, Inc. and ILM II Senior Living, Inc. will separately merge with and into a wholly-owned direct subsidiary of the Company with the aggregate issued and outstanding shares of ILM Senior Living, Inc. and ILM II Senior Living, Inc. common stock receiving 100% of the merger consideration in cash. The Amended and Restated Agreements and Plans of Merger amend and restate the Agreements and Plans of Merger dated February 7, 1999. The outside termination date of the amended merger agreements was extended to September 30, 2000. Both mergers had been previously approved by the boards of directors of each company. Each transaction requires the approval of two-thirds of the applicable shareholders of either ILM Senior Living, Inc. or ILM II Senior Living, Inc. The mergers are also subject to certain other customary conditions including regulatory approvals and are expected to be completed during the first half of 2000. Form 8-K's were filed by the Company on October 25, 1999 with copies of the Amended and Restated Agreements and Plans of Merger attached thereto. During 1999, the Company received management and incentive fees of $1,202,966 and $790,281 from ILM Senior Living, Inc. and ILM II Senior Living, Inc., respectively. ILM Senior Living, Inc. and ILM II Senior Living, Inc. are subject to the reporting requirements of the Securities and Exchange Commission. F-24 EX-10.76 2 EXHIBIT 10.76 EXHIBIT 10.76 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into on the 25th day of May, 1999, by and between Capital Senior Living Corporation, a Delaware corporation ("CSL" or "the Company"), and Ralph A. Beattie, an individual residing in the State of Texas ("Employee"). The term of this Agreement shall be deemed to have commenced as of June 1, 1999 ("Employment Commencement Date"). 1. APPOINTMENT, TITLE AND DUTIES. CSL hereby employs Employee to serve in the position as assigned to him by the Board of Directors. In such capacity, Employee shall report to the Chief Executive Officer of CSL and shall have such powers, duties and responsibilities as are customarily assigned to said position and as may be otherwise assigned to him. In addition Employee shall have such other duties and responsibilities as may reasonably be assigned to him by the Board of Directors, including serving with the consent or at the request of CSL on the board of directors or as an officer of entities affiliated with CSL (collectively, the "Affiliates") of affiliated corporations. 2. TERM OF AGREEMENT. The initial term of this Agreement shall be for a three (3) year period ending on May 24, 2002, however, the term of this Agreement shall automatically be extended for a two (2) year term on a consecutive basis. This Agreement shall terminate upon the earlier of: (i) the date of the voluntary resignation of Employee, (ii) the date of Employee's death or determination of Employee's disability (as defined in Paragraph 6 below), (iii) the date of notice by CSL to Employee that this Agreement is being terminated by CSL whether "for cause" (as defined in Paragraph 6 below) or without cause, or (iv) upon the date a notice of intent to resign for "good reason" (as defined in Paragraph 6 below) is delivered to the Company by Employee. 3. ACCEPTANCE OF POSITION. Employee hereby accepts the position assigned by the Board of Directors and agrees that during the term of this Agreement he will faithfully perform his duties and will devote substantially all of his business time to the business and affairs of CSL and will not engage, for his own account or for the account of any other person or entity, in any other business or enterprise except with the express written approval of the Board of Directors of CSL. Employee may, at his sole discretion, (i) serve as a director on the boards of directors of other entities, businesses and enterprises he currently serves on, and (ii) make personal, passive investments. Employee agrees to perform his duties faithfully, diligently and to the best of his ability, to use his best efforts to advance the best interests of the Company at all times, and to abide by all moral, ethical and lawful policies, guidelines, procedures, instructions and orders given to him by the Company from time to time. 4. SALARY AND BENEFITS. During the term of this Agreement: A) CSL shall pay to Employee a base salary at an annual rate of One Hundred Eighty Thousand Dollars ($180,000) per annum, paid in approximately equal installments no less frequently than semi-monthly. An annual bonus of thirty- three and one-third percent (33-1/3%) of Employee's base salary shall be paid in quarterly installments, subject to increase by the Compensation Committee and subject to meeting performance standards that the Company's reported quarterly earnings per share is not less than the First Call consensus earnings per share for that quarter. The Compensation Committee will use its reasonable discretion to determine the amount of the quarterly bonus to be paid if the reported quarterly earnings per share are lower than the First Call consensus earnings per share. The Company shall deduct from Employee's compensation and bonus, if any, all applicable local, state, Federal or foreign taxes, including, but not limited to, income tax, withholding tax, social security tax and pension contributions (if any). B) Employee shall participate in all health, retirement, Company-paid insurance, sick leave, disability, expense reimbursement and other benefit programs, if any, which CSL makes available, in its sole discretion, to its senior executives; however, nothing herein shall be construed to obligate the Company to establish or maintain any employee benefit program. The Company may purchase and maintain in force a death and disability insurance policy in an amount at all times equal to not less than an amount equal to Employee's annual base salary multiplied by two (2). The Company would be the beneficiary of said policy and would use said policy for the purposes described in Paragraph 7(A)(i), below. Reimbursement of Employee's reasonable and necessary business expenses incurred in the pursuit of the business of the Company or any of its affiliates shall be made to Employee upon his presentation to the Company of itemized bills, vouchers or accountings prepared in conformance with applicable regulations of the Internal Revenue Service and the policies and guidelines of the Company. C) Employee shall be entitled to reasonable vacation time in an amount of Four (4) weeks per year pursuant to the Company's Corporate Policies and Procedures Manual, provided that not more than two (2) weeks of such vacation time may be taken consecutively without prior notice to, and the consent of, the Compensation Committee of the Board of Directors of CSL or, if there is no Compensation Committee, the Board of Directors. 5. STOCK OPTIONS. Pursuant to the terms of CSL's 1997 Stock Option Plan, if adopted, Employee shall be entitled to receive a certain number of options, if available, to purchase the 2 common stock of the Company. The number of options to be offered to Employee shall be determined by the Board of Directors of CSL. 6. CERTAIN TERMS DEFINED. For purposes of this Agreement: A) Employee shall be deemed to be disabled if a physical or mental condition shall occur and persist which, in the written opinion of two (2) licensed physicians, has rendered Employee unable to perform his assigned duties for CSL for a period of ninety (90) consecutive calendar days or more, and which condition, in the opinion of such physicians, is likely to continue for an indefinite period of time, rendering Employee unable to return to his duties for CSL. One (1) of the two (2) physicians shall be selected in good faith by the Board of Directors of CSL, and the other of the two (2) physicians shall be selected in good faith by Employee. In the event that the two (2) physicians selected do not agree as to whether Employee is disabled, as described above, then said two (2) physicians shall mutually agree upon a third (3rd) physician whose written opinion as to Employee's condition shall be conclusive upon CSL and Employee for purposes of this Agreement. B) A termination of Employee's employment by CSL shall be deemed to be "for cause" if it is based upon (i) Employee is charged with and then convicted of any misdemeanor or any felony involving personal dishonesty, (ii) disloyalty by Employee to the Company, including but not limited to embezzlement, or (iii) Employee's failure or refusal to perform his duties in accordance with this Agreement based on a standard of reasonableness. C) A resignation by Employee shall not be deemed to be voluntary, and shall be deemed to be a resignation for "good reason" if it is based upon (i) a material diminution in Employee's base salary which is not part of an overall diminution for all executive officers of the Company, or (ii) a material breach by CSL of the Company's obligations to Employee under this Agreement or under the Company's Stock Option Plan, if adopted. 7. CERTAIN BENEFITS AND OBLIGATIONS UPON TERMINATION. A) In the event that Employee's employment terminates (i) because of death or disability, (ii) because CSL has terminated Employee other than "for cause" (as described above), including a Fundamental Change and if Employee has been continuously employed by CSL for at least one year prior to the Fundamental Change as described below, or (iii) because Employee has voluntarily resigned for "good reason" as described above, then, i) CSL shall pay Employee in accordance with its Corporate Policies 3 and Procedures Manual his base salary and annual bonus paid during the term of this Agreement in the past twelve (12) months for the balance of the term of this Agreement (not including any future extensions), but not less than two (2) years (base salary plus annual bonus paid during the term of this Agreement in the past twelve (12) months for three (3) years if termination due to a Fundamental Change) from the date of the notice of termination, and Employee shall retain all his Company stock options that are vested; provided, however, the benefits described in this Paragraph 7(A)(i) shall terminate at such time as Employee materially breaches the provisions of Paragraphs 7(D), 8, 9, or 10 hereof. A Fundamental Change shall be defined as a merger, consolidation or any sale of all or substantially all of the assets of the Company that requires the consent or vote of the holders of common stock where the Company is not the survivor or in control; ii) All accrued but unpaid or unused vacation, sick pay and expense reimbursement shall be calculated in accordance with CSL's Corporate Policies and Procedures Manual. B) In the event that Employee's employment terminates for any other cause other than those set forth in Paragraph 7(A), (which can include voluntary resignation without good reason or termination by CSL "for cause"), then, i) CSL shall pay Employee his base salary and annual bonus paid during the term of this Agreement in the past twelve (12) months up to and through the date of termination; ii) All accrued but unpaid or unused vacation, sick pay and expense reimbursement shall be calculated in accordance with CSL's corporate Policies and Procedures Manual. C) In the event that Employee's employment terminates by reason of his death, all benefits provided in this Paragraph 7 shall be paid to Employee's estate or as his executor or personal representative shall direct, but payment may be deferred until Employee's executor or personal representative has been appointed and qualified pursuant to the law in effect in Employee's jurisdiction of residence at the time of his death; D) Following the termination for any reason of Employee's employment, Employee shall not for himself or any third party, directly or indirectly (i) divert or attempt to divert from the Company or its Affiliates any business of any kind in which it is or has been engaged, including, without limitation, the 4 solicitation of, interference with, or entering into any contract with any of its past or then existing customers, and (ii) employ, solicit for employment, or recommend for employment any person employed by the Company or its Affiliates during the period of such person's employment and for a period of two (2) years thereafter. 8. CONFIDENTIALITY. Employee hereby acknowledges his understanding that as a result of his employment by CSL, he will have access to, and possession of, valuable and important confidential or proprietary data, documents and information concerning CSL or its Affiliates, its operations and its future plans. Employee hereby agrees that he will not, either during the term of his employment with CSL, or at any time before or after the term of his employment with CSL, divulge or communicate to any person or entity, or direct any employee or agent of CSL or its Affiliates or of his to divulge or communicate to any person or entity, or use to the detriment of CSL or its Affiliates or for the benefit of any other person or entity, or make or remove any copies of, such confidential information or proprietary data or information, whether or not marked or otherwise identified as confidential or secret. Upon any termination of this Agreement for any reason whatsoever, Employee shall surrender to CSL or its Affiliates any and all materials, including but not limited to drawings, manuals, reports, documents, lists, photographs, maps, surveys, plans, specifications, accountings and any and all other materials relating to the Company or any of its business, including all copies thereof, that Employee has in his possession, whether or not such material was created or compiled by Employee, but excluding, however, personal memorabilia belonging to Employee and notes taken by him as a member of the Board of Directors. With the exception of such excluded items, materials, etc., Employee acknowledges that all such material is solely the property of CSL or its Affiliates, and that Employee has no right, title or interest in or to such materials. Notwithstanding anything to the contrary set forth in this Paragraph 8, the Provisions of this Paragraph 8 shall not apply to information which: (i) is or becomes generally available to the public other than as a result of disclosure by Employee, or (ii) is already known to Employee as of the date of this Agreement from sources other than CSL or its Affiliates, or (iii) is required to be disclosed by law or by regulatory or judicial process. 9. NON-COMPETITION. Employee hereby agrees that for a period of one (1) year after any termination for any reason whatsoever of this Agreement and after the last payment to Employee provided for hereunder, he will not, directly or indirectly, commence doing business, in any manner whatsoever, which is in competition with all or any portion of the business of CSL or its Affiliates in any state in which CSL or its Affiliates then operate, own, asset manage, or is in the process of developing more than two (2) facilities. CSL hereby acknowledges and agrees that Employee's ownership of a class of securities listed on a stock exchange or traded on the over-the-counter market that represents five percent (5%) or less of the number of shares of such class of securities then issued and outstanding shall not constitute a violation of this Paragraph 9. 10. WORK PRODUCT. The Employee agrees that all innovations, improvements, developments, methods, designs, analyses, reports and all similar or related information which relates to the Company's or any of its subsidiaries' or Affiliates' actual or anticipated business, or 5 existing or future products or services and which are conceived, developed or made by the Employee while employed by the Company or its Affiliates ("Work Product") belong to the Company or such subsidiary or Affiliate. The Employee will promptly disclose such Work Product to the Board and perform all actions reasonably requested by the Board (whether during or after the employment period) to establish and to confirm such ownership (including, without limitation, assignments, consents, powers of attorney and other instruments). 11. LEGAL ACTION. In the event that any action or proceeding is brought to enforce the terms and provisions of this Agreement, the prevailing party shall be entitled to recover reasonable attorneys' fees and costs. In the event of a breach or threatened breach by Employee of the provisions of Paragraph 7(D), 8, 9, or 10, Employee and the Company agree that the Company, shall, in addition to any other available remedies, be entitled to an injunction restraining Employee from violating the terms of the applicable Paragraph and that said injunction is appropriate and proper relief for such violation. 12. NOTICES. All notices and other communications provided to either party hereto under this Agreement shall be in writing and delivered by hand delivery, overnight courier service or certified mail, return receipt requested, to the party being notified at said party's address set forth adjacent to said party's signature on this Agreement, or at such other address as may be designated by a party in a notice to the other party given in accordance with this Agreement. Notices given by hand delivery or overnight courier service shall be deemed received on the date of delivery shown on the courier's delivery receipt or log. Notices given by certified mail shall be deemed received three (3) days after deposit in the U.S. Mail. 13. CONSTRUCTION. In construing this Agreement, if any portion of this Agreement shall be found to be invalid or unenforceable, the remaining terms and provisions of this Agreement shall be given effect to the maximum extent permitted without considering the void, invalid or unenforceable provision. In construing this Agreement, the singular shall include the plural, the masculine shall include the feminine and neuter genders, as appropriate, and no meaning or effect shall be given to the captions of the paragraphs in this Agreement, which are inserted for convenience of reference only. 14. CHOICE OF LAW; SURVIVAL. This Agreement shall be governed and construed in accordance with the internal laws of the State of Texas without resort to choice of law principles. The provisions of Paragraphs 7(A), (B), (C), (D), 8, 9, and 10 shall survive the termination of this Agreement for any reason whatsoever. 15. INTEGRATION; AMENDMENTS. This is an integrated Agreement. This Agreement constitutes and is intended as a final expression and a complete and exclusive statement of the understanding and agreement of the parties hereto with respect to the subject matter of this Agreement. All negotiations, discussions and writings between the parties hereto relating to the subject matter of this Agreement are merged into this Agreement, and there are no rights conferred, nor promises, agreements, conditions, undertakings, warranties or representations, oral or written, 6 expressed or implied, between the undersigned parties as to such matters other than as specifically set forth herein. No amendment or modification of or addendum to, this Agreement shall be valid unless the same shall be in writing and signed by the parties hereto. No waiver of any of the provisions of this Agreement shall be valid unless in writing and signed by the party against whom it is sought to be enforced. 7 16. BINDING EFFECT. This Agreement is binding upon and shall inure to the benefit of the parties hereto and their respective heirs, personal representatives, successors and assigns; PROVIDED, HOWEVER, that Employee shall not be entitled to assign his interest in this Agreement (except for an assignment by operation of law to his estate), or any portion hereof, or any rights hereunder, to any party. Any attempted assignment by Employee in violation of this Paragraph 16 shall be null, void, AB INITIO and of no effect of any kind or nature whatsoever. IN WITNESS WHEREOF, the parties have executed this Agreement on the date set forth above to be effective as of the date specified in the preamble of this Agreement. CAPITAL SENIOR LIVING CORPORATION a Delaware corporation Address: 14160 Dallas Parkway, #300 Dallas, TX 75240 By: /s/ James A. Stroud ---------------------------------------- James A. Stroud, Chairman of the Company EMPLOYEE Address: 3624 Haynie Avenue Dallas, TX 75205 /s/ Ralph A. Beattie ---------------------------------------- 8 EX-10.77 3 EXHIBIT 10.77 Exhibit 10.77 CONSULTING/SEVERANCE AGREEMENT THIS CONSULTING/SEVERANCE AGREEMENT ("Agreement") is made and entered into as of the 20th day of May, 1999, by and between Capital Senior Living Corporation, a Delaware corporation ("CSLC"), and Jeffrey L. Beck, an individual ("Beck"). WHEREAS, Beck is a founder of CSLC and his leadership and commitment has been instrumental in the success of CSLC, and he has prior to the date hereof been the Chief Executive Officer, a director and Co-Chairman of CSLC; WHEREAS, Beck now desires for personal reasons to retire from his positions with CSLC and its subsidiaries, and he and CSLC have determined to terminate that certain Amended and Restated Employment Agreement, dated October 8, 1997, by and between Beck and CSLC; WHEREAS, CSLC considers Beck's knowledge of CSLC, its business and the senior living industry and his relationships with and knowledge of others engaged in the senior living business to be of great strategic value to CSLC; and WHEREAS, CSLC therefore desires to retain Beck as a strategic consultant, and Beck is willing to agree to those arrangements; NOW, THEREFORE, in consideration of the premises and covenants considered in this Agreement, the parties hereto agree as follows: AGREEMENTS 1. BECK'S OBLIGATIONS. During the term of this Agreement, Beck shall consult in an advisory capacity to the Board of Directors of CSLC (the "Board"). As consultant, Beck shall provide to the Board strategic advice and recommendations affecting the general welfare and business of CSLC and, as an "elder statesman" of the senior living industry, act as a goodwill ambassador for CSLC. Beck shall provide such services at the Board's request, upon reasonable notice, at such time or times and for such duration as shall be mutually agreed upon in any instance. It is expressly agreed that neither the Board's failure to request such services nor any failure or refusal by Beck to agree to any particular time or times and duration shall constitute a breach of this Agreement, whether such failures or refusals be in a particular instance or series of instances, the Board reposing great trust in Beck to determine whether or not advisory services or the timing thereof are appropriate in any particular instance or series of instances. It is also expressly agreed that neither CSLC nor the Board has any right under this Agreement to require Beck to report to or spend any time at CSLC's offices or other facilities or that he attend any particular Board meetings. In the event Beck becomes disabled during the term of this Agreement and as a result is unable to perform the services provided for in this Section 1, the payments and other benefits provided for in this Agreement shall nonetheless continue and all other terms and conditions of this Agreement shall remain in full force and effect. In the event of a Fundamental Change (as defined in Section 15(b) of this Agreement) during the term of this Agreement, Beck shall have no further obligation to provide services under this Section 1, CSLC shall have no further obligation to provide the benefits under Section 6, this Agreement shall immediately and automatically without further action by any person become solely a severance agreement and the payments and benefits to Beck provided for in this Agreement shall continue and all other terms and conditions of this Agreement shall remain in full force and effect. 2. CONFIDENTIALITY. Beck hereby acknowledges his understanding that as a result of his prior employment by CSLC and the consultancy provided for in this Agreement, he has had and may have access to, and possession of, valuable and important confidential or proprietary data, documents and information concerning CSLC, its operations and its future plans. Beck hereby agrees that he will not, either during the term of this Agreement, or at any time after the term of this Agreement with CSLC, divulge or communicate to any person or entity, or use to the detriment of CSLC or for the benefit of any other person or entity, or make or remove any copies of, such confidential information or proprietary data or information, whether or not marked or otherwise identified as confidential or secret. Upon any termination of this Agreement for any reason whatsoever, Beck shall surrender to CSLC any and all materials, including but not limited to drawings, manuals, reports, documents, lists, photographs, maps, surveys, plans, specifications, accountings and any and all other materials relating to CSLC or any of its business, including all copies thereof, that Beck has in his possession, whether or not such material was created or compiled by Beck, but excluding, however, personal memorabilia belonging to Beck and notes taken by him as a member of the Board of Directors ("Excluded Items"). With the exception of the Excluded Items, Beck acknowledges that all such material is solely the property of CSLC, and that Beck has no right, title or interest in or to such materials. Notwithstanding anything to the contrary set forth in this Section 2, the provisions of this Section 2 shall not apply to information which: (i) is or becomes generally available to the public other than as a result of disclosure by Beck, or (ii) is already known to Beck as of the date of this Agreement from sources other than CSLC, or (iii) is required to be disclosed by law or by regulatory or judicial process. 3. NON-COMPETITION; NON-SOLICITATION. Beck hereby agrees that during the term of this Agreement and for a period of one (1) year after any termination for any reason whatsoever of this Agreement, he will not and will cause his Affiliates not to, directly or indirectly, acquire, develop or operate senior living facilities anywhere in the United States. CSLC hereby acknowledges and agrees that (i) Beck's or Beck's Affiliates' ownership of a class of securities listed on a stock exchange or traded on the over-the-counter market that represents five percent (5%) or less of the number of shares of such class of securities then issued and outstanding, and (ii) Beck's services to Capital Senior Living Communities, LP and direct or indirect interests therein shall not constitute a violation of this Section 3. During the term of this Agreement and following the termination for any reason of this Agreement, Beck shall not for himself or any third party, directly or indirectly employ, solicit for employment, or recommend for employment any person employed by CSLC or its affiliated companies during the period of such person's employment and for a period of two (2) years thereafter without CSLC's consent. The parties hereto have carefully considered the necessity for protection of the goodwill and business of CSLC and the scope of such protection. Beck acknowledges that the restrictions, prohibitions and other provisions of this Section 3 are reasonable, fair and equitable in scope, terms 2 and duration, are necessary and essential to protect the legitimate business interests and goodwill of CSLC, are a material inducement to CSLC to enter into the transactions contemplated by this Agreement and that adequate consideration has been and will be received under this Agreement by Beck for such restrictions, prohibitions and other provisions. 4. WORK PRODUCT. Beck acknowledges that all innovations, improvements, developments, methods, designs, analyses, reports and all similar or related information which relates to CSLC's or any of its subsidiaries' or affiliates' actual or anticipated business, or existing or future products or services and which were conceived, developed or made by Beck while employed by CSLC or during the term of this Agreement ("Work Product") belong to CSLC or such subsidiary or affiliate. Beck will perform all actions requested by the Board of Directors of CSLC to establish and to confirm such ownership (including, without limitation, assignments, consents, powers of attorney and other instruments). 5. COMPENSATION. CSLC shall pay to Beck consulting compensation of $100,000 per year during the term of this Agreement, paid in approximately equal installments no less frequently than twice a month. CSLC shall not withhold or deduct from such compensation any amounts, Beck being an independent contractor under this Agreement. CSLC shall also reimburse Beck's reasonable and necessary business expenses incurred in providing services to CSLC under this Agreement upon his presentation to CSLC of itemized bills, vouchers or accountings. 6. OTHER BENEFITS. During the term of this Agreement and for one year thereafter, CSLC, at CSLC's option, either shall continue to provide health benefits made generally available by CSLC to its senior executives to Beck and his dependents or shall reimburse Beck for the cost of obtaining substantially equivalent benefits. During the term of this Agreement, CSLC shall provide for Beck office facilities and furnishings identified on Schedule A attached to this Agreement or substantially equivalent office facilities. During the term of this Agreement, CSLC shall employ Rosemary Papa for three days a week and shall assign Ms. Papa, as her sole and exclusive duty, to provide administrative support to Beck; provided that during the six months commencing with the execution and delivery of this Agreement, Ms Papa will also be required to assist CSLC's management with respect to insurance matters for CSLC and its affiliates. During such assignment, Ms. Papa shall continue to be employed by CSLC with a benefits package no less favorable than the one she now has, her compensation shall be not less than 60% of the compensation she now receives, and she shall be entitled to receive raises and additional benefits, including grants of stock options, no less favorable than 60% of the higher of those provided to the secretaries or administrative or executive assistants of the Chief Executive Officer and the Chief Operating Officer of CSLC. 7. TERM OF AGREEMENT. Subject to the survival provisions of Section 14 of this Agreement, the term of this Agreement shall be for a three (3) year period commencing on the date of this Agreement. Beck may terminate this Agreement at any time by written notice to CSLC, but any termination by Beck shall not affect those parts of this Agreement the survival of which is provided for in Section 14 of this Agreement. CSLC may terminate this Agreement at any time by written notice to Beck, but any termination by CSLC shall terminate only the rights of CSLC to consulting services under Section 1 of this Agreement and the obligations of Beck to provide such 3 consulting services and shall not otherwise affect those parts of this Agreement the survival of which is provided for in Section 14 of this Agreement. 8. STOCK OPTIONS. All options for CSLC common stock granted by CSLC to Beck and not exercised prior to the date of this Agreement, whether or not presently vested and notwithstanding any other term thereof, shall become fully vested upon the execution of this Agreement and shall be exercisable at any time during the term of this Agreement and for one (1) year after the expiration of the three-year term of this Agreement (notwithstanding an earlier termination of this Agreement, if any). 9. REGISTRATION RIGHTS. Beck shall have the following registration rights. (a) For purposes of this Section 9, the term "Registrable Securities shall mean any shares of CSLC common stock ("Common Stock") beneficially owned by Beck (directly or indirectly) plus all shares of Common Stock that Beck may acquire pursuant to the exercise of stock options. (b) If CSLC at any time proposes to register any of its securities under the Securities Act for sale to the public, whether for its own account or for the account of other security holders or both (except with respect to registration statements on Forms S-4 or S-8 or another form not available for registering the Registrable Securities for sale to the public), each such time it will give written notice to Beck of its intention so to do. Upon the written request of Beck, received by the Company within 30 days after the giving of any such notice by CSLC, CSLC will cause the Registrable Securities as to which registration shall have been so requested to be included in the securities to be covered by the registration statement proposed to be filed by CSLC, all to the extent requisite to permit the sale or other disposition by Beck (in accordance with its written request) of such Registrable Securities so registered; provided, however, that if the managing underwriter of CSLC's offering delivers in good faith a written opinion to Beck that either because of (i) the kind of securities which Beck or CSLC intends to include in the offering or (ii) the size of the offering which Beck or CSLC intend to make, the success of the offering or the market for CSLC's Common Stock would be materially and adversely affected by the inclusion of the Registrable Securities requested to be included (A) in the event that the size of the offering is the basis for the managing underwriter's opinion, the amount of the securities to be offered for the account of Beck and each other person registering securities of CSLC pursuant to similar incidental registration rights shall be reduced pro rata to the extent necessary to reduce the total amount of securities to be included in such offering to the amount reasonably recommended by such managing underwriter; and (B) in the event that the combination of securities to be offered is the basis of such managing underwriter's opinion (1) the Registrable Securities and other securities to be included in such offering shall be reduced as described in clause (A) above or, (2) if the actions described in Clause (A) would, in the reasonable judgment of the managing underwriter, be insufficient to substantially eliminate the material and adverse effect that inclusion of the Registrable Securities requested to be included would have on such offering, such Registrable Securities will be excluded from such offering. Notwithstanding the foregoing provisions, CSLC may withdraw any 4 registration statement referred to in this Section 9(b) without thereby incurring any liability to Beck. (c) If and whenever CSLC is required by Section 9(b) to effect a piggy back registration, CSLC shall as expeditiously as possible: (i) prepare and file with the Securities and Exchange Commission ("Commission") a registration statement (which, in the case of an underwritten public offering shall be on Form S-1, Form S-2, Form S-3, any successor forms thereto, or other form of general applicability satisfactory to the managing underwriter selected as therein provided) with respect to such securities and use its best efforts to cause such registration statement to become and remain effective for the period of the distribution contemplated thereby (as determined hereinafter); provided, however, that CSLC may postpone the filing, effectiveness, supplementing or amending of the registration statement for up to 90 days if, in the good faith opinion of CSLC's Board of Directors, the registration or sale of Registrable Securities would adversely affect a material financing, acquisition, disposition of assets or stock, merger or other comparable transaction or would require CSLC to make public disclosure of information the public disclosure of which would have a material adverse effect upon CSLC. During any time that CSLC defers amending or supplementing the registration statement, the holders of Registrable Securities shall discontinue disposing of Registrable Securities; (ii) subject to the proviso in subsection (i), prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective for the period of distribution and comply with the provisions of the Securities Act with respect to the disposition of all Registrable Securities covered by such registration statement in accordance with the intended method of disposition set forth in such registration statement for such period; (iii) furnish to Beck and to each underwriter such number of copies of the registration statement and the prospectus included therein (including each preliminary prospectus) as such persons reasonably may request in order to facilitate the public sale or other disposition of the Registrable Securities covered by such registration statement; (iv) use its best efforts to register or qualify the Registrable Securities covered by such registration statement under the securities or "blue sky" laws of such jurisdictions as Beck or, in the case of an underwritten public offering, the managing underwriter reasonably shall request, PROVIDED HOWEVER, that CSLC shall not for any such purpose be required to qualify generally to transact business as a foreign corporation in any jurisdiction where it is not so qualified or to consent to general service of process in any such jurisdiction; 5 (v) use its best efforts to list or qualify for quotation the Registrable Securities covered by such registration statement with any securities exchange or inter-dealer quotation system on which the Common Stock is then listed or quoted; (vi) notify Beck at any time when a prospectus relating to Registrable Securities is required to be delivered under the Securities Act or the happening of any event as a result of which the prospectus included in such registration statement contains an untrue statement of a material fact or omits any fact necessary to make the statements therein not misleading, and, at the request of Beck, CSLC will prepare a supplement or amendment to such prospectus so that, as thereafter delivered to the purchasers of such Registrable Securities, such prospectus will not contain an untrue statement of a material fact or omit to state any fact necessary to make the statements therein not misleading, provided that the 180-day period described below will be tolled from the time a prospectus contains such a statement or omission until a prospectus correcting such statement or omission has been delivered to Beck and may be delivered to the purchasers of such Registrable Securities in compliance with the Securities Act; (vii) notify Beck immediately, and confirm the notice in writing, (1) when the registration statement becomes effective, (2) of the issuance by the Commission of any stop order or of the initiation, or the threatening, of any proceedings for that purpose, (3) of the receipt by CSLC of any notification with respect to the suspension of qualification of the Registrable Securities for sale in any jurisdiction or of the initiation, or the threatening, of any proceedings for that purpose, and (4) of the receipt of any comments, or requests for additional information, from the Commission or any state regulatory authority. If the Commission or any state regulatory authority shall enter such a stop order or order suspending qualification at any time, CSLC will promptly use its best reasonable efforts to obtain the lifting of such order; and (viii) otherwise use its best efforts to comply with all applicable rules and regulations of the Commission, and make available to its security holders as soon as reasonably practicable, but not later than 15 months after the effective date of the registration statement, a statement covering a period of at least 12 months beginning after the effective date of the registration statement, which earnings statement shall satisfy the provisions of Section 11(a) of the Securities Act. For purposes hereof, the period of distribution of Registrable Securities in a firm commitment underwritten public offering shall be deemed to extend until each underwriter has completed the distribution of all securities purchased by it, and the period of distribution of Registrable Securities in any other registration shall be deemed to extend until the earlier of the sale of all Registrable Securities covered thereby or 180 days after the effective date thereof. In connection with each registration hereunder, Beck will furnish to CSLC in writing such information with respect to Beck as reasonably shall be necessary in order to assure compliance with federal and applicable state securities laws. 6 In connection with each registration pursuant to this Section 9 covering an underwritten public offering, CSLC and Beck agree to use their best efforts to select a managing underwriter (and any co-managers) and to enter into a written agreement with the managing underwriter in such form and containing such provisions as are customary in the securities business for such an arrangement between such underwriter and companies of CSLC's size and investment stature. (d) All expenses incurred by CSLC in complying with this Section 9, including, without limitation, all registration and filing fees, printing expenses, fees and disbursements of counsel and independent public accountants for CSLC, fees and expenses (including counsel fees) incurred in connection with complying with state securities or "blue sky" laws, fees of the National Association of Securities Dealers, Inc., transfer taxes, fees of transfer agents and registrars, costs of insurance, and fees and disbursements of one counsel for Beck but excluding any Selling Expenses, are called "Registration Expenses." All underwriting discounts and selling commissions applicable to the sale of Registrable Securities are called "Selling Expenses." (i) CSLC shall pay all Registration Expenses attributable to the shares of Registrable Securities included in the registration in connection with each registration statement under this Section 9. (ii) All Selling Expenses in connection with each such registration statement applicable to Registrable Securities sold by Beck shall be borne by Beck. (e) Subject to applicable law, CSLC will indemnify each underwriter, Beck and each person controlling any of them, against all claims, losses, damages and liabilities, including legal and other expenses reasonably incurred, arising out of any untrue statement of a material fact contained in the registration statement, or any omission to state a material fact required to be stated in the registration statement or necessary to make the statements not misleading, or arising out of any violation by CSLC of the Securities Act, any state securities or "blue-sky" laws or any applicable rule or regulation. This indemnification will not apply to any claims, losses, damages or liabilities to the extent that they may have been caused by an untrue statement or omission based upon information furnished in writing to CSLC by such underwriter, Beck or controlling person, respectively, expressly for use in the registration statement. With respect to such untrue statement or omission in the information furnished in writing to CSLC by Beck, he will indemnify the underwriters, CSLC, its directors and officers, and each person controlling any of them against any losses, claims, damages, expenses or liabilities to which any of them may become subject as a result of such untrue statement or omission. (f) The registration rights of Beck under this Agreement may be transferred to any trust, family partnership or other family entity formed by Beck to hold shares of Common Stock and to any member of his family. (g) In the event of any merger, consolidation or share exchange pursuant to which CSLC is not the surviving or resulting corporation, CSLC's obligations under this Section 9 shall be assumed by such surviving or resulting corporation. 7 (h) The registration obligations of CSLC under this Section 9 shall terminate on the date when CSLC delivers to Beck a written opinion of a law firm with recognized securities law expertise, reasonably acceptable to Beck, addressed to Beck that he is permitted to sell all Registrable Securities to the public without registration under applicable law, other than pursuant to Rule 144 or any similar rule. 10. INDEMNIFICATION BY CSLC. CSLC shall and hereby does indemnify Beck to the extent and in accordance with the terms of ATTACHMENT I to this Agreement. 11. TERMINATION OF AMENDED AND RESTATED EMPLOYMENT AGREEMENT. Beck and CSLC hereby agree that the Amended and Restated Employment Agreement, dated October 8, 1997, between Beck and CSLC shall be, subject to Section 12 below, upon execution and delivery of this Agreement, cancelled and of no further force and effect. Beck hereby resigns each and every directorship and officer position held on or prior to the date hereof with CSLC and any subsidiary or affiliate of CSLC. 12. NO EFFECT ON EMPLOYMENT COMPENSATION. Nothing in this Agreement shall be construed to affect in any way employment compensation amounts paid or payable to Beck by CSLC, whether or not determined on or prior to the date of this Agreement, with respect to his employment by CSLC prior to the date hereof. The parties hereto agree that no bonus payments are payable to Beck with respect to his employment by CSLC prior to the date hereof. 13. MUTUAL RELEASE. CSLC and Beck have, simultaneously with the execution and delivery of this Agreement, executed and delivered the mutual release attached hereto as Attachment II. CSLC represents and warrants to Beck that the release, attached as Attachment II hereto, this Agreement and the Indemnity, attached as Attachment I hereto, have each been approved in good faith by the Board of Directors of CSLC at a meeting, duly called and held in accordance with CSLC's Restated Certificate of Incorporation, its Bylaws and Delaware General Corporation Law, under the procedures provided in Delaware General Corporation Law Section 144(a)(1) with respect to transactions between a corporation and one or more of its directors or officers having a direct or indirect financial interest in the transaction. 14. SURVIVAL OF CERTAIN PROVISIONS. Sections 1 (last two sentences only), 2, 3 (to the extent provided therein), 6, 8, 9 and 10 (including ATTACHMENT I to this Agreement), 13, this Section 14, and Sections 16 through 22 of this Agreement shall survive the expiration or termination of this Agreement. 15. CERTAIN TERMS DEFINED. For purposes of this Agreement, the following defined terms have the meaning set forth below: (a) "Affiliate" with regard to Beck means any person controlled by or under common control with him. "Affiliate" with regard to CSLC means any person controlled by or under common control with CSLC. For purposes of these definitions, "Control" when used with respect to any person means the power to direct the management and policies of such person, whether through the ownership of voting securities, by contract or otherwise. 8 (b) "Fundamental Change" means any of the following: (i) a merger, consolidation, statutory share exchange or sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all or substantially all of the assets of CSLC that requires the consent or vote of the holders of the Common Stock, other than a consolidation, merger or share exchange of CSLC in which the holders of the Common Stock immediately prior to such transaction have the same proportionate ownership or control of Common Stock of the surviving corporation immediately after such transaction; (ii) the stockholders of CSLC approve any plan or proposal for the liquidation or dissolution of CSLC; (iii) the cessation of control (by virtue of their not constituting a majority of directors) of the Board of Directors of CSLC by the individuals (the "Continuing Directors") who (x) at the date of this Agreement were directors or (y) become directors after the date of this Agreement and whose election or nomination for election by CSLC's stockholders was approved by a vote of at least two-thirds of the directors then in office who were directors at the date of this Agreement or whose election or nomination for election was previously so approved; (iv) the acquisition of beneficial ownership (within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934) of an aggregate of 20% or more of the voting power of CSLC's outstanding voting securities by any person or group (as such term is used in Rule 13d-5 under the Securities Exchange Act of 1934) who beneficially owned less than 15% of the voting power of CSLC's outstanding voting securities on the date of this Agreement, or the acquisition of beneficial ownership of an additional 5% of the voting power of CSLC's outstanding voting securities by any person or group who beneficially owned at least 15% of the voting power of CSLC's outstanding voting securities on the date of this Agreement; PROVIDED, HOWEVER, that notwithstanding the foregoing, an acquisition shall not constitute a Fundamental Change hereunder if the acquiror is (x) a trustee or other fiduciary holding securities under any employee benefit plan of CSLC and acting in such capacity, (y) a wholly-owned subsidiary of CSLC or a corporation owned, directly or indirectly, by the stockholders of CSLC in the same proportions as their ownership of voting securities of CSLC or (z) any other person whose acquisition of shares of voting securities is approved in advance by a majority of the Continuing Directors; or (v) in a Title 11 bankruptcy proceeding, the appointment of a trustee or the conversion of a case involving CSLC to a case under Chapter 7. 16. EQUITABLE REMEDY. In the event of a breach by Beck of the provisions of Sections 2 or 3 of this Agreement, CSLC shall, in addition to any other available remedies, be entitled to an injunction restraining Beck from violating the terms of the applicable Section and Beck and CSLC agree that said injunction is appropriate and proper relief for such violation. 17. BECK'S LEGAL FEES AND EXPENSES. It is the intent of CSLC that Beck not be required to incur legal fees and the related expenses associated with the interpretation, enforcement or defense of his rights under this Agreement by litigation or otherwise because the cost and expense thereof would substantially detract from the benefits intended to be extended to Beck hereunder. Accordingly, if it should appear to Beck that CSLC has failed to comply with any of its obligations under this Agreement or in the event that CSLC or any other person takes or threatens to take any action to declare this Agreement void or unenforceable, or institutes any litigation or other action or proceeding designed to deny, or to recover from, Beck the benefits provided or intended to be provided to Beck hereunder, CSLC irrevocably authorizes Beck from time to time to retain counsel 9 of Beck's choice, at the reasonable expense of CSLC as hereafter provided, to advise and represent Beck in connection with any such interpretation, enforcement or defense, including without limitation the initiation or defense of any litigation or other legal action, whether by or against CSLC or any director, officer, stockholder or other person affiliated with CSLC, in any jurisdiction. CSLC will advance and be solely financially responsible for any and all reasonable attorneys' and related fees and reasonable expenses incurred by Beck in connection with any of the foregoing; provided that, if Beck is not successful on the merits or otherwise, Beck shall reimburse CSLC for any advances and payments for his attorneys and related fees and expenses under this Section 17. 18. NOTICES. All notices and other communications provided to either party hereto under this Agreement shall be in writing and delivered by hand delivery, overnight courier service or certified mail, return receipt requested, to the party being notified at such party's address set forth adjacent to such party's signature on this Agreement, or at such other address as may be designated by a party in a notice to the other party given in accordance with this Agreement. Notices given by hand delivery or overnight courier service shall be deemed received on the date of delivery shown on the courier's delivery receipt or log. Notices given by certified mail shall be deemed received three (3) days after deposit in the U.S. Mail. 19. CONSTRUCTION. In construing this Agreement, if any portion of this Agreement shall be found to be invalid or unenforceable, the remaining terms and provisions of this Agreement shall be given effect to the maximum extent possible without considering the void, invalid or unenforceable provision. In construing this Agreement, no meaning or effect shall be given to the captions of the paragraphs in this Agreement, which are inserted for convenience of reference only. 20. CHOICE OF LAW. This Agreement shall be governed and construed in accordance with the internal laws of the State of Texas without resort to choice of law principles. 21. INTEGRATION; AMENDMENTS. This is an integrated Agreement. This Agreement (including Attachment I hereto) constitutes and is intended as a final expression and a complete and exclusive statement of the understanding and agreement of the parties hereto with respect to the subject matter of this Agreement. All negotiations, discussions and writings between the parties hereto relating to the subject matter of this Agreement are merged into this Agreement, and there are no rights conferred, nor promises, agreements, conditions, undertakings, warranties or representations, oral or written, expressed or implied, between the undersigned parties as to such matters other than as specifically set forth herein. No amendment or modification of or addendum to, this Agreement shall be valid unless the same shall be in writing and signed by the parties hereto. No waiver of any of the provisions of this Agreement shall be valid unless in writing and signed by the party against whom it is sought to be enforced. 22. SUCCESSORS AND BINDING AGREEMENT: (a) CSLC will require any successor (whether direct or indirect, by purchase, merger, consolidation, reorganization or otherwise) to all or substantially all of the business or assets of CSLC, by agreement in form and substance reasonably satisfactory to Beck, expressly to assume and agree to perform this Agreement in the same manner and to the same extent CSLC would be required to perform if no such succession had taken place. This 10 Agreement will be binding upon and inure to the benefit of CSLC and any successor to CSLC, including without limitation any persons acquiring directly or indirectly all or substantially all of the business or assets of CSLC whether by purchase, merger, consolidation, reorganization or otherwise, but will not otherwise be assignable, transferable or delegable by CSLC. (b) This Agreement will inure to the benefit of and be enforceable by Beck's personal or legal representatives, executors, administrators, successors, heirs, distributees, legatees and permitted assignees. IN WITNESS WHEREOF, the parties have executed this Agreement on the date set forth above to be effective as of the date specified in the preamble of this Agreement. CAPITAL SENIOR LIVING CORPORATION a Delaware corporation Address: 14160 Dallas Parkway, #300 Dallas, TX 75240 By: /s/ David R. Brickman --------------------------------- Its: Vice President --------------------------------- JEFFREY L. BECK Address: 6211 Raintree Court Dallas, TX 75240 /s/ Jeffrey L. Beck ---------------------------------------- Jeffrey L. Beck 11 ATTACHMENT I INDEMNITY 1. CAPITAL SENIOR LIVING CORPORATION (the "Corporation") will indemnify JEFFREY L. BECK ("Indemnitee") in accordance with the following terms. 2. DEFINITIONS. As used in this Indemnity: (a) The term "Proceeding" shall include any threatened, pending or completed investigation, claim, action, suit or proceeding, whether of a civil, criminal, administrative or investigative nature (including without limitation any action, suit or proceeding by or in the right of the Corporation or Other Entity to procure a judgment in its favor), in which Indemnitee may be or may have been or may be threatened to be made or to become involved in any manner (including without limitation as a party or a witness) by reason of the fact that Indemnitee has advised the Corporation (as an officer, director or consultant of the Corporation) with respect to any matter, is alleged to have advised Other Entities with respect to any matter in which the Corporation was involved or related or by reason of anything actually or allegedly done or not done by Indemnitee in any of such capacities, and whether such advice, action or inaction occurred in the past or occurs after the date hereof. It is expressly agreed that "Proceeding" shall include any claim, action, suit or proceeding arising out of or related to the Corporation's business relationships with and proposed mergers with ILM Senior Living, Inc. and ILM II Senior Living, Inc., in connection with which the Corporation's Board of Directors in considering this Agreement has determined Indemnitee's actions and advice were in good faith and in the best interests of the Corporation. It is also expressly agreed that "Proceeding" shall include any claim, action, suit or proceeding arising out of allegations that Indemnitee's affiliates have engaged in transactions with the Corporation in which Indemnitee had a financial or conflicting interest. (b) The term "Expenses" includes, without limitation, reasonable attorneys' fees and disbursements and all other reasonable costs, expenses and obligations actually and reasonably incurred by Indemnitee in connection with (i) investigating, defending, being a witness in or otherwise participating in, or preparing to defend, be a witness in or participate in, any Proceeding, or (ii) establishing a right to indemnification under Paragraph 6 of this Indemnity, but shall not include the amount of any judgments, fines or penalties entered or assessed against Indemnitee or any amounts paid or payable in settlement by Indemnitee. (c) The term "Other Entity" includes, without limitation, any subsidiary or affiliate of the Corporation and any entity with which Indemnitee has served or is serving as an officer or director or otherwise in the general interest of the Corporation's business. It is expressly agreed that Indemnitee's (i) service with Capital Realty Group Senior Housing, Inc., a Texas corporation, and with its subsidiaries and partnerships in which it is a general partner, (ii) service with Capital Senior Living Communities, LP, and its general partner, Retirement Living Communities, L.P. and (iii) service with Tri-Point Communities, L.P. were all undertaken by the Indemnitee for the benefit of the Corporation, and all such entities and their affiliates are hereby agreed to be Other Entities within the meaning of this definition. 1 3. SCOPE OF INDEMNIFICATION. Subject to Paragraph 7 of this Indemnity, the Corporation shall indemnify Indemnitee in accordance with the provisions of this Paragraph 3 if Indemnitee is or was or is threatened to be made or to become involved in any manner, including without limitation as a party or witness, in any Proceeding (including a Proceeding by or in the right of the Corporation or Other Entity to procure a judgment in its favor) against any and all Expenses and any and all judgments, fines and penalties entered or assessed against Indemnitee, and any and all amounts reasonably paid or payable in settlement by Indemnitee, in connection with such Proceeding, but only if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in or not opposed to the Corporation's best interests and without gross negligence. THIS INDEMNITY EXPRESSLY INDEMNIFIES INDEMNITEE AGAINST HIS OWN NEGLIGENCE. The termination of any Proceeding by judgment, order of court, settlement or conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption for purposes of any provision of this Indemnity that Indemnitee did not act in good faith and in a manner Indemnitee reasonably believed to be in or not opposed to the Corporation's best interests, or with gross negligence. 4. INDEMNIFICATION OF EXPENSES OF SUCCESSFUL PARTY; NO ADVERSE PRESUMPTION. Notwithstanding any other provisions of this Indemnity, to the extent that Indemnitee has been successful on the merits or otherwise, in defense of any Proceeding or in defense of any claim, issue or matter therein, including the dismissal of an action without prejudice, Indemnitee shall be indemnified against all Expenses incurred in connection therewith. 5. ADVANCES OF EXPENSES. The Expenses incurred by Indemnitee pursuant to Paragraph 3 in any Proceeding shall be paid by the Corporation in advance, promptly upon the written request of the Indemnitee, if Indemnitee shall undertake to repay such amount to the extent that it is ultimately determined that Indemnitee is not entitled to indemnification. No security for the performance of any such undertaking shall be required and any such undertaking shall be accepted by the Corporation without regard to the financial capacity of Indemnitee to perform his obligations thereunder. 6. RIGHT OF INDEMNITEE TO INDEMNIFICATION UPON APPLICATION: PROCEDURE UPON APPLICATION. Without limiting the obligation of the Corporation to promptly make payments in respect of Expenses in accordance with Paragraph 5, any indemnification under Paragraph 3 shall be made no later than 45 days after receipt by the Corporation of the written request of Indemnitee, unless a determination is made within said 45-day period by (1) the Board of Directors of the Corporation by a majority vote of a quorum consisting of Directors who are not and were not parties to the relevant Proceeding, or (2) independent legal counsel in a written opinion (which counsel shall be appointed if such a quorum is not obtainable) that the Indemnitee has not met the relevant standards for indemnification set forth in Paragraph 3. The right to indemnification or advances as provided by this Indemnity shall be enforceable by Indemnitee in any court of competent jurisdiction. The burden of proving that indemnification is not appropriate shall be on the Corporation. Indemnitee's Expenses reasonably incurred in connection with successfully establishing his or her right to indemnification, in whole or in part, in any such proceeding shall also be indemnified by the Corporation. 2 7. INDEMNIFICATION HEREUNDER NOT EXCLUSIVE; CONSTRUCTION. The indemnification provided by this Indemnity shall not be deemed exclusive of any other rights to which Indemnitee may be entitled under the General Corporation Law of the State of Delaware, the Amended and Restated Certificate of Incorporation and/or Bylaws of the Corporation, any other indemnity, any vote of stockholders or disinterested Directors, or otherwise, either as to action in his official capacity on, prior or after the date hereof or as to action in any other capacity. The corporation hereby agrees and acknowledges that it will continue to honor its indemnification obligations to Indemnitee set forth in its Amended and Restated Certificate of Incorporation and/or Bylaws with respect to any existing or future lawsuit against the Corporation and any other actions pursuant to which Indemnitee would be entitled to indemnification. 8. PARTIAL INDEMNIFICATION. In the event that Indemnitee is entitled under any provision of this Indemnity to indemnification by the Corporation for a portion but less than the entire amount of any Expenses, judgments, fines, penalties and/or amounts paid or payable in settlement, the Corporation shall fully indemnify Indemnitee in accordance with the applicable provisions of this Indemnity for such portion of such Expenses, judgments, fines, penalties and/or amounts paid in settlement. 9. SUBROGATION. In the event that the Corporation provides any indemnification or makes any payment to Indemnitee in respect of any matter in respect of which indemnification or the advancement of expenses is provided for herein, the Corporation shall be subrogated to the extent of such indemnification or other payment to all of the related rights of recovery of Indemnitee against other persons or entities. Indemnitee shall execute all papers reasonably required and shall do everything that may be reasonably necessary to secure such rights and enable the Corporation effectively to bring suit to enforce such rights (with all of Indemnitee's reasonable costs and expenses, including attorneys' fees and disbursements, to be reimbursed by or, at the option of Indemnitee, advanced by the Corporation). 10. NO DUPLICATION OF PAYMENTS. The Corporation shall not be obligated under this Indemnity to provide any indemnification or make any payment to which Indemnitee is otherwise entitled hereunder to the extent, but only to the extent, that such indemnification or payment hereunder would be duplicative of any amount actually received by Indemnitee pursuant to any insurance policy, the General Corporation Law of the State of Delaware, the Amended and Restated Certificate of Incorporation and/or the Bylaws of the Corporation or otherwise. With respect to the Corporation's indemnity obligations concerning Other Entities, the Corporation shall have no obligation hereunder until and unless Beck has first sought all available insurance coverage benefitting such Other Entities and indemnity available from such Other Entities and such insurance coverage and indemnity has been exhausted or has been denied. 11. SAVING CLAUSE. If any provision of this Indemnity or the application of any provision hereof to any circumstance is held illegal, invalid or otherwise unenforceable, the remainder of this Indemnity and the application of such provision to any other circumstance shall not be affected, and the provision so held to be illegal, invalid or otherwise unenforceable shall be reformed to the extent (but only to the extent) necessary to make it legal, valid and enforceable. 3 12. NOTICE. Indemnitee shall give to the Corporation notice in writing as soon as practicable of any claim made against him or her for which indemnification will or could be sought under this Indemnity, provided, however, that any failure to give such notice to the Corporation will relieve the Corporation from its obligations hereunder only if, and to the extent that, such failure results in the forfeiture of substantial rights and defenses. Notice to the Corporation shall be directed to the Corporation (to the attention of the Chief Executive Officer, with a copy to the General Counsel) at its principal executive office or such other address as the Corporation shall designate in writing to Indemnitee. Notice shall be deemed received when hand delivered or dispatched by electronic facsimile transmission (with receipt thereof orally confirmed), or three calendar days after having been mailed by United States registered or certified mail, return receipt requested, postage prepaid, or one business day after having been sent for next-day delivery by a nationally recognized overnight courier. In addition, Indemnitee shall give the Corporation such information and cooperation as it may reasonably require and shall be within Indemnitee's power. The Corporation shall give prompt notice to Indemnitee of any potential claims against Indemnitee of which the Corporation becomes aware. 13. APPLICABLE LAW. This Indemnity shall be governed by and construed in accordance with the laws of the State of Delaware, without giving effect to the principles of conflicts of law thereof. 14. SUCCESSORS. This Indemnity shall be binding upon the Corporation and its successors, including without limitation any person acquiring directly or indirectly all or substantially all of the business or assets of the Corporation whether by purchase, merger, consolidation, reorganization or otherwise (and such successor will thereafter be deemed the "Corporation" for purposes of this Indemnity), but will not otherwise be assignable, transferable or delegable by the Corporation. The Corporation shall require any successor (whether direct or indirect, by purchase, merger, consolidation, reorganization or otherwise) to all or substantially all of the business or assets of the Corporation, to assume and agree in writing to perform this Indemnity, expressly for the benefit of Indemnitee, in the same manner and to the same extent the Corporation would be required to perform if no such succession had taken place. Dated: May 20, 1999 CAPITAL SENIOR LIVING CORPORATION By: /s/ David R. Brickman ------------------------------- Title: Vice President ------------------------------- 4 EX-10.78 4 EXHIBIT 10.78 EXHIBIT 10.78 - -------------------------------------------------------------------------------- TITLE SECOND AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP - -------------------------------------------------------------------------------- NAME OF PARTNERSHIP TRIAD SENIOR LIVING I, L.P. - -------------------------------------------------------------------------------- PURPOSE ACQUIRE, DEVELOP, OWN AND OPERATE SEVEN SENIOR LIVING AND ASSISTED LIVING FACILITIES - -------------------------------------------------------------------------------- PARTNERS General Partner: TRIAD SENIOR LIVING, INC. Limited Partners: CAPITAL SENIOR LIVING PROPERTIES, INC. LB TRIAD INC. - -------------------------------------------------------------------------------- DATE AS OF DECEMBER 30, 1999 - -------------------------------------------------------------------------------- TABLE OF CONTENTS
PAGE ---- ARTICLE I - ADDITIONAL DEFINITIONS.......................................................... 2 ARTICLE II - FORMATION; CONTINUATION; NAME AND OFFICE; PURPOSE.............................. 8 Section 2.1. Formation; Continuation................................................ 8 Section 2.2. Name, Registered Agent and Registered Office........................... 8 Section 2.3. Purpose................................................................ 8 ARTICLE III - TERM.......................................................................... 8 ARTICLE IV - INTERESTS OF THE GENERAL PARTNER AND LIMITED PARTNERS.......................... 8 Section 4.1. General Partner........................................................ 9 Section 4.2. Limited Partners....................................................... 9 ARTICLE V - CAPITAL CONTRIBUTIONS........................................................... 9 Section 5.1. Capital Contribution of the General Partner............................ 9 Section 5.2. Capital Contribution of the Limited Partners........................... 9 Section 5.3. Additional Capital Contributions....................................... 9 Section 5.4. Return or Withdrawal of Capital Contributions; Distributions........... 11 Section 5.5. Capital Accounts....................................................... 11 ARTICLE VI - LIMITED PARTNERS............................................................... 11 Section 6.1. Powers: Actions........................................................ 11 Section 6.2. Limitation of Liability................................................ 11 ARTICLE VII - GENERAL PARTNER............................................................... 12 Section 7.1. Powers; Actions........................................................ 12 Section 7.2. Restrictions on the General Partner.................................... 12 Section 7.3. Duties and Obligations of the General Partner.......................... 15 Section 7.4. Change of TSL's Interest from General to Limited Partner............... 16 Section 7.5. Annual Business Plan................................................... 17 Section 7.6. Option to Provide Financing to Partnership............................. 17 Section 7.7. Other Activities....................................................... 18 Section 7.8. Tax Matters Partner.................................................... 18 Section 7.9. Liability; Indemnification............................................. 18 Section 7.10. Fees to and Reimbursement of the General Partner....................... 19 ARTICLE VIII - ALLOCATIONS; DISTRIBUTIONS................................................... 19 Section 8.1. Allocations of Income and Loss......................................... 19 Section 8.2. Distributions of Net Cash Flow and Net Capital Transaction Proceeds.... 19 Section 8.3. Withholding Taxes with Respect to Partners............................. 20 ARTICLE IX - ASSIGNABILITY OF GENERAL PARTNER'S AND LIMITED PARTNER'S INTERESTS; BUY-SELL OPTION; PURCHASE OPTION.................................. 21 Section 9.1. General................................................................ 21 Section 9.2. Permitted Transfers.................................................... 21 Section 9.3. Effect of Assignment; Documents........................................ 22 Section 9.4. Substitute Partner..................................................... 22 Section 9.5. Further Requirements................................................... 22 Section 9.6. Buy-Sell Provisions.................................................... 22 Section 9.7. Sale of Properties After Second Anniversary............................ 25 Section 9.8. CSL Purchase Option: TSL Partnership Interests......................... 26 Section 9.9. CSL Purchase Option: LB Partnership Interests.......................... 26 Section 9.10. Closing Documentation.................................................. 27 Section 9.11. Sale of Partnership Interests By LB.................................... 27 Section 9.12. Withdrawal of a Partner................................................ 28 Section 9.13. Death, Legal Incompetency, Bankruptcy or Dissolution of Limited Partner...................................................... 28 ARTICLE X - DURATION, DISSOLUTION, TERMINATION, WINDING UP, REMOVAL OF GENERAL PARTNER AND RESIGNATION OF GENERAL PARTNER..................................... 28 Section 10.1. Dissolution and Termination............................................ 28 Section 10.2. Continuation of Business............................................... 29 Section 10.3. Winding Up of the Partnership.......................................... 29 Section 10.4. Sale or Liquidation.................................................... 29 ARTICLE XI - REPRESENTATIONS, WARRANTIES AND COVENANTS...................................... 30 Section 11.1. Ownership of TSL....................................................... 30 Section 11.2. Ownership of CSL....................................................... 30 Section 11.3. Confidentiality........................................................ 30 Section 11.4. Limitation of LB Liability............................................. 30 Section 11.5. Limitation of CSL Liability............................................ 31 Section 11.6. Limitation of TSL Liability............................................ 31 Section 11.7. Representations of TSL Regarding Partnership and Related Matters....... 31 Section 11.8. Representations of CSL Regarding Partnership and Related Matters....... 32 Section 11.9. LB Losses From Breach of Representation................................ 32 Section 11.10. Notice of Loss......................................................... 34 Section 11.11. Right to Defend........................................................ 35 Section 11.12. Cooperation............................................................ 35 ARTICLE XII - ACCOUNTS AND RECORDS: ACCOUNTANTS............................................. 35 Section 12.1. Accounting Methods: Fiscal Year........................................ 35 Section 12.2. Records and Books of Account........................................... 36 Section 12.3. Annual Examination and Tax Returns..................................... 36 Section 12.4. Bank Accounts.......................................................... 36 Section 12.5. Reports to Partners.................................................... 37 ARTICLE XIII - GENERAL PROVISIONS........................................................... 37 Section 13.1. Recipient of Distributions and Payments................................ 37 Section 13.2. Communications......................................................... 37 Section 13.3. Entire Agreement; Applicable Law; Effect............................... 38 Section 13.4. Modification; Waiver or Termination.................................... 38 Section 13.5. Counterparts........................................................... 38 Section 13.6. Separability........................................................... 38 Section 13.7. Article and Section Headings........................................... 38 Section 13.8. Word Meanings.......................................................... 39 Section 13.9. Exhibits............................................................... 39 Section 13.10. Further Actions........................................................ 39 Section 13.11. Prohibition Against Partition.......................................... 39 Section 13.12. Agreements with Affiliates and the GMAC Loan........................... 39 Section 13.13. Non-Compete of General Partner......................................... 40 Section 13.14. Litigation Without Termination......................................... 40 Section 13.15. Attorneys' Fees........................................................ 40 Section 13.16. Cumulative Remedies.................................................... 41 EXHIBIT A - PROPERTY DESCRIPTIONS........................................................... A-1 EXHIBIT B - CAPITAL CONTRIBUTIONS........................................................... B-1 EXHIBIT C - CERTAIN TAX AND ACCOUNTING MATTERS.............................................. C-1 EXHIBIT D - ADJUSTMENTS IN LOAN AND CAPITAL................................................. D-1 EXHIBIT E - AGREED VALUE OF EACH PROPERTY................................................... E-1 EXHIBIT F - REPRESENTATIONS AND WARRANTIES OF TSL REGARDING PARTNERSHIP AND RELATED MATTERS.................................................... F-1 EXHIBIT G - REPRESENTATIONS AND WARRANTIES OF CSL REGARDING PARTNERSHIP AND RELATED MATTERS.................................................... G-1 EXHIBIT H - FORM OF MONTHLY REPORTING....................................................... H-1
SECOND AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF TRIAD SENIOR LIVING I, L.P. (FORMERLY KNOWN AS TRI POINT COMMUNITIES, L.P.) THIS SECOND AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP is dated effective as of December 30, 1999. The parties are TRIAD SENIOR LIVING, INC., a Texas corporation ("TSL" or "General Partner") as the sole General Partner, and CAPITAL SENIOR LIVING PROPERTIES, INC., a Texas corporation ("CSL") and LB TRIAD INC., a Delaware corporation ("LB"), as the Limited Partners (CSL and LB are collectively referred to as the "Limited Partners"), and BLAKE N. FAIL ("Fail" or "Withdrawing Limited Partner") as the Withdrawing Limited Partner. WHEREAS, Capital Retirement Group, Inc., a Texas corporation ("CRG"), Jeffrey L. Beck ("Beck") and JAS Trust ("JAS") formed Tri Point Communities, L.P. pursuant to the Certificate of Limited Partnership filed with the Secretary of State of Texas on November 6, 1997 and that certain Limited Partnership Agreement dated as of November 6, 1997 ("Original Agreement"); WHEREAS, CRG transferred all its partnership interest in the Partnership to TSL and CRG withdrew from the Partnership pursuant to the terms of that Amended and Restated Agreement of Limited Partnership dated April 1, 1998 ("First Restated Agreement"); WHEREAS, Beck and JAS transferred all their partnership interests in the Partnership to Fail, and Beck and JAS withdrew from the Partnership pursuant to the terms of the First Restated Agreement; WHEREAS, pursuant to the terms of the First Restated Agreement, the Partnership changed its name to "Triad Senior Living I, L.P."; WHEREAS, Fail wishes to withdraw from the Partnership as a limited partner and LB desires to be admitted as a limited partner of the Partnership in Fail's place; WHEREAS, the Withdrawing Limited Partner, TSL, LB, and CSL desire to effect such withdrawal and admission, all as more fully set forth herein; and WHEREAS, TSL, LB and CSL desire to continue the existence of the Partnership, recapitalize the Partnership and to amend and restate the terms and provisions of the Original Agreement, as amended by the First Restated Agreement. NOW, THEREFORE, in consideration of the foregoing and of the mutual covenants, conditions and agreements hereinafter set forth, the parties hereby agree as follows: ARTICLE I ADDITIONAL DEFINITIONS As used herein, the following terms shall have the following meanings: "ACCOUNTANT" means Lane, Gorman, Trubitt, L.L.P. or any other independent firm of certified public accountants as may be engaged by the General Partner for the Partnership with the approval of LB. "AFFILIATE" means (a) a General Partner; (b) a Limited Partner; (c) a member of the immediate family of the Withdrawing Limited Partner or of a partner, shareholder or member of a General Partner or a Limited Partner; (d) a legal representative of any Person referred to in the preceding clauses (a) through (c); (e) a trustee for the benefit of any Person referred to in the preceding clauses (a) through (c); (f) a corporation, joint venture, partnership, limited liability company or other business entity which is controlled by such person or entity and/or any one or more of the Persons referred to in the preceding clauses (a) through (c); (g) a corporation, joint venture, partnership, limited liability company or other business entity which controls or is under common control with such person or entity, and/or with a person or entity referred to in the preceding clauses (a) through (c); or (h) the partners, officers, directors and key employees of such entity and/or any corporation, joint venture, partnership, limited liability company or other business entity referred to in the preceding clauses (a), (b), (c), (f) or (g). "AGENCIES" shall mean federal, state municipal or other governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign. "AGREEMENT" or "THIS AGREEMENT" means this Second Amended and Restated Agreement of Limited Partnership, as amended from time to time pursuant to its terms. "ANNUAL BUSINESS PLAN" means the strategic business and operating plan adopted by TSL, LB and CSL and setting forth (a) the program (including a timetable) for developing and constructing each Property, (b) progress and status reports on construction not yet completed, (c) a marketing and leasing plan for each Property, (d) the plan for operating each Property after it has been completed, (e) in reasonable detail, the plan for initial services and staffing to provide such services for each Property and any proposal for materially changing such services or staffing, (f) any proposal for refinancing or other capital transactions and (g) operating, capital expenditure and other relevant budgets for each Property. "ACQUISITION DATE" shall mean the date the Partnership acquired any Property. "BOT LOAN" means those certain loans from Lender to the Partnership in the original aggregate principal amount of up to $50,000,000.00. -2- "BUSINESS DAY" means Monday through Friday of each week, except that a legal holiday recognized as such by the Government of the United States or the States of New York or Texas shall not be regarded as a Business Day. "CAPITAL CONTRIBUTION ACCOUNT" means a memorandum account, which shall be maintained by the Partnership with respect to each Partner for accounting purposes only, determined as follows: (a) the initial balance as of the date of this Agreement of each Partner's Capital Contribution Account shall be as set forth in EXHIBIT B; (b) the balance of such account shall be increased as of the date of each contribution made by such Partner under ARTICLE V hereof by the amount of such contribution; and (c) the balance of such account shall be decreased (but not below zero) as of each date that a distribution is made to such Partner pursuant to SECTION 8.2 (b), (d), (f) or (i) as appropriate to such Partner by the amount of such distribution. "CAPITAL CONTRIBUTIONS" means the gross amount of contributions actually made to the capital of the Partnership by one or more Partners or all the Partners, as the case may be. Loans to the Partnership by any Partner shall not be considered a Capital Contribution. "CERTIFICATE" means the Certificate of Limited Partnership of this Partnership filed with the Secretary of State of the State of Texas, as such Certificate has been or may be further amended and filed from time to time. "CERTIFICATE OF OCCUPANCY" means the certificate of occupancy which has been issued for any building at a Property. "CODE" means the Internal Revenue Code of 1986, as amended. "CSL" means Capital Senior Living Properties, Inc., a Texas corporation. "CSL GUARANTY" means the Subsidiary Guaranty dated the date of this Agreement, made by Capital Senior Living Corporation, an Affiliate of CSL, for the benefit of the Partnership. "DEVELOPMENT AGREEMENT" means the development agreements between the Partnership and Capital Senior Development, Inc. relating to the Properties, as such agreements may be amended from time to time. "ENCUMBRANCES" shall mean any and all options, pledges, mortgages, security interests, liens, charges, adverse claims, burdens and encumbrances whatsoever. "15% PREFERRED RETURN" means at any date, for each Partner, an amount computed like interest equal to a cumulative annual return of 15%, compounded monthly, on the average daily balance of the Partner's Capital Contribution Account except as adjusted under Section 8.2(a) and (e). "FISCAL YEAR" means the fiscal year of the Partnership as set forth in Section 12.1 hereof. -3- "GAAP" means generally accepted accounting principles, consistently applied "GENERAL PARTNER" means TSL, and any additional or successor General Partner(s) designated in any case as such in accordance with the provisions of this Agreement, and, from time to time, holding such position in accordance with such provisions. "GMAC LOAN" means those certain loans from Standby Lender to the Partnership in the original aggregate principal amount of $50,000,000 which will be used, in part, to replace the BOT Loan. "GOVERNMENTAL AUTHORITY" shall mean the United States of America, the state, county, city and other political subdivision in which each of the Properties is located, and any agency, authority, court, department, commission, board or instrumentality of any of them. "GOVERNMENTAL REQUIREMENTS" shall mean all laws, ordinances, statutes, codes, rules, regulations, orders and decrees of the United States, the state, the county, the city, or any other political subdivision in which any Property is located, and any other political subdivision, agency or instrumentality exercising jurisdiction over the Partnership or any Property. "GROSS RECEIPTS" mean all revenues received by the Partnership from the operations of its business attributable to a particular period as determined in accordance with the accrual method of accounting under GAAP, but not including Capital Contributions and any loans from Partners and third parties. "HAZARDOUS MATERIALS" shall mean (i) any "HAZARDOUS WASTE" as defined by the Resource Conservation and Recovery Act of 1976 (42 U.S.C. Section 6901 ET SEQ.), as amended from time to time, and regulations promulgated thereunder ("RCRA"); (ii) any "hazardous substance" as defined by the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (42 U.S.C. Section 9601, ET SEQ.), as amended from time to time, and regulations promulgated thereunder ("CERCLA") (including petroleum-based products as described therein); (iii) other petroleum and petroleum-based products; (iv) asbestos in any quantity or form which would subject it to regulation under any applicable Hazardous Materials Law, (v) polychlorinated biphenyls; (vi) any substance, the presence of which in or on the Property is prohibited by any Hazardous Materials Law; (vii) any "extremely hazardous substance" or "hazardous chemical" as those terms are defined in the Emergency Planning and Community Right-to-Know Act (42 U.S.C. Section 11001 ET SEQ.) as amended from time to time, and regulations promulgated thereunder ("EPCRA"); (viii) any "chemical substance" as that term is defined in the Toxic Substance Control Act (15 U.S.C. Section 2601) as amended from time to time, and regulations promulgated thereunder ("TSCA"), (ix) any hazardous substance identified under the law of any State in which a Property is located; and (x) any other substance which, by any Hazardous Materials Law, requires special handling in its collection, storage, treatment, management or disposal, but excluding, cleaning, office supplies and other similar products used in connection with the routine conduct of business and for routine maintenance or repair of any Property, provided such products are stored and used in compliance with Hazardous Materials Laws. -4- "HAZARDOUS MATERIALS CONTAMINATION" shall mean the presence of Hazardous Materials at the Improvements, facilities, soil, groundwater, air or other elements on or of any Property, or the presence of Hazardous Materials at the buildings, facilities, soil, groundwater, air or other elements on or of any other property as a result of Hazardous Materials at any time emanating from any Property. "HAZARDOUS MATERIALS LAWS" shall mean all Governmental Requirements, including, without limitation, RCRA and CERCLA, relating to the handling, storage, existence of or otherwise regulating any Hazardous Materials relating to the removal or remediation of Hazardous Materials. "HAZARDOUS SUBSTANCE ACTIVITY" shall mean any actual, proposed, or threatened use, storage, holding, existence, location, or release, in each case in violation of Hazardous Materials Laws including, without limitation, any spilling, leaking (not to include oil, transmission, or other fluid leaks from automobiles), leaching, pumping, pouring, emitting, emptying, dumping, disposing into the environment, and the continuing migration into or through soil, surface water, groundwater or any body of water, discharge, deposit, placement, generation, processing, construction, treatment, abatement, removal, disposal, disposition, handling, or transportation of any Hazardous Materials from, under, in, into, or on any Property, including, without limitation, the movement or migration of any Hazardous Materials from surrounding property, surface water, groundwater or any body of water under, in, into, or onto any Property and any residual Hazardous Materials Contamination in, on, or under any Property. "INTERNAL RATE OF RETURN" or "IRR" means, the discount rate, compounded monthly, expressed as a percentage based on a year of 365 or 366 days, as the actual case may be, at which the net present value, as of the date LB makes each Capital Contribution to the Partnership pursuant to this Agreement, of all future distributions pursuant to Article VIII of this Agreement equals the amount of each such Capital Contribution. LB shall be deemed to have received a twenty-five percent (25%) IRR, compounded monthly, with respect to a segment of Capital Contribution it made to the Partnership upon its receipt of a cumulative amount of distributions pursuant to Article VIII that causes (i) the net present value of the aggregate of all distributions pursuant to Article VIII to LB with respect to the Capital Contributions, discounted at an annual rate of twenty-five percent (25%), compounded monthly, from the date of each such distribution back to the date of such Capital Contributions reduced by (ii) the amount of such Capital Contributions, to equal zero. "LB" means LB Triad Inc., a Delaware corporation. "LEASES" shall mean the interest of the Partnership in leases and rental agreements with tenants occupying space situated at any Property in the Improvements or otherwise having rights with regard to use of any Property and all security deposits or like payments, if any, paid by tenants or other security provided in connection therewith. "LENDER" means Bank One, Texas, N.A., a national banking association, as Agent for the Lenders (as defined therein) under the Master Loan Agreement dated December 23, 1997 among the Partnership, Bank One Texas, N.A. and the Lenders, as the same may be modified, amended or restated from time to time. -5- "LIMITED PARTNERS" mean LB and CSL, and any additional or substitute Limited Partner(s) as may be designated as such in accordance with the provisions of this Agreement. "LOAN DOCUMENTS" mean all documents evidencing, securing or otherwise entered into in connection with the BOT Loan or the GMAC Loan, including, without limitation, Note, Deed of Trust, Security Agreement, Assignment of Rents and Financing Statement, Assignment of Leases and Rents, and UCC-1 Financing Statement. "MANAGEMENT AGREEMENT" means the management agreements between the Partnership and Capital Senior Living, Inc. relating to the Properties, as such agreements may be amended from time to time. "NET CAPITAL TRANSACTION PROCEEDS" mean the proceeds from (a) any financing or refinancing of the Properties or any part thereof (but not including the BOT Loan or the GMAC Loan), and (b) any sale or disposition not in the ordinary course, taking or loss (including, but not limited to, the proceeds from any eminent domain proceeding or conveyance in lieu thereof or from title insurance or casualty insurance, other than rental income insurance) of the Properties or any part thereof that in accordance with GAAP are considered capital in nature, less payment of all costs and other expenses related thereto, any amounts expended to repair or replace any part of the Properties taken or destroyed, any reserves required by the Loan Documents or approved by the Partners as a Major Decision pursuant to Section 7 and any loans, debts or other obligations of the Partnership. "NET CASH FLOW" means the amount, if any, by which Gross Receipts plus cash reserves of the Partnership from the previous period that the General Partner, with the approval of the Limited Partners as a Major Decision pursuant to Section 7.2, determines are no longer required exceed Operating Expenses for such particular period, to the extent the General Partner determines, with the reasonable approval of LB and CSL, that cash is not otherwise required for Partnership purposes, including the setting up or continuing of a reasonable working capital reserve for the Partnership. "Net Cash Flow" shall not include or reflect any proceeds received or expenses incurred in the determination of Net Capital Transaction Proceeds "OPERATING DEFICITS GUARANTY" means collectively, the Subsidiary Guaranties dated as of December 30, 1999 made by Capital Senior Living Corporation for the benefit of the Partnership to pay and perform fully and promptly when due all of the covenants, agreements and other obligations undertaken by Capital Senior Living, Inc. pursuant to Section VII of the Property Management Agreements, as such Guaranty may be amended or restated from time to time in accordance with its terms. "OPERATING EXPENSES" means all expenditures of any kind or nature incurred by the Partnership attributable to a particular period (including, without limitation, principal, interest and other amounts payable with respect to the BOT Loan and the GMAC Loan), as determined in accordance with the accrual method of accounting in accordance with GAAP. "PARTNER" or "PARTNERS" means the General Partner or the Limited Partners, or any of them. -6- "PARTNERSHIP" means the limited partnership evidenced by this Agreement, as said limited partnership may from time to time be constituted, amended and, if necessary, reconstituted, including any successor limited partnership. "PARTNERSHIP PROPERTY" means the Properties, and all other property of whatever kind of nature owned by the Partnership from time to time. "PERCENTAGE INTERESTS" mean the percentage set forth opposite the name of such Partner under the column "Interest" in EXHIBIT B attached hereto and made a part hereof for all purposes. "PERMITTED ENCUMBRANCES" shall mean any mortgage, lien, security interest, claim or encumbrance under or in connection with the BOT Loan or the GMAC Loan. "PERSON" means an individual, firm, corporation or other legal entity "PERSONAL PROPERTY LEASES" shall mean the interest of the Partnership in all leases covering furniture, fixtures and equipment located in or on or about and used in connection with any Property or the operations thereon. "PROPERTIES" mean those certain tracts of land which the Partners have agreed in writing to acquire. Upon such written approval, the General Partner shall attach the legal description for a Property hereto as EXHIBIT A. "PROPERTY MANAGEMENT AGREEMENT" means collectively, the separate amended and restated Management Agreements dated as of December 30, 1999 between the Partnership and Capital Senior Living, Inc., relating to the Properties as each may be amended or restated in accordance with its terms. "RENT ROLL" shall have the meaning set forth in paragraph 23 of Exhibit F. "RENTS" shall mean all of the rents, royalties, bonuses, issues, profits, revenue, income, and other benefits derived from the Properties or arising from the use or enjoyment of any portion thereof or from any lease or agreement pertaining thereto and liquidated damages following default under such leases, and all proceeds payable under any policy of insurance covering loss of rents resulting from untenantability caused by damage to any part of the Properties, together with any and all rights that the Partnership may have against any tenant under such leases or any subtenants or occupants of any part of the Properties. "REVISED ACT" means the Texas Revised Limited Partnership Act, as adopted and from time to time amended by the State of Texas. "SERVICE CONTRACTS" shall mean the interest of the Partnership in all (i) brokerage contracts, (ii) maintenance, repair, service and pest control contracts (including but not limited to janitorial, elevator and landscaping agreements), and (iii) other contracts pursuant to which services or goods are provided to the Properties, not to include any management agreement affecting any Property. -7- "SERVICER" means Hatfield Philips, Inc., a Georgia corporation having an address at 285 Peachtree Center Avenue, Marquis Two Tower, Suite 2300, Atlanta, GA 30303, Attention James Philips. "STANDBY LENDER" means GMAC Commercial Mortgage Association, a California corporation. "TSL" means Triad Senior Living, Inc., a Texas corporation. ARTICLE II FORMATION; CONTINUATION; NAME AND OFFICE; PURPOSE Section 2.1. FORMATION; CONTINUATION The Partnership commenced on November 6, 1997 as a Texas limited partnership effective upon the filing of the Certificate with the Secretary of State of the State of Texas pursuant to the provisions of the Revised Act, and shall continue for the purpose and upon the terms and conditions herein set forth. Section 2.2. NAME, REGISTERED AGENT AND REGISTERED OFFICE The name of the Partnership shall be Triad Senior Living I, L.P. or such other name as the General Partner, with the approval of the Limited Partners as a Major Decision pursuant to Section 7.2, shall hereafter designate by notice to the Limited Partners and by amendment to the Certificate properly filed with the Secretary of State of the State of Texas. The principal place of business in Texas where books and records of the Partnership will be kept and made available shall be 4312 Mockingbird Lane, Dallas, Texas 75205, or such other place as the General Partner may from time to time designate in a notice to the Limited Partners and by amendment to the Certificate. The registered office of the Partnership and the registered agent shall be as set forth in the Certificate, or such other registered agent and registered office as the General Partner may from time to time designate in a notice to the Limited Partners and by amendment to the Certificate. Section 2.3. PURPOSE The purpose of the Partnership shall be strictly limited to activities relating to the acquisition, ownership, operation, and sale of the Properties, and such other activities as are incidental thereto, including without limitation, entering into the BOT Loan and the GMAC Loan and the performance of the Partnership's obligations under the Loan Documents. -8- ARTICLE III TERM The term of the Partnership commenced upon the filing of the Certificate with the Secretary of State of the State of Texas, and shall continue until December 31, 2050, on which date the Partnership shall terminate, unless sooner dissolved upon the occurrence of any of the events of dissolution or termination, as described in Article X. ARTICLE IV INTERESTS OF THE GENERAL PARTNER AND LIMITED PARTNERS Section 4.1. GENERAL PARTNER The General Partner is TSL, and it shall have a 1% interest in the Partnership. Except as provided in Article IX of this Agreement, no other Person shall become a General Partner in the Partnership. The address of the General Partner is set forth on EXHIBIT B. Section 4.2. LIMITED PARTNERS The Limited Partners are LB and CSL, which shall have the interests in the Partnership as shown on EXHIBIT B. Except as provided in Article IX of this Agreement, no other Person shall become a Limited Partner or substitute Limited Partner in the Partnership. The addresses of the Limited Partners are set forth on EXHIBIT B. ARTICLE V CAPITAL CONTRIBUTIONS Section 5.1. CAPITAL CONTRIBUTION OF THE GENERAL PARTNER The General Partner has contributed to the Partnership the amount set forth on EXHIBIT B. The General Partner shall not be obligated to pay any Partnership expenses or make any capital contributions to the Partnership except as provided in this Section 5.1 and Section 5.3 and in Section 2.2(d) of Exhibit C hereof. Section 5.2. CAPITAL CONTRIBUTION OF THE LIMITED PARTNERS The Limited Partners have contributed or will contribute or be deemed to have contributed on the date of this Agreement to the Partnership the amounts set forth on EXHIBIT B. The Limited Partners shall not be obligated to make any other capital contributions to the Partnership except as provided in Section 5.3. The amount contributed by LB to the capital of the Partnership shall be used by the Partnership to (i) repay $10,053,369.02 of the loan ("CSL Loan") made by CSL to the Partnership in the original principal amount of $15,000,000 as shown in EXHIBIT D; (ii) redeem the limited partner interest of the Withdrawing Limited Partner as shown on EXHIBIT D; and (iii) pay -9- certain expenses of the Partnership with respect to transactions contemplated by this Agreement as shown in EXHIBIT D. The remaining balance and accrued interest on the CSL Loan (which, when added to CSL's current Capital Contribution shown in EXHIBIT D, equals $3,000,000) shall be treated as having been repaid by the Partnership to CSL and then immediately contributed by CSL to the capital of the Partnership, which shall increase its Capital Contribution Account. Immediately after the transactions set forth in this Section 5.2, the Partners agree that their respective Capital Accounts and Capital Contribution Accounts shall be as set forth on EXHIBIT D. Section 5.3. ADDITIONAL CAPITAL CONTRIBUTIONS (a) If Net Cash Flow is not sufficient to pay Operating Expenses or to avoid or cure a default under the Loan Documents or other obligations of the Partnership and the Partnership has been unable to borrow funds sufficient to pay such Operating Expenses (such Operating Expenses are referred to as "Required Expenses"), CSL shall, on its own initiative or at the request of any Limited Partner, cause its Affiliate, Capital Senior Living, Inc., to contribute to the Partnership in accordance with the terms of Article VII of the Property Management Agreement an amount equal to the Required Expenses, which amount shall be treated as a Capital Contribution by CSL. If Capital Senior Living, Inc. fails to fund the Required Expenses in accordance with Article VII of the Property Management Agreement, then CSL shall, on its own initiative or at the request of any Limited Partner, cause its Affiliate, Capital Senior Living Corporation, to contribute to the Partnership an amount equal to the Required Expenses in accordance with the Operating Deficits Guaranty, which amount shall be treated as a Capital Contribution by CSL. If Capital Senior Living Corporation fails to fund the Required Expenses in accordance with the Operating Deficits Guaranty, then LB, on its own behalf or on behalf of the Partnership, shall have the right to commence any action, suit or proceeding against Capital Senior Living, Inc. and/or Capital Senior Living Corporation in order to be entitled to specific performance and all other available legal and equitable remedies against Capital Senior Living, Inc. and/or Capital Senior Living Corporation, including (without limitation) recovery of all losses, costs and expenses. If LB commences an action or proceeding against Capital Senior Living, Inc. and/or Capital Senior Living Corporation, LB shall have the right to sell the Properties pursuant to the terms of Section 9.7 at any time. Any amounts expended by LB in commencing any suit or proceeding against Capital Senior Living, Inc. and/or Capital Senior Living Corporation for breach of Article VII of the Property Management Agreement or the Operating Deficits Guaranty, as the case may be, shall be added to the Capital Account and the Capital Contribution Account of LB. (b) If Capital Senior Living, Inc. and/or Capital Senior Living Corporation shall fail for any reason to fund any amount described in subsection (a), the General Partner or any Limited Partner shall have the right to request that the Partners contribute additional capital to the Partnership to pay Required Expenses. If the General Partner or any Limited Partner exercises this right, it may request that the General Partner contribute 1%, CSL contribute 19% and LB contribute 80% of the amount of additional capital required within ten (10) days (or such shorter time as may be appropriate under the circumstances, but in no event less than three (3) Business Days) after the date of receipt of notice of the request for such additional capital. Each Partner may, but shall not be obligated to make any such additional capital contributions. Any amounts contributed to the capital of the Partnership pursuant to this subsection (b) by any Partner shall be added to the Capital Account and the Capital Contribution Account of that Partner. -10- (c) FAILURE TO MAKE ADDITIONAL CAPITAL CONTRIBUTIONS. If any Partner (a "Non-Contributing Partner") does not make any additional capital contribution within the time specified, then the other Partners (each of which is hereinafter referred to as a "Contributing Partner"), provided the Contributing Partner is ready to contribute the funds requested pursuant to subsection (b), may by written notice to each Non-Contributing Partner elect to make capital contributions to the Partnership on behalf of itself and the Non-Contributing Partner for the entire amount requested pursuant to Section 5.3(b). If a Contributing Partner makes such additional capital contributions pursuant to this subsection (c), then the Contributing Partner shall receive distributions with respect to such additional capital contributions as described in Section 8.2. In no event shall any Partner's Percentage Interest be increased or decreased as a result of capital contributions made pursuant to this subsection (c). (d) Except as may be agreed herein or hereafter agreed voluntarily by all of the Partners (and not pursuant to Section 5.3(a), (b) or (c)), no Partner shall be required to make any additional Capital Contributions to the Partnership. Section 5.4. RETURN OR WITHDRAWAL OF CAPITAL CONTRIBUTIONS; DISTRIBUTIONS Except as otherwise expressly provided in this Agreement, none of the Partners shall be entitled to demand a refund or return of any Capital Contribution or to withdraw any part of its capital account or to receive any distribution from the Partnership. Section 5.5. CAPITAL ACCOUNTS A capital account shall be established and maintained for each Partner as set forth in EXHIBIT C attached hereto. ARTICLE VI LIMITED PARTNERS Section 6.1. POWERS: ACTIONS The Limited Partners shall neither participate in the management or control of the Partnership's business nor shall they transact any business for the Partnership, nor shall they have the power to sign for or bind the Partnership, in each case except to the extent expressly authorized or stated in this Agreement or approved as a Major Decision pursuant to Section 7.2. Section 6.2. LIMITATION OF LIABILITY (a) Anything to the contrary herein expressed or implied notwithstanding, the Limited Partners shall not be personally liable for any of the debts of the Partnership or any of the losses thereof in excess of their respective shares of Partnership assets, capital contributions which they have made or are obligated to make to the Partnership, and their share of the Partnership's income and gains; PROVIDED, HOWEVER, that to the extent required by applicable law, if a Limited Partner receives a distribution at a time when it knew that, after giving effect to the distribution, all liabilities -11 of the Partnership, other than liabilities to the Partners with respect to the partnership interests and liabilities for which the recourse of creditors is limited to specific Partnership assets, exceed the fair value of the Partnership's assets (except that the fair value of property that is subject to a liability for which recourse of creditors is limited shall be included in the Partnership's assets only to the extent that the fair value of that property exceeds that liability), then the Limited Partner receiving such distribution shall be liable for the return of such distribution. (b) The Partners confirm and agree that (i) the voting and other rights and powers given to each Limited Partner in this Agreement were a material inducement to each Limited Partner's entering into this Agreement and (ii) the existence or exercise of such rights and powers by a Limited Partner shall not, to the fullest extent stated in Section 3.03(b) of the Texas Revised Limited Partnership Act, constitute participation by that Limited Partner in the control of the business of the Partnership or result in that Limited Partner being liable or responsible as a general partner for the debts or obligations of the Partnership. ARTICLE VII GENERAL PARTNER Section 7.1. POWERS; ACTIONS The General Partner shall manage and control the business and affairs of the Partnership, but only in accordance with the Annual Business Plan and the other Major Decisions adopted in accordance with Section 7.2 and subject to Section 7.3 and all other terms and conditions of this Agreement. Subject to the foregoing, the General Partner shall have full power to (i) manage the day-to-day operations of the Partnership; (ii) execute such documents as it may deem advisable for Partnership purposes, including, without limitation, the Loan Documents and all documents necessary for the acquisition, development, construction, financing, refinancing, ownership, operation and sale of the Properties; (iii) acquire, sell, lease, transfer, assign, convey, mortgage, refinance, or otherwise dispose of or deal with all or any part of the Properties on such terms as it deems reasonable; (iv) establish and maintain, to the extent Partnership funds are available, reasonable reserves for anticipated and unanticipated expenses relating to the activities of the Partnership; (v) perform or cause to be performed the Partnership's obligations, and exercise or cause to be exercised all of the Partnership's rights, under any agreement to which the Partnership or any nominee of the Partnership is a party; and (vi) on behalf of the Partnership, employ, engage, retain or deal with any Person, including any Affiliate, to perform services in connection with the ownership and operation of the Properties, provided in all such cases such services are deemed by the General Partner to be advisable and the compensation therefor is reasonable. The General Partner shall cause the Partnership to comply with all requirements of the BOT Loan and the GMAC Loan. Section 7.2. RESTRICTIONS ON THE GENERAL PARTNER (a) Notwithstanding the foregoing in Section 7.1 or any other provision of this Agreement, the Partnership shall be subject to the following restrictions and the General Partner shall -12 have no authority to take and shall not take any action on behalf of the Partnership in violation of any of the following restrictions: (i) No bankruptcy or insolvency filing or similar proceeding for the Partnership may be commenced. (ii) The Partnership and the General Partner are prohibited from creating, incurring or assuming any indebtedness other than the BOT Loan, the GMAC Loan and any subordinate financing permitted under the Loan Documents. (iii) The Partnership and the General Partner are prohibited from liquidating or dissolving or consenting to the liquidation or dissolution, in whole or in part, of either the Partnership or the General Partner. (iv) The Partnership and the General Partner may not consolidate, merge, or enter into any form of combination with or into any other entity or convey, transfer or lease its assets substantially as an entirety to any entity, except for a transfer of the Properties to the manager pursuant to the purchase option in the Management Agreement or permit any entity to consolidate, merge or enter into any form of combination with or into the Partnership or the General Partner, as the case may be, or convey, transfer or lease its assets substantially as an entirety to the Partnership or the General Partner, as the case may be. (b) Notwithstanding anything in this Agreement to the contrary, the General Partner shall not have the right or the power to make any commitment or engage in any undertaking on behalf of the Partnership (i) in respect of a Major Decision (as hereinafter defined) unless and until such Major Decision has been approved in writing by all of the Limited Partners or (ii) until and unless such act has already been authorized in the Annual Business Plan then in effect . The term "Major Decision," as used in this Agreement, means any decisions with respect to the following matters: (i) All financing and refinancing decisions pertaining to indebtedness owing, directly or indirectly, to and/or by the Partnership. (ii) Any amendment, modification, change or restatement of this Agreement. (iii) engagement by the Partnership in any business other than as set forth in SECTION 2.3 above; (iv) approval of each Annual Business Plan and budget; (v) approval of the terms and conditions of any management, construction development or any similar agreement relating to the Properties and of any material amendment or modification to, or material waiver under, any such agreement (the current Management Agreements and Development Agreements are hereby approved); -13- (vi) approval of any contract between the Partnership and a Partner or any Affiliate of a Partner, and approval of any amendment or modification to, or waiver of a provision of, any such contract (the current Management Agreements and Development Agreements are hereby approved); (vii) except as contemplated by Sections 10.1 and 13.12, approval of the sale, financing, restructuring, refinancing or disposition of all or substantially all of the Partnership Property, the merger or consolidation of the Partnership with any other entity or the liquidation or dissolution of the Partnership; (viii) acquisition of any additional real property in addition to the Properties; (ix) approval of forms of agreements for leasing or rental of the Properties to tenants (the current forms of which are hereby approved); (x) acquisition of shares of capital stock of or other equity interest in any corporation or other legal entity; (xi) formation by the Partnership of any corporation, partnership, limited liability company or other legal entity; (xii) other than the creation of trade receivables, making any loan, extending credit or acting as guarantor or surety to, for or on behalf of any other Person; (xiii) approval of the hiring or setting the compensation for attorneys, consultants, contractors, board of managers or other agents of the Partnership; (xiv) changing the Accountants designated herein or retaining or discharging accounting, financial or auditing specialists to assist the Accountants; (xv) commencing, settling, compromising or taking any other material action with respect to any litigation or legal proceeding of any type by, against or involving the Partnership excluding routine property management matters; (xvi) creation of any lien, security interest or material encumbrance on the Properties not contemplated by the BOT Loan or the GMAC Loan; (xvii) issuance or sale of additional partnership interests or admission of a new partner or member in this Partnership other than in accordance with Article IX of this Agreement or the appointment of an additional General Partner; (xviii) filing any petition in bankruptcy or reorganization or instituting any other type of bankruptcy, reorganization or insolvency proceeding with respect to the Partnership, consenting to the institution of involuntary bankruptcy, reorganization -14 or insolvency proceedings with respect to the Partnership, the admission in writing by the Partnership of its inability to pay its debts generally as they become due or the making by the Partnership of a general assignment for the benefit of its creditors; (xix) taking any material action that is inconsistent with the Annual Business Plan then in effect or expending any funds in a manner that is inconsistent with any budget set forth in the Annual Business Plan; PROVIDED, HOWEVER, that the General Partner may, on behalf of the Partnership: (A) expend funds for a budget category in excess of the total expenditures budgeted for that budget category, so long as such excess expenditures for any Fiscal Year do not exceed 10% of that budget category; (B) in addition to the expenditures in clause A above, apply amounts in any budget category that the General Partner reasonably determines are not required to be spent for that category to reduce or eliminate a cost overrun in another budget category; and (C) expend funds for matters which are non-discretionary (such as real estate taxes, utilities and insurance premiums) even if such amounts exceed any amounts budgeted for them; (xx) except to the extent authorized by policies or guidelines previously approved by TSL, LB and CSL, opening or changing the terms of each bank account in the name of or on behalf of the Partnership, or designating any Person to withdraw funds from or sign checks drawn on any such account; (xxi) approval of any action described in this Agreement that refers to action by "TSL, LB and CSL" or "all of TSL, LB and CSL" or contains language comparable to those phrases; (xxii) approval of any amendment, modification, change or restatement of this Agreement or any act in contravention of this Agreement; (xxiii) approval of any capital expenditures in excess of $50,000 on any Property that has already been developed; and (xxiv) with respect to any action or issue not specifically described in this or another Section of this Agreement, making any decision or taking any action that a Partner exercising commercially reasonable judgment and acting in good faith determines will or is reasonably expected materially and adversely to affect the Partnership, any Partner or the business or operations of the Partnership. (c) Any Partner may request approval of a Major Decision by written notice to the other Partners stating in reasonable detail the Major Decisions to be made and including any supporting data necessary for a proper understanding of the Major Decision to be made. Whenever TSL or CSL requests approval of Major Decision, its request shall be communicated to both Karen E. Blakely and David Chan (or such other individuals as designed by LB from time to time) at their office by the best available means. Whenever a Partner requests approval of a Major Decision, the other Partners shall notify the requesting Partner of their approval or disapproval within a commercially reasonable time (but not to exceed 10 Business Days) after the request is made. If a Partner fails to -15- respond to a request for approval of a Major Decision within the 10-Business Day period described above, that Partner shall be deemed to have approved the Major Decision so requested. If a Partner reasonably requests additional information in order to respond to a request for a Major Decision, the 10-Business Day period for response shall run from the date that it receives all the additional information requested. The requesting Partner shall promptly provide to each other Partner such information as the other Partners may reasonably request to assist them in making their decision. Section 7.3. DUTIES AND OBLIGATIONS OF THE GENERAL PARTNER (a) The General Partner shall manage and control the Partnership, its business and affairs as stated in Section 7.1. During the continuance of the Partnership, the General Partner shall diligently and faithfully devote such time to the management of the business of the Partnership as it deems reasonably necessary. (b) REMOVAL OF TSL AS GENERAL PARTNER. LB shall have the right to remove TSL as General Partner of the Partnership for cause (as defined below) by delivering to TSL a written notification of removal and stating the cause for that action. The grounds for removal for cause shall mean one or more of the following: (i) any material failure by TSL to exercise reasonable care in the discharge of its duties and obligations as General Partner which is not cured at TSL's sole expense (which shall not be deemed to be a capital contribution by TSL to the Partnership) within 30 days after delivery of written notice of such failure by LB to TSL; (ii) any fraud, gross negligence or willful misconduct in the performance by TSL of its obligations or covenants under this Agreement or under any provision of applicable law that LB determines in its reasonable discretion is materially detrimental to the Partnership; (iii) any material breach of the Partnership's obligations to any lender that results from the willful misconduct or material breach by TSL as described in subsection (i) above and causes an event of default beyond applicable grace periods under any loan documentation; or (iv) any material breach by TSL or Fail of any representation, warranty or covenant contained in Article XI of this Agreement that LB determines in its reasonable discretion is materially detrimental to the Partnership. (c) LB shall have the right to remove TSL as General Partner of the Partnership without cause at any time after the second anniversary of the date of this Agreement by delivering to TSL a written notification of removal. (d) LB or its designee (as reasonably approved by CSL) shall act as General Partner on behalf of the Partnership after LB has removed TSL as General Partner. If LB declines or fails for any reason to remove TSL as the General Partner for one or more of the reasons stated above even -16- though it has the right to do so, such failure to act at that time shall not prevent or preclude LB from removing TSL as General Partner at a future time for the same or a different reason. Section 7.4. CHANGE OF TSL'S INTEREST FROM GENERAL TO LIMITED PARTNER (a) If (1) a Bankruptcy Proceeding (as defined in subsection (b)) has been commenced, (2) all or part of the Partnership interest in TSL is transferred or otherwise disposed of in violation of Article IX or XI hereof, or (3) TSL has been removed as the General Partner of the Partnership pursuant to Section 7.3(b) or (c), the interest of TSL as General Partner of the Partnership shall be automatically and immediately changed into a Limited Partner interest. If Fail has died or is no longer actively involved in the business and management of TSL for any reason, the interest of TSL as General Partner of the Partnership shall, at the election of LB or CSL to be effective upon written notice to TSL, be automatically and without further action changed into a Limited Partner Interest. (b) DEFINITIONS. For purposes of this Section: (i) A "Bankruptcy Proceeding" means (1) the filing by TSL of a petition for its bankruptcy or reorganization under the U.S. Bankruptcy Code or comparable state law, (2) the commencement against TSL with or without its consent or approval of any proceeding seeking its bankruptcy, liquidation or reorganization, appointment of a receiver or trustee of its assets, or comparable relief, that in each case is not stayed or dismissed within 120 days, (3) the entry by a court of competent jurisdiction of a final and unappealable order granting relief of the type described in clause (1) or (2) above, (4) the admission in writing by TSL of its inability to pay its debts generally as they become due and (5) the making by TSL of a general assignment for the benefit of its creditors. (ii) Mr. Fail shall be deemed to be "no longer actively involved in the business or management of TSL" if (1) he has been discharged for any reason from employment by TSL, (2) he has not devoted such time to the operations and business affairs of the Partnership and the Properties as LB reasonably determines is necessary because of illness or physical disability, and such failure continues for more than forty-five (45) days after written notice has been given to him by either LB or CSL, or (3) he has died or become legally incompetent or permanently disabled. Section 7.5. ANNUAL BUSINESS PLAN Promptly after the execution and delivery of this Agreement (but in no event later than December 31, 1999), the General Partner shall prepare, in cooperation with the Property Manager and submit to the Limited Partners for approval as a Major Decision, pursuant to Section 7.2, an Annual Business Plan and related budgets for the Properties for Fiscal Year 2000. At least 15 days prior to the commencement of each Fiscal Year beginning with Fiscal Year 2001, the Partnership shall adopt an Annual Business Plan, including an operating budget and a capital budget, for the next Fiscal Year. Each such Annual Business Plan and related budgets must be approved in writing as a Major Decision as provided in Section 7.2. If the Partners fail for any reason to approve a new -17- Annual Business Plan, the existing Annual Business Plan shall remain in effect for an additional sixty (60) days. Section 7.6. OPTION TO PROVIDE FINANCING TO PARTNERSHIP Whenever the Partnership proposes to obtain financing or refinancing of any type (whether senior or junior debt or equity, but other than the GMAC Loan) for any purpose, the Partnership shall give written notice to LB describing the type, amount and material terms of the financing to be obtained and copies of any term sheet, offer or other written material delivered to or by the proposed lender. LB shall thereafter have the right (but not the obligation) to cause one of its Affiliates to commit to provide such financing on terms no less favorable to the Partnership than those that are offered to the Partnership by another lender or investor as determined by CSL and TSL (such determination to be made by TSL and CSL acting reasonably) and the Partnership will accept such financing from the Affiliate of LB. LB shall respond within fifteen (15) days to the written notice from the Partnership described above. If LB elects not to provide such financing or does not respond within fifteen (15) days, it shall be deemed to have waived its right to do so. If LB elects to provide such financing, LB shall cause one of its Affiliates to commit to provide such financing (subject to standard mortgage loan documentation, including, without limitation, title, survey, environmental, legal opinions and customary capital markets lending requirements reasonably acceptable to LB or its Affiliate) by the date on which the Partnership is required to submit its application, which commitment letter shall contain all material terms of the proposed loan, or comparable documentation to the lender. If the lender modifies the terms of its proposed loan in any material respect, LB shall again have the right described in this paragraph until the date that the Partnership is required to give to the lender its response to the modification. Section 7.7. OTHER ACTIVITIES The General Partner shall devote a sufficient amount of time to manage the Partnership. The Partners and Affiliates of the Partners may have other business interests and may engage in other activities in addition to those relating to the Partnership, including the making or management of other investments. Without limitation on the generality of the foregoing, each Partner recognizes that the Partners and Affiliates of all Partners each have an interest in investing in, owning, operating, transferring, leasing and otherwise using real property and interests therein for profit, and engaging in any and all activities related or incidental thereto and that each will make other investments consistent with such interests and the requirements of any agreement to which they or their Affiliates are a party. Except to the extent stated in this Agreement or in another agreement to which a Partner is a party or by which it is bound: (1) neither the Partnership nor any Partner shall have any right by virtue of this Agreement or the relationship created hereby in or to any other ventures or activities in which any Partner or its Affiliates are involved or to the income or proceeds derived therefrom; (2) the pursuit of other ventures and activities by the Partners or Affiliates of any Partner, even if competitive with the business of the Partnership, is hereby consented to by all other Partners and shall not be deemed wrongful or improper under this Agreement; and (3) no Partner or its Affiliate shall be obligated to present any particular investment opportunity to the Partnership, even if such opportunity is of a character which, if presented to the Partnership, could be taken by the Partnership, and each Partner and each Affiliate shall have the right to take for its own account, or to recommend to others, any such particular investment opportunity. -18- Section 7.8. TAX MATTERS PARTNER See Section 4.4 of EXHIBIT C attached hereto. Section 7.9. LIABILITY; INDEMNIFICATION The General Partner and its Affiliates shall not be liable to the Partnership or the Limited Partners for any act or omission performed or omitted by it pursuant to the authority granted to it by this Agreement, other than for fraud, willful malfeasance or gross negligence as described in Section 7.3(b)(ii). The Partnership shall and hereby does indemnify and save harmless the General Partner, the Limited Partners and their Affiliates to the greatest extent permitted by the Revised Act from any loss, damage, claim or liability, including but not limited to, reasonable attorney's fees and expenses, incurred by them by reason of any act performed by the General Partner, the Limited Partners or their Affiliates on behalf of the Partnership, including, without limitation, their activities in winding up and liquidating the Partnership, or in furtherance of the Partnership's interests, except that the General Partner and its Affiliates shall not be indemnified for actions by the General Partner or its Affiliates which constitute a breach of any of their obligations under this Agreement, fraud, willful malfeasance or gross negligence. The indemnity and save harmless provided for in the foregoing sentence shall be satisfied out of Partnership assets only and no Partner shall have any personal liability on account thereof. Section 7.10. FEES TO AND REIMBURSEMENT OF THE GENERAL PARTNER The Limited Partners acknowledge that the General Partner or its Affiliates will continue to receive $5,833 per month as an asset management fee. LB shall have the right to terminate payment of that fee if TSL has been removed as the General Partner of the Partnership or at any time after the second anniversary of the date of this Agreement; provided, however, that if payment of that fee has been terminated and TSL has not been removed as General Partner, TSL shall have the right at any time thereafter to convert its interest in the Partnership to a Limited Partner interest effective immediately upon notification of such conversion of the other Partners. The General Partner and its Affiliates shall also be entitled to receive reimbursement of their expenses to the extent payment thereof is authorized in the Annual Business Plan, but shall not be entitled to receive any other fees. The General Partner and its Affiliates shall receive reimbursement for all reasonable expenses advanced by the General Partner and its Affiliates on behalf of the Partnership and all expenses incurred during the operation of the Partnership. ARTICLE VIII ALLOCATIONS; DISTRIBUTIONS Section 8.1. ALLOCATIONS OF INCOME AND LOSS All items of income or loss of the Partnership shall be allocated to the Partners in accordance with the provisions of EXHIBIT C attached hereto, which are hereby incorporated by reference for all purposes of this Agreement. -19- Section 8.2. DISTRIBUTIONS OF NET CASH FLOW AND NET CAPITAL TRANSACTION PROCEEDS Distributions of Net Cash Flow shall be made once each calendar quarter and at such other times as is approved as a Major Decision pursuant to Section 7.2. Distributions of Net Capital Transaction Proceeds shall be made promptly following the Partnership's receipt thereof. All such distributions shall be made in the following order of priority, subject to the provisions of Section 11.9: (a) First, to LB until there shall have been distributed to LB an amount equal to the 15% Preferred Return calculated solely with respect to any additional capital contributed pursuant to Section 5.3(b) or (c) hereof. (b) Second, to LB until LB shall have received an amount equal to the then existing balance in its Capital Contribution Account calculated solely with respect to any additional capital contributed pursuant to Section 5.3(b) or (c). (c) Third, to LB, until there shall have been distributed to LB an amount equal to the unpaid and accrued 15% Preferred Return on the remaining amount (as reduced by Section 8.2(a)) in its Capital Contribution Account. (d) Fourth, to LB, until it shall have received an amount equal to the then remaining balance (as reduced by Section 8.2(b)) in its Capital Contribution Account. (e) Fifth, to TSL and CSL, PARI PASSU, until there shall have been distributed to each of them an amount equal to the 15% Preferred Return calculated solely with respect to additional capital contributed pursuant to Section 5.3. (f) Sixth, to TSL and CSL, PARI PASSU, until each of them shall have received an amount equal to the then existing balance in its Capital Contribution Account calculated solely with respect to additional capital contributed pursuant to Section 5.3. (g) Seventh, to LB in an amount equal to the greater of (i) $3,000,000 (this amount to be reduced to $2,000,000 if the distributions under this subsection (g) are distributed to LB within one year of the date of this Agreement) or (ii) the amount that would give LB an Internal Rate of Return of 25% on its capital contributions (such calculation to take into account all prior distributions to LB under this Section 8.2). (h) Eighth, to TSL and CSL, PARI PASSU, until there shall have been distributed to TSL and CSL, determined on a pro rata basis in accordance with their respective Capital Contribution Accounts, an amount equal to the unpaid and accrued 15% Preferred Return on the remaining amounts in their respective Capital Contribution Accounts. (i) Ninth, to TSL and CSL, PARI PASSU, until there shall have been distributed to TSL and CSL amounts, determined on a pro rata basis in accordance with their respective Capital Contribution Accounts, equal to the then remaining balances in their respective Capital Contribution Accounts. -20- (j) Tenth, if LB has not received in full all distributions described in clauses (a) through (g) above on or before the second anniversary of the date of this Agreement, 80% to LB, 19% to CSL and 1% to TSL, PARI PASSU. If LB has received such amounts in full on or before the second anniversary of the date hereof, 99% to CSL and 1% to TSL, PARI PASSU. Section 8.3. WITHHOLDING TAXES WITH RESPECT TO PARTNERS The Partnership shall comply with any withholding requirements under federal, state and local law and shall remit any amounts withheld to, and file required forms with, the applicable jurisdictions. All amounts withheld from Partnership revenues or distributions by or for the Partnership pursuant to the Code or any provision of any federal, state or local law, and any taxes, fees or assessments levied upon the Partnership, shall be treated for purposes of this Article VIII as having been distributed to those Partners who received tax credits with respect to the withheld amounts, or whose identity or status caused the withholding obligations, taxes, fees or assessments to be incurred. If the amount withheld exceeded the affected Partner's actual share of cash available for distribution, such Partner shall reimburse the Partnership for such withholding. Each Partner agrees to furnish the Partnership with such representations and forms as the General Partner shall reasonably request to assist it in determining the extent of, and in fulfilling, the Partnership's withholding obligations, if any. As soon as practicable after becoming aware that any withholding requirement may apply to a Partner, the General Partner shall advise such Partner of such requirement and the anticipated effect thereof. Such Partner shall pay or reimburse to the Partnership all identifiable costs or expenses of the Partnership caused by or resulting from withholding taxes with respect to such Partner. ARTICLE IX ASSIGNABILITY OF GENERAL PARTNER'S AND LIMITED PARTNER'S INTERESTS; BUY-SELL OPTION; PURCHASE OPTION Section 9.1. GENERAL (a) LB may at any time sell, assign, transfer, pledge, encumber or hypothecate all or any part of its partnership interest to either any Affiliate of LB, or a real estate investment trust controlled by LB or a securitization pool controlled by LB. At any time after the second anniversary of the date hereof, LB may sell, assign, transfer, pledge, encumber or hypothecate all or any part of its partnership interests to any Person after complying with Section 9.11. Except as permitted in this Article, neither TSL nor CSL may, directly or indirectly, sell, assign, transfer, pledge, encumber or hypothecate all or any part of their partnership interest (including, but not limited to, their interests in the capital or profits of the Partnership) without the prior written consent of LB, which shall not be unreasonably withheld, delayed or conditioned. Each sale, assignment, transfer, pledge, encumbrance or hypothecation of a partnership interest shall at all times be subject to the terms and conditions of the BOT Loan and the GMAC Loan. (b) No sale, assignment, transfer, pledge, encumbrance, hypothecation or issuance in violation of the provisions hereof shall be valid or effective for any purpose, and no consent to one such transaction shall apply to any other. -21- (c) Upon the transfer of its entire partnership interest in the Partnership and the admission of such Partner's transferee(s) as a substitute Partner pursuant to Section 9.4, a Partner shall be deemed to have withdrawn from the Partnership. Section 9.2. PERMITTED TRANSFERS (a) Notwithstanding the provisions of Section 9.1, but subject to the limitations set forth in Sections 9.4 and 9.5, either TSL or CSL shall be entitled, without the consent of the other Partners, to transfer all or any portion of their interests in the Partnership to any Permitted Affiliate (as hereinafter defined); provided, however, that no such transfer shall be effective without the consent of LB required in Section 9.1(a) if it is part of a series of transactions designed to effect a direct or indirect transfer to a person or entity not described in this sentence. (b) Any Partner may transfer all or any part of its partnership interest to another Partner without the consent or approval of any other Partner. (c) "Permitted Affiliate" means, with respect to a Partner, (1) any person directly or indirectly owning, controlling or holding with power to vote 100% of the outstanding securities of or equity or beneficial interests in such Partner as of the date hereof, (2) any person 100% of whose outstanding securities or equity or beneficial interests are directly or indirectly owned, controlled or held with power to vote by such Partner as of the date hereof, (3) any person 100% of whose out standing securities or equity or other beneficial interests are directly or indirectly owned, controlled or held with power to vote by a Person or Persons directly or indirectly owning, controlling or holding with power to vote 100% of the outstanding securities or equity or other beneficial interests of such Partner with whom affiliate status is being tested, or (4) with respect to TSL, the spouse, parents or children of Fail or trusts established solely for the benefit of one or more of those Persons so long as Fail at all times owns directly, indirectly or beneficially more than fifty percent (50%) of the profit and other economic interests in TSL and has the sole and exclusive power to direct the management and policies of TSL, whether by ownership of Partnership or other equity interests, by proxy, by contract or otherwise. Section 9.3. EFFECT OF ASSIGNMENT; DOCUMENTS In the event of any sale, assignment or transfer permitted hereunder, the Partnership shall not be dissolved or wound up, but shall continue. No such sale, assignment or transfer shall relieve the assignor from any of its obligations under this Agreement accruing prior to such sale, assignment or transfer. Notwithstanding the foregoing, as a condition to any sale, transfer or assignment by a Partner, the transferee or assignee must execute a joinder to this Agreement and agree to be bound by all of its terms and provisions. Section 9.4. SUBSTITUTE PARTNER The transferee of a partnership interest may be admitted to the Partnership as a substitute Partner only if such transfer is made in compliance with Sections 9.1, 9.2, 9.3 and 9.5. Unless a transferee of a partnership interest is admitted as a substitute Partner under this Section 9.4, it shall -22- have none of the powers of a Partner hereunder and shall have only such rights of an assignee under the Revised Act as are consistent with the other terms and provisions of this Agreement. Section 9.5. FURTHER REQUIREMENTS In addition to the other requirements of Sections 9.1, 9.2, 9.3 and 9.4, and unless waived or modified in whole or in part by the other Partners as a Major Decision pursuant to Section 7.2, no transfer of all or any portion of a partnership interest may be made unless the transferring Partner and the transferee deliver an opinion of counsel reasonably acceptable to the non-transferring Partners, that (a) the transfer will not cause the Partnership to be treated as an association taxable as a corporation for Federal income tax purposes, (b) the transfer will not cause the partnership to be treated as a "publicly traded partnership" within the meaning of Section 7704 of the Code and (c) the transfer will not violate the Securities Act of 1933, as amended, or any other applicable Federal or state securities laws, rules or regulations. Section 9.6. BUY-SELL PROVISIONS If (i) LB has the right at any time to remove TSL as General Partner of the Partnership for cause as a result of its fraud, gross negligence or willful misconduct under the circumstances described in Section 7.3(b)(ii) of this Agreement, whether or not LB has exercised that right, (ii) LB has the right on behalf of the Partnership at any time to terminate one or more of the Management Agreements for cause as a result of the fraud, gross negligence or willful misconduct of Capital Senior Living, Inc. that constitutes a material breach by it under Section IV (C)(1)(a) of any Management Agreement, whether or not LB has exercised that right, (iii) LB determines that TSL or CSL has breached a material representation in Article XI of this Agreement or (iv) LB has not received in full all distributions described in Sections 8.2(a) through (g) of this Agreement on or before December 30, 2001, LB shall be permitted (but not obligated) to notify the other Partners of its intent to invoke the procedures described in subsections A through D below. If (y) TSL has at any time been removed as General Partner of the Partnership pursuant to Section 7.3(b) of this Agreement or (z) LB, TSL and CSL have been deadlocked for more than thirty (30) days ending after December 30, 2000 over approval of a Major Decision in accordance with Section 7.2, any Partner shall be permitted (but not obligated) to notify the other Partners of its intent to invoke the procedures described in subsections A through D below. A. The Partner giving notice (the "Buy-Sell Notice") shall specify a price (the "Offer Price") for the Properties and all other assets of the Partnership, and indicate a willingness to be, at the option of the other Partners, either the buyer or the seller. The Buy-Sell Notice must be delivered with the words "Confidential/Urgent" clearly visible from the exterior of the container in which the Buy-Sell Notice is contained and must alert the other Partners to the 10-day limit for response as described below. Delivery of the Buy-Sell Notice shall be in accordance with the notice provisions of this Agreement. B. The Partners receiving the Buy-Sell Notice shall have ten (10) days from the receipt of the Buy-Sell Notice to elect by written notice given to the Partner who gave the Buy-Sell Notice to be either the seller or the buyer. If both Partners who receive the Buy-Sell Notice elect to be buyer, they shall each be entitled to purchase PRO RATA in accordance -23- with their Percentage Interests the partnership interests held by the Partner who gave the Buy Sell Notice. If one or both Partners receiving the Buy-Sell Notice elect to be the buyer, their notice shall constitute their legally binding obligation to complete the purchase described in Section 9.6C and shall not be effective with respect to each such Partner unless it also, within such 10-day period, delivers in escrow to the attorneys for the Partner who gave the Buy-Sell Notice cash in an amount equal to ten (10%) percent of the amount it would be obligated to pay under Section 9.6C (the "Deposit"). In the event both Partners receiving the Buy-Sell Notice fail to respond, or elect to be the buying Partner but fail to deliver the Deposit, within such 10-day period, then the Partner who gave the Buy-Sell Notice shall be the buyer. That buyer shall then deliver in escrow, within five (5) days of the end of such 30-day period, to the attorneys for the other Partner cash in an amount equal to the Deposit and such delivery of the Deposit shall constitute its legally binding obligation to complete the purchase described in Section 9.6C. If that buyer fails to pay the Deposit, then the rights of the Partners under this Section shall be as they were prior to the delivery of the Buy-Sell Notice. C. Within ninety (90) days after the Buy-Sell Notice has been given: (1) If TSL and CSL are the sellers, LB shall pay to TSL and CSL, in full payment for their interests in Partnership, the amount TSL and CSL would have received as a Partner of the Partnership if the Properties of the Partnership had been sold for an amount equal to the Offer Price on the date of such payment, and the proceeds of such sale (net of liabilities, obligations and expenses that would have been paid out of such proceeds, including without limitation any amounts due to a Partner or its Affiliates, if such sale had actually occurred) were distributed in the order of priority described in Section 8.2 of this Agreement. TSL and CSL shall thereupon cease to be Partners of the Partnership. (2) If LB and CSL are the sellers, TSL shall pay to LB and CSL in full payment for their interests in Partnership, the amount LB and CSL would have received as Partners of the Partnership if the Properties of the Partnership had been sold for an amount equal to the Offer Price on the date of such payment, and the proceeds of such sale (net of liabilities, obligations and expenses that would have been paid out of such proceeds, including, without limitation, any amounts due to a Partner or its Affiliates, if such sale had actually occurred) were distributed in the order of priority described in Section 8.2 of this Agreement. LB and CSL shall thereupon cease to be Partners of the Partnership. (3) If LB and TSL are the sellers, CSL shall pay to LB and TSL in full payment for their interests in Partnership, the amount LB and TSL would have received as Partners of the Partnership if the Properties of the Partnership had been sold for an amount equal to the Offer Price on the date of such payment, and the proceeds of such sale (net of liabilities, obligations and expenses that would have been paid out of such proceeds, including, without limitation, any amounts due to a Partner or its Affiliates, if such sale had actually occurred) were distributed in the order of priority described in Section 8.2 of this Agreement. LB and TSL shall thereupon cease to be Partners of the Partnership. -24- D. If the buyer fails to complete the transaction within ninety (90) days after the Buy-Sell Notice was given as described above for a reason other than default by the seller, the attorneys holding the Deposit in escrow shall deliver to the sellers on a pro rata basis in accordance with the purchase price each was to receive the full amount of the Deposit and all interest earned thereon and sellers shall (1) have the right (but not the obligation), to be exercised and completed within one hundred fifty (150) days after the Buy-Sell Notice was given, (x) to be the buyer on a pro rata basis as described above at an Offer Price equal to at least ninety (90%) percent of that stated in the Buy-Sell Notice, and/or (2) be entitled to specific performance and all other available legal and equitable remedies against the buyer, including (without limitation) recovery of all losses, costs and expenses. E. If none of the Partners has completed the exercise of purchase rights within the time periods specified in this section, the rights of the Partners shall be as they were before the Buy-Sell Notice was given, subject to any rights that the non-defaulting Partners may have hereunder, at law or at equity. F. Notwithstanding the foregoing, upon receipt of a Buy-Sell Notice from TSL or CSL, LB may, in lieu of electing to be either the Seller or Buyer, offer the Properties for sale on behalf of the Partnership in accordance with the procedures described in Sections 9.7. G. Notwithstanding anything to the contrary stated in this Section, in no event shall the amount to be paid to LB as seller under this Section be less than the amounts that would be distributed to LB pursuant to Section 8.2(a) through (e). Section 9.7. SALE OF PROPERTIES AFTER SECOND ANNIVERSARY At any time after December 30, 2001, LB may invoke the procedures described in Paragraphs A through D below for any reason in its sole and absolute discretion. A. LB shall deliver a notice ("Sale Notice") to TSL and CSL stating that it intends to cause one or more of the Properties to be sold on behalf of the Partnership. The Sale Notice must contain a proposed sale price for each such Property that LB has elected to sell (the "Sale Price"). The Sale Notice must be delivered with the words "Confiden tial/Urgent" clearly visible from the exterior of the envelope in which the Sale Notice is contained and must alert TSL and CSL to the 10-Business Day limit for response described in Paragraph B below. B. CSL shall have 10 Business Days from the receipt of the Sale Notice to elect by written notice given to LB to purchase all or part of LB's partnership interests in the Partnership at a purchase price equal to the amount LB would have received as a Partner of the Partnership if the Property or Properties of the Partnership had been sold for an amount equal to the Sale Price on the date of such payment, and the proceeds of such sale (net of liabilities, obligations and expenses that would have been paid out of such proceeds, including, without limitation, any amounts due to a Partner or its Affiliates, if such sale had actually occurred) were distributed in the order of priority described in Section 8.2 of this Agreement. If less than all the Properties are to be sold, LB's partnership interests subject -25- to sale under this Section shall be equal to the percentage obtained by multiplying LB's partnership interest by a fraction, the numerator of which shall be the agreed value of each Property to be sold set forth in SCHEDULE E to this Agreement and the denominator of which shall be the aggregate of the agreed value of all Properties stated in SCHEDULE E. If CSL makes this election, its notice shall constitute its legally binding obligation to complete such purchase and shall not be effective unless it also delivers to the Partnership cash in an amount equal to ten percent (10%) of the amount to be paid to LB pursuant to this Section ("Deposit") which shall be held by the Partnership in an interest-bearing, segregated account. C. If CSL elects to purchase the partnership interests of LB as described in Paragraph B, CSL shall within ninety (90) days after the Sale Notice was given pay to LB the amount described in Paragraph B. CSL shall thereafter be entitled to the same priority in distributions pursuant to Section 8.2 as LB had with respect to the partnership interests of LB sold under this Section. D. If CSL fails to respond within such 10-Business Day period, fails to pay the Deposit or notifies LB that it does not wish to exercise the right described in Paragraph B above, then LB, in its sole and absolute discretion, shall be entitled to offer the Properties for sale on behalf of the Partnership at the price set forth in the Sale Notice and on other terms no less favorable to the Partnership than those terms stated in the Sale Notice. Such offer may be made directly by LB or through investment bankers or real estate brokers for a commission and on other terms that are "market" as reasonably determined by LB. LB shall use commercially reasonable efforts to keep TSL and CSL informed regarding the progress of the sale of the Properties. E. If CSL elects to purchase the LB partnership interest, but fails for any reason to complete the transaction within 90 days after the Sale Notice was given as described above, LB (i) shall retain the full amount of the Deposit as its sole and exclusive remedy and (ii) shall have the right to sell the Properties being sold within a period of 180 days after the Sale Notice was given at a Sale Price equal to at least 90% of that stated in the Sale Notice and on other terms no less favorable to the Partnership than those terms stated in the Sale Notice. F. LB shall thereafter have the right to complete the sale of the Properties being sold on the terms no less favorable to those described in the Sales Notice and to execute and deliver on behalf of the Partnership all documentation and to take all other actions that LB shall reasonably determine are necessary to complete the sale of the Properties. If LB receives a bona fide offer to purchase the Properties ("Property Offer"), LB shall, before completing the sale of the Properties, deliver the Property Offer to CSL. CSL shall then have the right to purchase the Properties on the same terms and conditions as are set forth in the Property Offer. If CSL makes this election, CSL shall both notify LB of its election and complete the purchase of the Properties within 10 days (not Business Days) after its receipt from LB of the Property Offer. If the Properties are not sold within 180 days, then the rights of CSL shall be as they were before the Sale Notice was given under this Section. -26- G. If the Properties are sold under this Section, LB shall be entitled to all distributions payable to LB as described in Section 8.2(a), (b), (c) and (d) before any distributions are made to CSL and TSL under Section 8.2(e) and (f). Section 9.8. CSL PURCHASE OPTION: TSL PARTNERSHIP INTERESTS At any time, CSL shall have the right, but not the obligation, to purchase all, but not less than all, of the interests owned by TSL for an amount equal to the amount of money that TSL paid for its interests in the Partnership, plus non-compounding interest of 12% per annum from the date such amounts were paid to the date the option described herein is exercised. The Partners, by executing this Agreement, hereby agree that the future value of such interests is speculative and that the formula set forth above is the Partners' best estimate of the fair market value of such interests as of the date of the exercise of such option. Section 9.9. CSL PURCHASE OPTION: LB PARTNERSHIP INTERESTS At any time, CSL shall have the right, but not the obligation to purchase, all, but not less than all, of the partnership interests of LB for an amount equal to the sum of (i) an amount equal to the balance in LB's Capital Contributions Account, (ii) LB's accrued but unpaid 15% Preferred Return on its Capital Contributions Account, (iii) the greater of (x) $3,000,000 and (y) an amount that would give to LB a 25% Internal Rate of Return on its Capital Contributions taking into account all prior distributions made to LB pursuant to Section 8.2(a) through (d), and (iv) if such purchase is completed after the second anniversary hereof, the amount that LB would have received pursuant to Section 8.2 if all Properties had been sold at their fair market value as of the end of the month prior to the payment hereunder, taking into account all amounts set forth in (i), (ii) and (iii) above. In the event CSL completes the purchase of LB's partnership interest pursuant to this Section 9.9 prior to the first anniversary of the date hereof, the $3,000,000 amount above shall be reduced to $2,000,000. Section 9.10. CLOSING DOCUMENTATION At the closing of any transaction described in Section 9.6, 9.7, 9.8 or 9.9, the seller(s) shall execute and deliver to the buyer(s) such instruments and documents in form and substance reasonably satisfactory to the buyer(s) as may be necessary or appropriate to transfer the Properties or partnership interests of the seller(s) to the buyer(s) (or the designee of any buyer(s)), free and clear of all liens, security interests, claims and encumbrances, other than Permitted Encumbrances, against receipt by the seller(s), in immediately available funds, of the consideration determined in accordance with Section 9.6, 9.7, 9.8 or 9.9, as the case may be. Section 9.11. SALE OF PARTNERSHIP INTERESTS BY LB (a) If LB wishes at any time for any reason to sell or otherwise dispose of all or part of its partnership interest in this Partnership, it shall give notice ("Sale Notice") to CSL and shall specify the price and other material terms and conditions ("Sale Price") that it is seeking for sale of such partnership interest. The Sale Notice must be delivered with the words "Confidential/Urgent" clearly visible from the exterior of the container in which the Sale Notice is contained and must alert -27- CSL to the 10-day limit for response described below. Delivery of the Sale Notice shall be in accordance with the notice provisions of this Agreement. (b) CSL shall have ten (10) Business Days from the receipt of the Sale Notice to elect by written notice given to LB to purchase at the Sale Price the partnership interests of LB being sold. If CSL elects to purchase the partnership interest of LB being sold, its notice shall constitute its legally binding obligation to complete the purchase described in subsection (c) and shall not be effective unless it also delivers to LB cash in an amount equal to ten percent (10%) of the amount it would be obligated to pay under subsection (c) below ("CSL Deposit"). If CSL (i) fails to respond to the Sale Notice within such 10-Business Day period, (ii) fails to pay the CSL Deposit or (iii) notifies LB that it does not wish to purchase such partnership interests of LB, then LB shall be entitled to sell or otherwise dispose of such partnership interests in this Partnership at a price and on other material terms and conditions no less favorable to LB than the Sale Price stated in the Sale Notice for a period of one hundred twenty (120) days after the Sale Notice was given to CSL. (c) If CSL elects to purchase the partnership interests of LB, CSL shall within ninety (90) days after the Sale Notice was given pay to LB the Sale Price stated in the Sale Notice. CSL shall thereafter be entitled to the same priority in distributions pursuant to Section 8.2 as LB had with respect to the partnership interests of LB sold under this Section. (d) If CSL elects to purchase such partnership interests of LB, but fails for any reason other than a default by LB to complete the transaction within ninety (90) days after the Sale Notice was given as described above, LB (i) shall retain the full amount of the CSL Deposit, (ii) shall have the right to sell such partnership interests within a period of two hundred ten (210) days after the Sale Notice was given at a Sale Price equal to at least ninety percent (90%) of that stated in the Sale Notice and on other terms no less favorable to LB than those of the Sales Price stated in the Sale Notice and (iii) shall be entitled to and all available legal remedies against CSL, including (without limitation) recovery of all losses, costs and expenses. LB shall not, however, be entitled to any consequential damages or any equitable remedies, which are hereby waived. Section 9.12. WITHDRAWAL OF A PARTNER Except as otherwise specifically permitted by this Agreement, no Partner shall be entitled to withdraw or retire from the Partnership. Section 9.13. DEATH, LEGAL INCOMPETENCY, BANKRUPTCY OR DISSOLUTION OF LIMITED PARTNER The death, legal incompetency, bankruptcy, dissolution or other disability of a Limited Partner shall not dissolve or terminate the Partnership. Upon the death, legal incompetency, bankruptcy, dissolution or other disability of a Limited Partner, the estate, personal representative, trustee, guardian or other successor in interest, if applicable, of such Limited Partner shall have all the rights and obligations and be liable for all the liabilities of the Limited Partner in the Partnership to the extent of such Limited Partner's interest therein, subject to the terms and conditions of this Agreement, and, with the prior written consent of the General Partner which may be withheld at its sole discretion, may be substituted for such Limited Partner. -28- ARTICLE X DURATION, DISSOLUTION, TERMINATION, WINDING UP, REMOVAL OF GENERAL PARTNER AND RESIGNATION OF GENERAL PARTNER Section 10.1. DISSOLUTION AND TERMINATION Subject to the provisions of Section 7.2(a)(iii) hereof, the Partnership shall be dissolved only upon the occurrence of any of the following events: (a) The expiration of the fixed term of the Partnership; (b) The withdrawal or removal of the General Partner, the assignment by the General Partner of all its interest in the Partnership, or any other event that causes the General Partner to cease to be a general partner under the Revised Act, provided that any such event shall not constitute a event of dissolution if the Partnership is continued pursuant to Section 10.2; (c) The sale or other disposition of all or substantially all of the assets of the Partnership and the collection of the proceeds therefrom; and (d) The mutual consent of the Partners. Section 10.2. CONTINUATION OF BUSINESS The Partners hereby agree that notwithstanding any provision of the Revised Act, the Partnership shall not dissolve prior to the occurrence of any event set forth in Section 10.1 above. Upon the occurrence of any event set forth in Section 10.1 above, the Partnership shall not be dissolved or required to be wound up if (i) at the time of such event there is a remaining General Partner and that General Partner carries on the business of the Partnership or (ii) within ninety (90) days after such event all remaining Partners agree in writing to continue the business of the Partnership and to the appointment, effective as of the date of such event, of one or more additional General Partners Section 10.3. WINDING UP OF THE PARTNERSHIP Upon dissolution of the Partnership as provided in Section 10.1, the Partnership shall be wound up, and the General Partner will take full account of the Partnership's assets and liabilities, the assets will be liquidated as promptly as is consistent with obtaining the fair market value thereof, and the proceeds therefrom, to the extent sufficient therefor, will be applied and distributed in accordance with the provisions of Section 10.4. Notwithstanding the foregoing, the General Partner, with the consent of the other partners, may determine not to sell all or any portion of the assets of the Partnership, in which event there shall be distributed to each of the Partners its interest in the remaining assets of the Partnership. Section 10.4. SALE OR LIQUIDATION -29- In the case of a sale or other disposition of all or substantially all of the assets of the Partnership or termination and liquidation of the Partnership, the net proceeds of such sale or liquidation, shall be applied and distributed, after crediting or charging the Partners' Capital Accounts pursuant to Article VIII and as cash is received by the Partnership in the following order of priority on or before the end of the taxable year in which the Partnership liquidates (or, if later, within 90 days after the date of such liquidation): (a) To the payment of the debts and liabilities of the Partnership (other than debts of the Partnership to the Partners) and the expenses of sale and liquidation. (b) To the setting up of any reserves which LB determines are reasonably necessary for any contingent or unforeseen liabilities or obligations of the Partnership or of the Partners arising out of, or in connection with, the Partnership. Such reserves may be held by LB for the purpose of disbursing such reserves in payment of any of the aforementioned contingencies, and at the expiration of such period as LB may deem advisable, to distribute the balance thereafter remaining as provided herein. (c) To the Partners, in accordance with the provisions of Section 8.2. Should assets other than cash be distributed, the amount by which the fair market value of the assets, if any, to be distributed exceeds or is less than the Book Basis (as defined in Exhibit C) of such assets shall, to the extent not otherwise recognized by the Partnership, be taken into account as provided in Exhibit C for purposes of crediting or charging the Capital Accounts of, and distributing proceeds to, the Partners. ARTICLE XI REPRESENTATIONS, WARRANTIES AND COVENANTS Section 11.1. OWNERSHIP OF TSL Blake N. Fail ("Fail") represents and warrants to LB that, as of the date of this Agreement, he and Permitted Affiliates own of record and beneficially all of the outstanding equity interests in TSL. Fail agrees that, unless LB has given its prior written consent (which shall not be unreasonably withheld, delayed or conditioned), no Person other than a Permitted Affiliate will, directly or indirectly, (i) own any equity interest in TSL, (ii) be admitted as a stockholder of TSL, (iii) be granted any option or other contractual right to acquire any equity interest in TSL, (iv) be granted the right to vote or take other action with respect to the equity interest in TSL or (v) hold or be granted any mortgage, lien, pledge, security interest or other encumbrance on the equity interest in TSL. Section 11.2. OWNERSHIP OF CSL CSL represents and warrants to LB that, as of the date of this Agreement, Capital Senior Living Corporation owns of record and beneficially all of the outstanding equity interests in CSL, directly or indirectly. CSL agrees that, unless LB has given its prior written consent (which shall -30- not be unreasonably withheld, delayed or conditioned), no Person other than a Permitted Affiliate will, directly or indirectly, (i) own any equity interest in CSL, (ii) be admitted as a stockholder of CSL, (iii) be granted any option or other contractual right to acquire any equity interest in CSL, (iv) be granted the right to vote or take other action with respect to the equity interest in CSL or (v) hold or be granted any mortgage, lien, pledge, security interest or other encumbrance on the equity interest in CSL. Section 11.3. CONFIDENTIALITY The Partners shall not disclose the terms of this Agreement without the consent of TSL, LB and CSL except (i) to their attorneys, accountants and other advisors, (ii) to the extent required by law (including, without limitation, in any required filing with the Securities and Exchange Commission), (iii) to prospective assignees of partnership interests who agree to maintain the confidentiality of the provisions of this Agreement, (iv) to prospective lenders to the Partnership, (v) in connection with any transfer permitted herein by LB of its partnership interest in the Partnership to a liquidating trust, securitization pool or real estate investment trust as provided for in Section 9.1(a) or (vi) to prospective lenders to or investors in TSL or CSL. Section 11.4. LIMITATION OF LB LIABILITY Each of TSL, CSL and Fail, for themselves and on behalf of their respective Affiliates (collectively, "TSL and CSL Claiming Parties"), hereby agrees that if the TSL and CSL Claiming Parties, together or individually, make any claim of any nature whatsoever, whether legal or equitable, including (without limitation) claims based on federal or state law, against LB or its Affiliates arising out of or relating to (1) this Agreement, (2) the formation or operation of the Partnership, (3) any loans made to the Partnership, (4) the negotiations and representations of the parties preceding or following the execution of this Agreement, (5) any alleged breach of this Agreement or (6) the proposed transactions described in this Agreement, then the following limitations on the liability of LB and its Affiliates, and on the relief available to the TSL and CSL Claiming Parties, shall apply: (a) under no circumstances shall the TSL and CSL Claiming Parties be entitled to any form of equitable relief (including injunctive relief) except to the extent expressly stated in this Agreement, lost profits or consequential, special or punitive damages and (b) any judgment against LB and its Affiliates shall be enforceable against them only to the extent of the capital contributions of LB to the Partnership. Section 11.5. LIMITATION OF CSL LIABILITY Each of TSL, LB and Fail, for themselves and on behalf of their respective Affiliates (collectively, "TSL and LB Claiming Parties"), hereby agrees that if the TSL and LB Claiming Parties, together or individually, make any claim of any nature whatsoever, whether legal or equitable, including (without limitation) claims based on federal or state law, against CSL or its Affiliates arising out of or relating to (1) this Agreement, (2) the formation or operation of the Partnership, (3) any loans made to the Partnership, (4) the negotiations and representations of the parties preceding or following the execution of this Agreement, (5) any alleged breach of this Agreement or (6) the proposed transactions described in this Agreement, then the following limitations on the liability of CSL and its Affiliates, and on the relief available to the TSL and LB -31- Claiming Parties, shall apply: (a) under no circumstances shall the TSL and LB Claiming Parties be entitled to any form of equitable relief (including injunctive relief) except to the extent expressly stated in this Agreement, lost profits or consequential, special or punitive damages and (b) any judgment against CSL and its Affiliates shall be enforceable against them only to the extent of an amount equivalent to the capital contributions of LB (and not CSL) to the Partnership. Section 11.6. LIMITATION OF TSL LIABILITY Each of CSL and LB, for themselves and on behalf of their respective Affiliates (collectively, "CSL and LB Claiming Parties"), hereby agrees that if the CSL and LB Claiming Parties, together or individually, make any claim of any nature whatsoever, whether legal or equitable, including (without limitation) claims based on federal or state law, against TSL or its Affiliates arising out of or relating to (1) this Agreement, (2) the formation or operation of the Partnership, (3) any loans made to the Partnership, (4) the negotiations and representations of the parties preceding or following the execution of this Agreement, (5) any alleged breach of this Agreement or (6) the proposed transactions described in this Agreement, then the following limitations on the liability of TSL and its Affiliates, and on the relief available to the CSL and LB Claiming Parties, shall apply: (a) under no circumstances shall the CSL and LB Claiming Parties be entitled to any form of equitable relief (including injunctive relief) except to the extent expressly stated in this Agreement, lost profits or consequential, special or punitive damages and (b) any judgment against TSL and its Affiliates shall be enforceable against them only to the extent of an amount equivalent to the capital contributions of LB (and not TSL) to the Partnership. Section 11.7. REPRESENTATIONS OF TSL REGARDING PARTNERSHIP AND RELATED MATTERS In partial consideration of LB's agreement to become a Limited Partner and to make the capital contributions described in Section 5.2, TSL makes to LB the representations and warranties set forth in Exhibit F attached to this Agreement. Section 11.8. REPRESENTATIONS OF CSL REGARDING PARTNERSHIP AND RELATED MATTERS In partial consideration of LB's agreement to become a Limited Partner and to make the capital contributions described in Section 5.2, CSL makes to LB the representations and warranties set forth in Exhibit G attached to this Agreement. Section 11.9. LB LOSSES FROM BREACH OF REPRESENTATION (a) INDEMNIFICATION BY TSL. TSL agrees to indemnify and hold harmless LB and its Related Parties (collectively, the "LB INDEMNIFIED PARTIES") from, against, for and in respect of any and all damages (including, without limitation, amounts paid in settlement with the consent of TSL), losses, obligations, liabilities, claims, causes of action, deficiencies, costs and expenses, including, without limitation, reasonable attorneys' fees and other costs and expenses incident to any suit, action, investigation, claim or proceeding and within the reasonable contemplation of the parties (collectively, "LOSSES") suffered, sustained, incurred or required to be paid by any of LB Indemnified Parties by reason of (i) any representation or warranty made by TSL in this Agreement being untrue or incorrect in any material respect as of the time made; (ii) any failure by TSL to observe or -32- perform, in any material respect, their covenants and agreements set forth in this Agreement in any material respect; or (iii) any failure by TSL or the Partnership to satisfy and discharge any other liability or material obligation of TSL or the Partnership accrued, incurred or outstanding on the date of this Agreement and not expressly assumed by LB pursuant to this Agreement. TSL further agrees that, in the event any Losses occur in connection with (a) matters insured against under the terms of the Owner's Title Policies (as defined in paragraph 32 of Exhibit F) and/or (b) any matters relating to title to the Properties arising from the respective dates of the Owner's Title Policies, whether disclosed or undisclosed in any of the Updated Reports (as defined in paragraph 32 of Exhibit F), through and including the date hereof, and (c) the failure or delay in obtaining all proper zoning approvals from the appropriate governmental authorities, including but not limited to the City of Fort Worth, necessary for full zoning compliance of the facility located at Granbury Station, Fort Worth, Texas, then TSL (y) will be liable for any and all such Losses and (z) shall not look to LB or any LB Indemnified Party on the ground that LB as a Limited Partner of the Partnership had knowledge of any matter in connection with such Losses by reason of notice imputed to LB through its Partner TSL by operation of law, it being the specific understanding and agreement of the parties and the intent of this Section that neither LB nor any LB Indemnified Party shall ever be liable to any third party, the Partnership or its Partners, directly or indirectly, for any Loss that occurs in connection with (aa) matters insured against under the terms of the Owner's Title Policies and/or (bb) any matters relating to title to the Properties arising from the respective dates of the Owner's Title Policies, whether disclosed or undisclosed in any of the Updated Reports, through and including the date hereof and/or (cc) the failure or delay in obtaining all proper zoning approvals from the appropriate governmental authorities, including but not limited to the City of Fort Worth, necessary for full zoning compliance of the facility located at Granbury Station, Fort Worth, Texas. Notwithstanding any provision in this Agreement to the contrary, (a) the amount of any distribution otherwise payable to TSL pursuant to Section 8.2 shall secure and be used to pay and satisfy in full any obligation or liability that TSL has to LB under this Section, (b) the partnership interest of TSL in the Partnership and any interest that TSL has in any asset of the Partnership shall secure and be used to pay and satisfy in full any obligation or liability that TSL has to LB under this Section and (c) LB shall have all rights and benefits of a secured party under the Uniform Commercial Code with respect to the distributions, partnership interest and assets referred to in clauses (a) and (b) above. (b) INDEMNIFICATION BY CSL. CSL agrees to indemnify, save and hold harmless the LB Indemnified Parties from, against, for and in respect of any and all Losses (including, without limitation, amounts paid in settlement with the consent of CSL) suffered, sustained, incurred or required to be paid by any of the LB Indemnified Parties by reason of (i) any representation or warranty made by CSL in this Agreement being untrue or incorrect in any material respect as of the time made; (ii) any failure by CSL to observe or perform, in any material respect, its covenants and agreements set forth in this Agreement; or (iii) any failure by CSL or the Partnership to satisfy and discharge any other liability or material obligation of CSL or the Partnership accrued, incurred or outstanding on the date of this Agreement and not expressly assumed by LB pursuant to the Assignment. CSL further agrees that, in the event any Losses occur in connection with (a) matters insured against under the terms of the Owner's Title Policies (as defined in paragraph 8 of Exhibit G) and/or (b) any matters relating to title to the Properties arising from the respective dates of the Owner's Title Policies, whether disclosed or undisclosed in any of the Updated Reports and/or (c) the failure or delay in obtaining all proper zoning approvals from the appropriate governmental authorities, including but not limited to the City of Fort Worth, necessary for full zoning compliance -33- of the facility located at Granbury Station, Fort Worth, Texas, through and including the date hereof, then CSL (y) will be liable for any and all such Losses and (z) shall not look to LB or any LB Indemnified Party on the ground that LB as a Limited Partner of the Partnership had knowledge of any matter in connection with such Losses by reason of notice imputed to LB through its Partner TSL by operation of law, it being the specific understanding and agreement of the parties and the intent of this Section that neither LB nor any LB Indemnified Party shall ever be liable to any third party, the Partnership or its Partners, directly or indirectly, for any Loss that occurs in connection with (aa) matters insured against under the terms of the Owner's Title Policies and/or (bb) any matters relating to title to the Properties arising from the respective dates of the Owner's Title Policies, whether disclosed or undisclosed in any of the Updated Reports, through and including the date hereof and/or (cc) the failure or delay in obtaining all proper zoning approvals from the appropriate governmental authorities, including but not limited to the City of Fort Worth, necessary for full zoning compliance of the facility located at Granbury Station, Fort Worth, Texas. Notwithstanding any provision in this Agreement to the contrary, (a) the amount of any distribution otherwise payable to CSL pursuant to Section 8.2 shall secure and be used to pay and satisfy in full any obligation or liability that CSL has to LB under this Section, (b) the partnership interest of CSL in the Partnership and any interest that CSL has in any asset of the Partnership shall secure and be used to pay and satisfy in full any obligation or liability that CSL has to LB under this Section and (c) LB shall have all rights and benefits of a secured party under the Uniform Commercial Code with respect to the distributions, partnership interest and assets referred to in clauses (a) and (b) above. (c) LIMITATIONS ON INDEMNIFICATION. If prior to Closing LB shall have been notified in writing by TSL or CSL, or LB shall have obtained actual knowledge, of any failure of a warranty or representation made by TSL or CSL herein or pursuant hereto to be true and correct when made and LB consummates the transactions contemplated hereby, then LB shall also be deemed to have waived any indemnification hereunder with respect to such failure. In no event shall TSL or CSL be liable to the LB Indemnified Parties for (i) any consequential, exemplary or punitive damages or (ii) amounts that exceed the total amount of capital contributed by LB to the Partnership or (iii) amounts that are less than $100,000 in the aggregate. The right of the LB Indemnified Parties to seek indemnification for Losses suffered as a result of any matter described in subsection (a) or (b) above shall expire thirty-six (36) months following the date of this Agreement, except for any specific claim asserted prior to such date, which claim shall survive such thirty-six (36) month period. In addition, the amount of any Losses for which a LB Indemnified Party is to be indemnified by TSL or CSL pursuant to this Section shall be reduced by any amount actually recovered by such LB Indemnified Party from an insurer or other party in respect of such Losses (a "THIRD PARTY REIMBURSEMENT") to the extent such Third Party Reimbursement was not taken into account in assessing the amount of Losses suffered or incurred by such Indemnified Party. If, after receipt by any LB Indemnified Party of any indemnification payment under this Section from TSL or CSL, such LB Indemnified Party who received a Third Party Reimbursement in respect of the same Losses for which indemnification was made (and such Third Party Reimbursement was not taken into account in assessing the amount of Losses suffered or incurred by such LB Indemnified Party), then such LB Indemnified Party shall turn over promptly all of such Third Party Reimbursement to TSL or CSL, as applicable. In no event shall (i) an Indemnified Party be indemnified against its own willful misconduct or gross negligence or (ii) LB or any other LB Indemnified Party be required to assert any claims against or otherwise seek recovery of any amount from any insurer or other party in respect of any Losses; provided, however, if LB elects not to pursue such claim, LB shall assign -34- such claim (to the extent assignable) to TSL or CSL, as applicable, who may pursue such claims at its sole cost and expense. Section 11.10. NOTICE OF LOSS Notwithstanding anything herein contained, an indemnifying party ("INDEMNIFYING PARTY") shall not have any liability under the indemnity provisions of this Agreement with respect to any fact or occurrence known by any indemnified party ("INDEMNIFIED PARTY") with respect to a particular matter unless a notice setting forth in reasonable detail the breach which is asserted has been given to the Indemnifying Party and, in addition, if such matter arises out of a suit, action, investigation or proceeding, such notice is given promptly after the Indemnified Party shall have been given notice of the commencement of a suit, action, investigation or proceeding. A failure to give, or delay in giving, any such notice hereunder shall not affect the rights of an Indemnified Party to indemnification hereunder except to the extent the Indemnifying Party is materially prejudiced as a result of such failure or delay. SECTIONS 11.9 AND 11.10 HEREOF ARE INTENDED TO INDEMNIFY THE INDEMNIFIED PARTIES AGAINST THE RESULTS OF THEIR OWN NEGLIGENCE. AN INDEMNIFIED PARTY'S FAILURE TO INVESTIGATE, OR A LACK OF DUE DILIGENCE OCCURRING FOR ANY REASON WHATSOEVER, SHALL NOT (I) CONSTITUTE NEGLIGENCE, GROSS NEGLIGENCE OR WILFUL MISCONDUCT FOR PURPOSES OF THIS AGREEMENT (INCLUDING, WITHOUT LIMITATION, THIS SECTION), (II) CONSTITUTE A DEFENSE TO ANY ACTION OR PROCEEDING BROUGHT BY THE INDEMNIFIED PARTY TO ENFORCE HIS OR ITS RIGHTS UNDER THIS ARTICLE 11, (III) EXCUSE PERFORMANCE BY THE INDEMNIFYING PARTY OF ITS OBLIGATIONS UNDER THIS ARTICLE 11, OR (IV)ENTITLE THE INDEMNIFY ING PARTY TO ANY RIGHT OF SET OFF OR COUNTERCLAIM AGAINST AMOUNTS OWED UNDER THIS ARTICLE 11. Section 11.11. RIGHT TO DEFEND Upon receipt of notice of any suit, action, investigation, claim or proceeding for which indemnification might be claimed by an Indemnified Party, the Indemnifying Party shall be entitled promptly to defend, contest or otherwise protect against such suit, action, investigation, claim or proceeding at its own cost and expense. The Indemnified Party shall have the right, but not the obligation, to participate at its own expense in a defense thereof by counsel of its own choosing, but the Indemnifying Party shall be entitled to control the defense unless the Indemnified Party has relieved the Indemnifying Party from liability with respect to the particular matter or the Indemnifying Party fails to assume defense of the matter. In the event the Indemnifying Party shall fail to defend, contest or otherwise protect in a timely manner against any such suit, action, investigation, claim or proceeding, the Indemnified Party shall have the right, but not the obligation, to defend, contest or otherwise protect against the same and make any compromise or settlement thereof and recover the entire cost thereof from the Indemnifying Party including reasonable attorneys' fees, disbursements and all amounts paid as a result of such suit, action, investigation, claim or proceeding or the compromise or settlement thereof. However, if the Indemnifying Party undertakes the defense of such matters, the Indemnified Party shall not be entitled to recover from the Indemnifying Party any legal or other expenses subsequently incurred by the Indemnified Party -35- in connection with the defense thereof other than the reasonable costs of investigation undertaken by the Indemnified Party with the prior written consent of the Indemnifying Party. Section 11.12. COOPERATION Each of the parties hereto and each of their affiliates, successors and assigns shall cooperate with each other in the defense of any suit, action, investigation, proceeding or claim by a third party, and, during normal business hours, shall afford each other access to their books and records and employees relating to such suit, action, investigation, proceeding or claim and shall furnish each other all such further information that they have the right and power to furnish as may be reasonably necessary to defend such suit, action, investigation, proceeding or claim. ARTICLE XII ACCOUNTS AND RECORDS: ACCOUNTANTS Section 12.1. ACCOUNTING METHODS: FISCAL YEAR The books of account of the Partnership shall be kept on the accrual method of accounting in accordance with GAAP. The fiscal year of the Partnership shall end on December 31 of each year except upon termination. Section 12.2. RECORDS AND BOOKS OF ACCOUNT (a) The General Partner shall maintain, or cause to be maintain complete and accurate records and books of account of all transactions of the Partnership wherein shall be entered all transactions, matters and things relating to the Partnership's business as are usually entered into books of account kept by persons engaged in a business of a like character, all on the method of accounting determined in accordance with Section 12.1, consistently applied. (b) All of such records and books of account together with all other documents and files of the Partnership, including but not limited to copies of all documents prepared by the General Partner and all correspondence, shall, at all times, be kept at the main office of the Partnership or such other place as may be designated by the General Partner and to which the Partners shall have reasonable access as hereinafter provided, and all such records, books of account, documents and files shall be the exclusive property of the Partnership. In the event of the termination of the partnership interest of the General Partner, all such records, books of account, documents and files shall remain in the exclusive possession of the Partnership. At any time and from time to time while the Partnership continues and until its complete liquidation (but only during reasonable business hours), each Partner, including agents or representatives of the Partner may, at its own expense and upon reasonable prior written notice to the General Partner, fully examine, inspect, make copies of the Partnership's books, records, accounts and assets, including but not limited to bank balances and physical inspection of the Properties. -36- LB, at its sole and absolute discretion, may retain Ernst & Young LLP, at LB's expense, to review and approve all annual financial statements, tax returns and other financial and tax data specified by LB. Section 12.3. ANNUAL EXAMINATION AND TAX RETURNS (a) The books of the Partnership shall be brought to date annually each year by the General Partner or the Accountants. The General Partner or the Accountants shall determine and prepare for such fiscal year, using GAAP, such financial statements as are required by the BOT Loan or the GMAC Loan. (b) The General Partner or the Accountants shall also prepare all tax returns which the Partnership is required to file and the same shall be filed by the General Partner within the time prescribed by law for the filing of each such return. (c) At the election of the General Partner and LB or CSL, the Accountants shall perform an audit in accordance with generally accepted auditing standards. The financial statements and audit report shall be delivered to each Partner in the Partnership. Section 12.4. BANK ACCOUNTS The cash Capital Contributions of the Partners and other funds of the Partnership shall be deposited in a bank account or accounts which shall be separately owned by the Partnership and maintained by the General Partner. Withdrawals shall be made only in the regular course of partnership business on the signature of the General Partner or its designee. All funds not needed in the operation of the business may be deposited, to the extent permitted by applicable law, in interest bearing accounts or invested in short-term U.S. Government obligations, U.S. Government guaranteed obligations, bank certificates of deposit or other liquid high-grade investments, maturing, in any event, within one year. Section 12.5. REPORTS TO PARTNERS As soon as reasonably practicable but no later than thirty (30) days after the end of each month, the General Partner shall cause to be prepared and furnished to the Limited Partners income statements and balance sheets for such month in a format attached as EXHIBIT H. The General Partner shall also cause the Partnership to send to each Partner and the Servicer, promptly after they are sent to the Lender all financial, operating and other reports and data required to be submitted to the Lender pursuant to the Loan Documents. As soon as reasonably practicable but no later than seventy-five (75) days after the end of each fiscal year, the General Partner shall cause to be prepared and furnished to the Limited Partners the following: (i) all necessary tax reporting information required by the Partners for preparation of their respective income tax return and (ii) all information necessary for such Limited Partners to comply with all reporting requirements imposed by the securities laws of the United States or any state thereof. Upon the reasonable request of the Limited Partners for further information with respect to any matter with respect to the Partnership, the General Partner shall furnish such information within ten (10) days after such request. -37- ARTICLE XIII GENERAL PROVISIONS Section 13.1. RECIPIENT OF DISTRIBUTIONS AND PAYMENTS All distributions and payments of cash or property to be made pursuant to the provisions of this Agreement shall be made directly to the parties who are entitled thereto at their respective addresses indicated on EXHIBIT B or elsewhere in this Agreement or at such other address as shall have been set forth in a notice sent pursuant to the provisions of Section 13.2. Section 13.2. COMMUNICATIONS Except as otherwise expressly provided in this Agreement, any offer, acceptance, election, approval, consent, objection, certification, request waiver, notice or other document required or permitted to be made or given pursuant to any provisions of this Agreement shall be deemed duly made or given, as the case may be, if in writing, signed by or on behalf of the person making or giving the same, and shall be deemed completed when either personally delivered (with receipt acknowl edged by the recipient) or three days after deposited through the U.S. mail, registered or certified, first class, postage prepaid, addressed to the person or persons to whom such offer, acceptance, election, approval, consent, certification, request, waiver or notice is to be made or given at their respective addresses indicated on EXHIBIT B and, in the case of the Partnership, at the office of the Partnership specified in Section 2.2 of this Agreement, or, in any case, at such other address as shall have been set forth in a notice sent pursuant to the provisions of this Section 13.2. Section 13.3. ENTIRE AGREEMENT; APPLICABLE LAW; EFFECT This Agreement contains the entire agreement by and among the parties and supersedes any prior understandings and agreements among them respecting the subject hereof. THIS AGREEMENT SHALL BE CONSTRUED, ENFORCED AND GOVERNED IN CONFORMITY WITH THE LAWS OF THE STATE OF TEXAS, and within the County of Dallas, State of Texas, without giving effect to principles of conflicts of law, and whether in state or federal courts. This Agreement shall be binding upon the parties hereto, their successors, heirs, devisees, permitted assigns, legal representatives, executors and administrators but shall not be deemed for the benefit of creditors or any other Persons. Section 13.4. MODIFICATION; WAIVER OR TERMINATION Except as otherwise expressly provided in this Agreement, no modification, waiver, or termination of this Agreement, or any part hereof, shall be effective unless made in writing signed by the party or parties to be bound thereby, and no failure to pursue or elect any remedy shall constitute a waiver of any default under or breach of any provision of this Agreement, nor shall any waiver of any default under or breach of any provision of this Agreement be deemed to be a waiver of any other subsequent or similar or different default under or breach of such or any other provision or of any election or remedies available in connection therewith. Receipt by any party of any money -38- or other consideration due under this Agreement, with or without knowledge of any breach or default, shall not constitute a waiver of such breach or default of any provision of this Agreement. Section 13.5. COUNTERPARTS This Agreement may be executed in one or more counterparts and, notwithstanding that all of the parties did not execute the same counterpart, each of such counterparts shall, for all purposes, be deemed to be an original, and all of such counterparts shall constitute one and the same instrument binding on all of the parties hereto. Section 13.6. SEPARABILITY Each provision of this Agreement shall be considered separable and (a) if for any reason any provision or provisions herein are determined to be invalid and contrary to any existing or future law, such invalidity shall not impair the operation of or affect those portions of this Agreement which are valid, and (b) if for any reason any provision or provisions of this Agreement would subject the Limited Partners to any personal liability for the obligations of the Partnership under the laws of the State of Texas or any other laws, as the same may now or hereafter exist, such provision or provisions shall be deemed void and of no effect. Section 13.7. ARTICLE AND SECTION HEADINGS Article and Section titles or captions contained in this Agreement are inserted only as a matter of convenience and for reference, and shall not be construed in any way to define, limit, extend or describe the scope of any of the provisions hereof. Section 13.8. WORD MEANINGS The words such as "herein," "hereinafter," "hereof," and "hereunder" refer to this Agreement as a whole and not merely to a subdivision in which such words appear unless the context otherwise requires. The singular shall include the plural and the masculine gender shall include the feminine and neuter, and vice versa, unless the context otherwise requires. -39- Section 13.9. EXHIBITS All exhibits annexed hereto and any documents or instruments delivered simultaneously herewith are expressly made a part of this Agreement, as fully as though completely set forth herein, and all references to this Agreement herein or in any of such writings or elsewhere shall be deemed to refer to and include all such writings. Section 13.10. FURTHER ACTIONS Each of the Partners shall hereafter execute and deliver such further instruments and do such further acts and things as may be required or useful to carry out the intent and purpose of this Agreement and as are not inconsistent with the revisions hereof. Section 13.11. PROHIBITION AGAINST PARTITION Each of the parties hereto does hereby permanently waive and relinquish any and all rights it may have to cause the assets of the Partnership to be partitioned, it being the intention of the parties to prohibit any parties hereto from bringing a suit for partition against the other parties hereto. Section 13.12. AGREEMENTS WITH AFFILIATES AND THE GMAC LOAN (a) DEVELOPMENT AGREEMENTS. The Partnership hereby ratifies and agrees that the Properties shall be developed by Capital Senior Development, Inc. ("Developer") pursuant to the existing Development Agreements with the Partnership containing terms and conditions that have been approved by the Partners. The Partnership also ratifies and agrees to the terms and conditions in the Development and Turnkey Services Agreement by and between the Partnership and Capital Senior Development, Inc. At its sole and absolute discretion, LB, on its own behalf or on behalf of the Partnership, may terminate and replace the Developer for cause, as defined in the relevant Development Agreement. (b) ASSET MANAGEMENT AND LEASING AGREEMENT. The Partnership hereby ratifies and agrees that the Properties shall be managed and leased by Capital Senior Living, Inc. ("Property Manager") pursuant to the existing Management Agreements with the Partnership containing terms and conditions that have been approved by the Partners. At its sole and absolute discretion, LB, on its own behalf or on behalf of the Partnership, may terminate and replace a Property Manager (i) at any time for cause as defined in each Management Agreement and (ii) without cause in LB's sole and absolute discretion at any time after the second anniversary of the date of this Agreement. (c) GMAC LOAN. The Partners hereby ratify and agree that the Partnership will borrow from the Standby Lender, the GMAC Loan of not more than $50,000,000 pursuant to the Loan Documents for the purpose of refinancing the cost of acquiring, developing and operating the Properties. The Partners acknowledge and agree that the Partnership has previously executed a commitment letter for each of the Properties (collectively, "Commitment Letters") with the Standby Lender relating to the GMAC Loan secured by the Properties. The Partners hereby ratify and approve the Commitment Letters and agree that the General Partner shall have authority on behalf of the Partnership to enter into, execute, deliver and perform the Loan Documents with respect to -40- the GMAC Loan. The terms, conditions and provisions of the Loan Documents, as set forth in the Commitment Letters, are hereby approved as a Major Decision under Section 7.2. TSL shall use its good faith efforts to cause the Partnership to comply with all covenants or requirements of the Loan Documents to the extent that the Partnership has the financial and other resources available to do so. The Partners acknowledge and agree that LB shall have no responsibility for providing any guaranties or other agreements in connection with the GMAC Loan or other financing obtained by the Partnership. Section 13.13. NON-COMPETE OF GENERAL PARTNER TSL agrees that as long as it is the general partner of the Partnership and for one (1) year after TSL is no longer the general partner of the Partnership, neither TSL nor its Affiliates will acquire, own, develop, complete the development of, or manage any senior living facility providing the same or comparable level of services as any senior living facility owned or leased by the Partnership within a seven and one-half mile radius of a senior living facility owned or leased by the Partnership. Section 13.14. LITIGATION WITHOUT TERMINATION Each Partner shall be entitled to maintain, on its own behalf or on behalf of the Partnership, any action or proceeding against any other Partner or the Partnership (including, without limitation, any action for damages, specific performance or declaratory relief) for or by reason of the breach by such party of this Agreement or any other agreement entered into in connection with this Agreement, notwithstanding the fact that any or all of the parties to such proceeding may then be Partners in the Partnership, and without dissolving the Partnership as a limited partnership. Section 13.15. ATTORNEYS' FEES If the Partnership or any Partner obtains a judgment against any other Partner by reason of breach of this Agreement or failure to comply with the provisions hereof, reasonable attorneys' fees as fixed by the court shall be included in such judgment. -41- Section 13.16. CUMULATIVE REMEDIES No remedy conferred upon the Partnership or any Partner pursuant to this Agreement is intended to be exclusive of any other remedy herein or by law provided or permitted, but each shall be cumulative and shall be in addition to every other remedy given hereunder or now or hereafter existing at law, in equity or by statute (subject, however, to the limitations expressly herein set forth). [REMAINDER OF PAGE LEFT BLANK] -42- SIGNATURE PAGE TO SECOND AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF TRIAD SENIOR LIVING I, L.P. GENERAL PARTNER: Triad Senior Living, Inc., a Texas corporation By: /s/ Blake N. Fail ---------------------------------------- Name: Blake N. Fail ---------------------------------------- Title: President ---------------------------------------- LIMITED PARTNERS: LB Triad Inc., a Delaware corporation By: /s/ Christopher S. McKenna ---------------------------------------- Name: Christopher S. McKenna ---------------------------------------- Title: Authorized Signatory ---------------------------------------- Capital Senior Living Properties, Inc. a Texas corporation By: /s/ David R. Brickman ---------------------------------------- Name: David R. Brickman ---------------------------------------- Title: Vice President ---------------------------------------- WITHDRAWING LIMITED PARTNER: /s/ Blake N. Fail ----------------------------------------------- Blake N. Fail The undersigned is signing this Agreement solely for the purpose of signifying his agreement to comply with the provisions of Article XI of this Agreement. /s/ Blake N. Fail ----------------------------------------------- Blake N. Fail EXHIBIT A PROPERTY DESCRIPTIONS [SEE ATTACHED] A-1 EXHIBIT B
CAPITAL CONTRIBUTIONS REGULAR CONDITIONS STATED PERCENTAGE IN SECTION 8.2(j) CAPITAL CONTRIBUTIONS INTEREST HAVE BEEN SATISFIED --------------------- ---------- ------------------- GENERAL PARTNER Triad Senior Living, Inc. $1.00 1% 1% 4312 Mockingbird Lane Dallas, Texas 75205 Attention: Blake N. Fail LIMITED PARTNERS LB Triad Inc. $12,000,000 80% 0% 3 World Financial Center New York, New York 10285 Attention: Karen E. Blakely Capital Senior Living Properties, Inc. $3,000,000 19% 99% 14160 Dallas Parkway Suite 300 Dallas, Texas 75240 Attention: David R. Brickman, Esq.
B-1 EXHIBIT C CERTAIN TAX AND ACCOUNTING MATTERS ARTICLE I DEFINITIONS Section 1.1. DEFINITIONS. All capitalized terms used herein shall have the meanings assigned to them in the Agreement of Limited Partnership of Triad Senior Living I, L.P. Notwithstanding the foregoing, the following definitions shall be applicable to the following terms as used in this EXHIBIT C of the Agreement: (a) "ADJUSTED NET INCOME OR LOSS" of the Partnership derived for any Fiscal Year (or portion thereof) shall mean the excess or deficit, as the case may be, of (i) the Gross Income of the Partnership for such period (not including the amount of Gross Income (if any) allocated during such Fiscal Year pursuant to SECTIONS 3.1(a), 3.1(b), 3.1(c), 3.1(d), and 3.1(p) hereof for such period), over (ii) the Deductible Expenses of the Partnership for such period (not including the amount of Deductible Expenses (if any) allocated pursuant to SECTIONS 3.1(e), 3.1(f) and 3.1(p)) hereof for such period) with the following modifications: (i) Any Partnership income that is exempt from federal income tax, and that is not otherwise taken into account in computing Adjusted Net Income or Loss of the Partnership pursuant to this SECTION 1.1(a), shall be treated as additional Gross Income and added to the amount otherwise calculated as Adjusted Net Income or Loss under this SECTION 1.1(a). (ii) Any expenditures of the Partnership that are described in section 705(a)(2)(B) of the Code (relating to expenditures of the Partnership that are not deductible for federal income tax purposes in computing taxable income and not properly chargeable to capital), or treated as so described pursuant to section 1.704-1(b)(2)(iv)(I) of the Regulations, and that are not otherwise taken into account in computing Adjusted Net Income or Loss of the Partnership pursuant to this SECTION 1.1(a), shall be treated as additional Deductible Expenses and subtracted from the amount otherwise calculated as Adjusted Net Income or Loss under this SECTION 1.1(a). (b) "ADJUSTED PROPERTY" shall mean any Partnership asset that has a Book Basis different from its adjusted tax basis. Any asset that is contributed to the Partnership by a Partner shall be an "ADJUSTED PROPERTY" if its Agreed Value is not equal to the Partnership's initial tax basis in such asset. In addition, once the Book Basis of a Partnership asset is adjusted pursuant to SECTION 2.4 hereof, such asset shall thereafter be an "ADJUSTED PROPERTY." (c) "AGREED VALUE" of any asset contributed by a Partner to the Partnership shall mean the fair market value thereof (determined without regard to section 7701(g) of the Code) as of the date of such contribution and as reasonably determined by the General Partner. C-1 (d) "BOOK BASIS" of any asset of the Partnership shall be determined in accordance with the rules of SECTION 2.4. (e) "BOOK DEPRECIATION" in respect of any Partnership asset for any Fiscal Year shall mean the product of (i) the depreciation, cost recovery or other amortization deduction allowable to the Partnership for federal income tax purposes in respect of such asset for such Fiscal year, multiplied by (ii) a fraction, the numerator of which is the Book Basis of such asset as of the beginning of such Fiscal Year (or the date of acquisition if the asset is acquired during such Fiscal Year) and the denominator of which is the adjusted tax basis of such asset as of the beginning of such Fiscal Year (or the date of acquisition if the asset is acquired during such Fiscal Year). If the denominator of the fraction described in clause (ii) above is zero, "BOOK DEPRECIATION" in respect of such asset shall be determined under any reasonable method selected by the General Partner. (f) "BOOK GAIN OR LOSS" realized by the Partnership in respect of any asset of the Partnership in connection with the disposition of such asset shall mean the excess (or deficit) of (i) the amount realized by the Partnership in connection with such disposition (as determined under section 1001 of the Code) over (ii) the then Book Basis of such asset. If the Book Basis is adjusted pursuant to SECTION 2.4, any increase or decrease in Book Basis of the assets as a result of the adjustment shall be treated as Book Gain or Book Loss, as the case may be, and shall be allocated among the Partners pursuant to SECTION 3.1 of this EXHIBIT C. (g) "CAPITAL ACCOUNT" shall have the meaning assigned such term in SECTION 2.1 hereof. (h) "DEDUCTIBLE EXPENSES" of the Partnership for any Fiscal Year (or portion thereof) shall mean all items, as calculated for book purposes, which are allowable as deductions to the Partnership during such period under federal income tax accounting principles (including Book Depreciation). (i) "FISCAL YEAR" shall mean the fiscal year of the Partnership adopted under SECTION 8.1 of the Agreement. (j) "GROSS INCOME" of the Partnership for any Fiscal Year (or portion thereof) shall mean the gross income of the Partnership derived from all sources (other than from capital contributions and loans to the Partnership and other than Book Gain or Loss from a Terminating Capital Transaction) during such period, as calculated for book purposes in accordance with federal income tax accounting principles. (k) "IRS" shall mean the United States Internal Revenue Service. (l) "LIQUIDATION" of a Partner's interest in the Partnership shall mean and shall be deemed to occur upon the earlier of (i) the date upon which the Partnership is terminated under section 708(b)(1) of the Code; (ii) the date upon which the Partnership ceases to be a going concern (even though it may continue in existence for the limited purpose of winding up its affairs, paying its debts and distributing any remaining Partnership assets to the Partners); or (iii) the date upon which there is a liquidation of the Partner's interest in the Partnership (but the Partnership is not terminated) under section 1.761-1(d) of the Regulations. C-2 (m) "MODIFIED 752 SHARE OF RECOURSE DEBT" of any Partner shall mean, as of any date, the amount (if any) of economic risk that such Partner is treated, as of such date, as bearing with respect to Recourse Debt under section 1.752-2 of the Regulations (assuming the Partnership constructively liquidates on such date within the meaning of section 1.752-2(b) of the Regulations except that, for purposes of such section 1.752-2(b), all of the assets of the Partnership shall be deemed thereunder to be transferred in fully taxable exchanges for an aggregate amount of cash consideration equal to their respective Book Bases and such consideration shall be deemed thereunder to be used, in the appropriate order of priority, in full or partial satisfaction of the liabilities of the Partnership). (n) "NONRECOURSE DEDUCTIONS" of the Partnership shall have the meaning ascribed to such term in section 1.704-2(b)(1) of the Regulations. (o) "NONRECOURSE LIABILITY" of the Partnership shall have the meaning ascribed to such term in section 1.704-2(b)(3) of the Regulations. (p) "NONRECOURSE MINIMUM GAIN" of the Partnership shall mean the amount of "minimum gain" of the Partnership that is attributable to Nonrecourse Liabilities (as determined under section 1.704-2(b)(2) of the Regulations). A Partner's share of such "NONRECOURSE MINIMUM GAIN" shall be calculated in accordance with the provisions of section 1.704-2(g) of the Regulations. (q) "OPERATIONS" shall mean all revenue producing activities of the Partnership other than activities relating to a Capital Transaction that occur in connection with the dissolution of the Partnership. (r) "PARTNER MINIMUM GAIN" of the Partnership shall mean the amount of "minimum gain" of the Partnership that is attributable to Partner Nonrecourse Debt (as determined under section 1.704-2(i)(2) of the Regulations). A Partner's share of such "PARTNER MINIMUM GAIN" shall be calculated in accordance with the provisions of section 1.704-2(i)(5) of the Regulations. (s) "PARTNER NONRECOURSE DEBT" of the Partnership shall have the meaning ascribed to such term in section 1.704-2(b)(4) of the Regulations. (t) "PARTNER NONRECOURSE DEDUCTIONS" of the Partnership shall have the meaning ascribed to such term in section 1.704-2(i)(2) of the Regulations. (u) "RECOURSE DEBT" of the Partnership shall mean any liability (or portion thereof) of the Partnership that is neither a Nonrecourse Liability nor a Partner Nonrecourse Debt. (v) "REGULATIONS" shall mean the regulations promulgated by the United States Department of the Treasury pursuant to and in respect of provisions of the Code. All references herein to sections of the Regulations shall include any corresponding provision or provisions of succeeding, similar, substitute proposed or final Regulations. (w) "RELATED PERSON" shall mean, as to any Partner, any person who is related to such Partner (within the meaning of section 1.752-4(b) of the Regulations). C-3 (x) "REVALUATION EVENT" shall mean any of the following occurrences: (a) the contribution of money or other property (other than a de minimis amount) by a new or existing Partner to the Partnership as consideration for the issuance of an additional interest in the Partnership and/or increase in Interests; (b) the distribution of money or other property (other than a de minimis amount) by the Partnership to a retiring or continuing Partner as consideration for an interest in the Partnership and/or decrease in Interests; or (c) the liquidation of the Partnership within the meaning of section 1.704-1(b)(2)(ii)(g) of the Regulations. (y) "SECTION 704 CAPITAL ACCOUNT" shall have the meaning assigned to such term in SECTION 2.3 hereof. (z) "TAX DEPRECIATION" for any Fiscal Year shall mean the amount of depreciation, cost recovery or other amortization deductions allowable to the Partnership for federal income tax purposes for such Fiscal Year. (aa) "TAX ITEM" with respect to any asset shall mean any item of income, gain, loss or deduction (including depreciation, cost recovery or amortization) in respect of such asset, as computed for federal income tax purposes. (bb) "TAX MATTERS PARTNER" shall have the meaning ascribed to such term in SECTION 4.4(a) hereof. (cc) "TAXABLE GAIN OR LOSS" shall mean gain or loss recognized by the Partnership on the sale, exchange or other disposition of any asset of the Partnership as computed for federal income tax purposes. (dd) "TERMINATING CAPITAL TRANSACTION" means any transaction not in the ordinary course of business, and that in accordance with GAAP is capital in nature and is entered into in connection with or will result in the dissolution, winding up and termination of the Partnership. ARTICLE II CAPITAL ACCOUNTS AND SECTION 704 CAPITAL ACCOUNTS Section 2.1. CAPITAL ACCOUNTS. A separate "CAPITAL ACCOUNT" (herein so called) shall be maintained for each Partner in accordance with the capital accounting rules of section 1.704-1(b)(2)(iv) of the Regulations. Each Partner shall have only one Capital Account, regardless of the number or classes of interests in the Partnership owned by such Partner and regardless of the time or manner in which such interests were acquired by such Partner. Pursuant to the basic rules of section 1.704-1(b)(2)(iv) of the Regulations, the balance of each Partner's Capital Account: (a) shall be increased by the amount of money contributed by such Partner (or such Partner's predecessor in interest) to the Partnership (including but not limited to such Partner's C-4 Capital Contributions described in ARTICLE V of the Agreement) and decreased by the amount of money distributed to such Partner (or such Partner's predecessor in interest); (b) shall be increased by the fair market value (determined without regard to section 7701(g) of the Code) of each property contributed by such Partner (or such Partner's predecessor in interest) to the Partnership (net of liabilities secured by such property that the Partnership is considered to assume or take subject to under section 752 of the Code), and decreased by the fair market value (determined without regard to section 7701(g) of the Code) of each property distributed to such Partner (or such Partner's predecessor in interest) by the Partnership (net of liabilities secured by such property that such Partner is considered to assume or take subject to under section 752 of the Code); (c) shall be increased by the amount of Adjusted Net Income or item of income or gain or Book Gain allocated to such Partner (or such Partner's predecessor in interest) pursuant to SECTION 3.1 hereof; (d) shall be decreased by the amount of Adjusted Net Loss or item of loss or deduction or Book Loss allocated to such Partner (or such Partner's predecessor in interest) pursuant to SECTION 3.1 hereof; and (e) shall be otherwise adjusted in accordance with the other capital account maintenance rules of section 1.704-1(b)(2)(iv) of the Regulations. The foregoing provisions of this SECTION 2.1 and the other provisions of this EXHIBIT C relating to the maintenance of Capital Accounts are intended to comply with section 1.704-1(b) of the Regulations, and shall be interpreted and applied in a manner consistent with such Regulations. The Partners shall also make any appropriate modification if unanticipated events might otherwise cause this EXHIBIT C and the Agreement not to comply with such Regulations. If any Interest is transferred pursuant to the terms of the Agreement, the transferee shall succeed to the Capital Account of the transferor to the extent the Capital Account is attributable to the transferred Interest. Section 2.2. ADDITIONAL PROVISIONS REGARDING CAPITAL ACCOUNTS. (a) If a Partner pays any indebtedness of the Partnership, such payment shall be treated as a contribution by that Partner to the capital of the Partnership and the Capital Account of such Partner shall be increased by the amount so paid by such Partner. (b) Except as specifically provided in the Agreement, no Partner may contribute capital to, or withdraw capital from, the Partnership. (c) A loan by a Partner to the Partnership shall not be considered a contribution of money to the capital of the Partnership, and the balance of such Partner's Capital Account shall not be increased by the amount so loaned. No repayment of principal or interest on any such loan, or reimbursement made a Partner with respect to advances or other payments made by a such Partner on behalf of the Partnership or payments of fees to a Partner or Related Person to such Partner C-5 which are made by the Partnership shall be considered a return of capital or in any manner affect the balance of such Partner's Capital Account. (d) No Partner with a deficit balance in its Capital Account shall have any obligation to the Partnership, any other Partner, or any third party to restore said deficit balance. Notwithstanding any other provision of this Agreement to the contrary, upon liquidation of a Partner's partnership interest (whether or not in connection with a liquidation of the Partnership), no Partner shall have any liability to restore any deficit in its Capital Account except for, upon the liquidation of TSL's interest in the Partnership, if TSL has a deficit balance in its Capital Account following such liquidation, as determined after taking into account all adjustments to the Capital Accounts for the taxable year during which such liquidation occurs, TSL shall be required to immediately contribute cash to the Partnership in an amount equal to the lesser of (i) such deficit capital account balance or (ii) the amount of actual cash distributions to TSL during the term of the Partnership (determined without taking into account any amounts paid to any party pursuant to Section 7.10 of the Agreement). In addition, no allocation to any Partner of any loss, whether attributable to depreciation or otherwise, shall create any asset of or obligation to the Partnership, even if such allocation reduces a Partner's Capital Account or creates or increases a deficit in such Partner's Capital Account; it is also the intent of the Partners that no Partner shall be obligated to pay any such amount to or for the account of the Partnership or any creditor of the Partnership. (e) No interest will be paid on any capital contributed to the Partnership or the balance in any Partner's Capital Account. Section 2.3. SECTION 704 CAPITAL ACCOUNTS. A "SECTION 704 CAPITAL ACCOUNT" (herein so called) shall be determined and maintained for each Partner throughout the term of the Agreement. The balance of a Partner's Section 704 Capital Account shall be equal to such Partner's Capital Account balance (as determined after giving effect to all adjustment attributable to allocations of Partnership income, gain, loss, deduction and credits and contributions and distributions of money and property effected prior to such determination), modified as follows: (a) decreased by the amount (if any) of cash that reasonably is expected to be distributed to such Partner, but only to the extent that the amount thereof exceeds any offsetting increase in such Partner's Section 704 Capital Account that reasonably is expected to occur during (or prior to) the Fiscal Year during which such distribution reasonably is expected to be made (as determined under section 1.704-1(b)(ii)(d) of the Regulations); (b) decreased by the amount (if any) of loss and deduction that reasonably is expected to be allocated to such Partner pursuant to section 704(e)(2) or 706(d) of the Code or section 1.704-1(b)(2)(ii) of the Regulations (as determined under section 1.704-1(b)(2)(ii)(d) of the Regulations); (c) increased by the amount (if any) of such Partner's share of the Nonrecourse Minimum Gain of the Partnership; and (d) increased by the amount (if any) of such Partner's share of the Partner Minimum Gain of the Partnership. C-6 Section 2.4. ADJUSTMENT OF BOOK BASIS. Book Basis with respect to any asset of the Partnership is the asset's adjusted tax basis for federal income tax purposes, except as follows: (a) The initial Book Basis of any asset contributed to the Partnership by a Partner shall be the fair market value of the assets as of the date of contribution as agreed upon by the contributing Partner and the Partnership. (b) The Book Basis of each asset shall be its respective fair market value as reasonably determined by the General Partner, as of a Revaluation Event. (c) The Book Basis of each asset distributed to any Partner will be the fair market value of the asset as reasonably determined by the General Partner as of the date of determination. (d) The Book Basis of each asset will be increased or decreased to reflect any adjustment to the adjusted tax basis of the asset under section 734(b) or 743(b) of the Code, but only to the extent that the adjustment is taken into account in determining Capital Account balances under section 1.704-1(b)(2)(iv)(M) of the Regulations, provided that the Book Basis will not be adjusted hereunder to the extent that an adjustment under SECTION 2.4(b) is necessary or appropriate in connection with a transaction that would otherwise result in an adjustment under this SECTION 2.4(d). Book Basis will be adjusted by Book Depreciation, and Book Gain or Book Loss on a disposition of any asset shall be determined by reference to such asset's Book Basis as adjusted herein. ARTICLE III ALLOCATIONS OF PROFIT AND LOSS Section 3.1. ALLOCATION OF ITEMS OF PROFIT AND LOSS. Subject to the provisions of ARTICLE IV hereof, the Partnership's Gross Income, items of loss or deduction and Adjusted Net Income or Loss and Book Gain or Loss for each Fiscal Year shall be allocated to the Partners as follows and in the following order of priority (after giving effect to all Capital Account adjustments attributable to contributions and distributions of money and property, but prior to distributions of money and property made pursuant to SECTION 10.4 of the Agreement): (a) Pursuant to section 1.704-2(f) of the Regulations (relating to minimum gain chargebacks), if there is a net decrease in Nonrecourse Minimum Gain of the Partnership for such Fiscal Year (or if there was a net decrease in Nonrecourse Minimum Gain for a prior Fiscal Year and the Partnership did not have sufficient amounts of income during prior Fiscal Years to allocate to the Partners under this SECTION 3.1(a)), then Gross Income shall be allocated, before any other allocation is made pursuant to the succeeding provisions of this SECTION 3.1 for such Fiscal Year, to each Partner in an amount equal to such Partner's share of the net decrease in such minimum gain (as determined under section 1.704-2(g) of the Regulations). (b) Pursuant to section 1.704-2(i)(4) of the Regulations (relating to minimum gain chargebacks) if there is a net decrease in Partner Minimum Gain of the Partnership for such Fiscal C-7 Year (or if there was a net decrease in Partner Minimum Gain for a prior Fiscal Year and the Partnership did not have sufficient amounts of income during prior Fiscal Years to allocate to the Partners under this SECTION 3.1(b)), then Gross Income shall be allocated, before any other allocation is made pursuant to the succeeding provisions of this SECTION 3.1 for such Fiscal Year, to each Partner with a share of such minimum gain as of the first day of such Fiscal Year in an amount equal to such Partner's share of the net decrease in such Partner Minimum Gain (as determined under section 1.704- 2(i)(5) of the Regulations). (c) A Partner who unexpectedly receives any adjustment, allocation or distribution described in section 1.704-1(b)(2)(ii)(d)(4), (5) or (6) of the Regulations will be specially allocated items of income or gain (after the allocations required by SECTION 3.1(a) and SECTION 3.1(b) hereof but before any other allocations required by this SECTION 3.1) in an amount and in the manner sufficient to eliminate any deficit balance in his Section 704 Capital Account (for this purpose, a Partner's Section 704 Capital Account shall be increased by the amount (if any) that such Partner is treated as being obligated to contribute subsequently to the capital of the Partnership (as determined under section 1.704-1(b)(2)(ii)(c) of the Regulations) and, without duplication of any amount previously described in this sentence, shall be increased by the amount (if any) of such Partner's Modified 752 Share of Recourse Debt) as quickly as possible; provided, however, that an allocation shall be made pursuant to this SECTION 3.1(c) only if and to the extent that such Partner would have a deficit balance in his Section 704 Capital Account after all allocations in this SECTION 3.1 have been tentatively made as if this SECTION 3.1(c) were not in this Exhibit. This SECTION 3.1(c) is intended to satisfy the provisions of Section 1.704-1(b)(2)(ii)(d) of the Regulations and shall be interpreted consistently therewith. (d) Except as required by SECTION 3.1(a), SECTION 3.1(b) and SECTION 3.1(c), each Partner who has a deficit balance in its Capital Account (for this purpose, a Partner's Capital Account shall be increased by (A) the amount (if any) that a Partner is obligated to contribute subsequently to the capital of the Partnership under the Agreement or this Exhibit (including SECTION 2.2(d) of this Exhibit) or is treated as being obligated to contribute subsequently to the capital of the Partnership (as determined under section 1.704-1(b)(2)(ii)(c) of the Regulations); (B) the amount (if any) of such Partner's share of the Nonrecourse Minimum Gain of the Partnership; and (C) the amount (if any) of such Partner's share of the Partner Minimum Gain of the Partnership) at the end of the taxable year will be specially allocated items of income or gain in the amount of the deficit as quickly as possible; provided, however, that an allocation shall be made pursuant to this SECTION 3.1(d) only if and to the extent that such Partner would have a deficit balance in its Capital Account after all allocations in this SECTION 3.1 have been tentatively made as if this SECTION 3.1(d) were not in this Exhibit and SECTION 3.1(d) shall be applied before SECTION 3.1(c). (e) All Partner Nonrecourse Deductions attributable to a Partner Nonrecourse Debt shall be allocated to the Partner that is treated (under section 1.704-2(b)(4) of the Regulations) as bearing the economic risk of loss for such debt. (f) All Nonrecourse Deductions of the Partnership shall be allocated to the Partners, pro rata in accordance with their respective Percentage Interests. C-8 (g) Any Adjusted Net Income realized by the Partnership for such year shall be allocated among the Partners as follows and in the following order of priority: (i) FIRST: Adjusted Net Income shall be allocated to the General Partner until the aggregate Adjusted Net Income allocated under this SECTION 3.1(g)(i) for the current and prior years equals the aggregate amount of Adjusted Net Loss allocated to the General Partner under SECTION 3.1(h)(ii) for the current and prior years; and then (ii) SECOND: To LB until the cumulative amount allocated under this Section 3.1(g)(ii) for the current and prior years is equal to the sum of the cumulative Adjusted Net Loss allocated to LB for all prior years under Section 3.1(h)(viii); and then (iii) THIRD: To LB until the aggregate amount allocated under this Section 3.1(g)(iii) is equal to the sum of (A) the cumulative 15% Preferred Return distributable under Section 8.2(a) and (c) plus (B) the cumulative Adjusted Net Loss allocated for all prior years under Section 3.1(h)(vii); and then (iv) FOURTH: To TSL and CSL, in proportion to and to the extent of the excess, if any of their respective sum of (A) the cumulative Adjusted Net Loss allocated to the Partner under Section 3.1(h)(vi) for all prior years over (B) the cumulative Adjusted Net Income allocated to the Partner under this Section 3.1(g)(iv) for the current and all prior years; and then (v) FIFTH: To TSL and CSL, in proportion to and to the extent of the excess, if any, of (1) their respective sum of (A) the cumulative 15% Preferred Return distributable to the Partner under Section 8.2(e) plus (B) the cumulative Adjusted Net Loss allocated to the Partner under Section 3.1(h)(v) for all prior years over (2) the cumulative Adjusted Net Income allocated to the Partner under this Section 3.1(g)(vi) for the current and all prior years; and then (vi) SIXTH: To LB until the cumulative amount allocated under this Section 3.1(h)(vi) is equal to the sum of (A) the cumulative amount distributable to LB under Section 8.2(g) plus (B) the cumulative Adjusted Net Loss allocated to LB under Section 3.1(h)(iv) for the prior years; and then (vii) SEVENTH: To TSL and CSL, in proportion to and to the extent of the excess, if any of their respective sum of (A) the cumulative Adjusted Net Loss allocated to the Partner under Section 3.1(h)(iii) for all prior years over (B) the cumulative Adjusted Net Income allocated to the Partner under this Section 3.1(g)(vii) for all current and all prior years; and then (viii) EIGHTH: To TSL and CSL, in proportion to and to the extent of the excess, if any, of (1) their respective sum of (A) the cumulative 15% Preferred Return distributable to the Partner under Section 8.2(h) plus (B) the cumulative Adjusted Net Loss allocated to the Partner under Section 3.1(h)(ii) for all prior years over (2) the cumulative Adjusted Net C-9 Income allocated to the Partner under this Section 3.1(g)(viii) for the current and all prior years; and then (ix) NINTH: To the Partners in proportion to their respective Percentage Interests. For purposes of the allocation pursuant to this subsection, Percentage Interests shall be determined as if cash distributions equal to all allocations of net income have actually been made. (h) Any Adjusted Net Loss realized by the Partnership for such year shall be allocated among the Partners as follows and in the following order of priority: (i) FIRST: Adjusted Net Loss to the Partners, in proportion to and to the extent of the excess, if any, of (1) the cumulative Adjusted Net Income allocated to each Partner pursuant to Section 3.1(g)(ix) for all prior years, over (2) the cumulative Adjusted Net Loss allocated to such Partner pursuant to this Section 3.1(h)(i) for the current and all prior years; and then (ii) SECOND: Adjusted Net Loss to TSL and CSL, in proportion to and to the extent of the excess, if any, of (1) the cumulative Adjusted Net Income allocated to each such Partner pursuant to Section 3.1(g)(viii) for all prior years, over (2) the cumulative Adjusted Net Loss allocated to such Partner pursuant to this Section 3.1(h)(ii) for the current and all prior years; and then (iii) THIRD: Adjusted Net Loss to TSL and CSL, in proportion to and to the extent of their respective positive Section 704 Capital Account balances (reduced by any amount distributable under Section 8.2(e) and (f); and then (iv) FOURTH: Adjusted Net Loss to LB in an amount equal to the excess, if any, of the cumulative Adjusted Net Income allocated to LB pursuant to Section 3.1(g)(vi) for all prior years over the cumulative Adjusted Net Loss allocated to LB pursuant to this Section 3.1(h)(iv) for the current and all prior years; and then (v) FIFTH: Adjusted Net Loss to TSL and CSL, in proportion to and to the extent of the excess, if any, of (1) the cumulative Adjusted Net Income allocated to each such Partner pursuant to Section 3.1(g)(v) for all prior years, over (2) the cumulative Adjusted Net Loss allocated to such Partner pursuant to this Section 3.1(h)(v) for all prior years; and then (vi) SIXTH: Adjusted Net Loss to TSL and CSL in proportion to and to the extent of their respective positive Section 704 Capital Account balances until their respective positive Capital Account balances are reduced to zero; and then (vii) SEVENTH: Adjusted Net Loss to LB to the extent of the excess, if any, of (1) the cumulative Adjusted Net Income allocated to LB pursuant to Section 3.1(g)(iii) for all prior years, over (2) the cumulative Adjusted Net Loss allocated to such Partner pursuant to this Section 3.1(h)(vii) for all prior years; and then C-10 (viii) EIGHTH: Adjusted Net Loss to LB until its positive Capital Account balance is reduced to zero; and then (ix) NINTH: Adjusted Net Loss to the General Partner. For purposes of the allocation pursuant to this subsection, Percentage Interests shall be determined as if cash distributions equal to all allocations of net income have actually been made. (i) Notwithstanding any other provision of the Agreement or this Exhibit, from the date that construction commences with respect to a Property (the "Subject Property") to the earlier of (i) the date 18 months following the date that the Partnership receives a Certificate of Occupancy for the Subject Property or (ii) the date which is two years after the date of this Agreement, if LB is still a Limited Partner, all Adjusted Net Loss from the Subject Property shall be allocated under this SECTION3.1(i) to TSL. If LB is a Limited Partner after the second anniversary of the date of the Agreement, then notwithstanding any other provision of the Agreement or this Exhibit, all Adjusted Net Losses from the Subject Property shall be allocated under this SECTION 3.1(i) to LB. The provisions of this SECTION 3.1(i) shall be applied to each Property of the Partnership on a property-by-property basis. (j) Book Gain derived from a Terminating Capital Transactions shall be allocated among the Partners as follows in the following order of priority (after giving effect to all adjustments attributable to allocations made pursuant to the preceding provisions of this SECTION 3.1 for such year): (i) FIRST: Book Gain shall be allocated among the Partners having deficit Capital Account balances to the least extent necessary to cause their deficit Capital Account balances to be in the same proportion to one another as are their respective Percentage Interests. (ii) SECOND: Book Gain shall be allocated among those Partners having deficit Capital Account balances in accordance with their respective Percentage Interests, to the least extent necessary to cause their Capital Account balances to equal zero. (iii) THIRD: After all allocations under Section 3.1(k)(i) through (ii) but before any distributions under Section 8.2 as a result of Section 10.4, Book Gain shall be allocated to LB until LB's positive Capital Account balance is equal to the sum of amounts distributable to LB under Section 8.2(a), (b), (c) and (d); and then (iv) FOURTH: After all allocations under Section 3.1(k)(i) through (iii) but before any distributions under Section 8.2 as a result of Section 10.4, Book Gain shall be allocated to CSL and TSL until each of TSL's and CSL's positive Capital Account balance is equal to the sum of the amounts distributable under Section 8.2(e) and (f); provided, however, that if there is not sufficient Book Gain to allocate to cause each such Partner's positive Capital Account balance to equal the sum of the amounts distributable under Section 8.2(e) and (f), then Book Gain shall be allocated among TSL and CSL (to the extent possible and as necessary) so as to cause their respective positive Capital Account balances to be in the same C-11 ratio to one another as their respective amounts distributable under Section 8.2(e) and (f); and then (v) FIFTH: After all allocations under Section 3.1(k)(i) through (iv) but before any distributions under Section 8.2 as a result of Section 10.4, Book Gain shall be allocated to LB until LB's positive Capital Account balance is equal to the sum of the amounts distributable to LB under Section 8.2(a) through (d) plus (g); and then (vi) SIXTH: After all allocations under Section 3.1(k)(i) through (v) but before any distributions under Section 8.2 as a result of Section 10.4, Book Gain shall be allocated to CSL and TSL until each of TSL's and CSL's positive Capital Account balance is equal to the sum of the amounts distributable to TSL and CSL under Section 8.2(e) and (f) plus (h) and (i); provided, however, that if there is not sufficient Book Gain to allocate to cause each such Partner's positive Capital Account balance to equal the sum of the amounts distributable under Section 8.2(e) and (f) plus (h) and (i), then Book Gain shall be allocated among TSL and CSL (to the extent possible and as necessary) so as to cause so much of their respective positive Capital Account balances in excess of their amount distributable under Section 8.2(e) and (f) to be in the same ratio to one another as their respective amounts distributable under Section 8.2(h) and (i); and then (vii) SEVENTH: To the Partners in their sharing ratios as set forth in Section 8.2(j). (k) Book Loss derived from a Terminating Capital Transactions shall be allocated among the Partners as follows in the following order of priority (after giving effect to all adjustments attributable to allocations made pursuant to the preceding provisions of this SECTION 3.1 for such year): (i) FIRST: Before any distributions under Section 8.2 as a result of Section 10.4, Net Loss shall be allocated in the least amount necessary and to the extent possible so that the Partners' excess balances (as hereinafter defined) are as closely as possible in the same ratio to one another as their sharing ratios as set forth in Section 8.2(j), and then to all Partners in proportion to their excess balances until the excess balances are zero. LB's excess balance is defined as the amount, if any, by which its positive Capital Account balance exceeds the sum of the amounts distributable under Section 8.2(a) through (d) and (g). TSL's and CSL's respective excess balance is defined as the amount, if any, by which its positive Capital Account balance exceeds the sum of the amounts distributable to such Partner under Section 8.2(e), (f), (h) and (i); and then (ii) SECOND: Before any distributions under Section 8.2 as a result of Section 10.4 and after the allocations under Section 3.1(k)(i), Net Losses shall be allocated to TSL and CSL until their respective positive Capital Account balance is equal to the amounts distributable under Section 8.2(e) and (f); provided, however, that if there is not sufficient Book Loss to allocate to cause each such Partner's positive Capital Account balance to equal the sum of the amounts distributable under Section 8.2(e) and (f), then Book Loss shall be allocated among the Partners (to the extent possible and as necessary) so as to cause so much of their respective positive Capital Account balances in excess of the amount distributable C-12 under Section 8.2(e) and (f) to be in the same ratio to one another as their respective amounts distributable under Section 8.2(h) and (i); and then (iii) THIRD: Before any distributions under Section 8.2 as a result of Section 10.4 and after the allocations under Section 3.1(k)(i) through (ii), Net Losses shall be allocated to LB until its positive Capital Account balance is equal to the amounts distributable to it under Section 8.2(a) through (d); and then (iv) FOURTH: Before any distributions under Section 8.2 as a result of Section 10.4 and after the allocations under Section 3.1(k)(i) through (iii), Net Losses shall be allocated to TSL and CSL until their respective positive Capital Account balance is equal to zero; provided, however, that if there is not sufficient Book Loss to allocate to cause each such Partner's positive Capital Account balance to equal zero, then Book Loss shall be allocated among the Partners (to the extent possible and as necessary) so as to cause their respective positive Capital Account balances to be in the same ratio to one another as their respective amounts distributable under Section 8.2(e) and (f); and them (v) FIFTH: Before any distributions under Section 8.2 as a result of Section 10.4 and after the allocations under Section 3.1(k)(i) through (iv), Net Losses shall be allocated to LB until its positive Capital Account balance is reduced to zero; and then (vi) SIXTH: Before any distributions under Section 8.2 as a result of Section 10.4 and after the allocations under Section 3.1(k)(i) through (v), Net Losses shall be allocated to the General Partner. (l) For purposes of determining the nature (as ordinary or capital) of any Partnership profit allocated among the Partners for Federal income tax purposes pursuant to this SECTION 3.1, the portion of such profit required to be recognized as ordinary income pursuant to sections 1245 and/or 1250 of the Code shall be deemed to be allocated among the Partners in accordance with sections 1.1245-1(e)(2) and 1.1250-1(f) of the Regulations. (m) The Partners agree that their Percentage Interests represent their respective interest in Partnership profits for purposes of allocating excess nonrecourse liabilities (as defined in section 1.752-3(a)(3) of the Regulations) pursuant to section 1.752-3(a)(3) of the Regulations. (n) Notwithstanding any other provision herein to the contrary, no allocation of Adjusted Net Income, Adjusted Net Loss, Book Gain or Book Loss, or items of income, gain, loss and deduction will be made to a Partner if the allocation would not have "economic effect" under section 1.704-1(b)(2)(ii) of the Regulations or otherwise would not be in accordance with the Partners' interests in the Partnership within the meaning of section 1.704-1(b)(3) or section 1.704-2(b)(1) of the Regulations. The General Partner will have the authority to reallocate any item in accordance this SECTION 3.1(o); provided, however, that (a) no such change shall have a material adverse effect upon the amount of cash or other property distributable to any Partner, (b) each Partner shall have 30 days prior notice of such proposed modification and (c) if such proposed modification would be material, the Partnership shall have received an opinion of tax counsel to the Partnership that such modification is necessary to comply with section 704(b) of the Code. C-13 (o) The allocations set forth in SECTIONS 3.1(a)-(f) (the "REGULATORY ALLOCATIONS") are intended to comply with certain requirements of the Regulations. It is the intent of the Partners that, to the extent possible, all Regulatory Allocations shall be offset either with other Regulatory Allocations or with special allocations of other items of Partnership income, gain, loss, or deduction pursuant to this SECTION 3.1(p). Therefore, notwithstanding any other provision of this Article III (other than the Regulatory Allocations), the General Partner shall make such offsetting special allocations of Partnership income, gain, loss, or deduction in whatever manner it determine(s) appropriate so that after such offsetting allocations are made, each Partner's Capital Account balance is, to the extent possible, equal to the Capital Account balance such Partner would have had if the Regulatory Allocations were not part of the Agreement and all Partnership items were allocated pursuant to SECTIONS 3.1(g)-(l) hereof. Section 3.2. ALLOCATION OF TAX ITEMS. (a) Except as otherwise provided in the succeeding provisions of this SECTION 3.2, each Tax Item shall be allocated to the Partners in the same manner as each correlative item of income, gain, loss or deduction, as calculated for book purposes, is allocated pursuant to the provisions of SECTION 3.1 hereof. (b) The Partners hereby acknowledge that all Tax Items in respect of Adjusted Property are required to be allocated to the Partners in the same manner as under section 704(c) of the Code (as specified in sections 1.704-1(b)(2)(iv)(f), 1.704-1(b)(2)(iv)(g) and 1.704-3 of the Regulations), and that the principles of section 704(c) of the Code require that such Tax Items must be shared among the Partners so as to take account of the variation between the adjusted tax basis and Book Basis of each such Adjusted Property. Thus, notwithstanding anything in SECTIONS 3.1 or 3.2(a) hereof to the contrary, the Partners' distributive shares of Tax Items in respect of each Adjusted Property shall be separately determined and allocated to the Partners following any permissible method under 1.704-3 of the Regulations reasonably selected by the General Partner, and the Capital Account balances of the Partners shall be adjusted solely for allocations of book items in respect of such assets and shall not be adjusted for their distributive shares of any corresponding Tax Items. ARTICLE IV SPECIAL RULES Section 4.1. ALLOCATION OF PROFIT AND LOSS AND DISTRIBUTIONS IN RESPECT OF INTERESTS TRANSFERRED. (a) If any interest in the Partnership is transferred, or is increased or decreased by reason of the admission of a new Partner or otherwise, during any Fiscal Year, each item of Adjusted Net Income or Loss, and other income and deductions and Book Gain and Book Loss of the Partnership for such Fiscal Year shall be divided and allocated between the Partners in question by taking account of their varying interests in the Partnership during such Fiscal Year on a daily, monthly, or other basis, as determined by the General Partner using any permissible method under section 706 of the Code and the Regulations thereunder. C-14 (b) Distributions of Partnership assets in respect of an interest in the Partnership shall be made only to the persons or entities who, according to the books and records of the Partnership, are the holders of record of the interests in the Partnership in respect of which such distributions are made on the actual date of distribution. Neither the Partnership nor any Partner shall incur any liability for making distributions in accordance with the provisions of the preceding sentence, whether or not the Partnership or any Partner has knowledge or notice of any transfer or purported transfer of ownership of any interest in the Partnership. (c) Notwithstanding any provision above to the contrary, Book Gain or Loss of the Partnership realized in connection with a sale or other disposition of any substantial part of the assets of the Partnership shall be allocated solely to the parties owning interests in the Partnership as of the date such sale or other disposition occurs. Section 4.2. TAX RETURNS. The General Partner shall cause to be prepared for each taxable year of the Partnership the federal, state and local income tax returns and information returns, if any, which the Partnership is required to file. Such returns shall be prepared and submitted to the Partners for examination no later than ten (10) days prior to the required filing date (including any extension thereof), together with such additional forms and information as may be required by the Partners in order for the Partners to file returns reflecting the Partnership's operations. Section 4.3. TAX ELECTIONS. The Partnership shall make the following elections on the appropriate tax returns: (a) to the extent permitted by the Code, to adopt the calendar year as the Partnership's fiscal year; (b) to the extent permitted by the Code, to adopt the accrual method of accounting and to keep the Partnership's books and records on the income-tax method; (c) if a distribution of Partnership property as described in section 734 of the Code occurs or if a transfer of Interest as described in section 743 of the Code occurs, on written request of any Partner, to elect, pursuant to section 754 of the Code, to adjust the basis of Partnership properties; (d) to elect to amortize the organizational expenses of the Partnership ratably over a period of sixty (60) months as permitted by section 709(b) of the Code; and (e) any other election the General Partner with the prior written consent of LB may deem appropriate and in the best interests of the Partners. Neither the Partnership nor any Partner may make an election for the Partnership to be excluded from the application of the provisions of subchapter K of chapter 1 of subtitle A of the Code or any similar provisions of applicable state law. The Partnership intends to be classified as a partnership for federal income tax purposes under section 301.7701-3 of the Regulations. Neither the Partnership nor any Partner may make an election under section 301.7701-3(c) of the Regulations to treat the Partnership as an association taxable as a corporation. C-15 Section 4.4. TAX MATTERS PARTNER. (a) TSL is hereby designated the "Tax Matters Partner" as that term is defined in section 6231(a)(7) of the Code. (b) The Tax Matters Partner shall use its best efforts to comply with the responsibilities outlined in sections 6222 through 6232 of the Code and in doing so shall incur no liability to the other Partners. The Tax Matters Partner shall give written notice to each other Partner of all correspon dence and other communications with tax authorities, including the commencement of any audit and the nature and amount of any audit adjustments, and shall not agree or settle the amount of any audit adjustment without the prior written consent of each Limited Partner. Notwithstanding the Tax Matters Partner's obligation to use its best efforts in the fulfillment of its responsibilities, the Tax Matters Partner shall not be required to incur any expenses for the preparation for or pursuance of administrative or judicial proceedings unless the Partners agree on a method for sharing such expenses. (c) No Partner shall file, pursuant to section 6227 of the Code, a request for an administrative adjustment of items for any Partnership taxable year without first notifying the other Partners. If the other Partners agree with the requested adjustment, then the Tax Matters Partner shall file the request for administrative adjustment on behalf of the Partner. If unanimous consent is not obtained within thirty (30) calendar days from such notice, or within the period required to timely file the request for administrative adjustment, if shorter, any Partner, including the Tax Matters Partner, may file a request for administrative adjustment on its own behalf. (d) Any Partner intending to file a petition under sections 6226, 6228, or other section of the Code with respect to any item or other matter involving the Partnership shall notify the other Partners of such intention and the nature of the contemplated proceeding. In the case where the Tax Matters Partner is the Partner intending to file such petition on behalf of the Partnership, such notice shall be given within a reasonable period of time to allow the other Partners to participate in the choosing of the forum in which such petition will be filed. If the Partners do not agree on the appropriate forum, then the appropriate forum shall be decided by vote of a majority in interest of the Partners. If such a majority cannot agree, then the Tax Matters Partner shall choose the forum. If any Partner intends to seek review of any court decision rendered as a result of a proceeding instituted under the preceding provisions of this SECTION 4.4(d), then such Partner shall notify the other Partners of such intended action. (e) The provisions of this SECTION 4.4 shall survive the termination of the Partnership or the termination of any Partners's interest in the Partnership and shall remain binding on the Partners for a period of time necessary to resolve with the IRS or the United States Treasury Department the income taxation of the Partnership. Section 4.5. INCONSISTENT TREATMENT OF PARTNERSHIP ITEMS. If any Partner intends to file a notice of inconsistent treatment under section 6222(b) of the Code, then such Partner shall give reasonable notice under the circumstances to the other Partners of such intent and the manner in which the Partner's intended treatment of an item is (or may be) inconsistent with the treatment of that item by the other Partners. C-16 EXHIBIT D ADJUSTMENTS IN LOAN AND CAPITAL D-1 EXHIBIT E AGREED VALUE OF EACH PROPERTY E-1 EXHIBIT F REPRESENTATIONS AND WARRANTIES OF TSL REGARDING PARTNERSHIP AND RELATED MATTERS 1. EXISTENCE; AUTHORITY. The Partnership is a duly organized and validly existing limited partnership under the laws of the State of Texas and has all requisite partnership power and authority to own and lease its properties and to carry on its business as it is currently being operated and in the places where the Properties owned by the Partnership are owned or leased and such business is conducted. 2. NO DEFAULT. Neither the entry into, nor the performance of, nor the compliance with this Agreement, has resulted or will result in any violation of, or invalidate, cancel or make inoperative, or constitute a default under, result in the creation of an Encumbrance or other charge upon any Property or create any rights of termination, cancellation or acceleration in any person under, any charter, bylaw, partnership or joint venture agreement, trust agreement, mortgage, deed of trust, contract, indenture, credit agreement, franchise, permit, judgment, injunction, decree, order, ordinance, statute, rule, regulation, easement, restriction, or other charge, right, or interest applicable to TSL, the Partnership or any Property. 3. LITIGATION. There is no pending or, to the knowledge of TSL, threatened litigation or administrative proceedings to which TSL and/or the Partnership is a party and which could (i) adversely affect title to any Property or any part thereof or the ability of any of the parties hereto to perform any of its obligations hereunder or the ability of the Partnership to conduct the business or operations presently conducted by the Partnership or the use of any Property by the Partnership in the manner currently being used by the Partnership; (ii) result in a material adverse change in the business, operations, assets or results of operations of the Partnership; or (iii) otherwise affect any Property in any material respect. The Partnership is not subject to any continuing court or Agency order, writ, injunction or decree applicable to any Property or the business operations of the Partnership, and the Partnership is not in default with respect to any order, writ, injunction or decree of any court or Agency with respect to any Property or its operations. 4. ZONING. TSL has not received any written notice of a violation by any Property of any applicable zoning ordinances, rules and regulations, deed restrictions, restrictive covenants, building codes or any other land use controls to which the Property is subject. 5. NO BROKERS OR COMMISSIONS. Other than as disclosed on SCHEDULE F-5, TSL has not dealt with any broker, arranger, consultant, agent or finder to whom any commissions or other fees are still owing and there are no commissions or other fees payable to any such party in connection with the transactions contemplated hereunder. Other than as disclosed on SCHEDULE F-5 and except for finders fees or referral fees payable in the ordinary course of operations of the Properties there are no commissions payable to any party in connection with any purchase or lease of any of the Properties, or otherwise relating to the Properties and there are no agreements to pay such commissions with respect to any future transaction. F-1 6. TRUE AND CORRECT COPIES. All copies of all certificates and permits, and all other contracts or documents delivered or made available by TSL to LB in connection with the transactions contemplated hereby, the Partnership or any Property are true, correct and, to the extent they purport to be complete, complete copies. 7. FINANCIAL INFORMATION. To the knowledge of TSL, all financial statements and other financial information concerning the Properties, the Partnership or TSL delivered to LB as listed in SCHEDULE F-7 fairly and accurately reflect the information purported to be represented thereby. There exists no material liabilities or obligations affecting the Properties or the Partnership or the operation thereof which are not disclosed in the balance sheets attached hereto as SCHEDULE F-7, except for such liabilities and obligations that are adequately covered by insurance or with respect to which adequate reserves have been made. 8. EMPLOYMENT ARRANGEMENTS. The Partnership has no employees. There exists no union contracts, collective bargaining agreements, employment contracts, employee benefit plans or arrangements, or similar contracts or agreements, oral or written, pertaining to the Partnership or the Properties or any person employed in connection with the operation of the Properties and under which the Partnership will be obligated. 9. NO UNTRUE STATEMENT. No document or certificate prepared by or under the supervision of TSL or to the knowledge of TSL, no document or certificate furnished or to be furnished by TSL pursuant hereto and relating to the Partnership or the Properties contains or will contain, as of the date furnished, any untrue statement of material facts or omits or will omit, as of the date furnished, to state material facts necessary to make the statements or facts contained therein not misleading. 10. BANKRUPTCY. There is not pending or, to the knowledge of TSL threatened against any TSL or the Partnership a petition in bankruptcy, whether voluntary or otherwise, any assignment for the benefit of creditors, any petition seeking reorganization or arrangement under the Federal bankruptcy laws of the United States or of any state thereof, or any other action brought under the aforesaid bankruptcy laws. 11. FINANCIAL CONDITION. There has been no material adverse change in the financial condition of the Partnership since the date of the financial statements of the Partnership described on SCHEDULE F-7. 12. GOVERNMENTAL ACTION. TSL has not received any written notice of any change in, nor to the knowledge of TSL, is any change contemplated in, any Governmental Requirements applicable to any Property or the Partnership; and TSL has not and to the knowledge of TSL, the Partnership has not received any written notice of any judicial or administrative action applicable to any Property or any action by adjacent landowners affecting any Property, or any natural or artificial conditions upon any Property (or any significant adverse fact or condition relating to any Property or its present use); which in any such case has not been disclosed in writing to LB and which would prevent or limit, impede or materially render more costly the use of such Property as it is presently being used. F-2 13. CONDITION OF PROPERTY. To the knowledge of TSL, each Property is undamaged by fire or other hazards not covered by insurance, except that the Thousand Oaks Property under construction in San Antonio, Texas, recently burned and the loss was not fully insured. 14. DEFECTS; VIOLATIONS; CONDEMNATION PROCEEDINGS. TSL has not, and to the knowledge of TSL, the Partnership has not received, with respect to any Property, any notice from any insurance company agency or any other party of, nor, to the knowledge of TSL are there any facts or circumstances which give rise to, (i) any condition, defect, or inadequacy affecting such Property that, if not corrected, would result in termination of insurance coverage or increase its cost, (ii) any violation of any restrictive covenant or deed restriction affecting such Property (iii) any pending or threatened condemnation proceedings, or (iv) any proceedings that could or would cause the change, redemption, or other modification of the zoning classification or other legal requirements, applicable to such Property or any part thereof. To the knowledge of TSL, there does not exist any court order or any restriction or restrictive covenant (recorded or otherwise) or other private or public limitation which might adversely affect the use of any Property as it is presently being used except as set forth in the Owners' Policies. TSL has disclosed to LB that there are restrictive covenants that limit the use of certain Properties other than as independent living facilities. 15. MECHANIC'S LIENS. As of the date of this Agreement, there are no mechanics' or materialmen's or other statutory liens against any of the Properties that are not adequately reserved for by the Partnership. TSL has disclosed to LB that certain Properties are still under construction and could be subjected to such liens in the future. 16. UTILITIES. To the knowledge of TSL, all water, sewer, electric, natural gas, telephone, drainage facilities and all other utilities required for the use of each Property are installed to such Property, are connected with valid permits, comply in all material respects with all Governmental Requirements and are adequate to service such Property for its current use. To the knowledge of TSL, all utilities lines servicing each Property (other than internal lines located within such Property) are (i) located either within the boundaries of such Property or within lands dedicated to the public use, or within recorded easements for such purpose and (ii) are serviced and maintained by the appropriate public or quasi-public entity. All bonds, deposits, and initial charges for such utilities have been paid in full. 17. STREETS AND HIGHWAYS. TSL has not, and to the knowledge of TSL, the Partnership has not received any notice of (a) any existing and, except as set forth in SCHEDULE F-17, there are no proposed plans to widen, modify or realign any street adjoining any Property or (b) any pending or threatened governmental proceeding, or any other fact or condition which would limit or result in the termination of any Property's access to and from public roads. 18. PERMITS AND DEPOSITS. To the knowledge of TSL, all permit, deposit or initial charges have been paid in full. 19. WASTE DISPOSAL. All garbage, trash or other solid waste from or relating to each Property is being collected on a regular basis and, to the knowledge of TSL, is being properly disposed of in accordance with all applicable Governmental Requirements. All drains have been F-3 properly connected to the municipal storm or sanitary sewer lines with the approval of each municipality or the state highway department, as applicable. 20. NO NUISANCE. There is no public or private nuisance condition created by TSL or the Partnership currently existing on any Property, and, to the knowledge of TSL, no other public or private nuisance condition currently exists on any Property. 21. COMPLIANCE WITH GOVERNMENTAL REQUIREMENTS. All buildings, improvements, utilities and fixtures (including all streets, curbs, sidewalks, sewers and other utilities) forming a part of the Properties and existing on the date of this Agreement have been installed in compliance in all material respects with all Governmental Requirements (other than those pertaining to parking). Permanent certificates of occupancy, all licenses, permits, authorizations and approvals required by all Governmental Authorities having jurisdiction over the Properties which are completed, and the requisite certificates of the local board of fire underwriters (or other body exercising similar functions) have been issued for the buildings and improvements and have been paid for and all of the foregoing are in full force and effect, or if not issued, such failure will not have a material adverse effect on the Properties which are completed. 22. PARKING. To the knowledge of TSL, the parking available on each of the Properties is in accordance with all current Governmental Requirements, or TSL or the Partnership shall have obtained all necessary variances or other relief from such Governmental Requirements. 23. RENTS AND LEASES. The Rent Rolls for each Property currently occupied, which have been initialed by TSL and delivered to LB pursuant hereto (the "RENT ROLL"), contain a complete and correct list of all Leases setting forth with respect to each of the Leases (i) the type and size of unit covered thereby, (ii) the date thereof, (iii) the term thereof, (iv) the rents and other charges payable thereunder, (v) any rents or other charges in arrears or prepaid thereunder and the period for which such rents and other charges are in arrears or have been prepaid, (vi) the amount of the security deposit thereunder, (vii) the utilities which are furnished as part of the rent, (viii) any brokerage fees or finder's fees payable thereunder and (ix) any material amendments thereto. Except as disclosed in the Rent Roll, (A) there are no other lease or rental agreements for the occupancy of any of the units in the Improvements, (B) no tenant is entitled to any free rent or similar concession other than in the ordinary course of business, (C) no tenant has prepaid rent for more than one (1) month in advance, (D) no material number of tenants are entitled to a refund of any rent or other sums heretofore paid by such tenants (except for security deposits) or to assert any such refund or claim therefor as an offset or defense against the payment of rent hereafter coming due, (E) there are no Leases with an initial term in excess of one (1) year or less than six (6) months, (F) to the knowledge of TSL, all leased premises are actually occupied by the tenant under the lease agreement covering such leased premise, and (G) there are not more than three (3) units in the Improvements being leased to any one (1) person or entity. No brokerage or leasing commission or other compensation will be due or payable with respect to any of the leases at the Closing or thereafter, except for finders fees or referral fees payable in the ordinary course of operations of the Property. The Leases are in full force and effect and no material number of defaults or breaches on the part of the landlord exists thereunder and to the knowledge of TSL, there are no material number of defaults by the tenant thereunder. The Partnership has good title to the Leases and Rents for each of the F-4 Properties and no other person or entity has any right, title or interest therein, except the rights of the existing lienholders. 24. OBLIGATIONS TO TENANTS UNDER LEASES. Except as reflected in the Rent Rolls or in the ordinary course of ongoing activities, there are no unperformed obligations to provide any tenant under any Lease with any painting, repair, alteration, carpeting, appliance or any other equipment or work of any kind, under any Lease or under any other oral or written agreement whatsoever that would excuse such tenant from accepting its premises under the terms of its Lease. 25. ENFORCEABILITY OF LEASES. Each of the Leases is in full force and effect in accordance with its terms, provisions and conditions and to the knowledge of TSL, constitutes the legal, valid, binding and enforceable obligation of the tenant thereunder. To the knowledge of TSL, no tenant is in material default thereunder, except as shown on the Rent Roll. To the knowledge of TSL, no material number of tenants under the Leases has any pending litigation, offsets or counterclaims against the Partnership which, if successfully asserted, would reduce the rent payable thereunder or result in the cancellation or termination thereof. 26. AGREEMENTS TO ACQUIRE OR POSSESS THE PROPERTY. No person, firm, corporation or other entity except the Property Manager has any right or option to acquire any Property, or any part thereof, from the Partnership. Except as reflected within the Permitted Encumbrances, the Partnership has not entered into any agreement with any person, firm, corporation or entity granting the right to possess all or any portion of any Property, other than tenants in possession pursuant to the Leases described in the Rent Roll. 27. UNFULFILLED BINDING COMMITMENTS. TSL has no knowledge of any commitments made by the Partnership or TSL to any Governmental Authority, utility company, school board, church or other religious body, or any homeowners or homeowners' association, or any other organization, group or individual, relating to any Property which would impose an obligation upon the Partnership or its successors or assigns to make any contribution or dedications of money or land or to construct, install or maintain any improvements of a public or private nature on or off such Property. To the knowledge of TSL, no Governmental Authority has imposed any requirement that any developer of any Property pay directly or indirectly any fees or contributions relating to a specific Property or incur any expenses or obligations in connection with any development of such Property or any part thereof. The provisions of this SECTION shall not apply to any regular or nondiscriminatory local real estate or school taxes assessed against any Property. 28. SERVICE CONTRACTS, LEASES, ETC. TSL has provided LB with complete and correct copies of all Service Contracts, Leases and Personal Property Leases, in each case that involve payments by or to the Partnership of more than $50,000 per year or that have a term of more than 12 months at the time of the determination. There are no other contracts other than the Service Contracts, the Leases, the Personal Property Leases and the Permitted Encumbrances affecting the Properties or the operation thereof. 29. ENVIRONMENTAL REPRESENTATIONS AND WARRANTIES. F-5 No Hazardous Materials have been released into the environment, or deposited, discharged, placed or disposed of at, on, from or under any Property by the Partnership, TSL, or, to the knowledge of TSL, by any other party in violation of Hazardous Materials Laws, and to the knowledge of TSL, there has occurred no such release, deposit, discharge, placement or disposal in violation of Hazardous Materials Laws. Since the Partnership acquired any Property, no portion of the Property has been used for the disposal, storage, treatment, processing or other handling of Hazardous Materials and no Hazardous Materials have been placed or located on any Property by TSL, the Partnership or to the knowledge of TSL by any other party. To the knowledge of TSL, prior to its acquisition by the Partnership, no part of any Property has ever been used for the disposal, storage, treatment, processing, manufacturing or other handling of Hazardous Materials. No Hazardous Materials Contamination or Hazardous Substance Activity has occurred on any Property since its acquisition by the Partnership, or to the knowledge of TSL, prior to its acquisition by the Partnership. To the knowledge of TSL, (i) no property adjoining any Property has been used for the disposal, storage, treatment, processing, manufacturing or other handling of Hazardous Materials, and (ii) no property adjoining any Property is affected by Hazardous Materials Contamination. No asbestos or asbestos-containing materials have been placed on or in any Property by the Partnership or TSL or to the knowledge of TSL, by any other party and to the knowledge of TSL, no asbestos or asbestos-containing materials are present on or in any Property. No polychlorinated biphenyls have been placed on any Property by the Partnership or TSL and to the knowledge of TSL, no polychlorinated biphenyls are present on any Property. No underground storage tanks have been placed on or under any Property by the Partnership or TSL, and to the knowledge of TSL, no underground storage tanks are present on or under any Property. TSL has not, and to the knowledge of TSL, the Partnership has not received any written notice of any administrative order or notice, consent order and agreement, litigation or settlement with respect to Hazardous Materials or Hazardous Materials Contamination or Hazardous Substance Activity with respect to any Property, nor to the knowledge of TSL, is any such action proposed or threatened with respect to any Property. TSL has not, and to the knowledge of TSL, the Partnership has not received any written notice nor does TSL have any knowledge of any such action regarding any property adjacent to any Property. To the knowledge of TSL, no investigation with respect to the Hazardous Materials or Hazardous Materials Contamination is proposed, threatened or anticipated with respect to any Property. Neither the Partnership nor TSL has violated any Governmental Requirement relating to Hazardous Materials with respect to any Property and TSL has not, and to the knowledge of TSL, the Partnership has not received any written notice that any other party has violated any Governmental Requirements relating to Hazardous Materials with respect to any Property. To the knowledge of TSL, no condition occurred on any Property prior to its Acquisition Date which is or was in violation of any applicable Governmental Requirements relating to Hazardous Materials. Neither the Partnership nor TSL has received any communication from or on behalf of any Governmental Authority or any other person or entity indicating that any applicable Governmental Requirements relating to Hazardous Materials have been or may have been F-6 violated with respect to any Property. To the knowledge of TSL, none of the Properties is anticipated or threatened to be placed on any federal or state "Superfund" or "Superlien" list. Neither the Partnership nor TSL has received any notice of any third party claims regarding damage to property or persons resulting from any Hazardous Materials Contamination or Hazardous Substance Activity affecting any Property. TSL has not, and to the knowledge of TSL, the Partnership has not received any written notice from any tenants regarding the existence of Hazardous Materials on any Property. TSL has not, and to the knowledge of TSL, the Partnership has not received any written notice of a threat of release of Hazardous Materials from or into any Property. To the knowledge of TSL, the Partnership has obtained all governmental approvals required by any applicable Hazardous Materials Laws for the operation of the Properties owned by the Partnership. TSL has not and to the knowledge of TSL, the Partnership has not received any notice that either the Partnership or TSL (i) has any liability for response or corrective action, natural resource damage, or other liability pursuant to CERCLA, RCRA or any other Hazardous Materials Laws, and (ii) is currently subject to or is currently required to give any notice of any environmental claim or release of Hazardous Materials involving the Partnership or its Properties. To the knowledge of TSL, none of the Properties is subject to any restriction on the ownership, occupancy, use or transferability of the Property in connection with any (i) Hazardous Materials Laws or (ii) release, threatened release, treatment, management, storage, handling, recycling or disposal of a Hazardous Material. Notwithstanding anything to the contrary contained in this paragraph F-29, each of the representations and warranties contained in this paragraph F-29 is qualified and limited by, and expressly made subject to the information contained in the environmental reports (the "ENVIRONMENTAL REPORTS") listed in SCHEDULE F-29 attached hereto. LB represents and warrants to TSL that SCHEDULE F-29 lists all of the environmental reports received from consultants engaged by LB in connection with its due diligence investigation of the Properties and TSL warrants and represents to LB that SCHEDULE F-29 lists all of the environmental reports provided by TSL to LB for LB's review and information. 30. DUE ORGANIZATION AND QUALIFICATION OF TSL. TSL is a corporation duly organized and validly existing under the laws of the State of Texas. 31. POWER AND AUTHORITY. The execution, delivery and performance of this Agreement and all other agreements by and among TSL and other parties contemplated hereby that have been executed and delivered on or before the date of this Agreement ("TSL Transaction Documents"), and the consummation by TSL of the transactions contemplated hereby and thereby, have been duly authorized and no further action or approval will be required in order to permit TSL to perform such obligations and consummate the transactions contemplated hereby and thereby. This Agreement constitutes, and all other TSL Transaction Documents, when executed and delivered in accordance with the terms thereof, will constitute the legal, valid and binding obligations of TSL, F-7 enforceable in accordance with their terms. TSL has full power, authority and legal right to enter into this Agreement and all other TSL Transaction Documents, to perform its obligations hereunder and thereunder, and to consummate the transactions contemplated hereby and thereby. The execution, delivery and performance of this Agreement and all other TSL Transaction Documents, and the consummation of the transactions contemplated hereby and thereby in accordance with the terms hereof and thereof will not (i) violate any order, writ, injunction or decree to which TSL is a party or by which any of the Properties is bound or affected or (ii) result in the violation of any provisions of law applicable to Fail or the Partnership. 32. TITLE. TSL has delivered to LB full and complete copies of (i) all existing policies of title insurance issued in the name of the Partnership for each Property, including all riders, schedules supplements and endorsements thereto describing all Encumbrances on each Property and all exceptions, limitations and qualifications with respect to such title insurance (individually "Owner's Title Policy" and collectively "Owner's Title Policies") and (ii) a current "date down" title report for each Property showing the Partnership as the sole owner of such Property and specifically identifying all Encumbrances against such Property that have been recorded in the appropriate jurisdiction for each Property since the date of the applicable Owner's Title Policy through and including the date hereof (the "Updated Reports"). F-8 EXHIBIT G REPRESENTATIONS AND WARRANTIES OF CSL REGARDING PARTNERSHIP AND RELATED MATTERS 1. DUE ORGANIZATION AND QUALIFICATION OF CSL. CSL is a corporation duly organized, validly existing and in good standing under the laws of the State of Texas. 2. POWER AND AUTHORITY OF CSL. The execution, delivery and performance of this Agreement and all other agreements by and among CSL and other parties contemplated hereby that have been executed and delivered on or before the date of this Agreement ("CSL Transaction Documents"), and the consummation by CSL of the transactions contemplated hereby and thereby, have been duly authorized by all requisite corporate action and no further action or approval will be required in order to permit CSL to perform such obligations and consummate the transactions contemplated hereby and thereby. This Agreement constitutes, and all other CSL Transaction Documents, when executed and delivered in accordance with the terms thereof, will constitute the legal and valid and binding obligations of CSL, enforceable in accordance with their terms. CSL has full power, authority and legal right to enter into this Agreement and all CSL Transaction Documents and to consummate the transactions contemplated hereby and thereby. 3. NO CONFLICT OR DEFAULT. The execution, delivery and performance of this Agreement and all other CSL Transaction Documents and the consummation of the transactions contemplated hereby and thereby in accordance with the terms hereof and thereof will not (i) conflict with the Certificate of Incorporation or Bylaws of CSL, (ii) violate any order, writ, injunction or decree to which CSL is a party, (iii) constitute a default under any mortgage, lien, lease, indenture, agreement or instrument to which CSL is a party or (iv) result in the violation of any provisions of any Governmental Requirements applicable to CSL . 4. NO LITIGATION. There is no action, suit, proceeding or investigation pending or, to the best of the knowledge of CSL, threatened against CSL or the Partnership which questions the validity of this Agreement or any action taken or to be taken pursuant hereto or which might have an adverse effect upon the Partnership. CSL is not in default with respect to any judgment, order, writ, injunction or decree of any court or Agency which might have an adverse effect upon Partnership Interest or the ability of CSL to consummate the transactions contemplated hereunder. 5. BREACH OF REPRESENTATIONS AND WARRANTIES. CSL (1) has no knowledge that any representation or warranty contained in Article 2 is not true and correct in any material respect or (ii) has received any written notice, the receipt of which would cause a representation in Exhibit F not to be true and correct if such notice had been received by a TSL Party. 6. NO BROKERS OR COMMISSIONS. Other than as disclosed on SCHEDULE G-6, CSL has not dealt with any broker, arranger, consultant, agent or finder, and there are no commissions or other fees payable to any party with whom TSL has dealt, in each case in connection with the transactions contemplated hereunder. G-1 7. LIMITATION OF REPRESENTATIONS BY CSL. LB acknowledges and agrees that, with the exception of the representations and warranties set forth in this Agreement and the documents delivered by CSL at Closing, (a) the Limited Partnership Interest is being acquired by LB on a basis that is without representation or warranty by CSL, including any representation or warranty relating to the Properties, and (b) it has not relied upon any representations, warranties or other statements, whether express or implied, made by CSL or any of its agents, employees or other representatives. 8. CSL (or TSL or the Partnership) has delivered to LB full and complete copies of (i) all existing policies of title insurance issued in the name of the Partnership for each Property, including all riders, schedules supplements and endorsements thereto describing all Encumbrances on each Property and all exceptions, limitations and qualifications with respect to such title insurance (individually "Owner's Title Policy" and collectively "Owner's Title Policies") and (ii) a current "date down" title report for each Property showing the Partnership as the sole owner of such Property and specifically identifying all Encumbrances against such Property that have been recorded in the appropriate jurisdiction for each Property since the date of the applicable Owner's Title Policy through and including the date hereof (the "Updated Reports"). G-2 EXHIBIT H FORM OF MONTHLY REPORTING H-1 EX-21.1 5 EXHIBIT 21.1 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 - Veranda Club, Inc. Delaware 100% Capital Senior Living Properties 2 - Gramercy, Inc. Delaware 100% HealthCare Properties, L.P. Delaware 57% Capital Senior Living Properties 2, Inc. - NHPT Delaware 100% Capital Senior Living Properties 2, Inc.- Crosswood Oaks, Inc. Delaware 100% Capital Senior Living Properties 2, Inc.- Atrium of Carmichael, Inc. Delaware 100% Capital Senior Living Properties 2, Inc.- Heatherwood, Inc. Delaware 100% Capital Senior Living Properties 2, Inc.- Tesson Heights, Inc. Delaware 100% Capital Senior Living Acquisition, LLC Delaware 100%
EX-23.1 6 EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement (Form S-8) pertaining to the 1997 Omnibus Stock and Incentive Plan for Capital Senior Living Corporation of Capital Senior Living Corporation of our report dated February 4, 2000, with respect to the consolidated financial statements of Capital Senior Living Corporation included in its Annual Report, for the year ended December 31, 1999, filed with the Securities and Exchange Commission. Ernst & Young LLP Dallas, Texas March 23, 2000 EX-23.2 7 EXHIBIT 23.2 EXHIBIT 23.2 INDEPENDENT AUDITORS' CONSENT The Partners HealthCare Properties, L.P. We consent to incorporation by reference in the registration statement for the 1997 Omnibus Stock and Incentive Plan for Capital Senior Living Corporation, as amended, on Form S-8 of our report dated February 4, 2000, except as to the third paragraph of note 13 which is as of March 1, 2000, relating to the consolidated balance sheets of HealthCare Properties, L.P. and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of income, partnership equity, and cash flows for each of the years in the three-year period ended December 31, 1999, which report appears in the December 31, 1999 annual report on Form 10-K of Capital Senior Living Corporation. /s/ KPMG LLP Dallas, Texas March 29, 2000 EX-27.1 8 EXHIBIT 27.1
5 U.S. DOLLARS 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 1 32,988,024 9,122,850 15,490,653 (3,043,880) 0 53,722,387 116,375,784 (11,652,568) 221,875,759 6,749,568 0 0 0 197,173 109,351,490 221,875,759 0 70,522,149 0 54,248,690 1,354,583 0 7,089,229 7,829,647 2,991,723 4,837,924 0 0 0 4,837,924 0.25 0.24
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